Recon Technology Reports Fiscal 2017 Third Quarter and First Nine Months Financial Results

Highlighted by Higher Revenues and Improved Non GAAP Results

BEIJING, May 15, 2017 /PRNewswire/ -- Recon Technology, Ltd. (NASDAQ: RCON), ("Recon" or the "Company"), a leading independent oilfield services provider operating primarily in China, today reported its financial results for the third quarter and first nine months of fiscal year 2017, which ended March 31, 2017.

Third Quarter FY2017 Financial Highlights (all comparable to the prior year period):

• Total revenues for the third quarter of FY2017 increased by 30% to RMB5.9 million ($0.9 million)
• Gross profit for the third quarter of FY2017 was RMB1.1 million ($0.2 million)
• Gross profit margin decreased to 18.3%, largely reflecting temporary lower selling prices during this period in order to seize new market share while costs of sales remain stable.
• Net loss attributable to Recon for the third quarter of FY2017 was RMB7.2 million ($1.0 million), or RMB0.81($0.12) per basic and diluted share, compared to RMB9.6 million, or RMB1.66 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 RMB2.1 million($306,137), or RMB0.24($0.03) per basic and diluted share, for the third quarter of FY2017, compared to non-GAAP net loss attributable to common shareholders of RMB6.8 million, or RMB1.16 per basic and diluted share, for the same period last fiscal year.

First Fiscal Nine Months ended March 31, 2017 Financial Highlights (all comparable to the prior year period):

• Total revenues for the first nine months of FY2017 increased by 19.0% to RMB44.0 million ($6.4 million)
• Gross profit for the first nine months of FY2017 was RMB15.5 million ($2.2 million)
• Gross profit margin improved by 13.9% to 35.2%, largely due to continued revenues generated by higher margin projects stemming from its automation projects and investments in developing its oilfield waste water treatment services as of this fiscal year
• Net loss attributable to Recon for the first nine months of FY2017 was RMB17.0 million ($2.5 million), or RMB2.43($0.35) per basic and diluted share, compared to RMB21.0 million, or RMB3.75 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 RMB2.3 million($340,110), or RMB0.33($0.05) per basic and diluted share, for the first nine months of FY2017, compared to non-GAAP net loss attributable to common shareholders of RMB15.0 million, or RMB2.68 per basic and diluted share, for the same period last fiscal year.
• RMB3.93($0.57) per share in shareholders' equity per share

Management Commentary

Mr. Shenping Yin, Chairman and CEO of Recon stated, "The third quarter ended March 31, 2017 brought a number of operational achievements, such as our successful expansion into a new market in Changqing for our automation products and our development of wastewater treatment technology. We saw many encouraging signs of the industry beginning to turnaround, which allowed us to further improve our operations. Based on our current contractual agreements and partnerships, as well some positive bidding results, we remain confident in our ability to achieve our goal of a 30% increase in revenues for the fiscal year."

Results of Operations

The following consolidated results of operations include the results of operations of the Company's wholly owned subsidiaries and its variable interest entities ("VIEs"), Nanjing Recon Technology Co. Ltd ("Nanjing Recon") and Beijing BHD Petroleum Technology Co, Ltd ("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. Recon has provided selected fiscal 2017 third quarter results, with greater detail on its first half financial results in this report.  

(1) Includes 3,010,000 shares that are not vested and remain subject to forfeiture in part or whole, as disclosed on a current report on Form 6-K filed December 9, 2016.

3 MONTHS ENDED MARCH 31, 2017 UNAUDITED FINANCIAL RESULTS

Revenue

Total revenues for the three months ended March 31, 2017 increased by 30% to RMB5.9 million ($0.9 million) compared to RMB4.5 million, largely due to increased sales of equipment due to more furnaces provided to the Company's new client, Changqing Oilfield, a major subsidiary of PetroChina and the largest producing oilfield of China. 

Cost and Margin

The Company's gross profit decreased by 36% to RMB1.1 million (or $0.2 million) for the three months ended March 31, 2017 from RMB1.7 million in the prior year period. Gross profit margin decreased to 18.3% from 37.5% in the prior year period. The significant decrease in gross margin was largely due to lower price furnace products sold during this period in order to seize new market share.

Net Loss

Loss from operations was RMB7.0 million ($1.0 million) during the three months ended March 31, 2017, compared to RMB8.2 million in the prior year period. The decrease in net loss is largely due to higher total revenues and lower provision for doubtful accounts, offset by higher cost of revenues, share-based compensation, as well as the research and development expenses. 

Net loss attributable to Recon Technology for the three months ended March 31, 2017 was RMB7.2 million ($1.0 million), or RMB0.81($0.12) per basic and diluted share based on 8.9 million basic and diluted shares outstanding, compared to RMB9.6 million, or RMB1.66 per basic and diluted share based on 5.8 million basic and diluted shares outstanding in the prior year period. 

Non U.S. GAAP Net Loss

Non U.S. GAAP net loss attributable to ordinary shareholders excluding certain non-cash expenses such as restricted shares issued for consulting services and non-cash stock compensation expense was RMB2.1 million($306,137), or RMB0.24($0.03) per diluted share, for the three months ended March 31, 2017, compared to adjusted net loss attributable to common shareholders of RMB6.8 million, or RMB1.16 per basic and 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.

9 MONTHS ENDED MARCH 31, 2017 UNAUDITED FINANCIAL RESULTS

Revenue

Our total revenues for the nine months ended March 31, 2017 were approximately RMB44.0 million ($6.4 million), an increase of approximately RMB7.0 million or 19.0% from RMB37.0 million for the nine months ended March 31, 2016. The overall increase in revenue was accomplished through our expansion of new clients and development of new business. See below for more detail:

(1) As shown above, the overall increase in revenue was primarily affected by the increased sales of equipment, primarily more furnaces provided to our new client, Changqing Oilfield, a major subsidiary of PetroChina and the largest producing oilfield of China.

(2) The Company invested in R&D of new products used for oilfield waste water treatment beginning in 2016, and the outcome was gradually reflected its operating results. For the nine months ended March 31, 2017, this new business continued to contribute revenue and margin to our operation. Management expects to obtain more business in the coming months due to our technical advantage and long-term cooperation with oilfield companies.

(3) Revenue from other services decreased by RMB1.0 million or 93.4% mainly because we provided furnace maintenance services as required by clients in FY2016 while there was no such requirement during the same period of FY2017.

Cost and Margin

Cost of Revenues. Our cost of revenues decreased from approximately RMB29.1 million for the nine months ended March 31, 2016 to approximately RMB28.5 million ($4.1 million) for the same period in 2017, a decrease of approximately RMB0.6 million($85,496), or 2.0%. This decrease was mainly caused by less revenue generated from automation products and software which has higher cost of revenue.

Gross Profit. Our gross profit increased to approximately RMB15.5 million ($2.2 million) for the nine months ended March 31, 2017 from approximately RMB7.9 million for the same period in 2016. Our gross profit as a percentage of revenue increased to 35.2% for the nine months ended March 31, 2017 from 21.3% for the same period in 2016. This was mainly due to higher margin automation projects and waste water treatment business during this period.

Operating Expenses

Selling and Distribution Expenses.  Selling and distribution expenses consist primarily of salaries and related expenditures of our sales and marketing organization, sales commissions, costs of our marketing programs including traveling charges, advertising and trade shows, and an allocation of our facilities, depreciation expenses and rental expense, as well as shipping charges. Selling expenses increased by approximately RMB1.7 million ($0.2 million) for the nine months ended March 31, 2017 compared to the same period in 2016. This increase was primarily due to an increase in onsite projects service expenses as a result of projects increase. Selling expenses were 11.6% of total revenues for the nine months ended march 31, 2017 and 9.3% 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 44.3% or RMB6.4 million ($0.9 million), from approximately RMB14.5 million in the nine months ended March 31, 2016 to approximately RMB21.0 million ($3.0 million) in the same period of 2017. The increase in general and administrative expenses was mainly due to an increase in salaries and share-based compensation. General and administrative expenses were 47.6% of total revenues in the nine months ended March 31, 2017 and 39.3% 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 from accounts receivables, other receivables and purchase advances. We recorded a provision for doubtful accounts of RMB4.3 million for nine months ended March 31, 2016 and reversed provision for doubtful accounts of RMB0.9 million($127,196) for the same period in 2017. The decrease in provision of doubtful accounts was mainly resulted by the management's effort to collect the long outstanding receivables.  

Research and development ("R&D") expenses.  Research and development expenses consist primarily of salaries and related expenditures for our research and development projects. Research and development expenses increased from approximately RMB5.8 million for the nine months ended March 31, 2016 to approximately RMB6.5 million ($1.0 million) for the same period of 2017. This increase was primarily due to more research and development expense spent on design of chemical products used for waste water treatment and digital oilfield models and platform.

Net Loss

Loss from operations.  Loss from operations was approximately RMB16.3 million ($2.4 million) for the nine months ended March 31, 2017, compared to a loss of RMB20.2 million for the same period of 2016. This RMB3.9 million ($0.6 million) decrease in loss from operations was primary due to an increase in gross profit, as well as a decrease in provision for doubtful accounts and partly offset by an increased general and administrative expenses as discussed above.

Basic and diluted loss per share. Basic and diluted loss per share attributable to common shareholders was RMB2.43, as compared to RMB3.75, for the nine months ended March 31, 2016.

Non U.S. GAAP Net Loss

Non U.S. GAAP net loss attributable to ordinary shareholders excluding certain non-cash expenses (non-GAAP) such as restricted shares issued for consulting services and non-cash stock compensation expense was RMB2,343,740($340,110), or RMB 0.33($0.05) per diluted share, for the nine months ended March 31, 2017, compared to non U.S. GAAP net loss attributable to common shareholders of RMB15.0 million, or RMB2.68 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 provided by operating activities was approximately RMB9.1 million ($1.3 million) for the nine months ended March 31, 2017. This was an increase of approximately RMB10.4 million ($1.5 million) compared to net cash used in operating activities of approximately RMB1.3 million for the nine months ended March 31, 2016. The increase in net cash provided by operating activities for the nine months ended March 31, 2017 was primarily attributable to the net loss available to the Company in the amount of RMB16.7 million ($2.4 million), share based compensation of RMB11.4 million ($1.6 million) and restricted shares issued for services of RMB3.9 million ($0.6 million) as reconciled, and collections of other receivable, an increase in trade accounts payable and a decrease in inventory, partly offset by an increase in purchase advance.

Cash from Investing Activities. Net cash used in investing activities was approximately RMB0.3 million ($44.0 thousand) for the nine months ended March 31, 2017, which was a decrease in cash used in investing activities of approximately RMB0.1 million compared to the same period in 2016. The decrease is due to a decrease in the Company's purchase of additional property and equipment.

Cash from Financing Activities. Net cash used in financing activities amounted to RMB6.2 million ($0.9 million) for the nine months ended March 31, 2017, as compared to net cash used in financing activities of $8.1 million for the same period in 2016. During the nine months ended March 31, 2017, we repaid RMB13.4 million ($1.9 million) in short-term borrowings to two related parties and repaid RMB0.5million ($76.9 thousand) in short-term borrowings to one third-party, and we received RMB7.8 million ($1.1 million) from two related parties.

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 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 RMB6.89 to US$1.00, the noon buying rate as of March 31, 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

Investor Relations

The Equity Group Inc.
In China
Katherine Yao, Senior Associate
+86-10-6587-6435
kyao@equityny.com

In U.S.
Adam Prior, Senior Vice President
+1 (212) 836-9606
aprior@equityny.com

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SOURCE Recon Technology, Ltd.