U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2016

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             .

Commission File Number 001-34409

 

RECON TECHNOLOGY, LTD

(Exact name of registrant as specified in its charter) 

 

Cayman Islands   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

 

1902 Building C, King Long International Mansion

No. 9 Fulin Road

Beijing 100107 China

(Address of principal executive offices and zip code)

+86 (10) 8494-5799

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer   ¨   Accelerated filer   ¨
             
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)   Smaller reporting company   x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨  No x  

 

Indicate the number of shares outstanding of each of the issuer’s classes of ordinary shares, as of the latest practicable date. The Company is authorized to issue 100,000,000 ordinary shares. As of May 16, 2016, the Company has issued and outstanding 5,804,005 shares.

 

 

 

 

RECON TECHNOLOGY, LTD

FORM 10-Q

INDEX

 

Special Note Regarding Forward-Looking Statements ii
Part I   Financial Information 1
Item 1.    Financial Statements (Unaudited). 1
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. 1
Item 3.    Quantitative and Qualitative Disclosures about Market Risk. 20
Item 4.    Controls and Procedures. 20
Part II   Other Information 21
Item 1.    Legal Proceedings. 21
Item 1A.    Risk Factors. 21
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds. 21
Item 3.    Defaults upon Senior Securities. 21
Item 4.    Mine Safety Disclosures. 21
Item 5.    Other Information. 21
Item 6.    Exhibits. 22

 

 

 

 

Special Note Regarding Forward-Looking Statements

 

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be influenced by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to the following:

 

    the timing of the development of future products;

 

    projections of revenue, earnings, capital structure and other financial items;

 

    statements of our plans and objectives;

 

    statements regarding the capabilities of our business operations;

 

    statements of expected future economic performance;

 

    statements regarding competition in our market; and

 

    assumptions underlying statements regarding us or our business.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

 

ii 

 

 

Part I Financial Information

 

Item 1. Financial Statements.

 

See the unaudited condensed consolidated financial statements following the signature page of this report, which are incorporated herein by reference.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report. This discussion contains certain forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.

 

Overview

 

We are a company with limited liability incorporated in 2007 under the laws of the Cayman Islands. Headquartered in Beijing, we provide products and services to oil and gas companies and their affiliates through Nanjing Recon Technology Co. Ltd (“Nanjing Recon”) and Beijing BHD Petroleum Technology Co, Ltd (“BHD”), hereafter referred to as our domestic companies (the “Domestic Companies”), which are established as variable interest entities (“VIEs”) under the laws of the People’s Republic of China (“PRC”). As the Company contractually controls the Domestic Companies, we serve as the center of strategic management, financial control and human resources allocation.

 

Through Nanjing Recon and BHD, our business is mainly focused on the upstream sectors of the oil and gas industry. We derive our revenues from the sales and provision of (1) hardware products, (2) software products and (3) services. Our products and services involve most of the key procedures of the extraction and production of oil and gas, and include automation systems, equipment, tools and on-site technical services.

 

Our Domestic Companies provide the oil and gas industry with equipment, production technologies, automation and services.

 

Nanjing Recon: Nanjing Recon is a high-tech company that specializes in automation services for oilfield companies. It mainly focuses on providing automation solutions to the oil exploration industry, including monitoring wells, automatic metering to the joint station production, process monitor, and a variety of oilfield equipment and control systems.

 

BHD: BHD is a high-tech company that specializes in transportation equipment and stimulation productions and services. Possessing proprietary patents and substantial industry experience, BHD has built up stable and strong working relationships with the major oilfields in China.

 

Recent Developments

 

On September 22, 2015, the Company entered into an amendment to the Company’s letter agreement (the “Agreement”) with Maxim Group LLC, dated January 28, 2015, pursuant to which Maxim would serve as the Company’s exclusive agent in connection with a proposed at-the-market offering program by the Company of up to $10,000,000. The amendment extends the term of the Agreement for an additional six months, or until August 15, 2016, when the Company’s Form S-3 will expire. As of May 16, 2016, no shares have been issued under the amended Agreement.

 

On December 1, 2015, the Company entered into a share purchase agreement to acquire a 100% interest in Qinghai Huayou Downhole Technologies Co., Ltd. ( “QHHY”), a PRC corporation and oilfield service provider located in Qinghai province. This transaction is subject to shareholder approval and on May 2, 2016, the Company amended its proxy statement on Schedule 14A (the “Proxy Statement”) to disclose all necessary information related to obtaining shareholder approval of the transaction. The Company will hold a shareholder meeting to seek approval of the Company’s acquisition of QHHY after the Securities and Exchange Commission (“SEC”) completes its review of the Proxy Statement.

 

 1

 

 

Products and Services

 

We currently provide products and services to oil and gas field companies focused on the development and production of oil and natural gas. Our products and services described below correlate to the numbered stages of the oilfield production system graphical description shown below.

 

 

Our products and services include:

 

Equipment for Oil and Gas Production and Transportation

 

High-Efficiency Heating Furnaces (as shown above). Crude petroleum contains certain impurities that must be removed before it can be sold, including water and natural gas. To remove the impurities and to prevent solidification and blockage in transport pipes, companies employ heating furnaces. BHD researched, developed and implemented a new oilfield furnace that is advanced, highly automated, reliable, easy to operate, safe and highly heat-efficient (90% efficiency).

 

Burner (as shown above). We serve as an agent for the Unigas Burner, which is designed and manufactured by UNIGAS, a European burning equipment production company. The burner we provide has the following characteristics: high degree of automation, energy conservation, high turn-down ratio, high security and environmental safety.

 

Oil and Gas Production Improvement Techniques

 

Packers of Fracturing. This utility model is used in concert with the security joint, hydraulic anchor, and slide brushing of sand spray in the well. It is used for easy seat sealing and sand uptake prevention. The utility model reduces desilting volume and prevents sand-up, which makes the deblocking processes easier to realize. The back flushing is sand-stick proof.

 

Production Packer. At varying withdrawal points, the production packer separates different oil layers and protects the oil pipe from sand and permeation, promoting the recovery ratio.

 

 2

 

 

Sand Prevention in Oil and Water Wells. This technique processes additives that are resistant to elevated temperatures into “resin sand” which is transported to the bottom of the well via carrying fluid. The resin sand goes through the borehole, piling up and compacting at the borehole and oil vacancy layer. An artificial borehole wall is then formed, functioning as a means of sand prevention. This sand prevention technique has been adapted to more than 100 wells, including heavy oil wells, light oil wells, water wells and gas wells, with a 100% success rate and a 98% effective rate.

 

Water Locating and Plugging Technique. High water cut affects the normal production of oilfields. Previously, there was no sophisticated method for water locating and tubular column plugging in China. The mechanical water locating and tubular column plugging technique we have developed resolves the problem of high water cut wells. This technique conducts a self-sealing test during multi-stage usage and is reliable to separate different production sets effectively. The water location switch forms a complete set by which the water locating and plugging can be finished in one trip. The tubular column is adaptable to several oil drilling methods and is available for water locating and plugging in second and third class layers.

 

Fissure Shaper. This is our proprietary product that is used along with a perforating gun to effectively increase perforation depth by between 46% and 80%, shape stratum fissures, improve stratum diversion capability and, as a result, improve our ability to locate oilfields and increase the output of oil wells.

 

Fracture Acidizing. We inject acid to layers under pressure, which can form or expand fissures. The treatment process of the acid is defined as fracture acidizing. The technique is mainly adapted to oil and gas wells that are blocked up relatively deeply, or oil and gas wells in low permeability zones.

 

Electronic Break-Down Service. This service resolves block-up and freezing problems by generating heat from the electric resistivity of the drive pipe and utilizing a loop tank composed of an oil pipe and a drive pipe. This technique saves energy and is environmentally friendly. It can increase the production of oilfields that are in the middle and later periods.

 

Automation System and Services

 

Pumping Unit Controller. This controller functions as a monitor to the pumping unit and also collects data for load, pressure, voltage, and startup and shutdown control.

 

RTU Monitor. This monitor collects gas well pressure data.

 

Wireless Dynamometer and Wireless Pressure Gauge. These products replace wired technology with cordless displacement sensor technology. They are easy to install and significantly reduce the work load associated with cable laying.

 

Electric Multi-way Valve for Oilfield Metering Station Flow Control. This multi-way valve is used before the test separator to replace the existing three valve manifolds. It facilitates the electronic control of the connection of the oil lead pipeline with the separator.

 

Natural Gas Flow Computer System. The flow computer system is used in natural gas stations and gas distribution stations to measure flow.

 

Recon Supervisory Control and Data Acquisition System (“SCADA”). Recon SCADA is a system which applies to the oil well, measurement station and the union station for supervision and data collection.

 

EPC Service of Pipeline SCADA System. This service technique is used for pipeline monitoring and data acquisition after crude oil transmission.

 

EPC Service of Oil and Gas Wells SCADA System. This service technique is used for monitoring and data acquisition of oil wells and natural gas wells.

 

 3

 

 

EPC Service of Oilfield Video Surveillance and Control System. This video surveillance technique is used for controlling the oil and gas wellhead area and the measurement station area.

 

Technique Service for “Digital oilfield” Transformation. This service includes engineering technique services such as oil and gas SCADA systems, video surveillance and control systems and communication systems.

 

Factors Affecting Our Business

 

Business Outlook

 

The oilfield engineering and technical service industry is generally divided into five sections: (1) exploration, (2) drilling and completion, (3) testing and logging, (4) production and (5) oilfield construction. Thus far our businesses have been involved in the completion, production and construction processes. Our management still believes we need to expand our core business, move into new markets and develop new businesses quickly for the coming years. Management anticipates there will be opportunities in new markets and our existing markets. We also believe that many existing wells and oilfields need to improve or renew their equipment and service to maintain production and techniques and services like ours will be needed as new oil and gas fields are developed. In the next three years, we plan to focus on:

 

Measuring Equipment and ServiceDigital oil field technology and the management of oil companies are highly regarded in the industry. We believe our oilfield SCADA system and assorted products, production managing expert software, and related technical support services will address the needs of the oil well automation system market, for which we believe there will be increasing demand over the short term and strong needs in the long term. 

 

Gathering and Transferring EquipmentWith more new wells developed, our management anticipates that demand for our furnaces and burners will grow as compared to last year, especially in the Qinghai Oilfield and Zhongyuan Oilfield.

 

New businessWe are in the process of expanding our business through the acquisition of a down-hole service company. We also have developed new products for oilfield wastewater treatment and achieved preliminary business on this segment. Our management anticipates expanding the new business more rapidly in the coming year.

 

Growth Strategy

 

As a smaller China-focused company, our basic strategy focuses on developing our onshore oilfield business in the upstream sector of the industry. Due to the remote location and difficult environments of China’s oil and gas fields, historically, foreign competitors have rarely entered those areas directly.

 

Large domestic oil companies have historically focused on their exploration and development businesses to earn higher margins and maintain their competitive advantage. With regard to private oilfield service companies, we estimate that approximately 90% specialize in the manufacture of drilling and production equipment. Thus, the market for technical support and project service is still in its early stage. Our management is focused on providing high quality products and services in oilfields in which we have a geographical advantage. This helps us to avoid conflicts of interest with bigger suppliers of drilling equipment while protecting our position within this market segment. Our mission is to increase the automation and safety levels of industrial petroleum production in China and improve the underdeveloped working process and management mode used by many companies by providing advanced technologies. At the same time, we are always looking to improve our business and to increase our earning capability.

 

Recent Industry Developments

 

Affected by the worldwide decrease in oil prices, CNPC and Sinopec, mother companies of our direct clients, cut off their Capital Expenditure and production activities, resulting in a declining market and intensive competition. Management will closely monitor the situation and will seek to extend our business on the industrial chain, such as through providing more integrated services and advanced products and through growing our business from a predominantly up-ground business to include some down-hole services as well.

 

 4

 

 

Factors Affecting Our Results of Operations

 

Our operating results in any period are subject to general conditions typically affecting the Chinese oilfield service industry including:

 

Oil and gas price;
the amount of spending by our customers, primarily those in the oil and gas industry;
growing demand from large corporations for improved management and software designed to achieve such corporate performance;
the procurement processes of our customers, especially those in the oil and gas industry;
competition and related pricing pressure from other oilfield service solution providers, especially those targeting the Chinese oil and gas industry;
the ongoing development of the oilfield service market in China; and
inflation and other macroeconomic factors.

 

Unfavorable changes in any of these general conditions could negatively affect the number and size of the projects we undertake, the number of products we sell, the amount of services we provide, the price of our products and services, and otherwise affect our results of operations.

 

Our operating results in any period are more directly affected by company-specific factors including:

 

our revenue growth, in terms of the proportion of our business dedicated to large companies and our ability to successfully develop, introduce and market new solutions and services;
our ability to increase our revenues from both old and new customers in the oil and gas industry in China;
our ability to effectively manage our operating costs and expenses; and
our ability to effectively implement any targeted acquisitions and/or strategic alliances so as to provide efficient access to markets and industries in the oil and gas industry in China.

 

Critical Accounting Policies and Estimates

 

Estimates and Assumptions

 

We prepare our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), which require us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this quarterly report. Significant accounting estimates reflected in our Company’s consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory valuation, warrants liability, fair value of share based payments, and useful lives of property and equipment.

 

Consolidation of VIEs

 

We recognize an entity as a VIE if it either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. We consolidate a VIE as our primary beneficiary when we have both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. We perform 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 we continue to be the primary beneficiary.

 

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against our general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs.

 

Revenue Recognition

 

We recognize revenue when the following four criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the customers and the customers have signed a completion and acceptance report, risk of loss has transferred to the customer, customer acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in a customer’s acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

 

Hardware

 

Revenue from hardware sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer’s final acceptance of the arrangement.

 

Software

 

The Company sells self-developed software. For software sales, the Company recognizes revenues in accordance with the provisions of Accounting Standards Codification, Topic 985-605, “Software Revenue Recognition,” and related interpretations. Revenue from software is recognized according to project contracts. Contract costs are accumulated during the periods of installation and testing or commissioning. Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance statements.

 

Services

 

The Company provides services to improve software functions and system requirements on separated fixed-price contracts. Revenue is recognized when services are completed and acceptance is determined by a completion report signed by the customer.

 

Deferred income represents unearned amounts billed to customers related to sales contracts.

 

 5

 

 

Cost of Revenues

 

When the criteria for revenue recognition have been met, costs incurred are recognized as cost of revenue. Cost of revenues includes wages, materials, handling charges, the cost of purchased equipment and pipes, other expenses associated with manufactured products and services provided to customers, and inventory reserve. We expect cost of revenues to grow as our revenues grow. It is possible that we could incur development costs with little revenue recognition, but based upon our past history, we expect our revenues to grow.

 

Fair Values of Financial Instruments

 

The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The three levels of inputs are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 inputs to the valuation methodology are unobservable.

 

The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, advances to suppliers, trade accounts payable, accrued liabilities, advances from customers and notes payable approximate fair value because of the immediate or short-term maturity of these financial instruments. Long-term receivables and borrowings approximate fair value because their interest rates charged approximate the market rates for financial instruments with similar terms. The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs (See Note 13). Any changes in the assumptions that are used in the Black-Scholes Model may increase or decrease the warrants liability from quarter to quarter. Any change in the estimate of the fair value of the warrants liability would be charged to operations.

 

Receivables

 

Trade receivables are carried at the original invoiced amount less a provision for any potential uncollectible amounts. Provisions are applied to trade receivables where events or changes in circumstances indicate that the balance may not be collectible. The identification of doubtful accounts requires the use of judgment and estimates of management. Our management must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable, historical bad debts, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Increases in our allowance for doubtful accounts would lower our net income and earnings per share.

 

Deferred Tax Estimates

 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. Deferred tax accounting requires that we evaluate net deferred tax assets by jurisdiction to determine if these assets will more likely than not be realized. This analysis requires considerable judgment and is subject to change to reflect future events and changes in the tax laws. If an allowance is established against our deferred tax assets because they may not be fully realizable in the future, our net income and earnings per share would decrease.

 

 6

 

 

Valuation of Long-Lived Assets

 

We review the carrying values of our long-lived assets for impairment whenever events or changes in circumstances indicate that they may not be recoverable. When such an event occurs, we project undiscounted cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections indicate that the carrying value of the long-lived asset will not be recovered, we reduce the carrying value of the long-lived asset by the estimated excess of the carrying value over the projected discounted cash flows. In the past, we have not had to make significant adjustments to the carrying values of our long-lived assets, and we do not anticipate a need to do so in the future. However, circumstances could cause us to have to reduce the value of our capitalized assets more rapidly than we have in the past if our revenues were to significantly decline. Estimated cash flows from the use of the long-lived assets are highly uncertain and therefore the estimation of the need to impair these assets is reasonably likely to change in the future. Should the economy or acceptance of our assets change in the future, it is likely that our estimate of the future cash flows from the use of these assets will change by a material amount. There were no impairments at June 30, 2015 and March 31, 2016. However, if impairment were required, our net income and earnings per share would decrease accordingly.

 

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 mainly utilize the Black-Scholes valuation model to estimate an award’s fair value.

 

Recently enacted accounting pronouncements 

 

In January 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance makes targeted improvements to existing U.S. GAAP by: (1) Requiring equity investments to be measured at fair value with changes in fair value recognized in net income; (2) Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect this update will have a material impact on the presentation of the Company's consolidated financial position, results of operations and cash flows.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. Public business entities must apply the new requirements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. All other entities must apply the new requirements for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period. The Company does not expect any material impact of this new standard on its consolidated financial statements.

 

 7

 

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

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.

 

 8

 

 

Results of Operations

 

The following consolidated results of operations include the results of operations of the Company and its variable interest entities (“VIEs”), BHD and Nanjing Recon.

 

Our historical reporting results are not necessarily indicative of the results to be expected for any future period.

 

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

 

For the three months ended March 31, 2016, oil price continued to be low, and our clients’ production activities and spending were kept at a minimum level. Thus, our operations and numbers still suffered from these adverse effects.

 

Revenues

 

   For the Three Months Ended 
   March 31, 
           Increase/   Percentage 
    2015    2016    (Decrease)    Change 
Hardware - non-related parties  ¥17,267,740   ¥4,539,099   ¥(12,728,641)   (73.7)%
Hardware - related parties   839,542    -    (839,542)   (100.0)%
Software - non-related parties   1,091,095    -    (1,091,095)   (100.0)%
Software - related parties   820,513    -    (820,513)   (100.0)%
Total revenues  ¥20,018,890   ¥4,539,099   ¥(15,479,791)   (77.3)%

 

Our total revenues for the three months ended March 31, 2016 were approximately ¥4.5 million ($0.7 million), a decrease of approximately ¥15.5 million or 77.3% from ¥20.0 million for the three months ended March 31, 2015. This was mainly caused by a decreased demand from our clients and intensely competitive market  conditions. In more detail:

 

1)

Hardware revenue. During this quarter, both furnaces and automation products sales decreased as a result of lower demand from our clients as compared to the same period last year. Hardware revenues for the quarter of fiscal 2015 were mainly from projects we tracked a year earlier from our major clients, CNPC and Sinopec, who were evaluating and adjusting their business plans, kept their spending lower for 2015 . As a result, there were fewer projects started, causing less revenue for the Company for the third quarter of fiscal 2016. As oil prices have rebounded a bit in the first three months of 2016, our management expects this unfavorable trend will ease but expect reduced revenue to continue for some period.


  
2)Software revenue. Software used in oilfield production management is highly recommended, but not essential. As a result, sales and revenue related to software may fluctuate. During the three-month period, there were no software sales.

 

 9

 

 

Cost and Margin

 

   For the Three Months Ended 
   March 31, 
           Increase /   Percentage 
   2015   2016   (Decrease)   Change 
Total revenues  ¥20,018,890   ¥4,539,099   ¥(15,479,791)   (77.3)%
Cost of revenues   13,770,051    2,839,120    (10,930,931)   (79.4)%
Gross profit  ¥6,248,839   ¥1,699,979   ¥(4,548,860)   (72.8)%
Margin %   31.2%   37.5%   6.3%    

 

Cost of revenues.  Our cost of revenues includes raw materials and costs related to the design, implementation, delivery and maintenance of products and services. All materials and components we need can be purchased or manufactured by subcontractors. Usually the prices of electronic components do not fluctuate dramatically due to market competition and will not significantly affect our cost of revenues. However, specialized equipment and incentive chemical products may be directly influenced by metal and oil price fluctuations. Additionally, the prices of some imported accessories mandated by our customers can also impact our cost. Inventory reserves for changes in price level, impairment of inventory, slow moving or other causes will also affect our cost.

 

Our cost of revenues decreased from approximately ¥13.8 million in the three months ended March 31, 2015 to approximately ¥2.8 million ($0.4 million) for the same period in 2016, a decrease of approximately ¥11.0 million ($1.7 million), or 79.4%. This decrease was mainly caused by lower revenue during the three months ended March 31, 2016 compared to the same period of 2015.

 

Gross profit. Our gross profit decreased to approximately ¥1.7 million ($0.3 million) for the three months ended March 31, 2016 from approximately ¥6.2 million for the same period in 2015 due to revenue decrease. Our gross profit as a percentage of revenue increased to 37.5% for the three months ended March 31, 2016 from 31.2% for the same period in 2015. This was mainly caused by deferred income recognized as revenue in the 2016 period with little cost accrued.

 

Our software and hardware revenues are detailed below:

 

   For the Three Months Ended 
   March 31, 
           Increase/   Percentage 
    2015    2016    (Decrease)    Change 
Total revenues-hardware and software- non related parties  ¥18,358,835   ¥4,539,099   ¥(13,819,736)   (75.3)%
Cost of revenues -hardware and software- non related parties   13,759,652    2,839,120    (10,920,532)   (79.4)%
Gross profit  ¥4,599,183   ¥1,699,979   ¥(2,899,204)   (63.0)%
Margin %   25.1%   37.5%   12.4%   _- 

 

Revenue from hardware  and software to non-related parties decreased by approximately ¥13.8 million mainly due to the decrease of hardware products sold in the three months ended March 31, 2016. The gross profit from hardware and software sales to non-related parties decreased ¥2.9 million ($0.5 million) compared to the same period last year. As a percentage of revenue, gross margin was 25.1% for the three months ended March 31, 2015 and 37.5% for the three month period ended March 31, 2016. This increase was mainly because we had higher portions of consignment sales with lower margins in 2015 while there was no such business for 2016.

 

 10

 

 

   For the Three Months Ended 
   March 31, 
           Increase/   Percentage 
    2015    2016    (Decrease)    Change 
Total revenues-hardware and software-related parties  ¥1,660,055   ¥-   ¥(1,660,055)   (100)%
Cost of revenues -hardware and software-  related parties   10,399    -    (10,399)   (100)%
Gross profit  ¥1,649,656   ¥-   ¥(1,649,656)   (100)%
Margin %   99.4%   -    -    - 

 

Revenue from related parties decreased as we developed business directly with oilfield companies, rather than obtaining the business in cooperation with a local agency, which used to be our practice.

 

Operating Expenses

 

   For the Three Months Ended 
   March 31, 
           Increase/   Percentage 
    2015    2016    (Decrease)    Change 
Selling and distribution expenses   1,109,838    819,116    (290,722)   (26.2)%
  % of revenue   5.5%   18.0%   12.5%   - 
General and administrative expenses   4,191,030    7,898,857    3,707,827    88.5%
  % of revenue   20.9%   174.0%   153.1%   - 
Research and development expenses   544,063    1,228,105    684,042    125.7%
  % of revenue   2.7%   27.1%   24.4%   - 
Operating expenses  ¥5,844,931   ¥9,946,078   ¥4,101,147    70.2%

 

Selling and distribution expenses. Selling and distribution expenses consist primarily of salaries and related expenditures of our sales and marketing organization, sales commissions, costs of our marketing programs including travelling charges, advertising and trade shows, and an allocation of our facilities, depreciation expenses and rental expense, as well as shipping charges and related expenses. Selling expenses decreased 26.2% or ¥0.3 million ($45.1 thousand), from approximately ¥1.1 million in the three months ended March 31, 2015 to approximately ¥0.8 million ($0.1 million) in the same period of 2016. This decrease was primarily due to a decrease in traveling expense and payroll expense. Selling expenses were 5.5% of total revenues in the three months ended March 31, 2015 and 18.0% of total revenues in the same period of 2016.

 

General and administrative expenses. General and administrative expenses consist primarily of costs in human resources, facilities costs, depreciation expenses, professional advisor fees, audit fees, option expenses stock based comprehensive expense, bad debt allowance and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 88.5% or ¥3.7 million ($0.6 million), from approximately ¥4.2 million in the three months ended March 31, 2015 to approximately ¥7.9 million ($1.2 million) in the same period of 2016. General and administrative expenses were 20.9% of total revenues in the three months ended March 31, 2015 and 174.0% of total revenues in the same period of 2016. The increase in general and administrative expenses was mainly due to an increase in share-based compensation and provisions accrued for doubtful advanced purchases. We made partial advanced payments for customized products for some projects in year 2014. As these projects were postponed and products design would need to be modified, management made provisions for these amounts based on best estimation. Management is also negotiating with clients to minimize the loss.

 

 11

 

 

Research and development (“R&D”) expenses. Research and development expenses consist primarily of salaries and related expenditures of our research and development projects. Research and development expenses increased from approximately ¥0.5 million for the three months ended March 31, 2015 to approximately ¥1.2 million ($0.2 million) for the same period of 2016. This increase was primarily due to more research and development expense on new generation automation platform system.

 

Net Income

 

   For the Three Months Ended 
   March 31, 
           Increase /   Percentage 
   2015   2016   (Decrease)   Change 
Income (loss) from operations  ¥403,908   ¥(8,246,099)  ¥(8,650,007)   (2,141.6)%
Interest and other income (expense)   (2,000,719)   31,644    2,032,363    (101.6)%
Loss before income tax   (1,596,811)   (8,214,455)   (6,617,644)   414.4%
Provision (benefit) for income tax   (180,927)   1,412,945    1,593,872    (880.9)%
Net loss   (1,415,884)   (9,627,400)   (8,211,516)   580.0%
Less: Net income attributable to non-controlling interest   111,398    -    (111,398)   (100.0)%
Net loss attributable to Recon Technology, Ltd  ¥(1,527,282)  ¥(9,627,400)  ¥(8,100,118)   530.4%

 

Loss from operations. Loss from operations was approximately ¥8.2 million ($1.3 million) for the three months ended March 31, 2016, compared to an income of ¥0.4 million for the same period of 2015. This decrease in income from operations was primary due to a decrease in revenues and increased general and administrative expenses.

 

Interest and other income (expense). Interest and other income was approximately ¥31.6 thousand ($5.0 thousand) for the three months ended March 31, 2016, compared to interest and other expense of ¥2.0 million for the same period of 2015. The ¥2.0 million ($0.3 million) decrease in interest and other expense was primarily due to the decreased loss from warrants redemption, which only accrued for the three months ended March 31, 2015.

 

Provision (benefit) for income tax. Benefit for income tax for the three months ended March 31, 2015 was approximately ¥0.2 million. Provision for income tax was ¥1.4 million ($0.2 million) for the three months ended March 31, 2016. This increase in provision for income tax was mainly due to decrease of deferred tax assets recorded and income tax payable true-up during the three months ended March 31, 2016. During this period, based on available evidence, management concluded that it was more likely than not that there would be no sufficient deductible income in future years and revaluated the deferred tax assets and the adjustment was recorded as part of the total income tax provision.

 

Net loss. As a result of the factors described above, net loss was approximately ¥9.6 million ($1.5 million) for the three months ended March 31, 2016, a decrease of approximately ¥8.2 million ($1.3 million) from net loss of ¥1.4 million for the same period of 2015.

 

 12

 

 

Net loss attributable to Recon Technology, Ltd. As a result of the factors described above, net loss attributable to ordinary shareholders was approximately ¥9.6 million ($1.5 million) for the three months ended March 31, 2016. Net loss attributable to ordinary shareholders increased for approximately ¥8.1 million ($1.3 million) from net loss attributable to ordinary shareholders of approximately ¥1.5 million for same period of 2015.

 

Nine Months Ended March 31, 2015 Compared to Nine Months Ended March 31, 2016

 

Revenues

 

   For the Nine Months Ended 
   March 31, 
           Increase/   Percentage 
   2015   2016   (Decrease)   Change 
Hardware - non-related parties  ¥39,977,111   ¥35,877,231   ¥(4,099,880)   (10.3)%
Hardware - related parties   1,364,070         (1,364,070)   (100.0)%
Service   103,774    1,098,258    994,484    958.3%
Software - non-related parties   3,142,804    -    (3,142,804)   (100.0)%
Software - related parties   1,064,103    -    (1,064,103)   (100.0)%
Total revenues  ¥45,651,862   ¥36,975,489   ¥(8,676,373)   (19.0)%

 

Our total revenues for the nine months ended March 31, 2016 were approximately ¥37.0 million ($5.7 million), a decrease of approximately ¥8.7 million or 19.0% from ¥45.7 million for the nine months ended March 31, 2015. This was mainly caused by a decrease of sales of furnaces and consignment stock goods.

 

Cost and Margin

 

   For the Nine Months Ended 
   March 31, 
           Increase /   Percentage 
   2015   2016   (Decrease)   Change 
Total revenues  ¥45,651,862   ¥36,975,489   ¥(8,676,373)   (19.0)%
Cost of revenues   29,809,778    29,111,166    (698,612)   (2.3)%
Gross profit  ¥15,842,084   ¥7,864,323   ¥(7,977,761)   (50.4)%
Margin %   34.7%   21.3%   (13.4%)   - 

 

Cost of revenues. Our cost of revenues includes raw materials and costs related to design, implementation, delivery and maintenance of products and services. All materials and components we need can be purchased or manufactured by subcontracts. Usually the prices of electronic components do not fluctuate dramatically due to market competition and will not significantly affect our cost of revenues. However, specialized equipment and incentive chemical products may be directly influenced by metal and oil price fluctuations. Additionally, the prices of some imported accessories mandated by our customers can also affect our cost. Inventory reserve for changes in price level, impairment of inventory, slow moving or other causes will also affect our cost.

 

Our cost of revenues decreased from approximately ¥29.8 million in the nine months ended March 31, 2015 to approximately ¥29.1 million ($4.5 million) for the same period in 2016, a decrease of approximately ¥0.7 million ($0.1 million), or 2.3%. This decrease was mainly caused by lower revenue during the nine months ended March 31, 2016 compared to the same period of 2015.  

 

 13

 

 

Gross profit.  Our gross profit decreased to approximately ¥7.9 million ($1.2 million) for the nine months ended March 31, 2016 from approximately ¥15.8 million for the same period in 2015. Our gross profit as a percentage of revenue decreased to 21.3% for the nine months ended March 31, 2016 from 34.7% for the same period in 2015. This was mainly due to the decrease of (1) software sales with higher margins as compared with hardware revenues and (2) lower margins related to our bundled product and service agreements  due to the fiercely competitive environment existing in the oil sector this year.

 

In more detail:

 

   For the Nine Months Ended 
   March 31, 
           Increase /   Percentage 
   2015   2016   (Decrease)   Change 
Total revenues-hardware and software- non related parties  ¥43,119,915   ¥35,877,231   ¥(7,242,684)   (16.8)%
Cost of revenues -hardware and software- non related parties   29,782,617    28,434,196    (1,348,421)   (4.5)%
Gross profit  ¥13,337,298   ¥7,443,035   ¥(5,894,263)   (44.2)%
Margin %   30.9%   20.7%   (10.2%)   - 

 

Revenue from hardware and software to non-related parties decreased by approximately ¥7.2 million mainly due to the decreased orders from our customers as the Company is continually facing pressure from tough competition. The gross profit from hardware and software sales to non-related parties decreased ¥5.9 million ($0.9 million) compared to the same period of last year.

 

   For the Nine Months Ended 
   March 31, 
           Increase /   Percentage 
   2015   2016   (Decrease)   Change 
Total revenues-hardware and software-related parties  ¥2,428,173   ¥-   ¥(2,428,173)   (100.0)%
Cost of revenues -hardware and software-  related parties   27,161    -    (27,161)   (100.0)%
Gross profit  ¥2,401,012   ¥-   ¥(2,401,012)   (100.0)%
Margin %   98.9%   -    98.9%   - 

 

After the Company achieved business entrance certification and were able to cooperate with oilfield customers directly two years ago, we no longer required the services of a related party with such certification and, accordingly, revenue from related-parties decreased. As of result, there was no revenue or cost of hardware and software from related parties during 2016, since we developed business directly with oilfield, rather than cooperation with some local agency, which used to be our related parties.

 

 14

 

 

   For the Nine Months Ended 
   March 31, 
           Increase /   Percentage 
   2015   2016   (Decrease)   Change 
Total revenues-service  ¥103,774   ¥1,098,258   ¥994,484    958.3%
Cost of revenues-service   -    676,970    676,970    100%
Gross profit  ¥103,774   ¥421,288   ¥317,514    306.0%
Margin %   100.0%   38.4%   (61.6%)   - 

 

Service revenue for the nine months ended March 31, 2015 and 2016 consisted mainly of minor maintenance services, which were provided upon request by customers. The cost of revenues-service increased, since labor costs were incurred for the nine months ended March 31, 2016.

 

Operating Expenses

 

   For the Nine Months Ended 
   March 31, 
           Increase /   Percentage 
   2015   2016   (Decrease)   Change 
Selling and distribution expenses  ¥3,065,098    3,443,464   ¥378,366    12.3%
  % of revenue   6.7%   9.3%   2.6%   - 
General and administrative expenses   11,987,761    18,865,639    6,877,878    57.4%
  % of revenue   26.3%   51.0%   24.7%   - 
Research and development expenses   2,444,020    5,757,141    3,313,121    135.6%
  % of revenue   5.4%   15.6%   10.2%   - 
Operating expenses  ¥17,496,879   ¥28,066,244   ¥10,569,365    60.4%

 

Selling and distribution expenses. Selling and distribution expenses consist primarily of salaries and related expenditures of our sales and marketing organization, sales commissions, costs of our marketing programs including traveling charges, advertising and trade shows, and an allocation of our facilities, depreciation expenses and rental expense, as well as shipping charges and so on. Selling expenses increased approximately ¥0.4 million for the nine months ended March 31, 2016 compared to the same period in 2015. This increase was primarily due to an increase in shipping charges, service fees and rental fees. Selling expenses were 6.7% of total revenues in the nine months ended March 31, 2015 and 9.3% of total revenues in the same period of 2016.

 

General and administrative expenses. General and administrative expenses consist primarily of costs in human resources, facilities costs, depreciation expenses, professional advisor fees, audit fees, option expenses stock based comprehensive expense, bad debts allowance and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 57.4% or ¥6.9 million ($1.0 million), from approximately ¥12.0 million in the nine months ended March 31, 2015 to approximately ¥18.9 million ($2.9 million) in the same period of 2016. General and administrative expenses were 51.0% of total revenues in the nine months ended March 31, 2016 and 26.3% of total revenues in the same period of 2015. The increase in general and administrative expenses was mainly due to an increase in provisions for purchase advances and share-based compensation, offset by a decrease in consulting fees.

 

 15

 

 

Research and development (“R&D”) expenses. Research and development expenses consist primarily of salaries and related expenditures for our research and development projects. Research and development expenses increased from approximately ¥2.4 million for the nine months ended March 31, 2015 to approximately ¥5.8 million ($0.9 million) for the same period of 2016. This increase was primarily due to more research and development expense spent on design of downhole service tools and automation platform systems.

 

Net Income

 

   For the Nine Months Ended 
   March 31, 
           Increase /   Percentage 
   2015   2016   (Decrease)   Change 
Loss from operations  ¥(1,654,795)  ¥(20,201,921)  ¥(18,547,126)   1,120.8%
Interest and other income (expense)   2,305,420    (248,489)   (2,553,909)   (110.8)%
Income (loss) before income tax   650,625    (20,450,410)   (21,101,035)   (3,243.2)%
Provision for income tax   468,005    544,772    76,767    16.4%
Net income (loss)   182,620    (20,995,182)   (21,177,802)   (11,596.6)%
Less: Net income attributable to non-controlling interest   546,071    -    (546,071)   (100.0)%
Net loss attributable to Recon Technology, Ltd  ¥(363,451)  ¥(20,995,182)  ¥(20,631,731)   5,676.6%

 

Loss from operations. Loss from operations was approximately ¥20.2 million ($3.1 million) for the nine months ended March 31, 2016, compared to a loss of ¥1.7 million for the same period of 2015. This increase in loss from operations was primary due to a decrease in gross profit, an increase in R&D expenses and increase in stock based compensation and allowance accrued for doubtful accounts.

 

Interest and other income (expense). Interest and other expense was approximately ¥0.3 million ($0.04 million) for the nine months ended March 31, 2016, compared to interest and other income of ¥2.3 million for the same period of 2015. The ¥2.6 million ($0.4 million) decrease in interest and other income was primarily due to gain from change in fair value of warrants liability while there was no such gain for the current period.

 

Provision for income tax. Provision for income tax for the nine months ended March 31, 2015 was approximately ¥0.5 million. Provision for income tax was ¥0.5 million ($0.1 million) for the nine months ended March 31, 2016. This slight increase in provision for income tax was mainly due to deferred tax assets changes, offset by prior period income tax payable true-up during the nine months ended March 31, 2016.

 

Net income (loss). As a result of the factors described above, net loss was approximately ¥21.0 million ($3.3 million) for the nine months ended March 31, 2016, a decrease of approximately ¥21.2 million ($3.3 million) from net income of ¥0.2 million for the same period of 2015.

 

 16

 

 

Net loss attributable to Recon Technology, Ltd. As a result of the factors described above, net loss attributable to ordinary shareholders was approximately ¥21.0 million ($3.3 million) for the nine months ended March 31, 2016, a change of approximately ¥20.6 million ($3.2 million) from net loss attributable to ordinary shareholders of approximately ¥0.4 million for same period of 2015.

 

Adjusted EBITDA  

 

Adjusted EBITDA. We define adjusted EBITDA as net loss adjusted for income tax expense (benefit), interest expense, change in fair value of warrants liability, non-cash stock compensation expense, depreciation and amortization. We think it is useful to an equity investor in evaluating our operating performance because: (1) it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which the assets were acquired; and (2) it helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.

 

    For the Nine Months Ended  
    March 31,  
    2015     2016     2016     Increase /     Percentage  
    RMB     RMB     USD     (Decrease)      Change  
Reconciliation of Adjusted EBITDA to Net Loss                                        
Net income (loss)   ¥ 182,620     ¥ (20,995,182 )   $ (3,255,395 )   ¥ (21,177,802 )     (11,596.6 )%
Provision for income taxes (benefit)     468,005       544,772       84,469       76,767       16.4 %
Interest expense and foreign currency adjustment     827,146       693,821       107,580       (133,325 )     (16.1 )%
Change in fair value of warrants liability     (4,068,329 )     -       -       4,068,329       (100.0 )%
Restricted shares issued for consulting services     1,204,903       1,871,722       290,219       666,819       55.3 %
Loss from warrant redemptions     1,913,262       -       -       (1,913,262 )     (100.0 )%
Stock compensation expense     2,023,761       4,134,042       641,001       2,110,281       104.3 %
Depreciation and amortization     369,284       728,092       112,894       358,808       97.2 %
Adjusted EBITDA   ¥ 2,920,652     ¥ (13,022,733 )   $ (2,019,232 )   ¥ (15,943,385 )     (545.9 )%

 

Adjusted EBITDA decreased by approximately ¥16.0 million ($2.5 million) to a loss of approximately ¥13.0 million ($2.0 million) for the nine months ended March 31, 2016, compared to approximately ¥2.9 million income for the same period in 2015. This was mainly due to decreased gross profit, increased research and development expenses and increased bad debt allowances.

 

 17

 

  

Adjusted Net Income and Adjusted Loss Per Share

 

   For the Nine Months Ended 
   March 31, 
   2015   2016   2016 
   RMB   RMB   USD 
Reconciliation of Net Loss attributable to Recon Technology, Ltd               
to Adjusted Net Loss attributable to Recon Technology, Ltd               
     Net loss attributable to Recon Technology, Ltd  ¥(363,451)  ¥(20,995,182)  $(3,255,395)
Noncash items (A):               
     Change in fair value of warrants liability   (4,068,329)   -    - 
     Restricted shares issued for consulting services   1,204,903    1,871,722    290,219 
Loss from warrants redemption   1,913,262    -    - 
     Stock compensation expense   2,023,761    4,134,042    641,001 
Adjusted net loss attributable to Recon Technology, Ltd  ¥710,146   ¥(14,989,418)  $(2,324,175)
                
Reconciliation of U.S. GAAP Earnings (Loss) Per Share               
to Non U.S. GAAP Adjusted Earnings Per Share               
U.S. GAAP earnings (loss) per share  ¥(0.08)  ¥(3.75)  $(0.58)
Impact of noncash items on earnings per share   0.23    1.07    0.17 
Non U.S. GAAP adjusted earnings per share  ¥0.15   ¥(2.68)  $(0.41)
Weighted - average shares -diluted   4,773,803    5,603,229    5,603,229 

 

(A) Noncash items are certain non-cash expenses that are included in our U.S. GAAP reported results. The non-GAAP financial measures are provided to enhance investors’ overall understanding of Recon's current financial performance.

 

Liquidity and Capital Resources

 

As of March 31, 2016, we had cash in the amount of approximately ¥2.6 million ($0.4 million). As of June 30, 2015, we had cash in the amount of approximately ¥12.3 million.

 

Indebtedness. As of March 31, 2016, except for approximately ¥8.6 million ($1.3 million) of short-term borrowings from related parties, and ¥7.0 million ($1.1 million) in commercial loans from local banks, we did not have any finance leases or purchase commitments, guarantees or other material contingent liabilities.

 

Holding Company Structure. We are a holding company with no operations of our own. All of our operations are conducted through our Domestic Companies. As a result, our ability to pay dividends and to finance any debt that we may incur is dependent upon the receipt of dividends and other distributions from the Domestic Companies. In addition, Chinese legal restrictions permit payment of dividends to us by our Domestic Companies only out of their respective accumulated net profits, if any, determined in accordance with Chinese accounting standards and regulations. Under Chinese law, our Domestic Companies are required to set aside a portion (at least 10%) of their after-tax net income (after discharging all cumulated loss), if any, each year for compulsory statutory reserve until the amount of the reserve reaches 50% of our Domestic Companies’ registered capital. These funds may be distributed to shareholders at the time of each Domestic Company’s wind up.

 

 18

 

 

Off-Balance Sheet Arrangements. We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Capital Resources. To date we have financed our operations primarily through cash flows from operations, bank loans and short-term borrowings and loans from related parties. As of March 31, 2016, we had total assets of approximately ¥102.4 million ($15.9 million), which includes cash of approximately ¥2.6 million ($0.4 million), net accounts receivable due from third parties of approximately ¥50.2 million ($7.8 million), working capital amounted to approximately ¥64.3 million ($10.0 million), and shareholders’ equity amounted to approximately ¥59.7 million ($9.3 million).

 

Cash from Operating Activities.  Net cash used in operating activities was approximately ¥1.3 million ($0.2 million) for the nine months ended March 31, 2016. This was a decrease of approximately ¥14.9 million ($2.2 million) compared to net cash used in operating activities of approximately ¥16.2 million for the nine months ended March 31, 2015. The decrease in net cash used in operating activities for the nine months ended March 31, 2016, was primarily attributable to the ¥5.7 million ($0.9 million) change in trade accounts receivable due from third parties, ¥4.6 million ($0.7 million), change in trade accounts receivable due from related parties and ¥4.4 million ($0.7 million) change in change in purchase advance.

 

Cash from Investing Activities. Net cash used in investing activities was approximately ¥0.4 million ($68.6 thousand) for the nine months ended March 31, 2016, increased approximately ¥0.3 million compared to the same period in 2015, which is due to the decrease in proceeds from disposal of equipment.

 

Cash from Financing Activities. Net cash used in financing activities amounted to ¥8.1 million ($1.2 million) for the nine months ended March 31, 2016, as compared to net cash provided by financing activities of $3.0 million for the same period in 2015. During the nine months ended March 31, 2016, we repaid ¥16.7 million ($2.6 million) short-term borrowings to two related parties and repaid ¥0.5 million ($0.1 million) short-term bank loans, and we received ¥8.5 million ($1.3 million) from one related party and received ¥0.5 million ($0.1 million) short-term bank loans.

 

Working Capital. Total working capital as of March 31, 2016 amounted to approximately ¥64.3 million ($10.0 million), compared to approximately ¥72.4 million as of June 30, 2015. Total current assets as of March 31, 2016 amounted to approximately ¥98.8 million ($15.3 million), a decrease of approximately ¥25.7 million ($4.0 million) compared to approximately ¥124.5 million at June 30, 2015. The decrease in total current assets at March 31, 2016 compared to June 30, 2015 was mainly due to decreases in cash and purchase advances.

 

Current liabilities amounted to approximately ¥34.5 million ($5.4 million) at March 31, 2016, in comparison to approximately ¥52.1 million at June 30, 2015. This decrease of liabilities was attributable mainly to a decrease in short-term borrowings-related parties, other payable-related parties and other payable-third parties.

 

Capital Needs. With the uncertainty of the current market, our management believes it is necessary to enhance collection of outstanding balance of accounts receivable and other receivables, and to be cautious on operational decisions and project selection. Our management believes that our current operations can satisfy our daily working capital needs. We may also raise capital through public offering or private placement to finance our development of our business and to consummate any merger and acquisition, if necessary.

 

 19

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

As of March 31, 2016, the 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 under the 2013 COSO framework. Based on the foregoing, 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 Securities and Exchange Commission filings.

 

Changes in Internal Control over Financial Reporting

 

 Management continues to focus on internal control over financial reporting.  As of March 31, 2016, the Company intends to further implement the following remedial initiatives:

 

¨ Improve the design and documentation related to multiple levels of review over financial statements included in our SEC filings;

¨ Expand the design and assessment test work over the monitoring function of entity level controls;

¨ Enhance documentation retention policies over test work related to continuous management assessments of internal control effectiveness; and

¨ Expand 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.

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the nine months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as disclosed above.

 

 20

 

 

Part II Other Information

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

  (a) None

 

  (b) None

 

  (c) None

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

 21

 

 

Item 6. Exhibits.

 

The following exhibits are filed herewith:

 

Exhibit

Number

 

Document

   
  3.1   Amended and Restated Articles of Association of the Registrant (1)
   
  3.2   Amended and Restated Memorandum of Association of the Registrant (1)
   
  4.1   Specimen Share Certificate (1)
   
10.1   Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.2   Translation of Power of Attorney for rights of Chen Guangqiang in Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.3   Translation of Power of Attorney for rights of Yin Shenping in Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.4   Translation of Power of Attorney for rights of Li Hongqi in Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.5   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.6   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.7   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.8   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.9   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.10   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Beijing BHD Petroleum Technology Co., Ltd. (1)
   
10.11   Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Jining ENI Energy Technology Co., Ltd. (1)
   
10.12   Translation of Power of Attorney for rights of Chen Guangqiang in Jining ENI Energy Technology Co., Ltd. (1)
   
10.13   Translation of Power of Attorney for rights of Yin Shenping in Jining ENI Energy Technology Co., Ltd. (1)
   
10.14   Translation of Power of Attorney for rights of Li Hongqi in Jining ENI Energy Technology Co., Ltd. (1)

 

 22

 

   
10.15   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1)
   
10.16   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1)
   
10.17   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1)
   
10.18   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Jining ENI Energy Technology Co., Ltd. (1)
   
10.19   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Jining ENI Energy Technology Co., Ltd. (1)
   
10.20   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Jining ENI Energy Technology Co., Ltd. (1)
   
10.21   Translation of Exclusive Technical Consulting Service Agreement between Recon Technology (Jining) Co., Ltd. and Nanjing Recon Technology Co., Ltd. (1)
   
10.22   Translation of Power of Attorney for rights of Chen Guangqiang in Nanjing Recon Technology Co., Ltd. (1)
   
10.23   Translation of Power of Attorney for rights of Yin Shenping in Nanjing Recon Technology Co., Ltd. (1)
   
10.24   Translation of Power of Attorney for rights of Li Hongqi in Nanjing Recon Technology Co., Ltd. (1)
   
10.25   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1)
   
10.26   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1)
   
10.27   Translation of Exclusive Equity Interest Purchase Agreement between Recon Technology (Jining) Co. Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1)
   
10.28   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Chen Guangqiang and Nanjing Recon Technology Co., Ltd. (1)
   
10.29   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Yin Shenping and Nanjing Recon Technology Co., Ltd. (1)
   
10.30   Translation of Equity Interest Pledge Agreement between Recon Technology (Jining) Co., Ltd., Li Hongqi and Nanjing Recon Technology Co., Ltd. (1)
   
10.33   Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Yin Shenping (1)
   
10.34   Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Chen Guangqiang (1)
   
10.35   Employment Agreement between Recon Technology (Jining) Co., Ltd. and Mr. Li Hongqi (1)
   
10.36   Operating Agreement among Recon Technology (Jining) Co. Ltd., Nanjing Recon Technology Co., Ltd. and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1)
   
10.37   Operating Agreement among Recon Technology (Jining) Co. Ltd., Jining ENI Energy Technology Co., Ltd., and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1)

 23

 

   
10.38   Operating Agreement among Recon Technology (Jining) Co. Ltd., Beijing BHD and Mr. Yin Shenping, Mr. Chen Guangqiang and Mr. Li Hongqi (1)
   
21.1   Subsidiaries of the Registrant (2)
   
99.1   Stock Option Plan (1)
   
99.2   Code of Business Conduct and Ethics (1)
   
31.1   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
   
31.2   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
   
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4)
   
32.2   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4) 

 

101.INS   XBRL Instance Document (3)
     
101.SCH   XBRL Taxonomy Extension Schema Document (3)
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document (3)
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document (3)
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document (3)
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document (3)

 

(1) Incorporated by reference to the Company’s Registration Statement on Form S-1, Registration No. 333-152964.
(2) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A, filed on January 31, 2012.
(3) Filed herewith.
(4)

Furnished herewith.

 

 24

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

         
    RECON TECHNOLOGY, LTD
     
May 16, 2016   By:  

/s/ Liu Jia

        Liu Jia
        Chief Financial Officer
        (Principal Financial and Accounting Officer)

 

 25

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

         
    RECON TECHNOLOGY, LTD
     
May 16, 2016   By:  

/s/ Yin Shen ping

        Yin Shen ping
        Chief Executive Officer
         

  

 

 

 

RECON TECHNOLOGY, LTD

 

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE
   
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2015 and March 31, 2016 F-2

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine and three months ended March 31, 2015 and 2016

F-3
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2015 and 2016 F-4
Notes to Unaudited Condensed Consolidated Financial Statements F-5

 

 

 

 

RECON TECHNOLOGY, LTD

condensed Consolidated Balance Sheets

(UNAUDITED)

 

   As of Jun 30,   As of Mar 31,   As of Mar 31, 
   2015   2016   2016 
   RMB   RMB   U.S. Dollars 
Current assets               
Cash  ¥12,344,929   ¥2,619,943   $406,234 
Notes receivable   4,205,530    1,498,710    232,382 
Trade accounts receivable, net   52,186,397    50,248,411    7,791,236 
Trade accounts receivable- related parties, net   4,769,800    -    - 
Inventories, net   10,845,007    10,436,502    1,618,225 
Other receivables, net   18,064,568    22,358,526    3,466,788 
Other receivables- related parties   91,021    -    - 
Purchase advances, net   18,622,538    10,425,075    1,616,454 
Purchase advances- related parties   394,034    -    - 
Prepaid expenses   826,314    590,412    91,548 
Prepaid expenses - related parties   420,000    630,000    97,684 
Deferred tax assets   1,742,098    -    - 
Total current assets   124,512,236    98,807,579    15,320,551 
                
Property and equipment, net   2,666,953    2,430,926    376,926 
Long-term trade accounts receivable, net   4,440,665    484,265    75,087 
Long-term other receivable   2,729,033    692,325    107,348 
Total Assets  ¥134,348,887   ¥102,415,095   $15,879,912 
                
LIABILITIES AND EQUITY               
Current liabilities               
Short-term bank loans  ¥7,000,000   ¥7,000,000   $1,085,381 
Trade accounts payable   13,627,088    10,174,308    1,577,571 
Trade accounts payable- related parties   3,528,705    -    - 
Other payables   2,103,057    2,923,271    453,266 
Other payable- related parties   4,309,702    3,650,329    566,000 
Deferred revenue   2,285,529    304,335    47,188 
Advances from customers   529,700    386,294    59,897 
Accrued payroll and employees' welfare   246,789    328,817    50,985 
Accrued expenses   199,166    203,109    31,493 
Taxes payable   1,153,216    804,818    124,791 
Short-term borrowings - related parties   16,916,905    8,557,771    1,326,920 
Deferred tax liability   180,186    180,186    27,939 
Total current liabilities   52,080,043    34,513,238    5,351,431 
                
Equity               
Common stock, ($ 0.0185 U.S. dollar par value, 100,000,000 shares authorized; 5,427,946 and 5,804,005 shares issued and outstanding as of June 30, 2015 and March 31, 2016, respectively)   697,217    741,467    114,968 
                
Additional paid-in capital   92,541,687    99,055,188    15,358,941 
Statutory reserve   4,148,929    4,148,929    643,310 
Accumulated deficit   (23,024,935)   (44,020,117)   (6,825,512)
Accumulated other comprehensive loss   (317,551)   (254,151)   (39,407)
Total shareholders’ equity   74,045,347    59,671,316    9,252,300 
Non-controlling interest   8,223,497    8,230,541    1,276,181 
Total equity   82,268,844    67,901,857    10,528,481 
Total Liabilities and Equity  ¥134,348,887   ¥102,415,095   $15,879,912 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 F-2

 

 

RECON TECHNOLOGY, LTD

condensed Consolidated Statements of OPERATIONS and Comprehensive LOSS

(UNAUDITED)

 

   For the nine months ended   For the three months ended 
   Mar 31,      Mar 31, 
   2015   2016   2016   2015   2016   2016 
   RMB   RMB   USD   RMB   RMB   USD 
                         
Revenues                              
Hardware and software  ¥43,119,915   ¥35,877,231   $5,562,922   ¥18,358,835   ¥4,539,099   $703,807 
Service   103,774    1,098,258    170,290    -    -    - 
Hardware and software - related parties   2,428,173    -    -    1,660,055    -    - 
Total revenues   45,651,862    36,975,489    5,733,212    20,018,890    4,539,099    703,807 
    -    -    -    -    -    - 
Cost of revenues                              
Hardware and software  ¥29,782,617   ¥28,434,196   $4,408,847   ¥13,759,652   ¥2,839,120   $440,218 
Service   -    676,970    104,967    -    -    - 
Hardware and software - related parties   27,161    -    -    10,399    -    - 
Total cost of revenues   29,809,778    29,111,166    4,513,814    13,770,051    2,839,120    440,218 
Gross profit   15,842,084    7,864,323    1,219,398    6,248,839    1,699,979    263,589 
                               
Selling and distribution expenses   3,065,098    3,443,464    533,924    1,109,838    819,116    127,008 
General and administrative expenses   11,987,761    18,865,639    2,925,200    4,191,030    7,898,857    1,224,752 
Research and development expenses   2,444,020    5,757,141    892,670    544,063    1,228,105    190,423 
Operating expenses   17,496,879    28,066,244    4,351,794    5,844,931    9,946,078    1,542,183 
                               
Income (loss) from operations   (1,654,795)   (20,201,921)   (3,132,396)   403,908    (8,246,099)   (1,278,594)
                               
Other income (expenses)                              
Subsidy income   639,473    289,087    44,824    155,155    164,367    25,486 
Interest income   225,701    147,092    22,807    68,233    42,373    6,570 
Interest expense   (808,065)   (672,789)   (104,319)   (339,109)   (198,589)   (30,792)
Change in fair value of warrants liability   4,068,329    -    -    (9,188)   -    - 
Income (loss) from foreign currency exchange   (19,081)   (21,032)   (3,261)   1,799    (20,830)   (3,230)
Loss from warrants redemption   (1,913,262)   -    -    (1,913,262)   -    - 
Other income   112,325    9,153    1,419    35,653    44,323    6,872 
Other income (expense)   2,305,420    (248,489)   (38,530)   (2,000,719)   31,644    4,906 
Income (loss) before income tax   650,625    (20,450,410)   (3,170,926)   (1,596,811)   (8,214,455)   (1,273,688)
Provision (benefit) for income tax   468,005    544,772    84,469    (180,927)   1,412,945    219,083 
Net Income (loss)   182,620    (20,995,182)   (3,255,395)   (1,415,884)   (9,627,400)   (1,492,771)
    -    -    -    -    -    - 
Less: Net income attributable to non-controlling interest   546,071    -    -    111,398    -    - 
Net Loss attributable to Recon Technology, Ltd  ¥(363,451)  ¥(20,995,182)  $(3,255,395)  ¥(1,527,282)  ¥(9,627,400)  $(1,492,771)
                               
Comprehensive income (loss)                              
Net income (loss)   182,620    (20,995,182)   (3,255,395)   (1,415,884)   (9,627,400)   (1,492,771)
Foreign currency translation adjustment   (2,854)   63,400    9,830    (7,580)   (59,390)   (9,209)
Comprehensive income (loss)   179,766    (20,931,782)   (3,245,565)   (1,423,464)   (9,686,790)   (1,501,980)
Less: Comprehensive income attributable to non-controlling interest   545,952    7,044    1,092    111,032    (6,599)   (1,023)
Comprehensive loss attributable to Recon Technology, Ltd  ¥(366,186)  ¥(20,938,826)  $(3,246,657)  ¥(1,534,496)  ¥(9,680,191)  $(1,500,957)
                               
Earnings (loss) per common share - basic  ¥(0.08)  ¥(3.75)  $(0.58)  ¥(0.32)  ¥(1.66)  $(0.26)
Earnings (loss) per common share - diluted  ¥(0.08)  ¥(3.75)  $(0.58)  ¥(0.32)  ¥(1.66)  $(0.26)
Weighted - average shares -basic   4,773,803    5,603,229    5,603,229    4,839,004    5,804,005    5,804,005 
Weighted - average shares -diluted   4,773,803    5,603,229    5,603,229    4,839,004    5,804,005    5,804,005 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 F-3

 

 

RECON TECHNOLOGY, LTD

condensed Consolidated Statements of Cash Flows

(UNAUDITED)

 

   For the nine months ended March 31, 
   2015   2016   2016 
   RMB   RMB   U.S. Dollars 
             
Cash flows from operating activities:               
Net income (loss)  ¥182,620   ¥(20,995,182)  $(3,255,395)
Adjustments to reconcile net income (loss) to net cash used in operating activities:               
Depreciation   369,284    728,092    112,894 
Gain from disposal of  equipment   (149,504)   (40,688)   (6,309)
Provision for doubtful accounts   254,622    4,334,148    672,029 
Reversal of slow moving inventories   -    (95,122)   (14,749)
Share based compensation   2,023,761    4,134,042    641,001 
Deferred tax (benefit) provision   (50,481)   1,742,098    270,120 
Change in fair value of warrants liability   (4,068,329)   -    - 
Restricted shares issued for services   1,204,903    1,871,722    290,219 
Loss from warrants redemption   1,913,262    -    - 
Changes in operating assets and liabilities:               
Notes receivable   (400,000)   2,706,820    419,704 
Trade accounts receivable   (29,115,292)   5,705,680    884,691 
Trade accounts receivable-related parties   18,681,051    4,569,800    708,568 
Inventories   (4,791,259)   503,627    78,090 
Other receivable, net   (7,022,533)   (2,566,250)   (397,908)
Other receivables related parties, net   1,414,433    91,021    14,113 
Purchase advance, net   1,797,628    4,361,022    676,196 
Purchase advance-related party, net   -    394,034    61,097 
Prepaid expense   (1,565,998)   629,622    97,626 
Prepaid expense - related party, net   (132,400)   (210,000)   (32,561)
Trade accounts payable   6,042,777    (6,981,485)   (1,082,510)
Other payables   (566,064)   820,214    127,178 
Other payables-related parties   419,379    (659,373)   (102,239)
Deferred revenue   (1,643,339)   (1,981,194)   (307,193)
Advances from customers   (405,785)   (143,406)   (22,236)
Accrued payroll and employees' welfare   (108,066)   82,028    12,719 
Accrued expenses   185,433    67,803    10,513 
Taxes payable   (689,453)   (357,116)   (55,372)
Net cash used in operating activities   (16,219,350)   (1,288,043)   (199,714)
                
Cash flows from investing activities:               
Purchase of property and equipment   (514,009)   (502,658)   (77,939)
Proceeds from disposal of equipment   356,247    60,000    9,303 
Net cash used in investing activities   (157,762)   (442,658)   (68,636)
                
Cash flows from financing activities:               
Proceeds from short-term bank loans   -    500,000    77,527 
Repayments of short-term bank loans   (2,000,000)   (500,000)   (77,527)
Proceeds from short-term borrowings-related parties   12,550,000    8,525,400    1,321,901 
Repayment of short-term borrowings-related parties   (7,550,000)   (16,748,394)   (2,596,912)
Proceeds from sale of common stock, net of issuance costs   -    168,319    26,098 
Net cash provided by (used in) financing activities   3,000,000    (8,054,675)   (1,248,913)
                
Effect of exchange rate fluctuation on cash and cash equivalents   (51,605)   60,390    9,362 
                
Net decrease in cash   (13,428,717)   (9,724,986)   (1,507,901)
Cash at beginning of period   18,094,586    12,344,929    1,914,135 
Cash at end of period  ¥4,665,869   ¥2,619,943   $406,234 
                
Supplemental cash flow information               
Cash paid during the period for interest  ¥808,065   ¥672,789   $104,319 
Cash paid during the period for taxes  ¥616,225   ¥142,477   $22,092 
                
Non-cash investing and financing activities               
Issuance of common stock to prepay professional services  ¥1,002,721   ¥2,265,442   $351,267 
Non-cash transaction for AR and short-term borrowings-related parties offset   -    200,000    31,011 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 F-4

 

 

RECON TECHNOLOGY, LTD

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

 

Organization –Recon Technology, Ltd (the “Company”) was incorporated under the laws of the Cayman Islands on August 21, 2007 by Messrs. Yin Shenping, Chen Guangqiang and Li Hongqi (the “Founders”) as a limited liability company. The Company provides specialized oilfield equipment, automation systems, tools, chemicals and field services to petroleum companies mainly in the People’s Republic of China (the “PRC”).

 

The Company, along with its wholly-owned subsidiaries, Recon Technology Co., Limited (“Recon HK”), Jining Recon Technology Ltd. (“Recon JN”), Recon Investment Ltd. (“Recon IN”) and Recon Hengda Technology (Beijing) Co., Ltd. (“Recon BJ”), conducts its business through the following PRC legal entities that are consolidated as variable interest entities (“VIEs”) and operate in the Chinese oilfield equipment & service industry:

 

1.Beijing BHD Petroleum Technology Co., Ltd. (“BHD”),
2.Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”), and
3.Huanghua BHD Petroleum equipment manufacturing Company, Ltd (“Hanghua BHD”).

 

On January 29, 2015, the Company increased its authorized shares from 25,000,000 to 100,000,000 ordinary shares.

 

Nature of Operations –The Company engaged in (1) providing equipment, tools and other hardware related to oilfield production and management, including simple installations in connection with some projects; (2) service to improve production and efficiency of exploited oil wells, and (3) developing and selling its own specialized industrial automation control and information solutions. The products and services provided by the Company include:

 

High-Efficiency Heating Furnaces - High-Efficiency Heating Furnaces are designed to remove the impurities and to prevent solidification blockage in transport pipes carrying crude petroleum. Crude petroleum contains certain impurities including water and natural gas, which must be removed before the petroleum can be sold.

 

Multi-Purpose Fissure Shaper - Multipurpose fissure shapers improve the extractors’ ability to test for and extract petroleum which requires perforation into the earth before any petroleum extractor can test for the presence of oil.

 

Horizontal Multistage Fracturing related Service - The Company mainly uses the Baker Hughes FracPoint™ system and provides related service to oilfield companies. The Baker Hughes FracPoint™ system provided a completion method using packers to isolate sections of the wellbore (stages) and frac sleeves to direct the frac treatment to the desired stage. The use of this type of completion eliminated the need for cementing the liner, coiled tubing operations, and wireline operations, while significantly reducing overall pumping time.

 

Supervisory Control and Data Acquisition System (“SCADA”) - SCADA is an industrial computerized process control system for monitoring, managing and controlling petroleum extraction. SCADA integrates underground and aboveground activities of the petroleum extraction industry. This system can help to manage the oil extraction process in real-time to reduce the costs associated with extraction.

 

 F-5

 

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information pursuant to the rules of the SEC and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2015. The results of operations for the interim periods presented may not be indicative of the operating results to be expected for the Company’s fiscal year ending June 30, 2016.

 

Principles of Consolidation – The unaudited condensed consolidated financial statements include the accounts of the Company, all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.

 

Variable Interest Entities - A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company performs ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previously identified as a VIE continues to be a VIE and whether the Company continues to be the primary beneficiary.

 

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs.

 

Currency Translation - The Company’s functional currency is the Chinese Yuan (“RMB”) and the accompanying unaudited condensed consolidated financial statements have been expressed in Chinese Yuan. The unaudited condensed consolidated financial statements as of and for the nine months ended March 31, 2016 have been translated into United States dollars (“U.S. dollars”) solely for the convenience of the readers. The translation has been made at the rate of ¥6.4494 = US$1.00, the approximate exchange rate prevailing on March 31, 2016. These translated U.S. dollar amounts should not be construed as representing Chinese Yuan amounts or that the Chinese Yuan amounts have been or could be converted into U.S. dollars.

 

Estimates and assumptions - The preparation of the consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company’s consolidated financial statements include revenue recognition, allowance for doubtful accounts, allowance for inventory, deferred taxes, warrants liabilities, the useful lives of property and equipment and the fair value of share- based payments. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.

 

 F-6

 

 

Fair Values of Financial Instruments - The US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The three levels of inputs are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. 

Level 3 inputs to the valuation methodology are unobservable.

 

The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable, accrued liabilities, advances from customers, short-term bank loan and short-term borrowings approximate fair value because of the immediate or short-term maturity of these financial instruments. It was impracticable to estimate the fair value of long-term other receivables, because this is due from the Company’s former VIE and there are no comparable markets for receivables with similar terms. Long-term investment is measured at fair value which was determined to be zero during the nine months ended March 31, 2016 using level 1 inputs. (See Note 8.)

 

The fair value of the warrants liability was determined using the Black-Scholes Model, as Level 2 inputs (See Note 13).

 

Trade Accounts and Other Receivables - Accounts receivable are carried at original invoiced amount less a provision for any potential uncollectible amounts. Accounts are considered past due when the related receivables are more than a year old. Provision is made against trade accounts and other receivables to the extent they are considered to be doubtful. Accounts are written off after extensive efforts at collection. Other receivables arise from transactions with non-trade customers.

 

Purchase Advances - Purchase advances are the amounts prepaid to suppliers for purchases of inventory and are recognized as inventory when the final amount is paid to the suppliers and the inventory is delivered.

 

Inventories - Inventories are stated at the lower of cost or market value, on a weighted average basis for BHD. Inventories are stated at the lower of cost or market value, on a first-in-first-out basis for Nanjing Recon. The methods of determining inventory costs are used consistently from year to year. Allowance for inventory obsolescence is provided when the market value of certain inventory items are lower than the cost.

 

Property and Equipment - Property and equipment are stated at cost. Depreciation on motor vehicles and office equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from two to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets.

 

Items Useful life
Motor vehicles 5-10 years
Office equipment 2-5 years
Leasehold improvement 5 years

 

 F-7

 

 

Long-term investment –Long-term investment in equity over which the Company has the ability to exercise significant influence but not control, and that, in general, are 20-50 percent owned, are stated at cost plus equity in undistributed net income (loss) of the investee. These investments are evaluated for impairment, in which an impairment loss would be recorded whenever a decline in the value of an equity investment below its carrying amount is determined to be “other than temporary.” In judging “other than temporary,” the Company would consider the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and longer-term operating and financial prospects of the investee, and the Company’s longer-term intent of retaining the investment in the investee.

 

Long-Lived Assets - The Company applies the ASC Topic 360 “Property, plant and equipment.” ASC Topic 360 requires that long-lived assets, such as property and equipment be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. There were no impairments at June 30, 2015 and March 31, 2016.

 

Revenue Recognition - The Company recognizes revenue when the following four criteria are met: (1) persuasive evidence of an arrangement, (2) delivery has occurred or services have been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the customers and the customers have signed a completion and acceptance report, risk of loss has transferred to the customers, customers’ acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in customers’ acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

 

Hardware:

 

Revenue from hardware sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations that affect the customer’s final acceptance of the arrangement.

 

Software:

 

The Company sells self-developed software. For software sales, the Company recognizes revenues in accordance with ASC Topic 985 - 605 “Software Revenue Recognition.” Revenue from software is recognized according to project contracts. Contract costs are accumulated during the periods of installation and testing or commissioning. Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance statements.

 

 F-8

 

 

Service:

 

The Company provides services to improve software function and system operation on separated fixed-price contracts. Revenue is recognized on the completed contract method when acceptance is determined by a completion report signed by the customer.

 

Deferred revenue represents unearned amounts billed to customers related to sales contracts.

 

Subsidy Income - Grants are given by the government to support local software companies’ operation and research and development. Grants related to research and development projects are recognized as subsidy income in the unaudited condensed consolidated statements of operations when received. Grants in the form of value-added-tax refund for software products are recognized when received.

 

Share-Based Compensation - The Company accounts for share-based compensation in accordance with ASC Topic 718, Share-Based Payment. Under the fair value recognition provisions of this topic, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses using the Binomial Lattice valuation model estimated at the grant date based on the award’s fair value.

 

Income Taxes - Income taxes are provided based upon the liability method of accounting pursuant to ASC Topic 740, Accounting for Income Taxes. Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any income taxes in the United States or the Cayman Islands.

 

Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Income tax returns for the year prior to 2010 are no longer subject to examination by tax authorities.

 

Earnings (loss) per Share (“EPS”) - Basic EPS is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing net income (loss) by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding.

 

 F-9

 

 

Potentially dilutive ordinary shares consist of ordinary shares issuable upon the conversion of ordinary stock options, restricted shares and warrants (using the treasury stock method). The effect from options, restricted shares and warrants would have been anti-dilutive due to the fact that we incurred a net loss during the three months and nine months ended March 31, 2015 and 2016.

 

Recently Issued Accounting Pronouncements -

 

In January 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance makes targeted improvements to existing U.S. GAAP by: (1) Requiring equity investments to be measured at fair value with changes in fair value recognized in net income; (2) Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect this update will have a material impact on the presentation of the Company's consolidated financial position, results of operations and cash flows.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. Public business entities must apply the new requirements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. All other entities must apply the new requirements for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period. The Company does not expect any material impact of this new standard on its consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

 F-10

 

 

In April 2016, the FASB released ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

In April 2016, FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

NOTE 3. TRADE ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consisted of the following:

 

   June 30, 2015   March 31, 2016   March 31, 2016 
Third Party  RMB   RMB   U.S. Dollars 
Trade accounts receivable  ¥58,049,462   ¥53,547,142   $8,302,719 
Allowance for doubtful accounts   (5,863,065)   (3,298,731)   (511,483)
Total - third- party, net  ¥52,186,397   ¥50,248,411   $7,791,236 

 

   June 30, 2015   March 31, 2016   March 31, 2016 
Related Party  RMB   RMB   U.S. Dollars 
Beijing Langchen Construction Company  ¥726,800   ¥-   $- 
Xiamen Huangsheng Hitek Computer Network Co.Ltd.   980,000    -    - 
Xiamen Henda Hitek Computer Network Co. Ltd.   3,063,000    -    - 
Total - related-parties, net  ¥4,769,800   ¥-   $- 

 

   June 30, 2015   March 31, 2016   March 31, 2016 
Third Party – long-term  RMB   RMB   U.S. Dollars 
Beijing Yabei Nuoda Science and Technology Co. Ltd. *  ¥4,934,072   ¥538,072   $83,430 
Allowance for doubtful accounts   (493,407)   (53,807)   (8,343)
Total - long-term trade accounts receivable, net  ¥4,440,665   ¥484,265   $75,087 

 

 *The receivable from Yabei Nuoda was recognized primarily from the sale of automation system and services based on written contracts. Based on the repayment agreement signed on September 2, 2015, the outstanding balance was to be collected in two years beginning in 2017, with each installment of ¥2,467,036 ($380,000). During the nine months period ended March 31, 2016, the Company enhanced collection of long aging accounts receivable and thus reduced the outstanding balance of Yabei Nuoda, significantly.

 

NOTE 4. OTHER RECEIVABLES, NET

 

Other receivables consisted of the following:

 

Third Party  June 30, 2015   March 31, 2016   March 31, 2016 
Current Portion  RMB   RMB   U.S. Dollars 
Due from ENI (A)  ¥2,624,071   ¥3,401,553   $527,426 
Loans to third parties (B)   11,154,344    13,198,344    2,046,461 
Business advance to staff (C)   3,927,238    5,823,723    902,994 
Deposits for projects   543,800    882,607    136,852 
Others   637,348    183,532    28,458 
Allowance for doubtful accounts   (822,233)   (1,131,233)   (175,403)
Total  ¥18,064,568   ¥22,358,526   $3,466,788 

 

Provision for other receivables were ¥93,500 and ¥309,000 ($47,912) for the nine months ended March 31, 2015 and 2016, respectively.

 

Third Party  June 30, 2015   March 31, 2016   March 31, 2016 
Non-Current Portion  RMB   RMB   U.S. Dollars 
Due from ENI (A)  ¥2,729,033   ¥692,325   $107,348 
Total  ¥2,729,033   ¥692,325   $107,348 

 

(A)After ENI ceased to be a VIE of the Company, ENI in January 2012 agreed to repay the loan on a payment schedule, with interest accrued during the period at an annual rate of 4%. In accordance with the payment schedule, the principal plus accrued interest is required to be repaid over approximately three years on a quarterly basis beginning March 2012. The first four payments were RMB 1.2 million each. In March, June, September and December of 2012, the Company received RMB 4.8 million. Starting March 2013, installments for each quarter would be ¥1,777,653. The Company received the payments on time in March and June, 2013. On September 30, 2013, ENI proposed to extend the payment period and signed a new contract with the Company. According to the new arrangement, the remaining part of this loan will be repaid over four years with quarterly installments of ¥699,147. The Company has continued to receive the payments under the agreement.

 

(B)Loans to third-parties are mainly used for short-term funding to support the Company’s external business partners.  These loans are due on demand bearing no interest.

 

(C)Business advance to staff represents advances for business travel and sundry expenses related to oilfield or on-site installation and inspection of products through customer approval and acceptance.

 

 F-11

 

 

NOTE 5. PURCHASE ADVANCES

 

The Company purchased products and services from a third party and a related party during the normal course of business. Purchase advances consisted of the following:

 

   June 30, 2015   March 31, 2016   March 31, 2016 
Third Party  RMB   RMB   U.S. Dollars 
Prepayment for inventory purchase  ¥22,845,030   ¥18,484,007   $2,866,026 
Allowance for doubtful accounts   (4,222,492)   (8,058,932)   (1,249,572)
Total  ¥18,622,538   ¥10,425,075   $1,616,454 

 

Provision for purchase advances were ¥88,678 and ¥3,836,441 ($594,857) for the nine months ended March 31, 2015 and 2016, respectively.

 

NOTE 6. INVENTORIES

 

Inventories consisted of the following:

 

   June 30, 2015  

March 31,

2016

  

March 31,

2016

 
   RMB   RMB   U.S. Dollars 
Small component parts  ¥55,332   ¥55,332   $8,579 
Purchased goods and raw materials   244,667    55,604    8,622 
Work in process and goods on site   3,552,771    2,707,760    419,850 
Finished goods   14,693,073    10,492,574    1,626,920 
Allowance for slow moving inventory   (7,700,836)   (2,874,768)   (445,746)
Total inventories, net  ¥10,845,007   ¥10,436,502   $1,618,225 

 

The reversal of slow moving inventory was nil and ¥95,122 ($14,749) for the nine months ended March 31, 2015 and 2016.

 

NOTE 7. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

   June 30, 2015   March 31, 2016   March 31, 2016 
   RMB   RMB   U.S. Dollars 
Motor vehicles  ¥3,790,474   ¥3,871,567   $600,303 
Office equipment and fixtures   797,791    825,996    128,074 
Leasehold improvement   -    214,487    33,257 
Total property and equipment   4,588,265    4,912,050    761,634 
Less: Accumulated depreciation   (1,921,312)   (2,481,124)   (384,708)
Property and equipment, net  ¥2,666,953   ¥2,430,926   $376,926 

 

Depreciation expense was ¥94,773 and ¥232,022 ($35,976) for the three months ended March 31, 2015 and 2016, respectively.

 

Depreciation expense was ¥369,284 and ¥728,092 ($112,894) for the nine months ended March 31, 2015 and 2016, respectively.

 

NOTE 8. LONG-TERM INVESTMENT

 

On June 28, 2013, the Company purchased 2,800,000 restricted shares of Avalon Oil and Gas, Inc. ("Avalon") for $0.089 per share, or approximately ¥1.5 million ($250,000). Since the restriction for the shares is for two years, the Company was able to acquire the shares at 50% of the market value. The investment was accounted for using the equity method and no gain or loss from equity investment was recorded for the year ended June 30, 2013 due to immateriality. As of June 30, 2015 and March 31, 2016, Recon owned 16.92% and 15.39% of Avalon’s outstanding shares, respectively. Avalon is an independent US domestic oil and natural gas producer listed on the OTCBB under the ticker symbol AOGN. Avalon engages in the acquisition, exploration and development of oil and gas producing properties in the US. Based on the available information and discussion with the management team of Avalon, the Company believes Avalon’s operating loss would not be recovered in the foreseeable future, therefore, the Company considered the investment to be impaired and recorded an investment loss of ¥1,535,250 ($250,000) for the year ended June 30, 2014 to write its investment down to zero.

 

On April 13, 2015, BHD reached an agreement to invest RMB 80 million in Huanghua Heng Da Xiang Tong Manufacture Ltd (“HHBHDXT”) for a 54.05% ownership interest. BHD’s board of Directors and shareholders approved the transaction to invest in HHBHD. The investment is to enhance cooperation with HHBHD and protect BHD’s design copyright. Based on mutual agreements, BHD shall not enjoy voting right until the payment of investment is on position. On March 18, 2016, BHD decided to terminate this investment transaction with HHBHDXT, and was no longer a shareholder of HHBHDXT. As of this termination, no payment was ever made to HHBHDXT.

 

 F-12

 

 

NOTE 9. OTHER PAYABLES

 

Other payables consisted of the following:

 

 

   June 30, 2015   March 31, 2016   March 31, 2016 
Third Party  RMB   RMB   U.S. Dollars 
Consulting services  ¥1,628,508   ¥1,374,702   $213,154 
Distributors and employees   413,703    525,508    81,482 
Funds collected on behalf of others   -    895,022    138,777 
Others   60,846    128,039    19,853 
Total  ¥2,103,057   ¥2,923,271   $453,266 

 

   June 30, 2015   March 31, 2016   March 31, 2016 
Related Party  RMB   RMB   U.S. Dollars 
Due to related parties  ¥2,499,347   ¥-   $- 
Expenses paid by the major shareholders   1,558,738    2,764,390    428,631 
Due to family member of one owner   -    630,000    97,684 
Due to management staff for costs incurred on behalf of Recon   251,617    255,939    39,685 
Total  ¥4,309,702   ¥3,650,329    566,000 

 

NOTE 10. TAXES PAYABLE

 

Taxes payable consisted of the following:

 

   June 30, 2015   March 31, 2016   March 31, 2016 
   RMB   RMB   U.S. Dollars 
VAT payable  ¥23,885   ¥804,814   $124,790 
Enterprise income tax payable   1,127,131    -    - 
Other taxes payable   2,200    4    1 
Total taxes payable  ¥1,153,216   ¥804,818   $124,791 

 

NOTE 11. SHORT-TERM BANK LOANS

 

Short-term bank loans consisted of the following:

 

   June 30, 2015   March 31, 2016   March 31, 2016 
   RMB   RMB   U.S. Dollars 
Industrial and Commercial Bank, floating interest rate at 6.12 %, due on June 19, 2016  ¥7,000,000   ¥6,500,000    1,007,854 
Industrial and Commercial Bank, floating interest rate at 5.37 %, due on July 19, 2016   -    500,000    77,527 
Total short-term bank loans  ¥7,000,000   ¥7,000,000   $1,085,381 

 

Interest expense for the short-term bank loans was ¥162,000 and ¥108,239 ($16,783) for the three months ended March 31, 2015 and 2016, respectively.

 

Interest expense for the short-term bank loans was ¥400,178 and ¥322,888 ($50,065) for the nine months ended March 31, 2015 and 2016, respectively.

 F-13

 

 

NOTE 12. SHORT-TERM BORROWINGS DUE TO RELATED PARTIES

 

   June 30, 2015   March 31, 2016   March 31, 2016 
Short-term borrowings due to related parties:  RMB   RMB   U.S. Dollars 
Short-term borrowing from a Founder, 7.2% annual interest, due on October 20, 2015  ¥6,013,200   ¥-   $- 
Short-term borrowing from a Founder, 6.06% annual interest, due on October 2, 2015   3,403,431    -    - 
Short-term borrowing from a Founder, 5.13% annual interest, due on October 12, 2015   1,600,274    -    - 
Short-term borrowing from a Founder's family member, no interest, due on various dates   5,700,000    -    - 
Short-term borrowing from a Founder, 5.75% annual interest, due on September 25, 2016   -    1,808,913    280,480 
Short-term borrowings from Xiamen Huasheng Haitian Computer Network Co. Ltd., no interest, due on November 14, 2015   200,000    -    - 
Short-term borrowing from a Founder, 5.75% annual interest, due on October 10, 2016   -    2,408,434    373,438 
Short-term borrowing from a Founder, 5.43% annual interest, due on November 4, 2016   -    1,807,228    280,219 
Short-term borrowing from a Founder, 5.22% annual interest, due on March 10, 2017  ¥-   ¥2,533,196    392,783 
Total short-term borrowings due to related parties  ¥16,916,905   ¥8,557,771   $1,326,920 

 

Interest expense for short-term borrowings due to related parties was ¥177,109 and ¥92,382 ($14,324) for the three months ended March 31, 2015 and 2016, respectively.

 

Interest expense for short-term borrowings due to related parties was ¥407,887 and ¥349,901 ($54,254) for the nine months ended March 31, 2015 and 2016, respectively.

 

NOTE 13. SHAREHOLDERS’ EQUITY

 

Stock offering – During the nine months ended March 31, 2016, the Company offered 15,874 ordinary shares under the same purchase agreement from June 2015. The net cash proceeds received from the stock offering were ¥168,319 ($26,098).

 

Appropriated Retained Earnings - According to the Memorandum and Articles of Association, the Company is required to transfer a certain portion of its net profit, as determined under PRC accounting regulations, from current net income to the statutory reserve fund. In accordance with the PRC Company Law, companies are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory reserves until such reserves reach 50% of the registered capital or paid-in capital of the companies. As of June 30, 2015 and March 31, 2016, the balance of total statutory reserves was ¥4,148,929 and ¥4,148,929 ($643,310), respectively.

 

NOTE 14. STOCK-BASED COMPENSATION

 

Stock-Based Awards Plan

 

The following is a summary of the status of options outstanding and exercisable at March 31, 2016:

 

Outstanding Options   Exercisable Options 
Average Exercise Price   Number   Average Remaining Contractual life (Years)   Average Exercise Price   Number   Average Remaining Contractual life (Years) 
$6.00    193,000    3.33   $6.00    193,000    3.33 
$2.96    222,600    5.99   $2.96    74,200    5.99 
$1.65    400,000    8.84    -    -    - 
      815,600                     

 

 F-14

 

 

Restricted Shares

 

As of March 31, 2016, the Company has granted restricted shares of common stock, which are still vesting, to senior management and consultants. During the nine months ended March 31, 2016, the following grants were made:

 

On October 18, 2015, the Company agreed to issue a total of 800,000 restricted shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted shares was $704,000 based on the closing stock price $0.88 at October 18, 2015.

 

On November 16, 2015, the Company agreed to issue a total of 100,000 restricted shares to two investor relations firms in exchange for services. The fair value of the restricted shares was $108,400 based on the closing stock price $1.08 at November 16, 2015.

 

On November 19, 2015, the Company issued 260,185 restricted shares to Bei Jing Tian Hong Tong Xin Technology Co. Ltd. (“BJTH”) for certain mold and software platform development services. The fair value of the restricted shares was $247,176 based on the closing stock price $0.95 at November 19, 2015.

 

The Share-based compensation expense recorded for stock options granted were ¥797,016 and ¥1,564,094 ($242,519) for the nine months ended March 31, 2015 and 2016, respectively. The Share-based compensation expense recorded for stock options granted were ¥387,598 and ¥534,277 ($82,842) for the three months ended March 31, 2015 and 2016, respectively. The total unrecognized share-based compensation expense for stock options as of March 31, 2016 was approximately ¥3.3 million ($0.51 million), which is expected to be recognized over a weighted average period of approximately 1.66 years.

 

The Share-based compensation expense recorded for restricted shares granted were ¥1,226,745 and ¥2,569,948 ($398,482) for the nine months ended March 31, 2015 and 2016, respectively. The Share-based compensation expense recorded for restricted shares granted were ¥521,133 and ¥1,026,192 ($159,116) for the three months ended March 31, 2015 and 2016, respectively. The total unrecognized share-based compensation expense for restricted shares granted as of March 31, 2016 was approximately ¥6.9 million ($1.1 million), which is expected to be recognized over a weighted average period of approximately 2.07 years.

 

Following is a summary of the restricted stock grants:

 

Restricted stock grants  Shares 
Non-vested as of June 30, 2015   453,575 
Granted   1,160,185 
Non-vested adjustment   - 
Cancelled   - 
Vested   76,787 
Non-vested as of March 31, 2016   1,536,973 

 

 F-15

 

 

NOTE 15. INCOME TAX

 

The Company is not subject to any income taxes in the United States or the Cayman Islands and had minimal operations in jurisdictions other than the PRC. BHD and Nanjing Recon are subject to PRC’s income taxes as PRC domestic companies. The Company follows Implementing Rules for the Enterprise Income Tax Law (“Implementing Rules”), which took effect on January 1, 2008 and unified the income tax rate for domestic-invested and foreign-invested enterprises at 25%.

 

Nanjing Recon was approved as a government-certified high –technology company on December 11, 2013 and is subject to a reduced income tax rate of 15% through December 11, 2016. Nanjing Recon reapplied for high-technology enterprise approval and has passed all relevant reviews. Thus, for the calendar years 2014 and 2015, Nanjing Recon is subject to an income tax rate of 15%.

 

As approved by the domestic tax authority in the PRC, BHD was recognized as a government-certified high technology company on November 25, 2009 and is subject to a reduced income tax rate of 15% through November 2015. BHD reapplied for high-technology enterprise approval and successfully got the approval on November 25, 2015. Thus, the valid date of BHD’s high-technology enterprise certificate is extended to November 25, 2018.

 

Deferred tax asset is comprised of the following:

 

  

June 30,

2015

   March 31, 2016   March 31, 2016 
   RMB   RMB   U.S.Dollars 
Allowance for doubtful receivables  ¥1,072,279   ¥-   $- 
Net operating loss carry forward   669,819    -    - 
Total deferred income tax assets  ¥1,742,098   ¥-   $- 

  

Deferred tax liability is comprised of the following:

 

   June 30, 2015   March 31, 2016   March 31, 2016 
   RMB   RMB   U.S. Dollars 
Income tax cost due to unpayable accounts  ¥180,186   ¥180,186   $27,939 
Total deferred income tax liability  ¥180,186   ¥180,186   $27,939 

 

 F-16

 

 

The Company’s tax provision is comprised of the following:

 

   For the three months ended March 31, 
   2015   2016   2016 
   RMB   RMB   U.S. Dollars 
Current income tax benefit  ¥(158,423)  ¥-   $- 
Adjust over accrued income taxes   -    (141,339)   (21,915)
Deferred income taxes provision (benefit)   (22,504)   1,554,284    

240,998

 
Provision (benefit) for income tax  ¥(180,927)  ¥1,412,945   $

219,083

 

 

   For the nine months ended March 31, 
   2015   2016   2016 
   RMB   RMB   U.S. Dollars 
Current income tax provision  ¥518,486   ¥-   $- 
Adjust over accrued tax of prior years   -    (1,197,326)   (185,651)
Deferred income taxes provision (benefit)   (50,481)   

1,742,098

    

270,120

 
Provision (benefit) for income tax  ¥468,005   ¥

544,772

  $

84,469

 

NOTE 16. NON-CONTROLLING INTEREST

 

Non-controlling interest consisted of the following:

 

   As of June 30, 2015 
       Nanjing         
   BHD   Recon   Total   Total 
   RMB   RMB   RMB   U.S. Dollars 
Paid-in capital  ¥1,651,000   ¥200,000   ¥1,851,000   $304,001 
Unappropriated retained earnings   3,152,687    3,250,513    6,403,200    1,051,636 
Accumulated other comprehensive loss   (18,850)   (11,853)   (30,703)   (5,043)
Total noncom-trolling interest  ¥4,784,837   ¥3,438,660   ¥8,223,497   $1,350,594 

 

                 
   As of March 31, 2016 
       Nanjing         
   BHD   Recon   Total   Total 
    RMB    RMB    RMB    U.S. Dollars 
Paid-in capital  ¥1,651,000   ¥200,000   ¥1,851,000   $287,006 
Unappropriated retained earnings   3,152,687    3,250,513    6,403,200    992,844 
Accumulated other comprehensive loss   (15,382)   (8,277)   (23,659)   (3,669)
Total non-controlling interest  ¥4,788,305   ¥3,442,236   ¥8,230,541   $1,276,181 

 

 F-17

 

 

NOTE 17. CONCENTRATIONS

 

For the three months ended March 31, 2015 and 2016, the one largest customer, China National Petroleum Corporation (“CNPC”), represented approximately 29.65% and 71.17%  of the Company’s revenue, respectively.

 

For the nine months ended March 31, 2015 and 2016, the two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation Limited (“SINOPEC”), represented approximately 44.89%, and 7.70%, and 74.21% and 10.19% of the Company’s revenue, respectively.

 

For the three months ended March 31, 2015, one major supplier accounted for 56% of the company’s total purchases. For the three months ended March 31, 2016, two major suppliers accounted for 36% of the Company’s total purchases.

 

For the nine months ended March 31, 2015, one major supplier accounted for 21% of the Company’s total purchases. For the nine months ended March 31, 2016, two major suppliers accounted for 50% of the Company’s total purchases.


NOTE 18. COMMITMENTS AND CONTINGENCY

 

(a)Office Leases

 

The Company leases three offices in Beijing (two for BHD; one for Recon-JN) and one office in Nanjing for Nanjing Recon. Future payments under such leases are as follows as of March 31, 2016:

 

      Twelve months ending March 31, 
      Office lease payment 
      RMB   U.S. Dollars
   2017   ¥2,107,000   $326,699
   Total   ¥2,107,000   $326,699

 

(b) Contingency

 

The Labor Contract Law of the PRC requires employers to assure the liability of severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of the service provided by the employees. As of March 31, 2016, the Company estimated its severance payments of approximately ¥1.6 million ($0.25 million) which has not been reflected in its unaudited condensed consolidated financial statements, because management cannot predict what the actual payment, if any will be in the future.

 

NOTE 19. RELATED PARTY TRANSACTIONS AND BALANCES

 

There was no purchases from related party for the three month periods ended March 31, 2015 and 2016.

 

   For the nine months ended March 31, 
   2015   2016   2016 
   RMB   RMB   U.S. Dollars 
Huanghua Xiang Tong Manufacture  ¥-   ¥338,862   $52,542 
Xiamen Huangsheng Hitek Computer Network Co.Ltd.   797,585    588,894    91,311 
   Purchase from related parties  ¥797,585   ¥927,756   $143,853 

 

Account payable due to related parties - The Company purchased automation products and heating furnaces from Xiamen Huangsheng Hitek Computer Network Co.Ltd (Huangsheng Hitek) and Huanghua Xiang Tong, the ending balance of accounts payable due to Huangsheng Hitek as of March 31, 2016 and June 30, 2015 were both nil. On March 18, 2016, the Company terminated its equity investment in Huanghua Xiang Tong and therefore has no  related-party relationship with this entity after March 18, 2016.  

 

 F-18

 

 

Leases from related parties - The Company has various agreements for the lease of office space owned by the Founders and their family members. The terms of the agreement state that the Company will continue to lease the property at a monthly rent of ¥140 thousand with annual rental expense at ¥1.68 million ($0.26 million). The one-year lease agreements between Nanjing Recon and Mr. Yin and his family member started from April 1, 2016. The one-year lease agreements between BHD and Mr. Chen Guangqiang and his family member started from January 1, 2016 and the annual lease between the Company and Mr. Chen Guangqiang’s family member started from July 1, 2015.

 

Short-term borrowings from related parties - The Company borrowed ¥16,916,905 and ¥8,557,771 ($1,326,920) from the Founders and their family members as of June 30, 2015 and March 31, 2016, respectively. For the specific terms and interest rates of the borrowings, see Note 12.

 

Expenses paid by the owner on behalf of Recon -One owner of Nanjing Recon, Mr. Yin and the major owner of BHD, Mr. Chen paid certain operating expenses for the Company. As of June 30, 2015 and March 31, 2016, ¥1,558,738 and ¥2,764,390 ($428,631) was due to them, respectively.

 

NOTE 20. Variable Interest Entities

 

The Company reports its VIEs’ portion of unaudited condensed consolidated net income and stockholders’ equity as non-controlling interests in the unaudited condensed consolidated financial statements.

 

Summary information regarding consolidated VIEs is as follows:

 

   June 30, 2015  

March 31,

2016

  

March 31,

2016

 
   RMB   RMB   U.S. Dollars 
ASSETS               
Current Assets               
Cash  ¥7,096,901   ¥1,070,064   $165,918 
Notes receivable   4,205,530    1,498,710    232,382 
Trade accounts receivable, net   56,956,197    50,248,411    7,791,236 
Purchase advances   19,016,573    10,425,075    1,616,454 
Other assets   28,792,279    30,093,454    4,666,122 
Total current assets  ¥116,067,480   ¥93,335,714   $14,472,112 
                
Non-current assets   7,088,383    2,899,206    449,535 
Total Assets  ¥123,155,863   ¥96,234,920   $14,921,647 
                
LIABILITIES               
Trade accounts payable  ¥17,155,793   ¥10,174,308   $1,577,571 
Taxes payable   1,153,216    804,819    124,791 
Other liabilities   31,386,734    21,277,049    3,299,100 
Total current liabilities   49,695,743    32,256,176    5,001,462 
Total Liabilities  ¥49,695,743   ¥32,256,176   $5,001,462 

  

The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive income for the three months ended March 31, 2016 includes revenues of ¥4,539,099 ($703,807), operating expenses of ¥4,780,316 ($741,209), and net loss of ¥4,478,185 ($694,362).

 

The financial performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive income for the nine months ended March 31, 2016 includes revenues of ¥36,975,489 ($5,733,212), operating expenses of ¥16,546,759 ($2,565,648), and net loss of ¥9,578,364 ($1,485,167).

 

 F-19