Reconstruction Tech (NASDAQ:RCON)

BEIJING, May 23, 2012 /PRNewswire-Asia-FirstCall/ -- Recon Technology, Ltd (Nasdaq: RCON), a Chinese non-state-owned oil and gas automation services provider (the "Company"), announced today that one of its variable interest entities, Nanjing Recon Technology Co., Ltd. ("Nanjing Recon"), signed a major contract with the China National Petroleum Corporation's ("CNPC") Sichuan Petroleum Administration Bureau to provide the latter with the Emerson PCS & SIS Systems in its South Yolotan Gas Field Project (the "Project") located in Turkmenistan. The total contract value exceeds RMB19 million (USD3.02 million), which was by far the biggest contract for the Project's PCS & SIS Systems.

Under the contract, Nanjing Recon will not only provide all hardware and software related to the PCS & SIS Systems, but is also responsible for the procurement, production and installation of the systems and the after-sale services. The Project is significant in scale, advanced in technology and sophisticated in the overall design. As the systems involve all steps of the natural gas extraction process, they require intricate engineering techniques. Nanjing Recon is closely involved in the overall design of the automation control and undertakes the most critical step in designing the Emerson PCS & SIS Systems. The systems are expected to be delivered before May 30, 2012 and the entire project is expected to be completed by the end of year 2012.

"Located in Turkmenistan, the South Yolotan Gas Field is the largest natural gas field in the world with proved reserves of 7 trillion cubic meters," Mr. Yin Shenping, Recon's CEO, said. "CNPC signed the joint development agreement with the gas field in 2011 and is at the stage of researching and developing key techniques. We are very fortunate to have this opportunity to work with CNPC outside China at this critical stage. Our cooperation marks the first time Recon undertakes a foreign project and is an excellent first step for Recon to grow into an international company. This is also the first time Recon introduces the Emerson systems to the Central Asian market. We believe this project will lay a solid foundation for our automation business and will become a launch pad for additional large-scale overseas projects. As part of our overseas expansion strategy, we will take this opportunity to gain experience and win additional projects."

"The Emerson PCS & SIS Systems we supply focus mainly on automation solutions for the gathering and transmission of natural gas," Mr. Yin continued. "We won this contract thanks to our continued efforts in this area. First of all, Recon has cooperated with CNPC for more than 10 years. We have accumulated enough experience in initial designing and on-site implementation. We believe this project attests to our capabilities and experience in project management. Secondly, we have established a long-term strategic relationship with Emerson, which assures best products to our clients. Moreover, Recon has been consistently investing in the training of its service staff. Through its experienced team, Recon is able to provide the most cost-effective solutions and timely services of the highest quality. We believe we are capable of successfully implementing large-scale projects and further burnishing our reputation among our clients. We look forward to servicing our clients with a broader offering of state-of-the-art products and services."

Third Quarter 2012 Results

• Total revenues in the three months ended March 31, 2012 increased significantly to RMB13.02 million ($2.06 million) from RMB8.76 million in the three months ended March 31, 2011. New clients contributed to most of the increase. Total revenues in the nine months ended March 31, 2012 decreased to RMB48.81 million ($7.72 million) from RMB62.74 million in the nine months ended March 31, 2011, mainly due to the deconsolidation of one variable interest entity ("VIE") in 2010.
• Gross profit for the three months ended March 31, 2012 increased 332.69% to RMB6.23 million ($0.99 million) from RMB1.44 million in the same period of 2011. This increase was mainly due to higher margin of our new products based on horizontal well fracturing technology.
• Net income attributable to ordinary shareholders for the third quarter of fiscal year 2012 was RMB119,000 ($19,000), compared to a net loss attributable to ordinary shareholders of RMB2.01 million in the same quarter last year. Net loss attributable to ordinary shareholders improved from RMB21.85 million for the nine months ended March 31, 2011 to RMB1.89 million ($0.3 million) for the nine months ended March 31, 2012.
• Adjusted EBITDA was RMB989,000 ($156,000) for the three months ended March 31, 2012, up 142.78% compared to a loss of RMB2.31 million in the same quarter in 2011. Adjusted EBITDA was RMB320,000 ($51,000) for the nine months ended March 31, 2012, an increase of 103.32% compared to a loss of RMB9.65 million in the same period last year.
• Diluted net income per share was RMB0.03 ($0.00) for the three months ended March 31, 2012 and diluted net loss per share was RMB0.48 ($0.08) for the nine months ended March 31, 2012, compared to diluted net loss per share of RMB0.51 and RMB5.53 for the three- and nine-month periods ended March 31, 2011.

"We believe that Recon should act as a professional integrator of products and services, rather than simply acting as an equipment supplier," said Mr. Yin Shenping, CEO of Recon, "To achieve this goal, we have dedicated time and resources to optimize our operations and to improve our business model. Recently, we have mainly focused on introducing the most suitable products and technologies from the U.S. and Canada to domestic oilfield companies. We have made tremendous progress in this aspect by cooperating with international industry leaders such as Emerson and Baker Hughes. There are also many smaller foreign companies that possess expertise in one product in certain segmented areas of the oilfield service industry. We are actively seeking opportunities to cooperate with these companies as well."

Mr. Yin continued, "We have also devoted substantial resources to R&D as part of our long term strategy. Through such investment, we have combined our years of experience with advanced technologies to provide the best solutions to our clients. These efforts promote our competitiveness and encourage long-term profitability. We believe our business will remain strong in the coming years."

Second Quarter 2012 Highlights

• Total revenues in the three months ended December 31, 2011 decreased slightly to RMB30.84 million ($4.85 million) from RMB32.18 million in the three months ended December 31, 2010. New business, much of it from existing clients, factored heavily in reducing declines in revenues. Total revenues in the six months ended December 31, 2011 decreased more significantly to RMB35.79 million ($5.62 million) from RMB53.98 million in the six months ended December 31, 2010, due largely to the deconsolidation of one variable interest entity ("VIE") in 2010.
• Net income attributable to ordinary shareholders for the second quarter of fiscal year 2012 was RMB1.40 million ($219 thousand), compared to a net loss attributable to ordinary shareholders of RMB20.68 million in the same quarter last year. Net loss attributable to ordinary shareholders improved from RMB19.83 million for the six month period ended December 31, 2010 to RMB2.01 million ($316 thousand) for the six month period ended December 31, 2011.
• Adjusted EBITDA was RMB2.16 million ($339 thousand) for the three months ended December 31, 2011, up 121.41% compared to RMB(10.08 million) in the same quarter last year. Adjusted EBITDA was RMB(643 thousand) ($(101 thousand)) for the six months ended December 31, 2011, an improvement of 91.35% compared to RMB(7.44 million) in the same period last year.
• Diluted net income (loss) per share was RMB0.35($0.06) and RMB(0.51) ($(0.08)), respectively, for the three and six months ended December 31, 2011, compared to diluted net loss per share of RMB5.23 and RMB5.02 for respective periods ended December 31, 2010.

"Recon has met a number of challenges over the last twelve months," said Mr. Yin Shenping, CEO of Recon, "Jining ENI Energy Technology Co., Ltd. ('ENI') was previously one of our contractually controlled affiliates until December 16, 2010, when it was deconsolidated from our company. As a trading business, ENI acted as an agency to obtain purchase orders and earned through the sale price differentials. Since 2010, some of our large clients handled through ENI, especially SINOPEC, adjusted their procurement policies to increase direct purchases from strategic manufacturers rather than purchase from agencies like ENI. Business for ENI therefore decreased sharply. In addition, several of ENI's key employees resigned. Our management believes that even though ENI's deconsolidation from our company resulted in short-term losses, our company has already begun to recover, as demonstrated by improvements in net income and EBITDA this quarter. As a result, we do not believe the deconsolidation will have a significant impact on our long-term business development."

Mr. Yin continued, "Looking to our future, we continue to believe that our company should keep developing our proprietary products and services. We aim to serve as a professional integrator of products and services, rather than simply acting as equipment suppliers. To achieve this, we also devoted additional resources to our R&D activities, primarily for testing our furnaces and horizontal well fracturing technologies. This year, we will seek to expand our sales of existing core products and promote our recently developed proprietary oil/water separator and horizontal well fracturing technology."

"In light of the challenges we have faced over the last year, we have learned how important improving internal management is, particularly to small companies like ours. To assist us in improving our internal management, we have retained consultants to help us enhance our financial management and we have also strengthened our internal control system for the benefit of all of our shareholders. We will also strengthen our information disclosure and improve the frequency and content of our communications with investors."

On October 17, 2011, Recon Technology, Ltd (the “Company”) received from The Nasdaq OMX Group (“Nasdaq”) a letter (the “Nasdaq Letter”) indicating that, as a result of the Company’s failure to file its annual report on Form 10-K for the year ended June 30, 2011, the Company violated Nasdaq Listing Rule 5250(c)(1) (the “Rule”). The letter further states that the Company has 60 calendar days to submit a plan to regain compliance with the Rule. The plan is due no later than December 16, 2011. If Nasdaq accepts the Company’s plan of compliance, then Nasdaq can grant up to 180 calendar days (March 28, 2012) to the Company to regain compliance. Any subsequent periodic filings that are due prior to March 28, 2012 would need to be filed no later than March 28, 2012.

Risk factors omitted from 2010 10K.

The decrease in our revenues for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was due to the following operating challenges: 

(1) as described above, some of our large clients, especially Sinopec, adjusted their procurement policies, to increase direct purchases from strategic manufacturers rather than purchase from agency companies. Additionally, our former Chief Marketing Officer, Mr. Li Hongqi, resigned effective January 31, 2011. When Mr. Li resigned, we lost our established relationship with Sinopec and other companies. Without such relationships, it was very difficult for us to compete with the large strategic suppliers adopted by the large oil companies under their new procurement policies, thus decreasing our revenues as an agent for hardware sales; and;

(2) our equipment and service terminals can only be assembled and operated after completion of field infrastructure. Currently, our major on-going projects are all located in Ji dong oilfield and Weston Sichuan gas field, which are both newly developed oil and gas fields, with relatively long construction periods. Since some of our clients have not finished their oilfield construction, which in turn caused delays in our projects, we could not provide equipment to our clients and recognize the corresponding revenue as scheduled, this is also the reason for our increase of inventories for this period.

The changes to our clients’ procurement policies may have long-term adverse effects on our operation and our management believes we need to adjust our business structure to place a greater emphasis on our high efficiency equipment and service business.

Third Quarter Fiscal 2011 Financial Highlights (press release from May 16, 2011)

• Revenues for the third quarter of fiscal year 2011 decreased by 57.74% year-over-year to $1.7 million, down from $4.0 million in the third quarter of fiscal 2010
• Gross margin for the third quarter was 17.9% based on gross profit of $302 thousand, compared with a 44.7% margin based on gross profit of $1.8 million in the same period last year
• Operating expenses for the third quarter were $1.5 million, up 97.7% year-over-year from $741 thousand in the same period last year
• Operating loss for the third quarter was $1.2 million, down 211.18% compared to operating income of $1.0 million in the third quarter of fiscal 2010
• Net loss attributable to Recon for the third quarter decreased 263.21% year-over-year to $1.1 million compared with net income of $689 thousand for the third quarter of fiscal 2010
• Loss per diluted share was $0.28 for the quarter, down 263.21% from diluted EPS of $0.17 achieved in the same period a year ago

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 only been involved in production. Our management believes it’s time to expand our core business, move into new markets, and develop new businesses. There are great opportunities both in new markets and our existing markets. We believe that many existing wells and oilfields need to improve or renew their equipment and service to maintain production and our techniques and services will be needed as new oil and gas fields are developed

Fiscal Year 2010 Highlights

• Total revenues increased 54.67% year over year to $17.18 million. Exceeding RCON's guidance between $12.7 million and $13.3million
  
• Non-GAAP EBITDA increased 54.9% year over year to $4.8 million
  
• Net income attributable to common shareholders was $2.9 million, exceeding RCON's guidance between $2.5 million and $2.7 million, or $0.77 diluted net income per share attributable to common shareholders, exceeding RCON's guidance between $0.65 and $0.68 per share.

 "Although environment of global macro social 2010 was not good, our business performed very well, driven mostly by our automation business," said Mr. Yin Shenping, CEO of Recon. "We expect our business to continue to develop rapidly and benefit from our strong R&D capabilities and rich industry experience."

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 RCON's businesses have only been involved in production. Management of Recon believes it's time to expand core business, move into new markets, and develop new businesses. They also believe that many existing wells and oilfields need to improve or renew their equipment and service to maintain production and our techniques and services will be needed as new oil and gas fields are developed. Furthermore, the Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment (the "New 36 Guidelines on Non-State-owned Economy") promulgated in 2010 by the State encourages private investors to take part in oil and natural gas construction, and supports private enterprise investors entering into exploration and development of oilfield area. As exploration of oil and gas fields involves a wide range of professional technologies, it is expected that in the future the private investors investing in oil and gas field exploration will seek out general contracting and integrated services. This will bring RCON new opportunities to the integrated service projects.