Recon Technology, Ltd 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market for Our Ordinary Shares We completed our initial public offering on July 29, 2009. The following table sets forth the quarterly high and low sale prices for our ordinary shares as reported on the NASDAQ Capital Market. High Low Year Ended June 30, 2016 Quarter Ended September 30, 2015 (through September 23, 2015) $ 1.68 $ .74 Year Ended June 30, 2015 Quarter Ended September 30, 2014 $ 5.38 $ 3.46 Quarter Ended December 31, 2014 $ 5.47 $ 1.93 Quarter Ended March 31, 2015 $ 3.20 $ 1.27 Quarter Ended June 30, 2015 $ 2.95 $ 1.50 Year Ended June 30, 2014 Quarter Ended September 30, 2013 $ 2.43 $ 1.75 Quarter Ended December 31, 2013 $ 5.80 $ 2.18 Quarter Ended March 31, 2014 $ 8.00 $ 3.07 Quarter Ended June 30, 2014 $ 5.62 $ 3.22 As of June 30, 2015, there were approximately seven holders of record of our ordinary shares. This excludes our ordinary shares owned by shareholders holding ordinary shares under nominee security position listings. On June 30, 2015, the last sales price of our ordinary shares as reported on the NASDAQ Capital Market was $1.50 per ordinary share. Dividend Policy We have never declared or paid any cash dividends on our ordinary shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant. Because we are a holding company with no operations of our own and all of our operations are conducted through our Chinese subsidiary, our ability to pay dividends and to finance any debt that we may incur is dependent upon dividends and other distributions paid. In addition, Chinese legal restrictions permit payment of dividends to us by our Chinese subsidiary only out of its accumulated net profit, if any, determined in accordance with Chinese accounting standards and regulations. Under Chinese law, our subsidiary is required to set aside a portion (at least 10%) of its after-tax net income (after discharging all cumulated loss), if any, each year for compulsory statutory reserve until the amount of the reserve reaches 50% of our subsidiaries’ registered capital. These funds may be distributed to shareholders at the time of its wind up. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Holding Company Structure.” 17 Payments of dividends by our subsidiary in China to the Company are also subject to restrictions including primarily the restriction that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. There are no such similar foreign exchange restrictions in the Cayman Islands. (b) We are not required to provide any disclosure under this item, as we have applied all of the net proceeds from our initial public offering, as disclosed in our annual report on Form 10-K for the year ended June 30, 2011. While we have filed a shelf registration statement on Form S-3 (SEC no. 333-190387, declared effective August 14, 2013), we have sold 546,500 shares under such registration statement. (c) None. Item 6. Selected Financial Data. The Company is not required to provide the information required by this Item because the Company is a smaller reporting company. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. The following discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors. Overview We are a company with limited liability incorporated in 2007 under the laws of the Cayman Islands. Headquartered in Beijing, we provide products and services to oil and gas companies and their affiliates through our Domestic Companies. As the company contractually controls the Domestic Companies, the Company serves as the center of strategic management, financial control and human resources allocation for the Domestic Companies. Our business is mainly focused on the upstream sectors of the oil and gas industry. We derive our revenues from the sales and provision of (1) oilfield dedicated products and accessories, and (2) stimulation technology and services. Our products and services involve most of the key procedures of the extraction and production of oil and gas, and include automation systems, equipment, tools and on-site technical services. Our VIEs provide the oil and gas industry with equipment, production technologies, automation and services to enhance our customers’ efficiency. • Nanjing Recon: Nanjing Recon is a high-tech company that specializes in automation services for oilfield companies. It mainly focuses on providing automation solutions to the oil exploration industry, including monitoring wells, automatic metering to the joint station production, process monitor, and a variety of oilfield equipment and control systems. • BHD: BHD is a high-tech company that specializes in transportation equipment and stimulation productions and services. Possessing proprietary patents and substantial industry experience, BHD has built up stable and strong working relationships with the major oilfields in China. 18 Recent Developments During this year, affected by decreased oil prices and CAPEX expenditures of our clients, our finished projects were maintained at a lower level as compared to the same period of last year. On January 29, 2015, the shareholders of the Company approved the Second Amended and Restated Memorandum of Association and Articles of Association which, among other things, increases of the authorized ordinary shares from 25,000,000 to 100,000,000. On May 13, 2015, the Company entered into an Equity Distribution Agreement with Maxim Group LLC to create an at-the-market equity program (the “ATM Offering”) under which it may sell up to $10,000,000 worth of its ordinary shares (the “Shares”) from time to time through Maxim Group LLC, as sales agent. As of September 16, 2015, 313,071 shares have been issued under this agreement, among which 15,874 shares are issued after June 30, 2015. On September 22, 2015, the Company entered into an amendment to the Letter Agreement (the “Agreement”) with Maxim Group LLC dated January 28, 2015, extending the term of the Agreement for an additional six months, or until February 29, 2016. Business Outlook The oilfield engineering and technical service industry is generally divided into five sections: (1) exploration, (2) drilling and completion, (3) testing and logging, (4) production and (5) oilfield construction. Our businesses have mainly focused on production processes. As of this year, we are also expanding our business to well completion and horizontal well down-hole service process. We still believe that many existing oil wells and oilfields are in need of renewal and improvement on their current equipment to maintain production. We also believe that as many new wells are developed, our gathering and transferring equipment will be able to service an industry need. Accordingly, in the next year, we will focus on the following areas. Measuring Equipment and Service . “Digital oil field” and the management of oil companies are highly regarded. We believe our oilfield Supervisory Control and Data Acquisition (“SCADA”) and related technical support services will address the needs of the oil well automation system market. Through early cooperation with CNPC in Turkmenistan, we have developed our experience in this market. Although bidding has not yet commenced, we will continue pursuing overseas business projects in the coming second phase construction. Gathering and Transferring Equipment . With more new wells developed, our management anticipates that demand for our furnaces and burners will grow more compared to last year, especially in the Jilin Oilfield and Xinjiang Oilfield. Fracturing business . We believe we cooperated well with Zhongyuan Oilfield in 2013 and expect to continue growing revenue from fracturing and related stimulation services in the coming year. New business . Design and development of down-hole tools has always been an important technique for oilfield companies. Recently, this market has developed rapidly. After a year long test project for one of our client, we have developed experience with this technology and our products and services have been accepted by our client. We expect to generate revenue from this business in the coming year. Recent Industry Developments Despite uncertainty in the energy industry related to such matters as fluctuating prices and future opportunities for oil companies, our management believes there are still many factors to support our long-term development: (1) The opening of the Chinese oil industry to participation by non-state owned service providers and vendors played an increasingly important role in the high-end oilfield service segment to allow competition based on efficiency and price. As oil and gas fields are depleted, it becomes more challenging to find and convert reserves into usable energy sources. As the industry has permitted competition by private companies and oil companies have formed separate service companies, high-tech service has gradually opened up to private companies; 19 (2) Speeding up the development of unconventional hydrocarbon resources such as shale gas and coal bed methane will bring more requirements of related techniques and service. China is rich in unconventional hydrocarbon resources, but new exploration and development technology breakthroughs are urgently needed; and (3) Overseas assets of Chinese oilfield companies have increased gradually, and we expect this increase will provide more opportunity for domestic service companies to participate in foreign projects going forward. Management is focused on these factors and will seek to extend our business on the industrial chain, such as by providing more integrated services and incremental measures and growing our business from a predominantly up-ground business to include some down-hole services as well. Growth Strategy As a smaller local company in the PRC, it is our basic strategy to focus on developing our onshore oilfield business, i.e. the upstream segment of the industry. Due to the remote locations and difficult environment existing in China’s oil and gas fields, at present, there are few foreign competitors. Large domestic oil companies prefer to focus on their exploration and development businesses to earn higher margins and maintain their competitive advantage. With regard to private oilfield service companies, 90% specialize in the manufacture of drilling and production equipment. Thus, the market for technical support and project service is still in its early stages. Our management focuses on providing high quality products and services at oilfields where we have a geographical advantage. Such strategy allows us to avoid conflicts of interest with bigger suppliers of drilling equipment and keep our leading position within the market segment. Our mission is to increase the automation and safety levels of industrial petroleum production in China, and improve its efficiency and effectiveness through advanced technologies. At the same time, we are always looking to improve our business and to increase our earning capability. Factors Affecting Our Results of Operations Our operating results in any period are subject to the general conditions typically affecting the Chinese oilfield service industry including: • the amount of spending by our customers, primarily those in the oil and gas industry; • growing demand from large corporations for improved management and software designed to enhance corporate performance; • the procurement processes of our customers, especially those in the oil and gas industry; • competition and related pricing pressure from other oilfield service solution providers, especially those targeting the oil and gas industry in China; • the ongoing development of the oilfield service market in China; and • inflation and other factors. Unfavorable changes in any of these general conditions could negatively affect the number and size of the projects we undertake, the number of products we sell, the amount of services we provide, the price of our products and services or otherwise affect our results of operations. 20 Our operating results in any period are more directly affected by company-specific factors including: • our revenue growth in relation to the proportion of our business dedicated to large companies and our ability to successfully develop, introduce and market new solutions and services; • our ability to increase our revenues from customers both old and new in the oil and gas industry in China; • our ability to effectively manage our operating costs and expenses; and • our ability to effectively implement any targeted acquisitions and/or strategic alliances so as to provide efficient access to the markets in the oil and gas industry. Critical Accounting Policies and Estimates Estimates and Assumptions We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this quarterly report. Significant accounting estimates reflected in our Company’s consolidated financial statements include revenue recognition, deferred taxes, allowance for doubtful accounts, the fair value of share-based payments, warrants liability and useful lives of property and equipment. Consolidation of VIEs We recognize an entity as a variable interest entity, or VIE, if it either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. We consolidate a VIE as its primary beneficiary when we have both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. We will continue to make ongoing assessment of whether our VIEs still continue to be VIEs and whether we continue to be the primary beneficiary. Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against our general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. 21 Revenue Recognition We recognize revenue when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been provided; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client and the client has signed a completion and acceptance report, risk of loss has transferred to the client, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. Hardware Revenue from hardware sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer’s final acceptance of the arrangement. Software The Company sells self-developed software. For software sales, the Company recognizes revenues in accordance with the provisions of Accounting Standards Codification, Topic 985-605, “Software Revenue Recognition,” and related interpretations. Revenue from software is recognized according to project contracts. Contract costs are accumulated during the periods of installation and testing or commissioning. Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance statements. Services The Company provides services to improve software functions and system requirements on separated fixed-price contracts. Revenue is recognized when services are completed and acceptance is determined by a completion report signed by the customer. Deferred income represents unearned amounts billed to customers related to sales contracts. Cost of Revenues When the criteria for revenue recognition have been met, costs incurred are recognized as cost of revenue. Cost of revenues includes wages, materials, handling charges, the cost of purchased equipment and pipes, other expenses associated with manufactured products and services provided to customers, and inventory reserve. We expect cost of revenues to grow as our revenues grow. It is possible that we could incur development costs with little revenue recognition, but based upon our past history, we expect our revenues to grow. Fair Values of Financial Instruments The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs are defined as follows: Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. 22 Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable. The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, advances to suppliers, trade accounts payable, accrued liabilities, advances from customers and notes payable approximate fair value because of the immediate or short-term maturity of these financial instruments. Long-term receivables and borrowings approximate fair value because their interest rates charged approximate the market rates for financial instruments with similar terms. The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs (See Note 13). Any changes in the assumptions that are used in the Black-Scholes Model may increase or decrease the warrants liability from quarter to quarter and any change in adjustment would be charged to operations . Receivables Trade receivables are carried at the original invoiced amount less a provision for any potential uncollectible amounts. Provisions are applied to trade receivables where events or changes in circumstances indicate that the balance may not be collectible. The identification of doubtful accounts requires the use of judgment and estimates of management. Our management must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable, historical bad debts, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Increase in our allowance for doubtful accounts would lower our net income and earnings per share. Deferred Tax Estimates As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. Deferred tax accounting requires that we evaluate net deferred tax assets by jurisdiction to determine if these assets will more likely than not be realized. This analysis requires considerable judgment and is subject to change to reflect future events and changes in the tax laws. If an allowance is established against our deferred tax assets because they may not be fully realizable in the future, our net income and earnings per share would decrease. Valuation of Long-Lived Assets We review the carrying values of our long-lived assets for impairment whenever events or changes in circumstances indicate that they may not be recoverable. When such an event occurs, we project undiscounted cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections indicate that the carrying value of the long-lived asset will not be recovered, we reduce the carrying value of the long-lived asset by the estimated excess of the carrying value over the projected discounted cash flows. In the past, we have not had to make significant adjustments to the carrying values of our long-lived assets, and we do not anticipate a need to do so in the future. However, circumstances could cause us to have to reduce the value of our capitalized software more rapidly than we have in the past if our revenues were to significantly decline. Estimated cash flows from the use of the long-lived assets are highly uncertain and therefore the estimation of the need to impair these assets is reasonably likely to change in the future. Should the economy or the acceptance of our software change in the future, it is likely that our estimate of the future cash flows from the use of these assets will change by a material amount. There were no impairments at June 30, 2014 and June 30, 2015. 23 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. Recently enacted accounting pronouncements In June 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2015-10, “Technical Corrections and Improvements.” This ASU corrects for differences between original guidance and the Accounting Standards Codification (“ASC”) and makes minor improvements affecting several topics. We are currently in the process of evaluating this standard, but do not expect its adoption to have a material impact on our consolidated financial statements. The amendments in this Update will apply to all reporting entities within the scope of the affected accounting guidance. In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory.” The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For public business entities, The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently in the process of evaluating this standard, but do not expect its adoption to have a material impact on our consolidated financial statements. Results of Operations The following consolidated results of operations include the results of operations of the Company and its VIEs, BHD and Nanjing Recon. Our historical reporting results are not necessarily indicative of the results to be expected for any future period. Revenue For the Years Ended June 30, Increase / Percentage 2014 2015 (Decrease) Change Hardware - non-related parties ¥ 81,161,610 ¥ 45,488,149 ¥ (35,673,461 ) (44.0 )% Hardware - related parties 4,276,799 1,364,070 (2,912,729 ) (68.1 )% Service 477,778 103,774 (374,004 ) (78.3 )% Software - non-related parties 5,067,673 3,492,804 (1,574,869 ) (31.1 )% Software - related parties 2,463,248 1,064,103 (1,399,145 ) (56.8 )% Total revenues ¥ 93,447,108 ¥ 51,512,900 ¥ (41,934,208 ) (44.9 )% 24 Our total revenues for the year ended June 30, 2015 were approximately ¥51.5 million ($8.5 million), a decrease of approximately ¥41.9 million or 44.9% from ¥93.4 million for the year ended June 30, 2014. This was mainly caused by: 1. Hardware business - non - related parties. During the year ended June 30, 2015, the decrease in hardware revenue was mainly caused by lower sales of furnaces and automation system. 2. Hardware – related parties. After we achieved business entrance certification in the name of Recon and could cooperate with oilfield customers directly two years ago, we no longer required the services of a related party with such certification and, accordingly, revenue from related-parties would decrease. As long as the local agency still purchases automation products from Recon through our related parties, we will continue to recognize revenue from related parties, but we anticipate that such hardware and software related party revenue is likely to fluctuate from year to year. Major part of related party hardware revenue of this period was from increased requirement of system upgrading and remote guidance related service from some other related clients other than those of same period last year. Hardware revenue from related party decreased was mainly caused by reclassification. Revenue from some agent company was not included in this column. 3. Service business. Service revenue for the years ended June 30, 2014 and 2015 consisted mainly of minor maintenance services, which were provided upon request by customers. Decrease of service revenue was mainly caused by less production activities of our clients. 4. Software business - non – related parties. Our software sales decreased approximately ¥1.6 million ($0.3 million), mainly caused by reclassification of some company sales to non-related. We record revenue as software sales if (1) the customer signs a separate software contract with us, or (2) the customer accepts VAT invoices for software. The amount of our revenues categorized as software sales may fluctuate because certain software may be sold with hardware at times as a whole product and not separately priced 5. Software business – related parties. For the year ended June 30, 2015, we recorded software revenue of ¥1.1 million ($0.2 million) to a related party, a decrease of ¥1.4 million ($0.2 million) from the same period of last year, which was caused by less requirement of our clients. Cost and Margin For the Years Ended June 30, Increase / Percentage 2014 2015 (Decrease) Change Total revenues ¥ 93,447,108 ¥ 51,512,900 ¥ (41,934,208 ) (44.9 )% Cost of revenues 61,030,247 41,400,727 (19,629,520 ) (32.2 )% Gross profit ¥ 32,416,861 ¥ 10,112,173 ¥ (22,304,688 ) (68.8 )% Margin % 34.7 % 19.6 % (15.1 )% — Cost of Revenues . Our cost of revenues includes raw materials and costs related to design, implementation, delivery and maintenance of products and services. All materials and components we need can be purchased or manufactured by subcontracts. Usually the prices of electronic components do not fluctuate dramatically due to market competition and will not significantly affect our cost of revenues. However, specialized equipment and incentive chemical products may be directly influenced by metal and oil price fluctuations. Additionally, the prices of some imported accessories mandated by our customers can also impact our cost. Inventory reserve for changes in price level, impairment of inventory, slow moving or other causes will also affect our cost. 25 Our cost of revenues decreased from approximately ¥61.0 million in the year ended June 30, 2014 to approximately ¥41.4 million ($6.8 million) for the same period in 2015, a decrease of approximately ¥19.6 million ($3.2 million), or 32.2%. As a percentage of revenues, our cost of revenues increased from 65.3% in 2014 to 80.4% in 2015. This increase was mainly caused by an inventory allowance amounted to ¥7.7 million ($1.3 million) during the year ended June 30, 2015. Affected by unfavorable industrial surrounding, we made provision for slow moving inventories and valued some specialized tools to its net realizable value. Gross Profit . Our gross profit decreased to approximately ¥10.1 million ($1.7 million) for the year ended June 30, 2015 from approximately ¥32 .4 million for the year ended June 30, 2014. This was mainly due to decreased hardware and software revenue during the year ended June 30, 2015 as compared to the same period last year and increased provision for slow moving inventory. Our gross profit as a percentage of revenue decreased to 19.6 % for the year ended June 30, 2015 compared to 34.7% for the same period in 2014 because an inventory allowance in the amount of approximately ¥7.7 million ($1.3 million) was provided for the year ended June 30, 2015. In more detail: For the Years Ended June 30, Increase / Percentage 2014 2015 (Decrease) Change Total revenues-hardware and software- non related parties ¥ 86,229,283 ¥ 48,980,953 ¥ (37,248,330 ) (43.2 )% Cost of revenues -hardware and software- non related parties 57,333,670 41,373,566 (15,960,104 ) (27.8 )% Gross profit ¥ 28,895,613 ¥ 7,607,387 ¥ (21,288,226 ) (73.7 )% Margin % 33.5 % 15.5 % (18.0 )% __ Revenue from hardware and software to non-related parties decreased by approximately ¥37.2 million was mainly due to the decrease from furnaces sales and automation products in the year ended June 30, 2015. The gross profit from the hardware and software sales to non-related parties decreased ¥21.3 million ($3.5 million) compared to the same period of last year. For the Years Ended June 30, Increase / Percentage 2014 2015 (Decrease) Change Total revenues-hardware and software - related parties ¥ 6,740,047 ¥ 2,428,173 ¥ (4,311,874 ) (64.0 )% Cost of revenues -hardware and software - related parties 3,619,470 27,161 (3,592,309 ) (99.2 )% Gross profit ¥ 3,120,577 ¥ 2,401,012 ¥ (719,565 ) (23.1 )% Margin % 46.3 % 98.9 % 56.2 % __ Cost of revenue from hardware and software-related parties decreased as revenue decreased, while gross margin increased mainly due to most of the revenues to related parties having resulted from automation upgrades and maintaining service sales with higher gross profit. 26 For the Years Ended June 30, Increase / Percentage 2014 2015 (Decrease) Change Total revenues-service ¥ 477,778 ¥ 103,774 ¥ (374,004 ) (78.3 )% Cost of revenues -service 77,107 - (77,107 ) (100.0 )% Gross profit ¥ 400,671 ¥ 103,774 ¥ (296,897 ) (74.1 )% Margin % 83.9 % 100 % 16.1 % __ Service revenue for years ended June 30, 2014 and 2015 consisted mainly of minor maintenance services, which were provided upon request by customers. Operating Expenses For the Years Ended June 30, Increase / Percentage 2014 2015 (Decrease) Change Selling and distribution expenses 5,293,343 11,312,452 6,019,109 113.7 % % of revenue 5.7 % 22.0 % 16.3 % — General and administrative expenses 16,198,947 30,147,141 13,948,194 86.1 % % of revenue 17.3 % 58.5 % 41.2 % — Research and development expenses 8,094,333 4,168,813 (3,925,520 ) (48.5 )% % of revenue 8.7 % 8.1 % (0.6 )% — Operating expenses ¥ 29,586,623 ¥ 45,628,406 ¥ 16,041,783 54.2 % Selling and Distribution Expenses . Selling and distribution expenses consisted primarily of salaries and related expenditures of our sales and marketing organization, sales commissions, costs of our marketing programs including advertising and trade shows, and an allocation of our facilities and depreciation expenses. Selling expenses increased ¥6.0 million to ¥11.3 million ($1.9 million) for the year ended June 30, 2015 from ¥5.3 million for the year ended June 30, 2014. This increase was primarily due to an increase in traveling expenses and service fees, offset by a decrease in shipping charge. Selling expenses were 5.7% of total revenues in the year ended June 30, 2014 and 22.0% of total revenues in the same period of 2015. General and Administrative Expenses . General and administrative expenses consisted primarily of costs in human resources, facilities costs, depreciation expenses, professional advisor fees, audit fees, option expenses and other expenses incurred in connection with general operations. General and administrative expenses increased by 86.1%, or ¥13.9million ($2.3 million), from approximately ¥16.2 million in the year ended June 30, 2014 to approximately ¥30.1 million ($5.0 million) in the same period in 2015. General and administrative expenses were 17.3% of total revenues in 2014 and 58.5% of total revenues in 2015. The increase in general and administrative expenses was mainly due to an increase in consulting fees related to investor relationship services, salary and compensation, allowance for doubtful accounts. We recorded a provision of ¥13.9 million ($2.3 million) for unrecoverable accounts, which arose as a result of an unfavorable industry environment and our client’s postponed production plan. 27 Research and development (“R&D”) expenses . R&D expenses consist primarily of salaries and related expenditures on our R&D projects. R&D expenses decreased by 48.5%, from approximately ¥8.1 million for the year ended June 30, 2014 to approximately ¥4.2 million ($0.7 million) for the same period of 2015. This decrease was primarily due to lower research activities. We enhanced our cost/expense control during this fiscal year and may continue to be strict on our R&D project selection and implementation. Net Income For the Years Ended June 30, Increase / Percentage 2014 2015 (Decrease) Change Income (loss) from operations ¥ 2,830,238 ¥ (35,516,233 ) ¥ (38,346,471 ) (1,354.9 )% Interest and other expense (41,282 ) 1,507,770 1,549,052 3,752.4 % Income (loss) before income taxes 2,788,956 (34,008,463 ) (36,797,419 ) (1,319.4 )% Provision (benefit) for income taxes 961,136 (2,552,075 ) (3,513,211 ) (365.5 )% Net income (loss) 1,827,820 (31,456,388 ) (33,284,208 ) (1,821.0 )% Less: Net income attributable to non-controlling interest 1,020,632 - (1,020,632 ) (100.0 )% Net income (loss) attributable to Recon Technology, Ltd ¥ 807,188 ¥ (31,456,388 ) ¥ (32,263,576 ) (3,997.0 )% Income (loss) from operations . Loss from operations was approximately ¥35.5 million ($5.8 million) for the year ended June 30, 2015, as compared to income of ¥2.8 million for the same period in 2014. This decrease in income from operations can be attributed primarily to the decreased revenue and increases in provision of inventory allowance, selling, general and administrative expenses. Interest and other income (expense). Interest and other income was approximately ¥1.5 million ($0.2 million) for the year ended June 30, 2015, as compared to interest and other expense of ¥41,282 for the same period in 2014. The ¥1.5 million ($0.2 million) increase in interest and other income was primarily due to a loss from warrants redemption and decreases in subsidy income, offset by a decrease in loss from investment and change in warrant liability. 28 Provision (benefit) for income tax . Provision for income tax for the year ended June 30, 2014 was approximately ¥1.0 million and benefit from income tax was ¥2.6 million ($0.42 million) for the year ended June 30, 2015. This increase of benefit from income tax was mainly due to an over-accrual in income tax in prior years. Net income (loss) . As a result of the factors described above, net loss was approximately ¥31.5 million ($5.2 million) for the year ended June 30, 2015, a decrease of approximately ¥33.3 million ($5.5 million) from net income of ¥1.8 million for the same period in 2014. Net income (loss) attributable to ordinary shareholders . As a result of the factors described above, net loss attributable to ordinary shareholders was approximately ¥31.5 million ($5.2 million) for the year ended June 30, 2015, a decrease of approximately ¥32.3 million ($5.3 million) from net income attributable to ordinary shareholders of approximately ¥0.8 million for same period of 2014. Adjusted EBITDA Adjusted EBITDA. We define adjusted EBITDA as net income (loss) adjusted for income tax expense, interest expense, one-time write down expenses change in fair value of warrant liability, loss from investment, non-cash stock compensation expense, depreciation and amortization. We think it is useful to an equity investor in evaluating our operating performance because: (1) it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which the assets were acquired; and (2) it helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results. For the Years Ended June 30, 2014 2015 2015 Increase / Percentage RMB RMB USD (Decrease) Change Reconciliation of Adjusted EBITDA to Net Income (loss) Net income (loss) ¥ 1,827,820 ¥ (31,456,388 ) $ (5,166,270 ) ¥ (33,284,208 ) (1,821.0 )% Provision for income taxes 961,136 (2,552,075 ) (419,143 ) (3,513,211 ) (365.5 )% Interest expense and foreign currency adjustment 1,141,069 1,129,641 185,527 (11,428 ) (1.0 )% Change in fair value of warrants liability (60,647 ) (4,034,272 ) (662,573 ) (3,973,625 ) 6,552.1 % Write down of accounts receivable - 10,683,761 1,754,657 10 ,683,761 100.0 % Provision for slow moving inventories - 7,700,836 1,264,753 7,700,836 100.0 % Loss from investment 1,535,250 - - (1,535,250 ) (100 )% Restricted shares issued for consulting services 407,593 1,585,462 260,390 1,177,869 289.0 % Loss from warrants redemption - 2,496,375 409,995 2,496,375 100.0 % Stock compensation expense 2,429,028 3,123,417 512,977 694,389 28.64 % Depreciation and amortization 595,647 526,046 86,396 (69,601 ) (11.7 )% Adjusted EBITDA ¥ 8,836,896 ¥ (10,797,197 ) $ (1,773,291 ) ¥ (19,634,093 ) (222.2 )% Adjusted EBITDA decreased by approximately ¥19.6 million ($3.2 million) to an approximate loss of ¥10.8 million ($1.8 million) for the year ended June 30, 2015 as compared to approximately ¥8.8 million income for the same period in 2014. This was mainly due to decreased revenue, and increases in selling, general and administrative expenses. 29 Adjusted Net Income (Loss) and Adjusted Earnings (Loss) Per Share For the Years Ended June 30, 2014 2015 2015 RMB RMB USD Reconciliation of Net Income (loss) attributable to Recon Technology, Ltd To Adjusted Net Income (loss) attributable to Recon Technology, Ltd Net income (loss) attributable to Recon Technology, Ltd ¥ 807,188 ¥ (31,456,388 ) $ (5,166,271 ) Special items (A) : Change in fair value of warrants liability (60,647 ) (4,034,272 ) (662,573 ) Loss from investment 1,535,250 - - Restricted shares issued for consulting services 407,593 1,585 ,462 260,390 Write down of accounts receivable - 10,683,761 1,754,658 Provision for slow moving inventories - 7,700,836 1,264,754 Loss from warrants redemption - 2,496,375 409,995 Stock compensation expense 2,429,028 3,123,417 512,977 Adjusted net income (loss) attributable to Recon Technology, Ltd ¥ 5,118,412 ¥ (9,900,809 ) $ (1,626,070 ) Reconciliation of U.S. GAAP Earnings (Loss) Per Share to Non U.S. GAAP Adjusted Earnings (Loss) Per Share U.S. GAAP earnings (loss) per share ¥ 0.18 ¥ (6.45 ) $ (1.06 ) Impact of special items on earnings per share 0.99 4.42 0.73 Non U.S. GAAP adjusted earnings (loss) per share ¥ 1.17 ¥ (2.03 ) $ (0.33 ) Weighted - average shares -diluted 4,368,162 4,876,504 4,876,504 (A) Special items are certain non-cash expenses and one-time expenses that are included in our U.S. GAAP reported results. There was no income tax benefit associated with the special items. The non-GAAP financial measures are provided to enhance investors' overall understanding of Recon's current financial performance. Liquidity and Capital Resources Cash and Cash Equivalents . Cash and cash equivalents are comprised of cash on hand, demand deposits and highly liquid short-term debt investments with stated maturities of no more than six months. As of June 30, 2015, we had cash and cash equivalents in the amount of approximately ¥12.3 million ($2.0 million). Indebtedness . As of June 30, 2015, we had approximately ¥16.9 million ($2.8 million) in short-term borrowings from related parties, and ¥7.0 million ($1.1 million) in commercial loans from one local bank. Other than these amounts, we did not have any financing leases or purchase commitments, guarantees or other material contingent liabilities. 30 Holding Company Structure . We are a holding company with no operations of our own. All of our operations are conducted through our Domestic Companies. As a result, our ability to pay dividends and to finance any debt that we may incur is dependent upon the receipt of dividends and other distributions from the Domestic Companies. In addition, Chinese legal restrictions permit payment of dividends to us by our Domestic Companies only out of their respective accumulated net profits, if any, determined in accordance with Chinese accounting standards and regulations. Under Chinese law, our Domestic Companies are required to set aside a portion (at least 10%) of their after-tax net income (after discharging all cumulated loss), if any, each year for compulsory statutory reserve until the amount of the reserve reaches 50% of our Domestic Companies’ registered capital. These funds may be distributed to shareholders at the time of each Domestic Company’s wind up. Off-Balance Sheet Arrangements . We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. Capital Resources . To date we have financed our operations primarily through cash flows from operations, bank loans, short-term borrowings and stock offerings. As of June 30, 2015, we had total assets of approximately ¥134.3 million ($22.1 million), which includes cash of approximately ¥12.3 million ($2.0 million), net accounts receivable from third parties of approximately ¥52.2 million ($8.6 million), and net accounts receivable from related parties of approximately ¥4.8 million ($0.8 million). Working capital amounted to approximately ¥72.4 million ($11.9 million), and shareholders’ equity amounted to approximately ¥74.0 million ($12.2 million). Cash from Operating Activities . Net cash used in operating activities was approximately ¥15.1 million ($2.5 million) for the year ended June 30, 2015. This was an increase of approximately ¥7.1 million ($1.2 million) compared to net cash used in operating activities of approximately ¥8.0 million for the year ended June 30, 2014. In more detail: The increase in net cash used in operating activities for the year ended June 30, 2015, is primarily attributable to the decrease in net income offset by a ¥1.1 million change in accounts receivable, ¥4.2 million change in notes receivable, ¥3.8 million change other receivable, a ¥3.3 million change in purchase advance, a ¥1.6 million change in prepaid expense, a ¥5.7 million change in accounts payable, and a ¥1.3 million change in tax payable. Accounts receivable increased due to our operating seasonality and postpone payment by our clients. We will enhance our collection and expect to collect funds on these accounts by the year end. Cash from Investing Activities . Net cash used in investing activities was approximately ¥1.7 million ($0.3 million) for the year ended June 30, 2015, an increase of ¥1.4 million ($0.2 million) from ¥0.3 million for the same period of 2014. A ¥1.7 million net increase in the purchase of property and equipment, which was offset by the proceeds from disposal of equipment. Cash from Financing Activities . Net cash provided by financing activities amounted to approximately ¥11.1 million ($1.8 million) for the year ended June 30, 2015, as compared to cash flows provided by financing activities of approximately ¥14.0 million for the same period in 2014. During the year ended June 30, 2015, we repaid ¥3.0 million ($0.5 million) in short term bank loans and received ¥11.7 million ($1.9 million) of net proceeds from a related party. In June 2015, we had stock offerings to issued 297,197 shares of common stocks through an at-the-market offering, and received net proceeds of ¥2.3 million ($0.4 million). Working Capital . Total working capital as of June 30, 2015 amounted to approximately ¥72.4 million ($11.9 million), as compared to approximately ¥83.1 million as of June 30, 2014. Total current assets as of June 30, 2015 amounted to approximately ¥124.5 million ($20.5 million), a decrease of approximately ¥8.9 million ($1.5 million) as compared to approximately ¥133.4 million at June 30, 2014. The decrease in total current assets at June 30, 2015 compared to June 30, 2014 was mainly due to a decrease in cash and cash equivalents and purchase advances, offset by an increase in accounts receivable. 31 Current liabilities amounted to approximately ¥52.1 million ($8.6 million) at June 30, 2015, in comparison to approximately ¥50.3 million at June 30, 2014, an increase of approximately ¥1.8 million ($0.3 million). This increase of liabilities was attributable mainly to an increase in accounts payable and short-term borrowings from related parties, and offset by a decrease in short-term bank loans and taxes payable. Recently Enacted Accounting Standards In June 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2015-10, “Technical Corrections and Improvements.” This ASU corrects for differences between original guidance and the Accounting Standards Codification (“ASC”) and makes minor improvements affecting several topics. We are currently in the process of evaluating this standard, but do not expect its adoption to have a material impact on our consolidated financial statements. The amendments in this Update will apply to all reporting entities within the scope of the affected accounting guidance. In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory.” The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For public business entities, The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently in the process of evaluating this standard, but do not expect its adoption to have a material impact on our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. The Company is not required to provide the information required by this Item because the Company is a smaller reporting company.