Recon Technology, Ltd 10-Q

Item 5. Other Information. None. Item 6. Exhibits. The following exhibits are filed herewith: Exhibit Number Document 3.1 Amended and Restated Articles of Association of the Registrant (1) 3.2 Amended and Restated Memorandum of Association of the Registrant (1) 4.1 Specimen Share Certificate (1) 10.1 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.2 Translation of Power of Attorney for rights of Chen Guangqiang in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.3 Translation of Power of Attorney for rights of Yin Shenping in Beijing BHD Petroleum Technology Co., Ltd. (1) 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) 18 10.7 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.8 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.9 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.10 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.11 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Jining ENI Energy Technology Co., Ltd. (1) 10.12 Translation of Power of Attorney for rights of Chen Guangqiang in Jining ENI Energy Technology Co., Ltd. (1) 10.13 Translation of Power of Attorney for rights of Yin Shenping in Jining ENI Energy Technology Co., Ltd. (1) 10.14 Translation of Power of Attorney for rights of Li Hongqi in Jining ENI Energy Technology Co., Ltd. (1) 10.15 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.16 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.17 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.18 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.19 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.20 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.21 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Nanjing Recon Technology Co., Ltd. (1) 10.22 Translation of Power of Attorney for rights of Chen Guangqiang in Nanjing Recon Technology Co., Ltd. (1) 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) 19 10.27 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.28 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.29 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.30 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.33 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Yin Shenping (1) 10.34 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Chen Guangqiang (1) 10.35 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Li Hongqi (1) 10.36 Operating Agreement among Recon Technology (Jining) Co. Ltd., Nanjing Recon Technology Co., Ltd. and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.37 Operating Agreement among Recon Technology (Jining) Co. Ltd., Jining ENI Energy Technology Co., Ltd., and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.38 Operating Agreement among Recon Technology (Jining) Co. Ltd., Beijing BHD and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 21.1 Subsidiaries of the Registrant (2) 99.1 Stock Option Plan (1) 99.2 Code of Business Conduct and Ethics (1) 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) 101.INS XBRL Instance Document (3) 101.SCH XBRL Taxonomy Extension Schema Document (3) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (3) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (3) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (3) 20 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (3) (1) Incorporated by reference to the Company’s Registration Statement on Form S-1, Registration No. 333-152964. (2) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A, filed on January 31, 2012. (3) Filed herewith. 21 SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RECON TECHNOLOGY, LTD November 13, 2014 By: /s/ Yin Shen ping Yin Shen ping Chief Executive Officer (Principal Executive Officer) November 13, 2014 By: /s/ Liu Jia Liu Jia Chief Financial Officer (Principal Financial and Accounting Officer) RECON TECHNOLOGY, LTD INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE Unaudited Condensed Consolidated Balance Sheets as of June 30, 2014 and September 30, 2014 F-2 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2013 and 2014 F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2013 and 2014 F-4 Notes to Unaudited Condensed Consolidated Financial Statements F-5 F- 1 RECON TECHNOLOGY, LTD UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS As of June 30, As of September 30, As of September 30, 2014 2014 2014 RMB RMB U.S. Dollars ASSETS Current assets Cash and cash equivalents ¥ 18,094,586 ¥ 6,030,111 $ 979,964 Trade accounts receivable, net 43,553,737 38,445,529 6,247,851 Trade accounts receivable- related parties, net 7,479,298 7,934,047 1,289,376 Inventories, net 14,336,602 17,216,371 2,797,863 Other receivables, net 18,293,043 22,759,066 3,698,616 Other receivables- related parties 1,414,433 - - Purchase advances, net 25,759,065 26,500,238 4,306,601 Purchase advances- related parties 394,034 1,500,000 243,767 Prepaid expenses 2,634,664 4,388,693 713,214 Prepaid expenses - related parties 230,000 - - Deferred tax asset 1,209,961 1,211,995 196,963 Total current assets 133,399,423 125,986,050 20,474,215 Property and equipment, net 1,321,538 1,296,199 210,648 Long-term trade accounts receivable, net 14,456,317 13,588,962 2,208,366 Long-term other receivable 5,353,104 4,706,703 764,895 Total Assets ¥ 154,530,382 ¥ 145,577,914 $ 23,658,124 LIABILITIES AND EQUITY Current liabilities Short-term bank loans ¥ 10,000,000 ¥ 8,000,000 $ 1,300,094 Trade accounts payable 11,413,505 9,846,517 1,600,175 Trade accounts payable- related parties - 389,143 63,240 Other payables 1,765,079 1,041,711 169,290 Other payable- related parties 3,306,024 3,441,336 559,258 Deferred revenue 4,419,824 4,136,518 672,233 Advances from customers 801,385 282,035 45,834 Accrued payroll and employees' welfare 417,624 446,297 72,529 Accrued expenses 203,051 217,106 35,281 Taxes payable 7,589,846 6,830,082 1,109,969 Short-term borrowings- related parties 5,207,728 5,209,561 846,615 Deferred tax liability 180,186 180,186 29,282 Warrants liability 5,021,621 4,745,754 771,241 Total current liabilities 50,325,873 44,766,246 7,275,041 Commitments and Contingency Equity Common stock, ($ 0.0185 U.S. dollar par value, 25,000,000 shares authorized; 4,717,336 and 4,726,711 shares issued and outstanding as of June 30, 2014 and September 30, 2014, respectively) 616,865 617,943 100,421 Additional paid-in capital 83,061,058 83,829,527 13,623,286 Appropriated retained earnings 4,148,929 4,148,929 674,250 Unappropriated retained earnings 8,431,453 4,269,908 693,910 Accumulated other comprehensive loss (279,275 ) (280,077 ) (45,518 ) Total shareholders’ equity 95,979,030 92,586,230 15,046,349 Non-controlling interest 8,225,479 8,225,438 1,336,734 Total equity 104,204,509 100,811,668 16,383,083 Total Liabilities and Equity ¥ 154,530,382 ¥ 145,577,914 $ 23,658,124 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 2 RECON TECHNOLOGY, LTD UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the three months ended September 30, 2013 2014 2014 RMB RMB USD Revenues Hardware and software ¥ 11,097,092 ¥ 4,245,509 $ 689,945 Service - 58,491 9,505 Hardware and software - related parties 415,618 - - Total revenues 11,512,710 4,304,000 699,450 Cost of revenues Hardware and software ¥ 6,118,674 ¥ 3,688,686 $ 599,455 Hardware and software - related parties 102,936 - - Total cost of revenues 6,221,610 3,688,686 599,455 Gross profit 5,291,100 615,314 99,995 Selling and distribution expenses 1,353,922 700,790 113,887 General and administrative expenses 2,741,923 3,703,291 601,828 Research and development expenses 692,600 656,729 106,726 Operating expenses 4,788,445 5,060,810 822,441 Income (loss) from operations 502,655 (4,445,496 ) (722,446 ) Other income (expenses) Subsidy income 333,712 214,703 34,892 Interest income 103,201 83,032 13,494 Interest expense (221,259 ) (241,844 ) (39,302 ) Loss from investment (374,614 ) - - Change in fair value of warrants liability - 274,399 44,593 Gain (loss) from foreign currency exchange 94,300 (2,074 ) (337 ) Other expense (24,314 ) (14,020 ) (2,278 ) Other income (expenses) (88,974 ) 314,196 51,062 Income (loss) before income tax 413,681 (4,131,300 ) (671,384 ) Provision for income tax 207,327 30,245 4,915 Net Income (loss) 206,354 (4,161,545 ) (676,299 ) Less: Net income attributable to non-controlling interest 159,910 - - Net Income (loss) attributable to Recon Technology, Ltd ¥ 46,444 ¥ (4,161,545 ) $ (676,299 ) Comprehensive income (loss) Net income (loss) 206,354 (4,161,545 ) (676,299 ) Foreign currency translation adjustment (5,604 ) (802 ) (138 ) Comprehensive income (loss) 200,750 (4,162,347 ) (676,437 ) Less: Comprehensive income attributable to non-controlling interest 159,349 (41 ) (14 ) Comprehensive income (loss) attributable to Recon Technology, Ltd ¥ 41,401 ¥ (4,162,306 ) $ (676,423 ) Earnings per common share - basic and diluted ¥ 0.01 ¥ (0.87 ) $ (0.14 ) Weighted - average shares -basic and diluted 3,951,811 4,757,112 4,757,112 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 3 RECON TECHNOLOGY, LTD unaudited condensed Consolidated Statements of Cash Flows For the three months ended September 30, 2013 2014 2014 RMB RMB U.S. Dollars Cash flows from operating activities: Net income (loss) ¥ 206,354 ¥ (4,161,545 ) $ (676,299 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 150,368 121,347 19,720 Provision/(recovery of) for doubtful accounts 84,728 (68,361 ) (11,109 ) Share based compensation 414,954 600,578 97,601 Loss from investment 374,614 - - Deferred tax provision/(benefit) 11,868 (2,034 ) (331 ) Change in fair value of warrants liability - (274,399 ) (44,593 ) Restricted shares issued to consulting firm - 1,171,331 190,355 Changes in operating assets and liabilities: Trade accounts receivable 2,568,115 5,087,718 826,814 Trade accounts receivable-related parties 263,726 508,979 82,715 Inventories (4,673,420 ) (2,879,769 ) (467,996 ) Notes receivable 2,578,855 - - Other receivable, net (1,703,837 ) (3,818,122 ) (620,491 ) Other receivables related parties, net (428,699 ) 1,414,433 229,862 Purchase advance, net (2,097,795 ) (1,752,557 ) (284,811 ) Purchase advance-related party, net - (1,105,966 ) (179,733 ) Tax recoverable (199,225 ) - - Prepaid expense (224,273 ) (1,754,029 ) (285,050 ) Prepaid expense - related party, net - 230,000 37,378 Trade accounts payable 1,090,211 (1,566,988 ) (254,654 ) Trade accounts payable-related parties (3,994,718 ) 389,143 63,240 Other payables (1,013,574 ) (723,368 ) (117,556 ) Other payables-related parties (1,568,907 ) 135,312 21,990 Deferred income 78,484 (283,306 ) (46,041 ) Advances from customers (35,385 ) (519,350 ) (84,400 ) Accrued payroll and employees' welfare 136,258 28,673 4,660 Accrued expenses 9,543 14,055 2,284 Taxes payable 11,396 (759,764 ) (123,471 ) Net cash used in operating activities (7,960,359 ) (9,967,989 ) (1,619,916 ) Cash flows from investing activities: Purchase of property and equipment (6,720 ) (96,008 ) (15,602 ) Net cash used in investing activities (6,720 ) (96,008 ) (15,602 ) Cash flows from financing activities: Proceeds from short-term bank loans 7,560,000 - - Repayments of short-term bank loans - (2,000,000 ) (325,024 ) Repayment of short-term borrowings (40,000 ) - - Repayment of short-term borrowings-related parties (5,236,377 ) - - Net cash provided by (used in) financing activities 2,283,623 (2,000,000 ) (325,024 ) Effect of exchange rate fluctuation on cash and cash equivalents 14,967 (478 ) (77 ) Net decrease in cash and cash equivalents (5,668,489 ) (12,064,475 ) (1,960,619 ) Cash and cash equivalents at beginning of period 12,350,392 18,094,586 2,940,583 Cash and cash equivalents at end of period ¥ 6,681,903 ¥ 6,030,111 $ 979,964 Supplemental cash flow information Cash paid during the period for interest ¥ 212,187 ¥ 230,035 $ 37,383 Cash paid during the period for taxes ¥ - ¥ 32,280 $ 5,246 Non-cash investing and financing activities Cancelation of prior issuance of 40,625 shares of common stock for professional services - 1,002,721 162,954 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. F- 4 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS Organization – Recon Technology, Ltd (the “Company”) was incorporated under the laws of the Cayman Islands on August 21, 2007 as a company with limited liability. The Company provides oilfield specialized equipment, automation systems, tools, chemicals and field services to petroleum companies in the People’s Republic of China (the “PRC”). Its wholly owned subsidiary, Recon Technology Co., Limited (“Recon-HK”) was incorporated on September 6, 2007 in Hong Kong. Other than the equity interest in Recon-HK, the Company does not own any assets or conduct any operations. On November 15, 2007, Recon-HK established one wholly owned subsidiary, Jining Recon Technology Ltd. (“Recon-JN”) under the laws of the PRC. Other than the equity interest in Recon-JN, Recon-HK does not own any assets or conduct any operations. 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 were consolidated as variable interest entities (“VIEs”) and operate in the Chinese oilfield equipment & service industry: 1. Beijing BHD Petroleum Technology Co., Ltd. (“BHD”), and 2. Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”). Nature of Operations – The Company engaged in (1) providing equipment, tools and other hardware related to oilfield production and management, including simple installations in connection with some projects; (2) service to improve production and efficiency of exploited oil wells, and (3) developing and selling its own specialized industrial automation control and information solutions. The products and services provided by the Company include: High-Efficiency Heating Furnaces - High-Efficiency Heating Furnaces are designed to remove the impurities and to prevent solidification blockage in transport pipes carrying crude petroleum. Crude petroleum contains certain impurities including water and natural gas, which must be removed before the petroleum can be sold. Multi-Purpose Fissure Shaper - Multipurpose fissure shapers improve the extractors’ ability to test for and extract petroleum which requires perforation into the earth before any petroleum extractor can test for the presence of oil. Horizontal Multistage Fracturing related Service - The Company mainly uses Baker Hughes FracPoint™ system and provides related service to oilfield companies. The Baker Hughes FracPoint™ system provided a completion method using packers to isolate sections of the wellbore (stages) and frac sleeves to direct the frac treatment to the desired stage. The use of this type of completion eliminated the need for cementing the liner, coiled tubing operations, and wireline operations, while significantly reducing overall pumping time. Supervisory Control and Data Acquisition System (“SCADA”) - SCADA is an industrial computerized process control system for monitoring, managing and controlling petroleum extraction. SCADA integrates underground and aboveground activities of the petroleum extraction industry. This system can help to manage the oil extraction process in real-time to reduce the costs associated with extraction. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and have been consistently applied. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2014. The results of operations for the interim periods presented may not be indicative of the operating results to be expected for the Company’s fiscal year ending June 30, 2015. Variable Interest Entities - A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. We perform ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previous identified as a VIE continues to be a VIE and whether we continue to be the primary beneficiary. F- 5 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Currency Translation - The Company’s functional currency is the Chinese Yuan (“RMB”) and the accompanying consolidated financial statements have been expressed in Chinese Yuan. The statements as of and for the three months period ended September 30, 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 ¥6.1534 = US$1.00, the approximate exchange rate prevailing on September 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 estimates include revenue recognition, allowance for doubtful accounts, the useful lives of property and equipment, deferred income tax, warrants liability and the fair value of stock based payments. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Fair Values of Financial Instruments - The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs are defined as follows: Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable. The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable, accrued liabilities, advances from customers, short-term bank loan and short-term borrowings approximate fair value because of the immediate or short-term maturity of these financial instruments. Long-term borrowings approximate fair value because the interest rate charged approximates the market rate. Long-term other receivables approximate fair value because interest rate approximates the market rate. Long-term investment is carried at less than fair value, with fair value determined using level 1 inputs. (See Note 8.) The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs (See Note 13). Cash and Cash Equivalents - Cash and cash equivalents are comprised of cash on hand, demand deposits and highly liquid short-term debt investments with stated original maturities of no more than three months. Since a majority of the bank accounts are located in the PRC, those bank balances are uninsured. 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. F- 6 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. Property and Equipment - Property and equipment are stated at cost. Depreciation on motor vehicles and office equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets. Long-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, 2014 and September 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. 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 1) by the government to support local software companies’ operation and research and development and 2) by some local government to support development of selected middle and small-sized enterprises. Grants related to research and development projects are recognized as subsidy income in the unaudited condensed consolidated statements of operations when received. Grants in the form of value-added-tax refund for software products are recognized when received. F- 7 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Share-Based Compensation - The Company accounts for share-based compensation in accordance with ASC Topic 718, Share-Based Payment . Under the fair value recognition provisions of this topic, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses mainly using the Black-Scholes valuation model estimated at the grant date based on the award’s fair value. Income Taxes - Income taxes are provided based upon the liability method of accounting pursuant to ASC Topic 740, Accounting for Income Taxes . Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any income taxes in the United States or the Cayman Islands. Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Income tax returns for the years prior to 2010 are no longer subject to examination by tax authorities. Earnings (loss) per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net income (loss) attributable to ordinary shareholders by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding. 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). The effect from options and warrants would have been anti-dilutive due to the fact that the exercise prices were higher than the average stock price during the three months ended September 30, 2013. The effect from options, restricted shares and warrants would have been anti-dilutive due to the fact that we incurred a net loss during the three months ended September 30, 2014. Recently Issued Accounting Pronouncements - In June 2014, the FASB issued ASU 2014-12, “Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Prior the issuance of ASU 2014-12, U.S. GAAP did not contain explicit guidance on how to account for those share-based payments. Many reporting entities accounted for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, did not reflect the performance target in the estimate of the grant-date fair value of the award. Other reporting entities treated those performance targets as non-vesting conditions that affected the grant-date fair value of the award. We currently treat performance targets that affect vesting as a performance condition and as such, it is not included in the grant-date fair value. Therefore, the impact upon adoption would not be material to our consolidated financial position or results of operations. The amendments in ASU 2014-12 are effective for fiscal years and interim periods within those years, beginning after December 15, 2015. Earlier application is permitted. The Company does not expect the adoption of his guidance will have a significant impact on the Company’s unaudited condensed consolidated financial statements . In August 2014, The FASB issued ASU 2014-15, “'Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. Further, an entity must provide certain disclosures if "conditions or events raise substantial doubt about an entity’s ability to continue as a going concern." The amendments in ASU 2014-15 are effective for annual periods beginning after 15 December 2015, and interim periods thereafter, with early adoption permitted. The Company does not expect the adoption of his guidance will have a significant impact on the Company’s unaudited condensed consolidated financial statements. The Company does not expect the adoption of this guidance will have a significant impact on the Company’s unaudited condensed consolidated financial statements. In November 2014, The FASB issued Accounting Standards Update (ASU) No. 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity,” in response to the EITF’s final consensus on Issue 13-G. The ASU requires an entity to “determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of the relevant facts and circumstances” (commonly referred to as the whole-instrument approach). The ASU applies to all entities and is effective for annual periods beginning after December 15, 2015, and interim periods thereafter. Early adoption is permitted. The Company is currently in the process of evaluating the impact of this new standard update. F- 8 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2014 September 30, 2014 September 30, 2014 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 48,284,531 ¥ 43,196,812 $ 7,019,990 Allowance for doubtful accounts (4,730,794 ) (4,751,283 ) (772,139 ) Total - third- party, net ¥ 43,553,737 ¥ 38,445,529 $ 6,247,851 June 30, 2014 September 30, 2014 September 30, 2014 Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 5,441,498 ¥ 5,805,226 $ 943,418 Beijing Langchen Construction Company 726,800 817,821 132,906 Xiamen Huangsheng Hitek Computer Network Co.Ltd. 100,000 100,000 16,250 Xiamen Henda Hitek Computer Network Co. Ltd. 1,211,000 1,211,000 196,802 Total - related-parties, net ¥ 7,479,298 ¥ 7,934,047 $ 1,289,376 Related Party June 30, 2014 September 30, 2014 September 30, 2014 Non-Current Portion RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 16,062,574 ¥ 15,098,847 $ 2,453,741 Allowance for doubtful accounts (1,606,257 ) (1,509,885 ) (245,375 ) Total - related-parties, net ¥ 14,456,317 ¥ 13,588,962 $ 2,208,366 One of the Founders, Mr. Yin Shenping, was the legal representative of Beijing Yabei Nuoda Science and Technology Co. Ltd (“Yabei Nuoda”) before December 2013, and Chairman as of end of the quarter ended September 30, 2014. On October 30, 2014, Mr. Yin resigned from the chairman position and thus Yabei Nuoda is not related party of the Company after October 30, 2014. Mr. Yin 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, 2014 September 30, 2014 September 30, 2014 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,523,145 ¥ 3,247,154 $ 527,701 Loans to third parties (B) 8,979,408 9,846,653 1,600,197 Business advance to staff (C) 6,371,923 9,001,334 1,462,823 Deposits for projects 495,961 472,372 76,766 Others 373,622 641,069 104,181 Allowance for doubtful accounts (451,016 ) (449,516 ) (73,052 ) Total ¥ 18,293,043 ¥ 22,759,066 $ 3,698,616 F- 9 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Third Party June 30, 2014 September 30, 2014 September 30, 2014 Non-Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 5,353,104 ¥ 4,706,703 $ 764,895 Total ¥ 5,353,104 ¥ 4,706,703 $ 764,895 (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, installments for each quarter would be ¥1,777,653. The Company has received the payments on time in March and June, 2013. On September 30, 2013, ENI proposed to extend the payment period and signed a new contract with the Company. According to the new arrangement, the remaining part of this loan will be repaid over four years with quarterly installments of ¥699,147. The Company received the payments timely since March 2013. For the three months period ended September 30, 2014, the quarterly payment of ¥699,147 was received on October 10, 2014. (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, 2014 September 30, 2014 September 30, 2014 Name of Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. 500,000 - - Beijing Langchen Construction Company 913,780 - - Other-travel advances 653 - - Total ¥ 1,414,433 ¥ - $ - F- 10 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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, 2014 September 30, 2014 September 30, 2014 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 27,119,326 ¥ 27,869,522 $ 4,529,126 Allowance for doubtful accounts (1,360,261 ) (1,369,284 ) (222,525 ) Total ¥ 25,759,065 ¥ 26,500,238 $ 4,306,601 Below is a summary of purchase advances to related party. June 30, 2014 September 30, 2014 September 30, 2014 Related Party RMB RMB U.S. Dollars Xiamen Huangsheng Hitek Computer Network Co. Ltd. (A) ¥ 394,034 ¥ - $ - Guangxi Dadong Agriculture Co. Ltd (B) - 1,500,000 243,767 Total ¥ 394,034 ¥ 1,500,000 $ 243,767 (A) One of the Founders and a family member collectively own 57% of Xiamen Huasheng Haitian Computer Network Co. Ltd. (B) One of the Founders and a family member own Guangxi Dadong Agriculture Co. Ltd. This advance was repaid to the Company on October 27, 2014 due to the cancelation of the purchase. NOTE 6. INVENTORIES Inventories consisted of the following: June 30, 2014 September 30, 2014 September 30, 2014 RMB RMB U.S. Dollars Small component parts ¥ 55,262 ¥ 55,262 $ 8,981 Purchased goods and raw materials 272,416 194,643 31,632 Work in process 1,665,447 2,213,637 359,742 Finished goods 12,343,477 14,752,829 2,397,508 Total inventories ¥ 14,336,602 ¥ 17,216,371 $ 2,797,863 There was no inventory obsolescence reserve at June 30, 2014 and September 30, 2014. NOTE 7. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2014 September 30, 2014 September 30, 2014 RMB RMB U.S. Dollars Motor vehicles ¥ 2,314,296 ¥ 2,346,196 $ 381,284 Office equipment and fixtures 709,165 773,273 125,667 Total property and equipment 3,023,461 3,119,469 506,951 Less: Accumulated depreciation (1,701,923 ) (1,823,270 ) (296,303 ) Property and equipment, net ¥ 1,321,538 ¥ 1,296,199 $ 210,648 F- 11 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Depreciation expense was ¥150,368 and ¥121,347 ($19,720) for the three months ended September 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. As of June 30, 2014 and September 30, 2014, Recon owned 24.02% of Avalon’s outstanding shares. Avalon is an independent US domestic oil and natural gas producer listed on the OTCBB under the ticker symbol AOGN. However, based on the available information and discussion with the management team of Avalon, Avalon’s operating loss would not be recovered in the foreseeable future, therefore, the Company recorded an investment loss of ¥1,535,250 ( $250,000) during the year ended June 30, 2014. NOTE 9. OTHER PAYABLES Other payables consisted of the following: June 30, 2014 September 30, 2014 September 30, 2014 Third Party RMB RMB U.S. Dollars Consulting services ¥ 777,863 ¥ 434,584 $ 70,625 Distributors and employees 973,707 516,626 83,958 Others 13,509 90,501 14,707 Total ¥ 1,765,079 ¥ 1,041,711 $ 169,290 June 30, 2014 September 30, 2014 September 30, 2014 Related Party RMB RMB U.S. Dollars Due to related parties (1) ¥ 2,560,648 ¥ 2,560,648 $ 416,136 Expenses paid by the major shareholders 439,071 459,252 74,634 Due to family member of one owner on behalf of Recon 50,000 170,000 27,627 Due to management staff on behalf of Recon 256,305 251,436 40,861 Total ¥ 3,306,024 ¥ 3,441,336 $ 559,258 F- 12 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Includes an advance from Yabei Nuoda for RMB 61,301 and an advance from Xiamen Henda Haitek for RMB 2,499,347 to supplement the Company’s working capital. The advances are payable on demand and non-interest bearing. NOTE 10. TAXES PAYABLE Taxes payable consisted of the following: June 30, 2014 September 30, 2014 September 30, 2014 RMB RMB U.S. Dollars VAT payable ¥ 3,412,759 ¥ 2,613,396 $ 424,708 Enterprise income tax payable 4,134,210 4,182,592 679,720 Other taxes payable 42,877 34,094 5,541 Total taxes payable ¥ 7,589,846 ¥ 6,830,082 $ 1,109,969 NOTE 11. SHORT-TERM BANK LOANS Short-term bank loans consisted of the following: June 30, 2014 September 30, 2014 September 30, 2014 RMB RMB U.S. Dollars Industrial and commercial bank, floating interest rate at 5.6%, due on December 24, 2014 ¥ 2,000,000 ¥ - - Industrial and commercial bank, floating interest rate at 6.0%, due on June 24, 2015 8,000,000 8,000,000 1,300,094 Total short-term bank loans ¥ 10,000,000 ¥ 8,000,000 $ 1,300,094 Interest expense was ¥219,672 and ¥157,511 ($25,597) for the three months ended September 30, 2013 and 2014, respectively. NOTE 12. SHORT-TERM BORROWINGS DUE TO RELATED PARTIES Short-term borrowings due to related parties are generally extended upon maturity and consisted of the following: June 30, 2014 September 30, 2014 September 30, 2014 Short-term borrowings due to related parties: RMB RMB U.S. Dollars Short-term borrowing from a Founder, 6.6% annual interest,due on December 25, 2014 ¥ 5,007,728 ¥ 5,009,561 814,113 Short-term borrowings from Xiamen Huasheng Haitian Computer Network Co. Ltd., no interest, due on November 14, 2014, and extended to November 15, 2015 200,000 200,000 32,502 Total short-term borrowings due to related parties ¥ 5,207,728 ¥ 5,209,561 $ 846,615 F- 13 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interest expense for short-term borrowings due to related parties was ¥532 and ¥84,333 ($13,705) for the three months ended September 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. These common stock purchase warrants do not trade in an active securities market, and as such, their fair value is estimated by using the Black–Scholes Option Pricing Model using the following assumptions: September 30, June 30, 2014 2014 Annual dividend yield - - Exercised price 5.38 5.38 Underlying stock price at valuation date 4.77 3.86 Expected life (years) 2.17 2.42 Risk-free interest rate 1.07 % 0.88 % Expected volatility 157 % 220 % 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. F- 14 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 Fair Value Measurement at Carrying Value at Carrying Value at September 30, 2014 September 30, 2014 September 30, 2014 Level 1 Level 2 Level 3 RMB USD Warrants liability ¥ - ¥ 4,745,754 ¥ - ¥ 4,745,754 $ 771,241 The following is a reconciliation of the beginning and ending balance of the warrant liability measured at fair value on a recurring basis for three months ended September 30, 2014: Change of warrants liability RMB USD Beginning balance - June 30, 2014 ¥ 5,021,621 $ 815,834 Change of warrant liability (275,867 ) (44,593 ) Ending balance -September 30, 2014 ¥ 4,745,754 $ 771,241 NOTE 14. SHAREHOLDERS’ EQUITY Stock offering – On November 25, 2013, the Company entered into a securities purchase agreement (“Purchase Agreement”) with certain institutional investors for the sale of 546,500 ordinary shares in a registered direct offering at the price of $4.81 per ordinary share (amended to $4.30 per ordinary share on November 29, 2013). The net cash proceeds received from the stock offering, after deducting underwriter commission and other associated fees, were ¥12,132,882 (approximately $2.0 million). In addition, warrants to purchase 163,950 ordinary shares in the aggregate were issued to the investors. The warrants will be exercisable immediately as of the date of issuance at an exercise price of $6.01 per ordinary share (amended to $5.38 per ordinary share on November 29, 2013) and expire three years from the date of issuance. The Company also issued warrants to purchase 54,650 ordinary shares to the placement agent (“Placement Agent Warrant”). The Placement Agent Warrants are on substantially the same terms as the warrants issued pursuant to the Purchase Agreement, except that these warrants are not exercisable for a period of six months and will expire three years from the initial exercise date. In addition to the above warrants issued to the placement agent, the Company granted warrants for 170,000 shares in connection with its IPO offering, and none of these warrants was exercised during this period. Appropriated Retained Earnings - According to the Memorandum and Articles of Association, the Company is required to transfer a certain portion of its net profit, as determined under PRC accounting regulations, from current net income to the statutory reserve fund. In accordance with the PRC Company Law, companies are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory reserves until such reserves reach 50% of the registered capital or paid-in capital of the companies. As of June 30, 2014 and September 30, 2014, the balance of total statutory reserves was ¥4,148,929 ($674,250). NOTE 15. STOCK-BASED COMPENSATION Stock-Based Awards Plan 2009 Options Plan - The Company granted options to purchase 293,000 ordinary shares under the Stock Incentive 2009 Plan to its employees and non-employee directors on July 29, 2009. The options have an excise price of $6.00, equal to the IPO price of the Company’s ordinary shares, and will vest over a period of five years, with the first 20% vesting on July 29, 2010. The options expire ten years after the date of grant, on July 29, 2019. The fair value was estimated on July 29, 2009 using the Binomial Lattice valuation model, with the following weighted-average assumptions: F- 15 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The grant date fair value of the options was ¥30.17 ($4.42) per share. 2012 Options Plan – The Company granted options to purchase 415,000 ordinary shares to its employees and non-employee director on March 26, 2012. The options have an excise price of $2.96, which was equal to the share price of the Company’s ordinary shares at March 26, 2012, and will vest over a period of five years, with the first 20% vesting on March 26, 2013. The options expire ten years after the date of grant, on March 26, 2022. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The grant date fair value of the options was ¥10.06 ($1.49) per share. The following is a summary of the stock options activity: Stock Options Shares Weighted Average Exercise Price Per Share Outstanding as of July 1, 2014 415,600 $ 4.37 Granted - - Forfeited - - Exercised - - Outstanding as of September 30, 2014 415,600 $ 4.37 The following is a summary of the status of options outstanding and exercisable at September 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 4.83 $ 6.00 193,000 4.83 $ 2.96 222,600 7.49 - - - During the three months September 30, 2014, the Company has granted restricted shares of common stock to consultants as follow: F- 16 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 based on the closing stock price $3.8 at July 18, 2014. 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 July 19, 2014, the Company decided to cancel 40,625 restricted shares, as the services were not provided pursuant to the agreement it had with the Company. 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. The Share-based compensation expense recorded for restricted shares granted were ¥353,437 ($57,399) for the three months ended September 30, 2014. Total unrecognized share-based compensation expense for these shares as of September 30, 2014 was approximately ¥3.1 million ($0.5 million), which are expected to be recognized over a weighted average period of approximately 2.21 years. The Share-based compensation expense recorded for stock options granted were ¥414,954 and ¥247,141 ($40,136) for the three months ended September 30, 2013 and 2014, respectively. The total unrecognized share-based compensation expense for stock options as of September 30, 2014 was approximately ¥2.0 million ($0.3 million), which is expected to be recognized over a weighted average period of approximately 2.49 years. Following is a summary of the restricted stock grants: Restricted stock grants Shares Nonvested as of July 1, 2014 230,362 Granted 50,000 Nonvested adjustment 40,625 Cancelled (40,625 ) Vested - Nonvested as of September 30, 2014 280,362 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 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. Deferred tax assets are comprised of the following: June 30, 2014 September 30, 2014 September 30, 2014 RMB RMB U.S. Dollars Allowance for doubtful receivables ¥ 1,209,961 ¥ 1,211,995 $ 196,963 Total deferred income tax assets ¥ 1,209,961 ¥ 1,211,995 $ 196,963 F- 17 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Deferred tax liability is comprised of the following: June 30, 2014 September 30, 2014 September 30, 2014 RMB RMB U.S. Dollars Temporary difference - accounts payable ¥ 180,186 ¥ 180,186 $ 29,282 Total deferred income tax liability ¥ 180,186 ¥ 180,186 $ 29,282 The Company’s tax provision is comprised of the following: For the three months ended September 30, 2013 2014 2014 RMB RMB U.S. Dollars Current income taxes ¥ 195,459 ¥ 32,279 $ 5,246 Deferred income taxes provision (benefit) 11,868 (2,034 ) (331 ) Provision for income tax ¥ 207,327 ¥ 30,245 $ 4,915 NOTE 17. NON-CONTROLLING INTEREST Non-controlling interest consisted of the following: 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 $ 299,118 Unappropriated retained earnings 3,152,687 3,250,513 6,403,200 869,812 Accumulated other comprehensive loss (16,868 ) (11,853 ) (28,721 ) (5,265 ) Total non-controlling interest ¥ 4,786,819 ¥ 3,438,660 ¥ 8,225,479 $ 1,163,665 As of September 30, 2014 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 300,809 Unappropriated retained earnings 3,152,687 3,250,513 6,403,200 1,040,595 Accumulated other comprehensive loss (16,909 ) (11,853 ) (28,762 ) (4,670 ) Total non-controlling interest ¥ 4,786,778 ¥ 3,438,660 ¥ 8,225,438 $ 1,336,734 F- 18 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. CONCENTRATIONS For the three months ended September 30, 2013 and 2014, our two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented 37.53%, 34.16% and 46.65%, 1.64% of the Company’s revenue, respectively. For the three months ended September 30, 2013, four major suppliers accounted for 71.9% of the company’s total purchase. For the three months ended September 30, 2014, two major suppliers accounted for 25% of the company’s total purchases. NOTE 19. COMMITMENTS AND CONTINGENCY (a) Office Leases The Company leased 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 September 30, 2014: Twelve months ending September 30, Office lease payment RMB U.S. Dollars 2015 ¥ 662,500 $ 107,664 2016 135,000 21,939 Total ¥ 797,500 $ 129,603 (b) Contingency The Labor Contract Law of the PRC requires employers to assure the liability of severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of the service provided by the employees. As of September 30, 2014, the Company estimated its severance payments of approximately ¥1.4 million ($0.2 million) which has not been reflected in its unaudited condensed consolidated financial statements because the Company has determined that the likelihood to make these payments is remote. NOTE 20. RELATED PARTY TRANSACTIONS AND BALANCES Sales to related parties – sales to related parties consisted of the following: For the three months ended September 30, 2013 2014 2014 RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 116,473 ¥ - $ - Xiamen Henda Haitian computer network Inc 299,145 - - Revenues from related parties ¥ 415,618 ¥ - $ - F- 19 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Purchases from related parties – purchases from related parties consisted of the following: For the three months ended September 30, 2013 2014 2014 RMB RMB U.S. Dollars Xiamen Hengda Hitek Computer Network Co. Ltd. ¥ - ¥ 797,585 $ 129,67 Purchase from related parties ¥ - ¥ 797,585 $ 129,617 Trade accounts payable to related parties - The Company owed ¥0 and ¥389,143 ($63,240) to one related party as of June 30, 2014 and September 30, 2014 . Purchase advance to related parties - The Company paid ¥394,034 and ¥1,500,000 ($243,767) to related parties for materials as of June 30, 2014 and September 30, 2014 . Leases from related parties - The Company has various agreements for the lease of office space owned by the Founders and their family members. The terms of the agreement state that the Company will continue to lease the property for two years at a monthly rent of ¥95,000 with the annual rental expense at approximately ¥1.1 million ($0.2 million). The two-year lease agreements between Nanjing Recon and Mr. Yin and his family member started from July 10, 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 ¥5,207,728 and ¥5,209,561 ($846,615) from the Founders, their family members and senior officers as of June 30, 2014 and September 30, 2014, respectively. For the specific terms and interest rates of the borrowings, please see Note 12. 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, 2014 and September, 2014, ¥284,370 and ¥459,252 ($74,634) was due to them, respectively. NOTE 21. Variable Interest Entities The Company reports its VIEs’ portion of consolidated net income and stockholders’ equity as non-controlling interests in the condensed consolidated financial statements. Summary information regarding consolidated VIEs is as follows: June 30, 2014 September 30, 2014 September 30, 2014 RMB RMB U.S. Dollars ASSETS Current Assets Cash and cash equivalents ¥ 14,021,653 ¥ 1,821,972 $ 296,092 Trade accounts receivable, net 51,033,035 46,379,575 7,537,227 Purchase advances 24,600,379 28,000,238 4,550,369 Other assets 34,097,774 40,863,390 6,640,782 Total current assets ¥ 123,752,841 ¥ 117,065,175 $ 19,024,470 Non-current assets 15,758,115 14,866,712 2,416,016 Total Assets ¥ 139,510,956 ¥ 131,931,887 $ 21,440,486 LIABILITIES Trade accounts payable ¥ 11,413,505 ¥ 10,235,660 $ 1,663,415 Taxes payable 7,589,846 6,830,082 1,109,969 Other liabilities 21,878,699 21,481,516 3,490,999 Total current liabilities 40,882,050 38,547,258 6,264,383 Total Liabilities ¥ 40,882,050 ¥ 38,547,258 $ 6,264,383 The financial performance of VIEs reported in the unaudited condensed consolidated statement of income and comprehensive income for the three months ended September 30, 2014 includes revenues of ¥4,303,999 ($699,451), gross profit of ¥615,313 ($99,996), operating expenses of ¥2,511,735 ($408,187), other expense of ¥31,725($5,156) and a net loss of ¥1,958,392($318,262). F- 20 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 22. SUBSEQUENT EVENT On October 18, 2014, the Company received ¥6,000,000 ($975,071) loan from a founder of the Company. This loan is due on October 20, 2015 with a floating annual interest rate of 120% of the benchmark interest rate per year. F- 21