Recon Technology, Ltd 10-Q

Item 5. Other Information. None. 24 Item 6. Exhibits. The following exhibits are filed herewith: Exhibit Number Document 3.1 Amended and Restated Articles of Association of the Registrant (1) 3.2 Amended and Restated Memorandum of Association of the Registrant (1) 4.1 Specimen Share Certificate (1) 10.1 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.2 Translation of Power of Attorney for rights of Chen Guangqiang in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.3 Translation of Power of Attorney for rights of Yin Shenping in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.4 Translation of Power of Attorney for rights of Li Hongqi in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.5 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.6 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1) 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) 25 10.15 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.16 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.17 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.18 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.19 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.20 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.21 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Nanjing Recon Technology Co., Ltd. (1) 10.22 Translation of Power of Attorney for rights of Chen Guangqiang in Nanjing Recon Technology Co., Ltd. (1) 10.23 Translation of Power of Attorney for rights of Yin Shenping in Nanjing Recon Technology Co., Ltd. (1) 10.24 Translation of Power of Attorney for rights of Li Hongqi in Nanjing Recon Technology Co., Ltd. (1) 10.25 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.26 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.27 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.28 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.29 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.30 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.33 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Yin Shenping (1) 10.34 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Chen Guangqiang (1) 10.35 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Li Hongqi (1) 10.36 Operating Agreement among Recon Technology (Jining) Co. Ltd., Nanjing Recon Technology Co., Ltd. and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.37 Operating Agreement among Recon Technology (Jining) Co. Ltd., Jining ENI Energy Technology Co., Ltd., and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 26 10.38 Operating Agreement among Recon Technology (Jining) Co. Ltd., Beijing BHD and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.39 Share Purchase Agreement, dated as of December 1, 2015, by and between Recon Technology Ltd., Recon Hengda Technology (Beijing) Co., Ltd., Qinghai Hua You Downhole Technologies Co., Ltd. and its shareholders. (3) 10.40 Exclusive Equity Interest Purchase Agreement, dated as of December 1, 2015, by and between Recon Hengda Technology (Beijing) Co., Ltd., Haung Baokun, Shi Jing and Li Suzhen. (3) 10.41 Equity Pledge Agreement, dated as of December 1, 2015, by and among Recon Hengda Technology (Beijing) Co., Ltd., Huang Boakun, Shi Jing and Li Suzhen. (3) 10.42 Power of Attorney of Huang Baokun. (3) 10.43 Power of Attorney of Shi Jing. (3) 10.44 Power of Attorney of Li Suzhen. (3) 10.45 Exclusive Technical Consulting and Service Agreement, dated as of December 1, 2015, between Recon Hengda Technology (Beijing) Co., Ltd. and Qinghai Hua You Downhole Technologies Co., Ltd. (3) 21.1 Subsidiaries of the Registrant (2) 99.1 Stock Option Plan (1) 99.2 Code of Business Conduct and Ethics (1) 31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (4) 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. (4) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4) 32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4) 101.INS XBRL Instance Document (4) 101.SCH XBRL Taxonomy Extension Schema Document (4) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (4) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (4) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (4) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (4) (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) Incorporated by reference to the Company’s Current Reprot on Form 8-K filed on December 7, 2015. (4) Filed herewith. 27 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 16, 2016 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 16, 2016 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, 2015 and December 31, 2015 F-2 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the six and three months ended December 31, 2014 and 2015 F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2014 and 2015 F-4 Notes to Unaudited Condensed Consolidated Financial Statements F-5 F- 1 RECON TECHNOLOGY, LTD CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) As of Jun 30, As of Dec 31, As of Dec 31, 2015 2015 2015 RMB RMB U.S. Dollars ASSETS Current assets Cash and cash equivalents ¥ 12,344,929 ¥ 3,108,330 $ 478,890 Notes receivable 4,205,530 3,026,820 466,332 Trade accounts receivable, net 52,186,397 66,958,781 10,316,111 Trade accounts receivable- related parties, net 4,769,800 - - Inventories, net 10,845,007 7,780,702 1,198,746 Other receivables, net 18,064,568 19,717,394 3,037,792 Other receivables- related parties 91,021 - - Purchase advances, net 18,622,538 12,018,393 1,851,633 Purchase advances- related parties 394,034 - - Prepaid expenses 826,314 1,926,018 296,736 Prepaid expenses - related parties 420,000 - - Deferred tax asset 1,742,098 1,554,284 239,463 Total current assets 124,512,236 116,090,722 17,885,703 Property and equipment, net 2,666,953 2,658,759 409,626 Long-term trade accounts receivable, net 4,440,665 3,358,357 517,410 Long-term other receivable 2,729,033 1,377,896 212,288 Total Assets ¥ 134,348,887 ¥ 123,485,734 $ 19,025,027 LIABILITIES AND EQUITY Current liabilities Short-term bank loans ¥ 7,000,000 ¥ 6,500,000 $ 1,001,433 Trade accounts payable 13,627,088 24,533,458 3,779,786 Trade accounts payable- related parties 3,528,705 2,736,879 421,662 Other payables 2,103,057 1,930,626 297,445 Other payable- related parties 4,309,702 1,472,166 226,812 Deferred revenue 2,285,529 451,180 69,512 Advances from customers 529,700 322,449 49,679 Accrued payroll and employees' welfare 246,789 470,822 72,538 Accrued expenses 199,166 202,969 31,271 Taxes payable 1,153,216 1,424,445 219,459 Short-term borrowings - related parties 16,916,905 7,225,775 1,113,250 Deferred tax liability 180,186 180,186 27,761 Total current liabilities 52,080,043 47,450,955 7,310,608 Equity Common stock, ($ 0.0185 U.S. dollar par value, 100,000,000 shares authorized; 5,427,946 and 5,804,005 shares issued and outstanding as of June 30, 2015 and December 31, 2015, respectively) 697,217 741,467 114,235 Additional paid-in capital 92,541,687 97,494,721 15,020,679 Appropriated retained earnings 4,148,929 4,148,929 639,211 Unappropriated retained earnings (23,024,935 ) (34,392,717 ) (5,298,769 ) Accumulated other comprehensive loss (317,551 ) (194,761 ) (30,005 ) Total shareholders’ equity 74,045,347 67,797,639 10,445,351 Non-controlling interest 8,223,497 8,237,140 1,269,068 Total equity 82,268,844 76,034,779 11,714,419 Total Liabilities and Equity ¥ 134,348,887 ¥ 123,485,734 $ 19,025,027 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F- 2 RECON TECHNOLOGY, LTD CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) For the six months ended For the three months ended Dec 31, Dec 31, 2014 2015 2015 2014 2015 2015 RMB RMB USD RMB RMB USD Revenues Hardware and software ¥ 24,761,080 ¥ 31,338,132 $ 4,828,159 ¥ 20,515,571 ¥ 27,857,380 $ 4,291,891 Service 103,774 1,098,258 169,205 45,283 985,050 151,763 Hardware and software - related parties 768,118 - - 768,118 - - Total revenues 25,632,972 32,436,390 4,997,364 21,328,972 28,842,430 4,443,654 Cost of revenues Hardware and software ¥ 16,022,965 ¥ 25,595,076 $ 3,943,346 ¥ 12,334,279 ¥ 22,402,781 $ 3,451,520 Service - 676,970 104,298 - 676,970 104,298 Hardware and software - related parties 16,762 - - 16,762 - - Total cost of revenues 16,039,727 26,272,046 4,047,644 12,351,041 23,079,751 3,555,818 Gross profit 9,593,245 6,164,344 949,720 8,977,931 5,762,679 887,836 Selling and distribution expenses 1,955,260 2,624,348 404,324 1,254,470 1,511,678 232,899 General and administrative expenses 7,796,731 10,966,782 1,689,615 4,093,440 4,789,637 737,923 Research and development expenses 1,899,957 4,529,036 697,773 1,243,228 2,736,039 421,532 Operating expenses 11,651,948 18,120,166 2,791,712 6,591,138 9,037,354 1,392,354 Income (loss) from operations (2,058,703 ) (11,955,822 ) (1,841,992 ) 2,386,793 (3,274,675 ) (504,518 ) Other income (expenses) Subsidy income 484,318 124,720 19,215 269,615 75,720 11,666 Interest income 157,468 104,719 16,134 74,436 49,209 7,581 Interest expense (468,956 ) (474,200 ) (73,058 ) (227,112 ) (196,376 ) (30,255 ) Change in fair value of warrants liability 4,077,517 - - 3,803,118 - - Loss from foreign currency exchange (20,880 ) (202 ) (31 ) (18,806 ) 736 113 Other income (expense) 76,672 (35,170 ) (5,419 ) 90,692 (25,506 ) (3,930 ) Other income (expense) 4,306,139 (280,133 ) (43,159 ) 3,991,943 (96,217 ) (14,825 ) Income (loss) before income tax 2,247,436 (12,235,955 ) (1,885,151 ) 6,378,736 (3,370,892 ) (519,343 ) Provision (benefit) for income tax 648,932 (868,173 ) (133,756 ) 618,687 (851,716 ) (131,221 ) Net Income (loss) 1,598,504 (11,367,782 ) (1,751,395 ) 5,760,049 (2,519,176 ) (388,122 ) Less: Net income attributable to non-controlling interest 434,673 - - 434,673 - - Net Income (loss) attributable to Recon Technology, Ltd ¥ 1,163,831 ¥ (11,367,782 ) $ (1,751,395 ) ¥ 5,325,376 ¥ (2,519,176 ) $ (388,122 ) Comprehensive income (loss) Net income (loss) 1,598,504 (11,367,782 ) (1,751,395 ) 5,760,049 (2,519,176 ) (388,122 ) Foreign currency translation adjustment 4,726 122,790 18,918 5,528 (1,428 ) (220 ) Comprehensive income (loss) 1,603,230 (11,244,992 ) (1,732,477 ) 5,765,577 (2,520,604 ) (388,342 ) Less: Comprehensive income attributable to non-controlling interest 434,920 13,643 2,102 434,961 (2,977 ) (459 ) Comprehensive income (loss) attributable to Recon Technology, Ltd ¥ 1,168,310 ¥ (11,258,635 ) $ (1,734,579 ) ¥ 5,330,616 ¥ (2,517,627 ) $ (387,883 ) Earnings (loss) per common share - basic ¥ 0.25 ¥ (2.07 ) $ (0.32 ) ¥ 1.13 ¥ (0.45 ) $ (0.07 ) Earnings (loss) per common share - diluted ¥ 0.24 ¥ (2.07 ) $ (0.32 ) ¥ 1.10 ¥ (0.45 ) $ (0.07 ) Weighted - average shares -basic 4,741,911 5,503,932 5,503,932 4,726,711 5,569,102 5,569,102 Weighted - average shares -diluted 4,846,270 5,503,932 5,503,932 4,820,817 5,569,102 5,569,102 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F- 3 RECON TECHNOLOGY, LTD CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the six months ended December 31, 2014 2015 2015 RMB RMB U.S. Dollars Cash flows from operating activities: Net income (loss) ¥ 1,598,504 ¥ (11,367,782 ) $ (1,751,395 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 274,511 496,070 76,428 Loss (Gain) from disposal of equipment (149,480 ) 10,594 1,632 Provision for doubtful accounts 104,589 2,153,337 331,757 Provision for slow moving inventories - (87,558 ) (13,490 ) Share based compensation 1,115,030 2,573,575 396,502 Deferred tax benefit (provision) (27,977 ) 187,814 28,936 Change in fair value of warrants liability (4,077,517 ) - - Restricted shares issued for services 1,171,331 566,361 87,257 Changes in operating assets and liabilities: Notes receivable (2,977,565 ) 1,178,710 181,600 Trade accounts receivable (8,572,529 ) (13,793,992 ) (2,125,193 ) Trade accounts receivable-related parties 6,104,734 4,569,800 704,053 Inventories (4,833,407 ) 3,151,863 485,597 Other receivable, net (7,635,508 ) (314,689 ) (48,483 ) Other receivables related parties, net 1,414,433 91,021 14,023 Purchase advance, net 2,641,583 4,567,724 703,734 Purchase advance-related party, net - 394,034 60,707 Prepaid expense (2,127,821 ) 599,377 92,344 Prepaid expense - related party, net 230,000 420,000 64,708 Trade accounts payable 1,188,511 10,906,370 1,680,307 Trade accounts payable-related parties - (791,826 ) (121,994 ) Other payables (137,403 ) (172,431 ) (26,566 ) Other payables-related parties 290,738 (2,837,536 ) (437,169 ) Deferred income (1,223,397 ) (1,834,349 ) (282,612 ) Advances from customers (417,185 ) (207,251 ) (31,930 ) Accrued payroll and employees' welfare (132,687 ) 224,033 34,516 Accrued expenses 9,327 35,292 5,437 Taxes payable 779,567 271,229 41,787 Net cash provided by (used in) operating activities (15,389,618 ) 989,790 152,493 Cash flows from investing activities: Purchase of property and equipment (514,009 ) (498,470 ) (76,798 ) Proceeds from disposal of equipment 341,880 - - Net cash used in investing activities (172,129 ) (498,470 ) (76,798 ) Cash flows from financing activities: Repayments of short-term bank loans (2,000,000 ) (500,000 ) (77,033 ) Proceeds from short-term borrowings-related parties 9,400,000 6,000,000 924,400 Repayment of short-term borrowings-related parties (5,000,000 ) (15,522,619 ) (2,391,517 ) Proceeds from sale of common stock, net of issuance costs - 169,398 26,098 Net cash provided by (used in) financing activities 2,400,000 (9,853,221 ) (1,518,052 ) Effect of exchange rate fluctuation on cash and cash equivalents 15,125 125,302 19,306 Net decrease in cash and cash equivalents (13,146,622 ) (9,236,599 ) (1,423,051 ) Cash and cash equivalents at beginning of period 18,094,586 12,344,929 1,901,941 Cash and cash equivalents at end of period ¥ 4,947,964 ¥ 3,108,330 $ 478,890 Supplemental cash flow information Cash paid during the period for interest ¥ 510,956 ¥ 474,200 $ 73,058 Cash paid during the period for taxes ¥ 203,073 ¥ 72,217 $ 11,126 Non-cash investing and financing activities Issuance of common stock to prepay professional services ¥ 1,002,721 ¥ 2,265,442 $ 349,029 Non-cash transaction for AR and loan payable offset - 200,000 30,813 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 by Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (the “Founders”) as a limited liability company. The Company provides specialized oilfield equipment, automation systems, tools, chemicals and field services to petroleum companies mainly in the People’s Republic of China (the “PRC”). Its wholly owned subsidiary, Recon Technology Co., Limited (“Recon-HK”) was incorporated on September 6, 2007 in Hong Kong. Other than the equity interest in Recon-HK, the Company does not own any assets or conduct any operations. On November 15, 2007, Recon-HK established 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, 2010 , Recon-CI established one wholly owned subsidiary, Recon Investment Ltd. (“Recon-IN”) under the laws of HK. Other than the equity interest in Recon-IN, Recon-CI does not own any assets or conduct any operations. On January 18, 2014, Recon-IN established one wholly owned subsidiary, Recon Hengda Technology (Beijing) Co., Ltd. (“Recon-BJ”) under the laws of the PRC. Other than the equity interest in Recon-BJ, Recon-IN does not own any assets or conduct any operations. The Company conducts its business through the following PRC legal entities that are consolidated as variable interest entities (“VIEs”) and operate in the Chinese oilfield equipment & service industry: 1. Beijing BHD Petroleum Technology Co., Ltd. (“BHD”), and 2. Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”). On January 29, 2015, the Company increased its authorized shares from 25,000,000 to 100,000,000 ordinary shares. Chinese laws and regulations currently do not prohibit or restrict foreign ownership in petroleum businesses. However, Chinese laws and regulations do prevent direct foreign investment in certain industries. However, on January 1, 2008, to protect the Company’s shareholders from possible future foreign ownership restrictions, the Founders, who also held the controlling interest of BHD and Nanjing Recon, reorganized the corporate and shareholding structure of these entities by entering into certain exclusive agreements with Recon-JN, entitling Recon-JN to receive a majority of the residual returns. On May 29, 2009 Recon-JN, BHD and Nanjing Recon entered into an operating agreement to provide full guarantee for the performance of such contracts, agreements or transactions entered into by BHD and Nanjing Recon. As a result of the new agreement, Recon-JN absorbs 100% of the expected losses and receives 90% of the expected gains of BHD and Nanjing Recon, which resulted in Recon-JN being the primary beneficiary of these Companies. Recon-JN also entered into Share Pledge Agreements with the Founders, who pledged all their equity interest in these entities to Recon-JN. The Share Pledge Agreements, which were entered into by each Founder, pledged each of the Founders’ equity interest in BHD and Nanjing Recon as a guarantee for the service payment under the Service Agreement. The Service Agreement, entered into on January 1, 2008, between Recon-JN and BHD and Nanjing Recon, states that Recon-JN will provide technical consulting services to BHD and Nanjing Recon in exchange for 90% of their annual net profits as a service fee, which is to be paid quarterly. In addition, Recon-HK entered into Option Agreements to allow Recon-HK to acquire the Founders’ interest in these entities if or when permitted by the PRC laws. Based on these exclusive agreements, the Company consolidated BHD and Nanjing Recon as VIEs as required by Accounting Standards Codification (“ASC”) Topic 810, Consolidation because the Company was the primary beneficiary of the VIEs. Management makes ongoing reassessment of whether Recon-JN is the primary beneficiary of BHD and Nanjing Recon. F- 5 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On August 28, 2000, a Founder of the Company purchased a controlling interest in BHD which was organized under the laws of the PRC on June 29, 1999. Through December 15, 2010, the Founders held a 67.5% ownership interest in BHD. From December 16, 2010 to June 30, 2012, Messers. Yin and Chen held an 86.24% ownership interest of BHD. BHD was combined with the Company through the date of the exclusive agreements, and has been consolidated following January 1, 2008, the date of the agreements based on ASC Topic 810. The Company allocates profits and losses of 90% and 100%, respectively, based upon the control agreements. Profits allocated to the minority interest are the remaining amount (10%). On July 4, 2003, Nanjing Recon was organized under the laws of the PRC. On August 27, 2007, the Founders of the Company purchased a majority ownership of Nanjing Recon from a related party who was a majority owner of Nanjing Recon. Through December 15, 2010, the Founders held an 80% ownership interest in Nanjing Recon. From December 16, 2010 to June 30, 2012, Messers. Yin Shenping and Chen Guangqiang held an 80% ownership interest in Nanjing Recon. Nanjing Recon is combined with the Company through the date of the exclusive agreements, and is consolidated following January 1, 2008, the date of the agreements based on ASC Topic 810. The Company allocates profits and losses 90% and 100%, respectively, based upon the control agreements. Profits allocated to the non-controlling interest are the remaining amount (10%). On December 1, 2015, the Company entered into a share purchase agreement (the “SPA”) by and among Qinghai Hua You Downhole Technology Co., Ltd. (“QHHY”), a P.R. China limited liability company, providing oilfield service in Qinghai province, the shareholders of QHHY, and Recon Hengda Technology (Beijing) Co., Ltd., our wholly owned P.R. China subsidiary (“Recon BJ”). In conjunction with the SPA, Recon BJ entered into a series of control agreements with QHHY and its shareholders related to the transfer of ownership in QHHY to Recon BJ. The Control Agreements granting Recon BJ the right to provide exclusive technical consulting services to QHHY in exchange for 100% of QHHY’s quarterly profit, among other things. The Control Agreements will not become effective until after the Company obtains shareholder approval of the transaction. 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. F- 6 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 management, all adjustments (consisting of 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, 2015. 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, 2016. Principles of Consolidation – The unaudited condensed consolidated financial statements include the accounts of the Company, all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation. Variable Interest Entities - A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company performs ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previously identified as a VIE continues to be a VIE and whether the Company continues to be the primary beneficiary. Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Currency Translation - The Company’s functional currency is the Chinese Yuan (“RMB”) and the accompanying unaudited condensed consolidated financial statements have been expressed in Chinese Yuan. The unaudited condensed consolidated financial statements as of and for the three months ended December 31, 2015 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 ¥6.4907 = US$1.00, the approximate exchange rate prevailing on December 31, 2015. These translated U.S. dollar amounts should not be construed as representing Chinese Yuan amounts or that the Chinese Yuan amounts have been or could be converted into U.S. dollars. Estimates and assumptions - The preparation of the consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company’s consolidated financial statements include revenue recognition, allowance for doubtful accounts, allowance for inventory, deferred taxes, warrants liabilities, the useful lives of property and equipment and the fair value of share- based payments. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Fair Values of Financial Instruments - The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs are defined as follows: Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. F- 7 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. It was impracticable to estimate the fair value of long-term other receivables, because this is due from the Company’s former VIE and there are no comparable markets for receivables with similar terms. Long-term investment is measured at fair value which was determined to be zero during the six months ended December 31, 2015 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 six months. Since a majority of the bank accounts are located in the PRC, those bank balances are uninsured. Trade Accounts and Other Receivables - Accounts receivable are carried at original invoiced amount less a provision for any potential uncollectible amounts. Accounts are considered past due when the related receivables are more than a year old. Provision is made against trade accounts and other receivables to the extent they are considered to be doubtful. Accounts are written off after extensive efforts at collection. Other receivables arise from transactions with non-trade customers. Purchase Advances - Purchase advances are the amounts prepaid to suppliers for purchases of inventory and are recognized as inventory when the final amount is paid to the suppliers and the inventory is delivered. Inventories - Inventories are stated at the lower of cost or market value, on a weighted average basis for BHD. Inventories are stated at the lower of cost or market value, on a first-in-first-out basis for Nanjing Recon. 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. Items Useful life Motor vehicles 5-10 years Office equipment 2-5 years Leasehold improvement 5 years Long-term investment – Long-term investment in equity over which the Company has the ability to exercise significant influence but not control, and that, in general, are 20-50 percent owned, are stated at cost plus equity in undistributed net income (loss) of the investee. These investments are evaluated for impairment, in which an impairment loss would be recorded whenever a decline in the value of an equity investment below its carrying amount is determined to be “other than temporary.” In judging “other than temporary,” the Company would consider the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and longer-term operating and financial prospects of the investee, and the Company’s longer-term intent of retaining the investment in the investee. F- 8 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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, 2015 and December 31, 2015. 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 by the government to support local software companies’ operation and research and development. Grants related to research and development projects are recognized as subsidy income in the unaudited condensed consolidated statements of operations when received. Grants in the form of value-added-tax refund for software products are recognized when received. Share-Based Compensation - The Company accounts for share-based compensation in accordance with ASC Topic 718, Share-Based Payment . Under the fair value recognition provisions of this topic, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses using the Binomial Lattice valuation model estimated at the grant date based on the award’s fair value. F- 9 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Income Taxes - Income taxes are provided based upon the liability method of accounting pursuant to ASC Topic 740, Accounting for Income Taxes . Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any income taxes in the United States or the Cayman Islands. Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Income tax returns for the year prior to 2010 are no longer subject to examination by tax authorities. Earnings (loss) per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net income (loss) by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding. Potentially dilutive ordinary shares consist of ordinary shares issuable upon the conversion of ordinary stock options, restricted shares and warrants (using the treasury stock method). The effect from options, restricted shares and warrants would have been anti-dilutive due to the fact that we incurred a net loss during the three months and six months ended December 31, 2014 and 2015. Recently Issued Accounting Pronouncements - In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, or ASU 2015-14. This amendment defers the effective date of the previously issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, until the interim and annual reporting periods beginning after December 15, 2017. Earlier application is permitted for interim and annual reporting periods beginning after December 15, 2016. The Company is evaluating the effect of this standard on the Company's consolidated financial position, results of operations and cash flows. In August 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This ASU adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company does not expect this update will have a material impact on the Company's consolidated financial position, results of operations and cash flows. In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business acquisition opening balance sheet. Prior to the issuance of ASU 2015-16, an acquirer was required to restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within fiscal years. The Company does not expect this update will have a material impact on the Company's consolidated financial position, results of operations and cash flows. F- 10 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to retrospectively account for changes to provisional amounts initially recorded in a business acquisition opening balance sheet. Prior to the issuance of ASU 2015-16, an acquirer was required to restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within fiscal years. The Company does not expect this update will have a material impact on the presentation of the Company's consolidated financial position, results of operations and cash flows. In November 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not expect this update will have a material impact on the presentation of the Company's consolidated financial position, results of operations and cash flows. In January 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance makes targeted improvements to existing U.S. GAAP by: (1) Requiring equity investments to be measured at fair value with changes in fair value recognized in net income; (2) Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect this update will have a material impact on the presentation of the Company's consolidated financial position, results of operations and cash flows. F- 11 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2015 December 31, 2015 December 31, 2015 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 58,049,462 ¥ 69,853,378 $ 10,762,072 Allowance for doubtful accounts (5,863,065 ) (2,894,597 ) (445,961 ) Total - third- party, net ¥ 52,186,397 ¥ 66,958,781 $ 10,316,111 June 30, 2015 December 31, 2015 December 31, 2015 Related Party RMB RMB U.S. Dollars Beijing Langchen Construction Company 726,800 ¥ - $ - Xiamen Huangsheng Hitek Computer Network Co.Ltd. 980,000 - - Xiamen Henda Hitek Computer Network Co. Ltd. 3,063,000 - - Total - related-parties, net ¥ 4,769,800 ¥ - $ - June 30, 2015 December 31, 2015 December 31, 2015 Third Party – long-term RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. * ¥ 4,934,072 ¥ 3,731,508 $ 574,901 Allowance for doubtful accounts (493,407 ) (373,151 ) (57,491 ) Total - long-term trade accounts receivable, net ¥ 4,440,665 ¥ 3,358,357 $ 517,410 * 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 September 2, 2015, the outstanding balance will be collected in two years beginning 2017, with each installment of ¥2,467,036 ($380,000). F- 12 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. OTHER RECEIVABLES, NET Other receivables consisted of the following: Third Party June 30, 2015 December 31, 2015 December 31, 2015 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,624,071 ¥ 3,375,185 $ 520,003 Loans to third parties (B) 11,154,344 11,583,104 1,784,569 Business advance to staff (C) 3,927,238 4,517,706 696,028 Deposits for projects 543,800 853,492 131,495 Others 637,348 223,140 34,378 Allowance for doubtful accounts (822,233 ) (835,233 ) (128,681 ) Total ¥ 18,064,568 ¥ 19,717,394 $ 3,037,792 Third Party June 30, 2015 December 31, 2015 December 31, 2015 Non-Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,729,033 ¥ 1,377,896 $ 212,288 Total ¥ 2,729,033 ¥ 1,377,896 $ 212,288 (A) After ENI ceased to be a VIE of the Company, ENI in January 2012 agreed to repay the loan on a payment schedule, with interest accrued during the period at an annual rate of 4%. In accordance with the payment schedule, the principal plus accrued interest is required to be repaid over approximately three years on a quarterly basis beginning March 2012. The first four payments were 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 remaining part of this loan will be repaid over four years with quarterly installments of ¥699,147. The Company has continued to receive the payments under the 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- 13 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. PURCHASE ADVANCES The Company purchased products and services from a third party and a related party during the normal course of business. Purchase advances consisted of the following: June 30, 2015 December 31, 2015 December 31, 2015 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 22,845,030 ¥ 18,277,305 $ 2,815,922 Allowance for doubtful accounts (4,222,492 ) (6,258,912 ) (964,289 ) Total ¥ 18,622,538 ¥ 12,018,393 $ 1,851,633 NOTE 6. INVENTORIES Inventories consisted of the following: June 30, 2015 December 31, 2015 December 31, 2015 RMB RMB U.S. Dollars Small component parts ¥ 55,332 ¥ 55,332 $ 8,525 Purchased goods and raw materials 244,667 285,275 43,951 Work in process and goods on site 3,552,771 334,582 51,548 Finished goods 14,693,073 9,987,846 1,538,793 Allowance for slow moving inventory (7,700,836 ) (2,882,333 ) (444,071 ) Total inventories, net ¥ 10,845,007 ¥ 7,780,702 $ 1,198,746 The provision for slow moving inventory was ¥ 87,558 ($13,490) for the six months ended December 31, 2015. NOTE 7. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2015 December 31, 2015 December 31, 2015 RMB RMB U.S. Dollars Motor vehicles ¥ 3,790,474 ¥ 3,871,567 $ 596,479 Office equipment and fixtures 797,791 825,996 127,258 Leasehold improvement - 210,299 32,400 Total property and equipment 4,588,265 4,907,862 756,137 Less: Accumulated depreciation (1,921,312 ) (2,249,103 ) (346,511 ) Property and equipment, net ¥ 2,666,953 ¥ 2,658,759 $ 409,626 Depreciation expense was ¥153,164 and ¥236,303($36,406) for the three months ended December 31, 2014 and 2015, respectively. F- 14 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Depreciation expense was ¥274,511 and ¥496,070 ($76,428) for the six months ended December 31, 2014 and 2015, respectively. NOTE 8. LONG-TERM INVESTMENT On June 28, 2013, the Company purchased 2,800,000 restricted shares of Avalon Oil and Gas, Inc. ("Avalon") for $0.089 per share, or approximately ¥1.5 million ($250,000). Since the restriction for the shares is for two years, the Company was able to acquire the shares at 50% of the market value. The investment was accounted for using the equity method and no gain or loss from equity investment was recorded for the year ended June 30, 2013 due to immateriality. As of June 30, 2015 and December 31, 2015, Recon owned 16.92% and 16.00% 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 engages in the acquisition, exploration and development of oil and gas producing properties in the US. Based on the available information and discussion with the management team of Avalon, the Company believes Avalon’s operating loss would not be recovered in the foreseeable future, therefore, the Company considered the investment to be impaired and recorded an investment loss of ¥1,535,250 ($250,000) for the year ended June 30, 2014 to write its investment down to zero. On April 13, 2015, BHD reached an agreement to invest RMB 80 million in Huanghua Heng Da Xiang Tong Manufacture Ltd (“HHBHD”) for a 54.05% ownership interest. BHD’s board of Directors and shareholders approved the transaction to invest in HHBHD. The investment is to enhance cooperation with HHBHD and protect BHD’s design copyright. Based on mutual agreements, BHD shall not enjoy voting right until the payment of investment is on position. As of February 16, 2016, no payment was made to HHBHD for this investment and BHD did not have control or significant influence over HHBHD. F- 15 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. OTHER PAYABLES Other payables consisted of the following: June 30, 2015 December 31, 2015 December 31, 2015 Third Party RMB RMB U.S. Dollars Consulting services ¥ 1,628,508 ¥ 857,004 $ 132,036 Distributors and employees 413,703 124,840 19,234 Funds collected on behalf of others - 895,022 137,893 Others 60,846 53,760 8,282 Total ¥ 2,103,057 ¥ 1,930,626 $ 297,445 June 30, 2015 December 31, 2015 December 31, 2015 Related Party RMB RMB U.S. Dollars Due to related parties ¥ 2,499,347 ¥ - $ - Expenses paid by the major shareholders 1,558,738 1,220,503 188,039 Due to management staff for costs incurred on behalf of Recon 251,617 251,663 38,773 Total ¥ 4,309,702 ¥ 1,472,166 $ 226,812 NOTE 10. TAXES PAYABLE Taxes payable consisted of the following: June 30, 2015 December 31, 2015 December 31, 2015 RMB RMB U.S. Dollars VAT payable ¥ 23,885 ¥ 1,168,537 $ 180,033 Enterprise income tax payable 1,127,131 210,525 32,435 Other taxes payable 2,200 45,383 6,991 Total taxes payable ¥ 1,153,216 ¥ 1,424,445 $ 219,459 F- 16 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. SHORT-TERM BANK LOAN Short-term bank loans consisted of the following: June 30, 2015 December 31, 2015 December 31, 2015 RMB RMB U.S. Dollars Industrial and Commercial Bank, floating interest rate at 6.12 %, due on June 19, 2016 ¥ 7,000,000 ¥ 6,500,000 $ 1,001,433 Total short-term bank loans ¥ 7,000,000 ¥ 6,500,000 $ 1,001,433 Interest expense for the short-term bank loan was ¥80,667 and ¥106,242 ($16,368) for the three months ended December 31, 2014 and 2015, respectively. Interest expense for the short-term bank loan was ¥238,178 and ¥214,649 ($33,070) for the six months ended December 31, 2014 and 2015, respectively. NOTE 12. SHORT-TERM BORROWINGS DUE TO RELATED PARTIES June 30, 2015 December 31, 2015 December 31, 2015 Short-term borrowings due to related parties: RMB RMB U.S. Dollars Short-term borrowing from a Founder, 7.2% annual interest, due on October 20, 2015 ¥ 6,013,200 ¥ - $ - Short-term borrowing from a Founder, 6.06% annual interest, due on October 2, 2015 3,403,431 - - Short-term borrowing from a Founder, 5.13% annual interest, due on October 12, 2015 1,600,274 - - Short-term borrowing from a Founder's family member, no interest, due on various dates 5,700,000 1,200,000 184,880 Short-term borrowing from a Founder, 5.75% annual interest, due on September 25, 2016 - 1,808,913 278,693 Short-term borrowings from Xiamen Huasheng Haitian Computer Network Co. Ltd., no interest, due on November 14, 2015 200,000 - - Short-term borrowing from a Founder, 5.75% annual interest,due on October 10, 2016 - 2,409,250 371,185 Short-term borrowing from a Founder, 5.43% annual interest,due on November 4, 2016 - 1,807,612 278,492 Total short-term borrowings due to related parties ¥ 16,916,905 ¥ 7,225,775 $ 1,113,250 F- 17 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interest expense for short-term borrowings due to related parties was ¥146,445 and ¥86,071 ($13,261) for the three months ended December 31 , 2014 and 2015, respectively. Interest expense for short-term borrowings due to related parties was ¥230,778 and ¥257,519 ($39,675) for the six months ended December 31 , 2014 and 2015, respectively. NOTE 13. SHAREHOLDERS’ EQUITY Stock offering – During the six months ended December 31, 2015, the Company offered 15,874 ordinary shares under the same purchase agreement from June 2015. The net cash proceeds received from the stock offering were ¥169,398 ($26,098). 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, 2015 and December 31, 2015, the balance of total statutory reserves was ¥4,148,929 and ¥4,148,929 ($639,211), respectively. F- 18 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. STOCK-BASED COMPENSATION Stock-Based Awards Plan The following is a summary of the status of options outstanding and exercisable at December 31, 2015: 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 3.58 $ 6.00 193,000 3.58 $ 2.96 222,600 6.24 $ 2.96 74,200 6.24 $ 1.65 400,000 9.09 - - - 815,600 Restricted Shares As of December 31, 2015, the Company has granted restricted shares of common stock, which are still vesting, to senior management and consultants. During the six months ended December 31, 2015, the following grants were made: · On October 18, 2015, the Company agreed to issue a total of 800,000 restricted shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted shares was $704,000 based on the closing stock price $0.88 at October 18, 2015. · On November 16, 2015, the Company agreed to issue a total of 100,000 restricted shares to two investor relations firms in exchange for services. The fair value of the restricted shares was $108,400 based on the closing stock price $1.08 at November 16, 2015. · On November 19, 2015, the Company issued 260,185 restricted shares to Bei Jing Tian Hong Tong Xin Technology Co. Ltd. (“BJTH”) for certain mold and software development services. The fair value of the restricted shares was $247,176 based on the closing stock price $0.95 at November 19, 2015. The Share-based compensation expense recorded for stock options granted were ¥409,418 and ¥1,029,822 ($158,661) for the six months ended December 31, 2014 and 2015, respectively. The Share-based compensation expense recorded for stock options granted were ¥162,277 and ¥520,294 ($80,160) for the three months ended December 31, 2014 and 2015, respectively. The total unrecognized share-based compensation expense for stock options as of December 31, 2015 was approximately ¥3.8 million ($0.59 million), which is expected to be recognized over a weighted average period of approximately 1.90 years. The Share-based compensation expense recorded for restricted shares granted were ¥705,612 and ¥1,543,756 ($237,841) for the six months ended December 31, 2014 and 2015, respectively. The Share-based compensation expense recorded for restricted shares granted were ¥352,175 and ¥926,732 ($142,778) for the three months ended December 31, 2014 and 2015, respectively. The total unrecognized share-based compensation expense for restricted shares granted as of December 31, 2015 was approximately ¥7.92 million ($1.22 million), which is expected to be recognized over a weighted average period of approximately 2.27 years. F- 19 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Following is a summary of the restricted stock grants: Restricted stock grants Shares Non-vested as of June 30, 2015 453,575 Granted 1,160,185 Non-vested adjustment - Cancelled - Vested 76,787 Non-vested as of December 31, 2015 1,536,973 NOTE 15. INCOME TAX The Company is not subject to any income taxes in the United States or the Cayman Islands and had minimal operations in jurisdictions other than the PRC. BHD and Nanjing Recon are subject to PRC’s income taxes as PRC domestic companies. The Company follows Implementing Rules for the Enterprise Income Tax Law (“Implementing Rules”), which took effect on January 1, 2008 and unified the income tax rate for domestic-invested and foreign-invested enterprises at 25%. The Company reapplied for high-technology enterprise approval and has passed all relevant reviews. Thus, for the calendar years 2014 and 2015, 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. BHD reapplied for high-technology enterprise approval and successfully got the approval on November 25, 2015. Thus, the valid date of BHD’s high-technology enterprise certificate is extended to November 25, 2018. Deferred tax asset is comprised of the following: June 30, 2015 December 31, 2015 December 31, 2015 RMB RMB U.S. Dollars Allowance for doubtful receivables ¥ 1,072,279 ¥ 1,554,284 $ 239,463 Net operating loss carry forward 669,819 - - Total deferred income tax assets ¥ 1,742,098 ¥ 1,554,284 $ 239,463 Deferred tax liability is comprised of the following: June 30, 2015 December 31, 2015 December 31, 2015 RMB RMB U.S. Dollars Income tax cost due to unpayable accounts ¥ 180,186 ¥ 180,186 $ 27,761 Total deferred income tax liability ¥ 180,186 ¥ 180,186 $ 27,761 F- 20 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company’s tax provision is comprised of the following: For the three months ended December 31, 2014 2015 2015 RMB RMB U.S. Dollars Current income tax provision ¥ 644,630 ¥ - $ - Adjust over accrued income taxes (1,055,987 ) (162,692 ) Deferred income taxes provision (benefit) (25,943 ) 204,271 31,471 Provision (benefit) for income tax ¥ 618,687 ¥ (851,716 ) (131,221 ) For the six months ended December 31, 2014 2015 2015 RMB RMB U.S. Dollars Current income tax provision ¥ 676,909 ¥ - $ - Adjust over accrued tax of prior years (1,055,987 ) (162,692 ) Deferred income taxes provision (benefit) (27,977 ) 187,814 28,936 Provision (benefit) for income tax ¥ 648,932 ¥ (868,173 ) (133,756 ) NOTE 16. NON-CONTROLLING INTEREST Non-controlling interest consisted of the following: As of June 30, 2015 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 304,001 Unappropriated retained earnings 3,152,687 3,250,513 6,403,200 1,051,636 Accumulated other comprehensive loss (18,850 ) (11,853 ) (30,703 ) (5,043 ) Total noncom-trolling interest ¥ 4,784,837 ¥ 3,438,660 ¥ 8,223,497 $ 1,350,594 As of December 31, 2015 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 285,177 Unappropriated retained earnings 3,152,687 3,250,513 6,403,200 986,519 Accumulated other comprehensive loss (12,133 ) (4,927 ) (17,060 ) (2,628 ) Total non-controlling interest ¥ 4,791,554 ¥ 3,445,586 ¥ 8,237,140 $ 1,269,068 NOTE 17. CONCENTRATIONS For the three months ended December 31, 2014 and 2015, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented approximately 58.83%, 10.35% and 76.76%, 10.03% of the Company’s revenue, respectively. F- 21 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the six months ended December 31, 2014 and 2015, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented approximately 56.79% and 8.89%, and 74.63% and 11.54% of the Company’s revenue, respectively. For the three months ended December 31, 2014, one major supplier accounted for 20% of the company’s total purchases. For the three months ended December 31, 2015, two major suppliers accounted for 68% of the Company’s total purchases. For the six months ended December 31, 2014, one major supplier accounted for 14% of the Company’s total purchases. For the six months ended December 31, 2015, two major suppliers accounted for 57% of the Company’s total purchases. NOTE 18. COMMITMENTS AND CONTINGENCY (a) Office Leases The Company leases three offices in Beijing (two for BHD; one for Recon-JN) and one office in Nanjing for Nanjing Recon. Future payments under such leases are as follows as of December 31, 2015: Twelve months ending December 31, Office lease payment RMB U.S. Dollars 2016 ¥ 1,010,000 $ 155,607 Total ¥ 1,010,000 $ 155,607 (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, 2015, the Company estimated its severance payments of approximately ¥1.6 million ($0.26 million) which has not been reflected in its unaudited condensed consolidated financial statements, because management cannot predict what the actual payment, if any will be in the future. F- 22 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. RELATED PARTY TRANSACTIONS AND BALANCES Purchases from related parties – purchases from related parties consisted of the following: For the three months ended December 31, 2014 2015 2015 RMB RMB U.S. Dollars Huanghua Xiang Tong Manufacture ¥ - ¥ 38,469 $ 5,927 Xiamen Huangsheng Hitek Computer Network Co.Ltd. - 12,796 1,971 Purchase from related parties ¥ - ¥ 51,265 $ 7,898 For the six months ended December 31, 2014 2015 2015 RMB RMB U.S. Dollars Huanghua Xiang Tong Manufacture ¥ - ¥ 300,393 $ 46,281 Xiamen Huangsheng Hitek Computer Network Co.Ltd. 797,585 576,098 88,757 Purchase from related parties ¥ 797,585 ¥ 876,491 $ 135,038 Account payable due to related parties - The Company purchased automation products and heating furnaces from Xiamen Huangsheng Hitek Computer Network Co.Ltd and Huanghua Xiang Tong, the ending balance of accounts payable due to the two related parties as of December 31, 2015 and June 30, 2015 is RMB 2,736,879 ($421,662) and RMB 3,528,705, respectively. Leases from related parties - The Company has various agreements for the lease of office space owned by the Founders and their family members. The terms of the agreement state that the Company will continue to lease the property at a monthly rent of ¥95 thousand with annual rental expense at ¥1.14 million ($0.18 million). The one-year lease agreements between Nanjing Recon and Mr. Yin and his family member started from May 10, 2015. The one-year lease agreements between BHD and Mr. Chen Guangqiang and his family member started from January 1, 2016 and the annual lease between the Company and Mr. Chen Guangqiang’s family member started from July 1, 2015. Short-term borrowings from related parties - The Company borrowed ¥16,916,905 and ¥7,225,775($1,113,250) from the Founders and their family members as of June 30, 2015 and December 31, 2015, respectively. For the specific terms and interest rates of the borrowings, 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, 2015 and December 31, 2015, ¥1,558,738 and ¥1,220,503($188,039) was due to them, respectively. F- 23 RECON TECHNOLOGY, LTD NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 20. Variable Interest Entities The Company reports its VIEs’ portion of unaudited condensed consolidated net income and stockholders’ equity as non-controlling interests in the unaudited condensed consolidated financial statements. Summary information regarding consolidated VIEs is as follows: June 30, 2015 December 31, 2015 December 31, 2015 RMB RMB U.S. Dollars ASSETS Current Assets Cash and cash equivalents ¥ 7,096,901 ¥ 434,899 $ 67,003 Notes receivable 4,205,530 3,026,820 466,332 Trade accounts receivable, net 56,956,197 66,958,781 10,316,111 Purchase advances 19,016,573 12,018,393 1,851,633 Other assets 28,792,279 25,677,395 3,956,029 Total current assets ¥ 116,067,480 ¥ 108,116,288 $ 16,657,108 Non-current assets 7,088,383 6,000,048 924,407 Total Assets ¥ 123,155,863 ¥ 114,116,336 $ 17,581,515 LIABILITIES Trade accounts payable ¥ 17,155,793 ¥ 27,270,337 $ 4,201,448 Taxes payable 1,153,216 1,424,445 219,459 Other liabilities 31,386,734 16,964,624 2,613,682 Total current liabilities 49,695,743 45,659,406 7,034,589 Total Liabilities ¥ 49,695,743 ¥ 45,659,406 $ 7,034,589 The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive income for the three months ended December 31, 2015 includes revenues of ¥28,842,430 ($4,443,655), operating expenses of ¥7,404,066 ($1,140,719), and net loss of ¥1,142,211 ($175,977). The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive income for the six months ended December 31, 2015 includes revenues of ¥32,436,390 ($4,997,364), operating expenses of ¥11,766,443 ($1,812,816), and net loss of ¥5,100,179 ($785,767). F- 24