The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
NOTE
1.
ORGANIZATION AND NATURE OF OPERATIONS
Organization
–
Recon
Technology, Ltd (the “Company”) was incorporated under the laws of the Cayman Islands on August 21, 2007 by Messrs.
Yin Shenping, Chen Guangqiang and Li Hongqi (the “Founders”) as a limited liability company. The Company provides specialized
oilfield equipment, automation systems, tools, chemicals and field services to petroleum companies mainly in the People’s
Republic of China (the “PRC”).
The Company, along with its wholly-owned subsidiaries, Recon
Technology Co., Limited (“Recon HK”), Jining Recon Technology Ltd. (“Recon JN”), Recon Investment Ltd.
(“Recon IN”) and Recon Hengda Technology (Beijing) Co., Ltd. (“Recon BJ”), conducts its business through
the following PRC legal entities (“Domestic Companies”) that are consolidated as variable interest entities (“VIEs”)
and operate in the Chinese oilfield equipment & service industry:
|
1.
|
Beijing BHD Petroleum Technology Co., Ltd. (“BHD”),
|
|
2.
|
Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”).
|
The Company has signed Exclusive Technical Consulting Service
Agreements with each of the Domestic Companies, which are our VIEs and Equity Interest Pledge Agreements and Exclusive Equity Interest
Purchase Agreements with their shareholders. Through these contractual arrangements, the Company has the ability to substantially
influence each of the Domestic Companies’ daily operations and financial affairs, appoint their senior executives and approve
all matters requiring shareholder approval. As a result of these contractual arrangements, which enable the Company to control
the Domestic Companies, the Company is considered as the primary beneficiary of each Domestic Company. Thus, the Company is able
to absorb 90% of net interest or 100% of net loss of those VIEs.
On December 17, 2015, Huang Hua BHD Petroleum Equipment Manufacturing
Co. LTD, a fully owned subsidiary established by BHD was organized under the laws of the PRC.
Nature
of Operations
– The Company engaged in (1) providing
equipment, tools and other hardware related to oilfield production and management, including simple installations in connection
with some projects; (2) service to improve production and efficiency of exploited oil wells, and (3) developing and selling its
own specialized industrial automation control and information solutions. The products and services provided by the Company include:
NOTE 2. LIQUIDITY
As reflected in the Company’s unaudited condensed consolidated
financial statements, the Company had recurring net losses for the three months ended September 30, 2015 and 2016. In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand and its ability
to generate sufficient revenue sources in the future to support its operating and capital expenditure commitments. The Company
plans to fund its continuing operations through identifying new prospective joint venture and strategic alliance opportunities
for new revenue sources, financial supports by major shareholders and reducing costs to improve profitability and replenish working
capital. Management believes that the foregoing measures collectively will provide sufficient liquidity for the Company to meet
its future liquidity and capital obligations.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation -
The accompanying unaudited condensed
consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America for interim financial information pursuant to the rules of the SEC and have been consistently applied. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have
been included. These financial statements should be read in conjunction with the audited financial statements and notes thereto
included in the Company’s Form 10-K for the fiscal year ended June 30, 2016. The results of operations for the interim periods
presented may not be indicative of the operating results to be expected for the Company’s fiscal year ending June 30, 2017.
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
Principles
of Consolidation -
The unaudited condensed consolidated
financial statements include the accounts of the Company, all the subsidiaries and VIEs of the Company. All transactions and balances
between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.
Variable
Interest Entities
-
A
VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated
financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated
by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact
the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that
could potentially be significant to the VIE. The Company performs ongoing assessments to determine whether an entity should be
considered a VIE and whether an entity previously identified as a VIE continues to be a VIE and whether the Company continues to
be the primary beneficiary.
Assets recognized as a result of consolidating VIEs do not represent
additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized
as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they
represent claims against the specific assets of the consolidated VIEs.
Currency
Translation
-
The
Company’s functional currency is the Chinese Yuan (“RMB”) and the accompanying unaudited condensed consolidated
financial statements have been expressed in Chinese Yuan. The unaudited condensed consolidated financial statements as of and for
the three months ended September 30, 2016 have been translated into United States dollars (“U.S. dollars”) solely for
the convenience of the readers. The translation has been made at the rate of ¥6.6702 = US$1.00, the approximate exchange rate
prevailing on September 30, 2016. These translated U.S. dollar amounts should not be construed as representing Chinese Yuan amounts
or that the Chinese Yuan amounts have been or could be converted into U.S. dollars.
Estimates
and assumptions
-
The
preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires that management
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company’s
unaudited condensed consolidated financial statements include revenue recognition, allowance for doubtful accounts, allowance for
inventory, the useful lives of property and equipment and the fair value of share- based payments. Since the use of estimates is
an integral component of the financial reporting process, actual results could differ from those estimates.
Fair
Values of Financial Instruments
-
The
US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value,
establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value.
The three levels of inputs are defined
as follows:
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to
the valuation methodology are unobservable.
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
The carrying amounts reported in the unaudited condensed consolidated
balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable, accrued liabilities,
advances from customers, short-term bank loan and short-term borrowings approximate fair value because of the immediate or short-term
maturity of these financial instruments. It was impracticable to estimate the fair value of long-term other receivables, because
this is due from the Company’s former VIE and there are no comparable markets for receivables with similar terms.
Trade
Accounts and Other Receivables
-
Accounts
receivable are carried at original invoiced amount less a provision for any potential uncollectible amounts. Accounts are considered
past due when the related receivables are more than a year old. Provision is made against trade accounts and other receivables
to the extent they are considered to be doubtful. Accounts are written off after extensive efforts at collection. Other receivables
arise from transactions with non-trade customers.
Purchase
Advances
-
Purchase
advances are the amounts prepaid to suppliers for purchases of inventory and are recognized as inventory when the final amount
is paid to the suppliers and the inventory is delivered.
Inventories
-
Inventories
are stated at the lower of cost or market value, on a first-in-first-out basis. The methods of determining inventory costs are
used consistently from year to year. Allowance for inventory obsolescence is provided when the market value of certain inventory
items is lower than the cost.
Property
and Equipment
-
Property
and equipment are stated at cost. Depreciation on motor vehicles and office equipment is computed using the straight-line method
over the estimated useful lives of the assets, which range from two to ten years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the assets.
Items
|
Useful life
|
Motor vehicles
|
5-10 years
|
Office equipment
|
2-5 years
|
Leasehold improvement
|
5 years
|
Production equipment
|
10 years
|
Long-Lived
Assets
-
The
Company applies the ASC Topic 360 “Property, plant and equipment.” ASC Topic 360 requires that long-lived assets, such
as property and equipment be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted
future cash flows expected to be generated by the asset. There were no impairments at June 30, 2016 and September 30, 2016.
Revenue
Recognition
-
The
Company recognizes revenue when the following four criteria are met: (1) persuasive evidence of an arrangement, (2) delivery has
occurred or services have been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.
Delivery does not occur until products have been shipped or services have been provided to the customers and the customers have
signed a completion and acceptance report, risk of loss has transferred to the customers, customers’ acceptance provisions
have lapsed, or the Company has objective evidence that the criteria specified in customers’ acceptance provisions have been
satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been
resolved.
Hardware and software:
Revenue from hardware and software sales is generally recognized
when the product with the embedded software system is shipped to the customer and when there are no unfulfilled company obligations
that affect the customer’s final acceptance of the arrangement. Revenue from software is recognized according to project
contracts. Usually this is short term. Revenue is not recognized until completion of the contracts and receipt of acceptance.
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
Service:
The Company provides services to improve software function and
system operation on separated fixed-price contracts. Revenue is recognized on the completed contract method when acceptance is
determined by a completion report signed by the customer.
Share-Based
Compensation -
The Company accounts for share-based
compensation in accordance with ASC Topic 718, Share-Based Payment. Under the fair value recognition provisions of this topic,
share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense
with graded vesting on a straight–line basis over the requisite service period for the entire award. The Company has elected
to recognize compensation expenses using the Binomial Lattice valuation model estimated at the grant date based on the award’s
fair value.
Income
Taxes
- Provisions for income taxes are based on taxes
payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases
of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any income
taxes in the United States or the Cayman Islands.
The Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would
be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Loss
per Share
-
Basic
Earnings/Loss Per Share
(“EPS”)
is
computed by dividing net loss by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing
net loss by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding.
Potentially dilutive ordinary shares consist of ordinary shares
issuable upon the conversion of ordinary stock options, restricted shares and warrants (using the treasury stock method). The effect
from options, restricted shares and warrants would have been anti-dilutive due to the fact that we incurred a net loss during the
three months ended September 30, 2015 and 2016.
Recently Issued Accounting Pronouncements
In October 2016, the FASB has issued
Accounting
Standards Update
(ASU) No. 2016-17, Consolidation (Topic 810): Interest Held through Related Parties That Are under Common
Control, to provide guidance on the evaluation of whether a reporting entity is the primary beneficiary of a VIE by amending how
a reporting entity, that is a single decision maker of a VIE, treats indirect interests in that entity held through related parties
that are under common control. The amendments are effective for public business entities for fiscal years beginning after December
15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal
years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption
is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this new standard on its
unaudited condensed consolidated financial statements and related disclosures.
NOTE 4. TRADE ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
Third Party
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Trade accounts receivable
|
|
¥
|
42,665,499
|
|
|
¥
|
41,629,636
|
|
|
$
|
6,241,119
|
|
Allowance for doubtful accounts
|
|
|
(4,567,873
|
)
|
|
|
(4,361,928
|
)
|
|
|
(653,941
|
)
|
Total - third-party, net
|
|
¥
|
38,097,626
|
|
|
¥
|
37,267,708
|
|
|
$
|
5,587,178
|
|
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
Third Party – long-term
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Beijing Yabei Nuoda Science and Technology Co. Ltd. *
|
|
¥
|
2,467,036
|
|
|
¥
|
2,467,036
|
|
|
$
|
369,858
|
|
Allowance for doubtful accounts
|
|
|
(246,704
|
)
|
|
|
(246,704
|
)
|
|
|
(36,986
|
)
|
Total - long-term trade accounts receivable, net
|
|
¥
|
2,220,332
|
|
|
¥
|
2,220,332
|
|
|
$
|
332,872
|
|
*The receivable from Yabei Nuoda was recognized primarily from
the sale of automation system and services based on written contracts. Based on the repayment agreement signed on September 2,
2015, the outstanding balance was to be collected in three installments during the period from September, 2015 to December, 2017,
with each installment of ¥2,467,036 ($369,858). During the year ended June 30, 2016, the Company received the first payment
on time as scheduled.
Provision for accounts receivables due from third party was
¥32,038 for the three months ended September 30, 2015 and recovery of accounts receivables due from third party was ¥205,944
($30,875) for the three months ended September 30, 2016, respectively.
During the three months ended September 30, 2016, no accounts receivable write-off against allowance for doubtful accounts, the
recovery was due to the collections of accounts receivable.
NOTE 5. OTHER RECEIVABLES, NET
Other receivables consisted of the following:
Third Party
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
Current Portion
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Due from ENI (A)
|
|
¥
|
2,729,033
|
|
|
¥
|
2,455,924
|
|
|
$
|
368,192
|
|
Loans to third parties (B)
|
|
|
14,168,344
|
|
|
|
12,108,344
|
|
|
|
1,815,284
|
|
Business advance to staff (C)
|
|
|
4,952,114
|
|
|
|
5,527,172
|
|
|
|
828,634
|
|
Deposits for projects
|
|
|
893,669
|
|
|
|
865,892
|
|
|
|
129,815
|
|
Others
|
|
|
534,759
|
|
|
|
440,085
|
|
|
|
65,978
|
|
Allowance for doubtful accounts
|
|
|
(1,277,807
|
)
|
|
|
(1,295,455
|
)
|
|
|
(194,215
|
)
|
Total
|
|
¥
|
22,000,112
|
|
|
¥
|
20,101,962
|
|
|
$
|
3,013,688
|
|
Provision for other receivables was ¥19,000 and ¥17,648
($2,646) for the three months ended September 30, 2015 and 2016, respectively.
|
(A)
|
The remaining part of this loan will be repaid over four years with
quarterly installments of ¥699,147, which is due by June 30, 2017. The Company has continued to receive the payments under
the agreement.
|
|
(B)
|
Loans to third-parties are mainly used for short-term funding to
support the Company’s external business partners. These loans are due on demand bearing no interest.
|
|
(C)
|
Business advances to staffs represent advances for
business travel and sundry expenses related to oilfield or on-site installation and inspection of products through customer approval
and acceptance.
|
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
NOTE 6. PURCHASE ADVANCES
The Company purchased products and services from a third party
and a related party during the normal course of business. Purchase advances consisted of the following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
Third Party
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Prepayment for inventory purchase
|
|
¥
|
17,914,552
|
|
|
¥
|
20,787,693
|
|
|
$
|
3,116,493
|
|
Allowance for doubtful accounts
|
|
|
(16,591,247
|
)
|
|
|
(16,787,569
|
)
|
|
|
(2,516,794
|
)
|
Total
|
|
¥
|
1,323,305
|
|
|
¥
|
4,000,124
|
|
|
$
|
599,699
|
|
Provision for purchase advances were ¥2,058,888 and ¥196,322
($29,432) for the three months ended September 30, 2015 and 2016, respectively. The Company recorded allowance for these down payments
and will continue to try to collect or get inventories delivered. These payments were advanced for certain customized equipment
of the planned projects. As those projects were delayed or canceled or there is rare chance to be profitable, the Company decided
to suspend those projects and recorded allowances related to advanced payments for those projects as the Company may not be able
to receive those funds back. Management is still making efforts to collect partially or negotiate with venders for some other alternative
solutions to minimize the Company’s loss.
NOTE 7. INVENTORIES
Inventories consisted of the following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Small component parts
|
|
¥
|
55,726
|
|
|
¥
|
55,726
|
|
|
$
|
8,354
|
|
Purchased goods and raw materials
|
|
|
61,361
|
|
|
|
51,617
|
|
|
|
7,738
|
|
Work in process and goods on site
|
|
|
3,539,525
|
|
|
|
3,274,359
|
|
|
|
490,892
|
|
Finished goods
|
|
|
8,054,637
|
|
|
|
8,617,846
|
|
|
|
1,291,990
|
|
Allowance for slow moving inventory
|
|
|
(5,398,179
|
)
|
|
|
(5,660,314
|
)
|
|
|
(848,595
|
)
|
Total inventories, net
|
|
¥
|
6,313,070
|
|
|
¥
|
6,339,234
|
|
|
$
|
950,379
|
|
Recovery of slow moving inventory was ¥123,332 for the three
months ended September 30, 2015 and provision for slow moving inventory was ¥262,135 ($39,299) for the three months ended September
30, 2016, respectively.
NOTE 8. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Motor vehicles
|
|
¥
|
3,871,567
|
|
|
¥
|
3,702,767
|
|
|
$
|
555,119
|
|
Office equipment and fixtures
|
|
|
828,285
|
|
|
|
857,906
|
|
|
|
128,617
|
|
Production equipment
|
|
|
916,025
|
|
|
|
916,025
|
|
|
|
137,331
|
|
Total property and equipment
|
|
|
5,615,877
|
|
|
|
5,476,698
|
|
|
|
821,067
|
|
Less: Accumulated depreciation
|
|
|
(2,708,115
|
)
|
|
|
(2,753,335
|
)
|
|
|
(412,780
|
)
|
Property and equipment, net
|
|
¥
|
2,907,762
|
|
|
¥
|
2,723,363
|
|
|
$
|
408,287
|
|
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
Depreciation expense was ¥259,768 and ¥205,580 ($30,821)
for the three months ended September 30, 2015 and 2016, respectively.
NOTE 9. OTHER PAYABLES
Other payables consisted of the following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
Third Party
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Service
|
|
¥
|
1,659,505
|
|
|
¥
|
1,630,906
|
|
|
$
|
244,506
|
|
Distributors and employees
|
|
|
245,070
|
|
|
|
60,999
|
|
|
|
9,145
|
|
Funds collected on behalf of others
|
|
|
895,022
|
|
|
|
895,022
|
|
|
|
134,182
|
|
Others
|
|
|
172,595
|
|
|
|
200,516
|
|
|
|
30,061
|
|
Total
|
|
¥
|
2,972,192
|
|
|
¥
|
2,787,443
|
|
|
$
|
417,894
|
|
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
Related Party
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Expenses paid by the major shareholders
|
|
¥
|
3,144,263
|
|
|
¥
|
2,889,437
|
|
|
$
|
433,185
|
|
Due to family member of one owner
|
|
|
285,000
|
|
|
|
570,000
|
|
|
|
85,454
|
|
Due to management staff for costs incurred on behalf of Recon
|
|
|
250,981
|
|
|
|
253,261
|
|
|
|
37,969
|
|
Total
|
|
¥
|
3,680,244
|
|
|
¥
|
3,712,698
|
|
|
$
|
556,608
|
|
NOTE 10. TAXES PAYABLE
Taxes payable
consisted of the following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
VAT payable
|
|
¥
|
739,260
|
|
|
¥
|
676,378
|
|
|
$
|
101,403
|
|
Other taxes payable
|
|
|
16,620
|
|
|
|
6,770
|
|
|
|
1,015
|
|
Total taxes payable
|
|
¥
|
755,880
|
|
|
¥
|
683,148
|
|
|
$
|
102,418
|
|
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
NOTE 11. SHORT-TERM BORROWINGS
Short-term borrowings from a third party were fully repaid in
2016 without interest, due on August 15, 2016.
Short-term borrowings from related parties consisted of the
following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
Short-term borrowings due to related parties:
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Short-term borrowing from a Founder, 5.75% annual interest, due on September 25, 2016
|
|
|
1,807,207
|
|
|
|
-
|
|
|
|
-
|
|
Short-term borrowing from a Founder, 5.75% annual interest, due on October 10, 2016 *
|
|
|
2,409,610
|
|
|
|
719,854
|
|
|
|
107,921
|
|
Short-term borrowing from a Founder, 5.43% annual interest, due on November 4, 2016 **
|
|
|
1,805,180
|
|
|
|
540,245
|
|
|
|
80,994
|
|
Short-term borrowing from a Founder's family member, no interest, due on December 9, 2016
|
|
|
-
|
|
|
|
1,018,318
|
|
|
|
152,666
|
|
Short-term borrowing from a Founder's family member, no interest, due on December 16, 2016
|
|
|
1,500,000
|
|
|
|
1,010,000
|
|
|
|
151,419
|
|
Short-term borrowing from a Founder's family member, no interest, due on December 28, 2016
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
59,968
|
|
Short-term borrowing from a Founder's family member, no interest, due on December 31, 2016
|
|
|
-
|
|
|
|
500,000
|
|
|
|
74,960
|
|
Short-term borrowing from a Founder, 5.22% annual interest, due on March 10, 2017
|
|
|
2,529,795
|
|
|
|
2,530,522
|
|
|
|
379,376
|
|
Short-term borrowing from a Founder, 5.22% annual interest, due on May 6, 2017
|
|
|
2,490,056
|
|
|
|
2,474,656
|
|
|
|
371,001
|
|
Short-term borrowing from a Founder, 5.65% annual interest, due on August 24, 2017
|
|
|
-
|
|
|
|
1,260,132
|
|
|
|
188,919
|
|
Short-term borrowing from a Founder, 5.65% annual interest, due on September 18, 2017
|
|
|
-
|
|
|
|
801,361
|
|
|
|
120,140
|
|
Short-term borrowing from a Founder, 5.65% annual interest, due on September 30, 2017
|
|
|
-
|
|
|
|
1,260,165
|
|
|
|
188,924
|
|
Total short-term borrowings due to related parties
|
|
¥
|
12,941,848
|
|
|
¥
|
12,515,253
|
|
|
$
|
1,876,288
|
|
|
*
|
As of October 10, 2016, ¥719,854 ($107,921)
was fully paid back.
|
|
**
|
As of November 4, 2016, the Company repaid ¥540,245
($80,994).
|
Interest expense for short-term borrowings due to related parties
was ¥171,448 and ¥132,490 ($19,863) for the three months ended September 30, 2015 and 2016, respectively.
NOTE 12. SHAREHOLDERS’ EQUITY
Stock offering
In June 2015, the Company entered into a securities purchase
agreement with certain institutional investors for the sale of 297,197 ordinary shares in a registered direct offering (4,000 shares
at an average of $1.64 on June 9, 2015; 288,105 shares at an average of $2.12 on June 10, 2015; 5,092 shares at an average of $2.00
on June 11, 2015). The net cash proceeds received from the stock offering, after deducting ¥1,294,922 ($212,673) underwriter
commission and other associated fees, were ¥2,392,027 (approximately $0.6 million).
During
the year ended June 30, 2016, the Company offered 15,874 ordinary shares under the same purchase agreement from June 2015.
The net cash proceeds received from the stock offering were ¥158,268 ($23,820)
. During the three months ended
September 30, 2016, the Company did not offer any ordinary shares under the purchase agreement.
Appropriated Retained Earnings
-
According to the Memorandum and Articles of Association, the Company
is required to transfer a certain portion of its net profit, as determined under PRC accounting regulations, from current net income
to the statutory reserve fund. In accordance with the PRC Company Law, companies are required to transfer 10% of their profit after
tax, as determined in accordance with PRC accounting standards and regulations, to the statutory reserves until such reserves reach
50% of the registered capital or paid-in capital of the companies. As of June 30, 2016 and September 30, 2016, the balance of total
statutory reserves was ¥4,148,929 and ¥4,148,929 ($622,008), respectively
.
NOTE 13. STOCK-BASED COMPENSATION
Stock-Based Awards Plan
2012
Incentive Plan
–
The
Company granted options to purchase 415,000 ordinary shares to its employees and non-employee director on March 26, 2012. The options
have an excise price of $2.96, which was equal to the share price of the Company’s ordinary shares at March 26, 2012, and
will vest over a period of five years, with the first 20% vesting on March 26, 2013. The options expire ten years after the date
of grant, on March 26, 2022. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over
the requisite service period for the entire award. The grant date fair value of the options was ¥10.06 ($1.49) per share.
2015
Incentive Plan
– The Company granted options
to purchase 400,000 ordinary shares to its employees and non-employee director on January 31, 2015. The options have an excise
price of $1.65, which was equal to the share price of the Company’s ordinary shares at January 31, 2015, and will vest equally
over a period of three years, with one third vesting on January 31, 2016. The options expire ten years after the date of grant,
on January 31, 2025.
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over
the requisite service period for the entire award. The grant date fair value of the options was ¥10.13 ($1.65) per share.
The following is a summary of the stock options activity:
Stock Options
|
|
Shares
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2016
|
|
|
815,600
|
|
|
$
|
3.04
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of September 30, 2016
|
|
|
815,600
|
|
|
$
|
3.04
|
|
The following is a summary of the status of options outstanding
and exercisable at September 30, 2016:
Outstanding Options
|
|
|
Exercisable Options
|
|
Average Exercise
Price
|
|
|
Number
|
|
|
Average
Remaining
Contractual
life (Years)
|
|
|
Average Exercise
Price
|
|
|
Number
|
|
|
Average
Remaining
Contractual life
(Years)
|
|
$
|
6.00
|
|
|
|
193,000
|
|
|
|
2.83
|
|
|
$
|
6.00
|
|
|
|
193,000
|
|
|
|
2.83
|
|
$
|
2.96
|
|
|
|
222,600
|
|
|
|
5.49
|
|
|
$
|
2.96
|
|
|
|
148,400
|
|
|
|
5.49
|
|
$
|
1.65
|
|
|
|
400,000
|
|
|
|
8.34
|
|
|
$
|
1.65
|
|
|
|
133,333
|
|
|
|
8.34
|
|
|
|
|
|
|
815,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Share-based compensation expense recorded
for stock options granted were ¥509,528 and ¥543,102 ($81,422) for the three months ended September 30, 2015 and 2016,
respectively. The total unrecognized share-based compensation expense for stock options as of September 30, 2016 was approximately
¥2.3 million ($0.35 million), which is expected to be recognized over a weighted average period of approximately 1.21 years.
Restricted Shares to senior manager
As of September 30, 2016, the Company has
granted restricted shares of common stock to senior management as follows:
On December 13, 2013, the Company granted
95,181 restricted shares to Mr. Yin Shenping and 135,181 restricted shares to Mr. Chen Guangqiang at an aggregate value of ¥4,207,496
($688,782), based on the stock closing price of $2.99 at December 13, 2013. These restricted shares will vest over three years
with one third of the shares vesting every year from the grant date. The first one third was vested on December 13, 2014 and are
now non-restricted.
On January 31, 2015, the Company granted
150,000 restricted shares to Mr. Yin Shenping and 150,000 restricted shares to Mr. Chen Guangqiang at an aggregate value of ¥3,038,558($495,000),
based on the stock closing price of $1.65 at January 31, 2015. These restricted shares will vest over three years with one third
of the shares vesting every year from the grant date.
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
On October 18, 2015, the Company granted
800,000 restricted shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted
shares was $704,000 based on the closing stock price $0.88 at October 18, 2015.
On July 27, 2016, the Company granted 876,000
restricted shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted
shares was $963,600 based on the closing stock price $1.10 at July 27, 2016, and no shares were issued as of September 30, 2016.
The Share-based compensation expense recorded
for restricted shares granted were ¥617,024 and ¥1,423,568 ($213,421) for the three months ended September 30, 2015 and
2016, respectively. The total unrecognized share-based compensation expense for restricted shares granted as of September 30, 2016
was approximately ¥11.0 million ($1.66 million), which is expected to be recognized over a weighted average period of approximately
2.33 years.
Restricted Shares for service
For the three months ended September 30,
2016, the Company has granted restricted shares of common stock to consultants as follows:
On July 27, 2016, the Company
approved the grant of 250,000 restricted shares with a value of $275,000 to designees of an independent consulting firm as
compensation for advisory services. Those restricted shares were officially issued on October 21,
2016.
Following is a summary of the restricted
stock granted:
Restricted stock grants
|
|
Shares
|
|
Non-vested as of June 30, 2016
|
|
|
1,076,787
|
|
Granted
|
|
|
1,126,000
|
|
Cancelled
|
|
|
-
|
|
Vested
|
|
|
-
|
|
Non-vested as of September 30, 2016
|
|
|
2,202,787
|
|
NOTE 14. INCOME TAX
The Company is not subject to any income taxes in the United
States or the Cayman Islands and had minimal operations in jurisdictions other than the PRC. BHD and Nanjing Recon are subject
to PRC’s income taxes as PRC domestic companies. The Company follows Implementing Rules for the Enterprise Income Tax Law
(“Implementing Rules”), which took effect on January 1, 2008 and unified the income tax rate for domestic-invested
and foreign-invested enterprises at 25%.
Nanjing Recon was approved as a government-certified high –technology
company on December 11, 2013 and is subject to a reduced income tax rate of 15% through December 11, 2016. Nanjing Recon reapplied
for high-technology enterprise approval and has passed all relevant reviews.
As approved by the domestic tax authority in the PRC, BHD was
recognized as a government-certified high technology company on November 25, 2009 and is subject to a reduced income tax rate of
15% through November 25, 2018.
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
Loss before provision for income taxes consisted of:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Cayman Island and other areas
|
|
¥
|
(2,393,591
|
)
|
|
¥
|
(3,215,108
|
)
|
|
$
|
(482,009
|
)
|
China
|
|
|
(6,471,472
|
)
|
|
|
(2,265,619
|
)
|
|
|
(339,663
|
)
|
Total
|
|
¥
|
(8,865,063
|
)
|
|
¥
|
(5,480,727
|
)
|
|
$
|
(821,672
|
)
|
Deferred tax asset is comprised of the following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Allowance for doubtful receivables
|
|
¥
|
1,958,120
|
|
|
¥
|
1,958,120
|
|
|
$
|
293,562
|
|
Net operating loss carry forward
|
|
|
1,790,615
|
|
|
|
2,233,564
|
|
|
|
340,750
|
|
Less: Valuation allowance
|
|
|
(3,748,735
|
)
|
|
|
(4,191,684
|
)
|
|
|
(634,312
|
)
|
Total deferred income tax assets
|
|
¥
|
-
|
|
|
¥
|
-
|
|
|
$
|
-
|
|
Deferred tax liability is comprised of the following:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Income tax cost due to unpayable accounts
|
|
¥
|
180,186
|
|
|
¥
|
180,186
|
|
|
$
|
27,014
|
|
Total deferred income tax liability
|
|
¥
|
180,186
|
|
|
¥
|
180,186
|
|
|
$
|
27,014
|
|
The Company’s tax benefit is comprised of the following:
|
|
For the three months ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Tax refund
|
|
¥
|
-
|
|
|
¥
|
(20,143
|
)
|
|
$
|
(3,020
|
)
|
Deferred income taxes benefit
|
|
|
(16,457
|
)
|
|
|
-
|
|
|
|
-
|
|
Benefit for income tax
|
|
¥
|
(16,457
|
)
|
|
¥
|
(20,143
|
)
|
|
$
|
(3,020
|
)
|
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
NOTE 15. NON-CONTROLLING INTEREST
Non-controlling interest consisted of the following:
|
|
As of June 30, 2016
|
|
|
|
|
|
|
Nanjing
|
|
|
|
|
|
|
|
|
|
BHD
|
|
|
Recon
|
|
|
Total
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Paid-in capital
|
|
¥
|
1,651,000
|
|
|
¥
|
200,000
|
|
|
¥
|
1,851,000
|
|
|
$
|
278,583
|
|
Unappropriated retained earnings
|
|
|
3,152,687
|
|
|
|
3,250,513
|
|
|
|
6,403,200
|
|
|
|
963,709
|
|
Accumulated other comprehensive loss
|
|
|
(18,850
|
)
|
|
|
(11,853
|
)
|
|
|
(30,703
|
)
|
|
|
(4,621
|
)
|
Total non-controlling interest
|
|
¥
|
4,784,837
|
|
|
¥
|
3,438,660
|
|
|
¥
|
8,223,497
|
|
|
$
|
1,237,671
|
|
|
|
As of September 30, 2016
|
|
|
|
|
|
|
Nanjing
|
|
|
|
|
|
|
|
|
|
BHD
|
|
|
Recon
|
|
|
Total
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Paid-in capital
|
|
¥
|
1,651,000
|
|
|
¥
|
200,000
|
|
|
¥
|
1,851,000
|
|
|
$
|
277,502
|
|
Unappropriated retained earnings
|
|
|
3,152,687
|
|
|
|
3,250,513
|
|
|
|
6,403,200
|
|
|
|
959,968
|
|
Accumulated other comprehensive loss
|
|
|
(18,850
|
)
|
|
|
(11,853
|
)
|
|
|
(30,703
|
)
|
|
|
(4,603
|
)
|
Total non-controlling interest
|
|
¥
|
4,784,837
|
|
|
¥
|
3,438,660
|
|
|
¥
|
8,223,497
|
|
|
$
|
1,232,867
|
|
NOTE 16. CONCENTRATIONS
For the three months ended September 30, 2015 and 2016, the
two largest customers, China National Petroleum Corporation (“CNPC”) and China Petroleum & Chemical Corporation
Limited (“SINOPEC”), represented approximately 81.21% and 91.77% of the Company’s total revenue, respectively.
For
the three months ended September 30, 2015, four major suppliers accounted for 60% of the company’s total purchases.
For the
three months ended September
30, 2016, two major suppliers
accounted for 58% of the company’s total purchases.
NOTE 17. COMMITMENTS AND CONTINGENCY
The Company leases three offices in Beijing
(two for BHD; one for Recon-JN) and one office in Nanjing for Nanjing Recon. Future payments under such leases are as follows as
of September 30, 2016:
|
|
Twelve months ending September 30,
|
|
|
|
Office lease payment
|
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
2017
|
|
¥
|
1,021,000
|
|
|
$
|
153,068
|
|
2018
|
|
|
360,000
|
|
|
|
53,971
|
|
Total
|
|
¥
|
1,381,000
|
|
|
$
|
207,039
|
|
(b) Contingency
The Labor Contract Law of the PRC requires employers to assure
the liability of severance payments if employees are terminated and have been working for the employers for at least two years
prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of the service provided by
the employees. As of September 30, 2016, the Company estimated its severance payments of approximately ¥1.7 million ($0.25
million) which has not been reflected in its unaudited condensed consolidated financial statements, because management cannot predict
what the actual payment, if any, will be in the future.
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
NOTE 18. RELATED PARTY TRANSACTIONS
AND BALANCES
Purchases from related parties –
purchases
from related parties consisted of the following:
|
|
For the three months ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
Huanghua Heng Da Xiang Tong Manufacture Ltd
|
|
¥
|
300,393
|
|
|
¥
|
-
|
|
|
$
|
-
|
|
Xiamen Huangsheng Hitek Computer Network Co. Ltd.
|
|
|
576,098
|
|
|
|
-
|
|
|
|
-
|
|
Purchase from related parties
|
|
¥
|
876,491
|
|
|
¥
|
-
|
|
|
$
|
-
|
|
Leases
from related parties
- The Company has various agreements
for the lease of office space owned by the Founders and their family members. The terms of the agreement state that the Company
will continue to lease the property at a monthly rent of ¥140,000 with annual rental expense at ¥1.68 million ($0.25 million).
The one-year lease agreements between Nanjing Recon and Mr. Yin and his family member started from April 1, 2016. The one-year
lease agreements between BHD and Mr. Chen Guangqiang and his family member started from January 1, 2016 and the annual lease between
Recon BJ and Mr. Yin started from July 1, 2016.
Short-term
borrowings from related parties
- The Company
borrowed ¥12,941,848 and ¥12,515,253 ($1,876,288) from the Founders and their family members as of June 30, 2016 and September
30, 2016, respectively. For the specific terms and interest rates of the borrowings, see Note 11.
Expenses paid by the owner on behalf of Recon -
One
owner of Nanjing Recon, Mr. Yin and the major owner of BHD, Mr. Chen paid certain operating expenses for the Company. As of June
30, 2016 and September 30, 2016, ¥3,144,263 and ¥2,889,437 ($433,185) was due to them, respectively.
NOTE
19. Variable Interest Entities
The Company reports its VIEs’ portion of unaudited condensed
consolidated net income and stockholders’ equity as non-controlling interests in the unaudited condensed consolidated financial
statements.
RECON TECHNOLOGY, LTD
Notes to the unaudited condensed consolidated financial statements
Summary information regarding consolidated VIEs is as follows:
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
September 30,
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
U.S. Dollars
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
¥
|
619,430
|
|
|
¥
|
416,118
|
|
|
$
|
62,384
|
|
Notes receivable
|
|
|
4,660,177
|
|
|
|
3,105,770
|
|
|
|
465,617
|
|
Trade accounts receivable, net
|
|
|
38,097,626
|
|
|
|
37,267,708
|
|
|
|
5,587,178
|
|
Purchase advances
|
|
|
1,323,305
|
|
|
|
4,000,124
|
|
|
|
599,699
|
|
Other assets
|
|
|
25,584,030
|
|
|
|
23,986,051
|
|
|
|
3,595,991
|
|
Total current assets
|
|
¥
|
70,284,568
|
|
|
¥
|
68,775,771
|
|
|
$
|
10,310,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
5,113,193
|
|
|
|
4,929,878
|
|
|
|
739,088
|
|
Total Assets
|
|
¥
|
75,397,761
|
|
|
¥
|
73,705,649
|
|
|
$
|
11,049,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
¥
|
7,540,430
|
|
|
¥
|
9,267,662
|
|
|
$
|
1,389,409
|
|
Taxes payable
|
|
|
755,881
|
|
|
|
683,148
|
|
|
|
102,418
|
|
Other liabilities
|
|
|
19,025,594
|
|
|
|
17,692,534
|
|
|
|
2,652,466
|
|
Total current liabilities
|
|
|
27,321,905
|
|
|
|
27,643,344
|
|
|
|
4,144,293
|
|
Total Liabilities
|
|
¥
|
27,321,905
|
|
|
¥
|
27,643,344
|
|
|
$
|
4,144,293
|
|
The financial performance of VIEs reported in the unaudited
condensed consolidated statement of operations and comprehensive income for the three months ended September 30, 2016 includes
revenues of ¥7,802,103 ($1,169,692), operating expenses of ¥3,106,810 ($465,773), and net loss of ¥2,013,555 ($301,872).
NOTE
20. SUBSEQUENT EVENTS
On October 11, 2016, the Company borrowed ¥720,000 ($107,942)
from one of its founders bearing an annual interest of 5.66%, due by October 11, 2017 to supplement the Company’s working
capital.
On November 1, 2016, the Company borrowed ¥1,420,000 ($212,887)
from one of its founders bearing an annual interest of 5.66%, due by August 31, 2017 to supplement the Company’s working
capital.
On November 12, 2016, the Board approved to issue 330,000 restricted
shares to Beijing San Li Hai Tian Technology Co. Ltd. (“BJSL”) for certain mold and software platform development
services. The fair value of the restricted shares was $306,900 based on the closing stock price of $0.93 on November 11, 2016.