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Item 3. Legal Proceedings

2014-09-29 compared with 2013-09-27 · 650 added, 3 removed, 3 unchanged (100% of the section changed)

Legal Proceedings.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.

However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

We are currently not aware of any such pending or threatened legal proceedings, claims, regulatory inquires or investigations that we believe will have a material adverse affect on our business, financial condition or operating results.

From time to time, we may become involved

in various lawsuits and legal proceedings, which arise in the ordinary course of business.

However, litigation is subject to inherent

uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

We are currently

not aware of any such pending or threatened legal proceedings, claims, regulatory inquires or investigations that we believe will

have a material adverse effect on our business, financial condition or operating results.

Mine Safety Disclosures.

This item is inapplicable to the Company.

M arket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Market for Our Ordinary Shares

Year Ended June 30, 2014

Ended September 30, 2013

Ended December 31, 2013

Ended March 31, 2014

Ended June 30, 2014

Year Ended June 30, 2013

Ended September 30, 2012

Ended December 31, 2012

Ended March 31, 2013

Ended June 30, 2013

As of June 30, 2014, there were

nine holders of record of our ordinary shares.

This excludes our ordinary shares owned by shareholders holding ordinary shares

under nominee security position listings.

On June 30, 2014, the last sales price of our ordinary shares as reported on the NASDAQ

Capital Market was $4.14 per ordinary share.

Dividend Policy

We have never declared or paid any cash

dividends on our ordinary shares.

We anticipate that we will retain any earnings to support operations and to finance the growth

and development of our business.

Therefore, we do not expect to pay cash dividends in the foreseeable future.

Any future determination

relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors,

including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors

may deem relevant.

Because we are a holding company with

no operations of our own and all of our operations are conducted through our Chinese subsidiary, our ability to pay dividends

and to finance any debt that we may incur is dependent upon dividends and other distributions paid in U.S.

In addition, Chinese

legal restrictions permit payment of dividends to us by our Chinese subsidiary only out of its accumulated net profit, if

any, determined in accordance with Chinese accounting standards and regulations.

Under Chinese law, our subsidiary is

required to set aside a portion (at least 10%) of its 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 subsidiaries’

These funds may be distributed to shareholders at the time of its wind up.

See “Management’s Discussion

and Analysis of Financial Condition and Results of Operations—Holding Company Structure.”

Payments of dividends by our subsidiary

in China to the Company are also subject to restrictions including primarily the restriction that foreign invested enterprises

may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing

valid commercial documents.

There are no such similar foreign exchange restrictions in the Cayman Islands.

(b) We are not required to provide any

disclosure under this item, as we have applied all of the net proceeds from our initial public offering, as disclosed in our annual

report on Form 10-K for the year ended June 30, 2011.

Selected Financial Data.

The Company is not required to provide

the information required by this Item because the Company is a smaller reporting company.

Management’s Disc ussion and Analysis of Financial Condition and Results of Operation.

The following discussion and analysis

of our company’s financial condition and results of operations should be read in conjunction with our 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.

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 our Domestic Companies.

As the company contractually controlls the Domestic Companies,

we are the center of strategic management, financial control and human resources allocation.

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) oilfield dedicated products and

accessories, (2) stimulation technology and services.

Our products and services involve most of the key procedures of the extraction

and production of oil and gas, and include automation systems, equipment, tools and on-site technical services.

Our Domestic Companiess provide the oil

and gas industry with equipment, production technologies, automation and services to enhance our customers’

● Nanjing Recon:

Nanjing Recon is a high-tech company that specializes in automation services for oilfield companies.

focuses on providing automation solutions to the oil exploration industry, including monitoring wells, automatic metering to the

joint station production, process monitor, and a variety of oilfield equipment and control systems.

BHD is a high-tech company that specializes in transportation equipment and stimulation productions and services.

proprietary patents and substantial industry experience, BHD has built up stable and strong working relationships with the major

oilfields in China.

Factors Affecting Our Results of Operations

Our operating results in any period are

subject to the general conditions typically affecting the Chinese oilfield service industry including:

● the amount of spending by our customers, primarily

those in the oil and gas industry;

● growing demand from large corporations for improved

management and software designed to enhance corporate performance;

● the procurement processes of our customers, especially

those in the oil and gas industry;

● competition and related pricing pressure from other

oilfield service solution providers, especially those targeting the oil and gas industry in China;

● the ongoing development of the oilfield service market

● fluctuation in oil price;

● inflation and other factors.

Unfavorable changes in any of these general

conditions could negatively affect the number and size of the projects we undertake, the number of products we sell, the amount

of services we provide, the price of our products and services or otherwise affect our results of operations.

Our operating results in any period are

more directly affected by company-specific factors including:

● our continued ability to lead and to control all affiliated

● our revenue growth;

● the proportion of our business dedicated to large companies;

● our ability to successfully develop, introduce and

market new solutions and services;

● our ability to increase our revenues from customers

both old and new in the oil and gas industry in China;

● our ability to effectively manage our operating costs

and expenses;

● our ability to effectively implement any targeted acquisitions

and/or strategic alliances so as to provide efficient access to the markets in the oil and gas industry.

Critical Accounting Policies and Estimates

Estimates and Assumptions

We prepare our 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

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, deferred taxes, allowance for doubtful accounts, the fair value of share-based payments, warrants

liability 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

As such, the Domestic Companies are VIEs.

We will continue to make ongoing assessment whether the Domestic Companies still

continue to be VIEs 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

(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 client and the client has signed a completion and

acceptance report, risk of loss has transferred to the client, client acceptance provisions have lapsed, or the Company has objective

evidence that the criteria specified in client 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.

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.

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.

is short term.

Revenue is not recognized until completion of the contracts and receipt of acceptance statements.

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.

Cost of Revenues

When the criteria for revenue recognition

have been met, costs incurred are recognized as cost of revenue.

Cost of revenues includes wages, materials, handling charges,

the cost of purchased equipment and pipes, and other expenses associated with manufactured products and services provided to customers.

We expect cost of revenues to grow as our revenues grow.

It is possible that we could incur development costs with little revenue

recognition, but based upon our past history, we expect our revenues to grow.

Fair Values of Financial Instruments

The US GAAP accounting

standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level

valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs

when measuring fair value.

The three levels of

inputs are defined as follows:

Level 1 inputs to

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

Level 2 inputs to

the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable

for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to

the valuation methodology are unobservable.

The carrying amounts reported in the consolidated

balance sheets for trade accounts receivable, other receivables, advances to suppliers, trade accounts payable, accrued liabilities,

advances from customers and notes payable approximate fair value because of the immediate or short-term maturity of these financial

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 and any change in adjustment would be charged to operations .

Long-term investment is measured at fair value on a non-recurring basis at June 30, 2014, since the Company recorded an impairment

loss during 2014.

The fair value was determined to be zero using Level 2 inputs.

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.

We believe based on the current economic condition and our history of collections on accounts and notes receivable, our allowance

for doubtful accounts was adequate at June 30, 2013 and 2014.

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.

Valuation of Long-Lived Assets

review the carrying values of our long-lived assets for impairment whenever events or changes in circumstances indicate that they

may not be recoverable.

When such an event occurs, we project undiscounted cash flows to be generated from the use of the asset

and its eventual disposition over the remaining life of the asset.

If projections indicate that the carrying value of the long-lived

asset will not be recovered, we reduce the carrying value of the long-lived asset by the estimated excess of the carrying value

over the projected discounted cash flows.

In the past, we have not had to make significant adjustments to the carrying values of

our long-lived assets, and we do not anticipate a need to do so in the future.

However, circumstances could cause us to have to

reduce the value of our capitalized software more rapidly than we have in the past if our revenues were to significantly decline.

Estimated cash flows from the use of the long-lived assets are highly uncertain and therefore the estimation of the need to impair

these assets is reasonably likely to change in the future.

Should the economy or the acceptance of our software change in the future,

it is likely that our estimate of the future cash flows from the use of these assets will change by a material amount.

were no impairments at June 30, 2013 and June 30, 2014.

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 April 2014, the FASB issued ASU 2014-08,

“Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,”

(“ASU 2014-08”).

Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on the Company’s

operations and financial results should be presented as discontinued operations.

Additionally, ASU 2014-08 requires expanded disclosures

about discontinued operations that will provide financial statement users with more information about the assets, liabilities,

income, and expenses of discontinued operations.

The amendments in ASU 2014-08 are effective for fiscal years, and interim periods

within those years, beginning after December 15, 2014.

However, ASU 2014-08 should not be applied to a component that is classified

as held for sale before the effective date even if the component is disposed of after the effective date.

Early adoption is permitted,

but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued.

The effects of ASU 2014-08 will depend on any future disposals by the Company.

In May 2014, the FASB issued ASU 2014-09,

“Revenue from Contracts with Customers,”

(“ASU 2014-09”).

Previous revenue recognition guidance in U.S.

GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions,

which sometimes resulted in different accounting for economically similar transactions.

The core principle of the guidance is that

an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects

the consideration to which the entity expects to be entitled in exchange for those goods or services.

To achieve this core principal,

five steps are required to be applied.

In addition, ASU 2014-09 expands and enhances disclosure requirements which require disclosing

sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue

and cash flows arising from contracts with customers.

This includes both qualitative and quantitative information.

The amendments

in ASU 2014-09 are effective retrospectively for annual reporting periods beginning after December 15, 2016, including interim

periods within that reporting period.

Early application is not permitted.

Management is evaluating the effect, if any, on the Company’s

financial position and results of operations.

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.

For the Years Ended

Hardware - non-related parties

Hardware - related parties

(24,986,225 )

Software - non-related parties

Software - related parties

Total revenues

Our total revenues for the year ended

June 30, 2014 were approximately ¥93.4 million ($15.2 million), an increase of approximately ¥16.8 million or 22.0% from

¥76.6 million for the year ended June 30, 2013.

This was mainly caused by:

Hardware business - non - related parties.

During the year ended June 30, 2014, the

increase in hardware revenue was mainly due to higher sales of furnaces and automation products to our existing clients and sales

to new clients .

Hardware –

related parties.

of hardware to related parties decreased because we used to sell our products to Ji Dong oilfield through our related parties.

After we obtained business entrance certification, Recon now can make sales to oilfield customers directly.

As a result, sales

made to related-parties decreased .

Service business.

Service revenue for the year ended June 30, 2014

consisted mainly of minor maintenance services, which were provided upon request by customers.

The ¥25.5 million service revenue for the year ended June 30, 2013 was mainly due to several fracturing service contracts

signed with Sinopec Zhongyuan oil field.

The significant decrease in service revenue for the year ended June 30, 2014 was

mainly caused by short-term decline due to Sinopec Zhongyuan oil field's adjustment of their producing plan.

We expect the

service revenue to pick up in the next fiscal year as we successfully achieved access certification of additional oil field

which means we will be able to provide our fracturing services to a broader customer base.

Software business - non –

related parties.

The software sales decreased approximately ¥0.5 million ($0.1 million).

We record revenue as software sales if (1) the customer signs a separate software contract with us, or (2) the customer accepts VAT invoices for software.

The amount of our revenues categorized as software sales may fluctuate because certain software may be sold with hardware at times as a whole product and not separately priced

Software business –

related parties.

the year ended June 30, 2014, we recorded software revenue of ¥2.5 million ($0.4 million) to a related party, a decrease of

¥1.8 million ($0.3 million) from the same period of last year.

The decrease was mainly due to our decreased indirect

sales of automation system through the related parties .

Cost and Margin

For the Years Ended

Total revenues

Cost of revenues

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

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 ¥51.5 million in the year ended June 30, 2013 to approximately ¥61.0 million ($9.9 million)

for the same period of 2014, an increase of approximately ¥9.5 million ($1.5 million), or 18.4%.

As a percentage of revenues,

our cost of revenues decreased from 67.3% in 2013 to 65.3% in 2014.

This decrease was mainly caused by lower service costs.

Our gross profit increased to approximately ¥32.4 million ($5.3 million) for the year ended June 30, 2014

from approximately ¥25.1 million for the year ended June 30, 2013.

Our gross profit as a percentage of revenue increased to

34.7% for the year ended June 30, 2014 from 32.7% for the same period in 2013.

This was mainly because fracturing services, which

feature lower margins, accounted for a major part of our revenue during the year ended June 30, 2013.

As to our automation business

and furnaces business, our margins were both improved because our products and services were well received by our clients, especially

our newly developed clients.

In more detail:

For the Years Ended

Total revenues-hardware and software- non related parties

Cost of revenues -hardware and software- non related parties

Revenue from hardware and software to non-related

parties increased ¥44.8 million was mainly due to the hardware revenue increase from the furnaces sales and automation products

in the year ended June 30, 2014.

The gross profit from the hardware and software sales to non-related parties increased ¥14.1

million ($2.3 million) compared to the same period of last year.

For the Years Ended

Total revenues-hardware and software - related parties

Cost of revenues -hardware and software - related parties

Cost of revenue from hardware and software-related

parties decreased as revenue decreased.

While gross margin increased was mainly because software business with higher margin accounted

for a larger percentage this period.

For the Years Ended

Total revenues-service

(24,986,225 )

Cost of revenues -service

(18,490,016 )

The ¥25.5 million service revenue for

the year ended June 30, 2013 was mainly due to several fracturing service contracts signed with Sinopec Zhongyuan oilfield.

generated 27.1% gross profit margin from these service contracts.

Operating Expenses

For the Years Ended

Selling and distribution expenses

General and administrative expenses

Research and development expenses

Operating expenses

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

¥0.8 million to ¥5.3 million ($0.9 million) for the year ended June 30, 2014 from ¥6.1 million for the year ended

June 30, 2013.

Selling expenses were 8.0% of total revenues in the year ended June 30, 2013 and 5.7% of total revenues in the

same period of 2014.

The decrease of selling expense was mainly due to less traveling fees and field work service fees.

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 and other expenses incurred in connection

with general operations.

General and administrative expenses increased by 47.6%, or ¥5.2 million ($0.9 million), from approximately

¥11.0 million in the year ended June 30, 2013 to approximately ¥16.2 million ($2.6 million) in the same period of 2014.

General and administrative expenses were 14.3% of total revenues in 2013 and 17.3% of total revenues in 2014.

The increase in general

and administrative expenses was mainly due to the increase in consulting fees related to professional services, salary, the allowance

for doubtful accounts, share-based compensation and traveling expenses.

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 4.9%, from approximately

¥8.5 million for the year ended June 30, 2013 to approximately ¥8.1 million ($1.3 million) for the same period of 2014.

This decrease was primarily due to the lower investment of R&D materials and equipment into our furnaces and fracturing services

For the Years Ended

Income (loss) from operations

Interest and other income (expense)

Income before income taxes

Provision for income taxes

Net income attributable to non-controlling interest

Net income attributable to ordinary shareholders

Income (loss) from operations .

Income from operations was approximately ¥2.8 million ($0.5 million) for the year ended June 30, 2014, compared to loss

of ¥0.6 million for the same period of 2013.

This increase in income from operations can be attributed primarily to the increased

revenue, gross margins and decreases in research and development expenses.

Interest and other income (expense).

Interest and other expense was approximately ¥41,282 ($6,706) for the year ended June 30, 2014, compared to interest and

other income of ¥1.5 million for the same period of 2013.

The ¥1.5 million ($0.2 million) decrease was primarily

due to a significant loss from investment, a decrease in subsidy income and decreases in interest income and foreign currency exchange

gain, offset by an increase in other expense and a decrease in interest expense.

for income tax .

Provision for income tax for the year ended June 30, 2013 was approximately ¥0.3 million and ¥1.0

million ($0.2 million) for the year ended June 30, 2014.

This increase of provision for income tax was mainly due to the increase

in income from operations for the year ended June 30, 2014.

As a result of the factors

described above, net income was approximately ¥1.8 million ($0.3 million) for the year ended June 30, 2014, an increase of

approximately ¥1.2 million ($0.2 million) from net income of ¥0.6 million for the same period of 2013.

Net income attributable to Recon Technology,

As a result of the factors described above, net income attributable to Recon Technology, Ltd was approximately ¥0.8

million ($0.1 million) for the year ended June 30, 2014, an increase of approximately ¥0.8 million ($0.1 million) from net

income attributable to ordinary shareholders of approximately ¥40,000 for same period of 2013.

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.

For the Years Ended

Reconciliation of Adjusted EBITDA

to Net Income

Provision for income tax

Interest expense and foreign currency adjustment

Change in fair value of warrants liability

Loss from investment

Restricted shares issued for consulting services

Share-based compensation expense

Depreciation and amortization

Adjusted EBITDA

Adjusted EBITDA improved by approximately

¥4.1 million ($0.6 million) to approximately ¥8.8 million ($1.4 million) for the year ended June 30, 2014 compared to approximately ¥4.7

million income for the same period in 2013.

This was due to improved operations.

Adjusted Net Income (Loss) and Adjusted

Earnings (Loss) Per Share

For the Years Ended

Reconciliation of Net Income

to Adjusted Net Income attributable to Recon Technology, Ltd

Net income attributable to Recon Technology, Ltd

Special items (A) :

Change in fair value of warrants liability

Loss from investment

Restricted shares issued for consulting services

Share-based compensation expense

Adjusted net income attributable to Recon Technology, Ltd

Reconciliation of U.S.

GAAP Earnings Per Share

GAAP Adjusted Earnings Per Share - diluted

GAAP earnings per share - diluted

Impact of special items on earnings per share

GAAP adjusted earnings per share - diluted

Weighted - average shares -diluted

(A) Special 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

The non-GAAP financial measures are provided to enhance investors' overall understanding of Recon's current financial

Liquidity and Capital Resources

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 June 30, 2014, we had cash and cash equivalents in the

amount of approximately ¥18.1 million ($2.9 million).

Indebtedness .

As of June 30, 2014,

we had approximately ¥5.2 million ($0.8 million) of short-term borrowings from related parties, and ¥10 million ($1.6 million)

in commercial loans f rom two local Chinese banks.

Other than these amounts, we did not

have any finance leases or purchase commitments, guarantees or other material contingent liabilities.

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.

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.

To date we have financed our operations primarily through cash flows from operations, bank loans, short-term

borrowings and stock offerings.

As of June 30, 2014, we had total assets of approximately ¥154.5 million ($25.1 million), which

includes cash of approximately ¥18.1 million ($2.9 million), net accounts receivable from third parties of approximately ¥43.6

million ($7.1 million), and net accounts receivable from related parties of approximately ¥7.5 million ($1.2 million).

capital amounted to approximately ¥83.1 million ($13.5 million), and shareholders’

equity amounted to approximately ¥96.0

million ($15.6 million).

Cash from Operating

Net cash used in operating activities was approximately ¥8.0 million ($1.3 million) for the year ended June

This was a decrease of approximately ¥32.7 million ($5.3 million) compared to net cash provided by operating activities

of approximately ¥24.8 million for the year ended June 30, 2013.

The decrease in n et cash used in operating activities

for the year ended June 30, 2014, was primarily attributable to the increase in net income offset by a ¥8.2 million change

in accounts receivable, notes receivable and other receivable, a ¥6.9 million change in purchase advance, a ¥1.1 million

change in inventory a ¥1.1 million change in other payable, and a ¥1.6 million change in accrued payroll and employees’

We purchased inventories for projects in the upcoming quarters.

In addition, accounts receivable increased due to our

operating seasonality.

Most of our projects were finished by end of each calendar year, and we believe these receivables will be

recovered based on contractual payment schedules.

Cash from Investing Activities .

Net cash used in investing activities was approximately ¥0.3 million ($55,000) for the year ended June 30, 2014, a decrease

of ¥1.8 million ($0.3 million) from ¥2.1 million for the same period of 2013.

The decrease in net cash used in investing

activities was mainly due to approximately ¥1.5 million paid for a long-term investment of a 32.2% equity investment in a U.S.

oil and natural gas company during the year ended June 30, 2013 and a decrease of approximately ¥0.3 million in purchases of

property and equipment.

from Financing Activities .

Net cash provided by financing activities amounted to approximately ¥14.0 million

($2.3 million) for the year ended June 30, 2014, compared to cash flows used in financing activities of approximately

¥13.8 million for the same period in 2013.

During the year ended June 30, 2014, we received net proceeds of ¥12.1

million ($2.0 million) from a common stock sale of 546,500 shares with institutional investors in November 2013.

we received and repaid ¥23.5 million ($3.8 million) in short term borrowings from bank.

We received ¥5.0 million

($0.8 million) and repaid ¥5.3 million ($1.7 million) short term borrowing from a related party.

We also received

approximately ¥2.7 million ($0.4 million) of proceeds from stock option exercises.

Working Capital .

Total working capital

as of June 30, 2014 amounted to approximately ¥83.1 million ($13.5 million), compared to approximately ¥82.0 million as

of June 30, 2013.

Total current assets as of June 30, 2014 amounted to approximately ¥133.4 million ($21.6 million), an increase

of approximately ¥4.7 million ($0.7 million) compared to approximately ¥128.7 million at June 30, 2013.

The increase in

total current assets at June 30, 2014 compared to June 30, 2013 was mainly due to an increase in trade accounts receivable and

purchase advances.

liabilities amounted to approximately ¥50.3 million ($8.2 million) at June 30, 2014, in comparison to approximately ¥46.7

million at June 30, 2013, an increase of approximately ¥3.6 million ($0.6 million).

This increase of liabilities was

attributable mainly to an increase in warrant liability.

Recently Enacted

Accounting Standards

In April 2014, the FASB issued ASU 2014-08,

“Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,”

(“ASU 2014-08”).

Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on the Company’s

operations and financial results should be presented as discontinued operations.

Additionally, ASU 2014-08 requires expanded disclosures

about discontinued operations that will provide financial statement users with more information about the assets, liabilities,

income, and expenses of discontinued operations.

The amendments in ASU 2014-08 are effective for fiscal years, and interim periods

within those years, beginning after December 15, 2014.

However, ASU 2014-08 should not be applied to a component that is classified

as held for sale before the effective date even if the component is disposed of after the effective date.

Early adoption is permitted,

but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued.

The effects of ASU 2014-08 will depend on any future disposals by the Company.

In May 2014, the FASB issued ASU 2014-09,

“Revenue from Contracts with Customers,”

(“ASU 2014-09”).

Previous revenue recognition guidance in U.S.

GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions,

which sometimes resulted in different accounting for economically similar transactions.

The core principle of the guidance is that

an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects

the consideration to which the entity expects to be entitled in exchange for those goods or services.

To achieve this core principal,

five steps are required to be applied.

In addition, ASU 2014-09 expands and enhances disclosure requirements which require disclosing

sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue

and cash flows arising from contracts with customers.

This includes both qualitative and quantitative information.

The amendments

in ASU 2014-09 are effective restrospectively for annual reporting periods beginning after December 15, 2016, including interim

periods within that reporting period.

Early application is not permitted.

Management is evaluating the effect, if any, on the Company’s

financial position and results of operations.

Q uantitative and Qualitative Disclosures about Market Risk.

The Company is not required to provide

the information required by this Item because the Company is a smaller reporting company.

Financial Statements and Supplementary Data.

The Company’s financial statements

and the related notes, together with the report of Friedman LLP for the years ended June 30, 2014 and 2013 are set forth following

the signature pages of this report.

Ch anges in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 3. Legal Proceedings