LZEN Lizhan Environmental Corp. - Ordinary Shares (MM)

ZHEJIANG, China, Aug. 18, 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 nine-month results for the fiscal third quarter of 2011 ended June 30, 2011.

Financial Summary

"We experienced a challenging quarter, as pricing adjustments and higher sales of recycled leather flocked fabric were more than offset by significant increases in the cost of raw materials and labor," explained Chairman and Chief Executive Officer Jiangfeng Liu. "While we have recently seen stabilization in prices for base fabrics, we anticipate a lag between our recent price increases and margin stability."

Mr. Liu continued, "We met an important milestone in June as we commenced production at our first Evergreen line. We also signed two important customers by securing $12.4 million in Evergreen orders while making consistent volume improvements. We will continue to take additional steps to optimize both output and profitability."

The Company had 30 customers for its ultra suede products and 45 customers for its flocked leather fabric products at June 30, 2011. Total backlog was approximately 1.8 million meters at the end of the third quarter, equal to approximately $6.9 million based on current market prices.

"To minimize production impacted by future government imposed power restrictions we completed the installation of three backup power generators."

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

Net Sales for the three months ended June 30, 2011 were $11.1 million, a 9% decline from $12.2 million in the prior year. Sales of our recycled leather flocked fabrics increased from 7% to $8.9 million year-over-year, after the Company raised prices by 6% to 10% to help reduce adverse impact of rising production costs. The Company sold $1.6 million of ultra suede leather products, down 42% from the same period last year, due to planned product rationalization.

Gross Profit and Gross Profit Margin

Gross profit was $1.3 million compared to $2.8 million in the year ago quarter. The 56% decline was a result of adjustment of product structure and rising raw materials and labor costs which more than offset pricing adjustments. It takes between 7 to 9 months on average for pricing adjustments to be fully passed through. Management is currently evaluating additional price hikes in light of rising input costs. Gross margins were 11% and 23% in the three months ended June 30, 2011 and 2010, respectively.

Lizhan commenced initial production of its Evergreen Products in June 2011, with approximately 25,500 meters of base fabrics used to produce Evergreen Products in the third quarter. While no revenues were recognized in the third quarter of 2011, management believes Evergreen Products will generate higher margins than the corporate average.

Operating Expenses and Operating Income

Operating expenses increased by $0.4 million to $1.2 million, representing approximately 11% of revenues. The year-over-year increase was primarily due to higher salaries and expenses related to the addition of Evergreen Products.

Net Income

Net income attributable to common shareholders was $0.1 million compared to $1.9 million in the three months ended June 30, 2010. Earnings per share was $0.01 based on 13.6 million weighted average shares outstanding in the third quarter of 2011 versus $0.17 and 11.1 million in the same period last year, respectively.

Nine months Ended June 30, 2011 Financial Results (Unaudited)

Net Sales

Net sales for the nine months ended June 30, 2011 were $27.8 million, a 20% decline from $34.6 million in 2010. Sales in the first nine months 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 35% to $5.4 million due to management's ongoing efforts to reallocate capital to its higher margin businesses such as recycled leather flocked fabric and Evergreen Products.

Gross profit for the nine months ended June 30, 2011 decreased 35% to $5.5 million, from $8.6 million for the nine months ended June 30, 2010. Gross margin was 20%, down from 25% in the first three quarters of fiscal 2010.

General and administrative expenses totaled $3.0 million and selling and marketing expenses were $0.7 million compared to $1.4 million and $0.4 million in the nine months ended June 30, 2010, respectively. The increase was attributed to $0.3 million of public company expenses, 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.

Net income attributable to common shareholders declined from $6.3 million to $2 million for the nine months ended June 30, 2011. The fully diluted earnings per share were $0.15 and $0.57 in the first nine months of 2011 and 2010, respectively.

Balance Sheet and Cash Flow Statement

The Company had $3.0 million in cash and cash equivalents at June 30, 2011 compared to $3.7 million at September 30, 2010. Accounts receivable was $8.6 million, representing days sales outstanding of 77 days. Inventories increased from $4.7 million at the end of fiscal 2010 to $12.6 million at June 30, 2011. Shareholder equity was $28.1 million, up from $17.7 million at September 30, 2010, as a result of its IPO in November 2010.

Operating cash flows were an outflow of $9.8 million in the first nine months of fiscal 2011 as a result of increases in inventories and prepayments to support future growth. The Company spent approximately $8.8 million on capital expenditures related to the construction of its Evergreen Products manufacturing facility.

Business Updates

Evergreen Products

Lizhan completed installation of several pieces of equipment for Line 1 of its Evergreen Products manufacturing line in June 2011. We have finished the production of 25,500 meters from July 1st to August 15th.

In June 2011, the Company signed agreements with two customers for its Evergreen Products totaling $12.4 million. The separate one-year agreements with Novatex S.p.A. ("Novatex") and Beijing Hengxin Kaibo Textile Co. Ltd. ("Hengxin Kaibo") encompass delivery of 495,000 meters and 420,000 meters of Evergreen Products, respectively, over the next twelve months. Novatex is a leading manufacturer and distributor of textiles based in Italy. Hengxin Kaibo is an international distributor of fabrics and related products. The Company expects to deliver initial shipments to Novatex and Hengxin Kaibo in the fourth quarter of 2011.

Power Rationing

During the third quarter of 2011, the Company experienced intermittent power supply disruptions as a result of mandatory power restrictions imposed by the local government of Tongxiang City. Lizhan purchased and installed three backup power generators and secured additional diesel supplies, which it has used to maintain full operations on the days when electricity from the grid is not available.

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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