UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
| |
¨ |
REGISTRATION STATEMENT PURSUANT TO
SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
OR
|
|
x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2019
OR
| |
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
OR
| |
¨ |
SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
Date of event requiring this shell company report……………
For the transition period
from to
Commission file number 001-34409
|
RECON TECHNOLOGY,
LTD |
| (Exact name of Registrant as specified in its
charter) |
| |
|
Cayman Islands |
| (Jurisdiction of incorporation or
organization) |
| |
| 1902 Building C, King Long International
Mansion |
| 9 Fulin Road, Beijing 100107 |
|
People’s Republic of
China |
| (Address of principal executive
offices) |
| |
| Liu Jia, Chief Financial
Officer |
| Telephone: +86 (10) 8494 5799 |
| liujia@recon.cn; Fax: +86 (10) 8494
5792 |
| 1902 Building C, King Long International
Mansion |
| 9 Fulin Road, Beijing 100107 |
| People’s Republic of China |
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
|
Title of each
class |
|
Name of each exchange on which
registered |
| Ordinary Shares, $0.0185 par value per
share |
|
NASDAQ Capital Market |
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report: 21,799,300 Ordinary Shares.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
¨ Yes x No
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act
of 1934.
¨ Yes x No
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark
whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit such files).
x Yes ¨ No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or an emerging growth company. See definition of “large accelerated
filer, "accelerated filer,” and "emerging growth company" in Rule
12b-2 of the Exchange Act.
|
Large accelerated
filer ¨ |
|
Accelerated filer ¨ |
|
Non-accelerated
filer x |
| |
|
|
|
Emerging growth company ¨ |
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting
standards† provided pursuant to Section 13(a) of the Exchange Act.
¨
† The term “new or revised financial accounting standard” refers to
any update issued by the Financial Accounting Standards Board to
its Accounting Standards Codification after April 5,
2012.
Indicate by check mark which basis of accounting the registrant has
used to prepare the financial statements included in
this filing:
|
U.S. GAAP x |
|
International Financial Reporting
Standards as issued
by the International Accounting Standards Board ¨ |
|
Other ¨ |
If "Other" has been checked in response to the previous question,
indicate by check mark which financial statement item the
registrant has elected to follow.
¨ Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2
of the Securities Exchange Act of 1934).
¨ Yes x No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13
or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by
a court.
¨ Yes ¨ No
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this annual report with respect to the Company’s
current plans, estimates, strategies and beliefs and other
statements that are not historical facts are forward-looking
statements about the future performance of the Company.
Forward-looking statements include, but are not limited to, those
statements using words such as “believe,” “expect,” “plans,”
“strategy,” “prospects,” “forecast,” “estimate,” “project,”
“anticipate,” “aim,” “intend,” “seek,” “may,” “might,” “could” or
“should,” and words of similar meaning in connection with a
discussion of future operations, financial performance, events or
conditions. From time to time, oral or written forward-looking
statements may also be included in other materials released to the
public. These statements are based on management’s assumptions,
judgments and beliefs in light of the information currently
available to it. The Company cautions investors that a number of
important risks and uncertainties could cause actual results to
differ materially from those discussed in the forward-looking
statements, including but not limited to, product and service
demand and acceptance, changes in technology, economic conditions,
the impact of competition and pricing, government regulation, and
other risks contained in reports filed by the company with the
Securities and Exchange Commission. Therefore, investors should not
place undue reliance on such forward-looking statements. Actual
results may differ significantly from those set forth in the
forward-looking statements.
All such forward-looking statements, whether written or oral, and
whether made by or on behalf of the company, are expressly
qualified by the cautionary statements and any other cautionary
statements which may accompany the forward-looking statements. In
addition, the company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after
the date hereof.
PART I
|
Item 1. |
Identity of Directors, Senior
Management and Advisers |
Not applicable for annual reports on Form 20-F.
|
Item 2. |
Offer Statistics and Expected
Timetable |
Not applicable for annual reports on Form 20-F.
A. Selected Financial Data
The following table presents the selected consolidated financial
information for our company. The selected consolidated statements
of operations data for the three years ended June 30, 2017, 2018
and 2019 and the consolidated balance sheet data as of June 30,
2018 and 2019 have been derived from our audited consolidated
financial statements set forth in “Item 18 – Financial Statements”.
The selected consolidated balance sheet data for the year ended
June 30, 2016 have been derived from our audited consolidated
balance sheet as of June 30, 2016, which is not included in this
annual report. The selected consolidated statements of operations
data for the year ended June 30, 2015 and the selected consolidated
balance sheet data as of June 30, 2015 have been derived from our
audited consolidated financial statements for the years ended June
30, 2015, which are not included in this annual report. Our
historical results do not necessarily indicate results expected for
any future periods. The selected consolidated financial data should
be read in conjunction with, and are qualified in their entirety by
reference to, our audited consolidated financial statements and
related notes and “Item 5. Operating and Financial Review and
Prospects” below. Our audited consolidated financial statements are
prepared and presented in accordance with Generally Accepted
Accounting Principles in the United States of America, or U.S.
GAAP.
(All amounts in thousands of Renminbi, except Dividend per share in
U.S. dollars and Shares outstanding)
Statement of operations data:
| |
|
For the years ended June 30, |
|
| |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
| |
|
RMB¥ |
|
|
RMB¥ |
|
|
RMB¥ |
|
|
RMB¥ |
|
|
RMB¥ |
|
| Revenues |
|
|
102,384,327 |
|
|
|
84,712,046 |
|
|
|
60,054,462 |
|
|
|
42,728,277 |
|
|
|
51,512,900 |
|
| (Loss) from operations |
|
|
(24,243,574 |
) |
|
|
(40,924,896 |
) |
|
|
(30,611,484 |
) |
|
|
(39,911,129 |
) |
|
|
(35,516,233 |
) |
| Net loss |
|
|
(25,355,905 |
) |
|
|
(44,072,321 |
) |
|
|
(31,445,147 |
) |
|
|
(40,882,577 |
) |
|
|
(31,456,388 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| -Basic |
|
|
(1.30 |
) |
|
|
(3.84 |
) |
|
|
(4.90 |
) |
|
|
(7.23 |
) |
|
|
(6.45 |
) |
| -Diluted |
|
|
(1.30 |
) |
|
|
(3.84 |
) |
|
|
(4.90 |
) |
|
|
(7.23 |
) |
|
|
(6.45 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average number of ordinary shares used in
computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| -Basic |
|
|
19,544,164 |
|
|
|
11,483,464 |
|
|
|
6,417,305 |
|
|
|
5,653,149 |
|
|
|
4,876,504 |
|
| -Diluted |
|
|
19,544,164 |
|
|
|
11,483,464 |
|
|
|
6,417,305 |
|
|
|
5,653,149 |
|
|
|
4,876,504 |
|
Balance sheet data:
| |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
|
|
RMB¥ |
|
|
RMB¥ |
|
|
RMB¥ |
|
|
RMB¥ |
|
|
RMB¥ |
|
| Current
assets |
|
|
97,824,268 |
|
|
|
100,834,569 |
|
|
|
68,387,075 |
|
|
|
74,322,220 |
|
|
|
124,512,236 |
|
| Total assets |
|
|
156,981,554 |
|
|
|
121,807,517 |
|
|
|
71,155,045 |
|
|
|
79,450,314 |
|
|
|
134,348,887 |
|
| Current
liabilities |
|
|
42,084,370 |
|
|
|
25,991,921 |
|
|
|
29,445,757 |
|
|
|
29,850,518 |
|
|
|
52,080,043 |
|
| Total liabilities |
|
|
50,280,574 |
|
|
|
34,935,755 |
|
|
|
29,445,757 |
|
|
|
29,850,518 |
|
|
|
52,080,043 |
|
| Total stockholders’
equity (net assets) |
|
|
95,615,551 |
|
|
|
76,009,832 |
|
|
|
33,244,445 |
|
|
|
41,376,299 |
|
|
|
74,045,347 |
|
| Shares outstanding |
|
|
21,799,300 |
|
|
|
18,380,349 |
|
|
|
9,902,914 |
|
|
|
5,804,005 |
|
|
|
5,427,946 |
|
B. Capitalization and Indebtedness
Not applicable by 20-F as an annual report.
C. Reasons for the Offer and Use of Proceeds
Not applicable by 20-F as an annual report.
D. Risk Factors
Investing in our ordinary shares involves a high degree of risk.
Before deciding whether to invest in our ordinary shares, you
should consider carefully the risks and uncertainties described
below. There may be other unknown or unpredictable economic,
business, competitive, regulatory or other factors that could have
material adverse effects on our future results. If any of these
risks actually occurs, our business, business prospects, financial
condition or results of operations could be seriously harmed. This
could cause the trading price of our ordinary shares to decline,
resulting in a loss of all or part of your investment. Please also
read carefully the section below entitled “Cautionary Note
Regarding Forward-Looking Statements.”
Risks Related to Our Business
We operate in a very competitive industry and may not be able
to maintain our revenues and profitability.
Since the 1990s, several international companies engaged in
supplying integrated automation services for the petroleum
extraction industry have been qualified in China. These competitors
have significantly greater financial and marketing resources and
name recognition than we have. In addition, at least five domestic
private competitors also compete with us, and more competitors may
enter the market as Chinese petroleum companies seek to reduce oil
production costs and improve efficiencies. There can be no
assurance that we will be able to compete effectively in our
industry.
In addition, our competitors may introduce new systems. If these
new systems are more attractive to customers than the systems we
currently use or may develop, our customers may switch to our
competitors’ services, and we may lose market share. We believe
that competition may become more intense as more integrated
automation service providers, including Chinese/foreign joint
ventures, are qualified to conduct business. We cannot assure you
that we will be able to compete successfully against any new or
existing competitors, or against any new systems our competitors
may implement. Any of these competitive factors could have a
material adverse effect on our revenues and profitability.
We must continually research and develop new technologies and
products to remain competitive.
Because our industry is so competitive, we will need to continually
research, develop and refine new technologies and offer new
products to compete effectively. Many factors may limit our ability
to develop and refine new products, including the availability of
funds to dedicate to this portion of our business and access to new
products and technologies that we can incorporate into our
products, as well as marketplace resistance to new products and
technologies. We believe that the Domestic Companies (defined in
the following paragraph) and our products are able to compete in
the marketplace based upon, among other things, our intellectual
property. We cannot assure investors that applications of our and
the Domestic Companies’ technologies or those of third parties, if
developed, will not be rendered superfluous or obsolete by research
efforts and technological advances by others in these fields.
We control by contract the PRC companies of Beijing BHD Petroleum
Technology Co., Ltd. (“BHD”) and Nanjing Recon Technology Co., Ltd.
(“Nanjing Recon”), collectively, the Domestic Companies. As new
technologies are developed, the Domestic Companies and we may need
to adapt and change our products and services, our method of
marketing or delivery or alter our current business in ways that
may adversely affect revenue and our ability to achieve our
proposed business goals. Accordingly, there is a risk that the
Domestic Companies’ and our technology will not support a viable
commercial enterprise.
Our financial performance is dependent upon the sale and
implementation of petroleum mining and extraction software and
hardware and related services, a single, concentrated group of
products.
We derive substantially all of our revenues from the license and
implementation of software applications and hardware innovations
for the Chinese petroleum industry. The life cycle of our products
and services is difficult to estimate due in large measure to the
potential effect of new software and hardware applications and
enhancements, including those we introduce, and the maturation in
both the Chinese petroleum and software/hardware industries. If we
are unable to continually improve our software and hardware to
address the changing needs of the Chinese petroleum industry, we
may experience a significant decline in the demand for the Domestic
Companies’ and our products and services. In such a scenario, our
revenues may significantly decline.
As a technology-oriented business, our ability to operate
profitably is directly related to our ability to develop and
protect our proprietary technology.
We rely on a combination of trademark, trade secret, nondisclosure,
copyright and patent law to protect the Domestic Companies’ and our
software and hardware, which may afford only limited
protection.
Although the Chinese government has issued Nanjing Recon over ten
copyrights on software and Nanjing Recon and BHD over forty patents
on products, we cannot guarantee that competitors will be unable to
develop technologies that are similar or superior to the Domestic
Companies’ and our technology. Despite our efforts to protect the
Domestic Companies’ and our proprietary rights, unauthorized
parties, including customers, may attempt to reverse engineer or
copy aspects of the Domestic Companies’ and our products or to
obtain and use information that the Domestic Companies and we
regard as proprietary. Furthermore, our competitors may
independently develop substantially equivalent or superior
proprietary information and techniques, reverse engineer
information and techniques, or otherwise gain access to our
proprietary technology. In the future, we cannot guarantee that
others will not use the Domestic Companies’ and our technology
without proper authorization. In addition, under the Chinese
intellectual property law, the 50-year protection period for
software copyright and 10-year patent protection period are not
subject to renewal upon expiration.
The Domestic Companies and we develop our software products on
third-party middleware software programs that are licensed by our
customers from third parties, generally on a non-exclusive basis.
The termination of any such licenses, or the failure of the
third-party licensors to adequately maintain or update their
products, could result in delay in our ability to develop, market
or ship certain of our products while we seek to implement
technology offered by alternative sources. While it may be
necessary or desirable in the future to obtain other licenses,
there can be no assurance that they will be able to do so on
commercially reasonable terms or at all.
In addition, the Domestic Companies and we may initiate claims or
litigation against third parties for infringement of our
proprietary rights or to establish the validity, scope or
enforceability of our proprietary rights. Any such claims could be
time consuming, result in costly litigation, cause product
development or shipment delays or force the Domestic Companies or
us to enter into royalty or license agreements rather than dispute
the merits of such claims, thereby impairing our financial
performance by requiring the Domestic Companies or us to pay
additional royalties and/or license fees to third parties. There is
always a risk that patents, if issued, may be subsequently
invalidated, either in whole or in part and this could diminish or
extinguish protection for any technology we may license. In
addition, the laws of China may not protect proprietary rights to
the same extent as U.S. law. Therefore, we may be unable to
meaningfully protect our rights in trade secrets, technical
know-how and other non-patented technology. Any failure to enforce
or protect the Domestic Companies’ and our rights could cause us to
lose the ability to exclude others from issuing technology to
develop or sell competing products.
We may not be able to adequately protect our intellectual
property, which could cause us to be less competitive and
negatively impact our business.
We rely on trademark, patent and trade secret law, as well as
confidentiality agreements with certain of our employees to protect
our proprietary rights. The product patents owned by the Company
are employee service patents invented by the Company’s key
employees. We generally require the Domestic Companies’ and our
employees, consultants, advisors and collaborators to execute
appropriate confidentiality agreements with, as applicable, the
respective Domestic Companies and the Company. These agreements
typically provide that all material and confidential information
developed or made known to the individual during the course of the
individual’s relationship with the Company is owned by the Company
and will be kept confidential and not disclosed to third parties
except in specific circumstances. These agreements may be breached,
and in some instances, we may not have an appropriate remedy
available for breach of the agreements.
We may be accused of infringing the intellectual property
rights of others.
In the future, the Domestic Companies and we may receive notices
claiming that we are infringing the proprietary rights of third
parties. We cannot guarantee that the Domestic Companies and we
will not become the subject of infringement claims or legal
proceedings by third parties with respect to the Domestic
Companies’ and our current programs or future software
developments. Our standard software license agreements contain an
infringement indemnity clause under which we agree to indemnify and
hold harmless our customers and business partners against liability
and damages arising from claims of various copyright or other
intellectual property infringement by our products. Neither
the Domestic Companies nor we have been the subject of an
intellectual property claim since our formation.
Our software products may contain integration challenges,
design defects or software errors that could be difficult to detect
and correct.
Despite extensive testing, we may, from time to time, discover
defects or errors in the Domestic Companies’ and our software only
after use by a customer. We may also experience delays in shipment
of our software during the period required to correct such errors.
In addition, we may, from time to time, experience difficulties
relating to the integration of the Domestic Companies’ and our
software products with other hardware or software in the customer’s
environment that are unrelated to defects in such software
products. Such defects, errors or difficulties may cause future
delays in product introductions and shipments, result in increased
costs and diversion of development resources, require design
modifications or impair customer satisfaction with the Domestic
Companies’ and our software. Since these software products are used
by our customers to perform mission-critical functions related to
petroleum mining and extraction, design defects, software errors,
misuse of these products, incorrect data from external sources or
other potential problems within or out of our control that may
arise from the use of the Domestic Companies’ and our products
could result in financial or other damages to our customers. We do
not maintain product liability insurance. Although our license
agreements with customers contain provisions designed to limit our
exposure to potential claims as well as any liabilities arising
from such claims, such provisions may not effectively protect us
against such claims and the liability and costs associated
therewith. To the extent we are found liable in a product liability
case, we could be required to pay substantial amount of damages to
an injured customer, thereby impairing our financial condition.
We are dependent on the state of the PRC’s economy as the
majority of our business is conducted in the PRC.
Currently, the majority of our business operations are conducted in
the PRC, and most of our customers are also located in the PRC.
Accordingly, any significant slowdown in the PRC economy may cause
our customers to reduce expenditures or delay the building of new
facilities or projects. This may in turn lead to a decline in the
demand for our products and services. That would have a material
adverse effect on our business, financial condition and results of
operations.
Our future success depends on our ability to help our
customers find, develop and acquire petroleum reserves.
To remain competitive in our industry, our products must help our
customers locate and develop or acquire new crude oil reserves to
replace those depleted by production. Without successful
exploration or acquisition activities, our customers’ reserves,
production and revenues will decline rapidly. If the Domestic
Companies’ and our technology is less well accepted for helping our
customers locate additional reserves than our competitors’
technology, our customers may terminate their relationships with
us, which could have a material adverse effect on our financial
condition and future growth prospects.
Our customers are companies engaged in the petroleum industry
and the greater energy industry, and, consequently, our financial
performance is dependent upon the economic conditions of those
industries.
We have derived most of our revenues to date from providing
integrated automation services to Chinese petroleum companies at
oilfields within China and other energy industry companies in
China. Our customers’ success is intrinsically linked to economic
conditions in China and in the petroleum and energy industries in
general and the volatility of prices of crude oil, refined oil
products and coal chemical products in particular. Each of the
petroleum industry and energy industry is subject to intense
competitive pressures and is affected by overall economic
conditions. Demand for our services could be harmed by volatility
in those industries. There can be no assurance that we will be able
to continue our historical revenue growth or sustain our
profitability on a quarterly or annual basis or that our results of
operations will not be adversely affected by continuing or future
volatility in those industries.
Our revenues are highly dependent on a very limited number of
customers, which subjects our business to high seasonality. Our
contracts with such customers may be terminated at any time,
materially and adversely affecting our business.
Historically, we derived the majority of our revenues from two
customers, (i) China National Petroleum Corporation (“CNPC”)
and (ii) China Petroleum and Chemical Corporation (“Sinopec”).
Since the fiscal year ended June 30, 2017, Sinopec accounted for
less than 5% of our revenues.
We provide products and services to CNPC under a series of
agreements, each of which is terminable without notice. We first
began to provide services to CNPC in 2000. CNPC accounted for
approximately 39%, 45%, and 72% of our revenues in the fiscal years
ended June 30, 2019, 2018 and 2017, respectively, and any
termination of our business relationships with CNPC would
materially harm our operations.
In the fiscal year ended June 30, 2019, we had established a solid
relationship with Shenhua Group Corporation Limited (“Shenhua
Group”) and revenue from it in the fiscal year 2019 accounted for
approximately 24% of our revenue. Any termination of our business
relationships with CNPC, Shenhua Group or any other major client
would materially harm our operations.
Because we derive such a high percentage of our revenues from CNPC
and a few new clients, our revenue has been subject to high
seasonality. We recognize revenue when it is realized and earned.
We consider revenue realized or realizable and earned when
(1) we have persuasive evidence of an arrangement,
(2) delivery has occurred, (3) the sales price is fixed
or determinable, and (4) collectability is reasonably assured.
Because these matters depend on reaching agreements with these
clients, revenue recognition occurs, to a large extent, on their
schedule. Accordingly, revenue recognized in the first quarter is
usually the smallest in proportion to that for the whole year, due
to our clients’ budgeting and planning schedules. If these clients
were to change its budgeting or planning schedule our high and low
quarters could also shift. This seasonality limits our ability to
make accurate long-term predictions about our performance and makes
it difficult to compare our revenues across quarters.
Changes in environmental and regulatory factors may harm our
business.
The oil drilling industry in China to date has not been subject to
the type and scope of regulation seen in Europe and the United
States. However, the Chinese government may implement new
legislation or regulations or may enforce existing laws more
stringently. Either of these scenarios may have a significant
impact on our customers’ mining and extraction operations and may
require us or our customers to significantly change operations or
to incur substantial costs. We believe that the Domestic Companies’
and our operations in China are in compliance with China’s
applicable legal and regulatory requirements. However, there can be
no assurance that China’s central or local governments will not
impose new, stricter regulations or interpretations of existing
regulations that would require additional expenditures.
Petroleum reserve degradation and depletion may reduce our
customers’ and our profitability.
Our profitability depends substantially on our ability to help our
customers exploit their oil reserves at competitive costs.
Replacement reserves may not be available to our customers when
required or, if available, may not be drilled at costs comparable
to those characteristics of the depleting oilfield. The Domestic
Companies’ and our technology may not enable our customers to
accurately assess the geological characteristics of any new
reserves, which may adversely affect their decision to use the
Domestic Companies’ and our products in the future.
We are heavily dependent upon the services of experienced
personnel who possess skills that are valuable in our industry, and
we may have to actively compete for their services.
Our company is much smaller than our main foreign competitors,
including Schlumberger Limited, Honeywell International, Emerson
Process Management and Rockwell Automation, and we compete in large
part on the basis of the quality of services we are able to provide
our clients. As a result, we are heavily dependent upon our ability
to attract, retain and motivate skilled personnel to serve our
clients. Many of our personnel possess skills that would be
valuable to all companies engaged in the integrated automation
services industry. Consequently, we expect that we will have to
actively compete for these employees. Some of our competitors may
be able to pay our employees more than we are able to pay to retain
them. Our ability to profitably operate is substantially dependent
upon our ability to locate, hire, train and retain our personnel.
There can be no assurance that we will be able to retain our
current personnel, or that we will be able to attract or assimilate
other personnel in the future. If we are unable to effectively
obtain and maintain skilled personnel, the development and quality
of our technological products and the effectiveness of installation
and training could be materially impaired.
We are substantially dependent upon our key personnel,
particularly Yin Shenping, our Chief Executive Officer,
Mr. Chen Guangqiang, our Chief Technology Officer and
Ms. Liu Jia, our Chief Financial Officer.
Our performance is substantially dependent on the performance of
our executive officers and key employees. In particular, we rely on
the services of:
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Mr. Yin Shenping, Chief
Executive Officer; |
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Mr. Chen Guangqiang, Chief
Technology Officer; and |
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Ms. Liu Jia, Chief Financial
Officer. |
Each of these individuals would be difficult to replace. We do not
have in place “key person” life insurance policies on any of our
employees. The loss of the services of any of our executive
officers or other key employees could substantially impair our
ability to successfully development new systems and develop new
programs and enhancements. In addition, we would need to spend
considerable time and other resources to seek suitable
replacements, which might detract from our efforts to develop our
business.
Our business is capital intensive and our growth strategy may
require additional capital, which may not be available on favorable
terms or at all.
We may require additional cash resources due to changed business
conditions, implementation of our growth strategy or potential
investments or acquisitions we may pursue. To meet our capital
needs, we may sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity
securities or other securities convertible into such equity
securities could result in dilution of your holdings. The
incurrence of indebtedness would result in increased debt service
obligations and could require us to agree to operating and
financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at
all. Any failure by us to raise additional funds on terms favorable
to us, or at all, could limit our ability to expand our business
operations and could harm our overall business prospects.
We do not intend to pay dividends in the foreseeable future
and there are certain restrictions on the payment of dividend under
PRC laws.
We have not previously paid any cash dividends, and we do not
anticipate paying any dividends on our ordinary shares. As we
intend to remain in a growth mode, we intend to reinvest any
profits in the foreseeable future to grow the business. We cannot
assure you that our operations will continue to result in
sufficient revenues to enable us to operate at profitable levels or
to generate positive cash flows. Furthermore, there is no
assurance our Board of Directors will declare dividends even if we
are profitable. Dividend policy is subject to the discretion
of our Board of Directors and will depend on, among other things,
our earnings, financial condition, capital requirements and other
factors. If we determine to pay dividends on any of our
ordinary shares in the future, we will be dependent, in large part,
on receipt of funds from the Domestic Companies.
We are a holding company with no operations of our own and
substantially all of our operations are conducted through Nanjing
Recon and BHD, hereafter referred to as our Domestic Companies,
which are established as variable interest entities (“VIEs”) under
the laws of the People’s Republic of China (“PRC”). Our ability to
pay dividends is dependent upon dividends and other distributions
from the Domestic Companies. 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. Payments of dividends by Domestic Companies to us are also
subject to restrictions including primarily the restriction that
foreign invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign
exchange business after providing valid commercial documents. There
are no such similar foreign exchange restrictions in the Cayman
Islands.
Our certificates, permits, and license are subject to
governmental control and renewal, and the failure to obtain renewal
would cause all or part of our operations to be suspended and may
have a material adverse effect on our financial
condition.
We are subject to various PRC laws and regulations pertaining to
automation services for the petroleum extraction industry. We have
obtained certain certificates, permits, and licenses required for
the operation of an automation services provider for the petroleum
extraction industry and the manufacturing and distribution of
software and hardware products in the PRC.
During the application or renewal process for our licenses and
permits, we will be evaluated and re-evaluated by the appropriate
governmental authorities and must comply with the prevailing
standards and regulations, which may change from time to time. In
the event that we are not able to obtain or renew the certificates,
permits and licenses, all or part of our operations may be
suspended by the government, which would have a material adverse
effect on our business and financial condition. Furthermore, if
escalating compliance costs associated with governmental standards
and regulations restrict or prohibit any part of our operations, it
may adversely affect our results of operations and
profitability.
Risks Related to Our Corporate Structure
PRC laws and regulations governing our businesses and the
validity of certain of our contractual arrangements are uncertain.
In addition, changes in such PRC laws and regulations may
materially and adversely affect our business.
There are substantial uncertainties regarding the interpretation
and application of PRC laws and regulations, including, but not
limited to, the laws and regulations governing our business, and
the enforcement and performance of our contractual arrangements
with the Domestic Companies and their shareholders.
Recon Technology, Ltd (the “Company”), Recon Technology Co.,
Limited (“Recon HK”), Recon Investment Ltd. (“Recon IN”) and Recon
Hengda Technology (Beijing) Co., Ltd. (“Recon-BJ”) are considered
foreign persons or foreign invested enterprises under PRC law. As a
result, the Company, Recon-HK, Recon-IN and Recon-BJ are subject to
PRC law limitations on foreign ownership of domestic companies.
Although the primary business of the Domestic Companies falls
within a category in which foreign investment is currently
encouraged, the uncertainty of PRC regulations and governmental
policies affecting foreign ownership may result in the Company
being required to hold (or, conversely, being prohibited from
holding), directly or indirectly, a given percentage of the
Domestic Companies’ equity interests. Our contractual arrangements
with the Domestic Companies and their shareholders, which allow us
to substantially control the Domestic Companies through Recon-BJ,
are governed by Chinese law. We cannot assure you, however, that we
will be able to enforce these contracts. If we are unable to
enforce these contracts, we could be required to deconsolidate such
Domestic Company from our financial results.
In addition, Chinese laws and regulations limiting foreign
ownership of domestic companies are relatively new and may be
subject to change, and their official interpretation and
enforcement may involve substantial uncertainty. The effectiveness
of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses
may also be applied retroactively.
The PRC government has broad discretion in dealing with violations
of laws and regulations, including levying fines, revoking business
and other licenses and requiring actions necessary for compliance.
In particular, licenses and permits issued or granted to us by
relevant governmental bodies may be revoked at a later time by
higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our
businesses. We cannot assure you that our current ownership and
operating structure would not be found in violation of any current
or future PRC laws or regulations. As a result, we may be subject
to sanctions, including fines, and could be required to restructure
our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business
operations or restrict us from conducting a substantial portion of
our business operations, which could materially and adversely
affect our business, financial condition and results of operations
and future growth prospects.
Although we believe we comply and will continue to comply with
current PRC regulations, we cannot assure you that the PRC
government would agree that these operating arrangements comply
with PRC licensing, registration or other regulatory requirements,
with existing policies or with requirements or policies that may be
adopted in the future. If the PRC government determines that we do
not comply with applicable law, it could revoke our business and
operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to
restructure our operations, impose additional conditions or
requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or
take other regulatory or enforcement actions against us that could
be harmful to our business.
The PRC government may determine that the agreements we use
to control the Domestic Companies are not in compliance with
applicable PRC laws, rules and regulations and are therefore
unenforceable.
In the PRC, foreign invested enterprises are forbidden or
restricted to engage in certain specified businesses or industries
which are sensitive to the economy. The Chinese government
periodically revises its list of encouraged, permitted, restricted,
and forbidden industries. As we intend to centralize our management
and operation in the PRC without being restricted to conduct
certain business activities which are important for our current or
future business but are restricted or might be restricted in the
future, we believe the agreements between Recon-BJ and the Domestic
Companies will be essential for our business operation. In order
for Recon-BJ to manage and operate our business through the
Domestic Companies in the PRC, these agreements were entered into
under which almost all the business activities of the Domestic
Companies are managed and operated by Recon-BJ and almost all
economic benefits and risks arising from the business of the
Domestic Companies are transferred to Recon-BJ.
Risks are associated with our operations under the agreements with
the Domestic Companies. If the PRC government determines that these
agreements used to control the Domestic Companies are unenforceable
as they circumvent the PRC restrictions relating to foreign
investment restrictions, the relevant regulatory authorities would
have broad discretion in dealing with such breach, including:
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imposing economic
penalties; |
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• |
discontinuing or restricting our
operations; |
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• |
imposing conditions or
requirements in respect of the agreements with the Domestic
Companies with which we may not be able to comply; |
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• |
requiring us to restructure the
relevant ownership structure or operations; |
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• |
taking other regulatory or
enforcement actions that could adversely affect our business;
and |
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• |
revoking
the business license and/or the licenses or certificates of
Recon-BJ, and/or voiding the agreements. |
Any of these actions could have a material adverse impact on our
business, future operating prospects, financial condition and
results of operations.
Our contractual arrangements with the Domestic Companies and
their respective shareholders may not be as effective in providing
control over these entities as direct ownership.
We have no equity ownership interest in the Domestic Companies and
rely on contractual arrangements to control and operate such
businesses. These contractual arrangements may not be as effective
in providing control over the Domestic Companies as direct
ownership. For example, BHD could fail to take actions required for
our business or fail to pay dividends to Recon-BJ despite its
contractual obligation to do so. If the Domestic Companies fail to
perform under their agreements with us, we may have to rely on
legal remedies under PRC law, which may not be effective. In
addition, we cannot assure you that any of the Domestic Companies’
shareholders would always act in our best interests.
Regulations relating to offshore investment activities by PRC
residents may limit our ability to acquire PRC companies and could
adversely affect our business.
In July 2014, SAFE promulgated the Circular on Issues
Concerning Foreign Exchange Administration Over the Overseas
Investment and Financing and Roundtrip Investment by Domestic
Residents Via Special Purpose Vehicles,
or Circular 37, which replaced Relevant Issues
Concerning Foreign Exchange Control on Domestic Residents’
Corporate Financing and Roundtrip Investment through Offshore
Special Purpose Vehicles, or
Circular 75. Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their
direct establishment or indirect control of an offshore entity,
referred to in Circular 37 as a “special purpose
vehicle” for the purpose of holding domestic or offshore assets or
interests. Circular 37 further requires amendment to
a PRC resident’s registration in the event of any significant
changes with respect to the special purpose vehicle, such as an
increase or decrease in the capital contributed by PRC individuals,
share transfer or exchange, merger, division or other material
event. Under these regulations, PRC residents’ failure to comply
with specified registration procedures may result in restrictions
being imposed on the foreign exchange activities of the relevant
PRC entity, including the payment of dividends and other
distributions to its offshore parent, as well as restrictions on
capital inflows from the offshore entity to the PRC entity,
including restrictions on its ability to contribute additional
capital to its PRC subsidiaries. Further, failure to comply with
the SAFE registration requirements could result in penalties under
PRC law for evasion of foreign exchange regulations.
As Circular 37 is newly-issued, it is unclear how
these regulations will be interpreted and implemented. In addition,
different local SAFE branches may have different views and
procedures as to the interpretation and implementation of the SAFE
regulations, and it may be difficult for our ultimate shareholders
or beneficial owners who are PRC residents to provide sufficient
supporting documents required by the SAFE or to complete the
required registration with the SAFE in a timely manner, or at all.
Any failure by any of our shareholders who is a PRC resident, or is
controlled by a PRC resident, to comply with relevant requirements
under these regulations could subject us to fines or sanctions
imposed by the PRC government, including restrictions on Recon-BJ’s
ability to pay dividends or make distributions to us and on our
ability to increase our investment in the Recon-BJ.
Under Circular 37, if a non-listed special purpose
vehicle uses its own equity or share option to grant equity
incentive awards to directors, supervisors, members of senior
management or employees directly employed by a domestic enterprise
that is directly or indirectly controlled by such special purpose
vehicle, or with which such employee has established an employment
relationship, any of such directors, supervisors, members of senior
management or employees who is a PRC resident should, prior to
exercising their rights, file an application with the SAFE for
foreign exchange registration with respect to such special purpose
vehicle. However, in practice, different local SAFE branches may
have different views and procedures as to the interpretation and
implementation of the SAFE regulations and,
since Circular 37 was the first regulation to
regulate the foreign exchange registration of a non-listed special
purpose vehicle’s equity incentive granted to PRC residents, there
remains uncertainty with respect to its implementation.
Our contractual arrangements with the Domestic Companies may
result in adverse tax consequences to us.
As a result of our corporate structure and contractual arrangements
between Recon-BJ and the Domestic Companies, we are effectively
subject to several PRC taxes on both revenues generated by
Recon-BJ’s operations in China and revenues derived from Recon-BJ’s
contractual arrangements with the Domestic Companies. Moreover, we
would be subject to adverse tax consequences if the PRC tax
authorities were to determine that the contracts between Recon-BJ
and the Domestic Companies were not on an arm’s length basis and
therefore constitute a favorable transfer pricing. As a result, the
PRC tax authorities could request that we adjust our taxable income
upward for PRC tax purposes. If the PRC tax authorities took such
action, such authorities would be able to establish in its sole
discretion the amount of tax payable by Recon-BJ, so we cannot
predict the effect of such action on our company other than the
likely effect that our profits would decrease. Such a pricing
adjustment could adversely affect us by:
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increasing our tax expenses, which could subject
Recon-BJ to late payment fees and other penalties for under-payment
of taxes; and/or |
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resulting in Recon-BJ’s loss of
preferential tax treatment. |
The principal shareholders of the Domestic Companies have
potential conflicts of interest with us, which may adversely affect
our business.
Yin Shenping, our Chief Executive Officer, and Chen Guangqiang, our
Chief Technology Officer, are significant shareholders in our
company. They are also the principal shareholders of each of the
Domestic Companies and collectively control the Domestic Companies.
Conflicts of interests between their duties to our company and the
respective Domestic Companies may arise. For example, Mr. Yin
and Mr. Chen could cause a Domestic Company to fail to take
actions that are in the best interests of our Company or to fail to
pay dividends to Recon-BJ despite its contractual obligation to do
so if making such payment would harm the Domestic Company.
As Mr. Yin and Mr. Chen are also directors and executive
officers of our company, they have duties of loyalty and care to us
under Cayman Islands law when there are any potential conflicts of
interests between our company and the Domestic Companies. Each of
Mr. Yin and Mr. Chen has executed an irrevocable power of
attorney to appoint the individual designated by us to be his
attorney-in-fact to vote on his behalf on all matters related to
the Domestic Companies requiring shareholder approval. We cannot
assure you, however, that if conflicts of interest arise, they will
act completely in our interests or that conflicts of interests will
be resolved in our favor. In addition, Mr. Yin and
Mr. Chen could violate their respective employment agreements
with us or their legal duties by diverting business opportunities
from us to others. If we cannot resolve any conflicts of interest
between us and Mr. Yin and Mr. Chen, as applicable, we
would have to rely on legal proceedings, which could result in the
disruption of our business.
Any deterioration of the relationship between Recon-BJ and
the Domestic Companies could materially and adversely affect the
overall business operation of our company.
Our relationship with our Domestic Companies is governed by their
agreements with Recon-BJ, which are intended to provide us, through
our indirect ownership of Recon-BJ, with effective control over the
business operations of our Domestic Companies. However, these
agreements may not be effective in providing control over the
applications for and maintenance of the licenses required for our
business operations. Our Domestic Companies could violate these
agreements, go bankrupt, suffer from difficulties in its business
or otherwise become unable to perform its obligations under these
agreements and, as a result, our operations, reputation, business
and stock price could be severely harmed.
If Recon-BJ exercises its purchase option of the Domestic
Companies’ equity pursuant to the Exclusive Equity Interest
Purchase Agreement, payment of the purchase price could materially
and adversely affect our financial position.
Under the Exclusive Equity Interest Purchase Agreement, Recon-BJ
holds an option to purchase all or a portion of the equity of the
Domestic Companies at a price, based on the capital paid in by the
Domestic Company shareholders. If applicable PRC laws and
regulations require an appraisal of the equity interest or provide
other restriction on the purchase price, the purchase price shall
be the lowest price permitted under the applicable PRC laws and
regulations. As the Domestic Companies are already contractually
controlled affiliates to our company, Recon-BJ’s purchase of the
Domestic Companies’ equity would not bring immediate benefits to
our company and the exercise of the option and payment of the
purchase prices could adversely affect our financial position and
available working capital.
Our classified board structure may prevent a change in our
control.
Our board of directors is divided into three classes of directors.
The current terms of the directors expire in 2019, 2020 and 2021.
Directors of each class are chosen for three-year terms upon the
expiration of their current terms, and each year one class of
directors is elected by the shareholders. The staggered terms of
our directors may reduce the possibility of a tender offer or an
attempt at a change in control, even though a tender offer or
change in control might be in the best interest of our
shareholders.
Shareholder rights under Cayman Islands law may differ
materially from shareholder rights in the United States, which
could adversely affect the ability of us and our shareholders to
protect our and their interests.
Our corporate affairs are governed by our amended and restated
memorandum and articles of association, by the Companies Law (2013
Revision) and the common law of the Cayman Islands. The rights of
shareholders to take action against the directors, actions by
minority shareholders, and the fiduciary responsibilities of our
directors to us under Cayman Islands law are to a large extent
governed by the common law of the Cayman Islands. The common law in
the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands as well as from English
common law, the decisions of whose courts are of persuasive
authority but are not binding on a court in the Cayman Islands. In
particular, the Cayman Islands has a less developed body of
securities laws as compared to the United States, and some states,
such as Delaware, have more fully developed and judicially
interpreted bodies of corporate laws. Moreover, our company could
be involved in a corporate combination in which dissenting
shareholders would have no rights comparable to appraisal rights
which would otherwise ordinarily be available to dissenting
shareholders of United States corporations. However, Cayman Islands
statutory law does provide a mechanism for a dissenting shareholder
in a merger or consolidation to apply to the Grand Court for a
determination of the fair value of the dissenter’s shares if it is
not possible for the dissenter and the Company to agree a fair
price within the time limits prescribed. Also, our Cayman Islands
counsel is not aware of a significant number of reported derivative
actions having been brought in Cayman Islands courts. Class actions
are not recognized in the Cayman Islands, but groups of
shareholders with identical interests may bring representative
proceedings which are similar. Such actions are ordinarily
available in respect of United States corporations in U.S. courts.
Finally, Cayman Islands companies may not have standing to initiate
shareholder derivative action before the federal courts of the
United States. As a result, our public shareholders may face
different considerations in protecting their interests in actions
against the management, directors or our controlling shareholders
than would shareholders of a corporation incorporated in a
jurisdiction in the United States, and our ability to protect our
interests may be limited if we are harmed in a manner that would
otherwise enable us to sue in a United States federal court.
As we are a Cayman Islands company and most of our assets are
outside the United States, it will be extremely difficult to
acquire jurisdiction and enforce liabilities against us and our
officers, directors and assets based in China.
We are a Cayman Islands exempt company, and our corporate affairs
are governed by our Memorandum and Articles of Association and by
the Cayman Islands Companies Law (2013 Revision) and other
applicable Cayman Islands laws. Certain of our directors and
officers reside outside of the United States. In addition, the
Company’s assets will be located outside the United States. As a
result, it may be difficult or impossible to effect service of
process within the United States upon our directors or officers and
our subsidiaries, or enforce against any of them court judgments
obtained in United States’ courts, including judgments relating to
United States federal securities laws. In addition, there is
uncertainty as to whether the courts of the Cayman Islands and of
other offshore jurisdictions would recognize or enforce judgments
of United States’ courts obtained against us predicated upon the
civil liability provisions of the securities laws of the United
States or any state thereof on the grounds that such provisions are
penal in nature, or be competent to hear original actions brought
in the Cayman Islands or other offshore jurisdictions predicated
upon the securities laws of the United States or any state
thereof. Our Cayman Islands’ counsel has advised us that
although there is no statutory enforcement in the Cayman Islands of
judgments obtained in the United States, the courts of the Cayman
Islands will recognize and enforce a foreign judgment of a court of
competent jurisdiction if such judgment is final, for a liquidated
sum, provided it is not in respect of taxes or a fine or penalty,
is not inconsistent with a Cayman Islands’ judgment in respect of
the same matters, and was not obtained in a manner which is
contrary to the public policy of the Cayman Islands. A Cayman
Islands court may stay proceedings if concurrent proceedings are
being brought elsewhere. Furthermore, because the majority of our
assets are located in China, it would also be extremely difficult
to access those assets to satisfy an award entered against us in
United States court.
Risks Related to Doing Business in China
Adverse changes in China’s political, economic or social
conditions or government policies could have a material adverse
effect on the overall economic growth of China, which could reduce
the demand for our products and materially adversely affect our
competitive position.
We conduct substantially all of our operations and generate most of
our revenues in China. Accordingly, our business, financial
condition, results of operations and prospects are affected
significantly by economic, political and legal developments in
China. The PRC economy differs from the economies of most developed
countries in many respects, including:
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the higher level of government
involvement; |
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the early stage of development of
the market-oriented sector of the economy; |
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• |
the relatively rapid growth
rate; |
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• |
the higher level of control over
foreign exchange; and |
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the allocation policies of
resources. |
While the PRC economy has grown significantly since the late 1970s,
the growth has been uneven, both geographically and among various
sectors of the economy. The PRC government has implemented various
measures to encourage economic growth and guide the allocation of
resources. Some of these measures benefit the overall PRC economy,
but may also have a negative effect on our business. For example,
our financial condition and results of operations may be adversely
affected by government control over capital investments or changes
in tax regulations that are applicable to us.
The PRC economy has been transitioning from a planned economy to a
more market-oriented economy. The PRC government continues to
exercise significant control over economic growth in China through
the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and
imposing policies that impact particular industries or companies in
different ways.
Uncertainties with respect to the PRC legal system could
limit the legal protections available to you and us.
We conduct substantially all of our business through our operating
subsidiary in the PRC, Recon-BJ, which is a wholly foreign owned
enterprise in China. Recon-BJ is generally subject to laws and
regulations applicable to foreign invested enterprises in China and
intellectual property protections. The PRC legal system is based on
written statutes, and prior court decisions may be cited for
reference but have limited precedential value. Since the late
1970s, a series of new PRC laws and regulations have significantly
enhanced the protections afforded to intellectual property rights
and various forms of foreign investments in China. However, since
these laws and regulations are relatively new and the PRC legal
system continues to rapidly evolve, the interpretations of many
laws, regulations and rules are not always uniform and enforcement
of these laws, regulations and rules involve uncertainties, which
may limit legal protections available to you and us. In addition,
any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
We do not have business interruption, litigation or natural
disaster insurance.
The insurance industry in China is still at an early stage of
development. In particular PRC insurance companies offer limited
business products. As a result, we do not have any business
liability or disruption insurance coverage for our operations in
China. Any business interruption, litigation or natural disaster
may result in our business incurring substantial costs and the
diversion of resources.
We may be subject to foreign exchange controls in the
PRC.
Our PRC subsidiary and affiliates are subject to PRC rules and
regulations on currency conversion. In the PRC, the State
Administration for Foreign Exchange (“SAFE”) regulates the
conversion of the RMB into foreign currencies. Currently, foreign
investment enterprises (“FIEs”) are required to apply to SAFE for
“Foreign Exchange Registration Certificate for FIEs.” Recon-BJ is
an FIE. With such registration certifications (which need to be
renewed annually), FIEs are allowed to open foreign currency
accounts including the “recurrent account” and the “capital
account.” Currently, conversion within the scope of the “recurrent
account” can be effected without requiring the approval of SAFE.
However, conversion of currency in the “capital account” (e.g. for
capital items such as direct investments, loans, securities, etc.)
still requires the approval of SAFE. Accordingly, compliance with
SAFE requirements may limit how we are able to use our funds, in
ways that we would not be limited if we operated in countries other
than China.
Fluctuations in exchange rates could adversely affect the
value of our securities.
Changes in the value of the RMB against the U.S. dollar and other
foreign currencies are affected by, among other things, changes in
China’s political and economic conditions. Any significant
revaluation of the RMB may have a material adverse effect on the
value of, and any dividends payable on our shares in U.S. dollar
terms. For example, if we decide to convert our RMB into U.S.
dollars for the purpose of paying dividends on our ordinary shares
or for other business purposes, appreciation of the U.S. dollar
against the RMB would have a negative effect on the U.S. dollar
amount available to us.
Since July 2005, the RMB is no longer pegged to the U.S. dollar.
Although the People’s Bank of China regularly intervenes in the
foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, the RMB may appreciate or
depreciate significantly in value against the U.S. dollar in the
medium to long term. Moreover, it is possible that in the future
PRC authorities may lift restrictions on fluctuations in the RMB
exchange rate and lessen intervention in the foreign exchange
market.
Very limited hedging transactions are available in China to reduce
our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions. We do not plan to enter into
hedging transactions in the future, the availability and
effectiveness of these transactions may be limited, and we may not
be able to successfully hedge our exposure at all. In addition, our
foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into
foreign currencies.
PRC regulations relating to the establishment of offshore
special purpose vehicles by PRC residents, if applied to us, may
subject our PRC resident shareholders to personal liability and
limit our ability to acquire PRC companies or to inject capital
into Recon-HK, Recon-IN and Recon-BJ, limit Recon-HK’s, Recon-IN’s
and Recon-BJ’s ability to distribute profits to us or otherwise
materially adversely affect us.
On October 21, 2005, SAFE issued a public notice, the Notice on
Relevant Issues in the Foreign Exchange Control over Financing and
Return Investment Through Special Purpose Companies by Residents
Inside China, or the SAFE notice, which requires PRC residents,
including both legal persons and natural persons, to register with
the competent local SAFE branch before establishing or controlling
any company outside of China, referred to as an “offshore special
purpose company,” for the purpose of overseas equity financing
involving onshore assets or equity interests held by them. In
addition, any PRC resident that is the shareholder of an offshore
special purpose company is required to amend its SAFE registration
with the local SAFE branch with respect to that offshore special
purpose company in connection with any increase or decrease of
capital, transfer of shares, merger, division, equity investment or
creation of any security interest over any assets located in China.
Moreover, if the offshore special purpose company was established
and owned the onshore assets or equity interests before November 1,
2005, a retroactive SAFE registration is required to have been
completed before March 31, 2006. If any PRC shareholder of any
offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that offshore
special purpose company (Recon-HK, Recon-IN and Recon-BJ for our
company) may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or
liquidation to the offshore special purpose company. Moreover,
failure to comply with the SAFE registration and amendment
requirements described above could result in liability under PRC
laws for evasion of applicable foreign exchange restrictions.
Due to lack of official interpretation, some of the terms and
provisions in the SAFE notice remain unclear and implementation by
central SAFE and local SAFE branches of the SAFE notice has been
inconsistent since its adoption. Because of uncertainty over how
the SAFE notice will be interpreted and implemented, we cannot
predict how it will affect our business operations or future
strategies. For example, Recon-HK’s, Recon-IN’s, Recon-BJ’s and any
prospective PRC subsidiaries’ ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with
the SAFE notice by our company’s PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete
the necessary registration procedures required by the SAFE notice.
We also have little control over either our present or prospective
direct or indirect shareholders or the outcome of such registration
procedures. A failure by our PRC resident beneficial holders or
future PRC resident shareholders to comply with the SAFE notice, if
SAFE requires it, could subject us to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit
our subsidiary’s ability to make distributions or pay dividends or
affect our ownership structure, which could adversely affect our
business and prospects.
Under the Enterprise Income Tax Law, we may be classified as
a “Resident Enterprise” of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC
shareholders.
China passed the Enterprise Income Tax Law, or the EIT Law, and it
is implementing rules, both of which became effective on January 1,
2008. Under the EIT Law, an enterprise established outside of China
with “de facto management bodies” within China is considered a
“resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax purposes.
The implementing rules of the EIT Law define de facto management as
“substantial and overall management and control over the production
and operations, personnel, accounting, and properties” of the
enterprise.
On April 22, 2009, the State Administration of Taxation of China,
or the SAT, issued the Circular Concerning Relevant Issues
Regarding Cognizance of Chinese Investment Controlled Enterprises
Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the SAT Notice 82, further
interpreting the application of the EIT Law and its implementation
to offshore entities controlled by a Chinese enterprise or
enterprise group. Pursuant to the SAT Notice 82, an enterprise
incorporated in an offshore jurisdiction and controlled by a
Chinese enterprise or enterprise group will be classified as a
“non-domestically incorporated resident enterprise” if (i) its
senior management in charge of daily operations reside or perform
their duties mainly in China; (ii) its financial or personnel
decisions are made or approved by bodies or persons in China; (iii)
its substantial assets and properties, accounting books, corporate
stamps, board and shareholder minutes are kept in China; and (iv)
at least half of its directors with voting rights or senior
management often resident in China. After SAT Notice 82, the SAT
issued a bulletin, known as SAT Bulletin 45, which took effect on
September 1, 2011, to provide more guidance on the implementation
of SAT Notice 82 and clarify the reporting and filing obligations
of such “non-domestically incorporated resident enterprise.” SAT
Bulletin 45 provides procedures and administrative details for the
determination of resident status and administration on
post-determination matters. On January 29, 2014, the SAT issued
Announcement of the State Administration of Taxation on Recognizing
Resident Enterprises Based on the Criteria of de facto Management
Bodies, to further clarify the reporting and filing procedure for
offshore entities controlled by a Chinese enterprise or enterprise
group and recognized as a resident enterprise.
The determining criteria set forth in SAT Notice 82 and SAT
Bulletin 45 may reflect the SAT’s general position on how the “de
facto management body” test should be applied in determining the
tax resident status of offshore enterprises, regardless of whether
they are controlled by PRC enterprises, PRC enterprise groups or by
PRC or foreign individuals. If the PRC tax authorities determine
that Recon or its subsidiaries is a PRC resident enterprise for PRC
enterprise income tax purposes, a number of unfavorable PRC tax
consequences could follow. First, we may be subject to the
enterprise income tax at a rate of 25% on our worldwide taxable
income as well as PRC enterprise income tax reporting obligations.
In our case, this would mean that income such as non-China source
income would be subject to PRC enterprise income tax at a rate of
25%. Currently, we do not have any non-China source income, as we
complete our sales, including export sales, in China. Second, under
the EIT Law and its implementing rules, dividends paid to us from
our PRC subsidiaries would be deemed as “qualified investment
income between resident enterprises” and therefore qualify as
“tax-exempt income” pursuant to the clause 26 of the EIT Law.
Finally, it is possible that future guidance issued with respect to
the new “resident enterprise” classification could result in a
situation in which the dividends we pay with respect to our
ordinary shares, or the gain our non-PRC stockholders may realize
from the transfer of our ordinary shares, may be treated as
PRC-sourced income and may therefore be subject to a 10% PRC
withholding tax. If we are required under the EIT Law and its
implementing regulations to withhold PRC income tax on dividends
payable to our non-PRC stockholders, or if non-PRC stockholders are
required to pay PRC income tax on gains on the transfer of their
shares of ordinary shares, our business could be negatively
impacted and the value of your investment may be materially
reduced. Further, if we were treated as a “resident enterprise” by
PRC tax authorities, we would be subject to taxation in both China
and such countries in which we have taxable income, and our PRC tax
may not be creditable against such other taxes.
PRC regulations and potential registration requirements
relating to acquisitions of PRC companies by foreign entities may
create regulatory uncertainties that could restrict or limit our
ability to operate.
On August 8, 2006, six PRC regulatory agencies, including the PRC
Ministry of Commerce (“MOC”), the State-owned Assets Supervision
and Administration Commission of the State Council, the State
Administration of Taxation, the State Administration for Industry
and Commerce, the China Securities Regulatory Commission (“CSRC”)
and SAFE, jointly adopted the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the
M&A Rules, which came into effect on September 8, 2006 and
was amended on June 22, 2009. The M&A Rules
significantly revised China’s regulatory framework governing
onshore-to-offshore restructurings and foreign acquisitions of
domestic enterprises. These new rules signify greater PRC
government attention to cross-border merger, acquisition and other
investment activities, by confirming MOC as a key regulator for
issues related to mergers and acquisitions in China and requiring
MOC approval of a broad range of merger, acquisition and investment
transactions. Further, the new rules establish reporting
requirements for acquisition of control by foreigners of companies
in key industries and reinforce the ability of the Chinese
government to monitor and prohibit foreign control transactions in
key industries.
Among other things, the M&A Rules include new provisions that
purport to require that an offshore SPV, formed for listing
purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the
listing and trading of such SPV’s securities on an overseas stock
exchange. On September 21, 2006, the CSRC published on its official
website procedures specifying documents and materials required to
be submitted to it by SPVs seeking CSRC approval of their overseas
listings. However, the application of this PRC regulation remains
unclear with no consensus currently existing among the leading PRC
law firms regarding the scope and applicability of the CSRC
approval requirement.
If the PRC regulatory authorities take the view that the VIE
Agreements constitute a reverse merger acquisition or round-trip
investment in related party transactions without the approval of
the national offices of MOC, they could invalidate the VIE
Agreements. Additionally, the PRC regulatory authorities may take
the view that any public offering plan will require the prior
approval of CSRC. If we cannot obtain MOC or CSRC approval in case
we are required to do so, our business and financial performance
will be materially adversely affected. We may also face regulatory
actions or other sanctions from the MOC or other PRC regulatory
agencies. These regulatory agencies may impose fines and penalties
on our operations in the PRC, limit our operating privileges in the
PRC, delay or restrict the repatriation of the proceeds of this or
any other offering into the PRC, or take other actions that could
have a material adverse effect on our business, financial
condition, results of operations, reputation and prospects, as well
as the trading price of our ordinary shares.
Also, if the CSRC later requires that we obtain its approval, we
may be unable to obtain a waiver of the CSRC approval requirements,
if and when procedures are established to obtain such a waiver. Any
uncertainties and/or negative publicity regarding this CSRC
approval requirement could have a material adverse effect on the
trading price of our ordinary shares.
PRC registration requirements for stock option plans of
overseas publicly-listed companies may restrict our ability to
adopt equity compensation plans for our directors and employees or
otherwise limit our PRC subsidiaries’ ability to distribute profits
to us.
In February 2012, SAFE promulgated the Notice on the Administration
of Foreign Exchange Matters for Domestic Individuals Participating
in the Stock Incentive Plans of Overseas Listed Companies, or the
Stock Option Notice, which replaced the Application Procedures
of Foreign Exchange Administration for Domestic Individuals
Participating in Employee Stock Ownership Plans or Stock Option
Plans of Overseas Publicly-Listed Companies issued by SAFE on March
28, 2007. Under the Stock Option Notice and other relevant rules
and regulations, PRC residents who participate in stock incentive
plan in an overseas publicly-listed company are required to
register with SAFE or its local branches and complete certain other
procedures. Participants of a stock incentive plan who are PRC
residents must collectively retain a qualified PRC agent, which
could be a PRC subsidiary of such overseas publicly listed company
or another qualified institution selected by such PRC subsidiary,
to conduct the SAFE registration and other procedures with respect
to the stock incentive plan on behalf of its participants. Such
participants must also collectively retain an overseas entrusted
institution to handle matters in connection with their exercise of
stock options, the purchase and sale of corresponding stocks or
interests and fund transfers. In addition, the PRC agent is
required to amend the SAFE registration with respect to the stock
incentive plan if there is any material change to the stock
incentive plan, the PRC agent or the overseas entrusted institution
or other material changes. We and our PRC employees who have been
granted stock options are subject to these regulations. Failure of
our PRC stock option holders to complete their SAFE registrations
may subject these PRC residents to fines and legal sanctions and
may also limit our ability to compensate our employees and
directors through equity compensation, limited our PRC
subsidiaries’ ability to distribute dividends to us, or otherwise
materially adversely affect our business.
The Chinese government could change its policies toward
private enterprise or even nationalize or expropriate private
enterprises, which could result in the total loss of our investment
in that country.
Our business is subject to significant political and economic
uncertainties and may be adversely affected by political, economic
and social developments in China. Over the past several years, the
Chinese government has pursued economic reform policies including
the encouragement of private economic activity and greater economic
decentralization. The Chinese government may not continue to pursue
these policies or may significantly alter them to our detriment
from time to time with little, if any, prior notice.
Changes in policies, laws and regulations or in their
interpretation or the imposition of confiscatory taxation,
restrictions on currency conversion, restrictions or prohibitions
on dividend payments to shareholders, devaluations of currency or
the nationalization or other expropriation of private enterprises
could have a material adverse effect on our business.
Nationalization or expropriation could even result in the total
loss of our investment in China and in the total loss of your
investment in us.
We may be unable to establish and maintain an effective
system of internal control over financial reporting, and as a
result we may be unable to accurately report our financial results
or prevent fraud.
The PRC historically has been deficient in western style
management, governance and financial reporting concepts and
practices, as well as in modern banking, and other control systems.
Our current management has little experience with western style
management, governance and financial reporting concepts and
practices, and we may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a
result of these factors, and especially given that we are a
publicly listed company in the U.S. and subject to regulation as
such, we may experience difficulty in establishing management,
governance, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate
records and instituting business practices that meet western
standards. We may have difficulty establishing adequate management,
governance, legal and financial controls in the PRC. Therefore, we
may, in turn, experience difficulties in implementing and
maintaining adequate internal controls as required under Section
404 of the Sarbanes-Oxley Act of 2002 and other applicable laws,
rules and regulations. This may result in significant deficiencies
or material weaknesses in our internal controls which could impact
the reliability of our financial statements and prevent us from
complying with SEC rules and regulations and the requirements of
the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses
or lack of compliance could have a materially adverse effect on our
business and the public announcement of such deficiencies could
adversely impact our stock price.
Risks Related to Our Ordinary Shares
We are a foreign private issuer within the meaning of the
rules under the Exchange Act, and as such we are exempt from
certain provisions applicable to United States domestic public
companies.
Because we are a foreign private issuer under the Exchange Act, we
are exempt from certain provisions of the securities rules and
regulations in the United States that are applicable to U.S.
domestic issuers, including:
| |
• |
the rules under the Exchange Act
requiring the filing of quarterly reports on Form 10-Q or current
reports on Form 8-K with the SEC; |
| |
• |
the sections of the Exchange Act
regulating the solicitation of proxies, consents, or authorizations
in respect of a security registered under the Exchange
Act; |
| |
• |
the sections of the Exchange Act
requiring insiders to file public reports of their stock ownership
and trading activities and liability for insiders who profit from
trades made in a short period of time; and |
| |
• |
the selective disclosure rules by
issuers of material nonpublic information under Regulation
FD. |
We are required to file an annual report on Form 20-F within
four months of the end of each fiscal year. In addition, we intend
to publish our results on a quarterly basis through press releases,
distributed pursuant to the rules and regulations of the NASDAQ
Capital Market. Press releases relating to financial results and
material events are also furnished to the SEC on Form 6-K.
However, the information we are required to file with or furnish to
the SEC is less extensive and less timely compared to that
required to be filed with the SEC by U.S. domestic issuers. As a
result, you may not be afforded the same protections or
information, which would be made available to you, were you
investing in a U.S. domestic issuer. As a Cayman Islands company
listed on the NASDAQ Capital Market, we are subject to the NASDAQ
Capital Market corporate governance listing standards. However,
NASDAQ Capital Market rules permit a foreign private issuer like us
to follow the corporate governance practices of its home country.
Certain corporate governance practices in the Cayman Islands, which
is our home country, may differ significantly from the NASDAQ
Capital Market corporate governance listing standards. To the
extent that we choose to utilize the home country exemption for
corporate governance matters, our shareholders may be afforded less
protection than they otherwise would under the NASDAQ Capital
Market corporate governance listing standards applicable to U.S.
domestic issuers. We follow home country practice with respect to
annual shareholders meetings
You may experience future dilution as a result of future
equity offerings.
In order to raise additional capital, we may in the future offer
additional ordinary shares or other securities convertible into or
exchangeable for our ordinary shares at prices that may not be the
same as the price per share you paid. We may sell shares or other
securities in any other offering at a price per share that is less
than the price per share paid by existing investors, and investors
purchasing shares or other securities in the future could have
rights superior to existing stockholders. The price per share at
which we sell additional ordinary shares, or securities convertible
or exchangeable into ordinary shares, in future transactions may be
higher or lower than the price per share paid by existing
investors.
We do not intend to pay dividends in the foreseeable
future.
We have never paid cash dividends on our ordinary shares. We
currently intend to retain our future earnings, if any, to finance
the operation and growth of our business and currently do not plan
to pay any cash dividends in the foreseeable future.
Future sales of a significant number of our ordinary shares
in the public markets, or the perception that such sales could
occur, could depress the market price of our ordinary
shares.
Future sales of a substantial number of our ordinary shares in the
public markets, or the perception that such sales could occur,
could depress the market price of our ordinary shares and impair
our ability to raise capital through the sale of additional equity
securities. If any existing shareholder or shareholders sell a
substantial amount of our ordinary shares, the prevailing market
price for our ordinary shares could be adversely affected. In
addition, if we pay for our future acquisitions in whole or in part
with additionally issued ordinary shares, your ownership interests
in our company would be diluted and this, in turn, could have a
material and adverse effect on the price of our ordinary
shares.
We have received a notice of delisting from the Nasdaq
Capital Market for failure to comply with Nasdaq’s minimum bid
price requirement, and our shares may be delisted if we are unable
to regain compliance with Nasdaq rules within the applicable grace
periods.
On January 15, 2019, we received a notification letter (the
“Notice”) from the NASDAQ Capital Market advising us that for 30
consecutive business days preceding the date of the Notice, the bid
price of the Company’s ordinary shares had closed below the $1.00
per share minimum required for continued listing on The NASDAQ
Capital Market pursuant to the NASDAQ Marketplace Rule 5550(a)(2)
(the “Minimum Bid Price Rule”). The Company was provided 180
calendar days, or until July 15, 2019, to regain compliance with
the Minimum Bid Price Rule. The Company was unable to regain
compliance with the Minimum Bid Price Rule by July 15, 2019. On
July 16, 2019, the NASDAQ granted us an additional 180 calendar
days, or until January 13, 2020, to regain compliance with the
$1.00 per share minimum required for continued listing on The
NASDAQ pursuant to the Minimum Bid Price Rule.
There can be no guarantee that we will be able to regain compliance
with the continued listing requirement of Nasdaq Marketplace Rule
5550(a)(2). If we do not regain compliance by January 13, 2020,
Nasdaq will provide written notification to us that our ordinary
shares may be delisted.
The market price for our securities may be volatile, which
could result in substantial losses to investors.
The market price for our ordinary shares has been, and is likely to
remain, volatile and subject to wide fluctuations in response to
factors including the following:
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• |
actual or anticipated
fluctuations in our quarterly operating results; |
| |
• |
changes in the Chinese petroleum
and energy industries; |
| |
• |
changes in the Chinese
economy; |
| |
• |
announcements by our competitors
of significant acquisitions, strategic partnerships, joint ventures
or capital commitments; |
| |
• |
future sales of our ordinary
shares; |
| |
• |
period to period fluctuations in
our financial results; |
| |
• |
low trading volume of our
ordinary shares; |
| |
• |
additions or departures of key
personnel; or |
| |
• |
potential litigation. |
We expect that any other securities of our Company are likely to be
similarly volatile. In addition, the securities markets have from
time to time experienced significant price and volume fluctuations
that are not related to the operating performance of particular
companies. As a result, to the extent shareholders sell our
securities in negative market fluctuation, they may not receive a
price per share that is based solely upon our business performance.
We cannot guarantee that shareholders will not lose some of their
entire investment in our securities.
|
Item 4. |
Information on the Company |
A. History and Development of the Company
Recon Technology, Ltd (the “Company”) was incorporated under the
laws of the Cayman Islands on August 21, 2007 by Mr. Yin Shenping,
Mr. Chen Guangqiang and Mr. Li Hongqi (the “Founders”) as a company
with limited liability. We provide oilfield specialized equipment,
automation systems, tools, chemicals and field services to
petroleum companies mainly in the People’s Republic of China (the
“PRC”). The Company’s wholly owned subsidiary, Recon Technology
Co., Limited (“Recon-HK”) was incorporated on September 6, 2007 in
Hong Kong. On November 15, 2007, Recon-HK established one wholly
owned subsidiary, Jining Recon Technology Ltd. (“Recon-JN”) under
the laws of the PRC, which was later dissolved on April 10, 2019 as
part of our previously disclosed organizational restructuring. As
of the date of this report, Recon-HK does not own any assets or
conduct any operations. On November 19, 2010, the Company
established another wholly owned subsidiary, Recon Investment Ltd.
(“Recon-IN”) under the laws of HK. On January 18, 2014, Recon-IN
established one wholly owned subsidiary, Recon Hengda Technology
(Beijing) Co., Ltd. (“Recon-BJ”) under the laws of the PRC. Other
than the equity interest in Recon-BJ, Recon-IN does not own any
assets or conduct any operations.
We conduct our business through the following PRC legal entities
that are consolidated as variable interest entities (“VIEs”) and
operate in the Chinese oilfield equipment & service industry
and energy industry:
| |
1. |
Beijing BHD Petroleum Technology
Co., Ltd. (“BHD”), and |
| |
2. |
Nanjing Recon Technology Co.,
Ltd. (“Nanjing Recon”). |
Chinese laws and regulations currently do not prohibit or restrict
foreign ownership in petroleum businesses. However, Chinese laws
and regulations do prevent direct foreign investment in certain
industries. On January 1, 2008, to protect our shareholders from
possible future foreign ownership restrictions, the Founders, who
also held the controlling interest of BHD and Nanjing Recon,
reorganized the corporate and shareholding structure of these
entities by entering into certain exclusive agreements with
Recon-JN, which entitled Recon-JN to receive a majority of the
residual returns. On May 29, 2009 Recon-JN and BHD and Nanjing
Recon entered into an operating agreement to provide full guarantee
for the performance of such contracts, agreements or transactions
entered into by BHD and Nanjing Recon. As a result of the new
agreement, Recon-JN absorbed 100% of the expected losses and
received 90% of the expected net income of BHD and Nanjing Recon,
which resulted in Recon-JN being the primary beneficiary of these
Companies.
Recon-JN also entered into Share Pledge Agreements with the
Founders, who pledged all their equity interest in these entities
to Recon-JN. The Share Pledge Agreements, which were entered into
by each Founder, pledged each of the Founders’ equity interest in
BHD and Nanjing Recon as a guarantee for the service payment under
the Service Agreement.
The Service Agreement entered into on January 1, 2008, between
Recon-JN and BHD and Nanjing Recon, obligated Recon-JN to provide
technical consulting services to BHD and Nanjing Recon in exchange
for 90% of their annual net income as a service fee.
In addition, Recon-HK entered into Option Agreements to allow
Recon-HK to acquire the Founders’ interest in these entities if or
when permitted by the PRC laws.
Based on these exclusive agreements, we consolidated BHD and
Nanjing Recon as VIEs as required by Accounting Standards
Codification (“ASC”) Topic 810, Consolidation because we were the
primary beneficiary of the VIEs. Management performed an ongoing
reassessment of whether Recon-JN was the primary beneficiary of BHD
and Nanjing Recon.
On April 1, 2019, as part of our planned organizational
restructuring, Recon-BJ entered into a series of VIE agreements
with BHD and Nanjing Recon, respectively, under the same terms and
conditions as that of the VIE agreements previously entered into by
Recon-JN. As a result, the VIEs were effectively transferred from
Recon-JN to Recon-BJ. Accordingly, Recon-BJ bears all the economic
risk of losses and receives 90% of the expected profits of BHD and
Nanjing Recon, and consequently becomes the primary beneficiary of
the VIEs. As part of the plan of reorganization, Recon-JN was
dissolved on April 10, 2019.
On August 28, 2000, a founder of the Company purchased a
controlling interest in BHD which was organized under the laws of
the PRC on June 29, 1999. Through December 15, 2010, the Founders
held a 67.5% ownership interest in BHD. From December 16, 2010 to
June 30, 2012, Messrs. Yin Shenping and Chen Guangqiang held an
86.24% ownership interest of BHD. From June 30, 2012 to June 30,
2019, Mr. Chen Guangqiang continued to devote his personal patent
to BHD and increased his ownership interest of BHD. As of the date
of this report, Messrs. Yin Shenping and Chen Guangqiang
collectively hold a 91.62% ownership interest of BHD. BHD is
combined with the Company through the date of the exclusive
agreements, and has been consolidated following January 1, 2008,
the date of the agreements based on ASC Topic 810. The Company
allocates net income 90% and 100%, respectively, based upon the
control agreements. Profits allocated to the minority interest are
the remaining amount (10%).
On July 4, 2003, Nanjing Recon was organized under the laws of the
PRC. On August 27, 2007, the Founders of the Company purchased a
majority ownership of Nanjing Recon from a related party who was a
majority owner of Nanjing Recon. Through December 15, 2010, the
Founders held 80% ownership interest in Nanjing Recon. From
December 16, 2010 to June 30, 2012, Messrs. Yin Shenping and Chen
Guangqiang held 80% ownership interest of Nanjing Recon. Nanjing
Recon is combined with the Company through the date of the
exclusive agreements, and is consolidated following January 1,
2008, the date of the agreements based on ASC Topic 810. The
Company allocates net income 90% and 100%, respectively, based upon
the control agreements. Profits allocated to the non-controlling
interest are the remaining amount (10%).
On January 29, 2015, we increased our authorized shares from
25,000,000 to 100,000,000 ordinary shares.
BHD, one VIE, controls following subsidiaries:
On December 17, 2015, Huang Hua BHD Petroleum Equipment
Manufacturing Co. LTD (“HH BHD”), a fully owned subsidiary
established by BHD was organized under the laws of the PRC.
On May 23, 2017, Gan Su BHD Environmental Technology Co., Ltd (“Gan
Su BHD”) was established by BHD and another investor under the laws
of the PRC, with registered capital of ¥50 million. It is focusing
on oilfield sewage treatment and oily sludge disposal projects. As
of June 30, 2019, BHD had invested a total of ¥9.3 million Gan Su
BHD. The paid in capital was ¥15.48 million ($2.31 million) as of
June 30, 2019. Based on its revised chapter dated August 11, 2017,
BHD owns an interest of 51% of Gan Su BHD.
On October 16, 2017, Qing Hai BHD New Energy Technology Co., Ltd.
(“Qinghai BHD”) was established by BHD and a few other investors
under the laws of the PRC, with registered capital of ¥50 million.
It is focusing on design and production and sales of solar energy
heating furnaces. As of June 30, 2019, BHD had invested a total of
¥2.3 million to Qinghai BHD. The paid in capital was ¥4.2 million
($0.63 million) as of June 30, 2019. BHD owns an interest of 55% of
Qinghai BHD.
As the energy consumption market opened to private and foreign
companies, and online payment technology developed, we began to
invest in the downstream of the oil industry. On December 15, 2017,
we, through our VIEs, BHD and Nanjing Recon, entered into a
subscription agreement with Future Gas Station (Beijing)
Technology, Ltd (“FGS”), pursuant to which we acquired an 8% equity
interest in FGS. Established in January 2016, FGS is a service
company focusing on providing new technical applications and data
operations to gas stations and provides solutions to gas stations
to improve their operations and their customers’ experience. On
August 21, 2018, we entered into an investment agreement and a
supplemental agreement (collectively, the “Investment Agreement”)
with FGS and the other shareholders of FGS. Pursuant to the
Investment Agreement, our ownership interest in FGS shall increase
from 8% to 43%, in exchange for our investment in GFS for a total
amount of RMB 10 million in cash and the issuance of 2,435,284
restricted ordinary shares to the other shareholders of FGS with
certain conditions. As of June 30, 2019, we have invested an
aggregate amount of RMB 35,116,707 ($5,113,984) in FGS and issued
2,435,284 restricted shares in total to other shareholders of FGS,
and our ownership interest in FGS has increased to 43%.
B. Business Overview
General
Recon Technology, Ltd. (the “Company”, “we”, “us” or “our”) is a
provider of hardware, software, and on-site services to companies
primarily in the petroleum mining and extraction industry in China
(“PRC”). We provide services designed to automate and enhance the
extraction of petroleum. To date, we control by contract the PRC
companies of Beijing BHD Petroleum Technology Co., Ltd. (“BHD”) and
Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”). We refer to
BHD and Nanjing Recon collectively as the “Domestic Companies” in
this report.
The Company serves as the center of strategic management, financial
control and human resources allocation for the Domestic Companies.
Through our contractual relationships with the Domestic Companies,
we provide equipment, tools and other hardware related to oilfield
production and management and develop and sell our own specialized
industrial automation control and information solutions. However,
we do not engage in the production of petroleum or petroleum
products.
We believe that one of the most important advancements in China’s
petroleum industry has been the automation of significant segments
of the exploration and extraction process. The Domestic Companies’
and our automation products and services allow petroleum mining and
extraction companies to reduce their labor requirements and improve
the productivity of oilfields. The Domestic Companies’ and our
solutions allow our customers to locate productive oilfields more
easily and accurately, improve control over the extraction process,
increase oil yield efficiency in tertiary stage oil recovery, and
improve the transportation of crude oil.
For the most recent few years, our capacity to provide integrated
services has been a significant factor for long-term development.
We treat simulation measures around fracturing as our entry point
for our integrated service model. To date, we have formed new
business modules through our own R&D, investment in
service-team building and developed an integrated services solution
for stimulation.
Market Background
China is the world’s second-largest consumer of petroleum products,
largest importer of petroleum and fourth-largest producer of
petroleum. In the last twenty years, China’s demand for oil has
more than tripled, while its production of oil has only modestly
increased. China became a net importer of petroleum in 1983, and,
since then, oil production in China has been focused on meeting the
country’s domestic oil consumption requirements. The oil industry
in China is dominated by three state-owned holding companies: China
National Petroleum Corporation (“CNPC”), China Petroleum and
Chemical Corporation (“Sinopec”) and China National Offshore Oil
Corporation (“CNOOC”). Foreign companies have also been deeply
involved in China’s petroleum industry; however, according to
Chinese law, China’s national oil companies still take a majority
(or minority) stake in any commercial discovery. As a result, the
number of major foreign companies involved in the industry is
relatively limited in domestic China.
In the past, China’s petroleum companies mined for petroleum by
leveraging the country’s abundance of inexpensive labor, rather
than focusing on developing new technologies. For example, a
typical, traditional oilfield with an annual capacity of 1,000,000
tons would require between 10,000 and 20,000 laborers. By contrast,
when Baker CAC automated oil production products were employed in
the mid-1990s to explore and automate Cainan Oilfield, a desert
oilfield in Xinjiang, annual capacity for the field reached
1,500,000 tons, with only 400 employees needed to manage the
oilfield. After the introduction of Baker CAC’s products into
China’s petroleum industry, Chinese companies have also sought to
provide automation solutions.
In the primary oil recovery stage, oil pressure in an oil reservoir
may be high enough to force oil to the surface. Approximately 20%
of oil may be harvested at this stage. The secondary oil recovery
stage accounts for another 5% to 15% of oil recovery and involves
such efforts as pumps to extract petroleum and the injection of
water, natural gas, carbon dioxide or other gasses into the oil
reservoir to force oil to the surface. Most oilfields in China have
now entered into the tertiary stage of oil recovery, at which oil
extraction becomes increasingly difficult and inefficient. Tertiary
recovery generally focuses on decreasing oil viscosity to make
extraction easier and accounts for between 5% and 15% of oil
recovery. Our efforts in tertiary recovery focus on reducing water
content in crude oil in order to make extraction more efficient and
to improve the overall production of wells through advanced
technologies and effective managing tools and approaches.
Products and Services
We have historically provided products and services mainly to oil
and gas field companies, which focus 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 expression shown below.
The following list shows our products and services. The first three
items are covered by our (1) automation product and software
segment and (2) equipment and accessories segment. The last item is
covered by our oilfield environmental protection segment.
Equipment for Oil and Gas Production and
Transportation
| |
• |
High-Efficiency Heating
Furnaces (as shown above by process “3”). Crude petroleum
contains certain impurities that must be removed before the
petroleum 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, easily operable, safe and highly
heat-efficient (90% efficiency). |
| |
• |
Burner (as shown above by
process “5”). 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 concertedly with the
security joint, hydraulic anchor, and slide bushing 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 uptake which makes the deblocking processes easier to realize.
The back flushing is sand-stick proof. |
| |
• |
Production Packer. According
to different withdraw points, the production packer separates
different oil layers, and protects the oil pipe from sand and
permeability, so as to promote the recovery ratio. |
| |
• |
Sand Prevention in Oil and
Water Well. 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 process by which the water
locating and plugging can be finished in one trip. Our 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 the ones in the low permeable
zones. |
| |
• |
Electronic Broken-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 Service
| |
• |
Pumping Unit Controller.
Refers to process “1” above. Functions as a monitor to the pumping
unit, and also collects data for load, pressure, voltage, startup
and shutdown control. |
| |
• |
RTU Used to Monitor Natural
Gas Wells. Collects gas well pressure data. |
| |
• |
Wireless Dynamometer and
Wireless Pressure Gauge. Refers to process “1” above. These
products replace wired technology with cordless displacement sensor
technology. They are easy to install and significantly reduce the
working load associated with cable laying. |
| |
• |
Electric Multi-Way Valve for
Oilfield Metering Station Flow Control. Refers to process “2”
above. 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. Flow computer system used in natural gas stations and
gas distribution stations to measure flow. |
| |
• |
Recon SCADA Oilfield Monitor
and Data Acquisition System. 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. A service technique for pipeline monitoring and data
acquisition after crude oil transmission. |
| |
• |
EPC Service of Oil and Gas
Wells SCADA System. A service technique for monitoring and data
acquisition of oil wells and natural gas wells. |
| |
• |
EPC Service of Oilfield Video
Surveillance and Control System. A video surveillance
technique for controlling the oil and gas wellhead area and the
measurement station area. |
| |
• |
Technique Service for “Digital
Oilfield” Transformation. Includes engineering technique services
such as oil and gas SCADA system, video surveillance and control
system and communication systems. |
Beginning in 2017, we began to provide automation services to other
companies in the broader energy industry in China and also to
provide the following products and services beyond the oilfield
production process:
Waste Water and Oil Treatment Products and
Services
| |
• |
Oilfield sewage treatment. It
is for oilfield waste water treatment solutions, related chemicals
and onsite services customized to clients’ requirement. We have
also developed our own designed equipment and aim to manufacture in
the future. |
| |
• |
Oily sludge disposal
(planned). This planned business line will provide
engineering services of oily sludge disposal in Gan Su
province. |
ISO9000 Certification
We have received ISO9000 certifications for several of our
processes. The International Organization for Standardization
consists of a worldwide federation of national standards bodies for
approximately 130 countries, and the ISO9000 certification
represents an international consensus of these standards bodies,
with the aim of creating global standards of product and service
quality. We have received ISO9000 certification for the
following:
| |
• |
Nanjing Recon has received
certification for the development and service of
RSCADA. |
| |
• |
BHD has received certification
for high efficiency heating furnaces, import burners, and manometer
surrogate rendition and service. |
Customers
We operate our business by cooperating with oil companies and their
subsidiaries, the petroleum administration bureau and local service
companies. Historically, most actual control of our direct and
indirect clients could be traced to Sinopec and CNPC, the two major
Chinese state-owned companies responsible for on-shore petroleum
mining and extraction. Since the fiscal year ended June 30, 2017,
Sinopec accounted for less than 5% of our revenues.
We have undertaken projects at the following locations, among
others:
CNPC
We provide products and services to CNPC under a series of
agreements, each of which is terminable without advance notice. We
first began to provide services to CNPC in 2000. CNPC accounted for
approximately 23.94%, 45.10% and 71.89% of our revenues in the
fiscal years ended June 30, 2019, 2018 and 2017, respectively, and
any termination of our business relationships with CNPC would
materially harm our operations.
Shenhua Group
We began to provide equipment to Shenhua Group, which was merged
into China Energy with another group company, in 2017.We signed a
series of contracts with Shenhua Group and have established what we
believe is a solid business relationship with Shenhua.
Our Strengths
| |
• |
Safety of products. The
automation projects we have conducted have demonstrated that our
products are reliable, safe and effective at automating the
petroleum extraction process. |
| |
• |
Efficiency of technology. We
believe our technology increases efficiency and profitability for
petroleum companies by enabling them to monitor, manage and control
petroleum extraction; increase the amount of petroleum extracted
and reduce impurities in extracted petroleum. |
| |
• |
Ability to leverage our knowledge of Chinese
business culture. Many of our competitors are based outside of
China. As the Domestic Companies are based in China, we are in a
unique position to emphasize Chinese culture and business knowledge
to obtain new customers and new agreements with existing customers.
We believe that many Chinese businesses, including state-owned
companies like Shenhua Group and CNPC, would prefer to hire a
Chinese company to assist in their business operations if a Chinese
company exists with the ability to fulfill their needs on a timely
and cost-efficient basis. In addition, our knowledge of Chinese
culture allows us to anticipate and adapt to Chinese oilfield
management methods. We provide our software solutions in Mandarin
for the benefit of our Chinese customers, and all of our customer
support is available from Mandarin-fluent
personnel. |
| |
• |
Experienced, successful
executive management team. Our executive management team has
significant experience and success in the petroleum automation
industry. They will be able to draw on their knowledge of the
industry and their relationships in the industry. |
| |
• |
Ability to leverage China’s
cost structure. As a Chinese company, we believe we can operate our
business more cost-effectively because all of our employees,
operations and assets are located in China, resulting in lower
labor, development, manufacturing and rent costs than we believe we
would incur if we also maintained operations abroad. We expect
these costs savings will be reflected in lower costs to our
customers for comparable products. |
| |
• |
Ownership of our intellectual
property. Because we own our intellectual property, we are able to
avoid licensing fees or contravening licensing
agreements. |
Our Strategies
Our goal is to help our customers improve their efficiency and
profitability by providing them with software and hardware
solutions and services to improve their ability to locate
productive oil reservoirs, manage the oil extraction process,
reduce extraction costs, and enhance recovery from extraction
activities. Key elements of our strategies include:
| |
• |
Increase our market share in
China. We believe that as the Chinese economy and oil industry
continue to develop, Chinese petroleum extraction automation
companies will compete with international businesses at an
increasing rate. Consequently, we believe we will have
opportunities to take market share from foreign companies by
developing positive business relationships in China’s petroleum
mining and extraction industry. We will also use strategic
advertisements, predominantly in China’s northeast and northwest,
where China’s major oilfields are located, to increase our brand
awareness and market penetration. We aim to continue developing new
technologies designed to improve petroleum mining and extraction
efficiency and profitability for our customers. |
| |
• |
Develop our own branded
products and services and shift our focus away from trading
business. Our management believes in the importance of our own
branded products and our services, in light of their higher profit
margins and their long-term significance in establishing the status
of our Company in the oil and gas industry. Moreover, the trading
business relies on the major clients’ procurement policies toward
agencies, any significant change of which could jeopardize our
operating results. Our management therefore believes that in the
long run we will need to focus our growth strategy in developing
professional services for the oil and gas industry in
China. |
| |
• |
Focus on higher-profit
subsection of market. While we plan to continue to provide services
to all of our clients, we believe that we may improve our profit
margins by focusing a higher portion of our advertising and
promotions at those sub-divisions of our industry that have
traditionally held the highest profit margins. |
| |
• |
Offer services to foreign
oilfields contracted by Chinese petroleum companies. As Sinopec and
CNPC continue to invest in oilfields in other countries, we will
focus on offering our services in these new locations based on our
success in working with the companies in China. |
| |
• |
Seek opportunities with
foreign companies in China. Even where oilfields in China are
partially operated by foreign companies, a significant number of
employees will be Chinese and will benefit from our
Chinese-language services. We believe our hardware and software
solutions would be beneficial to any petroleum company—foreign or
domestic—doing business in China and plan to continue marketing to
foreign companies entering the Chinese market. |
| |
• |
Provide services that generate
high customer satisfaction levels. Chinese companies in our market
are strongly influenced by formal and informal referrals. We
believe that we have the opportunity to expand market share by
providing high levels of customer satisfaction with our current
customers, thereby fostering strong customer referrals to support
sales activities. |
Competition
We face competition from a variety of foreign and domestic
companies involved in the petroleum mining automation industry.
While we believe we effectively compete in our market, our
competitors hold a substantial market share.
A few of our existing competitors, as well as a number of potential
new competitors, have significantly greater financial, technical,
marketing and other resources than we do, which could provide them
with a significant competitive advantage over us. We cannot
guarantee that we will be able to compete successfully against our
current or future competitors in our industry or that competition
will not have a material adverse effect on our business, operating
results and financial condition.
Research and Development
We focus our research and development efforts on improving our
development efficiency and the quality of our products and
services. As of June 30, 2019, our research and development
team consisted of 32 experienced engineers, developers and
programmers. In addition, some of our support employees regularly
participate in our research and development programs.
In the fiscal years ended June 30, 2019, 2018 and 2017, we
spent approximately RMB3.1 million (approximately $0.5 million),
3.2 million (approximately $0.5 million), and 7.6 million
(approximately $1.1 million) respectively, on research and
development activities.
Intellectual Property
Our success and competitive position is dependent in part upon our
ability to develop and maintain the proprietary aspect of our
technology. The reverse engineering, unauthorized copying, or other
misappropriation of our technology could enable third parties to
benefit from our technology without paying for it. We rely on a
combination of trademark, trade secret, copyright law and
contractual restrictions to protect the proprietary aspects of the
Domestic Companies’ and our technology. We seek to protect the
source code to the Domestic Companies’ and our software,
documentation and other written materials under trade secret and
copyright laws. While we actively take steps to protect the
Domestic Companies’ and our proprietary rights, such steps may not
be adequate to prevent the infringement or misappropriation of the
Domestic Companies’ and our intellectual property. This is
particularly the case in China where the laws may not protect our
proprietary rights as fully as in the United States.
We license the Domestic Companies’ and our software products under
signed license agreements that impose restrictions on the
licensee’s ability to utilize the software and do not permit the
re-sale, sublicense or other transfer of the software. Finally, we
seek to avoid disclosure of the Domestic Companies’ and our
intellectual property by requiring employees and independent
consultants to execute confidentiality agreements.
Although we develop our software products in conjunction with the
Domestic Companies, each software product is based upon middleware
developed by third parties. We integrate this technology, licensed
by our customers from third parties in our software products. If
our customers are unable to continue to license any of this
third-party software, or if the third-party licensors do not
adequately maintain or update their products, we would face delays
in the releases of our software until equivalent technology can be
identified, licensed or developed, and integrated into our software
products. These delays, if they occur, could harm our business,
operating results and financial condition.
There has been a substantial amount of litigation in the software
industry regarding intellectual property rights. It is possible
that in the future third parties may claim that our current or
potential future software solutions infringe their intellectual
property. We expect that software product developers will
increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the
functionality of products in different industry segments overlap.
In addition, we may find it necessary to initiate claims or
litigation against third parties for infringement of our
proprietary rights or to protect our trade secrets. Although, along
with the Domestic Companies, we may disclaim certain intellectual
property representations to our customers, these disclaimers may
not be sufficient to fully protect us against such claims. Any
claims, with or without merit, could be time consuming, result in
costly litigation, cause product shipment delays or require the
Domestic Companies and us to enter into royalty or license
agreements. Royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could have
a material adverse effect on our business, operating results and
financial condition.
Our standard software license agreements contain an infringement
indemnity clause under which we agree to indemnify and hold
harmless our customers and business partners against liability and
damages arising from claims of various copyright or other
intellectual property infringement by the Domestic Companies’ and
our products. We have never lost an infringement claim, and our
costs to defend such lawsuits have been insignificant. Although it
is possible that in the future third parties may claim that our
current or potential future software solutions or we infringe on
their intellectual property, we do not currently expect a
significant impact on our business, operating results, or financial
condition.
We market our products under the following trademarks which are
registered with the PRC Trademark Bureau under the State
Administration for Industry and Commerce. We currently own the
following trademarks:
|
1. |
Trademark of “BHD” valid from
November 7, 2003 through November 6, 2023; |
|
2. |
Trademark of “Recon” of the
7th classification valid from October 21, 2011 through
October 20, 2021; |
|
3. |
Trademark of “Recon” of the
9th classification valid from April 21, 2011 through
April 20, 2021; and |
|
4. |
Trademark of “Recon” of the
42nd classification valid from September 7, 2011 through
September 6, 2021. |
We currently own over 50 patents registered with the PRC State
Intellectual Property Office which cover our automated products and
heating related equipment for the petroleum industry. Below is a
list of our selected patents:
|
1. |
Patent of hot water furnace valid until April 8, 2021; |
|
2. |
Patent of efficient gas-liquid separator valid until August 15,
2021; |
|
3. |
Patent of efficient oil-gas-water separator valid until October
24, 2021; |
|
4. |
Patent of horizontal type furnace valid until December 14,
2022; |
|
5. |
Patent of vertical type furnace valid until December 13,
2022; |
|
6. |
Patent of vacuum furnace valid until December 14, 2022; |
|
7. |
Patent of wireless pressure sensor valid until November 11,
2023; |
|
8. |
Patent of wireless start-end module valid until November 11,
2023; |
|
9. |
Patent of one-piece skid mount package of heating, separating,
buffering and pressurizing valid until June 30, 2024; |
|
10. |
Patent of oily sewage treatment equipment valid until July 8,
2025; |
|
11. |
Patent of an oil-water well smart wireless pressure transmitter
valid until November 17, 2026; |
|
12. |
Patent of an oily sewage treatment bio-stimulants and
Production Methods valid until July 11,2027; and |
|
13. |
Patent of torch specialized for oilfield waste-gas burning
valid until July 10, 2028. |
We have registered 15 software products with the PRC State
Intellectual Property Office. Below is a list of our selected
software products:
| |
1. |
Recon automated monitoring system
version II was published on August 18, 2013 and version I was
published on July 30, 2011; |
| |
2. |
Recon SCADA field monitoring and
data acquisition system software version 2.0 was published on
August 18, 2003, and version 3.0 was registered and published
on April 5, 2008; |
| |
3. |
Recon RCNAMT version 1 was
published on April 27, 2012; |
| |
4. |
Recon Process Auto version 1 was
published on August 25, 2012; |
| |
5. |
Recon Industrial Process Control
system V2.0 was published on August 13, 2013, and V1.0 was
published on December 25, 2012; and |
| |
6. |
Recon Oil and Gas Processing
SCADA System V1.0 was published on March 2, 2016. |
Environmental Matters
We have not incurred material expenses in connection with
compliance with Chinese environmental laws and regulations. We do
not anticipate expending any material amounts for such compliance
purposes for the remainder of our current or succeeding fiscal
year.
China’s Intellectual Property Rights Enforcement System
In 1998, China established the State Intellectual Property Office
(“SIPO”) to coordinate China’s intellectual property enforcement
efforts. SIPO is responsible for granting and enforcing patents, as
well as coordinating intellectual property rights related to
copyrights and trademarks. Protection of intellectual property in
China follows a two-track system. The first track is administrative
in nature, whereby a holder of intellectual property rights files a
complaint at a local administrative office. Determining which
intellectual property agency can be confusing, as jurisdiction of
intellectual property matters is diffused throughout a number of
government agencies and offices, with each typically responsible
for the protection afforded by one statute or one specific area of
intellectual property-related law. The second track is a judicial
track, whereby complaints are filed through the Chinese court
system. Since 1993, China has maintained various intellectual
property tribunals. The total volume of intellectual property
related litigation, however, remains small.
Although there are differences in intellectual property rights
between the United States and China, of most significance to the
Company is the inexperience of China in connection with the
development and protection of intellectual property rights. Similar
to the United States, China has chosen to protect software under
copyright law rather than trade secrets, patent or contract law. As
such, we will attempt to protect our most significant intellectual
property pursuant to Chinese laws that have only recently been
adopted. Unlike the United States, which has lengthy case law
related to the interpretation and applicability of intellectual
property law, China has a less developed body of relevant
intellectual property case law.
Regulations
We are subject to a variety of PRC and foreign laws, rules and
regulations across a number of aspects of our business. This
section summarizes the principal PRC laws, rules and regulations
relevant to our business and operations. Areas in which we are
subject to laws, rules and regulations outside of the PRC include
intellectual property, competition, taxation, anti-money laundering
and anti-corruption.
Regulation on Software Products
On March 1, 2009, the Ministry of Industry and Information
Technology of China issued the Administrative Measures on Software
Products, or the Software Measures, which became effective as of
April 10, 2009, to strengthen the regulation of software
products and to encourage the development of the Chinese software
industry. Under the Software Measures, a software developer must
have all software products imported into or sold in China tested by
a testing organization supervised by the Ministry of Industry and
Information Technology. The software industry authorities in
provinces, autonomous regions, municipalities and cities with
independent planning are in charge of the registration, report and
management of software products. Software products can be
registered for five years, and the registration is renewable upon
expiration. Although some of Nanjing Recon’s current software
products were registered in 2008, there can be no guarantee that
the registration will be renewed timely or that the Domestic
Companies’ and our future products will be registered.
Regulation of Intellectual Property Rights
China has adopted legislation governing intellectual property
rights, including trademarks and copyrights. China is a signatory
to the main international conventions on intellectual property
rights and became a member of the Agreement on Trade Related
Aspects of Intellectual Property Rights upon its accession to the
WTO in December 2001.
Copyright. China adopted its first copyright law in
1990. The National People’s Congress amended the Copyright Law in
2001 to widen the scope of works and rights that are eligible for
copyright protection. The amended Copyright Law extends copyright
protection to software products, among others. In addition, there
is a voluntary registration system administered by the China
Copyright Protection Center. Unlike patent and trademark
registration, copyrighted works do not require registration for
protection. Protection is granted to individuals from countries
belonging to the copyright international conventions or bilateral
agreements of which China is a member. Nanjing Recon has over ten
copyrights for software programs.
Trademark. The Chinese Trademark Law, adopted in 1982
and revised in 1993 and 2001, protects registered trademarks. The
Trademark Office under the Chinese State Administration for
Industry and Commerce handles trademark registrations and grants a
term of ten years to registered trademarks. Trademark license
agreements must be filed with the Trademark Office for record.
China has a “first-to-register” system that requires no evidence of
prior use or ownership. The Domestic Companies and we have
registered a number of product names with the Trademark Office.
Regulations on Foreign Exchange
Foreign Currency Exchange. Under the PRC foreign
exchange regulations, payments of current account items, such as
profit distributions and trade and service-related foreign exchange
transactions, may be made in foreign currencies without prior
approval from SAFE by complying with certain procedural
requirements. By contrast, approval from or registration with
appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay
capital expenses such as the repayment of foreign
currency-denominated loans or foreign currency is to be remitted
into China under the capital account, such as a capital increase or
foreign currency loans to our PRC subsidiaries.
SAFE issued the Circular on the Relevant Operating Issues
Concerning the Improvement of the Administration of the Payment and
Settlement of Foreign Currency Capital of Foreign-Invested
Enterprises (2008), or SAFE Circular 142, regulating the conversion
by a foreign-invested enterprise of foreign currency-registered
capital into RMB by restricting how the converted RMB may be used.
In addition, SAFE promulgated Circular 45 on November 9, 2011 in
order to clarify the application of SAFE Circular 142. Under SAFE
Circular 142 and Circular 45, the RMB capital converted from
foreign currency registered capital of a foreign-invested
enterprise may only be used for purposes within the business scope
approved by the applicable government authority and may not be used
for equity investments within the PRC. In addition, SAFE
strengthened its oversight of the flow and use of the RMB capital
converted from foreign currency registered capital of
foreign-invested enterprises. The use of such RMB capital may not
be changed without SAFE’s approval, and such RMB capital may not in
any case be used to repay RMB loans if the proceeds of such loans
have not been used.
Since SAFE Circular 142 has been in place for more than five years,
SAFE decided to further reform the foreign exchange administration
system in order to satisfy and facilitate the business and capital
operations of foreign invested enterprises, and issued the Circular
on the Relevant Issues Concerning the Launch of Reforming Trial of
the Administration Model of the Settlement of Foreign Currency
Capital of Foreign-Invested Enterprises in Certain Areas on August
4, 2014. This circular suspends the application of SAFE Circular
142 in certain areas and allows a foreign-invested enterprise
registered in such areas with a business scope including
“investment” to use the RMB capital converted from foreign currency
registered capital for equity investments within the PRC.
SAFE promulgated Circular 59 in November 2010, which tightens the
regulation over settlement of net proceeds from overseas offerings,
such as our initial public offering, and requires, among other
things, the authenticity of settlement of net proceeds from
offshore offerings to be closely examined and the net proceeds to
be settled in the manner described in the offering documents or
otherwise approved by our board. Violations of these SAFE
regulations may result in severe monetary or other penalties,
including confiscation of earnings derived from such violation
activities, a fine of up to 30% of the RMB funds converted from the
foreign invested funds or in the case of a severe violation, a fine
ranging from 30% to 100% of the RMB funds converted from the
foreign-invested funds.
In November 2012, SAFE promulgated the Circular of Further
Improving and Adjusting Foreign Exchange Administration Policies on
Foreign Direct Investment, which substantially amends and
simplifies the current foreign exchange procedure. Pursuant to this
circular, the opening of various special purpose foreign exchange
accounts, such as pre-establishment expenses accounts, foreign
exchange capital accounts and guarantee accounts, the reinvestment
of RMB proceeds by foreign investors in the PRC, and remittance of
foreign exchange profits and dividends by a foreign-invested
enterprise to its foreign shareholders no longer require the
approval or verification of SAFE, and multiple capital accounts for
the same entity may be opened in different provinces, which was not
possible previously. In addition, SAFE promulgated the Circular on
Printing and Distributing the Provisions on Foreign Exchange
Administration over Domestic Direct Investment by Foreign Investors
and the Supporting Documents in May 2013, which specifies that the
administration by SAFE or its local branches over direct investment
by foreign investors in the PRC shall be conducted by way of
registration and banks shall process foreign exchange business
relating to the direct investment in the PRC based on the
registration information provided by SAFE and its branches.
Regulation of Dividend Distribution. The principal
regulations governing the distribution of dividends by foreign
holding companies include the Foreign Investment Enterprise Law
(1986), as amended, and the Administrative Rules under the Foreign
Investment Enterprise Law (2001).
Under these regulations, foreign investment enterprises in China
may pay dividends only out of their retained profits, if any,
determined in accordance with PRC accounting standards and
regulations. In addition, foreign investment enterprises in China
are required to allocate at least 10% of their respective retained
profits each year, if any, to fund certain reserve funds unless
these reserves have reached 50% of the registered capital of the
enterprises. These reserves are not distributable as cash
dividends.
In July 2014, SAFE promulgated SAFE Circular 37, which replaced the
former circular commonly known as “SAFE Circular 75” promulgated by
SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their
direct establishment or indirect control of an offshore entity, for
the purpose of overseas investment and financing, with such PRC
residents’ legally owned assets or equity interests in domestic
enterprises or offshore assets or interests, referred to in SAFE
Circular 37 as a “special purpose vehicle.” SAFE Circular 37
further requires amendment to the registration in the event of any
significant changes with respect to the special purpose vehicle,
such as increase or decrease of capital contributed by PRC
individuals, share transfer or exchange, merger, division or other
material event. In the event that a PRC shareholder holding
interests in a special purpose vehicle fails to fulfill the
required SAFE registration, the PRC subsidiaries of that special
purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent
cross-border foreign exchange activities, and the special purpose
vehicle may be restricted in its ability to contribute additional
capital into its PRC subsidiary. Furthermore, failure to comply
with the various SAFE registration requirements described above
could result in liability under PRC law for evasion of foreign
exchange controls.
Regulations on Foreign Investment in Automation Service
Industry and Oil Exploration and Extraction Industry in
PRC. In accordance with the Catalogue of Industries
for Guiding Foreign Investment (Revised 2007), the oil and gas
automation service industries are in the catalogue of permitted
industries, and thus there are no restrictions on foreign
investment in the oil and gas automation industry. In addition, the
following industries are encouraged for foreign investment in
China:
| |
• |
Manufacturing of equipment for
oil exploration, drilling, collection and transportation: floating
drilling systems and floating production systems with an operating
water depth of more than 1,500 meters and the supporting subsea oil
extraction, collection and transportation equipment |
| |
• |
Exploration and exploitation of
oil and natural gas with venture capital (limited to equity joint
ventures and cooperative joint ventures); |
| |
• |
Development and application of
new technologies that increase the recovery ratio of crude oil
(limited to equity joint ventures and cooperative joint
ventures); |
| |
• |
Development and application of
new oil exploration and exploitation technologies such as
geophysical exploration, drilling, well logging, and downhole
operation, etc. (limited to cooperative joint ventures);
and |
| |
• |
Exploration and development of
unconventional oil resources such as oil shale, oil sands, heavy
oil, and excess oil (limited to cooperative joint
ventures). |
C. Organizational Structure
Below is a chart representing our current corporate structure
(as of June 30, 2019):
Our registered office in the Cayman Islands is at the offices of
Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus
Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands.
D. Property, Plants and Equipment
We currently operate in three facilities throughout China. Our
headquarters are located in Beijing. Following is a list of our
properties. The first six properties are rentals. Gan Su BHD has
received a land usage rights certificate regarding the last
property and is constructing a plant on that piece of land.
|
No. |
|
Tenant/Transferee |
|
Address |
|
Rental/Use Term |
|
Space |
|
Usage |
| 1 |
|
Recon-BJ |
|
Room 1902, Building C King Long
International Mansion, Chaoyang District Beijing, PRC |
|
July 1, 2019 to June 30,
2020 |
|
267 square meters |
|
Headquarter office |
| |
|
|
|
|
|
|
|
|
|
|
| 2 |
|
Nanjing Recon |
|
Room 310&311, No. 2 Building,
Chu Qiao Cheng, Andemen Street, Yu Hua District, Nanjing City,
PRC |
|
April 1, 2018 to March 31, 2020 |
|
564.64 square meters |
|
Office |
| |
|
|
|
|
|
|
|
|
|
|
| 3 |
|
BHD |
|
18th Floor, Building C
King Long International Mansion, Chaoyang District Beijing,
PRC |
|
January 1, 2019 to
December 31, 2019 |
|
428 square meters |
|
Office |
| |
|
|
|
|
|
|
|
|
|
|
| 4 |
|
BHD |
|
West building, Zhengfu Street, Huo
ying, Changping District, PRC |
|
January 1, 2019 to
December 31, 2019 |
|
420 square meters |
|
Warehouse |
| |
|
|
|
|
|
|
|
|
|
|
| 5 |
|
HH
BHD |
|
No.
1767, Yin Bin South Street, Huang Hua Economic Development Zone, He
Bei Province, PRC |
|
July 1, 2017 to June 30, 2020 |
|
4,624 square meters |
|
Plant |
| |
|
|
|
|
|
|
|
|
|
|
| 6 |
|
Qing
Hai BHD |
|
No. 17, Jing Chang Road, Dongchuan
industrial park, economic zone, Xi Ning City, Qing Hai province,
PRC |
|
September 1, 2018 to August 30,
2019 |
|
2,192.42 square meters |
|
Office
and Plant |
| |
|
|
|
|
|
|
|
|
|
|
| 7 |
|
Gan Su
BHD |
|
North of Dongyun Road and West of
Petroleum Management Bureau Wooden Furniture Factory, Old District,
Yumen City, Gansu Province, PRC |
|
August 1, 2017 to July 31, 2067 |
|
26,235.59 square meters |
|
Land
for Plant |
Previously, we did not operate any plant. Based on the customers’
recent requirements, we begin to operate plants. HH BHD has rent a
plant which includes the equipment. The annual rent is RMB 716,000
(approximately $104,000). It is planned to produce furnaces related
products. We began to operate this plant since November 2017.
Gan Su BHD has received a land usage right certificate. The
purchase price of the land usage right is RMB 1,322,300
(approximately $193,000). Gan Su BHD’s source of the payment is
from investment of BHD. Gan Su BHD began to build a plant on this
land since October 2017 and expects to complete the construction by
the end of year 2019. The estimated expense of the construction is
RMB 40 million (approximately $6 million). The source of the
payment is loan from major shareholders and equity financing. It is
planned to produce products related to the oily sludge disposal
projects of Yumen Oilfield. As of the date of this report, Gan Su
BHD has won 4 bids and has been on a test running status.
|
Item 4A. |
Unresolved Staff
Comments |
None.
|
Item 5. |
Operating and Financial Review and
Prospects |
The following discussion and analysis of our company’s financial
condition and results of operations should be read in conjunction
with our consolidated financial statements and the related notes
included elsewhere in this report. This discussion contains
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 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. Due
to this contractual control and our obligation to bear the losses
of the Domestic Companies, we consider them to be variable interest
entities (“VIEs”) for accounting purposes and consolidate their
results in our financial statements.
Through Nanjing Recon and BHD, our business is mainly focused on
the upstream sectors of the oil and gas industry. From 2018, our
business has been expanding to the downstream of the energy
industry– the civil and industrial heating furnaces market,
electric and coal chemical industry and the energy service
management industry. We derive our revenues from the sales and
provision of (1) automation products and projects, (2) equipment
and installment for heating furnaces and overall energy saving
resolution, (3) chemical products and overall resolution for waste
water and oily sludge treatment, and (4) related engineering and
project services for aforementioned.
| |
• |
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.
From 2018, Nanjing Recon also provides automation products and
services to other segments of the energy industry, such as the new
energy industry, electric power and coal chemical industries.
|
| |
• |
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 also been expanding services to
oilfield waste water and oily sludge treatment, and extended its
heating products and resolutions to the civil market by leveraging
its advantage on furnace products.
|
Recent Developments
On January 15, 2019, the Company received a notification letter
(the “Notice”) from The NASDAQ Stock Market (“NASDAQ”) advising the
Company that for 30 consecutive business days preceding the date of
the Notice, the bid price of the Company’s ordinary shares had
closed below the $1.00 per share minimum required for continued
listing on NASDAQ pursuant to the Minimum Bid Price Rule. The
Company was provided 180 calendar days, or until July 15, 2019, to
regain compliance with the Minimum Bid Price Rule. The Company was
unable to regain compliance with the Minimum Bid Price Rule by July
15, 2019. The NASDAQ determination to grant the second compliance
period was based on the Company’s meeting the continued listing
requirement for market value of publicly held shares and all other
applicable requirements for initial listing on NASDAQ, with the
exception of the bid price requirement, and the Company’s written
notice of its intention to cure the deficiency during the second
compliance period by effecting a reverse stock split, if necessary.
On July 16, 2019, NASDAQ granted the Company an additional 180
calendar days, or until January 13, 2020, to regain compliance with
the $1.00 per share minimum required for continued listing on The
NASDAQ Capital Market pursuant to NASDAQ Marketplace Rule
5550(a)(2) (the “Minimum Bid Price Rule”). On July 16, 2019, The
NASDAQ Stock Market (“NASDAQ”) granted Recon Technology, Ltd (the
“Company”) an additional 180 calendar days, or until January 13,
2020, to regain compliance with the $1.00 per share minimum
required for continued listing on The NASDAQ Capital Market
pursuant to NASDAQ Marketplace Rule 5550(a)(2) (the “Minimum Bid
Price Rule”).
On August 21, 2018, the Company entered into a definitive
investment agreement and a supplemental agreement (collectively,
the “Agreement”) with Future Gas Station (Beijing) Technology, Ltd
(“FGS”) and the other shareholders of FGS. Following full
performance under the Agreement, the Company will own 43% of FGS.
As consideration for increasing its affiliates’ interest in FGS
from 8% to 43%, Recon shall (1) pay a total of RMB 10 million in
cash to FGS and (2) issue 2,435,284 restricted ordinary shares of
Recon (the “Restricted Shares”) to the other shareholders of FGS
within 30 days after FGS finalizes recording Recon’s corresponding
interest at the local governmental agency. If FGS does not reach
certain performance goals, Recon has the right to cancel without
further payment part or all of the Restricted Shares. The
Restricted Shares are also subject to lock-up period requirements
that vary for each FGS shareholder, from one year to three years
following the issuance of the Restricted Shares. As of the date of
this report, FGS finalized recording Recon’s corresponding interest
at the local governmental agency, and Recon issued 2,435,284
Restricted Shares in total to the other shareholders of FGS. Recon
has invested RMB3.6 million in cash to FGS as of the date of this
report under this agreement and has the obligation to pay the
remaining RMB 6.4 million according to the agreement. On September
24, 2019, the Company agreed to extend the agreement for six more
months as negotiated with FGS to ensure the founding team can
better meet its obligations under the agreement.
Recent Industry Developments and Business Outlook
Automation Department. As
CNPC continuously to increase their capitalized
expenditure on exploration and
development and we continuously expand our automation products to
other energy markets, we believe our
SCADA system and assorted products, production managing expert
software, and related technical support services will continue to
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 in oilfield industry, power
industry and coal-chemical industry.
Equipment and
Accessories. As we entered in the market of the civilian
heating furnaces, we believe our resolutions and knowledge in
heating equipment will also bring new resource of operation. We
have established new subsidiaries, Qing Hai BHD and HH BHD, to
focus on these practices.
Oilfield Environmental
Protection Business. We have also devoted massive resource
into oilfield environmental protection business through Gan Su BHD,
and we believe this part will devote into operation and be a
supportive branch of our environment business. For the year ended
June 30, 2019, we have achieved four disposal agreements with Yumen
Oilfield and its affiliates to treat up to 3,000 tons of oily
sludge.
New business. As energy
consumption market is open to private and foreign companies and the
on-line payment technology develops rapidly, we believe there is
some opportunity in downstream of oil industry, which is mainly
around the scene of consumption in gas station. We invested in FGS
in fiscal year 2018 and made additional investment into FGS in
August 2018. Online orders of FGS platform is increasing and up to
an average level of RMB 7 million per day with only 460 gas
stations and earned a net profit from July 2019. We believe this
segment will face a chance of strong growth as FGS expands
its operation into more provinces in China in the coming
months.
Chart: Monthly Gross Merchandise Volume (GMV) of DT APP from
year 2018 to date. For September 2019, data is estimated.
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. We continuously focus on providing high quality
products and services in oilfields in which we have a geographical
advantage. This helps us avoid conflicts of interest with bigger
private companies 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.
Currently, as more markets of Chine’s energy industry are open to
non-state-owned companies, we are also seeking for opportunities in
other markets. We believe our experience on energy technics will
always be our development foundation. By combining more technology
and ideas developed in recent years, such as solar energy and
Industrial Internet, we expect to create more profitable business
lines.
Also, to diversify our revenue stream and lower risk of
concentration, we will continue to seek new opportunities in other
industries by leveraging our knowledge of intelligent equipment and
the “Internet of things” (IoT).
Trend Information
Other than as disclosed elsewhere in this report, we are not aware
of any trends, uncertainties, demands, commitments or events since
the beginning of our fiscal year 2019 that are reasonably likely to
have a material effect on our net revenues, income from operations,
profitability, liquidity or capital resources, or that would cause
the disclosed financial information to be not necessarily
indicative of future operating results or financial condition.
Factors Affecting Our Results of Operations
Our operating results in any period are subject to general
conditions typically affecting the Chinese oilfield service
industry and included but are not limited to:
| |
• |
the amount of spending by our
customers, primarily those in the oil and gas industry; |
| |
• |
growing demand from large
corporations for improved management and software designed to
achieve such corporate performance; |
| |
• |
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
Consolidation of VIEs
A VIE is an entity that 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. A VIE
is consolidated by its primary beneficiary. The primary beneficiary
has 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. The Company performs
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 the Company continues 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 the Company’s general assets. Conversely, liabilities
recognized as a result of consolidating these VIEs do not represent
additional claims on the Company’s general assets; rather, they
represent claims against the specific assets of the consolidated
VIEs.
Estimates and Assumptions
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in United
States of America (“US GAAP”), which requires that management make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Estimates are adjusted to reflect actual experience when
necessary. Significant accounting estimates reflected in the
Company’s consolidated financial statements include allowance for
doubtful accounts related to trade accounts receivable, other
receivables and purchase advances, allowance for inventory, the
useful lives of property and equipment, valuation allowance for
deferred tax assets, impairment assessment for long-lived assets
and investment and the fair value of share-based payments. The use
of estimates is an integral component of the financial reporting
process; actual results could differ from those estimates.
The key assumptions underlying the Company’s accounting for
material arrangements and the reasonably likely material effects of
resolving any uncertainties on the Company’s allowance for doubtful
accounts related to purchase advances. The production of the
Company’s products requires custom-made equipment from its
suppliers. To ensure that it can secure the required customized
equipment, the Company often needs to make full prepayment for its
intended purchases. As a standard practice in the petroleum
extraction industry, the Company generally must submit a bid in
order to secure the sales contract. The bidding process generally
takes between one month to one year and the timing depends on the
size of the overall project, which timing and size are generally
controlled by its client. In order to secure timely purchase
delivery and to meet its product delivery schedule, the Company
normally prepays for the purchase advances if the Company believes
that it is more than likely to win the bid for the sales contract
which is accounted as pre-contract costs. After winning the bid and
securing the sale contract, the Company normally needs to deliver
its products approximately within one week to six months. Based on
the Company’s historical experience, the Company generally is able
to realize its purchase advances on the customized equipment that
it orders. If it subsequently confirms that the Company is unable
to secure the planned contracts with a customer after making the
advance payments for these planned contracts, the Company evaluates
the probable recoverability of the pre-contract cost and charges to
expenses when the Company determines that the recovery of such
pre-contract cost is improbable.
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, purchase
advances, trade accounts payable, accrued liabilities, advances
from customers, investment payable, short-term bank loan and
short-term borrowings approximate fair value because of the
immediate or short-term maturity of these financial
instruments.
Purchase Advances, net
Purchase advances are the amounts prepaid to suppliers for business
activities, such as standard raw materials, supplies and services.
These types of prepayments will be expensed when those
products or services have been rendered or consumed.
Contract assets
The Company recognizes an asset from the costs incurred to fulfill
a contract when those costs meet all of the following criteria: (i)
the costs relate directly to a contract or to an anticipated
contract that the Company can specifically identify; (ii) the costs
generate or enhance resources of the Company that will be used in
satisfying (or in continuing to satisfy) performance obligations in
the future; (iii) the costs are expected to be recovered.
| |
- |
Pre-Contract Costs -
Pre-contract costs are the amounts prepaid to suppliers for
purchases of customized equipment in anticipation of obtaining
planned contracts for the Company’s hardware and software revenues.
If it subsequently confirms that the Company is unable to secure
the planned contracts with a customer after making the advance
payments for these planed contracts, the Company evaluates the
probable recoverability of the pre-contract cost and charges to
expenses when the Company determines that the recovery of such
pre-contract cost is improbable. |
| |
- |
Executed Contract
Costs - Direct costs, such as material, labor,
depreciation and amortization and subcontracting costs and indirect
costs allocable to contracts include the costs of contract
supervision, tools and equipment, supplies, quality control and
inspection, insurance, repairs and maintenance for quality
assurance purposes before clients’ initial acceptance. Once
products are delivered, installed and debugged for intended use and
accepted by a client, which may last from weeks to months (this
process is decided by the client’s individual project construction
arrangement), the Company records revenue based on the contract or
the final clients’ acceptance. Minor costs for repair during the
maintenance period after initial acceptance are recorded as cost of
goods sold as they are incurred. All other general and
administrative costs and selling costs are charged to expenses as
incurred. The Company generally ships its products approximately
one week to six months after production begins and the timing
depends on the size of the overall project. |
Revenue Recognition
The Company previously recognized revenue when the following four
criteria are met: (1) persuasive evidence of an arrangement, (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 customers, customers’ acceptance
provisions have lapsed, or the Company has objective evidence that
the criteria specified in customers’ 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. With adoption of Accounting Standard Codification (“ASC”)
606, “Revenue from Contracts with Customers”, revenue is
recognized when all of the following five steps are met: (i)
identify the contract(s) with the customer; (ii) identify the
performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the
performance obligations; (v) recognize revenue when (or as) each
performance obligation is satisfied. The Company applied the new
revenue standard from July 1, 2018 and adopted a modified
retrospective approach upon the adoption. The core principle
underlying the new revenue recognition ASU is that the Company will
recognize revenue to represent the transfer of goods or services to
customers in an amount that reflects the consideration to which the
Company expects to be entitled in such exchange. This will require
the Company to identify contractual performance obligations and
determine whether revenue should be recognized at a point in time
or over time, based on when goods or services are provided to a
customer.
Adoption of ASC Topic 606, “Revenue from Contracts with
Customers”
The Company has completed its assessment of the impact of the new
standard and adopted the new standard for all open contracts as of
July 1, 2018 using the modified retrospective transition method,
and applied the guidance to report new disclosures surrounding the
Company’s recognition of revenue. The adoption of the new standard
did not have a material impact on the financial position of the
Company, the results of its operations or its cash flows as of and
for the year ended June 30, 2019, and the Company’s internal
controls over financial reporting. There was no cumulative effect
of adopting the standard at the date of initial application in
retained earnings. The Company’s Revenue Recognition accounting
policy has been updated for the new standard. Revenue is measured
as the amount of consideration the Company expects to receive in
exchange for transferring goods or providing services.
Disaggregation of Revenues
Revenues are recognized when control of the promised goods or
services are transferred to our customers, in an amount that
reflects the considerations the Company expects to be entitled to
in exchange for those goods or services.
The following items represent the Company’s revenues disaggregated
by revenue source. In accordance with ASC 606-10-50-5, the Company
selects categories to present disaggregated revenue that depict how
the nature, amount, timing, and uncertainty of revenues and cash
flows are affected by exonymic factors and delivery conditions of
products and fulfillment of obligations.
The Company’s disaggregation of revenues for the years ended June
30, 2019, 2018 and 2017 is disclosed in Note 26.
Automation Products and Software; Equipment and
Accessories
The Company generates revenues primarily through delivery of
standard or customized products and equipment, including automation
products, furnaces and related accessories. Revenue is recognized
when products are delivered, and acceptance reports are signed off
by customers.
The sale of automation products or our specialized equipment when
combined with services represent a single performance obligation
for the development and construction of a single asset. The Company
may also provide installation services to clients as there may be
such obligation in contracts. The promises to transfer the
equipment and installation are not separately identifiable, which
is evidencing by the fact that the Company provides a significant
services of integrating the goods and services into a single
deliverable for which the customer has contracted. For such sales
arrangements, the Company recognize revenue using input method,
based on the relationship between actual costs incurred compared to
the total estimated costs for the contract. Such method is adopted
because the Company believes it best depicts the transfer of goods
and services to the customer.
Oilfield Environmental Protection Service
The Company provides waste water treatment and oily sludge
disposal service to oilfield and chemical industry companies and
generates revenue from special equipment, self-developed chemical
products and supporting service, transfer and treatment of oily
sludge. Revenue is recognized when contract obligations have been
performed. For such sales arrangements, the Company recognizes
revenue using the input method, based on the relationship between
actual costs incurred compared to the total estimated costs for the
contract. Such method is adopted because the Company believes it
best depicts the transfer of services to the customer.
Arrangements with Multiple Performance
Obligations
Contracts with customers may include multiple performance
obligations. For such arrangements, the Company will allocate
revenues to each performance obligation based on its relative
standalone selling price. We generally determine standalone selling
prices based on the prices charged to customers or using expected
cost-plus margin.
Performance Obligations
Performance obligations include delivery of product and
installation of product. The Company recognizes revenue when
performance obligations under the terms of a contract with its
customer are satisfied. This occurs when the control of the goods
and services have been transferred to the customer. Accordingly,
revenue for sale of goods is generally recognized upon shipment or
delivery depending on the shipping terms of the underlying
contract. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring goods and
providing installation services.
Amounts billed to customers for shipping and handling activities to
fulfill the Company’s promise to transfer the goods are included in
Sales, and costs incurred by the Company for the delivery of goods
are classified as Cost of sales in the Consolidated Statements of
Operations and Comprehensive Loss. Sales, value added, and other
taxes the Company collects concurrent with revenue-producing
activities are excluded from revenue. The Company generally offers
assurance-type warranties for its products. The specific terms and
conditions of those warranties vary depending upon the product. The
Company estimates the costs that may be incurred under its
warranties and records a liability in the amount of such costs at
the time product revenue is recognized. Factors that affect the
warranty liability include historical product-failure experience
and estimated repair costs for identified matters. The Company
periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary. The amount
accrued for expected returns and warranty claims was immaterial as
of June 30, 2019. The amount of revenue recognized during the
twelve months ended June 30, 2019 that was previously included
within the deferred revenue and advances from customers balances
was ¥122,996 ($17,912) and primarily relates to warranty
liabilities and performance obligations that were satisfied in
prior periods.
Practical Expedients Elected
Incremental Costs of Obtaining a Contract - The Company has elected
the practical expedient permitted in ASC 340-40-25-4, which permits
an entity to recognize incremental costs to obtain a contract as an
expense when incurred if the amortization period will be less than
one year.
Significant Financing Component - The Company has elected the
practical expedient permitted in ASC 606-10-32-18, which allows an
entity to not adjust the promised amount of consideration for the
effects of a significant financing component if a contract has a
duration of one year or less. As the Company’s contracts are
typically less than one year in length, consideration will not be
adjusted. The Company’s contracts include a standard payment term
of 90 days to 180 days, consequently there is no significant
financing component within contracts.
The following table provides changes to the opening balances of
certain current assets accounts resulting from the adoption of the
new guidance.
| |
|
June
30, |
|
|
Impact
of |
|
|
July 1,
2018
|
|
|
July
1, |
|
| |
|
2018 |
|
|
Adoption |
|
|
(As adjusted) |
|
|
2018 |
|
| |
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
U.S. Dollars |
|
| Inventories |
|
¥ |
7,972,115 |
|
|
¥ |
(7,972,115 |
) |
|
¥ |
- |
|
|
$ |
- |
|
| Other
receivables |
|
|
824,709 |
|
|
|
(824,709 |
) |
|
|
- |
|
|
|
- |
|
| Purchase
advances |
|
|
5,334,829 |
|
|
|
(5,334,829 |
) |
|
|
- |
|
|
|
- |
|
|
Contract assets |
|
|
- |
|
|
|
14,131,653 |
|
|
|
14,131,653 |
|
|
|
2,057,968 |
|
| Total
contract assets |
|
¥ |
14,131,653 |
|
|
¥ |
- |
|
|
¥ |
14,131,653 |
|
|
$ |
2,057,968 |
|
Trade Accounts and Other Receivables, net
Accounts receivable are carried at original invoiced amount less a
provision for any potential uncollectible amounts. Accounts are
considered past due when the related receivables are more than a
year old. Provision is made against trade accounts and other
receivables to the extent they are considered to be doubtful.
Accounts are written off after extensive efforts at collection.
Other receivables arise from transactions with non-trade
customers.
Share-Based Compensation
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 to recognize
compensation expenses using the Black-Scholes valuation model
estimated at the grant date based on the award’s fair value.
Recently enacted accounting pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”)
issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure
Framework – Changes to the Disclosure Requirements for Fair Value
Measurement,” to improve the effectiveness of disclosures in the
notes to financial statements related to recurring or nonrecurring
fair value measurements by removing amounts and reasons for
transfers between Level 1 and Level 2 of the fair value hierarchy,
the policy for timing of transfers between levels, and the
valuation processes for Level 3 fair value measurements. The new
standard requires disclosure of the range and weighted average of
significant unobservable inputs used to develop Level 3 fair value
measurements. The amendments in this update are effective for all
entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. The Company expects that
the adoption of this ASU will not have a material impact on the
Company’s consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, "Consolidation (Topic
810): Targeted Improvements to Related Party Guidance for Variable
Interest Entities". The new standard changes how entities evaluate
decision-making fees under the variable interest entity guidance.
The new standard is effective for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years.
Early adoption is permitted in any interim period after issuance.
The standard should be applied on a modified retrospective basis
through a cumulative-effect adjustment directly to retained
earnings at the beginning of the period of adoption. The Company
expects that the adoption of this ASU will not have a material
impact on the Company’s consolidated financial statements.
In November 2018, the FASB issued ASU 2018-19, “Codification
Improvements to Topic 326, Financial Instruments-Credit
Losses.” ASU 2018-19 clarifies that receivables arising from
operating leases are not within the scope of Subtopic 326-20.
Instead, impairment of receivables arising from operating leases
should be accounted for in accordance with Accounting Standard
Codification (“ASC”) 842, Leases. The Company expects that the
adoption of this ASU will not have a material impact on the
Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic
842), to increase the transparency and comparability about leases
among entities. The new guidance requires lessees to recognize a
lease liability and a corresponding lease asset for virtually all
lease contracts. It also requires additional disclosures about
leasing arrangements. ASU 2016-02 is effective for interim and
annual periods beginning after December 15, 2018, and requires a
modified retrospective approach to adoption assuming the Company
will remain an emerging growth company at that date. Early adoption
is permitted. In September 2017, the FASB issued ASU No. 2017-13,
which to clarify effective dates that public business entities and
other entities were required to adopt ASC Topic 842 for annual
reporting. A public business entity that otherwise would not meet
the definition of a public business entity except for a requirement
to include or the inclusion of its financial statements or
financial information in another entity's filing with the SEC
adopting ASC Topic 842 for annual reporting periods beginning after
December 15, 2019, and interim reporting periods within annual
reporting periods beginning after December 15, 2020. ASU No.
2017-13 also amended that all components of a leveraged lease be
recalculated from inception of the lease based on the revised after
tax cash flows arising from the change in the tax law, including
revised tax rates. The difference between the amounts originally
recorded and the recalculated amounts must be included in income of
the year in which the tax law is enacted. The Company has not early
adopted this update and it will become effective on January 1,
2020. The Company is currently evaluating the impact of this new
standard on its financial statements and related disclosures.
The Company does not believe other recently issued but not yet
effective accounting standards, if currently adopted, would have a
material effect on the consolidated financial position, statements
of operations and cash flows.
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, and subsidiaries of these
VIEs.
Our historical reporting results are not necessarily indicative of
the results to be expected for any future period.
Year Ended June 30, 2019 Compared to Year Ended June 30,
2018
During the year ended June 30, 2019, we saw a breakthrough of our
revenue and an improvement of our operating margins as we
continuously try to optimize our business structure. We believe
this trend will continue and strengthen our competitiveness in the
future.
1)
To cope with decreased requirements of oilfield companies as oil
prices remained at lower levels and to diversify industry risk, we
leveraged our technology from the oilfield services sector to the
broader energy industry; thus we successfully expanded our
automation business to the power energy industry and coal chemical
industry, mainly by serving China Energy Investment Corporation
(“China Energy”) through the Shenhua Group. As of the end of fiscal
year 2019, we have achieved about RMB40.84 million in orders.
In addition, we entered into the civilian and general industrial
furnaces markets and energy management service market through
subsidiaries of BHD.
For the coming year, we expect requirements from oilfield clients
to increase as capitalized expenditures of CNPC increase. Also, we
expect our orders from Shenhua Group will continue to increase.
2)
To
follow the trend of comprehensive utilization of energy, we also
expanded our business and technology to the renewable energy
market. We introduced more solar technology in our current
equipment to make them more efficient and cost beneficial. We also
brought our technology and experience to polycrystalline silicon
production factories in Xin Jiang Autonomous Region, of which about
RMB 14 million contracts have been achieved and completed; and
3) We
completed the main body construction of Gan Su BHD’s comprehensive
disposal treatment project and obtained a hazardous waste operating
permit issued by the Jiuquan Environmental Protection Bureau in
Gansu province. This project has an annual processing capacity of
60,000 tons of oily waste and is currently the only such treatment
facility located in Yumen City. As of the date of this report, we
have signed several contracts with Yumen Oilfield affiliates to
dispose over 2,500 tons of oily sludge, which is not completed and
thus not reflected in the operations of fiscal year 2019.
Revenue
| |
|
For the
Years Ended |
|
| |
|
June 30 |
|
| |
|
|
|
|
|
|
|
Increase
/ |
|
|
Percentage |
|
| |
|
2018 |
|
|
2019 |
|
|
(Decrease) |
|
|
Change |
|
|
Automation product and software |
|
¥ |
18,989,924 |
|
|
¥ |
63,577,177 |
|
|
¥ |
44,587,253 |
|
|
|
234.8 |
% |
| Equipment and
accessories |
|
|
63,960,425 |
|
|
|
23,951,132 |
|
|
|
(40,009,293 |
) |
|
|
(62.6 |
)% |
|
Oilfield environmental protection |
|
|
1,761,697 |
|
|
|
14,856,018 |
|
|
|
13,094,321 |
|
|
|
743.3 |
% |
| Total
revenue |
|
¥ |
84,712,046 |
|
|
¥ |
102,384,327 |
|
|
¥ |
17,672,281 |
|
|
|
20.9 |
% |
Our total revenues for the year ended June 30, 2019 were
approximately ¥102.4 million ($14.9 million), an increase of
approximately ¥17.7 million ($2.6 million) or 20.9%
from ¥84.7 million for the year ended June 30, 2018. The overall
increase in revenue was mainly due to the increased revenue from
the automation products and software and oilfield environmental
protection segments, offset by decreased revenue from equipment and
accessories segments.
| |
(1) |
Revenue
from automation product and software increased by ¥44.6 million
($6.5 million) or 234.8%. The increased revenue was mainly due to
the automation business projects from Shenhua Group and automation
control system projects for Xinjiang East Hope New Energy Co., Ltd.
(“East Hope”), a polysilicon producer in China and a wholly-owned
subsidiary of East Hope Group, a large Chinese
conglomerate. |
| |
(2) |
Revenue
from equipment and accessories decreased by ¥40.0 million ($5.8
million) or 62.6%. For the year ended June 30, 2018, to occupy the
market, we accepted some low-margin contracts, resulting in higher
revenue. We didn’t continue this type of temporary business in the
same period of fiscal year 2019 and the revenue from furnaces
decreased dramatically. We believe this decision will not hurt our
business materially as our normal business cycle has been
established and margins from furnaces segment increased, even with
less revenue. We expect revenue from this segment will rebound in
the coming year. |
| |
(3) |
Revenue
from oilfield environmental protection increased by ¥13.1 million
($1.9 million) or 743.3% as requirements of oilfield companies
increased and the customers’ demand for environmental
protection increased. Revenue
from this segment includes sales to our related party, Urumqi
Yikeli Automatic Control Equipment Co., Ltd. (“Urumqi Yikeli”)
which amounted to ¥3.7 million ($0.5 million) during the
year ended June 30, 2019. As required by local market regulatory
authorities, only several qualified contractors were allowed to
provide waste water treatment business in Xin Jiang area. Urumqi
Yikeli is one of those contractors. We provide waste water
treatment solutions and chemicals to Urumqi to access the Xin Jiang
market. Urumqi Yikeli is a related party to us as one major
shareholder of Yikeli is also a minority shareholder of GS
BHD. |
Cost of revenue
| |
|
For the
Years Ended |
|
| |
|
June 30 |
|
| |
|
|
|
|
|
|
|
Increase
/ |
|
|
Percentage |
|
| |
|
2018 |
|
|
2019 |
|
|
(Decrease) |
|
|
Change |
|
|
Automation product and software |
|
¥ |
16,943,002 |
|
|
¥ |
49,273,350 |
|
|
¥ |
32,330,348 |
|
|
|
190.8 |
% |
| Equipment and
accessories |
|
|
62,010,361 |
|
|
|
14,948,376 |
|
|
|
(47,061,985 |
) |
|
|
(75.9 |
)% |
| Oilfield
environmental protection |
|
|
1,326,598 |
|
|
|
7,860,599 |
|
|
|
6,534,001 |
|
|
|
492.5 |
% |
|
Business and sales related tax |
|
|
281,900 |
|
|
|
436,638 |
|
|
|
154,738 |
|
|
|
54.9 |
% |
| Total
cost of revenue |
|
¥ |
80,561,861 |
|
|
¥ |
72,518,963 |
|
|
¥ |
(8,042,898 |
) |
|
|
(10.0 |
)% |
Our cost of revenues decreased from ¥80.6 million for the year
ended June 30, 2018 to ¥72.5 million ($10.6 million) for the same
period in 2019, a decrease of ¥8.0 million ($1.2 million) or 10.0%.
This decrease was mainly caused by a significant decrease in cost
of revenue incurred in equipment and accessories.
For the years ended June 30, 2018 and 2019, cost of revenue from
automation product and software was approximately ¥17.0 million
($2.5 million) and ¥49.3 million ($7.2 million), respectively,
representing an increase of approximately ¥32.3 million ($4.7
million) or 190.8%. The increase in cost of revenue from automation
product and software was primarily attributable to increased
business of China Energy and East Hope contracts.
For the years ended June 30, 2018 and 2019, cost of revenue from
equipment and accessories was approximately ¥62.0 million ($9.1
million) and ¥14.9 million ($2.2 million), respectively,
representing a decrease of approximately ¥47.1 million ($6.9
million) or 75.9%. The decrease in cost of revenue from equipment
and accessories was primarily attributable to quickly decreased
sales of heating related products with low margins to general
industry clients.
For the years ended June 30, 2018 and 2019, cost of revenue from
oilfield environmental protection was approximately ¥1.3 million
($0.19 million) and ¥7.9 million ($1.1 million), respectively,
representing an increase of approximately ¥6.5 million ($1.0
million) or 492.5%. The increase in cost of revenue was mainly due
to the increased oily
sludge treatment processing projects during the year ended June 30,
2019. We expect this segment will increase in the
coming year as our new subsidiary Gan Su BHD enters into
operation.
Gross Profit
| |
|
For the
Years Ended |
|
| |
|
June 30 |
|
|
|
|
2018 |
|
|
2019 |
|
|
Increase / |
|
|
Percentage |
|
| |
|
Gross Profit |
|
|
Margin % |
|
|
Gross Profit |
|
|
Margin % |
|
|
(Decrease) |
|
|
Change |
|
| Automation
product and software |
|
¥ |
1,953,531 |
|
|
|
10.3 |
% |
|
¥ |
14,221,022 |
|
|
|
22.4 |
% |
|
¥ |
12,267,491 |
|
|
|
628.0 |
% |
| Equipment and
accessories |
|
|
1,845,025 |
|
|
|
2.9 |
% |
|
|
8,911,504 |
|
|
|
37.2 |
% |
|
|
7,066,479 |
|
|
|
383.0 |
% |
|
Oilfield environmental protection |
|
|
351,629 |
|
|
|
20.0 |
% |
|
|
6,732,838 |
|
|
|
45.3 |
% |
|
|
6,381,209 |
|
|
|
1,814.8 |
% |
| Total
gross profit and margin % |
|
¥ |
4,150,185 |
|
|
|
4.9 |
% |
|
¥ |
29,865,364 |
|
|
|
29.2 |
% |
|
¥ |
25,715,179 |
|
|
|
619.6 |
% |
Our gross profit increased to ¥29.9 million ($4.3 million) for the
year ended June 30, 2019 from ¥4.2 million for the same period in
2018. Our gross profit as a percentage of revenue increased to
29.2% for the year ended June 30, 2019 from 4.9% for the same
period in 2018. As our business shifted from lower margin equipment
during transition period to normal operation, our profit margin
increased as revenue recovered and percentage of normal business
with higher margins increased. As our business improved with
industry recovering and enhancement of our cost control, our profit
margin improved to normal levels, while the profit margin of last
year was lower because we undertook some exploiting business with
higher level of resource input leading to a lower profit margin
than usual.
For the years ended June 30, 2018 and 2019, gross profit from
automation product and software was approximately ¥2.0 million
($0.3 million) and ¥14.2 million ($2.1 million), respectively,
representing an increase of approximately ¥12.3 million ($1.8
million) or 628.0%. The increase in gross profit from automation
product and software was primarily due to 1) more revenue generated
from oilfield automation services projects and East Hope with
higher gross margins; and 2) higher percentage of business from
China Energy with only simple treatment which resulted in higher
margins compared to the same period of last year.
For the years ended June 30, 2018 and 2019, gross profit from
equipment and accessories was approximately ¥1.8 million ($0.26
million) and ¥8.9 million, respectively, representing an increase
of approximately ¥7.1 million ($1.0 million) or 383.0%, which was
mainly contributed to higher percentage of normal profitable
equipment sales.
For the years ended June 30, 2018 and 2019, gross profit from
oilfield environmental protection was approximately ¥0.4 million
($0.05 million) and ¥6.7 million ($1.0 million), respectively,
representing an increase of approximately ¥6.4 million ($0.9
million) or 1,814.8%. The increase in gross profit from oilfield
environmental protection was primarily attributable to the increase
in revenue, as discussed above.
Operating Expenses
| |
|
For the Years Ended |
|
| |
|
June 30, |
|
| |
|
|
|
|
|
|
|
Increase / |
|
|
Percentage |
|
| |
|
2018 |
|
|
2019 |
|
|
(Decrease) |
|
|
Change |
|
| Selling
and distribution expenses |
|
¥ |
8,013,353 |
|
|
¥ |
9,076,266 |
|
|
¥ |
1,062,913 |
|
|
|
13.3 |
% |
| % of revenue |
|
|
9.5 |
% |
|
|
8.9 |
% |
|
|
(0.6 |
)% |
|
|
- |
|
| General and
administrative expenses |
|
|
34,687,317 |
|
|
|
41,288,351 |
|
|
|
6,601,034 |
|
|
|
19.0 |
% |
| % of revenue |
|
|
40.9 |
% |
|
|
40.3 |
% |
|
|
(0.6 |
)% |
|
|
- |
|
| Provision for
(reversal of) doubtful accounts |
|
|
(841,242 |
) |
|
|
610,776 |
|
|
|
1,452,018 |
|
|
|
(172.6 |
)% |
| % of revenue |
|
|
(1.0 |
)% |
|
|
0.6 |
% |
|
|
1.6 |
% |
|
|
- |
|
| Research and
development expenses |
|
|
3,215,653 |
|
|
|
3,133,545 |
|
|
|
(82,108 |
) |
|
|
(2.6 |
)% |
| % of revenue |
|
|
3.8 |
% |
|
|
3.1 |
% |
|
|
(0.7 |
)% |
|
|
- |
|
|
Operating expenses |
|
¥ |
45,075,081 |
|
|
¥ |
54,108,938 |
|
|
¥ |
9,033,857 |
|
|
|
20.0 |
% |
Selling and Distribution Expenses. Selling and distribution
expenses consist primarily of salaries and related expenditures of
the Company’s sales and marketing departments, sales commissions,
costs of marketing programs including traveling expenses,
advertising and trade shows, and rental expense, as well as
shipping charges. Selling expenses increased by ¥1.1 million ($0.2
million) for the year
ended June 30, 2019 compared to the same period in
2018. This increase was primarily due to an increase in
salaries and related expenditures as we expanded our market to new
basement layers of China Energy projects and new industries.
Selling expenses were 8.9% of total revenues for the year ended June 30, 2019 and 9.5%
of total revenues in the same period of 2018.
General and Administrative Expenses. General and
administrative expenses consist primarily of costs in human
resources, facilities costs, depreciation expenses, professional
advisor fees, audit fees, stock-based compensation expense and
other miscellaneous expenses incurred in connection with general
operations. General and administrative expenses increased by 19.0%
or ¥6.6 million ($1.0 million), from
¥34.7 million in the year ended June 30, 2018 to
¥41.3 million ($6.0 million) in the same period of
2019. The increase in
general and administrative expenses was mainly due to an increase
in stock-based compensation expense and audit fees,
while the increase was partially offset by the decrease in investor
relationship expenses during the year ended June 30,
2019. General and
administrative expenses accounted for 40.3% of total revenues in
the year ended June 30, 2019 and 40.9% of total revenues for the
same period of last year.
Provision for (reversal of) doubtful accounts. Provision for
doubtful accounts is the estimated amount of bad debt that will
arise as a result of lower collectability from account receivables,
other receivables and purchase advances. We recorded reversal of
provision for doubtful accounts of ¥0.8 million
for the year ended June
30, 2018 and recorded provision for doubtful accounts
of ¥0.6 million ($0.1 million) for the same period in 2019. The
increase in provision for doubtful accounts was mainly resulted by
the provision made for long outstanding account receivables.
Management plans to continue to monitor account receivables to
maintain the provision at a lower risk level.
Research and development (“R&D”) expenses.
Research and development expenses consist primarily of salaries and
related expenditures for research and development projects.
Research and development expenses decreased slightly from
approximately ¥3.2 million for the year ended June 30, 2018 to ¥3.1
million ($0.5 million) for the same period of 2019. The R&D
expenses incurred were relatively stable during the years ended
June 30, 2018 and 2019 as the Company was focusing on the
transformation of advanced R&D results into projects. The
Company expects its R&D will be maintained at current levels in
the coming year.
Net Loss
| |
|
For the Years Ended |
|
| |
|
June 30, |
|
| |
|
|
|
|
|
|
|
Increase / |
|
|
Percentage |
|
| |
|
2018 |
|
|
2019 |
|
|
(Decrease) |
|
|
Change |
|
| Loss from
operations |
|
¥ |
(40,924,896 |
) |
|
¥ |
(24,243,574 |
) |
|
¥ |
16,681,322 |
|
|
|
(40.8 |
)% |
|
Other expense, net |
|
|
(4,434,108 |
) |
|
|
(1,140,355 |
) |
|
|
3,293,753 |
|
|
|
(74.3 |
)% |
| Loss before income
taxes |
|
|
(45,359,004 |
) |
|
|
(25,383,929 |
) |
|
|
19,975,075 |
|
|
|
(44.0 |
)% |
|
Provision for income taxes |
|
|
16,230 |
|
|
|
398,477 |
|
|
|
382,247 |
|
|
|
2,355.2 |
% |
| Net loss |
|
|
(45,375,234 |
) |
|
|
(25,782,406 |
) |
|
|
19,592,828 |
|
|
|
(43.2 |
)% |
|
Less: Net loss attributable to non-controlling interest |
|
|
(1,302,913 |
) |
|
|
(426,501 |
) |
|
|
876,412 |
|
|
|
(67.3 |
)% |
| Net loss
attributable to Recon Technology, Ltd |
|
¥ |
(44,072,321 |
) |
|
¥ |
(25,355,905 |
) |
|
¥ |
18,716,416 |
|
|
|
(42.5 |
)% |
Loss from operations. Loss from operations was ¥24.2 million
($3.5 million) for the year ended June 30, 2019, compared to a loss
of ¥40.9 million for the same period of 2018. This ¥16.7 million
($2.4 million) decrease in loss from operations was primarily due
to an increase in gross profit, partially offset by an increase in
general and administrative expenses and selling and distribution
expenses as discussed above.
Other expense. Other expense, net was ¥1.1 million ($0.2
million) for the year ended June 30, 2019, compared to other
expense, net of ¥4.4 million for the same period of 2018. The ¥3.3
million ($0.5 million) decrease in other expense, net was
primarily due to the decreased impairment loss from investment in
unconsolidated entity of ¥4.0 million ($0.6 million) and an
increase in subsidy income of ¥0.8 million ($0.1 million), the
decrease was partially offset by an increase in loss from
investment in unconsolidated entity of ¥1.0 million ($0.1 million)
and an increase in interests expense of ¥0.7 million ($0.1 million)
for the year ended June 30, 2019
Net loss. As a result of the factors described above,
net loss was ¥25.4 million ($3.7 million) for the year ended June
30, 2019, a decrease of ¥20.0 million ($2.9 million) from net loss
of ¥45.4 million for the same period of 2018.
Year Ended June 30, 2017 Compared to Year Ended June 30,
2018
Revenue
| |
|
For the
Years Ended |
|
| |
|
June 30 |
|
| |
|
|
|
|
|
|
|
Increase
/ |
|
|
Percentage |
|
| |
|
2017 |
|
|
2018 |
|
|
(Decrease) |
|
|
Change |
|
|
Automation product and software |
|
¥ |
22,399,066 |
|
|
¥ |
18,989,924 |
|
|
¥ |
(3,409,142 |
) |
|
|
(15.2 |
)% |
| Equipment and
accessories |
|
|
26,658,094 |
|
|
|
63,960,425 |
|
|
|
37,302,331 |
|
|
|
139.9 |
% |
|
Oilfield environmental protection |
|
|
10,997,302 |
|
|
|
1,761,697 |
|
|
|
(9,235,605 |
) |
|
|
(84.0 |
)% |
| Total
revenue |
|
¥ |
60,054,462 |
|
|
¥ |
84,712,046 |
|
|
¥ |
24,657,584 |
|
|
|
41.1 |
% |
Our total revenues for the year ended June 30, 2018 were
approximately ¥84.7 million ($12.8 million), an increase of
approximately ¥24.7 million or 41.1% from ¥60.1 million for the
year ended June 30, 2017. The overall increase in revenue was
accomplished through our expansion of new clients and development
of new business.
| |
(1) |
Revenue from automation product
and software decreased by ¥3.4 million or 15.2%, mainly affected by
less expenditure on surface projects and postpone production
activities by our clients. As of June 30, 2018, we have roughly i)
¥14.3 million contracts on hand for automation business for Shenhua
Group and ii) ¥4.49 million contracts of Changqing Oilfield on
construction process. We expect these projects to be finished and
accepted by our client by the end of calendar year 2018 and should
be recorded in our revenue for the coming fiscal year. |
| |
(2) |
Revenue from equipment and
accessories increased by ¥37.3 million or 139.9%, the significant
increase was primarily due to increased equipment sales, including
furnaces and related accessories in normal chemical and civil
furnace markets. |
|
|
(3) |
Revenue
from oilfield environmental protection decreased by ¥9.2 million or
84.0%. We devoted a lot of
our resources on construction of oily sludge treatment processing
projects this year and less waste water projects were done during
this period. We expect the oily sludge treatment processing
projects to be operational by the end of the calendar year 2018 and
to generate annual revenue of more than RMB 50 million, assuming
full capacity. |
Cost of revenue
| |
|
For the
Years Ended |
|
| |
|
June 30 |
|
| |
|
|
|
|
|
|
|
Increase
/ |
|
|
Percentage |
|
| |
|
2017 |
|
|
2018 |
|
|
(Decrease) |
|
|
Change |
|
|
Automation product and software |
|
¥ |
12,348,861 |
|
|
¥ |
16,943,002 |
|
|
¥ |
4,594,141 |
|
|
|
37.2 |
% |
| Equipment and
accessories |
|
|
21,886,884 |
|
|
|
62,010,361 |
|
|
|
40,123,477 |
|
|
|
183.3 |
% |
| Oilfield
environmental protection |
|
|
9,417,177 |
|
|
|
1,326,598 |
|
|
|
(8,090,579 |
) |
|
|
(85.9 |
)% |
|
Business and sales related tax |
|
|
438,038 |
|
|
|
281,900 |
|
|
|
(156,138 |
) |
|
|
(35.6 |
)% |
| Total
cost of revenue |
|
¥ |
44,090,960 |
|
|
¥ |
80,561,861 |
|
|
¥ |
36,470,901 |
|
|
|
82.7 |
% |
Our cost of revenues increased from ¥44.1 million for the year
ended June 30, 2017 to ¥80.6 million (approximately $12.2 million)
for the same period in 2018, an increase of ¥36.5 million
(approximately $5.5 million), or 82.7%. This increase was mainly
caused by significant growth in revenue generated from equipment
and accessories.
For the years ended June 30, 2017 and 2018, cost of revenue from
automation product and software was approximately ¥12.3 million and
¥17.0 million ($2.6 million), respectively, representing an
increase of approximately 4.6 million ($0.7 million) or 37.2%. The
increase in cost of revenue from automation product and software
was primarily attributable to 1) a mass of business of Shenhua
Group contracts with lower margins; and 2) some pre-contract costs
devoted to Changqing Oilfield projects.
For the years ended June 30, 2017 and 2018, cost of revenue from
equipment and accessories was approximately ¥21.9 million and ¥62.0
million ($9.4 million), respectively, representing an increase of
approximately ¥40.1 million ($6.1 million) or 183.3%. The increase
in cost of revenue from equipment and accessories was primarily
attributable to quickly increased sales of heating related products
with low margins to general industry clients.
For the years ended June 30, 2017 and 2018, cost of revenue from
oilfield environmental protection was approximately ¥9.4 million
and ¥1.3 million ($0.2 million), respectively, representing a
decrease of approximately ¥8.1 million ($1.2 million) or 85.9%. The
percentage of the variance in cost of revenue was mainly due to
less business of waste water treatment. We expect this part will
increase in the coming year as our new subsidiary Gan Su BHD
runs.
Gross Profit
| |
|
For the
Years Ended |
|
| |
|
June 30 |
|
|
|
|
2017 |
|
|
2018 |
|
|
Increase / |
|
|
Percentage |
|
| |
|
Gross Profit |
|
|
Margin % |
|
|
Gross Profit |
|
|
Margin % |
|
|
(Decrease) |
|
|
Change |
|
| Automation
product and software |
|
¥ |
9,805,637 |
|
|
|
43.8 |
% |
|
¥ |
1,953,531 |
|
|
|
10.3 |
% |
|
¥ |
(7,852,106 |
) |
|
|
(80.1 |
)% |
| Equipment and
accessories |
|
|
4,634,243 |
|
|
|
17.4 |
% |
|
|
1,845,025 |
|
|
|
2.9 |
% |
|
|
(2,789,218 |
) |
|
|
(60.2 |
)% |
|
Oilfield environmental protection |
|
|
1,523,622 |
|
|
|
13.9 |
% |
|
|
351,629 |
|
|
|
20.0 |
% |
|
|
(1,171,993 |
) |
|
|
(76.9 |
)% |
| Total
gross profit and margin % |
|
¥ |
15,963,502 |
|
|
|
26.6 |
% |
|
¥ |
4,150,185 |
|
|
|
4.9 |
% |
|
¥ |
(11,813,317 |
) |
|
|
(74.0 |
)% |
Our gross profit decreased to ¥4.2 million (approximately $0.6
million) for the year ended June 30, 2018 from ¥16.0 million for
the same period in 2017. Our gross profit as a percentage of
revenue decreased to 4.9% for the year ended June 30, 2018 from
26.6% for the same period in 2017. The decrease in gross profit was
primarily due to the increase in revenue, offset by the increase in
cost of revenue, as discussed above.
For the years ended June 30, 2017 and 2018, gross profit from
automation product and software was approximately ¥9.8 million and
¥2.0 million ($0.3 million), respectively, representing a decrease
of approximately ¥7.9 million ($1.2 million) or 80.1%. The decrease
in gross profit from automation product and software was primarily
due to 1) more percentage of business from Shenhua Group with only
simple treatment thus with lower margins; and 2) some cost incurred
for testing projects.
For the years ended June 30, 2017 and 2018, gross profit from
equipment and accessories was approximately ¥4.6 million and ¥1.8
million ($0.3 million), respectively, representing a decrease of
approximately ¥2.8 million ($0.4 million) or 60.2%. The decrease in
gross profit from equipment and accessories was primarily
attributable to the increase in cost of revenue was higher than the
increase in revenue, as discussed above. As currently under the new
business developing stage, the Company sold a larger number of
equipment and accessories with lower margins during the year ended
June 30, 2018.
For the years ended June 30, 2017 and 2018, gross profit from
oilfield environmental protection was approximately ¥1.5 million
and ¥0.4 million ($0.1 million), respectively, representing a
decrease of approximately ¥1.2 million ($0.2 million) or 76.9%. The
decrease in gross profit from oilfield environmental protection was
primarily attributable to the decrease in revenue, as discussed
above.
Operating Expenses
| |
|
For the Years Ended |
|
| |
|
June 30, |
|
| |
|
|
|
|
|
|
|
Increase / |
|
|
Percentage |
|
| |
|
2017 |
|
|
2018 |
|
|
(Decrease) |
|
|
Change |
|
| Selling
and distribution expenses |
|
¥ |
4,458,218 |
|
|
¥ |
8,013,353 |
|
|
¥ |
3,555,135 |
|
|
|
79.7 |
% |
| % of revenue |
|
|
7.4 |
% |
|
|
9.5 |
% |
|
|
2.1 |
% |
|
|
- |
|
| General and
administrative expenses |
|
|
32,751,142 |
|
|
|
34,687,317 |
|
|
|
1,936,175 |
|
|
|
5.9 |
% |
| % of revenue |
|
|
54.5 |
% |
|
|
40.9 |
% |
|
|
(13.6 |
)% |
|
|
- |
|
| Provision for (net
recovery of) doubtful accounts |
|
|
1,766,286 |
|
|
|
(841,242 |
) |
|
|
(2,607,528 |
) |
|
|
(147.6 |
)% |
| % of revenue |
|
|
2.9 |
% |
|
|
(1.0 |
)% |
|
|
(3.9 |
)% |
|
|
- |
|
| Research and
development expenses |
|
|
7,599,340 |
|
|
|
3,215,653 |
|
|
|
(4,383,687 |
) |
|
|
(57.7 |
)% |
| % of revenue |
|
|
12.7 |
% |
|
|
3.8 |
% |
|
|
(8.9 |
)% |
|
|
- |
|
|
Operating expenses |
|
¥ |
46,574,986 |
|
|
¥ |
45,075,081 |
|
|
¥ |
(1,499,905 |
) |
|
|
(3.2 |
)% |
Selling and Distribution Expenses. Selling and distribution
expenses consist primarily of salaries and related expenditures of
the Company’s sales and marketing departments, sales commissions,
costs of marketing programs including traveling expenses,
advertising and trade shows, and rental expense, as well as
shipping charges. Selling expenses increased by ¥3.6 million
(approximately $0.5 million) for the year ended June 30,
2018 compared to the same period in 2017. This increase was primarily due to an
increase in traveling expense and service and testing fees as we
expanded our market to new basement layers of Changqing Oilfield
and new industries. Selling expenses were 9.5% of total
revenues for the year ended June 30, 2018 and 7.4% of total
revenues in the same period of 2017.
General and Administrative Expenses. General and
administrative expenses consist primarily of costs in human
resources, facilities costs, depreciation expenses, professional
advisor fees, audit fees, stock-based compensation expense and
other miscellaneous expenses incurred in connection with general
operations. General and administrative expenses increased by 5.9%
or ¥1.9 million ($0.3 million), from ¥32.8 million in the
year ended June 30,
2017 to ¥34.7 million (approximately $5.2 million)
in the same period of 2018. The increase in general and
administrative expenses was mainly due to an increase in salaries
and rent expenses, the increase was partially offset by the
decrease in consulting fees. General and administrative
expenses accounted 40.9% of total revenues in the year ended June
30, 2018 and 54.5% of total revenues for the same period of last
year.
Provision for doubtful accounts. Provision for doubtful
accounts is the estimated amount of bad debt that will arise as a
result of lower collectability from accounts receivables, other
receivables and purchase advances. We recorded a provision for
doubtful accounts of ¥1.8 million the year ended June 30, 2017 and
recorded reversal of provision for doubtful accounts of ¥0.8
million ($0.1 million) for the same period in 2018. Management
plans to continue to monitor accounts receivable to maintain the
provision at a lower level.
Research and development (“R&D”) expenses. Research and
development expenses consist primarily of salaries and related
expenditures for research and development projects. Research and
development expenses decreased from approximately ¥7.6 million for
the year ended June 30, 2017 to ¥3.2 million (approximately $0.5
million) for the same period of 2018. This decrease was primarily
due to less research and development expense spent on design of
chemical products used for waste water treatment and digital
oilfield models and platform. The Company was focusing on the
transformation of advanced R&D results into projects, which
were undertaken by Gan Su BHD and Qing Hai BHD.
Net Loss
| |
|
For the Years Ended |
|
| |
|
June 30, |
|
| |
|
|
|
|
|
|
|
Increase / |
|
|
Percentage |
|
| |
|
2017 |
|
|
2018 |
|
|
(Decrease) |
|
|
Change |
|
| Loss from
operations |
|
¥ |
(30,611,484 |
) |
|
¥ |
(40,924,896 |
) |
|
¥ |
(10,313,412 |
) |
|
|
33.7 |
% |
|
Other expense, net |
|
|
(284,417 |
) |
|
|
(4,434,108 |
) |
|
|
(4,149,691 |
) |
|
|
1,459.0 |
% |
| Loss before income
taxes |
|
|
(30,895,901 |
) |
|
|
(45,359,004 |
) |
|
|
(14,463,103 |
) |
|
|
46.8 |
% |
|
Provision for income taxes |
|
|
307,900 |
|
|
|
16,230 |
|
|
|
(291,670 |
) |
|
|
(94.7 |
)% |
| Net loss |
|
|
(31,203,801 |
) |
|
|
(45,375,234 |
) |
|
|
(14,171,433 |
) |
|
|
45.4 |
% |
|
Less: Net income attributable to non-controlling interest |
|
|
241,346 |
|
|
|
(1,302,913 |
) |
|
|
(1,544,259 |
|
|
|
(639.9 |
)% |
| Net loss
attributable to Recon Technology, Ltd |
|
¥ |
(31,445,147 |
) |
|
¥ |
(44,072,321 |
) |
|
¥ |
(12,627,174 |
) |
|
|
40.2 |
% |
Loss from operations. Loss from operations was ¥40.9
million (approximately $6.2 million) for the year ended June 30,
2018, compared to a loss of ¥30.6 million for the same period of
2017. This ¥10.3 million ($1.6 million) increase in loss from
operations was primary due to a decrease in gross profit, as well
as an increase in selling and distribution expenses and general and
administrative expenses and partly offset by a decrease in research
and development expenses as discussed above.
Other expense. Other expense, net was ¥4.4 million
(approximately $0.7 million) for the year ended June 30, 2018,
compared to other expense, net of ¥0.3 million for the same period
of 2017. The ¥4.1 million (approximately $0.7 million) increase in
other expense, net was primarily due to the increased impairment
loss from investment in unconsolidated entity of ¥4.0 million
(approximately $0.6 million).
Provision for income taxes. Provision for income tax was
¥16,230 (approximately $2,500) for the year ended June 30, 2018,
compared to ¥0.3 million for the same period of 2017. The decrease
in the Company’s provision for income taxes was primarily due to
the decreased taxable income of Nanjing Recon for the year ended
June 30, 2018.
Net loss. As a result of the factors described above,
net loss was ¥45.4 million (approximately $6.9 million) for the
year ended June 30, 2018, a decrease of ¥14.2 million
(approximately $2.1 million) from net loss of ¥31.2 million for the
same period of 2017.
Liquidity and Capital Resources
As of June 30, 2019, we had cash in the amount of approximately
¥4.5 million ($0.7 million). As of June 30, 2018, we had cash in
the amount of approximately ¥45.3 million.
Indebtedness. As of June 30, 2019, except for approximately
¥2.5 million ($0.4 million) of short-term bank loan, ¥1.1 million
($0.2 million) of short-term borrowings from a third party, ¥9.0
million ($1.3 million) of short-term borrowings from a related
party, and ¥9.0 million ($1.3 million) of long-term borrowings from
a related party, and except that Gan Su BHD has a production line
under construction in progress which the main construction of the
project has completed, based on the management’s best estimation,
the expected completion date will be in December 2019, we did not
have any other 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, short-term and
long-term borrowings due to related parties. As of June 30, 2019,
we had total assets of ¥157.0 million ($22.9 million), which
includes cash of ¥4.5 million ($0.7 million), net accounts
receivable due from third parties of ¥72.0 million ($10.5 million),
and working capital of ¥55.7 million ($8.1 million). Shareholders'
equity amounted to ¥95.6 million ($13.9 million).
Cash from Operating Activities. Net cash used in operating
activities was ¥32.2 million ($4.7 million) for the year ended June
30, 2019. This was an increase of approximately ¥12.6 million ($1.8
million) compared to net cash used in operating activities of
approximately ¥19.6 million for the year ended June 30, 2018. The
increase in net cash used in operating activities for the year
ended June 30, 2019 was primarily attributable to the net loss
available to the Company in the amount of ¥25.8 million ($3.8
million), and reconciled by restricted shares issued for management
resulting in expenses of ¥21.3 million ($3.1 million), and an
increase in trade account receivable and other receivables, partly
offset by a decrease in inventories, purchase advances and increase
in taxes payable.
Cash from Investing Activities. Net cash used in investing
activities was approximately ¥13.5 million ($2.0 million) for the
year ended June 30, 2019, representing a decrease in cash used in
investing activities of approximately ¥4.0 million ($0.6 million)
compared to the same period in 2018. This decrease was due to a
decrease in the Company’s payments and prepayments for construction
in progress.
Cash from Financing Activities. Net cash provided by
financing activities amounted to ¥3.5 million ($0.5 million) for
the year ended June 30, 2019, as compared to net cash provided by
financing activities of ¥76.9 million for the same period in 2018.
During the year ended June 30, 2019, we received ¥2.5 million ($0.4
million) in short-term bank loan, repaid ¥5.0 million ($0.7
million) in short-term borrowings to related party, received ¥5.0
million ($0.7 million) in short-term borrowings from a related
party and received ¥1.1 million ($0.2 million) in short-term
borrowings from one third-party. We also received ¥0.9 million
($0.1 million) capital contribution by a non-controlling
shareholder during the year ended June 30, 2019.
Working Capital. Total working capital as of June 30, 2019
amounted to ¥55.7 million ($8.1 million), compared to ¥74.8 million
as of June 30, 2018. The decrease in working capital was mainly due
to the Company’s use of cash on construction of new product capabilities and equity
investment. Total current assets as of June 30, 2019
amounted to ¥97.8 million ($14.2 million), a slight decrease of
¥3.0 million ($0.4 million) compared to approximately ¥100.8
million at June 30, 2018. The decrease in total current assets at
June 30, 2019 compared to June 30, 2018 was mainly due to a
decrease in cash, purchase advances and inventories, partially
offset by an increase in trade account receivable, contract costs
and other receivables.
Current liabilities amounted to ¥42.1 million ($6.1
million) at June 30, 2019, in comparison to ¥26.0 million at June
30, 2018. This increase of current liabilities was attributable
mainly to an increase in trade accounts payable as a result of the
increased purchases for undergoing contracts, as well as increase
in investment payable, short-term bank loan and short-term
borrowings from a third party.
Capital Needs. With the uncertainty of the current
market, our management believes it is necessary to enhance
collection of outstanding 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 offerings or private placements of our
securities to finance our development of our business and to
consummate any merger and acquisition, if necessary.
Tabular Disclosure of Contractual Obligations
Below is a table setting forth all our contractual obligations as
of June 30, 2019, which consists of our short-term loan agreements,
operating lease obligations, loans from a third party and due to
related party:
| |
|
Payment Due by Period |
|
| Contractual Obligations |
|
Total |
|
|
Less
than
1 year |
|
|
1 – 3
years |
|
|
3 – 5
years |
|
|
More
than
5 years |
|
| Short-term
debt obligations |
|
¥ |
12,591,621 |
|
|
¥ |
12,591,621 |
|
|
¥ |
- |
|
|
¥ |
- |
|
|
¥ |
- |
|
| Operating lease
obligations |
|
|
1,875,092 |
|
|
|
1,875,092 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Due to related
parties |
|
|
2,290,873 |
|
|
|
2,290,873 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Purchase obligation |
|
|
864,433 |
|
|
|
864,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Long-term debt obligations |
|
|
8,977,001 |
|
|
|
780,797 |
|
|
|
1,709,653 |
|
|
|
2,041,395 |
|
|
|
4,445,157 |
|
| Total |
|
¥ |
26,599,020 |
|
|
¥ |
18,402,815 |
|
|
¥ |
1,709,653 |
|
|
¥ |
2,041,395 |
|
|
¥ |
4,445,157 |
|
Safe Harbor
See “SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS.”
|
Item 6. |
Directors, Senior Management and
Employees |
A. Directors and Senior Management
Executive Officers and Directors
The following table sets forth our executive officers and
directors, their ages and the positions held by them:
|
Name |
|
Age |
|
Position Held |
|
Mr. Yin Shenping |
|
49 |
|
Chief Executive Officer and Director |
|
Ms. Liu Jia |
|
36 |
|
Chief Financial Officer |
|
Mr. Chen Guangqiang |
|
56 |
|
Chief Technology Officer and Director |
|
Mr. Bi Yongquan |
|
41 |
|
Director and Chairman |
|
Mr. Zhao Shudong |
|
73 |
|
Independent Director |
|
Mr. Nelson N.S. Wong |
|
57 |
|
Independent Director (Audit Committee
Chair) |
|
Mr. Hu Jijun |
|
54 |
|
Independent Director |
|
Mr. Yan Changqing |
|
46 |
|
Independent Director |
Yin Shenping. Mr. Yin has been our Chief Executive
Officer and a director since the Company’s inception. In 2003,
Mr. Yin founded Nanjing Recon, a Chinese company that provides
services to automate and enhance the extraction of petroleum in
China, and has been the Chief Executive Officer since that time.
Prior to founding Nanjing Recon, Mr. Yin served as a sales
manager for Fujian Haitian Network Company from 1992 through 1994.
Mr. Yin has founded and operated a number of companies engaged
in the IT industry including: Xiamen Hengda Haitian Computer
Network Co., Ltd. (1994), Baotou Hengda Haitian Computer Network
Co., Ltd. (1997) and Beijing Jingke Haitian Electronic
Technology Development Co., Ltd. (1999), and Jingsu Huasheng
Information Technology Co., Ltd. (2000). In 2000, Mr. Yin
merged the former Nanjing Kingsley Software Engineering Co., Ltd.
into Nanjing Recon. Mr. Yin received his bachelor’s degree in
1991 from Nanjing Agricultural University in information systems.
Mr. Yin was chosen as a director of the Company because as one
of the founders of the Company, we believe his knowledge of the
Company and years of experience in our industry give him the
ability to guide the Company as a director.
Liu Jia. Ms. Liu has served as our Chief Financial
Officer since 2008. Ms. Liu received her bachelor’s degree in
2006 from Beijing University of Chemical Technology, School of
Economics and Management and her master’s degree in industrial
economics in 2009 from Beijing Wuzi University. Ms. Liu is a
certified U.S. CPA.
Chen Guangqiang. Mr. Chen has served as our Chief
Technology Officer and director since our inception. Mr. Chen
was a geological engineer for the Fourth Oil Extraction Plant of
Huabei Oilfield from 1985 through 1993. From 1993 through 1999,
Mr. Chen was a chief engineer for Xinda Company, CNPC
Development Bureau. From 1999 through 2003, Mr. Chen served as
the general manager of Beijing Adar. Mr. Chen received his
bachelor’s degree in 1985 from Southwest Petroleum Institute.
Mr. Chen was appointed to the position of director because he
is one of the founders of the Company and we believe we can benefit
from his many years of engineering experience and management
experience in the oil extraction industry.
Bi Yongquan. Mr. Bi has served as our director since
January 2018. Mr. Bi founded Dalian Boqi Xinhai Group Ltd. Co.
(“Boqi Group”) and its subsidiaries including Dalian Boqi
Agriculture Technology Development Ltd. Co. and Dalian Boqi Culture
Media Ltd. Co. in July 2008. He also founded Dalian Boqi Zhengji
Pharmacy Franchise Ltd. Co. in July 2008 and Boqi Finance Lease
(Liaoning) Ltd. Co., another subsidiary of Boqi Group, in November
2009. He has been the Chairman of each of these companies since
their incorporation. Mr. Bi entered into a securities purchase
agreement with us on November 20, 2017 to purchase 3 million shares
for $4.8 million. Mr. Bi received a bachelor’s degree in finance in
2000 and a master’s degree in management in 2003, both from Dongbei
University of Finance and Economics. Mr. Bi was appointed to the
position of director and Chairman of the board because we believe
we can benefit from his investment skills and management
experience.
Nelson N.S. Wong. Mr. Wong joined our Board of
Directors in 2008. Prior to joining our Board, in 1990
Mr. Wong joined the Vigers Group, a real estate company that
provides services in valuation, corporate property services,
investment advisory services, general practice surveying, building
surveying, commercial, in both retail and industrial agency, and
property and facilities management. Mr. Wong became the Vice
Chairman and CEO of the Vigers Group in 1993. In 1995 Mr. Wong
established the ACN Group, a business consulting firm, where he has
worked continuously and continues to serve as the Chairman and
Managing Partner. Mr. Wong received a bachelor’s degree in
arts from the PLA Institute of International Relations in Nanjing
in 1983. Mr. Wong was appointed to the position of director
because we believe we can benefit from his leadership skills and
management experience.
Hu Jijun. Mr. Hu joined our Board of Directors in 2008.
Prior to joining our Board, from 1988 to 2003, Mr. Hu served
in a variety of positions at No. 2 test-drill plant, including
technician of installation, assets equipment work, electrical
installation, control room production dispatcher, Deputy Chief
Engineer of the Technology Battalion, and Deputy Director of
Production. From 2003 to 2005 he served as Head of the Integrated
Battalion and he is currently the Head of the Transport Battalion,
Senior Electric Engineer. Mr. Hu graduated as an automated
professional from the China University of Petroleum in 1988.
Mr. Hu was appointed to the position of a director because we
believe his years of experience and knowledge gained while working
at our No. 2 test-drill plant will prove beneficial to the
guidance of the Company.
Zhao Shudong. Mr. Zhao joined our Board of Directors in
2013. Mr. Zhao spent over 30 years working in the oilfield industry
prior to retiring from full-time work in 2006. From 1970 to 1976,
Mr. Zhao worked as a technician in the Daqing oilfield. From 1976
to 1982, Mr. Zhao served as the vice director of the Hubei Oilfield
Generalized Geologic Technical Research Institute. Mr. Zhao then
spent 11 years as a director and section chief at the Scientific
and Technological Development Department of the Huabei Petroleum
Administrative Bureau. He was subsequently appointed Chief
Geologist of the bureau, a position he held from 1993 to 1999. From
1999 to 2006, Mr. Zhao served as the General Manager of the Huabei
Oilfield Company of CNPC. Mr. Zhao studied at the Northeast
Petroleum Institute from 1965 to 1970. Mr. Zhao has been chosen as
a director nominee because of his extensive experience in the
oilfield industry.
Yan Changqing. Mr. Yan has served as our director since
January 2018. Mr. Yan has been working in finance area for a long
time. From June 2017, Mr. Yan has been the vice president of
Shanghai Hualing Investment Co., Ltd. From June 2016 to February
2017, Mr. Yan was the secretary of the board of Ningbo Sunlight
Electrical Appliance, Co. Ltd., a public company in China, and also
a director of Ningbo Sunlight Electrical Appliance, Co. Ltd. and is
a member of its nominating board. From July 2013 to May 2016, Mr.
Yan was the capitalization consultant of Beijing Liujianfang
Technology, Co., Ltd. From January 2011 to June 2013, Mr. Yan was
the vice president of Shanghai Jinyongxin Investment Co., Ltd. Mr.
Yan received his bachelor’s degree in science in 1996 and a master
of law degree in 1999, both from Peking University. Mr. Yan has the
lawyer’s certificate. Mr. Yan was nominated as a director
because of his extensive experience in capital market.
Employment Agreements
We have employment agreements with each of our Chief Executive
Officer, Chief Technology Officer and Chief Financial Officer. With
the exception of the employment agreement with our Chief Financial
Officer, each of these employment agreements provides for an
indefinite term. Such employment agreements may be terminated (1)
if the employee gives written notice of his or her intention to
resign, (2) the employee is absent from three consecutive meetings
of the board of directors, without special leave of absence from
the other members of the board of directors, and the board of
directors passes a resolution that such employee has vacated his
office, or (3) the death, bankruptcy or mental incapacity of the
employee. The employment agreement for our Chief Financial Officer
provides for a one-year term, which expired on March 12, 2017, and
the parties have continued to operate under the terms of this
agreement since its expiration. Such employment agreement may be
terminated if Ms. Liu gives thirty days’ written notice of her
intention to resign, or if the board of directors determines she
can no longer perform her duties as Chief Financial Officer and
provides her with thirty days’ written notice of termination.
Under Chinese law, we may only terminate employment agreements
without cause and without penalty by providing notice of
non-renewal one month prior to the date on which the employment
agreement is scheduled to expire. If we fail to provide this notice
or if we wish to terminate an employment agreement in the absence
of cause, then we are obligated to pay the employee one month’s
salary for each year we have employed the employee. We are,
however, permitted to terminate an employee for cause without
penalty to our company, where the employee has committed a crime or
the employee’s actions or inactions have resulted in a material
adverse effect to us.
B. Compensation
The following table shows the annual compensation paid by us to Yin
Shenping, our Chief Executive Officer, Liu Jia, our Chief Financial
Officer, and Chen Guangqiang, our Chief Technology Officer, for the
years ended June 30, 2019, 2018 and 2017. No other employee or
officer received more than $100,000 in total compensation in 2019,
2018 and 2017.
Summary Executive Compensation Table
|
Name and principal position |
|
Year |
|
Salary |
|
|
Bonus |
|
|
Option
Awards |
|
|
Restricted Stock
Awards |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yin Shenping,
Principal Executive Officer |
|
2019 |
|
$ |
120,000 |
|
|
$ |
29,125 |
|
|
$ |
— |
|
|
$ |
129,000 |
(7) |
|
$ |
278,125 |
|
|
|
|
2018 |
|
$ |
120,000 |
|
|
$ |
30,212 |
|
|
$ |
— |
|
|
$ |
0 |
|
|
$ |
150,212 |
|
| |
|
2017 |
|
$ |
125,590 |
|
|
$ |
7,272 |
|
|
$ |
— |
|
|
$ |
2,224,575 |
(1)(2)(4)(5)(6) |
|
$ |
2,357,437 |
|
Liu Jia
Chief Financial Officer |
|
2019 |
|
$ |
80,000 |
|
|
$ |
21,844 |
|
|
$ |
— |
(3) |
|
$ |
103,200 |
(7) |
|
$ |
205,044 |
|
|
|
|
2018 |
|
$ |
80,000 |
|
|
$ |
22,659 |
|
|
$ |
— |
(3) |
|
$ |
0 |
|
|
$ |
102,659 |
|
| |
|
2017 |
|
$ |
80,000 |
|
|
$ |
4,500 |
|
|
$ |
— |
(3) |
|
$ |
478,950 |
(4)(5)(6) |
|
$ |
563,450 |
|
Chen Guangqiang,
Chief Technology Officer |
|
2019 |
|
$ |
141,844 |
|
|
$ |
29,125 |
|
|
$ |
— |
|
|
$ |
129,000 |
(7) |
|
$ |
299969 |
|
|
|
|
2018 |
|
$ |
144,472 |
|
|
$ |
30,212 |
|
|
$ |
— |
|
|
$ |
0 |
|
|
$ |
174,684 |
|
| |
|
2017 |
|
$ |
115,000 |
|
|
$ |
5,272 |
|
|
$ |
— |
|
|
$ |
2,224,575 |
(1)(2)(4)(5)(6) |
|
$ |
2,344,847 |
|
| |
(1) |
On December 13, 2013, the Company
granted 95,181 restricted shares to Mr. Yin at an aggregate grant
date fair value of $284,591 and 135,181 restricted shares to Mr.
Chen at an aggregate grant date fair value of $404,191, based on
the stock closing price of $2.99 at December 13, 2013. These
restricted shares will vest over three years with one-third of the
shares vesting every year from the grant date. These restricted
shares granted in fiscal 2014 are not reflected in the Summary
Executive Compensation Table. |
| |
(2) |
On January 31, 2015, the Company
granted 150,000 restricted shares to Mr. Yin at an aggregate grant
date fair value of $247,500 and 150,000 restricted shares to Mr.
Chen at an aggregate grant date fair value of $247,500, based on
the stock closing price of $1.65 at January 31, 2015. These
restricted shares will vest over three years with one-third of the
shares vesting every year from the grant date. These restricted
shares granted in fiscal 2015 are not reflected in the Summary
Executive Compensation Table. |
| |
(3) |
On January 31, 2015, the Company
granted 32,000 options to Ms. Liu Jia. These options vest over a
period of three years, one-third of which vest on January 31 of
each year beginning in 2016. The grant date fair value of such
options was $1.65 per underlying share. These options granted in
fiscal 2015 are not reflected in the Summary Executive Compensation
Table. |
| (4) |
On October 18, 2015, the Company
granted 320,000 restricted shares to Mr. Yin at an aggregate grant
date fair value of $281,600, 320,000 restricted shares to Mr. Chen
at an aggregate grant date fair value of $281,600, and 36,000
restricted shares to Ms. Liu at an aggregate grant date fair value
of $31,680, based on the stock closing price of $0.88 at October
16, 2015. These restricted shares will vest over three years with
one-third of the shares vesting every year from the grant
date. |
| (5) |
On July 27, 2016, the Company
granted 360,000 restricted shares to Mr. Yin at an aggregate grant
date fair value of $396,000, 360,000 restricted shares to Mr. Chen
at an aggregate grant date fair value of $396,000, and 66,000
restricted shares to Ms. Liu at an aggregate grant date fair value
of $72,600, based on the stock closing price of $1.10 at July 27,
2016. These restricted shares will vest over three years with
one-third of the shares vesting every year from the grant
date. |
| (6) |
On December 9, 2016, the Company
approved management's new plan based on potential performance for
the coming three fiscal years from fiscal 2017 to fiscal 2019.
During fiscal year 2017, 3,010,000 shares were issued in front and
they are forfeited and cancelled automatically in the event the
company fails to meet certain operating performance goals. For more
details, please see our current report in the form 6-K filed on
December 9, 2016. The amortized compensation for fiscal year 2017
was aggregated to ¥7,449,818 ($1,080,000), based on the stock
closing price of $1.35 at December 9, 2016. Among the 3,010,000
shares, assuming the maximum performance will be achieved, the
Company granted 1,354,500 restricted shares to Mr. Yin at an
aggregate grant date fair value of $1,828,575, 1,354,500 restricted
shares to Mr. Chen at an aggregate grant date fair value of
$1,828,575 and 301,000 restricted shares to Ms. Liu at an aggregate
grant date fair value of $406,350. |
| (7) |
On August 21, 2018, the Company
granted 100,000 restricted shares to Mr. Yin at an aggregate grant
date fair value of $129,000, 100,000 restricted shares to Mr. Chen
at an aggregate grant date fair value of $129,000, and 80,000
restricted shares to Ms. Liu at an aggregate grant date fair value
of $103,200, based on the stock closing price of $1.29 at August
21, 2018. These restricted shares will vest over three years with
one-third of the shares vesting every year from the grant
date. |
Director Compensation
All directors hold office until the expiration of their respective
terms and until their successors have been duly elected and
qualified. There are no family relationships among our directors or
executive officers. Officers are elected by and serve at the
discretion of the Board of Directors. Employee directors and
non-voting observers do not receive any compensation for their
services. We pay $8,000 to each independent director annually for
their service a director. In addition, non-employee directors are
entitled to receive compensation for their actual travel expenses
for each Board of Directors meeting attended.
Summary Director Compensation Table
|
Name(1) |
|
Fees earned
or
paid in cash |
|
|
Option
Awards |
|
|
Total(2) |
|
|
Nelson N.S. Wong |
|
$ |
8,000 |
|
|
$ |
0 |
|
|
$ |
8,000 |
|
|
Hu Jijun |
|
$ |
8,000 |
|
|
$ |
0 |
|
|
$ |
8,000 |
|
|
Zhao Shudong |
|
$ |
8,000 |
|
|
$ |
0 |
|
|
$ |
8,000 |
|
|
Bi Yongquan(3) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Yan
Changqing(4) |
|
$ |
4,000 |
|
|
$ |
0 |
|
|
$ |
4,000 |
|
| (1) |
Compensation for our directors
Yin Shenping and Chen Guangqiang, who also serve as executive
officers, is fully disclosed in the executive compensation
table. |
| (2) |
None of the directors received
any ordinary share awards, nonqualified deferred compensation
earnings or non-equity incentive plan compensation in fiscal year
2018. |
| (3) |
Mr. Bi Yongquan began to serve as
the Company’s director and Chairman of the board since January
2018. |
| (4) |
Mr. Yan Changqing began to serve
as the Company’s director since January 2018 and has been an
independent director. |
The following table summarizes, as of June 30, 2019, the
outstanding options and restricted shares that we granted to our
current directors and executive officers and to other individuals
as a group.
| |
|
Ordinary
shares |
|
|
|
|
|
|
|
|
|
|
| |
|
underlying
options |
|
|
|
|
|
|
|
|
|
|
| |
|
awarded/Restricted |
|
|
Exercise
price |
|
|
|
|
|
|
|
|
Name |
|
Share Units |
|
|
(US$/share) |
|
|
Date of grant |
|
|
Date of expiration |
|
| Yin
Shenping |
|
|
60,000 |
|
|
|
6.00 |
|
|
|
7/29/2009 |
|
|
|
7/28/2019 |
|
| |
|
|
48,000 |
|
|
|
2.96 |
|
|
|
3/26/2012 |
|
|
|
3/26/2022 |
|
| |
|
|
120,000 |
(1) |
|
|
— |
|
|
|
7/26/2016 |
|
|
|
7/26/2019 |
|
| |
|
|
1,354,500 |
(1) |
|
|
— |
|
|
|
12/9/2016 |
|
|
|
10/1/2019 |
|
| |
|
|
100,000 |
|
|
|
— |
|
|
|
8/21/2018 |
|
|
|
8/21/2021 |
|
|
Liu Jia
|
|
|
50,000 |
|
|
|
6.00 |
|
|
|
7/29/2009 |
|
|
|
7/28/2019 |
|
|
|
|
|
32,000 |
|
|
|
1.65 |
|
|
|
1/31/2015 |
|
|
|
1/31/2025 |
|
|
|
|
|
22,000 |
(1) |
|
|
— |
|
|
|
7/26/2016 |
|
|
|
7/26/2019 |
|
| |
|
|
301,000 |
|
|
|
— |
|
|
|
12/9/2016 |
|
|
|
10/1/2019 |
|
| |
|
|
80,000 |
|
|
|
— |
|
|
|
8/21/2018 |
|
|
|
8/21/2021 |
|
| Chen Guangqiang |
|
|
50,000 |
|
|
|
6.00 |
|
|
|
7/29/2009 |
|
|
|
7/28/2019 |
|
| |
|
|
30,000 |
|
|
|
2.96 |
|
|
|
3/26/2012 |
|
|
|
3/26/2022 |
|
| |
|
|
120,000 |
(1) |
|
|
— |
|
|
|
7/26/2016 |
|
|
|
7/26/2019 |
|
| |
|
|
1,354,500 |
(1) |
|
|
— |
|
|
|
12/9/2016 |
|
|
|
10/1/2019 |
|
| |
|
|
100,000 |
|
|
|
— |
|
|
|
8/21/2018 |
|
|
|
8/21/2021 |
|
| Bi Yongquan |
|
|
100,000 |
|
|
|
— |
|
|
|
8/21/2018 |
|
|
|
8/21/2021 |
|
| Nelson N.S. Wong |
|
|
18,000 |
|
|
|
6.00 |
|
|
|
7/29/2009 |
|
|
|
7/28/2019 |
|
| |
|
|
25,000 |
|
|
|
1.65 |
|
|
|
1/31/2015 |
|
|
|
1/31/2025 |
|
| |
|
|
10,000 |
(1) |
|
|
— |
|
|
|
7/26/2016 |
|
|
|
7/26/2019 |
|
| |
|
|
50,000 |
|
|
|
— |
|
|
|
8/21/2018 |
|
|
|
8/21/2021 |
|
| Hu
Jijun |
|
|
15,000 |
|
|
|
6.00 |
|
|
|
7/29/2009 |
|
|
|
7/28/2019 |
|
| |
|
|
25,000 |
|
|
|
1.65 |
|
|
|
1/31/2015 |
|
|
|
1/31/2025 |
|
| |
|
|
10,000 |
(1) |
|
|
— |
|
|
|
7/26/2016 |
|
|
|
7/26/2019 |
|
| |
|
|
50,000 |
|
|
|
— |
|
|
|
8/21/2018 |
|
|
|
8/21/2021 |
|
| Zhao Shudong |
|
|
9,000 |
|
|
|
2.96 |
|
|
|
3/26/2012 |
|
|
|
3/26/2022 |
|
| |
|
|
18,000 |
|
|
|
1.65 |
|
|
|
1/31/2015 |
|
|
|
1/31/2025 |
|
| |
|
|
10,000 |
(1) |
|
|
— |
|
|
|
7/26/2016 |
|
|
|
7/26/2019 |
|
| |
|
|
50,000 |
|
|
|
— |
|
|
|
8/21/2018 |
|
|
|
8/21/2021 |
|
| Yan Changqing |
|
|
26,000 |
|
|
|
— |
|
|
|
8/21/2018 |
|
|
|
8/21/2021 |
|
| Other Individuals as
a Group |
|
|
135,600 |
|
|
|
2.96 |
|
|
|
3/26/2012 |
|
|
|
3/26/2022 |
|
| |
|
|
300,000 |
|
|
|
1.65 |
|
|
|
1/31/2015 |
|
|
|
1/31/2025 |
|
| |
|
|
50,000 |
(1) |
|
|
— |
|
|
|
10/18/2015 |
|
|
|
10/18/2018 |
|
| |
|
|
12,667 |
(1) |
|
|
— |
|
|
|
7/26/2016 |
|
|
|
7/26/2019 |
|
| |
|
|
600,000 |
(2) |
|
|
— |
|
|
|
10/13/2017 |
|
|
|
3/31/2020 |
|
| Total |
|
|
5,336,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Restricted share
units. |
| |
|
| (2) |
Granted but not yet
issued. |
C. Board Practices
Board of Directors and Board Committees
Our board of directors currently consists of seven members. There
are no family relationships between any of our executive officers
and directors.
The directors are divided into three classes, as nearly equal in
number as the then total number of directors permits. Class I
directors faced re-election at our annual general meeting of
shareholders in 2014 and every three years thereafter. Class II
directors faced re-election at our annual general meeting of
shareholders in 2015 and every three years thereafter. Class III
directors faced re-election at our annual general meeting of
shareholders in 2016 and every three years thereafter.
If the number of directors changes, any increase or decrease will
be apportioned among the classes so as to maintain the number of
directors in each class as nearly as possible. Any additional
directors of a class elected to fill a vacancy resulting from an
increase in such class will hold office for a term that coincides
with the remaining term of that class. Decreases in the number of
directors will not shorten the term of any incumbent director.
These board provisions could make it more difficult for third
parties to gain control of the Company by making it difficult to
replace members of our Board of Directors.
A director may vote in respect of any contract or transaction in
which he is interested, provided, however, that the nature of the
interest of any director in any such contract or transaction shall
be disclosed by him at or prior to the Board of Directors
consideration and any vote on that matter. A general notice or
disclosure to the directors, or otherwise contained in the minutes
of a meeting or a written resolution of the directors or any
committee thereof that a director is a shareholder of any specified
firm or company and is to be regarded as interested in any
transaction with such firm or company shall be sufficient
disclosure and after such general notice it shall not be necessary
to give special notice relating to any particular transaction.
There are no membership qualifications for directors. Further,
there are no share ownership qualifications for directors unless so
fixed by us in a general meeting.
The Board of Directors maintains a majority of independent
directors who are deemed to be independent under the definition of
independence provided by NASDAQ Stock Market Rule 4200(a)(15).
Mr. Zhao, Mr. Wong, Mr. Hu and Mr. Yan are our
independent directors.
We do not have a lead independent director because of the foregoing
reason because we believe our independent directors are encouraged
to freely voice their opinions on a relatively small company
board.
Our Board of Directors plays a significant role in our risk
oversight. The Board of Directors makes all relevant Company
decisions. As such, it is important for us to have our Chief
Executive Officer serve on the Board as he plays a key role in the
risk oversight of the Company. As a smaller reporting company with
a small board of directors, we believe it is appropriate to have
the involvement and input of all of our directors in risk oversight
matters.
Currently, three committees have been established under the board:
the audit committee, the compensation committee and the nominating
committee. All of these committees consist solely of independent
directors.
The audit committee is responsible for overseeing the accounting
and financial reporting processes of the Company and audits of the
financial statements of the Company, including the appointment,
compensation and oversight of the work of our independent auditors.
Mr. Wong qualifies as the audit committee financial expert and
serves as the chair of the audit committee.
The compensation committee of the board of directors reviews and
makes recommendations to the board regarding our compensation
policies for our officers and all forms of compensation, and also
administers our incentive compensation plans and equity-based plans
(but our board retains the authority to interpret those plans).
Mr. Hu serves as the chair of the compensation committee.
The nominating committee of the board of directors is responsible
for the assessment of the performance of the board, considering and
making recommendations to the board with respect to the nominations
or elections of directors and other governance issues. The
nominating committee considers diversity of opinion and experience
when nominating directors. Mr. Zhao serves as the chair of the
nominating committee.
There are no other arrangements or understandings pursuant to which
our directors are selected or nominated.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to
the Company to act in good faith in their dealings with or on
behalf of the Company and exercise their powers and fulfill the
duties of their office honestly. This duty has four essential
elements:
| |
• |
a duty to act in good faith in
the best interests of the Company; |
| |
• |
a duty not to personally profit
from opportunities that arise from the office of
director; |
| |
• |
a duty to avoid conflicts of
interest; and |
| |
• |
a duty to exercise powers for the
purpose for which such powers were intended. |
In general, Cayman Islands law imposes various duties on directors
of a company with respect to certain matters of management and
administration of the Company. In addition to the remedies
available under general law, the Companies Law imposes fines on
directors who fail to satisfy some of these requirements. However,
in many circumstances, an individual is only liable if he is
knowingly guilty of the default or knowingly and willfully
authorizes or permits the default. In comparison, under Delaware
law, the business and affairs of a corporation are managed by or
under the direction of its board of directors. In exercising their
powers, directors are charged with a fiduciary duty of care to
protect the interests of the corporation and a fiduciary duty of
loyalty to act in the best interests of its shareholders. In
addition, under Delaware law, a party challenging the propriety of
a decision of the directors bears the burden of rebutting the
applicability of the presumptions afforded to directors by the
“business judgment rule.” If the presumption is not rebutted, the
business judgment rule protects the directors and their decisions,
and their business judgments will not be second guessed. If the
presumption is rebutted, the directors bear the burden of
demonstrating the entire fairness of the relevant transaction.
Notwithstanding the foregoing, Delaware courts subject directors’
conduct to enhanced scrutiny in respect of defensive actions taken
in response to a threat to corporate control and approval of a
transaction resulting in a sale of control of the corporation.
Limitation of Director and Officer Liability
Pursuant to our Amended Memorandum and Articles of Association,
every director or officer and the personal representatives of the
same shall be indemnified and held harmless out of our assets and
funds against all actions, proceedings, costs, charges, expenses,
losses, damages or liabilities incurred or sustained by him or her
in or about the conduct of our business or affairs or in the
execution or discharge of his or her duties, powers, authorities or
discretions, including without prejudice to the generality of the
foregoing, any costs, expenses, losses or liabilities incurred by
him in defending (whether successfully or otherwise) any civil
proceedings concerning us or our affairs in any court whether in
the Cayman Islands or elsewhere. No such director or officer will
be liable for: (a) the acts, receipts, neglects, defaults or
omissions of any other such Director or officer or agent; or
(b) any loss on account of defect of title to any of our
properties; or (c) account of the insufficiency of any
security in or upon which any of our money shall be invested; or
(d) any loss incurred through any bank, broker or other
similar person; or (e) any loss occasioned by any negligence,
default, breach of duty, breach of trust, error of judgment or
oversight on his or her part; or (f) any loss, damage or
misfortune whatsoever which may happen in or arise from the
execution or discharge of the duties, powers authorities, or
discretions of his or her office or in relation thereto, unless the
same shall happen through his or her own dishonesty, gross
negligence or willful default.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive
officers has been convicted in a criminal proceeding, excluding
traffic violations or similar misdemeanors, or has been a party to
any judicial or administrative proceeding during the past ten years
that resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities subject
to, federal or state securities laws, or a finding of any violation
of federal or state securities or commodities laws, any laws
respecting financial institutions or insurance companies, any law
or regulation prohibiting mail or wire fraud in connection with any
business entity or been subject to any disciplinary sanctions or
orders imposed by a stock, commodities or derivatives exchange or
other self-regulatory organization, except for matters that were
dismissed without sanction or settlement.
D. Employees
As of June 30, 2019, we employed a total of 129 full-time and 0
part time employees in the following functions:
| |
|
Number of Employees |
|
|
Department |
|
June 30,
2019 |
|
|
June 30,
2018 |
|
|
June 30,
2017 |
|
| Senior
Management |
|
|
10 |
|
|
|
7 |
|
|
|
7 |
|
| Human Resource &
Administration |
|
|
21 |
|
|
|
19 |
|
|
|
7 |
|
| Finance |
|
|
16 |
|
|
|
10 |
|
|
|
6 |
|
| Research &
Development |
|
|
32 |
|
|
|
30 |
|
|
|
32 |
|
| Procurement and
production |
|
|
29 |
|
|
|
5 |
|
|
|
2 |
|
| Sales &
Marketing |
|
|
21 |
|
|
|
19 |
|
|
|
17 |
|
|
Total |
|
|
129 |
|
|
|
90 |
|
|
|
71 |
|
Our employees are not represented by a labor organization or
covered by a collective bargaining agreement. We have not
experienced any work stoppages.
We are required under PRC law to make contributions to employee
benefit plans at specified percentages of our after-tax profit. In
addition, we are required by PRC law to cover employees in China
with various types of social insurance. In fiscal year 2019, we
contributed approximately $167,277 to the employee benefit plans
and social insurance. In fiscal year 2018, we contributed
approximately $127,371 to the employee benefit plans and social
insurance. In fiscal year 2017, we contributed approximately
$133,402 to the employee benefit plans and social insurance. The
effect on our liquidity by the payments for these contributions is
immaterial. We believe that we are in material compliance with the
relevant PRC employment laws.
E. Share Ownership
For information regarding the share ownership of our directors and
senior management, see “Item 7. Major Shareholders and Related
Party Transactions — A. Major Shareholders.”
Share and Share Options
Share Option Pool
In connection with our initial public offering, we established a
pool for share options as our 2009 Stock Incentive Plan (“2009
Incentive Plan”) for the Domestic Companies’ and our employees.
This pool contains options to purchase up to 790,362 of our
ordinary shares. The options will vest at a rate of 20% per
year for five years and have an exercise price of the market price
of our shares on the date the options are granted. To date, we
issued 564,000 options and 226,362 shares out of this employee
share option pool. We initially granted 293,000 options in 2009. We
held a shareholder meeting in December 2010 and announced the
resignation of three directors, and as a result, 100,000 options
were forfeited and went back in the pool. In 2012, we granted an
additional 415,000 options and 44,000 options were forfeited and
went back to the pool. In the three months ended June 30, 2014,
148,400 vested options from 2012 grants were exercised. As of June
30, 2019, we have 415,600 options outstanding under the 2009
Incentive Plan.
On January 29, 2015, the Company held its 2014 annual general
meeting of shareholders, during which the Company’s shareholders
approved the Company’s 2015 Stock Incentive Plan (“2015 Incentive
Plan”). Pursuant to the 2015 Incentive Plan, we were initially
authorized to issue up to an aggregate of Seven Hundred Thousand
(700,000) ordinary Shares. Additionally, commencing on the first
business day in fiscal year ending June 30, 2016 and on the first
business day of each fiscal year thereafter while the 2015
Incentive Plan is in effect, the maximum number of Ordinary Shares
available for issuance under this 2015 Incentive Plan during that
fiscal year shall be increased such that, as of such first business
day, the maximum aggregate number of Ordinary Shares available for
issuance under this 2015 Incentive Plan during that fiscal year
shall be equal to Fifteen Percent (15%) of the number of total
issued and outstanding Ordinary Shares of the Company as recorded
by the Company’s transfer agent on the last business day of the
prior fiscal year. The Company granted options to purchase 400,000
Ordinary Shares to its employees and non-employee director on
January 31, 2015 under the 2015 Incentive Plan. As of June 30,
2019, we have 400,000 options outstanding under this 2015 Incentive
Plan.
As of June 30, 2019, we have an aggregate of 815,600 options
outstanding under our incentive plans.
Executive Stock Grants
On December 13, 2013, the Company granted 95,181 restricted shares
to Mr. Yin Shenping and 135,181 restricted shares to Mr. Chen
Guangqiang at an aggregate value of ¥4,207,496 ($688,782), based on
the stock closing price of $2.99 at December 13, 2013. These
restricted shares will be vested over three years with one-third of
the shares vesting every year from the grant date. Of these 76,787
restricted shares vested and were issued to Mr. Yin and Mr. Chen on
March 24, 2015, and 76,787 restricted shares were vested and issued
to Mr. Yin and Chen on July 13, 2016.
On January 31, 2015, the Company granted 150,000 restricted shares
to Mr. Yin and 150,000 restricted shares to Mr. Chen at an
aggregate value of ¥3,038,558($495,000), based on the stock closing
price of $1.65 at January 31, 2015. These restricted shares will
vest over three years with one-third of the shares vesting every
year from the grant date.
On July 11, 2015, the Company’s board approved to reserve 800,000
shares and options under the 2015 Incentive Plan. On October 18,
2015, 800,000 restricted shares were granted to staff under this
plan at an aggregate value of ¥4,677,608 ($704,000), based on the
stock closing price of $0.88 at October 16, 2015. These restricted
shares will vest over three years with one-third of the shares
vesting every year from the grant date.
On July 23, 2016, the Company’s board approved the reservation of
876,000 shares and options. On July 27, 2016, 876,000 restricted
shares were granted to staff pursuant to this authorization.
On December 9, 2016, the Company’s board approved management's new
plan based on future performance for the three fiscal years from
2017 to 2019. The Company also agreed on front-issuing of shares
based on the optimism situation, thus non-vested 3.01 million
shares were issued to management on January 23, 2017. The fair
value of the restricted shares was $4,063,500 based on the closing
stock price $1.35 at December 9, 2016. Prior to the filing of the
annual report for the years ending June 30, 2017, 2018 and 2019,
certain number of shares granted under this plan may not be sold,
transferred, hypothecated, voted or otherwise used for any purpose,
and any shares that are not earned as stated above will be
automatically cancelled without payment by the transfer agent of
the Company.
On August 27, 2018, the Company’s board approved a grant of
1,956,000 restricted stock units (the “RSUs”) to certain employees
and directors under the Company’s 2015 Incentive Plan according to
a vesting schedule as a reward and compensation to encourage as an
incentive for their future dedication to the Company. Fair value of
these RSUs are $2,503,680 based on the closing price of the
resolution of the board on August 27, 2018, with a vesting period
of three years from the date of the grant.
As of June 30, 2019, we have 4,018,222 non-vested restricted stocks
outstanding.
| Item 7. |
Major Shareholders and Related Party
Transactions |
A. Major
Shareholders
The following table sets forth information with respect to
beneficial ownership of our ordinary shares as of the date of this
report, for each person known by us to beneficially own 5% or more
of our ordinary shares, and all of our executive officers and
directors individually and as a group. Beneficial ownership is
determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the securities. Except
as indicated below, and subject to applicable community property
laws, the persons named in the table have sole voting and
investment power with respect to all ordinary shares shown as
beneficially owned by them. Percentage of beneficial ownership is
based on shares, which consists of 21,799,300 shares outstanding as
of September 23, 2019, and 2,172,937 shares subject to options that
are exercisable and 1,250,000 restricted shares issued and to be
vested within 60 days after September 23, 2019. These shares do not
include 2,435,284 restricted shares which have been granted to FGS
individual shareholders and are subject to cancellation. The
2,172,937 shares subject to options and restricted shares are
deemed to be outstanding for the purposes of computing the
percentage ownership of the individual holding such shares, but are
not deemed outstanding for purposes of computing the percentage for
any other person shown in the table. Our major shareholders do not
possess voting rights that differ from our other shareholders. The
address of each of the below shareholders is c/o Recon Technology
Ltd, Room 1902, Building C, King Long International Mansion, 9
Fulin Road, Beijing 100107 China.
| |
|
Amount of
Beneficial
Ownership |
|
|
Percentage
Ownership |
|
|
Yin Shenping
(1) |
|
|
3,072,775 |
|
|
|
13.87 |
% |
|
Chen Guangqiang
(2) |
|
|
3,112,775 |
|
|
|
14.05 |
% |
|
Hu Jijun (3) |
|
|
116,667 |
|
|
|
* |
% |
|
Nelson Wong
(4) |
|
|
119,667 |
|
|
|
* |
% |
|
Zhao
Shudong(5) |
|
|
109,667 |
|
|
|
* |
% |
|
Liu Jia (6) |
|
|
511,667 |
|
|
|
2.31 |
% |
|
Bi Yongquan |
|
|
3,033,333 |
|
|
|
13.69 |
% |
|
Yan Changqing |
|
|
8,667 |
|
|
|
* |
% |
|
Directors and Executive Officers as a Group (eight members)** |
|
|
10,085,218 |
|
|
|
45.52 |
% |
| (1) |
Includes 48,000 options to
purchase ordinary shares that are exercisable and 153,333
restricted shares that are vested within 60 days after September
23, 2019. |
| (2) |
Includes 30, 000 options to
purchase ordinary shares that are exercisable and 153,333
restricted shares that are vested within 60 days after September
23, 2019. |
| (3) |
Includes 25,000 options to
purchase ordinary shares that are exercisable and 36,667 restricted
shares that are vested within 60 days after September 23,
2019. |
| (4) |
Includes 25,000 options to
purchase ordinary shares that are exercisable and 66,667 restricted
shares that are vested within 60 days after September 23,
2019. |
| (5) |
Include 27,000 options that are
exercisable and 56,667 restricted shares that are vested within 60
days after September 23, 2019. |
| (6) |
Includes 32,000 options to
purchase ordinary shares and 48,667 restricted shares that are
vested within 60 days after September 23, 2019. |
| * |
Less than 1%. |
| ** |
No other 5%
shareholder. |
B. Related party transactions
Transactions with Related Persons
Sales to related party consisted of the following:
| |
|
For the years ended June 30, |
|
| |
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
2019 |
|
| |
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
U.S. Dollars |
|
|
Urumqi Yikeli Automatic Control Equipment Co., Ltd. |
|
¥ |
- |
|
|
¥ |
- |
|
|
¥ |
3,726,894 |
|
|
$ |
542,741 |
|
| Total
revenues from related parties |
|
¥ |
- |
|
|
¥ |
- |
|
|
¥ |
3,726,894 |
|
|
$ |
542,741 |
|
Other payables consisted of the following:
| |
|
June 30, 2018 |
|
|
June 30, 2019 |
|
|
June 30, 2019 |
|
|
Related Party |
|
RMB |
|
|
RMB |
|
|
U.S. Dollars |
|
| Expenses
paid by the major shareholders |
|
¥ |
2,767,349 |
|
|
¥ |
2,029,908 |
|
|
$ |
295,612 |
|
| Due to family member
of one owner |
|
|
193,143 |
|
|
|
- |
|
|
|
- |
|
|
Due to management staff for costs incurred on behalf of Recon |
|
|
250,965 |
|
|
|
260,965 |
|
|
|
38,004 |
|
| Total |
|
¥ |
3,211,457 |
|
|
¥ |
2,290,873 |
|
|
$ |
333,616 |
|
The Company also had short-term borrowings` from related parties.
Below is a summary of the Company’s short-term borrowings due to
related parties as of June 30, 2018 and 2019, respectively.
|
Short-term borrowings |
|
June 30, 2018 |
|
|
June 30, 2019 |
|
|
June 30, 2019 |
|
|
due to related parties: |
|
RMB |
|
|
RMB |
|
|
U.S. Dollars |
|
|
Short-term borrowing from a Founder, 5.655% annual interest, due on
December 15, 2018 |
|
|
5,011,782 |
|
|
|
|
|
|
|
|
|
| Short-term borrowing
from a Founder, 5.655% annual interest, due on March 21, 2019 |
|
|
4,006,283 |
|
|
|
|
|
|
|
|
|
| Short-term borrowing
from a Founder, 5.65% annual interest, due on December 19,
2019 |
|
|
|
|
|
|
5,008,640 |
|
|
|
729,400 |
|
| Short-term borrowing
from a Founder, 5.65% annual interest, due on March 27, 2020 |
|
|
|
|
|
|
4,001,885 |
|
|
|
582,787 |
|
| Total
short-term borrowings due to related parties |
|
¥ |
9,018,065 |
|
|
¥ |
9,010,525 |
|
|
$ |
1,312,187 |
|
The Company also had long-term borrowings` from a related party.
Below is a summary of the Company’s long-term borrowings due to a
related party as of June 30, 2018 and 2019, respectively.
|
Long-term borrowings |
|
June 30, 2018 |
|
|
June 30, 2019 |
|
|
June 30, 2019 |
|
|
due to related party: |
|
RMB |
|
|
RMB |
|
|
U.S. Dollars |
|
| Long-term
borrowing from a Founder, monthly payments of ¥126,135 inclusive of
interest at 8.90%, ten years loan, due in November 2027. |
|
¥ |
9,663,729 |
|
|
¥ |
8,977,001 |
|
|
$ |
1,307,305 |
|
|
Less: current portion |
|
|
(719,895 |
|
|
|
(780,797 |
) |
|
|
(113,706 |
) |
| Total
long-term borrowings due to related party |
|
¥ |
8,943,834 |
|
|
¥ |
8,196,204 |
|
|
$ |
1,193,599 |
|
Leases from related parties - The Company has
various agreements for the lease of office space owned by the
Founders and their family members. The terms of the agreement state
that the Company will continue to lease the property at a monthly
rent of ¥140,000 with annual rental expense at ¥1.68 million ($0.24
million). The details of leases from related parties are as
below:
| |
|
|
|
|
|
Monthly Rent |
|
|
Monthly Rent |
|
|
Lessee |
|
Lessor |
|
Rent Period |
|
RMB |
|
|
USD |
|
| Nanjing
Recon |
|
Yin
Shenping |
|
April
1, 2018 - March 31, 2020 |
|
¥ |
60,000 |
|
|
$ |
8,737 |
|
| BHD |
|
Chen
Guangqiang |
|
January 1, 2019 -
December 31, 2019 |
|
|
22,500 |
|
|
|
3,277 |
|
| BHD |
|
Mr Chen's family
member |
|
January 1, 2019 -
December 31, 2019 |
|
|
47,500 |
|
|
|
6,917 |
|
| Recon-BJ |
|
Yin Shenping |
|
July 1, 2019 - June
30, 2020 |
|
|
10,000 |
|
|
|
1,456 |
|
Expenses paid by the owner on behalf of Recon
- Shareholders of our VIEs paid certain operating
expenses for the Company. As of June 30, 2018, and 2019, ¥2,767,349
and ¥2,029,908 ($295,612) was due to them, respectively.
Other than as described herein, no transactions required to be
disclosed under Item 404 of Regulation S-K have occurred since
the beginning of the Company’s last fiscal year.
Director Independence
The Board of Directors maintains a majority of independent
directors who are deemed to be independent under the definition of
independence provided by NASDAQ Stock Market Rule 4200(a)(15). Mr.
Wong, Mr. Hu, Mr. Zhao and Mr. Yan are our independent
directors.
C. Interests of experts and counsel
Not applicable for annual reports on Form 20-F.
| Item 8. |
Financial Information |
A. Consolidated Statements and Other Financial
Information
Please refer to Item 18.
Legal and Administrative Proceedings
We are currently not a party to any material legal or
administrative proceedings and are not aware of any pending or
threatened material legal or administrative proceedings against us.
We may from time to time become a party to various legal or
administrative proceedings arising in the ordinary course of our
business.
Dividend Policy
(a) We have never declared or paid any cash dividends on our
ordinary shares. We anticipate that we will retain any earnings to
support operations and to finance the growth and development of our
business. Therefore, we do not expect to pay cash dividends in the
foreseeable future. Any future determination relating to our
dividend policy will be made at the discretion of our Board of
Directors and will depend on a number of factors, including future
earnings, capital requirements, financial conditions and future
prospects and other factors the Board of Directors may deem
relevant.
Because we are a holding company with no operations of our own and
all of our operations are conducted through our Chinese subsidiary,
our ability to pay dividends and to finance any debt that we may
incur is dependent upon dividends and other distributions paid. In
addition, Chinese legal restrictions permit payment of dividends to
us by our Chinese subsidiary only out of its accumulated net
profit, if any, determined in accordance with Chinese accounting
standards and regulations. Under Chinese law, our subsidiary is
required to set aside a portion (at least 10%) of its 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 subsidiaries’ registered capital. These funds
may be distributed to shareholders at the time of its wind up. See
“Holding Company Structure.”
Payments of dividends by our subsidiary in China to the Company are
also subject to restrictions including primarily the restriction
that foreign invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign
exchange business after providing valid commercial documents. There
are no such similar foreign exchange restrictions in the Cayman
Islands.
(b) We are not required to provide any disclosure under this item,
as we have applied all of the net proceeds from our initial public
offering, as disclosed in our annual report on Form 10-K for the
year ended June 30, 2011. While we have filed a shelf registration
statement on Form S-3 (SEC no. 333-190387, declared effective
August 14, 2013), we have sold 546,500 shares under such
registration statement. We also filed a shelf registration
statement on Form S-3 (SEC no. 333-213702, declared effective
October 7, 2016) and we have sold 3,592,500 shares under such
registration statement.
(c) None.
B. Significant Changes
We have not experienced any significant changes since the date of
our audited consolidated financial statements included in this
annual report.
| Item 9. |
The Offer and Listing |
A. Offer and listing
details
We completed our initial public offering on July 29, 2009. The
following table sets forth the high and low sale prices for our
ordinary shares as reported on the NASDAQ Capital Market.
| |
|
High |
|
|
Low |
|
|
Annual Highs and Lows |
|
|
|
|
|
|
|
|
| Year
Ended June 30, 2019 |
|
$ |
1.9 |
|
|
$ |
0.63 |
|
| |
|
|
|
|
|
|
|
|
|
Quarterly Highs and Lows |
|
|
|
|
|
|
|
|
| Quarter Ended
September 30, 2018 |
|
$ |
1.9 |
|
|
$ |
1.1053 |
|
| Quarter Ended
December 31, 2018 |
|
$ |
1.3335 |
|
|
$ |
0.63 |
|
| Quarter Ended
March 31, 2019 |
|
$ |
1.22 |
|
|
$ |
0.68 |
|
| Quarter Ended
June 30, 2019 |
|
$ |
1.06 |
|
|
$ |
0.7212 |
|
| |
|
|
|
|
|
|
|
|
|
Monthly Highs and Lows |
|
|
|
|
|
|
|
|
| April 2019 |
|
$ |
1.06 |
|
|
$ |
0.92 |
|
| May 2019 |
|
$ |
0.9975 |
|
|
$ |
0.8064 |
|
| June 2019 |
|
$ |
0.92 |
|
|
$ |
0.7212 |
|
| July 2019 |
|
$ |
0.87 |
|
|
$ |
0.7 |
|
| August 2019 |
|
$ |
0.73 |
|
|
$ |
0.6301 |
|
| September 2019
(through September 23, 2019) |
|
$ |
0.823 |
|
|
$ |
0.65 |
|
As of September 23, 2019, there were approximately 28 holders of
record of our ordinary shares. This excludes our ordinary shares
owned by shareholders holding ordinary shares under nominee
security position listings. On September 23, 2019, the last sales
price of our ordinary shares as reported on the NASDAQ Capital
Market was $0.7649 per ordinary share.
B. Plan of distribution
Not applicable for annual reports on Form 20-F.
C. Markets
Our Ordinary Shares are listed on the Nasdaq Capital Market under
the symbol “RCON.”
D. Selling shareholders
Not applicable for annual reports on Form 20-F.
E. Dilution
Not applicable for annual reports on Form 20-F.
F. Expenses of the issue
Not applicable for annual reports on Form 20-F.
| Item 10. |
Additional
Information |
A. Share capital
Not applicable for annual reports on Form 20-F.
B. Memorandum and articles of association
The information required by this item is incorporated by reference
to the material headed “Description of Share Capital” in our
Registration Statement on Form S-3, File no. 333- 213702, filed
with the SEC on September 29, 2016.
C. Material contracts
We have not entered into any material contracts other than in the
ordinary course of business and otherwise described elsewhere in
this annual report.
D. Exchange controls
Foreign Currency Exchange
The principal regulations governing foreign currency exchange in
China are the Foreign Exchange Administration Regulations. Under
the PRC foreign exchange regulations, payments of current account
items, such as profit distributions and trade and service-related
foreign exchange transactions, may be made in foreign currencies
without prior approval from SAFE by complying with certain
procedural requirements. By contrast, approval from or registration
with appropriate government authorities is required where RMB is to
be converted into foreign currency and remitted out of China to pay
capital expenses such as the repayment of foreign
currency-denominated loans or foreign currency is to be remitted
into China under the capital account, such as a capital increase or
foreign currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular on the Relevant Operating
Issues Concerning the Improvement of the Administration of the
Payment and Settlement of Foreign Currency Capital of
Foreign-Invested Enterprises, or SAFE Circular 142, regulating the
conversion by a foreign-invested enterprise of foreign
currency-registered capital into RMB by restricting how the
converted RMB may be used. In addition, SAFE promulgated Circular
45 on November 9, 2011 in order to clarify the application of SAFE
Circular 142. Under SAFE Circular 142 and Circular 45, the RMB
capital converted from foreign currency registered capital of a
foreign-invested enterprise may only be used for purposes within
the business scope approved by the applicable government authority
and may not be used for equity investments within the PRC. In
addition, SAFE strengthened its oversight of the flow and use of
the RMB capital converted from foreign currency registered capital
of foreign-invested enterprises. The use of such RMB capital may
not be changed without SAFE’s approval, and such RMB capital may
not in any case be used to repay RMB loans if the proceeds of such
loans have not been used.
In November 2012, SAFE promulgated the Circular of Further
Improving and Adjusting Foreign Exchange Administration Policies on
Foreign Direct Investment, which substantially amends and
simplifies the current foreign exchange procedure. Pursuant to this
circular, the opening of various special purpose foreign exchange
accounts, such as pre-establishment expenses accounts, foreign
exchange capital accounts and guarantee accounts, the reinvestment
of RMB proceeds by foreign investors in the PRC, and remittance of
foreign exchange profits and dividends by a foreign-invested
enterprise to its foreign shareholders no longer require the
approval or verification of SAFE, and multiple capital accounts for
the same entity may be opened in different provinces, which was not
possible previously. In addition, SAFE promulgated the Circular on
Printing and Distributing the Provisions on Foreign Exchange
Administration over Domestic Direct Investment by Foreign Investors
and the Supporting Documents in May 2013, which specifies that the
administration by SAFE or its local branches over direct investment
by foreign investors in the PRC shall be conducted by way of
registration and banks shall process foreign exchange business
relating to the direct investment in the PRC based on the
registration information provided by SAFE and its branches.
We typically do not need to use our offshore foreign currency to
fund our PRC operations. In the event we need to do so, we will
apply to obtain the relevant approvals of SAFE and other PRC
government authorities as necessary.
SAFE Circular 75
Under the Circular on Relevant Issues Concerning Foreign Exchange
Control on Domestic Residents’ Financing and Roundtrip Investment
Through Offshore Special Purpose Vehicles, or SAFE Circular 75,
issued by SAFE on October 21, 2005 and its implementation rules, a
PRC resident (whether a natural or legal person) is required to
complete an initial registration with its local SAFE branch before
incorporating or acquiring control of an offshore special purpose
vehicle, or SPV, with assets or equity interests in a PRC company,
for the purpose of offshore equity financing. The PRC resident is
also required to amend the registration or make a filing upon (1)
the injection of any assets or equity interests in an onshore
company or undertaking of offshore financing, or (2) the occurrence
of a material change that may affect the capital structure of a
SPV. SAFE also subsequently issued various guidance and rules
regarding the implementation of SAFE Circular 75, which imposed
obligations on PRC subsidiaries of offshore companies to coordinate
with and supervise any PRC-resident beneficial owners of offshore
entities in relation to the SAFE registration process.
Regulation of Dividend Distribution
The principal laws, rules and regulations governing dividend
distribution by foreign-invested enterprises in the PRC are the
Company Law of the PRC, as amended, the Wholly Foreign-owned
Enterprise Law and its implementation regulations and the Equity
Joint Venture Law and its implementation regulations. Under these
laws, rules and regulations, foreign-invested enterprises may pay
dividends only out of their accumulated profit, if any, as
determined in accordance with PRC accounting standards and
regulations. Both PRC domestic companies and wholly-foreign owned
PRC enterprises are required to set aside as general reserves at
least 10% of their after-tax profit, until the cumulative amount of
such reserves reaches 50% of their registered capital. A PRC
company is not permitted to distribute any profits until any losses
from prior fiscal years have been offset. Profits retained from
prior fiscal years may be distributed together with distributable
profits from the current fiscal year.
E. Taxation
The following sets forth the material Cayman Islands, Chinese and
U.S. federal income tax consequences related to an investment in
our Ordinary Shares. It is directed to U.S. Holders (as defined
below) of our Ordinary Shares and is based upon laws and relevant
interpretations thereof in effect as of the date of this annual
report, all of which are subject to change. This description does
not deal with all possible tax consequences relating to an
investment in our Ordinary Shares, such as the tax consequences
under state, local and other tax laws.
The following brief description applies only to U.S. Holders
(defined below) that hold Ordinary Shares as capital assets and
that have the U.S. dollar as their functional currency. This brief
description is based on the tax laws of the United States in effect
as of the date of this annual report and on U.S. Treasury
regulations in effect or, in some cases, proposed, as of the date
of this annual report, as well as judicial and administrative
interpretations thereof available on or before such date. All of
the foregoing authorities are subject to change, which change could
apply retroactively and could affect the tax consequences described
below.
The brief description below of the U.S. federal income tax
consequences to “U.S. Holders” will apply to you if you are a
beneficial owner of shares and you are, for U.S. federal income tax
purposes,
| |
• |
an individual who is a citizen or
resident of the United States; |
| |
• |
a corporation (or other entity
taxable as a corporation for U.S. federal income tax purposes)
organized under the laws of the United States, any state thereof or
the District of Columbia; |
| |
• |
an estate whose income is subject
to U.S. federal income taxation regardless of its source;
or |
| |
• |
a trust that (1) is subject to
the primary supervision of a court within the United States and the
control of one or more U.S. persons for all substantial decisions
or (2) has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person. |
WE URGE POTENTIAL PURCHASERS OF OUR SHARES TO CONSULT THEIR
OWN TAX
ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S.
TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR
SHARES.
People’s Republic of China Enterprise Taxation
The following brief description of Chinese enterprise laws is
designed to highlight the enterprise-level taxation on our
earnings, which will affect the amount of dividends, if any, we are
ultimately able to pay to our shareholders. See “Dividend
Policy.”
We are a holding company incorporated in the Cayman Islands and we
gain substantial income by way of dividends paid to us from our PRC
subsidiaries. The EIT Law and its implementation rules provide that
China-sourced income of foreign enterprises, such as dividends paid
by a PRC subsidiary to its equity holders that are non-resident
enterprises, will normally be subject to PRC withholding tax at a
rate of 10%, unless any such foreign investor’s jurisdiction of
incorporation has a tax treaty with China that provides for a
preferential tax rate or a tax exemption.
Under the EIT Law, an enterprise established outside of China with
a “de facto management body” within China is considered a “resident
enterprise,” which means that it is treated in a manner similar to
a Chinese enterprise for enterprise income tax purposes. Although
the implementation rules of the EIT Law define “de facto management
body” as a managing body that actually, comprehensively manage and
control the production and operation, staff, accounting, property
and other aspects of an enterprise, the only official guidance for
this definition currently available is set forth in SAT Notice 82,
which provides guidance on the determination of the tax residence
status of a Chinese-controlled offshore incorporated enterprise,
defined as an enterprise that is incorporated under the laws of a
foreign country or territory and that has a PRC enterprise or
enterprise group as its primary controlling shareholder. Although
Recon does not have a PRC enterprise or enterprise group as our
primary controlling shareholder and is therefore not a
Chinese-controlled offshore incorporated enterprise within the
meaning of SAT Notice 82, in the absence of guidance specifically
applicable to us, we have applied the guidance set forth in SAT
Notice 82 to evaluate the tax residence status of Recon and its
subsidiaries organized outside the PRC.
According to SAT Notice 82, a Chinese-controlled offshore
incorporated enterprise will be regarded as a PRC tax resident by
virtue of having a “de facto management body” in China and will be
subject to PRC enterprise income tax on its worldwide income only
if all of the following criteria are met: (i) the places where
senior management and senior management departments that are
responsible for daily production, operation and management of the
enterprise perform their duties are mainly located within the
territory of China; (ii) financial decisions (such as money
borrowing, lending, financing and financial risk management) and
personnel decisions (such as appointment, dismissal and salary and
wages) are decided or need to be decided by organizations or
persons located within the territory of China; (iii) main property,
accounting books, corporate seal, the board of directors and files
of the minutes of shareholders’ meetings of the enterprise are
located or preserved within the territory of China; and (iv) one
half (or more) of the directors or senior management staff having
the right to vote habitually reside within the territory of
China.
We believe that we do not meet some of the conditions outlined in
the immediately preceding paragraph. For example, as a holding
company, the key assets and records of the Company, including the
resolutions and meeting minutes of our board of directors and the
resolutions and meeting minutes of our shareholders, are located
and maintained outside the PRC. In addition, we are not aware of
any offshore holding companies with a corporate structure similar
to ours that has been deemed a PRC “resident enterprise” by the PRC
tax authorities. Accordingly, we believe that Recon and its
offshore subsidiaries should not be treated as a “resident
enterprise” for PRC tax purposes if the criteria for “de facto
management body” as set forth in SAT Notice 82 were deemed
applicable to us. However, as the tax residency status of an
enterprise is subject to determination by the PRC tax authorities
and uncertainties remain with respect to the interpretation of the
term “de facto management body” as applicable to our offshore
entities, we will continue to monitor our tax status.
The implementation rules of the EIT Law provide that, (i) if the
enterprise that distributes dividends is domiciled in the PRC or
(ii) if gains are realized from transferring equity interests of
enterprises domiciled in the PRC, then such dividends or gains are
treated as China-sourced income. It is not clear how “domicile” may
be interpreted under the EIT Law, and it may be interpreted as the
jurisdiction where the enterprise is a tax resident. Therefore, if
we are considered as a PRC tax resident enterprise for PRC tax
purposes, any dividends we pay to our overseas shareholders which
are non-resident enterprises as well as gains realized by such
shareholders from the transfer of our shares may be regarded as
China-sourced income and as a result become subject to PRC
withholding tax at a rate of up to 10%.
See “Risk Factors — Risks Related to Doing Business in
China — Under the Enterprise Income Tax Law, we may be
classified as a ‘Resident Enterprise’ of China. Such classification
will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.”
Any gain or loss recognized by you generally will be treated as
United States source gain or loss. However, if we are treated as a
PRC resident enterprise for PRC tax purposes and PRC tax were
imposed on any gain, and if you are eligible for the benefits of
the tax treaty between the United States and PRC, you may elect to
treat such gain as PRC source gain under such treaty and,
accordingly, you may be able to credit the PRC tax against your
United States federal income tax liability.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or
corporations based upon profits, income, gains or appreciation and
there is no taxation in the nature of inheritance tax or estate
duty. There are no other taxes likely to be material to our company
levied by the Government of the Cayman Islands except for stamp
duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of the Cayman Islands.
The Cayman Islands is not a party to any double tax treaties. There
are no exchange control regulations or currency restrictions in the
Cayman Islands.
United States Federal Income Taxation
The following does not address the tax consequences to any
particular investor or to persons in special tax situations such
as:
| |
• |
financial
institutions; |
| |
• |
regulated investment
companies; |
| |
• |
real estate investment
trusts; |
| |
• |
traders that elect to
mark-to-market; |
| |
• |
persons liable for alternative
minimum tax; |
| |
• |
persons holding our Ordinary
Shares as part of a straddle, hedging, conversion or integrated
transaction; |
| |
• |
persons that actually or
constructively own 10% or more of our voting shares; |
| |
• |
persons who acquired our Ordinary
Shares pursuant to the exercise of any employee share option or
otherwise as consideration; or |
| |
• |
persons holding our Ordinary
Shares through partnerships or other pass-through
entities. |
Prospective purchasers are urged to consult their own tax advisors
about the application of the U.S. Federal tax rules to their
particular circumstances as well as the state, local, foreign and
other tax consequences to them of the purchase, ownership and
disposition of our Ordinary Shares.
Taxation of Dividends and Other Distributions on our Ordinary
Shares
Subject to the passive foreign investment company rules discussed
below, the gross amount of distributions made by us to you with
respect to the Ordinary Shares (including the amount of any taxes
withheld therefrom) will generally be includable in your gross
income as dividend income on the date of receipt by you, but only
to the extent that the distribution is paid out of our current or
accumulated earnings and profits (as determined under U.S. federal
income tax principles). With respect to corporate U.S. Holders, the
dividends will not be eligible for the dividends-received deduction
allowed to corporations in respect of dividends received from other
U.S. corporations.
With respect to non-corporate U.S. Holders, including individual
U.S. Holders, dividends will be taxed at the lower capital gains
rate applicable to qualified dividend income, provided that (1) the
Ordinary Shares are readily tradable on an established securities
market in the United States, or we are eligible for the benefits of
an approved qualifying income tax treaty with the United States
that includes an exchange of information program, (2) we are not a
passive foreign investment company (as discussed below) for either
our taxable year in which the dividend is paid or the preceding
taxable year, and (3) certain holding period requirements are met.
Under U.S. Internal Revenue Service authority, Ordinary Shares are
considered for purpose of clause (1) above to be readily tradable
on an established securities market in the United States if they
are listed on the Nasdaq Capital Market. You are urged to consult
your tax advisors regarding the availability of the lower rate for
dividends paid with respect to our Ordinary Shares, including the
effects of any change in law after the date of this annual
report.
Dividends will constitute foreign source income for foreign tax
credit limitation purposes. If the dividends are taxed as qualified
dividend income (as discussed above), the amount of the dividend
taken into account for purposes of calculating the foreign tax
credit limitation will be limited to the gross amount of the
dividend, multiplied by the reduced rate divided by the highest
rate of tax normally applicable to dividends. The limitation on
foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. For this purpose, dividends
distributed by us with respect to our Ordinary Shares will
constitute “passive category income” but could, in the case of
certain U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution exceeds our
current and accumulated earnings and profits (as determined under
U.S. federal income tax principles), it will be treated first as a
tax-free return of your tax basis in your Ordinary Shares, and to
the extent the amount of the distribution exceeds your tax basis,
the excess will be taxed as capital gain. We do not intend to
calculate our earnings and profits under U.S. federal income tax
principles. Therefore, a U.S. Holder should expect that a
distribution will be treated as a dividend even if that
distribution would otherwise be treated as a non-taxable return of
capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign investment company rules discussed
below, you will recognize taxable gain or loss on any sale,
exchange or other taxable disposition of a share equal to the
difference between the amount realized (in U.S. dollars) for the
share and your tax basis (in U.S. dollars) in the Ordinary Shares.
The gain or loss will be capital gain or loss. If you are a
non-corporate U.S. Holder, including an individual U.S. Holder, who
has held the Ordinary Shares for more than one year, you will
generally be eligible for reduced tax rates. The
deductibility of capital losses is subject to limitations. Any such
gain or loss that you recognize will generally be treated as United
States source income or loss for foreign tax credit limitation
purposes.
Passive Foreign Investment Company
A non-U.S. corporation is considered a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes for any
taxable year if either:
| |
• |
at least 75% of its gross income
is passive income; or |
| |
• |
at least 50% of the value of its
assets (based on an average of the quarterly values of the assets
during a taxable year) is attributable to assets that produce or
are held for the production of passive income (the “asset
test”). |
We will be treated as owning our proportionate share of the assets
and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, at least 25%
(by value) of the stock.
Based on the market price of our Ordinary Shares, the value of our
assets and the composition of our assets and income, we believe
that we were not a PFIC for our taxable year ended December 31,
2017, 2016 or 2015. However, given the factual nature of the
analyses and the lack of guidance, no assurance can be given. We do
not expect to be a PFIC for our taxable year ending December 31,
2018. However, because PFIC status is a factual determination for
each taxable year which cannot be made until the close of the
taxable year, our actual PFIC status will not be determinable until
the close of the taxable year and, accordingly, there is no
guarantee that we will not be a PFIC for the current taxable year
or any future taxable year.
We must make a separate determination each year as to whether we
are a PFIC. As a result, our PFIC status may change from year to
year. In particular, because the value of our assets for purposes
of the asset test will generally be determined based on the market
price of our Ordinary Shares, our PFIC status will depend in large
part on the market price of our Ordinary Shares. Accordingly,
fluctuations in the market price of the Ordinary Shares may cause
us to become a PFIC. In addition, the application of the PFIC rules
is subject to uncertainty in several respects including the
composition of our income and assets in a given year. If we are a
PFIC for any year during which you hold Ordinary Shares, we will
continue to be treated as a PFIC for all succeeding years during
which you hold Ordinary Shares. However, if we cease to be a PFIC,
you may avoid some of the adverse effects of the PFIC regime by
making a “deemed sale” election with respect to the Ordinary
Shares.
If we are a PFIC for any taxable year during which you hold
Ordinary Shares, you will be subject to special tax rules with
respect to any “excess distribution” that you receive and any gain
you realize from a sale or other disposition (including a pledge)
of the Ordinary Shares, unless you make a “mark-to-market” election
as discussed below. Distributions you receive in a taxable year
that are greater than 125% of the average annual distributions you
received during the shorter of the three preceding taxable years or
your holding period for the Ordinary Shares will be treated as an
excess distribution. Under these special tax rules:
| |
• |
the excess distribution or gain
will be allocated ratably over your holding period for the Ordinary
Shares; |
| |
• |
the amount allocated to the
current taxable year, and any taxable year prior to the first
taxable year in which we were a PFIC, will be treated as ordinary
income, and |
| |
• |
the amount allocated to each
other year will be subject to the highest tax rate in effect for
that year and the interest charge generally applicable to
underpayments of tax will be imposed on the resulting tax
attributable to each such year. |
The tax liability for amounts allocated to years prior to the year
of disposition or “excess distribution” cannot be offset by any net
operating losses for such years, and gains (but not losses)
realized on the sale of the Ordinary Shares cannot be treated as
capital, even if you hold the Ordinary Shares as capital
assets.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC
may make a mark-to-market election for such stock to elect out of
the tax treatment discussed above. If you make a mark-to-market
election for the Ordinary Shares, you will include in income each
year an amount equal to the excess, if any, of the fair market
value of the Ordinary Shares as of the close of your taxable year
over your adjusted basis in such Ordinary Shares. You are allowed a
deduction for the excess, if any, of the adjusted basis of the
Ordinary Shares over their fair market value as of the close of the
taxable year. However, deductions are allowable only to the extent
of any net mark-to-market gains on the Ordinary Shares included in
your income for prior taxable years. Amounts included in your
income under a mark-to-market election, as well as gain on the
actual sale or other disposition of the Ordinary Shares, are
treated as ordinary income. Ordinary loss treatment also applies to
the deductible portion of any mark-to-market loss on the Ordinary
Shares, as well as to any loss realized on the actual sale or
disposition of the Ordinary Shares, to the extent that the amount
of such loss does not exceed the net mark-to-market gains
previously included for such Ordinary Shares. Your basis in the
Ordinary Shares will be adjusted to reflect any such income or loss
amounts. If you make a valid mark-to-market election, the tax rules
that apply to distributions by corporations which are not PFICs
would apply to distributions by us, except that the lower
applicable capital gains rate for qualified dividend income
discussed above under “— Taxation of Dividends and Other
Distributions on our Ordinary Shares” generally would not
apply.
The mark-to-market election is available only for “marketable
stock”, which is stock that is traded in other than de minimis
quantities on at least 15 days during each calendar quarter
(“regularly traded”) on a qualified exchange or other market (as
defined in applicable U.S. Treasury regulations), including the
Nasdaq Capital Market. If the Ordinary Shares are regularly traded
on the Nasdaq Capital Market and if you are a holder of Ordinary
Shares, the mark-to-market election would be available to you were
we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a
“qualified electing fund” election with respect to such PFIC to
elect out of the tax treatment discussed above. A U.S. Holder who
makes a valid qualified electing fund election with respect to a
PFIC will generally include in gross income for a taxable year such
holder’s pro rata share of the corporation’s earnings and profits
for the taxable year. However, the qualified electing fund election
is available only if such PFIC provides such U.S. Holder with
certain information regarding its earnings and profits as required
under applicable U.S. Treasury regulations. We do not currently
intend to prepare or provide the information that would enable you
to make a qualified electing fund election. If you hold Ordinary
Shares in any year in which we are a PFIC, you will be required to
file U.S. Internal Revenue Service Form 8621 regarding
distributions received on the Ordinary Shares and any gain realized
on the disposition of the Ordinary Shares.
You are urged to consult your tax advisors regarding the
application of the PFIC rules to your investment in our Ordinary
Shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our Ordinary Shares and proceeds
from the sale, exchange or redemption of our Ordinary Shares may be
subject to information reporting to the U.S. Internal Revenue
Service and possible U.S. backup withholding at a current rate of
28%. Backup withholding will not apply, however, to a U.S. Holder
who furnishes a correct taxpayer identification number and makes
any other required certification on U.S. Internal Revenue Service
Form W-9 or who is otherwise exempt from backup withholding. U.S.
Holders who are required to establish their exempt status generally
must provide such certification on U.S. Internal Revenue Service
Form W-9. U.S. Holders are urged to consult their tax advisors
regarding the application of the U.S. information reporting and
backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as
backup withholding may be credited against your U.S. federal income
tax liability, and you may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the
appropriate claim for refund with the U.S. Internal Revenue Service
and furnishing any required information. We do not intend to
withhold taxes for individual shareholders.
Under the Hiring Incentives to Restore Employment Act of 2010,
certain United States Holders are required to report information
relating to ordinary shares, subject to certain exceptions
(including an exception for ordinary shares held in accounts
maintained by certain financial institutions), by attaching a
complete Internal Revenue Service Form 8938, Statement of Specified
Foreign Financial Assets, with their tax return for each year in
which they hold ordinary shares. U.S. Holders are urged to consult
their tax advisors regarding the application of the U.S.
information reporting and backup withholding rules.
F. Dividends and paying agents
Not applicable for annual reports on Form 20-F.
G. Statement by experts
Not applicable for annual reports on Form 20-F.
H. Documents on display
We are subject to the information requirements of the Exchange Act.
In accordance with these requirements, the Company files reports
and other information with the SEC. You may read and copy any
materials filed with the SEC at the Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains a web site
at http://www.sec.gov that contains reports and other
information regarding registrants that file electronically with the
SEC.
I. Subsidiary Information
Not applicable.
| Item 11. |
Quantitative and Qualitative
Disclosures About Market Risk |
Interest Rate Risk
Our exposure to interest rate risk primarily relates to excess cash
invested in short-term instruments with original maturities of less
than a year and long-term held-to-maturity securities with
maturities of greater than a year. Investments in both fixed rate
and floating rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our
future investment income may fall short of expectations due to
changes in interest rates, or we may suffer losses in principal if
we have to sell securities that have declined in market value due
to changes in interest rates. We have not been, and do not expect
to be, exposed to material interest rate risks, and therefore have
not used any derivative financial instruments to manage our
interest risk exposure.
In fiscal years 2019, 2018 and 2017, we had RMB 20,487,526
(approximately $2.98 million), RMB 16.60 (approximately $2.51
million) and RMB 9,818,008 (approximately $1.45 million) of
weighted outstanding bank loans, with weighted average effective
interest rate of 7.07%, 5.41%, and 5.65% respectively.
As of June 30, 2019, if interest rates increased/decreased by 1%,
with all other variables having remained constant, and assuming the
amount of bank borrowings outstanding at the end of the year was
outstanding for the entire year, profit attributable to equity
owners of our company would have been RMB 14,484 (approximately
$2,109) lower/higher, respectively, mainly as a result of
higher/lower interest expense from our short-term borrowings.
Foreign Exchange Risk
Our functional currency is the RMB, and our financial statements
are presented in the RMB. Therefore, the change in the value of RMB
relative to the U.S. dollar will not affect our financial results
reported in the RMB.
However, any significant revaluation of RMB against U.S. dollar may
materially the value of, and any dividends payable on, our Ordinary
Shares in U.S. dollars in the future. See “Risk Factors — Risks
Related to Doing Business in China — Fluctuations in exchange rates
could adversely affect the value of our securities.”
Commodity Risk
As a provider of hardware, software, and on-site services, our
Company is exposed to the risk of an increase in the price of raw
materials. We historically have been able to pass on price
increases to customers by virtue of pricing terms that vary with
changes in steel prices, but we have not entered into any contract
to hedge any specific commodity risk. Moreover, our Company does
not purchase or trade on commodity instruments or positions;
instead, it purchases commodities for use.
| Item 12. |
Description of Securities Other than
Equity Securities |
With the exception of Items 12.D.3 and 12.D.4, this Item 12 is not
applicable for annual reports on Form 20-F. As to Items 12.D.3 and
12.D.4, this Item 12 is not applicable, as the Company does not
have any American Depositary Shares.
PART II
| Item 13. |
Defaults, Dividend Arrearages and
Delinquencies |
We do not have any material defaults in the payment of principal,
interest, or any installments under a sinking or purchase
fund.
| Item 14. |
Material Modifications to the Rights
of Securities Holders and Use of Proceeds |
Material Modifications to the Rights of Security Holders
Item 5, “Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities” from our annual
report on Form 10-K filed on September 28, 2016 is incorporated
herein by reference.
Use of Proceeds
Not applicable.
| Item 15. |
Controls and
Procedures |
| |
(a) |
Disclosure Controls and
Procedures. |
As of June 30, 2019, our company carried out an evaluation, under
the supervision of and with the participation of management,
including our Company’s chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our
Company’s disclosure controls and procedures. Included in this
Annual Report on Form 20-F, the chief executive officer and chief
financial officer concluded that our Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934) were ineffective in timely
alerting them to information required to be included in the
Company’s U.S. Securities and Exchange Commission (the
“Commission”) filings.
| |
(b) |
Management’s annual report on
internal control over financial reporting. |
The Company’s management is responsible for establishing and
maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) under the Securities and Exchange Act of
1934, as amended. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. The Company’s internal control over
financial reporting includes those policies and procedures
that:
(1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the Company’s assets;
(2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. GAAP, and that the
Company’s receipts and expenditures are being made only in
accordance with the authorization of its management and directors;
and
(3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material
effect on the financial statements.
The Company’s management assessed the effectiveness of its internal
control over financial reporting as of June 30, 2019. In
making this assessment, management used the 2013 framework set
forth in the report entitled Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. The COSO
framework summarizes each of the components of a company’s internal
control system, including (i) the control environment,
(ii) risk assessment, (iii) control activities,
(iv) information and communication, and (v) monitoring.
Our management has implemented and tested our internal control over
financial reporting based on these criteria. Based on the
assessment and material weakness identified, the Company’s
management concluded that, as of June 30, 2019, its internal
control over financing reporting was not effective.
The specific material weaknesses identified by the Company’s
management as of June 30, 2019 are described as follows:
We did not have sufficient skilled accounting personnel who are
either qualified as Certified Public Accountants in the U.S. or who
have received education from U.S. institutions or other educational
programs that would provide enough relevant education relating to
U.S. GAAP. While our CFO is a U.S. Certified Public Accountant, our
controller is not, and they have limited experience with U.S. GAAP.
Further, our operating subsidiaries are based in China, and in
accordance with PRC laws and regulations, are required to comply
with PRC GAAP, rather than U.S. GAAP. Thus, the accounting skills
and understanding necessary to fulfill the requirements of U.S.
GAAP-based reporting, including the preparation of consolidated
financial statements, are inadequate, and determined to be a
material weakness.
While we have developed the scope of our internal audit function,
it has not yet been fully implemented as we have not been able to
hire sufficient qualified resources to do so. And due to limited
availability of qualified resources, we may not be able to make
sufficient hiring within a short period of time.
We recently completed our designs of our internal controls,
assessments for all of our financial reporting cycles and
assessment of adoption of new revenue recognition standards during
fiscal year 2019, and we are unable to declare effectiveness of our
controls due to lack of sufficient time to obtain evidence of
operating effectiveness as of June 30, 2019 due to lack of
monitoring of our internal controls (lack of self-testing of
internal controls) and lack of enough training and adjustment of
our internal procedures to provide enough supporting documents as
required. Therefore, we determined that the lack of time to
evaluate our design and operating effectiveness are material
weaknesses. It should be noted, however, that (a) many actions had
been undertaken to enhance the control environment during the year;
and (b) there are other remedial activities that are scheduled to
be take place in fiscal 2019.
As a result, the Company has developed remedial actions to
strengthen its accounting and financial reporting functions as well
as the internal audit function. Such plan will require the hiring
of additional resources and the deployment of other corporate
resources for the accounting department in relation to the
financial reporting process and internal audit department. Such
additional resources will include the establishment of a work force
dedicated to the task of correcting past financial irregularities
and maintaining correct financial reporting on an on-going basis.
To strengthen the Company’s internal control over financial
reporting, the Company needs to engage outside consultants that are
skilled in SEC reporting and Section 404 compliance to assist in
the implementation of the following remedial actions as of the date
of this report:
|
• |
Continuous assessment of our
internal procedure of operation as we develop new business and new
subsidiaries; |
|
• |
Development and formalization of
key accounting and financial reporting policies and
procedures; |
|
• |
Identification and documentation of
key controls by business process; |
|
• |
Enhancement of existing disclosures
policies and procedures; |
|
• |
Formalization of periodic
communication between management and the audit committee; and |
|
• |
Implementation of policies and
procedures intended to enhance management monitoring and oversight
by the Audit Committee. |
In addition to the foregoing efforts, the Company expects to
implement the following remedial actions during fiscal year
2019:
|
• |
Formalization of a periodic staff
training program to enhance their awareness of the key internal
control activities. |
|
• |
Develop a comprehensive training
and development plan, for our finance, accounting and internal
audit personnel, including our Chief Financial Officer, Controller,
and others, in the principles and rules of U.S. GAAP, SEC reporting
requirements and the application thereof. |
|
• |
Hire a full-time employee who
possesses the requisite U.S. GAAP experience and education. |
|
• |
Monitoring of internal controls by
performing self-testing of various key controls. |
Despite the material weaknesses reported above, our management
believes that our consolidated financial statements included in
this report fairly present in all material respects our financial
condition, results of operations and cash flows for the periods
presented and that this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report.
This annual report does not include an attestation report of the
Company’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public
accounting firm pursuant to rules of the Securities and Exchange
Commission that permit the Company to provide only management’s
report in this annual report.
| |
(c) |
Attestation report of the
registered public accounting firm. |
Not applicable.
| |
(d) |
Changes in internal control over
financial reporting. |
Management continues to focus on internal control over financial
reporting. As of June 30, 2019, the Company has completed certain
documentation of our internal controls and will be implementing the
following remedial initiatives:
|
• |
Improved the design and
documentation related to multiple levels of review over financial
statements included in our SEC filings; |
|
• |
Expanded the design and assessment
test work over the monitoring function of entity level
controls; |
|
• |
Enhanced documentation retention
policies over test work related to our continuous management
assessments of internal control effectiveness; and |
|
• |
Expanded documentation practices
and policies related to various key controls to provide support and
audit trails for both internal management assessment as well as
external auditor testing. |
| Item 15T. |
Controls and
Procedures |
Not applicable.
| Item 16A. |
Audit Committee Financial
Expert |
The Company’s board of directors has determined that Mr. Nelson
Wong qualifies as an “audit committee financial expert” in
accordance with applicable Nasdaq Capital Market standards. The
Company’s board of directors has also determined that Mr. Wong and
the other members of the Audit Committee are all “independent” in
accordance with the applicable Nasdaq Capital Market standards.
The Company has adopted a Code of Business Conduct and Ethics that
applies to the Company’s directors, officers, employees and
advisors. The Code of Ethics is attached it as an exhibit to this
annual report. We have also posted a copy of our code of business
conduct and ethics on our website at www.recon.cn.
| Item 16C. |
Principal Accountant Fees and
Services |
Friedman LLP was appointed by the Company to serve as its
independent registered public accounting firm for fiscal 2019 and
2018.
Fees Paid To Independent Registered Public Accounting
Firm
Audit Fees
During fiscal years 2019 and 2018, Friedman LLP’s audit fees were
$170,00 and $195,000, respectively.
Audit-Related Fees
The Company has not paid Friedman LLP for audit-related services in
fiscal years 2019 and 2018.
Tax Fees
The Company has not paid Friedman LLP for tax services in fiscal
years 2019 and 2018.
All Other Fees
During fiscal years 2019 and 2018, Friedman LLP’s other services
fees were $0 and $8,000, respectively.
Audit Committee Pre-Approval Policies
Before Friedman LLP was engaged by the Company to render audit or
non-audit services, the engagement was approved by the Company’s
audit committee. All services rendered by Friedman LLP have been so
approved.
Percentage of Hours
The percentage of hours expended on the principal accountants’
engagement to audit our consolidated financial statements for
fiscal 2019 that were attributed to work performed by persons other
than Friedman LLP’s full-time permanent employees was less than
50%.
| Item 16D. |
Exemptions from the Listing Standards
for Audit Committees |
Not applicable.
| Item 16E. |
Purchases of Equity Securities by the
Issuer and Affiliated Purchasers |
Neither the Company nor any affiliated purchaser has purchased any
shares or other units of any class of the Company’s equity
securities registered by the Company pursuant to Section 12 of the
Securities Exchange Act during the fiscal year ended June 30,
2019.
| Item 16F. |
Change in Registrant’s Certifying
Accountant |
Not applicable.
| Item 16G. |
Corporate Governance |
We are incorporated in the Cayman Islands and our corporate
governance practices are governed by applicable Cayman Islands law.
In addition, because our ordinary shares are listed on The Nasdaq
Capital Market, we are subject to Nasdaq’s corporate governance
requirements.
As noted above in the risk factor titled “We are a foreign private
issuer within the meaning of the rules under the Exchange Act, and
as such we are exempt from certain provisions applicable to United
States domestic public companies.”, The Nasdaq Capital Market
allows foreign private issuers like our Company to opt to follow
rules that apply in the issuer’s home country instead of a given
Nasdaq rule. For example, there are circumstances in which Nasdaq
requires Nasdaq-listed companies to get shareholder approval prior
to issuing stock, but a foreign private issuer may not need such
shareholder approval if their home country does not require it.
| Item 16H. |
Mine Safety
Disclosure |
Not applicable.
PART III
| Item 17. |
Financial Statements |
See Item 18.
| Item 18. |
Financial Statements |
Our consolidated financial statements are included at the end of
this annual report, beginning with page F-1.
| Exhibit No. |
|
Description of Exhibit |
|
Included |
|
Form |
|
Filing Date |
| |
|
|
|
|
|
|
|
|
| 1.1.1 |
|
Second
Amended and Restated Articles of Association of the
Registrant |
|
By
Reference |
|
S-3 |
|
2016-09-19 |
| |
|
|
|
|
|
|
|
|
| 1.1.2 |
|
Second
Amended and Restated Memorandum of Association of the
Registrant |
|
By
Reference |
|
S-3 |
|
2016-09-19 |
| |
|
|
|
|
|
|
|
|
| 2.1 |
|
Specimen Share Certificate |
|
By
Reference |
|
S-1/A |
|
2009-07-15 |
| |
|
|
|
|
|
|
|
|
| 4.1 |
|
2009
Stock Incentive Plan |
|
By
Reference |
|
S-1/A |
|
2009-06-10 |
| |
|
|
|
|
|
|
|
|
| 4.2 |
|
2015
Stock Incentive Plan |
|
By
Reference |
|
10-K |
|
2016-09-28 |
| |
|
|
|
|
|
|
|
|
| 4.3 |
|
Translation of Exclusive Technical Consulting
Service Agreement between Recon Technology (Jining) Co., Ltd. and
Beijing BHD Petroleum Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.4 |
|
Translation of Power of Attorney for rights of
Chen Guangqiang in Beijing BHD Petroleum Technology Co.,
Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.5 |
|
Translation of Power of Attorney for rights of
Yin Shenping in Beijing BHD Petroleum Technology Co.,
Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.6 |
|
Translation of Power of Attorney for rights of Li
Hongqi in Beijing BHD Petroleum Technology Co.,
Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.7 |
|
Translation of Exclusive Equity Interest
Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen
Guangqiang and Beijing BHD Petroleum Technology Co.,
Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.8 |
|
Translation of Exclusive Equity Interest Purchase
Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping
and Beijing BHD Petroleum Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.9 |
|
Translation of Exclusive Equity Interest Purchase
Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and
Beijing BHD Petroleum Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.10 |
|
Translation of Equity Interest Pledge
Agreement between Recon Technology (Jining) Co., Ltd., Chen
Guangqiang and Beijing BHD Petroleum Technology Co.,
Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.11 |
|
Translation of Equity Interest Pledge Agreement
between Recon Technology (Jining) Co., Ltd., Yin Shenping and
Beijing BHD Petroleum Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
4.17 |
|
Translation of Exclusive Equity Interest Purchase
Agreement between Recon Technology (Jining) Co. Ltd., Chen
Guangqiang and Nanjing Recon Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.18 |
|
Translation of Exclusive Equity Interest Purchase
Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping
and Nanjing Recon Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.19 |
|
Translation of Exclusive Equity Interest Purchase
Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and
Nanjing Recon Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.20 |
|
Translation of Equity Interest Pledge Agreement
between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and
Nanjing Recon Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.21 |
|
Translation of Equity Interest Pledge Agreement
between Recon Technology (Jining) Co., Ltd., Yin Shenping and
Nanjing Recon Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.22 |
|
Translation of Equity Interest Pledge Agreement
between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing
Recon Technology Co., Ltd. |
|
By
Reference |
|
S-1/A |
|
2008-08-12 |
| |
|
|
|
|
|
|
|
|
| 4.23 |
|
Translation of the Investment Agreement between
Recon Technology, Ltd., Future Gas Station (Beijing) Technology,
Ltd. and six individuals |
|
By
Reference |
|
6-KA |
|
2018-08-28 |
| |
|
|
|
|
|
|
|
|
| 4.24 |
|
Translation of the Supplemental Agreement between
Recon Technology, Ltd., Future Gas Station (Beijing) Technology,
Ltd. and six individuals |
|
By
Reference |
|
6-KA |
|
2018-08-28 |
| |
|
|
|
|
|
|
|
|
|
4.25 |
|
Translation of Exclusive Technical Consulting
Service Agreement dated April 1, 2019 between Recon Hengda
Technology (Beijing) Co., Ltd. and Beijing BHD Petroleum Technology
Co., Ltd. |
|
By
Reference |
|
6-K |
|
2019-04-24 |
| |
|
|
|
|
|
|
|
|
| 4.26 |
|
Translation of Amended and Restated Exclusive
Equity Interest Purchase Agreement dated April 1, 2019 among Recon
Hengda Technology (Beijing) Co., Ltd., Beijing BHD Petroleum
Technology Co., Ltd. and Fan Zhang, Shenping Yin, Donglin Li,
Zhiqiang Feng and Guangqiang Chen |
|
By
Reference |
|
6-K |
|
2019-04-24 |
| |
|
|
|
|
|
|
|
|
| 4.27 |
|
Translation of Amended and Restated Equity
Interest Pledge Agreement dated April 1, 2019 between Recon Hengda
Technology (Beijing) Co., Ltd. and Fan Zhang, Shenping Yin, Donglin
Li, Zhiqiang Feng and Guangqiang Chen about Beijing BHD Petroleum
Technology Co., Ltd. |
|
By
Reference |
|
6-K |
|
2019-04-24 |
| |
|
|
|
|
|
|
|
|
| 4.28 |
|
Translation of Exclusive Technical Consulting
Service Agreement dated April 1, 2019 between Recon Hengda
Technology (Beijing) Co., Ltd. and Nanjing Recon Technology Co.,
Ltd. |
|
By
Reference |
|
6-K |
|
2019-04-24 |
| |
|
|
|
|
|
|
|
|
| 4.29 |
|
Translation of Amended and Restated Exclusive
Equity Interest Purchase Agreement dated April 1, 2019 among Recon
Hengda Technology (Beijing) Co., Ltd., Nanjing Recon Technology
Co., Ltd. and Shenping Yin, Guangqiang Chen and Degui
Zhai |
|
By
Reference |
|
6-K |
|
2019-04-24 |
| |
|
|
|
|
|
|
|
|
| 4.30 |
|
Translation of Amended and Restated Equity
Interest Pledge Agreement dated April 1, 2019 between Recon Hengda
Technology (Beijing) Co., Ltd. and Shenping Yin, Guangqiang Chen
and Degui Zhai about Nanjing Recon Technology Co.,
Ltd. |
|
By
Reference |
|
6-K |
|
2019-04-24 |
| |
|
|
|
|
|
|
|
|
| 4.31 |
|
Translation of Financial Support Commitment
Letter from Two Major Shareholders dated August 31, 2019 |
|
Herewith |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 4.32 |
|
Translation of Supplemental Agreement to
the Investment Agreement with respect to Future Gas Station
(Beijing) Technology Co., Ltd. dated September 24, 2019 |
|
Herewith |
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy
Extension Calculation Linkbase Document. |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 101.DEF |
|
XBRL Taxonomy Extension
Definition Linkbase Document. |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 101.LAB |
|
XBRL Taxonomy Extension Labels
Linkbase Document. |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 101.PRE |
|
XBRL Taxonomy Extension
Presentation Linkbase Document. |
|
|
|
|
|
|
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused
and authorized the undersigned to sign this annual report on its
behalf.
| |
|
Recon
Technology, Ltd. |
| |
|
|
| |
By: |
/s/ Yin Shenping |
| |
|
Name: Yin
Shenping |
| |
|
Title: Chief
Executive Officer |
Date: October 1, 2019
RECON TECHNOLOGY, LTD
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Director and
Stockholders of Recon Technology, Ltd
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
Recon Technology, Ltd and Subsidiaries (collectively, the
“Company”) as of June 30, 2019 and 2018, and the related
consolidated statements of operations and comprehensive loss,
changes in stockholders’ equity, and cash flows for each of the
years in the three-year period ended June 30, 2019, and the related
notes (collectively referred to as the financial statements). In
our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company as
of June 30, 2019 and 2018, and the results of its operations and
its cash flows for each of the years in the three-year period ended
June 30, 2019, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Friedman LLP
Friedman LLP
We have served as the Company’s auditor since 2011.
New York, New York
October 1, 2019
RECON TECHNOLOGY, LTD
BALANCE SHEETS
| |
|
As of June 30 |
|
|
As of June 30 |
|
|
As of June 30 |
|
| |
|
2018 |
|
|
2019 |
|
|
2019 |
|
| |
|
RMB |
|
|
RMB |
|
|
U.S. Dollars |
|
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
¥ |
45,340,578 |
|
|
¥ |
4,521,325 |
|
|
$ |
658,433 |
|
| Notes receivable |
|
|
3,995,962 |
|
|
|
3,073,680 |
|
|
|
447,615 |
|
| Trade accounts receivable, net |
|
|
24,254,007 |
|
|
|
68,535,282 |
|
|
|
9,980,673 |
|
| Trade accounts receivable- related
party, net |
|
|
- |
|
|
|
3,409,912 |
|
|
|
496,579 |
|
| Inventories, net |
|
|
6,758,841 |
|
|
|
1,270,523 |
|
|
|
185,024 |
|
| Other receivables, net |
|
|
5,360,953 |
|
|
|
5,665,593 |
|
|
|
825,070 |
|
| Loans to third parties |
|
|
1,960,000 |
|
|
|
4,960,000 |
|
|
|
722,316 |
|
| Purchase advances, net |
|
|
12,654,546 |
|
|
|
1,343,576 |
|
|
|
195,663 |
|
| Contract assets, net |
|
|
- |
|
|
|
4,633,940 |
|
|
|
674,833 |
|
| Prepaid expenses |
|
|
509,682 |
|
|
|
192,837 |
|
|
|
28,083 |
|
| Prepaid expenses
- related parties |
|
|
- |
|
|
|
217,600 |
|
|
|
31,689 |
|
| Total current assets |
|
|
100,834,569 |
|
|
|
97,824,268 |
|
|
|
14,245,978 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
|
|
3,171,109 |
|
|
|
3,661,321 |
|
|
|
533,192 |
|
| Construction in progress |
|
|
11,779,784 |
|
|
|
21,524,994 |
|
|
|
3,134,647 |
|
| Land use right, net |
|
|
1,335,126 |
|
|
|
1,307,887 |
|
|
|
190,465 |
|
| Investment in unconsolidated
entity |
|
|
- |
|
|
|
31,078,971 |
|
|
|
4,525,976 |
|
| Long-term trade accounts receivable,
net |
|
|
4,212,829 |
|
|
|
- |
|
|
|
- |
|
| Long-term other receivables, net |
|
|
- |
|
|
|
440,015 |
|
|
|
64,079 |
|
| Prepayments for
construction in progress |
|
|
474,100 |
|
|
|
1,144,098 |
|
|
|
166,613 |
|
|
Total Assets |
|
¥ |
121,807,517 |
|
|
¥ |
156,981,554 |
|
|
$ |
22,860,950 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Current
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| Short-term bank loan |
|
¥ |
- |
|
|
¥ |
2,500,000 |
|
|
$ |
364,071 |
|
| Trade accounts payable |
|
|
8,754,347 |
|
|
|
14,089,293 |
|
|
|
2,051,799 |
|
| Other payables |
|
|
3,255,810 |
|
|
|
2,366,410 |
|
|
|
344,617 |
|
| Other payable- related parties |
|
|
3,211,457 |
|
|
|
2,290,873 |
|
|
|
333,616 |
|
| Accrued payroll and employees'
welfare |
|
|
600,434 |
|
|
|
1,384,529 |
|
|
|
201,628 |
|
| Investment payable |
|
|
- |
|
|
|
6,400,000 |
|
|
|
932,021 |
|
| Taxes payable |
|
|
431,913 |
|
|
|
2,180,847 |
|
|
|
317,592 |
|
| Short-term borrowings |
|
|
- |
|
|
|
1,081,096 |
|
|
|
157,438 |
|
| Short-term borrowings - related
party |
|
|
9,018,065 |
|
|
|
9,010,525 |
|
|
|
1,312,187 |
|
| Long-term
borrowings - related party - current portion |
|
|
719,895 |
|
|
|
780,797 |
|
|
|
113,706 |
|
| Total Current
Liabilities |
|
|
25,991,921 |
|
|
|
42,084,370 |
|
|
|
6,128,675 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Long-term
borrowings - related party |
|
|
8,943,834 |
|
|
|
8,196,204 |
|
|
|
1,193,599 |
|
| Total
Liabilities |
|
|
34,935,755 |
|
|
|
50,280,574 |
|
|
|
7,322,274 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Commitments and
Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock, ($ 0.0185 U.S. dollar par value, 100,000,000
shares author |