Lizhan Environmental Corporation Reports Fiscal Year 2011 Second Quarter Results

ZHEJIANG, China, May 26, 2011 /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 six-month results for the fiscal second quarter of 2011 ended March 31, 2011.

Six months Ended March 31, 2011 Financial Results (Unaudited)

Net Sales

Net sales for the six months ended March 31, 2011 was $16.7 million, a decrease of approximately 25% from $22.4 million in 2009.  Sales of recycled leather flocked fabric sales decreased by 26% to $11.9 million.  Sales in the first half of fiscal 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 31% to $3.8 million due to management's ongoing efforts to reallocate capital to its higher margin businesses.

"Production during the three-month and six-month periods was impacted by a steam supply suspension in Tongxiang City for citywide machinery maintenance during the end of January and February," explained Chairman and Chief Executive Officer Jianfeng Liu. "The impact of this suspension, along with temporary disruptions from transitioning some of our outsourced production, was responsible for the sales decrease during the quarter ended March 31, 2011. While we are not pleased with these results, we believe we are making meaningful progress toward our long term objectives. We know that consistency in our sales and operating performance is important and we firmly believe our assets and technologies position us well to deliver on those objectives."

Management anticipates production of recycled leather flocked fabric normalizing during the third and fourth fiscal quarters.

Gross Profit and Gross Profit Margin

Gross profit for the six months ended March 31, 2011 decreased 25% to $4.3 million, from $5.7 million for the six months ended March 31, 2010.  Gross margin was 26% for both periods as a favorable shift to higher margin products was offset by lower plant utilization.

General and Administrative Expenses

General and administrative expenses totaled $2.1 million for the six months ended March 31, 2011 from $0.8 million for the six months ended March 31, 2010, an increase of 156.5%. The increase was attributed to the increasing professional service fee of $0.3 million and staff expenses to operate as a public company since Lizhan became public in late 2010, as well as a one-time cost of $0.6 million to establish our operating subsidiary, Hongzhan. These expenses were not incurred in the prior year period.

Selling and Marketing Expenses

Selling and marketing expenses increased 97% to $0.5 million for the six months ended March 31, 2011, commensurate with increased advertising, promotion and marketing activities. Management expects advertising and marketing investments will lead to higher sales and brand recognition over time.

Net Income

Net income decreased 59% to $1.8 million for the six months ended March 31, 2011 as compared to approximately $4.5 million for the six months ended March 31, 2010. The fully diluted earnings per share were $0.15 and $0.40 in the first six months of 2011 and 2010, respectively.  

Three months Ended March 31, 2011 Financial Results (Unaudited)

Net Sales for the three months ended March 31, 2011 decreased 48% to $5.9 million. Sales of our recycled fabrics dropped from $10.4 million in the second quarter of 2010 to $4 million in the same period this year due to management's decision to only take on profitable orders in light of the significant increase in raw materials costs. The Company generated $1.6 million of revenue from its ultrasuede leather products, up 216% from the same period last year.

After renegotiating with customers in April and May for higher pricing to reflect the higher cost production costs, sales of the Company's recycled fabrics has rebounded.

Gross profit declined 60% to $1.2 million with gross margins of 20% compared to 26% in the year ago period due to lower plant utilization and higher raw materials costs. The average capacity utilization was approximately 40% in the second quarter of 2011 compared to 70% in the same period last year. Net loss was $0.3 million or $0.03 per share, compared to a net profit of $2.2 million and $0.19 in earnings per share for the second quarter of fiscal 2010.  

Total backlog was approximately 1.8 million meters at the end of the second quarter, equal to approximately $6.9 million based on current market prices.

Mr. Liu continued, "We have already started producing Evergreen Products on a limited basis and expect to book revenues from our first Evergreen Product line in the upcoming quarter.  In addition, once we complete testing of the new equipment, we believe we can ramp production of our Evergreen Products in subsequent quarters. We have several orders in hand and expect to begin shipping products to select clients in June."

Balance Sheet and Cash Flow Statement

As of March 31, 2011, the Company had $2.1 million in cash and cash equivalents.  The Company used $5.7 million of cash from operating activities in the six months ended March 31, 2011, compared to $2.1 million cash provided by operating activities in the six months ended March 31, 2010, primarily due to the increased cost of raw materials and a prepaid rent of $2.1 million for the Evergreen facilities.

Business Updates

Lizhan's production and sales during the three and six months ended March 31, 2011 were negatively impacted by several one-time disruptions. All of the disruptions have been resolved and the Company has resumed normal operations. The Company generated sales of approximately $4.2 million in April 2011.

First, the Tongxiang Environmental Thermoelectricity Co., Ltd. in Tongxiang City completely shut down its steam production from January 20th to February 12th, 2011 to complete maintenance of its equipment. This mandatory maintenance, which occurs every three or four years at the local government's discretion, was the primary reason for the approximate 25% reduction of the Company's total production. Steam production has returned to normal since Tongxiang Environmental Thermoelectricity Co., Ltd completed its repairs in February 13th, 2011.

The Company decided to reduce the amount of outsourced production during the second quarter of 2011 due to rising costs of outsourced manufacturing. In the second quarter of 2010, Lizhan outsourced approximately 30% of its production in order to fill excess demand for its products. Due to rising labor and commodity costs, outsourcing no longer generated acceptable returns. However, the Company experienced some short-term production and sales disruptions while it transitioned the manufacturing back in-house. Since completing the conversion in March 2011, the Company has resumed normal production.    

Evergreen Products

One component of Lizhan's growth strategy is to produce and sell a high quality, environmentally friendly recycled leather product – Evergreen Products – using proprietary production technologies. The Company owns two patents and one patent application relating to the Evergreen Products and has an exclusive license from the Company's Chief Scientist Liwen Zhang for 18 patents (including one Chinese patent and 17 international patents) and eight international patent applications, relating to the technologies that are critical to the processing of the Evergreen Products. The primary advantages of Evergreen Products are abundance and low cost of raw materials; value-added finished products that can replace genuine leather at less than half the cost; and no harmful waste produced during the manufacturing process. These products will initially be sold to customers in the automotive and furniture industries.

The Company is finalizing the construction and testing of its initial Evergreen Products production line – Line 1. Because no such equipment currently exists on the market, Lizhan needed to make modifications to the equipment purchased from a US vendor. Once it completes the installation and testing of the water treatment equipment, Lizhan will commence volume production. Management believes it will gradually ramp production in Line 1 starting in June from 3,000 meters per day to 5,000 meters per day by the fiscal fourth quarter of 2011.

Power Rationing

The local government has informed Lizhan that all businesses in Tongxiang city will be subject to electricity restrictions from approximately three to four months this summer.  The Company is preparing to mitigate the potential disruption by purchasing three backup power generators and securing additional diesel supplies. Based on information available today, Management does not anticipate a meaningful impact on overall production as a result of the upcoming power restrictions. However, the full extent of the restrictions is not known at this time and margins may be impacted if the Company is not able to fully offset the higher anticipated electricity costs through higher prices.

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 Evergreen 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 February 1 2011. 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.

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