Lotus Pharmaceuticals Inc (LTUS)

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LOTUS PHARMACEUTICALS, INC. (LTUS) - Description of business

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Company Description
We are a pharmaceutical company focused on developing, manufacturing and distributing innovative drugs in the People's Republic of China ("China" or PRC"). Additionally, through our 10 retail pharmacy locations in Beijing, China, we sell Western and traditional Chinese medications, and medical treatment equipment.
We were incorporated on January 28, 2004 in the State of Nevada as S.E. Asia Trading Company, Inc. ("SEAA") to sell jewelry and home accessories. The Company's name was changed to Lotus Pharmaceuticals, Inc. on December 6, 2006.

On September 6, 2006, we entered into a definitive Share Exchange Agreement with Lotus Pharmaceutical International, Inc. ("Lotus International"), whereby we would acquire all of the outstanding common stock of Lotus International in exchange for newly-issued stock of Lotus to Lotus International's shareholders. Lotus International was incorporated under the laws the State of Nevada on August 28, 2006 to develop and market pharmaceutical products in China. On September 28, 2006, Lotus International became our wholly-owned subsidiary and Lotus International's shareholders own the majority of our voting stock. The acquisition of Lotus International by us was accounted for as a reverse merger because on a post-merger basis, the former shareholders of Lotus International held a majority of our outstanding common stock on a voting and fully-diluted basis. As a result, Lotus International is deemed to be the acquirer for accounting purposes.

PRC law currently has limits on foreign ownership of certain companies. To comply with these foreign ownership restrictions, we operate our pharmaceutical business in PRC through Beijing Liang Fang Pharmaceutical Co., Ltd. ("Liang Fang"), which was formed on June 21, 2000, and an affiliate of Liang Fang, Beijing En Zhe Jia Shi Pharmaceutical Co., Ltd. ("En Zhe Jia"), which was formed on September 17, 1999, both of which are limited liability companies headquartered in PRC and organized under the laws of PRC (hereinafter, referred to together as "Lotus East"). We have contractual arrangements with Lotus East and its shareholders pursuant to which we provide technology consulting and other general business operation services to Lotus East. Through these contractual arrangements, we also have the ability to substantially influence Lotus East's daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As a result of these contractual arrangements, which enable us to control Lotus East, we are considered the primary beneficiary of Lotus East. Accordingly, we consolidate Lotus East's results, assets and liabilities in our financial statements.

On September 6, 2006, we entered into the following contractual arrangements: 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 shall pay a quarterly consulting service fees in Renminbi ("RMB") to Lotus that is equal to Lotus East's revenue, as defined, for such quarter.

Operating Agreement. Pursuant to the operating agreement among Lotus, Lotus East and the shareholders of Lotus East, (collectively "Lotus East's Shareholders"), Lotus provides guidance and instructions on Lotus East's daily operations, financial management and employment issues. The shareholders of Lotus East must designate the candidates recommended by Lotus as their representatives on Lotus East's Board of Directors. Lotus has the right to appoint senior executives of Lotus East. In addition, Lotus agreed to guarantee Lotus East's performance under any agreements or arrangements relating to Lotus East's 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 Lotus's written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties. 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 East's performance of its obligations under the technology consulting agreement. If Lotus East or Lotus East's 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 East's 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 East's 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 East's 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 ten (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 East's Shareholders, Lotus East's Shareholders agreed to irrevocably grant a person to be designated by Lotus with the right to exercise Lotus East's Shareholders' voting rights and their other rights, including the attendance at and the voting of Lotus East's 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. Based in Beijing, China, Liang Fang is engaged in the production, trade and retailing of pharmaceuticals. Further, Liang Fang is focused on development of innovative medicines and investing strategic growth to address various medical needs for patients worldwide. Liang Fang owns and operates 10 drug stores throughout Beijing, China. These drug stores sell Western and traditional Chinese drinking pieces, lease medical treatment facilities to licensed physicians, and generate revenues from the leasing of retail space to third party vendors and the leasing of advertising locations at its retail stores. En Zhe Jia 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.

As a result of these agreements, Lotus East was deemed to be the acquirer of Lotus International for accounting purposes. Accordingly, the financial statement data presented are those of Lotus East for all periods prior to the Company's acquisition of Lotus International on September 28, 2006, and the financial statements of the consolidated companies from the acquisition date forward.

En Zhe Jia has 2 shareholders: our CEO, Liu Zhong Yi and Song Zheng Hong, Liu Zhong Yi's spouse. Liang Fang has 3 shareholders: Wen Li Xian, Song Zheng Hong, and Liu Zhong Yi.

Our headquarters are located in Boca Raton, Florida at Boca Corporate Plaza, 7900 Glades Road, Suite 420, Boca Raton, FL 33434, and our telephone number at that address is [phone]. We maintain a web site at www.lotuseast.com. Information on our web site is not a part of this annual report.

The shares of our common stock are quoted on the Over the Counter Bulletin Board ("OTC Bulletin Board") under the symbol LTUS.OB.

Business Description

Our business is composed of three parts: (1) Manufacturing and distribution of pharmaceutical products, including the manufacture of pharmaceutical products for other distributors (OEM manufacturing), (2) retailing of Western and traditional Chinese medications, and medical treatment equipment through retail locations and (3) research and development. Manufacturing and distribution of pharmaceutical products

Our production enterprise is located in the Chaoyang District of Beijing and covers a floor space of approximately 50,000 square feet. We possess liquid phase, gas phase, spectrum, and mass spectrum equipment and all kinds of purification and distilling equipment, all of which can be used for production and R&D of biochemical medicines, Chinese traditional medicines, chemical compound medicines, antibiotics and other new medicines. As one of the first enterprises to be authenticated by the National China Good Manufacturing Practices (GMP), we have an advanced automatic pharmacy product line which is GMP authenticated under certificate numbers C0849, C0850, D1645, and G3452. Medicines produced by the Company include material medicine, troches, capsules, granule medicaments; freeze-dried powder for injections, injections of small capacities and eye drops. Different production control zones are used with separated air conditioning system according to different production and control needs.

Production of pharmaceuticals is Lotus' largest and most profitable business and accounts for approximately 83% of our revenues. Under various manufacturing contracts, we provide manufacturing services for several drug companies in which they supply the raw materials and we manufacture their product to their specifications for a fee.

Our principal pharmaceutical manufactured products include:

Valsartan

In 2000, we obtained approval from the State Food and Drug Administration ("SFDA") of China to sell Valsartan as a raw material and as a capsule (Maixin). Among our best selling products, Valsartan is a drug that treats hypertension or high blood pressure. This product is globally recognized as the ideal anti high blood pressure medication by the medical industry due to its most stable and longest lasting treatment results and minimum side-effects.

High blood pressure adds to the workload of the heart and arteries. If it continues for a long time, the heart and arteries may not function properly. This can damage the blood vessels of the brain, heart, and kidneys, resulting in a stroke, heart failure, or kidney failure. High blood pressure may also increase the risk of heart attacks. These problems may be less likely to occur if blood pressure is controlled.

Valsartan works by blocking a substance in the body that causes blood vessels to tighten. As a result, Valsartan relaxes blood vessels. This lowers blood pressure and increases the supply of blood and oxygen to the heart.

Our goal is to make Valsartan the number one prescribed brand in its class of high blood pressure medications in the PRC.

Through October 29, 2006, we held protective manufacturing rights to produce Valsartan. We estimate that there are currently 10 enterprises producing single regent dosage and fixed-dose combinations of Valsartan in China. The foreign pharmacy Novartis Pharma sells Valsartan under its brand name, Diovan. According to clinical verification, the two products, Maixin and Diovan, have the same clinical effects. We believe that the longer our product is on the market, our market share will increase year by year due to brand recognition and continued sales efforts. We believe that even if the Chinese government does not take any measures to protect these products, other enterprises still can not replicate our products before February 2009 because it takes at least 28 months to replicate any orally taken medicine. By then, even if the market has fiercer competition, our market will be relatively mature and we believe that our production cost will be lower than those new products. Accordingly, we believe that our sales revenue from Valsartan can stay relatively stable.

Brimonidine Tartrate Eyes Drops

Brimonidine Tartrate is a drug used to constrict adrenaline receptors, an important step in treating glaucoma. We sell Brimonidine Tartrate eye drops under our brand name "Muxin". The drug was first put into market in the U.S. in 1998 and in August 2004, we received the rights to manufacture and release the drug in the Chinese market. A fast and obvious curative effect, very few side effects, a very high exponent of cure and high endurement are prime features of the drug. It will produce no harmful effects of reducing blood pressure, resulting in calmness and so on, much like diazepam. The imported product of its kind is Alphagan and is produced by Allergan (Hangzhou) Pharmaceutical Co., Ltd. According to clinical experiments of People's Hospital of Peking University and Tianjin Eye Hospital, our Muxin and imported Alphagan have exactly the same curative effect but the side-effects of Muxin are fewer than Alphagan, so our product has a stronger competitive advantage.

To date, we have done minimal advertising on this product, with sales increasing only by the customer's natural needs. Through September 2007, we hold protective manufacturing rights to produce Brimonidine Tartrate. We estimate that other enterprises will not be able to replicate this product until March 2010, because we believe it takes at least 30 months to replicate an eye drop medicine. Currently, we have minimal competition and we believe our market share will not decrease. However, we anticipate lowers profits after 2010.

Leflunomide

Leflunomide is a medicine for the treatment of rheumatoid arthritis, systematically erythematic lupus, and psoriasis. It also has functions such as anti-rejection.

Levofloxacin Lactate

Levofloxacin is a popular anti-bacterial drug with indications of all kinds of bacterial inflections and used for medical care.

Nicergoline for Injection

Nicergoline for Injection is a national medical insurance product. It is an a-receptor blockage nerve system blood-brain medicine with remarkable curative effect.

With the implementation in China of macro economic policy, the profit margin of medicines shall decrease. As of the date of this report, we can not estimate the effect of these economic policies on our results of operations.

Currently, we market and sell the products only in PRC.