As of December 31, 2009, we had deferred debt costs of $52,226 as compared to $464,411 as of December 31, 2008, a decrease of $ 412,185. In the February 2008 financing, the Company paid fees of $468,568 in cash and granted warrants to placement agent for the transaction. The value of the warrants granted to the placement agent was $327,565. Accordingly, we recorded a total deferred debt cost of $796,133 and started to amortize it in March 2008. The decrease in deferred debt costs was primarily attributable to the amortization for our deferred debt cost in 2009.
As of December 31, 2009, we had a deposit and installments on intangible assets of $41,926,520 as compared to $41,093,053 as of December 31, 2008, an increase of $833,467. We made a deposit to acquire a new Chinese Class I anti-asthma medicine drug patent in accordance with a technology transfer agreement the Company entered into in April 2008. The increase in deposit and installments on intangible assets was primarily attributed to (i) our increased payments of approximately $2,779,000 to acquire the patent of a new Chinese Class I anti-asthma medicine drug in accordance with a technology transfer agreement the Company entered into in April 2008 and (ii) the increased payments of approximately $878,000 to acquire another patent of a new Chinese drug which cures Hormone-Diabetes according to a new drug patent transfer agreement the Company entered into in February 2009 and (iii) the favorable RMB currency
appreciation which converted our deposit and installments on intangible assets in RMB into higher US dollar amounts offset by the amount of approximately $2,925,000 related to a intellectual property right was transferred from deposit and installments on intangible assets to intangible assets in fiscal 2009.
As of December 31, 2009, we had a property and equipment, net of accumulated depreciation, of $16,223,775 as compared to $7,554,817 as of December 31, 2008, an increase of $8,668,958. The increase was primarily attributable to the increased purchases of approximately $10,797,000 for our construction-in-progress of Inner Mongolia facility and Beijing office building (See note 4) and the favorable RMB currency appreciation which converted our property and equipment, net of accumulated depreciation, in RMB into higher US dollar amounts offset by the depreciation on our fixed assets of approximately $2,147,000 in fiscal 2009.
As of December 31, 2009, we had intangible assets, net of accumulated amortization, of $17,176,207 as compared to $1,231,730 as of December 31, 2008, an increase of $15,944,477. The increase was primarily attributed to the increase in intellectual property right of approximately $7,898,000 and the increase in land use rights of approximately $9,605,000 and the favorable RMB currency appreciation which converted our intangible assets, net of accumulated amortization, in RMB into higher US dollar amounts offset by the amortization on intangible assets of approximately $1,560,000 in 2009.
As of December 31, 2009, we had accounts payable and accrued expenses of $427,924 as compared to $895,283 as of December 31, 2008, a decrease of $467,359. The decrease was primarily attributable to the decrease in trade accounts payable of approximately $562,000 and the decrease in accrued dividend payable related to our convertible redeemable preferred shares of approximately $49,000 which was offset by the increase in accrued other expenses of approximately $143,000.
As of December 31, 2009, we had other payables of $2,262,760 as compared to $1,274,882 as of December 31, 2008, an increase of $987,878. The increase in other payables was primarily due to the increased payables for sales representatives commission of approximately $1,437,000 and the RMB currency appreciation which converted our other payables in RMB into higher US dollar amounts and offset by the decreased payable for our construction-in-progress of approximately $451,000.
As of December 31, 2009, we had a taxes payable of $3,131,908 as compared to $5,015,908 as of December 31, 2008, a decrease of $1,884,000. The decrease in the taxes payable was mainly due to the payments that we made to the China tax authority.
As of December 31, 2009, we had unearned revenue of $1,163,771 as compared to $565,629 as of December 31, 2008, an increase of $598,142. The increase was primarily attributable to the increased advance from a customer of approximately $597,000 and the RMB currency appreciation which converted our unearned revenue in RMB into higher US dollar amounts.
At December 31, 2009, we had a $2,356,751 due to related parties as compared to $2,113,914 at December 31, 2008, an increase of $242,837. The increase was primarily attributable to the accrued and unpaid interest in 2009 of approximately $238,000 related to a working capital advance made to us by our CEO and his wife and a Board member and two employees and the RMB currency appreciation which converted our due to related parties in RMB into higher US dollar amounts.
At December 31, 2009, we had Series A Convertible Redeemable Preferred Stock of $4,170,572 as compared to $3,652,341 at December 31, 2008, an increase of $518,231. The increase was primarily attributable to the amortization of discount on convertible redeemable preferred stock of $1,196,106 and the issued additional convertible redeemable preferred stock of $432,125 as dividends and offset by the conversion of the Series A Convertible Redeemable Preferred Stock of $1,110,000.
43
Our balance sheet as of December 31, 2009 also reflects notes payable to related parties of $5,069,023 due on December 30, 2015 which was a series of working capital loans made to us on December 31, 2005 by the Companys Chief Executive Officer, his wife, two employees of the Company and a Board member. These loans bear the interest based on a floating annual interest rate, which is 80% of China bank interest rate and are unsecured. During the year ended December 31, 2009, 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 December 31, 2009 and 2008 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 year to calculate these changes.
Net cash provided by operating activities for the year ended December 31, 2009 was $31,362,466 as compared to net cash provided by operating activities of $37,394,084 for the year ended December 31, 2008. For the year ended December 31, 2009, net cash provided by operating activities was primarily attributable to a decrease in accounts receivable of $4,361,619, a decrease in inventories of $2,755,869, a decrease in prepaid expenses and other current assets of $2,043,209, an increase in accounts payable and accrued expenses of $213,431, an increase in other current payables of $668,662, an increase in unearned revenue of $596,414 and an increase in due to related parties of $237,452, and the add back of net income of $16,432,294, depreciation and amortization of $1,986,361, amortization of deferred debt issuance costs of $412,184, amortization of discount on convertible redeemable preferred stock of
$1,196,106, amortization of prepaid expense attributable to warrants of $14,849, stock based compensation of $282,083, interest expenses caused by escrow shares transfer of $337,500 and one-time loss form fixed assets impairment of $1,719,884 offset by a decrease in taxes payable of $1,895,451. For the year ended December 31, 2008, net cash provided by operating activities was primarily attributable to a decrease in accounts receivable of $16,001,384, a decrease in prepaid expenses and other current assets of $939,654, an increase in accounts payable and accrued expenses of $1,360,568, an increase in taxes payable of $4,336,947, and the add back of net income of $12,790,648, depreciation and amortization of $634,347, amortization of deferred debt issuance costs of $361,062, amortization of debt discount of $208,355, amortization of discount on convertible redeemable preferred stock of $962,604, amortization of prepaid expense attributable to warrants of $163,338, stock based
compensation of $318,551 and warrant revaluation of $74,593 offset by a decrease in allowance for doubtful accounts of $575,781, an increase in inventories of $145,910 and a decrease in unearned revenue of $36,276.
Net cash used in investing activities for the year ended December 31, 2009 amounted to $28,699,955. For the year ended December 31, 2009, net cash used in investing activities was attributable to the installments on intangible assets of $17,581,071, and the purchase of property and equipment of $11,118,884. Net cash used in investing activities for the year ended December 31, 2008 was $41,901,488 and was attributable to the deposit on patent right of $2,872,635, the deposits on land use right of $32,124,672, the purchase of intangible assets of $5,465,762 and the purchase of property and equipment of $1,438,419.
Net cash provided by financing activities was $0 for the year ended December 31, 2009. Net cash provided by financing activities was $980,937 for the year ended December 31, 2008 and was mainly attributable to the receipt of net proceeds of $5,000,000 from our private financing and proceeds from related party advances of $ 965,986 offset by payments on convertible debt of $2,520,000, debt issuance costs of $468,568 and repayments of related party advances of $1,996,481.
We reported a net increase in cash for the year ended December 31, 2009 of $2,666,932 as compared to a net decrease in cash of $3,279,149 for the year ended December 31, 2008.
Lotus East has historically funded its capital expenditures from its working capital. Lotus East believes this capital is sufficient for its current needs. In 2009, Lotus East planned a total of $22 million in capital expenditure for its new facility in Chaoyang District of Beijing. Lotus East planned to use its working capital $12 million on the construction phase, and to seek financing of $10 million for equipment and GMP certification. 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 secured bank financing and/or government grants and/or third party finance.
44
There is no guarantee that Lotus East can obtain these financings on favorable terms at right time. Although the Chinese government has recently announced an economic stimulation plan, there is no guarantee that we will be awarded the government grants successfully. While Lotus Easts management believes the Company will be successful in securing the necessary funding through its increasing revenue, faster collections on receivables, and continuance 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 Liang Fangs 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 agreement 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 $51.8 million in the next five years, it could get back approximately $39.7 million spent to date, including the approximately $32.7 million for the installments on the land use rights, which is refundable if the Chinese local government would not grant it land use rights certificate.
In addition, under the designations, rights and preferences of the Series A Convertible Redeemable Preferred Stock, the Company can be required to redeem the Series A Preferred Stock at the option of the holder for a period of 90 days beginning on February 25, 2010. The redemption price which is equal to $0.87 per share plus any accrued but unpaid dividends, must be paid in cash, in one lump sum within one month from the end of the 90 day period. Assuming that sufficient funds are available to us to pay these redemption amounts, if one or more of the holders of the Series A Convertible Redeemable Preferred Stock should elect redemption of those shares, the payment of the redemption price will materially and adversely impact our liquidity. We anticipate that sufficient funds should be available as the aggregate redemption amount for the 2,847,623 shares of outstanding Series A Convertible Redeemable
Preferred Stock $2,477,432 and accrued and unpaid dividend of approximately $49,500.
Recent Capital Raising Transaction
In order to improve our access to working capital, on March 3, 2010, we entered into a Standby Equity Distribution Agreement (the SEDA) with YA Global Master SPV Ltd. (YA Global) pursuant to which we may, at its sole and exclusive option, periodically sell to YA Global shares of its common stock, $0.001 par value per share for a total purchase price of up to ten million dollars ($10,000,000). Each advance under the SEDA shall not be more than $200,000. For each share of Common Stock purchased pursuant to an advance under the SEDA, YA Global will pay to we the higher of (i) ninety-three (93%) of the lowest daily volume weighted average price of the Common Stock during the five (5) consecutive trading days following delivery by we of an advance notice or (ii) $0.87, the minimum acceptable price. Under the SEDA, we cannot begin to take advances until such time as it files with the
Securities and Exchange Commission (SEC) a registration statement which registers the resale of the shares of Company Common Stock to be issued to YA Global, and such registration statement is declared effective by the SEC. Additionally, any advance under the SEDA which causes YA Global to own more than 4.99% of our Common Stock will be automatically withdrawn. We are not obligated to utilize any of the $10 million available under the SEDA and there are no minimum commitments or minimum use penalties. The SEDA, unless terminated by us, shall terminate on the earlier of (i) the two-year anniversary of the date that the registration statement shall be declared effective by the SEC or (ii) the date on which we has drawn down the maximum amount permitted under the SEDA.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The total of contractual obligations and commitments does not include any payments made by us.
The following tables summarize our contractual obligations as of December 31, 2009, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
45
|
|
Payments due by period
|
|
|
Total
|
|
Less than
1 year
|
|
1-3
Years
|
|
3-5
Years
|
|
5+
Years
|
Series A convertible redeemable preferred stock
|
|
$
|
4,606,648
|
|
$
|
4,606,648
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Related parties indebtedness
|
|
$
|
7,425,774
|
|
$
|
1,490,649
|
|
$
|
263,266
|
|
$
|
-
|
|
$
|
5,671,859
|
Technology purchase obligations
|
|
$
|
1,608,846
|
|
$
|
804,423
|
|
$
|
804,423
|
|
$
|
-
|
|
$
|
-
|
New drug patent purchase obligations
|
|
$
|
438,776
|
|
$
|
438,776
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Construction obligations in Inner Mongolia
|
|
$
|
51,798,635
|
|
$
|
846,198
|
|
$
|
10,000,000
|
|
$
|
40,952,437
|
|
$
|
-
|
Construction obligations in Beijing
|
|
$
|
22,000,000
|
|
$
|
22,000,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Total contractual obligations
|
|
$
|
87,878,679
|
|
$
|
30,186,694
|
|
$
|
11,067,689
|
|
$
|
40,952,437
|
|
$
|
5,671,859
|
Off-balance Sheet Arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, however we have agreed to guarantee loans for Lotus East, if required. As of the date of this report, we have not entered into any guarantee arrangements with Lotus East. The term off-balance sheet arrangement generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that
serves as credit, liquidity or market risk support for such assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see our financial statements beginning on page F-1 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND PROCEDURES.
Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on our financial statements.
Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all errors and frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.
46
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
As required by Rule 13a-15 under the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009. As discussed in more detail below, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2009, due to the significant deficiencies that we identified in internal control over financial reporting.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2009, management identified significant deficiencies related to (i) the U.S. GAAP expertise of our internal
accounting staff, (ii) our internal audit functions, and (iii) a lack of segregation of duties within accounting functions. Therefore, our internal controls over financial reporting were not effective as of December 31, 2009.
We began preparing to be in compliance with the internal control obligations, including Section 404, for our fiscal year ended December 31, 2009. Our internal accounting staff was primarily engaged in ensuring compliance with PRC accounting and reporting requirements for Lotus East and their U.S. GAAP knowledge was limited. As a result, majority of our internal accounting staff, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP matters.
Management has determined that our internal audit function is also deficient due to insufficient qualified resources to perform internal audit functions.
Remediation Measures of Significant Deficiencies
We have implemented, or plan to implement, the measures described below under the supervision and guidance of our management to remediate the above control deficiencies and to strengthen our internal controls over financial reporting. Key elements of the remediation effort include, but are not limited to, the following activities, which have been implemented, or are in the process of implementation, as of the date of filing of this Annual Report:
|
|
We have recruited and will continue to bring in additional qualified financial personnel for the accounting department to further strengthen our financial reporting function. We have started training our internal accounting staff on US GAAP and financial reporting requirements.
|
47
|
|
We engaged a qualified internal control consultant, Union Strength Business Consulting Co. Ltd, to help us comply with internal control obligations, including Section 404. We had adopted a timetable to commence the design phase of our Sarbanes-Oxley Compliance Project in March 2010 and enter implementation stage in June, to ensure full and timely Sarbanes-Oxley Act compliance in 2010. We have put together multileveled teams to execute the compliance under the assistance of the independent consultant.
|
|
|
We have commenced to establish the effective internal audit functions, however, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit persons before the end of 2009. However, we will increase our search for qualified candidates with assistance from recruiters and through referrals.
|
|
|
Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.
|
We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.
A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the companys financial reporting.
Our management is not aware of any material weaknesses in our internal control over financial reporting, and nothing has come to the attention of management that causes them to believe that any material inaccuracies or errors exist in our financial statements as of December 31, 2009. The reportable conditions and other areas of our internal control over financial reporting identified by us as needing improvement have not resulted in a material restatement of our financial statements. Nor are we aware of any instance where such reportable conditions or other identified areas of weakness have resulted in a material misstatement in any report we have filed with or submitted to the Commission.
Auditor Attestation
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only managements report in this annual report.
Changes in Internal Control over Financial Reporting
Except as described above, there were no changes in our internal controls over financial reporting during fiscal year 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
48
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
The following individuals serve as our executive officers and members of our Board of Directors:
Name
|
|
Age
|
|
Positions held:
|
Dr. Liu Zhongyi
|
|
49
|
|
Chief Executive Officer, President, and Chairman of the Board of Directors
|
Ms. Zeng Yan
|
|
41
|
|
Chief Financial Officer
|
Dr. Ian Ashley
|
|
40
|
|
Director
|
Ms. Li Ping
|
|
48
|
|
Director
|
Mr. Liu Jin
|
|
73
|
|
Director
|
Ms. Xian Xuemei
|
|
40
|
|
Director
|
Mrs. Song Zhenghong
|
|
43
|
|
Director
|
DR. LIU ZHONGYI. Dr. Liu has served as Chairman of the Board and Chief Executive Officer of Lotus since September 2006 and he has also served in those positions at Lotus International since founding that company in August 2006. Dr. Liu is also the Chairman, Deputy Chief Physician and founder of Liang Fang and founder and General Manager of En Ze Jia Shi. As a researcher and medical student, Dr. Liu excelled in the development of many new drugs which are widely used in China today. While worked for the Chinese Government in 1992, he established the Research Center of Space Flight Biological Engineering Technology, and continued his renowned research related to incretion diseases. Four years later, entering the private sector and invigorated by burgeoning capitalism in China, Dr. Liu started his first pharmaceutical company in Beijing. He earned his Masters Degree in Endocrinology
from Beijing Xiehe Medical School, after finished his undergraduate studies in Inner Mongolia Medicine College located in Inner Mongolia, China. He is a majority stockholder in each of Liang Fang and En Ze Jia Shi and the husband of Mrs. Song Zhenghong. The Board believes that Dr. Liu has the experience, qualifications, attributes and skills necessary to serve on the Board because of his extensive experience in the medical research industry, his having provided leadership and strategic direction to the Company and his unparalleled knowledge of the Company and its business. Dr. Liu is not a member of the board of directors for any public company or any investment company, neither has he been a member of the board of directors for such companies for the past five years
.
MS. ZENG YAN. Ms. Zeng has served as Chief Financial Officer for Lotus Pharmaceuticals, Inc. since May 1, 2009. Ms. Zeng has over ten years experience as a financial manager and auditor for Chinese based companies. From 2008 to April, 2009, Ms. Zeng has been an accountant for Beijing Liang Fang Pharmaceutical International, Inc., a subsidiary of Lotus Pharmaceuticals, Inc. From 2005 to 2008, Ms. Zeng was a registered accountant in Beijing Topson Certified Public Accountants, where she conducted auditing and provided financial counsel for public companies. From 2004 to 2005, Ms. Zeng was a financial manager for Beijing Unite Youbang Science and Technology Ltd. Ms. Zeng is a CPA in China with bachelor degree in Business from Beijing Information Science & Technology University.
DR. IAN ASHLEY. Dr. Ashley has been a member of our Board of Directors since September 2006 and a member of Lotus Internationals Board of Directors since August 2006. Previously he worked for Merck & Co in 1990 in Research and Development with focus on hypertension and calcium channel blockers. He is ABEM Board Certified in Emergency Medicine after finishing a residency in Emergency Medicine at Loma Linda University Medical Center in Southern California. Since 2002, Dr. Ashley has served as Attending Physician at Providence Hospital in Waco, Texas. Dr. Ashley graduated Summa Cum Laude with degrees in Chemistry and Biochemistry from Oberlin College before graduating from Baylor College of Medicine in Houston, Texas in 1996. The Board believes that Dr. Ashley can provide market information and strategy on new drugs development because of his experience in the medical research
industry. Dr. Ashley is not a member of the board of directors for any public company or any investment company, neither has he been a member of the board of directors for such companies for the past five years
.
MS. LI PING. Ms. Li has been a member of our Board of Directors since September 2006 and a member of Lotus Internationals Board of Directors since August 2006. Ms. Li served as salesman and deputy manager of the sales department of Beijing Dongcheng Medicine Wholesale Company from 1984 to 1999. Since 2000, she served as director of Liang Fang and is responsible for medicine and clinic promotions. Ms. Li graduated from the Beijing Medical School, apothecary. The Board believes that Ms. Li has the experience, qualifications, attributes and skills necessary to serve on the Board because of her experience in the field of sale, her having provided leadership and strategic direction to the Company and her unparalleled knowledge of the Company and its business. Ms. Li is not a member of the board of directors for any public company or any investment company, neither has he been a
member of the board of
49
directors for such companies for the past five years
.
LIU JIN. Mr. Liu has been a member of our Board of Directors since September 2006 and a member of Lotus Internationals Board of Directors since August 2006. Mr. Liu served as an accountant for the Finance Bureau of Liangcheng County from 1958 to1970 and as accountant and financial manager for Finance Bureau of Chayouqiqnqi of Inner Mongolia form 1971 to 1999. Since 2000, Mr. Liu has served as a director of Liang Fang and has been responsible for production cost control. Mr. Liu graduated from the Middling Finance School of Wulanchabu City of Inner Mongolia in 1958. The Board believes that Mr. Liu has the experience, qualifications, attributes and skills necessary to serve on the Board because of his experience in the finance and accounting, his having provided leadership and strategic direction to the Company and his unparalleled knowledge of the Company and its business.
Mr. Liu. is not a member of the board of directors for any public company or any investment company, neither has he been a member of the board of directors for such companies for the past five years
.
XIAN XUEMEI. Ms. Xian has been a member of our Board of Directors since December 2006. Ms. Xian served as clinical pharmacist of Chengdu Spaceflight Hospital from 1997 to 2000. Since 2001, she has been working with Liang Fang and is responsible for medical quality inspections. Ms. Xian graduated from the School of Pharmacy, West China University of Medical Sciences with a bachelors degree in 1996 with excellent academic results. The Board believes that Ms. Xian has the experience, qualifications, attributes and skills necessary to serve on the Board because of her leadership and strategic direction to the Company and his unparalleled knowledge of the Company and its business. Ms. Xian is not a member of the board of directors for any public company or any investment company, neither has he been a member of the board of directors for such companies for the past five
years
.
SONG ZHENGHONG. Mrs. Song has been a member of our Board of Directors since September 2006 and a member of Lotus Internationals Board of Directors since August 2006. Since 1991, Mrs. Song has been a teacher, assistant teacher and senior teacher at Yungang Second Middle School in Fengtai, Beijing. She is a minority stockholder in each of Liang Fang and En Ze Jia Shi and the wife of Dr. Liu Zhongyi. The Board believes that Mrs. Song has the experience, qualifications, attributes and skills necessary to serve on the Board because of her background in education. Ms. Xian is not a member of the board of directors for any public company or any investment company, neither has he been a member of the board of directors for such companies for the past five years
.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the officers or directors of the Company have been the subject of litigation over the past ten years nor was any the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
|
|
Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time; or
|
|
|
Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or
|
|
|
Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
|
|
|
Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; or
|
|
|
Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or
|
50
|
|
Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
There are no family relationships between or among any of the current directors or executive officers except as set forth above.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review and to the best of our knowledge, our six directors who are Liu Zhongyi, Ian Ashley, Li Ping, Liu Jin, Xian Xuemei and Song Zhenghong have not filed any required Forms.
CODE OF ETHICS
On February 1, 2006 our Board of Directors adopted a Financial Code of Ethics which applies to our Chief Executive Officer, Chief Financial Officer and members of our financial department. We will provide a copy, without charge, to any person desiring a copy of the Financial Code of Ethics, by written request to 16 Cheng Zhuang Road, Feng Tai District, Beijing 100071, Peoples Republic of China. Attention: Corporate Secretary. In addition, we have filed a copy of the Financial Code of Ethics with the Securities and Exchange Commission as an exhibit to this report.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors plans to strengthen itself while implementing the requirements of Sarbanes Oxley. As of December 31, 2009, the Board of Directors has not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. The functions of those committees are being undertaken by the board as a whole.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size and lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal
is made, all members of our Board will participate in the consideration of director nominees.
None of our directors is an audit committee financial expert within the meaning of Item 401(e) of Regulation S-B. In general, an audit committee financial expert is an individual member of the audit committee or Board of Directors who:
|
|
understands generally accepted accounting principles and financial statements,
|
|
|
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
|
|
|
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
|
|
|
understands internal controls over financial reporting, and
|
|
|
understands audit committee functions.
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51
Since the closing of the share exchange with Lotus International, we have relied upon the personal relationships of our CEO to attract individuals to our Board of Directors. While we would prefer that one or more of our directors are an audit committee financial expert, the individuals whom we have been able to attract to our Board do not have the requisite professional backgrounds. It is our intent to expand our Board of Directors during 2010 to include additional independent directors as well as one or more directors who are considered audit committee financial experts. At that time we intend to establish an Audit Committee of our Board of Directors. Our securities are not quoted on an exchange, however, that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of
Directors include independent directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in the last completed fiscal year for our principal executive officer, each other executive officer serving as such whose annual compensation exceeded $100,000, and up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer of our company at December 31, 2009. The value attributable to any option awards is computed in accordance with FAS 123R.
SUMMARY
COMPENSATION
TABLE
|
Name and
principal
position
(a)
|
Year
(b)
|
Salary
($)
(c)
|
Bonus
($)
(d)
|
Stock
Awards
($)
(e)
|
Option
Awards
($)
(f)
|
Non-Equity
Incentive Plan
Compensation
($)
(g)
|
Nonqualified
Deferred
Compensation
Earnings ($)
(h)
|
All
Other
Compensation
($)
(i)
|
Total
($)
(j)
|
|
|
|
|
|
|
|
|
|
|
Liu Zhongyi
(1)
|
2009
|
180,000
|
0
|
0
|
0
|
0
|
0
|
0
|
180,000
|
|
2008
|
180,000
|
0
|
0
|
0
|
0
|
0
|
0
|
180,000
|
(1) Dr. Liu has served as our Chief Executive Officer and President since September 28, 2006. Dr. Lius did not have any other compensation for 2009 and 2008. Compensation amounts reflected for Dr. Liu for each of 2009 and 2008 exclude any payments to him for his services as a director or pursuant to the terms of the assignment agreement entered into between Dr. Liu and Lotus East in October 2006 in conjunction with the loan agreement and contract with Wu Lan Cha Bu Emergency Hospital. See Director Compensation below and Item 13. Certain Relationships and Related Transactions, and Director Independence.
HOW COMPENSATION IS DETERMINED
We currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officers responsibilities following a change-in-control. Dr. Lius and other employees compensation is determined from time to time by the Board of Directors of Lotus Internationals, Inc, of which Dr. Liu is a member. The amount of compensation of any employee is not tied to any performance goals or other traditional measurements and may be increased from time to time at the sole discretion of such Board.
Our compensation program for our executive officers
and all other employees is designed such that it will not incentivize unnecessary risk-taking. We provide our senior executive
officers solely with a base salary to compensate them for services rendered during the year.Our policy of compensating our senior
executives with a cash salary has served us well.To date, we have not believed it necessary to provide our executives discretionary
bonuses, equity incentives, or other benefits in order for us to continue to be successful.However, as the Company grows and the
operations become more complex, the Board of Directors may deem it in the best interest of the Company to provide such additional
compensation to existing executives and in order to attract new executives.
RETIREMENT BENEFITS
Our executive officers are not presently entitled to company-sponsored retirement benefits.
PERQUISITES
We have not provided our executive officers with any material perquisites and other personal benefits and, therefore, we do not view perquisites as a significant or necessary element of our executives compensation.
DEFERRED COMPENSATION
We do not provide our executives the opportunity to defer receipt of annual compensation.
52
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2009:
OPTION AWARDS
|
STOCK AWARDS
|
Name
(a)
|
Number of
securities
underlying
unexercised
options
(#)
exercisable
(b)
|
Number of
securities
underlying
unexercised
options
(#)
unexercisable
(c)
|
Equity
incentive
plan
awards:
Number of
Securities
underlying
unexercised
unearned
options
(#)
(d)
|
Option
Exercise
price
($)
(e)
|
Option
Expiration
date
(f)
|
Number
of
shares
or
units
of
stock
that
have
not
vested
(#)
(g)
|
Market
Value
of
shares
or
units of
stock
that
have
not
vested
($)
(h)
|
Equity
incentive
plan
awards:
Number
of
unearned
shares,
units or
other
rights
that
have
not
vested
(#)
(i)
|
Equity
incentive
plan
awards:
Market
or
Payout
value of
unearned
shares,
units or
other
rights
that
have
not
vested
(#)
(j)
|
|
|
|
|
|
|
|
|
|
|
Liu Zhongyi
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Zeng Yan
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
DIRECTORS COMPENSATION
The following table provides information concerning the compensation of members of our Board of Directors for each of their services as a director for 2009. The value attributable to any option awards is computed in accordance with FAS 123R.
Director Compensation
|
Name
(a)
|
Fees
Earned
or paid
in cash
($)
(b)
|
Stock awards
($)
(c)
|
Option
Awards
($)
(d)
|
Non-equity
Incentive
plan compensation
($)
(e)
|
Nonqualified
Deferred
compensation
($)
(f)
|
All other
compensation
($)
(g)
|
Total
($)
(h)
|
Liu Zhong Yi
|
0
|
3,000
|
0
|
0
|
0
|
0
|
3,000
|
Ian Ashley
|
0
|
3,000
|
0
|
0
|
0
|
0
|
3,000
|
Li Ping
|
0
|
3,000
|
0
|
0
|
0
|
0
|
3,000
|
Liu Jin
|
0
|
3,000
|
0
|
0
|
0
|
0
|
3,000
|
Xian Xuemei
|
0
|
3,000
|
0
|
0
|
0
|
0
|
3,000
|
Song Zhenghong
|
0
|
3,000
|
0
|
0
|
0
|
0
|
3,000
|
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
At March 30, 2010 we had 50,863,217 shares of common stock issued and outstanding and 2,847,623 shares of Series A Convertible Redeemable Preferred Stock issued and outstanding. Each share of common stock entitles the holder to one vote and each of the Series A Convertible Redeemable Preferred Stock entitles the holder to a number of votes equal to the number of shares into which the Series A Convertible Redeemable Preferred Stock is then convertible vote at any meeting of our stockholders. Presently, the Series A Convertible Redeemable Preferred Stock is convertible on a one for one basis. The holders of the common stock and the Series A Convertible Redeemable Preferred Stock vote together on all matters submitted to a vote of our stockholders, except that they are not entitled to vote in the election of our directors. The following table sets forth information known to us as of March 30, 2010 relating to
the beneficial ownership of shares of our voting securities by:
|
|
each person who is known by us to be the beneficial owner of more than five percent of our outstanding voting stock;
|
|
|
each named executive officer; and
|
|
|
all named executive officers and directors and director nominees as a group.
|
Unless otherwise indicated, the business address of each person listed is in care of 16 Cheng Zhuang Road, Feng Tai District Beijing 100071 Peoples Republic of China. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of stock owned by them, except to the extent that power may be shared with a spouse.
|
Amount and Nature of Beneficial Ownership
|
|
|
Common Stock
|
Series A Convertible
Redeemable Preferred Stock
|
|
Name
|
# of Shares
|
% of Class
|
# of Shares
|
% of Class
|
% of Vote
|
Liu Zhongyi (1)
|
19,052,992
|
37.6%
|
0
|
n/a
|
35.6%
|
Zeng Yan
|
0
|
*
|
0
|
n/a
|
*
|
Ian Ashley
|
44,483
|
*
|
0
|
n/a
|
*
|
Li Ping
|
10,000
|
*
|
0
|
n/a
|
*
|
Liu Jin
|
10,000
|
*
|
0
|
n/a
|
*
|
Xian Xuemei
|
10,000
|
*
|
0
|
n/a
|
*
|
Song Zhenghong (2)
|
6,718,000
|
13.3%
|
0
|
n/a
|
12.5%
|
All officers and directors as a group (seven persons)
|
25,845,475
|
51.0%
|
0
|
n/a
|
48.3%
|
* represents less than 1%
|
(1)
|
Includes 5,833,333 shares of our common stock which are subject to the terms of the Escrow Agreement entered into in February 2008 in conjunction with the sale our Series A Convertible Redeemable Preferred Stock described earlier in this annual report. Dr. Liu Zhongyis holdings exclude the holdings of his wife, Mrs. Song Zhenghong, over which he disclaims beneficial ownership.
|
|
(2)
|
Mrs. Song Zhenghong is Dr. Liu Zhongyis wife. Mrs. Song Zhenghongs holdings exclude the holdings of Dr. Liu Zhongyi over which she disclaims beneficial ownership.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
PRC law currently limits foreign equity ownership of Chinese companies. To comply with these foreign ownership restrictions, we operate our business in China through the Contractual Arrangements with Lotus East and shareholders of Lotus East that were executed on September 6, 2006. Certain of our principal shareholders, executive officers and directors are also principal owners, officers and directors of Lotus East, including Dr. Liu Zhongyi and Mrs. Song Zhenghong.
Dr. Liu Zhongyi leases Lotus East two retail spaces for no charge on a month-to-month basis.
54
Our Chief Executive Officer and his spouse and several employees, from time to time, provided advances to us for working capital purpose. These advances are non-interest bearing, unsecured and payable on demand. At December 31, 2009, we had a payable to the chief executive officer and his spouse and these employees at an amount of $720,323 which was included in due to related parties on our balance sheet.
On October 9, 2006, the Company entered into a five-year loan agreement and a contract with Wu Lan, whereby the Company agreed to lend Wu Lan approximately $4.4 million (RMB 30 million) for the construction of a hospital ward in Inner Mongolia, China. In exchange for the loan, Wu Lan agreed to grant the Company an exclusive right to supply all medicines and disposable medical treatment apparatus to Wu Lan for a period of twenty (20) years. In October 2006, the Companys chief executive officer, Mr. Liu, lent this loan to Wu Lan on behalf of the Company. On October 21, 2006, the Company entered into an assignment agreement whereby the Company assigned all of its rights, obligations, and receipts under the Loan Agreement to Mr. Liu, except the rights to receive revenues from the sale of medical and disposable medical treatment apparatus. Since Mr. Liu accepted the assignment with all the
risks and obligations but had no right to revenues from the sale of medical and disposable medical treatment apparatus, the Company agreed to pay Mr. Liu compensation for an aggregate of approximately $1.3 million (RMB 9 million) in 5 equal annual installments of approximately $263,000 (RMB 1.8 million) started from October 21, 2006. During fiscal 2009 and 2008, we did not pay anything to Dr. Liu for the liability incurred by the assignment in the agreement mentioned above. Dr. Liu agreed to allow the Company deferred the installments in fiscal year 2009 and 2008 in order to ease the burden on Companys working capital needs. At December 31, 2009, amounts due under this assignment agreement was $1,033,592, and was included in due to related parties ($263,266 was in long-term portion and $770,326 was in the current portion) on our balance sheet.
Our Chief Executive Officer, Mrs. Song Zhenghong, Mr. Song Guoan who is Mrs. Song Zhenghongs father and Chief Executive Officers father-in-law, and two employees made a loan to us for working capital purpose on December 31, 2005. The loan is due on December 30, 2015 with variable annual interest at 80% of current bank rate and unsecured. According to the terms set forth in the loan agreement, the interest for the loan will be paid off on due date of the loan. The principal of the loan was included in long-term loan payable related parties at an amount of $5,069,023 and the accrued and unpaid interest for the loan was included in long-term due to related parties at an amount of $602,836 on our balance sheet dated December 31, 2009.
DIRECTOR INDEPENDENCE
Our Board of Directors has determined that director Dr. Ian Ashley is independent director within The NASDAQ Stock Markets director independence standards pursuant to Marketplace Rule 4200.
REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
All ongoing and future transactions between us and any of our officers and directors and their respective affiliates, including loans by our officers and directors, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties. Such transactions or loans, including any forgiveness of loans, will require prior approval by a majority of our disinterested independent directors (to the extent we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested independent directors determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties. We
will not enter into a business combination or invest alongside any of our directors, officers, any affiliate of ours or of any of our directors or officers or a portfolio company of any affiliate of our directors or officers.
POTENTIAL CONFLICTS OF INTERESTS
Save as disclosed below and under the section Interested Person Transactions, during the past three financial years:
|
a)
|
None of our directors, executive officers or controlling shareholder or their affiliates has had any interest, direct or indirect, in any material transaction to which we are a party.
|
|
b)
|
None of our directors, executive officers or controlling shareholder or their affiliates has had any interest, direct or indirect, in any company that carries the same business or similar trade which competes materially and directly with our existing business.
|
55
|
c)
|
None of our directors, executive officers or controlling shareholder or their affiliates has had any interest, direct or indirect, in any enterprise or company that is our major customer or supplier of goods or services.
|
|
d)
|
None of our directors, executive officers or controlling shareholder or their affiliates has had any interest, direct or indirect, in any material transaction we have undertaken within the last three years.
|
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table sets forth the fees billed by our principal independent accountants for each of our last two fiscal years for the categories of services indicated.
|
|
Years Ended December 31,
|
|
Category
|
|
2009
|
|
2008
|
|
Audit Fees (1)
|
|
$
|
45,000
|
|
$
|
77,000
|
|
Audit Related Fees (2)
|
|
|
21,000
|
|
|
22,500
|
|
Tax Fees (3)
|
|
|
0
|
|
|
0
|
|
All Other Fees (4)
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
66,000
|
|
$
|
99,500
|
|
(1)
|
Consists of fees billed for the audit of our annual financial statements, review of our Form 10-K/10-KSB and services that are normally provided by the accountant in connection with year-end statutory and regulatory filings or engagements.
|
|
|
(2)
|
Consists of fees billed for the review of our quarterly financial statements, review of our forms 10-Q/10-QSB and 8-K and services that are normally provided by the accountant in connection with non year end statutory and regulatory filings on engagements.
|
|
|
(3)
|
Consists of professional services rendered by a company aligned with our principal accountant for tax compliance, tax advice and tax planning.
|
|
|
(4)
|
The services provided by our accountants within this category consisted of advice and other services relating to SEC matters, registration statement review, accounting issues and client conferences.
|
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to fiscal year 2009 were pre-approved by the entire Board of Directors.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibit No.
|
Description
|
2.3
|
Share Exchange Agreement between S.E. Asia Trading Company, Inc., SEAA Stockholders and Lotus Pharmaceutical International, Inc. and the Lotus Pharmaceutical International, Inc. Stockholders dated September 6, 2006 (1)
|
3.1
|
Certificate of Amendment effective December 14, 2006 (5)
|
3.2
|
Charter of S.E. Asia Trading Company, Inc. as filed with the State of Nevada (2)
|
3.3
|
Bylaws (2)
|
3.4
|
Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Redeemable Preferred Stock (8)
|
4.1
|
Form of Warrant (6)
|
4.2
|
Form of Series A Convertible Redeemable Preferred Stock Certificate (8)
|
5.1
|
Legal Opinion Concerning Lotus Pharmaceuticals, Inc. and its Subsidiaries/Affiliates dated February 5, 2008. *
|
10.1
|
Equity Pledge Agreement between Lotus Pharmaceutical International, Inc. and Liang Fang Pharmaceutical Co., Ltd. and Liang Fangs Majority Stockholders dated September 6, 2006 (3)
|
56
10.2
|
Operating Agreement between Lotus Pharmaceutical International, Inc., and Liang Fang, Liang Fangs Majority Stockholders dated September 6, 2006 (3)
|
10.3
|
Proxy Agreement between Lotus Pharmaceutical International, Inc., Liang Fang, and Liang Fang s Majority Stockholders dated September 6, 2006 (3)
|
10.4
|
Option Agreement between Lotus Pharmaceutical International, Inc. and Liang Fang, Liang Fang Majority Stockholders dated September 6, 2006 (3)
|
10.5
|
Equity Pledge Agreement between Lotus Pharmaceutical International, Inc. and En Zhe Jia Shi Pharmaceutical Co., Ltd. and En Zhe Jia Shis Majority Stockholders dated September 6, 2006 (3)
|
10.6
|
Operating Agreement between Lotus Pharmaceutical International, Inc., and En Zhe Jia Shi, En Zhe Jia Shis Majority Stockholders dated September 6, 2006 (3)
|
10.7
|
Proxy Agreement between Lotus Pharmaceutical International, Inc., En Zhe Jia Shi, and En Zhe Jia Shis Majority Stockholders dated September 6, 2006 (3)
|
10.8
|
Option Agreement between Lotus Pharmaceutical International, Inc. and En Zhe Jia Shi, En Zhe Jia Shis Majority Stockholders dated September 6, 2006 (3)
|
10.9
|
Consulting Services Agreement between Lotus Pharmaceutical International, Inc. and Liang Fang Pharmaceutical Co., Ltd. dated September 6, 2006 (3)
|
10.10
|
Consulting Services Agreement between Lotus Pharmaceutical International, Inc., En Zhe Jia Shi Pharmaceutical Co., Ltd. dated September 6, 2006 (3)
|
10.11
|
Letter of Resignation by Mr. Thomas Miller to the Board of Directors of S.E. Asia Trading Company (3)
|
10.12
|
General Partnership Agreement between Genesis Equity Partners, LLC and Liang Fang Pharmaceutical, Ltd. dated March 15, 2006. (3)
|
10.13
|
Lease Agreement between Beijing Aoshikai Peace Lane Shopping Center and Liang Fang Pharmaceutical Co. Ltd. dated June 1, 2002. (3)
|
10.14
|
Lease Agreement between Beijing Aoshikai Peace Lane Shopping Center and Liang Fang Pharmaceutical Co. Ltd. dated June 1, 2005. (3)
|
10.15
|
Lease Agreement between Beijing Fengtai District Retired Officer Management Agency of General Logistics of P.L.A. and Liang Fang Pharmaceutical Co. Ltd. dated September 15, 2003. (3)
|
10.16
|
Lease Agreement between Beijing Fengtai District 2
nd
Sanatorium of General Logistics of P.L.A. and Liang Fang Pharmaceutical Co. Ltd. dated April 1, 2003. (3)
|
10.17
|
Lease Agreement between Beijing Qiji Investment and Management Center and Liang Fang Pharmaceutical Co. Ltd. dated October 10, 2005. (3)
|
10.18
|
Lease Agreement between Beijing South Palace Marketing Center and Liang Fang Pharmaceutical Co. Ltd. dated January 1, 2006. (3)
|
10.19
|
Lease Agreement between Beijing Xingfa Food Shop and Liang Fang Pharmaceutical Co. Ltd. dated January 1, 2006. (3)
|
10.20
|
Lease Agreement between Construction and Repair Agency of Haiying Group and Liang Fang Pharmaceutical Co. Ltd. dated December 31, 2000. (3)
|
10.21
|
Lease Agreement between Liu Zhongyi and Liang Fang Pharmaceutical Co. Ltd. Dated December 15, 2001. (3)
|
10.22
|
Lease Agreement between Real Estate Management Agency of General Logistics of P.L.A. and Drugstore (Wanshou Round Branch) of Liang Fang Pharmaceutical Co. Ltd. dated September 1, 2004. (3)
|
10.23
|
Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd. and Liu Zhongyi dated December 31, 2005. (3)
|
10.24
|
Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd. and Ma Zhaozhao dated December 31, 2005. (3)
|
10.25
|
Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd. and Song Guo an dated December 31, 2005. (3)
|
10.26
|
Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd. and Song Zhenghong dated December 31, 2005. (3)
|
10.27
|
Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd. and Zehng Guixin dated December 31, 2005. (3)
|
10.28
|
Letter Agreement among S.E. Asia Trading Company, Inc., Lynn Management, LLC and Dynacap Holdings Limited LLC dated September 13, 2006. (3)
|
10.29
|
Bill of Sale between S.E. Asia Trading Company, Inc. and Charles Smith dated September 25, 2006. (3)
|
57
10.30
|
Loan Agreement among Beijing Liang Fang Pharmaceutical Co., Ltd. and Wu Lan Cha Bu Emergency Hospital (English version) (7)
|
10.31
|
Loan Agreement among Beijing Liang Fang Pharmaceutical Co., Ltd. and Wu Lan Cha Bu Emergency Hospital (Chinese version) (7)
|
10.32
|
Contract among Wu Lan Cha Bu Emergency Hospital Center and Beijing Liang Fang Pharmaceutical Co., Ltd. dated October 10, 2006 (English version) (7)
|
10.33
|
Contract among Wu Lan Cha Bu Emergency Hospital Center and Beijing Liang Fang Pharmaceutical Co., Ltd. dated October 10, 2006 (Chinese version) (7)
|
10.34
|
Assignment agreement among Beijing Liang Fang Pharmaceuticals Co., Ltd. and Dr. Liu Zhong Yi dated October 10, 2006 (English version) (7)
|
10.35
|
Assignment agreement among Beijing Liang Fang Pharmaceuticals Co., Ltd. and Dr. Liu Zhong Yi dated October 10, 2006 (Chinese version) (7)
|
10.36
|
Convertible Redeemable Preferred Share and Warrant Purchase Agreement dated February 25, 2008 by and among Lotus Pharmaceuticals, Inc., its founders Dr. Liu Zhong Yi and Mrs. Song Zhenghong, and certain accredited investors (6)
|
10.37
|
Form of Escrow Agreement (6)
|
10.38
|
Form of Closing Escrow Agreement (6)
|
10.39
|
English translation of Technology Transfer Agreement dated April 25, 2008 by and between Bei Jing En Ze Jia Shi Pharmaceuticals LTD and Dong Guan Kai Fa Biologicals Medicine LTD (9)
|
10.40
|
English translation of Agreement dated June 3, 2008 by and between Beijing Liang Fang Pharmaceutical Co., Ltd., a Chinese limited liability company, and Cha You Qian Qi Economy Commission. (10)
|
10.41
|
Yipubishan New Drug Certificate and Intellectual Property Right Transfer Contract (12)
|
10.42
|
Standby Equity Distribution Agreement between Lotus Pharmaceuticals Inc. and YA Global Master SPV Ltd (13)
|
10.43
|
Assignment of Agreement between Lotus Pharmaceutical International, Inc. and Lotus Century Pharmaceutical (Beijing) Technology dated August 20, 2007. *
|
14.1
|
Lotus Pharmaceuticals, Inc. Code of Business Conduct and Ethics (11)
|
21.1
|
Subsidiaries of the company (7)
|
31.1
|
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer *
|
31.2
|
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer *
|
32.1
|
Section 1350 Certification of Chief Executive Officer *
|
32.2
|
Section 1350 Certification of Chief Financial Officer *
|
*
|
Filed herein
|
(1)
|
Incorporated by reference from the Current Report on Form 8-K filed on September 7, 2006.
|
(2)
|
Incorporated by reference from the registration statement on Form SB-1, SEC File No. 333-118898, filed on September 10, 2004, as amended.
|
(3)
|
Incorporated by reference from the Current Report on Form 8-K filed on October 5, 2006.
|
(4)
|
Incorporated by reference from the Current Report on Form 8-K filed on November 13, 2006.
|
(5)
|
Incorporated by reference from the Current Report on Form 8-K filed on December 19, 2006.
|
(6)
|
Incorporated by reference from the Current Report on Form 8-K filed on February 26, 2008.
|
(7)
|
Incorporated by reference from the Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006.
|
(8)
|
Incorporated by reference from the Current Report on Form 8-K/A as filed on February 29, 2008.
|
(9)
|
Incorporated by reference from the Current Report on Form 8-K as filed on May 30, 2008.
|
(10)
|
Incorporated by reference from the Current Report on Form 8-K as filed on July 17, 2008.
|
(11)
|
Incorporated by reference from the Current Report on Form S-1 as filed on May 13, 2008.
|
(12)
|
Incorporated by reference from the Current Report on Form 8-K as filed on February 18, 2009.
|
(13)
|
Incorporated by reference from the Current Report on Form 8-K as filed on March 5, 2010
|
58
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
|
LOTUS PHARMACEUTICALS, INC.
|
|
|
|
March 30, 2010
|
By:
|
/s/ Zhongyi Liu
|
|
Zhongyi Liu, Chief Executive Officer and Director
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Dr. Liu Zhongyi
|
|
Chief Executive Officer and Director
|
|
March 30, 2009
|
Dr. Liu Zhongyi
|
|
|
|
|
|
|
|
|
|
/s/ Ms. Zeng Yan
|
|
Chief Financial Officer
|
|
March 30, 2009
|
Ms. Zeng Yan
|
|
|
|
|
|
|
|
|
|
/s/ Dr. Ian Ashley
|
|
Director
|
|
March 30, 2009
|
Dr. Ian Ashley
|
|
|
|
|
|
|
|
|
|
/s/ Ms. Li Ping
|
|
Director
|
|
March 30, 2009
|
Ms. Li Ping
|
|
|
|
|
|
|
|
|
|
/s/ Mr. Liu Jin
|
|
Director
|
|
March 30, 2009
|
Mr. Liu Jin
|
|
|
|
|
|
|
|
|
|
/s/ Ms. Xian Xuemei
|
|
Director
|
|
March 30, 2009
|
Ms. Xian Xuemei
|
|
|
|
|
|
|
|
|
|
/s/ Mrs. Song Zhenghong
|
|
Director
|
|
March 30, 2009
|
Mrs. Song Zhenghong
|
|
|
|
|
59
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
CONTENTS
Report of Independent Registered Public Accounting Firm, Friedman LLP
|
F-1
|
|
|
Report of Independent Registered Public Accounting Firm, Sherb & Co. LLP
|
F-2
|
|
|
Consolidated Financial Statements:
|
|
|
|
Consolidated Balance Sheets
As of December 31, 2009 and 2008
|
F-3
|
|
|
Consolidated Statements of Income and other comprehensive income
For the Years Ended December 31, 2009 and 2008
|
F-4
|
|
|
Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2009 and 2008
|
F-5
|
|
|
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2009 and 2008
|
F-6
|
|
|
Notes to Consolidated Financial Statements
|
F-7 to F-35
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Lotus Pharmaceuticals Inc and subsidiaries
We have audited the accompanying consolidated balance sheet of Lotus Pharmaceuticals Inc and subsidiaries. as of December 31, 2009, and the related consolidated statements of income, stockholders equity and comprehensive income, and cash flows for the year ended December 31, 2009. Lotus Pharmaceuticals Inc and subsidiaries management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lotus Pharmaceuticals Inc and subsidiaries. as of December 31, 2009, and the results of its operations and its cash flows for the year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
Marlton, New Jersey
March 30, 2010
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Lotus Pharmaceuticals, Inc. and Subsidiaries
Beijing, China
We have audited the accompanying consolidated balance sheets of Lotus Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in shareholders equity, and cash flows for the years ended December 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amount and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lotus Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years ended December 31, 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ Sherb & Co., LLP
Certified Public Accountants
New York, New York
March 17, 2009
F-2
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
As of December 31,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,945,740
|
|
$
|
1,278,808
|
|
Accounts receivable
|
|
|
1,784,194
|
|
|
6,132,912
|
|
Other receivable
|
|
|
16,132
|
|
|
15,757
|
|
Other receivable-related party
|
|
|
|
|
|
2,027,954
|
|
Inventories
|
|
|
1,039,867
|
|
|
3,787,802
|
|
Prepaid expenses and other assets - current
|
|
|
856,691
|
|
|
121,274
|
|
Deferred debt costs - current
|
|
|
52,226
|
|
|
398,067
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
7,694,850
|
|
|
13,762,574
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT - net of depreciation
|
|
|
16,223,775
|
|
|
6,896,886
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
Prepaid expenses - noncurrent
|
|
|
1,359,583
|
|
|
|
|
Deposits and Installments on intangible assets
|
|
|
41,926,520
|
|
|
41,093,053
|
|
Intangible assets, net of accumulated amortization
|
|
|
17,176,207
|
|
|
1,889,661
|
|
Deferred debt costs - noncurrent
|
|
|
|
|
|
66,344
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
84,380,935
|
|
$
|
63,708,518
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
427,924
|
|
$
|
895,283
|
|
Other payables
|
|
|
2,262,760
|
|
|
1,274,882
|
|
Taxes payable
|
|
|
3,131,908
|
|
|
5,015,908
|
|
Unearned revenue
|
|
|
1,163,771
|
|
|
565,629
|
|
Due to related parties - current
|
|
|
1,490,649
|
|
|
1,224,339
|
|
Series A convertible redeemable preferred stock, $.001 par value;
10,000,000 shares authorized; 4,967,959 and 5,747,118 shares issued and
outstanding at December 31, 2009 and 2008, respectively, net of discount
|
|
|
4,170,572
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
12,647,584
|
|
|
8,976,041
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
Due to related parties - noncurrent
|
|
|
866,102
|
|
|
889,575
|
|
Notes payable - related parties
|
|
|
5,069,023
|
|
|
5,056,451
|
|
Series A convertible redeemable preferred stock, $.001 par value;
10,000,000 shares authorized; 4,967,959 and 5,747,118 shares issued and
outstanding at December 31, 2009 and 2008, respectively, net of discount
|
|
|
|
|
|
3,652,341
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
18,582,709
|
|
|
18,574,408
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
Common stock ($.001 par value; 200,000,000 shares authorized;
47,306,332 and 42,420,239 shares issued and outstanding at
December 31, 2009 and 2008, respectively)
|
|
|
47,306
|
|
|
42,420
|
|
Additional paid-in capital
|
|
|
15,649,328
|
|
|
11,554,381
|
|
Statutory reserves
|
|
|
5,674,324
|
|
|
3,750,529
|
|
Retained earnings
|
|
|
40,066,036
|
|
|
25,557,537
|
|
Accumulated other comprehensive income
|
|
|
4,361,232
|
|
|
4,229,243
|
|
|
|
|
|
|
|
|
|
Total stockholders' Equity
|
|
|
65,798,226
|
|
|
45,134,110
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
84,380,935
|
|
$
|
63,708,518
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-3
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
|
|
For the Years Ended
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
NET REVENUES:
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
44,842,525
|
|
$
|
54,067,149
|
|
Retail
|
|
|
11,639,923
|
|
|
14,034,389
|
|
Other revenues
|
|
|
1,342,197
|
|
|
5,701,491
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
57,824,645
|
|
|
73,803,029
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
25,353,714
|
|
|
40,651,042
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
32,470,931
|
|
|
33,151,987
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
8,040,161
|
|
|
14,902,646
|
|
Research and development
|
|
|
|
|
|
1,200,194
|
|
Loss on fixed assets impairment
|
|
|
1,719,884
|
|
|
|
|
General and administrative
|
|
|
3,391,875
|
|
|
1,979,203
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
13,151,920
|
|
|
18,082,043
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
19,319,011
|
|
|
15,069,944
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(412,184
|
)
|
|
(361,436
|
)
|
Registration rights penalty
|
|
|
|
|
|
(650
|
)
|
Interest income
|
|
|
48,520
|
|
|
12,626
|
|
Interest expense
|
|
|
(2,154,373
|
)
|
|
(1,929,836
|
)
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(2,518,037
|
)
|
|
(2,279,296
|
)
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
16,800,974
|
|
|
12,790,648
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
|
|
|
368,680
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
16,432,294
|
|
$
|
12,790,648
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
16,432,294
|
|
|
12,790,648
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
131,989
|
|
|
2,247,686
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
16,564,283
|
|
$
|
15,038,334
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
$
|
0.30
|
|
Diluted
|
|
$
|
0.33
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
Basic
|
|
|
44,209,856
|
|
|
42,307,762
|
|
Diluted
|
|
|
50,046,381
|
|
|
48,054,880
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-4
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2009 and 2008
|
|
Common Stock,
$.001 Par Value
|
|
Additional
|
|
|
|
|
|
Accumulated
other
|
|
Total
|
|
|
|
Number of
|
|
|
|
Paid-in
|
|
Retained
|
|
Statutory
|
|
Comprehensive
|
|
Shareholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Reserves
|
|
Income
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
41,794,200
|
|
$ 41,794
|
|
$ 8,095,848
|
|
$ 14,355,913
|
|
$ 2,161,505
|
|
$ 1,981,557
|
|
$ 26,636,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A convertible redeemable preferred stock
|
|
|
|
|
|
2,637,828
|
|
|
|
|
|
|
|
2,637,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for consulting expense
|
|
|
|
|
|
178,187
|
|
|
|
|
|
|
|
178,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
366,962
|
|
367
|
|
318,184
|
|
|
|
|
|
|
|
318,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for conversion of convertible debt
|
|
250,000
|
|
250
|
|
249,750
|
|
|
|
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for warrants exercised
|
|
9,077
|
|
9
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants repricing
|
|
|
|
|
|
74,593
|
|
|
|
|
|
|
|
74,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation to statutory reserve
|
|
|
|
|
|
|
|
(1,589,024
|
)
|
1,589,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
12,790,648
|
|
|
|
|
|
12,790,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
2,247,686
|
|
2,247,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
42,420,239
|
|
42,420
|
|
11,554,381
|
|
25,557,537
|
|
3,750,529
|
|
4,229,243
|
|
45,134,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
3,610,237
|
|
3,610
|
|
2,648,723
|
|
|
|
|
|
|
|
2,652,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for conversion of convertible preferred stock
|
|
1,275,856
|
|
1,276
|
|
1,108,724
|
|
|
|
|
|
|
|
1,110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrow Shares transferred to various investors per 2008 Purchase Agreement
|
|
|
|
|
|
337,500
|
|
|
|
|
|
|
|
337,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation to statutory reserve
|
|
|
|
|
|
|
|
(1,923,795
|
)
|
1,923,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
16,432,294
|
|
|
|
|
|
16,432,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
131,989
|
|
131,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
47,306,332
|
|
$ 47,306
|
|
$ 15,649,328
|
|
$ 40,066,036
|
|
$ 5,674,324
|
|
$ 4,361,232
|
|
$ 65,798,226
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-5
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,432,294
|
|
$
|
12,790,648
|
|
Adjustments to reconcile net income from operations to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,986,361
|
|
|
634,347
|
|
Loss on fixed assets impairment
|
|
|
1,719,884
|
|
|
|
|
Amortization of deferred debt issuance costs
|
|
|
412,184
|
|
|
361,062
|
|
Amortization of debt discount
|
|
|
|
|
|
208,355
|
|
Amortization of discount on convertible redeemable preferred stock
|
|
|
1,196,106
|
|
|
962,604
|
|
Amortization of prepaid expense attributable to warrants
|
|
|
14,849
|
|
|
163,338
|
|
Stock-based compensation
|
|
|
282,083
|
|
|
318,551
|
|
Interest expenses caused by escrow shares transfer
|
|
|
337,500
|
|
|
|
|
Warrants revaluation
|
|
|
|
|
|
74,593
|
|
Decrease in allowance for doubtful accounts and sales returns
|
|
|
|
|
|
(575,781
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,361,619
|
|
|
16,001,384
|
|
Inventories
|
|
|
2,755,869
|
|
|
(145,910
|
)
|
Prepaid expenses and other current assets
|
|
|
2,043,209
|
|
|
939,654
|
|
Accounts payable and accrued expenses
|
|
|
213,431
|
|
|
1,360,568
|
|
Other current payables
|
|
|
668,662
|
|
|
|
|
Taxes payable
|
|
|
(1,895,451
|
)
|
|
4,336,947
|
|
Unearned revenue
|
|
|
596,414
|
|
|
(36,276
|
)
|
Due to related parties
|
|
|
237,452
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
31,362,466
|
|
|
37,394,084
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Deposits on patent right
|
|
|
|
|
|
(2,872,635
|
)
|
Deposits on land use right
|
|
|
|
|
|
(32,124,672
|
)
|
Payments on intangible assets
|
|
|
(17,581,071
|
)
|
|
(5,465,762
|
)
|
Purchase of property and equipment
|
|
|
(11,118,884
|
)
|
|
(1,438,419
|
)
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(28,699,955
|
)
|
|
(41,901,488
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Repayment of convertible debt
|
|
|
|
|
|
(2,520,000
|
)
|
Proceeds from sale of convertible redeemable stocks
|
|
|
|
|
|
5,000,000
|
|
Payment of debt issuance costs
|
|
|
|
|
|
(468,568
|
)
|
Proceeds from related party advances
|
|
|
|
|
|
965,986
|
|
Repayments of related party advances
|
|
|
|
|
|
(1,996,481
|
)
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
|
|
|
980,937
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH
|
|
|
4,421
|
|
|
247,318
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
2,666,932
|
|
|
(3,279,149
|
)
|
|
|
|
|
|
|
|
|
CASH - beginning of year
|
|
|
1,278,808
|
|
|
4,557,957
|
|
|
|
|
|
|
|
|
|
CASH - end of year
|
|
$
|
3,945,740
|
|
$
|
1,278,808
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
|
|
$
|
103,250
|
|
Income taxes
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Warrants issued for prepaid financing costs and consulting service
|
|
$
|
|
|
$
|
505,752
|
|
Common stock issued for services
|
|
$
|
2,370,250
|
|
$
|
318,551
|
|
Common stock issued for conversion of convertible debt
|
|
$
|
|
|
$
|
250,000
|
|
Common stock issued for conversion of convertible redeemable preferred stock
|
|
$
|
1,110,000
|
|
$
|
|
|
Debt discount for grant of warrants and beneficial conversion feature
|
|
$
|
|
|
$
|
2,310,263
|
|
Convertible redeemable preferred stock issued for dividend payable
|
|
$
|
432,125
|
|
$
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-6
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Lotus Pharmaceuticals, Inc. (Lotus or the Company), formerly S.E. Asia Trading Company, Inc. (SEAA), was incorporated on January 28, 2004 under the laws of the State of Nevada. SEAA originally operated as a retailer of jewelry, framed art and home accessories. In December 2006, SEAA changed its name to Lotus Pharmaceuticals, Inc.
On September 28, 2006, pursuant to a Share Exchange Agreement with Lotus Pharmaceutical International, Inc. (
Lotus International
), the Company acquired all of the outstanding common stock of Lotus International from the Lotus International shareholders in exchange for newly-issued stock of the Company (
Stock Exchange
). Lotus International became a wholly-owned subsidiary of the Company and Lotus Internationals shareholders became the owners of the majority of the Companys voting stock. The acquisition of Lotus International by the Company was accounted for as a reverse merger on a post-merger basis; the former shareholders of Lotus International hold a majority of the outstanding common stock of the Company on a voting and fully-diluted basis. As a result,
Lotus International is deemed to be the acquirer for accounting purposes.
Lotus International was incorporated under the laws the State of Nevada on August 28, 2006 to develop and market pharmaceutical products in the Peoples Republic of China (
PRC
or
China
). PRC law currently has limits on foreign ownership of certain companies. To comply with these foreign ownership restrictions, Lotus International operates its pharmaceutical business in China through Beijing Liang Fang Pharmaceutical Co., Ltd. (
Liang Fang
) and an affiliate of Liang Fang, Beijing En Ze Jia Shi Pharmaceutical Co., Ltd. (
En Ze Jia Shi
), both of which are pharmaceutical companies headquartered in the PRC and organized under the laws of the PRC (hereinafter, referred to
together as
Lotus East
). Lotus International controlled Lotus East through various contracts with Lotus East and its shareholders in September 2006, pursuant to which Lotus International should provide technology consulting and other general business operation services to Lotus East. Lotus International also has the ability to substantially influence Lotus Easts daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As a result, Lotus International is considered the primary beneficiary of Lotus East.
In September 2006, Lotus International entered into the following contractual arrangements:
Operating Agreement
. Pursuant to the operating agreement among Lotus, Lotus East and the shareholders of Lotus East, (collectively
Lotus Easts Shareholders
), Lotus provides guidance and instructions on Lotus Easts daily operations, financial management and employment issues. The shareholders of Lotus East must designate the candidates recommended by Lotus as their representatives on Lotus Easts Board of Directors. Lotus has the right to appoint senior executives of Lotus East. In addition, Lotus agreed to guarantee Lotus Easts performance under any agreements or arrangements relating to Lotus Easts business arrangements with any third party. Lotus East, in return, agreed to pledge its accounts receivable and all of its assets to Lotus. Moreover, Lotus East agreed that without the prior consent
of Lotus, Lotus East would not engage in any transaction that could materially affect the assets, liabilities, rights or operations of Lotus East, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. The term of this agreement is ten (10) years from September 6, 2006 and may be extended only upon Lotuss written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.
Consulting Services Agreement
. Pursuant to the exclusive consulting services agreements between Lotus and Lotus East, Lotus has the exclusive right to provide to Lotus East general pharmaceutical business operations services as well as consulting services related to the technological research and development of pharmaceutical products as well as general business operation advice and strategic planning (the
Services
). Under this agreement, Lotus owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. Lotus East is required to pay a quarterly consulting service fees in Renminbi (
RMB
), the functional currency of the PRC, to Lotus that is
equal to Lotus Easts profits, as defined, for such quarter.
F-7
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Organization (continued)
The Companys structure is commonly used to allow foreign investors to invest 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 one of Lotus East. The board of Lotus Pharmaceuticals has decided that incomes generated by the operating entities are retained within China for operating purpose.
Equity Pledge Agreement
.
Under the equity pledge agreement between the shareholders of Lotus East and Lotus, the shareholders of Lotus East pledged all of their equity interests in Lotus East to Lotus to guarantee Lotus Easts performance of its obligations under the technology consulting agreement. If Lotus East or Lotus Easts Shareholders breaches its respective contractual obligations, Lotus, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. Lotus Easts Shareholders also agreed that upon occurrence of any event of default, Lotus shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of Lotus Easts Shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument
that Lotus may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The shareholders of Lotus East agreed not to dispose of the pledged equity interests or take any actions that would prejudice Lotus interest. The equity pledge agreement will expire two (2) years after Lotus Easts obligations under the exclusive consulting services agreements have been fulfilled.
Option Agreement
.
Under the option agreement between the shareholders of Lotus East and Lotus, the shareholders of Lotus East irrevocably granted Lotus or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in Lotus East for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Lotus or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement is 10 years from September 6, 2006 and may be extended prior to its expiration by written agreement of the parties.
Proxy Agreement
.
Pursuant to the proxy agreement among Lotus and Lotus Easts Shareholders, Lotus Easts Shareholders agreed to irrevocably grant a person to be designated by Lotus with the right to exercise Lotus Easts Shareholders voting rights and their other rights, including the attendance at and the voting of Lotus Easts Shareholders shares at the shareholders meetings (or by written consent in lieu of such meetings) in accordance with applicable laws and its Article of Association, including but not limited to the rights to sell or transfer all or any of his equity interests of Lotus East, and appoint and vote for the directors and Chairman as the authorized representative of the shareholders of Lotus East. The term of this Proxy Agreement is ten (10) years from September 6, 2006 and may be extended prior to
its expiration by written agreement of the parties.
Liang Fang is a Chinese limited liability company and was formed under laws of the Peoples Republic of China on June 21, 2000. Liang Fang is engaged in the production, trade and retailing of pharmaceuticals. Further, Liang Fang is focused on developing innovative medicines and investing strategic growth to address various medical needs for patients worldwide. Liang Fangs operations are based in Beijing, China.
As of December 31, 2009, Liang Fang owns and operates 10 drug stores throughout Beijing, China. These drugstores sell Western and traditional Chinese medicines, and medical treatment accessories.
Liang Fangs affiliate, En Ze Jia Shi is a Chinese limited liability company and was formed under laws of the Peoples Republic of China on September 17, 1999. En Ze Jia Shi is the sole manufacturer for Liang Fang and maintains facilities for the production of medicines, patented Chinese medicine, as well as the research and production of other new medicines.
F-8
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Organization (continued)
As a result of the management agreements between Lotus International and Lotus East, which enable Lotus International to absorb a majority of the risk of loss from Lotus Easts activities and enable Lotus International to receive a majority of its expected residual returns, Lotus International accounts for Lotus east as a variable interest entity (VIE) under FASB Interpretation No. 46R (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 52.
On May 29, 2007, the Company formed a new entity, Lotus Century Pharmaceutical (Beijing) Technology Co., Ltd. (Lotus Century), a wholly foreign-owned enterprise (WFOE) organized under the laws of the Peoples Republic of China. Lotus Century is a Chinese limited liability company and a wholly-owned subsidiary of Lotus Pharmaceutical International, Inc. Lotus Century intends to be engaged in development of innovative medicines, medical technology consulting and outsourcing services, and related training services. On August 20, 2007, an assignment agreement was signed between Lotus International and Lotus Century. Pursuant to the terms of the assignment agreement, Lotus Century was assigned all of Lotus Internationals right, title and interest to control the management and voting and to be entitled to all of the profits and losses of Lotus East.
Basis of presentation; managements responsibility for preparation of financial statements
Management acknowledges its responsibility for the preparation of the accompanying consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the years presented.
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP). The consolidated statements include the accounts of Lotus Pharmaceuticals, Inc. and its wholly-owned subsidiaries, Lotus international and Lotus Century and variable interest entities under its control (Liang Fang and En Ze Jia Shi). All significant inter-company balances and transactions have been eliminated.
The Company has adopted ASC 810 Consolidation of Variable Interest Entities (
ASC 810
), an Interpretation of Accounting Research Bulletin No. 51. ASC 810 requires a Variable Interest Entity (VIE) to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIEs residual returns. VIEs are those entities in which the Company, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership of the entities, and therefore the Company is the primary beneficiary of these entities. As a VIE, Lotus Easts revenues are included in the Companys total revenues, its income from operations is consolidated with the Companys, and the Companys net income includes all of Lotus Easts net income.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in 2009 and 2008 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, fair value of warrants and beneficial conversion features related to the convertible preferred stock and fair value of warrants granted.
Fair value of financial instruments
The Company adopted ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
F-9
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value of financial instruments (continued)
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entitys own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses, convertible debt, customer advances, and amounts due to related parties approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the United States. Balances in the United States are insured up to $250,000 at each bank. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. Non-performance by these institutions could expose the Company to losses for amounts in excess of insured balances.
Accounts receivable
The Company records accounts receivable, net of an
allowance for doubtful accounts and sales returns. The Company maintains allowances for doubtful accounts for estimated losses. The
Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the
collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers
many factors, including the age of the balance, customers historical payment history, its current credit-worthiness and
current economic trends. The amount of the provision, if any is recognized in the consolidated statement of operations within
General and Administrative Expenses. Accounts are written off after exhaustive efforts at collection. Because we have
good relationship with our customers and our collection representative make great efforts to collect our outstanding receivable, the
majority age of the balance of our accounts receivable are less than three months. Based on a review of its outstanding balances,
the Company did not record any allowance for doubtful accounts in the years ended December 31, 2009 and 2008.
Inventories
Inventories, consisting of raw materials, packaging materials, work-in-process and finished goods related to the Companys products are stated at the lower of cost or market utilizing the average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates and reflected in cost of sales. The Company did not consider it necessary to record any inventory reserve during the years ended December 31, 2009 and 2008.
F-10
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment
Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
The construction-in-progress which consists of factories and office buildings under construction in China was included in property and equipment. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.
Impairment of long-lived assets
In accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the assets estimated fair value and its book value. In fiscal 2010, we will demolish a portion of a Beijing En Ze Jia Shi building in order to construct our nine-floor new building. The new building will be used for our offices, research and development, production, and modern storage. Therefore, we recognized the break away as impairment loss. We recorded an impairment loss from fixed assets of $1,719,884
during the year ended December 31, 2009 while we did not record any impairment charges during the year ended December 31, 2008.
Income tax
The Company is governed by the Income Tax Law of the Peoples Republic of China and the United States. Income taxes are accounted for under ASC 740, Accounting for Income Taxes, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Companys financial statements or tax returns.
In July 2006, the ASC 740, Accounting for Uncertainty in Income Taxes, which clarifies the accounting and disclosure for uncertain tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006, and the Company has implemented this interpretation as of July 1, 2007. ASC 740 prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Income tax
Under ASC 740, evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first
subsequent financial reporting period in which the threshold is no longer met.
The adoption of ASC 740 on July 1, 2007 had no effect on the Companys consolidated financial statements.
F-11
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Value added tax
The Company is subject to value added tax
(
VAT
) for manufacturing and selling products and business tax for
services provided. The applicable VAT rate is 17% for products sold in the PRC. The amount of VAT liability is determined by
applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant
supporting invoices (input VAT). Under the commercial practice of the PRC, the Company paid VAT based on tax invoices issued. The
tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the
date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities
dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can
range from zero to five times the amount of the taxes which are determined to be late or deficient, and will be charged to
operations in the period if and when a determination is made by the taxing authorities that a penalty is due.
Revenue recognition
Product sales
Product sales are generally recognized when title to
the product has transferred to customers in accordance with the terms of the sale. The Company recognizes revenue in accordance with
ASC 605. ASC 605 states that revenue should not be recognized until it is realized or realizable and earned. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the
sales price to the customer is fixed or determinable, and collectability is reasonably assured.
ASC 605 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if the sellers price to the buyer is substantially fixed or determinable at the date of sale, the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product, the buyers obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product, the buyer acquiring the product for resale has economic substance apart from that provided by the seller, the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and the amount of future returns can be reasonably estimated.
Allowance for returns
The Company accounts for sales returns in accordance
with ASC 605, Revenue Recognition When Right of Return Exists, by establishing an accrual in an amount equal to its estimate of
sales recorded for which the related products are expected to be returned. The Company determines the estimate of the sales return
accrual primarily based on historical experience regarding sales returns, but also by considering other factors that could impact
sales returns. These factors include levels of inventory in the distribution channel, estimated shelf life, product discontinuances,
and price changes of competitive products, introductions of generic products and introductions of competitive new products. In
general, for wholesale sales, the Company provides credit for product returns that are returned six months prior to and up to six
months after the product expiration date. Upon sale, the Company estimates an allowance for future product returns. The Company
provides additional reserves for contemporaneous events that were not known and knowable at the time of shipment. In order to
reasonably estimate future returns, the Company analyzed both quantitative and qualitative information including, but not limited
to, actual return rates, the level of product manufactured by the Company, the level of product in the distribution channel,
expected shelf life of the product, current and projected product demand, the introduction of new or generic products that may erode
current demand, and general economic and industry wide indicators. The Company also utilizes the guidance provided in ASC 360 in
establishing its return estimates. Historically, the Companys sales returns have been minimal. Accordingly, based upon the
Companys experience, it historically does not record a reserve at the time of sale and there have been no accounting entries
related to its product return policy which have reduced its gross revenues or had any material impact on its financial statements.
F-12
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other revenues
Other revenues consist of (i) leasing revenues
received for the lease of retail space to various retail merchants; (ii) advertising revenues from the lease of counter space at the
Companys retail locations; (iii) leasing revenue from the lease of retail space to licensed medical practitioners; (iv)
revenues received by the Company for research and development projects and lab testing jobs conducted on behalf of third party
companies, and; (v) revenues received for performing third party contract manufacturing projects. In connection with third-party
manufacturing, the customer supplies the raw materials and we are paid a fee for manufacturing their product and revenue is
recognized at the completion of the manufacturing job. The Company recognizes revenues from leasing of space and advertising
revenues as earned from contracting third parties. The Company recognizes revenues upon performance of any research or lab testing
jobs. Revenues received in advance are reflected as unearned revenue on the accompanying balance sheet. Additionally, the Company
receives income from the sale of developed drug formulas. Income from the sale of drug formulas are recognized upon performance of
all of the Companys obligations under the respective sales contract and are included in other income on the accompanying
consolidated statement of operations.
Concentrations of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially, all of the Companys cash is maintained with state-owned banks within the Peoples Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Companys sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
Unearned Revenue
Unearned revenue consists of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue when customers take delivery of the goods, in accordance with its revenue recognition policy. At December 31, 2009 and 2008, we have unearned revenue of $1,163,771 and $565,629, respectively.
Stock-based compensation
Stock-based compensation is accounted for under ASC 718, Share-Based Payment. ASC 718 requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively the vesting period). ASC 718 also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. The Company accounts for non-employee share-based awards in accordance with ASC 505, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquisition, or in Conjunction with Selling, Goods or Services.
Shipping and handling
Shipping and handling costs are expensed as incurred. Shipping and handling costs were included in selling expenses and amounted to $292 and $210,096 for the years ended December 31, 2009 and 2008, respectively.
Employee benefits
The Companys operations and employees are all located in the PRC. The Company makes mandatory contributions to the PRC governments health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws, which is approximately 20% of salaries. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs and are not material.
F-13
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
Advertising is expensed as incurred. Advertising expenses were included in selling expenses and amounted to $46,450 and $181,026 for the years ended December 31, 2009 and 2008, respectively.
Research and development
Research and development costs are expensed as incurred. These costs primarily consist of cost of material used and salaries paid for the development of the Companys products and depreciation related to facilities used and fees paid to third parties. For the year ended December 31, 2009, the Company did not have any research and development expense. For the year ended December 31, 2008, the Company expensed $1,200,194 as research and development expense.
Foreign currency translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Companys operating subsidiaries and affiliates is the local currency, the Chinese Renminbi (
RMB
). For the subsidiaries and affiliates whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Companys revenue transactions are transacted in the functional currency. The Company does not enter any material transaction in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts on December 31, 2009 and
2008 were translated at 6.8372 RMB to $1.00 USD and at 6.8542 RMB to $1.00 USD, respectively. Equity accounts were stated at their
historical rate. The average translation rates applied to income statements for the years ended December 31, 2009 and 2008 were
6.84088 RMB and 6.96225 RMB to $1.00 USD, respectively. In accordance with ASC 230, Statement of Cash Flows, cash flows
from the Companys operations is calculated based upon the local currencies using the average translation rate. As a result,
amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
Earnings per common share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of common shares issuable upon the conversion of series A preferred stock (using the if-converted method) and common stock warrants (using the treasury stock method). The following table presents a reconciliation of basic and diluted net income per share:
F-14
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per common share (continued)
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
Net income for basic and diluted earnings per share
|
|
$
|
16,432,294
|
|
$
|
12,790,648
|
|
Weighted average shares outstanding basic
|
|
|
44,209,856
|
|
|
42,307,762
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Unexercised warrants
|
|
|
68,199
|
|
|
|
|
Convertible debentures
|
|
|
5,768,326
|
|
|
5,747,118
|
|
Weighted average shares outstanding diluted
|
|
|
50,046,381
|
|
|
48,054,880
|
|
Earnings per share basic
|
|
$
|
0.37
|
|
$
|
0.30
|
|
Earnings per share diluted
|
|
$
|
0.33
|
|
$
|
0.27
|
|
As of December 31, 2009 and 2008, a total of 3,726,999 and 5,166,999, respectively, warrants have not been included in the calculation of diluted earnings per share in order to avoid any anti-dilutive effect.
Accumulated other comprehensive income
The Company follows ASC 220
Reporting Comprehensive Income
to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, accumulated other comprehensive income consisted of unrealized gains on foreign currency translation adjustments from the translation of financial statements from Chinese RMB to US dollars. For the Company, comprehensive income for the years ended December 31, 2009 and 2008 included net income and unrealized gains from foreign currency translation adjustments.
Segment reporting
ASC 280 requires use of the management
approach model for segment reporting. The management approach model is based on the way a companys management organizes
segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. During
the years ended December 31, 2009 and 2008, the Company operated in two business segments - (1) Wholesales segment and (2) Retail
segment.
Subsequent Events
For purposes of determining whether a post-balance sheet event should be evaluated to determine whether it has an effect on the financial statements for the year ending December 31, 2009, subsequent events were evaluated by the Company as of the date on which the consolidated financial statements at and for the year ended December 31, 2009, were available to be issued.
Recent Accounting Pronouncements
In April 2009, the FASB updated the accounting standards to provide guidance on estimating the fair value of a financial asset or liability when the trade volume and level of activity for the asset or liability have significantly decreased relative to historical levels. The standard requires entities to disclose the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, debt and equity securities as defined by GAAP shall be disclosed by major category. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is to be applied prospectively. The adoption did not have a material effect on the Companys results of operations and financial condition.
F-15
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
In April 2009, the FASB updated the accounting
standards for the recognition and presentation of other-than-temporary impairments. The standard amends existing guidance on
other-than-temporary impairments for debt securities and requires that the credit portion of other-than-temporary impairments be
recorded in earnings and the noncredit portion of losses be recorded in other comprehensive income. The standard requires separate
presentation of both the credit and noncredit portions of other-than-temporary impairments on the financial statements and
additional disclosures. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. At the date of adoption, the portion of previously recognized
other-than-temporary impairments that represent the noncredit related loss component shall be recognized as a cumulative effect of
adoption with an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other
comprehensive income (loss). The adoption of this standard did not have a material effect on the preparation of the Companys
consolidated financial statements.
In May 2009, FASB issued FAS No. 165, Subsequent Events, which was subsequently codified within ASC 855, Subsequent Events. The standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. An entity should apply the requirements of ASC 855 to interim or annual financial periods ending after June 15, 2009. Adoption of this standard does not have a material impact on the Companys results of operations or financial position.
In June 2009, FASB established Accounting
Standards Codification TM (Codification) as the single source of authoritative accounting principles recognized by the
FASB in the preparation of financial statements in conformity with the GAAP. The Codification will supersede all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. The Codification is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. Adoption of the Codification does not have a material impact on the
Companys results of operations or financial position.
In June 2009, FASB updated the accounting standards related to the consolidation of variable interest entities (VIEs). The standard amends current consolidation guidance and requires additional disclosures about an enterprises involvement in VIEs. The standard shall be effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the adoption to have a material impact on the Companys results of operations or financial position.
In August 2009, the FASB issued an Accounting Standards Update (ASU) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the Companys consolidated financial statements.
In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The
Company is currently evaluating the impact of this ASU on its consolidated financial statements.
F-16
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140
.
The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and: (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily
qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entitys involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or
after December 31, 2009. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
F-17
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements (continued)
In January 2010, FASB issued ASU No. 2010-02, Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements An Amendment of ARB No. 51. If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are
effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The adoption of this ASU did not have a material impact on the Companys consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06
Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires
new disclosure as follows: (1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers. (2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales,
issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic
820-10 that clarify existing disclosures as follows: (1) Level of disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line
item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. (2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures
about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and
clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Thos disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the
adoption of this ASU to have a material impact on its consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect impact on the previously reported financial position, results of operations and cash flows.
NOTE 2
ACCOUNTS RECEIVABLE
At December 31, 2009 and 2008, accounts receivable consisted of the following:
|
|
2009
|
|
2008
|
Accounts receivable
|
$
|
1,784,194
|
$
|
6,132,912
|
Less: allowance for sales returns
|
|
-
|
|
-
|
Less: allowance for doubtful accounts
|
|
-
|
|
-
|
|
$
|
1,784,194
|
$
|
6,132,912
|
F-18
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 3
INVENTORIES
At December 31, 2009 and 2008, inventories consisted of the following:
|
|
2009
|
|
2008
|
Raw materials
|
$
|
773,211
|
$
|
2,884,092
|
Work in process
|
|
-
|
|
-
|
Packaging materials
|
|
16,023
|
|
16,100
|
Finished goods
|
|
250,633
|
|
887,610
|
|
|
1,039,867
|
|
3,787,802
|
Less: reserve for obsolete inventory
|
|
-
|
|
-
|
|
$
|
1,039,867
|
$
|
3,787,802
|
NOTE 4
PROPERTY AND EQUIPMENT
At December 31, 2009 and 2008, property and equipment consist of the following:
|
Useful Life
|
|
2009
|
|
2008
|
Office equipment and furniture
|
3-8 Years
|
$
|
244,490
|
$
|
228,673
|
Manufacturing equipment
|
10 15 Years
|
|
5,589,490
|
|
5,585,793
|
Building and building improvements
|
20 40 Years
|
|
2,339,612
|
|
2,333,809
|
Construction in progress
|
|
|
12,620,225
|
|
1,181,757
|
|
|
|
20,793,817
|
|
9,330,032
|
Less: accumulated depreciation
|
|
|
(4,570,042)
|
|
(2,433,146)
|
|
|
|
|
|
|
|
|
$
|
16,223,775
|
$
|
6,896,886
|
On December 31, 2009, construction in progress amounted to $12,620,225, representing (i) payments for construction of a new manufacturing plant of approximately $7.02 million located in Cha Ha Er Industrial Park in Inner Mongolia, China, and (ii) payment for construction of a new building of approximately $ 5.6 million in Beijing, China. The amount for the new plant in Inner Mongolia includes costs for road, paving, water well, water reservoir, pump station, switchboard room, distribution room materials, equipment installation engineering (such as transformation boxes, related corollary equipments and various cables etc.,), filter plant, flameproof equipment, fire control pond and pump, civil defense engineering and underground long corridor project, such as electrical, drainage system, heating, water pipes constructions and payment for design service. The amount for the new construction building in Beijing
includes payments for design service, water supply and sewerage work, civil air-defense construction fees, heating systems and old building removal. The new building will be set up on the land of 6700 square meters where Beijing En Ze Jia Shi currently is located.
The Company expects to finish the construction of the new building by July, interior decoration by September and GMP certification by December of 2010. Currently, the Companys administration office, sales office, R&D center and production base are widely separated in various districts of Beijing.
After finishing the construction of the new building, we will relocate above mentioned operating units into one concentrated area, which would help us run our business more efficiently. Upon completion of the construction in progress, the assets will be classified to be its respective property and equipment category.
For the year ended December 31, 2009, depreciation
expense amounted to $ 425,895, of which $399,731 was included in cost of sales. For the year ended December 31, 2008, depreciation
expense amounted to $482,624, of which $480,201 was included in cost of sales. During the year ended December 31, 2009, the Company
recorded an impairment on fixed assets of $1,719,884.
F-19
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 5
DEPOSIT AND INSTALLMENT ON INTANGIBLE ASSETS
Deposit and Installments on a Chinese Class I drug patent-Laevo-Bambutero
Pursuant to the technology transfer agreement the Company entered into in April 2008 (See note 12), the Company made a deposit to acquire a Chinese Class I drug patent. Accordingly, the Company recorded $2,925,174 (RMB 20 million) as deposit on patent as of December 31, 2009.
Also, the Company has arranged an installment payment plan on the Chinese Class I drug patent to obtain the patent according to the signed contract. Therefore, the Company made $5,411,572 (RMB 37 million) as installment payments on the intangible assets as of December 31, 2009. The Company will need to make additional installment payments of approximately $1.6 million (RMB 11 million) to obtain the patent.
In addition, we expect to incur approximately $11.7 million (RMB 80 million) related to the clinical trial evaluations for our Laevo-Bambutero drug in next 36 months, the application of which was accepted by the Chinese SFDA on July 10, 2008
Deposit on land use right
As of December 31, 2009, the Company paid a total of $32,712,221 (RMB 223.66 million) for the land use rights to the Companys new plant site in the Cha Ha Er Industrial Park ( See note 12), located in Inner Mongolia. The amount has been recorded as a deposit payment on intangible assets on the Companys balance sheet as of December 31, 2009. The deposit payment is refundable if the Chinese local government would not grant its land use rights certificate.
Installments on Gliclazide-Controlled Release Tablets
Pursuant to the new drug patent transfer agreement the Company entered into in February 2009 (See note 12 for Gliclazide-Controlled Release Tablets), the Company has made the first installment to the transferor to obtain the patent. Hence, the Company recorded $877,553 (RMB 6 million) as installment payment on intangible assets as of December 31, 2009. In order to acquire the patent, the Company needs to make additional installments of approximately $439,000 (RMB 3 million).
In addition, we expect to incur approximately $293,000 million (RMB 2 million) related to our Gliclazide-Controlled Release Tablets that was recently accepted by the Chinese SFDA for medicine registration application in the next 12 months.
NOTE 6
INTANGIBLE ASSETS
On October 9, 2006, the Company entered into a five-year loan agreement and a contract with Wu Lan Cha Bu Emergency Hospital (
Wu Lan
), whereby the Company agreed to lend Wu Lan approximately $4 million (RMB 30 million) for the construction of a hospital ward in Inner Mongolia, China. In exchange for the loan, Wu Lan agreed to grant the Company an exclusive right to supply all medicines and disposable medical treatment apparatus to Wu Lan for a period of twenty (20) years. In October 2006, the Companys chief executive officer, Mr. Liu Zhongyi (hereafter,
Mr.
Liu
), lent this loan to Wu Lan on behalf of the Company. On October 21, 2006, the Company entered into an assignment agreement whereby the Company assigned all of its rights,
obligations, and receipts under the Loan Agreement to Mr. Liu, except the rights to receive revenues from the sale of medical and disposable medical treatment apparatus. Since Mr. Liu accepted the assignment with all the risks and obligations but no right to revenues from the sale of medical and disposable medical treatment apparatus, the Company agreed to pay Mr. Liu compensation for an aggregate of approximately $1.3 million (RMB 9 million) in five (5) equal annual installments of approximately $263,000 (RMB 1.8 million) started from October 21, 2006
.
Accordingly, the Company recorded an intangible asset of approximately $1.3 million (RMB 9 million) related to the exclusive rights to provide all medicines and disposable medical treatment apparatus to Wu Lan for a period of twenty (20) years. The Company will amortize this exclusive right over a term of 20 years.
F-20
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 6
INTANGIBLE ASSETS (Continued)
The Company entered into an intellectual rights
transfer contract with Beijing Yipuan Bio-Medical Technology Co., Ltd. in December 2008 to acquire the drug property right of
Yipubishan. The intellectual property right is valued at a fixed amount of RMB 54 million (approximately $7.9 million). We have paid
the transfer fee in full for the intellectual property right to Yipuan as of June 30, 2009. The intellectual property right has a
term of 10 years and will not expire until December 31, 2018. The Company amortizes the intellectual property right over the term of
the intellectual property right
The intangible assets also include land use right
amounted to $9,765,621 which is amortized over a term of 50 years.
At December 31, 2009 and 2008, intangible assets consist of the following:
|
|
2009
|
|
2008
|
Manufacturing rights
|
$
|
-
|
$
|
1,264,334
|
Revenue rights
|
|
1,316,328
|
|
1,313,064
|
Intellectual rights
|
|
7,897,970
|
|
-
|
Land use rights
|
|
9,765,621
|
|
802,355
|
Software
|
|
10,823
|
|
10,796
|
|
|
18,990,742
|
|
3,390,549
|
Less: accumulated amortization
|
|
(1,814,535)
|
|
(1,500,888)
|
|
|
|
|
|
|
$
|
17,176,207
|
$
|
1,889,661
|
Amortization expense amounted to approximately $1,560,466 and $151,723 for the years ended December 31, 2009 and 2008, respectively.
The projected amortization expense attributed to future years is as follows:
Year ending December 31:
|
|
|
Expense
|
2010
|
|
$
|
1,752,609
|
2011
|
|
|
1,751,683
|
2012
|
|
|
1,749,976
|
2013
|
|
|
1,749,976
|
Thereafter
|
|
|
10,171,963
|
|
|
|
|
|
|
$
|
17,176,207
|
F-21
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 7
RELATED PARTY TRANSACTIONS
Notes payable related parties
Notes payable - related parties consisted of the following at December 31, 2009 and 2008:
|
|
2009
|
|
2008
|
Note to Song Guoan, father of Song Zheng Hong, director and spouse of the companys CEO Liu Zhongyi, due on December 30, 2015 with variable annual interest at 80% of current bank rate (4.75% at December 31, 2009 and 2008), and unsecured
|
$
|
763,788
|
$
|
761,894
|
|
|
|
|
|
Note to Zheng Guixin, employee, due on December 30, 2015 with with variable annual interest at 80% of current bank rate (4.75% at December 31, 2009 and 2008), and unsecured
|
|
1,653,455
|
|
1,649,354
|
|
|
|
|
|
Note to Ma Zhaozhao, employee, due on December 30, 2015 with variable annual interest at 80% of current bank rate (4.75% at December 31, 2009 and 2008), and unsecured
|
|
662,204
|
|
660,562
|
|
|
|
|
|
Note to Liu Zhongyi, CEO and director, due on December 30, 2015 with variable annual interest at 80% of current bank rate (4.75% at December 31, 2009 and 2008), and unsecured
|
|
1,409,590
|
|
1,406,094
|
|
|
|
|
|
Note to Song Zhenghong, director and spouse of the Company Chief Executive Officer, Liu Zhong Yi, due on December 30, 2015 with variable annual interest at 80% of current bank rate (4.75% at December 31, 2009 and 2008), and unsecured
|
|
579,986
|
|
578,547
|
|
|
|
|
|
Total notes payable related parties, long term
|
$
|
5,069,023
|
$
|
5,056,451
|
For the years ended December 31, 2009 and 2008, the Company recorded a total interest expense of $237,452 and $294,394 related to those loans, respectively.
Due to related parties
The Chief Executive Officer of the Company
Mr. Liu Zhongyi and his spouse and several employees of the Company, from time to time, provided advances to the Company for
working capital purpose. During the years ended December 31, 2009 and 2008, the Company did not repay any of these advances. On
December 31, 2009 and 2008, the Company had a payable to its Chief Executive Officer and his spouse and other employees at an amount
of $720,323 and $718,536, respectively. These advances are short-term in nature and non-interest bearing.
As mentioned in Notes 6, the Company entered into a five-year loan agreement and a contract with Wu Lan, whereby the Company agreed to lend Wu Lan approximately $4 million (RMB 30 million) for the construction of a hospital ward in Inner Mongolia, China. The Companys CEO, Mr. Liu, lent this loan to Wu Lan on behalf of the Company. In return, the Company entered into an assignment agreement whereby the Company assigned all of its rights, obligations, and receipts under the Loan Agreement to Mr. Liu, except the rights to receive revenues from the sale of medical and disposable medical treatment apparatus. Since Mr. Liu accepted the assignment with all the risks and obligations but had no right to revenues from the sale of medical and disposable medical treatment apparatus, the Company agreed to pay Mr. Liu compensation for an aggregate of approximately $1.3 million (RMB 9 million) in
5 equal annual installments of approximately $263,000 (RMB 1.8 million) started from October 21, 2006.
F-22
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 7
RELATED PARTY TRANSACTIONS (Continued)
For the years ended December 31, 2009 and 2008, the Company did not pay anything to Mr. Liu for the liability incurred by the assignment in the agreement mentioned above. On December 31, 2009 and 2008, amounts due under this assignment agreement were $1,033,592 and $1,031,028 respectively, of which $263,266 and $525,225 were included in long-term liabilities and has been included in due to related parties on the accompanying balance sheets, respectively.
At December 31, 2009 and 2008, the Company has recorded accrued interest relating to notes payable - related parties of $602,836 and $364,350, respectively, which have been included in due to related parties non-current on the accompanying balance sheets. The accrued and unpaid interest relating to notes payable will be paid in full on the notes due date in according to the loan agreement. Therefore, the accrued interest is long-term in nature.
For the years ended December 31, 2009 and 2008, a summary of activities in due to related parties is as follows:
|
|
Assignment fee
payable
|
|
Working capital
advances
|
|
Accrued
interest
|
|
Total
|
Balance - December 31, 2007
|
|
966,198
|
|
34,072
|
|
61,208
|
|
1,061,478
|
Additions
|
|
-
|
|
682,179
|
|
299,036
|
|
981,215
|
Payments made
|
|
-
|
|
-
|
|
-
|
|
-
|
Foreign currency fluctuations
|
|
64,830
|
|
2,285
|
|
4,106
|
|
71,221
|
Balance - December 31, 2008
|
$
|
1,031,028
|
$
|
718,536
|
$
|
364,350
|
$
|
2,113,914
|
Additions
|
|
-
|
|
-
|
|
237,580
|
|
237,580
|
Payments made
|
|
-
|
|
-
|
|
-
|
|
-
|
Foreign currency fluctuations
|
|
2,564
|
|
1,787
|
|
906
|
|
5,257
|
Balance - December 31, 2009
|
$
|
1,033,592
|
$
|
720,323
|
$
|
602,836
|
$
|
2,356,751
|
NOTE 8
CONVERTIBLE REDEEMABLE PREFERRED STOCKS
On February 25, 2008 (
Closing Date
), the Company sold, pursuant to a Convertible Redeemable Preferred Share and Warrant Purchase Agreement (the
Purchase Agreement
) by and among the Company, Dr. Liu Zhongyi and Mrs. Song Zhenghong (the
Founders
), and accredited investors (each a
Purchaser
and collectively, the
Purchasers
), 5,747,118 shares of the Companys series A convertible redeemable preferred stock (the
Preferred Stock
) and warrants (the
Warrants
) to purchase 2,873,553 shares of the
Companys common stock, in a private placement (the
February 2008 Private Placement
) pursuant to Regulation D under the Securities Act of 1933, for an aggregate purchase price of $5 million (the
Transaction
). Net proceeds, exclusive of expenses of the transaction were $4.6 million in cash, after the Company paid fees of approximately $469,000 in cash, of which $400,000 was paid to Maxim Group, LLC, the placement agent for the Transaction. The Company recorded $796,133 fees, of which $327,565 was related to the value of the warrants granted to the placement agent, as a deferred debt cost and amortized approximately $ 412,184 and $331,722 of the deferred cost during the years ended December 31, 2009 and 2008, respectively. The convertible redeemable preferred stock is deemed debt due to the mandatory redeemable feature of the preferred stocks according to ASC
480.
The Company used $2,576,556 of the net proceeds of the Transaction to repay in full all of its outstanding principal obligations including accrued interest under the 14% Secured Convertible Notes due February 2008, and the Company used the remainder of the net proceeds for working capital and general corporate purposes.
Pursuant to the Purchase Agreement, the Company
issued to the Purchasers an aggregate of 5,747,118 shares of the Companys series A convertible redeemable preferred stock, par
value $0.001 per share, at a price equal to $0.87 per share (the Preferred Shares). Each of these Preferred Shares is
convertible into one share of the Companys common stock (as adjusted for stock splits, stock dividends, reclassification and
the like), pays an 8% dividend annually, payable in additional Convertible Preferred Shares and also pays any dividend to be paid on
the common shares on an as-converted basis. Until May 25, 2010, the Preferred Shares may be redeemed at the option of the Purchasers
at the redemption price of $0.87 per share (as adjusted for stock splits, stock dividends, reclassification and
F-23
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 8
CONVERTIBLE REDEEMABLE PREFERRED STOCKS (Continued)
the like), and no other capital stock of the Company may be redeemable prior to the Preferred Shares. Holders of Preferred Shares may not convert Preferred Shares to common shares if the conversion would result in the holder beneficially owning more than 4.99% of the Companys outstanding common shares. That limitation may be waived by a holder of Preferred Shares on not less than 61 days written notice to the Company. In addition, the Company issued to the Purchasers warrants to purchase up to 2,873,553 shares of the Companys common stock in the aggregate.
The Warrants have an exercise price of $1.21 (subject to adjustment pursuant to the terms of the warrants). The warrants are exercisable for a period of five (5) years from the closing date. Holders of the warrants may not exercise the warrants if the exercise would result in the holder beneficially owning more than 4.99% of the Companys outstanding common shares. That limitation may be waived by a holder of the warrants on not less than 61 days written notice to the Company.
The warrants issued to the investors to purchase 2,873,553 shares of the Companys common stock were treated as a discount on the convertible redeemable preferred stocks and were valued at $1,188,926 and will be amortized over the term of the Purchase Agreement. Additionally, the convertible redeemable preferred stocks were considered to have an embedded beneficial conversion feature (BCF) because the effective conversion price was less than the fair value of the Companys common stock. The value of the beneficial conversion feature was $1,121,337 and was recorded as a discount on the convertible redeemable preferred stocks and will be amortized over the term of the Purchase Agreement. Hence, in connection with the issuance of the Preferred Shares and Warrants, the Company recorded a total debt discount of $2,310,263 to be amortized over the term of the convertible preferred stocks. For the years
ended December 31, 2009 and 2008, amortization of debt discount amounted to $ 1,196,106 and $962,604, respectively, have been included in interest expense.
The fair values of the warrants granted to the placement agent and issued to the investors with this private placement were computed using the Black-Scholes option-pricing model. Variables used in the option-pricing model include (1) risk-free interest rate at the date of grant (4.64%), (2) expected warrant life of 5 years, (3) expected volatility of 91.85%, (4) expected dividend yield of 0 and (5) grant date share fair value of $0.81.
Other key provisions of the February 2008 Private Placement:
|
|
The Preferred Shares vote with the common stock on an as converted basis, except that the Preferred Shares are not entitled to vote for directors. The Company is prohibited from taking certain corporate actions, including, without limitation, issuing securities senior to the Preferred Shares, selling substantially all assets, repurchasing securities and declaring or paying dividends, without the approval of the holders of a majority of the Preferred Shares then outstanding.
|
|
|
The Company agreed to undertake to file a resale registration statement within 60 days following the Closing Date registering the maximum number of shares common stock issuable upon conversion of the Preferred Shares and exercise of the warrants allowable under applicable federal securities regulations. If the Company was informed by the SEC that there were no comments to the registration statement, then the registration statement was required to be declared effective within five (5) business days thereafter or on the 60th day after the filing date, whichever is sooner. If the SEC issued comments to the registration statement, then the registration statement was required to be declared effective by the 120th day after it was filed. If the registration statement was not declared effective by the applicable date, the Company would be subject to liquidated
damages, equal to 1% of the total conversion price and exercise price for the common stock being registered under the registration statement, for every 30-day period following the date that the registration statement should have been effective, prorated for any period less than 30 days, until either all of common shares registered under the registration statement have been sold or all such common shares may be sold in any three (3) month period pursuant to Rule 144 promulgated under the Securities Act, whichever is earlier. The Company must also pay the liquidated damages if sales cannot be made pursuant to the registration statement for any reason (excepting market conditions). The maximum amount of liquidated damages is $500,000. The Company filed the resale registration statement on May 13, 2008 and received comments from the SEC. The SEC declared the resale registration statement effective on July 25, 2008.
|
F-24
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 8
CONVERTIBLE REDEEMABLE PREFERRED STOCKS (Continued)
|
|
The Founders delivered
in the aggregate 7,500,000 shares of the Companys common stock owned by them (the Escrow Shares) to an escrow
account. Portions of the Escrow Shares are being held in escrow subject to the Company meeting certain net income targets in fiscal
years 2007, 2008 and 2009. The target for 2007 is $8.5 million in net income. The target for 2008 is 95% of $13.8 million in net
income after eliminating the effect of non-cash charges associated with the Transaction and adjusting for differences in the
exchange rate between Chinese Renminbi and US dollars used in the Companys 2008 financial statements and an exchange rate of
RMB 7.30 to USD 1.00. The target for 2009 is 95% of $17.5 million in net income after eliminating the effect of non-cash charges
associated with the Transaction and adjusting for differences in the exchange rate between Chinese Renminbi and US dollars used in
the Companys 2009 financial statements and an exchange rate of RMB 7.30 to USD 1. A portion of the Escrow Shares will be
transferred to the Purchasers if the Company does not meet the earning targets, and released back to the Founders if the Company
does; another portion of the Escrow Shares is being held in escrow subject to the Company listing on the NASDAQ Stock Market within
18 months following the Closing Date. These Escrow Shares will be transferred to the Purchasers if the listing is not completed
within that time period, and released back to the Founders if it is. These net income targets for 2007, 2008 and 2009 were achieved
by the Company. In September 2009, a total of 416,667 Escrow Shares subject to the Company listing on the NASDAQ Stock Market within
18 months following the Closing Date were transferred to the Purchasers since the listing is not completed within that time period.
The Company valued these Escrow Shares transferred to the Purchasers at the fair value on the transfer date at $0.81 per share or an
aggregate of $337,500. In connection with transfer of the 416,667 shares of the Companys common stock, the Company recorded
interest expenses of $337,500 with a corresponding credit to additional paid-in capital of $337,500. In addition, two-thirds of the
Escrow Shares are held in escrow to ensure that the Purchasers receive their full redemption payments if they choose to redeem their
Preferred Shares. If a Purchaser receives less than the full redemption amount for each Preferred Share being redeemed, the
Purchaser will receive a number of Escrow Shares to make up the difference, based on the then-current market price of the common
shares. Following the end of the redemption period, these Escrow Shares, less those transferred to any Purchasers that redeemed
their Preferred Shares, will be released back to the Founders.
|
In fiscal 2008, the Company evaluated whether or not the series A convertible redeemable preferred stock contain embedded conversion options, which meet the definition of derivatives under ASC 815 Accounting for Derivative Financial Instruments and Hedging Activities and related interpretations. The Company concluded that since the series A convertible redeemable preferred stock had a fixed redemption price of $0.87, the convertible redeemable preferred stock was not a derivative instrument.
On February 25, 2009, the Company issued 459,772 additional shares of Series A Preferred Stock to the holders of Series A Preferred Stock for the mandatory 8% annual dividends.
During the period from May 1, 2009 to December 31, 2009, the Company issued 36,925 shares of Series A Preferred Stock to a few of our Series A preferred stockholders for their mandatory dividends since they fully converted their convertible redeemable preferred stock into our common stock.
During the fiscal 2009, 1,275,856 shares of Series A convertible redeemable preferred stock were converted into 1,275,856 shares of the Companys common stock.
The series A convertible redeemable preferred stock on December 31, 2009 and 2008 is as follows:
|
|
2009
|
|
2008
|
Series A convertible redeemable preferred stock
|
$
|
4,322,125
|
$
|
5,000,000
|
Less: unamortized discount
|
|
(151,553)
|
|
(1,347,659)
|
Series A convertible redeemable preferred stock, net
|
$
|
4,170,572
|
$
|
3,652,341
|
F-25
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 9
TAXES PAYABLE
Income Tax
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
The Company was incorporated in the United States and
has incurred a net operating loss for income tax purposes for the year ended December 31, 2009. The Company had estimated loss carry
forwards of approximately $3,683,000 and $2,258,000 as of December 31, 2009 and 2008, respectively, subject to the Internal Revenue
Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a
change in ownership. The net operating loss carries forward for United States income taxes, which may be available for offset
against future taxable U.S. income expiring in 2029 and 2028, respectively.
Management believes that the realization of the
benefits from these losses carryforward appears uncertain due to The Companys limited operating history and continuing losses
for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as needed.
The valuation allowance at December 31, 2009 and 2008 was approximately $1,252,000 and $768,000, respectively. The net change in the
valuation allowance was an increase of approximately $484,000 during the year ended December 31, 2009. The consolidated income is
earned overseas and will continue to be indefinitely reinvested in oversea operations. Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes
that would have to be provided if we concluded that such earnings will be remitted in the future.
Deferred tax assets and liabilities are provided for significant income and expense items recognized in different years for income tax and financial reporting purposes. Temporary differences, which give rise to a net deferred tax asset for the Company as of December 31, 2009 and 2008 is as follows:
|
|
2009
|
|
|
2008
|
|
Tax benefit of net operating loss carryforward
|
|
$
|
1,252,000
|
|
|
$
|
768,000
|
|
Valuation allowance
|
|
|
(1,252,000
|
)
|
|
|
(768,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Lotus Pharmaceutical International, Inc. was incorporated in the United States and it was an affiliated group of Lotus Pharmaceuticals Inc. for United States income tax purpose. So, no income tax provision was made for Lotus Pharmaceutical International, Inc.
Lotus Century Pharmaceutical (Beijing) Technology Co., Ltd. and Lotus East were incorporated in the PRC and are subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC.
Lotus Century Pharmaceutical (Beijing) Technology Co., Ltd. did not have any business activity for PRC income tax purpose. So, no income tax provision was made for Lotus Century Pharmaceutical (Beijing) Technology Co., Ltd.
On March 16, 2007, the National Peoples
Congress of China passed the new Enterprise Income Tax Law (
EIT Law
), and
on November 28, 2007, the State Council of China passed the Implementing Rules for the EIT Law (
Implementing Rules
) which took effect on January 1, 2008. The EIT Law and Implementing Rules
impose a unified EIT rate of 25.0% on all domestic-invested enterprises and Foreign Interest Enterprises (
FIEs
), unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are
subject to the new tax rate alongside other domestic businesses rather than benefiting from the Foreign Enterprise Income Tax
(
FEIT
), and its associated preferential tax treatments, beginning on
January 1, 2008. Lotus East received income tax exemption for its fiscal year 2008 taxable income from National Taxation Bureau of
P.R.C. located in Fengtai District, Beijing, PRC on January 22, 2008.
F-26
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 9
TAXES PAYABLE (Continued)
Income Tax (continued)
In addition to the changes to the current tax
structure, under the EIT Law, an enterprise established outside of China with de facto management bodies within China is
considered a resident enterprise and will normally be subject to an EIT of 25.0% on its global income. The Implementing Rules define
the term de facto management bodies as an establishment that exercises, in substance, overall management and
control over the production, business, personnel, accounting, etc., of a Chinese enterprise. If the PRC tax authorities
subsequently determine that the Company should be classified as a resident enterprise, then the organizations global income
will be subject to PRC income tax of 25.0%. Beijing Liang Fang was subject to 25% income tax rate since January 1, 2009. Located in
Inner Mongolia, Liang Fangs branch received income tax exemption for its fiscal 2009 taxable income from Cha You Qian Qi
government situated in Inner Mongolia, P.R.C. on June 3, 2008. Lotus East received income taxes exemption for its fiscal 2008
taxable income.
The table below summarizes the differences between the U.S. statutory federal rate and the Companys effective tax rate for years ended December 31, 2009 and 2008:
|
2009
|
|
2008
|
US statutory rates
|
34.0%
|
|
34.0%
|
US effective rate in excess of China tax rate
|
(10.5%)
|
|
(11.1%)
|
China income tax exemptions
|
(27.0%)
|
|
(31.1%)
|
Non-deductible expenses
|
2.8%
|
|
4.1%
|
US valuation allowance
|
2.9%
|
|
4.1%
|
|
|
|
|
Effective tax rates
|
2.2%
|
|
0.0%
|
Value Added Tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax, or VAT, in accordance with Chinese laws. The applicable VAT tax rate is 17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT).
VAT on sales and VAT on purchases amounted to $9,607,184, and $979,731 for the year ended December 31, 2009 and $11,759,766 and $936,974 for the year ended December 31, 2008, respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent because the VAT taxes are not impacted by the income tax holiday. As of December 31, 2009 and 2008, the VAT payable amounted to $2,411,459 and $5,015,908, respectively.
At December 31, 2009 and 2008, taxes payable are as follows:
|
|
December 31, 2009
|
|
December 31, 2008
|
Value added tax payable
|
$
|
2,411,459
|
$
|
5,015,908
|
Income tax payable
|
|
368,878
|
|
-
|
Other taxes payable
|
|
351,571
|
|
-
|
Total
|
$
|
3,131,908
|
$
|
5,015,908
|
F-27
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 10
STOCKHOLDERS EQUITY
Common Stock and Additional Paid-in Capital
In February 2009, the Company issued 842,308 shares of common stock to Mr. Liu Zhongyi, Chairman and CEO of the Company, for his services rendered through December 31, 2008 as the Companys Chief Executive Officer. The stock was valued at the fair value of $0.26 per share on the grant date.
In February 2009, the Company issued 67,308 shares of common stock to Adam Wasserman (former CFO) using a fair value of $0.26 per share on the grant date for his services rendered through December 31, 2008 as the Companys Chief Financial Officer.
In February 2009, the Company issued 48,077 shares of common stock to Mel Rothberg using a fair value of $0.26 per share on the grant date for his services as an independent director from January 1, 2008 to April 15, 2008 and consulting services rendered through November 30, 2008.
In June 2009, the Company issued 251,668 shares of common stock to Mr. Liu Zhongyi, Chairman and CEO of the Company, for his services rendered from January 1, 2009 to May 31, 2009 as the Companys Chief Executive Officer. The stock was valued at the fair value of $0.30 per share on the grant date. In connection with the issuance of these shares, the Company recorded stock-based compensation of $75,000.
In June 2009, the Company issued 90,876 shares of common stock to Adam Wasserman for services rendered from January 1, 2009 to April 30, 2009 as the Companys former Chief Financial Officer and services rendered from May 1, 2009 to May 31, 2009 as the Companys consultant. The stock was valued at the fair value of $0.28 per share on the grant date. In connection with the issuance of these shares, the Company recorded stock-based compensation of $25,333.
In June 2009, the Company issued in aggregate 60,000 shares of common stock to the six directors of the Company for services rendered from January 1, 2009 to December 31, 2009 as the Companys Board of Directors members. The Company valued these common shares at the fair value on the grant date at $0.30 per share or an aggregate of $18,000. In connection with issuance of these shares, the Company recorded stock-based expenses of $18,000.
In October 2009, the Company issued 1.25 million shares of common stock to Mr. Shihong Zhai in according to the consulting agreement dated October 22, 2009 between Liangfang and Shihong Zhai. The Company valued these common shares at the fair value on the grant date at $1.06 per share. In connection with the issuance of these shares, the Company recorded prepaid expense of $1,325,000 and will amortize it over the related service term. For the year ended December 31, 2009, the amortization expense related to this issuance was $110,417.
In November 2009, the Company issued 1 million shares of common stock to Mr. Baocai Liu in according to a consulting agreement entered on November 20, 2009 between Liangfang and Baocai Liu. The Company valued these common shares at the fair value on the grant date at $0.96 per share. In connection with the issuance of these shares, the Company recorded prepaid consulting expense of $960,000 and will amortize it over its service period. For the year ended December 31, 2009, the amortization expense related to this issuance was $53,333.
During the fiscal 2009, the Company issued in aggregate 1,275,856 shares of common stock to various Series A convertible redeemable preferred stockholders in connection with the conversion of 1,275,856 shares of Series A convertible preferred stock.
F-28
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 10
SHAREHOLDERS EQUITY (Continued)
Statutory Surplus Reserves
The Company is required to make appropriations to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (
PRC GAAP
). Appropriations to the statutory surplus reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities registered capital.
The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered capital.
Pursuant to the Companys articles of incorporation, the Company is to appropriate 10% of its net profits as statutory surplus reserve. For the years ended December 31, 2009 and 2008, statutory surplus reserve activity was as follows:
|
|
Statutory Surplus Reserve
|
Balance December 31, 2007
|
$
|
2,161,505
|
Addition to statutory reserves
|
|
1,589,024
|
Balance December 31, 2008
|
|
3,750,529
|
Addition to statutory reserves
|
|
1,923,795
|
Balance December 31, 2009
|
$
|
5,674,324
|
Stock Warrants
Stock warrants issued, terminated/forfeited, exercised and outstanding during the years ended December 31, 2009 and 2008 are as follows:
|
Shares
|
|
Average
Exercise price
per share
|
|
Warrants outstanding, December 31, 2007
|
|
1,500,000
|
|
$
|
0.87
|
|
Warrants issued
|
|
3,726,999
|
|
|
1.21
|
|
Warrants terminated/forfeited
|
|
-
|
|
|
-
|
|
Warrants exercised
|
|
(60,000)
|
|
|
0.87
|
|
Warrants outstanding, December 31, 2008
|
|
5,166,999
|
|
|
1.13
|
|
Warrants granted
|
|
-
|
|
|
-
|
|
Warrants expired/forfeited
|
|
-
|
|
|
-
|
|
Warrants exercised
|
|
-
|
|
|
-
|
|
Warrants outstanding, December 31, 2009
|
|
5,166,999
|
|
$
|
1.13
|
|
F-29
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 10
SHAREHOLDERS EQUITY (Continued)
Stock Warrants (continued)
The following table summarizes the shares of the Companys common stock issuable upon exercise of warrants outstanding on December 31, 2009:
Warrants Outstanding
|
|
Warrants Exercisable
|
|
Range of
Exercise
Price
|
|
Number
Outstanding on
December 31,
2009
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable on
December 31,
2009
|
|
Weighted
Average
Exercise
Price
|
$
|
0.87
|
|
1,440,000
|
|
2.12
|
$
|
0.87
|
|
1,440,000
|
$
|
0.87
|
|
1.20
|
|
2,873,553
|
|
3.16
|
|
1.20
|
|
2,873,553
|
|
1.20
|
|
1.21
|
|
603,446
|
|
3.16
|
|
1.21
|
|
603,446
|
|
1.21
|
$
|
1.50
|
|
250,000
|
|
2.07
|
|
1.50
|
|
250,000
|
|
1.50
|
|
|
|
5,166,999
|
|
2.81
|
$
|
1.13
|
|
5,166,999
|
$
|
1.13
|
NOTE 11
SEGMENT INFORMATION
The following information is presented in accordance with ASC 280, Disclosure about Segments of an Enterprise and Related Information. In the years ended December 31, 2009 and 2008, the Company operated in two reportable business segments: (1) the manufacture and distribution of pharmaceutical products and examination of other companies products and (2) the retailing of traditional and Chinese medicines and supplies through ten drug stores located in Beijing China and other ancillary revenues generated from retail location such as rental income. The Companys reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations.
Information with respect to these reportable business segments for the years ended December 31, 2009 and 2008 is as follows:
For the year ended December 31, 2009
|
|
Wholesale and third-party manufacturing and examination
|
|
Retail operations
|
|
Rent and advertising
|
|
Unallocated
|
|
Total
|
Net revenues
|
$
|
45,391,549
|
$
|
11,639,923
|
$
|
793,173
|
$
|
-
|
$
|
57,824,645
|
Cost of sales
|
|
16,700,366
|
|
8,609,723
|
|
43,625
|
|
-
|
|
25,353,714
|
Operating expenses
|
|
-
|
|
-
|
|
-
|
|
13,151,920
|
|
13,151,920
|
Other expense (income)
|
|
-
|
|
-
|
|
-
|
|
2,518,037
|
|
2,518,037
|
Income tax
|
|
-
|
|
-
|
|
-
|
|
368,680
|
|
368,680
|
Net income
|
$
|
28,691,183
|
$
|
3,030,200
|
$
|
749,548
|
$
|
(16,038,637)
|
$
|
16,432,294
|
F-30
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 11
SEGMENT INFORMATION (Continued)
For the year ended December 31, 2008
|
|
Wholesale and third-party manufacturing and examination
|
|
Retail operations
|
|
Rent and advertising
|
|
Unallocated
|
|
Total
|
Net revenues
|
$
|
58,989,064
|
$
|
14,034,389
|
$
|
779,576
|
$
|
-
|
$
|
73,803,029
|
Cost of sales
|
|
27,609,871
|
|
12,830,217
|
|
-
|
|
-
|
|
40,440,088
|
Operating expenses
|
|
-
|
|
-
|
|
-
|
|
18,292,997
|
|
18,292,997
|
Other expense (income)
|
|
-
|
|
-
|
|
-
|
|
2,279,296
|
|
2,279,296
|
Income tax
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Net income
|
$
|
31,379,193
|
$
|
1,204,172
|
$
|
779,576
|
$
|
(20,572,293)
|
$
|
12,790,648
|
The Company does not allocate selling expenses, research and development expenses, loss on fixed assets impairment, general and administrative expenses, other expense (income) and income tax to its reportable segments, because these activities are managed at a corporate level.
Asset information by reportable segment is not reported to or reviewed by the chief operating decision maker and, therefore, the Company has not disclosed asset information for each reportable segment. Substantially all of the Companys assets are located in China.
NOTE 12
COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office and manufacturing space in Beijing, China and those leases expire through May 2019.
Future minimum rental payments required under these operating leases are as follows:
Year Ending December 31,
|
|
|
2010
|
|
309,110
|
2011
|
|
206,912
|
2012
|
|
172,750
|
2013
|
|
109,694
|
2014 and thereafter
|
|
589,605
|
|
|
|
Total minimum lease payments
|
|
$ 1,388,071
|
For the years ended December 31, 2009 and 2008, rent expense amounted to $301,994 and $210,954, respectively.
Technology Transfer Agreement
In April 2008, one of the Companys affiliates, En Ze Jia Shi, entered into a Technology Transfer Agreement with Dong Guan Kai Fa Biological Medicine LTD (
Dong Guan
) pursuant to which Dong Guan agreed to transfer the technology material, new medicine research and rights to the Chinese patent of the anti-asthma new medicine R-BM to En Ze Jia Shi on an exclusive basis in exchange for a transfer technology fee of approximately $7.02 million (RMB 48 million) to be paid at various intervals. Under the terms of the agreement, En Ze Jia Shi is obligated to:
F-31
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 12
COMMITMENTS AND CONTINGENCIES
Technology Transfer Agreement (continued)
|
|
complete the filing with the SFDA of the medicines clinical research ratification document,
|
|
|
complete the clinical research,
|
|
|
complete the medicines trial production, and
|
|
|
provide raw materials and formulation related documentation and apply for the new medicine certification and production approval.
|
In addition to the payment of the technology transfer fee, En Ze Jia Shi is responsible for paying all costs associated with its responsibility under the agreement which are presently estimated at $11.7 million (RMB 80 million). Lotus East intends to use its working capital to fund the project costs.
Dong Guan is responsible for preparing and transferring the clinical research and application documents as well as assisting En Ze Jia Shi in the completing the clinical research and applying for the new medicine certification and production approval documents.
Under the terms of the agreement, the technology transfer fee is to be paid upon the following schedule:
|
|
Approximately $1.46 million (RMB 10 million) is due by the 15th business day following the receipt of the processing notice of the receipt of the clinical application and all related material from SFDA is received,
|
|
|
Approximately $1.17 million (RMB 8 million) is due by the 10th business day after the receipt of the medicines clinical ratification document,
|
|
|
Approximately $1.46 million (RMB 10 million) is due by the 15th business day after the medicines Phase I clinical study is completed and ratification from the SFDA is obtained, and
|
|
|
Approximately $2.93 million (RMB 20 million) is due by the 10th business day after the medicines Phase II clinical study is completed and ratification from the SFDA is obtained.
|
En Ze Jia Shi paid Dong Guan a deposit of approximately $2.93 million (RMB 20 million) in April 2008 which is to be returned to En Ze Jia Shi within 10 days after the transfer technology fee is fully paid. In the event Dong Guan should be unable to timely return the deposit, it will pay En Ze Jia Shi a late fee and En Ze Jia Shi is entitled to damages for Dong Guans failure to timely return the deposit.
The intellectual property arising from the agreement will be jointly shared by the parties. In addition, En Ze Jia Shi has guaranteed that both parties must jointly apply for related government grants prior to when the new medicine is marketed. Upon receipt of the government grants En Ze Jia Shi guaranteed that the grant monies will be shared equally by both parties. As of December 31, 2009, the Company has not received any government grant. The agreement can be terminated by Dong Guan if En Ze Jia Shi should fail to make any of the aforedescribed payments in which event the patent rights would revert to Dong Guan and it is entitled to transfer the project rights to a third party.
New Manufacturing Facility
In June 2008, one of the Companys affiliates, Liang Fang, entered into an agreement with Cha You Qian Qi Economy Commission, a governmental agency (
Cha You
) related to the construction of a pharmaceutical plant in Cha Yous Cha Ha Er Industrial Garden District in Inner Mongolia. The new facility, which will be comprised approximately 40,000 square meters situated on 600 MU of land (approximately 400,200 square meters), will be used to expand Liang Fangs current manufacturing capacity. The Company was subsequently granted the right to expand the land use right area to 1,000 MU (approximately 667,000 square meters). The new facility, which will manufacture medical injection products, including 0.9% physiological saline injection, hydroxyethyl starch 130/0.4 injection
F-32
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 12
COMMITMENTS AND CONTINGENCIES (Continued)
New Manufacturing Facility (continued)
and hydroxyethyl starch 200/0.5 injection, Qiang Yi Ji starch, a medical corn starch commonly known as O-2-hydeoxyethyl starch, dextran and additional pharmaceuticals, will require a total investment of RMB 623.66 million, or approximately $91 million. The construction began on the project in August 2008 and the Company anticipates that it will take five years to complete the construction. As of December 31, 2009, the Company has incurred approximately $39.7 million related to this project and the amount has been included as construction in progress of approximately $7 million and installments on intangible assets of approximately $32.7 million in the consolidated financial statements.
Included in the total cost of the project is land cost of approximately $32.7 million (RMB 223.66 million) which was paid in full to Cha You government. Other components of the project include construction costs of approximately $17.6 million (RMB 120 million) costs associated with the various production lines estimated at approximately $33.6 million (RMB 230 million) and working capital of approximately $7.3 million (RMB 50 million).
Liang Fang intends to use its present working capital together with bank loans and government grants and third party finance to fund the project. The funds are required to be invested over the next five years. As of December 31, 2009, Liang Fang has paid approximately $39.4 million (approximately RMB 269.5 million) of the total investment. Liang Fang, however, has not secured either the bank loans or government grants and does not have sufficient working capital to complete this project without securing substantial funds from those third party sources.
Under the terms of the agreement, Cha You agreed to abate fees associated with water resources, waste and other relative supplies for a period of 30 years and agreed to ensure that the land use tax to be paid by Liang Fang after it begins normal production will be at the lowest tax rate imposed for five years. Once the project is completed, for a period of eight years the local reserved portion of the imposed corporation income tax will be returned to Liang Fang.
New Drug Patent Transfer Agreement
In February 2009, one of our affiliates, En Ze Jia Shi, entered into a New Drug Patent Transfer Agreement with Beijing Huicheng Ruixiang Pharmaceutical Technology Co. LTD (
Huicheng
) pursuant to which Huicheng agreed to transfer the patent technology and related research materials about the Chinese drug of Gliclazide-Controlled Released Tablets to En Ze Jia Shi on an exclusive basis in exchange for a transfer patent fee of approximately $1.3 million (RMB 9 million) to be paid at various intervals. Under the terms of the agreement, En Ze Jia Shi is obligated to:
|
|
Finishing other needed related technical materials of this new medicine and providing the legal invoice for raw materials and purchase agreement etc.,
|
|
|
Providing enough raw materials, of which amount should ensure Huicheng to successfully prepare new medicine of 100,000 dosage units, and standard samples for experiments and research,
|
|
|
Providing the choice basis and quality standards of the package materials,
|
|
|
Paying for organization, seal, signature, field-exam, registration and related fees including registration and examination fees, registration evaluation fees etc. for the new medicine registration materials,
|
|
|
Completing clinical research and paying related fees if the new medicine is required for clinical research, and
|
|
|
Making payment to Huicheng according to specific schedule mentioned in the agreement.
|
In addition to the payment of the patent transfer fee, En Ze Jia Shi is responsible for paying all costs associated with its responsibility under the agreement which are presently estimated at proximately $293,000 million (RMB 2 million). Lotus East intends to use its working capital to fund the project costs.
F-33
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 12
COMMITMENTS AND CONTINGENCIES (Continued)
New Drug Patent Transfer Agreement (continued)
Huicheng Ruixiang Pharmaceutical Technology Co. Ltd. is obligated to
|
|
Provide the patent of the new medicine,
|
|
|
Provide the related technical materials and the original records of the experiments which satisfy the requirement of the fifth classified chemical drug registration by Drug Registration Administration Method (2005) issued by Chinese SFDA. The Huicheng has to provide above mentioned materials to En Ze Jia Shi in 30 days after it received first installment payment and qualified documents from En Ze Jia Shi,
|
|
|
Provide the new medicine registration samples with 100,000 dosage units, and
|
|
|
Supplement and improve the technical materials according to the requirement of the Evaluation Center of Chinese State Drug Administration.
|
Under the terms of the agreement, the technology transfer fee is to be paid upon the following schedule:
|
|
Approximately $0.9 million (RMB 6 million) is due by the 90
th
business day following the receipt of the Notice of China Accepted Patent and Notice of Medicine Registration Application,
|
|
|
Approximately $0.2 million (RMB 1.5 million) is due by the 30
th
business day after the receipt of the medicines clinical ratification document, and
|
|
|
Approximately $0.2 million (RMB1.5 million) is due by the 30
th
business day after the production ratification from the SFDA is obtained.
|
En Ze Jia Shi made the first installment of approximately $0.9 million (RMB 6 million) to Huicheng in May 2009 which is to be returned to En Ze Jia Shi if it can not obtain the production ratification from the SFDA due to any fault caused by Huicheng.
NOTE 13
CONCENTRATIONS OF MAJOR CUSTOMERS AND SUPPLIERS
Customers
During the years ended December 31, 2009 and 2008, no customer accounted for more than 10% of the Companys total sales.
Suppliers
One major supplier provided approximately 25% of the Companys purchases of raw materials and third party manufactured finished goods for the year ended December 31, 2009 and the Company did not have any amount of advance to this supplier as of December 31, 2009. During the fiscal year of 2008, no supplier accounted for more than 10% of the Companys total purchases.
NOTE 14
OPERATING RISK
(a) Country risk
Currently, the Companys revenues are primarily derived from the sale of pharmaceutical products to customers in P.R.C. The Company hopes to expand its operations to countries outside the PRC, however, such expansion has not been commenced and there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Companys financial condition.
F-34
LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
NOTE 14
OPERATING RISK (Continued)
(b) Products risk
In addition to competing with other manufacturers of pharmaceutical product offerings, the Company competes with larger Chinese and International companies who may have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel. These Chinese companies may be able to offer products at a lower price. There can be no assurance that the Company will remain competitive.
(c) Political risk
Currently, PRC is in a period of growth and is openly promoting business development in order to bring more business into PRC. Additionally, PRC allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Companys ability to operate the PRC subsidiaries and controlled entities could be affected.
NOTE 15
SUBSEQUENT EVENT
On March 3, 2010, the Company entered into a Standby Equity Distribution Agreement (the SEDA) with YA Global Master SPV Ltd. (YA Global) pursuant to which the Company may, at its sole and exclusive option, periodically sell to YA Global shares of its common stock, $0.001 par value per share for a total purchase price of up to ten million dollars ($10,000,000). Each advance under the SEDA shall not be more than $200,000. For each share of Common Stock purchased pursuant to an advance under the SEDA, YA Global will pay to the Company the higher of (i) ninety-three (93%) of the lowest daily volume weighted average price of the Common Stock during the five (5) consecutive trading days following delivery by the Company of an advance notice or (ii) $0.87, the minimum acceptable price. Under the SEDA, the Company cannot begin to take advances until such time as it files with the Securities
and Exchange Commission (SEC) a registration statement which registers the resale of the shares of Company Common Stock to be issued to YA Global, and such registration statement is declared effective by the SEC. Additionally, any advance under the SEDA which causes YA Global to own more than 4.99% of the Companys Common Stock will be automatically withdrawn. The Company is not obligated to utilize any of the $10 million available under the SEDA and there are no minimum commitments or minimum use penalties. The SEDA, unless terminated by the Company, shall terminate on the earlier of (i) the two-year anniversary of the date that the registration statement shall be declared effective by the SEC or (ii) the date on which the Company has drawn down the maximum amount permitted under the SEDA. The Company has granted YA Global customary indemnification rights in connection with the SEDA. YA Global has also granted the Company customary indemnification rights in
connection with the SEDA.
In January 2010, the Company issued an aggregate of 659,113 shares of common stock to Longview Fund LP for its 1,315,000 warrants at the exercise price of $0.87 per warrant, which such shares were issued as a result of cashless exercise.
In January 2010, the Company issued McLaughlin & Stern, LLP, warrants to purchase 150,000 shares of common stock at an exercise price of $1.91 per share in connection with legal services rendered.
In March 2010, the Company issued YA Global Master SPV Ltd. (YA) an aggregate of 208,117 shares of its common Stock as a commitment fee of $300,000 in connection with a Standby Equity Distribution Agreement entered into with YA.
In March 2010, the Company issued Gragnola Limited an aggregate of 200,000 shares of common stock in connection with corporate affairs and development services to be rendered. The stock was valued at the fair value of $1.38 per share on the grant date.
Between January and February of 2010, the Company issued an aggregate of 2,489,655 shares of common stock to various Series A convertible redeemable preferred stockholders in connection with the conversion of 2,489,655 shares of Series A preferred stock.
In 2010, the Company issued 369,319 additional shares of Series A Preferred Stock to the holders of Series A Preferred Stock for the mandatory 8% annual dividends.
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