Recon Technology, Ltd 10-Q

Item 5. Other Information. None. Item 6. Exhibits. The following exhibits are filed herewith: 23 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) 4.2 Form of Warrant (2) 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) 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) 24 10.12 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Nanjing Recon Technology Co., Ltd. (1) 10.13 Translation of Power of Attorney for rights of Chen Guangqiang in Nanjing Recon Technology Co., Ltd. (1) 10.14 Translation of Power of Attorney for rights of Yin Shenping in Nanjing Recon Technology Co., Ltd. (1) 10.15 Translation of Power of Attorney for rights of Li Hongqi in Nanjing Recon Technology Co., Ltd. (1) 10.16 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.17 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.18 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.19 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.20 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.21 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.22 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Yin Shenping (1) 10.23 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Chen Guangqiang (1) 10.24 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Li Hongqi (1) 10.25 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) 10.26 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 (3) 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. (4) 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. (4) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4) 99.1 Stock Option Plan (1) 99.2 Code of Business Conduct and Ethics (1) 99.3 Press Release dated May 15, 2014 (4) 25 101.INS XBRL Instance Document (5) 101.SCH XBRL Taxonomy Extension Schema Document (5) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (5) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (5) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (5) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (5) (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 Report on Form 8-K, filed on November 25, 2013. (3) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A, filed on January 31, 2012. (4) Filed herewith. (5) 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. 26 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 May 15, 2014 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 May 15, 2014 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 March 31, 2014 F-2 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine and three months ended March 31, 2013 and 2014 F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2013 and 2014 F-4 Notes to Unaudited Condensed Consolidated Financial Statements F-5 RECON TECHNOLOGY, LTD UNaudited condensed Consolidated Balance Sheets As of June 30, As of March 31, As of March 31, 2013 2014 2014 RMB RMB U.S. Dollars ASSETS Current assets Cash and cash equivalents ¥ 12,350,392 ¥ 8,863,889 $ 1,438,499 Notes receivable 2,578,855 - - Trade accounts receivable, net 38,648,780 55,808,726 9,057,065 Trade accounts receivable- related parties, net 18,744,364 16,794,476 2,725,535 Inventories, net 13,271,070 22,094,753 3,585,705 Other receivables, net 19,131,503 15,970,126 2,591,754 Other receivables- related parties 742,528 664,831 107,894 Purchase advances, net 18,412,507 23,480,982 3,810,672 Purchase advances- related parties 394,034 394,034 63,947 Tax recoverable 575,650 - - Prepaid expenses 2,853,956 3,434,100 557,311 Deferred tax asset 1,006,721 1,082,436 175,666 Total current assets 128,710,360 148,588,353 24,114,048 Property and equipment, net 1,709,846 1,345,742 218,397 Long-term investment 1,549,450 674,792 109,510 Long-term other receivable 3,502,680 5,993,198 972,622 Total Assets ¥ 135,472,336 ¥ 156,602,085 $ 25,414,577 LIABILITIES AND EQUITY Current liabilities Short-term bank loans ¥ 10,000,000 ¥ 15,630,000 $ 2,536,555 Trade accounts payable 7,384,165 13,595,942 2,206,453 Trade accounts payable- related parties 3,994,718 - - Other payables 1,964,691 1,773,163 287,762 Other payable- related parties 4,239,675 3,382,337 548,911 Deferred revenue 3,381,382 4,326,473 702,133 Advances from customers 470,700 275,600 44,726 Accrued payroll and employees' welfare 1,992,783 389,443 63,202 Accrued expenses 488,730 246,113 39,942 Taxes payable 6,754,428 7,909,731 1,283,651 Short-term borrowings- related parties 5,503,279 200,000 32,458 Short-term borrowings- other 570,375 - - Warrants liability - 5,992,127 972,448 Total current liabilities 46,744,926 53,720,929 8,718,241 Commitments and Contingency Equity Common stock, ($ 0.0185 U.S. dollar par value, 25,000,000 shares authorized; 3,951,811 and 4,528,311 shares issued and outstanding as of June 30, 2013 and March 31, 2014, respectively) 529,979 595,335 96,613 Additional paid-in capital 69,516,447 78,669,718 12,767,120 Appropriated retained earnings 3,023,231 4,868,048 790,024 Unappropriated retained earnings 8,749,963 10,835,662 1,758,494 Accumulated other comprehensive loss (293,201 ) (326,126 ) (52,925 ) Total controlling shareholders’ equity 81,526,419 94,642,637 15,359,326 Non-controlling interest 7,200,991 8,238,519 1,337,010 Total equity 88,727,410 102,881,156 16,696,336 Total Liabilities and Equity ¥ 135,472,336 ¥ 156,602,085 $ 25,414,577 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 nine months ended For the three months ended March 31, March 31, 2013 2014 2014 2013 2014 2014 RMB RMB USD RMB RMB USD Revenues Hardware and software ¥ 35,959,339 ¥ 73,337,585 $ 11,901,781 ¥ 4,161,583 ¥ 17,998,444 $ 2,920,924 Service 20,567,637 477,769 77,536 62,678 80,180 13,012 Hardware and software - related parties 6,009,611 2,196,152 356,408 3,277,534 153,846 24,967 Total revenues 62,536,587 76,011,506 12,335,725 7,501,795 18,232,470 2,958,903 Hardware and software 23,033,622 48,447,792 7,862,476 2,527,534 12,848,136 2,085,093 Service 15,743,234 77,107 12,514 20,620 42,161 6,842 Hardware and software - related parties 3,139,082 426,139 69,157 798,190 97,217 15,777 Total cost of revenues 41,915,938 48,951,038 7,944,147 3,346,344 12,987,514 2,107,712 Gross profit 20,620,649 27,060,468 4,391,578 4,155,451 5,244,956 851,191 Selling and distribution expenses 4,693,193 4,701,989 763,075 1,790,199 1,097,549 178,119 General and administrative expenses 8,452,540 10,450,904 1,696,052 3,966,782 3,993,341 648,070 Research and development expenses 6,284,834 4,074,953 661,314 552,645 720,956 117,002 Operating expenses 19,430,567 19,227,846 3,120,441 6,309,626 5,811,846 943,191 Income (loss) from operations 1,190,082 7,832,622 1,271,137 (2,154,175 ) (566,890 ) (92,000 ) Other income (expenses) Subsidy income 2,143,669 1,220,024 197,995 1,343,669 201,711 32,735 Interest income 443,391 296,997 48,199 137,803 92,027 14,935 Interest expense (1,494,887 ) (757,226 ) (122,888 ) (618,473 ) (277,578 ) (45,047 ) Loss from investment - (870,627 ) (141,292 ) - (135,547 ) (21,998 ) Change in fair value of warrants liability - (904,327 ) (146,761 ) - (904,883 ) (146,851 ) Gain (loss) from foreign currency exchange 339,876 (88,080 ) (14,294 ) (185 ) 31,312 5,082 Other income (expense) (19,158 ) (143,498 ) (23,288 ) (109,881 ) (99,552 ) (16,156 ) Income (loss) before income tax 2,602,973 6,585,885 1,068,808 (1,401,242 ) (1,659,400 ) (269,300 ) Provision for income tax 302,550 1,609,976 261,279 (152,382 ) 150,787 24,471 Net Income (loss) 2,300,423 4,975,909 807,529 (1,248,860 ) (1,810,187 ) (293,771 ) Less: Net income attributable to non-controlling interest 602,961 1,045,396 169,655 (2,127 ) 120,415 19,542 Net Income attributable to Recon Technology, Ltd ¥ 1,697,462 ¥ 3,930,513 $ 637,874 ¥ (1,246,733 ) ¥ (1,930,602 ) $ (313,313 ) Comprehensive income (loss) Net income ¥ 2,300,423 ¥ 4,975,909 $ 807,529 ¥ (1,248,860 ) ¥ (1,810,187 ) $ (293,771 ) Foreign currency translation adjustment (16,889 ) (40,833 ) (6,627 ) (717 ) (118,110 ) (19,168 ) Comprehensive income (loss) 2,283,534 4,935,076 800,902 (1,249,577 ) (1,928,297 ) (312,939 ) Less: Comprehensive income attributable to non-controlling interest 601,084 1,041,313 168,992 (2,207 ) 108,604 17,625 Comprehensive income (loss) attributable to Recon Technology, Ltd ¥ 1,682,450 ¥ 3,893,763 $ 631,910 ¥ (1,247,370 ) ¥ (2,036,901 ) $ (330,564 ) Earnings (loss) per common share - basic ¥ 0.43 ¥ 0.93 $ 0.15 ¥ (0.32 ) ¥ (0.43 ) $ (0.07 ) Earnings (loss) per common share - diluted ¥ 0.43 ¥ 0.92 $ 0.15 ¥ (0.32 ) ¥ (0.43 ) $ (0.07 ) Weighted - average shares -basic 3,951,811 4,211,785 4,211,785 3,951,811 4,528,311 4,528,311 Weighted - average shares -diluted 3,951,811 4,269,510 4,269,510 3,951,811 4,528,311 4,528,311 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 nine months ended March 31, 2013 2014 2014 RMB RMB U.S. Dollars Cash flows from operating activities: Net income ¥ 2,300,423 ¥ 4,975,909 $ 807,529 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 467,914 457,439 74,237 Loss from disposal of equipment 26,845 67,587 10,969 Provision/(recovery of) for doubtful accounts (82,420 ) 668,610 108,507 Share based compensation 1,358,726 1,660,144 269,421 Loss from investment - 870,627 141,292 Deferred tax provision/(benefit) 12,363 (75,715 ) (12,288 ) Change in fair value of warrants liability - 904,327 146,761 Restricted shares issued to consulting firm - 407,972 66,209 Changes in operating assets and liabilities: Trade accounts receivable 13,156,606 (17,127,239 ) (2,779,539 ) Trade accounts receivable-related parties 2,701,259 1,487,501 241,403 Notes receivable - 2,578,855 418,516 Inventories 9,397,201 (8,823,683 ) (1,431,974 ) Other receivable, net (4,641,896 ) 688,724 111,770 Other receivables related parties, net (1,038,967 ) 77,697 12,609 Purchase advance, net (5,597,453 ) (5,325,269 ) (864,225 ) Purchase advance-related party, net (300,500 ) - - Tax recoverable 2,790,722 575,650 93,421 Prepaid expense (274,350 ) (580,144 ) (94,150 ) Trade accounts payable (5,643,032 ) 6,211,777 1,008,094 Trade accounts payable-related parties 110,157 (3,994,718 ) (648,293 ) Other payables (51,139 ) (191,528 ) (31,083 ) Other payables-related parties 4,899,620 (857,338 ) (139,135 ) Deferred income (155,169 ) 945,091 153,377 Advances from customers 244,996 (195,100 ) (31,662 ) Accrued payroll and employees' welfare 713,859 (1,603,340 ) (260,202 ) Accrued expenses (133,253 ) (242,617 ) (39,374 ) Taxes payable (2,988,030 ) 1,155,303 187,491 Net cash provided by (used in) operating activities 17,274,482 (15,283,478 ) (2,480,319 ) Cash flows from investing activities: Purchase of property and equipment (676,504 ) (258,922 ) (42,020 ) Proceeds from disposal of equipment 161,000 98,000 15,904 Net cash used in investing activities (515,504 ) (160,922 ) (26,116 ) Cash flows from financing activities: Proceeds from short-term bank loans 8,350,000 18,500,000 3,002,321 Repayments of short-term bank loans (21,652,952 ) (12,870,000 ) (2,088,641 ) Proceeds from borrowings-related parties 3,658,102 - - Repayment of short-term borrowings (2,275,764 ) (570,375 ) (92,565 ) Repayment of short-term borrowings-related parties (2,232,477 ) (5,303,279 ) (860,656 ) Proceeds from sale of common stock, net of issuance costs - 12,132,882 1,969,016 Capital contribution in VIE 20,000 - - Net cash provided by (used in) financing activities (14,133,091 ) 11,889,228 1,929,475 Effect of exchange rate fluctuation on cash and cash equivalents 293,521 68,669 11,143 Net increase (decrease) in cash and cash equivalents 2,919,408 (3,486,503 ) (565,817 ) Cash and cash equivalents at beginning of period 3,533,283 12,350,392 2,004,316 Cash and cash equivalents at end of period ¥ 6,452,691 ¥ 8,863,889 $ 1,438,499 Supplemental cash flow information Cash paid during the period for interest ¥ 1,356,581 ¥ 952,125 $ 154,518 Cash paid during the period for taxes ¥ 832,028 ¥ 700,268 $ 113,645 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 and nine months period ended March 31, 2014 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 ¥6.1619 = US$1.00, the approximate exchange rate prevailing on March 31, 2014. 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 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, 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.) The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs (See Note 13). 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. F- 6 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 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. 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 March 31, 2014. 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. F- 7 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. Subsidy Income - Grants are given 1) by the government to support local software companies’ operation and research and development and 2) by some local government to support development of selected middle and small-sized enterprises. 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 mainly using the Black-Scholes 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, restricted shares and warrants (using the treasury stock method). For the nine months ended March 31, 2014, there were 57,725 restricted shares included in the weighted average dilutive shares calculation. However, the effect from options, restricted shares and warrants would have been anti-dilutive due to the fact that we incurred a net loss during the three months ended March 31, 2013 and 2014. Reclassification – The Company made some reclassification of revenue from software - related parties for the three months ended March 31, 2013. F- 8 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2013 March 31, 2014 March 31, 2014 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 42,993,298 ¥ 60,120,536 $ 9,756,818 Allowance for doubtful accounts (4,344,518 ) (4,311,810 ) (699,753 ) Total - third-party, net ¥ 38,648,780 ¥ 55,808,726 $ 9,057,065 June 30, 2013 March 31, 2014 March 31, 2014 Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 19,722,574 ¥ 18,235,072 $ 2,959,326 Allowance for doubtful accounts (978,210 ) (1,440,596 ) (233,791 ) Total - related-parties, net ¥ 18,744,364 ¥ 16,794,476 $ 2,725,535 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 March 31, 2014 March 31, 2014 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 6,799,669 ¥ 2,498,526 $ 405,480 Loans to third parties (B) 8,440,639 8,118,542 1,317,539 Business advance to staff (C) 2,977,176 5,089,502 825,963 Deposits for projects 185,669 308,944 50,138 Others 1,210,230 418,626 67,938 Allowance for doubtful accounts (481,880 ) (464,014 ) (75,304 ) Total ¥ 19,131,503 ¥ 15,970,126 $ 2,591,754 F- 9 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Third Party June 30, 2013 March 31, 2014 March 31, 2014 Non-Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 3,502,680 ¥ 5,993,198 $ 972,622 Total ¥ 3,502,680 ¥ 5,993,198 $ 972,622 (A) Due from ENI represents a working capital loan to the Company’s former VIE. The loan balance had been an intercompany balance and was eliminated in the Company’s consolidated financial statements before the deconsolidation of ENI. It was reclassified to other receivables after ENI ceased to be a VIE of the Company on December 16, 2010. 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 were 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 timely in March and June of 2013. On September 30, 2013, ENI proposed to extend the payment period and resigned an agreement with the Company. According to the new agreement, the remaining balance of this loan would be repaid over four years with installments of ¥ 699,147 each quarter including interest. The payments required after 1 year are RMB 5,993,198 ($972,622). (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 March 31, 2014 March 31, 2014 Name of Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 500,000 ¥ 500,000 $ 81,144 Other-travel advances (A) 242,528 164,831 26,750 Total ¥ 742,528 ¥ 664,831 $ 107,894 (A) Other travel advances were paid to the Company’s management. 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 March 31, 2014 March 31, 2014 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 19,237,449 ¥ 24,562,718 $ 3,986,225 Allowance for doubtful accounts (824,942 ) (1,081,736 ) (175,553 ) Total ¥ 18,412,507 ¥ 23,480,982 $ 3,810,672 F- 10 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Below is a summary of purchase advances to related party. June 30, 2013 March 31, 2014 March 31, 2014 Third Party RMB RMB U.S. Dollars Xiamen Huangsheng Hitek Computer Network Co. Ltd ¥ 394,034 ¥ 394,034 $ 63,947 Total ¥ 394,034 ¥ 394,034 $ 63,947 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 March 31, 2014 March 31, 2014 RMB RMB U.S. Dollars Small component parts ¥ 45,314 ¥ 52,922 $ 8,589 Purchased goods and raw materials - 256,411 41,612 Work in process 1,356,755 2,818,145 457,350 Finished goods 11,869,001 18,967,275 3,078,154 Total inventories ¥ 13,271,070 ¥ 22,094,753 $ 3,585,705 There was no inventory obsolescence reserve at June 30, 2013 and March 31, 2014. NOTE 7. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2013 March 31, 2014 March 31, 2014 RMB RMB U.S. Dollars Motor vehicles ¥ 2,683,250 ¥ 2,436,831 $ 395,467 Office equipment and fixtures 593,654 647,395 105,064 Total property and equipment 3,276,904 3,084,226 500,531 Less: Accumulated depreciation (1,567,058 ) (1,738,484 ) (282,134 ) Property and equipment, net ¥ 1,709,846 ¥ 1,345,742 $ 218,397 Depreciation expense was ¥152,757 and ¥156,098 ($25,333) for the three months ended March 31, 2013 and 2014, respectively. Depreciation expense was ¥467,914 and ¥457,439 ($74,237) for the nine months ended March 31, 2013 and 2014, respectively. F- 11 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 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 March 31, 2014, Recon owned 24.4% 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. Since Avalon’s operating results for the year ended March 31, 2014 were not available as of the filing date, the Company recorded Avalon’s operating results from October to December its investment loss for the three months ended March 31, 2014. For the three and nine months ended March 31, 2014, Avalon had revenue of approximately $35,000 and $94,000, net loss attributable to common shareholders of $0.2 million and $0.6 million, respectively. The Company recorded a loss from its equity investment of ¥135,547 ($21,998) and ¥870,627 ($141,292) for the three and nine months ended March 31, 2014, respectively. NOTE 9. OTHER PAYABLES Other payables consisted of the following: June 30, 2013 March 31, 2014 March 31, 2014 Third Party RMB RMB U.S. Dollars Consulting services ¥ 1,199,716 ¥ 269,673 $ 43,765 Due to ENI (A) 148,000 - - Distributors and employees 580,648 1,152,239 186,994 Others 36,327 351,251 57,003 Total ¥ 1,964,691 ¥ 1,773,163 $ 287,762 (A) A former VIE of the Company, which ceased to be a VIE on December 16, 2010. June 30, 2013 March 31, 2014 March 31, 2014 Related Party RMB RMB U.S. Dollars Due to related parties (1) ¥ 2,860,824 ¥ 2,560,649 $ 415,563 Expenses paid by the major shareholders 467,499 570,595 92,600 Due to family member of one owner on behalf on Recon 716,000 - - Due to management staff on behalf of Recon 195,352 251,093 40,748 Total ¥ 4,239,675 ¥ 3,382,337 $ 548,911 (1) Includes an advance from Yabei Nuoda for RMB 61,302 and an advance from Xiamen Henda Haitek for RMB 2,499,347 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 March 31, 2014 March 31, 2014 RMB RMB U.S. Dollars VAT payable ¥ 2,802,890 ¥ 3,066,887 $ 497,718 Business tax payable 75,865 75,865 12,312 Enterprise income tax payable 3,850,288 4,835,712 784,776 Other taxes payable (receivable) 25,385 (68,733 ) (11,155 ) Total taxes payable ¥ 6,754,428 ¥ 7,909,731 $ 1,283,651 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 March 31, 2014 March 31, 2014 RMB RMB U.S. Dollars Communication Bank, 6.6% annual interest, due on November 15, 2014 ¥ 3,090,000 ¥ 3,090,000 ¥ 501,469 Communication Bank, 6.6% annual interest, due on November 15, 2014 1,910,000 1,910,000 309,969 Beijing Bank, 5.75% annual interest, matures and paid off by February 25, 2014 1,200,000 - - Beijing Bank, 5.75 % annual interest, matures and paid off by February 27, 2014 600,000 - - Beijing Bank, 5.75 % annual interest, repaid on April 9, 2014 1,200,000 360,000 58,423 Beijing Bank, 5.75 % annual interest, repaid on April 16, 2014 900,000 270,000 43,818 Beijing Bank, 5.75 % annual interest, matures and paid off by March 11, 2014 1,100,000 - - Industrial and Commercial Bank, floating interest rate at 6.3%, due on July 28, 2014 - 3,060,000 496,600 Industrial and Commercial Bank, floating interest rate at 6.3%, due on August 8, 2014 - 1,000,000 162,288 Industrial and Commercial Bank, floating interest rate at 6.3%, due on February 17, 2015 - 3,100,000 503,092 Industrial and Commercial Bank, floating interest rate at 6.3%, due on June 13, 2014 - 2,840,000 460,896 Total short-term bank loans ¥ 10,000,000 ¥ 15,630,000 $ 2,536,555 Interest expense was ¥437,436 and ¥277,445 ($45,026) for the three months ended March 31, 2013 and 2014, respectively. Interest expense was ¥1,183,845 and ¥754,202 ($122,398) for the nine months ended March 31, 2013 and 2014, respectively. F- 13 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. SHORT-TERM BORROWINGS Short-term borrowings are generally extended upon maturity and consisted of the following: June 30, 2013 March 31, 2014 March 31, 2014 Short-term borrowings due to non-related parties: RMB RMB U.S. Dollars Short-term borrowing, 6% annual interest, matures and paid off by November 9, 2013 ¥ 70,375 ¥ - $ - Short-term borrowings with no interest, beginning April 22, 2013, paid off on January 31, 2014 500,000 - - Total short-term borrowings due to non-related parties ¥ 570,375 ¥ - $ - Interest expense for short-term borrowings due to non-related parties was ¥16,754 and none for the three months ended March 31, 2013 and 2014, respectively. Interest expense for short-term borrowings due to non-related parties was ¥56,890 and ¥1,525 ($247) for the nine months ended March 31, 2013 and 2014, respectively. June 30, 2013 March 31, 2014 March 31, 2014 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, matures and paid off by December 21, 2013 3,653,906 - - Short-term borrowing from a Founder's family member, 6% annual interest, matures and paid off by November 29, 2013 1,610,000 - - Short-term borrowings from Xiamen Huasheng Haitian Computer Network Co. Ltd., no interest, due on November 14, 2014 200,000 200,000 32,458 Short-term borrowings from management, 6% annual interest, matures and paid off by December 7, 2013 32,996 - - Total short-term borrowings due to related parties ¥ 5,503,279 ¥ 200,000 $ 32,458 Interest expense for short-term borrowings due to related parties was ¥151,742 and none for the three months ended March 31, 2013 and 2014, respectively. Interest expense for short-term borrowings due to related parties was ¥265,649 and ¥1,441 ($234) for the nine months ended March 31, 2013 and 2014, respectively. Note 13 –WARRANT LIABILITY In connection with the stock offering in November 2013, the Company issued warrants to certain institutional investors and placement agent to purchase 218,600 ordinary shares (see details in Note 14). F- 14 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS According to ASC 815-40, if the strike price of the warrants is denominated in a currency other than the Company’s functional currency, the warrants are not considered indexed to the entity’s own stock. The Company’s functional currency is RMB and the strike price of the warrants is denominated in USD, as a result, the warrants are classified as liabilities with all future changes in the fair value of these warrants recognized in earnings until such time as the warrants are exercised or expired. These common stock purchase warrants do not trade in an active securities market, and as such, their fair value is estimated by using the Cox-Ross-Rubinstein (CRR) Binomial Model using the following assumptions: March 31, November 29, 2014 2013 Annual dividend yield - - Exercised price 5.38 5.38 Underlying stock price at valuation date 4.66 3.86 Expected life (years) 2.67 3 Risk-free interest rate 0.90 % 0.56 % Expected volatility 248 % 272 % Expected volatility is based on the historical volatility of the Company’s common stock. The Company has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the warrants. The expected dividend yield was based on the Company’s current and expected dividend policy. The following table sets forth by level within the fair value hierarchy the warrants liability that was accounted at fair value on a recurring basis. Fair Value Measurement at Carrying Value at Carrying Value at March 31, 2014 March 31, 2014 March 31, 2014 Level 1 Level 2 Level 3 RMB USD Warrants liability ¥ - ¥ 5,992,127 ¥ - ¥ 5,992,127 $ 972,448 The following is a reconciliation of the beginning and ending balance of the warrant liability measured at fair value on a recurring basis for nine months ended March 31, 2014: Change of warrants liability RMB USD Beginning balance - June 30, 2013 - - Initial measurement of warrants liability on November 29, 2013 ¥ 5,087,800 $ 825,687 Change of warrant liability from November 29, 2013 to March 31, 2014 904,327 146,761 Ending balance - March 31, 2014 ¥ 5,992,127 $ 972,448 F- 15 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. SHAREHOLDERS’ EQUITY Stock offering – On November 25, 2013, the Company entered into a securities purchase agreement (“Purchase Agreement”) with certain institutional investors for the sale of 546,500 ordinary shares in a registered direct offering at the price of $4.81 per ordinary share (amended to $4.30 per ordinary share on November 29, 2013). The net cash proceeds received from the stock offering, after deducting underwriter commission and other associated fees, were ¥12,132,882 (approximately $2.0 million). In addition, warrants to purchase 163,950 ordinary shares in the aggregate were issued to the investors. The warrants will be exercisable immediately as of the date of issuance at an exercise price of $6.01 per ordinary share (amended to $5.38 per ordinary share on November 29, 2013) and expire three years from the date of issuance. The Company also issued warrants to purchase 54,650 ordinary shares to the placement agent (“Placement Agent Warrant”). The Placement Agent Warrants are on substantially the same terms as the warrants issued pursuant to the Purchase Agreement, except that these warrants are not exercisable for a period of six months and will expire three years from the initial exercise date. In addition to the above warrants issued to the placement agent, the Company granted warrants for 170,000 shares in connection with its IPO offering, and none of these warrants was exercised during this period. 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 March 31, 2014, the balance of total statutory reserves was ¥3,023,231 and ¥4,868,048 ($790,024), respectively. NOTE 15. 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**** 0 % * 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. F- 16 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 – The Company granted options to purchase 415,000 ordinary shares to its employees and a 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 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 ($1.49) per share. The following is a summary of the stock options activity: Stock Options Shares Weighted Average Exercise Price Per Share Outstanding as of July 1, 2013 608,000 $ 3.93 Granted - - Forfeited (44,000 ) (2.96 ) Exercised - - Outstanding as of March 31, 2014 564,000 $ 4.00 The following is a summary of the status of options outstanding and exercisable at March 31, 2014: Outstanding Options Exercisable Options Average Exercise Price Number Average Remaining Contractual life (Years) Average Exercise Price Number Average Remaining Contractual life (Years) $ 6.00 193,000 5.33 $ 6.00 154,400 5.33 $ 2.96 371,000 7.99 $ 2.96 148,400 7.99 During the three and nine months ended March 31, 2014, the Company has granted restricted shares of common stock to senior management and consultants as follow: On October 31, 2013, the Company issued 30,000 restricted shares to a consulting firm for consulting services. The total value amounted to ¥407,972 ($66,420), based on the stock closing price of $2.21 at September 30, 2013. 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. Share-based compensation expense recorded for restricted shares granted were ¥352,324 ($57,399) and ¥418,553 ($68,241) for the three and nine months ended March 31, 2014. Total unrecognized share-based compensation expense for these shares as of March 31, 2014 was approximately ¥3.8 million ($0.6 million), which are expected to be recognized over a weighted average period of approximately 2.71 years. The Share-based compensation expense recorded for stock options granted were ¥451,573 and ¥412,311 ($67,476) for the three months ended March 31, 2013 and 2014, respectively. The total share-based compensation expense recorded for stock options granted were ¥1,358,726 and ¥1,660,144 ($269,421) for the nine months ended March 31, 2013 and 2014, respectively. The total unrecognized share-based compensation expense for stock options as of March 31, 2014 was approximately ¥2.7 million ($0.5 million), which is expected to be recognized over a weighted average period of approximately 2.66 years. F- 17 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Following is a summary of the restricted stock grants: Restricted stock grants Shares Nonvested as of June 30, 2013 - Granted 260,362 Forfeited - Vested (30,000 ) Nonvested as of March 31, 2014 230,362 NOTE 16. 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 2013 and 2014, 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 assets are comprised of the following: June 30, 2013 March 31, 2014 March 31, 2014 RMB RMB U.S. Dollars Allowance for doubtful receivables ¥ 1,006,721 ¥ 1,082,436 $ 175,666 Total deferred income tax assets ¥ 1,006,721 ¥ 1,082,436 $ 175,666 The Company’s tax provision (benefit) is comprised of the following: For the three months ended March 31, 2013 2014 2014 RMB RMB U.S. Dollars Current income tax provision (benefit) ¥ (158,721 ) ¥ 194,291 $ 31,531 Deferred income taxes provision (benefit) 6,339 (43,504 ) (7,060 ) Provision (benefit) for income tax ¥ (152,382 ) ¥ 150,787 $ 24,471 F- 18 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the nine months ended March 31, 2013 2014 2014 RMB RMB U.S. Dollars Current income taxes ¥ 290,187 ¥ 1,685,691 $ 273,567 Deferred income taxes provision (benefit) 12,363 (75,715 ) (12,288 ) Provision for income tax ¥ 302,550 ¥ 1,609,976 $ 261,279 NOTE 17. 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 March 31, 2014 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 300,394 Unappropriated retained earnings 3,233,461 3,194,502 6,427,963 1,043,179 Accumulated other comprehensive loss (22,756 ) (17,688 ) (40,444 ) (6,563 ) Total non-controlling interest ¥ 4,861,705 ¥ 3,376,814 ¥ 8,238,519 $ 1,337,010 NOTE 18. CONCENTRATIONS For the three months ended March 31, 2013 and 2014, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented 25.05%, 32.56% and 13.80%, 24.80% of the Company’s revenue, respectively. For the nine months ended March 31, 2013 and 2014, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented 27.86%, 44.32% and 46.62%, 19.64% of the Company’s revenue, respectively. For the three and nine months ended March 31, 2013, one supplier, Hebei Huanghua Xiangtong Technical Co. Ltd, accounted for 15.31% and 24.90% of the company’s total purchases. For the three months ended March 31, 2014, three major suppliers accounted for 66.4% of the company’s total purchases. For the nine ended March 31, 2014, two major suppliers accounted for 33.7% of the company’s total purchases. F- 19 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE19. 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 March 31, 2014: Twelve months ending March 31, Office lease payment RMB U.S. Dollars 2014 ¥ 1,000,000 $ 162,288 2015 25,000 4,057 Total ¥ 1,025,000 $ 166,345 (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 March 31, 2014, the Company estimated its severance payments of approximately ¥1.3 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 20. RELATED PARTY TRANSACTIONS AND BALANCES Sales to related parties – sales to related parties consisted of the following: For the three months ended March 31, 2013 2014 2014 RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 3,277,534 ¥ 68,376 $ 11,097 Xiamen Huangsheng Hitek Computer Network Co. Ltd. - 85,470 13,870 Revenues from related parties ¥ 3,277,534 ¥ 153,846 $ 24,967 For the nine months ended March 31, 2013 2014 2014 RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 5,454,055 ¥ 1,426,922 $ 231,572 Xiamen Henda Haitian computer network Inc 555,556 683,760 110,966 Xiamen Huangsheng Hitek Computer Network Co. Ltd. - 85,470 13,870 Revenues from related parties ¥ 6,009,611 ¥ 2,196,152 $ 356,408 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 ¥93,333 with the annual rental expense at approximately ¥1.1 million ($0.2 million). The two-year lease agreements between Nanjing Recon and Mr. Yin and his family member started from July 10, 2012, the one-year lease agreements between BHD and Mr. Chen Guangqiang and his family member started from January 1, 2014 and the annual lease between the Company and Mr. Chen Guangqiang’s family member started from July 1, 2013. F- 20 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Short-term borrowings from related parties - The Company borrowed ¥5,503,279 and ¥200,000 ($32,458) from the Founders, their family members and senior officers as of June 30, 2013 and March 31, 2014, 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 and ¥0 to one related party as of June 30, 2013 and March 31, 2014. As of March 31, 2014, BHD was no longer a related party to this supplier. Expenses paid by the owner on behalf of Recon - One owner of Nanjing Recon, Mr. Yin and the major owner of BHD, Mr. Chen paid certain operating expense for the Company. As of June 30, 2013 and March 31, 2014, ¥467,499 and ¥570,595($92,600) was due to them, respectively. NOTE 21. 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 March 31, 2014 March 31, 2014 RMB RMB U.S. Dollars ASSETS Current Assets Cash and cash equivalents ¥ 10,341,778 ¥ 1,814,195 $ 294,421 Trade accounts receivable, net 57,393,144 72,603,202 11,782,600 Notes receivable 2,578,855 - - Purchase advances 17,862,507 23,325,016 3,785,361 Other assets 29,974,454 38,898,754 6,312,786 Total current assets ¥ 118,150,738 ¥ 136,641,167 $ 22,175,168 Non-current assets 1,705,940 1,343,008 217,954 Total Assets ¥ 119,856,678 ¥ 137,984,175 $ 22,393,122 LIABILITIES Trade accounts payable ¥ 11,378,883 ¥ 13,595,942 $ 2,206,453 Taxes payable 6,754,428 7,909,731 1,283,651 Other liabilities 24,770,161 22,233,841 3,608,277 Total current liabilities 42,903,472 43,739,514 7,098,381 Total Liabilities ¥ 42,903,472 ¥ 43,739,514 $ 7,098,381 The financial performance of VIEs reported in the condensed consolidated statement of income and comprehensive income for the three months ended March 31, 2014 includes revenues of ¥18,232,470 ($2,958,904), gross profit of ¥5,244,955 ($851,191), operating expenses of ¥3,541,603 ($574,758), other expense of ¥135,913($22,057) and a net income of ¥1,416,651($229,905). F- 21 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The financial performance of VIEs reported in the condensed consolidated statement of income and comprehensive income for the nine months ended March 31, 2014 includes revenues of ¥76,011,506 ($12,335,725), gross profit of ¥27,060,468 ($4,391,579), operating expenses of ¥13,417,176 ($2,177,441), other income of ¥265,463 ($43,081) and a net income of ¥12,298,778($1,995,939). NOTE 22. Subsequent events On April 01, 2014, shareholders of BHD and representative of Recon-JN approved the resolution to increase the registered capital of BHD from RMB 12 million to RMB 15 million. BHD has provided the document to the registration authority for approval. The increase in the registered capital will be paid by Mr. Chen Guangqiang, CTO of the Company, and the fund should be in place no later than December 31, 2014. On April 22, 2014, the Chief Executive Office and Chief Technology Officer of the Company exercised their stock options to purchased 52,000 shares of the Company’s common stock for RMB 948,559 ($153,920). The transaction was completed on May 13, 2014. On May 6, 2014, the board of directors of the Company had approved to retain Expert Asia Investment Ltd. (“EAI”) for financial advisory and investor relations services. The board of directors also approved the issuance of 40,625 of restricted shares for the finder services in connection with the securities purchase agreement provided by EAI. F- 22