Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The following
discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with
our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report. This discussion
contains certain forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events
could differ materially from those anticipated in these forward-looking statements as a result of various factors.
Overview
We are a company
with limited liability incorporated in 2007 under the laws of the Cayman Islands. Headquartered in Beijing, we provide products
and services to oil and gas companies and their affiliates through Nanjing Recon Technology Co. Ltd (“Nanjing Recon”)
and Beijing BHD Petroleum Technology Co, Ltd (“BHD”), hereafter referred to as our domestic companies (the “Domestic
Companies”), which are established as variable interest entities (“VIEs”) under the laws of the People’s
Republic of China (“PRC”). As the Company contractually controls the Domestic Companies, we serve as the center of
strategic management, financial control and human resources allocation.
Through Nanjing Recon
and BHD, our business is mainly focused on the upstream sectors of the oil and gas industry. We derive our revenues from the sales
and provision of (1) hardware products, (2) software products and (3) services. Our products and services involve most of the
key procedures of the extraction and production of oil and gas, and include automation systems, equipment, tools and on-site technical
services.
Our Domestic Companies
provide the oil and gas industry with equipment, production technologies, automation and services.
|
•
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Nanjing
Recon: Nanjing Recon is a high-tech company that specializes in automation services for
oilfield companies. It mainly focuses on providing automation solutions to the oil exploration
industry, including monitoring wells, automatic metering to the joint station production,
process monitor, and a variety of oilfield equipment and control systems.
|
|
•
|
BHD:
BHD is a high-tech company that specializes in transportation equipment and stimulation
productions and services. Possessing proprietary patents and substantial industry experience,
BHD has built up stable and strong working relationships with the major oilfields in
China.
|
Recent Developments
On September 22,
2015, the Company entered into an amendment to the Company’s letter agreement (the “Agreement”) with Maxim Group
LLC, dated January 28, 2015, pursuant to which Maxim would serve as the Company’s exclusive agent in connection with a proposed
at-the-market offering program by the Company of up to $10,000,000. The amendment extends the term of the Agreement for an additional
six months, or until August 15, 2016, when the Company’s Form S-3 will expire. As of May 16, 2016, no shares have been issued
under the amended Agreement.
On December 1, 2015,
the Company entered into a share purchase agreement to acquire a 100% interest in Qinghai Huayou Downhole Technologies Co., Ltd.
( “QHHY”), a PRC corporation and oilfield service provider located in Qinghai province. This transaction is subject
to shareholder approval and on May 2, 2016, the Company amended its proxy statement on Schedule 14A (the “Proxy Statement”)
to disclose all necessary information related to obtaining shareholder approval of the transaction. The Company will hold a shareholder
meeting to seek approval of the Company’s acquisition of QHHY after the Securities and Exchange Commission (“SEC”)
completes its review of the Proxy Statement.
Products and Services
We currently provide products and services
to oil and gas field companies focused on the development and production of oil and natural gas. Our products and services described
below correlate to the numbered stages of the oilfield production system graphical description shown below.
Our products and services include:
Equipment for Oil and Gas Production
and Transportation
High-Efficiency Heating
Furnaces
(as shown above)
. Crude petroleum contains certain impurities that must be removed before it can be sold,
including water and natural gas. To remove the impurities and to prevent solidification and blockage in transport pipes, companies
employ heating furnaces. BHD researched, developed and implemented a new oilfield furnace that is advanced, highly automated,
reliable, easy to operate, safe and highly heat-efficient (90% efficiency).
Burner
(as
shown above)
. We serve as an agent for the Unigas Burner, which is designed and manufactured by UNIGAS, a European burning
equipment production company. The burner we provide has the following characteristics: high degree of automation, energy conservation,
high turn-down ratio, high security and environmental safety.
Oil and Gas Production Improvement
Techniques
Packers of Fracturing.
This utility model is used in concert with the security joint, hydraulic anchor, and slide brushing of sand spray in the well.
It is used for easy seat sealing and sand uptake prevention. The utility model reduces desilting volume and prevents sand-up,
which makes the deblocking processes easier to realize. The back flushing is sand-stick proof.
Production Packer.
At varying withdrawal points, the production packer separates different oil layers and protects the oil pipe from sand and permeation,
promoting the recovery ratio.
Sand Prevention in
Oil and Water Wells. This technique processes additives that are resistant to elevated temperatures into “resin sand”
which is transported to the bottom of the well via carrying fluid. The resin sand goes through the borehole, piling up and compacting
at the borehole and oil vacancy layer. An artificial borehole wall is then formed, functioning as a means of sand prevention.
This sand prevention technique has been adapted to more than 100 wells, including heavy oil wells, light oil wells, water wells
and gas wells, with a 100% success rate and a 98% effective rate.
Water Locating and
Plugging Technique. High water cut affects the normal production of oilfields. Previously, there was no sophisticated method for
water locating and tubular column plugging in China. The mechanical water locating and tubular column plugging technique we have
developed resolves the problem of high water cut wells. This technique conducts a self-sealing test during multi-stage usage and
is reliable to separate different production sets effectively. The water location switch forms a complete set by which the water
locating and plugging can be finished in one trip. The tubular column is adaptable to several oil drilling methods and is available
for water locating and plugging in second and third class layers.
Fissure Shaper. This
is our proprietary product that is used along with a perforating gun to effectively increase perforation depth by between 46%
and 80%, shape stratum fissures, improve stratum diversion capability and, as a result, improve our ability to locate oilfields
and increase the output of oil wells.
Fracture Acidizing.
We inject acid to layers under pressure, which can form or expand fissures. The treatment process of the acid is defined as fracture
acidizing. The technique is mainly adapted to oil and gas wells that are blocked up relatively deeply, or oil and gas wells in
low permeability zones.
Electronic Break-Down
Service. This service resolves block-up and freezing problems by generating heat from the electric resistivity of the drive pipe
and utilizing a loop tank composed of an oil pipe and a drive pipe. This technique saves energy and is environmentally friendly.
It can increase the production of oilfields that are in the middle and later periods.
Automation System and Services
Pumping Unit Controller.
This controller functions as a monitor to the pumping unit and also collects data for load, pressure, voltage, and startup and
shutdown control.
RTU Monitor. This monitor collects gas
well pressure data.
Wireless Dynamometer
and Wireless Pressure Gauge. These products replace wired technology with cordless displacement sensor technology. They are easy
to install and significantly reduce the work load associated with cable laying.
Electric Multi-way
Valve for Oilfield Metering Station Flow Control. This multi-way valve is used before the test separator to replace the existing
three valve manifolds. It facilitates the electronic control of the connection of the oil lead pipeline with the separator.
Natural Gas Flow
Computer System. The flow computer system is used in natural gas stations and gas distribution stations to measure flow.
Recon Supervisory
Control and Data Acquisition System (“SCADA”). Recon SCADA is a system which applies to the oil well, measurement
station and the union station for supervision and data collection.
EPC Service of Pipeline
SCADA System. This service technique is used for pipeline monitoring and data acquisition after crude oil transmission.
EPC Service of Oil
and Gas Wells SCADA System. This service technique is used for monitoring and data acquisition of oil wells and natural gas wells.
EPC Service of Oilfield
Video Surveillance and Control System. This video surveillance technique is used for controlling the oil and gas wellhead area
and the measurement station area.
Technique Service
for “Digital oilfield” Transformation. This service includes engineering technique services such as oil and gas SCADA
systems, video surveillance and control systems and communication systems.
Factors Affecting Our Business
Business Outlook
The oilfield engineering
and technical service industry is generally divided into five sections: (1) exploration, (2) drilling and completion, (3) testing
and logging, (4) production and (5) oilfield construction. Thus far our businesses have been involved in the completion, production
and construction processes. Our management still believes we need to expand our core business, move into new markets and develop
new businesses quickly for the coming years. Management anticipates there will be opportunities in new markets and our existing
markets. We also believe that many existing wells and oilfields need to improve or renew their equipment and service to maintain
production and techniques and services like ours will be needed as new oil and gas fields are developed. In the next three years,
we plan to focus on:
Measuring Equipment
and Service
.
Digital oil field technology and the management of oil companies are highly regarded in the industry.
We believe our oilfield SCADA system and assorted products, production managing expert software, and related technical support
services will address the needs of the oil well automation system market, for which we believe there will be increasing demand
over the short term and strong needs in the long term.
Gathering and
Transferring Equipment
.
With more new wells developed, our management anticipates that demand for our furnaces and
burners will grow as compared to last year, especially in the Qinghai Oilfield and Zhongyuan Oilfield.
New business
.
We
are in the process of expanding our business through the acquisition of a down-hole service company. We also have developed new
products for oilfield wastewater treatment and achieved preliminary business on this segment. Our management anticipates expanding
the new business more rapidly in the coming year.
Growth Strategy
As a smaller China-focused
company, our basic strategy focuses on developing our onshore oilfield business in the upstream sector of the industry. Due to
the remote location and difficult environments of China’s oil and gas fields, historically, foreign competitors have rarely
entered those areas directly.
Large domestic oil
companies have historically focused on their exploration and development businesses to earn higher margins and maintain their
competitive advantage. With regard to private oilfield service companies, we estimate that approximately 90% specialize in the
manufacture of drilling and production equipment. Thus, the market for technical support and project service is still in its early
stage. Our management is focused on providing high quality products and services in oilfields in which we have a geographical
advantage. This helps us to avoid conflicts of interest with bigger suppliers of drilling equipment while protecting our position
within this market segment. Our mission is to increase the automation and safety levels of industrial petroleum production in
China and improve the underdeveloped working process and management mode used by many companies by providing advanced technologies.
At the same time, we are always looking to improve our business and to increase our earning capability.
Recent Industry Developments
Affected by the worldwide
decrease in oil prices, CNPC and Sinopec, mother companies of our direct clients, cut off their Capital Expenditure and production
activities, resulting in a declining market and intensive competition.
Management will closely monitor the situation and will seek to extend our business on the industrial chain, such as through providing
more integrated services and advanced products and through growing our business from a predominantly up-ground business to include
some down-hole services as well.
Factors Affecting Our Results of Operations
Our operating results
in any period are subject to general conditions typically affecting the Chinese oilfield service industry including:
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•
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the
amount of spending by our customers, primarily those in the oil and gas industry;
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|
•
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growing
demand from large corporations for improved management and software designed to achieve
such corporate performance;
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|
•
|
the
procurement processes of our customers, especially those in the oil and gas industry;
|
|
•
|
competition
and related pricing pressure from other oilfield service solution providers, especially
those targeting the Chinese oil and gas industry;
|
|
•
|
the
ongoing development of the oilfield service market in China; and
|
|
•
|
inflation
and other macroeconomic factors.
|
Unfavorable changes
in any of these general conditions could negatively affect the number and size of the projects we undertake, the number of products
we sell, the amount of services we provide, the price of our products and services, and otherwise affect our results of operations.
Our operating results
in any period are more directly affected by company-specific factors including:
|
•
|
our
revenue growth, in terms of the proportion of our business dedicated to large companies
and our ability to successfully develop, introduce and market new solutions and services;
|
|
•
|
our
ability to increase our revenues from both old and new customers in the oil and gas industry
in China;
|
|
•
|
our
ability to effectively manage our operating costs and expenses; and
|
|
•
|
our
ability to effectively implement any targeted acquisitions and/or strategic alliances
so as to provide efficient access to markets and industries in the oil and gas industry
in China.
|
Critical Accounting Policies and Estimates
Estimates and Assumptions
We prepare our unaudited
condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (“US GAAP”), which require us to make judgments, estimates and assumptions. We continually evaluate these
estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions
that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial
reporting process, actual results could differ from those estimates. An accounting policy is considered critical if it requires
an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made,
and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following policies
involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates.
The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated
financial statements and other disclosures included in this quarterly report. Significant accounting estimates reflected in our
Company’s consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory valuation,
warrants liability, fair value of share based payments, and useful lives of property and equipment.
Consolidation of VIEs
We recognize an entity
as a VIE if it either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated
financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. We consolidate
a VIE as our primary beneficiary when we have both the power to direct the activities that most significantly impact the entity’s
economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially
be significant to the VIE. We perform ongoing assessments to determine whether an entity should be considered a VIE and whether
an entity previously identified as a VIE continues to be a VIE and whether we continue to be the primary beneficiary.
Assets recognized
as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against our general
assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general
assets; rather, they represent claims against the specific assets of the consolidated VIEs.
Revenue Recognition
We recognize revenue
when the following four criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred
or services have been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.
Delivery does not occur until products have been shipped or services have been provided to the customers and the customers have
signed a completion and acceptance report, risk of loss has transferred to the customer, customer acceptance provisions have lapsed,
or the Company has objective evidence that the criteria specified in a customer’s acceptance provisions have been satisfied.
The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.
Hardware
Revenue from hardware
sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations
that affect the customer’s final acceptance of the arrangement.
Software
The Company sells
self-developed software. For software sales, the Company recognizes revenues in accordance with the provisions of Accounting Standards
Codification, Topic 985-605, “Software Revenue Recognition,” and related interpretations. Revenue from software is
recognized according to project contracts. Contract costs are accumulated during the periods of installation and testing or commissioning.
Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance statements.
Services
The Company provides
services to improve software functions and system requirements on separated fixed-price contracts. Revenue is recognized when
services are completed and acceptance is determined by a completion report signed by the customer.
Deferred income represents
unearned amounts billed to customers related to sales contracts.
Cost of Revenues
When the criteria for revenue recognition
have been met, costs incurred are recognized as cost of revenue. Cost of revenues includes wages, materials, handling charges,
the cost of purchased equipment and pipes, other expenses associated with manufactured products and services provided to customers,
and inventory reserve. We expect cost of revenues to grow as our revenues grow. It is possible that we could incur development
costs with little revenue recognition, but based upon our past history, we expect our revenues to grow.
Fair Values of Financial Instruments
The US GAAP accounting
standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level
valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
The three levels
of inputs are defined as follows:
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation
methodology are unobservable.
The carrying amounts
reported in the consolidated balance sheets for trade accounts receivable, other receivables, advances to suppliers, trade accounts
payable, accrued liabilities, advances from customers and notes payable approximate fair value because of the immediate or short-term
maturity of these financial instruments. Long-term receivables and borrowings approximate fair value because their interest rates
charged approximate the market rates for financial instruments with similar terms. The fair value of the warrants liability was
determined using the Black-Scholes Model, as Level 2 inputs (See Note 13). Any changes in the assumptions that are used in the
Black-Scholes Model may increase or decrease the warrants liability from quarter to quarter. Any change in the estimate of the
fair value of the warrants liability would be charged to operations.
Receivables
Trade receivables
are carried at the original invoiced amount less a provision for any potential uncollectible amounts. Provisions are applied to
trade receivables where events or changes in circumstances indicate that the balance may not be collectible. The identification
of doubtful accounts requires the use of judgment and estimates of management. Our management must make estimates of the collectability
of our accounts receivable. Management specifically analyzes accounts receivable, historical bad debts, customer creditworthiness,
current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.
Increases in our allowance for doubtful accounts would lower our net income and earnings per share.
Deferred Tax Estimates
As part of the process
of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions
in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are
recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. Deferred tax accounting
requires that we evaluate net deferred tax assets by jurisdiction to determine if these assets will more likely than not be realized.
This analysis requires considerable judgment and is subject to change to reflect future events and changes in the tax laws. If
an allowance is established against our deferred tax assets because they may not be fully realizable in the future, our net income
and earnings per share would decrease.
Valuation of Long-Lived Assets
We review the carrying
values of our long-lived assets for impairment whenever events or changes in circumstances indicate that they may not be recoverable.
When such an event occurs, we project undiscounted cash flows to be generated from the use of the asset and its eventual disposition
over the remaining life of the asset. If projections indicate that the carrying value of the long-lived asset will not be recovered,
we reduce the carrying value of the long-lived asset by the estimated excess of the carrying value over the projected discounted
cash flows. In the past, we have not had to make significant adjustments to the carrying values of our long-lived assets, and
we do not anticipate a need to do so in the future. However, circumstances could cause us to have to reduce the value of our capitalized
assets more rapidly than we have in the past if our revenues were to significantly decline. Estimated cash flows from the use
of the long-lived assets are highly uncertain and therefore the estimation of the need to impair these assets is reasonably likely
to change in the future. Should the economy or acceptance of our assets change in the future, it is likely that our estimate of
the future cash flows from the use of these assets will change by a material amount. There were no impairments at June 30, 2015
and March 31, 2016. However, if impairment were required, our net income and earnings per share would decrease accordingly.
Share-Based Compensation
The Company accounts
for share-based compensation in accordance with ASC Topic 718, Share-Based Payment. Under the fair value recognition provisions
of this topic, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized
as expense with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company
has elected mainly utilize the Black-Scholes valuation model to estimate an award’s fair value.
Recently enacted accounting pronouncements
In January 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities. The new guidance makes targeted improvements to existing U.S. GAAP by: (1) Requiring equity
investments to be measured at fair value with changes in fair value recognized in net income; (2) Requiring separate presentation
of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the
accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose the method(s)
and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured
at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive
income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit
risk. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company does not expect this update will have a material impact on the presentation of
the Company's consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02
requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in
this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early
application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at,
or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company
is currently evaluating the impact of this new standard on its consolidated financial statements.
In March 2016, the FASB issued Accounting
Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments
apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined
to have a debt host) with embedded call (put) options. The amendments clarify what steps are required when assessing whether the
economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks
of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option
is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call
(put) option is related to interest rates or credit risks. Public business entities must apply the new requirements for fiscal
years beginning after December 15, 2016 and interim periods within those fiscal years. All other entities must apply the new requirements
for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018.
All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early
adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that
includes that interim period. The Company does not expect any material impact of this new standard on its consolidated financial
statements.
In March 2016, the FASB issued Accounting
Standards Update No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity
Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method
of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the
requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership
interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively
on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.
The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the
current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment
becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive
adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security
that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated
other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective
for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments
should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence
that result in the adoption of the equity method. Earlier application is permitted. The Company is currently evaluating the impact
of this new standard on its consolidated financial statements.
In April 2016, the FASB released ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The ASU includes
multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the
cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income,
EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant
share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016,
and interim periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated
financial statements.
In April 2016, FASB issued Accounting
Standards Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
.
The amendments clarify the following two aspects of Topic 606:
(a)
identifying performance obligations; and
(b)
the
licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective
date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606.
Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim
reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
Results of Operations
The following consolidated
results of operations include the results of operations of the Company and its variable interest entities (“VIEs”),
BHD and Nanjing Recon.
Our historical reporting
results are not necessarily indicative of the results to be expected for any future period.
Three Months Ended March 31, 2016 Compared to Three Months
Ended March 31, 2015
For the three months ended March 31, 2016,
oil price continued to be low, and our clients’ production activities and spending were kept at a minimum level. Thus, our
operations and numbers still suffered from these adverse effects.
Revenues
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
(Decrease)
|
|
|
|
Change
|
|
Hardware - non-related
parties
|
|
¥
|
17,267,740
|
|
|
¥
|
4,539,099
|
|
|
¥
|
(12,728,641
|
)
|
|
|
(73.7
|
)%
|
Hardware - related parties
|
|
|
839,542
|
|
|
|
-
|
|
|
|
(839,542
|
)
|
|
|
(100.0
|
)%
|
Software - non-related parties
|
|
|
1,091,095
|
|
|
|
-
|
|
|
|
(1,091,095
|
)
|
|
|
(100.0
|
)%
|
Software
- related parties
|
|
|
820,513
|
|
|
|
-
|
|
|
|
(820,513
|
)
|
|
|
(100.0
|
)%
|
Total revenues
|
|
¥
|
20,018,890
|
|
|
¥
|
4,539,099
|
|
|
¥
|
(15,479,791
|
)
|
|
|
(77.3
|
)%
|
Our
total revenues for the three months ended
March 31,
2016 were approximately ¥4.5 million ($0.7 million), a decrease of approximately ¥15.5 million or 77.3% from ¥20.0
million for the three months ended March 31, 2015. This was mainly caused by a decreased demand from our clients and intensely
competitive market conditions. In more detail:
|
1)
|
Hardware revenue. During this quarter,
both furnaces and automation products sales decreased as a result of lower demand from
our clients as compared to the same period last year. Hardware revenues for the quarter
of fiscal 2015 were mainly from projects we tracked a year earlier from our major clients,
CNPC and Sinopec, who were evaluating and adjusting their business plans, kept their
spending lower for 2015
.
As a result, there were fewer projects started, causing less revenue for the Company
for the third quarter of fiscal 2016. As oil prices have rebounded a bit in the first
three months of 2016, our management expects this unfavorable trend will ease but expect
reduced revenue to continue for some period.
|
|
|
|
|
2)
|
Software revenue. Software used
in oilfield production management is highly recommended, but not essential. As a result,
sales and revenue related to software may fluctuate. During the three-month period, there
were no software sales.
|
Cost and Margin
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Total revenues
|
|
¥
|
20,018,890
|
|
|
¥
|
4,539,099
|
|
|
¥
|
(15,479,791
|
)
|
|
|
(77.3
|
)%
|
Cost of revenues
|
|
|
13,770,051
|
|
|
|
2,839,120
|
|
|
|
(10,930,931
|
)
|
|
|
(79.4
|
)%
|
Gross profit
|
|
¥
|
6,248,839
|
|
|
¥
|
1,699,979
|
|
|
¥
|
(4,548,860
|
)
|
|
|
(72.8
|
)%
|
Margin %
|
|
|
31.2
|
%
|
|
|
37.5
|
%
|
|
|
6.3
|
%
|
|
|
|
|
Cost of revenues
.
Our cost of revenues includes raw materials and costs related to the design, implementation, delivery and maintenance of
products and services. All materials and components we need can be purchased or manufactured by subcontractors. Usually the prices
of electronic components do not fluctuate dramatically due to market competition and will not significantly affect our cost of
revenues. However, specialized equipment and incentive chemical products may be directly influenced by metal and oil price fluctuations.
Additionally, the prices of some imported accessories mandated by our customers can also impact our cost. Inventory reserves for
changes in price level, impairment of inventory, slow moving or other causes will also affect our cost.
Our cost of revenues
decreased from approximately ¥13.8 million in the three months ended March 31, 2015 to approximately ¥2.8 million ($0.4
million) for the same period in 2016, a decrease of approximately ¥11.0 million ($1.7 million), or 79.4%. This decrease was
mainly caused by lower revenue during the three months ended March 31, 2016 compared to the same period of 2015.
Gross profit
.
Our gross profit decreased to approximately ¥1.7 million ($0.3 million) for the three months ended March 31, 2016 from approximately
¥6.2 million for the same period in 2015 due to revenue decrease. Our gross profit as a percentage of revenue increased to
37.5% for the three months ended March 31, 2016 from 31.2% for the same period in 2015. This was mainly caused by deferred income
recognized as revenue in the 2016 period with little cost accrued.
Our software and hardware revenues are
detailed below:
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
(Decrease)
|
|
|
|
Change
|
|
Total revenues-hardware
and software- non related parties
|
|
¥
|
18,358,835
|
|
|
¥
|
4,539,099
|
|
|
¥
|
(13,819,736
|
)
|
|
|
(75.3
|
)%
|
Cost of revenues
-hardware and software- non related parties
|
|
|
13,759,652
|
|
|
|
2,839,120
|
|
|
|
(10,920,532
|
)
|
|
|
(79.4
|
)%
|
Gross profit
|
|
¥
|
4,599,183
|
|
|
¥
|
1,699,979
|
|
|
¥
|
(2,899,204
|
)
|
|
|
(63.0
|
)%
|
Margin %
|
|
|
25.1
|
%
|
|
|
37.5
|
%
|
|
|
12.4
|
%
|
|
|
_-
|
|
Revenue from hardware
and software to non-related parties decreased by approximately ¥13.8 million mainly due to the decrease of hardware products
sold in the three months ended March 31, 2016. The gross profit from hardware and software sales to non-related parties decreased
¥2.9 million ($0.5 million) compared to the same period last year. As a percentage of revenue, gross margin was 25.1% for
the three months ended March 31, 2015 and 37.5% for the three month period ended March 31, 2016. This increase was mainly because
we had higher portions of consignment sales with lower margins in 2015 while there was no such business for 2016.
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
(Decrease)
|
|
|
|
Change
|
|
Total revenues-hardware
and software-related parties
|
|
¥
|
1,660,055
|
|
|
¥
|
-
|
|
|
¥
|
(1,660,055
|
)
|
|
|
(100
|
)%
|
Cost of revenues
-hardware and software- related parties
|
|
|
10,399
|
|
|
|
-
|
|
|
|
(10,399
|
)
|
|
|
(100
|
)%
|
Gross profit
|
|
¥
|
1,649,656
|
|
|
¥
|
-
|
|
|
¥
|
(1,649,656
|
)
|
|
|
(100
|
)%
|
Margin %
|
|
|
99.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revenue from related
parties decreased as we developed business directly with oilfield companies, rather than obtaining the business in cooperation
with a local agency, which used to be our practice.
Operating Expenses
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
(Decrease)
|
|
|
|
Change
|
|
Selling and distribution
expenses
|
|
|
1,109,838
|
|
|
|
819,116
|
|
|
|
(290,722
|
)
|
|
|
(26.2
|
)%
|
% of revenue
|
|
|
5.5
|
%
|
|
|
18.0
|
%
|
|
|
12.5
|
%
|
|
|
-
|
|
General and administrative expenses
|
|
|
4,191,030
|
|
|
|
7,898,857
|
|
|
|
3,707,827
|
|
|
|
88.5
|
%
|
% of revenue
|
|
|
20.9
|
%
|
|
|
174.0
|
%
|
|
|
153.1
|
%
|
|
|
-
|
|
Research and development expenses
|
|
|
544,063
|
|
|
|
1,228,105
|
|
|
|
684,042
|
|
|
|
125.7
|
%
|
% of revenue
|
|
|
2.7
|
%
|
|
|
27.1
|
%
|
|
|
24.4
|
%
|
|
|
-
|
|
Operating
expenses
|
|
¥
|
5,844,931
|
|
|
¥
|
9,946,078
|
|
|
¥
|
4,101,147
|
|
|
|
70.2
|
%
|
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 travelling charges, advertising and trade shows, and
an allocation of our facilities, depreciation expenses and rental expense, as well as shipping charges and related expenses. Selling
expenses decreased 26.2% or ¥0.3 million ($45.1 thousand), from approximately ¥1.1 million in the three months
ended March 31, 2015 to approximately ¥0.8 million ($0.1 million) in the same period of 2016. This decrease was primarily
due to a decrease in traveling expense and payroll expense. Selling expenses were 5.5% of total revenues in the three months ended
March 31, 2015 and 18.0% 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, option expenses stock based comprehensive expense, bad debt allowance and other
miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 88.5%
or ¥3.7 million ($0.6 million), from approximately ¥4.2 million in the three months ended March 31, 2015 to
approximately ¥7.9 million ($1.2 million) in the same period of 2016. General and administrative expenses were 20.9%
of total revenues in the three months ended March 31, 2015 and 174.0% of total revenues in the same period of 2016. The increase
in general and administrative expenses was mainly due to an increase in share-based compensation and provisions accrued for doubtful
advanced purchases. We made partial advanced payments for customized products for some projects in year 2014. As these projects
were postponed and products design would need to be modified, management made provisions for these amounts based on best estimation.
Management is also negotiating with clients to minimize the loss.
Research and development
(“R&D”) expenses
. Research and development expenses consist primarily of salaries and related expenditures
of our research and development projects. Research and development expenses increased from approximately ¥0.5 million for
the three months ended March 31, 2015 to approximately ¥1.2 million ($0.2 million) for the same period of 2016. This increase
was primarily due to more research and development expense on new generation automation platform system.
Net Income
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Income (loss) from
operations
|
|
¥
|
403,908
|
|
|
¥
|
(8,246,099
|
)
|
|
¥
|
(8,650,007
|
)
|
|
|
(2,141.6
|
)%
|
Interest
and other income (expense)
|
|
|
(2,000,719
|
)
|
|
|
31,644
|
|
|
|
2,032,363
|
|
|
|
(101.6
|
)%
|
Loss before income tax
|
|
|
(1,596,811
|
)
|
|
|
(8,214,455
|
)
|
|
|
(6,617,644
|
)
|
|
|
414.4
|
%
|
Provision
(benefit) for income tax
|
|
|
(180,927
|
)
|
|
|
1,412,945
|
|
|
|
1,593,872
|
|
|
|
(880.9
|
)%
|
Net loss
|
|
|
(1,415,884
|
)
|
|
|
(9,627,400
|
)
|
|
|
(8,211,516
|
)
|
|
|
580.0
|
%
|
Less: Net
income attributable to non-controlling interest
|
|
|
111,398
|
|
|
|
-
|
|
|
|
(111,398
|
)
|
|
|
(100.0
|
)%
|
Net
loss attributable to Recon Technology, Ltd
|
|
¥
|
(1,527,282
|
)
|
|
¥
|
(9,627,400
|
)
|
|
¥
|
(8,100,118
|
)
|
|
|
530.4
|
%
|
Loss from operations
.
Loss from operations was approximately ¥8.2 million ($1.3 million) for the three months ended March 31, 2016, compared to
an income of ¥0.4 million for the same period of 2015. This decrease in income from operations was primary due to a decrease
in revenues and increased general and administrative expenses.
Interest and other
income (expense).
Interest and other income was approximately ¥31.6 thousand ($5.0 thousand) for the three months
ended March 31, 2016, compared to interest and other expense of ¥2.0 million for the same period of 2015. The ¥2.0 million
($0.3 million) decrease in interest and other expense was primarily due to the decreased loss from warrants redemption, which
only accrued for the three months ended March 31, 2015.
Provision (benefit)
for income tax
. Benefit for income tax for the three months ended March 31, 2015 was approximately ¥0.2 million. Provision
for income tax was ¥1.4 million ($0.2 million) for the three months ended March 31, 2016. This increase in provision for income
tax was mainly due to decrease of deferred tax assets recorded and income tax payable true-up during the three months ended
March 31, 2016. During this period, based on available evidence, management concluded that it was more likely than not that there
would be no sufficient deductible income in future years and revaluated the deferred tax assets and the adjustment was recorded
as part of the total income tax provision.
Net loss
.
As a result of the factors described above, net loss was approximately ¥9.6 million ($1.5 million) for the three months ended
March 31, 2016, a decrease of approximately ¥8.2 million ($1.3 million) from net loss of ¥1.4 million for the same period
of 2015.
Net loss attributable
to Recon Technology, Ltd
. As a result of the factors described above, net loss attributable to ordinary shareholders was approximately
¥9.6 million ($1.5 million) for the three months ended March 31, 2016. Net loss attributable to ordinary shareholders increased
for approximately ¥8.1 million ($1.3 million) from net loss attributable to ordinary shareholders of approximately ¥1.5
million for same period of 2015.
Nine Months Ended March 31, 2015 Compared to Nine Months
Ended March 31, 2016
Revenues
|
|
For the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Hardware - non-related
parties
|
|
¥
|
39,977,111
|
|
|
¥
|
35,877,231
|
|
|
¥
|
(4,099,880
|
)
|
|
|
(10.3
|
)%
|
Hardware - related parties
|
|
|
1,364,070
|
|
|
|
|
|
|
|
(1,364,070
|
)
|
|
|
(100.0
|
)%
|
Service
|
|
|
103,774
|
|
|
|
1,098,258
|
|
|
|
994,484
|
|
|
|
958.3
|
%
|
Software - non-related parties
|
|
|
3,142,804
|
|
|
|
-
|
|
|
|
(3,142,804
|
)
|
|
|
(100.0
|
)%
|
Software
- related parties
|
|
|
1,064,103
|
|
|
|
-
|
|
|
|
(1,064,103
|
)
|
|
|
(100.0
|
)%
|
Total revenues
|
|
¥
|
45,651,862
|
|
|
¥
|
36,975,489
|
|
|
¥
|
(8,676,373
|
)
|
|
|
(19.0
|
)%
|
Our
total revenues for the nine months ended March 31, 2016 were approximately ¥37.0 million ($5.7 million), a decrease of approximately
¥8.7 million or 19.0% from ¥45.7 million for the nine months ended March 31, 2015. This was mainly caused by a decrease
of sales of furnaces and consignment stock goods.
Cost and Margin
|
|
For the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Total revenues
|
|
¥
|
45,651,862
|
|
|
¥
|
36,975,489
|
|
|
¥
|
(8,676,373
|
)
|
|
|
(19.0
|
)%
|
Cost of revenues
|
|
|
29,809,778
|
|
|
|
29,111,166
|
|
|
|
(698,612
|
)
|
|
|
(2.3
|
)%
|
Gross profit
|
|
¥
|
15,842,084
|
|
|
¥
|
7,864,323
|
|
|
¥
|
(7,977,761
|
)
|
|
|
(50.4
|
)%
|
Margin %
|
|
|
34.7
|
%
|
|
|
21.3
|
%
|
|
|
(13.4
|
%)
|
|
|
-
|
|
Cost of revenues
.
Our cost of revenues includes raw materials and costs related to design, implementation, delivery and maintenance of products
and services. All materials and components we need can be purchased or manufactured by subcontracts. Usually the prices of electronic
components do not fluctuate dramatically due to market competition and will not significantly affect our cost of revenues. However,
specialized equipment and incentive chemical products may be directly influenced by metal and oil price fluctuations. Additionally,
the prices of some imported accessories mandated by our customers can also affect our cost. Inventory reserve for changes in price
level, impairment of inventory, slow moving or other causes will also affect our cost.
Our cost of revenues
decreased from approximately ¥29.8 million in the nine months ended March 31, 2015 to approximately ¥29.1 million ($4.5
million) for the same period in 2016, a decrease of approximately ¥0.7 million ($0.1 million), or 2.3%. This decrease was
mainly caused by lower revenue during the nine months ended March 31, 2016 compared to the same period of 2015.
Gross profit
.
Our gross profit decreased to approximately ¥7.9 million ($1.2 million) for the nine months ended March 31, 2016 from
approximately ¥15.8 million for the same period in 2015. Our gross profit as a percentage of revenue decreased to 21.3% for
the nine months ended March 31, 2016 from 34.7% for the same period in 2015. This was mainly due to the decrease of (1) software
sales with higher margins as compared with hardware revenues and (2) lower margins related to our bundled product and service
agreements due to the fiercely competitive environment existing in the oil sector this year.
In more detail:
|
|
For the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Total revenues-hardware
and software- non related parties
|
|
¥
|
43,119,915
|
|
|
¥
|
35,877,231
|
|
|
¥
|
(7,242,684
|
)
|
|
|
(16.8
|
)%
|
Cost of revenues
-hardware and software- non related parties
|
|
|
29,782,617
|
|
|
|
28,434,196
|
|
|
|
(1,348,421
|
)
|
|
|
(4.5
|
)%
|
Gross profit
|
|
¥
|
13,337,298
|
|
|
¥
|
7,443,035
|
|
|
¥
|
(5,894,263
|
)
|
|
|
(44.2
|
)%
|
Margin %
|
|
|
30.9
|
%
|
|
|
20.7
|
%
|
|
|
(10.2
|
%)
|
|
|
-
|
|
Revenue from hardware
and software to non-related parties decreased by approximately ¥7.2 million mainly due to the decreased orders from our customers
as the Company is continually facing pressure from tough competition. The gross profit from hardware and software sales to non-related
parties decreased ¥5.9 million ($0.9 million) compared to the same period of last year.
|
|
For the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Total revenues-hardware
and software-related parties
|
|
¥
|
2,428,173
|
|
|
¥
|
-
|
|
|
¥
|
(2,428,173
|
)
|
|
|
(100.0
|
)%
|
Cost of revenues
-hardware and software- related parties
|
|
|
27,161
|
|
|
|
-
|
|
|
|
(27,161
|
)
|
|
|
(100.0
|
)%
|
Gross profit
|
|
¥
|
2,401,012
|
|
|
¥
|
-
|
|
|
¥
|
(2,401,012
|
)
|
|
|
(100.0
|
)%
|
Margin %
|
|
|
98.9
|
%
|
|
|
-
|
|
|
|
98.9
|
%
|
|
|
-
|
|
After the Company
achieved business entrance certification and were able to cooperate with oilfield customers directly two years ago, we no longer
required the services of a related party with such certification and, accordingly, revenue from related-parties decreased. As
of result, there was no revenue or cost of hardware and software from related parties during 2016, since we developed business
directly with oilfield, rather than cooperation with some local agency, which used to be our related parties.
|
|
For the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Total revenues-service
|
|
¥
|
103,774
|
|
|
¥
|
1,098,258
|
|
|
¥
|
994,484
|
|
|
|
958.3
|
%
|
Cost of revenues-service
|
|
|
-
|
|
|
|
676,970
|
|
|
|
676,970
|
|
|
|
100
|
%
|
Gross profit
|
|
¥
|
103,774
|
|
|
¥
|
421,288
|
|
|
¥
|
317,514
|
|
|
|
306.0
|
%
|
Margin %
|
|
|
100.0
|
%
|
|
|
38.4
|
%
|
|
|
(61.6
|
%)
|
|
|
-
|
|
Service
revenue for the nine months ended March 31, 2015 and 2016 consisted mainly of minor maintenance services, which were provided
upon request by customers. The cost of revenues-service increased, since labor costs were incurred for the nine months ended March
31, 2016.
Operating Expenses
|
|
For the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Selling and distribution
expenses
|
|
¥
|
3,065,098
|
|
|
|
3,443,464
|
|
|
¥
|
378,366
|
|
|
|
12.3
|
%
|
% of revenue
|
|
|
6.7
|
%
|
|
|
9.3
|
%
|
|
|
2.6
|
%
|
|
|
-
|
|
General and administrative expenses
|
|
|
11,987,761
|
|
|
|
18,865,639
|
|
|
|
6,877,878
|
|
|
|
57.4
|
%
|
% of revenue
|
|
|
26.3
|
%
|
|
|
51.0
|
%
|
|
|
24.7
|
%
|
|
|
-
|
|
Research and development expenses
|
|
|
2,444,020
|
|
|
|
5,757,141
|
|
|
|
3,313,121
|
|
|
|
135.6
|
%
|
% of revenue
|
|
|
5.4
|
%
|
|
|
15.6
|
%
|
|
|
10.2
|
%
|
|
|
-
|
|
Operating
expenses
|
|
¥
|
17,496,879
|
|
|
¥
|
28,066,244
|
|
|
¥
|
10,569,365
|
|
|
|
60.4
|
%
|
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 and so on. Selling expenses
increased approximately ¥0.4 million for the nine months ended March 31, 2016 compared to the same period in 2015. This increase
was primarily due to an increase in shipping charges, service fees and rental fees. Selling expenses were 6.7% of total revenues
in the nine months ended March 31, 2015 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, option expenses stock based comprehensive expense, bad debts allowance and other
miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 57.4%
or ¥6.9 million ($1.0 million), from approximately ¥12.0 million in the nine months ended March 31, 2015 to
approximately ¥18.9 million ($2.9 million) in the same period of 2016. General and administrative expenses were 51.0%
of total revenues in the nine months ended March 31, 2016 and 26.3% of total revenues in the same period of 2015. The increase
in general and administrative expenses was mainly due to an increase in provisions for purchase advances and share-based compensation,
offset by a decrease in consulting fees.
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 ¥2.4 million for
the nine months ended March 31, 2015 to approximately ¥5.8 million ($0.9 million) for the same period of 2016. This increase
was primarily due to more research and development expense spent on design of downhole service tools and automation platform systems.
Net Income
|
|
For the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Increase /
|
|
|
Percentage
|
|
|
|
2015
|
|
|
2016
|
|
|
(Decrease)
|
|
|
Change
|
|
Loss from operations
|
|
¥
|
(1,654,795
|
)
|
|
¥
|
(20,201,921
|
)
|
|
¥
|
(18,547,126
|
)
|
|
|
1,120.8
|
%
|
Interest
and other income (expense)
|
|
|
2,305,420
|
|
|
|
(248,489
|
)
|
|
|
(2,553,909
|
)
|
|
|
(110.8
|
)%
|
Income (loss) before income tax
|
|
|
650,625
|
|
|
|
(20,450,410
|
)
|
|
|
(21,101,035
|
)
|
|
|
(3,243.2
|
)%
|
Provision
for income tax
|
|
|
468,005
|
|
|
|
544,772
|
|
|
|
76,767
|
|
|
|
16.4
|
%
|
Net income
(loss)
|
|
|
182,620
|
|
|
|
(20,995,182
|
)
|
|
|
(21,177,802
|
)
|
|
|
(11,596.6
|
)%
|
Less: Net
income attributable to non-controlling interest
|
|
|
546,071
|
|
|
|
-
|
|
|
|
(546,071
|
)
|
|
|
(100.0
|
)%
|
Net loss
attributable to Recon Technology, Ltd
|
|
¥
|
(363,451
|
)
|
|
¥
|
(20,995,182
|
)
|
|
¥
|
(20,631,731
|
)
|
|
|
5,676.6
|
%
|
Loss from operations
.
Loss from operations was approximately ¥20.2 million ($3.1 million) for the nine months ended March 31, 2016, compared to
a loss of ¥1.7 million for the same period of 2015. This increase in loss from operations was primary due to a decrease in
gross profit, an increase in R&D expenses and increase in stock based compensation and allowance accrued for doubtful accounts.
Interest and other
income (expense)
. Interest and other expense was approximately ¥0.3 million ($0.04 million) for the nine months ended
March 31, 2016, compared to interest and other income of ¥2.3 million for the same period of 2015. The ¥2.6 million ($0.4
million) decrease in interest and other income was primarily due to gain from change in fair value of warrants liability while
there was no such gain for the current period.
Provision for
income tax
. Provision for income tax for the nine months ended March 31, 2015 was approximately ¥0.5 million. Provision
for income tax was ¥0.5 million ($0.1 million) for the nine months ended March 31, 2016. This slight increase in provision
for income tax was mainly due to deferred tax assets changes, offset by prior period income tax payable true-up during the nine
months ended March 31, 2016.
Net income (loss)
.
As a result of the factors described above, net loss was approximately ¥21.0 million ($3.3 million) for the nine months ended
March 31, 2016, a decrease of approximately ¥21.2 million ($3.3 million) from net income of ¥0.2 million for the same
period of 2015.
Net loss attributable
to Recon Technology, Ltd
. As a result of the factors described above, net loss attributable to ordinary shareholders was approximately
¥21.0 million ($3.3 million) for the nine months ended March 31, 2016, a change of approximately ¥20.6 million ($3.2 million)
from net loss attributable to ordinary shareholders of approximately ¥0.4 million for same period of 2015.
Adjusted EBITDA
Adjusted EBITDA.
We
define adjusted EBITDA as net loss adjusted for income tax expense (benefit), interest expense, change in fair value of warrants
liability, non-cash stock compensation expense, depreciation and amortization. We think it is useful to an equity investor in
evaluating our operating performance because: (1) it is widely used by investors in our industry to measure a company’s
operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially
from company to company depending upon accounting methods and book value of assets, capital structure and the method by which
the assets were acquired; and (2) it helps investors more meaningfully evaluate and compare the results of our operations from
period to period by removing the impact of our capital structure and asset base from our operating results.
|
|
For
the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
Increase
/
|
|
|
Percentage
|
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
|
(Decrease)
|
|
|
Change
|
|
Reconciliation
of Adjusted EBITDA to Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
¥
|
182,620
|
|
|
¥
|
(20,995,182
|
)
|
|
$
|
(3,255,395
|
)
|
|
¥
|
(21,177,802
|
)
|
|
|
(11,596.6
|
)%
|
Provision for income taxes (benefit)
|
|
|
468,005
|
|
|
|
544,772
|
|
|
|
84,469
|
|
|
|
76,767
|
|
|
|
16.4
|
%
|
Interest expense and foreign currency
adjustment
|
|
|
827,146
|
|
|
|
693,821
|
|
|
|
107,580
|
|
|
|
(133,325
|
)
|
|
|
(16.1
|
)%
|
Change in fair value of warrants liability
|
|
|
(4,068,329
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,068,329
|
|
|
|
(100.0
|
)%
|
Restricted shares issued for consulting
services
|
|
|
1,204,903
|
|
|
|
1,871,722
|
|
|
|
290,219
|
|
|
|
666,819
|
|
|
|
55.3
|
%
|
Loss
from warrant redemptions
|
|
|
1,913,262
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,913,262
|
)
|
|
|
(100.0
|
)%
|
Stock compensation expense
|
|
|
2,023,761
|
|
|
|
4,134,042
|
|
|
|
641,001
|
|
|
|
2,110,281
|
|
|
|
104.3
|
%
|
Depreciation and amortization
|
|
|
369,284
|
|
|
|
728,092
|
|
|
|
112,894
|
|
|
|
358,808
|
|
|
|
97.2
|
%
|
Adjusted
EBITDA
|
|
¥
|
2,920,652
|
|
|
¥
|
(13,022,733
|
)
|
|
$
|
(2,019,232
|
)
|
|
¥
|
(15,943,385
|
)
|
|
|
(545.9
|
)%
|
Adjusted EBITDA decreased
by approximately ¥16.0 million ($2.5 million) to a loss of approximately ¥13.0 million ($2.0 million) for the nine months
ended March 31, 2016, compared to approximately ¥2.9 million income for the same period in 2015. This was mainly due to decreased
gross profit, increased research and development expenses and increased bad debt allowances.
Adjusted Net Income and Adjusted Loss Per Share
|
|
For the Nine Months Ended
|
|
|
|
March
31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
USD
|
|
Reconciliation of Net Loss
attributable to Recon Technology, Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
to Adjusted Net Loss attributable
to Recon Technology, Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to Recon Technology, Ltd
|
|
¥
|
(363,451
|
)
|
|
¥
|
(20,995,182
|
)
|
|
$
|
(3,255,395
|
)
|
Noncash
items
(A)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of warrants liability
|
|
|
(4,068,329
|
)
|
|
|
-
|
|
|
|
-
|
|
Restricted
shares issued for consulting services
|
|
|
1,204,903
|
|
|
|
1,871,722
|
|
|
|
290,219
|
|
Loss from
warrants redemption
|
|
|
1,913,262
|
|
|
|
-
|
|
|
|
-
|
|
Stock
compensation expense
|
|
|
2,023,761
|
|
|
|
4,134,042
|
|
|
|
641,001
|
|
Adjusted
net loss attributable to Recon Technology, Ltd
|
|
¥
|
710,146
|
|
|
¥
|
(14,989,418
|
)
|
|
$
|
(2,324,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of U.S. GAAP
Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
to Non U.S. GAAP Adjusted
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP
earnings (loss) per share
|
|
¥
|
(0.08
|
)
|
|
¥
|
(3.75
|
)
|
|
$
|
(0.58
|
)
|
Impact
of noncash items on earnings per share
|
|
|
0.23
|
|
|
|
1.07
|
|
|
|
0.17
|
|
Non U.S.
GAAP adjusted earnings per share
|
|
¥
|
0.15
|
|
|
¥
|
(2.68
|
)
|
|
$
|
(0.41
|
)
|
Weighted - average shares
-diluted
|
|
|
4,773,803
|
|
|
|
5,603,229
|
|
|
|
5,603,229
|
|
(A) Noncash items are certain non-cash
expenses that are included in our U.S. GAAP reported results. The non-GAAP financial measures are provided to enhance investors’
overall understanding of Recon's current financial performance.
Liquidity and Capital Resources
As of March 31, 2016,
we had cash in the amount of approximately ¥2.6 million ($0.4 million). As of June 30, 2015, we had cash in the amount of
approximately ¥12.3 million.
Indebtedness
.
As of March 31, 2016, except for approximately ¥8.6 million ($1.3 million) of short-term borrowings from related parties,
and ¥7.0 million ($1.1 million) in commercial loans from local banks, we did not have any finance leases or purchase commitments,
guarantees or other material contingent liabilities.
Holding Company
Structure
. We are a holding company with no operations of our own. All of our operations are conducted through our Domestic
Companies. As a result, our ability to pay dividends and to finance any debt that we may incur is dependent upon the receipt of
dividends and other distributions from the Domestic Companies. In addition, Chinese legal restrictions permit payment of dividends
to us by our Domestic Companies only out of their respective accumulated net profits, if any, determined in accordance with Chinese
accounting standards and regulations. Under Chinese law, our Domestic Companies are required to set aside a portion (at least
10%) of their after-tax net income (after discharging all cumulated loss), if any, each year for compulsory statutory reserve
until the amount of the reserve reaches 50% of our Domestic Companies’ registered capital. These funds may be distributed
to shareholders at the time of each Domestic Company’s wind up.
Off-Balance Sheet
Arrangements
. We have not entered into any financial guarantees or other commitments to guarantee the payment obligations
of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified
as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained
or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support
to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity,
market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Capital Resources
.
To date we have financed our operations primarily through cash flows from operations, bank loans and short-term borrowings and
loans from related parties. As of March 31, 2016, we had total assets of approximately ¥102.4 million ($15.9 million), which
includes cash of approximately ¥2.6 million ($0.4 million), net accounts receivable due from third parties of approximately
¥50.2 million ($7.8 million), working capital amounted to approximately ¥64.3 million ($10.0 million), and shareholders’
equity amounted to approximately ¥59.7 million ($9.3 million).
Cash from Operating
Activities
. Net cash used in operating activities was approximately ¥1.3 million ($0.2 million) for the nine months
ended March 31, 2016. This was a decrease of approximately ¥14.9 million ($2.2 million) compared to net cash used in operating
activities of approximately ¥16.2 million for the nine months ended March 31, 2015. The decrease in net cash used in operating
activities for the nine months ended March 31, 2016, was primarily attributable to the ¥5.7 million ($0.9 million) change
in trade accounts receivable due from third parties, ¥4.6 million ($0.7 million), change in trade accounts receivable due
from related parties and ¥4.4 million ($0.7 million) change in change in purchase advance.
Cash from Investing
Activities
. Net cash used in investing activities was approximately ¥0.4 million ($68.6 thousand) for the nine months
ended March 31, 2016, increased approximately ¥0.3 million compared to the same period in 2015, which is due to the decrease
in proceeds from disposal of equipment.
Cash from Financing
Activities
. Net cash used in financing activities amounted to ¥8.1 million ($1.2 million) for the nine months ended March
31, 2016, as compared to net cash provided by financing activities of $3.0 million for the same period in 2015. During the nine
months ended March 31, 2016, we repaid ¥16.7 million ($2.6 million) short-term borrowings to two related parties and repaid
¥0.5 million ($0.1 million) short-term bank loans, and we received ¥8.5 million ($1.3 million) from one related party
and received ¥0.5 million ($0.1 million) short-term bank loans.
Working Capital
.
Total working capital as of March 31, 2016 amounted to approximately ¥64.3 million ($10.0 million), compared to approximately
¥72.4 million as of June 30, 2015. Total current assets as of March 31, 2016 amounted to approximately ¥98.8 million ($15.3
million), a decrease of approximately ¥25.7 million ($4.0 million) compared to approximately ¥124.5 million at June 30,
2015. The decrease in total current assets at March 31, 2016 compared to June 30, 2015 was mainly due to decreases in cash and
purchase advances.
Current liabilities
amounted to approximately ¥34.5 million ($5.4 million) at March 31, 2016, in comparison to approximately ¥52.1 million
at June 30, 2015. This decrease of liabilities was attributable mainly to a decrease in short-term borrowings-related parties,
other payable-related parties and other payable-third parties.
Capital Needs.
With
the uncertainty of the current market, our management believes it is necessary to enhance collection of outstanding balance of
accounts receivable and other receivables, and to be cautious on operational decisions and project selection. Our management believes
that our current operations can satisfy our daily working capital needs. We may also raise capital through public offering or
private placement to finance our development of our business and to consummate any merger and acquisition, if necessary.