Recon Technology, Ltd. — FY2020 Form 20-F Summary
Reporting-period note: The request metadata says “2019 Q4,” but the supplied filing is an audited annual report for the fiscal year ended June 30, 2020, with comparisons to fiscal 2019 and 2018. Figures below refer to FY2020 unless noted. Financial statements are prepared under U.S. GAAP; amounts are primarily RMB.
Business context
Recon provides oilfield automation products and software, equipment, and environmental-protection services, principally to energy customers in China. It conducts operations through PRC entities BHD and Nanjing Recon, which it consolidates as variable interest entities (VIEs) under contractual arrangements. The company does not produce petroleum.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | RMB 65.8 million ($9.3 million) | RMB 102.4 million | Down 35.8% |
| Gross profit / margin | RMB 19.6 million / 29.8% | RMB 29.9 million / 29.2% | Profit down; margin up slightly |
| Operating loss | RMB 20.2 million | RMB 24.2 million | Loss narrowed |
| Net loss | RMB 20.1 million | RMB 25.8 million | Loss narrowed 22.0% |
| Net loss attributable to Recon | RMB 19.2 million; loss per share RMB 4.16 | RMB 25.4 million; loss per share RMB 6.49 | Loss per share improved |
| Cash from operating activities | Used RMB 5.2 million | Used RMB 32.2 million | Outflow reduced |
| Cash from investing activities | Used RMB 2.1 million | Used RMB 13.5 million | Outflow reduced |
| Cash from financing activities | Provided RMB 33.2 million | Provided RMB 3.5 million | Increased, mainly from equity and borrowing |
Revenue fell across all three segments: automation products and software declined 19.1% to RMB 51.4 million; equipment and accessories fell 40.6% to RMB 14.2 million; and oilfield environmental protection dropped 99.2% to RMB 0.1 million. The environmental-protection segment recorded a small gross loss.
At June 30, 2020, cash was RMB 30.3 million ($4.3 million), current assets RMB 129.3 million, current liabilities RMB 65.2 million, and working capital RMB 64.1 million. Total assets were RMB 194.4 million and total liabilities RMB 73.8 million. Contract assets rose sharply to RMB 31.5 million from RMB 4.6 million, while net trade receivables, including related-party receivables, were approximately RMB 51.3 million, down from RMB 71.9 million.
Borrowings included RMB 9.5 million of short-term bank loans, RMB 0.2 million of third-party short-term borrowings, RMB 10.2 million of short-term related-party borrowings, and RMB 8.2 million of long-term related-party borrowings. Lease liabilities were RMB 2.5 million. Financing cash flow included RMB 26.1 million net proceeds from stock issuance and new short-term bank borrowing; cash increased by RMB 25.8 million during the year.
Material changes and notable items
- COVID-19 restrictions delayed project work, delivery, customer acceptance, revenue recognition, and collections. Operations gradually resumed during 2020. Management said demand was not eliminated but customer budgets and spending were reduced amid the outbreak, lower oil prices, and economic conditions.
- A new customer’s Iraq project represented approximately 30.5% of FY2020 revenue. The customer terminated the project due to COVID-19, and the company did not expect further revenue from it in FY2021. Shenhua Group contributed approximately 17% of FY2020 revenue and CNPC 39%; CNPC also represented 39% in FY2019.
- Operating expenses declined 26.5% to RMB 39.8 million, partly offsetting lower gross profit. Doubtful-account provisions increased to RMB 2.2 million, and research and development expense rose to RMB 7.0 million from RMB 3.1 million.
- Two May and June 2020 registered direct offerings raised approximately $4.2 million gross in total, before fees, and included warrants for up to 2,591,112 shares. The company had 7,202,832 ordinary shares outstanding at fiscal year-end. A one-for-five reverse stock split became effective December 27, 2019.
- The company holds a 43% interest in Future Gas Station (FGS); its performance deadline was extended to February 2021, and RMB 6.4 million remained payable for the investment. A proposed purchase of up to 100% of Originwater Purification Engineering was only at the memorandum-of-understanding stage.
Outlook, risks, and contingencies
The filing gives no formal quantified company-wide earnings or revenue guidance. Management expected lower customer budgets to persist through calendar 2020, while stating that the long-term impact of COVID-19 was not expected to be significant. It expected automation activity to benefit from increased industry adoption and cited a Jidong Oilfield automation project priced at RMB 9.5 million per year for a three-year construction period. Environmental-protection work included nine oily-sludge disposal agreements covering up to 3,200 tons and a separate RMB 3.8 million contract; management expected delayed work to be completed by the end of calendar 2020. Low oil prices were expected to continue weighing on demand for oilfield heating equipment.
- Customer and market concentration: A small number of customers drive a large share of revenue; CNPC agreements may be terminated without advance notice. Revenue is seasonal and customer acceptance schedules affect recognition and collection.
- VIE and China exposure: The company has no equity ownership in its principal operating VIEs and relies on contracts whose enforceability and treatment under PRC law are uncertain. Foreign-exchange controls, regulatory changes, and limits on moving funds out of China could affect access to operating cash.
- Liquidity and collection: The company has recurring annual losses and relies partly on public offerings, bank loans, and related-party financing. Management reported collecting about RMB 28.2 million of receivables by September 30, 2020 and cited a three-year support commitment from two major shareholders if liquidity difficulties arise.
- Financial reporting controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective as of June 30, 2020. Identified material weaknesses included insufficient U.S. GAAP and SEC-reporting expertise, an incomplete internal audit function, and insufficient time and monitoring to demonstrate operating effectiveness. The auditor’s financial-statement opinion was unqualified, but the auditor did not attest to internal-control effectiveness.
- Other exposures: The company disclosed an estimated RMB 3.9 million severance contingency that was not recorded because the timing and amount were uncertain, plus RMB 2.5 million of purchase commitments. It reported no material legal proceedings. It also disclosed no business-interruption, litigation, or natural-disaster insurance.
Most important facts for investors to verify
- Whether the large FY2020 contract-asset balance converts to accepted work, recognized revenue, and cash collection, and whether the delayed environmental-protection projects are completed.
- How FY2021 results replace the Iraq customer’s 30.5% revenue contribution and manage ongoing reliance on CNPC and other major customers.
- Actual progress on remediation of the disclosed material weaknesses and whether internal controls become effective.
- Cash availability and repayment capacity for short-term bank and related-party debt, including the extent of continued shareholder support.
- The status and terms of the FGS performance milestones and outstanding investment payment, and whether any Originwater acquisition proceeds beyond the MOU.
- Potential dilution from the 2,591,112 offering warrants and other share-based awards, and continuing compliance with Nasdaq listing requirements.