Recon Technology Reports Fiscal Year 2018 Financial Results

BEIJING, Sept. 28, 2018 /PRNewswire/ -- Recon Technology, Ltd. (Nasdaq: RCON) ("Recon" or the "Company"), a China-based independent solutions integrator in the oilfield service and environmental protection, electric power and coal chemical industries, today announced its financial results for the fiscal year ended June 30, 2018.

Management Commentary

Mr. Shenping Yin, founder and CEO of Recon stated, "We are pleased to announce our financial results for fiscal year 2018. Our revenues increased to RMB 84.7 million from RMB 60.1 million over the same period last year. This was an improvement of 41.1% year over year, exceeding our expectations of a 30% increase as previously disclosed in our annual letter to shareholders. In addition to this top line growth, over the past fiscal year our management invested in manufacturing equipment, constructing wastewater and oil sludge treatment plants and Future Gas Station (Beijing) Technology, Ltd ("FGS"), as oil prices and the oil industry improved. FGS is a service company focusing on providing new technical application and data operation to gas stations of oil companies such as PetroChina Co., Ltd. So far, we have secured a 43% interest in FGS and FGS' performance is exceeding our expectations. We expect to improve our margins as these investments bear fruition and we continue to see strong demand for energy services as the oil market strengthens."

Mr. Yin continued, "China's energy market is more and more diversified in terms of the structure and the market participants. As a non-state-owned company, Recon is getting more opportunities. In addition, we have expanded our automation business from the oil industry to the coal chemical and new energy industries by leveraging our knowledge and experience in automation, and our relationships with large energy companies. As of today, we have signed contracts amounted up to RMB22.48 million with Shenhua Group Corporation Limited ("Shenhua Group") and RMB14.20 million with Xinjiang East Hope New Energy Co., Ltd. ("East Hope"). We have also integrated the new energy technology into our traditional furnaces and will vigorously explore the civilian market of furnaces. We believe all these efforts will bring Recon and our shareholders more value in the future."

Fiscal Year 2018 Financial Highlights (all comparable to the prior year period):

• Total revenues for fiscal year 2018 increased by 41.1% to RMB84.7 million ($12.8 million).
• The revenue of equipment and accessories business was a record RMB64.0 million ($9.7 million) for fiscal year 2018 increasing 139.9% compared to RMB26.7 million during fiscal year 2017.
• Gross profit for fiscal year 2018 was RMB4.2 million ($0.6 million). Gross profit margin for fiscal year 2018 was 4.9%, which decreased by 21.7 percentage points compared to fiscal year 2017.
• Net loss attributable to Recon for fiscal year 2018 was RMB44.1 million ($6.7 million), or RMB3.84 ($0.58) per basic and diluted share, compared to RMB31.5 million, or RMB4.90 per basic and diluted share, for fiscal year 2017.

Fiscal Year 2018 Financial Results

Revenue

Total revenues for the fiscal year ended June 30, 2018 increased by RMB24.7 million, or 41.1%, to RMB84.7 million ($12.8 million) compared to RMB60.1 million for the fiscal year ended June 30, 2017. The increase in revenues was accomplished through the addition of new clients and development of new business.

Revenue from automation product and software decreased by RMB3.4 million, or 15.2%, to RMB19.0 million ($2.9 million) for the fiscal year ended June 30, 2018 from RMB22.4 million for the fiscal year ended June 30, 2017, mainly affected by less expenditure on surface projects and postponed production activities by clients.

Revenue from equipment and accessories increased by RMB37.3 million, or 139.9%, to RMB64.0 million ($9.7 million) for the fiscal year ended June 30, 2018 from RMB26.7 million for the fiscal year ended June 30, 2017, the significant increase was primarily due to increased equipment sales, including furnaces and related accessories in normal chemical and civil furnace markets.

Revenue from oilfield environmental protection decreased by RMB9.2 million, or 84.0%, to RMB1.8 million ($0.3 million) for the fiscal year ended June 30, 2018 from RMB11.0 million for the fiscal year ended June 30, 2017. The Company devoted resources on construction of oily sludge treatment processing projects this year and less waste-water projects were done during this period. The Company expects the oily sludge treatment processing projects to be operational by the end of the calendar year 2018 and to generate annual revenue of more than RMB50 million, assuming full capacity.

Cost and Margin

Total cost of revenues increased by RMB36.5 million, or 82.7%, to RMB80.6 million ($12.2 million) for the fiscal year ended June 30, 2018 from RMB44.1 million for the fiscal year ended June 30, 2017. The increase was mainly caused by significant growth in revenue generated from equipment and accessories.

Cost of revenue from automation product and software increased by RMB4.6 million ($0.7 million), or 37.2%, to RMB17.0 million ($2.6 million) for the fiscal year ended June 30, 2018 from RMB12.3 million for the fiscal year ended June 30, 2017. The increase in cost of revenue from automation product and software was primarily attributable to 1) a mass of business of Shenhua Group contracts with lower margin; and 2) some pre-contract costs devoted to Changqing Oilfield projects.

Cost of revenue from equipment and accessories increased by RMB40.1 million ($6.1 million), or 183.3%, to RMB62.0 million ($9.4 million) for the fiscal year ended June 30, 2018 from RMB21.9 million for the fiscal year ended June 30, 2017. The increase in cost of revenue from equipment and accessories was primarily attributable to quickly increased sales of furnaces to general industry clients.

Cost of revenue from oilfield environmental protection decreased by RMB8.1 million ($1.2 million), or 85.9%, to RMB1.3 million ($0.2 million) for the fiscal year ended June 30, 2018 from RMB9.4 million for the fiscal year ended June 30, 2017. The variance in cost of revenue was mainly due to less business of waste water treatment. The Company expects this part will increase in the coming year as our new subsidiary Gan Su BHD runs.

Gross profit decreased by RMB11.8 million, or 74.0%, to RMB4.2 million ($0.6 million) for the fiscal year ended June 30, 2018 from RMB16.0 million from the fiscal year ended June 30, 2017. The decrease in gross profit was primarily due to the increase in revenue, offset by the increase in cost of revenue. Gross margin decreased by 21.7 percentage points to 4.9% for the fiscal year ended June 30, 2018 from 26.6% from the fiscal year ended June 30, 2017.

Operating Expenses 

Selling and distribution expenses increased by RMB3.6 million, or 79.7%, to RMB8.0 million ($1.2 million) for the fiscal year ended June 30, 2018 from RMB4.5 million for the fiscal year ended June 30, 2017. This increase was primarily due to an increase in traveling expense and service and testing fees as the Company expanded its market to new basements of Changqing Oilfield and new industries.

General and administrative expenses increased by RMB1.9 million, or 5.9%, to RMB34.7 million ($5.2 million) for the fiscal year ended June 30, 2018 from RMB32.8 million for the fiscal year ended June 30, 2017. The increase in general and administrative expenses was mainly due to an increase in salaries and rent expenses, the increase was partially offset by the decrease in consulting fees. 

Provision for doubtful accounts was RMB0.8 million ($0.1 million) for the fiscal year ended June 30, 2018, compared to reversal of provision for doubtful accounts of RMB1.8 million for the fiscal year ended June 30, 2017. Management plans to continue to monitor accounts receivable to maintain the provision at a lower level.

Research and development expenses decreased by RMB4.4 million, or 57.7%, to RMB3.2 million ($0.5 million) for the fiscal year ended June 30, 2018 from RMB7.6 million for the fiscal year ended June 30, 2017. This decrease was primarily due to less research and development expense spent on design of chemical products used for waste water treatment and digital oilfield models and platform. The Company was focusing on the transformation of advanced R&D results into projects, which were undertaken by Gan Su BHD and Qing Hai BHD.

Net Loss

Loss from operations was RMB40.9 million ($6.2 million) for the fiscal year ended June 30, 2018, compared to a loss of RMB30.6 million for the fiscal year ended June 30, 2017. This RMB10.3 million ($1.6 million) increase in loss from operations was primary due to a decrease in gross profit, as well as an increase in selling and distribution expenses and general and administrative expenses and partly offset by a decrease in research and development expenses.

Other expense, net was RMB4.4 million ($0.7 million) for the fiscal year ended June 30, 2018, compared to other expense, net of RMB0.3 million for the fiscal year ended June 30, 2017. The RMB4.1 million ($0.6 million) increase in other expense, net was primarily due to the increased loss from investment in unconsolidated entity of RMB4.0 million ($0.6 million).

Provision for income tax was RMB16,230 (approximately $2,500) for the fiscal year ended June 30, 2018, compared to RMB0.3 million for the fiscal year ended June 30, 2017. The decrease in the Company's provision for income taxes was primarily due to the decreased taxable income of Nanjing Recon for the fiscal year ended June 30, 2018.

Net loss was RMB45.4 million ($6.9 million) for the fiscal year ended June 30, 2018, compared to RMB31.2 million for the fiscal year ended June 30, 2017. Net loss attributable to Recon for the fiscal year ended June 30, 2018 was RMB44.1 million ($6.7 million), or RMB3.84 ($0.58) per basic and diluted share, compared to RMB31.4 million, or RMB4.90 per basic and diluted share for the fiscal year ended June 30, 2017.

Financial Condition

As of June 30, 2018, the Company had cash of RMB45.3 million ($6.8 million), compare to RMB3.8 million as of June 30, 2017. As of June 30, 2018, the Company had working capital of RMB74.8 million ($11.3 million), compare to RMB38.9 million as of June 30, 2017.

Net cash used in operating activities was RMB21.1 million ($3.2 million) for the fiscal year ended June 30, 2018, compared to net cash provided by operating activities of RMB5.7 million for the fiscal year ended June 30, 2017. Net cash used in investing activities was RMB16.0 million ($2.4 million) for the fiscal year ended June 30, 2018, compare to RMB0.6 million for the fiscal year ended June 30, 2017. Net cash provided by financing activities was RMB76.9 million ($11.6 million) for the fiscal year ended June 30, 2018, compared to net cash used in financing activities of RMB3.1 million for the fiscal year ended June 30, 2017.

Exchange Rate

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 RMB6. 6198 to $1.00, the approximate exchange rate prevailing on June 30, 2018.

Recent Developments

On August 27, 2018, the Company signed a contract with East Hope, a polysilicon producer in China. Pursuant to the signed contract, Recon has agreed to sell to East Hope a distributed control system known as "DCS" for data collection and equipment control and a safety instrumented system known as "SIS" for safety protection control. Recon is obligated to deliver the equipment before December 15, 2018 and install the equipment before December 31, 2018. As consideration, East Hope is obligated to pay Recon RMB 14.2 million (approximately USD $2.1 million).

On August 21, 2018, the Company entered into a definitive investment agreement and a supplemental agreement (collectively, the "Agreement") with FGS and the other shareholders of FGS. Following full performance under the Agreement, Recon will own 43% of FGS. As consideration for increasing its affiliates' interest in FGS from 8% to 43%, Recon will (1) pay a total of RMB 10 million in cash to FGS in five installments and (2) issue 2,435,284 restricted ordinary shares of Recon (the "Restricted Shares") to the other shareholders of FGS within 30 days after FGS finalizes recording Recon's corresponding interest at the local governmental agency. If FGS does not reach certain performance goals, Recon has the right to cancel without further payment part or all of the Restricted Shares. The Restricted Shares are also subject to lock-up period requirements that vary for each FGS shareholder, from one year to three years following issuance of the Restricted Shares.

On July 19, 2018, the Company completed the first stage of its construction of a comprehensive disposal treatment project (the "Project") in Yumen city, Gansu province through its 51% subsidiary, Gansu BHD Environmental Technology Co., Ltd ("Gansu BHD"), which focuses on oilfield sewage treatment and oily sludge disposal projects. The Project, which will have an annual processing capacity of 60,000 tons of oily waste, is the only such treatment facility located in Yumen city.

On June 11, 2018, FGS, of which Recon indirectly holds a minority stake, has recently entered into a strategic cooperation agreement with JD Finance, to establish an information communication mechanism and long term cooperation relationship. JD Finance is the financial technology arm of JD.com, China's largest online direct sales company. This cooperation will allow customers to refuel their vehicles though the JD Finance App, which will be supported by the FGS platform and linked to the FGS database.

About Recon Technology, Ltd.

Recon Technology, Ltd. (RCON) 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 (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, Recon has taken leading positions on several market segments of the oil and gas field service industry. Recon also has developed stable long-term cooperation relationship with its major clients, and its products and service are well accepted by clients. For additional information please visit: www.recon.cn.

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.

For more information, please contact:

In China:

Ms. Liu Jia 
Chief Financial Officer
Recon Technology, Ltd.
Phone: +86 (10) 8494-5799 
Email: info@recon.cn

In the United States:

Ms. Tina Xiao
President 
Ascent Investor Relations LLC 
Phone: +1-917-609-0333 
Email: tina.xiao@ascent-ir.com

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