Recon Technology, Ltd Reports Financial Year Results for Fiscal Year 2023

Management Commentary

Mr. Shenping Yin, Founder and CEO of Recon said, "Fiscal year ended 2023 was a year of change, challenge and opportunity for Recon. As a result of the impact of the outbreak and changes in the industry, our established business volume temporarily declined and recovered less than optimally, and resulting in a decline in overall revenue in fiscal year ended 2023, but our gross margins improved due to management efficiencies and the overall recovery of the industry.

We believe that China's investment and demand in the oil industry will not decrease in the near future, and we believe that there are still many opportunities for growth in the oil industry. Recon will continue to benefit from this trend. We expect a significant increase in the volume of business in the oilfield services segment in the coming year. We are also expanding our business focus from oilfield service segment to broader energy sectors, including carbon-zero opportunities and alternative materials for primary petroleum products. We are actively exploring the chemical recycling business of low-value plastics based on waste treatment and recycling, and have reached preliminary cooperation agreements and market expansion and sales intentions with key upstream and downstream customers. Our drive has always been to maximize the long-term benefits for our company and our shareholders based on our experience and resources in the petrochemical and energy industries."

Fiscal Year Ended 2023 Financial Results:

Revenue

Total revenues for the year ended June 30, 2023 were approximately RMB67.1 million ($9.3 million), a decrease of approximately RMB16.7 million ($2.3 million) or 19.9% from RMB83.8million ($12.5 million) for the same period in 2022. The overall decrease in revenue was mainly due to decrease from all four segments during the year ended June 30, 2023.

 -  Revenue from automation product and software decreased by RMB5.3 million ($0.7 million) or 316.6%. The decrease was mainly caused by decreased orders from JiDong oilfield as this client reduced their investment budget and oil and gas extraction activities.

 -  Revenue from equipment and accessories decreased by ¥0.9 million ($0.1 million) or 5.3% as we decided not to continue working with some oilfield client with low production levels and allocated our sales and service resources into some larger oilfield companies. We believe this was a temporary decline. Our revenue from this segment will increase in the coming year.

 -  Revenue from oilfield environmental protection decreased by RMB6.2million ($0.9 million) or 24.5%. This was mainly caused by less raw materials we could collect. As a result, our revenue decreased due to lower processing volume compared to the same period last year.

 -  Revenue from platform outsourcing services decreased by RMB4.2 million ($0.6 million) or 45.2%. The decrease was mainly due to less overall economic activities and lower refueling volumes at gas stations, and change in the method of settlement with major customers, from the original service fee based on a percentage of the volume and transaction amount to a basic fixed monthly service fee. 

Cost of revenue

Cost of revenues decreased from RMB64.4 million ($9.6 million) for the year ended June 30, 2022 to RMB48.2 million ($6.7 million) for the same period in 2023. This decrease was mainly caused by the decreased cost of revenue from automation product and software, oilfield environmental protection and platform outsourcing services segments, which was partially offset by the decreased cost of revenue from equipment and accessories segment during the year ended June 30, 2023.

Gross profit

Gross profit decreased to RMB18.9 million ($2.6 million) for the year ended June 30, 2023 from RMB19.4 million ($2.9 million) for the same period in 2022. Gross profit as a percentage of revenue increased to 28.1% for the year ended June 30, 2023 from 23.2% for the same period in 2022.

- For the years ended June 30, 2022 and 2023, our gross profit from automation product and software was approximately RMB2.1 million and RMB3.0 million ($0.4 million), respectively, representing an increase in gross profit of approximately RMB0.9 million ($0.1 million) or 42.4%. In year 2021, we mainly carried out contracts that were signed during the COVID-19 and low oil price period, during which we used a low-margin strategy to maintain our cooperation business with clients. As oil price increase in 2022, our customers recovered and contract terms were improved and our margin increased and the margin percentage will also be higher.

-  For the years ended June 30, 2022 and 2023, gross profit from equipment and accessories was approximately RMB6.7 million and RMB7.3 million ($1.0 million), respectively, representing a slight increase of approximately RMB0.6 million ($0.09 million) or 9.3%. This was mainly driven by high oil price and more demands for heating furnaces with higher margin rather than accessories with lower margin.

-  For the years ended June 30, 2022 and 2023, gross profit from oilfield environmental protection was approximately RMB5.1 million and RMB5.2 million ($0.7 million), respectively, maintaining at a stable level.

-  For the years ended June 30, 2022 and 2023, gross profit from platform outsourcing services was approximately RMB5.5 million and RMB3.4 million ($0.5 million), respectively, representing a decrease of approximately RMB2.1 million ($0.3 million) or 38.6%, this was mainly because personnel expenses, which constitutes major part of our costs, reduced during the year ended June 30, 2023.

Operating expenses

Selling expenses increased by 4.8%, or RMB0.4 million ($0.07 million), from RMB10.2 million in the year ended June 30, 2022 to RMB10.6 million ($1.5 million) in the same period of 2023.

General and administrative expenses decreased by 7.8%, or RMB6.5 million ($0.9 million), from RMB83.3 million in the year ended June 30, 2022 to RMB76.8 million ($10.6 million) in the same period of 2023. 

Net recovery of credit losses of RMB0.7 million for the year ended June 30, 2022 as compared to net recovery of credit losses of RMB9.0 million ($1.2 million) for the same period in 2023. 

Research and development expenses remained relatively stable with a slight decrease by 1.8%, or RMB0.2 million ($0.02 million) from RMB9.0 million for the year ended June 30, 2022 to RMB8.8 million ($1.2 million) for the same period of 2023.

Loss from operations

Loss from operations was RMB69.3 million ($9.6 million) for the year ended June 30, 2023, compared to a loss of RMB82.3 million for the same period of 2022. This RMB13.0 million ($1.8 million) decrease in loss from operations was primarily due to the decrease in operating expense as discussed above.

Gain in fair value changes of warrant liability

The Company classified the warrants issued in connection with common share offering as liabilities at their fair value and adjusted the warrant instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statement of operations. Gain in change in fair value of warrant liability was RMB174.5 million and RMB6.1 million ($0.8 million) for the years ended June 30, 2022 and 2023, respectively.

Impairment loss on goodwill and intangible assets

In conjunction with the preparation of our consolidated financial statement for years ended June 30, 2022 and 2023, the management performed evaluation on the impairment of goodwill and intangible assets and recorded an impairment loss on goodwill and intangible assets of RMB2.3 million and RMB10.0 million ($1.4 million) for the years ended June 30, 2022 and 2023, respectively. The impairment was mainly due to the decision of the major customers to develop their own autonomous unified system and to significantly reduce the procurement of third-party services. This change has had a significant and negative impact on FGS's business model and enterprise value. 

Interest income

Net interest income was RMB11.1 million ($1.5 million) for the year ended June 30, 2023, compared to net interest income of RMB3.8 million for the same period of 2022. The RMB.3 million ($1.0 million) increase in net interest income was primarily due to the increased interest-bearing loans to third parties and increased short-term investments we invested during the year ended June 30, 2023.

Other income (expenses), net.

Other net income was RMB0.7 million ($0.1 million) for the year ended June 30, 2023, compared to other net expenses of RMB0.1 million for the same period of 2022.

Net income (loss)

As a result of the factors described above, net loss was RMB61.5 million ($8.5 million) for the year ended June 30, 2023, an increase of RMB155.8 million ($21.5 million) from net income of RMB94.3 million for the same period of 2022.

Cash and short-term investment

As of June 30, 2023, we had cash in the amount of approximately RMB104.1 million ($14.4 million) and short-term investment in bank fixed income product of approximately RMB184.2 million ($25.4 million). As of June 30, 2022, we had cash in the amount of approximately RMB317.0 million ($47.3 million).

About Recon Technology, Ltd ("RCON")

Recon Technology, Ltd (NASDAQ: RCON) is the People's Republic of China's first NASDAQ-listed non-state owned oil and gas field service company. Recon supplies China's largest oil exploration companies, Sinopec (NYSE: SNP) and The China National Petroleum Corporation ("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 within several segmented markets of the oil and gas filed service industry. RCON also has developed stable long-term cooperation relationship with its major clients. For additional information please visit: http://www.recon.cn/.

Forward-Looking Statements

Recon includes "forward-looking statements" within the meaning of the federal securities laws throughout this press release. A reader can identify forward-looking statements because they are not limited to historical fact or they use words such as "scheduled," "may," "will," "could," "should," "would," "expect," "believe," "anticipate," "project," "plan," "estimate," "forecast," "goal," "objective," "committed," "intend," "continue," or "will likely result," and similar expressions that concern Recon's strategy, plans, intentions or beliefs about future occurrences or results. Forward-looking statements are subject to risks, uncertainties and other factors that may change at any time and may cause actual results to differ materially from those that Recon expected. Many of these statements are derived from Recon's operating budgets and forecasts, which are based on many detailed assumptions that Recon believes are reasonable, or are based on various assumptions about certain plans, activities or events which we expect will or may occur in the future. However, it is very difficult to predict the effect of known factors, and Recon cannot anticipate all factors that could affect actual results that may be important to an investor. All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors, including those factors disclosed under "Risk Factors" in Recon's most recent Annual Report on Form 20-F and any subsequent half-year financial filings on Form 6-K filed with the Securities and Exchange Commission. All forward-looking statements are qualified in their entirety by the cautionary statements that Recon makes from time to time in its SEC filings and public communications. Recon cannot assure the reader that it will realize the results or developments Recon anticipates, or, even if substantially realized, that they will result in the consequences or affect Recon or its operations in the way Recon expects. Forward-looking statements speak only as of the date made. Recon undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances arising after the date on which they were made, except as otherwise required by law. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included herein or that may be made elsewhere from time to time by, or on behalf of, Recon.

RECON TECHNOLOGY, LTD
CONSOLIDATED BALANCE SHEETS
		As of June 30			As of June 30			As of June 30
		2022			2023			2023
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