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Item 1. Financial Statements

2014-11-13 compared with 2014-05-15 · 378 added, 440 removed, 387 unchanged (68% of the section changed)

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

Management’s Discussion

and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations.

The following discussion

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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 controlling

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

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 and BHD, our Domestic

Companies we control through certain contractual arrangement.

As the company contractually controlling the Domestic Companies, we are

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

Our business is mainly

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

Our VIEs provide the

oil and gas industry with equipment, production technologies, automation and services.

Our Domestic Companies provide the oil and

gas industry with equipment, production technologies, automation and services.

Nanjing Recon:

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with the major oilfields in China.

Recent Developments

During this quarter, we mainly focused on automation projects

and furnaces sales for China National Petroleum Corporation (“CNPC”) oilfields including Jidong Oilfield, Huabei Oilfield,

Jilin Oilfield, Qinghai Oilfield and northwest branch of China Petroleum &Chemical Corporation Limited (“SINOPEC”).

In the last six months, CNPC and SINOPEC, our two largest customers, both reduced their capitalized exploration and production

expenditure while CNPC’s expenditure reduction is more significant than that of SINOPEC.

As a result, the number of projects

we provided to CNPC during this quarter decreased compared to same period last year.

Since the overall production construction

process of our clients were delayed, our finished projects also decreased compared to same period last year.

While we actively

procure new contracts with existing CNPC oilfields, we will also develop new projects from SINOPEC’s domestic and overseas

Management expects the volume of finished projects will recover and thus revenue will keep increasing during fiscal

year ending June 30, 2015.

Products and Services

We provide the following three types of

integrated products and services for our customers.

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

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High-Efficiency Heating

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.

researched, developed and implemented a new oilfield furnace that is advanced, highly automated, reliable, easily operable, safe

and highly heat-efficient (90% efficiency).

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.

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

We serve as an agent for the Unigas Burner, which is designed and manufactured by UNIGAS, a European burning equipment

production company.

The burner 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

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Fissure Shaper.

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.

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.

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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.

This controller

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

This monitor collects gas

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It facilitates the electronic control of the connection of the oil lead pipeline with the separator.

Natural Gas Flow Computer

The flow computer system is used in natural gas stations and gas distribution stations to measure flow.

Natural Gas Flow Computer System.

computer system is used in natural gas stations and gas distribution stations to measure flow.

Recon Supervisory

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Management anticipates great opportunities both in new markets and our existing markets.

We 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

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

Measuring Equipment

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strong needs in the short term.

In addition, through early cooperation with CNPC in Turkmenistan, we have developed our experience

in this market.

Although bidding has not yet commenced , we

will continue pursuing overseas business projects in the coming second phase construction, which we expect to occur in 2014.

Through early cooperation with CNPC in Turkmenistan, we have developed our experience in this market.

Although bidding has not yet commenced, we will continue pursuing overseas business projects in the coming second phase construction.

Gathering and

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With more new wells developed, our management anticipates that demand for our furnaces and burners

will grow more compared to last year, especially in the Jilin

Oilfield and Zhongyuan oilfield.

Fracturing service .

We believe we cooperated well with Zhongyuan Oilfield in fiscal year 2013 and expect to continue growing revenue from fracturing

and related stimulation services for fiscal year 2014, from Zhongyuan oilfield and also some other oilfields clients.

will grow more compared to last year, especially in the Jilin Oilfield and Zhongyuan oilfield.

We believe we cooperated well with Zhongyuan Oilfield on the open-hole fracturing for horizontal wells in

fiscal years 2013 and 2014.

In addition, we succeeded in the design and development of our own open-hole horizontal

well fracturing tool used for exploration of convential resources and unconventional gas.

As such, we expect to continue

growing revenue from fracturing and related stimulation services in the coming year.

New business .

Design and development of down-hole tools has always been an important technique for oilfield companies.

this market has developed very rapidly.

After a year test project for our customers, we have developed experience with this technology

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 fiscal year 2014.

We expect revenue from this business in the coming year.

Growth Strategy

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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

Due to the remote location and difficult environments of China’s oil and gas fields, foreign competitors rarely enter those

Large domestic oil

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our business and to increase our earning capability.

Industry and Recent Developments

Recent Industry Developments

Despite uncertainty

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believes there are still many factors to support our long-term development:

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

Overseas assets of

Chinese oilfield companies increased gradually, and they will provide more opportunity for domestic service companies to participate

(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

(2) Speeding up the

development of unconventional hydrocarbon resources such as shale gas and coal bed methane will bring more requirements of related

production-increasing technology and services.

China is rich in unconventional hydrocarbon resources, but new exploration and development

technology breakthroughs are urgently needed;

(3) Overseas assets

of Chinese oilfield companies increased gradually, and they will provide more opportunity for domestic service companies to participate

in foreign projects.

Management is focused

on these factors and will seek to extend our business on the industrial chain, like 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.

Management is focused on these factors

and will seek to extend our business on the industrial chain, like 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:

Our operating results in any period are

subject to 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;

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Significant accounting estimates reflected in our Company’s

consolidated financial statements include revenue recognition, allowance for doubtful accounts, and useful lives of property and

consolidated financial statements include revenue recognition, allowance for doubtful accounts, deferred income tax, stock based

compensation, warrants liability and useful lives of property and equipment.

Consolidation of VIEs

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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

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charged to operations.

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 March 31, 2014.

Long-term investment is measured at fair value on a non-recurring basis at September 30, 2014, 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

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 September 30, 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

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There were no impairments at June 30, 2014

and March 31, 2014.

and September 30, 2014.

Share-Based Compensation

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on the award’s fair value.

Recently enacted accounting pronouncements

In June 2014, the FASB issued ASU 2014-12,

“Compensation-Stock Compensation (Topic 718):

Accounting for Share-Based Payments When the Terms of an Award Provide That

a Performance Target Could Be Achieved after the Requisite Service Period,”

(“ASU 2014-12”).

ASU 2014-12 requires

that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance

As such, the performance target should not be reflected in estimating the grant-date fair value of the award.

the issuance of ASU 2014-12, U.S.

GAAP did not contain explicit guidance on how to account for those share-based payments.

reporting entities accounted for performance targets that could be achieved after the requisite service period as performance conditions

that affect the vesting of the award and, therefore, did not reflect the performance target in the estimate of the grant-date fair

value of the award.

Other reporting entities treated those performance targets as non-vesting conditions that affected the grant-date

fair value of the award.

We currently treat performance targets that affect vesting as a performance condition and as such, it

is not included in the grant-date fair value.

Therefore, the impact upon adoption would not be material to our consolidated financial

position or results of operations.

The amendments in ASU 2014-12 are effective for fiscal years and interim periods within those

years, beginning after December 15, 2015.

Earlier application is permitted.

The Company does not expect the adoption of his

guidance will have a significant impact on the Company’s unaudited condensed consolidated financial statements.

2014, The FASB issued ASU 2014-15, “'Disclosure of Uncertainties about an Entity’s Ability to Continue as a

Going Concern”

(“ASU 2014-15”).

ASU 2014-15 requires management to perform interim and annual assessments

of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s

financial statements.

Further, an entity must provide certain disclosures if "conditions or events raise substantial

doubt about an entity’s ability to continue as a going concern."

The amendments in ASU 2014-15 are effective for

annual periods beginning after 15 December 2015, and interim periods thereafter, with early adoption permitted.

does not expect the adoption of this guidance will have a significant impact on the Company’s unaudited condensed

consolidated financial statements.

Management believes this ASU 2014-15 does not have any significant impact on the

Company’s consolidated financial statements.

In November 2014, The

FASB issued Accounting Standards Update (ASU) No.

2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument

Issued in the Form of a Share Is More Akin to Debt or to Equity,”

in response to the EITF’s final consensus on Issue

The ASU requires an entity to “determine the nature of the host contract by considering all stated and implied substantive

terms and features of the hybrid financial instrument, weighing each term and feature on the basis of the relevant facts and circumstances”

(commonly referred to as the whole-instrument approach).

The ASU applies to all entities and is effective for annual periods

beginning after December 15, 2015, and interim periods thereafter.

Early adoption is permitted.

The Company is currently in

the process of evaluating the impact of this new standard update.

Results of Operations

Three Months Ended March 31, 2014 Compared to Three Months

Ended March 31, 2013

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 September 30, 2014 Compared to Three

Months Ended September 30, 2013

For the Three Months Ended

September 30,

Hardware - non-related parties

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Total revenues

Our revenues increased by 143%, or approximately ¥10.7 million ($1.7 million), from approximately ¥7.5 million for the

three months ended March 31, 2013 to ¥18.2 million ($3 million) for the same period of 2014.

The changes in our revenues for

the three-month period were due to the following factors:

total revenues decreased by 62.6%, or approximately ¥7.2 million ($1.2 million), from approximately ¥11.5 million for the

three months ended September 30, 2013 to ¥4.3 million ($0.7 million) for the same period of 2014.

The changes in our revenues

for the three-month period were due to the following factors:

(1) Hardware business.

During the three-month ended March 31, 2014, the increase in hardware revenue

was mainly caused by higher sales of automation business from the Southwest branch of Sinopec and sales of furnaces to the Jilin

The decrease in hardware revenue during the three-month ended September 30, 2014 was

mainly due to lower sales of automation system and furnaces, which are the majority of our hardware sales.

In the last six months,

CNPC and SINOPEC, our two largest customers, both reduced their capitalized exploration and production expenditure while CNPC’s

expenditure reduction is more significant than that of SINOPEC.

As a result, the number of projects we provided to CNPC during

this quarter decreased compared to the same period last year.

In addition, we were not able to finish a number of our projects

with CNPC subsidiaries as our customers or its general contractors were not able to finish the overall projects which our projects

are a part of.

Therefore, finished projects also decreased compared to same period last year.

(2) Hardware –

related parties.

Sales of hardware to related parties decreased due to the reclassification of revenue from

related party hardware revenue to non-related party hardware revenue.

After we achieved business entrance certification in the

name of Recon and could cooperate with oilfield customers directly two years ago, we no longer required the services of a related

party with such certification and, accordingly, revenue from related-parties decreased.

So long as the local agency still purchases

automation products from Recon, we will continue to recognize revenue from related parties, but we anticipate that such hardware

and software related party revenue is likely to fluctuate from year to year.

Sales of hardware to

related parties decreased because we used to sell our products to oilfield customers through our related parties.

After we obtained

our own entrance certification, Recon now can sell to oilfield customers directly.

As a result, sales to related-parties decreased.

(3) Service business.

Service revenue

for three months ended March 31, 2013 and 2014 consisted mainly of minor maintenance services, which were provided upon request

by customers.

(4) Software business.

The software sales to non-related parties increased approximately ¥0.2 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.

Service revenue for three months ended

September 30, 2014 consisted mainly of minor maintenance services, which were provided upon request by customers.

(4) Software business non-related parties.

The software sales to non-related parties decreased

approximately ¥0.7 million ($0.1

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.

(5) Software business –

related parties.

the quarter ended March 31, 2014, we recorded software revenue of ¥59,400 ($9,640) to a related party.

As mentioned above,

we used to develop our Ji Dong oilfield business through a local agent that is a related party.

Since we achieved business entrance

certification by ourselves and could thus directly compete for projects, revenue through this related party decreased overall.

So Software revenue from related party also decreased during this period.

During the quarter ended September 30, 2013, we

recorded software revenue of ¥0.3 million to a related party.

We used to develop our Ji Dong oilfield business through a

local agent that is a related party.

Since we achieved business entrance certification by ourselves and could thus directly

bid for projects, revenue through this related party decreased overall and decreased to zero during this period.

Cost and Margin

For the Three Months Ended

September 30,

Total revenues

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Our cost of revenues includes raw materials and costs related to design, implementation, delivery and maintenance of products and

All materials and components we need can be purchased or manufactured by subcontracts.

All materials and components we need can be purchased or manufactured by subcontractors.

Usually the prices of electronic

components do not fluctuate dramatically due to market competition and will not significantly affect our cost of revenues.

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.

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 ¥3.3 million in the three months ended March 31, 2013 to approximately ¥13.0 million ($2.1

million) for the same period of 2014, an increase of approximately ¥9.6 million ($1.6 million), or 288.1%.

This increase was

mainly caused by higher revenue during the three months ended March 31, 2014 compared to the same period of 2013.

decreased from approximately ¥6.2 million in the three months ended September 30, 2013 to approximately ¥3.7 million ($0.6

million) for the same period of 2014, a decrease of approximately ¥2.5 million ($0.4 million), or 40.7%.

This decrease was

mainly caused by lower revenue during the three months ended September 30, 2014 compared to the same period of 2013.

As a percentage

of revenues, our cost of revenues increased from 44.6% in 2013 to 71.2% in 2014, largely due to increased hardware sales, which

feature higher cost of revenues, than service or software revenues.

of revenues, our cost of revenues increased from 54.0% in 2013 to 85.7% in 2014, largely due to decreased hardware sales.

Gross profit .

Our gross profit increased to approximately ¥5.2 million ($0.9 million) for the three months ended March 31, 2014 from approximately

¥4.2 million for the same period in 2013.

Our gross profit as a percentage of revenue decreased to 28.8% for the three months

ended March 31, 2014 from 55.4% for the same period in 2013.

This was mainly due to increased hardware revenue with lower gross

profit margins during the three months ended March 31, 2014 as compared to the same period last year where we had higher software

revenue with higher gross margins during the three months ended March 31, 2013.

Our gross profit decreased to approximately ¥0.6 million ($0.1 million) for the three months ended September 30, 2014 from

approximately ¥5.3 million for the same period in 2013.

Our gross profit as a percentage of revenue decreased to 14.3% for

the three months ended September 30, 2014 from 46.0% for the same period in 2013.

This was mainly due to decreased hardware revenue

during the three months ended September 30, 2014 as compared to the same period last year when we had higher software revenue with

higher gross margins during the three months ended September 30, 2013.

In more detail:

For the Three Months Ended

September 30,

Total revenues-hardware and software- non related parties

Cost of revenues -hardware and software- non related parties

The revenue increase from hardware and

software to non-related parties of ¥13.8 million was mainly due to the increase from the furnaces sales and automation business

in the three months ended March 31, 2014.

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

The revenue decrease from

hardware and software to non-related parties of ¥6.9 million from 2013 to 2014 was mainly due to the decrease from the

furnaces sales and automation business in the three months ended September 30, 2014.

The gross profit from the hardware and

software sales to non-related parties decreased ¥

4.4million ($0.7 million) compared to the same period of last year.

For the Three Months Ended

September 30,

Total revenues-hardware and software - related parties

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While gross profit decreased was mainly because revenue decreased as we developed business

directly with oilfield, rather than cooperation with some parties.

directly with oilfield, rather than cooperation with related parties.

There was no activity with our related parties during the

quarter ended September 30, 2014.

For the Three Months Ended

September 30,

Total revenues-service

Cost of revenues -service

revenue for three months ended March 31, 2013 and 2014 consisted mainly of minor maintenance services, which were provided upon

request by customers.

There was no fracturing project completed for this period, so no revenue from fracturing service was recorded.

revenue for three months ended September 30, 2014 consisted mainly of minor maintenance services, which were provided upon request

by customers.

Operating Expenses

For the Three Months Ended

September 30,

Selling and distribution expenses

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facilities and depreciation expenses.

Selling expenses decreased

by 38.7%, from approximately ¥1.8 million for the three months ended March 31, 2013 to approximately ¥1.1 million ($0.2

Selling expenses decreased by 48.2%, from approximately ¥1.4 million for the three months

ended September 30, 2013 to approximately ¥0.7 million ($0.1 million) for the same period of 2014.

This decrease was primarily

from decreased service fee, shipping fee, traveling expenses, heating fee and rent expenses.

Selling expenses were 11.8% of total

revenues in the three months ended September 30, 2013 and 16.3% of total revenues in the same period of 2014.

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

expenses incurred in connection with general operations.

General and administrative expenses increased by 35.1%, or ¥1.0

million ($0.2 million), from approximately ¥2.7 million in the three months

ended September 30, 2013 to approximately ¥3.7 million ($0.6 million) in the same

period of 2014.

General and administrative expenses were 23.8% of total revenues in 2013 and 86.0% of total revenues in 2014.

increase in general and administrative expenses was mainly due to increase in consulting fee, salaries, 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 5.2%,

from approximately ¥0.7 million for the three months ended September 30, 2013 to approximately ¥0.6 million ($0.1

million) for the same period of 2014.

This decrease was primarily from decreased traveling expenses, bidding fees, salaries and

maintenance expenses.

Selling expenses were 23.9% of total revenues in the three months ended March 31, 2013 and 6% of total revenues

in the same period of 2014.

General and administrative

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 misc.

expenses incurred

in connection with general operations.

General and administrative expenses were flat at ¥4.0 million ($0.6 million) for the

three months ended March 31, 2013 and 2014.

Research and development

(“R&D”) expenses .

Research and development expenses consist primarily of salaries and related expenditures

of our research and development projects.

Research and development expenses increased by 30.5%, from approximately ¥0.6 million

for the three months ended March 31, 2013 to approximately ¥0.7 million ($0.1 million) for the same period of 2014.

This increase

was primarily due to higher input of materials and equipment of R&D on our furnace services.

This decrease was primarily due to reduced spending on materials and equipment

for R&D on our furnace, because we didn’t have new improvement project of our furnace.

For the Three Months Ended

Loss from operations

September 30,

Income (loss) from operations

Interest and other income (expense)

Loss before income tax

Provision (benefit) for income tax

Income (loss) before income tax

Provision for income tax

Net income (loss)

Net income attributable to non-controlling interest

Net loss attributable to ordinary shareholders

Loss from operations .

Loss from operations was approximately ¥0.6 million ($0.1 million) for the three months ended March 31, 2014, compared to loss

of ¥2.2 million for the same period of 2013.

This decrease in loss from operations can be attributed primarily to the increased

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

Net income (loss) attributable to ordinary shareholders

Income (loss) from

Loss from operations was approximately ¥4.4 million ($0.7 million) for the three months ended September 30,

2014, compared to income of ¥0.5 million for the same period of 2013.

This decrease in income from operations can be attributed

primarily to the decreased revenue and gross margins and increases in general and administrative expenses.

Interest and other

income (expense).

Interest and other expense was approximately ¥1.1 million ($0.2 million) for the three months ended March

31, 2014, compared to interest and other income of ¥0.8 million for the same period of 2013.

Interest and other income was approximately ¥0.3 million ($0.05 million) for the three months ended September

30, 2014, compared to interest and other expense of ¥0.1 million for the same period of 2013.

The ¥0.4 million ($0.07 million)

decrease in interest and other income was primarily due to changes in the fair value of warrant liability ,,

a decrease in subsidy income and an increase in loss from investment, offset by a decrease in interest expense.

Investment loss.

The Company held approximately 24.4% interest of Avalon

at March 31, 2014.

Since Avalon’s operating results for three months ended March 31, 2014 will not be available as of the

filing date, the Company used Avalon’s last quarter’s operating results as the best estimate for the three months ended

March 31, 2014, which was a loss of approximately ¥0.1 million ($22,000).

Provision (benefit)

increase in interest and other income was primarily due to changes in the fair value of warrant liability and a decrease in loss

from investment, offset by a decrease in subsidy income, interest income, gain from foreign currency exchange and an increase in

interest expense.

for income tax .

Benefit for income tax for the three months ended March 31, 2013 was approximately ¥0.2 million and provision

for income tax was ¥0.2 million ($24,000) for the three months ended March 31, 2014.

This increase 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 notwithstanding

consolidated losses from operations for the three months ended March 31, 2014.

a result of the factors described above, net loss was approximately ¥1.8 million ($0.3 million) for the three months ended

March 31, 2014, an increase of approximately ¥0.6 million ($0.1 million) from net loss of ¥1.2 million for the same period

Net loss attributable

to ordinary shareholders .

As a result of the factors described above, net loss attributable to ordinary shareholders was approximately

¥1.9 million ($0.3 million) for the three months ended March 31, 2014, an increase of approximately ¥0.7 million ($0.1

million) from net loss attributable to ordinary shareholders of ¥1.2 million for same period of 2013.

Nine Months Ended March 31, 2014 Compared to Nine Months

Ended March 31, 2013

For the Nine Months Ended

Hardware -non-related parties

Hardware - related parties

(20,089,868 )

Software –

non-related parties

Software - related parties

Total revenues

revenues increased by 21.5%, or approximately ¥13.5 million ($2.2 million), from ¥62.5 million for the nine months ended

March 31, 2013 to ¥76.0 million ($12.3 million) for the same period of 2014.

The changes in our revenues for the nine-month

period were due to the following factors:

(1) Hardware business.

During the nine-month ended March 31, 2014, the increase in hardware revenue

was mainly due to higher sales of furnaces and automation products .

(2) Hardware –

related parties.

Sales of hardware from related parties decreased because we used

to develop business on Ji Dong oilfield through some local agent companies.

After we achieved business entrance certification in

the name of Recon and could cooperate with oilfield customers directly two years ago, revenue from related-parties decreased, while

the local agency might still purchase automation products from Recon, there would be always revenue from related parties and the

revenue of both hardware and software from related parties might fluctuate from year to year.

(3) Service business.

Service revenue for nine months ended March 31, 2014 consisted mainly of minor

maintenance services, which were provided upon request by customers.

Our fracturing business is still proceeding, and we also obtained

new contracts of this business.

In addition, we successfully achieved access certification of other oilfield branches, which means

we can provide our fracturing services to a broader customer base.

The ¥20.6 million

service revenue in the nine months ended March 31, 2013 was mainly due to several fracturing service contracts signed

with Sinopec Zhongyuan oilfield.

(4) Software business.

The software sales increased 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

(5) Software business –

related parties.

In the nine months ended March 31, 2014, we recorded

software revenue of ¥1.4 million ($0.2 million) to a related party, a decrease of ¥2.3 million ($0.4 million) from the

same period of last year.

Cost and Margin

For the Nine Months Ended

Total revenues

Cost of revenues

Cost of revenues .

Our cost of revenues includes raw materials and costs related to design, implementation, delivery and maintenance of products and

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.

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 ¥41.9 million in the nine months ended March 31, 2013 to approximately ¥49.0 million ($7.9

million) for the same period of 2014, an increase of approximately ¥7.0 million ($1.1 million), or 16.8%.

As a percentage of

revenues, our cost of revenues decreased from 67.0% in 2013 to 64.4% in 2014.

This decrease was mainly caused by lower service

Gross profit .

Our gross profit increased to approximately ¥27.1 million ($4.4 million) for the nine months ended March 31, 2014 from approximately

¥20.6 million for the same period in 2013.

Our gross profit as a percentage of revenue increased to 35.6% for the nine months

ended March 31, 2014 from 33.0% 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 nine months ended March 31, 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 Nine Months 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 ¥37.4 million was mainly due to the hardware revenue increase from the furnaces sales and automation products

in the nine months ended March 31, 2014.

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

¥12.0 million ($2.0 million) compared to the same period of last year.

For the Nine Months 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 Nine Months Ended

Total revenues - service

(20,089,868 )

Cost of revenues -service

(15,666,127 )

¥20.6 million service revenue for the nine months ended March 31, 2013 was mainly due to several fracturing service contracts

signed with Sinopec Zhongyuan oilfield.

We generated 23.5% gross profit margin from these service contracts.

Operating Expenses

For the Nine Months Ended

Selling and distribution expenses

General and administrative expenses

Research and development expenses

Operating expenses

Selling and distribution

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 were flat at ¥4.7 million ($0.8 million) for nine months ended March

31, 2013 and 2014.

Selling expenses were 7.5% of total revenues in the nine months ended March 31, 2013 and 6.2% of total revenues

in the same period of 2014.

General and administrative

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 23.6%, or ¥2.0 million ($0.3 million), from approximately ¥8.5 million

in the nine months ended March 31, 2013 to approximately ¥10.5 million ($1.7 million) in the same period of 2014.

administrative expenses were 13.5% of total revenues in 2013 and 13.7% of total revenues in 2014.

The increase in general and administrative

expenses was mainly due to an increase in consulting fees related to IR services, salary, an increase in the allowance for doubtful

accounts, share-based compensation and traveling expenses.

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 35.2%, from approximately ¥6.3 million

for the nine months ended March 31, 2013 to approximately ¥4.1 million ($0.7 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 in 2014.

For the Nine Months Ended

Income 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 from operations .

Income from operations was approximately ¥7.8 million ($1.3 million) for the nine months ended March 31, 2014, compared to

income of ¥1.2 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.

Investment loss.

Investment loss was ¥0.9 million ($0.1 million) for the nine months ended March 31, 2014.

The Company held approximately

24.4% interest of Avalon at March 31, 2014.

Since Avalon’s operating results for three months ended March 31, 2014 is not

available as of the filing date, the Company used Avalon’s last quarter’s operating results as the best estimate for

Interest and other

income (expense).

Interest and other expense was approximately ¥1.2 million ($0.2 million) for the nine months ended March

31, 2014, compared to interest and other income of ¥1.4 million for the same period of 2013.

The ¥2.6 million ($0.4 million)

decrease in interest and other income was primarily due to change in fair value of warrant liability ,

increase in loss from investment and decrease in interest income and foreign currency exchange gain, increase in loss from investment

and offset by increase in subsidy income and decrease in interest expense.

Provision for income

Provision for income tax for the nine months ended March 31, 2013 was approximately ¥0.3 million and ¥1.6 million

($0.3 million) for the nine months ended March 31, 2014.

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

from operations for the nine months ended March 31, 2014.

As a result of the factors described above, net income was approximately ¥5.0 million ($0.8 million) for the nine months ended

March 31, 2014, an increase of approximately ¥2.7 million ($0.4 million) from net income of ¥2.3 million for the same period

Net income attributable

to ordinary shareholders .

As a result of the factors described above, net income attributable to ordinary shareholders was

approximately ¥3.9 million ($0.6 million) for the nine months ended March 31, 2014, an increase of approximately ¥2.2

million ($0.4 million) from net income attributable to ordinary shareholders of ¥1.7 million for same period of 2013.

Adjusted EBITDA

Provision for income tax for the three months ended September 30, 2013 was approximately ¥0.2 million

and ¥30,000 ($5,000) for the three months ended September 30, 2014 because we had a loss for the period ended September

This decrease of provision for income tax was mainly due to the pre-consolidation income from our

subsidiaries in China where we must pay income tax decreased for the three months ended September 30, 2014.

Net income (loss) .

As a result of the factors described above, net loss was approximately ¥4.2 million ($0.7 million) for the three months ended

September 30, 2014, a decrease of approximately ¥4.4 million ($0.7 million) from net income of ¥0.2 million for the same

period of 2013.

Net income (loss)

attributable to ordinary shareholders .

As a result of the factors described above, net loss attributable to ordinary shareholders

was approximately ¥4.2 million ($0.7 million) for the three months ended September 30, 2014, a decrease of approximately ¥4.2

million ($0.7 million) from net income attributable to ordinary shareholders of approximately ¥46,000 for same period of 2013.

Adjusted EBITDA (Non GAAP)

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 Nine Months Ended

Reconciliation of Adjusted EBITDA

to Net Income

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

(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 Three Months Ended

September 30,

Reconciliation of Adjusted EBITDA to Net Income (loss)

Net income (loss)

Provision for income taxes

6 unchanged sentences

Adjusted EBITDA

Adjusted EBITDA improved

by approximately ¥6.1 million ($1.0 million) to approximately ¥11.7 million ($1.9 million) for the nine months ended March

31, 2014 compared to approximately ¥

5.6 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 Nine Months Ended

Reconciliation of Net Income attributable to ordinary shareholders

to Adjusted Net Income attributable to ordinary shareholders

Net income attributable to ordinary shareholders

Special items (A) :

Adjusted EBITDA decreased

by approximately ¥3.7 million ($0.6 million) to approximately loss of ¥2.3 million ($0.4 million) for the three months

ended September 30, 2014 compared to approximately income of ¥1.5 million for the same period in 2013.

This decrease

was due to decreased revenue and increased professional service consulting expense.

Adjusted Net Income (Loss) and Adjusted Earnings (Loss) Per

For the Three Months Ended

September 30,

Reconciliation of Net Income (loss) attributable to Recon Technology, Ltd to

Adjusted Net Income (loss) attributable to Recon Technology, Ltd

Net income (loss) attributable to Recon Technology, Ltd

Noncash items (A) :

Change in fair value of warrants liability

2 unchanged sentences

Stock compensation expense

Adjusted net income attributable to ordinary shareholders

Adjusted net income (loss) attributable to Recon Technology, Ltd

Reconciliation of U.S.

GAAP Earnings Per Share

GAAP Adjusted Earnings Per Share

GAAP earnings per share

GAAP Earnings (Loss) Per Share to Non U.S.

GAAP Adjusted Earnings (Loss) Per Share

GAAP earnings (loss) per share

Impact of special items on earnings per share

GAAP adjusted earnings per share

GAAP adjusted earnings (loss) per share

Weighted - average shares -diluted

(A) Special items are certain non-cash expenses that are

included in our U.S.

(A) Noncash items are certain expenses that are included in

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.

There was no income tax benefit associated with the noncash items.

The non-GAAP financial measures

are provided to enhance investors' overall understanding of Recon's current financial performance.

Liquidity and Capital Resources

1 unchanged sentence

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 2014, we had cash and cash equivalents in the amount of approximately ¥8.9

million ($1.4 million).

maturities of no more than three months.

As of September 30 2014, we had cash and cash equivalents in the amount of approximately

¥6.0 million ($1.0 million).

Indebtedness .

As of March 31, 2014, except for approximately

¥0.2 million ($32,000) of short-term borrowings from related parties, and ¥15.63 million ($2.5 million) in commercial loans

from local banks, we did not have any finance leases or purchase commitments, guarantees or other material contingent liabilities.

As of September 30, 2014, except for approximately ¥5.2 million ($0.8 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

26 unchanged sentences

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

As of March 31, 2014, we had total assets of approximately ¥156.6 million ($25.4 million), which includes cash of

approximately ¥8.9 million ($1.4 million), net accounts receivable from third parties of approximately ¥55.8 million ($9.1

As of September 30, 2014, we had total assets of approximately ¥145.6 million ($23.7 million), which includes cash

of approximately ¥6.0 million ($1.0 million), net accounts receivable from third parties of approximately ¥38.4 million

($6.2 million), and net accounts receivable from related parties of approximately ¥7.9 million ($1.3 million).

Working capital amounted

to approximately ¥94.9 million ($15.4 million), and shareholders’

equity amounted to approximately ¥102.9 million

($16.7 million).

Working capital

amounted to approximately ¥81.2 million ($13.2 million), and shareholders’

equity amounted to approximately ¥100.8

million ($16.4 million).

Cash from Operating

Net cash used in operating activities was approximately ¥15.3 million ($2.5 million) for the nine months ended

March 31, 2014.

This was a decrease of approximately ¥32.6 million ($5.3 million) compared to net cash provided by operating

activities of approximately ¥17.3 million for the nine months ended March 31, 2013.

Net cash used in operating activities was approximately ¥10.0 million ($1.6 million) for the three months ended

September 30, 2014.

This was an increase of approximately ¥2.0 million ($0.3 million) compared to net cash used in operating

activities of approximately ¥8.0 million for the three months ended September 30, 2013.

In more detail:

Net cash used in operating

activities totaled approximately ¥15.3 million for the nine months ended March 31, 2014, are primarily attributable to net

income adjusted to reconcile to net cash provided by operating activities of ¥5.0 million, which primarily included an adjustment

for a $0.9 million change in fair value of warrant liability ,

a ¥0.5 million of depreciation, a ¥0.7 million of provision for doubtful accounts, a ¥1.7 million of share based compensation,

a ¥0.4 million of restricted shares issued to consulting

firm and a ¥0.9 million of loss from investment.

Net cash used in changes in operating assets and liabilities resulted in a

net cash use of ¥25.2 million, which mainly due to a ¥12.3 million change in accounts receivable, notes receivable and

other receivable, a ¥8.8 million change in inventory, a ¥5.3 million change in purchase advance, a ¥1.0 million change

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

welfare, offset by a ¥2.2 million change

in accounts payable, a ¥1.2 million change in taxes payable and a ¥0.9 million change in deferred income.

used in operating activities were primarily for purchase of 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 calendar year, and we believe

these receivables will be recovered based on contractual payment schedules.

activities are primarily attributable to net loss adjusted to reconcile to net cash used in operating activities of ¥1.5 million,

which primarily included a ¥1.2 million of restricted shares issued to consulting firm,, a ¥0.6 million of share based

compensation, an adjustment for a $0.3 million change in fair value of warrant liability, a ¥0.1 million of depreciation and

a ¥0.07 million of recovery for doubtful accounts.

Net cash used in changes in operating assets and liabilities resulted in

a net cash use of ¥7.7 million, which mainly due to a ¥2.9 million change in inventory, a ¥2.4 million change in other

receivable, a ¥2.8 million change in purchase advance, a ¥1.5 million change in prepaid expense, a ¥1.8 million change

in trade payable and other payable, a ¥0.8 million change in taxes payable and ¥0.5 million change in advances from customers,

offset by a ¥5.6 million change in accounts receivable.

Our net cash used in operating activities were primarily for purchase

of inventories for projects in the upcoming quarters and short-term funding support to some of our suppliers.

Cash from Investing

Net cash used in investing activities was approximately ¥0.2 million ($26,000) for the nine months ended March

31, 2014, a decrease of ¥0.3 million ($58,000) from ¥0.5 million for the same period of 2013.

The decrease was due to a

decrease in the purchase of property and equipment.

Net cash used in investing activities was approximately ¥96,000 ($16,000) for the three months ended September

30, 2014, an increase of ¥89,000 ($15,000) from ¥7,000 for the same period of 2013.

The increase was due to a increase

in the purchase of property and equipment.

Cash from Financing

Net cash provided by financing activities amounted to approximately ¥11.9 million ($1.9 million) for the nine

months ended March 31, 2014, compared to cash flows used in financing activities of approximately ¥14.1 million for the same

period in 2013.

During the nine-month period ended March 31, 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.

In addition, we repaid ¥12.87 million

($2.1 million) in short term borrowings to related parties and received ¥18.5 million ($3.0 million) of net loan proceeds from

a commercial bank, which was guaranteed by one of our shareholders.

Net cash used in financing activities amounted to ¥2.0 million ($0.3 million) for the three months ended September

30, 2014, compared to cash flows provided by financing activities of approximately ¥2.3 million for the same period in 2013.

During the three-month period ended September 30, 2014, we repaid ¥2.0 million ($0.3 million) in short term bank loans.

Working Capital .

Total working capital as of March 31, 2014 amounted to approximately ¥94.9 million ($15.4 million), compared to approximately

Total working capital as of September 30, 2014 amounted to approximately ¥81.2 million ($13.2 million), compared to approximately

¥83.1 million as of June 30, 2014.

Total current assets as of March 31, 2014 amounted to approximately ¥148.6 million ($24.1

million), an increase of approximately ¥19.9 million ($3.2 million) compared to approximately ¥128.7 million at June 30,

The increase in total current assets at March 31, 2014 compared to June 30, 2013 was mainly due to an increase in trade accounts

receivable, inventory and purchase advances.

Total current assets as of September 30, 2014 amounted to approximately ¥126.0 million

($20.5 million), a decrease of approximately ¥7.4 million ($1.2 million) compared to approximately ¥133.4 million at June

The decrease in total current assets at September 30, 2014 compared to June 30, 2014 was mainly due to a decrease in

cash and cash equivalents, and trade accounts receivable.

Current liabilities

amounted to approximately ¥53.7 million ($8.7 million) at March 31, 2014, in comparison to approximately ¥46.7 million

amounted to approximately ¥44.8 million ($7.3 million) at September 30, 2014, in comparison to approximately ¥50.3 million

at June 30, 2014.

This increase of liabilities was attributable mainly to an increase in short-term bank loans, trade accounts

payable, taxes payable and warrant liability.

Quantitative and Qualitative

Disclosures about Market Risk.

This decrease of liabilities was attributable mainly to a decrease in short-term bank loans, trade accounts payable,

taxes payable and warrant liability.

Quantitative and Qualitative Disclosures about Market

Not applicable.

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-Q

Item 1. Financial Statements