Recon Technology, Ltd 10-K

Item 9A. Controls and Procedures. Disclosure Controls and Procedures As of June 30, 2016, our company carried out an evaluation, under the supervision of and with the participation of management, including our Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of our Company’s disclosure controls and procedures. Included in this Annual Report on Form 10-K, the chief executive officer and chief financial officer concluded that our Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were ineffective in timely alerting them to information required to be included in the Company’s periodic U.S. Securities and Exchange Commission (the “Commission”) filings. Changes in Internal Control over Financial Reporting Management continues to focus on internal control over financial reporting. As of June 30, 2016, the Company has completed certain documentation of our internal controls and will be implementing the following remedial initiatives: · Improved the design and documentation related to multiple levels of review over financial statements included in our SEC filings; 34 · Expanded the design and assessment test work over the monitoring function of entity level controls; · Enhanced documentation retention policies over test work related to our continuous management assessments of internal control effectiveness; and · Expanded documentation practices and policies related to various key controls to provide support and audit trails for both internal management assessment as well as external auditor testing. Management’s Annual Report on Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with the authorization of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. The Company’s management assessed the effectiveness of its internal control over financial reporting as of June 30, 2016. In making this assessment, management used the 2013 framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Our management has implemented and tested our internal control over financial reporting based on these criteria. Based on the assessment and material weakness identified, the Company’s management concluded that, as of June 30, 2016, its internal control over financing reporting was not effective. The specific material weaknesses identified by the Company’s management as of June 30, 2016 are described as follows: We did not have sufficient skilled accounting personnel who are either qualified as Certified Public Accountants in the U.S. or who have received education from U.S. institutions or other educational programs that would provide enough relevant education relating to U.S. GAAP. The Company’s CFO and Controller have limited experience with U.S. GAAP and are not U.S. Certified Public Accountants. Further, our operating subsidiaries are based in China, and in accordance with PRC laws and regulations, are required to comply with PRC GAAP, rather than U.S. GAAP. Thus, the accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the preparation of consolidated financial statements, are inadequate, and determined to be a material weakness. We recently completed our designs of our internal controls and assessments for all of our financial reporting cycles during fiscal year 2016, and we are unable to declare effectiveness of our controls due to lack of sufficient time to obtain evidence of operating effectiveness as of June 30, 2016 due to lack of monitoring of our internal controls (lack of self-testing of internal controls). Therefore, we determined that the lack of time to evaluate our design and operating effectiveness is a material weakness. It should be noted, however, that (a) many actions had been undertaken to enhance the control environment during the year; and (b) there are other remedial activities that are scheduled to be take place in fiscal 2017. 35 As a result, the Company has developed remedial actions to strengthen its accounting and financial reporting functions as well as the related disclosure controls and procedures. Such plan will require the hiring of additional resources and the deployment of other corporate resources for the accounting department in relation to the financial reporting process. Such additional resources will include the establishment of a work force dedicated to the task of correcting past financial irregularities and maintaining correct financial reporting on an on-going basis. To strengthen the Company’s internal control over financial reporting, the Company needs to engage outside consultants that are skilled in SEC reporting and Section 404 compliance to assist in the implementation of the following remedial actions as of the date of this report: • Development and formalization of key accounting and financial reporting policies and procedures; • Identification and documentation of key controls by business process; • Enhancement of existing disclosures policies and procedures; • Formalization of periodic communication between management and the audit committee; and • Implementation of policies and procedures intended to enhance management monitoring and oversight by the Audit Committee. In addition to the foregoing efforts, the Company expects to implement the following remedial actions during fiscal year 2017: • Formalization of a periodic staff training program to enhance their awareness of the key internal control activities. • Develop a comprehensive training and development plan, for our finance, accounting and internal audit personnel, including our Chief Financial Officer, Controller, and others, in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof. • Hire a full-time employee who possesses the requisite U.S. GAAP experience and education • Monitoring of internal controls by performing self-testing of various key controls. Despite the material weaknesses and deficiencies reported above, our management believes that our consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. Item 9B. Other Information. Other than as described in this section, our corporate governance practices do not differ from those followed by domestic companies listed on the NASDAQ Capital Market. NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the NASDAQ Capital Market prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants. Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers like the Company to follow their home country practice rather than these shareholder approval requirements. The Cayman Islands does not require shareholder approval prior to the foregoing sorts of transactions. The Company, therefore, is not required to obtain such shareholder approval prior to entering into such transaction. The Board of Directors of the Company has elected to follow home Cayman Islands country rule as to such transactions and will not be required to seek shareholder approval prior to entering into such a transaction. 36 PART III Item 10. Directors, Executive Officers and Corporate Governance. Regulation S-K Item 401: Executive Officers and Directors The following table sets forth our executive officers and directors, their ages and the positions held by them: Name Age Position Held Mr. Yin Shenping 47 Chief Executive Officer and Director Ms. Liu Jia 33 Chief Financial Officer Mr. Chen Guangqiang 53 Chief Technology Officer and Director Mr. Zhao Shudong 70 Independent Director Mr. Nelson N.S. Wong 54 Independent Director (Audit Committee Chair) Mr. Hu Jijun 51 Independent Director Yin Shenping. Mr. Yin has been our Chief Executive Officer and a director since the Company’s inception. In 2003, Mr. Yin founded Nanjing Recon, a Chinese company that provides services to automate and enhance the extraction of petroleum in China, and has been the Chief Executive Officer since that time. Prior to founding Nanjing Recon, Mr. Yin served as a sales manager for Fujian Haitian Network Company from 1992 through 1994. Mr. Yin has founded and operated a number of companies engaged in the IT industry including: Xiamen Hengda Haitian Computer Network Co., Ltd. (1994), Baotou Hengda Haitian Computer Network Co., Ltd. (1997) and Beijing Jingke Haitian Electronic Technology Development Co., Ltd. (1999), and Jingsu Huasheng Information Technology Co., Ltd. (2000). In 2000, Mr. Yin merged the former Nanjing Kingsley Software Engineering Co., Ltd. into Nanjing Recon. Mr. Yin received his bachelor’s degree in 1991 from Nanjing Agricultural University in information systems. Mr. Yin was chosen as a director of the Company because as one of the founders of the Company, we believe his knowledge of the Company and years of experience in our industry give him the ability to guide the Company as a director. Liu Jia. Ms. Liu has served as our Chief Financial Officer since 2008. In 2008 Ms. Liu assisted Heilongjiang Province Jintian Group with financial due diligence, field surveys and data analysis. While in college Ms. Liu interned at Xinghua Certified Public Accountants, Ltd., Beijing Zhongweihuahao Accountants Affairs Office, Tiantong Securities Co., Ltd. and Industrial and Commercial Bank of China, focused on the areas of auditing, accounting and data analysis. Ms. Liu received her bachelor’s degree in 2006 from Beijing University of Chemical Technology, School of Economics and Management and her master’s degree in industrial economics in 2009 from Beijing Wuzi University. Chen Guangqiang. Mr. Chen has served as our Chief Technology Officer and director since our inception. Mr. Chen was a geological engineer for the Fourth Oil Extraction Plant of Huabei Oil Field from 1985 through 1993. From 1993 through 1999, Mr. Chen was a chief engineer for Xinda Company, CNPC Development Bureau. From 1999 through 2003, Mr. Chen served as the general manager of Beijing Adar. Mr. Chen received his bachelor’s degree in 1985 from Southwest Petroleum Institute. Mr. Chen was appointed to the position of director because he is one of the founders of the Company and we believe we can benefit from his many years of engineering experience and management experience in the oil extraction industry. Nelson N.S. Wong . Mr. Wong joined our Board of Directors in 2008. Prior to joining our Board, in 1990 Mr. Wong joined the Vigers Group, a real estate company that provides services in valuation, corporate property services, investment advisory services, general practice surveying, building surveying, commercial, in both retail and industrial agency, and property and facilities management. Mr. Wong became the Vice Chairman and CEO of the Vigers Group in 1993. In 1995 Mr. Wong established the ACN Group, a business consulting firm, where he has worked continuously and continues to serve as the Chairman and Managing Partner. Mr. Wong received a bachelor’s degree in arts from the PLA Institute of International Relations in Nanjing in 1983. Mr. Wong was appointed to the position of director because we believe we can benefit from his leadership skills and management experience. 37 Hu Jijun . Mr. Hu joined our Board of Directors in 2008. Prior to joining our Board, from 1988 to 2003, Mr. Hu served in a variety of positions at No. 2 test-drill plant, including technician of installation, assets equipment work, electrical installation, control room production dispatcher, Deputy Chief Engineer of the Technology Battalion, and Deputy Director of Production. From 2003 to 2005 he served as Head of the Integrated Battalion and he is currently the Head of the Transport Battalion, Senior Electric Engineer. Mr. Hu graduated as an automated professional from the China University of Petroleum in 1988. Mr. Hu was appointed to the position of a director because we believe his years of experience and knowledge gained while working at our No. 2 test-drill plant will prove beneficial to the guidance of the Company. Zhao Shudong . Mr. Zhao joined our Board of Directors in 2013. Mr. Zhao spent over 30 years working in the oilfield industry prior to retiring from full-time work in 2006. From 1970 to 1976, Mr. Zhao worked as a technician in the Daqing oilfield. From 1976 to 1982, Mr. Zhao served as the vice director of the Hubei Oilfield Generalized Geologic Technical Research Institute. Mr. Zhao then spent 11 years as a director and section chief at the Scientific and Technological Development Department of the Huabei Petroleum Administrative Bureau. He was subsequently appointed Chief Geologist of the bureau, a position he held from 1993 to 1999. From 1999 to 2006, Mr. Zhao served as the General Manager of the Huabei Oilfield Company of CNPC. Mr. Zhao studied at the Northeast Petroleum Institute from 1965 to 1970. Mr. Zhao has been chosen as a director nominee because of his extensive experience in the oilfield industry. Employment Agreements We have employment agreements with each of our Chief Executive Officer, Chief Technology Officer and Chief Financial Officer. With the exception of the employment agreement with our Chief Financial Officer, each of these employment agreements provides for an indefinite term. Such employment agreements may be terminated (1) if the employee gives written notice of his or her intention to resign, (2) the employee is absent from three consecutive meetings of the Board of Directors, without having obtained special leave of absence from the other members of the Board of Directors, and the Board of Directors passes a resolution that such employee has vacated his office, or (3) the death, bankruptcy or mental incapacity of the employee. The employment agreement for our Chief Financial Officer provides for a one-year term, currently expiring on March 12, 2017. Such employment agreement may be terminated if the employee gives thirty days’ written notice of her intention to resign, or if the Board of Directors determines she can no longer perform her duties as Chief Financial Officer and provides her with thirty days’ written notice of termination. Under Chinese law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal one month prior to the date on which the employment agreement is scheduled to expire. If we fail to provide this notice or if we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for each year we have employed the employee. We are, however, permitted to terminate an employee for cause without penalty to the Company, where the employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse effect to us. Share Option Pool In connection with our initial public offering, we established a pool for share options as our 2009 Stock Incentive Plan (“2009 Incentive Plan”) for the Domestic Companies’ and our employees. This pool contains options to purchase up to 790,362 of our ordinary shares. The options will vest at a rate of 20% per year for five years and have an exercise price of the market price of our shares on the date the options are granted. To date, we issued 564,000 options and 226,362 shares out of this employee share option pool. We initially granted 293,000 options in 2009. We held a shareholder meeting in December 2010 and announced the resignation of three directors, and as a result, 100,000 options were forfeited and went back in the pool. In 2012, we granted an additional 415,000 options and 44,000 options were forfeited and went back to the pool. In the three months ended June 30, 2014, 148,400 vested options from 2012 grants were exercised. As of June 30, 2016, we have 415,600 options outstanding under the 2009 Incentive Plan. On January 29, 2015, the Company held its 2014 annual general meeting of shareholders, during which the Company’s shareholders approved the Company’s 2015 Stock Incentive Plan (“2015 Incentive Plan”). Pursuant to the 2015 Incentive Plan, we were initially authorized to issue up to an aggregate of Seven Hundred Thousand (700,000) ordinary Shares. Additionally, commencing on the first business day in fiscal year ending June 30, 2016 and on the first business day of each fiscal year thereafter while the 2015 Incentive Plan is in effect, the maximum number of Ordinary Shares available for issuance under this 2015 Incentive Plan during that fiscal year shall be increased such that, as of such first business day, the maximum aggregate number of Ordinary Shares available for issuance under this 2015 Incentive Plan during that fiscal year shall be equal to Fifteen Percent (15%) of the number of total issued and outstanding Ordinary Shares of the Company as recorded by the Company’s transfer agent on the last business day of the prior fiscal year. The Company granted options to purchase 400,000 Ordinary Shares to its employees and non-employee director on January 31, 2015 under the 2015 Incentive Plan. As of June 30, 2016, we have 400,000 options outstanding under this 2015 Incentive Plan. As of June 30, 2016, we have an aggregate of 815,600 options outstanding under our incentive plans. 38 Executive Stock Grants On December 13, 2013, the Company granted 95,181 restricted shares to Mr. Yin Shenping and 135,181 restricted shares to Mr. Chen Guangqiang at an aggregate value of ¥4,207,496 ($688,782), based on the stock closing price of $2.99 at December 13, 2013. These restricted shares will be vested over three years with one third of the shares vesting every year from the grant date. Of these 76,787 restricted shares vested and were issued to Mr. Yin and Mr. Chen on March 24, 2015, and 76,787 restricted shares were vested and issued to Mr. Yin and Chen on July 13, 2016. On January 31, 2015, the Company granted 150,000 restricted shares to Mr. Yin and 150,000 restricted shares to Mr. Chen at an aggregate value of ¥3,038,558($495,000), based on the stock closing price of $1.65 at January 31, 2015. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. On July 11, 2015, the Company’s board approved to reserve 800,000 shares and options under the 2015 Incentive Plan. On October 18, 2015, 800,000 restricted shares were granted to staff under this plan at an aggregate value of ¥4,677,608 ($704,000), based on the stock closing price of $0.88 at October 16, 2015. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. As of June 30, 2016, we have 1,076,788 non-vested restricted stocks outstanding. On July 23, 2016, the Company’s board approved the reservation of 876,000 shares and options. On July 27, 2016, 876,000 restricted shares were granted to staff pursuant to this authorization. Board of Directors and Board Committees Our board of directors currently consists of five members. There are no family relationships between any of our executive officers and directors. The directors are divided into three classes, as nearly equal in number as the then total number of directors permits. Class I directors faced re-election at our annual general meeting of shareholders in 2014 and every three years thereafter. Class II directors face re-election at our annual general meeting of shareholders in 2015 and every three years thereafter. Class III directors face re-election at our annual general meeting of shareholders in 2016 and every three years thereafter. If the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly as possible. Any additional directors of a class elected to fill a vacancy resulting from an increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent director. These board provisions could make it more difficult for third parties to gain control of the Company by making it difficult to replace members of our Board of Directors. A director may vote in respect of any contract or transaction in which he is interested, provided, however, that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to the Board of Directors consideration and any vote on that matter. A general notice or disclosure to the directors, or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof that a director is a shareholder of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. 39 The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). Mr. Zhao, Mr. Wong, and Mr. Hu are our independent directors. Mr. Yin Shenping currently holds both the positions of Chief Executive Officer and Chairman of the Board. These two positions have not been consolidated into one position; Mr. Yin simply holds both positions at this time. We do not have a lead independent director because of the foregoing reason and also because we believe our independent directors are encouraged to freely voice their opinions on a relatively small company board. We believe this leadership structure is appropriate because we are a smaller reporting company that recently became listed on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Mr. Yin as both our principal executive officer and Chairman of the Board. Our Board of Directors plays a significant role in our risk oversight. The Board of Directors makes all relevant Company decisions. As such, it is important for us to have our Chief Executive Officer serve on the Board as he plays a key role in the risk oversight of the Company. As a smaller reporting company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters. Currently, three committees have been established under the board: the audit committee, the compensation committee and the nominating committee. All of these committees consist solely of independent directors. The audit committee is responsible for overseeing the accounting and financial reporting processes of the Company and audits of the financial statements of the Company, including the appointment, compensation and oversight of the work of our independent auditors. Mr. Wong qualifies as the audit committee financial expert and serves as the chair of the audit committee. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the authority to interpret those plans). Mr. Hu serves as the chair of the compensation committee. The nominating committee of the board of directors is responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience when nominating directors. Mr. Zhao serves as the chair of the nominating committee. There are no other arrangements or understandings pursuant to which our directors are selected or nominated. Duties of Directors Under Cayman Islands law, our directors have a fiduciary duty to the Company to act in good faith in their dealings with or on behalf of the Company and exercise their powers and fulfill the duties of their office honestly. This duty has four essential elements: • a duty to act in good faith in the best interests of the Company; • a duty not to personally profit from opportunities that arise from the office of director; • a duty to avoid conflicts of interest; and • a duty to exercise powers for the purpose for which such powers were intended. 40 In general, Cayman Islands law imposes various duties on directors of a company with respect to certain matters of management and administration of the Company. In addition to the remedies available under general law, the Companies Law imposes fines on directors who fail to satisfy some of these requirements. However, in many circumstances, an individual is only liable if he is knowingly guilty of the default or knowingly and willfully authorizes or permits the default. In comparison, under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. In addition, under Delaware law, a party challenging the propriety of a decision of the directors bears the burden of rebutting the applicability of the presumptions afforded to directors by the “business judgment rule.” If the presumption is not rebutted, the business judgment rule protects the directors and their decisions, and their business judgments will not be second guessed. If the presumption is rebutted, the directors bear the burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing, Delaware courts subject directors’ conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat to corporate control and approval of a transaction resulting in a sale of control of the corporation. Limitation of Director and Officer Liability Pursuant to our Amended Memorandum and Articles of Association, every director or officer and the personal representatives of the same shall be indemnified and held harmless out of our assets and funds against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by him or her in or about the conduct of our business or affairs or in the execution or discharge of his or her duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by him in defending (whether successfully or otherwise) any civil proceedings concerning us or our affairs in any court whether in the Cayman Islands or elsewhere. No such director or officer will be liable for: (a) the acts, receipts, neglects, defaults or omissions of any other such Director or officer or agent; or (b) any loss on account of defect of title to any of our properties; or (c) account of the insufficiency of any security in or upon which any of our money shall be invested; or (d) any loss incurred through any bank, broker or other similar person; or (e) any loss occasioned by any negligence, default, breach of duty, breach of trust, error of judgment or oversight on his or her part; or (f) any loss, damage or misfortune whatsoever which may happen in or arise from the execution or discharge of the duties, powers authorities, or discretions of his or her office or in relation thereto, unless the same shall happen through his or her own dishonesty, gross negligence or willful default. Involvement in Certain Legal Proceedings To the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities or commodities laws, any laws respecting financial institutions or insurance companies, any law or regulation prohibiting mail or wire fraud in connection with any business entity or been subject to any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization, except for matters that were dismissed without sanction or settlement. Regulation S-K Item 406: The Company has adopted a Code of Ethics and has filed a copy of the Code of Ethics with the Commission. Regulation S-K Item 407(c)(3): None. Regulation S-K Item 407(d)(4) and (5): The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). The Company has an audit committee, consisting solely of independent directors of the Company, Mr. Zhao Shudong, Mr. Nelson N.S. Wong, and Mr. Hu Jijun. Mr. Wong qualifies as the audit committee financial expert. The Company’s audit committee charter has been filed as Exhibit 99.1 to the Company’s annual report on Form 10-K for the year ended June 30, 2009 and is available on the Company’s website (www.recon.cn). 41 Item 11. Executive Compensation. The following table shows the annual compensation paid by us to Mr. Yin Shenping, our Chief Executive Officer, for the years ended June 30, 2016 and 2015. No other employee or officer received more than $100,000 in total compensation in 2016 or 2015. Summary Executive Compensation Table Name and principal position Year Salary Bonus Option Awards Restricted Stock Awards Total Yin Shenping, Principal Executive Officer 2015 $ 126,347 $ 10,000 $ — $ 129,239 (1)(2) $ 265,586 2016 $ 125,975 $ 10,000 $ $ 271,231 (1)(2)(4) $ 407,206 Liu Jia Chief Financial Officer 2015 $ 80,000 $ 7,390- $ — $ 7,332 (3) $ 94,722 2016 $ 80,000 $ 7,525 $ $ 28,160 (3)(4) $ 115,685 Chen Guangqiang, Chief Technology Officer 2015 $ 117,343 $ 10,000 $ — $ 169,105 (1)(2) $ 296,448 2016 $ 115,893 $ 10,000 $ — $ 311,732 (1)(2)(4) $ 437,571 (1) On December 13, 2013, the Company granted 95,181 restricted shares to Mr. Yin and 135,181 restricted shares to Mr. Chen at an aggregate value of ¥4,207,496 ($688,782), based on the stock closing price of $2.99 at December 13, 2013. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. (2) On January 31, 2015, the Company granted 150,000 restricted shares to Mr. Yin and 150,000 restricted shares to Mr. Chen at an aggregate value of ¥3,038,558($495,000), based on the stock closing price of $1.65 at January 31, 2015. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. (3) On January 31, 2015, the Company granted 32,000 options to Ms. Liu Jia, which options vest over a period of three years, one third of which vest on January 31 of each year beginning in 2016. The grant date fair value of such options was $1.65. (4) On October 18, 2015, the Company granted 320,000 restricted shares to Mr. Yin, 320,000 restricted shares to Mr. Chen and 36,000 restricted shares to Ms. Liu at an aggregate value of ¥3,952,579 ($594,880), based on the stock closing price of $0.88 at October 16, 2015. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. Director Compensation All directors hold office until the expiration of their respective terms and until their successors have been duly elected and qualified. There are no family relationships among our directors or executive officers. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors and non-voting observers do not receive any compensation for their services. Non-employee directors are entitled to receive $2,000 per Board of Directors meeting attended. In addition, non-employee directors are entitled to receive compensation for their actual travel expenses for each Board of Directors meeting attended. 42 Summary Director Compensation Table Name (1) Fees earned or paid in cash Option Awards Total (2) Nelson N.S. Wong $ 8,000 $ 19,907 $ 27,907 Hu Jijun $ 8,000 $ 19,907 $ 27,907 Zhao Shudong $ 8,000 $ 16,058 $ 24,058 (1) Compensation for our directors Yin Shenping and Chen Guangqiang, who also serve as executive officers, is fully disclosed in the executive compensation table. (2) None of the directors received any ordinary share awards, nonqualified deferred compensation earnings or non-equity incentive plan compensation in fiscal year 2015. (3) On January 31, 2015, the Company granted 25,000 options to Mr. Nelson N.S. Wong , which options vest over a period of three years, one third of which vest on January 31 of each year beginning in 2016. The grant date fair value of such options was $1.65. On October 18, 2015, the Company granted 30,000 restricted shares to Mr. Nelson N.S. Wong , which vests over a period of three years, one third of which vest on October 17 of each year beginning in 2016. The grant date fair value of such options was $0.88. (4) On January 31, 2015, the Company granted 25,000 options to Mr. Hu Jijun , which options vest over a period of three years, one third of which vest on January 31 of each year beginning in 2016. The grant date fair value of such options was $1.65. On October 18, 2015, the Company granted 30,000 restricted shares to Mr. Nelson N.S. Wong , which vests over a period of three years, one third of which vest on October 17 of each year beginning in 2016. The grant date fair value of such options was $0.88. (5) On January 31, 2015, the Company granted 18,000 options to Mr. Hu Jijun , which options vest over a period of three years, one third of which vest on January 31 of each year beginning in 2016. The grant date fair value of such options was $1.65. On October 18, 2015, the Company granted 30,000 restricted shares to Mr. Nelson N.S. Wong , which vests over a period of three years, one third of which vest on October 17 of each year beginning in 2016. The grant date fair value of such options was $0.88. Outstanding Equity Awards At Fiscal Year-End Option Awards Shares Awards Name Number of securities underlying unexercised options (#) exercisable Number of securities underlying unexercised options (#) unexercisable Weighted Option exercise price ($) Option expiration date Number of shares or units of stock that have not vested Market value of shares of units of stock that have not vested ($) Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#) Equity incentive plan awards: Market or payout of value of unearned shares, units or other rights that have not vested (a) (b) (c) (e) (f) (g) (h) (i) (j) Yin Shenping 60,000 - 6.00 July 29, 2019 (2) 31,727 94,864 31,727 94,864 (4) Principal Executive Officer 32,000 16,000 2.96 March 25, 2022 (3) 50,000 82,500 100,000 165,000 (5) - - 320,000 281,600 (6) Total 92,000 88,000 4.65 81,727 177,364 451,727 541,464 Chen Guangqiang 50,000 - 6.00 July 29, 2019 (2) 45,060 134,729 45,061 134,732 (4) Chief Technology Officer 20,000 10,000 2.96 March 25, 2022 (3) 50,000 82,500 100,000 165,000 (5) - - 320,000 281,600 (6) Total 40,000 10,000 4.86 95,060 217,229 465,061 581,332 (2) Options granted on July 30, 2009, which vest at a rate of 20% per year on the anniversary of the grant date and which are exercisable for $6.00 per share. (3) Options granted on March 26, 2012, which vest at a rate of 20% per year on the anniversary of the grant date and which are exercisable for $2.96 per share. (4) Based on the share price of Oct. 13, 2013. (5) Based on the share price of Jan 31, 2015. (6) Based on the share price of Oct. 16, 2015. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders 815,600 (1) $ 3.04 153,193 (2) Equity compensation plans not approved by security holders (3) 4,000 (4) $ N/A -- (1) Options to purchase ordinary shares. We have granted in aggregate options to acquire 1,108,000 shares, of which 292,400 have been exercised, forfeited or expired. (2) We have requested shareholder approval to issue options, shares or other securities as compensation for, in aggregate 3,175,155 ordinary shares. We have, to date, issued 2,206,362 ordinary shares, of which 253,574 are outstanding and the remaining 1,952,788 have not yet vested. We have also granted options to acquire 1,108,000 ordinary shares, of which 815,600 remain issued and outstanding. The 153,193 shares listed here reflect 3,175,155 plan shares, minus 2,206,362 granted shares and minus 815,600 option shares. (3) NASDAQ Listing Rule 5615(a)(3)(A) permits the Company, like other foreign private issuers, to follow its home country practice rather than NASDAQ shareholder approval requirements; thus, the Company, in accordance with Cayman Islands law, is not required to seek shareholder approval prior to making such issuances. (4) Restricted shares. PRINCIPAL SHAREHOLDERS The following table sets forth information with respect to beneficial ownership of our ordinary shares as of the date of this report, for each person known by us to beneficially own 5% or more of our ordinary shares, and all of our executive officers and directors individually and as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. Percentage of beneficial ownership is based on 6,532,429 Shares, which consists of 5,980,792 Shares outstanding as of September 16, 2016 and 551,667 shares subject to options that are exercisable within 60 days after September 16, 2016. Such shares subject to options are deemed to be outstanding for the purposes of computing the percentage ownership of the individual holding such shares, but are not deemed outstanding for purposes of computing the percentage for any other person shown in the table. Our major shareholders do not possess voting rights that differ from our other shareholders. The address of each of the below shareholders is c/o Recon Technology Ltd, Room 1902, Building C, King Long International Mansion, 9 Fulin Road, Beijing 100107 China. 43 Amount of Beneficial Ownership Percentage Ownership Yin Shenping (1) 963,427 14.75 % Chen Guangqiang (2) 972,548 14.89 % Hu Jijun (3) 33,333 1.11 % Nelson Wong (4) 36,333 * % Zhao Shudong (5) 34,000 * % Liu Jia (6) 72,667 * Liu Hui (7) 833,681 12.76 % Chen Yiquan (7) 833,681 12.76 % Total 2,945,989 45.10 % Directors and Executive Officers as a Group (seven members) 2,112,308 32.34 % (1) Includes 92,000 options to purchase ordinary shares that were exercisable and 106,667 restricted shares vested within 60 days after September 16, 2016. (2) Includes 70, 000 options to purchase ordinary shares that were exercisable and 106,667 restricted shares vested within 60 days after September 16, 2016. (3) Includes 23,333 options to purchase ordinary shares and 10,000 restricted shares vested that were exercisable within 60 days after September 16, 2016 (4) Includes 26,333 options to purchase ordinary shares and 10,000 restricted shares vested that were exercisable within 60 days after September 16, 2016 (5) Include 24,000 options that were exercisable and 10,000 restricted shares vested within 60 days after September 28, 2015 September 16, 2016. (6) Includes 60,667 options to purchase ordinary shares and 12,000 restricted shares vested that were exercisable within 60 days after September 16, 2016 (7) Includes 458,525 Shares held by Chen Yiquan and 375,156 Shares held by Liu Hui. According to a jointly filed Schedule 13D dated December 27, 2010 (Accession No. 0001144204-10-068264), Chen Yiquan and Liu Hui share beneficial ownership of and have joint voting and dispositive power over the aggregate 833,681 Shares. * Less than 1%. Item 13. Certain Relationships and Related Transactions, and Director Independence. Transactions with Related Persons Because we do not have access certification to Jidong Oilfield, Nanjing Recon, one of our Domestic Companies, conducted transactions with Jidong Oilfield through Beijing Yabei Nuoda Science and Technology Co. Ltd. (“Yabei Nuoda”), which has access certification to the oilfield and wherein one of the Founders, Mr. Yin Shenping, was the legal representative of Yabei Nuoda before December 2013 and Chairman as of September 30, 2014. On October 30, 2014, Mr. Yin resigned from the chairman position and at that point Yabei Nuoda was no longer a related party of the Company after October 30, 2014. Mr. Yin does not have any equity interest in this company currently. Below is a summary of trade accounts receivable with related parties as of June 30, 2015 and 2016, respectively. 44 June 30, 2015 June 30, 2016 June 30, 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 ¥ - $ - Sales to related parties consisted of the following as of June 30, 2015 and 2016: For the years ended June 30, 2015 2016 2016 RMB RMB U.S. Dollars Xiamen Henda Hitek Computer Network Co. Ltd ¥ 1,676,036 ¥ - $ - Xiamen Huangsheng Hitek Computer Network Co. Ltd. 752,137 - - Revenues from related parties ¥ 2,428,173 ¥ - $ - Purchase from related parties consisted of the following as of June 30, 2015 and 2016, respectively. For the years ended June 30, 2015 2016 2016 RMB RMB U.S. Dollars Huanghua Heng Da Xiang Tong Manufacture Ltd ¥ 862,782 ¥ 338,862 $ 51,000 Xiamen Huangsheng Hitek Computer Network Co. Ltd. 797,587 588,894 88,631 Purchase from related parties ¥ 1,660,369 ¥ 927,756 $ 139,631 The Company also had short-term borrowings from related parties. Below is a summary of the Company’s short-term borrowings due to related parties as of June 30, 2015 and 2016, respectively. 45 Short-term borrowings June 30, 2015 June 30, 2016 June 30, 2016 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 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 September 25, 2016 - 1,807,207 271,992 Short-term borrowing from a Founder, 5.75% annual interest, due on October 10, 2016 - 2,409,610 362,657 Short-term borrowing from a Founder, 5.43% annual interest, due on November 4, 2016 - 1,805,180 271,687 Short-term borrowing from a Founder's family member, no interest, due on December 16, 2016 - 1,500,000 225,756 Short-term borrowing from a Founder's family member, no interest, due on December 28, 2016 - 400,000 60,202 Short-term borrowing from a Founder, 5.22% annual interest, due on March 10, 2017 - 2,529,795 380,745 Short-term borrowing from a Founder, 5.22% annual interest, due on May 6, 2017 - 2,490,056 374,764 Total short-term borrowings due to related parties ¥ 16,916,905 ¥ 12,941,848 $ 1,947,803 Other than as described herein, no transactions required to be disclosed under Item 404 of Regulation S-K have occurred since the beginning of the Company’s last fiscal year. Director Independence The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). Mr. Wong, Mr. Hu and Mr. Zhao are our independent directors. Item 14. Principal Accountant Fees and Services. Friedman LLP was appointed by the Company to serve as its independent registered public accounting firm for fiscal 2015 and 2016. Fees Paid To Independent Registered Public Accounting Firm Audit Fees During fiscal years 2015 and 2016, Friedman LLP’s audit fees were $185,000 and $190,000, respectively. Audit-Related Fees The Company has not paid Friedman LLP for audit-related services in fiscal years 2015 and 2016. 46 Tax Fees The Company has not paid Friedman LLP for tax services in fiscal years 2015 and 2016. All Other Fees The Company has not paid Friedman LLP for any other services in fiscal years 2015 and 2016. Audit Committee Pre-Approval Policies Before Friedman LLP was engaged by the Company to render audit or non-audit services, the engagement was approved by the Company’s audit committee. All services rendered by Friedman LLP have been so approved. Item 15. Exhibits, Financial Statement Schedules. The following documents are filed herewith: Number Exhibit 3.1 Second Amended and Restated Articles of Association of the Registrant (1) 3.2 Second Amended and Restated Memorandum of Association of the Registrant (1) 4.1 Specimen Share Certificate (2) 10.1 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Beijing BHD Petroleum Technology Co., Ltd. (2) 10.2 Translation of Power of Attorney for rights of Chen Guangqiang in Beijing BHD Petroleum Technology Co., Ltd. (2) 10.3 Translation of Power of Attorney for rights of Yin Shenping in Beijing BHD Petroleum Technology Co., Ltd. (2) 10.4 Translation of Power of Attorney for rights of Li Hongqi in Beijing BHD Petroleum Technology Co., Ltd. (2) 10.5 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (2) 10.6 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (2) 10.7 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (2) 10.8 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (2) 10.9 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (2) 10.10 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (2) 47 10.11 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Jining ENI Energy Technology Co., Ltd. (2) 10.12 Translation of Power of Attorney for rights of Chen Guangqiang in Jining ENI Energy Technology Co., Ltd. (2) 10.13 Translation of Power of Attorney for rights of Yin Shenping in Jining ENI Energy Technology Co., Ltd. (2) 10.14 Translation of Power of Attorney for rights of Li Hongqi in Jining ENI Energy Technology Co., Ltd. (2) 10.15 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (2) 10.16 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (2) 10.17 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (2) 10.18 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (2) 10.19 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (2) 10.20 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (2) 10.21 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Nanjing Recon Technology Co., Ltd. (2) 10.22 Translation of Power of Attorney for rights of Chen Guangqiang in Nanjing Recon Technology Co., Ltd. (2) 10.23 Translation of Power of Attorney for rights of Yin Shenping in Nanjing Recon Technology Co., Ltd. (2) 10.24 Translation of Power of Attorney for rights of Li Hongqi in Nanjing Recon Technology Co., Ltd. (2) 10.25 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (2) 10.26 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (2) 10.27 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (2) 10.28 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (2) 10.29 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (2) 10.30 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (2) 48 14.1 Code of Ethics of the Company. (3) 21.1 List of subsidiaries of the Company. (4) 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) 99.1 2009 Stock Incentive Plan (1) 99.2 2015 Stock Incentive Plan (4) 99.3 Press release dated September 28, 2016 regarding earnings for year ended June 30, 2016 (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. DEF XBRL Taxonomy Extension Definition Linkbase Document (4) 101. LAB XBRL Taxonomy Extension Label Linkbase Document (4) 101. PRE XBRL Taxonomy Extension Presentation Linkbase Document (4) (1) Incorporated by reference to the Company’s Registration Statement on Form S-3, Registration No. 333-213702. (2) Incorporated by reference to the Company’s Registration Statement on Form S-1, Registration No. 333-152964. (3) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed with the SEC on September 28, 2009. (4) Filed herewith. 49 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 September 28, 2016 By: /s/ Liu Jia Liu Jia Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Exchange Act, this report has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date /s/ Yin Shenping Chief Executive Officer and Director September 28, 2016 Yin Shenping (Principal Executive Officer) /s/ Chen Guangqiang Chief Technology Officer and Director September 28, 2016 Chen Guangqiang /s/ Zhao Shudong Director September 28, 2016 Zhao Shudong /s/ Nelson N.S. Wong Director September 28, 2016 Nelson N.S. Wong /s/ Hu Jijun Director September 28, 2016 Hu Jijun 50 RECON TECHNOLOGY, LTD INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets as of June 30, 2015 and 2016 F-2 Consolidated Statements of Operations and Comprehensive Loss for the years ended June 30, 2015 and 2016 F-3 Consolidated Statements of Equity for the years ended June 30, 2015 and 2016 F-4 Consolidated Statements of Cash Flows for the years ended June 30, 2015 and 2016 F-5 Notes to the Consolidated Financial Statements F-6 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Recon Technology, Ltd. We have audited the accompanying consolidated balance sheets of Recon Technology, Ltd. (the “Company”) as of June 30, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, equity, and cash flows for each of the two years in the period ended June 30, 2016. Recon Technology, Ltd.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Recon Technology, Ltd. as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2016 in conformity with accounting principles generally accepted in the United States of America. /s/ Friedman LLP New York, New York September 28, 2016 F- 1 RECON TECHNOLOGY, LTD CONSOLIDATED BALANCE SHEETS As of June 30, As of June 30, As of June 30, 2015 2016 2016 ASSETS RMB RMB U.S. Dollars Current assets Cash ¥ 12,344,929 ¥ 1,817,620 $ 273,560 Notes receivable 4,205,530 4,660,177 701,377 Trade accounts receivable, net 52,186,397 38,097,626 5,733,855 Trade accounts receivable- related parties, net 4,769,800 - - Inventories, net 10,845,007 6,313,070 950,144 Other receivables, net 18,064,568 22,000,112 3,311,111 Other receivables- related parties 91,021 - - Purchase advances, net 18,622,538 1,323,305 199,163 Purchase advances- related parties 394,034 - - Prepaid expenses 826,314 110,310 16,602 Prepaid expenses - related parties 420,000 - - Deferred tax assets 1,742,098 - - Total current assets 124,512,236 74,322,220 11,185,812 Property and equipment, net 2,666,953 2,907,762 437,631 Long-term trade accounts receivable, net 4,440,665 2,220,332 334,169 Long-term other receivable 2,729,033 - - Total Assets ¥ 134,348,887 ¥ 79,450,314 $ 11,957,612 Current liabilities Short-term bank loans ¥ 7,000,000 ¥ - $ - Trade accounts payable 13,627,088 7,540,430 1,134,867 Trade accounts payable- related parties 3,528,705 - - Other payables 2,103,057 2,972,192 447,328 Other payable- related parties 4,309,702 3,680,244 553,892 Deferred revenue 2,285,529 406,681 61,207 Advances from customers 529,700 200,600 30,191 Accrued payroll and employees' welfare 246,789 381,109 57,359 Accrued expenses 199,166 261,348 39,334 Taxes payable 1,153,216 755,880 113,763 Short-term borrowings - 530,000 79,767 Short-term borrowings - related parties 16,916,905 12,941,848 1,947,803 Deferred tax liability 180,186 180,186 27,119 Total current liabilities 52,080,043 29,850,518 4,492,630 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 2016, respectively) 697,217 741,467 111,594 Additional paid-in capital 92,541,687 100,612,455 15,142,604 Statutory reserve 4,148,929 4,148,929 624,432 Accumulated deficits (23,024,935 ) (63,907,512 ) (9,618,353 ) Accumulated other comprehensive loss (317,551 ) (219,040 ) (32,966 ) Total shareholders’ equity 74,045,347 41,376,299 6,227,311 Non-controlling interest 8,223,497 8,223,497 1,237,671 Total equity 82,268,844 49,599,796 7,464,982 Total Liabilities and Equity ¥ 134,348,887 ¥ 79,450,314 $ 11,957,612 The accompanying notes are an integral part of these consolidated financial statements. F- 2 RECON TECHNOLOGY, LTD CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the years ended June 30, 2015 2016 2016 RMB RMB USD Revenues Hardware and software ¥ 48,980,953 ¥ 41,544,925 $ 6,252,688 Service 103,774 1,183,352 178,100 Hardware and software - related parties 2,428,173 - - Total revenues 51,512,900 42,728,277 6,430,788 Cost of revenues Hardware and software ¥ 41,373,566 ¥ 34,732,965 $ 5,227,459 Service - 748,429 112,642 Hardware and software - related parties 27,161 - - Total cost of revenues 41,400,727 35,481,394 5,340,101 Gross profit 10,112,173 7,246,883 1,090,687 Selling and distribution expenses 11,312,452 5,630,715 847,447 General and administrative expenses 26,894,273 20,195,701 3,039,539 Provision for doubtful accounts 3,252,868 14,475,074 2,178,560 Research and development expenses 4,168,813 6,856,522 1,031,936 Operating expenses 45,628,406 47,158,012 7,097,482 Loss from operations (35,516,233 ) (39,911,129 ) (6,006,795 ) Other income (expenses) Subsidy income 781,457 289,087 43,509 Interest income 293,499 183,553 27,626 Interest expense (1,110,451 ) (903,368 ) (135,961 ) Change in fair value of warrants liability 4,034,272 - - Income (loss) from foreign currency exchange (19,190 ) 7,570 1,139 Loss from warrants redemption (2,496,375 ) - - Other income (expense) 24,558 (2,445 ) (368 ) Other income (expense) 1,507,770 (425,603 ) (64,055 ) Loss before income tax (34,008,463 ) (40,336,732 ) (6,070,850 ) Provision (benefit) for income tax (2,552,075 ) 545,845 82,152 Net loss (31,456,388 ) (40,882,577 ) (6,153,002 ) Comprehensive loss Net loss (31,456,388 ) (40,882,577 ) (6,153,002 ) Foreign currency translation adjustment (38,276 ) 98,511 14,826 Comprehensive loss (31,494,664 ) (40,784,066 ) (6,138,176 ) Less: Comprehensive loss attributable to non-controlling interest (1,982 ) - - Comprehensive loss attributable to Recon Technology, Ltd ¥ (31,492,682 ) ¥ (40,784,066 ) $ (6,138,176 ) Loss per common share - basic ¥ (6.45 ) ¥ (7.23 ) $ (1.09 ) Loss per common share - diluted ¥ (6.45 ) ¥ (7.23 ) $ (1.09 ) Weighted - average shares -basic 4,876,504 5,653,149 5,653,149 Weighted - average shares -diluted 4,876,504 5,653,149 5,653,149 The accompanying notes are an integral part of these consolidated financial statements. F- 3 RECON TECHNOLOGY, LTD CONSOLIDATED STATEMENTS OF EQUITY Ordinary Shares Additional Paid-in Capital Statutory Reserves Retained Earnings (deficits) Accumulated Other Comprehensive loss Shareholders' Equity Non-controlling Interest Total Equity Total Equity Number of Shares Amount (RMB) (RMB) (RMB) (RMB) (RMB) (RMB) (RMB) (RMB) (USD) Balance, July 1, 2014 4,717,336 ¥ 616,865 ¥ 83,061,058 ¥ 4,148,929 ¥ 8,431,453 ¥ (279,275 ) ¥ 95,979,030 ¥ 8,225,479 ¥ 104,204,509 $ 15,683,225 Stock issuance 297,197 33,497 2,358,530 2,392,027 2,392,027 360,010 Restricted shares issued for services 140,162 15,876 567,223 583,099 583,099 87,759 Restricted shares issued to redeem warrants 273,251 30,979 3,431,459 3,462,438 3,462,438 521,112 Stock based payment 3,123,417 3,123,417 3,123,417 470,088 Net loss for the year (31,456,388 ) (31,456,388 ) - (31,456,388 ) (4,734,321 ) Foreign currency translation adjustment (38,276 ) (38,276 ) (1,982 ) (40,258 ) (6,065 ) Balance, June 30, 2015 5,427,946 ¥ 697,217 ¥ 92,541,687 ¥ 4,148,929 ¥ (23,024,935 ) ¥ (317,551 ) ¥ 74,045,347 ¥ 8,223,497 ¥ 82,268,844 $ 12,381,808 Stock issuance 15,874 1,796 156,472 - 158,268 158,268 23,820 Restricted shares issued for services 360,185 42,454 2,222,988 2,265,442 2,265,442 340,959 Stock based payment 5,691,308 5,691,308 5,691,308 856,566 Net loss for the year (40,882,577 ) (40,882,577 ) (40,882,577 ) (6,153,002 ) Foreign currency translation adjustment 98,511 98,511 - 98,511 14,831 Balance, June 30, 2016 5,804,005 ¥ 741,467 ¥ 100,612,455 ¥ 4,148,929 ¥ (63,907,512 ) ¥ (219,040 ) ¥ 41,376,299 ¥ 8,223,497 ¥ 49,599,796 $ 7,464,982 The accompanying notes are an integral part of these consolidated financial statements. F- 4 RECON TECHNOLOGY, LTD CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 2015 2016 2016 RMB RMB U.S. Dollars Cash flows from operating activities: Net loss ¥ (31,456,388 ) ¥ (40,882,577 ) $ (6,153,002 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 526,046 955,083 143,744 Gain from disposal of equipment (193,657 ) (40,688 ) (6,124 ) Provision for doubtful accounts 3,252,868 14,475,074 2,178,560 Provision for slow moving inventories 7,700,836 2,428,288 365,468 Share based compensation 3,123,417 5,691,308 856,566 Deferred tax (benefit) provision (532,136 ) 1,742,098 262,193 Change in fair value of warrants liability (4,034,272 ) - - Restricted shares issued for services 1,585,462 2,287,415 344,266 Loss from warrants redemption 2,496,375 - - Income tax benefit (2,111,281 ) (1,196,253 ) (180,041 ) Changes in operating assets and liabilities: Notes receivable (4,205,530 ) (454,647 ) (68,426 ) Trade accounts receivable (3,245,218 ) 14,658,360 2,206,146 Trade accounts receivable-related parties 4,315,755 1,090,453 164,118 Inventories (4,209,241 ) 1,191,811 179,373 Other receivable, net 2,481,328 (1,775,659 ) (267,244 ) Other receivables-related parties, net 1,323,412 91,021 13,699 Purchase advance, net 3,271,935 4,930,479 742,058 Purchase advance-related parties, net - 1,374,034 206,798 Prepaid expense 1,808,350 716,004 107,762 Prepaid expense - related parties, net (190,000 ) 420,000 63,212 Trade accounts payable 2,213,583 (9,615,363 ) (1,447,153 ) Trade accounts payable-related parties 3,528,705 - - Other payables 337,978 869,135 130,809 Other payables-related parties 1,003,678 1,869,889 281,426 Deferred revenue (2,134,295 ) (1,878,848 ) (282,775 ) Advances from customers (271,685 ) (329,100 ) (49,531 ) Accrued payroll and employees' welfare (170,835 ) 134,320 20,216 Accrued expenses 5,291 172,490 25,960 Taxes payable (1,322,818 ) 790,199 118,928 Net cash used in operating activities (15,102,337 ) (285,674 ) (42,994 ) Cash flows from investing activities: Purchase of property and equipment (2,078,204 ) (181,075 ) (27,253 ) Proceeds from disposal of equipment 400,400 60,000 9,030 Net cash used in investing activities (1,677,804 ) (121,075 ) (18,223 ) Cash flows from financing activities: Proceeds from short-term bank loans 7,000,000 500,000 75,252 Repayments of short-term bank loans (10,000,000 ) (7,500,000 ) (1,128,782 ) Proceeds from short-term borrowings - 530,000 79,767 Proceeds from short-term borrowings-related parties 18,250,000 12,895,400 1,940,813 Repayment of short-term borrowings-related parties (6,550,000 ) (16,780,765 ) (2,525,577 ) Proceeds from sale of common stock, net of issuance costs 2,392,027 171,919 25,874 Net cash provided by (used in) financing activities 11,092,027 (10,183,446 ) (1,532,653 ) Effect of exchange rate fluctuation on cash and cash equivalents (61,543 ) 62,886 9,466 Net decrease in cash (5,749,657 ) (10,527,309 ) (1,584,404 ) Cash at beginning of the year 18,094,586 12,344,929 1,857,964 Cash at end of the year ¥ 12,344,929 ¥ 1,817,620 $ 273,560 Supplemental cash flow information Cash paid during the period for interest ¥ 1,060,529 ¥ 903,368 $ 135,961 Cash paid during the period for taxes ¥ 881,794 ¥ 142,477 $ 21,443 Non-cash investing and financing activities Issuance of common stock to redeem warrants 3,462,438 - - AR and short-term borrowings-related parties offset - 200,000 30,101 Inventories used for fixed assets - 1,025,410 154,329 The accompanying notes are an integral part of these consolidated financial statements. F- 5 RECON TECHNOLOGY, LTD NOtes to the 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 (“Domestic Companies”) 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”). The Company has signed Exclusive Technical Consulting Service Agreements with each of the Domestic Companies, which are our VIEs and Equity Interest Pledge Agreements and Exclusive Equity Interest Purchase Agreements with their shareholders. Through these contractual arrangements, the Company has the ability to substantially influence each of the Domestic Companies’ daily operations and financial affairs, appoint their senior executives and approve all matters requiring shareholder approval. As a result of these contractual arrangements, which enable the Company to control the Domestic Companies, the Company is considered as the primary beneficiary of each Domestic Company. Thus, the Company is able to absorb 90% of net interest or 100% of net loss of those VIEs. On December 17, 2015, Huang Hua BHD Petroleum Equipment Manufacturing Co. LTD, a fully owned subsidiary established by BHD was organized under the laws of the PRC. 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. Note 2. LIQUIDITY As reflected in the Company’s consolidated financial statements, the Company had recurring net losses for the years ended June 30, 2016 and 2015. In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future and its operating and capital expenditure commitments. The Company plans to fund continuing operations through identifying new prospective joint venture and strategic alliance opportunities for new revenue sources, financial supports by major shareholders and reducing costs to improve profitability and replenish working capital. Management believes that the foregoing measures collectively will provide sufficient liquidity for the Company to meet its future liquidity and capital obligations. F- 6 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements NOTE 3. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and have been consistently applied. Principles of Consolidation - The 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 consolidated financial statements have been expressed in Chinese Yuan. The consolidated financial statements as of and for the year ended June 30, 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 ¥6.6443 = US$1.00, the approximate exchange rate prevailing on June 30, 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. 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. F- 7 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements 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. The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs. 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 is 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 Production equipment 10 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. 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 2016. F- 8 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements 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 and software: Revenue from hardware and software sales is generally recognized when the product with the embedded software system is shipped to the customer and when there are no unfulfilled company obligations that affect the customer’s final acceptance of the arrangement. Revenue from software is recognized according to project contracts. Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance. 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 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. Loss per Share - Basic Earnings/Loss Per Share (“EPS”) is computed by dividing net loss by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net 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 year ended June 30, 2015 and 2016. F- 9 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements Recently Issued Accounting Pronouncements 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. In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”, The amendments rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically, registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: 1) Revenue and Expense Recognition for Freight Services in Process, which is codified in paragraph 605-20-S99-2; 2) Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph 605-45-S99-1; 3) Accounting for Consideration Given by a Vendor to a Customer (including Reseller of the Vendor's Products), which is codified in paragraph 605-50-S99-1; 4) Accounting for Gas-Balancing Arrangements (i.e., use of the "entitlements method"), which is codified in paragraph 932-10-S99-5, which is effective upon adoption of ASU 2014-09. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients". The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements. F- 10 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements In August 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4)Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received from Equity Method Investees; (8) Beneficial Interests in Securitization Transactions; and Separately Identifiable Cash Flows and Application of the Predominance Principle. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures NOTE 4. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 58,049,462 ¥ 42,665,499 $ 6,421,340 Allowance for doubtful accounts (5,863,065 ) (4,567,873 ) (687,485 ) Total - third- party, net ¥ 52,186,397 ¥ 38,097,626 $ 5,733,855 June 30, 2015 June 30, 2016 June 30, 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 June 30, 2016 June 30, 2016 Third Party – long-term RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. * ¥ 4,934,072 ¥ 2,467,036 $ 371,299 Allowance for doubtful accounts (493,407 ) (246,704 ) (37,130 ) Total - long-term trade accounts receivable, net ¥ 4,440,665 ¥ 2,220,332 $ 334,169 F- 11 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements *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 ($371,299). During the year ended June 30, 2016, the Company received the payment on time as scheduled. ** During the year ended June 30, 2016, the Company offset ¥980,000 ($147,494) of accounts receivable and accounts payable pursuant to certain settlement agreements with Xiamen Huangsheng Hitek Computer Network Co. Ltd , a related party of the Company. *** During the year ended June 30, 2016, the Company offset ¥2,699,347 ($406,263) of accounts receivable with ¥2,499,347 ($376,162) of accounts payable and ¥200,000 ($30,101) pursuant to certain settlement agreements with Xiamen Henda Hitek Computer Network Co. Ltd., a related party of the Company. Provision for accounts receivables due from third party was ¥19,421 and ¥1,650,745 ($248,444) for the years ended June 30, 2015 and 2016, respectively. Movement of allowance for doubtful accounts is as follows: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Beginning balance 6,337,051 6,356,472 956,676 Charge to expense 19,421 1,650,745 248,444 Less: write-off - (3,192,640 ) (480,505 ) Ending balance ¥ 6,356,472 ¥ 4,814,577 $ 724,615 NOTE 5. OTHER RECEIVABLES, NET Other receivables consisted of the following: Third Party June 30, 2015 June 30, 2016 June 30, 2016 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,624,071 ¥ 2,729,033 $ 410,731 Loans to third parties (B) 11,154,344 14,168,344 2,132,396 Business advance to staff (C) 3,927,238 4,952,114 745,314 Deposits for projects 543,800 893,669 134,501 Others 637,348 534,759 80,484 Allowance for doubtful accounts (822,233 ) (1,277,807 ) (192,315 ) Total ¥ 18,064,568 ¥ 22,000,112 $ 3,311,111 Provision for other receivables was ¥371,217 and ¥455,574 ($68,566) for the years ended June 30, 2015 and 2016, respectively. Third Party June 30, 2015 June 30, 2016 June 30, 2016 Non-Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,729,033 ¥ - $ - Total ¥ 2,729,033 ¥ - $ - (A) After ENI ceased to be a VIE of the Company, ENI in January 2012 agreed to repay the loan on a payment schedule, with interest accrued during the period at an annual rate of 4%. In accordance with the payment schedule, the principal plus accrued interest is required to be repaid over approximately three years on a quarterly basis beginning March 2012. The first four payments are RMB 1.2 million each. In March, June, September and December of 2012, the Company received RMB 4.8 million. Starting March 2013, installments for each quarter would be ¥1,777,653. The Company 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, which is due by June 30, 2017. The Company has continued to receive the payments under the agreement. F- 12 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements (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. Other receivables - related parties represent loans to related parties for working capital advances. Such advances are due-on-demand and non-interest bearing. Balances have been fully collected as of June 30, 2016. Movement of allowance for doubtful accounts is as follows: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Beginning balance 451,016 822,233 123,750 Charge to expense 371,217 455,574 68,565 Ending balance ¥ 822,233 ¥ 1,277,807 $ 192,315 NOTE 6. PURCHASE ADVANCES The Company purchased products and services from a third party and a related party during the normal course of business. Purchase advances consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 22,845,030 ¥ 17,914,552 $ 2,696,216 Allowance for doubtful accounts (4,222,492 ) (16,591,247 ) (2,497,053 ) Total ¥ 18,622,538 ¥ 1,323,305 $ 199,163 Provision for purchase advances were ¥2,862,231 and ¥12,368,755 ($1,861,550) for the years ended June 30, 2015 and 2016, respectively. The Company recorded allowance for these down payments and will continue to try to collect or get inventories delivered. These payments were advanced for certain customized equipment of the planned projects. As those projects were delayed or canceled or there is rare chance to be profitable, the Company decided to suspend those projects and recorded allowances related to advanced payments for those projects as the Company may not be able to receive those funds back. Management is still making efforts to collect partially or negotiate with venders for some other alternative solutions to minimize the Company’s loss. Purchases from related parties consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 Related Party RMB RMB U.S. Dollars Xiamen Huangsheng Hitek Computer Network Co. Ltd. (A) ¥ 394,034 ¥ - $ - Total - related-parties, net ¥ 394,034 ¥ - $ - One of the Founders of the Company and his family member collectively own 57% of Xiamen Huasheng Haitian Computer Network Co. Ltd. Between August 10, 2015 and September 1, 2015, materials purchased have been delivered to the Company and this balance was settled in full. F- 13 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements Movement of allowance for doubtful accounts is as follows: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Beginning balance 1,360,261 4,222,492 635,503 Charge to expense 2,862,231 12,368,755 1,861,550 Ending balance ¥ 4,222,492 ¥ 16,591,247 $ 2,497,053 NOTE 7. INVENTORIES Inventories consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Small component parts ¥ 55,332 ¥ 55,726 $ 8,387 Purchased goods and raw materials 244,667 61,361 9,235 Work in process and goods on site 3,552,771 3,539,525 532,714 Finished goods 14,693,073 8,054,637 1,212,257 Allowance for slow moving inventory (7,700,836 ) (5,398,179 ) (812,449 ) Total inventories, net ¥ 10,845,007 ¥ 6,313,070 $ 950,144 Provisions for slow moving inventory were ¥7,700,836 and ¥2,428,290 ($365,468) for the years ended June 30, 2015 and 2016, respectively. Movement of provisions for slow moving inventory is as follows: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Beginning balance - 7,700,836 1,159,009 Charge to cost of sales 7,700,836 2,428,290 365,468 Less: write-off - (4,730,947 ) (712,028 ) Ending balance ¥ 7,700,836 ¥ 5,398,179 $ 812,449 NOTE 8. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Motor vehicles ¥ 3,790,474 ¥ 3,871,567 $ 582,687 Office equipment and fixtures 797,791 828,285 124,660 Production equipment - 916,025 137,866 Total property and equipment 4,588,265 5,615,877 845,213 Less: Accumulated depreciation (1,921,312 ) (2,708,115 ) (407,582 ) Property and equipment, net ¥ 2,666,953 ¥ 2,907,762 $ 437,631 Depreciation expense was ¥526,046 and ¥955,083 ($143,744) for the years ended June 30, 2015 and 2016, respectively. F- 14 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements NOTE 9. LONG-TERM INVESTMENT On April 13, 2015, BHD reached an agreement to invest RMB 80 million in Huanghua Bai 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 HHBHDXT. The investment is to enhance cooperation with HHBHDXT 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. The Company didn’t make any payment as of the termination and termination of this transaction subjects to no payment or penalty. NOTE 10. OTHER PAYABLES Other payables consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 Third Party RMB RMB U.S. Dollars Consulting services ¥ 1,628,508 ¥ 1,659,505 $ 249,763 Distributors and employees 413,703 245,070 36,884 Funds collected on behalf of others - 895,022 134,705 Others 60,846 172,595 25,976 Total ¥ 2,103,057 ¥ 2,972,192 $ 447,328 June 30, 2015 June 30, 2016 June 30, 2016 Related Party RMB RMB U.S. Dollars Due to related parties (1) ¥ 2,499,347 ¥ - $ - Expenses paid by the major shareholders 1,558,738 3,144,263 473,225 Due to family member of one owner - 285,000 42,894 Due to management staff for costs incurred on behalf of Recon 251,617 250,981 37,773 Total ¥ 4,309,702 ¥ 3,680,244 $ 553,892 (1) Includes an advance from Xiamen Henda Hitek Computer Network Co. Ltd. for RMB 2,499,347 to supplement the Company’s working capital. The advance is payable on demand and non-interest bearing. This debt was off set with accounts receivable on September 3, 2015 (See Note 3). NOTE 11. TAXES PAYABLE Taxes payable consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars VAT payable ¥ 23,885 ¥ 739,260 $ 111,262 Enterprise income tax payable 1,127,131 - - Other taxes payable 2,200 16,620 2,501 Total taxes payable ¥ 1,153,216 ¥ 755,880 $ 113,763 F- 15 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements NOTE 12. SHORT-TERM BANK LOANS Short-term bank loans consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Industrial and Commercial Bank, floating interest rate at 6.12 %, due on June 19, 2016 ¥ 7,000,000 ¥ - - Total short-term bank loans ¥ 7,000,000 ¥ - $ - Interest expense for the short-term bank loan was ¥516,567 and ¥415,676 ($62,561) for the years ended June 30, 2015 and 2016, respectively. The loan was repaid in full during the year ended June 30, 2016. NOTE 13. SHORT-TERM BORROWINGS Short-term borrowings consisted of the following: June 30, 2015 June 30, 2016 June 30, 2016 Short-term borrowings due to third parties: RMB RMB U.S. Dollars Short-term borrowing from a third party, without interest, due on August 15, 2016 ¥ - ¥ 530,000 $ 79,767 Total short-term borrowings due to third parties ¥ - ¥ 530,000 $ 79,767 The Company repaid the short-term borrowing in full on August 8, 2016. June 30, 2015 June 30, 2016 June 30, 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 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 September 25, 2016* - 1,807,207 271,992 Short-term borrowing from a Founder, 5.75% annual interest, due on October 10, 2016 ** - 2,409,610 362,657 Short-term borrowing from a Founder, 5.43% annual interest, due on November 4, 2016 *** - 1,805,180 271,687 Short-term borrowing from a Founder's family member, no interest, due on December 16, 2016 - 1,500,000 225,756 Short-term borrowing from a Founder's family member, no interest, due on December 28, 2016 - 400,000 60,202 Short-term borrowing from a Founder, 5.22% annual interest, due on March 10, 2017 - 2,529,795 380,745 Short-term borrowing from a Founder, 5.22% annual interest, due on May 6, 2017 - 2,490,056 374,764 Total short-term borrowings due to related parties ¥ 16,916,905 ¥ 12,941,848 $ 1,947,803 * As of September 23, ¥1,800,000 was paid back with an accumulated interest of ¥17,537 ($2,639). ** As of September 23, 2016, the Company repaid ¥1,680,000 ($252,847) with an interest of ¥20,202 ($3,040). *** As of September 23, 2016, the Company repaid ¥ 540,000 ($81,272) of short-term borrowing with an interest of ¥8,428($1,268). F- 16 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements Interest expense for short-term borrowings due to related parties was ¥593,884 and ¥487,692 ($73,400) for the years ended June 30, 2015 and 2016, respectively. NOTE 14. SHAREHOLDERS’ EQUITY Stock offering In June 2015, the Company entered into a securities purchase agreement with certain institutional investors for the sale of 297,197 ordinary shares in a registered direct offering (4,000 shares at an average of $1.64 on June 9, 2015; 288,105 shares at an average of $2.12 on June 10, 2015; 5,092 shares at an average of $2.00 on June 11, 2015). The net cash proceeds received from the stock offering, after deducting ¥1,294,922 ($212,673) underwriter commission and other associated fees, were ¥2,392,027 (approximately $0.6 million). During the year ended June 30, 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 ¥158,268 ($23,820 ). 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 2016, the balance of total statutory reserves was ¥4,148,929 and ¥4,148,929 ($624,432), respectively. NOTE 15. STOCK-BASED COMPENSATION Stock-Based Awards Plan 2009 Incentive Plan – The Company granted options to purchase 415,000 ordinary shares to its employees and non-employee director on March 26, 2012. The options have an excise price of $2.96, which was equal to the share price of the Company’s ordinary shares at March 26, 2012, and will vest over a period of five years, with the first 20% vesting on March 26, 2013. The options expire ten years after the date of grant, on March 26, 2022. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The grant date fair value of the options was ¥10.06 ($1.49) per share. 2015 Incentive Plan – The Company granted options to purchase 400,000 ordinary shares to its employees and non-employee director on January 31, 2015. The options have an excise price of $1.65, which was equal to the share price of the Company’s ordinary shares at January 31, 2015, and will vest equally over a period of three years, with one third vesting on January 31, 2016. The options expire ten years after the date of grant, on January 31, 2025. F- 17 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements Stock price at grant date $ 1.65 Exercise price (per share) $ 1.65 Risk free rate of interest*** 1.49 % Dividend yield 0.0 % Life of option (years)** 6.5 Volatility* 297 % * Volatility is projected using the performance of the Company’s common share performances. ** The life of options represents the average period the option is expected to be outstanding. *** The risk-free interest rate is based on the Chinese international bond denominated in U.S. dollar, with a maturity that approximates the life of the option. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The grant date fair value of the options was ¥10.13 ($1.65) per share. The following is a summary of the stock options activity: Stock Options Shares Weighted Average Exercise Price Per Share Outstanding as of June 30, 2014 415,600 $ 4.37 Granted 400,000 1.65 Forfeited - - Exercised - - Outstanding as of June 30, 2015 815,600 $ 3.04 Granted - - Forfeited - - Exercised - - Outstanding as of June 30, 2016 815,600 $ 3.04 The following is a summary of the status of options outstanding and exercisable at June 30, 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 3.08 $ 6.00 193,000 3.08 $ 2.96 222,600 5.74 $ 2.96 148,400 5.74 $ 1.65 400,000 8.59 $ 1.65 133,333 8.59 815,600 The Share-based compensation expense recorded for stock options granted were ¥1,294,629 and ¥2,096,162 ($315,481) for the years ended June 30, 2015 and 2016, respectively. The total unrecognized share-based compensation expense for stock options as of June 30, 2016 was approximately ¥2.8 million ($0.43 million), which is expected to be recognized over a weighted average period of approximately 1.43 years. Restricted Shares to senior management As of June 30, 2016, the Company has granted restricted shares of common stock to senior management as follows: F- 18 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements On December 13, 2013, the Company granted 95,181 restricted shares to Mr. Yin Shenping and 135,181 restricted shares to Mr. Chen Guangqiang at an aggregate value of ¥4,207,496 ($688,782), based on the stock closing price of $2.99 at December 13, 2013. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. The two thirds were vested through June 30, 2016 and now non-restricted. On January 31, 2015, the Company granted 150,000 restricted shares to Mr. Yin Shenping and 150,000 restricted shares to Mr. Chen Guangqiang at an aggregate value of ¥3,038,558($495,000), based on the stock closing price of $1.65 at January 31, 2015. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. 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. The Share-based compensation expense recorded for restricted shares granted were ¥1,828,790 and ¥3,595,146 ($541,085) for the years ended June 30, 2015 and 2016, respectively. The total unrecognized share-based compensation expense for restricted shares granted as of June 30, 2016 was approximately ¥6.1 million ($0.90 million), which is expected to be recognized over a weighted average period of approximately 1.88 years. Restricted Shares for service For the year ended June 30, 2016, the Company has granted restricted shares of common stock to consultants as follows: On July 19, 2014, the Company granted 50,000 restricted shares to a non-affiliate as compensation for certain consulting service. The fair value of the restricted shares was $190,000 based on the closing stock price $3.8 at July 18, 2014. On January 29, 2015, 10,000 of those restricted shares were canceled based on the agreement with the consultant. On July 19, 2014, the Company decided to cancel 40,625 restricted shares, which was issued to Expert Asia Investment Ltd. on May 8, 2014, as the services were not provided pursuant to the agreement it had with the Company. On February 2, 2015, the Company issued 24,000 restricted shares to Maxim Group LLC (“Maxim”) for certain consulting service. The fair value of the restricted shares was $43,440 based on the closing stock price $1.81 at February 2, 2015. On April 8, 2015, the Company granted 40,000 restricted shares to a non-affiliate as compensation for certain consulting service. The fair value of the restricted shares was $62,400 based on the closing stock price $1.56 at April 8, 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 of $1.08 on 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 of $0.95 on November 19, 2015. Following is a summary of the restricted stock grants: Restricted stock grants Shares Non-vested as of June 30, 2014 230,362 Granted 414,000 Cancelled (10,000 ) Vested (180,787 ) Non-vested as of June 30, 2015 453,575 Granted 1,160,185 Cancelled - Vested (536,972 ) Non-vested as of June 30, 2016 1,076,787 Among the vested shares for the year ended June 30, 2016, 176,787 shares were not issued until July 23, 2016. F- 19 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements NOTE 16. INCOME TAX The Company is not subject to any income taxes in the United States or the Cayman Islands and had minimal operations in jurisdictions other than the PRC. 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. Loss before provision for income taxes consisted of: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Cayman Island and other areas ¥ (8,872,589 ) ¥ (14,257,066 ) $ (2,145,749 ) China (25,135,874 ) (26,079,666 ) (3,925,101 ) Total ¥ (34,008,463 ) ¥ (40,336,732 ) $ (6,070,850 ) Deferred tax asset is comprised of the following: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Allowance for doubtful receivables ¥ 1,072,279 ¥ 1,958,120 $ 294,705 Net operating loss carry forward 669,819 1,790,615 269,495 Less: Valuation allowance - (3,748,735 ) (564,200 ) Total deferred income tax assets ¥ 1,742,098 ¥ - $ - Deferred tax liability is comprised of the following: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars Income tax cost due to unpayable accounts ¥ 180,186 ¥ 180,186 $ 27,119 Total deferred income tax liability ¥ 180,186 ¥ 180,186 $ 27,119 F- 20 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements Following is a reconciliation of income tax at the effective rate to income tax at the calculated statutory rates: For the year ended June 30, 2015 For the year ended June 30, 2016 For the year ended June 30, 2016 RMB RMB U.S. Dollars Income tax calculated at statutory rates ¥ (6,108,744 ) ¥ (6,230,384 ) $ (937,699 ) Nondeductible expenses (non-taxable income) 5,335,231 1,774,956 267,138 Benefit of favorable rate for high-technology companies 385,650 2,492,154 375,080 Benefit of revenue exempted from enterprise income tax (190,614 ) (43,363 ) (6,526 ) Deferred income tax 137,683 3,748,735 564,200 Over-accrued tax of prior year and others (2,111,281 ) (1,196,253 ) (180,041 ) Provision (benefit) for income tax ¥ (2,552,075 ) ¥ 545,845 $ 82,152 The Company’s tax provision is comprised of the following: For the years ended June 30, 2015 2016 2016 RMB RMB U.S. Dollars Current income tax provision ¥ (2,019,938 ) ¥ - $ - Adjust over accrued tax of prior years - (1,196,253 ) (180,041 ) Deferred income taxes provision (benefit) (532,137 ) 1,742,098 262,193 Provision (benefit) for income tax ¥ (2,552,075 ) ¥ 545,845 $ 82,152 NOTE 17. 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 non-controlling interest ¥ 4,784,837 ¥ 3,438,660 ¥ 8,223,497 $ 1,350,594 As of June 30, 2016 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 278,583 Unappropriated retained earnings 3,152,687 3,250,513 6,403,200 963,709 Accumulated other comprehensive loss (18,850 ) (11,853 ) (30,703 ) (4,621 ) Total non-controlling interest ¥ 4,784,837 ¥ 3,438,660 ¥ 8,223,497 $ 1,237,671 F- 21 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements NOTE 18. CONCENTRATIONS For the years ended June 30, 2015 and 2016, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented approximately 43.09%, 6.82% and 75.36%, 8.85% of the Company’s revenue, respectively. For the year ended June 30, 2015, one major supplier accounted for 18% of the company’s total purchases. For the year ended June 30, 2016, two major suppliers accounted for 49% of the company’s total purchases. NOTE 19. 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 June 30, 2016: Twelve months ending June 30, Office lease payment RMB U.S. Dollars 2017 ¥ 1,264,000 $ 190,237 2018 540,000 81,272 Total ¥ 1,804,000 $ 271,509 (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 June 30, 2016, the Company estimated its severance payments of approximately ¥1.6 million ($0.24 million) which has not been reflected in its consolidated financial statements, because management cannot predict what the actual payment, if any will be in the future. NOTE 20. RELATED PARTY TRANSACTIONS AND BALANCES Sales to related parties – sales to related parties consisted of the following: For the years ended June 30, 2015 2016 2016 RMB RMB U.S. Dollars Xiamen Henda Hitek Computer Network Co. Ltd ¥ 1,676,036 ¥ - $ - Xiamen Huangsheng Hitek Computer Network Co. Ltd. 752,137 - - Revenues from related parties ¥ 2,428,173 ¥ - $ - F- 22 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements Purchases from related parties – purchases from related parties consisted of the following: For the years ended June 30, 2015 2016 2016 RMB RMB U.S. Dollars Huanghua Heng Da Xiang Tong Manufacture Ltd ¥ 862,782 ¥ 338,862 $ 51,000 Xiamen Huangsheng Hitek Computer Network Co. Ltd. 797,587 588,894 88,631 Purchase from related parties ¥ 1,660,369 ¥ 927,756 $ 139,631 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 June 30, 2015 and 2016 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. 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 ($0.25 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 Recon BJ and Mr. Yin started from July 1, 2016. Short-term borrowings from related parties - The Company borrowed ¥16,916,905 and ¥12,941,848 ($1,947,803) from the Founders and their family members as of June 30, 2015 and 2016, respectively. For the specific terms and interest rates of the borrowings, see Note 13. 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 2016, ¥1,558,738 and ¥3,144,263 ($473,225) was due to them, respectively. NOTE 21. Variable Interest Entities The Company reports its VIEs’ portion of consolidated net income and stockholders’ equity as non-controlling interests in the consolidated financial statements. Summary information regarding consolidated VIEs is as follows: June 30, 2015 June 30, 2016 June 30, 2016 RMB RMB U.S. Dollars ASSETS Current Assets Cash and cash equivalents ¥ 7,096,901 ¥ 619,430 $ 93,227 Notes receivable 4,205,530 4,660,177 701,377 Trade accounts receivable, net 56,956,197 38,097,626 5,733,855 Purchase advances 19,016,573 1,323,305 199,163 Other assets 28,792,279 25,584,030 3,850,506 Total current assets ¥ 116,067,480 ¥ 70,284,568 $ 10,578,128 Non-current assets 7,088,383 5,113,193 769,557 Total Assets ¥ 123,155,863 ¥ 75,397,761 $ 11,347,685 LIABILITIES Trade accounts payable ¥ 17,155,793 ¥ 7,540,430 $ 1,134,867 Taxes payable 1,153,216 755,881 113,763 Other liabilities 31,386,734 19,025,594 2,863,433 Total current liabilities 49,695,743 27,321,905 4,112,063 Total Liabilities ¥ 49,695,743 ¥ 27,321,905 $ 4,112,063 F- 23 RECON TECHNOLOGY, LTD NOtes to the consolidated financial statements The financial performance of VIEs reported in the consolidated statement of operations and comprehensive income for the year ended June 30, 2016 includes revenues of ¥42,728,277 ($6,430,788), operating expenses of ¥31,590,843 ($4,754,557), and net loss of ¥25,481,256 ($3,835,038). NOTE 22. SUBSEQUENT EVENTS On July 23, 2016, the Board of the Company approved the termination of the acquisition of Qinghai Huayou Downhole Technology Co., Ltd.(“QHHY”), and, as a result, terminated the share purchase agreement and related control agreements. On July 27, 2016, the Board of the Company approved the grant of 876,000 restricted shares valued at $963,600 to management with a vesting period of 3 years. On July 27, 2016, the Company approved the hiring of an independent company strategy consulting firm, by issuing 250,000 restricted shares as compensation with a value of $275,000. On July 26, 2016, the Company borrowed ¥500,000 ($75,252) from one of the shareholder’s family member bearing no interest, due by December 31, 2016 to supplement the Company’s working capital. On September 6, 2016, the Company borrowed ¥50,000 ($7,525) from one of the shareholder’s family member bearing no interest, due by December 6, 2016 to supplement the Company’s working capital. On September 9, 2016, the Company borrowed ¥968,318 ($145,736) from one of the shareholder’s family member bearing no interest, due by December 9, 2016 to supplement the Company’s working capital. F- 24