Natrols November Dollars and Deals

December 14, 2007

5 Min Read
Natrols November Dollars and Deals

CHATSWORTH, Calif.In the span of one week, Natrol (NASDAQ: NTOL) reported a double-digit quarter revenue growth, was bought by an overseas company, and struck a development and marketing deal with an entertainment company.

For its third quarter, the 22.3-percent jump in third quarter(3Q) net sales to $19.2 million, compared to $15.7 million a year ago, was not enough to save Natrols bottom line, which dropped to a net loss per share of $0.22 due to several uncommon costs and special charges. Among the approximately $3.3 million in charges that affected gross margin and, ultimately, net earnings were those related to a strategic decision to reduce exposure to the H57 Hoodia product line and to adjust reserves in connection with a major customer. As reported, the companys 3Q gross margin was 31.5 percent; excluding the charges, gross margin would have been 44.4 percent, compared to 42.7 percent posted last year.

Natrol (www.Natrol.com) also reported it incurred unusual selling, general and administrative (SG&A) costs during the third quarter, including $750,000 in legal costs related to a settlement of the companys last unresolved suit for ephedrine-related products, as well as some costs incurred due to ongoing strategic transactions. Additionally, the discontinuation of its H57 Hoodia business carried a special SG&A impact of $620,000. Overall, SG&A expenses amounted to $11.0 million in the quarter, compared to $6.5 million in the same quarter last year. Management noted approximately $2.3 million of the increase was due to the companys NuHair, Shen Min, Promensil and MRI acquisitions, and $0.8 million was due to increased sales and marketing expenses related to the core Natrol brand, with the remainder being due to the Hoodia charges.

Wayne Bos, chairman and CEO, assured Natrols strategic and operational turnaround of remains intact and in progress. While the decisions made this past quarter have an obvious impact on third quarter financials, he said this kind of housekeeping activity is an essential part of repositioning the business. What is not readily apparent in our reported numbers is that our gross shipments in the third quarter increased 47 percent, year-on-year, he noted. This kind of performance is one reason why we remain confident about the future. Our NuHair, Shen Min, Promensil and MRI brands are all performing well. Natrol too, once we adjust for the Ester-C issue, continues to improve, and Laci LeBeau is stable and profitable.

Less than a week after publishing its quarter results, Natrol signed a definitive merger agreement for Plethico Pharmaceuticals Ltd. of India to acquire all outstanding NTOL shares for $4.40 per share; based on current stock data, this could amount to approximately $80.8 million. The transaction will include an initial general tender offer in cash by a wholly-owned subsidiary of Plethico for all outstanding shares, followed by a second-step, cash-out merger in which all remaining untendered Natrol shares will be acquired at the same net cash price per share. All Natrol stock options will receive cash equal to the excess, if any, of $4.40 over their exercise price.

Boards from both Plethico and Natrol have approved the deal, which is still subject to certain conditions, including the valid tender in the offer of a majority of the fully diluted Natrol common stock, and other customary conditions.

The goal in the initial tender offer is have Plethico own at least 90 percent of outstanding NTOL shares. Natrol has granted Plethico a top-up option, exercisable under certain limited circumstances, to help complete the merger even if Plethico does not reach 90-percent ownership during the initial tender period. Plethico also agreed to reserve the right to commence a subsequent offering period if it owns less than 90 percent upon completion of the initial tender offer period. Plethicos CFO Sanjay Pai reported his company would fund the deal through the $75 million raised in convertible bonds, coming from the proceeds from its initial public offering.

Bos said the transaction completes a process initiated and directed by Natrols board of directors to maximize value for stockholders. We have gained a solid reputation in our market niches and believe the merger with Plethico will also be a win-win for our customers and employees, he said. He further noted Natrols revenue is expected to jump from $65.6 million in 2006 to $90 million in 2009 due to contributions from the three acquisitions it made in the last 12 months.

Shashikant A. Patel, chairman and managing director of Plethico, said the acquisition will help Plethico consolidate its position as a leading global herbal/nutraceutical player. The acquisition brings under our fold a truly professional entity which has a very strong presence in the United States, in addition to operations in the United Kingdom and Hong Kong, he added. Accessing these markets will make Plethico a truly global player and will expand upon our international presence in Commonwealth of Independent States (CIS), Africa, South East Asia, Latin America and GCC (Gulf Cooperation Council).

Natrol expected the tender offer to be commenced on Nov. 27, with the tender offer open for 20 business days from commencement, subject to extension under certain circumstances. The acquisition is expected to be completed during the first quarter of 2008.

Natrol later announced it had a letter of intent to form a strategic alliance with Gener8xion Entertainment (8X.com), a family- and faith-based media company, to create a Health and Wellness platform that will provide products, services and strategy for GNXEs community of interest and target market. In addition to exclusively licensing the Living Pure brand to Gener8Xion, Natrol will provide support services.

As part of the deal, Natrol is expected to pay $150,000 to Gener8Xion, which will execute a convertible note for the same amount, which Natrol can choose to convert to 750,000 shares of common stock. Also, Gener8Xion will issue to Natrol warrants, options or similar instruments to be determined equal to 40 percent of the fully diluted capital of Gener8Xion. The warrants will have a strike price of $0.80 and a term of three years.

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