What changed in this filing

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Item 1. Financial Statements

2016-11-14 compared with 2016-05-16 · 469 added, 804 removed, 149 unchanged (90% 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.

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 certain 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 BHD Petroleum Technology Co, Ltd (“BHD”), hereafter referred to as our domestic companies (the “Domestic

Companies”), which are established as variable interest entities (“VIEs”) under the laws of the People’s

Republic of China (“PRC”).

As the Company contractually controls the Domestic Companies, we serve as 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 BHD Petroleum Technology Co, Ltd (“BHD”), hereafter referred to as our domestic companies (the “Domestic

Companies”), which are established under the laws of the People’s Republic of China (“PRC”).

As the Company

contractually controls the Domestic Companies, we serve as the center of strategic management, financial control and human resources

Due to this contractual control and our obligation to bear the losses of the Domestic Companies, we consider them to

be variable interest entities (“VIEs”) for accounting purposes and consolidate their results in our financial statements.

Through Nanjing Recon

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We derive our revenues from the sales

and provision of (1) hardware products, (2) software products and (3) services.

Our products and services involve most of the

key procedures of the extraction and production of oil and gas, and include automation systems, equipment, tools and on-site technical

Our Domestic Companies

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

and provision of (1) oilfield automation products, (2) equipment for oil and gas production and transportation, (3) waste water

treatment products, and (4) engineering services.

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

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

Nanjing Recon:

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

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

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

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

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

oilfields in China.

Recent Developments

On September 22,

2015, the Company entered into an amendment to the Company’s letter agreement (the “Agreement”) with Maxim Group

LLC, dated January 28, 2015, pursuant to which Maxim would serve as the Company’s exclusive agent in connection with a proposed

at-the-market offering program by the Company of up to $10,000,000.

The amendment extends the term of the Agreement for an additional

six months, or until August 15, 2016, when the Company’s Form S-3 will expire.

As of May 16, 2016, no shares have been issued

under the amended Agreement.

On December 1, 2015,

the Company entered into a share purchase agreement to acquire a 100% interest in Qinghai Huayou Downhole Technologies Co., Ltd.

( “QHHY”), a PRC corporation and oilfield service provider located in Qinghai province.

This transaction is subject

to shareholder approval and on May 2, 2016, the Company amended its proxy statement on Schedule 14A (the “Proxy Statement”)

to disclose all necessary information related to obtaining shareholder approval of the transaction.

The Company will hold a shareholder

meeting to seek approval of the Company’s acquisition of QHHY after the Securities and Exchange Commission (“SEC”)

completes its review of the Proxy Statement.

As of the first quarter of fiscal year 2017,

the Company has achieved remarkable achievement in oilfield waste water treatment segment.

In January 2016, the Company announced

its cooperation with Qinghai Oilfield Company, signing an agreement to sell the oilfield RMB3.98 million of related products and

For the three months period as of September 30, 2016, the Company has completed this agreement and continues to expand

markets in environmental protection industry, including oilfield water treatment and other industrial and sewage disposal projects.

The Company has also developed new clients

in China’s top producing Changqing Oilfield, which is located in China’s Xi’an Province.

The Company has signed

sales contracts for furnaces as of the report day.

Management expects further improvement in the coming year.

Products and Services

We currently provide products and services

to oil and gas field companies focused 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 description shown below.

We currently provide

products and services to oil and gas field companies focused on the development and production of oil and natural gas.

and services described below correlate to the numbered stages of the oilfield production system graphical expression shown below.

Our products and services include:

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employ heating furnaces.

BHD researched, developed and implemented a new oilfield furnace that is advanced, highly automated,

reliable, easy to operate, safe and highly heat-efficient (90% efficiency).

BHD researched, developed and implemented a new oilfield furnace that is advanced, highly automated, reliable,

easy to operate, safe and highly heat-efficient (90% efficiency).

shown above) .

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high turn-down ratio, high security and environmental safety.

Oil and Gas Production Improvement

Oil and Gas Production Improvement Techniques

Packers of Fracturing.

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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.

Production Packer.

At varying withdrawal points, the production packer separates different oil layers and protects the oil pipe from sand and permeation,

promoting the recovery ratio.

Sand Prevention in

Oil and Water Wells.

At varying withdrawal

points, the production packer separates different oil layers and protects the oil pipe from sand and permeation, promoting the

recovery ratio.

Sand Prevention in Oil and Water Well.

This technique processes additives that are resistant to elevated temperatures into “resin sand”

which is transported to the bottom of the well via carrying fluid.

The resin sand goes through the borehole, piling up and compacting

at the borehole and oil vacancy layer.

which is transported

to the bottom of the well via carrying fluid.

The resin sand goes through the borehole, piling up and compacting at the borehole

and oil vacancy layer.

An artificial borehole wall is then formed, functioning as a means of sand prevention.

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

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

Water Locating and

Plugging Technique.

This sand prevention

technique has been adapted to more than 100 wells, including heavy oil wells, light oil wells, water wells and gas wells, with

a 100% success rate and a 98% effective rate.

Water Locating and Plugging Technique.

High water cut affects the normal production of oilfields.

Previously, there was no sophisticated method for

water locating and tubular column plugging in China.

The mechanical water locating and tubular column plugging technique we have

developed resolves the problem of high water cut wells.

This technique conducts a self-sealing test during multi-stage usage and

is reliable to separate different production sets effectively.

The water location switch forms a complete set by which the water

locating and plugging can be finished in one trip.

The tubular column is adaptable to several oil drilling methods and is available

for water locating and plugging in second and third class layers.

Previously, there was no sophisticated method for water locating and

tubular column plugging in China.

The mechanical water locating and tubular column plugging technique we have developed resolves

the problem of high water cut wells.

This technique conducts a self-sealing test during multi-stage usage and is reliable to separate

different production sets effectively.

The water location switch forms a complete set by which the water locating and plugging

can be finished in one trip.

The tubular column is adaptable to several oil drilling methods and is available for water locating

and plugging in second and third class layers.

Fissure Shaper.

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.

We inject acid to layers under pressure, which can form or expand fissures.

The treatment process of the acid is defined as fracture

The technique is mainly adapted to oil and gas wells that are blocked up relatively deeply, or oil and gas wells in

low permeability zones.

Electronic Break-Down

This service resolves block-up and freezing problems by generating heat from the electric resistivity of the drive pipe

and utilizing a loop tank composed of an oil pipe and a drive pipe.

We inject acid to layers

under pressure, which can form or expand fissures.

The treatment process of the acid is defined as fracture acidizing.

The technique

is mainly adapted to oil and gas wells that are blocked up relatively deeply, or oil and gas wells in low permeability zones.

Electronic Break-Down Service.

resolves block-up and freezing problems by generating heat from the electric resistivity of the drive pipe and utilizing a loop

tank composed of an oil pipe and a drive pipe.

This technique saves energy and is environmentally friendly.

It can increase the production of oilfields that are in the middle and later periods.

It can increase the

production of oilfields that are in the middle and later periods.

Automation System and Services

Pumping Unit Controller.

This controller functions as a monitor to the pumping unit and also collects data for load, pressure, voltage, and startup and

shutdown control.

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

well pressure data.

Wireless Dynamometer

and Wireless Pressure Gauge.

Wireless Dynamometer and Wireless Pressure

These products replace wired technology with cordless displacement sensor technology.

They are easy

to install and significantly reduce the work load associated with cable laying.

Electric Multi-way

Valve for Oilfield Metering Station Flow Control.

This multi-way valve is used before the test separator to replace the existing

three valve manifolds.

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

Natural Gas Flow

Computer System.

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

Recon Supervisory

Control and Data Acquisition System (“SCADA”).

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

station and the union station for supervision and data collection.

EPC Service of Pipeline

SCADA System.

This service technique is used for pipeline monitoring and data acquisition after crude oil transmission.

EPC Service of Oil

and Gas Wells SCADA System.

They are easy to install and significantly

reduce the work load associated with cable laying.

Electric Multi-way Valve for Oilfield Metering

Station Flow Control.

This multi-way valve is used before the test separator to replace the existing three valve manifolds.

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.

Recon Supervisory Control and Data Acquisition

System (“SCADA”).

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

for supervision and data collection.

EPC Service of Pipeline SCADA System.

service technique is used for pipeline monitoring and data acquisition after crude oil transmission.

EPC Service of Oil and Gas Wells SCADA

This service technique is used for monitoring and data acquisition of oil wells and natural gas wells.

EPC Service of Oilfield

Video Surveillance and Control System.

This video surveillance technique is used for controlling the oil and gas wellhead area

and the measurement station area.

Technique Service

for “Digital oilfield”

EPC Service of Oilfield Video Surveillance

and Control System.

This video surveillance technique is used for controlling the oil and gas wellhead area and the measurement

station area.

Technique Service for “Digital oilfield”

Transformation.

This service includes engineering technique services such as oil and gas SCADA

systems, video surveillance and control systems and communication systems.

This service includes engineering technique services such as oil and gas SCADA systems, video surveillance and

control systems and communication systems.

Factors Affecting Our Business

Business Outlook

The oilfield engineering

and technical service industry is generally divided into five sections:

(1) exploration, (2) drilling and completion, (3) testing

and logging, (4) production and (5) oilfield construction.

Thus far our businesses have been involved in the completion, production

and construction processes.

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

new businesses quickly for the coming years.

Management anticipates there will be opportunities in new markets and our existing

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 plan to focus on:

Measuring Equipment

and Service .

Digital oil field technology and the management of oil companies are highly regarded in the industry.

We believe our oilfield SCADA system and assorted products, production managing expert software, and related technical support

services will address the needs of the oil well automation system market, for which we believe there will be increasing demand

over the short term and strong needs in the long term.

Gathering and

Transferring Equipment .

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

burners will grow as compared to last year, especially in the Qinghai Oilfield and Zhongyuan Oilfield.

The oilfield engineering and technical

service industry is generally divided into five sectors:

(1) exploration, (2) drilling and completion, (3) testing and logging,

(4) production and (5) oilfield construction.

Thus far our businesses have been involved in the completion, production and construction

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

quickly for the coming years.

Management anticipates there will be opportunities in new markets and our existing markets.

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 plan to focus

on the following:

Measuring Equipment and Service.

oil field technology and the management of oil companies are highly regarded in the industry.

We believe our oilfield SCADA system

and assorted products, production managing expert software, and related technical support services will address the needs of the

oil well automation system market, for which we believe there will be increasing demand over the short term and strong needs in

the long term.

Gathering and Transferring Equipment .

more new wells developed, our management anticipates that demand for our furnaces and burners will grow as compared to last year,

especially in the Qinghai Oilfield and Zhongyuan Oilfield.

New business .

are in the process of expanding our business through the acquisition of a down-hole service company.

We also have developed new

products for oilfield wastewater treatment and achieved preliminary business on this segment.

Our management anticipates expanding

the new business more rapidly in the coming year.

developing new products for oilfield wastewater treatment and achieved preliminary business on this segment.

Our management anticipates

expanding the new business more rapidly in the coming year.

Growth Strategy

As a smaller China-focused

company, our basic strategy focuses on developing our onshore oilfield business in the upstream sector of the industry.

the remote location and difficult environments of China’s oil and gas fields, historically, foreign competitors have rarely

entered those areas directly.

Large domestic oil

companies have historically focused on their exploration and development businesses to earn higher margins and maintain their

competitive advantage.

With regard to private oilfield service companies, we estimate that approximately 90% specialize in the

manufacture of drilling and production equipment.

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

Our management is focused on providing high quality products and services in oilfields in which we have a geographical

This helps us to avoid conflicts of interest with bigger suppliers of drilling equipment while protecting our position

within this 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 used by many companies by providing advanced technologies.

At the same time, we are always looking to improve our business and to increase our earning capability.

As a smaller China-focused company, our

basic strategy focuses on developing our onshore oilfield business in the upstream sector of the industry.

Large domestic oil companies have historically

focused on their exploration and development businesses to earn higher margins and maintain their competitive advantage.

to private oilfield service companies, we estimate that approximately 90% specialize in the manufacture of drilling and production

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

Our management is focused on

providing high quality products and services in oilfields in which we have a geographical advantage.

This helps us to avoid conflicts

of interest with bigger suppliers of drilling equipment while protecting our position within this 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 used by many companies by providing advanced technologies.

At the same time, we are always looking

to improve our business and to increase our earning capability.

Recent Industry Developments

Affected by the worldwide

decrease in oil prices, CNPC and Sinopec, mother companies of our direct clients, cut off their Capital Expenditure and production

activities, resulting in a declining market and intensive competition.

Management will closely monitor the situation and will seek to extend our business on the industrial chain, such as through providing

more integrated services and advanced products and through growing our business from a predominantly up-ground business to include

some down-hole services as well.

Affected by the worldwide decrease in oil

prices, CNPC and Sinopec, parent companies of our direct clients, reduced their capital expenditure and production activities,

resulting in a declining market and intensive competition.

Management will closely monitor the situation and will seek to

extend our business on the industrial chain, such as through providing more integrated services and advanced products and through

growing our business from a predominantly above-ground business to include some downhole services as well.

On January 1, 2015, China formally

began implementing an updated Environmental Protection Law (the China EPL).

The EPL is perceived as the most progressive and

stringent law in the history of environmental protection in China.

It details harsher penalties for environmental offences

and imposes additional requirements for oil and gas production companies.

As a result, although they reduced capital

expenditures and production activities, China’s oil companies have strengthened their investment and

resources in oil field environment protection and this market is estimated to be billions of RMB.

The Company also focused

on this segment and started to develop its own products and service from year 2015.

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:

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;

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.

in any period are subject to general conditions typically affecting the Chinese oilfield service industry and included but are

not limited to:

oil and gas prices;

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.

Unfavorable changes

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

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;

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

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 in China;

our ability to effectively manage our operating costs and expenses;

our ability to effectively implement any targeted acquisitions and/or strategic alliances so as to provide efficient access to markets and industries in the oil and gas industry in China.

Critical Accounting

Policies and Estimates

Estimates and Assumptions

We prepare our unaudited

condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of

America (“US GAAP”), which require us to make judgments, estimates and assumptions.

We continually evaluate these

estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions

that we believe to be reasonable under the circumstances.

Since the use of estimates is an integral component of the financial

reporting process, actual results could differ from those estimates.

An accounting policy is considered critical if it requires

an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made,

and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably

likely to occur periodically, could materially impact the consolidated financial statements.

We believe that the following policies

involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates.

The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated

financial statements and other disclosures included in this quarterly report.

Significant accounting estimates reflected in our

Company’s consolidated financial statements include revenue recognition, allowance for doubtful accounts, inventory valuation,

warrants liability, fair value of share based payments, and useful lives of property and equipment.

We prepare our unaudited condensed consolidated

financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”),

which require us to make judgments, estimates and assumptions.

We continually evaluate these estimates and assumptions based on

the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable

under the circumstances.

Since the use of estimates is an integral component of the financial reporting process, actual results

could differ from those estimates.

An accounting policy is considered critical if it requires an accounting estimate to be made

based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates

that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically,

could materially impact the unaudited condensed consolidated financial statements.

We believe that the following policies involve

a higher degree of judgment and complexity in their application and require us to make significant accounting estimates.

The following

descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our unaudited condensed

consolidated financial statements and other disclosures included in this quarterly report.

Significant accounting estimates reflected

in our Company’s unaudited condensed consolidated financial statements include revenue recognition, allowance for doubtful

accounts, inventory valuation, fair value of share based payments, and useful lives of property and equipment.

Consolidation of VIEs

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Assets recognized

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

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

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

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

Revenue Recognition

We recognize revenue

when the following four criteria are met:

(1) persuasive evidence of an arrangement exists, (2) delivery has occurred

or services have been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.

Delivery does not occur until products have been shipped or services have been provided to the customers and the customers have

signed a completion and acceptance report, risk of loss has transferred to the customer, customer acceptance provisions have lapsed,

or the Company has objective evidence that the criteria specified in a customer’s acceptance provisions have been satisfied.

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

Revenue from hardware

sales is generally recognized when the product is shipped to the customer and when there are no unfulfilled company obligations

that affect the customer’s final acceptance of the arrangement.

The Company sells

self-developed software.

For software sales, the Company recognizes revenues in accordance with the provisions of Accounting Standards

Codification, Topic 985-605, “Software Revenue Recognition,”

and related interpretations.

Revenue from software is

recognized according to project contracts.

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

We recognize revenue when the following

four criteria are met:

(1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been

provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.

Delivery does not

occur until products have been shipped or services have been provided to the customers and the customers have signed a completion

and acceptance report, risk of loss has transferred to the customer, customer acceptance provisions have lapsed, or the Company

has objective evidence that the criteria specified in a customer’s acceptance provisions have been satisfied.

The sales price

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

Hardware and software

Revenue from hardware and software sales

is generally recognized when the product with the embedded software system is shipped to the customer and when there are no unfulfilled

company obligations that affect the customer’s final acceptance of the arrangement.

Revenue from software is recognized according

to project contracts.

Usually this is short term.

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

The Company provides

services to improve software functions and system requirements on separated fixed-price contracts.

Revenue is recognized when

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

Deferred income represents

unearned amounts billed to customers related to sales contracts.

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

The Company provides services to improve

software functions and system requirements on separated fixed-price contracts.

Revenue is recognized when services are completed

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

Deferred income represents unearned amounts

billed to customers related to sales contracts.

Cost of Revenues

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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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The carrying amounts

reported in the consolidated balance sheets for trade accounts receivable, other receivables, advances to suppliers, trade accounts

payable, accrued liabilities, advances from customers and notes payable approximate fair value because of the immediate or short-term

maturity of these financial instruments.

Long-term receivables and borrowings approximate fair value because their interest rates

charged approximate the market rates for financial instruments with similar terms.

The fair value of the warrants liability was

determined using the Black-Scholes Model, as Level 2 inputs (See Note 13).

Any changes in the assumptions that are used in the

Black-Scholes Model may increase or decrease the warrants liability from quarter to quarter.

Any change in the estimate of the

fair value of the warrants liability would be charged to operations.

reported in the unaudited condensed consolidated balance sheets for trade accounts receivable, other receivables, advances to suppliers,

trade accounts payable, accrued liabilities, advances from customers and notes payable approximate fair value because of the immediate

or short-term maturity of these financial instruments.

Long-term receivables and borrowings approximate fair value because their

interest rates charged approximate the market rates for financial instruments with similar terms.

Trade receivables

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Increases in our allowance for doubtful accounts would lower our net income and earnings per share.

Deferred Tax Estimates

As part of the process

of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions

in which we operate.

This process involves using an asset and liability approach whereby deferred tax assets and liabilities are

recorded for differences in the financial reporting bases and tax bases of our assets and liabilities.

Deferred tax accounting

requires that we evaluate net deferred tax assets by jurisdiction to determine if these assets will more likely than not be realized.

This analysis requires considerable judgment and is subject to change to reflect future events and changes in the tax laws.

an allowance is established against our deferred tax assets because they may not be fully realizable in the future, our net income

and earnings per share would decrease.

Valuation of Long-Lived Assets

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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.

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There were no impairments at June 30, 2016

and March 31, 2016.

However, if impairment were required, our net income and earnings per share would decrease accordingly.

and September 30, 2016.

However, if impairments were required, our net income and earnings per share would decrease accordingly.

Share-Based Compensation

The Company accounts

for share-based compensation in accordance with ASC Topic 718, Share-Based Payment.

Under the fair value recognition provisions

of this topic, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized

as expense with graded vesting on a straight–line basis over the requisite service period for the entire award.

has elected mainly utilize the Black-Scholes valuation model to estimate an award’s fair value.

for share-based compensation in accordance with Accounting Standards Codification (ASC) Topic 718, Share-Based Payment.

the fair value recognition provisions of this topic, share-based compensation cost is measured at the grant date based on the fair

value of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period

for the entire award.

The Company has elected to mainly utilize the Black-Scholes valuation model to estimate an award’s

Recently enacted accounting pronouncements

In January 2016, the FASB issued Accounting

In October 2016, the FASB has issued Accounting

Standards Update (ASU) No.

2016-01, Financial Instruments –

Overall (Subtopic 825-10):

Recognition and Measurement of Financial

Assets and Financial Liabilities.

The new guidance makes targeted improvements to existing U.S.

(1) Requiring equity

investments to be measured at fair value with changes in fair value recognized in net income;

(2) Requiring separate presentation

of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the

accompanying notes to the financial statements;

(3) Eliminating the requirement for public business entities to disclose the method(s)

and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured

at amortized cost on the balance sheet;

(4) Requiring a reporting organization to present separately in other comprehensive

income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit

The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim

periods within those fiscal years.

The Company does not expect this update will have a material impact on the presentation of

the Company's consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU

2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840).

requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged.

The amendments in

this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.

application is permitted for all entities.

ASU 2016-02 requires a modified retrospective approach for all leases existing at,

or entered into after, the date of initial application, with an option to elect to use certain transition relief.

is currently evaluating the impact of this new standard on its consolidated financial statements.

In March 2016, the FASB issued Accounting

Standards Update No.

2016-06, Derivatives and Hedging (Topic 815):

Contingent Put and Call Options in Debt Instruments.

The amendments

apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined

to have a debt host) with embedded call (put) options.

The amendments clarify what steps are required when assessing whether the

economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks

of their debt hosts, which is one of the criteria for bifurcating an embedded derivative.

Consequently, when a call (put) option

is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call

(put) option is related to interest rates or credit risks.

Public business entities must apply the new requirements for fiscal

years beginning after December 15, 2016 and interim periods within those fiscal years.

All other entities must apply the new requirements

for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018.

All entities have the option of adopting the new requirements early, including adoption in an interim period.

If an entity early

adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that

includes that interim period.

The Company does not expect any material impact of this new standard on its consolidated financial

In March 2016, the FASB issued Accounting

Standards Update No.

2016-07, Investments - Equity Method and Joint Ventures (Topic 323):

Simplifying the Transition to the Equity

Method of Accounting.

The amendments affect all entities that have an investment that becomes qualified for the equity method

of accounting as a result of an increase in the level of ownership interest or degree of influence.

The amendments eliminate the

requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership

interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively

on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.

The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the

current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment

becomes qualified for equity method accounting.

Therefore, upon qualifying for the equity method of accounting, no retroactive

adjustment of the investment is required.

The amendments require that an entity that has an available-for-sale equity security

that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated

other comprehensive income at the date the investment becomes qualified for use of the equity method.

The amendments are effective

for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.

The amendments

should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence

that result in the adoption of the equity method.

Earlier application is permitted.

The Company is currently evaluating the impact

of this new standard on its consolidated financial statements.

In April 2016, the FASB released ASU 2016-09,

Compensation - Stock Compensation (Topic 718):

Improvements to Employee Share-Based Payment Accounting .

The ASU includes

multiple provisions intended to simplify various aspects of the accounting for share-based payments.

While aimed at reducing the

cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income,

EPS, and the statement of cash flows.

Implementation and administration may present challenges for companies with significant

share-based payment activities.

The ASU is effective for public companies in annual periods beginning after December 15, 2016,

and interim periods within those years.

The Company is currently evaluating the impact of this new standard on its consolidated

financial statements.

In April 2016, FASB issued Accounting

Standards Update No.

2016-10, Revenue from Contracts with Customers (Topic 606):

Identifying Performance Obligations and Licensing .

The amendments clarify the following two aspects of Topic 606:

(a) identifying performance obligations;

licensing implementation guidance.

The amendments do not change the core principle of the guidance in Topic 606.

The effective

date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606.

Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim

reporting periods therein (i.e., January 1, 2018, for a calendar year entity).

Early application for public entities is permitted

only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting

The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

2016-17, Consolidation (Topic 810):

Interest Held through Related Parties That Are under Common Control,

to provide guidance on the evaluation of whether a reporting entity is the primary beneficiary of a VIE by amending how a reporting

entity, that is a single decision maker of a VIE, treats indirect interests in that entity held through related parties that are

under common control.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2016,

including interim periods within those fiscal years.

For all other entities, the amendments are effective for fiscal years beginning

after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.

Early adoption is permitted,

including adoption in an interim period.

The Company is currently evaluating the impact of this new standard on its unaudited condensed

consolidated financial statements and related disclosures.

Results of Operations

The following consolidated

results of operations include the results of operations of the Company and its variable interest entities (“VIEs”),

BHD and Nanjing Recon.

Our historical reporting

results are not necessarily indicative of the results to be expected for any future period.

Three Months Ended March 31, 2016 Compared to Three Months

Ended March 31, 2015

For the three months ended March 31, 2016,

oil price continued to be low, and our clients’

production activities and spending were kept at a minimum level.

operations and numbers still suffered from these adverse effects.

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, 2015 Compared to Three

Months Ended September 30, 2016

For the Three Months Ended

Hardware - non-related

(12,728,641 )

Hardware - related parties

Software - non-related parties

- related parties

September 30,

Hardware and software- non-related parties

Total revenues

(15,479,791 )

total revenues for the three months ended March 31,

2016 were approximately ¥4.5 million ($0.7 million), a decrease of approximately ¥15.5 million or 77.3% from ¥20.0

million for the three months ended March 31, 2015.

This was mainly caused by a decreased demand from our clients and intensely

competitive market conditions.

In more detail:

1) Hardware revenue.

During this quarter,

both furnaces and automation products sales decreased as a result of lower demand from

our clients as compared to the same period last year.

Hardware revenues for the quarter

of fiscal 2015 were mainly from projects we tracked a year earlier from our major clients,

CNPC and Sinopec, who were evaluating and adjusting their business plans, kept their

spending lower for 2015 .

As a result, there were fewer projects started, causing less revenue for the Company

for the third quarter of fiscal 2016.

As oil prices have rebounded a bit in the first

three months of 2016, our management expects this unfavorable trend will ease but expect

reduced revenue to continue for some period.

2) Software revenue.

Software used

in oilfield production management is highly recommended, but not essential.

sales and revenue related to software may fluctuate.

During the three-month period, there

were no software sales.

Our total revenues for

the three months ended September 30, 2016 were approximately ¥7.8 million ($1.2 million), an increase of approximately ¥4.2

million or 117.1% from ¥3.6 million for the three months ended September 30, 2015.

The overall increase in revenue was mainly

caused by our increased hardware and software revenue, which includes revenue from automation products and embedded software, equipment

and accessories.

The increase in hardware and software revenue was mainly caused by increased demand for our waste water treatment

products, and equipment and furnaces for the first quarter of fiscal year 2017.

Revenue –

Hardware and software- non-related parties

For the Three Months Ended

Automation product and software

Equipment and accessories

Waste water treatment products

Total revenue - Hardware and software- non-related parties

(1) Revenue from automation products and embedded software increased slightly by ¥56.1 thousand ($8.4 thousand).

(2) As shown above, the overall increase in revenue was significantly affected by equipment sales increases due to more furnaces

provided to our new client, Changqing Oilfield, a major subsidiary of PetroChina.

(3) During fiscal year 2016, the Company expanded the new market of oilfield waste water treatment products.

quarter of fiscal year 2017, this segment continued to contribute revenue and margin to our operation.

Management expects to

obtain more business in the coming months due to the quality of our products and long-term cooperation with oilfield

Cost and Margin

For the Three Months Ended

September 30,

Total revenues

(15,479,791 )

Cost of revenues

(10,930,931 )

Cost of Revenues .

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

products and services.

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

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

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

Inventory reserves for

changes in price level, impairment of inventory, slow moving or other causes will also affect our cost.

Our cost of revenues

decreased from approximately ¥13.8 million in the three months ended March 31, 2015 to approximately ¥2.8 million ($0.4

million) for the same period in 2016, a decrease of approximately ¥11.0 million ($1.7 million), or 79.4%.

This decrease was

mainly caused by lower revenue during the three months ended March 31, 2016 compared to the same period of 2015.

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 subcontractors.

Usually the prices of electronic components do not fluctuate

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

However, specialized equipment and

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

Additionally, the prices of some imported

accessories mandated by our customers can also affect our costs.

Inventory reserve for changes in price level, impairment of inventory,

slow moving inventory or other similar causes will also affect our cost.

Our cost of revenues increased from approximately

¥3.2 million in the three months ended September 30, 2015 to approximately ¥6.7 million ($1.0 million) for the same period

in 2016, an increase of approximately ¥3.5 million ($0.5 million), or 110.2% .

This increase was mainly caused by higher

revenue during the three months ended September 30, 2016 compared to the same period of 2015.

Gross Profit .

Our gross profit decreased to approximately ¥1.7 million ($0.3 million) for the three months ended March 31, 2016 from approximately

¥6.2 million for the same period in 2015 due to revenue decrease.

Our gross profit as a percentage of revenue increased to

37.5% for the three months ended March 31, 2016 from 31.2% for the same period in 2015.

This was mainly caused by deferred income

recognized as revenue in the 2016 period with little cost accrued.

Our software and hardware revenues are

detailed below:

Our gross profit increased

to approximately ¥1.1 million ($0.2 million) for the three months ended September 30, 2016 from approximately ¥0.4 million

for the same period in 2015.

Our gross profit as a percentage of revenue increased to 14.0% for the three months ended September

30, 2016 from 11.2% for the same period in 2015.

This was mainly due to the increase of higher margin hardware sales during this

In 2015, there was a slow-down in the oilfield

industry, thus customers negotiated a lower selling price which caused the margin percentage to be depressed.

In 2016, the gross

margin percentage increased to a normal amount.

In more detail:

For the Three Months Ended

Total revenues-hardware

and software- non related parties

(13,819,736 )

Cost of revenues

-hardware and software- non related parties

(10,920,532 )

Revenue from hardware

and software to non-related parties decreased by approximately ¥13.8 million mainly due to the decrease of hardware products

sold in the three months ended March 31, 2016.

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

¥2.9 million ($0.5 million) compared to the same period last year.

As a percentage of revenue, gross margin was 25.1% for

the three months ended March 31, 2015 and 37.5% for the three month period ended March 31, 2016.

This increase was mainly because

we had higher portions of consignment sales with lower margins in 2015 while there was no such business for 2016.

September 30,

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 by approximately ¥4.3 million mainly due to the increased orders of waste water treatment products and furnaces.

The gross profit from hardware and software sales to non-related parties increased ¥0.8 million ($0.1 million) compared to

the same period of last year.

For the Three Months Ended

Total revenues-hardware

and software-related parties

Cost of revenues

-hardware and software- related parties

Revenue from related

parties decreased as we developed business directly with oilfield companies, rather than obtaining the business in cooperation

with a local agency, which used to be our practice.

September 30,

Total revenues-service

Cost of revenues -service

revenue for the three months ended September 30, 2015 and 2016 consisted mainly of maintenance services, which were provided upon

request by customers.

Operating Expenses

For the Three Months Ended

Selling and distribution

September 30,

Selling and distribution expenses

General and administrative expenses

Provision for doubtful accounts

Research and development 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 travelling charges, advertising and trade shows, and

an allocation of our facilities, depreciation expenses and rental expense, as well as shipping charges and related expenses.

expenses decreased 26.2% or ¥0.3 million ($45.1 thousand), from approximately ¥1.1 million in the three months

ended March 31, 2015 to approximately ¥0.8 million ($0.1 million) in the same period of 2016.

This decrease was primarily

due to a decrease in traveling expense and payroll expense.

Selling expenses were 5.5% of total revenues in the three months ended

March 31, 2015 and 18.0% of total revenues in the same period of 2016.

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, bad debt allowance and other

miscellaneous expenses incurred in connection with general operations.

General and administrative expenses increased by 88.5%

or ¥3.7 million ($0.6 million), from approximately ¥4.2 million in the three months ended March 31, 2015 to

approximately ¥7.9 million ($1.2 million) in the same period of 2016.

General and administrative expenses were 20.9%

of total revenues in the three months ended March 31, 2015 and 174.0% of total revenues in the same period of 2016.

in general and administrative expenses was mainly due to an increase in share-based compensation and provisions accrued for doubtful

advanced purchases.

We made partial advanced payments for customized products for some projects in year 2014.

As these projects

were postponed and products design would need to be modified, management made provisions for these amounts based on best estimation.

Management is also negotiating with clients to minimize the loss.

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 from approximately ¥0.5 million for

the three months ended March 31, 2015 to approximately ¥1.2 million ($0.2 million) for the same period of 2016.

This increase

was primarily due to more research and development expense on new generation automation platform system.

For the Three Months Ended

Income (loss) from

and other income (expense)

Loss before income tax

(benefit) for income tax

income attributable to non-controlling interest

loss attributable to Recon Technology, Ltd

Loss from operations .

Loss from operations was approximately ¥8.2 million ($1.3 million) for the three months ended March 31, 2016, compared to

an income of ¥0.4 million for the same period of 2015.

This decrease in income from operations was primary due to a decrease

in revenues and increased general and administrative expenses.

Interest and other

income (expense).

Interest and other income was approximately ¥31.6 thousand ($5.0 thousand) for the three months

ended March 31, 2016, compared to interest and other expense of ¥2.0 million for the same period of 2015.

The ¥2.0 million

($0.3 million) decrease in interest and other expense was primarily due to the decreased loss from warrants redemption, which

only accrued for the three months ended March 31, 2015.

Provision (benefit)

for income tax .

Benefit for income tax for the three months ended March 31, 2015 was approximately ¥0.2 million.

for income tax was ¥1.4 million ($0.2 million) for the three months ended March 31, 2016.

This increase in provision for income

tax was mainly due to decrease of deferred tax assets recorded and income tax payable true-up during the three months ended

March 31, 2016.

During this period, based on available evidence, management concluded that it was more likely than not that there

would be no sufficient deductible income in future years and revaluated the deferred tax assets and the adjustment was recorded

as part of the total income tax provision.

As a result of the factors described above, net loss was approximately ¥9.6 million ($1.5 million) for the three months ended

March 31, 2016, a decrease of approximately ¥8.2 million ($1.3 million) from net loss of ¥1.4 million for the same period

Net loss attributable

to Recon Technology, Ltd .

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

¥9.6 million ($1.5 million) for the three months ended March 31, 2016.

Net loss attributable to ordinary shareholders increased

for approximately ¥8.1 million ($1.3 million) from net loss attributable to ordinary shareholders of approximately ¥1.5

million for same period of 2015.

Nine Months Ended March 31, 2015 Compared to Nine Months

Ended March 31, 2016

For the Nine Months Ended

Hardware - non-related

Hardware - related parties

Software - non-related parties

- related parties

Total revenues

total revenues for the nine months ended March 31, 2016 were approximately ¥37.0 million ($5.7 million), a decrease of approximately

¥8.7 million or 19.0% from ¥45.7 million for the nine months ended March 31, 2015.

This was mainly caused by a decrease

of sales of furnaces and consignment stock goods.

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 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 affect our cost.

Inventory reserve for changes in price

level, impairment of inventory, slow moving or other causes will also affect our cost.

Our cost of revenues

decreased from approximately ¥29.8 million in the nine months ended March 31, 2015 to approximately ¥29.1 million ($4.5

million) for the same period in 2016, a decrease of approximately ¥0.7 million ($0.1 million), or 2.3%.

This decrease was

mainly caused by lower revenue during the nine months ended March 31, 2016 compared to the same period of 2015.

Gross profit .

Our gross profit decreased to approximately ¥7.9 million ($1.2 million) for the nine months ended March 31, 2016 from

approximately ¥15.8 million for the same period in 2015.

Our gross profit as a percentage of revenue decreased to 21.3% for

the nine months ended March 31, 2016 from 34.7% for the same period in 2015.

This was mainly due to the decrease of (1) software

sales with higher margins as compared with hardware revenues and (2) lower margins related to our bundled product and service

agreements due to the fiercely competitive environment existing in the oil sector this year.

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 decreased by approximately ¥7.2 million mainly due to the decreased orders from our customers

as the Company is continually facing pressure from tough competition.

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

parties decreased ¥5.9 million ($0.9 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

After the Company

achieved business entrance certification and were able to 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.

of result, there was no revenue or cost of hardware and software from related parties during 2016, since we developed business

directly with oilfield, rather than cooperation with some local agency, which used to be our related parties.

For the Nine Months Ended

Total revenues-service

Cost of revenues-service

revenue for the nine months ended March 31, 2015 and 2016 consisted mainly of minor maintenance services, which were provided

upon request by customers.

The cost of revenues-service increased, since labor costs were incurred for the nine months ended March

Operating expenses

For the Nine Months Ended

Selling and distribution

Selling and Distribution Expenses .

distribution expenses consist primarily of salaries and related expenditures of our sales and marketing organization, sales commissions,

costs of our marketing programs including traveling charges, advertising and trade shows, and an allocation of our facilities,

depreciation expenses and rental expense, as well as shipping charges.

Selling expenses decreased approximately ¥62.5 thousand

($9.4 thousand) for the three months ended September 30 , 2016 compared to the

same period in 2015.

This decrease was primarily due to a decrease in service fees and shipping charges, as we began working with

qualified vendors located closer to our customers.

Selling expenses were 31.0% of total revenues in the three months ended

September 30, 2015 and 13.5% of total revenues in the same period of 2016.

General and Administrative Expenses .

Research and development 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 traveling charges, advertising and trade shows, and

an allocation of our facilities, depreciation expenses and rental expense, as well as shipping charges and so on.

Selling expenses

increased approximately ¥0.4 million for the nine months ended March 31, 2016 compared to the same period in 2015.

This increase

was primarily due to an increase in shipping charges, service fees and rental fees.

Selling expenses were 6.7% of total revenues

in the nine months ended March 31, 2015 and 9.3% of total revenues in the same period of 2016.

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, bad debts allowance and other

miscellaneous expenses incurred in connection with general operations.

General and administrative expenses increased by 57.4%

or ¥6.9 million ($1.0 million), from approximately ¥12.0 million in the nine months ended March 31, 2015 to

approximately ¥18.9 million ($2.9 million) in the same period of 2016.

General and administrative expenses were 51.0%

of total revenues in the nine months ended March 31, 2016 and 26.3% of total revenues in the same period of 2015.

in general and administrative expenses was mainly due to an increase in provisions for purchase advances and share-based compensation,

offset by a decrease in consulting fees.

Research and development

(“R&D”) expenses .

Research and development expenses consist primarily of salaries and related expenditures

for our research and development projects.

Research and development expenses increased from approximately ¥2.4 million for

the nine months ended March 31, 2015 to approximately ¥5.8 million ($0.9 million) for the same period of 2016.

This increase

was primarily due to more research and development expense spent on design of downhole service tools and automation platform systems.

For the Nine Months Ended

General and administrative expenses consist primarily of costs in human resources, facilities costs, depreciation expenses, professional

advisor fees, audit fees, stock based compensation expense and other miscellaneous expenses incurred in connection with general

General and administrative expenses increased by 20.5% or ¥0.8 million ($0.1 million), from approximately

¥4.1 million in the three months ended September 30 , 2015 to approximately

¥4.9 million ($0.7 million) in the same period of 2016.

The increase in general and administrative expenses was mainly

due to an increase in share-based compensation.

General and administrative expenses were 62.8% of total revenues in the three

months ended September 30 , 2016 and 113.2% of total revenues in the same period of 2015, due to the increase in our

total revenue.

Provision for doubtful accounts .

Provision for doubtful accounts is the estimated amount of bad debt that will arise from accounts receivables, other receivables

and purchase advances.

We recorded a provision for doubtful accounts of ¥2.1 million for the three

months ended September 30 , 2015 and ¥8.0 thousand ($1.2 thousand) for the same period in 2016.

The decrease in provision

of doubtful accounts was mainly caused by provision for purchase advances of ¥2.0 million in the three months ended September

During the last few years, we made various down payments for some customized products with a non-refundable requirement.

As those projects were canceled or postponed due to unfavorable industry conditions, management recorded a provision for these

down payments while still trying to minimize the potential losses in the fiscal year of 2016.

Research and development (“R&D”)

Research and development expenses consist primarily of salaries and related expenditures for our research and

development projects.

Research and development expenses decreased from approximately ¥1.8 million for three

months ended September 30, 2015 to approximately ¥0.6 million ($0.1 million) for the same period of 2016.

This decrease

was primarily due to less research and development expense spent on design of chemical products used for waste water treatment.

For the Three Months Ended

September 30,

Loss from operations

(20,201,921 )

(18,547,126 )

and other income (expense)

Income (loss) before income tax

(20,450,410 )

(21,101,035 )

for income tax

(20,995,182 )

(21,177,802 )

income attributable to non-controlling interest

attributable to Recon Technology, Ltd

(20,995,182 )

(20,631,731 )

Interest and other income (expense)

Loss before income taxes

Benefit for income taxes

Net income attributable to non-controlling interest

Net loss attributable to Recon Technology, Ltd

Loss from operations .

Loss from operations was approximately ¥20.2 million ($3.1 million) for the nine months ended March 31, 2016, compared to

a loss of ¥1.7 million for the same period of 2015.

This increase in loss from operations was primary due to a decrease in

gross profit, an increase in R&D expenses and increase in stock based compensation and allowance accrued for doubtful accounts.

Interest and other

income (expense) .

Interest and other expense was approximately ¥0.3 million ($0.04 million) for the nine months ended

March 31, 2016, compared to interest and other income of ¥2.3 million for the same period of 2015.

The ¥2.6 million ($0.4

million) decrease in interest and other income was primarily due to gain from change in fair value of warrants liability while

there was no such gain for the current period.

Provision for

Provision for income tax for the nine months ended March 31, 2015 was approximately ¥0.5 million.

for income tax was ¥0.5 million ($0.1 million) for the nine months ended March 31, 2016.

This slight increase in provision

for income tax was mainly due to deferred tax assets changes, offset by prior period income tax payable true-up during the nine

months ended March 31, 2016.

Net income (loss) .

As a result of the factors described above, net loss was approximately ¥21.0 million ($3.3 million) for the nine months ended

March 31, 2016, a decrease of approximately ¥21.2 million ($3.3 million) from net income of ¥0.2 million for the same

Loss from operations was approximately ¥5.5 million ($0.8 million) for the three months ended September 30, 2016, compared

to a loss of ¥8.7 million for the same period of 2015.

This decrease in loss from operations was primary due to an increase

in gross profit, and a decrease in provision for doubtful accounts and research and development expenses.

Interest and other income (expense) .

Interest and other income was approximately ¥3.1 thousand ($0.5 thousand)

for the three months ended September 30, 2016, compared to interest and other expense of ¥0.2 million for the same period of

The ¥0.2 million ($0.03 million) increase in interest and other income was primarily due to the increased other income

and the decreased interest expense.

Benefit for income tax .

for income tax was approximately ¥20.1 thousand ($3.0 thousand) for the three months ended September 30, 2016, compared to

¥16.5 thousand for the three months ended September 30, 2015.

This increase in benefit for income tax was mainly due to an

increase in income tax benefit of Nanjing Recon as a result of increased tax rebate for the three months ended September 30, 2016

compared to the same period of 2015.

a result of the factors described above, net loss was approximately ¥5.5 million ($0.8 million) for the three months ended

September 30, 2016, a decrease of approximately ¥3.3 million ($0.5 million) from net loss of ¥8.8 million for the same

period of 2015.

Net loss attributable

to Recon Technology, Ltd .

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

¥21.0 million ($3.3 million) for the nine months ended March 31, 2016, a change of approximately ¥20.6 million ($3.2 million)

from net loss attributable to ordinary shareholders of approximately ¥0.4 million for same period of 2015.

Adjusted EBITDA

Adjusted EBITDA.

define adjusted EBITDA as net loss adjusted for income tax expense (benefit), interest expense, change in fair value of warrants

liability, 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.

the Nine Months Ended

Reconciliation

of Adjusted EBITDA to Net Loss

Net income (loss)

Provision for income taxes (benefit)

Interest expense and foreign currency

Change in fair value of warrants liability

Restricted shares issued for consulting

from warrant redemptions

Stock compensation expense

Depreciation and amortization

Adjusted EBITDA decreased

by approximately ¥16.0 million ($2.5 million) to a loss of approximately ¥13.0 million ($2.0 million) for the nine months

ended March 31, 2016, compared to approximately ¥2.9 million income for the same period in 2015.

This was mainly due to decreased

gross profit, increased research and development expenses and increased bad debt allowances.

Adjusted Net Income and Adjusted Loss Per Share

For the Nine Months Ended

Reconciliation of Net Loss

attributable to Recon Technology, Ltd

to Adjusted Net Loss attributable

to Recon Technology, Ltd

loss attributable to Recon Technology, Ltd

(20,995,182 )

$ (3,255,395 )

in fair value of warrants liability

shares issued for consulting services

warrants redemption

compensation expense

net loss attributable to Recon Technology, Ltd

(14,989,418 )

$ (2,324,175 )

Reconciliation of U.S.

Earnings (Loss) Per Share

GAAP Adjusted

Earnings Per Share

earnings (loss) per share

of noncash items on earnings per share

GAAP adjusted earnings per share

Weighted - average shares

(A) Noncash items are certain non-cash

expenses that are included in our U.S.

GAAP reported results.

The non-GAAP financial measures are provided to enhance investors’

overall understanding of Recon's current financial performance.

Liquidity and Capital Resources

As of March 31, 2016,

we had cash in the amount of approximately ¥2.6 million ($0.4 million).

As of June 30, 2015, we had cash in the amount of

approximately ¥12.3 million.

As of September 30, 2016, we had cash in

the amount of approximately ¥554.6 thousand ($83.2 thousand).

As of June 30, 2016, we had cash in the amount of approximately

¥1.8 million.

Indebtedness .

As of March 31, 2016, except for approximately ¥8.6 million ($1.3 million) of short-term borrowings from related parties,

and ¥7.0 million ($1.1 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

We are a holding company with no operations of our own.

All of our operations are conducted through our Domestic

As a result, our ability to pay dividends and to finance any debt that we may incur is dependent upon the receipt of

dividends and other distributions from the Domestic Companies.

In addition, Chinese legal restrictions permit payment of dividends

to us by our Domestic Companies only out of their respective accumulated net profits, if any, determined in accordance with Chinese

accounting standards and regulations.

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

10%) of their after-tax net income (after discharging all cumulated loss), if any, each year for compulsory statutory reserve

until the amount of the reserve reaches 50% of our Domestic Companies’

As of September 30,

2016, except for approximately ¥12.5 million ($1.9 million) of short-term borrowings from related parties, we did not have

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

Holding Company Structure .

a holding company with no operations of our own.

All of our operations are conducted through our Domestic Companies.

our ability to pay dividends and to finance any debt that we may incur is dependent upon the receipt of dividends and other distributions

from the Domestic Companies.

In addition, Chinese legal restrictions permit payment of dividends to us by our Domestic Companies

only out of their respective accumulated net profits, if any, determined in accordance with Chinese accounting standards and regulations.

Under Chinese law, our Domestic Companies are required to set aside a portion (at least 10%) of their after-tax net income (after

discharging all cumulated loss), if any, each year for compulsory statutory reserve until the amount of the reserve reaches 50%

of our Domestic Companies’

registered capital.

These funds may be distributed

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

Off-Balance Sheet

Arrangements .

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

of any third parties.

In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified

as shareholders’

These funds may be distributed to shareholders at the time of each Domestic

Company’s wind up.

Off-Balance Sheet Arrangements .

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

In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’

equity, or that are not reflected in our financial statements.

Furthermore, we do not have any retained

or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support

to such entity.

Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity,

market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Furthermore, we do not have any retained or contingent interest

in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support

to us or engages in leasing, hedging or research and development services with us.

Capital Resources .

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

loans from related parties.

As of March 31, 2016, we had total assets of approximately ¥102.4 million ($15.9 million), which

includes cash of approximately ¥2.6 million ($0.4 million), net accounts receivable due from third parties of approximately

¥50.2 million ($7.8 million), working capital amounted to approximately ¥64.3 million ($10.0 million), and shareholders’

To date we have

financed our operations primarily through cash flows from operations and financing activities.

As of September 30, 2016, we had

total assets of approximately ¥76.4 million ($11.4 million), which includes cash of approximately ¥0.6 million ($0.08 million),

net accounts receivable due from third parties of approximately ¥37.3 million ($5.6 million), working capital of approximately

¥41.2 million ($6.2 million).

Shareholders’

equity amounted to approximately ¥37.9 million ($5.7 million).

Cash from Operating

Net cash used in operating activities was approximately ¥1.3 million ($0.2 million) for the nine months

ended March 31, 2016.

This was a decrease of approximately ¥14.9 million ($2.2 million) compared to net cash used in operating

activities of approximately ¥16.2 million for the nine months ended March 31, 2015.

The decrease in net cash used in operating

activities for the nine months ended March 31, 2016, was primarily attributable to the ¥5.7 million ($0.9 million) change

in trade accounts receivable due from third parties, ¥4.6 million ($0.7 million), change in trade accounts receivable due

from related parties and ¥4.4 million ($0.7 million) change in change in purchase advance.

Cash from Investing

Net cash used in investing activities was approximately ¥0.4 million ($68.6 thousand) for the nine months

ended March 31, 2016, increased approximately ¥0.3 million compared to the same period in 2015, which is due to the decrease

in proceeds from disposal of equipment.

Cash from Operating Activities .

Net cash used in operating activities was approximately ¥0.3 million ($0.05 million) for the three months ended September 30,

This was a decrease of approximately ¥0.7 million ($0.1 million) compared to net cash used in operating activities of

approximately ¥1.0 million for the three months ended September 30, 2015.

The decrease in net cash used in operating activities

for the three months ended September 30, 2016 was primarily attributable to collections of notes receivable of ¥1.6 million

($0.2 million), collections from trade accounts receivable due from third parties of ¥1.0 million ($0.2 million), collections

of other receivable due from third parties of ¥1.9 million ($0.3 million) and an increase in trade accounts payable due from

third parties of ¥1.7 million ($0.3 million), partly offset by payments for advances due from third parties of ¥2.9 million

($0.4 million).

Cash from Investing Activities .

Net cash provided by investing activities was approximately ¥22.3 thousand ($3.3 thousand) for the three months ended September

30, 2016, which was an increase in cash provided by investing activities of approximately ¥0.5 million compared to the same

period in 2015, which increase is due to a decrease in the Company’s purchase of additional property and equipment and an

increase in proceeds from disposal of equipment.

Cash from Financing

Net cash used in financing activities amounted to ¥8.1 million ($1.2 million) for the nine months ended March

31, 2016, as compared to net cash provided by financing activities of $3.0 million for the same period in 2015.

During the nine

months ended March 31, 2016, we repaid ¥16.7 million ($2.6 million) short-term borrowings to two related parties and repaid

¥0.5 million ($0.1 million) short-term bank loans, and we received ¥8.5 million ($1.3 million) from one related party

and received ¥0.5 million ($0.1 million) short-term bank loans.

Net cash used in financing activities amounted to ¥1.0 million ($0.1 million) for the three months ended

September 30, 2016, as compared to net cash used in financing activities of $7.1 million for the same period in 2015.

the three months ended September 30, 2016, we repaid ¥5.3 million ($0.8 million) in short-term borrowings to two related

parties and repaid ¥0.5 million ($0.08 million) in short-term borrowings to one third-party, and we received

¥4.8 million ($0.7 million) from two related parties.

Working Capital .

Total working capital as of March 31, 2016 amounted to approximately ¥64.3 million ($10.0 million), compared to approximately

¥72.4 million as of June 30, 2015.

Total current assets as of March 31, 2016 amounted to approximately ¥98.8 million ($15.3

million), a decrease of approximately ¥25.7 million ($4.0 million) compared to approximately ¥124.5 million at June 30,

The decrease in total current assets at March 31, 2016 compared to June 30, 2015 was mainly due to decreases in cash and

purchase advances.

Current liabilities

amounted to approximately ¥34.5 million ($5.4 million) at March 31, 2016, in comparison to approximately ¥52.1 million

at June 30, 2015.

This decrease of liabilities was attributable mainly to a decrease in short-term borrowings-related parties,

other payable-related parties and other payable-third parties.

Total working

capital as of September 30, 2016 amounted to approximately ¥41.2 million ($6.2 million), compared to approximately ¥44.5

million as of June 30, 2016.

Total current assets as of September 30, 2016 amounted to approximately ¥71.4 million ($10.7 million),

a decrease of approximately ¥2.9 million ($0.4 million) compared to approximately ¥74.3 million at June 30, 2016.

in total current assets at September 30, 2016 compared to June 30, 2016 was mainly due to decreases in cash, notes receivable and

other receivables, partially offset by an increase in purchase advance.

Current liabilities amounted to approximately

¥30.3 million ($4.5 million) at September 30, 2016, in comparison to approximately ¥29.9 million at June 30, 2016.

increase of liabilities was attributable mainly to an increase in trade accounts payable, partially offset by a decrease in short-term

borrowings-third parties and short-term borrowings-related parties.

The decrease in working capital of approximately

¥3.3 million helped to support the loss from operation of approximately ¥5.4 million.

Capital Needs .

the uncertainty of the current market, our management believes it is necessary to enhance collection of outstanding balance of

accounts receivable and other receivables, and to be cautious on operational decisions and project selection.

Our management believes

that our current operations can satisfy our daily working capital needs.

We may also raise capital through public offering or

private placement to finance our development of our business and to consummate any merger and acquisition, if necessary.

Quantitative and Qualitative Disclosures about Market Risk.

With the uncertainty

of the current market, our management believes it is necessary to enhance collection of outstanding accounts receivable and other

receivables, and to be cautious on operational decisions and project selection.

Our management believes that our current operations

can satisfy our daily working capital needs.

We may also raise capital through public offerings or private placements of our securities

to finance our development of our business and to consummate any merger and acquisition, if necessary.

Quantitative and Qualitative

Disclosures about Market Risk.

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