Recon Technology, Ltd 10-Q

Item 5. Other Information. None. Item 6. Exhibits. The following exhibits are filed herewith: 22 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) 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) 23 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) 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., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.30 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Yin Shenping (1) 10.31 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Chen Guangqiang (1) 10.32 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Li Hongqi (1) 10.33 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) 10.34 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) 10.35 Operating Agreement among Recon Technology (Jining) Co. Ltd., Beijing BHD and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.36 Form of Warrant Exchange Agreement by and among the Company and certain warrant holders dated February 13, 2015.(3) 21.1 Subsidiaries of the Registrant (2) 99.1 Stock Option Plan (1) 24 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) 32.1 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) 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. 25 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 February 13, 2015 By: /s/ Liu Jia Liu Jia Chief Financial Officer (Principal Financial and Accounting Officer) SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RECON TECHNOLOGY, LTD February 13, 2015 By: /s/ Yin Shen ping Yin Shen ping Chief Executive Officer RECON TECHNOLOGY, LTD INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE Unaudited Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2014 F-2 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the six and three months ended December 31, 2013 and 2014 F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2013 and 2014 F-4 Notes to Unaudited Condensed Consolidated Financial Statements F-5 RECON TECHNOLOGY, LTD UNaudited condensed Consolidated Balance Sheets As of June 30, As of December 31, As of December 31, 2014 2014 2014 RMB RMB U.S. Dollars ASSETS Current assets Cash and cash equivalents ¥ 18,094,586 ¥ 4,947,964 $ 806,054 Notes receivable - 2,977,565 485,064 Trade accounts receivable, net 43,553,737 50,350,533 8,202,416 Trade accounts receivable- related parties, net 7,479,298 2,980,821 485,594 Inventories, net 14,336,602 19,170,009 3,122,914 Other receivables, net 18,293,043 27,201,739 4,431,333 Other receivables- related parties 1,414,433 - - Purchase advances, net 25,759,065 22,116,442 3,602,906 Purchase advances- related parties 394,034 394,034 64,191 Prepaid expenses 2,634,664 4,762,485 775,840 Prepaid expenses - related parties 230,000 - - Deferred tax asset 1,209,961 1,237,938 201,668 Total current assets 133,399,423 136,139,530 22,177,980 Property and equipment, net 1,321,538 1,368,636 222,959 Long-term trade accounts receivable, net - 14,545,865 2,369,612 Long-term trade accounts receivable-related party, net 14,456,317 - - Long-term other receivable 5,353,104 4,053,933 660,411 Total Assets ¥ 154,530,382 ¥ 156,107,964 $ 25,430,962 LIABILITIES AND EQUITY Current liabilities Short-term bank loans ¥ 10,000,000 ¥ 8,000,000 $ 1,303,250 Trade accounts payable 11,413,505 12,602,016 2,052,947 Other payables 1,765,079 1,627,676 265,159 Other payable- related parties 3,306,024 3,596,762 585,935 Deferred revenue 4,419,824 3,196,427 520,718 Advances from customers 801,385 384,200 62,589 Accrued payroll and employees' welfare 417,624 284,937 46,418 Accrued expenses 203,051 212,378 34,597 Taxes payable 7,589,846 8,369,413 1,363,430 Short-term borrowings- related parties 5,207,728 9,631,504 1,569,032 Deferred tax liability 180,186 180,186 29,353 Warrants liability 5,021,621 930,480 151,581 Total current liabilities 50,325,873 49,015,979 7,985,009 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 December 31, 2014, respectively) 616,865 617,943 100,665 Additional paid-in capital 83,061,058 84,343,979 13,740,161 Appropriated retained earnings 4,148,929 4,631,899 754,565 Unappropriated retained earnings 8,431,453 9,112,314 1,484,453 Accumulated other comprehensive loss (279,275 ) (274,549 ) (44,727 ) Total shareholders’ equity 95,979,030 98,431,586 16,035,117 Non-controlling interest 8,225,479 8,660,399 1,410,836 Total equity 104,204,509 107,091,985 17,445,953 Total Liabilities and Equity ¥ 154,530,382 ¥ 156,107,964 $ 25,430,962 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 For the six months ended For the three months ended December 31, December 31, 2013 2014 2014 2013 2014 2014 RMB RMB USD RMB RMB USD Revenues Hardware and software ¥ 55,339,141 ¥ 24,761,080 $ 4,033,735 ¥ 44,242,049 ¥ 20,515,571 $ 3,342,115 Service 397,589 103,774 16,905 397,589 45,283 7,377 Hardware and software - related parties 2,042,306 768,118 125,131 1,626,688 768,118 125,131 Total revenues 57,779,036 25,632,972 4,175,771 46,266,326 21,328,972 3,474,623 Cost of revenues Hardware and software 35,599,656 16,022,965 2,610,241 29,480,982 12,334,279 2,009,331 Service 34,946 - - 34,946 - - Hardware and software - related parties 328,922 16,762 2,731 225,986 16,762 2,731 Total cost of revenues 35,963,524 16,039,727 2,612,972 29,741,914 12,351,041 2,012,062 Gross profit 21,815,512 9,593,245 1,562,799 16,524,412 8,977,931 1,462,561 Selling and distribution expenses 3,604,440 1,955,260 318,524 2,250,518 1,254,470 204,361 General and administrative expenses 6,457,563 7,796,731 1,270,136 3,715,640 4,093,440 666,847 Research and development expenses 3,353,997 1,899,957 309,515 2,661,397 1,243,228 202,530 Operating expenses 13,416,000 11,651,948 1,898,175 8,627,555 6,591,138 1,073,738 Income (loss) from operations 8,399,512 (2,058,703 ) (335,376 ) 7,896,857 2,386,793 388,823 Other income (expenses) Subsidy income 1,018,313 484,318 78,898 684,601 269,615 43,922 Interest income 204,970 157,468 25,653 101,769 74,436 12,126 Interest expense (479,648 ) (468,956 ) (76,396 ) (258,389 ) (227,112 ) (36,998 ) Loss from investment (735,080 ) - - (360,466 ) - - Change in fair value of warrants liability 556 4,077,517 664,253 556 3,803,118 619,552 Loss from foreign currency exchange (119,392 ) (20,880 ) (3,401 ) (213,692 ) (18,806 ) (3,064 ) Other expense (43,946 ) 76,672 12,490 (19,632 ) 90,692 14,774 Income before income tax 8,245,285 2,247,436 366,121 7,831,604 6,378,736 1,039,135 Provision for income tax 1,459,189 648,932 105,715 1,251,862 618,687 100,788 Net Income 6,786,096 1,598,504 260,406 6,579,742 5,760,049 938,347 Less: Net income attributable to non-controlling interest 924,981 434,673 70,811 765,071 434,673 70,811 Net Income attributable to Recon Technology, Ltd ¥ 5,861,115 ¥ 1,163,831 $ 189,595 ¥ 5,814,671 ¥ 5,325,376 $ 867,536 Comprehensive income Net income ¥ 6,786,096 ¥ 1,598,504 $ 260,406 ¥ 6,579,742 ¥ 5,760,049 $ 938,347 Foreign currency translation adjustment 77,277 4,726 770 82,881 5,528 901 Comprehensive income 6,863,373 1,603,230 261,176 6,662,623 5,765,577 939,248 Less: Comprehensive income attributable to non-controlling interest 932,709 434,920 70,851 773,360 434,961 70,858 Comprehensive income attributable to Recon Technology, Ltd ¥ 5,930,664 ¥ 1,168,310 $ 190,325 ¥ 5,889,263 ¥ 5,330,616 $ 868,390 Earnings per common share - basic ¥ 1.44 ¥ 0.25 $ 0.04 ¥ 1.40 ¥ 1.13 $ 0.18 Earnings per common share - diluted ¥ 1.44 ¥ 0.24 $ 0.04 ¥ 1.38 ¥ 1.10 $ 0.18 Weighted - average shares -basic 4,056,963 4,741,911 4,741,911 4,162,115 4,726,711 4,726,711 Weighted - average shares -diluted 4,056,963 4,846,270 4,846,270 4,224,560 4,820,817 4,820,817 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 six months ended December 31, 2013 2014 2014 RMB RMB U.S. Dollars Cash flows from operating activities: Net income ¥ 6,786,096 ¥ 1,598,504 $ 260,406 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 301,341 274,511 44,720 Gain from disposal of equipment - (149,480 ) (24,351 ) Provision for doubtful accounts 378,584 104,589 17,038 Share based compensation 895,509 1,115,030 181,645 Loss from investment 735,080 - - Deferred tax benefit (32,211 ) (27,977 ) (4,558 ) Change in fair value of warrants liability (556 ) (4,077,517 ) (664,253 ) Restricted shares issued for services 407,972 1,171,331 190,817 Changes in operating assets and liabilities: Notes receivable 2,578,855 (2,977,565 ) (485,064 ) Trade accounts receivable (27,881,579 ) (8,572,529 ) (1,396,519 ) Trade accounts receivable-related parties 610,501 6,104,734 994,499 Inventories (8,799,658 ) (4,833,407 ) (787,392 ) Other receivable, net 1,830,372 (7,635,508 ) (1,243,873 ) Other receivables related parties, net 147,224 1,414,433 230,420 Purchase advance, net 472,846 2,641,583 430,330 Tax recoverable 575,650 - - Prepaid expense 1,223,568 (2,127,821 ) (346,635 ) Prepaid expense - related party, net - 230,000 37,468 Trade accounts payable 15,717,487 1,188,511 193,616 Trade accounts payable-related parties (3,994,718 ) - - Other payables (556,242 ) (137,403 ) (22,384 ) Other payables-related parties (723,453 ) 290,738 47,363 Deferred income 544,754 (1,223,397 ) (199,299 ) Advances from customers 83,462 (417,185 ) (67,962 ) Accrued payroll and employees' welfare (1,639,401 ) (132,687 ) (21,616 ) Accrued expenses 269,270 9,327 1,519 Taxes payable 3,292,976 779,567 126,996 Net cash used in operating activities (6,776,271 ) (15,389,618 ) (2,507,069 ) Cash flows from investing activities: Purchase of property and equipment (36,495 ) (514,009 ) (83,735 ) Proceeds from disposal of equipment - 341,880 55,694 Net cash used in investing activities (36,495 ) (172,129 ) (28,041 ) Cash flows from financing activities: Proceeds from short-term bank loans 15,400,000 - - Repayments of short-term bank loans (6,040,000 ) (2,000,000 ) (325,812 ) Proceeds from short-term borrowings-related parties - 9,400,000 1,531,319 Repayment of short-term borrowings (110,375 ) - - Repayment of short-term borrowings-related parties (5,303,279 ) (5,000,000 ) (814,531 ) Proceeds from sale of common stock, net of issuance costs 12,132,882 - - Net cash provided by financing activities 16,079,228 2,400,000 390,976 Effect of exchange rate fluctuation on cash and cash equivalents 116,711 15,125 2,467 Net ncrease (decrease) in cash and cash equivalents 9,383,173 (13,146,622 ) (2,141,667 ) Cash and cash equivalents at beginning of period 12,350,392 18,094,586 2,947,721 Cash and cash equivalents at end of period ¥ 21,733,565 ¥ 4,947,964 $ 806,054 Supplemental cash flow information Cash paid during the period for interest ¥ 689,828 ¥ 510,956 $ 83,238 Cash paid during the period for taxes ¥ - ¥ 203,073 $ 33,082 Non-cash investing and financing activities Cancelation of prior issuance of 40,625 shares of common stock for professional services - 1,002,721 163,350 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 for interim financial information pursuant to the rules of the SEC and have been consistently applied. In the opinion of the management, all adjustments (consisting only normal recurring accruals) considered necessary for a fair presentation have been included. 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 six months period ended December 31, 2014 have been translated into United States dollars (“U.S. dollars”) solely for the convenience of the readers. The translation has been made at the rate of ¥6.1385 = US$1.00, the approximate exchange rate prevailing on December 31, 2014. These translated U.S. dollar amounts should not be construed as representing Chinese Yuan amounts or that the Chinese Yuan amounts have been or could be converted into U.S. dollars. Estimates and assumptions - The preparation of the consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant estimates include revenue recognition, allowance for doubtful accounts, the useful lives of property and equipment and the fair value of stock based payments. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Fair Values of Financial Instruments - The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs are defined as follows: Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable. The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable, accrued liabilities, advances from customers, short-term bank loan and short-term borrowings approximate fair value because of the immediate or short-term maturity of these financial instruments. Long-term borrowings approximate fair value because the interest rate charged approximates the market rate. Long-term other receivables approximate fair value because interest rate approximates the market rate. Long-term investment is carried at less than fair value, with fair value determined using level 1 inputs. (See Note 8.) The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs (See Note 13). Cash and Cash Equivalents - Cash and cash equivalents are comprised of cash on hand, demand deposits and highly liquid short-term debt investments with stated original maturities of no more than three months. Since a majority of the bank accounts are located in the PRC, those bank balances are uninsured. 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 December 31, 2014. Revenue Recognition - The Company recognizes revenue when the following four criteria are met: (1) persuasive evidence of an arrangement, (2) delivery has occurred or services have been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the customers and the customers have signed a completion and acceptance report, risk of loss has transferred to the customers, customers acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in customers’ acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. Hardware: Revenue from hardware sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer’s final acceptance of the arrangement. 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 per Share (“EPS”) - Basic EPS is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net income 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). For the six months ended December 31, 2014, there were 104,359 restricted shares included in the weighted average dilutive shares calculation. For the three months ended December 31, 2013 and 2014, there were 62,445 and 94,106 restricted shares included in the weighted average dilutive shares calculation, respectively. The effect from options, restricted shares and warrants would have been anti-dilutive due to the fact that the exercise prices were higher than the average stock price during the six months ended December 31, 2013. Recently Issued Accounting Pronouncements - In November 2014, The FASB issued Accounting Standards Update (ASU) No. 2014-17, “Business Combinations (Topic 805): Pushdown Accounting, a consensus of the FASB Emerging Issues Task Force, which was ratified by the Financial Accounting Standards Board (FASB) on Oct 8, 2014. ASU No. 2014-17 impacts the stand-alone financial statements of an acquired entity (subsidiary), however it does not change the requirement for an acquirer (parent) to apply business combination accounting and record its new basis in the acquired entity’s assets, liabilities, and non-controlling interests in the acquirer’s consolidated financial statements. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. Management believes this ASU 2014-17 does not have any significant impact on the Company’s consolidated financial statements. F- 8 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In December 2014, The FASB issued Accounting Standards Update (ASU) No. 2014-18, “Business Combinations (Topic 805): accounting for identifiable intangible assets in a business combination (a consensus of the private company council)”. ASU No. 2014-18 affects all entities except for public business entities and not-for-profit entities as defined in the Master Glossary of the FASB Accounting Standards Codification®. An entity within the scope of this Update that elects the accounting alternative to recognize or otherwise consider the fair value of intangible assets as a result of any in-scope transactions should no longer recognize separately from goodwill (1) customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business and (2) noncompetition agreements. The decision to adopt the accounting alternative in this Update must be made upon the occurrence of the first transaction within the scope of this accounting alternative in fiscal years beginning after December 15, 2015, and the effective date of adoption depends on the timing of that first in-scope transaction. If the first in-scope transaction occurs in the first fiscal year beginning after December 15, 2015, the elective adoption will be effective for that fiscal year’s annual financial reporting and all interim and annual periods thereafter. If the first inscope transaction occurs in fiscal years beginning after December 15, 2016, the elective adoption will be effective in the interim period that includes the date of that first in-scope transaction and subsequent interim and annual periods thereafter. Early application is permitted for any interim and annual financial statements that have not yet been made available for issuance. In January 2015, the FASB issued ASU 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 eliminates from GAAP the concept of extraordinary items. The amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The impact upon adoption would not affect our consolidated financial position or results of operations. F- 9 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. Notes receivable Notes receivable consisted of the following: June 30, 2014 December 31, 2014 December 31, 2014 RMB RMB U.S. Dollars Notes receivable ¥ - ¥ 2,977,565 $ 485,064 Total Notes receivable ¥ - ¥ 2,977,565 $ 485,064 Notes receivable represents trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment. The notes are non-interest bearing and normally paid within three to six months. The Company has collected ¥2,777,565 ($452,483) on January 22, 2015. NOTE 4. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2014 December 31, 2014 December 31, 2014 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 48,284,531 ¥ 55,151,305 $ 8,984,492 Allowance for doubtful accounts (4,730,794 ) (4,800,772 ) (782,076 ) Total - third- party, net ¥ 43,553,737 ¥ 50,350,533 $ 8,202,416 June 30, 2014 December 31, 2014 December 31, 2014 Third Party – long-term RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ - ¥ 16,162,072 $ 2,632,902 Allowance for doubtful accounts - (1,616,207 ) (263,290 ) Total - long-term trade accounts receivable, net ¥ - ¥ 14,545,865 $ 2,369,612 The receivable from Yabei Nuoda was recognized 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 beginning 2016, with each installment of ¥4,015,644. June 30, 2014 December 31, 2014 December 31, 2014 Related Party RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd.* ¥ 5,441,498 ¥ - $ - Beijing Langchen Construction Company 726,800 817,821 133,227 Xiamen Huangsheng Hitek Computer Network Co.Ltd. 100,000 100,000 16,291 Xiamen Henda Hitek Computer Network Co. Ltd. 1,211,000 2,063,000 336,076 Total - related-parties, net ¥ 7,479,298 ¥ 2,980,821 $ 485,594 F- 10 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2014 December 31, 2014 December 31, 2014 Related Party – long-term RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. ¥ 16,062,574 ¥ - $ - Allowance for doubtful accounts (1,606,257 ) - - Total - long-term trade accounts receivable, net 14,456,317 - - * One of the Founders, Mr. Yin Shenping, was the legal representative of Beijing Yabei Nuoda before December 2013 and Chairman as of September 30, 2014. On October 30, 2014, Mr. Yin resigned from the chairman position and thus Yabei Nuoda ceased to be a related party of the Company after October 30, 2014. Mr. Yin does not have any equity interest in this company currently. NOTE 5. OTHER RECEIVABLES, NET Other receivables consisted of the following: Third Party June 30, 2014 December 31, 2014 December 31, 2014 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,523,145 ¥ 2,573,113 $ 419,176 Loans to third parties (B) 8,979,408 14,728,760 2,399,407 Business advance to staff (C ) 6,371,923 9,071,177 1,477,751 Deposits for projects 495,961 1,071,555 174,563 Others 373,622 234,131 38,141 Allowance for doubtful accounts (451,016 ) (476,997 ) (77,705 ) Total ¥ 18,293,043 ¥ 27,201,739 $ 4,431,333 Third Party June 30, 2014 December 31, 2014 December 31, 2014 Non-Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 5,353,104 ¥ 4,053,933 $ 660,411 Total ¥ 5,353,104 ¥ 4,053,933 $ 660,411 (A) After Jining ENI Energy Technology Co. Ltd (“ENI”) ceased to be a VIE of the Company in [ ], 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 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 then remaining balance of this loan will be repaid by June 2017 with quarterly installments of ¥699,147. The has Company received the payments timely under the new agreement. (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. F- 11 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2014 December 31, 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 ¥ - $ - * Not a related party after October 31, 2014 (See Note 3). NOTE 6. 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 December 31, 2014 December 31, 2014 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 27,119,326 ¥ 23,475,382 $ 3,824,286 Allowance for doubtful accounts (1,360,261 ) (1,358,940 ) (221,380 ) Total ¥ 25,759,065 ¥ 22,116,442 $ 3,602,906 Below is a summary of purchase advances to related party. June 30, 2014 December 31, 2014 December 31, 2014 Related Party RMB RMB U.S. Dollars Xiamen Huasheng Hitek Computer Network Co. Ltd. (A) ¥ 394,034 ¥ 394,034 $ 64,191 Total ¥ 394,034 ¥ 394,034 $ 64,191 The Company entered into a purchase agreement with Xiamen Huasheng Hitek in September, 2014 and planned to offset the purchase advance. At September 30, 2014, remaining amount to be paid was ¥797,585, which was included in accounts payable-related party. In October, 2014, the Company didn’t offset the advance payment and paid the whole contract amount in cash. (A) One of the Founders and a family member collectively own 57% of Xiamen Huasheng Hitek Computer Network Co. Ltd. Current ending balance of the purchase advances to Xiamen Huasheng Hitek is expect to be settled within one year. F- 12 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 7. INVENTORIES Inventories consisted of the following: June 30, 2014 December 31, 2014 December 31, 2014 RMB RMB U.S. Dollars Small component parts ¥ 55,262 ¥ 55,262 $ 9,003 Purchased goods and raw materials 272,416 165,251 26,920 Work in process 1,665,447 1,860,073 303,018 Finished goods 12,343,477 17,089,423 2,783,973 Total inventories ¥ 14,336,602 ¥ 19,170,009 $ 3,122,914 There was no inventory obsolescence reserve at June 30, 2014 and December 31, 2014. NOTE 8. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2014 December 31, 2014 December 31, 2014 RMB RMB U.S. Dollars Motor vehicles ¥ 2,314,296 ¥ 2,291,947 $ 373,372 Office equipment and fixtures 709,165 793,923 129,335 Total property and equipment 3,023,461 3,085,870 502,707 Less: Accumulated depreciation (1,701,923 ) (1,717,234 ) (279,748 ) Property and equipment, net ¥ 1,321,538 ¥ 1,368,636 $ 222,959 Depreciation expense was ¥150,973 and ¥153,164 ($24,951) for the three months ended December 31, 2013 and 2014, respectively. Depreciation expense was ¥301,341 and ¥274,511 ($44,720) for the six months ended December 31, 2013 and 2014, respectively. NOTE 9. 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, 2014 and December 31, 2014, Recon owned 24.02% and 23.61% 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, the stock is not actively traded and, based on 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 was impaired and recorded an investment loss of ¥1,535,250 ( $250,000) for the year ended June 30, 2014 to write its investment own to zero. F- 13 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. OTHER PAYABLES Other payables consisted of the following: June 30, 2014 December 31, 2014 December 31, 2014 Third Party RMB RMB U.S. Dollars Consulting services ¥ 777,863 ¥ 412,599 $ 67,215 Distributors and employees 973,707 1,126,265 183,476 Others 13,509 88,812 14,468 Total ¥ 1,765,079 ¥ 1,627,676 $ 265,159 June 30, 2014 December 31, 2014 December 31, 2014 Related Party RMB RMB U.S. Dollars Due to related parties (1) ¥ 2,560,648 ¥ 2,499,347 $ 407,159 Expenses paid by the major shareholders 439,071 676,322 110,177 Due to family member of one owner on behalf of Recon 50,000 170,000 27,694 Due to management staff on behalf of Recon 256,305 251,093 40,905 Total ¥ 3,306,024 ¥ 3,596,762 $ 585,935 (1) Includes 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 11. TAXES PAYABLE Taxes payable consisted of the following: June 30, 2014 December 31, 2014 December 31, 2014 RMB RMB U.S. Dollars VAT payable ¥ 3,412,759 ¥ 2,967,332 $ 483,397 Enterprise income tax payable 4,134,210 5,375,919 875,771 Other taxes payable 42,877 26,162 4,262 Total taxes payable ¥ 7,589,846 ¥ 8,369,413 $ 1,363,430 NOTE 12. SHORT-TERM BANK LOANS Short-term bank loans consisted of the following: June 30, 2014 December 31, 2014 December 31, 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 1,303,250 Total short-term bank loans ¥ 10,000,000 ¥ 8,000,000 $ 1,303,250 F- 14 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interest expense was ¥257,085 and ¥80,667 ($13,141) for the three months ended December 31, 2013 and 2014, respectively. Interest expense was ¥476,757 and ¥238,178 ($38,801) for the six months ended December 31, 2013 and 2014, respectively. NOTE 13. 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 December 31, 2014 December 31, 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 ¥ - - Short-term borrowing from a Founder, 7.0% annual interest, due on October 20, 2015 - 6,014,400 979,783 Short-term borrowing from a Founder, 6.0% annual interest, due on October 2, 2015 - 3,417,104 556,668 Short-term borrowings from Xiamen Huasheng Haitian Computer Network Co. Ltd., no interest, due on November 14, 2015 200,000 200,000 32,581 Total short-term borrowings due to related parties ¥ 5,207,728 ¥ 9,631,504 $ 1,569,032 Interest expense for short-term borrowings due to related parties was ¥910 and ¥146,445 ($23,857) for the three months ended December 31, 2013 and 2014, respectively. Interest expense for short-term borrowings due to related parties was ¥1,441 and ¥230,778 ($37,595) for the six months ended December 31, 2013 and 2014, respectively. Note 14 –WARRANT LIABILITY In connection with the stock offering in November 2013, the Company issued warrants to certain institutional investors and placement agent to purchase 218,600 ordinary shares (see details in Note 14). 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: F- 15 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, June 30, 2014 2014 Annual dividend yield - - Exercised price 5.38 5.38 Underlying stock price at valuation date 1.97 3.86 Expected life (years) 1.92 2.42 Risk-free interest rate 1.10 % 0.88 % Expected volatility 113 % 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. 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 December 31, 2014 December 31, 2014 December 31, 2014 Level 1 Level 2 Level 3 RMB USD Warrants liability ¥ - ¥ 930,480 ¥ - ¥ 930,480 $ 151,581 The following is a reconciliation of the beginning and ending balance of the warrant liability measured at fair value on a recurring basis for six months ended December 31, 2014: Change of warrants liability RMB USD Beginning balance - June 30, 2014 ¥ 5,021,621 $ 815,834 Change of warrant liability (4,091,141 ) (664,253 ) Ending balance -December 31, 2014 ¥ 930,480 $ 151,581 F- 16 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. 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 2016. In addition to the above warrants issued to the placement agent, the Company granted warrants for 170,000 sharesin 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 December 31, 2014, the balance of total statutory reserves was ¥4,148,929 and ¥4,631,899 ($754,565). NOTE 16. STOCK-BASED COMPENSATION Stock-Based Awards Plan 2009 Options Plan - The Company granted options to purchase 293,000 ordinary shares under the Stock Incentive 2009 Plan to its employees and non-employee directors on July 29, 2009. The options have an excise price of $6.00, equal to the IPO price of the Company’s ordinary shares, and will vest over a period of five years, with the first 20% vesting on July 29, 2010. The options expire ten years after the date of grant, on July 29, 2019. The fair value was estimated on July 29, 2009 using the Binomial Lattice valuation model, with the following weighted-average assumptions: Stock price at grant date $ 6.00 Exercise price (per share) $ 6.00 Risk free rate of interest*** 4.6118 % Dividend yield 0.0 % Life of option (years)** 10 Volatility* 78 % Forfeiture rate**** 0 % * Volatility is projected using the performance of PHLX Oil Service Sector index. ** The life of options represents the period the option is expected to be outstanding. *** The risk-free interest rate is based on the Chinese international bond denominated in U.S. dollar, with a maturity that approximates the life of the option. **** Forfeiture rate is the estimated percentage of options forfeited by employees by leaving or being terminated before vesting. 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. F- 17 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2012 Options Plan – T he Company granted options to purchase 415,000 ordinary shares to its employees and non-employee director on March 26, 2012. The options have an excise price of $2.96, which was equal to the share price of the Company’s ordinary shares at March 26, 2012, and will vest over a period of five years, with the first 20% vesting on March 26, 2013. The options expire ten years after the date of grant, on March 26, 2022. The 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 December 31, 2014 415,600 $ 4.37 The following is a summary of the status of options outstanding and exercisable at December 31, 2014: Outstanding Options Exercisable Options Average Exercise Price Number Average Remaining Contractual life (Years) Average Exercise Price Number Average Remaining Contractual life (Years) $ 6.00 193,000 4.58 $ 6.00 193,000 4.58 $ 2.96 222,600 7.24 - - - During the six months December 31, 2014, the Company has granted restricted ordinary shares as follows: 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 August 7, 2014, the Company canceled 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. 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. The first one third was vested on December 13, 2014 and are now non-restricted. The Share-based compensation expense recorded for restricted shares granted were ¥66,229 and ¥705,612 ($114,949) for the six months ended December 31, 2013 and 2014, respectively. Total unrecognized share-based compensation expense for these shares as of December 31, 2014 was approximately ¥2.8 million ($0.4 million), which are expected to be recognized over a weighted average period of approximately 1.95 years. F- 18 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Share-based compensation expense recorded for stock options granted were ¥414,326 and ¥409,418 ($66,697) for the six months ended December 31, 2013 and 2014, respectively. The total unrecognized share-based compensation expense for stock options as of December 31, 2014 was approximately ¥1.9 million ($0.3 million), which is expected to be recognized over a weighted average period of approximately 2.24 years. Following is a summary of the restricted stock grants: Restricted stock grants Shares Nonvested as of June 30, 2014 230,362 Granted 50,000 No vested adjustment 40,625 Cancelled (40,625 ) Vested (126,787 ) Nonvested as of December 31, 2014 153,575 NOTE 17. 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 December 31, 2014 December 31, 2014 RMB RMB U.S. Dollars Allowance for doubtful receivables ¥ 1,209,961 ¥ 1,237,938 $ 201,668 Total deferred income tax assets ¥ 1,209,961 ¥ 1,237,938 $ 201,668 Deferred tax liability is comprised of the following: June 30, 2014 December 31, 2014 December 31, 2014 RMB RMB U.S. Dollars Income tax cost due to unpayable accounts ¥ 180,186 ¥ 180,186 $ 29,353 Total deferred income tax liability ¥ 180,186 ¥ 180,186 $ 29,353 F- 19 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company’s tax provision (benefit) is comprised of the following: For the three months ended December 31, 2013 2014 2014 RMB RMB U.S. Dollars Current income tax ¥ 1,295,941 ¥ 644,630 $ 105,014 Deferred income taxes (44,079 ) (25,943 ) (4,226 ) Provision ¥ 1,251,862 ¥ 618,687 $ 100,788 For the six months ended December 31, 2013 2014 2014 RMB RMB U.S. Dollars Current income taxes ¥ 1,491,400 ¥ 676,909 $ 110,273 Deferred income taxes (32,211 ) (27,977 ) (4,558 ) Provision ¥ 1,459,189 ¥ 648,932 $ 105,715 NOTE 18. 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 December 31, 2014 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 301,539 Unappropriated retained earnings 3,388,114 3,449,759 6,837,873 1,113,932 Accumulated other comprehensive loss (16,621 ) (11,853 ) (28,474 ) (4,635 ) Total non-controlling interest ¥ 5,022,493 ¥ 3,637,906 ¥ 8,660,399 $ 1,410,836 F- 20 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. CONCENTRATIONS For the three months ended December 31, 2013 and 2014, our two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented 50.7%, 14.0% and 58.83%, 10.35% of the Company’s revenue, respectively. For the six months ended December 31, 2013 and 2014, our two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented 48.04%, 18.01% and 56.79%, 8.89% of the Company’s revenue, respectively. For the three months ended December 31, 2013, four major suppliers accounted for 52.7% of the company’s total purchase. For the three months ended December 31, 2014, one major suppliers accounted for 20% of the company’s total purchases. For the six months ended December 31, 2013, four major suppliers accounted for 48.8% of the company’s total purchase. For the six months ended December 31, 2014, one major suppliers accounted for 14% of the company’s total purchases. NOTE 20. 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 December 31, 2014: Twelve months ending December 31, Office lease payment RMB U.S. Dollars 2015 ¥ 1,188,333 $ 193,587 2016 90,000 14,662 Total ¥ 1,278,333 $ 208,249 In January 2015, BHD renewed its lease agreements amounted to ¥840,000 ($136,841) for one more year. (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 December 31, 2014, the Company estimated its severance payments of approximately ¥1.5 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 21. RELATED PARTY TRANSACTIONS AND BALANCES Sales to related parties – sales to related parties consisted of the following: For the three months ended December 31, 2013 2014 2014 RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. * ¥ 1,242,073 ¥ - $ - Xiamen Henda Haitian computer network Inc 384,615 768,118 125,131 Revenues from related parties ¥ 1,626,688 ¥ 768,118 $ 125,131 F- 21 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the six months ended December 31, 2013 2014 2014 RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. * ¥ 1,358,546 ¥ - $ - Xiamen Henda Haitian computer network Inc 683,760 768,118 125,131 Revenues from related parties ¥ 2,042,306 ¥ 768,118 $ 125,131 * Not a related party after October 31, 2014, (See Note 3). Purchases from related parties – purchases from related parties consisted of the following: For the six months ended December 31, 2013 2014 2014 RMB RMB U.S. Dollars Xiamen Hengda Hitek Computer Network Co. Ltd. ¥ - ¥ 797,585 $ 129,932 Purchase from related parties ¥ - ¥ 797,585 $ 129,932 There was no purchase from related parties for the three months ended December 31, 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 ¥9,631,504 ($1,569,032) from the Founders, their family members and senior officers as of June 30, 2014 and December 31, 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 December 31, 2014, ¥284,370 and ¥676,322 ($110,177) was due to them, respectively. NOTE 22. 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. F- 22 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Summary information regarding consolidated VIEs is as follows: June 30, 2014 December 31, 2014 December 31, 2014 RMB RMB U.S. Dollars ASSETS Current Assets Cash and cash equivalents ¥ 14,021,653 ¥ 1,186,734 $ 193,326 Trade accounts receivable, net 51,033,035 53,331,354 8,688,011 Purchase advances 24,600,379 22,510,477 3,667,097 Other assets 34,097,774 51,981,630 8,468,132 Total current assets ¥ 123,752,841 ¥ 129,010,195 $ 21,016,566 Non-current assets 15,758,115 15,897,211 2,589,755 Total Assets ¥ 139,510,956 ¥ 144,907,406 $ 23,606,321 LIABILITIES Trade accounts payable ¥ 11,413,505 ¥ 12,602,016 $ 2,052,948 Taxes payable 7,589,846 8,369,413 1,363,430 Other liabilities 21,878,699 25,685,691 4,184,360 Total current liabilities 40,882,050 46,657,120 7,600,738 Total Liabilities ¥ 40,882,050 ¥ 46,657,120 $ 7,600,738 The financial performance of VIEs reported in the condensed consolidated statement of income and comprehensive income for the three months ended December 31, 2014 includes revenues of ¥21,328,972 ($3,474,623), gross profit of ¥8,977,931 ($1,462,561), operating expenses of ¥3,63,239 ($588,619), other income of ¥119,650($19,492) and a net income of ¥4,865,655($792,646). The financial performance of VIEs reported in the condensed consolidated statement of income and comprehensive income for the six months ended December 31, 2014 includes revenues of ¥25,632,972 ($4,175,771), gross profit of ¥9,593,245 ($1,562,799), operating expenses of ¥6,124,974 ($997,797), other income of ¥87,925($14,323) and a net income of ¥2,907,263 ($473,611). NOTE 23. SUBSEQUENT EVENTS On January 12, 2015 the Company borrowed ¥1.6 million from its Chief Operating Officer to supplement the Company’s working capital. This loan is due on October 12, 2015 with an annual interest rate of 6.16%. On January 28, 2015, the Company entered into an engagement agreement with Maxim Group LLC ( “Maxim”) who shall serve as the exclusive agent for the Company in connection with the Company’s offering of up to $10,000,000 of its registered shares. On January 29, 2015, the Company’s shareholders approved an increase of its authorized shares from 25,000,000 shares to 100,000,000 shares. The shareholders also approved the Company's 2015 Equity Incentive Plan. On January 31, 2015, the Company granted 150,000 restricted shares to Mr. Yin Shenping and 150,000 restricted shares to Mr. Chen Guangqiang under the Company’s 2015 Inventive Plan. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. The Company also granted 400,000 options to management and staff. Exercise price for each warrant is $1.65 per share and will vest over three years with one third of the warrants vesting every year from the grant date. On February 2, 2015, the Company entered into an engagement agreement with Maxim who shall serve as the exclusive financial advisor and investment banker for the Company . Either party may terminate this engagement agreement at any time upon 30 days prior written notice after the 6 months anniversary of this agreement. Pursuant to this agreement, the Company issued 24,000 restricted shares to Maxim. On February 13, 2015, the Company entered into certain warrants exchange agreements with certain holders (the “Holders”) of warrants to purchase 163,950 ordinary shares of the Company (the “Warrants”) issued in the Company’s November 2013 registered offering. These Holders agreed to exchange the Warrants for 204,938 of ordinary shares (the “Exchange Shares”) equal to one hundred twenty five percent (125%) of the shares issuable upon exercise of the Warrants. The Exchange Shares will be issued to the Holders in exchange for the Warrant and without the payment of any other consideration by the Holders. Upon completion of the transaction contemplated in the Exchange Agreement, the Warrants shall will be automatically canceled and terminated. F- 23