Lizhan Environmental Corporation Reports Fiscal Year 2011 (Unaudited) Results

ZHEJIANG, China, April 2, 2012 /PRNewswire-Asia/ -- Lizhan Environmental Corporation ("Lizhan" or the "Company") (Nasdaq: LZEN), one of China's leading manufacturers of eco-friendly fabrics made from patented technologies, announced today its three- and twelve-month unaudited results for the fiscal year ended September 30, 2011.

Financial Summary

The Company produced and sold approximately 12 million meters of fabric in the twelve months ended September 30, 2011, down 2 million meters from 14 million meters in the corresponding period in 2010. Domestic sales fell by approximately 33% and sales to international customers increased by 16%.  

"We faced several challenges in the past year, which we are actively working to address," explained Chairman and Chief Executive Officer Jiangfeng Liu. "The most encouraging development has been an improvement in our Colgre Products daily production from 1,000 meters per day in the fourth quarter of 2011 to 3,000 meters per day currently. Demand is building gradually and we are in active discussions with new customers in China and overseas."

Mr. Liu continued, "We do not expect to experience the production disruptions caused by the lack of steam supply that occurred from January to March of year 2011. We are also working on diversifying our raw materials suppliers, which should help improve our production stability and enhance our profitability."

Three months Ended September 30, 2011 Financial Results (Unaudited)

Net Sales

Net Sales for the three months ended September 30, 2011 were $8.5 million, a 27% decline from $11.7 million in the same period of fiscal 2010. Sales of recycled leather flocked fabrics decreased 35% to $6.4 million due to lower orders from domestic and international customers. The Company sold $1.2 million of ultra suede leather products, up 35% from the same period last year.

Lizhan continued to increase production of its Colgre Products – previously known as Evergreen Products - in the fourth quarter of 2011, with approximately 25,000 meters produced. The Company shipped and sold approximately 15,000 meters of Colgre Products during the fourth quarter of year 2011, resulting in sales of approximately $0.2 million.

Gross Profit

Gross profit was $1.2 million compared to $2.7 million for the same quarter in 2010. The 56% decline was a result of rising raw materials and labor costs. Gross margins were 14% and 23% in the three months ended September 30, 2011 and 2010, respectively.

Operating Expenses

Operating expenses increased from $1.0 million to $1.7 million, representing approximately 20% of revenues. The increase was primarily due to higher salaries and expenses related to the addition of Colgre Products.

Net Income

Lizhan generated a $0.3 million loss attributable to common shareholders compared to a $1.8 million net income in the three months ended September 30, 2010 due mainly to lower sales and higher expenses. Net loss was $0.02 per share based on 13.6 million weighted average shares outstanding in the fourth quarter of 2011 compared to $0.17 net income and 11.1 million shares in the same period last year, respectively.  

Twelve months Ended September 30, 2011 Financial Results (Unaudited)

Net Sales

Net sales for the twelve months ended September 30, 2011 were $36.3 million, a 22% decline from $46.3 million in fiscal year 2010.  Sales in fiscal year 2011 were negatively impacted by a shutdown of production mandated by the local government to review and repair the steam supply systems during the second quarter. Sales of the lower margin ultrasuede leather products decreased by 28% to $6.6 million due to management's ongoing efforts to reallocate capital to its higher margin businesses such as recycled leather flocked fabric and Colgre Products. Recycled leather flocked fabric sales dropped 20% to $27.2 million.

Gross Profit

Gross profit for the twelve months ended September 30, 2011 fell 41% to $6.7 million, from $11.3 million for the twelve months ended September 30, 2010.  Gross margin was 19%, down from 24% in fiscal 2010.

Operating Expenses

General and administrative expenses totaled $4.5 million and selling and marketing expenses were $0.8 million compared to $2.1 million and $0.6 million in the twelve months ended September 30, 2010, respectively. The increase was primarily attributable to expenses incurred in connection with operating as a public company and expenses in connection with the cost of establishing our operating subsidiary, Hongzhan. In addition to the increased employee salaries and related expenses, the Company also incurred higher marketing and promotion costs.

Net Income

Net income attributable to common shareholders declined from $8.2 million to $1.6 million for the twelve months ended September 30, 2011. The fully diluted earnings per share were $0.12 and $0.74 in the first twelve months of 2011 and 2010, respectively.  

Balance Sheet and Cash Flow Statement

The Company had $1.2 million in cash and $1.3 million in restricted cash at September 30, 2011 compared to $2.6 million and $1.1 million, respectively, at September 30, 2010. Total loans outstanding were $24.7 million and $13.7 million in 2011 and 2010, respectively.  

Accounts receivable was $6.3 million at September 30, 2011, representing days sales outstanding of 68 days. Inventories increased from $4.7 million at the end of fiscal 2010 to $13.0 million at September 30, 2011 due to changes in the product mix, increasing complexity of the manufacturing process, and higher quality requirements from the Company's customers, and advance raw materials purchases to reduce the impact of cost inflation. Shareholder equity was $28.1 million, up from $17.7 million at September 30, 2010, as a result of its IPO in November 2010.

Cash from operations was a net outflow of $8.6 million in the twelve months ended September 30, 2011 as a result of increases in inventories and prepayments. The Company spent approximately $9.4 million on capital expenditures, the majority of which were related to the construction of its Colgre Products manufacturing facility, compared to total capital expenditures of $16.6 million in fiscal year 2010.

Business Updates

Colgre Products

Colgre Products are manufactured by using a new leather processing technology which utilizes genuine leather and its scraps to generate a new class of fabrics derived from natural fiber. The technology enables dissembling collagen fibers and recomposing or weaving the collagen fiber bundles according to the natural leather structure. These products are expected to be suitable for applications in furniture, shoes, eco-fashion apparel, radiation proof clothing and luggage and bags. We sell and expect to continue to sell these products to furniture manufacturers.  

Lizhan completed the construction of the Colgre Products manufacturing facility in January 2011 and launched the first production line in June 2011. Due to technical adjustments that needed to be made to the equipment purchased from a U.S. vendor, the costs to launch the initial production line significantly exceeded the original projections. As of September 30, 2011, the Company spent $20.1 million on land, equipment and manufacturing of the first production line and part of the second production line. The cost for increasing the capacity of the first production line to full capacity is expected to be approximately $500,000. Lizhan intends to use cash generated from operations and additional financing to meet this capital requirement.

From June to September 2011, the Company produced 25,000 meters and shipped 15,000 meters of Colgre Products, representing a daily production rate of approximately 1,000 meters per day. Currently the daily production rate is approximately 3,000 meters. Lizhan is making modifications to the equipment in order to achieve maximum production capacity of 5,000 meters per day.

Lizhan has signed contracts with multiple customers since launching the Colgre Products in June 2011. The Company has initially focused on distributors and wholesalers in the furniture and upholstery fabric industries. Because of its superior quality and environmental benefits, Colgre Products can be used in other consumer applications such as shoes, luggage and apparel.  

About Lizhan Environmental Corporation
Lizhan Environmental Corporation is one of China's leading manufacturers of eco-friendly fabrics whose products are developed with patented technology that regenerates collagen fiber from leftover cuttings, pieces and trimmings of genuine leather. The Company's products are mainly used in furniture, garments and other consumer applications. For more information about Lizhan Environmental Corporation, please visit www.lzencorp.com.

Safe Harbor Statements
This press release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks outlined in the Company's public filings with the Securities and Exchange Commission, including the Company's annual report on 20F, as amended. Some of risks inherent in an investment in our company include, but are not limited to, our limited operation history, our need to maintain sufficient levels of liquidity and working capitals, the potential need to reduce our expansion plans, price inflation in the PRC, difficulties in developing and selling our new Colgre Products, seasonal patterns in our business, protection of our intellectual property and the risk of infringing the intellectual property of others, customer decisions to discontinue purchasing our products, and restrictions imposed by Chinese regulations, including every policies.  All information provided in this press release is as of April 2, 2012. Except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

Contacts:
Company:
Lizhan Environmental Corporation
Eileen Liu, Investor Relations Manager
Email: [email protected]
Phone: +011-86-573-8862-268

Investor Relations:
MZ North America
Ted Haberfield, President
Email: [email protected]
Phone: +1-760-755-2716

Financial Tables to Follow:

SOURCE Lizhan Environmental Corporation