Hanfeng Evergreen Inc.
TSX : HF

Hanfeng Evergreen Inc.

November 14, 2013 22:04 ET

Hanfeng Evergreen Announces First Quarter Fiscal 2014 Financial Results

TORONTO, ONTARIO--(Marketwired - Nov. 14, 2013) - Hanfeng Evergreen Inc. (TSX:HF) ("Hanfeng" or the "Company"), a provider of value-add fertilizers in China and South East Asia, today reported its financial results for the first quarter of Fiscal 2014 ("Q1FY14") ended September 30, 2013. All amounts are in Canadian dollars unless otherwise noted.

Sales decreased to $3.0 million in Q1FY14 from $35.9 million in the first quarter of fiscal 2013 ("Q1FY13"). The decrease in sales is due primarily to no production and sales from its Heilongjiang facility in China ("HLJ") during Q1FY14 as a result of a shift in the seasonal low time frame, maintenance shut downs, and uncertainty surrounding the completion of the Privatization Proposal. Jiangsu ("JS") the Company's other China based production facility contributed a relatively small amount of sales due to seasonal trends and reduced production capacity.

Gross profit was lower for Q1FY14 at negative $10.9 million, compared to $4.3 million during Q1FY13, predominantly due to a net $11.3 million impairment recorded by the Company related to inventory and advances to suppliers in Q1FY14. Gross margin was lower for Q1FY14 at (367%), as compared to 12% for Q1FY13. The reduction in gross margin is due to the impairment, which is included in the cost of goods sold. After adjusting for the impairment, gross margin was relatively consistent with Q1FY13 at 13%. Gross margin per metric ton ("MT") was lower in Q1FY14, as compared to Q1FY13 given that sales at the Company's JS facility in China typically realize relatively lower gross margin per MT than HLJ.

The impairment of inventory and advances to suppliers in Q1FY14 is based on the estimated recoverable amount being lower than carrying value, and is consistent in terms of methodology with the impairment to working capital since Q2FY13.

Contributions from its Joint Venture facility in Indonesia ("JVI") were also limited due to ongoing issues related to returned goods during Fiscal 2013, a portion of which have been resold, but at reduced prices.

Adjusted EBITDA decreased during Q1FY14 to negative $5.1 million compared to $3.3 million during Q1FY13. The main reason for the decrease was reduced sales volumes during Q1FY14 and reduced gross profit as explained above, as well as higher public company compliance costs including costs related to the on-going Privatization Proposal. Net loss for Q1FY14 was $13.0 million, or $0.22 per share compared to net income of 1.4 million, or $0.02 per share during Q1FY13. Adjusting for non-cash items, Non-IFRS loss per share was $0.06 in Q1FY14 versus income per share of $0.03 in Q1FY2013.

Cash was $27.4 million as at September 30, 2013 compared to $56.5 million as at June 30, 2013. Cash decreased as a result of the negative cash flow from operating activities and working capital during Q1FY14 led predominantly by reduced sales and an increase in advances to suppliers and inventory, partially offset by a decrease in accounts receivable and cash proceeds from the sale of the long-lived assets in HLJ totaling $1.5 million.

Total inventory and advances to suppliers increased to $133.1 million as at September 30, 2013 compared to $99.9 million as at June 30, 2013. The increase is mainly due to increased advances to suppliers in the HLJ and JS plants, including to a supplier of potash raw materials at the JS plant, and deliveries of other raw materials at the HLJ and JS plant that were contractually agreed to in previous quarters, offset by the aforementioned impairment to inventory.

Current Status of Privatization Proposal

There has been no material development since the Company announced that it was informed by Mr. Xinduo Yu and 8310831 Canada Inc., a corporation wholly-owned by Mr. Yu (collectively, the "Purchaser") that the previously announced debt financing committed by Nongken Longgang Agriculture Investment Co., Limited in favour of the Purchaser for the purpose of financing $85 million, a portion of the cash consideration payable under the proposed privatization of the Company, by the Purchaser had expired and was no longer available to the Purchaser at this time. At that time, the Company announced that it is in the ongoing process of exploring strategic alternatives to the Privatization Proposal by the Purchaser pursuant to the "go shop" rights that were previously negotiated by the Special Committee at the time of the second extension of the outside date under the Arrangement Agreement that was previously announced on May 3, 2013. In connection with that process, the Chairman of the Special Committee, on behalf of the Company, has engaged in discussions, negotiations and due diligence with third parties, which has resulted in an expression of interest in a possible strategic acquisition transaction with the Company. While such discussions and negotiations are ongoing, there is no assurance that an alternative transaction can or will surface or be completed.

Hanfeng's interim financial statements and MD&A have been filed on SEDAR and will be available at www.sedar.com.

About Hanfeng Evergreen Inc.

Hanfeng is a producer and supplier of value-added fertilizer solutions in emerging markets. It is one of the largest producers of slow and controlled release fertilizer in two of world's most significant agricultural markets: the People's Republic of China ("China") and the Republic of Indonesia. A Canadian Company, Hanfeng is headquartered in Toronto, Ontario and its shares trade on the Toronto Stock Exchange under the ticker HF.

Adjusted EBITDA: Adjusted earnings before interest, taxes, depreciation, and amortization ("Adjusted EBITDA") is a non-IFRS financial measure, which the Company believes is meaningful information for purposes of performance evaluation and it allows for comparisons of the Company's performance to the industry as it eliminates the impact of financing decisions, capital structure and the cost basis of assets. Hanfeng calculates Adjusted EBITDA by adding (1) net income/(loss), (2) interest expense reported on the income statements (or deducting interest income), (3) depreciation and amortization expense reported as part of cost of goods sold, (4) depreciation and amortization expense reported as part of general and administrative expenses, (5) income tax expense (recovery), (6) impairment (or deducting the reversal of previously recorded impairment) of property and equipment and intangible assets and the net impairment (or deducting the net reversal of impairment) of working capital items, where the net realizable value is lower than the cost, (7) loss (gain) on disposal of property and equipment and intangible assets and (8) foreign exchange loss (gain). Adjusted EBITDA does not have a standard meaning prescribed under IFRS and is therefore unlikely to be comparable to similar measures presented by other companies.

Non-IFRS income per share ("IPS") is calculated by adding back non-cash impairment of assets and loss on disposition to basic IPS.

This press release contains forward-looking statements based on current expectations. Forward looking statements include, without limitation, statements evaluating market and general economic conditions, and statements regarding growth strategy and future-oriented projected revenue, costs and expenditures. Actual results could differ materially from those projected and should not be relied upon as a prediction of future events. A variety of inherent risks, uncertainties and factors, many of which are beyond Hanfeng's control, affect the operations, performance and results of Hanfeng and its business, and could cause actual results to differ materially from current expectations of estimated or anticipated events or results. Some of these risks, uncertainties and factors include the impact or unanticipated impact of: current, pending and proposed legislative or regulatory developments in the jurisdictions where Hanfeng operates, in particular in China and the Republic of Indonesia; the outcome of the privatization transaction; the outcome of shareholder disputes in the Indonesian joint venture; supply or purchases of non-compliant products; changes in tax laws; political conditions and developments; intensifying competition from established competitors and new entrants in the fertilizer industries; technological change; currency value fluctuation and changes in foreign exchange restrictions; changes in Chinese government support or restrictions on foreign investment; general economic conditions worldwide, as well as in China and South East Asia; Hanfeng's success in developing and introducing new products and services, constructing and operating new manufacturing facilities, expanding existing distribution channels, developing new distribution channels and realizing increased revenue from these channels. This list is not exhaustive of the factors that may affect any of Hanfeng's forward-looking statements. Risks and uncertainties about Hanfeng's business are more fully discussed in the Company's disclosure materials, including its annual information form and MD&A, filed with the securities regulatory authorities in Canada and available at www.sedar.com. Hanfeng undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results or for any other reason. Readers are cautioned not to put undue reliance on forward-looking statements.

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