What changed in this filing

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Item 1. Financial Statements

2015-02-13 compared with 2014-11-13 · 533 added, 377 removed, 388 unchanged (70% of the section changed)

Financial Statements.

See the unaudited condensed consolidated

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.

The following discussion

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

condensed consolidated financial statements and the related notes included elsewhere in this report.

This discussion contains forward-looking

statements that involve risks and uncertainties.

Actual results and the timing of selected events could differ materially from

those anticipated in these forward-looking statements as a result of various factors.

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.

Management’s

Discussion and Analysis of Financial Condition and Results of Operations.

The following

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

our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report.

This discussion

contains 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 Nanjing Recon Technology Co.

Ltd (“Nanjing

Recon”) and Beijing Recon BHD Petroleum Technology Co.

Ltd (“BHD”and together with Nanjing Recon, our

“Domestic Companies”).

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

4 unchanged sentences

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

Our Domestic Companies provide the oil and

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

Nanjing Recon:

Our VIEs provide

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

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

oilfield companies.

It mainly focuses on providing automation solutions to the oil exploration industry, including monitoring wells,

automatic metering to the joint station production, process monitor, and a variety of oilfield equipment and control systems.

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

and services.

Possessing proprietary patents and substantial industry experience, BHD has built up stable and strong working relationships

with the major oilfields in China.

It mainly focuses on providing automation solutions to the oil exploration

industry, including monitoring wells, automatic metering to the joint station production,

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

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

productions and services.

Possessing proprietary patents and substantial industry experience,

BHD has built up stable and strong working relationships with the major oilfields in

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.

During this six-month period,

affected by decreased oil prices and CAPEX expenditures of our clients, our finished projects were maintained at a lower

level compared to the same period of last year.

Management expects the volume of finished projects will recover and thus

revenue will increase during the balance of fiscal year ending June 30, 2015.

During this period, we have achieved

some major accomplishments on our self-developed down-hole equipment and oversees business development.

Products and Services

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production company.

The burner has the following characteristics:

The burner we provide has the following characteristics:

high degree of automation, energy conservation, high

turn-down ratio, high security and environmental safety.

Oil and Gas Production Improvement Techniques

Oil and Gas Production Improvement

Packers of Fracturing.

1 unchanged sentence

It is used for easy seat sealing and sand uptake prevention.

The utility model reduces desilting volume and prevents sand-up, which

makes the deblocking processes easier to realize.

The utility model reduces desilting volume and prevents sand-up,

which makes the deblocking processes easier to realize.

The back flushing is sand-stick proof.

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sand prevention.

This sand prevention technique has been adapted to more than 100 wells, including heavy oil wells, light oil wells,

water wells and gas wells, with a 100% success rate and a 98% effective rate.

This sand prevention technique has been adapted to more than 100 wells, including heavy oil wells, light oil

wells, water wells and gas wells, with a 100% success rate and a 98% effective rate.

Water Locating and

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Fissure Shaper.

This is our proprietary

product that is used along with a perforating gun to effectively increase perforation depth by between 46% and 80%, shape stratum

fissures, improve stratum diversion capability and, as a result, improve our ability to locate oilfields and increase the output

of oil wells.

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 System.

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

Natural Gas Flow

Computer System.

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

Recon Supervisory

Control and Data Acquisition System (“SCADA”).

Recon SCADA is a system which applies to the oil well, measurement station,

and the union station for supervision and data collection.

Recon SCADA is a system which applies to the oil well, measurement

station, and the union station for supervision and data collection.

EPC Service of Pipeline

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and construction processes.

Our management still believes we need to expand our core business, move into new markets, and develop

Our management still believe we need to expand our core business, move into new markets, and develop

new businesses quickly for the coming years.

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SCADA and related technical support services will address the needs of the oil well automation system market, for which we forecast

strong needs in the short term.

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.

increasing demand in short term and strong needs in the long term.

Gathering and

1 unchanged sentence

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.

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.

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

We believe we cooperated well with Zhongyuan Oilfield in fiscal years 2013 and 2014 and expect to continue growing

revenue from fracturing and related stimulation services in the coming years.

New business .

6 unchanged sentences

Growth Strategy

As a smaller China-focused

company, it is our basic strategy to focus on developing our onshore oilfield business, that is, the upstream of the industry.

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

company with our current customers mostly based in China, it is our basic strategy to focus on

developing our onshore oilfield business, that is, the upstream of the industry.

Due to the remote location and difficult

environments of China’s oil and gas fields, foreign competitors rarely enter those areas.

Large domestic oil

3 unchanged sentences

Thus, the market for technical support and project service is still in its early stage.

management insists on providing high quality products and service in oilfields in which we have a geographical advantage.

will allow us to avoid conflicts of interest with bigger suppliers of drilling equipment and protect our position within the market

Our mission is to increase the automation and safety levels of industrial petroleum production in China and improve the

underdeveloped working process and management mode by using advanced technologies.

At the same time, we are always looking to improve

our business and to increase our earning capability.

Our management insists on providing high quality products and service in oilfields in which we have a geographical advantage.

This will allow us to avoid conflicts of interest with bigger suppliers of drilling equipment and protect our position within

the market segment.

Our mission is to increase the automation and safety levels of industrial petroleum production in China and

improve the underdeveloped working process and management mode by using advanced technologies.

At the same time, we are always

looking to improve our business and to increase our earning capability.

Recent Industry Developments

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

(1) The opening of

the Chinese oil industry to participation by non-state owned service providers and vendors played an increasingly important role

in the high-end oilfield service segment to allow competition based on efficiency and price.

As oil and gas fields are depleted,

it becomes more challenging to find and convert reserves into usable energy sources.

As the industry has permitted competition

by private companies and oil companies have formed separate service companies, high-tech service has gradually opened up to private

(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.

(1) The opening of the Chinese oil industry

to participation by non-state owned service providers and vendors played an increasingly important role in the high-end oilfield

service segment to allow competition based on efficiency and price.

As oil and gas fields are depleted, it becomes more challenging

to find and convert reserves into usable energy sources.

As the industry has permitted competition by private companies and oil

companies have formed separate service companies, high-tech service has gradually opened up to private companies.

(2) As worldwide oil and gas prices

decreased, development transform and strict management have been recent subject of domestic oil companies.

reforms have been their first choice to achieve their goals about quality and efficiency upgrade.

The construction of digital

oilfield have also been one of oil companies’

long term development strategies.

Even though total capital expenditure

is expected to be reduced, we believe investment in technology reform will maintain at a high level.

the Company will benefit from this trend.

Management is focused on these factors and will seek to extend

our business on the industrial chain, including 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:

the amount of spending by our customers, primarily those in the oil and gas industry;

growing demand from large corporations for improved management and software designed to achieve such corporate performance;

the procurement processes of our customers, especially those in the oil and gas industry;

competition and related pricing pressure from other oilfield service solution providers, especially those targeting the Chinese

oil and gas industry;

the ongoing development of the oilfield service market in China;

inflation and other macroeconomic factors.

Our operating results

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

and gas price;

amount of spending by our customers, primarily those in the oil and gas industry;

demand from large corporations for improved management and software designed to achieve

such corporate performance;

procurement processes of our customers, especially those in the oil and gas industry;

seasonality caused by own customers’

capital expenditure planning and change of

Generally speaking, the second quarter ending December 31 is

our high season when the customers make payment to use up their budget for the calendar year;

while the third quarter ending

March 31 and the fourth quarter ending June 30 are generally our low seasons due to the cold weather in the oil field and the

customers’

pending approval of their expenditure.

and related pricing pressure from other oilfield service solution providers, especially

those targeting the Chinese oil and gas industry;

ongoing development of the oilfield service market in China;

and other macroeconomic factors.

Unfavorable changes

3 unchanged sentences

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

our revenue growth, in terms of the proportion of our business dedicated to large companies and

our ability to successfully develop, introduce and market new solutions and services;

our ability to increase our revenues from both old and new customers in the oil and gas industry

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 markets and industries in the oil and gas industry in China.

our revenue growth, due to the high percentage of the

proportion of our business dedicated to large state-owned oil and gas companies and

ability to successfully collect and recognize revenue from such large companies and develop, introduce and market new

ability to increase our revenues from both old and new customers in the oil and gas industry

ability to effectively manage our operating costs and expenses;

ability to effectively implement any targeted acquisitions and/or strategic alliances

so as to provide efficient access to markets and industries in the oil and gas industry

Critical Accounting Policies and Estimates

19 unchanged sentences

Significant accounting estimates reflected in our Company’s

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.

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

Consolidation of VIEs

9 unchanged sentences

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;

as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against our general

Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general

rather, they represent claims against the specific assets of the consolidated VIEs.

7 unchanged sentences

lapsed, or the Company has objective evidence that the criteria specified in customers’

acceptance provisions have been satisfied.

The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

acceptance provisions have been

The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been

Revenue from hardware

8 unchanged sentences

Contract costs are accumulated during the periods of installation and testing or commissioning.

is short term.

this is short term.

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

1 unchanged sentence

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.

Revenue is recognized when

services are completed and acceptance is determined by a completion report signed by the customer.

Deferred income represents

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when measuring fair value.

The three levels of

inputs are defined as follows:

The three levels

of inputs are defined as follows:

Level 1 inputs to the valuation

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charged to operations.

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

Long-term investment is measured at fair value on a non-recurring basis at December 31, 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

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.

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 December 31, 2014.

Deferred Tax Estimates

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we reduce the carrying value of the long-lived asset by the estimated excess of the carrying value over the projected discounted

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.

In the past, we have not had to make significant adjustments to the carrying values of our long-lived assets, and

we do not anticipate a need to do so in the future.

However, circumstances could cause us to have to reduce the value of our capitalized

assets more rapidly than we have in the past if our revenues were to significantly decline.

Estimated cash flows from the use of

the long-lived assets are highly uncertain and therefore the estimation of the need to impair these assets is reasonably likely

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.

2 unchanged sentences

There were no impairments at June 30, 2014

and September 30, 2014.

and December 31, 2014.

Share-Based Compensation

7 unchanged sentences

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.

November 2014, The FASB issued Accounting Standards Update (ASU) No.

2014-17, “Business Combinations (Topic 805):

Pushdown Accounting, a consensus of the FASB Emerging Issues Task Force, which was ratified by the Financial Accounting

Standards Board (FASB) on Oct 8, 2014.

2014-17 impacts the stand-alone financial statements of an acquired entity

(subsidiary), however it does not change the requirement for an acquirer (parent) to apply business combination accounting

and record its new basis in the acquired entity’s assets, liabilities, and non-controlling interests in the

acquirer’s consolidated financial statements.

The amendments in this Update are

effective on November 18, 2014.

After the effective date, an acquired entity can make an election to apply the guidance to

future change-in-control events or to its most recent change-in-control event.

Management believes this ASU No.

not have any significant impact on the Company’s consolidated financial position and results of operations.

In January 2015, the

FASB issued ASU 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement

Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”).

ASU 2015-01 eliminates from GAAP the

concept of extraordinary items.

The amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider

whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual

in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning

after December 15, 2015.

Early adoption is permitted.

The Company is currently in

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

The impact upon adoption would not affect the Company’s consolidated

financial position or results of operations.

Results of Operations

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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

Three Months Ended December 31, 2014 Compared to Three

Months Ended December 31, 2013

During the three months ended December

31, 2014, we encountered worldwide decline of oil and gas prices and decreased CAPEX expense of our major clients.

our projects were slowed and/or cancelled.

Our operation and revenue were affected negatively.

For the Three Months Ended

September 30,

Hardware - non-related parties

(21,001,766 )

Hardware - related parties

2 unchanged sentences

Total revenues

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.

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.

(24,937,354 )

total revenues decreased by 53.9%, or approximately ¥24.9 million ($4.1 million), from approximately ¥46.3 million

for the three months ended December 31, 2013 to ¥21.3 million ($3.5 million) for the same period of 2014.

three months ended December 31, 2014, our largest customers CNPC and SINOPEC, continued to reduce their capitalized exploration

and production expenditure.

As a result, the number of projects we provided to these customers 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 these customers

as they or their 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.

The changes in our revenues for

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

(1) Hardware business

- non related parties.

During the three-month ended December 31, 2014, the decrease in

hardware revenue was mainly caused by lower sales of furnaces, which are the majority of our hardware sales.

(2) Hardware –

related parties.

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.

After we achieved business entrance certification in the name of Recon

and could directly enter into contract with oilfield customers directly two years ago, we no longer required

the services of a related party with such certification and, accordingly, revenue from

related-parties decreased.

As long as the local agency continue purchasing 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

(3) Service business

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 –

- non related parties.

Service revenue for three months ended December 31, 2014 consisted

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

(4) Software business.

The software sales to non-related parties decreased approximately ¥2.7 million ($0.4

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.

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.

During the quarter ended December 31, 2013, we recorded software

revenue of ¥1.1 million 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.

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.

We reclassified some prior related

party software sales to non-related because they are not a related party anymore.

Cost and Margin

For the Three Months Ended

September 30,

Total revenues

(24,937,354 )

Cost of revenues

(17,390,873 )

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 subcontractors.

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

4 unchanged sentences

Our cost of revenues

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

decreased from approximately ¥29.7 million in the three months ended December 31, 2013 to approximately ¥12.3 million

($2.0 million) for the same period of 2014, a decrease of approximately ¥17.4 million ($2.8 million), or 58.5%.

This decrease was

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

This decrease

was mainly caused by lower revenue during the three months ended December 31, 2014 compared to the same period of 2013.

As a percentage

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

of revenues, our cost of revenues decreased from 64.3% in 2013 to 57.9% in 2014, mainly due to decreased hardware cost of revenue.

Gross profit .

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

Our gross profit decreased to approximately ¥9.0 million ($1.5 million) for the three months ended December 31, 2014 from

approximately ¥16.5 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.

Our gross profit as a percentage of revenue increased to 42.1% for

the three months ended December 31, 2014 from 35.7% for the same period in 2013.

This was mainly due to decreased hardware cost

of revenue during the three months ended December 31, 2014 as compared to the same period last year.

In more detail:

For the Three Months Ended

September 30,

Total revenues-hardware and software- non related parties

(23,726,478 )

Cost of revenues -hardware and software- non related parties

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.

(17,146,703 )

The revenue decrease from hardware and

software to non-related parties of ¥23.7 million was mainly due to the decrease from the furnaces sales and automation business

in the three months ended December 31, 2014.

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

¥6.6 million ($1.1 million) compared to the same period of last year.

For the Three Months Ended

September 30,

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 profit decreased was mainly because revenue decreased as we developed business

directly with oilfield, rather than cooperation with related parties.

There was no activity with our related parties during the

quarter ended September 30, 2014.

Revenue from related parties decreased

was mainly due to reclassification.

Besides, cost of revenue from hardware and software-related parties decreased as revenue decreased.

While gross profit decreased was mainly because revenue decreased as we developed business directly with oilfield, rather than

cooperation with some local agency, which used to be our related parties.

For the Three Months Ended

September 30,

Total revenues-service

Cost of revenues -service

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

revenue for three months ended December 31, 2014 consisted mainly of minor maintenance services, which were provided upon request

by customers.

Our fracturing projects are still on process and not officially accepted by our clients, thus no revenue from fracturing

was recorded this period.

Operating Expenses

For the Three Months Ended

September 30,

Selling and distribution expenses

7 unchanged sentences

Selling expenses decreased by 44.3%, from approximately ¥2.3 million for the three months

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

ended December 31, 2013 to approximately ¥1.3 million ($0.2 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.

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

Selling expenses were 4.9% of total revenues in the three months

ended December 31, 2013 and 5.9% of total revenues in the same period of 2014.

and administrative expenses .

1 unchanged sentence

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.

miscellaneous expenses incurred in connection with general operations.

General and administrative expenses increased by 10.2%

or ¥0.4 million ($61,000), from approximately ¥3.7 million in the three

months ended December 31, 2013 to approximately ¥4.1 million ($0.7 million) in the

same period of 2014.

General and administrative expenses were 8.0% of total revenues in 2013 and 19.2% 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 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.

The increase in general and administrative expenses was mainly due to increase in consulting fee, share-based compensation and

traveling fees.

Research and development

(“R&D”) expenses .

Research and development expenses consist primarily of salaries and related expenditures

of our research and development projects.

Research and development expenses decreased from approximately ¥2.7 million for

the three months ended December 31, 2013 to approximately ¥1.2 million ($0.2 million) for the same period of 2014.

This decrease

was primarily due to the Company spending less research and development expense on furnaces.

For the Three Months Ended

September 30,

Income (loss) from operations

Income from operations

Interest and other income (expense)

Income (loss) before income tax

Income before income tax

Provision for income tax

Net income (loss)

Net income attributable to non-controlling interest

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,

Net income attributable to Recon Technology, Ltd

Income from operations .

Income from operations was approximately ¥2.4 million ($0.4 million) for the three months ended December 31, 2014, compared

to income of ¥7.9 million for the same period of 2013.

This decrease in income from operations can be attributed primarily

to the decreased revenue and increases in general and administrative expenses.

Interest and other

income (expense).

Interest and other income was approximately ¥4.0 million ($0.7 million) for the three months ended December

31, 2014, compared to interest and other expense of ¥65,000 for the same period of 2013.

The ¥4.1 million ($0.7 million)

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.

Provision for

Provision for income tax for the three months ended December 31, 2013 was approximately ¥1.3 million and ¥0.6

million ($0.1 million) for the three months ended December 31, 2014.

This decrease of provision for income tax was mainly due

to the pre-consolidation income from operations in subsidiaries in China on which we must pay income tax decreased for the three

months ended December 31, 2014.

As a result of the factors described above, net income was approximately ¥5.8 million ($0.9 million) for the three months

ended December 31, 2014, an decrease of approximately ¥0.9 million ($0.1 million) from net income of ¥6.6 million for

the same period of 2013.

Net income attributable

to Recon Technology, Ltd .

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

approximately ¥5.3 million ($0.9 million) for the three months ended December 31, 2014, an decrease of approximately ¥0.5

million ($0.1 million) from net income attributable to ordinary shareholders of approximately ¥5.8 million for same period

Six Months Ended December 31, 2014 Compared to Six Months

Ended December 31, 2013

For the Six Months Ended

Hardware - non-related parties

(27,155,913 )

Hardware - related parties

Software - non-related parties

Software - related parties

Total revenues

(32,146,064 )

total revenues decreased by 55.6%, or approximately ¥32.1 million ($5.2 million), from approximately ¥57.8 million for

the six months ended December 31, 2013 to ¥25.6 million ($4.2 million) for the same period of 2014.

The changes in our revenues

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

(1) Hardware business - non related

During the six-month ended December 31, 2014, the decrease in hardware revenue

was mainly caused by lower sales of furnaces and automation system.

(2) Hardware –

related parties.

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.

As 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.

(3) Service business - non related parties.

Service revenue

for six months ended December 31, 2014 consisted mainly of minor maintenance services, which were provided upon request by customers.

(4) Software business.

The software sales to non-related

parties decreased approximately ¥3.4 million ($0.6 million), mainly caused by reclassification of some company to non-related.

(5) Software business –

related parties.

six months ended December 31, 2013, we recorded software revenue of ¥1.4 million to a related party.

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.

Cost and Margin

For the Six Months Ended

Total revenues

(32,146,064 )

Cost of revenues

(19,923,797 )

(12,222,267 )

Cost of revenues .

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

and services.

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

Usually the prices of electronic

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

specialized equipment and incentive chemical products may be directly influenced by metal and oil price fluctuations.

Additionally,

the prices of some imported accessories mandated by our customers can also impact our cost.

Our cost of revenues

decreased from approximately ¥36.0 million for the six months ended December 31, 2013 to approximately ¥16.0 million ($2.6

million) for the same period of 2014, a decrease of approximately ¥19.9 million ($3.2 million), or 55.4%.

This decrease was

mainly caused by lower revenue during the six months ended December 31, 2014 compared to the same period of 2013.

As a percentage

of revenues, our cost of revenues changed slightly from 62.2% in 2013 to 62.6% in 2014.

Gross profit .

Our gross profit decreased to approximately ¥9.6 million ($1.6 million) for the six months ended December 31, 2014 from approximately

¥21.8 million for the same period in 2013.

Our gross profit as a percentage of revenue decreased to 37.4% for the six months

ended December 31, 2014 from 37.8% for the same period in 2013.

This was mainly due to decreased hardware revenue during the six

months ended December 31, 2014 as compared to the same period last year when we had higher software revenue with higher gross

margins during the six months ended December 31, 2013.

In more detail:

For the Six Months Ended

Total revenues-hardware and software- non related parties

(30,578,061 )

Cost of revenues -hardware and software- non related parties

(19,576,691 )

(11,001,370 )

The revenue decrease from hardware and

software to non-related parties of ¥30.6 million was mainly due to the decrease from the furnaces sales and automation business

in the six months ended December 31, 2014.

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

¥11.0 million ($1.8 million) compared to the same period of last year.

For the Six 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.

The decrease in gross profit was mainly due to

revenue decrease as we developed business directly with oilfield, rather than cooperation with the previous related party.

For the Six Months Ended

Total revenues-service

Cost of revenues -service

revenue for six months ended December 31, 2014 consisted mainly of minor maintenance services, which were provided upon request

by customers.

Operating Expenses

For the Six 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 decreased by 45.8%, from approximately ¥3.6 million for the six months

ended December 31, 2013 to approximately ¥2.0 million ($0.3 million) for the same period of 2014.

This decrease was primarily

from decreased service fee, shipping fee and traveling expenses.

Selling expenses were 6.2% of total revenues in the six months

ended December 31, 2013 and 7.6% 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

miscellaneous.

expenses incurred in connection with general operations.

General and administrative expenses increased by 20.7%,

or ¥1.3 million ($0.2 million), from approximately ¥6.5 million in the

six months ended December 31, 2013 to approximately ¥7.8 million ($1.3 million)

in the same period of 2014.

General and administrative expenses were 11.2% of total revenues in 2013 and 30.4% of total revenues

The increase in general and administrative expenses was mainly due to increase in consulting fee, salaries, 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 43.4%, from approximately ¥3.4 million

for the six months ended December 31, 2013 to approximately ¥1.9 million ($0.3 million) for the same period of 2014.

decrease was primarily due to the Company spending less research and development expenses on furnaces.

For the Six Months Ended

Income (loss) from operations

(10,458,215 )

Interest and other income (expense)

Income before income taxes

Provision for income taxes

Net income attributable to non-controlling interest

Net income attributable to Recon Technology, Ltd

Income (loss)

from operations .

Loss from operations was approximately ¥2.1 million ($0.3 million) for the six months ended December

31, 2014, compared to income of ¥8.4 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.

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

Interest and other

income (expense).

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

Interest and other income was approximately ¥4.3 million ($0.7 million) for the six months ended December

31, 2014, compared to interest and other expense of ¥0.2 million for the same period of 2013.

1 unchanged sentence

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 .

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

from investment, offset by a decrease in subsidy income .

Provision for

Provision for income tax for the six months ended December 31, 2013 was approximately ¥1.5 million and ¥0.6

million ($0.1 million) for the six months ended December 31, 2014.

This decrease of provision for income tax was mainly due to

the pre-consolidation income from operations in subsidiaries in China on which we must pay income tax decreased for the six months

ended December 31, 2014.

As a result of the factors described above, net income was approximately ¥1.6 million ($0.3 million) for the six months ended

December 31, 2014, a decrease of approximately ¥5.2 million ($0.8 million) from net income of ¥6.8 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)

Net income attributable

to Recon Technology, Ltd .

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

approximately ¥1.2 million ($0.2 million) for the six months ended December 31, 2014, a decrease of approximately ¥4.7

million ($0.8 million) from net income attributable to ordinary shareholders of approximately ¥5.9 million for same period

Adjusted EBITDA

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)

Adjusted EBITDA.

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 Six Months Ended

Reconciliation of Adjusted EBITDA to Net Income

Provision for income taxes

7 unchanged sentences

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

by approximately ¥10 million ($1.6 million) to approximately income of ¥1.2 million ($0.2 million) for the six months

ended December 31, 2014 compared to approximately of ¥11.2 million income for the same period in 2013.

due to decreased revenue and increased expenses.

Adjusted Net Income and Adjusted Earnings Per Share

For the Six Months Ended

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

Net income attributable to Recon Technology, Ltd

Noncash items (A) :

7 unchanged sentences

GAAP Adjusted Earnings (loss) Per Share

GAAP earnings (loss) per share

GAAP earnings per share

Impact of special items on earnings per share

GAAP adjusted earnings (loss) per share

GAAP adjusted earnings per share

Weighted - average shares -diluted

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

(A) Noncash items are certain expenses that are included in our U.S.

GAAP reported results.

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

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.

(A) Noncash items are certain non-cash expenses that are included

GAAP reported results.

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

The non-GAAP financial measures

1 unchanged sentence

Liquidity and Capital Resources

Cash and Cash Equivalents .

Cash and cash equivalents are comprised of cash on hand, demand deposits and highly liquid short-term debt investments with stated

maturities of no more than three months.

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

¥6.0 million ($1.0 million).

Cash and Cash

Equivalents .

Cash and cash equivalents are comprised of cash on hand, demand deposits and highly liquid short-term debt investments

with stated maturities of no more than six months.

As of December 31, 2014, we had cash and cash equivalents in the amount of

approximately ¥5.0 million ($0.8 million).

Indebtedness .

As of September 30, 2014, except for approximately ¥5.2 million ($0.8 million) of short-term borrowings from related parties,

As of December 31, 2014, except for approximately ¥9.6 million ($1.6 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,

9 unchanged sentences

Under Chinese law, our Domestic Companies are required to set aside a portion (at least

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’

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.

These funds may be distributed

to shareholders at the time of each Domestic Company’s wind up.

Off-Balance Sheet

Arrangements .

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of

any third parties.

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

7 unchanged sentences

Capital Resources .

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

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 ¥81.2 million ($13.2 million), and shareholders’

equity amounted to approximately ¥100.8

million ($16.4 million).

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

of December 31, 2014, we had total assets of approximately ¥156.1 million ($25.4 million), which includes cash of approximately

¥5.0 million ($0.8 million), net accounts receivable from third parties of approximately ¥50.3 million ($8.2 million),

and net accounts receivable from related parties of approximately ¥3.0 million ($0.5 million).

Working capital amounted to

approximately ¥87.1 million ($14.2 million), and shareholders’

equity amounted to approximately ¥98.4 million ($16.0

Cash from Operating

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.

Net cash used in operating activities was approximately ¥15.4 million ($2.5 million) for the six months ended

December 31, 2014.

This was a decrease of approximately ¥8.6 million ($1.4 million) compared to net cash used in operating

activities of approximately ¥6.8 million for the six months ended December 31, 2013.

In more detail:

Net cash used in operating

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.

Net cash used in

operating activities totaled approximately ¥15.4 million for the six months ended December 31, 2014, are primarily attributable

to net income adjusted to reconcile to net cash provided by operating activities of ¥1.6 million, which primarily included

a ¥1.2 million of restricted shares issued to consulting firm, a ¥1.1 million of share based compensation and an adjustment

for a ¥4.1 million change in fair value of warrant liability.

Net cash used in changes in operating assets and liabilities

resulted in a net cash use of ¥15.4 million, which mainly due to a ¥4.8 million change in inventory, a ¥6.2 million

change in other receivable, a ¥3.0 million change in notes receivable, a ¥1.9 million change in prepaid expense, a ¥2.5

million change in accounts receivable and a ¥1.2 million change in deferred income, offset by a ¥2.6 million change in

purchase advance and a ¥1.3 million change in trade payable and other payable.

Our net cash used in operating activities were

primarily for purchase of inventories for projects in the upcoming quarters.

Cash from Investing

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.

Net cash used in investing activities was approximately ¥0.2 million ($28,000) for the six months ended December

31, 2014, an increase of ¥0.1 million ($22,000) from ¥36,000 for the same period of 2013.

The increase was due to an increase

in the purchase of property and equipment and offset by the proceeds from disposal of equipment.

Cash from Financing

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 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 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.

Net cash provided by financing activities amounted to ¥2.4 million ($0.4 million) for the six months ended

December 31, 2014, compared to cash flows provided by financing activities of approximately ¥16.1 million for the same period

During the six-month period ended December 31, 2014, we repaid ¥2.0 million ($0.3 million) in short term bank loans

and received ¥4.4 million ($0.7 million) net proceeds from a related party.

Total working capital as of December 31, 2014 amounted to approximately ¥87.1 million ($14.2

million), compared to approximately ¥83.1 million as of June 30, 2014.

Total current assets as of December 31, 2014

amounted to approximately ¥136.1 million ($22.2 million), an increase of approximately ¥2.7 million ($0.4 million)

compared to approximately ¥133.4 million at June 30, 2014.

The increase in total current assets at December 31, 2014

compared to June 30, 2014 was mainly due to an increase in trade accounts receivable, inventory and other receivables.

expect that our current working capital is sufficient to maintain our routine operation for the next twelve months without

extraordinary business expansion.

Current liabilities

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

amounted to approximately ¥49.0 million ($8.0 million) at December 31, 2014, in comparison to approximately ¥50.3 million

at June 30, 2014.

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

taxes payable and warrant liability.

This decrease of liabilities was attributable mainly to a decrease in warrant liability and short-term bank

loans, offset by an increase in trade accounts payable and short-term borrowings –

related party.

Quantitative and Qualitative Disclosures about Market

1 unchanged sentence

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