Recon Technology, Ltd 10-K

Item 9A. Controls and Procedures. Disclosure Controls and Procedures As of June 30, 2014, our company carried out an evaluation, under the supervision of and with the participation of management, including our Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of our Company’s disclosure controls and procedures. Included in this Annual Report on Form 10-K, the chief executive officer and chief financial officer concluded that our Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were ineffective. Changes in Internal Control over Financial Reporting Management continues to focus on internal control over financial reporting. As of June 30, 2014, the Company has completed certain documentation of our internal controls and implemented the following remedial initiatives: · Improved the design and documentation related to multiple levels of review over financial statements included in our SEC filings; · Expanded the design and assessment test work over the monitoring function of entity level controls; · Enhanced documentation retention policies over test work related to our continuous management assessments of internal control effectiveness; and · Expanded documentation practices and policies related to various key controls to provide support and audit trails for both internal management assessment as well as external auditor testing. 32 Management’s Annual Report on Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with the authorization of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. The Company’s management assessed the effectiveness of its internal control over financial reporting as of June 30, 2014. In making this assessment, management used the 1992 framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework(old) summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this assessment, the Company’s management believes that, as of June 30, 2014, its internal control over financing reporting is not effective based on those criteria. The specific material weaknesses identified by the Company’s management as of June 30, 2014 are described as follows: We did not have sufficient skilled accounting personnel who are either qualified as Certified Public Accountants in the U.S. or who have received education from U.S. institutions or other educational programs that would provide enough relevant education relating to U.S. GAAP. The Company’s CFO have limited experience with U.S. GAAP and are not U.S. Certified Public Accountants. Further, our operating subsidiaries are based in China, and in accordance with PRC laws and regulations, are required to comply with PRC GAAP, rather than U.S. GAAP. Thus, the accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the preparation of consolidated financial statements, are inadequate, and determined to be a material weakness. We completed our designs of our internal controls and assessments for all of our financial reporting cycles during fiscal year 2013, and we are unable to declare effectiveness of our controls due to lack of sufficient time to obtain evidence of operating effectiveness as of June 30, 2014 due to lack of monitoring of our internal controls (lack of self-testing of internal controls). Therefore, we determined that the lack of time to evaluate our design and operating effectiveness is a material weakness. It should be noted, however, that (a) many actions had been undertaken to enhance the control environment during the year; and (b) there are other remedial activities that are scheduled to be take place in fiscal 2015. As a result, the Company has developed remedial actions to strengthen its accounting and financial reporting functions as well as the related disclosure controls and procedures. Such plan will require the hiring of additional resources and the deployment of other corporate resources for the accounting department in relation to the financial reporting process. Such additional resources will include the establishment of a work force dedicated to the task of correcting past financial irregularities and maintaining correct financial reporting on an on-going basis. To strengthen the Company’s internal control over financial reporting, the Company engaged outside consultants that are skilled in SEC reporting and Section 404 compliance to assist in the implementation of the following remedial actions, which have been completed as of the date of this report: 33 ● Enhancement of existing disclosures policies and procedures; ● Formalization of periodic communication between management and the audit committee; and ● Implementation of policies and procedures intended to enhance management monitoring and oversight by the Audit Committee. ● Formalization of a periodic staff training program to enhance their awareness of the key internal control activities. In addition to the foregoing efforts, the Company expects to implement the following remedial actions during fiscal year 2015: ● Develop a comprehensive training and development plan, for our finance, accounting and internal audit personnel, including our Chief Financial Officer, Controller, and others, in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof. ● Hire a full-time employee who possesses the requisite U.S. GAAP experience and education ● Monitoring of internal controls by performing self-testing of various key controls. Despite the material weaknesses and deficiencies reported above, our management believes that our consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. Item 9B. Other Information. None. 34 PART III Item 10. Directors, Executive Officers and Corporate Governance. Regulation S-K Item 401: Executive Officers and Directors The following table sets forth our executive officers and directors, their ages and the positions held by them: Name Age Position Held Mr. Yin Shenping 45 Chief Executive Officer and Director Ms. Liu Jia 31 Chief Financial Officer Mr. Chen Guangqiang 51 Chief Technology Officer and Director Mr. Zhao Shudong 68 Independent Director (Nominating Committee Chair) Mr. Nelson N.S. Wong 52 Independent Director (Audit Committee Chair) Mr. Hu Jijun 49 Independent Director (Compensation Committee Chair) Yin Shenping. Mr. Yin has been our Chief Executive Officer and director since our inception. In 2003, Mr. Yin founded Nanjing Recon, a Chinese company that provides services to automate and enhance the extraction of petroleum in China, and has been the Chief Executive Officer since that time. Prior to founding Nanjing Recon, Mr. Yin served as a sales manager for Fujian Haitian Network Company from 1992 through 1994. Mr. Yin has founded and operated a number of companies engaged in the IT industry: Xiamen Hengda Haitian Computer Network Co., Ltd. (1994), Baotou Hengda Haitian Computer Network Co., Ltd. (1997) and Beijing Jingke Haitian Electronic Technology Development Co., Ltd. (1999), and Jingsu Huasheng Information Technology Co., Ltd. (2000). Mr. Yin received his bachelor’s degree in 1991 from Nanjing Agricultural University in information systems. Mr. Yin has been chosen as a director because he is one of the founders of the Company and we believe his knowledge of the Company and years of experience in our industry give him the ability to guide the Company as a director. Liu Jia. Ms. Liu has served as our Chief Financial Officer since 2008. In 2008 Ms. Liu assisted Heilongjiang Province Jintian Group with financial due diligence, field surveys and data analysis. While in college Ms. Liu served internships in Xinghua Certified Public Accountants, Ltd., Beijing Zhongweihuahao Accountants Affairs Office, Tiantong Securities Co., Ltd. and Industrial and Commercial Bank of China, which internships focused on auditing, accounting and data analysis. Ms. Liu received her bachelor’s degree in 2006 from Beijing University of Chemical Technology, School of Economics and Management and her master’s degree in industrial economics in 2009 from Beijing Wuzi University. Chen Guangqiang. Mr. Chen has served as our Chief Technology Officer and director since our inception. In 1999, Mr. Chen founded BHD and has been the General Manager since then. From 1999 through 2003, Mr. Chen served as the general manager of Beijing Adar. From 1993 through 1999, Mr. Chen was a chief engineer for Xinda Company, CNPC Development Bureau. Mr. Chen was a geological engineer for the Fourth Oil Extraction Plant of Huabei Oil Field from 1985 through 1993. Mr. Chen received his bachelor’s degree in 1985 from Southwest Petroleum Institute. Mr. Chen has been chosen as a director because he is one of the founders of the Company and we believe we can benefit from his years of engineering experience and management experience in the oil extraction industry. Nelson N.S. Wong . Mr. Wong joined our Board of Directors in 2008. In 1990 Mr. Wong joined the Vigers Group, a real estate company that provides services in valuation, corporate property services, investment advisory services, general practice surveying, building surveying, commercial, retail and industrial agency, and property and facilities management. Mr. Wong became the Vice Chairman and CEO of the Vigers Group in 1993. In 1995 Mr. Wong established the ACN Group, a business consulting firm, where he has worked continuously and continues to serve as the Chairman and Managing Partner. Mr. Wong received a bachelor’s degree in arts from the PLA Institute of International Relations in Nanjing in 1983. Mr. Wong has been chosen as a director because we believe we can benefit from his leadership skills and management experience. 35 Hu Jijun . Mr. Hu joined our Board of Directors in 2008. From 1988 to 2003, Mr. Hu served in a variety of positions at our No. 2 test-drill plant, including technician of installation, assets equipment work, electrical installation, control room production dispatcher, Deputy Chief Engineer of the Technology Battalion, and Deputy Director of Production. From 2003 to 2005 he served as Head of the Integrated Battalion and he is currently the Head of the Transport Battalion, Senior Electric Engineer. Mr. Hu graduated as an automated professional from the China University of Petroleum in 1988. Mr. Hu has been chosen as a director because we believe his years of experience and knowledge gained while working at our No. 2 test-drill plant will prove beneficial to the guidance of the Company. Zhao Shudong . Mr. Zhao joined our Board of Directors in 2013. Before retiring in 2006, Mr. Zhao spent over 30 years working in the oilfield industry. From 1970 to 1976, Mr. Zhao worked as a technician in the Daqing oilfield. From 1976 to 1982, Mr. Zhao served as the vice director of the Hubei Oilfield Generalized Geologic Technical Research Institute. Mr. Zhao then spent 11 years as a director and section chief at the Scientific and Technological Development Department of the Huabei Petroleum Administrative Bureau. He was subsequently appointed Chief Geologist of the bureau, a position he held from 1993 to 1999. From 1999 to 2006, Mr. Zhao served as the General Manager of the Huabei Oilfield Company of CNPC. Mr. Zhao studied at the Northeast Petroleum Institute from 1965 to 1970. Mr. Zhao has been chosen as a director nominee because of his extensive experience in the oilfield industry. Employment Agreements We have employment agreements with each of our Chief Executive Officer, Chief Technology Officer and Chief Financial Officer. With the exception of the employment agreement with our Chief Financial Officer, each of these employment agreements provides for an indefinite term. Such employment agreements may be terminated (1) if the employee gives written notice of his or her intention to resign, (2) the employee is absent from three consecutive meetings of the Board of Directors, without special leave of absence from the other members of the Board of Directors, and the Board of Directors passes a resolution that such employee has vacated his office, or (3) the death, bankruptcy or mental incapacity of the employee. The employment agreement for our Chief Financial Officer provides for a one-year term, currently expiring on March 12, 2015. Such employment agreement may be terminated if the employee gives thirty days’ written notice of her intention to resign, or if the Board of Directors determines she can no longer perform her duties as Chief Financial Officer and provides her with thirty days’ written notice of termination. Under Chinese law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal one month prior to the date on which the employment agreement is scheduled to expire. If we fail to provide this notice or if we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for each year we have employed the employee. We are, however, permitted to terminate an employee for cause without penalty to the Company, where the employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse effect to us. Share Option Pool In connection with our initial public offering, we established a pool for share options for the Domestic Companies’ and our employees. This pool contains options to purchase up to 790,362 of our ordinary shares. The options will vest at a rate of 20% per year for five years and have an exercise price of the market price of our shares on the date the options are granted. To date, we issued 564,000 options out of our employee share option pool. We initially granted 293,000 options in 2009. We held a shareholder meeting in December 2010 and announced the resignation of three directors, and as a result, 100,000 options were forfeited and went back to the pool. In 2012, we granted an additional 415,000 options and 44,000 options were forfeited and went back to the pool. In the three months ended June 30, 2014, 148,400 vested options for 2012 grants were exercised. As of June 30, 2014, we have 415,600 options outstanding. Executive Stock Grants On December 13, 2013, the Company granted 95,181 restricted shares to Mr. Yin Shenping and 135,181 restricted shares to Mr. Chen Guangqiang at an aggregate value of ¥4,207,496 ($688,782), based on the stock closing price of $2.99 at December 13, 2013. These restricted shares will be vested over three years with one third of the shares vesting every year from the grant date. As of June 30, 2014, we have 230,362 non-vested restricted stocks outstanding. 36 Board of Directors and Board Committees Our board of directors currently consists of five (5) members. There are no family relationships between any of our executive officers and directors. The directors are divided into three classes, as nearly equal in number as the then total number of directors permits. Class I directors shall face re-election at our annual general meeting of shareholders during fiscal year ending June 30, 2016 and every three years thereafter. Class II directors shall face re-election at our annual general meeting of shareholders during fiscal year ending June 30, 2014 and every three years thereafter. Class III directors shall face re-election at our annual general meeting of shareholders during fiscal year ending June 30, 2015 and every three years thereafter. If the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly as possible. Any additional directors of a class elected to fill a vacancy resulting from an increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent director. These board provisions could make it more difficult for third parties to gain control of the Company by making it difficult to replace members of our Board of Directors. A director may vote in respect of any contract or transaction in which he is interested, provided, however, that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof that a director is a shareholder of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). Mr. Zhao, Mr. Wong, and Mr. Hu are our independent directors. Mr. Yin Shenping currently holds both the positions of Chief Executive Officer and Chairman of the Board. These two positions have not been consolidated into one position; Mr. Yin simply holds both positions at this time. We do not have a lead independent director because of the foregoing reason and also because we believe our independent directors are encouraged to freely voice their opinions on a relatively small company board. We believe this leadership structure is appropriate because we are a smaller reporting company that recently became listed on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Mr. Yin as both our principal executive officer and Chairman of the Board. Our Board of Directors plays a significant role in our risk oversight. The Board of Directors makes all relevant Company decisions. As such, it is important for us to have our Chief Executive Officer serve on the Board as he plays a key role in the risk oversight of the Company. As a smaller reporting company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters. Currently, three committees have been established under the board: the audit committee, the compensation committee and the nominating committee. All of these committees consist solely of independent directors. The audit committee is responsible for overseeing the accounting and financial reporting processes of the Company and audits of the financial statements of the Company, including the appointment, compensation and oversight of the work of our independent auditors. Mr. Wong qualifies as the audit committee financial expert and serves as the chair of the audit committee. 37 The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the authority to interpret those plans). Mr. Hu serves as the chair of the compensation committee. The nominating committee of the board of directors is responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience when nominating directors. Mr. Zhao serves as the chair of the nominating committee. There are no other arrangements or understandings pursuant to which our directors are selected or nominated. Duties of Directors Under Cayman Islands law, our directors have a fiduciary duty to the Company to act in good faith in their dealings with or on behalf of the Company and exercise their powers and fulfill the duties of their office honestly. This duty has four essential elements: ● a duty to act in good faith in the best interests of the Company; ● a duty not to personally profit from opportunities that arise from the office of director; ● a duty to avoid conflicts of interest; and ● a duty to exercise powers for the purpose for which such powers were intended. In general, Cayman Islands law imposes various duties on directors of a company with respect to certain matters of management and administration of the Company. In addition to the remedies available under general law, the Companies Law imposes fines on directors who fail to satisfy some of these requirements. However, in many circumstances, an individual is only liable if he is knowingly guilty of the default or knowingly and willfully authorizes or permits the default. In comparison, under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. In addition, under Delaware law, a party challenging the propriety of a decision of the directors bears the burden of rebutting the applicability of the presumptions afforded to directors by the “business judgment rule.” If the presumption is not rebutted, the business judgment rule protects the directors and their decisions, and their business judgments will not be second guessed. If the presumption is rebutted, the directors bear the burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing, Delaware courts subject directors’ conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat to corporate control and approval of a transaction resulting in a sale of control of the corporation. Limitation of Director and Officer Liability Pursuant to our Memorandum and Articles of Association, every director or officer and the personal representatives of the same shall be indemnified and held harmless out of our assets and funds against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by him or her in or about the conduct of our business or affairs or in the execution or discharge of his or her duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by him in defending (whether successfully or otherwise) any civil proceedings concerning us or our affairs in any court whether in the Cayman Islands or elsewhere. No such director or officer will be liable for: (a) the acts, receipts, neglects, defaults or omissions of any other such Director or officer or agent; or (b) any loss on account of defect of title to any of our properties; or (c) account of the insufficiency of any security in or upon which any of our money shall be invested; or (d) any loss incurred through any bank, broker or other similar person; or (e) any loss occasioned by any negligence, default, breach of duty, breach of trust, error of judgment or oversight on his or her part; or (f) any loss, damage or misfortune whatsoever which may happen in or arise from the execution or discharge of the duties, powers authorities, or discretions of his or her office or in relation thereto, unless the same shall happen through his or her own dishonesty, gross negligence or willful default. 38 Involvement in Certain Legal Proceedings To the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities or commodities laws, any laws respecting financial institutions or insurance companies, any law or regulation prohibiting mail or wire fraud in connection with any business entity or been subject to any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization, except for matters that were dismissed without sanction or settlement. Pursuant to Rule 3a12-3 of Securities Exchange Act of 1934, as amended, directors, officers and beneficial owners of more than ten percent of the Company’s equity services are exempted from Section 16 filings as the Company qualifies as a foreign private issuer. The Company has adopted a Code of Ethics and has filed a copy of the Code of Ethics with the Commission. The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). The Company has an audit committee, consisting solely of independent directors of the Company, Mr. Zhao Shudong, Mr. Nelson N.S. Wong, and Mr. Hu Jijun. Mr. Wong qualifies as the audit committee financial expert. The Company’s audit committee charter has been filed as Exhibit 99.1 to the Company’s annual report on Form 10-K for the year ended June 30, 2009 and is available on the Company’s website (www.recon.cn). Item 11. Executive Compensation. The following table shows the annual compensation paid by us to Mr. Yin Shenping, our Chief Executive Officer, for the years ended June 30, 2014 and 2013. No other employee or officer received more than $100,000 in total compensation in 2014 or 2013. 39 Summary Executive Compensation Table Name and principal position Year Salary Bonus Option Awards Restricted Stock Awards Total Yin Shenping, Principal Executive Officer 2014 $ 125,463 $ 10,455 $ — $ 47,432 (1) $ 183,350 2013 $ 85,437 $ — $ — $ — $ 85,437 Chen Guangqiang, Chief Technology Officer 2014 $ 113,593 $ 10,000 $ — $ 67,365 (1) $ 190,958 2013 $ 71,942 $ 12,945 $ $ — $ 84,887 (1) 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. Director Compensation All directors hold office until the expiration of their respective terms and until their successors have been duly elected and qualified. There are no family relationships among our directors or executive officers. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors and non-voting observers do not receive any compensation for their services. Non-employee directors are entitled to receive $2,000 per Board of Directors meeting attended. In addition, non-employee directors are entitled to receive compensation for their actual travel expenses for each Board of Directors meeting attended. Summary Director Compensation Table Name(1) Fees earned or paid in cash Option Awards Total(2) Nelson N.S. Wong $ 8,000 $ — $ 10,000 Hu Jijun $ 8,000 $ — $ 4,000 Zhao Shudong $ 8,000 $ — $ 4,000 (1) Compensation for our directors Yin Shenping and Chen Guangqiang, who also serve as executive officers, is fully disclosed in the executive compensation table. (2) None of the directors received any ordinary share awards, nonqualified deferred compensation earnings or non-equity incentive plan compensation in fiscal year 2014. 40 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders 415,600 $ 4.37 374,762 Security Ownership of Certain Beneficial Owners and Management The following table sets forth information with respect to beneficial ownership of our ordinary shares as of the date of this report, for each person known by us to beneficially own 5% or more of our ordinary shares, and all of our executive officers and directors individually and as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. Percentage of beneficial ownership is based on 4,919,711 Shares, which consists of 4,726,711 Shares outstanding as of September 23, 2014 and 193,000 shares subject to options that were exercisable within 60 days after September 23, 2014. Such shares subject to options are deemed to be outstanding for the purposes of computing the percentage ownership of the individual holding such shares, but are not deemed outstanding for purposes of computing the percentage of any other person shown in the table. Our major shareholders do not possess voting rights that differ from our other shareholders. Unless otherwise noted, the address of each of the below shareholders is c/o Recon Technology Ltd, Room 1902, Building C, King Long International Mansion, 9 Fulin Road, Beijing 100107 China. Amount of Beneficial Ownership Percentage Ownership Directors and Officers Yin Shenping (1) 711,761 14.47 % Chen Guangqiang (2) 705,761 14.35 % Liu Jia (3) 50,000 1.02 % Hu Jijun (4) 15,000 * % Nelson Wong (5) 18,000 * % Zhao Shudong (6) 6,000 * % Directors and Officers as a Group (six persons) 1,506,522 30.62 % 5% Holder Liu Hui (7) 833,681 16.95 % Chen Yiquan (7) 833,681 16.95 % (1) Includes 60,000 options to purchase ordinary shares that are exercisable within 60 days after September 28, 2014. Does not include 48,000 options that were not exercisable within 60 days after September 28, 2014. (2) Includes 50,000 options to purchase ordinary shares that are exercisable within 60 days after September 28, 2014 and 16,000 options granted to Chen Guangqiang’s wife that are exercisable within 60 days after September 28, 2014. Does not include 30,000 options that are not exercisable within 60 days after September 28, 2014. (3) Includes 50,000 options to purchase ordinary shares that are exercisable within 60 days after September 28, 2014. (4) Includes 15,000 options to purchase ordinary shares that were exercisable within 60 days after September 28, 2014. (5) Includes 18,000 options to purchase ordinary shares that were exercisable within 60 days after September 28, 2014. (6) [Includes 6,000 options to purchase ordinary shares that were exercisable within 60 days after September 28, 2014.] (7) Includes 458,525 Shares held by Chen Yiquan and 375,156 Shares held by Liu Hui. According to a jointly filed Schedule 13D dated December 27, 2010 (Accession No. 0001144204-10-068264), Chen Yiquan and Liu Hui share beneficial ownership of and have joint voting and dispositive power over the aggregate 833,681 Shares. The Company has not been able to get in touch with either Chen Yiquan or Liu Hui and therefore the information listed here in is solely based on the Schedule 13D filed on December 27, 2010. * Less than 1%. 41 Item 13. Certain Relationships and Related Transactions, and Director Independence. Transactions with Related Persons Because we do not have access certification to Jidong Oilfield, Nanjing Recon, one of our Domestic Companies, conducted transactions with Jidong Oilfield through Beijing Yabeinuoda Technology Development Co. Ltd. (“Yabeinuoda”), which has access certification to the oilfield and wherein Mr. Yin is the legal representative. Mr. Yin does not have any equity interest in this company currently. In the year ended June 30, 2014, Nanjing Recon sold approximately ¥4.6 million ($0.8 million) of goods and services to Yabeinuoda. During the same period, Nanjing Recon has accounts receivables from Yabeinuoda in the amount of approximately ¥ 23.5 million ($3.8 million) as of June 30, 2014, and approximately ¥1.1 million was received as of September 28, 2014. Below is a summary of trade accounts receivable with related parties as of June 30, 2013 and 2014, respectively. June 30, 2013 June 30, 2014 June 30, 2014 Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 19,722,574 ¥ 5,441,498 $ 884,049 Beijing Langchen Construction Company - 726,800 118,080 Xiamen Huangsheng Hitek Computer Network Co. Ltd. - 100,000 16,246 Xiamen Hengda Hitek Computer Network Co. Ltd. - 1,211,000 196,744 Allowance for doubtful accounts (978,210 ) - - Total - related-parties, net ¥ 18,744,364 ¥ 7,479,298 $ 1,215,119 Related Party June 30, 2013 June 30, 2014 June 30, 2014 Non-current portion RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ - ¥ 16,062,574 $ 2,609,595 Allowance for doubtful accounts - (1,606,257 ) (260,960 ) Total - related-parties, net ¥ - ¥ 14,456,317 $ 2,348,635 Based on the repayment agreement signed on August 27, 2014, the outstanding balance will be collected in four years with each installment of ¥4,015,644. Below is a summary of purchase advances to related parties as of June 30, 2013 and 2014, respectively June 30, 2013 June 30, 2014 June 30, 2014 Related Party RMB RMB U.S. Dollars Xiamen Huasheng Hitek Computer Network Co. Ltd. ¥ 394,034 ¥ 394,034 $ 64,016 Total ¥ 394,034 ¥ 394,034 $ 64,016 Current ending balance of the purchase advances to Xiamen Huasheng Hitek is expect to be settled within one year, In addition, included in the Company’s other receivables as of June 30, 2014 were amounts “due from ENI” 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 determined payment schedule, and interest is accrued during the period at an annual rate of 4%. In accordance with the payment schedule, the principal plus accrued interest will be repaid over three years on a quarterly basis. The first four payments are set at 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, installment for each quarter would be ¥1,777,653. The Company has received the payment on time in March and June 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 one year are RMB 5,353,104 ($869,688). 42 Accordingly, the current and non-current portion of the amount due from ENI at June 30, 2014 is determined to be RMB 2,523,145 ($409,921) and RMB 5,353,104 ($869,688), respectively. The Company also had short-term borrowings from related parties. Below is a summary of the Company’s short-term borrowings due to related parties as of June 30, 2013 and 2014, respectively. June 30, 2013 June 30, 2014 June 30, 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, 6.6% annual interest,due on December 25, 2014 - 5,007,728 813,577 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 32,493 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 ¥ 5,207,728 $ 846,070 The Company also paid ¥366,000 and ¥230,000 ($37,367) in advance for rental to Mr. Chen and his family member as of June 30, 2013 and June 30, 2014. Other than as described herein, no transactions required to be disclosed under Item 404 of Regulation S-K have occurred since the beginning of the Company’s last fiscal year. Director Independence The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). Mr. Wong, Mr. Hu and Mr. Zhao are our independent directors. Item 14. Principal Accountant Fees and Services. Friedman LLP was appointed by the Company to serve as its independent registered public accounting firm for fiscal 2013 and 2014. 43 Fees Paid To Independent Registered Public Accounting Firm Audit Fees During fiscal years 2013 and 2014, Friedman LLP’s audit fees were $180,000and $185,000, respectively. Audit-Related Fees The Company has not paid Friedman LLP for audit-related services in fiscal years 2013 and 2014. Tax Fees The Company has not paid Friedman LLP for tax services in fiscal years 2013 and 2014. All Other Fees The Company has not paid Friedman LLP for any other services in fiscal years 2013 and 2014. Audit Committee Pre-Approval Policies Before Friedman LLP was engaged by the Company to render audit or non-audit services, the engagement was approved by the Company’s audit committee. All services rendered by Friedman LLP have been so approved. Item 15. Exhibits, Financial Statement Schedules. The following documents are filed herewith: Number Exhibit 3.1 Amended and Restated Articles of Association of the Registrant (1) 3.2 Amended and Restated Memorandum of Association of the Registrant (1) 4.1 Specimen Share Certificate (1) 10.1 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.2 Translation of Power of Attorney for rights of Chen Guangqiang in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.3 Translation of Power of Attorney for rights of Yin Shenping in Beijing BHD Petroleum Technology Co., Ltd. (1) 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) 44 10.8 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.9 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.10 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.11 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Jining ENI Energy Technology Co., Ltd. (1) 10.12 Translation of Power of Attorney for rights of Chen Guangqiang in Jining ENI Energy Technology Co., Ltd. (1) 10.13 Translation of Power of Attorney for rights of Yin Shenping in Jining ENI Energy Technology Co., Ltd. (1) 10.14 Translation of Power of Attorney for rights of Li Hongqi in Jining ENI Energy Technology Co., Ltd. (1) 10.15 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.16 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.17 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.18 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.19 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.20 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.21 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Nanjing Recon Technology Co., Ltd. (1) 10.22 Translation of Power of Attorney for rights of Chen Guangqiang in Nanjing Recon Technology Co., Ltd. (1) 10.23 Translation of Power of Attorney for rights of Yin Shenping in Nanjing Recon Technology Co., Ltd. (1) 10.24 Translation of Power of Attorney for rights of Li Hongqi in Nanjing Recon Technology Co., Ltd. (1) 10.25 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.26 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 45 10.27 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.28 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.29 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.30 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 14.1 Code of Ethics of the Company. (2) 21.1 List of subsidiaries of the Company. (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. (3) 31.2 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3) 32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3) 99.1 Audit Committee Charter (2) 101.INS * XBRL Instance Document 101.SCH * XBRL Taxonomy Extension Schema Document 101.CAL * XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF * XBRL Taxonomy Extension Definition Linkbase Document 101.LAB * XBRL Taxonomy Extension Label Linkbase Document XBRL 101.PRE * XBRL Taxonomy Extension Presentation Linkbase Document * XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or report for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. (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 Annual Report of Form 10-K for the fiscal year ended June 30, 2009, filed with the SEC on September 28, 2009. (3) Filed herewith. 46 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 September 2 9, 2014 By: /s/ Liu Jia Liu Jia Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Exchange Act, this report has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date /s/ Yin Shenping Chief Executive Officer and Director September 2 9, 2014 Yin Shenping (Principal Executive Officer) /s/ Chen Guangqiang Chief Technology Officer and Director September 2 9, 2014 Chen Guangqiang /s/ Zhao Shudong Director September 2 9, 2014 Zhao Shudong /s/ Nelson N.S. Wong Director September 2 9, 2014 Nelson N.S. Wong /s/ Hu Jijun Director September 2 9, 2014 Hu Jijun 47 RECON TECHNOLOGY, LTD INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of June 30, 2013 and 2014 F-3 Consolidated Statements of Operations and Comprehensive Income for the years ended June 30, 2013 and 2014 F-4 Consolidated Statements of Equity for the years ended June 30, 2013 and 2014 F-5 Consolidated Statements of Cash Flows for the years ended June 30, 2013 and 2014 F-6 Notes to the Consolidated Financial Statements F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Recon Technology, Ltd. We have audited the accompanying consolidated balance sheets of Recon Technology, Ltd. (the “Company”) as of June 30, 2014 and 2013, and the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the two years in the period ended June 30, 2014. Recon Technology, Ltd.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Recon Technology, Ltd. as of June 30, 2014 and 2013, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2014 in conformity with accounting principles generally accepted in the United States of America. /s/ Friedman LLP New York, New York September 29, 2014 F- 2 RECON TECHNOLOGY, LTD CONSOLIDATED BALANCE SHEETS As of June 30, As of June 30, As of June 30, 2013 2014 2014 ASSETS RMB RMB U.S. Dollars Current assets Cash and cash equivalents ¥ 12,350,392 ¥ 18,094,586 $ 2,939,723 Notes receivable 2,578,855 - - Trade accounts receivable, net 38,648,780 43,553,737 7,075,926 Trade accounts receivable- related parties, net 18,744,364 7,479,298 1,215,119 Inventories, net 13,271,070 14,336,602 2,329,185 Other receivables, net 19,131,503 18,293,043 2,971,966 Other receivables- related parties 742,528 1,414,433 229,795 Purchase advances, net 18,412,507 25,759,065 4,184,927 Purchase advances- related parties 394,034 394,034 64,016 Tax recoverable 575,650 - - Prepaid expenses 2,487,956 2,634,664 428,039 Prepaid expenses - related parties 366,000 230,000 37,367 Deferred tax asset 1,006,721 1,209,961 196,575 Total current assets 128,710,360 133,399,423 21,672,638 Property and equipment, net 1,709,846 1,321,538 214,703 Long-term trade accounts receivable - related parties, net - 14,456,317 2,348,635 Long-term investment 1,549,450 - - Long-term other receivable 3,502,680 5,353,104 869,688 Total Assets ¥ 135,472,336 ¥ 154,530,382 $ 25,105,664 LIABILITIES AND EQUITY Current liabilities Short-term bank loans ¥ 10,000,000 ¥ 10,000,000 $ 1,624,643 Trade accounts payable 7,384,165 11,413,505 1,854,287 Trade accounts payable- related parties 3,994,718 - - Other payables 1,964,691 1,765,079 286,762 Other payable- related parties 4,239,675 3,306,024 537,111 Deferred revenue 3,381,382 4,419,824 718,063 Advances from customers 470,700 801,385 130,196 Accrued payroll and employees' welfare 1,992,783 417,624 67,849 Accrued expenses 488,730 203,051 32,989 Taxes payable 6,754,428 7,589,846 1,233,079 Short-term borrowings- related parties 5,503,279 5,207,728 846,070 Short-term borrowings- other 570,375 - - Deferred tax liability - 180,186 29,274 Warrants liability - 5,021,621 815,834 Total current liabilities 46,744,926 50,325,873 8,176,157 Commitments and Contingency Equity Common stock, ($ 0.0185 U.S. dollar par value, 25,000,000 shares authorized; 3,951,811 and 4,717,336 shares issued and outstanding as of June 30, 2013 and June 30, 2014, respectively) 529,979 616,865 100,217 Additional paid-in capital 69,516,447 83,061,058 13,494,453 Appropriated retained earnings 3,023,231 4,148,929 674,053 Unappropriated retained earnings 8,749,963 8,431,453 1,369,810 Accumulated other comprehensive loss (293,201 ) (279,275 ) (45,374 ) Total shareholders’ equity 81,526,419 95,979,030 15,593,159 Non-controlling interest 7,200,991 8,225,479 1,336,348 Total equity 88,727,410 104,204,509 16,929,507 Total Liabilities and Equity ¥ 135,472,336 ¥ 154,530,382 $ 25,105,664 The accompanying notes are an integral part of these consolidated financial statements. F- 3 RECON TECHNOLOGY, LTD CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the years ended June 30, 2013 2014 2014 RMB RMB USD Revenues Hardware and software ¥ 41,408,517 ¥ 86,229,283 $ 14,009,176 Service 25,464,003 477,778 77,622 Hardware and software - related parties 9,713,209 6,740,047 1,095,017 Total revenues 76,585,729 93,447,108 15,181,815 Cost of revenues Hardware and software ¥ 26,617,786 ¥ 57,333,670 $ 9,314,672 Service 18,567,123 77,107 12,527 Hardware and software - related parties 6,346,850 3,619,470 588,035 Total cost of revenues 51,531,759 61,030,247 9,915,234 Gross profit 25,053,970 32,416,861 5,266,581 Selling and distribution expenses 6,126,095 5,293,343 859,979 General and administrative expenses 10,978,942 16,198,947 2,631,750 Research and development expenses 8,513,680 8,094,333 1,315,040 Operating expenses 25,618,717 29,586,623 4,806,769 Income (loss) from operations (564,747 ) 2,830,238 459,812 Other income (expenses) Subsidy income 2,257,344 1,250,509 203,163 Interest income 570,442 384,182 62,416 Interest expense (1,557,204 ) (952,574 ) (154,759 ) Loss from investment - (1,535,250 ) (249,423 ) Change in fair value of warrants liability - 60,647 9,853 Gain (loss) from foreign currency exchange 233,478 (188,495 ) (30,624 ) Other expense (32,901 ) 939,699 152,668 1,471,159 (41,282 ) (6,706 ) Income before income tax 906,412 2,788,956 453,106 Provision for income tax 286,871 961,136 156,150 Net Income 619,541 1,827,820 296,956 Less: Net income attributable to non-controlling interest 579,843 1,020,632 165,816 Net Income attributable to Recon Technology, Ltd ¥ 39,698 ¥ 807,188 $ 131,140 Comprehensive income Net income 619,541 1,827,820 296,956 Foreign currency translation adjustment (3,004 ) 17,783 2,889 Comprehensive income 616,537 1,845,603 299,845 Less: Comprehensive income attributable to non-controlling interest 579,543 1,022,410 166,105 Comprehensive income attributable to Recon Technology, Ltd ¥ 36,994 ¥ 823,193 $ 133,740 Earnings per common share - basic ¥ 0.01 ¥ 0.19 $ 0.03 Earnings per common share - diluted ¥ 0.01 ¥ 0.18 $ 0.03 Weighted - average shares -basic 3,951,811 4,303,955 4,303,955 Weighted - average shares -diluted 3,951,811 4,368,162 4,368,162 The accompanying notes are an integral part of these consolidated financial statements. F- 4 RECON TECHNOLOGY, LTD CONSOLIDATED STATEMENTS OF EQUITY Recon Technology, LTD Ordinary Shares Additional Paid-in Capital Statutory Reserves Retained Earnings Accumulated Other Comprehensive loss Shareholders' Equity Non-controlling Interest Total Equity Total Equity Number of Shares Amount (RMB) (RMB) (RMB) (RMB) (RMB) (RMB) (RMB) (RMB) (USD) Balance, July 1, 2012 3,951,811 ¥ 529,979 ¥ 67,643,791 ¥ 2,378,961 ¥ 9,354,535 ¥ (290,496 ) ¥ 79,616,770 ¥ 6,621,447 ¥ 86,238,217 $ 14,010,628 Capital contribution in VIE 20,000 20,000 20,000 3,249 Stock based payment 1,852,656 1,852,656 1,852,656 300,990 Net income for the year 39,698 39,698 579,843 619,541 100,653 Appropriation of statutory reserves 644,270 (644,270 ) - - - Foreign currency translation adjustment (2,705 ) (2,705 ) (299 ) (3,004 ) (490 ) Balance, June 30, 2013 3,951,811 ¥ 529,979 ¥ 69,516,447 ¥ 3,023,231 ¥ 8,749,963 ¥ (293,201 ) ¥ 81,526,419 ¥ 7,200,991 ¥ 88,727,410 $ 14,415,030 Stock issuance 546,500 61,937 7,025,668 7,087,605 7,087,605 1,151,482 Restricted shares issued for services 70,625 8,044 1,401,911 1,409,955 1,409,955 229,067 Stock options exercised 148,400 16,905 2,688,004 2,704,909 2,704,909 439,451 Stock based payment 2,429,028 2,429,028 2,429,028 394,630 Net income for the year 807,188 807,188 1,020,632 1,827,820 296,955 Appropriation of statutory reserves 1,125,698 (1,125,698 ) - - - Foreign currency translation adjustment 13,926 13,926 3,856 17,782 2,892 Balance, June 30, 2014 4,717,336 ¥ 616,865 ¥ 83,061,058 ¥ 4,148,929 ¥ 8,431,453 ¥ (279,275 ) ¥ 95,979,030 ¥ 8,225,479 ¥ 104,204,509 $ 16,929,507 The accompanying notes are an integral part of these consolidated financial statements. F- 5 RECON TECHNOLOGY, LTD CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 2013 2014 2014 RMB RMB U.S. Dollars Cash flows from operating activities: Net income ¥ 619,541 ¥ 1,827,820 $ 296,956 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 618,552 595,647 96,771 Loss from disposal of equipment 38,006 128,902 20,942 Provision/(recovery of) for doubtful accounts (749,121 ) 1,518,778 246,747 Share based compensation 1,852,656 2,429,028 394,630 Loss from investment - 1,535,250 249,423 Deferred tax provision/(benefit) 100,080 (23,054 ) (3,745 ) Change in fair value of warrants liability - (60,647 ) (9,853 ) Restricked shares issued for services - 407,593 66,219 Changes in operating assets and liabilities: Notes receivable (2,578,855 ) 2,578,855 418,972 Trade accounts receivable 25,107,519 (5,291,233 ) (859,636 ) Inventories 11,010,230 (1,065,532 ) (173,111 ) Trade accounts receivable-related parties 672,175 (3,819,299 ) (620,500 ) Other receivable, net (4,263,858 ) (981,099 ) (159,395 ) Other receivables related parties, net (724,799 ) (671,905 ) (109,161 ) Purchase advance, net (2,190,796 ) (6,879,156 ) (1,117,617 ) Purchase advance-related party, net 699,500 - - Tax recoverable 2,215,072 575,650 93,523 Prepaid expense (1,952,620 ) (146,708 ) (23,835 ) Prepaid expense - related party, net (366,000 ) 136,000 22,095 Trade accounts payable (4,521,395 ) 4,029,340 654,624 Trade accounts payable-related parties (1,344,513 ) (3,994,718 ) (648,999 ) Other payables (377,135 ) (199,612 ) (32,430 ) Other payables-related parties 3,140,416 (933,651 ) (151,685 ) Deferred income 90,309 1,038,442 168,710 Advances from customers (465,424 ) 330,685 53,724 Accrued payroll and employees' welfare 1,043,204 (1,575,159 ) (255,907 ) Accrued expenses 12,314 (285,679 ) (46,413 ) Taxes payable (2,927,192 ) 835,418 135,726 Net cash provided by (used in) operating activities 24,757,866 (7,960,044 ) (1,293,225 ) Cash flows from investing activities: Purchase of property and equipment (753,583 ) (477,957 ) (77,651 ) Long-term investment (1,549,450 ) - - Proceeds from disposal of equipment 162,000 141,716 23,024 Net cash used in investing activities (2,141,033 ) (336,241 ) (54,627 ) Cash flows from financing activities: Proceeds from short-term bank loans 10,000,000 23,500,000 3,817,910 Repayments of short-term bank loans (23,000,000 ) (23,500,000 ) (3,817,910 ) Proceeds from short-term borrowing 579,073 - - Proceeds from borrowings-related parties 1,962,450 5,007,728 813,577 Repayment of short-term borrowings (2,775,764 ) (570,375 ) (92,666 ) Repayment of short-term borrowings-related parties (582,477 ) (5,303,279 ) (861,594 ) Proceeds from sale of common stock, net of issuance costs - 12,132,882 1,971,160 Proceeds from stock options exercised - 2,704,909 439,451 Capital contribution in VIE 20,000 - - Net cash provided by (used in) financing activities (13,796,718 ) 13,971,865 2,269,928 Effect of exchange rate fluctuation on cash and cash equivalents (3,006 ) 68,614 11,150 Net increase (decrease) in cash and cash equivalents 8,817,109 5,744,194 933,226 Cash and cash equivalents at beginning of year 3,533,283 12,350,392 2,006,497 Cash and cash equivalents at end of year ¥ 12,350,392 ¥ 18,094,586 $ 2,939,723 Supplemental cash flow information Interest paid ¥ 1,356,581 ¥ 939,416 $ 152,622 Income taxes paid ¥ 832,028 ¥ 704,982 $ 114,534 Non-cash investing and financing activities Issurance of common stock to prepay professional services - 1,002,721 165,142 The accompanying notes are an integral part of these consolidated financial statements. F- 6 RECON TECHNOLOGY, LTD NOTES TO THE 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 by Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (the “Founders”) as a company with limited liability. The Company provides oilfield specialized equipment, automation systems, tools, chemicals and field services to petroleum companies mainly 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 a 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. On November 19, 2011, the Company established one wholly owned subsidiary, Recon Investment Ltd. (“Recon-IN”) under the laws of HK. Other than the equity interest in Recon-IN, The Company does not own any assets or conduct any operations. The Company conducts its business through the following PRC legal entities that are 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”). Chinese laws and regulations currently do not prohibit or restrict foreign ownership in petroleum businesses. However, Chinese laws and regulations do prevent direct foreign investment in certain industries. On January 1, 2008, to protect the Company’s shareholders from possible future foreign ownership restrictions, the Founders, who also held the controlling interest of BHD and Nanjing Recon, reorganized the corporate and shareholding structure of these entities by entering into certain exclusive agreements with Recon-JN, which entitles Recon-JN to receive a majority of the residual returns. On May 29, 2009 Recon-JN and BHD and Nanjing Recon entered into an operating agreement to provide full guarantee for the performance of such contracts, agreements or transactions entered into by BHD and Nanjing Recon. As a result of the new agreement, Recon-JN absorbs 100% of the expected losses and receives 90% of the expected gains of BHD and Nanjing Recon, which resulted in Recon-JN being the primary beneficiary of these Companies. Recon-JN also entered into Share Pledge Agreements with the Founders, who pledged all their equity interest in these entities to Recon-JN. The Share Pledge Agreements, which were entered into by each Founder, pledged each of the Founders’ equity interest in BHD and Nanjing Recon as a guarantee for the service payment under the Exclusive Technical consulting Services Agreement (the “Services Agreement”). The Service Agreement, entered into on January 1, 2008, between Recon-JN and BHD and Nanjing Recon, states that Recon-JN will provide technical consulting services to BHD and Nanjing Recon in exchange for 90% of their annual net profits as a service fee, which is to be paid quarterly. In addition, Recon-HK entered into Option Agreements to allow Recon-HK to acquire the Founders’ interest in these entities if or when permitted by the PRC laws. Based on these exclusive agreements, the Company consolidated BHD and Nanjing Recon as VIEs as required by Accounting Standards Codification (“ASC”) Topic 810, Consolidation because the Company was the primary beneficiary of the VIEs. Management makes ongoing reassessment of whether Recon-JN is the primary beneficiary of BHD and Nanjing Recon. On August 28, 2000, a Founder of the Company purchased a controlling interest in BHD which was organized under the laws of the PRC on June 29, 1999. Through December 15, 2010, the Founders held a 67.5% ownership interest in BHD. From December 16, 2010 to June 30, 2012, Messers. Yin Shenping and Chen Guangqiang held an 86.24% ownership interest of BHD. BHD is combined with the Company through the date of the exclusive agreements, and has been consolidated following January 1, 2008, the date of the agreements based on ASC Topic 810. The Company allocates profits and losses 90% and 100%, respectively, based upon the control agreements. Profits allocated to the minority interest are the remaining amount (10%). F- 7 On July 4, 2003, Nanjing Recon was organized under the laws of the PRC. On August 27, 2007, the Founders of the Company purchased a majority ownership of Nanjing Recon from a related party who was a majority owner of Nanjing Recon. Through December 15, 2010, the Founders held 80% ownership interest in Nanjing Recon. From December 16, 2010 to June 30, 2012, Messers. Yin Shenping and Chen Guangqiang held 80% ownership interest of Nanjing Recon. Nanjing Recon is combined with the Company through the date of the exclusive agreements, and is consolidated following January 1, 2008, the date of the agreements based on ASC Topic 810. The Company allocates profits and losses 90% and 100%, respectively, based upon the control agreements. Profits allocated to the non-controlling interest are the remaining amount (10%). 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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and have been consistently applied. Principles of Consolidation - The consolidated financial statements include the accounts of the Company, all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation. 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. The Company performs ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previously identified as a VIE continues to be a VIE and whether the Company continues to be the primary beneficiary. Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs. F- 8 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 consolidated financial statements as of and for the year ended June 30, 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 ¥6.1552 = US$1.00, the approximate exchange rate prevailing on June 30, 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 accounting estimates reflected in the Company’s consolidated financial statements include revenue recognition, allowance for doubtful accounts, deferred taxes, warrants liability, the useful lives of property and equipment and the fair value of share- 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 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. (See Note 8.) The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs (See Note 13). F- 9 Cash and Cash Equivalents - Cash and cash equivalents are comprised of cash on hand, demand deposits and highly liquid short-term debt investments with stated original maturities of no more than three months. Since a majority of the bank accounts are located in the PRC, those bank balances are uninsured. Trade Accounts and Other Receivables - Accounts receivable are carried at original invoiced amount less a provision for any potential uncollectible amounts. Accounts are considered past due when the related receivables are more than a year old. Provision is made against trade accounts and other receivables to the extent they are considered to be doubtful. Accounts are written off after extensive efforts at collection. Other receivables arise from transactions with non-trade customers. Purchase Advances - Purchase advances are the amounts prepaid to suppliers for purchases of inventory and are recognized as inventory when the final amount is paid to the suppliers and the inventory is delivered. Inventories - Inventories are stated at the lower of cost or market value, on a weighted average basis for BHD. Inventories are stated at the lower of cost or market value, on a first-in-first-out basis for Nanjing Recon and ENI. The methods of determining inventory costs are used consistently from year to year. Allowance for inventory obsolescence is provided when the market value of certain inventory items are lower than the cost. 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 Items Useful life Motor vehicles 5-10 years Office equipment 2-5 years Leasehold improvement 5 years 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 June 30, 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. F- 10 Hardware: Revenue from hardware sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer’s final acceptance of the arrangement. Software: The Company sells self-developed software. For software sales, the Company recognizes revenues in accordance with ASC Topic 985 - 605 “Software Revenue Recognition”. Revenue from software is recognized according to project contracts. Contract costs are accumulated during the periods of installation and testing or commissioning. Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance statements. Service: The Company provides services to improve software function and system operation on separated fixed-price contracts. Revenue is recognized on the completed contract method when acceptance is determined by a completion report signed by the customer. Deferred revenue represents unearned amounts billed to customers related to sales contracts. Subsidy Income - Grants are given by the government to support local software companies’ operation and research and development. Grants related to research and development projects are recognized as subsidy income in the unaudited condensed consolidated statements of operations when received. Grants in the form of value-added-tax refund for software products are recognized when received. Share-Based Compensation - The Company accounts for share-based compensation in accordance with ASC Topic 718, Share-Based Payment . Under the fair value recognition provisions of this topic, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses using the Binomial Lattice valuation model estimated at the grant date based on the award’s fair value. Income Taxes - Income taxes are provided based upon the liability method of accounting pursuant to ASC Topic 740, Accounting for Income Taxes . Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any income taxes in the United States or the Cayman Islands. Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Income tax returns for the year prior to 2010 are no longer subject to examination by tax authorities. Earnings (loss) per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net income (loss) by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding. 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 year ended June 30, 2014, there were 64,207 restricted shares included in the weighted average dilutive shares calculation. However, the effect from options and warrants would have been anti-dilutive due to the fact that the weighted average exercise price per share of options and warrants is higher than the weighted average market price per ordinary share during the years ended June 30, 2013 and 2014. F- 11 Reclassification – Certain accounts from prior period have been reclassified to confirm to the current period presentation. Recently Issued 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 retrospectively effective 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, the Company’s financial positions and results of operations. NOTE 3. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2013 June 30, 2014 June 30, 2014 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 42,993,298 ¥ 48,284,531 $ 7,844,510 Allowance for doubtful accounts (4,344,518 ) (4,730,794 ) (768,584 ) Total - third- party, net ¥ 38,648,780 ¥ 43,553,737 $ 7,075,926 June 30, 2013 June 30, 2014 June 30, 2014 Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 19,722,574 ¥ 5,441,498 $ 884,049 Beijing Langchen Construction Company - 726,800 118,080 Xiamen Huangsheng Hitek Computer Network Co. Ltd. - 100,000 16,246 Xiamen Hengda Hitek Computer Network Co. Ltd. - 1,211,000 196,744 Allowance for doubtful accounts (978,210 ) - - Total - related-parties, net ¥ 18,744,364 ¥ 7,479,298 $ 1,215,119 F- 12 Related Party June 30, 2013 June 30, 2014 June 30, 2014 Non-current portion RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ - ¥ 16,062,574 $ 2,609,595 Allowance for doubtful accounts - (1,606,257 ) (260,960 ) Total - related-parties, net ¥ - ¥ 14,456,317 $ 2,348,635 One of the Founders, Mr. Yin Shen ping, was the legal representative of Beijing Yabei Nuoda Science and Technology Co. Ltd (“Yabei Nuoda”) before December 2013. 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. Based on the repayment agreement signed on August 27, 2014, the outstanding balance will be collected in four years with each installment of ¥4,015,644. NOTE 4. OTHER RECEIVABLES, NET Other receivables consisted of the following: Third Party June 30, 2013 June 30, 2014 June 30, 2014 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 6,799,669 ¥ 2,523,145 $ 409,921 Loans to third parties (B) 8,440,639 8,979,408 1,458,833 Business advance to staff (C) 2,977,176 6,371,923 1,035,210 Deposits for projects 185,669 495,961 80,576 Others 1,210,230 373,622 60,700 Allowance for doubtful accounts (481,880 ) (451,016 ) (73,274 ) Total ¥ 19,131,503 ¥ 18,293,043 $ 2,971,966 Third Party June 30, 2013 June 30, 2014 June 30, 2014 Non-Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 3,502,680 ¥ 5,353,104 $ 869,688 Total ¥ 3,502,680 ¥ 5,353,104 $ 869,688 (A) After ENI ceased to be a VIE of the Company, ENI in January 2012 agreed to repay the loan on a payment schedule, with interest accrued during the period at an annual rate of 4%. In accordance with the payment schedule, the principal plus accrued interest is required to be repaid over approximately three years on a quarterly basis beginning March 2012. The first four payments are RMB 1.2 million each. In March, June, September and December of 2012, the Company received RMB 4.8 million. Starting March 2013, the installment for each quarter would be ¥1,777,653. The Company received the payments on time quarterly since March, 2013.The payments after one year are RMB5,353,104 ($ 869,688). F- 13 (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 June 30, 2014 June 30, 2014 Name of Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. 500,000 500,000 81,232 Beijing Langchen Construction Company - 913,780 148,457 Other-travel advances 242,528 653 106 Total ¥ 742,528 ¥ 1,414,433 $ 229,795 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 June 30, 2014 June 30, 2014 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 19,237,449 ¥ 27,119,326 $ 4,405,921 Allowance for doubtful accounts (824,942 ) (1,360,261 ) (220,994 ) Total ¥ 18,412,507 ¥ 25,759,065 $ 4,184,927 Below is a summary of purchase advances to related party. June 30, 2013 June 30, 2014 June 30, 2014 Related Party RMB RMB U.S. Dollars Xiamen Huangsheng Hitek Computer Network Co. Ltd. ¥ 394,034 ¥ 394,034 $ 64,016 Total ¥ 394,034 ¥ 394,034 $ 64,016 One of the Founders of the Company and his family member collectively own 57% of Xiamen Huasheng Haitian Computer Network Co. Ltd. Current ending balance of the purchase advances to Xiamen Huasheng Hitek is expect to be settled within one year. NOTE 6. INVENTORIES Inventories consisted of the following: June 30, 2013 June 30, 2014 June 30, 2014 RMB RMB U.S. Dollars Small component parts ¥ 45,314 ¥ 55,262 $ 8,978 Raw materials - 272,416 44,258 Work in process 1,356,755 1,665,447 270,576 Finished goods 11,869,001 12,343,477 2,005,373 Total inventories ¥ 13,271,070 ¥ 14,336,602 $ 2,329,185 There was no inventory obsolescence reserve at June 30, 2013 and 2014. F- 14 NOTE 7. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2013 June 30, 2014 June 30, 2014 RMB RMB U.S. Dollars Motor vehicles ¥ 2,683,250 ¥ 2,314,296 $ 375,990 Office equipment and fixtures 593,654 709,165 115,215 Total property and equipment 3,276,904 3,023,461 491,205 Less: Accumulated depreciation (1,567,058 ) (1,701,923 ) (276,502 ) Property and equipment, net ¥ 1,709,846 ¥ 1,321,538 $ 214,703 Depreciation expense was ¥618,552 and ¥595,647 ($96,771) for the years ended June 30, 2013 and 2014, respectively. NOTE 8. Long-term investment On June 28, 2013, the Company purchased 2,800,000 restricted shares of Avalon Oil and Gas, Inc. ("Avalon") for $0.089 per share, or approximately ¥1.5 million ($250,000). Since the restriction for the shares is for two years, the Company was able to acquire the shares at 50% of the market value. 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 June 30, 2013 and 2014, Recon owned 32.22% and 24.02% of Avalon’s outstanding shares, respectively. 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. However, based on the available information and discussion with the management team of Avalon, we believe Avalon’s operating loss would not be recovered in the foreseeable future, therefore, the Company believes the investment is impaired and recorded an investment loss of ¥ 1,535,250 ( $250,000) for the year ended June 30, 2014. NOTE 9. OTHER PAYABLES Other payables consisted of the following: June 30, 2013 June 30, 2014 June 30, 2014 Third Party RMB RMB U.S. Dollars Consulting services ¥ 1,199,716 ¥ 777,863 $ 126,375 Due to ENI (A) 148,000 - - Distributors and employees 580,648 973,707 158,193 Others 36,327 13,509 2,194 Total ¥ 1,964,691 ¥ 1,765,079 $ 286,762 (A) A former VIE of the Company, which ceased to be a VIE on December 16, 2010. F- 15 June 30, 2013 June 30, 2014 June 30, 2014 Related Party RMB RMB U.S. Dollars Due to related parties (1) ¥ 2,860,824 ¥ 2,560,648 $ 416,015 Expenses paid by the major shareholders 467,499 439,071 71,333 Due to family member of an owner of Recon 716,000 50,000 8,123 Due to management staff on behalf of Recon 195,352 256,305 41,640 Total ¥ 4,239,675 ¥ 3,306,024 $ 537,111 (1) Primarily includes an advance from Yabei Nuoda for RMB 61,301 and an advance from Xiamen Hengda Haitek for RMB 2,499,347 to supplement the Company’s working capital. The advance is payable on demand and non-interest bearing. NOTE 10. TAXES PAYABLE Taxes payable consisted of the following: June 30, 2013 June 30, 2014 June 30, 2014 RMB RMB U.S. Dollars VAT payable ¥ 2,802,890 ¥ 3,412,759 $ 554,451 Business tax payable 75,865 - - Enterprise income tax payable 3,850,288 4,134,210 671,661 Other taxes payable 25,385 42,877 6,967 Total taxes payable ¥ 6,754,428 ¥ 7,589,846 $ 1,233,079 NOTE 11. SHORT-TERM BANK LOAN Short-term bank loans consisted of the following: June 30, 2013 June 30, 2014 June 30, 2014 RMB RMB U.S. Dollars Communication Bank, 6.6% annual interest, due on October 25, 2013 ¥ 3,090,000 ¥ - ¥ - Communication Bank, 6.6% annual interest, due on November 15, 2013 1,910,000 - - Beijing Bank,5.75% annual interest, matured and paid off by February 25, 2014 ¥ 1,200,000 ¥ - $ - Beijing Bank, 5.75 % annual interest, matured and paid off by February 27, 2014 600,000 - - Beijing Bank, 5.75 % annual interest, paid off on April 9, 2014 1,200,000 - - Beijing Bank, 5.75 % annual interest, paid off on April 16, 2014 900,000 - - Beijing Bank,5.75 % annual interest, matured and paid off by March 11, 2014 1,100,000 - - Industrial and commercial bank, floating interest rate at 5.6%, due on December 24, 2014 - 2,000,000 324,929 Industrial and commercial bank, floating interest rate at 6.0%, due on June 24, 2015 - 8,000,000 1,299,714 Total short-term bank loans ¥ 10,000,000 ¥ 10,000,000 $ 1,624,643 Interest expense for the short-term bank loan was ¥1,243,914 and ¥624,096 ($101,393) for the years ended June 30, 2013 and 2014. F- 16 NOTE 12. SHORT-TERM BORROWINGS Short-term borrowings are generally extended upon maturity and consisted of the following: June 30, 2013 June 30, 2014 June 30, 2014 Short-term borrowings due to non-related parties: RMB RMB U.S. Dollars Short-term borrowing, 6% annual interest, matured 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 ¥47,360 and ¥1,525 ($248) for the year ended June 30, 2013 and 2014, respectively. June 30, 2013 June 30, 2014 June 30, 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, matured and paid off by December 21, 2013 3,653,906 - - Short-term borrowing from a Founder, 6.6% annual interest, due on November 25, 2014. 5,007,728 813,577 Short-term borrowing from a Founder's family member, 6% annual interest, matured 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 32,493 Short-term borrowings from management, 6% annual interest, matured and paid off by December 7, 2013 32,996 - - Total short-term borrowings due to related parties ¥ 5,503,279 ¥ 5,207,728 $ 846,070 Interest expense for short-term borrowings due to related parties was ¥217,884 and ¥326,953 ($53,118) for the years ended June 30, 2013 and 2014, respectively. Note 13 –WARRANTS 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). 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. F- 17 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: June 30, November 29, 2014 2013 Annual dividend yield - - Exercised price 5.38 5.38 Underlying price at grant date 3.86 3.86 Expected life (years) 2.42 3.00 Risk-free interest rate 0.88 % 0.56 % Expected volatility 220 % 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 June 30, 2014 June 30, 2014 June 30, 2014 Level 1 Level 2 Level 3 RMB USD Warrants liability ¥ - ¥ 5,021,621 ¥ - ¥ 5,021,621 $ 815,834 The following is a reconciliation of the beginning and ending balance of the warrants liability measured at fair value on a recurring basis for the year ended June 30, 2014: Change of warrants liability RMB USD Beginning balance – July 1 2012 and June 30, 2013 - - Initial measurement of warrants liability on November 29, 2013 ¥ 5,082,268 $ 825,687 Change of warrant liability from November 29, 2013 to June 30, 2014 (60,647 ) (9,853 ) Ending balance - June 30, 2014 ¥ 5,021,621 $ 815,834 F- 18 NOTE 14. SHAREHOLDERS’ EQUITY Registered direct 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 are exercisable immediately 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 issuance date. In addition to the above warrants issued to the placement agent, the Company granted 170,000 shares of warrants on connection with its IPO offering, and none of these warrants was exercised during the years ended June 30, 2013 and 2014. 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 2014, the balance of total statutory reserves was ¥3,023,231 and ¥4,148,929 ($674,053), respectively. On April 1, 2014, shareholders of BHD and a 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 documents to the registration authority for approval. The increase in the registered capital will be paid for by Mr. Chen Guangqiang, CTO of the Company, and the funds should be in place no later than December 31, 2014. 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 20% vesting on each anniversary to the grant date. 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- 19 The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The grant date fair value of the options was ¥30.17 ($4.42) per share. 2012 Options Plan – T he Company granted options to purchase 415,000 ordinary shares to its employees and non-employee director on March 26, 2012. The options have an excise price of $2.96, which was equal to the share price of the Company’s ordinary shares at March 26, 2012, and will vest over a period of five years, with 20% vesting each anniversary of the grant date. The options will 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, 2012 and June 30, 2013 608,000 $3.93 Granted - - Forfeited (44,000) (2.96) Exercised (1) (148,400) (2.96) Outstanding as of June 30, 2014 415,600 $4.37 (1) 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 June 30, 2014, other employees exercised their stock options to purchased 96,400 shares of the Company’s common stock for RMB 1,756,349 ($285,344). The following is a summary of the status of options outstanding and exercisable at June 30, 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 5.08 $6.00 154,400 5.08 $2.96 222,600 7.74 - - - For the year ended June 30, 2014, the Company has granted restricted shares of common stock to senior management and consultants as follows: On September 30 2013, the Company granted 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. F- 20 On May 7, 2014, the Company granted 40,625 restricted shares to a consulting firm for consulting services. The total value amounted to ¥1,002,362 ($162,906), based on the stock closing price of $4.01 at May 7, 2014. 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 vest 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 to the Company’s officers were ¥771,549 ($125,639) for the year ended June 30, 2014. Total unrecognized share-based compensation expense for these shares as of June 30, 2014 was approximately ¥3.5 million ($0.6 million), which are expected to be recognized over a weighted average period of approximately 2.46 years. The Share-based compensation expense recorded for stock options granted were ¥1,852,656 and ¥1,657,479 ($269,904) for the years ended June 30, 2013 and 2014, respectively. The total unrecognized share-based compensation expense for stock options as of June 30, 2014 was approximately ¥2.3 million ($0.4 million), which is expected to be recognized over a weighted average period of approximately 2.64 years. Following is a summary of the restricted stock grants: Restricted stock grants Shares Nonvested as of June 30, 2013 - Granted 300,987 Forfeited - Vested (70,625 ) Nonvested as of June 30, 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. The Company follows Implementing Rules for the Enterprise Income Tax Law (“Implementing Rules”), which took effect on January 1, 2008 and unified the income tax rate for domestic-invested and foreign-invested enterprises at 25%. The Company reapplied for high-technology enterprise approval and has passed all relevant reviews. Thus, 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. F- 21 Deferred tax asset is comprised of the following: June 30, 2013 June 30, 2014 June 30, 2014 RMB RMB U.S. Dollars Allowance for doubtful receivables ¥ 1,006,721 ¥ 1,209,961 $ 196,575 Total deferred income tax assets ¥ 1,006,721 ¥ 1,209,961 $ 196,575 Deferred tax liability is comprised of the following: June 30, 2013 June 30, 2014 June 30, 2014 RMB RMB U.S. Dollars Temporary difference - accounts payable ¥ - ¥ 180,186 $ 29,274 Total deferred income tax liability ¥ - ¥ 180,186 $ 29,274 Following is a reconciliation of income tax at the effective rate to income tax at the calculated statutory rates: For the year ended June 30, 2013 For the year ended June 30, 2014 For the year ended June 30, 2014 RMB RMB U.S. Dollars Income tax calculated at statutory rates ¥ 1,685,433 ¥ 3,073,289 $ 499,300 Nondeductible expenses (non-taxable income) (187,280 ) 115,054 18,691 Benefit of favorable rate for high-technology companies (116,334 ) (1,229,316 ) (199,720 ) Benefit of revenue exempted from enterprise income tax (1,207,316 ) (794,651 ) (129,102 ) Deferred income taxes provision 12,288 - - Deferred income tax (benefit) 100,080 (203,240 ) (33,019 ) Provision for income tax ¥ 286,871 ¥ 961,136 $ 156,150 F- 22 The Company’s tax provision is comprised of the following: For the years ended June 30, 2013 2014 2014 RMB RMB U.S. Dollars Current income tax provision ¥ 186,791 ¥ 1,164,376 $ 189,169 Deferred income taxes provision (benefit) 100,080 (203,240 ) (33,019 ) Provision for income tax ¥ 286,871 ¥ 961,136 $ 156,150 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 June 30, 2014 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 300,721 Unappropriated retained earnings 3,152,687 3,250,513 6,403,200 1,040,291 Accumulated other comprehensive loss (16,863 ) (11,853 ) (28,721 ) (4,664 ) Total non-controlling interest ¥ 4,786,824 ¥ 3,438,660 ¥ 8,225,479 $ 1,336,348 F- 23 NOTE 18. CONCENTRATIONS For the year ended June 30, 2013, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented approximately 27.88%, and 45.99%. For the year ended June 30, 2014, the three largest customers, China National Petroleum Corporation (“CNPC”), China Petroleum & Chemical Corporation Limited (“SINOPEC”), and Wuhan Xin Tian Network System Integration Co., Ltd., represented approximately 42.79%,19.63%, and 13.36% of the Company’s revenue. For the year ended June 30, 2013, one supplier, Hebei Huanghua Xiangtong Technical Co. Ltd, accounted for 21.17% of the company’s total purchases. For the year ended June 30, 2014, two major suppliers accounted for 32.46% of the company’s total purchases. NOTE 19. COMMITMENTS AND CONTINGENCY (a) Office Leases The Company leases three offices in Beijing (two for BHD; one for Recon-JN) and one office in Nanjing for Nanjing Recon. Future payments under such leases are as follows as of June 30, 2014: Twelve months ended June 30, Office lease payment RMB U.S. Dollars 2015 ¥ 980,000 $ 159,215 2016 180,000 29,244 Total ¥ 1,160,000 $ 188,459 (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 June 30, 2014, the Company estimated its severance payments of approximately ¥1.3 million ($0.2 million) which has not been reflected in its consolidated financial statements, because management cannot predict what the actual payment, if any will be in the future. NOTE 20. RELATED PARTY TRANSACTIONS AND BALANCES Sales to related parties – sales to related parties consisted of the following: For the years ended June 30, 2013 2014 2014 RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 8,815,773 ¥ 4,680,389 $ 760,396 Beijing Langchen Construction Company - 640,000 103,977 Xiamen Hengda Haitian computer network Inc 897,436 1,334,188 216,758 Xiamen Huangsheng Hitek Computer Network Co. Ltd. - 85,470 13,886 Revenues from related parties ¥ 9,713,209 ¥ 6,740,047 $ 1,095,017 F- 24 Purchases from related parties – purchases from related parties consisted of the following: For the years ended June 30, 2013 2014 2014 RMB RMB U.S. Dollars Huanghua Xiang Tong Manufacture ¥ 9,247,580 ¥ - $ - Beijing Yabei Nuoda Science and Technology Co. Ltd. - - - Xiamen Huangsheng Hitek Computer Network Co. Ltd. 512,393 - - Nanjing Youkong Information Technology Co., Ltd - - - Purchase from related parties ¥ 9,759,973 ¥ - $ - 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 ¥95,000 with 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, 2014, 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. Short-term borrowings from related parties - The Company borrowed ¥5,503,279 and ¥5,207,728 ($846,070) from the Founders, their family members and senior officers as of June 30, 2013 and 2014, respectively. For the specific terms and interest rates of the borrowings, 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 June 30, 2014. Prepaid expenses - related parties - The Company paid ¥366,000 and ¥230,000 ($37,367) in advance for rental to Mr. Chen and his family member as of June 30, 2013 and June 30, 2014. 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 June 30, 2014, ¥467,499 and ¥284,370($46,200) was due to them, respectively. NOTE 21. Variable Interest Entities Summary information regarding consolidated VIEs is as follows: June 30, 2013 June 30, 2014 June 30, 2014 RMB RMB U.S. Dollars ASSETS Current Assets Cash and cash equivalents ¥ 10,341,778 ¥ 14,021,653 $ 2,278,017 Trade accounts receivable, net 57,393,144 51,033,035 8,291,044 Notes receivable 2,578,855 - - Purchase advances 17,862,507 24,600,379 3,996,682 Other assets 29,974,454 34,097,774 5,539,670 Total current assets ¥ 118,150,738 ¥ 123,752,841 $ 20,105,413 Non-current assets 1,705,940 15,758,115 2,560,130 Total Assets ¥ 119,856,678 ¥ 139,510,956 $ 22,665,543 F- 25 LIABILITIES Trade accounts payable ¥ 11,378,883 ¥ 11,413,505 $ 1,854,287 Taxes payable 6,754,428 7,589,846 1,233,079 Other liabilities 24,770,161 21,878,699 3,554,507 Total current liabilities 42,903,472 40,882,050 6,641,873 Total Liabilities ¥ 42,903,472 ¥ 40,882,050 $ 6,641,873 The financial performance of VIEs reported in the consolidated statement of operations and comprehensive income for the year ended June 30, 2014 includes revenues of ¥93,447,108 ($15,181,815), operating expenses of ¥21,211,185 ($3,446,059), other income of ¥1,087,482 ($176,677) and net profit of ¥11,332,021 ($1,841,048). NOTE 22. EARNINGS PER SHARE The computation of basic and diluted earnings per common share is as follows: For the years ended June 30, 2013 2014 2014 RMB RMB U.S. Dollars BASIC Weighted average number of common shares outstanding used in computing basic earnings per share 3,951,811 4,303,955 4,303,955 Net income ¥ 39,698 ¥ 807,188 $ 131,140 Earnings per share ¥ 0.01 ¥ 0.19 $ 0.03 DILUTED Weighted average number of common shares outstanding used in computing basic earnings per share 3,951,811 4,303,955 4,303,955 Add: Assumed exercise of stock options, stock awards and warrants - 64,207 64,207 Weighted average number of common shares outstanding 3,951,811 4,368,162 4,368,162 Net income ¥ 39,698 ¥ 807,188 $ 131,140 Earnings per share ¥ 0.01 ¥ 0.18 $ 0.03 Note 23 SUBSEQUENT EVENTS On July 19, 2014, the Company granted 50,000 restricted shares to a non-affiliate as compensation for certain consulting service. The fair value of the restricted shares was $190,000. On July 19, 2014, the Company decided to cancel 40,625 restricted shares, which was issued to Expert Asia Investment Ltd. on May 8, 2014, as the services were not provided pursuant to the agreement it had with the Company. F- 26