Recon Technology, Ltd 10-Q

Item 5. Other Information. None. 21 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) 22 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) 23 10.38 Operating Agreement among Recon Technology (Jining) Co. Ltd., Beijing BHD and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 21.1 Subsidiaries of the Registrant (2) 99.1 Stock Option Plan (1) 99.2 Code of Business Conduct and Ethics (1) 31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) 31.2 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (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 (3) 101.SCH XBRL Taxonomy Extension Schema Document (3) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (3) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (3) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (3) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (3) (1) Incorporated by reference to the Company’s Registration Statement on Form S-1, Registration No. 333-152964. (2) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A, filed on January 31, 2012. (3) Filed herewith. (4) Furnished herewith. 24 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 May 16, 2016 By: /s/ Liu Jia Liu Jia Chief Financial Officer (Principal Financial and Accounting Officer) 25 SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RECON TECHNOLOGY, LTD May 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 March 31, 2016 F-2 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine and three months ended March 31, 2015 and 2016 F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2015 and 2016 F-4 Notes to Unaudited Condensed Consolidated Financial Statements F-5 RECON TECHNOLOGY, LTD condensed Consolidated Balance Sheets (UNAUDITED) As of Jun 30, As of Mar 31, As of Mar 31, 2015 2016 2016 RMB RMB U.S. Dollars Current assets Cash ¥ 12,344,929 ¥ 2,619,943 $ 406,234 Notes receivable 4,205,530 1,498,710 232,382 Trade accounts receivable, net 52,186,397 50,248,411 7,791,236 Trade accounts receivable- related parties, net 4,769,800 - - Inventories, net 10,845,007 10,436,502 1,618,225 Other receivables, net 18,064,568 22,358,526 3,466,788 Other receivables- related parties 91,021 - - Purchase advances, net 18,622,538 10,425,075 1,616,454 Purchase advances- related parties 394,034 - - Prepaid expenses 826,314 590,412 91,548 Prepaid expenses - related parties 420,000 630,000 97,684 Deferred tax assets 1,742,098 - - Total current assets 124,512,236 98,807,579 15,320,551 Property and equipment, net 2,666,953 2,430,926 376,926 Long-term trade accounts receivable, net 4,440,665 484,265 75,087 Long-term other receivable 2,729,033 692,325 107,348 Total Assets ¥ 134,348,887 ¥ 102,415,095 $ 15,879,912 LIABILITIES AND EQUITY Current liabilities Short-term bank loans ¥ 7,000,000 ¥ 7,000,000 $ 1,085,381 Trade accounts payable 13,627,088 10,174,308 1,577,571 Trade accounts payable- related parties 3,528,705 - - Other payables 2,103,057 2,923,271 453,266 Other payable- related parties 4,309,702 3,650,329 566,000 Deferred revenue 2,285,529 304,335 47,188 Advances from customers 529,700 386,294 59,897 Accrued payroll and employees' welfare 246,789 328,817 50,985 Accrued expenses 199,166 203,109 31,493 Taxes payable 1,153,216 804,818 124,791 Short-term borrowings - related parties 16,916,905 8,557,771 1,326,920 Deferred tax liability 180,186 180,186 27,939 Total current liabilities 52,080,043 34,513,238 5,351,431 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 March 31, 2016, respectively) 697,217 741,467 114,968 Additional paid-in capital 92,541,687 99,055,188 15,358,941 Statutory reserve 4,148,929 4,148,929 643,310 Accumulated deficit (23,024,935 ) (44,020,117 ) (6,825,512 ) Accumulated other comprehensive loss (317,551 ) (254,151 ) (39,407 ) Total shareholders’ equity 74,045,347 59,671,316 9,252,300 Non-controlling interest 8,223,497 8,230,541 1,276,181 Total equity 82,268,844 67,901,857 10,528,481 Total Liabilities and Equity ¥ 134,348,887 ¥ 102,415,095 $ 15,879,912 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 nine months ended For the three months ended Mar 31, Mar 31, 2015 2016 2016 2015 2016 2016 RMB RMB USD RMB RMB USD Revenues Hardware and software ¥ 43,119,915 ¥ 35,877,231 $ 5,562,922 ¥ 18,358,835 ¥ 4,539,099 $ 703,807 Service 103,774 1,098,258 170,290 - - - Hardware and software - related parties 2,428,173 - - 1,660,055 - - Total revenues 45,651,862 36,975,489 5,733,212 20,018,890 4,539,099 703,807 - - - - - - Cost of revenues Hardware and software ¥ 29,782,617 ¥ 28,434,196 $ 4,408,847 ¥ 13,759,652 ¥ 2,839,120 $ 440,218 Service - 676,970 104,967 - - - Hardware and software - related parties 27,161 - - 10,399 - - Total cost of revenues 29,809,778 29,111,166 4,513,814 13,770,051 2,839,120 440,218 Gross profit 15,842,084 7,864,323 1,219,398 6,248,839 1,699,979 263,589 Selling and distribution expenses 3,065,098 3,443,464 533,924 1,109,838 819,116 127,008 General and administrative expenses 11,987,761 18,865,639 2,925,200 4,191,030 7,898,857 1,224,752 Research and development expenses 2,444,020 5,757,141 892,670 544,063 1,228,105 190,423 Operating expenses 17,496,879 28,066,244 4,351,794 5,844,931 9,946,078 1,542,183 Income (loss) from operations (1,654,795 ) (20,201,921 ) (3,132,396 ) 403,908 (8,246,099 ) (1,278,594 ) Other income (expenses) Subsidy income 639,473 289,087 44,824 155,155 164,367 25,486 Interest income 225,701 147,092 22,807 68,233 42,373 6,570 Interest expense (808,065 ) (672,789 ) (104,319 ) (339,109 ) (198,589 ) (30,792 ) Change in fair value of warrants liability 4,068,329 - - (9,188 ) - - Income (loss) from foreign currency exchange (19,081 ) (21,032 ) (3,261 ) 1,799 (20,830 ) (3,230 ) Loss from warrants redemption (1,913,262 ) - - (1,913,262 ) - - Other income 112,325 9,153 1,419 35,653 44,323 6,872 Other income (expense) 2,305,420 (248,489 ) (38,530 ) (2,000,719 ) 31,644 4,906 Income (loss) before income tax 650,625 (20,450,410 ) (3,170,926 ) (1,596,811 ) (8,214,455 ) (1,273,688 ) Provision (benefit) for income tax 468,005 544,772 84,469 (180,927 ) 1,412,945 219,083 Net Income (loss) 182,620 (20,995,182 ) (3,255,395 ) (1,415,884 ) (9,627,400 ) (1,492,771 ) - - - - - - Less: Net income attributable to non-controlling interest 546,071 - - 111,398 - - Net Loss attributable to Recon Technology, Ltd ¥ (363,451 ) ¥ (20,995,182 ) $ (3,255,395 ) ¥ (1,527,282 ) ¥ (9,627,400 ) $ (1,492,771 ) Comprehensive income (loss) Net income (loss) 182,620 (20,995,182 ) (3,255,395 ) (1,415,884 ) (9,627,400 ) (1,492,771 ) Foreign currency translation adjustment (2,854 ) 63,400 9,830 (7,580 ) (59,390 ) (9,209 ) Comprehensive income (loss) 179,766 (20,931,782 ) (3,245,565 ) (1,423,464 ) (9,686,790 ) (1,501,980 ) Less: Comprehensive income attributable to non-controlling interest 545,952 7,044 1,092 111,032 (6,599 ) (1,023 ) Comprehensive loss attributable to Recon Technology, Ltd ¥ (366,186 ) ¥ (20,938,826 ) $ (3,246,657 ) ¥ (1,534,496 ) ¥ (9,680,191 ) $ (1,500,957 ) Earnings (loss) per common share - basic ¥ (0.08 ) ¥ (3.75 ) $ (0.58 ) ¥ (0.32 ) ¥ (1.66 ) $ (0.26 ) Earnings (loss) per common share - diluted ¥ (0.08 ) ¥ (3.75 ) $ (0.58 ) ¥ (0.32 ) ¥ (1.66 ) $ (0.26 ) Weighted - average shares -basic 4,773,803 5,603,229 5,603,229 4,839,004 5,804,005 5,804,005 Weighted - average shares -diluted 4,773,803 5,603,229 5,603,229 4,839,004 5,804,005 5,804,005 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 nine months ended March 31, 2015 2016 2016 RMB RMB U.S. Dollars Cash flows from operating activities: Net income (loss) ¥ 182,620 ¥ (20,995,182 ) $ (3,255,395 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 369,284 728,092 112,894 Gain from disposal of equipment (149,504 ) (40,688 ) (6,309 ) Provision for doubtful accounts 254,622 4,334,148 672,029 Reversal of slow moving inventories - (95,122 ) (14,749 ) Share based compensation 2,023,761 4,134,042 641,001 Deferred tax (benefit) provision (50,481 ) 1,742,098 270,120 Change in fair value of warrants liability (4,068,329 ) - - Restricted shares issued for services 1,204,903 1,871,722 290,219 Loss from warrants redemption 1,913,262 - - Changes in operating assets and liabilities: Notes receivable (400,000 ) 2,706,820 419,704 Trade accounts receivable (29,115,292 ) 5,705,680 884,691 Trade accounts receivable-related parties 18,681,051 4,569,800 708,568 Inventories (4,791,259 ) 503,627 78,090 Other receivable, net (7,022,533 ) (2,566,250 ) (397,908 ) Other receivables related parties, net 1,414,433 91,021 14,113 Purchase advance, net 1,797,628 4,361,022 676,196 Purchase advance-related party, net - 394,034 61,097 Prepaid expense (1,565,998 ) 629,622 97,626 Prepaid expense - related party, net (132,400 ) (210,000 ) (32,561 ) Trade accounts payable 6,042,777 (6,981,485 ) (1,082,510 ) Other payables (566,064 ) 820,214 127,178 Other payables-related parties 419,379 (659,373 ) (102,239 ) Deferred revenue (1,643,339 ) (1,981,194 ) (307,193 ) Advances from customers (405,785 ) (143,406 ) (22,236 ) Accrued payroll and employees' welfare (108,066 ) 82,028 12,719 Accrued expenses 185,433 67,803 10,513 Taxes payable (689,453 ) (357,116 ) (55,372 ) Net cash used in operating activities (16,219,350 ) (1,288,043 ) (199,714 ) Cash flows from investing activities: Purchase of property and equipment (514,009 ) (502,658 ) (77,939 ) Proceeds from disposal of equipment 356,247 60,000 9,303 Net cash used in investing activities (157,762 ) (442,658 ) (68,636 ) Cash flows from financing activities: Proceeds from short-term bank loans - 500,000 77,527 Repayments of short-term bank loans (2,000,000 ) (500,000 ) (77,527 ) Proceeds from short-term borrowings-related parties 12,550,000 8,525,400 1,321,901 Repayment of short-term borrowings-related parties (7,550,000 ) (16,748,394 ) (2,596,912 ) Proceeds from sale of common stock, net of issuance costs - 168,319 26,098 Net cash provided by (used in) financing activities 3,000,000 (8,054,675 ) (1,248,913 ) Effect of exchange rate fluctuation on cash and cash equivalents (51,605 ) 60,390 9,362 Net decrease in cash (13,428,717 ) (9,724,986 ) (1,507,901 ) Cash at beginning of period 18,094,586 12,344,929 1,914,135 Cash at end of period ¥ 4,665,869 ¥ 2,619,943 $ 406,234 Supplemental cash flow information Cash paid during the period for interest ¥ 808,065 ¥ 672,789 $ 104,319 Cash paid during the period for taxes ¥ 616,225 ¥ 142,477 $ 22,092 Non-cash investing and financing activities Issuance of common stock to prepay professional services ¥ 1,002,721 ¥ 2,265,442 $ 351,267 Non-cash transaction for AR and short-term borrowings-related parties offset - 200,000 31,011 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 Messrs. Yin Shenping, Chen Guangqiang and 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”). The Company, along with its wholly-owned subsidiaries, Recon Technology Co., Limited (“Recon HK”), Jining Recon Technology Ltd. (“Recon JN”), Recon Investment Ltd. (“Recon IN”) and Recon Hengda Technology (Beijing) Co., Ltd. (“Recon BJ”), 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”), 2. Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”), and 3. Huanghua BHD Petroleum equipment manufacturing Company, Ltd (“Hanghua BHD”). On January 29, 2015, the Company increased its authorized shares from 25,000,000 to 100,000,000 ordinary shares. 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 the 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- 5 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 nine months ended March 31, 2016 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 ¥6.4494 = US$1.00, the approximate exchange rate prevailing on March 31, 2016. 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. F- 6 Fair Values of Financial Instruments - The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs are defined as follows: Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable. The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable, accrued liabilities, advances from customers, short-term bank loan and short-term borrowings approximate fair value because of the immediate or short-term maturity of these financial instruments. 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 nine months ended March 31, 2016 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). 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 F- 7 Long-term investment – Long-term investment in equity over which the Company has the ability to exercise significant influence but not control, and that, in general, are 20-50 percent owned, are stated at cost plus equity in undistributed net income (loss) of the investee. These investments are evaluated for impairment, in which an impairment loss would be recorded whenever a decline in the value of an equity investment below its carrying amount is determined to be “other than temporary.” In judging “other than temporary,” the Company would consider the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and longer-term operating and financial prospects of the investee, and the Company’s longer-term intent of retaining the investment in the investee. Long-Lived Assets - The Company applies the ASC Topic 360 “Property, plant and equipment.” ASC Topic 360 requires that long-lived assets, such as property and equipment be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. There were no impairments at June 30, 2015 and March 31, 2016. 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. F- 8 Service: The Company provides services to improve software function and system operation on separated fixed-price contracts. Revenue is recognized on the completed contract method when acceptance is determined by a completion report signed by the customer. Deferred revenue represents unearned amounts billed to customers related to sales contracts. Subsidy Income - Grants are given by the government to support local software companies’ operation and research and development. Grants related to research and development projects are recognized as subsidy income in the unaudited condensed consolidated statements of operations when received. Grants in the form of value-added-tax refund for software products are recognized when received. Share-Based Compensation - The Company accounts for share-based compensation in accordance with ASC Topic 718, Share-Based Payment. Under the fair value recognition provisions of this topic, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses using the Binomial Lattice valuation model estimated at the grant date based on the award’s fair value. Income Taxes - Income taxes are provided based upon the liability method of accounting pursuant to ASC Topic 740, Accounting for Income Taxes. Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any income taxes in the United States or the Cayman Islands. Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Income tax returns for the year prior to 2010 are no longer subject to examination by tax authorities. Earnings (loss) per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net income (loss) by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding. F- 9 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 nine months ended March 31, 2015 and 2016. Recently Issued Accounting Pronouncements - 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. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements. In March 2016, the FASB issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. Public business entities must apply the new requirements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. All other entities must apply the new requirements for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period. The Company does not expect any material impact of this new standard on its consolidated financial statements. In March 2016, the FASB issued Accounting Standards Update No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements. F- 10 In April 2016, the FASB released ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements. In April 2016, FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing . The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new standard on its consolidated financial statements. NOTE 3. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2015 March 31, 2016 March 31, 2016 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 58,049,462 ¥ 53,547,142 $ 8,302,719 Allowance for doubtful accounts (5,863,065 ) (3,298,731 ) (511,483 ) Total - third- party, net ¥ 52,186,397 ¥ 50,248,411 $ 7,791,236 June 30, 2015 March 31, 2016 March 31, 2016 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 March 31, 2016 March 31, 2016 Third Party – long-term RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. * ¥ 4,934,072 ¥ 538,072 $ 83,430 Allowance for doubtful accounts (493,407 ) (53,807 ) (8,343 ) Total - long-term trade accounts receivable, net ¥ 4,440,665 ¥ 484,265 $ 75,087 *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 was to be collected in two years beginning in 2017, with each installment of ¥2,467,036 ($380,000). During the nine months period ended March 31, 2016, the Company enhanced collection of long aging accounts receivable and thus reduced the outstanding balance of Yabei Nuoda, significantly. NOTE 4. OTHER RECEIVABLES, NET Other receivables consisted of the following: Third Party June 30, 2015 March 31, 2016 March 31, 2016 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,624,071 ¥ 3,401,553 $ 527,426 Loans to third parties (B) 11,154,344 13,198,344 2,046,461 Business advance to staff (C) 3,927,238 5,823,723 902,994 Deposits for projects 543,800 882,607 136,852 Others 637,348 183,532 28,458 Allowance for doubtful accounts (822,233 ) (1,131,233 ) (175,403 ) Total ¥ 18,064,568 ¥ 22,358,526 $ 3,466,788 Provision for other receivables were ¥93,500 and ¥309,000 ($47,912) for the nine months ended March 31, 2015 and 2016, respectively. Third Party June 30, 2015 March 31, 2016 March 31, 2016 Non-Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,729,033 ¥ 692,325 $ 107,348 Total ¥ 2,729,033 ¥ 692,325 $ 107,348 (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 the Company’s external business partners. These loans are due on demand bearing no interest. (C) Business advance to staff represents advances for business travel and sundry expenses related to oilfield or on-site installation and inspection of products through customer approval and acceptance. F- 11 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 March 31, 2016 March 31, 2016 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 22,845,030 ¥ 18,484,007 $ 2,866,026 Allowance for doubtful accounts (4,222,492 ) (8,058,932 ) (1,249,572 ) Total ¥ 18,622,538 ¥ 10,425,075 $ 1,616,454 Provision for purchase advances were ¥88,678 and ¥3,836,441 ($594,857) for the nine months ended March 31, 2015 and 2016, respectively. NOTE 6. INVENTORIES Inventories consisted of the following: June 30, 2015 March 31, 2016 March 31, 2016 RMB RMB U.S. Dollars Small component parts ¥ 55,332 ¥ 55,332 $ 8,579 Purchased goods and raw materials 244,667 55,604 8,622 Work in process and goods on site 3,552,771 2,707,760 419,850 Finished goods 14,693,073 10,492,574 1,626,920 Allowance for slow moving inventory (7,700,836 ) (2,874,768 ) (445,746 ) Total inventories, net ¥ 10,845,007 ¥ 10,436,502 $ 1,618,225 The reversal of slow moving inventory was nil and ¥95,122 ($14,749) for the nine months ended March 31, 2015 and 2016. NOTE 7. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2015 March 31, 2016 March 31, 2016 RMB RMB U.S. Dollars Motor vehicles ¥ 3,790,474 ¥ 3,871,567 $ 600,303 Office equipment and fixtures 797,791 825,996 128,074 Leasehold improvement - 214,487 33,257 Total property and equipment 4,588,265 4,912,050 761,634 Less: Accumulated depreciation (1,921,312 ) (2,481,124 ) (384,708 ) Property and equipment, net ¥ 2,666,953 ¥ 2,430,926 $ 376,926 Depreciation expense was ¥94,773 and ¥232,022 ($35,976) for the three months ended March 31, 2015 and 2016, respectively. Depreciation expense was ¥369,284 and ¥728,092 ($112,894) for the nine months ended March 31, 2015 and 2016, 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 March 31, 2016, Recon owned 16.92% and 15.39% 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 (“HHBHDXT”) 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. On March 18, 2016, BHD decided to terminate this investment transaction with HHBHDXT, and was no longer a shareholder of HHBHDXT. As of this termination, no payment was ever made to HHBHDXT. F- 12 NOTE 9. OTHER PAYABLES Other payables consisted of the following: June 30, 2015 March 31, 2016 March 31, 2016 Third Party RMB RMB U.S. Dollars Consulting services ¥ 1,628,508 ¥ 1,374,702 $ 213,154 Distributors and employees 413,703 525,508 81,482 Funds collected on behalf of others - 895,022 138,777 Others 60,846 128,039 19,853 Total ¥ 2,103,057 ¥ 2,923,271 $ 453,266 June 30, 2015 March 31, 2016 March 31, 2016 Related Party RMB RMB U.S. Dollars Due to related parties ¥ 2,499,347 ¥ - $ - Expenses paid by the major shareholders 1,558,738 2,764,390 428,631 Due to family member of one owner - 630,000 97,684 Due to management staff for costs incurred on behalf of Recon 251,617 255,939 39,685 Total ¥ 4,309,702 ¥ 3,650,329 566,000 NOTE 10. TAXES PAYABLE Taxes payable consisted of the following: June 30, 2015 March 31, 2016 March 31, 2016 RMB RMB U.S. Dollars VAT payable ¥ 23,885 ¥ 804,814 $ 124,790 Enterprise income tax payable 1,127,131 - - Other taxes payable 2,200 4 1 Total taxes payable ¥ 1,153,216 ¥ 804,818 $ 124,791 NOTE 11. SHORT-TERM BANK LOANS Short-term bank loans consisted of the following: June 30, 2015 March 31, 2016 March 31, 2016 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 1,007,854 Industrial and Commercial Bank, floating interest rate at 5.37 %, due on July 19, 2016 - 500,000 77,527 Total short-term bank loans ¥ 7,000,000 ¥ 7,000,000 $ 1,085,381 Interest expense for the short-term bank loans was ¥162,000 and ¥108,239 ($16,783) for the three months ended March 31, 2015 and 2016, respectively. Interest expense for the short-term bank loans was ¥400,178 and ¥322,888 ($50,065) for the nine months ended March 31, 2015 and 2016, respectively. F- 13 NOTE 12. SHORT-TERM BORROWINGS DUE TO RELATED PARTIES June 30, 2015 March 31, 2016 March 31, 2016 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 - - Short-term borrowing from a Founder, 5.75% annual interest, due on September 25, 2016 - 1,808,913 280,480 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 - 2,408,434 373,438 Short-term borrowing from a Founder, 5.43% annual interest, due on November 4, 2016 - 1,807,228 280,219 Short-term borrowing from a Founder, 5.22% annual interest, due on March 10, 2017 ¥ - ¥ 2,533,196 392,783 Total short-term borrowings due to related parties ¥ 16,916,905 ¥ 8,557,771 $ 1,326,920 Interest expense for short-term borrowings due to related parties was ¥177,109 and ¥92,382 ($14,324) for the three months ended March 31, 2015 and 2016, respectively. Interest expense for short-term borrowings due to related parties was ¥407,887 and ¥349,901 ($54,254) for the nine months ended March 31, 2015 and 2016, respectively. NOTE 13. SHAREHOLDERS’ EQUITY Stock offering – During the nine months ended March 31, 2016, 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 ¥168,319 ($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 March 31, 2016, the balance of total statutory reserves was ¥4,148,929 and ¥4,148,929 ($643,310), respectively. NOTE 14. STOCK-BASED COMPENSATION Stock-Based Awards Plan The following is a summary of the status of options outstanding and exercisable at March 31, 2016: 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 3.33 $ 6.00 193,000 3.33 $ 2.96 222,600 5.99 $ 2.96 74,200 5.99 $ 1.65 400,000 8.84 - - - 815,600 F- 14 Restricted Shares As of March 31, 2016, the Company has granted restricted shares of common stock, which are still vesting, to senior management and consultants. During the nine months ended March 31, 2016, 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 platform 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 ¥797,016 and ¥1,564,094 ($242,519) for the nine months ended March 31, 2015 and 2016, respectively. The Share-based compensation expense recorded for stock options granted were ¥387,598 and ¥534,277 ($82,842) for the three months ended March 31, 2015 and 2016, respectively. The total unrecognized share-based compensation expense for stock options as of March 31, 2016 was approximately ¥3.3 million ($0.51 million), which is expected to be recognized over a weighted average period of approximately 1.66 years. The Share-based compensation expense recorded for restricted shares granted were ¥1,226,745 and ¥2,569,948 ($398,482) for the nine months ended March 31, 2015 and 2016, respectively. The Share-based compensation expense recorded for restricted shares granted were ¥521,133 and ¥1,026,192 ($159,116) for the three months ended March 31, 2015 and 2016, respectively. The total unrecognized share-based compensation expense for restricted shares granted as of March 31, 2016 was approximately ¥6.9 million ($1.1 million), which is expected to be recognized over a weighted average period of approximately 2.07 years. 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 March 31, 2016 1,536,973 F- 15 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%. Nanjing Recon was approved as a government-certified high –technology company on December 11, 2013 and is subject to a reduced income tax rate of 15% through December 11, 2016. Nanjing Recon 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 a reduced 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 March 31, 2016 March 31, 2016 RMB RMB U.S.Dollars Allowance for doubtful receivables ¥ 1,072,279 ¥ - $ - Net operating loss carry forward 669,819 - - Total deferred income tax assets ¥ 1,742,098 ¥ - $ - Deferred tax liability is comprised of the following: June 30, 2015 March 31, 2016 March 31, 2016 RMB RMB U.S. Dollars Income tax cost due to unpayable accounts ¥ 180,186 ¥ 180,186 $ 27,939 Total deferred income tax liability ¥ 180,186 ¥ 180,186 $ 27,939 F- 16 The Company’s tax provision is comprised of the following: For the three months ended March 31, 2015 2016 2016 RMB RMB U.S. Dollars Current income tax benefit ¥ (158,423 ) ¥ - $ - Adjust over accrued income taxes - (141,339 ) (21,915 ) Deferred income taxes provision (benefit) (22,504 ) 1,554,284 240,998 Provision (benefit) for income tax ¥ (180,927 ) ¥ 1,412,945 $ 219,083 For the nine months ended March 31, 2015 2016 2016 RMB RMB U.S. Dollars Current income tax provision ¥ 518,486 ¥ - $ - Adjust over accrued tax of prior years - (1,197,326 ) (185,651 ) Deferred income taxes provision (benefit) (50,481 ) 1,742,098 270,120 Provision (benefit) for income tax ¥ 468,005 ¥ 544,772 $ 84,469 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 March 31, 2016 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 287,006 Unappropriated retained earnings 3,152,687 3,250,513 6,403,200 992,844 Accumulated other comprehensive loss (15,382 ) (8,277 ) (23,659 ) (3,669 ) Total non-controlling interest ¥ 4,788,305 ¥ 3,442,236 ¥ 8,230,541 $ 1,276,181 F- 17 NOTE 17. CONCENTRATIONS For the three months ended March 31, 2015 and 2016, the one largest customer, China National Petroleum Corporation (“CNPC”), represented approximately 29.65% and 71.17% of the Company’s revenue, respectively. For the nine months ended March 31, 2015 and 2016, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented approximately 44.89%, and 7.70%, and 74.21% and 10.19% of the Company’s revenue, respectively. For the three months ended March 31, 2015, one major supplier accounted for 56% of the company’s total purchases. For the three months ended March 31, 2016, two major suppliers accounted for 36% of the Company’s total purchases. For the nine months ended March 31, 2015, one major supplier accounted for 21% of the Company’s total purchases. For the nine months ended March 31, 2016, two major suppliers accounted for 50% 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 March 31, 2016: Twelve months ending March 31, Office lease payment RMB U.S. Dollars 2017 ¥ 2,107,000 $326,699 Total ¥ 2,107,000 $326,699 (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 March 31, 2016, the Company estimated its severance payments of approximately ¥1.6 million ($0.25 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. NOTE 19. RELATED PARTY TRANSACTIONS AND BALANCES There was no purchases from related party for the three month periods ended March 31, 2015 and 2016. For the nine months ended March 31 , 2015 2016 2016 RMB RMB U.S. Dollars Huanghua Xiang Tong Manufacture ¥ - ¥ 338,862 $ 52,542 Xiamen Huangsheng Hitek Computer Network Co.Ltd. 797,585 588,894 91,311 Purchase from related parties ¥ 797,585 ¥ 927,756 $ 143,853 Account payable due to related parties - The Company purchased automation products and heating furnaces from Xiamen Huangsheng Hitek Computer Network Co.Ltd (Huangsheng Hitek) and Huanghua Xiang Tong, the ending balance of accounts payable due to Huangsheng Hitek as of March 31, 2016 and June 30, 2015 were both nil. On March 18, 2016, the Company terminated its equity investment in Huanghua Xiang Tong and therefore has no related-party relationship with this entity after March 18, 2016. F- 18 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 ¥140 thousand with annual rental expense at ¥1.68 million ($0.26 million). The one-year lease agreements between Nanjing Recon and Mr. Yin and his family member started from April 1, 2016. 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 ¥8,557,771 ($1,326,920) from the Founders and their family members as of June 30, 2015 and March 31, 2016, 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 expenses for the Company. As of June 30, 2015 and March 31, 2016, ¥1,558,738 and ¥2,764,390 ($428,631) was due to them, respectively. 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 March 31, 2016 March 31, 2016 RMB RMB U.S. Dollars ASSETS Current Assets Cash ¥ 7,096,901 ¥ 1,070,064 $ 165,918 Notes receivable 4,205,530 1,498,710 232,382 Trade accounts receivable, net 56,956,197 50,248,411 7,791,236 Purchase advances 19,016,573 10,425,075 1,616,454 Other assets 28,792,279 30,093,454 4,666,122 Total current assets ¥ 116,067,480 ¥ 93,335,714 $ 14,472,112 Non-current assets 7,088,383 2,899,206 449,535 Total Assets ¥ 123,155,863 ¥ 96,234,920 $ 14,921,647 LIABILITIES Trade accounts payable ¥ 17,155,793 ¥ 10,174,308 $ 1,577,571 Taxes payable 1,153,216 804,819 124,791 Other liabilities 31,386,734 21,277,049 3,299,100 Total current liabilities 49,695,743 32,256,176 5,001,462 Total Liabilities ¥ 49,695,743 ¥ 32,256,176 $ 5,001,462 The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive income for the three months ended March 31, 2016 includes revenues of ¥4,539,099 ($703,807), operating expenses of ¥4,780,316 ($741,209), and net loss of ¥4,478,185 ($694,362). The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive income for the nine months ended March 31, 2016 includes revenues of ¥36,975,489 ($5,733,212), operating expenses of ¥16,546,759 ($2,565,648), and net loss of ¥9,578,364 ($1,485,167). F- 19