Lotus Pharmaceuticals, Inc. (OTCBB: LTUS) raised $5 million by selling 5,747,118 series A convertible redeemable preferred shares in a private placement at a price of 80 cents per share. Lotus will receive $4.6 million in net proceeds from the transaction, after payment of placement fees. It has announced that almost $2.6 million will go to pay off remaining obligations from its 14% Secured Convertible Notes offering, which are due this year.
The offering contained an interesting “make good” clause. Lotus founders put 7.5 million of their personal shares into an escrow account, which will be released back to the investors if Lotus meets specified financial goals for 2007-2009 and if Lotus migrates to an NASDAQ listing. The targets are:
2007 -- $8.5 million in net income
2008 – 95% of $13.8 million
2009 – 95% of $17.5 million
The 2008 and 2009 figures will be adjusted to take out any charges related to the $5 million private placement and they will also be adjusted to reflect the current exchange rate of 7.3 RMB to $1. Although a portion of the shares will be returned to the founders each time a milestone is met, two-thirds of the total amount will be held in escrow until the new investors receive their full redemption amount, should they choose to redeem their Preferred shares. If the targets are not met, the shares will go to the investors in the Preferred shares.
The Preferred shares receive an 8% dividend (paid in shares rather than cash) and can be exchanged into common on a one-to-one basis. They may also be redeemed at any point during a 90-day period following February 25, 2010 at 87 cents each. In addition, the preferred offering includes 50% warrant coverage, allowing purchasers to buy additional shares of Lotus at $1.20 each at any point during the five-year life of the warrants. Lotus is currently trading at $.80 per share, the low end of its 52-week range of $.78 to $3.30.
On February 11, Lotus withdrew its financial statements for 2007 and end-of-year 2006. The company had entered an agreement with Wu Lan Cha Bu Hospital in Inner Mongolia. In exchange for a $3.8 million loan to build a new hospital, Wu Lan agreed to buy their medicines and disposable medical treatment equipment over the next 20 years from Lotus. The loan was made by the CEO of Lotus, Mr. Liu, who is to receive from Lotus $1.15 million in return, payable in five equal installments of $230,000. The company did not account for the loan correctly, but has since updated its financial statements.
For the first nine months of 2007, Lotus booked revenues of $37.6 million, a 50% increase over the year earlier. Revenues included $7 million in third-party manufacturing the company has undertaken for other pharmaceutical companies. Lotus made a net profit of $6.1 million during the nine months. At the end of the third quarter, Lotus had $6.2 million in cash and $15.5 million in working capital. All of this, of course, was before the $5 million private placement.
Also before the private placement, Lotus had 40.6 million shares of stock outstanding, giving it a market capitalization of just $32.5 million, or something considerably less than its nine-month revenues. Considering the 2007 net income target of $8.5 million (which is specified in the private placement), the company has a forward PE multiple of just less than 4, and its founders are willing to bet their own shares that Lotus will increase earnings by 62.5% in 2008 and 27% in 2009.
In China, Lotus operates through two subsidiaries: Beijing Liang Fang Pharmaceutical Co., Ltd. and Beijing En Zhe Jia Shi Pharmaceutical Co., Ltd. Besides ten retail pharmacies in Beijing, the company makes sells and promotes its own pharmaceuticals.
Disclosure: none.
