updated 3/10/2011 7:16:46 AM ET 2011-03-10T12:16:46

BEIJING, March 10, 2011 (GLOBE NEWSWIRE) -- SinoTech Energy Limited ("SinoTech" or the "Company") (Nasdaq:CTE), a fast-growing provider of enhanced oil recovery ("EOR") services in China, today announced its unaudited financial results for the first quarter of fiscal year 2011.

First Quarter of Fiscal Year 2011 Financial Highlights

  • Total sales in the first quarter of fiscal year 2011 were US$22.8 million, an increase of 207.5% from the corresponding period in fiscal year 2010
     
  • Gross profit in the first quarter of fiscal year 2011 was US$16.3 million, an increase of 191.0% from the corresponding period in fiscal year 2010
     
  • Adjusted net income (Non-GAAP) (1) in the first quarter of fiscal year 2011 was US$ 11.4 million, an increase of 165.8% from the corresponding period in fiscal year 2010
     
  • Non-GAAP earning per ADS were US$ 0.19 for the first quarter of fiscal year 2011
     
  • Adjusted EBITDA (Non-GAAP)(1) in the first quarter of fiscal year 2011 was US$16.5 million, an increase of 212.5 % from the corresponding period in fiscal year 2010
     
  • Net cash balance was US$108.4 million as of December 31, 2010

Recent Business Highlights

  • On December 17, 2010, the Company announced a RMB437 million agreement to purchase 10 new lateral hydraulic drilling ("LHD") units; the new units will double SinoTech's LHD capacity by the end of December 2011 and the first two units will arrive in late March 2011.
     
  • On January 10, 2011, the Company signed agreements to extend its existing patented molecular deposition film ("MDF") oil recovery services in the Dagang and Liaohe oilfields in northern China, and has signed a new agreement to provide MDF services at a new oil block located in Liaoning  Province.
     
  • On March 2, 2011, the Company announced the appointment of Ernst & Young Hua Ming as its independent registered public accounting firm.

"We are pleased to report another quarter of robust results, reflecting strong and growing industry demand for our high-efficiency cost-effective EOR solutions," commented Mr. Guoqiang Xin, chief executive officer of SinoTech. "To keep pace with rising demand for our LHD services, we signed an agreement in the last quarter that will significantly expand our capacity for our core LHD service. By the end of December 2011, we expect to have 20 LHD units in the field, double the number we currently have in operation. With China's oil and natural gas producers increasingly reliant on EOR services to maximize output from their wells, we also see very healthy growth in demand for our MDF services."

Mr. Boxun Zhang, chief financial officer of SinoTech, noted, "I am pleased to report that we continue to have very strong visibility for the coming quarter and the year ahead. Our existing LHD fleet is fully contracted for next year, and our new LHD capacity coming on stream this quarter will go into immediate operation to service our very healthy contract pipeline. Moreover, as we quickly expand our business scale we are achieving greater cost efficiencies which will be increasingly evident on our bottom line. Our balance sheet has also been reinforced by our recent IPO and strong cash flow."

Financial Results for the First Quarter of Fiscal Year 2011

Sales were US$22.8 million in the first quarter of fiscal year 2011, an increase of 15.2% from US$19.8 million in the fourth quarter of fiscal year 2010, and a 207.5% increase from the corresponding period in fiscal year 2010, primarily due to the additional revenue contribution from four new LHD units which were delivered in late August 2010 and two new LHD units delivered in late October 2010. Sales for the LHD business increased 71.7% quarter-over-quarter to US$17.6 million in the first quarter of fiscal year 2011.

Cost of sales were US$6.6 million in the first quarter of fiscal year 2011, a 65.7% increase from US$4.0 million in the fourth quarter of fiscal year 2010, and a 257.8% increase from US$1.8 million in the corresponding period in fiscal year 2010. The quarter-over-quarter increase was primarily due to the additional operation costs related to the new LHD units added in late August and the second half of October 2010.

Gross profit was US$16.3 million in the first quarter of fiscal year 2011, an increase of 2.5% from US$15.9 million in the fourth quarter of fiscal year 2010, and an increase of 191.0% from US$5.6 million in the corresponding period in fiscal year 2010. Gross margin was 71.3% in the first quarter of fiscal year 2011, compared with 80.0% in the fourth quarter of fiscal year 2010, and 75.3% in the corresponding period in fiscal year 2010. The quarter-over-quarter decrease in gross margin was primarily due to the decline in sales from the Company's high margin consulting service, as well as the decline in gross margin for the LHD business which in turn was due to annual servicing costs related to two of the Company's LHD units.

         
(USD) Sales

Q1 FY2011
Gross Profit Margin Sales

Q4 FY2010
Gross Profit Margin
LHD 17,619,809 66.6% 10,263,743 69.4%
MDF 4,942,328 88.0% 4,858,360 88.0%
Others 262,881 71.4% 4,697,920 94.9%
Total 22,825,018 71.3% 19,820,023 80.0%

Expenses for the first quarter of fiscal year 2011 were US$3.2 million compared to US$2.8 million in the previous quarter and US$2.0 million in the corresponding period in fiscal year 2010. The year-over-year increase was mainly due to the increased amortization expense of intangible assets, share based compensation charge and travel expenses related to business expansion.

Adjusted operating income (Non-GAAP)(1) increased 2.2% to US$15.2 million for the first quarter of fiscal year 2011 compared to US$14.9 million in the fourth quarter of fiscal year 2010, and US$5.1 million in the corresponding period in fiscal year 2010. The increase was in line with the Company's fast growing sales and effective expenses control.

Other income and expenses which mainly consist of changes in fair value of warrant liabilities, write-off bank loan discount and amortization of bank loan discount, totaled US$36.8 million. These items were mainly related to the warrant valuation gain and loss, and interest on bank loans. Because the Company paid off all its remaining debt (including interests) and all the outstanding warrants were converted into common shares at the time of the IPO.

Adjusted net income (Non-GAAP)(1)in the first quarter of fiscal year 2011was US$11.4 million, compared to US$11.4 million in the fourth quarter of fiscal year 2010.

Non-GAAP earning per ADS were US$ 0.19 for the first quarter of fiscal year 2011.

Adjusted EBITDA(Non-GAAP)(1) was US$16.5 million, representing quarter-over-quarter growth of 4.6% or an increase of 212.5% from the corresponding period in fiscal year 2010.

As of December 31, 2010, the Company had cash and cash equivalents of US$108.4 million. Accounts receivable was US$22.8 million as of December 31, 2010, compared to US$20.1 million as of September 30, 2010, in line with the top line growth.

As of December 31, 2010, the Company had no bank loan and warrant liabilities as a result of the loan repayment and warrant conversion in November 2010.

In the first quarter of fiscal year 2011, capital expenditures totaled US$18.7 million, primarily as a result of the purchase of new equipment. Depreciation and amortization expenses totaled US$3.2 million.

Outlook for Fiscal Year 2011

For fiscal year 2011, based on current operating and business conditions, SinoTech currently still expects its total sales to be in an estimated range of US$90 million to US$95 million, representing a 98.6% to 109.7% increase from fiscal year 2010. The Company intends to add six LHD units in fiscal year 2011, bringing the total number of operational LHD units to 16 by the end of fiscal year 2011 and 20 by the end of December 2011. Total capital expenditures related to the procurement of new equipment to be added in fiscal year 2011 and prepayment for additional LHD units to be delivered in 2012 is expected to be in the range of US$70 million to US$80 million.

This forecast reflects SinoTech's current and preliminary view, which is subject to change.

Use of Non-GAAP Financial Measures

To supplement SinoTech's consolidated financial results presented in accordance with GAAP, SinoTech uses the following measures defined as non-GAAP financial measures by the SEC: adjusted net income (Non-GAAP), adjusted operating income (Non-GAAP) and adjusted EBITDA (Non-GAAP).

Adjusted operating income (Non-GAAP) refers to operating income before amortization of intangible assets and share-based compensation.

Adjusted net income (Non-GAAP) refers to net income before amortization of intangible assets, changes in fair value of warrant liabilities, amortization of bank loan discount, share-based compensation and write-off bank loan discount.

Adjusted EBITDA refers to earnings before current income tax expenses, deferred income tax expenses (benefits), interest income, amortization of bank loan discount, share-based compensation, write-off bank loan discount and other adjustments. Other adjustments comprise of gain on disposal of equipment and foreign exchange gain.

Adjusted net income (Non-GAAP), adjusted operating income (Non-GAAP) and adjusted EBITDA (Non-GAAP) for prior periods have been reclassified so that the presentations are consistent. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

SinoTech believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance and are often used as supplemental financial measures by management and by investors, research analysts and others, to assess the Company's intrinsic operating performance and return on capital as compared to those of other companies in the industry, without regard to financing or capital structure. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company's performance and when planning and forecasting future periods. A limitation of using adjusted EBITDA (non-GAAP) is that this non-GAAP measure fails to account for tax, interest income, bank loan interest and other non-operating cash expenses. The use of adjusted EBITDA (Non-GAAP) has certain limitations because it does not reflect all items of income and expense that affect the Company's operations. Items excluded from adjusted EBITDA (Non-GAAP) are significant components in understanding and assessing the Company's operating and financial performance. Depreciation, amortization, income tax expenses, bank loan interest and interest income as well as changes in fair value of warrant liabilities have been incurred in the Company's business and are not reflected in the presentation of adjusted EBITDA (Non-GAAP). Each of these items should also be considered in the overall evaluation of the Company's results. Additionally, adjusted EBITDA (Non-GAAP) does not consider capital expenditures and other investing activities and should not be considered as a measure of the Company's liquidity. Management compensates for these limitations by reconciling this non-GAAP financial measure to the most comparable U.S. GAAP performance measure, all of which should be considered when evaluating the Company's performance. The accompanying tables have more details on the reconciliations between GAAP financial measures that are comparable to non-GAAP financial measures.

Notes to Unaudited Financial Information

This release contains unaudited financial information which is subject to year-end audit adjustments. Adjustments to the financial statements may be identified when the audit work is completed, which could result in significant differences between the Company's audited financial statements and this unaudited financial information.

First Quarter of Fiscal Year 2011 Conference Call Information

The Company has scheduled a conference call to discuss the results at 8:30 AM Eastern Time (ET) (9:30PM Beijing/Hong Kong time) on March 10, 2011.

Dial-in details for the live conference call are as follows:

  • International dial-in number: +1- 617-614-4078
  • U.S. Toll Free: 800-435-1398
  • South China Toll Free (Netcom): 10-800-852-1490
  • North China Toll Free (Telecom): 10-800-152-1490
  • South China Toll Free (Telecom): 10-800-130-0399
  • ChinaToll: 400 8811 629/ 400 8811 630
  • Hong Kong Toll Free: 800963844

Participant Passcode: 86571057

A live and archived webcast of the conference call will be available on Sinotech's website at http://ir.sinotechenergy.com/events.cfm.

A replay of the conference call will also be available until March 17, 2011 by dialing:

  • International dial-in number: +1- 617-801-6888
  • U.S. Toll Free: 888-286-8010

Passcode: 68890880

About SinoTech Energy Limited

SinoTech Energy Limited (Nasdaq:CTE) ("SinoTech") is a fast-growing provider of enhanced oil recovery ("EOR") services in China. SinoTech provides innovative EOR services to major oil companies in China using leading technologies, including certain patented lateral hydraulic drilling ("LHD") technologies, which the Company has an exclusive right to use in China, and a molecular deposition film technology, for which the Company holds a PRC patent. SinoTech also provides technical services to coalbed methane customers using the LHD technology. For more information, please visit  http://ir.sinotechenergy.com .

Safe Harbor Statement

This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact in this press release are forward-looking statements, including but not limited to, SinoTech's goals and strategies, its future business development, growth of its operations, financial condition and results of operations, its ability to introduce successful new services and attract new clients, growth of the EOR services market in China and worldwide, its beliefs regarding its strengths and strategies, changes in the oil services industry in China, including changes in the policies and regulations of the PRC government governing the oil services industry, its access to current or future financing arrangements, and fluctuations in general economic and business conditions in China, and other risks and uncertainties disclosed in SinoTech's filings with the Securities and Exchange Commission. These forward-looking statements involve known and unknown risks and uncertainties and are based on information available to SinoTech's management as of the date hereof and on its current expectations, assumptions, estimates and projections about SinoTech and the oil and gas industry. Actual results may differ materially from the anticipated results because of such and other risks and uncertainties. SinoTech undertakes no obligation to update forward-looking statements to reflect subsequent events or circumstances, or changes in its expectations, assumptions, estimates and projections except as may be required by law.

(1) Adjusted operating income (Non-GAAP), adjusted net income (Non-GAAP) and adjusted EBITDA (Non-GAAP) are non-GAAP measures. Adjusted operating income (Non-GAAP) refers to operating income before amortization of intangible assets. Adjusted net income (Non-GAAP) refers to net income before amortization of intangible assets, changes in fair value of warrant liabilities and amortization of bank loan discount, share-based compensation and write-off bank loan discount. Adjusted EBITDA refers to earnings before current income tax expenses, deferred income tax expenses (benefits), interest income, bank loan interest, depreciation and amortization, changes in fair value of warrant liabilities, amortization of bank loan discount, share-based compensation, write-off bank loan discount and other adjustments. Other adjustments comprise of gain on disposal of equipment and foreign exchange gain. The non-GAAP measures and related reconciliations to GAAP measures are described in the accompanying sections of "Reconciliation from net income to Adjusted EBITDA" and "Reconciliations of Non-GAAP results of operations measures to the nearest comparable GAAP measures" at the end of the press release.

 
SINOTECH ENERGY LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
     
     
  December 31, September 30,
  2010 2010
     
ASSETS    
     
CURRENT     
Cash and cash equivalents  $ 108,380,159  $ 43,826,024
Accounts receivable  22,787,746  20,119,753
Other receivable  51,888  51,112
Prepaid expenses and deposit  12,405,566  10,178,924
   143,625,359  74,175,813
Equipment, net  81,627,710  64,286,601
Intangible assets, net  25,265,007  26,770,105
     
   $ 250,518,076  $ 165,232,519
     
LIABILITIES    
     
CURRENT    
Accounts payable  $ 1,027,537  $ --
Other payables and accrued liabilities  3,719,218  2,417,620
Loan interest payable  --  763,248
Income taxes payable   3,830,875  3,541,873
Deferred gain on disposal of equipment - current portion   --  17,133
Obligation under capital lease - current portion   4,549  4,395
Due to related parties  8,157,215  8,206,579
   16,739,394  14,950,848
Bank loan  --  12,082,499
Obligation under capital lease  4,915  5,994
Warrant liabilities  --  69,020,000
Deferred tax liability   5,974,965  5,030,055
     
SHAREHOLDERS' EQUITY    
     
Common stock   13,158  100
Additional paid in capital  256,350,433  67,120,298
Accumulated other comprehensive income  7,868,951  5,487,243
Accumulated losses  (36,433,740)  (8,464,518)
Total equity  227,798,802  64,143,123
     
Total liabilities and equity  $ 250,518,076  $ 165,232,519
 
 
SINOTECH ENERGY LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. dollars)
       
       
  For the three months ended
  December 31, 2009 September 30, 2010 December 31, 2010
       
Sales  $ 7,422,848  $ 19,820,023  $ 22,825,018
-LHD  2,342,063  10,263,743  17,619,809
-MDF  5,080,785  4,858,360  4,942,328
-Others  --  4,697,920  262,881
       
Cost of sales  1,834,175  3,959,746  6,561,889
-LHD  900,764  3,138,058  5,893,297
-MDF  933,411  584,443  593,352
-Others  --  237,245  75,240
Gross profit  5,588,673  15,860,277  16,263,129
       
Expenses      
Accounting and auditing fees  97,769  325,026  240,349
Depreciation of equipment  10,107  9,080  9,148
Amortization of intangible assets  1,487,874  1,859,615  1,892,784
Consulting and professional fees  39,826  44,847  120,507
Office and miscellaneous  36,607  151,263  40,680
Rent and utilities  48,305  94,538  87,756
Repair and maintenance  3,150  5,704  1,601
Salaries and benefits  150,739  182,098  228,884
Stock based compensation  --  --  198,604
Travel and business promotion  136,713  166,358  332,742
   2,011,090  2,838,529  3,153,055
       
Operating income  3,577,583  13,021,748  13,110,074
       
Other income and expenses      
Gain on disposal of equipment  30,443  30,714  17,221
Interest income  51,067  61,778  69,808
Foreign exchange (loss) gain  (518)  259,185  457,935
Changes in fair value of warrant liabilities  --  (13,760,000)  654,627
Amortization of bank loan discount  --  (2,219,091)  (940,701)
Bank loan interest  --  (725,766)  (112,168)
Write-off bank loan discount  --  --  (36,976,800)
   80,992  (16,353,180)  (36,830,078)
       
Net income (loss) from operations before provision for income taxes   3,658,575  (3,331,432)  (23,720,004)
       
Current income tax expenses  1,195,529  3,374,826  3,389,483
Deferred income tax (benefits) expenses   (333,054)  (249,515)  859,735
       
Net income (loss) for the period   2,796,100  (6,456,743)  (27,969,222)
       
Earnings per ADS attributable to shareholders    
Basic      (0.47)
Diluted      (0.47)
 
 
RECONCILIATION FROM NET INCOME TO ADJUSTED EBITDA(*)
(Expressed in U.S. dollars, Unaudited)
       
  Three months ended Three months ended Three months ended
  December 31, 2009 September 30, 2010 December 31, 2010
Net income (loss) 2,796,100 (6,456,743) (27,969,222)
Income taxes expense (including deferred income tax) 862,475 3,125,311 4,249,218
Interest (income) expense, net (51,067) 663,988 42,360
Depreciation and amortization 1,711,438 2,773,519 3,220,572
Changes in fair value of warrant liabilities -- 13,760,000 (654,627)
Amortization of bank loan discount -- 2,219,091 940,701
Share-based compensation -- -- 198,604
Write-off bank loan discount -- -- 36,976,800
Other adjustments (29,925) (289,899) (475,156)
       
Adjusted EBITDA 5,289,021 15,795,267 16,529,250
       
(*) Definition of adjusted EBITDA: Adjusted EBITDA refers to earnings before current income tax expenses, deferred income tax expenses (benefits), interest income, bank loan interest, depreciation and amortization, changes in fair value of warrant liabilities, amortization of bank loan discount, share-based compensation, write-off bank loan discount and other adjustments. Other adjustments comprise of gain on disposal of equipment and foreign exchange gain.
 
 
RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATIONS MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES (*)
(Expressed in U.S. dollars, Unaudited)  
               
  Three months ended December 31, 2009
  GAAP Results Amortization of intangible assets  Changes in fair value of warrant liabilities  Amortization of bank loan discount  Share-based compensation  Write-off bank loan discount Non-GAAP Results
Operating income 3,577,583 1,487,874 -- -- -- -- 5,065,457
Operating income margin 48.2%           68.2%
               
Net income  2,796,100 1,487,874 -- -- -- -- 4,283,974
Net income margin 37.7%           57.7%
               
               
  Three months ended September 30, 2010
  GAAP Results Amortization of intangible assets  Changes in fair value of warrant liabilities  Amortization of bank loan discount  Share-based compensation  Write-off bank loan discount Non-GAAP Results
Operating income 13,021,748 1,859,615 -- -- -- -- 14,881,363
Operating income margin 65.7%           75.1%
               
Net (loss) income (6,456,743) 1,859,615 13,760,000 2,219,091 -- -- 11,381,963
Net (loss) income margin  -32.6%           57.4%
               
               
  Three months ended December 31, 2010
  GAAP Results Amortization of intangible assets  Changes in fair value of warrant liabilities  Amortization of bank loan discount  Share-based compensation  Write-off bank loan discount Non-GAAP Results
Operating income 13,110,074 1,892,784 -- -- 198,604 -- 15,201,462
Operating income margin 57.4%           66.6%
               
Net (loss) income (27,969,222) 1,892,784 (654,627) 940,701 198,604 36,976,800 11,385,040
Net (loss) income margin  -122.5%           49.9%
               
Earnings per ADS attributable to shareholders              
-Basic (0.47)           0.19
-Diluted (0.47)           0.19
               
(*) The adjustment is for amortization of intangible assets, changes in fair value of warrant liabilities, amortization of bank loan discount, share-based compensation and write-off bank loan discount.    
CONTACT:  For investor and media inquiries please contact:
         
          Ms. Rebecca Guo
          SinoTech Energy Limited, Beijing 
          + 86-10-8712-5555
          rebecca.guo@sinotechenergy.com

          Ms. Yue Yu
          Brunswick Group LLP
          +86-10-6566-2256
          sinotech@brunswickgroup.com

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