Recon Technology, Ltd 10-K

Item 3. Legal Proceedings. From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such pending or threatened legal proceedings, claims, regulatory inquires or investigations that we believe will have a material adverse effect on our business, financial condition or operating results. Item 4. Mine Safety Disclosures. This item is inapplicable to the Company. 17 PART II Item 5. M arket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market for Our Ordinary Shares Year Ended June 30, 2014 Quarter Ended September 30, 2013 $ 2.43 $ 1.75 Quarter Ended December 31, 2013 $ 5.80 $ 2.18 Quarter Ended March 31, 2014 $ 8.00 $ 3.07 Quarter Ended June 30, 2014 $ 5.62 $ 3.22 Year Ended June 30, 2013 Quarter Ended September 30, 2012 $ 2.14 $ 1.38 Quarter Ended December 31, 2012 $ 3.44 $ 0.95 Quarter Ended March 31, 2013 $ 3.17 $ 1.40 Quarter Ended June 30, 2013 $ 2.65 $ 1.55 As of June 30, 2014, there were nine holders of record of our ordinary shares. This excludes our ordinary shares owned by shareholders holding ordinary shares under nominee security position listings. On June 30, 2014, the last sales price of our ordinary shares as reported on the NASDAQ Capital Market was $4.14 per ordinary share. Dividend Policy We have never declared or paid any cash dividends on our ordinary shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant. Because we are a holding company with no operations of our own and all of our operations are conducted through our Chinese subsidiary, our ability to pay dividends and to finance any debt that we may incur is dependent upon dividends and other distributions paid in U.S. In addition, Chinese legal restrictions permit payment of dividends to us by our Chinese subsidiary only out of its accumulated net profit, if any, determined in accordance with Chinese accounting standards and regulations. Under Chinese law, our subsidiary is required to set aside a portion (at least 10%) of its after-tax net income (after discharging all cumulated loss), if any, each year for compulsory statutory reserve until the amount of the reserve reaches 50% of our subsidiaries’ registered capital. These funds may be distributed to shareholders at the time of its wind up. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Holding Company Structure.” 18 Payments of dividends by our subsidiary in China to the Company are also subject to restrictions including primarily the restriction that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. There are no such similar foreign exchange restrictions in the Cayman Islands. (b) We are not required to provide any disclosure under this item, as we have applied all of the net proceeds from our initial public offering, as disclosed in our annual report on Form 10-K for the year ended June 30, 2011. (c) None. Item 6. Selected Financial Data. The Company is not required to provide the information required by this Item because the Company is a smaller reporting company. Item 7. Management’s Disc ussion and Analysis of Financial Condition and Results of Operation. The following discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors. Overview We are a company with limited liability incorporated in 2007 under the laws of the Cayman Islands. Headquartered in Beijing, we provide products and services to oil and gas companies and their affiliates through our Domestic Companies. As the company contractually controlls the Domestic Companies, we are the center of strategic management, financial control and human resources allocation. Our business is mainly focused on the upstream sectors of the oil and gas industry. We derive our revenues from the sales and provision of (1) oilfield dedicated products and accessories, (2) stimulation technology and services. Our products and services involve most of the key procedures of the extraction and production of oil and gas, and include automation systems, equipment, tools and on-site technical services. Our Domestic Companiess provide the oil and gas industry with equipment, production technologies, automation and services to enhance our customers’ efficiency. ● Nanjing Recon: Nanjing Recon is a high-tech company that specializes in automation services for oilfield companies. It mainly focuses on providing automation solutions to the oil exploration industry, including monitoring wells, automatic metering to the joint station production, process monitor, and a variety of oilfield equipment and control systems. ● BHD: BHD is a high-tech company that specializes in transportation equipment and stimulation productions and services. Possessing proprietary patents and substantial industry experience, BHD has built up stable and strong working relationships with the major oilfields in China. 19 Factors Affecting Our Results of Operations Our operating results in any period are subject to the general conditions typically affecting the Chinese oilfield service industry including: ● the amount of spending by our customers, primarily those in the oil and gas industry; ● growing demand from large corporations for improved management and software designed to enhance corporate performance; ● the procurement processes of our customers, especially those in the oil and gas industry; ● competition and related pricing pressure from other oilfield service solution providers, especially those targeting the oil and gas industry in China; ● the ongoing development of the oilfield service market in China; ● fluctuation in oil price; and ● inflation and other factors. Unfavorable changes in any of these general conditions could negatively affect the number and size of the projects we undertake, the number of products we sell, the amount of services we provide, the price of our products and services or otherwise affect our results of operations. Our operating results in any period are more directly affected by company-specific factors including: ● our continued ability to lead and to control all affiliated entities; ● our revenue growth; ● the proportion of our business dedicated to large companies; ● our ability to successfully develop, introduce and market new solutions and services; ● our ability to increase our revenues from customers both old and new in the oil and gas industry in China; ● our ability to effectively manage our operating costs and expenses; and ● our ability to effectively implement any targeted acquisitions and/or strategic alliances so as to provide efficient access to the markets in the oil and gas industry. 20 Critical Accounting Policies and Estimates Estimates and Assumptions We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this quarterly report. Significant accounting estimates reflected in our Company’s consolidated financial statements include revenue recognition, deferred taxes, allowance for doubtful accounts, the fair value of share-based payments, warrants liability and useful lives of property and equipment. Consolidation of VIEs We recognize an entity as a VIE if it 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. We consolidate a VIE as its primary beneficiary when we have 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. As such, the Domestic Companies are VIEs. We will continue to make ongoing assessment whether the Domestic Companies still continue to be VIEs 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 our general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Revenue Recognition We recognize revenue when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (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 client and the client has signed a completion and acceptance report, risk of loss has transferred to the client, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client 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. 21 Software The Company sells self-developed software. For software sales, the Company recognizes revenues in accordance with the provisions of Accounting Standards Codification, Topic 985-605, “Software Revenue Recognition,” and related interpretations. 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. Services The Company provides services to improve software functions and system requirements on separated fixed-price contracts. Revenue is recognized when services are completed and acceptance is determined by a completion report signed by the customer. Deferred income represents unearned amounts billed to customers related to sales contracts. Cost of Revenues When the criteria for revenue recognition have been met, costs incurred are recognized as cost of revenue. Cost of revenues includes wages, materials, handling charges, the cost of purchased equipment and pipes, and other expenses associated with manufactured products and services provided to customers. We expect cost of revenues to grow as our revenues grow. It is possible that we could incur development costs with little revenue recognition, but based upon our past history, we expect our revenues to grow. 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, advances to suppliers, trade accounts payable, accrued liabilities, advances from customers and notes payable approximate fair value because of the immediate or short-term maturity of these financial instruments. Long-term receivables and borrowings approximate fair value because their interest rates charged approximate the market rates for financial instruments with similar terms. The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs (See Note 13). Any changes in the assumptions that are used in the Black-Scholes Model may increase or decrease the warrants liability from quarter to quarter and any change in adjustment would be charged to operations . Long-term investment is measured at fair value on a non-recurring basis at June 30, 2014, since the Company recorded an impairment loss during 2014. The fair value was determined to be zero using Level 2 inputs. 22 Receivables Trade receivables are carried at original invoiced amount less a provision for any potential uncollectible amounts. Provisions are applied to trade receivables where events or changes in circumstances indicate that the balance may not be collectible. The identification of doubtful accounts requires the use of judgment and estimates of management. Our management must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable, historical bad debts, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We believe based on the current economic condition and our history of collections on accounts and notes receivable, our allowance for doubtful accounts was adequate at June 30, 2013 and 2014. Deferred Tax Estimates As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. Deferred tax accounting requires that we evaluate net deferred tax assets by jurisdiction to determine if these assets will more likely than not be realized. This analysis requires considerable judgment and is subject to change to reflect future events and changes in the tax laws. Valuation of Long-Lived Assets We review the carrying values of our long-lived assets for impairment whenever events or changes in circumstances indicate that they may not be recoverable. When such an event occurs, we project undiscounted cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections indicate that the carrying value of the long-lived asset will not be recovered, we reduce the carrying value of the long-lived asset by the estimated excess of the carrying value over the projected discounted cash flows. In the past, we have not had to make significant adjustments to the carrying values of our long-lived assets, and we do not anticipate a need to do so in the future. However, circumstances could cause us to have to reduce the value of our capitalized software more rapidly than we have in the past if our revenues were to significantly decline. Estimated cash flows from the use of the long-lived assets are highly uncertain and therefore the estimation of the need to impair these assets is reasonably likely to change in the future. Should the economy or the acceptance of our software change in the future, it is likely that our estimate of the future cash flows from the use of these assets will change by a material amount. There were no impairments at June 30, 2013 and June 30, 2014. 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. 23 Recently enacted accounting pronouncements In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” (“ASU 2014-08”). Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on the Company’s operations and financial results should be presented as discontinued operations. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. However, ASU 2014-08 should not be applied to a component that is classified as held for sale before the effective date even if the component is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. The effects of ASU 2014-08 will depend on any future disposals by the Company. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principal, five steps are required to be applied. In addition, ASU 2014-09 expands and enhances disclosure requirements which require disclosing sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This includes both qualitative and quantitative information. The amendments in ASU 2014-09 are effective retrospectively for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Management is evaluating the effect, if any, on the Company’s financial position and results of operations. Results of Operations The following consolidated results of operations include the results of operations of the Company and its variable interest entities (“VIEs”), BHD and Nanjing Recon. Our historical reporting results are not necessarily indicative of the results to be expected for any future period. Revenue For the Years Ended June 30, Increase / Percentage 2013 2014 (Decrease) Change Hardware - non-related parties ¥ 35,873,924 ¥ 81,161,610 ¥ 45,287,686 126.2 % Hardware - related parties 5,479,021 4,276,799 (1,202,222 ) (21.9 )% Service 25,464,003 477,778 (24,986,225 ) (98.1 )% Software - non-related parties 5,534,593 5,067,673 (466,920 ) (8.4 )% Software - related parties 4,234,188 2,463,248 (1,770,940 ) (41.8 )% Total revenues ¥ 76,585,729 ¥ 93,447,108 ¥ 16,861,379 22.0 % 24 Our total revenues for the year ended June 30, 2014 were approximately ¥93.4 million ($15.2 million), an increase of approximately ¥16.8 million or 22.0% from ¥76.6 million for the year ended June 30, 2013. This was mainly caused by: 1. Hardware business - non - related parties. During the year ended June 30, 2014, the increase in hardware revenue was mainly due to higher sales of furnaces and automation products to our existing clients and sales to new clients . 2. Hardware – related parties. Sales of hardware to related parties decreased because we used to sell our products to Ji Dong oilfield through our related parties. After we obtained business entrance certification, Recon now can make sales to oilfield customers directly. As a result, sales made to related-parties decreased . 3. Service business. Service revenue for the year ended June 30, 2014 consisted mainly of minor maintenance services, which were provided upon request by customers. The ¥25.5 million service revenue for the year ended June 30, 2013 was mainly due to several fracturing service contracts signed with Sinopec Zhongyuan oil field. The significant decrease in service revenue for the year ended June 30, 2014 was mainly caused by short-term decline due to Sinopec Zhongyuan oil field's adjustment of their producing plan. We expect the service revenue to pick up in the next fiscal year as we successfully achieved access certification of additional oil field which means we will be able to provide our fracturing services to a broader customer base. 4. Software business - non – related parties. The software sales decreased approximately ¥0.5 million ($0.1 million). We record revenue as software sales if (1) the customer signs a separate software contract with us, or (2) the customer accepts VAT invoices for software. The amount of our revenues categorized as software sales may fluctuate because certain software may be sold with hardware at times as a whole product and not separately priced 5. Software business – related parties. For the year ended June 30, 2014, we recorded software revenue of ¥2.5 million ($0.4 million) to a related party, a decrease of ¥1.8 million ($0.3 million) from the same period of last year. The decrease was mainly due to our decreased indirect sales of automation system through the related parties . Cost and Margin For the Years Ended June 30, Increase / Percentage 2013 2014 (Decrease) Change Total revenues ¥ 76,585,729 ¥ 93,447,108 ¥ 16,861,379 22.0 % Cost of revenues 51,531,759 61,030,247 9,498,488 18.4 % Gross profit ¥ 25,053,970 ¥ 32,416,861 ¥ 7,362,891 29.4 % Margin % 32.7 % 34.7 % 2.0 % — Cost of Revenues . Our cost of revenues includes raw materials and costs related to design, implementation, delivery and maintenance of products and services. All materials and components we need can be purchased or manufactured by subcontracts. Usually the prices of electronic components do not fluctuate dramatically due to market competition and will not significantly affect our cost of revenues. However, specialized equipment and incentive chemical products may be directly influenced by metal and oil price fluctuations. Additionally, the prices of some imported accessories mandated by our customers can also impact our cost. 25 Our cost of revenues increased from approximately ¥51.5 million in the year ended June 30, 2013 to approximately ¥61.0 million ($9.9 million) for the same period of 2014, an increase of approximately ¥9.5 million ($1.5 million), or 18.4%. As a percentage of revenues, our cost of revenues decreased from 67.3% in 2013 to 65.3% in 2014. This decrease was mainly caused by lower service costs. Gross Profit . Our gross profit increased to approximately ¥32.4 million ($5.3 million) for the year ended June 30, 2014 from approximately ¥25.1 million for the year ended June 30, 2013. Our gross profit as a percentage of revenue increased to 34.7% for the year ended June 30, 2014 from 32.7% for the same period in 2013. This was mainly because fracturing services, which feature lower margins, accounted for a major part of our revenue during the year ended June 30, 2013. As to our automation business and furnaces business, our margins were both improved because our products and services were well received by our clients, especially our newly developed clients. In more detail: For the Years Ended June 30, Increase / Percentage 2013 2014 (Decrease) Change Total revenues-hardware and software- non related parties ¥ 41,408,517 ¥ 86,229,283 ¥ 44,820,766 108.2 % Cost of revenues -hardware and software- non related parties 26,617,786 57,333,670 30,715,884 115.4 % Gross profit ¥ 14,790,731 ¥ 28,895,613 ¥ 14,104,882 95.4 % Margin % 35.7 % 33.5 % (2.2 )% — Revenue from hardware and software to non-related parties increased ¥44.8 million was mainly due to the hardware revenue increase from the furnaces sales and automation products in the year ended June 30, 2014. The gross profit from the hardware and software sales to non-related parties increased ¥14.1 million ($2.3 million) compared to the same period of last year. For the Years Ended June 30, Increase / Percentage 2013 2014 (Decrease) Change Total revenues-hardware and software - related parties ¥ 9,713,209 ¥ 6,740,047 ¥ (2,973,162 ) (30.6 )% Cost of revenues -hardware and software - related parties 6,346,850 3,619,470 (2,727,380 ) (43.0 )% Gross profit ¥ 3,366,359 ¥ 3,120,577 ¥ (245,782 ) (7.3 )% Margin % 34.7 % 46.3 % 11.6 % — Cost of revenue from hardware and software-related parties decreased as revenue decreased. While gross margin increased was mainly because software business with higher margin accounted for a larger percentage this period. 26 For the Years Ended June 30, Increase / Percentage 2013 2014 (Decrease) Change Total revenues-service ¥ 25,464,003 ¥ 477,778 ¥ (24,986,225 ) (98.1 )% Cost of revenues -service 18,567,123 77,107 (18,490,016 ) (99.6 )% Gross profit ¥ 6,896,880 ¥ 400,671 ¥ (6,496,209 ) (94.2 )% Margin % 27.1 % 83.9 % 56.8 % — The ¥25.5 million service revenue for the year ended June 30, 2013 was mainly due to several fracturing service contracts signed with Sinopec Zhongyuan oilfield. We generated 27.1% gross profit margin from these service contracts. Operating Expenses For the Years Ended June 30, Increase / Percentage 2013 2014 (Decrease) Change Selling and distribution expenses 6,126,095 5,293,343 (832,752 ) (13.6 )% % of revenue 8.0 % 5.7 % (2.3 )% — General and administrative expenses 10,978,942 16,198,947 5,220,005 47.6 % % of revenue 14.3 % 17.3 % 3.3 % — Research and development expenses 8,513,680 8,094,333 (419,347 ) (4.9 )% % of revenue 11.1 % 8.7 % (2.5 )% — Operating expenses ¥ 25,618,717 ¥ 29,586,623 ¥ 3,967,906 15.5 % Selling and Distribution Expenses . Selling and distribution expenses consist primarily of salaries and related expenditures of our sales and marketing organization, sales commissions, costs of our marketing programs including advertising and trade shows, and an allocation of our facilities and depreciation expenses. Selling expenses decreased ¥0.8 million to ¥5.3 million ($0.9 million) for the year ended June 30, 2014 from ¥6.1 million for the year ended June 30, 2013. Selling expenses were 8.0% of total revenues in the year ended June 30, 2013 and 5.7% of total revenues in the same period of 2014. The decrease of selling expense was mainly due to less traveling fees and field work service fees. General and Administrative Expenses . General and administrative expenses consist primarily of costs in human resources, facilities costs, depreciation expenses, professional advisor fees, audit fees, option expenses and other expenses incurred in connection with general operations. General and administrative expenses increased by 47.6%, or ¥5.2 million ($0.9 million), from approximately ¥11.0 million in the year ended June 30, 2013 to approximately ¥16.2 million ($2.6 million) in the same period of 2014. General and administrative expenses were 14.3% of total revenues in 2013 and 17.3% of total revenues in 2014. The increase in general and administrative expenses was mainly due to the increase in consulting fees related to professional services, salary, the allowance for doubtful accounts, share-based compensation and traveling expenses. Research and development (“R&D”) expenses . Research and development expenses consist primarily of salaries and related expenditures of our research and development projects. Research and development expenses decreased by 4.9%, from approximately ¥8.5 million for the year ended June 30, 2013 to approximately ¥8.1 million ($1.3 million) for the same period of 2014. This decrease was primarily due to the lower investment of R&D materials and equipment into our furnaces and fracturing services in 2014. 27 Net Income For the Years Ended June 30, Increase / Percentage 2013 2014 (Decrease) Change Income (loss) from operations ¥ (564,747 ) ¥ 2,830,238 ¥ 3,394,985 601.2 % Interest and other income (expense) 1,471,159 (41,282 ) (1,512,441 ) (102.8 )% Income before income taxes 906,412 2,788,956 1,882,544 207.7 % Provision for income taxes 286,871 961,136 674,265 235.0 % Net income 619,541 1,827,820 1,208,279 195.0 % Less: Net income attributable to non-controlling interest 579,843 1,020,632 440,789 76.0 % Net income attributable to ordinary shareholders ¥ 39,698 ¥ 807,188 ¥ 767,490 1,933.3 % Income (loss) from operations . Income from operations was approximately ¥2.8 million ($0.5 million) for the year ended June 30, 2014, compared to loss of ¥0.6 million for the same period of 2013. This increase in income from operations can be attributed primarily to the increased revenue, gross margins and decreases in research and development expenses. Interest and other income (expense). Interest and other expense was approximately ¥41,282 ($6,706) for the year ended June 30, 2014, compared to interest and other income of ¥1.5 million for the same period of 2013. The ¥1.5 million ($0.2 million) decrease was primarily due to a significant loss from investment, a decrease in subsidy income and decreases in interest income and foreign currency exchange gain, offset by an increase in other expense and a decrease in interest expense. Provision for income tax . Provision for income tax for the year ended June 30, 2013 was approximately ¥0.3 million and ¥1.0 million ($0.2 million) for the year ended June 30, 2014. This increase of provision for income tax was mainly due to the increase in income from operations for the year ended June 30, 2014. Net income . As a result of the factors described above, net income was approximately ¥1.8 million ($0.3 million) for the year ended June 30, 2014, an increase of approximately ¥1.2 million ($0.2 million) from net income of ¥0.6 million for the same period of 2013. Net income attributable to Recon Technology, Ltd . As a result of the factors described above, net income attributable to Recon Technology, Ltd was approximately ¥0.8 million ($0.1 million) for the year ended June 30, 2014, an increase of approximately ¥0.8 million ($0.1 million) from net income attributable to ordinary shareholders of approximately ¥40,000 for same period of 2013. Adjusted EBITDA Adjusted EBITDA. We define adjusted EBITDA as net income (loss) adjusted for income tax expense, interest expense, loss from investment, non-cash stock compensation expense, depreciation and amortization. We think it is useful to an equity investor in evaluating our operating performance because: (1) it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which the assets were acquired; and (2) it helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results. 28 For the Years Ended June 30, 2013 2014 2014 Increase / Percentage RMB RMB USD (Decrease) Change Reconciliation of Adjusted EBITDA to Net Income Net income ¥ 619,541 ¥ 1,827,820 $ 296,956 ¥ 1,208,279 195.0 % Provision for income tax 286,871 961,136 156,150 674,265 235.0 % Interest expense and foreign currency adjustment 1,323,726 1,141,069 185,383 (182,657 ) (13.8 )% Change in fair value of warrants liability - (60,647 ) (9,853 ) (60,647 ) 100 % Loss from investment - 1,535,250 249,423 1,535,250 100 % Restricted shares issued for consulting services - 407,593 66,219 407,593 100 % Share-based compensation expense 1,852,656 2,429,028 394,630 576,372 31.1 % Depreciation and amortization 618,552 595,647 96,771 (22,905 ) (3.7 )% Adjusted EBITDA ¥ 4,701,346 ¥ 8,836,896 $ 1,435,679 ¥ 4,135,550 88.0 % Adjusted EBITDA improved by approximately ¥4.1 million ($0.6 million) to approximately ¥8.8 million ($1.4 million) for the year ended June 30, 2014 compared to approximately ¥4.7 million income for the same period in 2013. This was due to improved operations. Adjusted Net Income (Loss) and Adjusted Earnings (Loss) Per Share For the Years Ended June 30, 2013 2014 2014 RMB RMB USD Reconciliation of Net Income to Adjusted Net Income attributable to Recon Technology, Ltd Net income attributable to Recon Technology, Ltd ¥ 39,698 ¥ 807,188 $ 131,140 Special items (A) : Change in fair value of warrants liability - (60,647 ) (9,853 ) Loss from investment - 1,535,250 249,423 Restricted shares issued for consulting services - 407,593 66,219 Share-based compensation expense 1,852,656 2,429,028 394,630 Adjusted net income attributable to Recon Technology, Ltd ¥ 1,892,354 ¥ 5,118,412 $ 831,559 Reconciliation of U.S. GAAP Earnings Per Share to Non U.S. GAAP Adjusted Earnings Per Share - diluted U.S. GAAP earnings per share - diluted ¥ 0.01 ¥ 0.18 $ 0.03 Impact of special items on earnings per share 0.47 0.99 0.16 Non U.S. GAAP adjusted earnings per share - diluted ¥ 0.48 ¥ 1.17 $ 0.19 Weighted - average shares -diluted 3,951,811 4,368,162 4,368,162 (A) Special items are certain non-cash expenses that are included in our U.S. GAAP reported results. There was no income tax benefit associated with the special items. The non-GAAP financial measures are provided to enhance investors' overall understanding of Recon's current financial performance. 29 Liquidity and Capital Resources 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 maturities of no more than six months. As of June 30, 2014, we had cash and cash equivalents in the amount of approximately ¥18.1 million ($2.9 million). Indebtedness . As of June 30, 2014, we had approximately ¥5.2 million ($0.8 million) of short-term borrowings from related parties, and ¥10 million ($1.6 million) in commercial loans f rom two local Chinese banks. Other than these amounts, we did not have any finance leases or purchase commitments, guarantees or other material contingent liabilities. Holding Company Structure . We are a holding company with no operations of our own. All of our operations are conducted through our Domestic Companies. As a result, our ability to pay dividends and to finance any debt that we may incur is dependent upon the receipt of dividends and other distributions from the Domestic Companies. In addition, Chinese legal restrictions permit payment of dividends to us by our Domestic Companies only out of their respective accumulated net profits, if any, determined in accordance with Chinese accounting standards and regulations. Under Chinese law, our Domestic Companies are required to set aside a portion (at least 10%) of their after-tax net income (after discharging all cumulated loss), if any, each year for compulsory statutory reserve until the amount of the reserve reaches 50% of our Domestic Companies’ registered capital. These funds may be distributed to shareholders at the time of each Domestic Company’s wind up. Off-Balance Sheet Arrangements . We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. Capital Resources . To date we have financed our operations primarily through cash flows from operations, bank loans, short-term borrowings and stock offerings. As of June 30, 2014, we had total assets of approximately ¥154.5 million ($25.1 million), which includes cash of approximately ¥18.1 million ($2.9 million), net accounts receivable from third parties of approximately ¥43.6 million ($7.1 million), and net accounts receivable from related parties of approximately ¥7.5 million ($1.2 million). Working capital amounted to approximately ¥83.1 million ($13.5 million), and shareholders’ equity amounted to approximately ¥96.0 million ($15.6 million). Cash from Operating Activities . Net cash used in operating activities was approximately ¥8.0 million ($1.3 million) for the year ended June 30, 2014. This was a decrease of approximately ¥32.7 million ($5.3 million) compared to net cash provided by operating activities of approximately ¥24.8 million for the year ended June 30, 2013. The decrease in n et cash used in operating activities for the year ended June 30, 2014, was primarily attributable to the increase in net income offset by a ¥8.2 million change in accounts receivable, notes receivable and other receivable, a ¥6.9 million change in purchase advance, a ¥1.1 million change in inventory a ¥1.1 million change in other payable, and a ¥1.6 million change in accrued payroll and employees’ welfare. We purchased inventories for projects in the upcoming quarters. In addition, accounts receivable increased due to our operating seasonality. Most of our projects were finished by end of each calendar year, and we believe these receivables will be recovered based on contractual payment schedules. 30 Cash from Investing Activities . Net cash used in investing activities was approximately ¥0.3 million ($55,000) for the year ended June 30, 2014, a decrease of ¥1.8 million ($0.3 million) from ¥2.1 million for the same period of 2013. The decrease in net cash used in investing activities was mainly due to approximately ¥1.5 million paid for a long-term investment of a 32.2% equity investment in a U.S. oil and natural gas company during the year ended June 30, 2013 and a decrease of approximately ¥0.3 million in purchases of property and equipment. Cash from Financing Activities . Net cash provided by financing activities amounted to approximately ¥14.0 million ($2.3 million) for the year ended June 30, 2014, compared to cash flows used in financing activities of approximately ¥13.8 million for the same period in 2013. During the year ended June 30, 2014, we received net proceeds of ¥12.1 million ($2.0 million) from a common stock sale of 546,500 shares with institutional investors in November 2013. In addition, we received and repaid ¥23.5 million ($3.8 million) in short term borrowings from bank. We received ¥5.0 million ($0.8 million) and repaid ¥5.3 million ($1.7 million) short term borrowing from a related party. We also received approximately ¥2.7 million ($0.4 million) of proceeds from stock option exercises. Working Capital . Total working capital as of June 30, 2014 amounted to approximately ¥83.1 million ($13.5 million), compared to approximately ¥82.0 million as of June 30, 2013. Total current assets as of June 30, 2014 amounted to approximately ¥133.4 million ($21.6 million), an increase of approximately ¥4.7 million ($0.7 million) compared to approximately ¥128.7 million at June 30, 2013. The increase in total current assets at June 30, 2014 compared to June 30, 2013 was mainly due to an increase in trade accounts receivable and purchase advances. Current liabilities amounted to approximately ¥50.3 million ($8.2 million) at June 30, 2014, in comparison to approximately ¥46.7 million at June 30, 2013, an increase of approximately ¥3.6 million ($0.6 million). This increase of liabilities was attributable mainly to an increase in warrant liability. Recently Enacted Accounting Standards In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” (“ASU 2014-08”). Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on the Company’s operations and financial results should be presented as discontinued operations. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. However, ASU 2014-08 should not be applied to a component that is classified as held for sale before the effective date even if the component is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. The effects of ASU 2014-08 will depend on any future disposals by the Company. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principal, five steps are required to be applied. In addition, ASU 2014-09 expands and enhances disclosure requirements which require disclosing sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This includes both qualitative and quantitative information. The amendments in ASU 2014-09 are effective restrospectively for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Management is evaluating the effect, if any, on the Company’s financial position and results of operations. 31 Item 7A. Q uantitative and Qualitative Disclosures about Market Risk. The Company is not required to provide the information required by this Item because the Company is a smaller reporting company. Item 8. Financial Statements and Supplementary Data. The Company’s financial statements and the related notes, together with the report of Friedman LLP for the years ended June 30, 2014 and 2013 are set forth following the signature pages of this report. Item 9. Ch anges in and Disagreements with Accountants on Accounting and Financial Disclosure. None.