Recon Technology, Ltd 10-Q

Item 5. Other Information. None. Item 6. Exhibits. The following exhibits are filed herewith: Exhibit Number Document 3.1 Amended and Restated Articles of Association of the Registrant (1) 3.2 Amended and Restated Memorandum of Association of the Registrant (1) 4.1 Specimen Share Certificate (1) 10.1 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.2 Translation of Power of Attorney for rights of Chen Guangqiang in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.3 Translation of Power of Attorney for rights of Yin Shenping in Beijing BHD Petroleum Technology Co., Ltd. (1) 16 10.4 Translation of Power of Attorney for rights of Li Hongqi in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.5 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.6 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.7 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.8 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.9 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.10 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.11 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Jining ENI Energy Technology Co., Ltd. (1) 10.12 Translation of Power of Attorney for rights of Chen Guangqiang in Jining ENI Energy Technology Co., Ltd. (1) 10.13 Translation of Power of Attorney for rights of Yin Shenping in Jining ENI Energy Technology Co., Ltd. (1) 10.14 Translation of Power of Attorney for rights of Li Hongqi in Jining ENI Energy Technology Co., Ltd. (1) 10.15 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.16 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.17 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.18 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.19 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.20 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.21 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Nanjing Recon Technology Co., Ltd. (1) 10.22 Translation of Power of Attorney for rights of Chen Guangqiang in Nanjing Recon Technology Co., Ltd. (1) 17 10.23 Translation of Power of Attorney for rights of Yin Shenping in Nanjing Recon Technology Co., Ltd. (1) 10.24 Translation of Power of Attorney for rights of Li Hongqi in Nanjing Recon Technology Co., Ltd. (1) 10.25 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.26 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.27 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.28 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.29 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.30 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.33 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Yin Shenping (1) 10.34 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Chen Guangqiang (1) 10.35 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Li Hongqi (1) 10.36 Operating Agreement among Recon Technology (Jining) Co. Ltd., Nanjing Recon Technology Co., Ltd. and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.37 Operating Agreement among Recon Technology (Jining) Co. Ltd., Jining ENI Energy Technology Co., Ltd., and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.38 Operating Agreement among Recon Technology (Jining) Co. Ltd., Beijing BHD and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 21.1 Subsidiaries of the Registrant (2) 31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) 31.2 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3) 99.1 Stock Option Plan (1) 99.2 Code of Business Conduct and Ethics (1) 99.3 Press release dated November 14, 2013 regarding earnings for quarter ended September 30, 2013 (3) 18 101.INS XBRL Instance Document (4) 101.SCH XBRL Taxonomy Extension Schema Document (4) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (4) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (4) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (4) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (4) (1) Incorporated by reference to the Company’s Registration Statement on Form S-1, Registration No. 333-152964. (2) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A, filed on January 31, 2012. (3) Filed herewith. (4) Furnished herewith. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. 19 SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RECON TECHNOLOGY, LTD November 13, 2013 By: /s/ Liu Jia Liu Jia Chief Financial Officer (Principal Financial and Accounting Officer) SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RECON TECHNOLOGY, LTD November 13, 2013 By: /s/ Yin Shen ping Yin Shen ping Chief Executive Officer RECON TECHNOLOGY, LTD INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE Unaudited Condensed Consolidated Balance Sheets as of June 30, 2013 and September 30, 2013 F-2 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2012 and September 30, 2013 F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2012 and September 30, 2013 F-4 Notes to Unaudited Condensed Consolidated Financial Statements F-5 F-1 RECON TECHNOLOGY, LTD UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS As of June 30, As of September 30, As of September 30, 2013 2013 2013 RMB RMB U.S. Dollars ASSETS Current assets Cash and cash equivalents ¥ 12,350,392 ¥ 6,681,903 $ 1,088,896 Notes receivable 2,578,855 - - Trade accounts receivable, net 38,648,780 35,887,868 5,848,359 Trade accounts receivable- related parties, net 18,744,364 18,575,786 3,027,147 Inventories, net 13,271,070 17,944,490 2,924,270 Other receivables, net 19,131,503 17,095,176 2,785,864 Other receivables- related parties 742,528 1,171,227 190,865 Purchase advances, net 18,412,507 20,511,358 3,342,572 Purchase advances- related parties 394,034 394,034 64,213 Tax recoverable 575,650 774,874 126,275 Prepaid expenses 2,853,956 3,078,229 501,633 Deferred tax asset 1,006,721 994,853 162,123 Total current assets 128,710,360 123,109,798 20,062,217 Property and equipment, net 1,709,846 1,566,198 255,231 Long-term investment 1,549,450 1,174,836 191,454 Long-term other receivable 3,502,680 7,254,709 1,182,242 Total Assets ¥ 135,472,336 ¥ 133,105,541 $ 21,691,144 LIABILITIES AND EQUITY Current liabilities Short-term bank loans ¥ 10,000,000 ¥ 17,560,000 $ 2,861,613 Trade accounts payable 7,384,165 8,474,376 1,381,001 Trade accounts payable- related parties 3,994,718 - - Other payables 1,964,691 951,117 154,996 Other payable- related parties 4,239,675 2,670,768 435,234 Deferred revenue 3,381,382 3,459,866 563,827 Advances from customers 470,700 435,315 70,940 Accrued payroll and employees' welfare 1,992,783 2,129,041 346,953 Accrued expenses 488,730 498,273 81,200 Taxes payable 6,754,428 6,765,824 1,102,572 Short-term borrowings- related parties 5,503,279 266,902 43,495 Short-term borrowings- other 570,375 530,375 86,431 Total current liabilities 46,744,926 43,741,857 7,128,262 Commitments and Contingency Equity Common stock, ($ 0.0185 U.S. dollar par value, 25,000,000 shares authorized; 3,951,811 shares issued and outstanding as of June 30, 2013 and September 30, 2013) 529,979 529,979 86,364 Additional paid-in capital 69,516,447 69,951,973 11,399,513 Appropriated retained earnings 3,023,231 3,310,881 539,548 Unappropriated retained earnings 8,749,963 8,508,756 1,386,604 Accumulated other comprehensive loss (293,201) (297,985) (48,560) Total controlling shareholders’ equity 81,526,419 82,003,604 13,363,469 Non-controlling interest 7,200,991 7,360,080 1,199,413 Total equity 88,727,410 89,363,684 14,562,882 Total Liabilities and Equity ¥ 135,472,336 ¥ 133,105,541 $ 21,691,144 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F-2 RECON TECHNOLOGY, LTD UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the three months ended September 30, 2012 2013 2013 RMB RMB USD Revenues Hardware and software ¥ 8,438,964 ¥ 11,097,092 $ 1,808,404 Service 83,177 - - Hardware and software - related parties 532,051 415,618 67,730 Total revenues 9,054,192 11,512,710 1,876,134 Cost of revenues Hardware and software ¥ 5,766,562 ¥ 6,118,674 $ 997,111 Service 20,620 - - Hardware and software - related parties 821,585 102,936 16,775 Total cost of revenues 6,608,767 6,221,610 1,013,886 Gross profit 2,445,425 5,291,100 862,248 Selling and distribution expenses 1,268,798 1,353,922 220,638 General and administrative expenses 1,983,111 2,741,923 446,829 Research and development expenses 1,533,329 692,600 112,867 Operating expenses 4,785,238 4,788,445 780,334 Income (loss) from operations (2,339,813) 502,655 81,914 Other income (expenses) Subsidy income - 333,712 54,382 Interest income 1,310 103,201 16,818 Interest expense (329,756) (221,259) (36,057) Loss from equity method investment - (374,614) (61,048) Gain from foreign currency exchange 266,460 94,300 15,367 Other income (expense) 95,139 (24,314) (3,962) Income (loss) before income tax (2,306,660) 413,681 67,414 Provision for income tax 31,624 207,327 33,786 Net Income (loss) (2,338,284) 206,354 33,628 Less: Net income attributable to non-controlling interest 5,882 159,910 26,059 Net Income (loss) attributable to Recon Technology, Ltd ¥ (2,344,166) ¥ 46,444 $ 7,569 Comprehensive income (loss) Net income (loss) (2,338,284) 206,354 33,628 Foreign currency translation adjustment (15,962) (5,604) (913) Comprehensive income (loss) (2,354,246) 200,750 32,715 Less: Comprehensive income attributable to non-controlling interest 7,656 159,349 25,968 Comprehensive income (loss) attributable to Recon Technology, Ltd ¥ (2,361,902) ¥ 41,401 $ 6,747 Earnings (loss) per common share - basic ¥ (0.59) ¥ 0.01 $ 0.00 Earnings per common share - diluted ¥ (0.59) ¥ 0.01 $ 0.00 Weighted - average shares -basic 3,951,811 3,951,811 3,951,811 Weighted - average shares -diluted 3,951,811 3,951,811 3,951,811 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F-3 RECON TECHNOLOGY, LTD UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended September 30, 2012 2013 2013 RMB RMB U.S. Dollars Cash flows from operating activities: Net income (loss) ¥ (2,338,284) ¥ 206,354 $ 33,628 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 72,379 150,368 24,504 Provision/(recovery of) for doubtful accounts (413,622) 84,728 13,807 Stock based compensation 454,805 414,954 67,622 Loss from investment - 374,614 61,048 Deferred tax (benifit)/provision 31,624 11,868 1,934 Changes in operating assets and liabilities: Trade accounts receivable 5,011,902 2,568,115 418,505 Trade accounts receivable-related parties 538,500 263,726 42,977 Inventories 183,484 (4,673,420) (761,590) Notes receivable - 2,578,855 420,255 Other receivable, net (1,139,779) (1,703,837) (277,662) Other receivables related parties, net (427,764) (428,699) (69,862) Purchase advance, net (606,488) (2,097,795) (341,861) Purchase advance-related party, net 100,000 - - Tax recoverable 1,218,082 (199,225) (32,466) Prepaid expense (388,071) (224,273) (36,548) Trade accounts payable (2,812,072) 1,090,211 177,663 Trade accounts payable-related parties 1,686,797 (3,994,718) (650,987) Other payables (682,186) (1,013,574) (165,174) Other payables-related parties (176,073) (1,568,907) (255,672) Deferred income 100,555 78,484 12,790 Advances from customers 950,869 (35,385) (5,766) Accrued payroll and employees' welfare 67,796 136,258 22,205 Accrued expenses 63,324 9,543 1,555 Taxes payable (1,260,010) 11,396 1,857 Net cash provided by (used in) operating activities 235,768 (7,960,359) (1,297,238) Cash flows from investing activities: Purchase of property and equipment (381,406) (6,720) (1,095) Net cash used in investing activities (381,406) (6,720) (1,095) Cash flows from financing activities: Proceeds from short-term bank loans - 7,560,000 1,231,993 Proceeds from borrowings-related parties 7,675 - - Repayment of short-term borrowings (949,183) (40,000) (6,518) Repayment of short-term borrowings-related parties (202,434) (5,236,377) (853,330) Net cash provided by (used in) financing activities (1,143,942) 2,283,623 372,145 Effect of exchange rate fluctuation on cash and cash equivalents 10,624 14,967 2,439 Net decrease in cash and cash equivalents (1,278,956) (5,668,489) (923,749) Cash and cash equivalents at beginning of period 3,533,283 12,350,392 2,012,645 Cash and cash equivalents at end of period ¥ 2,254,327 ¥ 6,681,903 $ 1,088,896 Supplemental cash flow information Cash paid during the period for interest ¥ 407,215 ¥ 212,187 $ 34,578 Cash paid during the period for taxes ¥ - ¥ - $ - The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F-4 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS Organization – Recon Technology, Ltd (the “Company”) was incorporated under the laws of the Cayman Islands on August 21, 2007 as a company with limited liability. The Company provides oilfield specialized equipment, automation systems, tools, chemicals and field services to petroleum companies in the People’s Republic of China (the “PRC”). Its wholly owned subsidiary, Recon Technology Co., Limited (“Recon-HK”) was incorporated on September 6, 2007 in Hong Kong. Other than the equity interest in Recon-HK, the Company does not own any assets or conduct any operations. On November 15, 2007, Recon-HK established one wholly owned subsidiary, Jining Recon Technology Ltd. (“Recon-JN”) under the laws of the PRC. Other than the equity interest in Recon-JN, Recon-HK does not own any assets or conduct any operations. The Company conducts its business through the following PRC legal entities that were consolidated as variable interest entities (“VIEs”) and operate in the Chinese oilfield equipment & service industry: 1. Beijing BHD Petroleum Technology Co., Ltd. (“BHD”), and 2. Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”). Nature of Operations – The Company engaged in (1) providing equipment, tools and other hardware related to oilfield production and management, including simple installations in connection with some projects; (2) service to improve production and efficiency of exploited oil wells, and (3) developing and selling its own specialized industrial automation control and information solutions. The products and services provided by the Company include: High-Efficiency Heating Furnaces - High-Efficiency Heating Furnaces are designed to remove the impurities and to prevent solidification blockage in transport pipes carrying crude petroleum. Crude petroleum contains certain impurities including water and natural gas, which must be removed before the petroleum can be sold. Multi-Purpose Fissure Shaper - Multipurpose fissure shapers improve the extractors’ ability to test for and extract petroleum which requires perforation into the earth before any petroleum extractor can test for the presence of oil. Horizontal Multistage Fracturing related Service - The Company mainly uses Baker Hughes FracPoint™ system and provides related service to oilfield companies. The Baker Hughes FracPoint™ system provided a completion method using packers to isolate sections of the wellbore (stages) and frac sleeves to direct the frac treatment to the desired stage. The use of this type of completion eliminated the need for cementing the liner, coiled tubing operations, and wireline operations, while significantly reducing overall pumping time. Supervisory Control and Data Acquisition System (“SCADA”) - SCADA is an industrial computerized process control system for monitoring, managing and controlling petroleum extraction. SCADA integrates underground and aboveground activities of the petroleum extraction industry. This system can help to manage the oil extraction process in real-time to reduce the costs associated with extraction. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its subsidiaries, and VIEs for which the Company is the primary beneficiary. All inter-company transactions and balances between the Company, its subsidiaries and VIEs are eliminated upon consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring entries, which are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2013. The results of operations for the interim periods presented may not be indicative of the operating results to be expected for the Company’s fiscal year ending June 30, 2014. F-5 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Variable Interest Entities - 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. We perform ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previous identified as a VIE continues to be a VIE and whether we continue 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. Currency Translation - The Company’s functional currency is the Chinese Yuan (“RMB”) and the accompanying consolidated financial statements have been expressed in Chinese Yuan. The statements as of and for the three months period ended September 30, 2013 have been translated into United States dollars (“U.S. dollars”) solely for the convenience of the readers. The translation has been made at the rate of ¥6.1364 = US$1.00, the approximate exchange rate prevailing on September 30, 2013. These translated U.S. dollar amounts should not be construed as representing Chinese Yuan amounts or that the Chinese Yuan amounts have been or could be converted into U.S. dollars. Estimates and assumptions - The preparation of the consolidated financial statements in conformity with U.S. GAAP 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 estimates include revenue recognition, allowance for doubtful accounts, the useful lives of property and equipment and the fair value of stock based payments. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Fair Values of Financial Instruments - 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, short-term bank loan and short-term borrowings approximate fair value because of the immediate or short-term maturity of these financial instruments. Long-term borrowings approximate fair value because the interest rate charged approximates the market rate. Long-term other receivables approximate fair value because interest rate approximates the market rate. Long-term investment is carried at less than fair value, with fair value determined using level 1 inputs. (See Note 8.) Cash and Cash Equivalents - Cash and cash equivalents are comprised of cash on hand, demand deposits and highly liquid short-term debt investments with stated original maturities of no more than three months. Since a majority of the bank accounts are located in the PRC, those bank balances are uninsured. Trade Accounts and Other Receivables - 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. Purchase Advances - Purchase advances are the amounts prepaid to suppliers for purchases of inventory and are recognized as inventory when the final amount is paid to the suppliers and the inventory is delivered. Inventories - Inventories are stated at the lower of cost or market value, on a weighted average basis for BHD. Inventories are stated at the lower of cost or market value, on a first-in-first-out basis for Nanjing Recon and ENI. The methods of determining inventory costs are used consistently from year to year. Allowance for inventory obsolescence is provided when the market value of certain inventory items are lower than the cost. F-6 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Tax Recoverable – Tax recoverable represented amounts paid for value added tax ( “ VAT ” ) on purchases in the PRC amounting to ¥ 575,650 at June 30, 2013 and ¥ 774,874 ($ 126,275 ) at September 30, 2013. The amount can be used to offset VAT payable on sales made by the Company. Property and Equipment - Property and equipment are stated at cost. Depreciation on motor vehicles and office equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets. Long-term investment – Long-term investment in equity over which the Company has the ability to exercise significant influence but not control, and that, in general, are 20-50 percent owned, are stated at cost plus equity in undistributed net income (loss) of the investee. These investments are evaluated for impairment, in which an impairment loss would be recorded whenever a decline in the value of an equity investment below its carrying amount is determined to be “other than temporary.” In judging “other than temporary,” the Company would consider the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and longer-term operating and financial prospects of the investee, and the Company’s longer-term intent of retaining the investment in the investee. Long-Lived Assets - The Company applies the ASC Topic 360 “Property, plant and equipment.” ASC Topic 360 requires that long-lived assets, such as property and equipment be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. There were no impairments at June 30, 2013 and September 30, 2013. Revenue Recognition - The Company recognizes 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. Hardware: Revenue from hardware sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer’s final acceptance of the arrangement. Software: The Company sells self-developed software. For software sales, the Company recognizes revenues in accordance with ASC Topic 985 - 605 “Software Revenue Recognition”. Revenue from software is recognized according to project contracts. Contract costs are accumulated during the periods of installation and testing or commissioning. Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance statements. Service: The Company provides services to improve software function and system operation on separated fixed-price contracts. Revenue is recognized on the completed contract method when acceptance is determined by a completion report signed by the customer. Deferred revenue represents unearned amounts billed to customers related to sales contracts. F-7 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Subsidy Income - Grants are given by the government to support local software companies’ operation and research and development. Grants related to research and development projects are recognized as subsidy income in the unaudited condensed consolidated statements of operations when received. Grants in the form of value-added-tax refund for software products are recognized when received. Share-Based Compensation - The Company accounts for share-based compensation in accordance with ASC Topic 718, Share-Based Payment . Under the fair value recognition provisions of this topic, 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 Binomial Lattice valuation model estimated at the grant date based on the award’s fair value. Income Taxes - Income taxes are provided based upon the liability method of accounting pursuant to ASC Topic 740, Accounting for Income Taxes . Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any income taxes in the United States or the Cayman Islands. Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Income tax returns for the years prior to 2009 are no longer subject to examination by tax authorities. Earnings (loss) per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net income (loss) attributable to ordinary shareholders by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding. Basic net income per share is computed by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of ordinary shares, ordinary shares equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive ordinary shares consist of ordinary shares issuable upon the conversion of ordinary stock options and warrants (using the treasury stock method). However, the effect from options and warrants would have been anti-dilutive due to the fact that the weighted average exercise price per share of options and warrants is higher than the weighted average market price per ordinary share during the three months ended September 30, 2012 and 2013. NOTE 3. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2013 September 30, 2013 September 30, 2013 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 42,993,298 ¥ 40,425,182 $ 6,587,768 Allowance for doubtful accounts (4,344,518) (4,537,314) (739,409) Total - third- party, net ¥ 38,648,780 ¥ 35,887,868 $ 5,848,359 F-8 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2013 September 30, 2013 September 30, 2013 Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 19,722,574 ¥ 19,458,847 $ 3,171,053 Allowance for doubtful accounts (978,210) (883,061) (143,906) Total - related-parties, net ¥ 18,744,364 ¥ 18,575,786 $ 3,027,147 One of the Founders, Mr. Yin Shenping, is the legal representative of Beijing Yabei Nuoda Science and Technology Co. Ltd (“Yabei Nuoda”). The founder does not have any equity interest in this company currently. The receivable from Yabei Nuoda was generated primarily from the sale of automation system and services based on written contracts. NOTE 4. OTHER RECEIVABLES, NET Other receivables consisted of the following: Third Party June 30, 2013 September 30, 2013 September 30, 2013 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 6,799,669 ¥ 2,450,006 $ 399,258 Loans to third parties (B) 8,440,639 10,486,824 1,708,954 Business advance to staff (C) 2,977,176 3,863,135 629,544 Deposits for projects 185,669 276,648 45,083 Others 1,210,230 488,578 79,620 Allowance for doubtful accounts (481,880) (470,015) (76,595) Total ¥ 19,131,503 ¥ 17,095,176 $ 2,785,864 Third Party June 30, 2013 September 30, 2013 September 30, 2013 Non-Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 3,502,680 ¥ 7,254,709 $ 1,182,242 Total ¥ 3,502,680 ¥ 7,254,709 $ 1,182,242 (A) Due from ENI represents a working capital loan to the Company’s former VIE. In January 2012, ENI agreed to repay the loan on a payment schedule, and interest is accruing during the period at an annual rate of 4 %. In accordance with the payment schedule, the principal plus accrued interest is required to be repaid over approximately three years on a quarterly basis beginning March 2012. The first four payments are RMB 1.2 million each. In March, June, September and December of 2012, the Company received an aggregate of RMB 4.8 million. Starting March 2013, installments for each quarter would be ¥ 1,777,653 . The Company has received the payments on time in March and June, 2013. On September 30, 2013, ENI proposed to extend the payment period and signed a new contract with the Company. According to the new arrangement, the remaining part of this loan will be repaid over four years with quarterly installments of ¥ 699,147 . The payments after 1 year are RMB 7,254,709 ($ 1,182 , 242) . F-9 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (B) Loans to third parties are mainly used for short-term funding to support cooperative companies. These loans are due on demand bearing no interest. (C) Business advance to staff represents advances for business travel and sundry expenses related to oilfield or on-site installation and inspection of products through customer approval and acceptance. Other receivables - related parties represent loans to related parties for working capital advances to related entities. Such advances are due-on-demand and non-interest bearing. Below is a summary of other receivables - related parties which consisted of the following: Related Party June 30, 2013 September 30, 2013 September 30, 2013 Name of Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. (A) ¥ 500,000 ¥ 500,000 $ 81,481 Other-travel advances (B) 242,528 671,227 109,384 Total ¥ 742,528 ¥ 1,171,227 $ 190,865 (A) Non-interest bearing loan due on demand. (B) Other travel advances were paid to the Company’s management. These advances are short term and will be offset against travel and business expenses. NOTE 5. PURCHASE ADVANCES The Company purchased products and services from a third-party and a related party during the normal course of business. Purchase advances consisted of the following: June 30, 2013 September 30, 2013 September 30, 2013 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 19,237,449 ¥ 21,335,245 $ 3,476,834 Allowance for doubtful accounts (824,942) (823,887) (134,262) Total ¥ 18,412,507 ¥ 20,511,358 $ 3,342,572 Below is a summary of purchase advances to related party. June 30, 2013 September 30, 2013 September 30, 2013 Related Party RMB RMB U.S. Dollars Xiamen Huangsheng Hitek Computer Network Co. Ltd. ¥ 394,034 ¥ 394,034 $ 64,213 Total ¥ 394,034 ¥ 394,034 $ 64,213 F-10 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS One of the Founders and a family member collectively own 57 % of Xiamen Huasheng Haitian Computer Network Co. Ltd. NOTE 6. INVENTORIES Inventories consisted of the following: June 30, 2013 September 30, 2013 September 30, 2013 RMB RMB U.S. Dollars Small component parts ¥ 45,314 ¥ 46,744 $ 7,617 Work in process 1,356,755 2,884,140 470,005 Finished goods 11,869,001 15,013,606 2,446,648 Total inventories ¥ 13,271,070 ¥ 17,944,490 $ 2,924,270 NOTE 7. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2013 September 30, 2013 September 30, 2013 RMB RMB U.S. Dollars Motor vehicles ¥ 2,683,250 ¥ 2,683,250 $ 437,268 Office equipment and fixtures 593,654 600,374 97,838 Total property and equipment 3,276,904 3,283,624 535,106 Less: Accumulated depreciation (1,567,058) (1,717,426) (279,875) Property and equipment, net ¥ 1,709,846 ¥ 1,566,198 $ 255,231 Depreciation expenses were ¥ 72,379 and ¥ 150,368 ($ 24,504 ) for the three months ended September 30, 2012 and 2013, respectively. NOTE 8. Long-term investment On June 28, 2013, the Company purchased 2,800,000 restricted shares of Avalon Oil and Gas, Inc. ("Avalon") for $ 0.089 per share, or approximately ¥ 1.5 million ($ 250,000 ). Since the restriction for the shares is for two years, the Company was able to acquire the shares at 50 % of the market value. As a result, Recon owns 32.22 % of Avalon's outstanding shares. The investment was accounted for using the equity method and no gain or loss from equity investment was recorded for the year ended June 30, 2013 due to immateriality. As of September 30, 2013, Recon owns 27.43 % of Avalon’s outstanding shares due to Avalon issuing more shares. Avalon is an independent US domestic oil and natural gas producer listed on the OTCBB under the ticker symbol AOGN. Avalon is building a portfolio of oil and gas producing properties to generate asset growth. For the three months ended September 30, 2013, Avalon had revenue of approximately $ 40,000 and net loss of $ 0.2 million. The Company recorded a loss of ¥ 374,614 ($ 61,048 ) for its share of Avalon’s loss for the three months ended September 30, 2013. F-11 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. OTHER PAYABLES Other payables consisted of the following: June 30, 2013 September 30, 2013 September 30, 2013 Third Party RMB RMB U.S. Dollars Consulting services ¥ 1,199,716 ¥ 499,049 $ 81,326 Due to ENI (A) 148,000 - - Expenses paid by third-parties 580,648 440,085 71,717 Others 36,327 11,983 1,953 Total ¥ 1,964,691 ¥ 951,117 $ 154,996 (A) A former VIE of the Company, which ceased to be a VIE on December 16, 2010. June 30, 2013 September 30, 2013 September 30, 2013 Related Party RMB RMB U.S. Dollars Due to related parties (1) ¥ 2,860,824 1,860,824 $ 303,245 Expenses paid by the major shareholders 467,499 432,321 70,452 Due to family member of one owner on behalf on Recon 716,000 200,000 32,592 Due to management staff on behalf of Recon 195,352 177,623 28,945 Total ¥ 4,239,675 ¥ 2,670,768 $ 435,234 (1) Includes an advance from Yabei Nuoda for RMB 61,477 and an advance from Xiamen Henda Haitek for RMB 1,799,347 to supplement the Company’s working capital. The advances are payable on demand and non-interest bearing. NOTE 10. TAXES PAYABLE Taxes payable consisted of the following: June 30, 2013 September 30, 2013 September 30, 2013 RMB RMB U.S. Dollars VAT payable ¥ 2,802,890 ¥ 2,635,313 $ 429,456 Business tax payable 75,865 75,865 12,363 Enterprise income tax payable 3,850,288 4,045,748 659,303 Other taxes payable 25,385 8,898 1,450 Total taxes payable ¥ 6,754,428 ¥ 6,765,824 $ 1,102,572 F-12 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. SHORT-TERM BANK LOANS Short-term bank loans consisted of the following: June 30, 2013 September 30, 2013 September 30, 2013 RMB RMB U.S. Dollars Communication Bank, 6.6% annual interest, due on October 25, 2013 (A) ¥ 3,090,000 ¥ 3,090,000 ¥ 503,554 Communication Bank, 6.6% annual interest, due on November 15, 2013 1,910,000 1,910,000 311,257 Beijing Bank,5.75% annual interest, due on February 25, 2014 1,200,000 1,200,000 195,554 Beijing Bank, 5.75 % annual interest, due on February 27, 2014 600,000 600,000 97,777 Beijing Bank, 5.75 % annual interest, due on April 9, 2014 1,200,000 1,200,000 195,554 Beijing Bank, 5.75 % annual interest, due on April 16, 2014 900,000 900,000 146,666 Beijing Bank,5.75 % annual interest, due on March 11, 2014 1,100,000 1,100,000 179,258 Industrial and commercial bank, float interest rate, due on December 31, 2013 - 500,000 81,481 Industrial and commercial bank, float interest rate, due on July 28, 2014 3,060,000 498,664 Industrial and commercial bank, float interest rate, due on August 8, 2014 1,000,000 162,962 Industrial and commercial bank, float interest rate, due on February 25, 2014 3,000,000 488,886 Total short-term bank loans ¥ 10,000,000 ¥ 17,560,000 $ 2,861,613 (A) The Company paid off the loan of ¥ 3,090,000 from Communication Bank on October 25, 2013. Interest expense for short-term bank loans was ¥ 474,125 and ¥ 219,672 ($ 35,798 ) for the three months ended September 30, 2012 and 2013, respectively. F-13 NOTE 12. SHORT-TERM BORROWINGS Short-term borrowings are generally extended upon maturity and consisted of the following: June 30, 2013 September 30, 2013 September 30, 2013 Short-term borrowings due to non-related parties: RMB RMB U.S. Dollars Short-term borrowing, 6% annual interest, due on November 29, 2013 ¥ 70,375 ¥ 70,375 $ 11,468 Short-term borrowings with no interest, due on April 21, 2014 500,000 460,000 74,963 Total short-term borrowings due to non-related parties ¥ 570,375 ¥ 530,375 $ 86,431 Interest expense for short-term borrowings due to non-related parties was ¥19,768 and ¥1,056 ($172) for the three months ended September 30, 2012 and 2013, respectively. June 30, 2013 September 30, 2013 September 30, 2013 Short-term borrowings due to related parties: RMB RMB U.S. Dollars Due-on-demand borrowings from Founders, no interest ¥ 6,377 ¥ - $ - Short-term borrowing from a Founder's family member, 6% annual interest, due on December 21, 2013 (A) 3,653,906 33,906 5,525 Short-term borrowing from a Founder's family member, 6% annual interest, matures on November 29, 2013 (A) 1,610,000 - - Short-term borrowings from Xiamen Huasheng Haitian Computer Network Co. Ltd., no interest, due on November 14, 2013 200,000 200,000 32,592 Short-term borrowings from management, 6% annual interest, due on December 7, 2013 32,996 32,996 5,378 Total short-term borrowings due to related parties ¥ 5,503,279 ¥ 266,902 $ 43,495 (A) The Company has repaid ¥ 5,230,000 by July 29, 2013. Interest expense for short-term borrowings due to related parties was ¥ 55,117 and ¥ 532 ($ 87 ) for the three months ended September 30, 2012 and 2013, respectively. NOTE 13. SHAREHOLDERS’ EQUITY Appropriated Retained Earnings - According to the Memorandum and Articles of Association, the Company is required to transfer a certain portion of its net profit, as determined under PRC accounting regulations, from current net income to the statutory reserve fund. In accordance with the PRC Company Law, companies are required to transfer 10 % of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory reserves until such reserves reach 50 % of the registered capital or paid-in capital of the companies. As of June 30, 2013 and September 30, 2013, the balance of total statutory reserves was ¥ 3,023,231 and ¥ 3,310,881 ($ 539,548 ), respectively. F-14 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. STOCK-BASED COMPENSATION Stock-Based Awards Plan 2009 Options Plan - The Company granted options to purchase 293,000 ordinary shares under the Stock Incentive 2009 Plan to its employees and non-employee directors on July 29, 2009 . The options have an excise price of $ 6.00 , equal to the IPO price of the Company’s ordinary shares, and will vest over a period of five years, with the first 20% vesting on July 29, 2010 . The options expire ten years after the date of grant, on July 29, 2019 . The fair value was estimated on July 29, 2009 using the Binomial Lattice valuation model, with the following weighted-average assumptions: Stock price at grant date $ 6.00 Exercise price (per share) $ 6.00 Risk free rate of interest*** 4.6118 % Dividend yield 0.0 % Life of option (years)** 10 Volatility* 78 % Forfeiture rate**** 15 % * Volatility is projected using the performance of PHLX Oil Service Sector index. ** The life of options represents the period the option is expected to be outstanding. *** The risk-free interest rate is based on the Chinese international bond denominated in U.S. dollar, with a maturity that approximates the life of the option. **** Forfeiture rate is the estimated percentage of options forfeited by employees by leaving or being terminated before vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The grant date fair value of the options was ¥ 30.17 ($ 4.42 ) per share. 2012 Options Plan – T he Company granted options to purchase 415,000 ordinary shares to its employees and non-employee director on March 26, 2012 . The options have an excise price of $ 2.96 , which was equal to the share price of the Company’s ordinary shares at March 26, 2012, and will vest over a period of five years, with the first 20% vesting on March 26, 2013 . The options expire ten years after the date of grant, on March 26, 2022 . The fair value was estimated on March 26, 2012 using the black-scholes option-pricing model with the following assumptions: Stock price at grant date $ 2.96 Exercise price (per share) $ 2.96 Discount Rate - Bond Equivalent Yield*** 1.56 % Dividend yield 0.0 % Life of option (years) ** 7.5 Volatility* 46 % Forfeiture rate**** 0 % * Volatility is projected using the performance of PHLX Oil Service Sector index over past five years. ** The life of options represents the period the option is expected to be outstanding. *** The risk-free interest rate is based on the U.S. government bond, with a maturity that approximates the life of the option. **** Forfeiture rate is the estimated percentage of options forfeited by employees by leaving or being terminated before vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The grant date fair value of the options was ¥ 10.06 ($ 1.59 ) per share. In July 2013, three employees with 44,000 options resigned from the Company and their granted options were forfeited back to the Company’s incentive option pool. F-15 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the stock options activity: Weighted Average Exercise Price Per Stock Options Shares Share Outstanding as of July 1, 2013 608,000 $ 3.93 Granted - - Forfeited (44,000) - Exercised - - Outstanding as of September 30, 2013 564,000 $ 3.93 The following is a summary of the status of options outstanding and exercisable at September 30, 2013: Outstanding Options Exercisable Options Average Average Remaining Remaining Average Exercise Contractual life Average Exercise Contractual life Price Number (Years) Price Number (Years) $ 6.00 193,000 5.83 $ 6.00 115,800 5.83 $ 2.96 371,000 8.49 $ 2.96 - 8.49 The total share-based compensation expenses recorded for stock options granted were ¥ 454,805 and ¥ 414,954 ($ 67,622 ) for the three months ended September 30, 2012 and 2013, respectively. The total unrecognized share-based compensation expense as of September 30, 2013 was approximately ¥ 3.3 million ($ 0.5 million), which is expected to be recognized over a weighted average period of approximately 2.85 years. Placement Agent Warrants The Company had 170,000 of granted placement agent warrants as of September 30, 2013 and no warrants were exercised during this period. NOTE 15. INCOME TAX The Company is not subject to any income taxes in the United States or the Cayman Islands and had minimal operations in jurisdictions other than the PRC. BHD and Nanjing Recon are subject to PRC’s income taxes as PRC domestic companies. For the calendar years 2012 and 2013, Nanjing Recon is subject to an income tax rate of 15 %. As approved by the domestic tax authority in the PRC, BHD was recognized as a government-certified high technology company on November 25, 2009 and is subject to an income tax rate of 15 % through November 2015. Deferred tax asset is comprised of the following: June 30, 2013 September 30, 2013 September 30, 2013 RMB RMB U.S. Dollars Allowance for doubtful receivables ¥ 1,006,721 ¥ 994,853 $ 162,123 Total deferred income tax assets ¥ 1,006,721 ¥ 994,853 $ 162,123 F-16 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company’s tax provision is comprised of the following: For the three months ended September 30, 2012 2013 2013 RMB RMB U.S. Dollars Current income tax provision ¥ - ¥ 200,914 $ 32,741 Deferred income taxes provision 31,624 11,868 1,934 Provision for income tax ¥ 31,624 ¥ 212,782 $ 34,675 NOTE 16. NON-CONTROLLING INTEREST Non-controlling interest consisted of the following: As of June 30, 2013 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 299,118 Unappropriated retained earnings 2,717,231 2,665,337 5,382,568 869,812 Accumulated other comprehensive loss (18,793) (13,784) (32,577) (5,265) Total non-controlling interest ¥ 4,349,438 ¥ 2,851,553 ¥ 7,200,991 $ 1,163,665 As of September 30, 2013 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 301,643 Unappropriated retained earnings 2,784,200 2,758,277 5,542,477 903,213 Accumulated other comprehensive loss (19,205) (14,193) (33,397) (5,443) Total non-controlling interest ¥ 4,415,995 ¥ 2,944,084 ¥ 7,360,080 $ 1,199,413 NOTE 17. CONCENTRATIONS For the three months ended September 30, 2013, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented 37.53 % and 34.16 % of the Company’s revenue, respectively. For the three months ended September 30, 2012, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”) represented 9.08 % and 13.23 % of the Company’s revenue, respectively. F-17 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended September 30, 2012, one supplier, Hebei Huanghua Xiangtong Technical Co. Ltd, accounted for 30.54 % of the company’s total purchases . For the three months ended September 30, 2013, four major suppliers accounted for 11.8 %, 20.1 %, 15.1 % and 24.9 % of the company’s total purchase. NOTE 18. COMMITMENTS AND CONTINGENCY (a) Office Leases The Company leased three offices in Beijing (two for BHD; one for Recon-JN), one office in Jining for Recon-JN and one office in Nanjing for Nanjing Recon. Future payments under such leases are as follows as of September 30, 2013: Twelve months ending September 30, Office lease payment RMB U.S. Dollars 2014 ¥ 695,400 $ 113,324 2015 175,000 28,518 Total ¥ 870,400 $ 141,842 (b) Contingency The Labor Contract Law of the PRC requires employers to assure the liability of severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of the service provided by the employees. As of September 30, 2013, the Company estimated its severance payments of approximately ¥ 1.2 million ($ 0.2 million) which has not been reflected in its unaudited condensed consolidated financial statements because the Company has determined that the likelihood to make these payments is remote. NOTE 19. RELATED PARTY TRANSACTIONS AND BALANCES Sales to related parties – sales to related parties consisted of the following: For the three months ended September 30, 2012 2013 2013 RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 532,051 ¥ 116,473 $ 18,981 Xiamen Henda Haitian computer network Inc - 299,145 48,749 Revenues from related parties ¥ 532,051 ¥ 415,618 $ 67,730 Purchases from related parties – purchases from related parties consisted of the following: For the three months ended September 30, 2012 2013 2013 RMB RMB U.S. Dollars Huanghua Xiang Tong Manufacture ¥ 2,919,320 ¥ - $ - Purchase from related parties ¥ 2,919,320 ¥ - $ - F-18 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 for two years at a monthly rent of ¥ 84,333 with the annual rental expense at approximately ¥ 1 million ($ 0.2 million). Short-term borrowings from related parties - The Company borrowed ¥ 5,503,279 and ¥ 266,902 ($ 43,495 ) from the Founders, their family members and senior officers as of June 30, 2013 and September 30, 2013, respectively. For the specific terms and interest rates of the borrowings, please see Note 12. Trade accounts payable to related parties - The Company owed ¥ 3,994,718 to one related party as of June 30, 2013. As of September 30, 2013, BHD was not a related party to this supplier. Expenses paid by the owners on behalf of Recon – The major owner of Nanjing Recon, Mr. Yin and the major owner of BHD, Mr. Chen, paid certain operating expenses for the Company. As of June 30, 2013 and September 30, 2013, ¥ 467,499 and ¥ 432,321 ($ 70,452 ) were due to them, respectively. NOTE 20. Variable Interest Entities The Company reports its VIEs’ portion of consolidated net income and stockholders’ equity as non-controlling interests in the condensed consolidated financial statements. Summary information regarding consolidated VIEs is as follows: June 30, 2013 September 30, 2013 September 30, 2013 RMB RMB U.S. Dollars ASSETS Current Assets Cash and cash equivalents ¥ 10,341,778 ¥ 5,599,307 $ 912,474 Trade accounts receivable, net 57,393,144 54,463,653 8,875,506 Notes receivable 2,578,855 - - Purchase advances 17,862,507 20,355,393 3,317,155 Other assets 29,974,454 37,850,180 6,168,141 Total current assets ¥ 118,150,738 ¥ 118,268,533 $ 19,273,276 Non-current assets 1,705,940 1,562,683 254,658 Total Assets ¥ 119,856,678 ¥ 119,831,216 $ 19,527,934 LIABILITIES Trade accounts payable ¥ 11,378,883 ¥ 8,474,376 $ 1,381,001 Taxes payable 6,754,428 6,765,520 1,102,523 Other liabilities 24,770,161 25,375,056 4,135,170 Total current liabilities 42,903,472 40,614,952 6,618,695 Total Liabilities ¥ 42,903,472 ¥ 40,614,952 $ 6,618,695 The financial performance of VIEs reported in the condensed consolidated statement of operations and comprehensive income (loss) for the three months ended September 30, 2013 includes revenues of ¥ 11,512,710 ($ 1,876,134 ), operating expenses of ¥ 3,388,009 ($ 552,117 ), other expenses of ¥ 129 ($ 21 ) and a net income of ¥ 1,886,755 ($ 307,469 ). F-19