Recon Technology, Ltd - Quarter Report: 2015 March (Form 10-Q)

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended March 31, 2015

For the transition period from              to             .

Commission File Number 001-34409

RECON TECHNOLOGY, LTD

(Exact name of registrant as specified in its charter) 

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.

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 11, 2015, the Company has issued and outstanding 5,022,436 shares. 

RECON TECHNOLOGY, LTD

FORM 10-Q

INDEX

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 impacted 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:

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.

Part I Financial Information

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

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 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”), our Domestic Companies. As the Company contractually is controlling the Domestic Companies, we are the center of strategic management, financial control and human resources allocation.

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 Variable Interest Entities (“VIEs”) provide the oil and gas industry with equipment, production technologies, automation and services.

Recent Developments

During this nine-month period, affected by decreased oil prices and CAPEX expenditures of our clients, our finished projects were maintained at a lower level compared to the same period of last year. Although management expects the volume of finished projects will recover and thus revenue increase during the balance of fiscal year ending June 30, 2015. During this period, we achieved some major accomplishment on our self-developed down-hole equipment and oversea business development.

On January 29, 2015, the shareholders of the Company approved the Second Amended and Restated Memorandum of Association and Articles of Association which, among other things, include the increase of the authorized ordinary shares from 25,000,000 to 100,000,000.

Products and Services

We currently provide products and services to oil and gas field companies, which focus 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 expression 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, easily operable, 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.

Sand Prevention in Oil and Water Well. 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, pilling 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 the ones 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.

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 system, video surveillance and control system 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 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 opportunities both 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 will focus on:

Measuring Equipment and Service. “Digital oil field” and the management of oil companies are highly regarded. We believe our oilfield SCADA and related technical support services will address the needs of the oil well automation system market, for which we forecast increasing demand in short term and strong needs in the long term. 

Gathering and Transferring Equipment. With more new wells developed, our management anticipates that demand for our furnaces and burners will grow compared to last year, especially in the Jilin Oilfield and Xinjiiang oilfield.

Fracturing service. We believe we cooperated well with Zhongyuan Oilfield in fiscal years 2013 and 2014 and expect to continue growing revenue from fracturing and related stimulation services in the coming years.

New business. Design and development of down-hole tools has always been an important technique for oilfield companies. Recently, this market has developed very rapidly. After a year long test project for our customers, we have developed experience with this technology and our customers have accepted our products and services. We expect revenue from this business in the coming year.

Growth Strategy

As a smaller China-focused company, it is our basic strategy to focus on developing our onshore oilfield business, that is, the upstream of the industry. Due to the remote location and difficult environments of China’s oil and gas fields, foreign competitors rarely enter those areas.

Large domestic oil companies have historically focused on their exploration and development businesses to earn higher margins and keep 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 insists on providing high quality products and service in oilfields in which we have a geographical advantage. This will allow us to avoid conflicts of interest with bigger suppliers of drilling equipment and protect our position within the 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 by using advanced technologies. At the same time, we are always looking to improve our business and to increase our earning capability.

Recent Industry Developments

Despite uncertainty in the energy industry related to such matters as fluctuating prices and future opportunities for oil companies, our management believes there are still many factors to support our long-term development:

(1) The opening of the Chinese oil industry to participation by non-state owned service providers and vendors played an increasingly important role in the high-end oilfield service segment to allow competition based on efficiency and price. As oil and gas fields are depleted, it becomes more challenging to find and convert reserves into usable energy sources. As the industry has permitted competition by private companies and oil companies have formed separate service companies, high-tech service has gradually opened up to private companies.

(2) As worldwide oil and gas prices decreased, development transform and strict management haven been recent subject of domestic oil companies. Technology reforms have been their first choice to achieve their goals about quality and efficiency upgrade. Furthermore, the construction of digital oilfield have also been one of oil companies’ long term development strategies. Even though total capital expenditure is expected to be reduced, we believe investment in technology reform will maintain at a higher level. We believe the Company will benefit from this trend.

Management is focused on these factors and will seek to extend our business on the industrial chain, such as providing more integrated services and incremental measures and growing our business from a predominantly up-ground business to include some down-hole services as well.

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:

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:

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 (U.S. 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 its 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 previous 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 customers, customer- 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 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.

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 adjustment would be charged to operations. Long-term investment is measured at fair value on a non-recurring basis at March 31, 2015, since the Company recorded an impairment loss during the year ended June 30, 2014. The fair value was determined to be zero using Level 2 inputs.

Receivables

Trade receivables are carried at 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. Increase 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.

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 mainly using the Black-Scholes valuation model estimated at the grant date based on the award’s fair value.

Recently enacted accounting pronouncements

In January 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810) – Amendments to the Consolidation Analysis". The ASU concludes the FASB’s project to rescind the indefinite deferral of the VIE guidance in ASU 2009-17 (FAS 1672) for reporting entities with variable interests in legal entities that have the attributes of an investment company that meet certain criteria (ASU 2010-103). The ASU also makes changes to the VOE consolidation model. The ASU does not change the general order in which the consolidation models are applied. A reporting entity that holds an economic interest in, or is otherwise involved with, another legal entity (has a “variable interest”) should first determine if the VIE model applies, and if so, whether it holds a controlling financial interest under that model. If the entity being evaluated for consolidation is not a VIE, then the VOE model should be applied to determine whether the entity should be consolidated by the reporting entity. Since consolidation is only assessed for legal entities, the determination of whether there is a legal entity is important. It is often clear when the entity is incorporated, but unincorporated structures can also be legal entities and judgment may be required to make that determination. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. Management is evaluating the impact, if any, of this ASU on the Company’s consolidated financial statements.

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, 2015 Compared to Three Months Ended March 31, 2014

During the three months ended March 31, 2015, we encountered a worldwide decline of oil and gas prices and decreased CAPEX expense of our major clients. As a result, our projects were slowed and/or cancelled. Our operations and revenue were affected negatively.

Revenues

Our total revenues increased by 9.8%, or approximately ¥1.8 million ($0.3 million), from approximately ¥18.2 million for the three months ended March 31, 2014 to ¥20.0 million ($3.3 million) for the same period of 2015. The changes in our revenues for the three-month period was due to the following factors:

Cost and Margin

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 impact our cost.

Our cost of revenues increased from approximately ¥13.0 million in the three months ended March 31, 2014 to approximately ¥13.8 million ($2.3 million) for the same period of 2015, an increase of approximately ¥0.8 million ($0.1 million), or 6.0%. This increase was mainly caused by higher revenue during the three months ended March 31, 2015 compared to the same period of 2014. As a percentage of revenues, our cost of revenues decreased from 71.2% in 2014 to 68.8% in 2015, mainly due to some contracts with lower cost during period.  

Gross profit. Our gross profit increased to approximately ¥1.0 million ($0.2 million) for the three months ended March 31, 2015 from approximately ¥5.2 million for the same period in 2014 to approximately ¥6.5 million ($1.0 million) for the same period of 2015. Our gross profit as a percentage of revenue increased to 31.2% for the three months ended March 31, 2015 from 28.8% for the same period in 2014. This was mainly because we seized some system updating service related contracts with higher margin.

In more detail:

The revenue increase from hardware and software to non-related parties of ¥0.4 million was mainly due to the increase from the furnaces sales and automation business in the three months ended March 31, 2015. The gross profit from the hardware and software sales to non-related parties decreased ¥0.6 million ($0.1 million) compared to the same period of last year, because gross margin from burner business were lower compared to same period last year.

Revenue from related parties increased mainly due to increased sales of automation metering system increased during the three months ended March 31, 2015. Cost of this kind of business was minor because there were only some software upgrading and online debugging cost, which were much lower than general hardware business sales.

Service revenue for three months ended March 31, 2014 consisted mainly of minor maintenance services, which were provided upon request by customers.

Operating Expenses

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 advertising and trade shows, and an allocation of our facilities and depreciation expenses. Selling expenses remained flat at approximately ¥1.1 million for each of the three months ended March 31, 2014 and 2015. Selling expenses were 6.0% of total revenues in the three months ended March 31, 2014 and 5.5% of total revenues in the same period of 2015.

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 and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 5.0% or ¥0.2 million ($32,000), from approximately ¥4.0 million in the three months ended March 31, 2014 to approximately ¥4.2 million ($0.7 million) in the same period of 2015. General and administrative expenses were 21.9% of total revenues in 2014 and 20.9% of total revenues in 2015. The increase in general and administrative expenses was mainly due to an increase in share-based compensation.

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 decreased from approximately ¥0.7 million for the three months ended March 31, 2014 to approximately ¥0.5 million ($0.1 million) for the same period of 2015. This decrease was primarily due to less research and development expense on furnaces. We will continue to strengthen R&D project management and control spending.

Net Income

Income (loss) from operations. Income from operations was approximately ¥0.4 million ($0.1 million) for the three months ended March 31, 2015, compared to a loss of ¥0.6 million for the same period of 2014. This increase in income from operations can be attributed primarily to the increased revenue and higher gross profit.

Interest and other expense. Interest and other expense was approximately ¥2.0 million ($0.3 million) for the three months ended March 31, 2015, compared to interest and other expense of ¥1.1 million for the same period of 2014. The ¥0.9 million ($0.1 million) increase in interest and other expense was primarily due to a loss from warrant redemptions and an increase in interest expense.

Provision (benefit) for income tax. Provision for income tax for the three months ended March 31, 2014 was approximately ¥0.2 million. Benefit for income tax was ¥0.2 million ($30,000) for the three months ended March 31, 2015. This decrease in provision for income tax was mainly due to the pre-consolidation income from operations in subsidiaries in China on which we must pay income tax, decreased for the three months ended March 31, 2015.

Net loss. As a result of the factors described above, net loss was approximately ¥1.4 million ($0.2 million) for the three months ended March 31, 2015, a decrease of approximately ¥0.4 million ($0.1 million) from net loss of ¥1.8 million for the same period of 2014.

Net loss attributable to Recon Technology, Ltd. As a result of the factors described above, net loss attributable to ordinary shareholders was approximately ¥1.5 million ($0.2 million) for the three months ended March 31, 2015, a decrease of approximately ¥0.4 million ($0.1 million) from net loss attributable to ordinary shareholders of approximately ¥1.9 million for same period of 2014.

Nine Months Ended March 31, 2015 Compared to Nine Months Ended March 31, 2014

Revenues

Our total revenues decreased by 39.9%, or approximately ¥30.4 million ($5.0 million), from approximately ¥76.0 million for the nine months ended March 31, 2014 to ¥45.7 million ($7.5 million) for the same period of 2015. The change in our revenues for the nine-month period was due to the following factors:

Cost and Margin

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 impact our cost.

Our cost of revenues decreased from approximately ¥49.0 million for the nine months ended March 31, 2014 to approximately ¥29.8 million ($4.9 million) for the same period of 2015, a decrease of approximately ¥19.1 million ($3.1 million), or 39.1%. This decrease was mainly caused by lower revenue during the nine months ended March 31, 2015 compared to the same period of 2014. As a percentage of revenues, our cost of revenues changed slightly from 64.4% in 2014 to 65.3% in 2015.

Gross profit. Our gross profit decreased to approximately ¥15.8 million ($2.6 million) for the nine months ended March 31, 2015 from approximately ¥27.1 million for the same period in 2014. Our gross profit as a percentage of revenue decreased to 34.7% for the nine months ended March 31, 2015 from 35.6% for the same period in 2014. This was mainly due to decreased hardware revenue during the nine months ended March 31, 2015 as compared to the same period last year and also had higher software revenue with higher gross margins during the nine months ended March 31, 2014.

In more detail:

The revenue from hardware and software to non-related parties decreased by approximately ¥30.2 million was mainly due to the decrease from the furnaces sales and automation business in the nine months ended March 31, 2015. The gross profit from the hardware and software sales to non-related parties decreased by approximately ¥11.6 million ($1.9 million) compared to the same period of last year.

Cost of revenue from hardware and software-related parties decreased as revenue increased. Gross profit increased mainly due to most of the revenues to related parties were automation upgrad and maintaining service sales with higher gross profit.

Service revenue for nine months ended March 31, 2014 and 2015 consisted mainly of minor maintenance services, which were provided upon request by customers.

Operating Expenses

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 advertising and trade shows, and an allocation of our facilities and depreciation expenses. Selling expenses decreased by 34.8%, from approximately ¥4.7 million for the nine months ended March 31, 2014 to approximately ¥3.1 million ($0.5 million) for the same period of 2015. This decrease was primarily from decreased shipping fees, service fees and traveling expenses. Selling expenses were 6.2% of total revenues in the nine months ended March 31, 2014 and 6.7% of total revenues in the same period of 2015.

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 and other miscellaneous expenses incurred in connection with general operations. General and administrative expenses increased by 14.7%, or approximately ¥1.5 million ($0.3 million), from approximately ¥10.5 million in the nine months ended March 31, 2014 to approximately ¥12.0 million ($2.0 million) in the same period of 2015. General and administrative expenses were 13.7% of total revenues in 2014 and 26.3% of total revenues in 2015. The increase in general and administrative expenses was mainly due to an increase in consulting fees, salaries, and share-based compensation.

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 decreased by 40.0%, from approximately ¥4.1 million for the nine months ended March 31, 2014 to approximately ¥2.4 million ($0.4 million) for the same period of 2015. This decrease was primarily due to lower research activities on our furnaces products. We enhanced our cost/expense control this year and may continue to be strict on our R&D project selection and implementation.

Net Income

Income (loss) from operations. Loss from operations was approximately ¥1.7 million ($0.3 million) for the nine months ended March 31, 2015, compared to income of ¥7.8 million for the same period of 2014. This decrease in income from operations can be attributed primarily to the decreased revenue and increases in general and administrative expenses.

Interest and other income (expense). Interest and other income was approximately ¥2.3 million ($0.4 million) for the nine months ended March 31, 2015, compared to interest and other expense of ¥1.2 million for the same period of 2014. The ¥3.6 million ($0.6 million) increase in interest and other income was primarily due to changes in the fair value of our warrant liability and a decrease in loss from an investment, offset by a decrease in subsidy income and loss on warrants redemption.

Provision for income tax. Provision for income tax for the nine months ended March 31, 2014 was approximately ¥1.6 million and ¥0.5 million ($0.1 million) for the nine months ended March 31, 2015. This decrease of provision for income tax was mainly due to the pre-consolidation income from operations in subsidiaries in China on which we must pay income tax, decreased for the nine months ended March 31, 2015.

Net income . As a result of the factors described above, net income was approximately ¥0.2 million ($30,000) for the nine months ended March 31, 2015, a decrease of approximately ¥4.8 million ($0.8 million) from net income of approximately ¥5.0 million for the same period of 2014.

Net income (loss) attributable to Recon Technology, Ltd. As a result of the factors described above, net loss attributable to ordinary shareholders was approximately ¥0.4 million ($0.1 million) for the nine months ended March 31, 2015, a decrease of approximately ¥4.3 million ($0.7 million) from net income attributable to ordinary shareholders of approximately ¥3.9 million for same period of 2014.

Adjusted EBITDA 

Adjusted EBITDA. We define adjusted EBITDA as net income (loss) adjusted for income tax expense, interest expense, loss from investment, 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.

Adjusted EBITDA decreased by approximately ¥8.8 million ($1.4 million) to income of approximately ¥2.9 million ($0.5 million) for the nine months ended March 31, 2015 compared to income of approximately ¥11.7 million income for the same period in 2014. This was mainly due to decreased revenue, non-operation income related to warrant and warrant redemptions and increased share-based expenses.

Adjusted Net Income and Adjusted Earnings (Loss) Per Share

(A) Noncash items are certain non-cash expenses that are included in our U.S. GAAP reported results. There was no income tax benefit associated with the special items. The non-GAAP financial measures are provided to enhance investors' overall understanding of Recon's current financial performance.

Liquidity and Capital Resources

Cash and Cash Equivalents. Cash and cash equivalents are comprised of cash on hand, demand deposits and highly liquid short-term debt investments with stated maturities of no more than six months. As of March 31, 2015, we had cash and cash equivalents in the amount of approximately ¥4.7 million ($0.8 million). As of June 30, 2014, we had cash and cash equivalents in the amount of approximately ¥18.1 million ($2.9 million).

Indebtedness. As of March 31, 2015, except for approximately ¥10.2 million ($1.7 million) of short-term borrowings from related parties, and ¥8.0 million ($1.3 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.

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 including our Chief Technology Officer. As of March 31, 2015, we had total assets of approximately ¥161.0 million ($26.4 million), which includes cash of approximately ¥4.7 million ($0.8 million), net accounts receivable from third parties of approximately ¥56.4 million ($9.2 million), and net accounts receivable from related parties of approximately ¥4.9 million ($0.8 million). Working capital amounted to approximately ¥90.0 million ($14.7 million), and shareholders’ equity amounted to approximately ¥100.5 million ($16.4 million).

Cash from Operating Activities. Net cash used in operating activities was approximately ¥16.2 million ($2.7 million) for the nine months ended March 31, 2015. This was an increase of approximately ¥0.9 million ($0.2 million) compared to net cash used in operating activities of approximately ¥15.3 million for the nine months ended March 31, 2014. In more detail:

Net cash used in operating activities totaled approximately ¥16.2 million for the nine months ended March 31, 2015, and was primarily attributable to net income adjusted to reconcile to net cash used in operating activities of ¥0.2 million, which primarily included ¥2.0 million of share based compensation, an adjustment for a ¥4.1 million change in fair value of a warrant liability and a ¥1.9 million loss from warrant redemptions. Net cash used in changes in operating assets and liabilities resulted in a net cash used of ¥17.9 million, which was mainly due to a ¥10.4 million change in accounts receivable, a ¥4.8 million change in inventory, a ¥5.6 million change in other receivable, a ¥1.6 million change in prepaid expense, and a ¥1.6 million change in deferred income, offset by a ¥1.8 million change in purchase advance and a ¥6.0 million change in trade payable and other payable. Our net cash used in operating activities were primarily for purchases of inventories for projects in the upcoming quarters.

Cash from Investing Activities. Net cash used in investing activities was approximately ¥0.2 million ($26,000) for the nine months ended March 31, 2015, which remained flat as compared to the same period of 2014. A ¥0.3 million increase in the purchase of property and equipment was offset by the proceeds from disposal of equipment.

Cash from Financing Activities. Net cash provided by financing activities amounted to ¥3.0 million ($0.5 million) for the nine months ended March 31, 2015, as compared to cash flows provided by financing activities of approximately ¥11.9 million for the same period in 2014. During the nine-month period ended March 31, 2015, we repaid ¥2.0 million ($0.3 million) in short term bank loans and received ¥5.0 million ($0.9 million) of net proceeds from a related party.

Working Capital. Total working capital as of March 31, 2015 amounted to approximately ¥90.0 million ($14.7 million), compared to approximately ¥83.1 million as of June 30, 2014. Total current assets as of March 31, 2015 amounted to approximately ¥141.8 million ($23.2 million), an increase of approximately ¥8.4 million ($1.5 million) compared to approximately ¥133.4 million at June 30, 2014. The increase in total current assets at March 31, 2015 compared to June 30, 2014 was mainly due to an increase in trade accounts receivable, inventory and other receivables.

Current liabilities amounted to approximately ¥51.7 million ($8.5 million) at March 31, 2015, in comparison to approximately ¥50.3 million at June 30, 2014. This decrease of liabilities was attributable mainly to a decrease in warrant liability and short-term bank loans, offset by an increase in trade accounts payable and short-term borrowings – related party.

Capital Needs. 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 further expansion of our business and to consummate any possible merge and acquisition, if necessary.

Not applicable.

Disclosure Controls and Procedures

As of March 31, 2015, 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 1992 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, 2015, the Company has completed the necessary documentation of our internal controls and will 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.

·   Implement and update the internal controls to be in compliance with the 2013 COSO framework.

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 three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as disclosed above.

Part II Other Information

None.

Not applicable.

None.

Not applicable.

None.

The following exhibits are filed herewith:

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.

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

RECON TECHNOLOGY, LTD

condensed Consolidated Balance Sheets

(UNAUDITED)

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

RECON TECHNOLOGY, LTD

condensed Consolidated Statements of OPERATIONS and Comprehensive Income (LOSS)

(UNAUDITED)