Recon Technology Reports Fiscal 2018 First Quarter and First Three Months Financial Results

BEIJING, Nov. 15, 2017 /PRNewswire/ -- Recon Technology, Ltd. (NASDAQ: RCON), ("Recon" or the "Company"), a China-based independent solutions integrator in the oilfield service, electric power and coal chemical industries, today reported its financial results for the first quarter and first three months of fiscal year 2018, which ended September 30, 2017.

First Quarter FY2018 Financial Highlights (all comparable to the prior year period):

• Total revenues for the first quarter of FY2018 increased by 56% to RMB 12.2 million ($1.8 million);
• Gross profit for the first quarter of FY2018 was RMB 2.1 million ($0.3 million);
• Gross profit margin increased to 17.2%, largely due to continued higher margin generated from automation business;
• Net loss attributable to Recon for the first quarter of FY2018 was RMB 6.7 million ($1.0 million), or RMB 0.97($0.15) per basic and diluted share, compared to net loss attributable to Recon of RMB 5.5 million, or RMB 0.92 per basic and diluted share, for the same period of last fiscal year;
• Non-GAAP net loss attributable to common shareholders excluding certain non-cash expenses was RMB 2.3 million($341,093), or RMB 0.33($0.05) per basic and diluted share, for the first quarter of FY2018, compared to non-GAAP net loss attributable to common shareholders of RMB 3.2 million, or RMB 0.54 per basic and diluted share, for the same period last fiscal year.

Management Commentary

Mr. Shenping Yin, Chairman and CEO of Recon stated, "Revenue of this quarter is mainly driven by equipment and integration of automation business, the basic two legs of Recon, as we stated in our open letter to shareholders (Refer to the following link for more details: http://recon.mediaroom.com/2017-06-12-Recon-Outlines-2017-Strategy-and-China-Oil-and-Gas-Market-Outlook-in-Open-Letter-to-Shareholders?pagetemplate=widgetpopup). As most of our projects of waste water treatments are currently in progress, we expect revenue of this business line will contribute significantly to the overall revenues in the coming quarters. The rally in crude prices helped generate positive sentiment and we did see more investments in oil extraction by our clients and thus more opportunities for Recon. Based on our current estimation, we remain confident in our ability to achieve our goal of a minimum 30% increase in revenues for this fiscal year. This estimation was also mentioned by the open letter to shareholders as above."

Mr. Yin continued, "Our Gansu subsidiary construction projects, focusing on oilfield sewage treatment and oily sludge disposal treatment project with an annual processing capacity of 60,000 tons of oily waste ("Project"), is also proceeding well (Refer to the following link for more details: http://recon.mediaroom.com/2017-11-07-Recon-Announces-Investment-to-Expand-Services-for-Oily-Sludge-Market-in-Yumen-Oilfield?pagetemplate=widgetpopup). Total investment of this project is expected to about RMB100 million. Approximately RMB5.4 million, which mainly consisted of the purchase of land use right and prepayment for equipments and construction supplies, has been devoted into the first stage of construction. We expect this project to be operational by June 2018 and annual revenue to be generated by the Project is estimated to be over RMB 50 million." 

Results of Operations

The following unaudited condensed consolidated results of operations which include the Company's wholly owned subsidiaries, their variable interest entities ("VIEs") and VIE's subsidiaries. The VIEs are Nanjing Recon Technology Co. Ltd ("Nanjing Recon"), Beijing BHD Petroleum Technology Co, Ltd ("BHD"). BHD owns 100% of the equity interest of Huang Hua BHD Petroleum Equipment Manufacturing Co. LTD ("HH BHD") and 51% of the equity interest of Gansu BHD Environmental Technology Ltd ("Gansu BHD").

On November 25, 2016, the Company began reporting under Rule 3b-4 of the Securities Exchange Act of 1934 as a foreign private issuer, including the filing of annual reports on Form 20-F and current reports on Form 6-K. By this current report on Form 6-K, Recon has provided selected fiscal 2018 first quarter results, with greater detail on its first quarter financial results. 

The translation has been made at the rate of US$ 1.0: RMB 6.65, the approximate exchange rate prevailing on September 30, 2017.

Cost of Revenues. Recon's cost of revenues increased from approximately ¥6.7 million for the three months ended September 30, 2016 to approximately ¥10.1 million ($1.5 million) for the same period in 2017, representing an increase of approximately ¥3.4 million ($0.5 million), or 50.2%. This increase was mainly due to increased costs deriving from additional revenue generated from automation products and equipment than the same period of last year.

Gross Profit. Recon's gross profit increased to approximately ¥2.1 million ($0.3 million) for the three months ended September 30, 2017 from approximately ¥1.1 million for the same period in 2016. Recon's gross profit as a percentage of revenue increased to 17.2% for the three months ended September 30, 2017 from 14.0% for the same period in 2016. This was mainly due to higher margin automation projects and equipment business during this period, which led to the increase in revenues more than the increase in Recon's cost of revenues.

Operating Expenses

Selling and Distribution Expenses. Selling and distribution expenses consist primarily of salaries and related expenditures of Recon's sales and marketing organization, sales commissions, costs of Recon's marketing programs including traveling charges, advertising and trade shows, and rental expense, as well as shipping charges. Selling expenses increased by approximately ¥36,100 (approximately $5,400) for the three months ended September 30, 2017 compared to the same period in 2016. This increase was primarily due to an increase in meal and entertainment expenses, partly offset by a decreased traveling expense. Selling expenses were 8.9% of total revenues for the three months ended September 30, 2017 and 13.5% of total revenues in the same period of 2016.

General and Administrative Expenses. General and administrative expenses consist primarily of costs in human resources, facilities costs, depreciation expenses, professional advisor fees, audit fees, stock based compensation expense and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 43.3% or ¥2.1 million (approximately $0.3 million), from approximately ¥4.9 million in the three months ended September 30, 2016 to approximately ¥7.0 million (approximately $1.1 million) in the same period of 2017. The increase in general and administrative expenses was mainly due to an increase in and performance-based compensation issued to management with an amount of ¥1.2 million (approximately $0.2 million) and investor relationship ("IR") expenses. General and administrative expenses accounted 57.7% of total revenues in the three months ended September 30, 2017 and 62.8% of total revenues in the same period of 2016.

Provision for doubtful accounts. Provision for doubtful accounts is the estimated amount of bad debt that will arise as a result of uncollectibility from accounts receivables, other receivables and purchase advances. We recorded a provision for doubtful accounts of ¥8,000 for three months ended September 30, 2016 and ¥0.3 million (approximately $44,715) for the same period in 2017. Management will make efforts to collect long outstanding receivables.

Research and development ("R&D") expenses. Research and development expenses consist primarily of salaries and related expenditures for Recon's research and development projects. Research and development expenses decreased slightly from ¥619,000 for the three months ended September 30, 2016 to ¥555,000 (approximately $0.1 million) for the same period of 2017.

Net Loss

Loss from operations. Loss from operations was ¥6.9 million (approximately $1.0 million) for the three months ended September 30, 2017, compared to a loss of ¥5.5 million for the same period of 2016. This ¥1.4 million (approximately $0.2 million) increase in loss from operations was primary due to higher meal & entertainment expenses, IR expenses and performance-based compensation issued to management.

Basic and diluted loss per share. Basic and diluted loss per share attributable to common stockholders was RMB 0.97, as compared to RMB 0.92, for the three months ended September 30, 2016.

Non U.S. GAAP Net Loss

Non U.S. GAAP net loss attributable to common shareholders excluding certain non-cash expenses (non-GAAP) such as restricted shares issued for consulting services and non-cash stock compensation expense was RMB 2,269,939 (approximately $341,093), or RMB 0.33 (approximately $0.05) per diluted share, for the three months ended September 30, 2017, compared to non U.S. GAAP net loss attributable to common shareholders of RMB 3,223,753, or RMB 0.54 per diluted share, for the same period last fiscal year. Please see the note about non-GAAP measures and the reconciliation table at the end of this press release.

LIQUIDITY AND CAPITAL RESOURCES

Cash from Operating Activities. Net cash used in operating activities was ¥1.7 million (approximately $0.3 million) for the three months ended September 30, 2017. This was an increase of ¥1.4 million (approximately $0.2 million) compared to net cash used in operating activities of ¥0.3 million for the three months ended September 30, 2016. The increase in net cash used in operating activities for the three months ended September 30, 2017 was primarily for purchases for inventories of ¥2.3 million (approximately $0.3 million) and purchase advances of ¥3.9 million (approximately $0.6 million), offset by amounts received from collection of both notes and trade receivables.

Cash from Investing Activities. Net cash used in investing activities was ¥1.3 million (approximately $0.2 million) for the three months ended September 30, 2017, representing an increase in cash used in investing activities of ¥1.3 million (approximately $0.2 million) compared to the same period in 2016. This increase was due to an increase in the Company's prepayment for a land use right of 50 years.

Cash from Financing Activities. Net cash provided by financing activities amounted to ¥5.3 million (approximately $0.8 million) for the three months ended September 30, 2017, as compared to net cash used in financing activities of ¥1.0 million for the same period in 2016. During the three months ended September 30, 2017, we repaid ¥11.82 million (approximately $1.8 million) in short-term borrowings to related parties, and we received ¥11.0 million (approximately $1.7 million) from related parties and received ¥4.6 million (approximately $0.7 million) in short-term borrowings from third-parties, and we received ¥1.5 million (approximately $0.2 million) capital contribution by a non-controlling shareholder.

STATEMENT REGARDING UNAUDITED FINANCIAL INFORMATION

The unaudited financial information set forth above is subject to adjustments that may be identified when audit work is performed on the Company's year-end financial statements, which could result in significant differences from this unaudited financial information.

Use of Non-GAAP Financial Measures

To supplement Recon's unaudited condensed consolidated financial information presented in accordance with U.S. generally accepted accounting principles ("GAAP"), Recon uses the following non-GAAP financial measures: certain non-cash expenses such as restricted shares issued for consulting services and non-cash stock compensation expense, basic and diluted earnings (losses) per common share excludes non-cash expenses such as restricted shares issued for consulting services and non-cash stock compensation expense.

The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Recon believes these non-GAAP financial measures provide meaningful supplemental information about its performance by excluding non-cash items, which may not be indicative of its operating performance.

About Recon Technology, Ltd. (NASDAQ: RCON)

Recon Technology, Ltd. is China's first listed non-state owned oil and gas field service company on NASDAQ. Recon supplies China's largest oil exploration companies, Sinopec (NYSE: SNP) and CNPC, with advanced automated technologies, efficient gathering and transportation equipment and reservoir stimulation measure for increasing petroleum extraction levels, reducing impurities and lowering production costs. Through the years, RCON has taken leading positions on several segmented markets of the oil and gas filed service industry. RCON also has developed stable long-term cooperation relationship with its major clients, and its products and service are also well accepted by clients. For additional information please visit us at www.recon.cn.

Currency Conversion

The translation of RMB amounts into U.S. dollars are included solely for the convenience of readers and have been made at the rate of RMB 6.65 to US$ 1.00, the noon buying rate as of September 30, 2017 as set forth in the H.10 statistical release of the Federal Reserve Board. Prior period numbers have been recast into the new reporting currency.

Safe Harbor

This news release contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are other than statements of historical facts. These statements are subject to uncertainties and risks including, but not limited to, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition and pricing, government regulation, and other risks contained in reports filed by the company with the Securities and Exchange Commission. All such forward-looking statements, whether written or oral, and whether made by or on behalf of the company, are expressly qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, the company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.

Company Contact
Liu Jia
Recon Technology, Ltd.
+86 (10) 84945799
info@recon.cn

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SOURCE Recon Technology, Ltd.