Recon Technology, Ltd 10-Q

Item 5. Other Information. None. 15 Item 6. Exhibits. The following exhibits are filed herewith: Exhibit Number Document 3.1 Amended and Restated Articles of Association of the Registrant (1) 3.2 Amended and Restated Memorandum of Association of the Registrant (1) 4.1 Specimen Share Certificate (1) 10.1 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.2 Translation of Power of Attorney for rights of Chen Guangqiang in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.3 Translation of Power of Attorney for rights of Yin Shenping in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.4 Translation of Power of Attorney for rights of Li Hongqi in Beijing BHD Petroleum Technology Co., Ltd. (1) 10.5 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.6 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.7 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.8 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.9 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.10 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1) 10.11 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Jining ENI Energy Technology Co., Ltd. (1) 10.12 Translation of Power of Attorney for rights of Chen Guangqiang in Jining ENI Energy Technology Co., Ltd. (1) 10.13 Translation of Power of Attorney for rights of Yin Shenping in Jining ENI Energy Technology Co., Ltd. (1) 16 10.14 Translation of Power of Attorney for rights of Li Hongqi in Jining ENI Energy Technology Co., Ltd. (1) 10.15 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.16 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.17 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.18 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1) 10.19 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1) 10.20 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1) 10.21 Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Nanjing Recon Technology Co., Ltd. (1) 10.22 Translation of Power of Attorney for rights of Chen Guangqiang in Nanjing Recon Technology Co., Ltd. (1) 10.23 Translation of Power of Attorney for rights of Yin Shenping in Nanjing Recon Technology Co., Ltd. (1) 10.24 Translation of Power of Attorney for rights of Li Hongqi in Nanjing Recon Technology Co., Ltd. (1) 10.25 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.26 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.27 Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.28 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1) 10.29 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1) 10.30 Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1) 10.33 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Yin Shenping (1) 10.34 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Chen Guangqiang (1) 17 10.35 Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Li Hongqi (1) 10.36 Operating Agreement among Recon Technology (Jining) Co. Ltd., Nanjing Recon Technology Co., Ltd. and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.37 Operating Agreement among Recon Technology (Jining) Co. Ltd., Jining ENI Energy Technology Co., Ltd., and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 10.38 Operating Agreement among Recon Technology (Jining) Co. Ltd., Beijing BHD and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1) 21.1 Subsidiaries of the Registrant (2) 31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) 31.2 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4) 32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4) 99.1 Stock Option Plan (1) 99.2 Code of Business Conduct and Ethics (1) 99.3 Press Release (3) 101.INS XBRL Instance Document (3) 101.SCH XBRL Taxonomy Extension Schema Document (3) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (3) 101.LAB XBRL Taxonomy Extension Label Linkbase Document (3) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (3) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (3) (1) Incorporated by reference to the Company’s Registration Statement on Form S-1, Registration No. 333-152964. (2) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A, filed on January 31, 2012. (3) Filed herewith. (4) Furnished herewith. 18 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 November 14, 2016 By: /s/ Liu Jia Liu Jia Chief Financial Officer (Principal Financial and Accounting Officer) 19 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 November 14, 2016 By: /s/ Yin Shenping Yin Shen ping Chief Executive Officer 20 RECON TECHNOLOGY, LTD INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE Unaudited Condensed Consolidated Balance Sheets as of June 30, 2016 and September 30, 2016 F-2 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2015 and 2016 F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2015 and 2016 F-4 Notes to the Unaudited Condensed Consolidated Financial Statements F-5 F- 1 RECON TECHNOLOGY, LTD Condensed Consolidated Balance Sheets (unAUDITED) As of June 30, As of September 30, As of September 30, 2016 2016 2016 ASSETS RMB RMB U.S. Dollars Current assets Cash ¥ 1,817,620 ¥ 554,630 $ 83,150 Notes receivable 4,660,177 3,105,770 465,617 Trade accounts receivable, net 38,097,626 37,267,708 5,587,178 Inventories, net 6,313,070 6,339,234 950,379 Other receivables, net 22,000,112 20,101,962 3,013,688 Purchase advances, net 1,323,305 4,000,124 599,699 Prepaid expenses 110,310 55,260 8,285 Total current assets 74,322,220 71,424,688 10,707,996 Property and equipment, net 2,907,762 2,723,363 408,287 Long-term trade accounts receivable, net 2,220,332 2,220,332 332,872 Total Assets ¥ 79,450,314 ¥ 76,368,383 $ 11,449,155 Current liabilities Trade accounts payable ¥ 7,540,430 ¥ 9,267,662 $ 1,389,409 Other payables 2,972,192 2,787,443 417,894 Other payable- related parties 3,680,244 3,712,698 556,608 Deferred revenue 406,681 231,187 34,660 Advances from customers 200,600 200,100 29,999 Accrued payroll and employees' welfare 381,109 499,155 74,833 Accrued expenses 261,348 193,274 28,974 Taxes payable 755,880 683,148 102,418 Short-term borrowings 530,000 - - Short-term borrowings - related parties 12,941,848 12,515,253 1,876,288 Deferred tax liability 180,186 180,186 27,014 Total current liabilities 29,850,518 30,270,106 4,538,097 Equity Common stock, ($ 0.0185 U.S. dollar par value, 100,000,000 shares authorized; 5,804,005 and 5,980,792 shares issued and outstanding as of June 30, 2016 and September 30, 2016, respectively) 741,467 763,340 114,440 Additional paid-in capital 100,612,455 102,557,249 15,375,392 Statutory reserve 4,148,929 4,148,929 622,008 Accumulated deficits (63,907,512 ) (69,368,096 ) (10,399,671 ) Accumulated other comprehensive loss (219,040 ) (226,642 ) (33,978 ) Total shareholders’ equity 41,376,299 37,874,780 5,678,191 Non-controlling interest 8,223,497 8,223,497 1,232,867 Total equity 49,599,796 46,098,277 6,911,058 Total Liabilities and Equity ¥ 79,450,314 ¥ 76,368,383 $ 11,449,155 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F- 2 RECON TECHNOLOGY, LTD CONDENSED Consolidated Statements of operations and Comprehensive LOSS (UNAUDITED) For the three months ended September 30, 2015 2016 2016 RMB RMB USD Revenues Hardware and software ¥ 3,480,752 ¥ 7,802,103 $ 1,169,692 Service 113,208 - - Total revenues 3,593,960 7,802,103 1,169,692 - - - Cost of revenues Hardware and software 3,315,627 6,447,643 966,632 Provision for (reversal of) slow moving inventories (123,332 ) 262,135 39,299 Total cost of revenues 3,192,295 6,709,778 1,005,931 Gross profit 401,665 1,092,325 163,761 Selling and distribution expenses 1,112,670 1,050,141 157,437 General and administrative expenses 4,067,219 4,899,328 734,508 Provision for doubtful accounts 2,109,926 8,026 1,203 Research and development expenses 1,792,997 618,674 92,752 Operating expenses 9,082,812 6,576,169 985,900 Loss from operations (8,681,147 ) (5,483,844 ) (822,139 ) Other income (expenses) Subsidy income 49,000 7,807 1,170 Interest income 55,510 27,894 4,182 Interest expense (277,824 ) (132,490 ) (19,863 ) Income (loss) from foreign currency exchange (938 ) 388 58 Other income (expense) (9,664 ) 99,518 14,920 Other income (expense) (183,916 ) 3,117 467 Loss before income tax (8,865,063 ) (5,480,727 ) (821,672 ) Benefit for income tax (16,457 ) (20,143 ) (3,020 ) Net loss (8,848,606 ) (5,460,584 ) (818,652 ) Comprehensive loss Net loss (8,848,606 ) (5,460,584 ) (818,652 ) Foreign currency translation adjustment 124,218 (7,602 ) (1,140 ) Comprehensive loss (8,724,388 ) (5,468,186 ) (819,792 ) Less: Comprehensive loss attributable to non-controlling interest 16,620 - - Comprehensive loss attributable to Recon Technology, Ltd ¥ (8,741,008 ) ¥ (5,468,186 ) $ (819,792 ) Loss per common share - basic and diluted ¥ (1.63 ) ¥ (0.92 ) $ (0.14 ) Weighted - average shares -basic and diluted 5,438,763 5,957,733 5,957,733 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F- 3 RECON TECHNOLOGY, LTD CONDENSED Consolidated Statements of Cash flows (UNAUDITED) For the three months ended September 30, 2015 2016 2016 RMB RMB U.S. Dollars Cash flows from operating activities: Net loss ¥ (8,848,606 ) ¥ (5,460,584 ) $ (818,652 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 259,768 205,580 30,821 Gain from disposal of equipment - (35,919 ) (5,385 ) Provision for doubtful accounts 2,109,926 8,026 1,203 Provision for (reversal of) slow moving inventories (123,332 ) 262,135 39,299 Share based compensation 1,126,552 1,966,670 294,843 Deferred tax benefit (16,458 ) - - Restricted shares issued for services 202,475 - - Changes in operating assets and liabilities: Notes receivable 977,950 1,554,407 233,037 Trade accounts receivable 1,685,745 1,035,863 155,297 Trade accounts receivable-related parties 4,569,800 - - Inventories (908,544 ) (288,299 ) (43,222 ) Other receivable, net (419,821 ) 1,866,616 279,843 Other receivables-related parties, net 91,021 - - Purchase advance, net (847,071 ) (2,873,141 ) (430,742 ) Purchase advance-related parties, net 394,034 - - Prepaid expense 216,619 55,050 8,253 Prepaid expense - related parties, net 210,000 - - Trade accounts payable (217,263 ) 1,727,232 258,947 Trade accounts payable-related parties (254,826 ) - - Other payables (308,852 ) (184,749 ) (27,698 ) Other payables-related parties (2,465,074 ) 32,454 4,866 Deferred revenue 166,982 (175,494 ) (26,310 ) Advances from customers (158,716 ) (500 ) (75 ) Accrued payroll and employees' welfare 83,268 118,046 17,697 Accrued expenses (7,505 ) (56,539 ) (8,476 ) Taxes payable 1,507,434 (80,273 ) (12,035 ) Net cash used in operating activities (974,494 ) (323,419 ) (48,489 ) Cash flows from investing activities: Purchase of property and equipment (470,265 ) (29,621 ) (4,441 ) Proceeds from disposal of equipment - 51,900 7,781 Net cash provided by (used in) investing activities (470,265 ) 22,279 3,340 Cash flows from financing activities: Repayment of short-term borrowings - (530,000 ) (79,458 ) Proceeds from short-term borrowings-related parties 1,800,000 4,838,318 725,361 Repayment of short-term borrowings-related parties (9,100,000 ) (5,276,448 ) (791,046 ) Proceeds from sale of common stock, net of issuance costs 165,823 - - Net cash used in financing activities (7,134,177 ) (968,130 ) (145,143 ) Effect of exchange rate fluctuation on cash and cash equivalents 111,279 6,280 943 Net decrease in cash (8,467,657 ) (1,262,990 ) (189,349 ) Cash at beginning of period 12,344,929 1,817,620 272,498 Cas at end of period ¥ 3,877,272 ¥ 554,630 $ 83,149 Supplemental cash flow information Cash paid during the period for interest ¥ 277,824 ¥ 167,403 $ 25,097 Cash paid during the period for taxes ¥ 72,217 ¥ - $ - Non-cash investing and financing activities AR and short-term borrowings-related parties offset ¥ 200,000 ¥ - $ - The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F- 4 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS Organization – Recon Technology, Ltd (the “Company”) was incorporated under the laws of the Cayman Islands on August 21, 2007 by Messrs. Yin Shenping, Chen Guangqiang and Li Hongqi (the “Founders”) as a limited liability company. The Company provides specialized oilfield equipment, automation systems, tools, chemicals and field services to petroleum companies mainly in the People’s Republic of China (the “PRC”). The Company, along with its wholly-owned subsidiaries, Recon Technology Co., Limited (“Recon HK”), Jining Recon Technology Ltd. (“Recon JN”), Recon Investment Ltd. (“Recon IN”) and Recon Hengda Technology (Beijing) Co., Ltd. (“Recon BJ”), conducts its business through the following PRC legal entities (“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: NOTE 2. LIQUIDITY As reflected in the Company’s unaudited condensed consolidated financial statements, the Company had recurring net losses for the three months ended September 30, 2015 and 2016. In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand and its ability to generate sufficient revenue sources in the future to support its operating and capital expenditure commitments. The Company plans to fund its 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. NOTE 3. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information pursuant to the rules of the SEC and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2016. The results of operations for the interim periods presented may not be indicative of the operating results to be expected for the Company’s fiscal year ending June 30, 2017. F- 5 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements Principles of Consolidation - The unaudited condensed consolidated financial statements include the accounts of the Company, all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation. Variable Interest Entities - A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company performs ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previously identified as a VIE continues to be a VIE and whether the Company continues to be the primary beneficiary. Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Currency Translation - The Company’s functional currency is the Chinese Yuan (“RMB”) and the accompanying unaudited condensed consolidated financial statements have been expressed in Chinese Yuan. The unaudited condensed consolidated financial statements as of and for the three months ended September 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 ¥6.6702 = US$1.00, the approximate exchange rate prevailing on September 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 unaudited condensed 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 unaudited condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, allowance for inventory, 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- 6 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements The carrying amounts reported in the unaudited condensed 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. 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 first-in-first-out basis. 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 is 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-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, 2016 and September 30, 2016. Revenue Recognition - The Company recognizes revenue when the following four criteria are met: (1) persuasive evidence of an arrangement, (2) delivery has occurred or services have been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the customers and the customers have signed a completion and acceptance report, risk of loss has transferred to the customers, customers’ acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in customers’ acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. Hardware 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. F- 7 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements Service: The Company provides services to improve software function and system operation on separated fixed-price contracts. Revenue is recognized on the completed contract method when acceptance is determined by a completion report signed by the customer. 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 - 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. 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 three months ended September 30, 2015 and 2016. Recently Issued Accounting Pronouncements In October 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-17, Consolidation (Topic 810): Interest Held through Related Parties That Are under Common Control, to provide guidance on the evaluation of whether a reporting entity is the primary beneficiary of a VIE by amending how a reporting entity, that is a single decision maker of a VIE, treats indirect interests in that entity held through related parties that are under common control. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this new standard on its unaudited condensed consolidated financial statements and related disclosures. NOTE 4. TRADE ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following: June 30, 2016 September 30, 2016 September 30, 2016 Third Party RMB RMB U.S. Dollars Trade accounts receivable ¥ 42,665,499 ¥ 41,629,636 $ 6,241,119 Allowance for doubtful accounts (4,567,873 ) (4,361,928 ) (653,941 ) Total - third-party, net ¥ 38,097,626 ¥ 37,267,708 $ 5,587,178 F- 8 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements June 30, 2016 September 30, 2016 September 30, 2016 Third Party – long-term RMB RMB U.S. Dollars Beijing Yabei Nuoda Science and Technology Co. Ltd. * ¥ 2,467,036 ¥ 2,467,036 $ 369,858 Allowance for doubtful accounts (246,704 ) (246,704 ) (36,986 ) Total - long-term trade accounts receivable, net ¥ 2,220,332 ¥ 2,220,332 $ 332,872 *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 three installments during the period from September, 2015 to December, 2017, with each installment of ¥2,467,036 ($369,858). During the year ended June 30, 2016, the Company received the first payment on time as scheduled. Provision for accounts receivables due from third party was ¥32,038 for the three months ended September 30, 2015 and recovery of accounts receivables due from third party was ¥205,944 ($30,875) for the three months ended September 30, 2016, respectively. During the three months ended September 30, 2016, no accounts receivable write-off against allowance for doubtful accounts, the recovery was due to the collections of accounts receivable. NOTE 5. OTHER RECEIVABLES, NET Other receivables consisted of the following: Third Party June 30, 2016 September 30, 2016 September 30, 2016 Current Portion RMB RMB U.S. Dollars Due from ENI (A) ¥ 2,729,033 ¥ 2,455,924 $ 368,192 Loans to third parties (B) 14,168,344 12,108,344 1,815,284 Business advance to staff (C) 4,952,114 5,527,172 828,634 Deposits for projects 893,669 865,892 129,815 Others 534,759 440,085 65,978 Allowance for doubtful accounts (1,277,807 ) (1,295,455 ) (194,215 ) Total ¥ 22,000,112 ¥ 20,101,962 $ 3,013,688 Provision for other receivables was ¥19,000 and ¥17,648 ($2,646) for the three months ended September 30, 2015 and 2016, respectively. (A) 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. (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 advances to staffs represent advances for business travel and sundry expenses related to oilfield or on-site installation and inspection of products through customer approval and acceptance. F- 9 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements 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, 2016 September 30, 2016 September 30, 2016 Third Party RMB RMB U.S. Dollars Prepayment for inventory purchase ¥ 17,914,552 ¥ 20,787,693 $ 3,116,493 Allowance for doubtful accounts (16,591,247 ) (16,787,569 ) (2,516,794 ) Total ¥ 1,323,305 ¥ 4,000,124 $ 599,699 Provision for purchase advances were ¥2,058,888 and ¥196,322 ($29,432) for the three months ended September 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. NOTE 7. INVENTORIES Inventories consisted of the following: June 30, 2016 September 30, 2016 September 30, 2016 RMB RMB U.S. Dollars Small component parts ¥ 55,726 ¥ 55,726 $ 8,354 Purchased goods and raw materials 61,361 51,617 7,738 Work in process and goods on site 3,539,525 3,274,359 490,892 Finished goods 8,054,637 8,617,846 1,291,990 Allowance for slow moving inventory (5,398,179 ) (5,660,314 ) (848,595 ) Total inventories, net ¥ 6,313,070 ¥ 6,339,234 $ 950,379 Recovery of slow moving inventory was ¥123,332 for the three months ended September 30, 2015 and provision for slow moving inventory was ¥262,135 ($39,299) for the three months ended September 30, 2016, respectively. NOTE 8. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: June 30, 2016 September 30, 2016 September 30, 2016 RMB RMB U.S. Dollars Motor vehicles ¥ 3,871,567 ¥ 3,702,767 $ 555,119 Office equipment and fixtures 828,285 857,906 128,617 Production equipment 916,025 916,025 137,331 Total property and equipment 5,615,877 5,476,698 821,067 Less: Accumulated depreciation (2,708,115 ) (2,753,335 ) (412,780 ) Property and equipment, net ¥ 2,907,762 ¥ 2,723,363 $ 408,287 F- 10 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements Depreciation expense was ¥259,768 and ¥205,580 ($30,821) for the three months ended September 30, 2015 and 2016, respectively. NOTE 9. OTHER PAYABLES Other payables consisted of the following: June 30, 2016 September 30, 2016 September 30, 2016 Third Party RMB RMB U.S. Dollars Service ¥ 1,659,505 ¥ 1,630,906 $ 244,506 Distributors and employees 245,070 60,999 9,145 Funds collected on behalf of others 895,022 895,022 134,182 Others 172,595 200,516 30,061 Total ¥ 2,972,192 ¥ 2,787,443 $ 417,894 June 30, 2016 September 30, 2016 September 30, 2016 Related Party RMB RMB U.S. Dollars Expenses paid by the major shareholders ¥ 3,144,263 ¥ 2,889,437 $ 433,185 Due to family member of one owner 285,000 570,000 85,454 Due to management staff for costs incurred on behalf of Recon 250,981 253,261 37,969 Total ¥ 3,680,244 ¥ 3,712,698 $ 556,608 NOTE 10. TAXES PAYABLE Taxes payable consisted of the following: June 30, 2016 September 30, 2016 September 30, 2016 RMB RMB U.S. Dollars VAT payable ¥ 739,260 ¥ 676,378 $ 101,403 Other taxes payable 16,620 6,770 1,015 Total taxes payable ¥ 755,880 ¥ 683,148 $ 102,418 F- 11 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements NOTE 11. SHORT-TERM BORROWINGS Short-term borrowings from a third party were fully repaid in 2016 without interest, due on August 15, 2016. Short-term borrowings from related parties consisted of the following: June 30, 2016 September 30, 2016 September 30, 2016 Short-term borrowings due to related parties: RMB RMB U.S. Dollars Short-term borrowing from a Founder, 5.75% annual interest, due on September 25, 2016 1,807,207 - - Short-term borrowing from a Founder, 5.75% annual interest, due on October 10, 2016 * 2,409,610 719,854 107,921 Short-term borrowing from a Founder, 5.43% annual interest, due on November 4, 2016 ** 1,805,180 540,245 80,994 Short-term borrowing from a Founder's family member, no interest, due on December 9, 2016 - 1,018,318 152,666 Short-term borrowing from a Founder's family member, no interest, due on December 16, 2016 1,500,000 1,010,000 151,419 Short-term borrowing from a Founder's family member, no interest, due on December 28, 2016 400,000 400,000 59,968 Short-term borrowing from a Founder's family member, no interest, due on December 31, 2016 - 500,000 74,960 Short-term borrowing from a Founder, 5.22% annual interest, due on March 10, 2017 2,529,795 2,530,522 379,376 Short-term borrowing from a Founder, 5.22% annual interest, due on May 6, 2017 2,490,056 2,474,656 371,001 Short-term borrowing from a Founder, 5.65% annual interest, due on August 24, 2017 - 1,260,132 188,919 Short-term borrowing from a Founder, 5.65% annual interest, due on September 18, 2017 - 801,361 120,140 Short-term borrowing from a Founder, 5.65% annual interest, due on September 30, 2017 - 1,260,165 188,924 Total short-term borrowings due to related parties ¥ 12,941,848 ¥ 12,515,253 $ 1,876,288 * As of October 10, 2016, ¥719,854 ($107,921) was fully paid back. ** As of November 4, 2016, the Company repaid ¥540,245 ($80,994). Interest expense for short-term borrowings due to related parties was ¥171,448 and ¥132,490 ($19,863) for the three months ended September 30, 2015 and 2016, respectively. NOTE 12. 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) . During the three months ended September 30, 2016, the Company did not offer any ordinary shares under the purchase agreement. 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, 2016 and September 30, 2016, the balance of total statutory reserves was ¥4,148,929 and ¥4,148,929 ($622,008), respectively . NOTE 13. STOCK-BASED COMPENSATION Stock-Based Awards Plan 2012 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- 12 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements 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, 2016 815,600 $ 3.04 Granted - - Forfeited - - Exercised - - Outstanding as of September 30, 2016 815,600 $ 3.04 The following is a summary of the status of options outstanding and exercisable at September 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 2.83 $ 6.00 193,000 2.83 $ 2.96 222,600 5.49 $ 2.96 148,400 5.49 $ 1.65 400,000 8.34 $ 1.65 133,333 8.34 815,600 The Share-based compensation expense recorded for stock options granted were ¥509,528 and ¥543,102 ($81,422) for the three months ended September 30, 2015 and 2016, respectively. The total unrecognized share-based compensation expense for stock options as of September 30, 2016 was approximately ¥2.3 million ($0.35 million), which is expected to be recognized over a weighted average period of approximately 1.21 years. Restricted Shares to senior manager As of September 30, 2016, the Company has granted restricted shares of common stock to senior management as follows: On December 13, 2013, the Company granted 95,181 restricted shares to Mr. Yin Shenping and 135,181 restricted shares to Mr. Chen Guangqiang at an aggregate value of ¥4,207,496 ($688,782), based on the stock closing price of $2.99 at December 13, 2013. These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. The first one third was vested on December 13, 2014 and are now non-restricted. 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. F- 13 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements On October 18, 2015, the Company granted 800,000 restricted shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted shares was $704,000 based on the closing stock price $0.88 at October 18, 2015. On July 27, 2016, the Company granted 876,000 restricted shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted shares was $963,600 based on the closing stock price $1.10 at July 27, 2016, and no shares were issued as of September 30, 2016. The Share-based compensation expense recorded for restricted shares granted were ¥617,024 and ¥1,423,568 ($213,421) for the three months ended September 30, 2015 and 2016, respectively. The total unrecognized share-based compensation expense for restricted shares granted as of September 30, 2016 was approximately ¥11.0 million ($1.66 million), which is expected to be recognized over a weighted average period of approximately 2.33 years. Restricted Shares for service For the three months ended September 30, 2016, the Company has granted restricted shares of common stock to consultants as follows: On July 27, 2016, the Company approved the grant of 250,000 restricted shares with a value of $275,000 to designees of an independent consulting firm as compensation for advisory services. Those restricted shares were officially issued on October 21, 2016. Following is a summary of the restricted stock granted: Restricted stock grants Shares Non-vested as of June 30, 2016 1,076,787 Granted 1,126,000 Cancelled - Vested - Non-vested as of September 30, 2016 2,202,787 NOTE 14. 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. 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 25, 2018. F- 14 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements Loss before provision for income taxes consisted of: June 30, 2016 September 30, 2016 September 30, 2016 RMB RMB U.S. Dollars Cayman Island and other areas ¥ (2,393,591 ) ¥ (3,215,108 ) $ (482,009 ) China (6,471,472 ) (2,265,619 ) (339,663 ) Total ¥ (8,865,063 ) ¥ (5,480,727 ) $ (821,672 ) Deferred tax asset is comprised of the following: June 30, 2016 September 30, 2016 September 30, 2016 RMB RMB U.S. Dollars Allowance for doubtful receivables ¥ 1,958,120 ¥ 1,958,120 $ 293,562 Net operating loss carry forward 1,790,615 2,233,564 340,750 Less: Valuation allowance (3,748,735 ) (4,191,684 ) (634,312 ) Total deferred income tax assets ¥ - ¥ - $ - Deferred tax liability is comprised of the following: June 30, 2016 September 30, 2016 September 30, 2016 RMB RMB U.S. Dollars Income tax cost due to unpayable accounts ¥ 180,186 ¥ 180,186 $ 27,014 Total deferred income tax liability ¥ 180,186 ¥ 180,186 $ 27,014 The Company’s tax benefit is comprised of the following: For the three months ended September 30, 2015 2016 2016 RMB RMB U.S. Dollars Tax refund ¥ - ¥ (20,143 ) $ (3,020 ) Deferred income taxes benefit (16,457 ) - - Benefit for income tax ¥ (16,457 ) ¥ (20,143 ) $ (3,020 ) F- 15 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements NOTE 15. NON-CONTROLLING INTEREST Non-controlling interest consisted of the following: 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 As of September 30, 2016 Nanjing BHD Recon Total Total RMB RMB RMB U.S. Dollars Paid-in capital ¥ 1,651,000 ¥ 200,000 ¥ 1,851,000 $ 277,502 Unappropriated retained earnings 3,152,687 3,250,513 6,403,200 959,968 Accumulated other comprehensive loss (18,850 ) (11,853 ) (30,703 ) (4,603 ) Total non-controlling interest ¥ 4,784,837 ¥ 3,438,660 ¥ 8,223,497 $ 1,232,867 NOTE 16. CONCENTRATIONS For the three months ended September 30, 2015 and 2016, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented approximately 81.21% and 91.77% of the Company’s total revenue, respectively. For the three months ended September 30, 2015, four major suppliers accounted for 60% of the company’s total purchases. For the three months ended September 30, 2016, two major suppliers accounted for 58% of the company’s total purchases. NOTE 17. 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 September 30, 2016: Twelve months ending September 30, Office lease payment RMB U.S. Dollars 2017 ¥ 1,021,000 $ 153,068 2018 360,000 53,971 Total ¥ 1,381,000 $ 207,039 (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 September 30, 2016, the Company estimated its severance payments of approximately ¥1.7 million ($0.25 million) which has not been reflected in its unaudited condensed consolidated financial statements, because management cannot predict what the actual payment, if any, will be in the future. F- 16 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements NOTE 18. RELATED PARTY TRANSACTIONS AND BALANCES Purchases from related parties – purchases from related parties consisted of the following: For the three months ended September 30, 2015 2016 2016 RMB RMB U.S. Dollars Huanghua Heng Da Xiang Tong Manufacture Ltd ¥ 300,393 ¥ - $ - Xiamen Huangsheng Hitek Computer Network Co. Ltd. 576,098 - - Purchase from related parties ¥ 876,491 ¥ - $ - 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 ¥140,000 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 ¥12,941,848 and ¥12,515,253 ($1,876,288) from the Founders and their family members as of June 30, 2016 and September 30, 2016, respectively. For the specific terms and interest rates of the borrowings, see Note 11. 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, 2016 and September 30, 2016, ¥3,144,263 and ¥2,889,437 ($433,185) was due to them, respectively. NOTE 19. Variable Interest Entities The Company reports its VIEs’ portion of unaudited condensed consolidated net income and stockholders’ equity as non-controlling interests in the unaudited condensed consolidated financial statements. F- 17 RECON TECHNOLOGY, LTD Notes to the unaudited condensed consolidated financial statements Summary information regarding consolidated VIEs is as follows: June 30, 2016 September 30, 2016 September 30, 2016 RMB RMB U.S. Dollars ASSETS Current Assets Cash and cash equivalents ¥ 619,430 ¥ 416,118 $ 62,384 Notes receivable 4,660,177 3,105,770 465,617 Trade accounts receivable, net 38,097,626 37,267,708 5,587,178 Purchase advances 1,323,305 4,000,124 599,699 Other assets 25,584,030 23,986,051 3,595,991 Total current assets ¥ 70,284,568 ¥ 68,775,771 $ 10,310,869 Non-current assets 5,113,193 4,929,878 739,088 Total Assets ¥ 75,397,761 ¥ 73,705,649 $ 11,049,957 LIABILITIES Trade accounts payable ¥ 7,540,430 ¥ 9,267,662 $ 1,389,409 Taxes payable 755,881 683,148 102,418 Other liabilities 19,025,594 17,692,534 2,652,466 Total current liabilities 27,321,905 27,643,344 4,144,293 Total Liabilities ¥ 27,321,905 ¥ 27,643,344 $ 4,144,293 The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive income for the three months ended September 30, 2016 includes revenues of ¥7,802,103 ($1,169,692), operating expenses of ¥3,106,810 ($465,773), and net loss of ¥2,013,555 ($301,872). NOTE 20. SUBSEQUENT EVENTS On October 11, 2016, the Company borrowed ¥720,000 ($107,942) from one of its founders bearing an annual interest of 5.66%, due by October 11, 2017 to supplement the Company’s working capital. On November 1, 2016, the Company borrowed ¥1,420,000 ($212,887) from one of its founders bearing an annual interest of 5.66%, due by August 31, 2017 to supplement the Company’s working capital. On November 12, 2016, the Board approved to issue 330,000 restricted shares to Beijing San Li Hai Tian Technology Co. Ltd. (“BJSL”) for certain mold and software platform development services. The fair value of the restricted shares was $306,900 based on the closing stock price of $0.93 on November 11, 2016. F- 18