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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of February 2019

 

Commission File Number: 001-34409

 

RECON
TECHNOLOGY, LTD

 

Room 1902, Building C, King Long International
Mansion

No. 9 Fulin Road

Beijing, 100107

People’s Republic of China

(Address of principal executive offices)

 

Indicate by check mark whether the registrant
files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F   x Form 40-F  ¨

 

Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
¨

 

Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
¨

 

 

Explanatory Note:

 

The Registrant is filing
this Report on Form 6-K to report its financial results for the six months ended December 31, 2018 and to discuss its recent corporate
developments.

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

 

Statements in this annual report with respect
to the Company’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are
forward-looking statements about the future performance of the Company. Forward-looking statements include, but are not limited
to, those statements using words such as “believe,” “expect,” “plans,” “strategy,”
“prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,”
“intend,” “seek,” “may,” “might,” “could” or “should,”
and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions.
From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These
statements are based on management’s assumptions, judgments and beliefs in light of the information currently available to
it. The Company cautions investors that a number of important risks and uncertainties could cause actual results to differ materially
from those discussed in the forward-looking statements, including but not limited to, product and service demand and acceptance,
changes in technology, economic conditions, the impact of competition and pricing, government regulation, and other risks contained
in reports filed by the company with the Securities and Exchange Commission. Therefore, investors should not place undue reliance
on such forward-looking statements. Actual results may differ significantly from those set forth in the forward-looking statements. 

 

All such forward-looking statements, whether
written or oral, and whether made by or on behalf of the company, are expressly qualified by the cautionary statements and any
other cautionary statements which may accompany the forward-looking statements. In addition, the company disclaims any obligation
to update any forward-looking statements to reflect events or circumstances after the date hereof.

 

 

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.

 

Overview

 

We are a company with limited liability
incorporated in 2007 under the laws of the Cayman Islands. Headquartered in Beijing, we provide products and services to oil and
gas companies and their affiliates through Nanjing Recon Technology Co. Ltd (“Nanjing Recon”) and Beijing BHD Petroleum
Technology Co, Ltd (“BHD”), 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 allocation.
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
and BHD, our business is mainly focused on the upstream sectors of the oil and gas industry. From year 2018, our business has been
expanding to downstream of energy industry, involving civil and industrial heating furnaces market, electric and coal chemical
industry and energy service management industry. We derive our revenues from the sales and provision of (1) automation products
and projects, (2) equipment and installment for heating furnaces and overall energy saving resolution, (3) chemical products and
overall resolution for waste water and oily sludge treatment, and (4) related engineering and project services for above contents.

 

  Nanjing Recon: 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. From year 2018, Nanjing Recon also provides automation products and services to other segment of energy segment, such as new energy industry, electric power and coal chemical industries.

  

  BHD: 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 also been expanding service to oilfield waste water and oily sludge treatment, and extended its heating products and resolutions to civil market by leverage its advantage on furnaces products.

 

Recent Developments

 

On January 15, 2019, the Registrant received
a letter from the Listings Qualifications Department of The Nasdaq Capital Market (“Nasdaq”) notifying the Registrant
that the minimum bid price per share for its ordinary shares was below $1.00 for a period of 30 consecutive business days and that
the Registrant did not meet the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2). This current report
is filed pursuant to Nasdaq Listing Rule 5810(b). The Nasdaq notification letter does not result in the immediate delisting of
the Registrant’s ordinary shares, and the shares will continue to trade uninterrupted under the symbol “RCON”.
Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Registrant has a compliance period of 180 calendar days, or until July 15, 2019
(the “Compliance Period”), to regain compliance with Nasdaq’s minimum bid price requirement. If at any time during
the Compliance Period, the closing bid price per share of the Registrant’s ordinary shares is at least $1.00 for a minimum of 10
consecutive business days, Nasdaq will provide the Registrant a written confirmation of compliance and the matter will be closed.

 

On August 21, 2018, the Company entered into a definitive investment agreement and a supplemental agreement
(collectively, the “Agreement”) with FGS and the other shareholders of FGS. Following full performance under the Agreement,
the Company will own 43% of FGS. As consideration for increasing its affiliates’ interest in FGS from 8% to 43%, Recon shall
(1) pay a total of RMB 10 million in cash to FGS and (2) issue 2,435,284 restricted ordinary shares of Recon (the “Restricted
Shares”) to the other shareholders of FGS within 30 days after FGS finalizes recording Recon’s corresponding interest
at the local governmental agency. If FGS does not reach certain performance goals,
Recon has the right to cancel without further payment part or all of the Restricted Shares. The Restricted Shares are also subject
to lock-up period requirements that vary for each FGS shareholder, from one year to three years following the issuance of the Restricted
Shares. As of the date of this report, FGS finalized recording Recon’s corresponding interest at the local governmental agency,
and Recon issued 2,435,284 Restricted Shares in total to the other shareholders of FGS. Recon has invested RMB3.6 million in cash
to FGS as of December 31, 2018 under this agreement and has the obligation to pay the remaining RMB 6.4 million by May 31, 2019.

 

 

Recent Industry Developments and Business Outlook

 

Measuring Equipment and Service. Digital
oilfield 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 continue to 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 in oilfield industry, power industry and coal-chemical industry.

 

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 Chang Qing Oilfield and Qing Hai oilfield.

 

Equipment and Accessories.
As we entered in the market of the civilian heating furnaces, we believe our resolutions and knowledge in heating equipment will
also bring new resource of operation. We have established new subsidiaries, Qing Hai BHD and HH BHD, to focus on these practices.

 

Oilfield Environmental Protection
Business
. We have also devoted massive resource into oilfield environmental protection business through Gan Su BHD, and
we believe this part will devote into operation and be a supportive branch of our environment business.

 

New business. As energy consumption
market is open to private and foreign companies and the on-line payment technology develops rapidly, we believe there is some opportunity
in downstream of oil industry, which is mainly around the scene of consumption in gas station. We invested in FGS in fiscal year
2018 and made additional investment into FGS in August 2018. We plan to develop this new market with FGS, making full use of our
knowledge of energy segment and our relationship with CNPC.

 

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. We continuously focus
on providing high quality products and services in oilfields in which we have a geographical advantage. This helps us avoid conflicts
of interest with bigger private companies 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.

 

Currently, as more markets of Chine’s
energy industry are open to non-state-owned companies, we are also seeking for opportunities in other markets. We believe our experience
on energy technics will always be our development foundation. By combining more technology and ideas developed in recent years,
such as solar energy and Industrial Internet, we expect to create more profitable business lines.

 

Trend Information

 

Other than as disclosed elsewhere in this
report, we are not aware of any trends, uncertainties, demands, commitments or events since the beginning of our fiscal year 2019
that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity or capital
resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results
or financial condition.

 

 

Factors Affecting Our Results of Operations

 

Our operating results
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; and
  inflation and other macroeconomic factors.

 

Unfavorable changes in any of these general
conditions could negatively affect the number and size of the projects we undertake, the number of products we sell, the amount
of services we provide, the price of our products and services, and otherwise affect our results of operations.

 

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

 

  our revenue growth, in terms of the proportion of our business dedicated to large companies and our ability to successfully develop, introduce and market new solutions and services;
  our ability to increase our revenues from both old and new customers in the oil and gas industry in China;
  our ability to effectively manage our operating costs and expenses; and
  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

 

Consolidation of VIEs

 

A VIE is an entity that either (i) has insufficient
equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors
who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary
beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance
and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the
VIE. The Company performs ongoing assessments to determine whether an entity should be considered a VIE and whether an entity previously
identified as a VIE continues to be a VIE and whether the Company continues to be the primary beneficiary.

 

Assets recognized as a result of consolidating
VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely,
liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general
assets; rather, they represent claims against the specific assets of the consolidated VIEs.

 

Estimates and Assumptions

 

The preparation of the unaudited condensed
consolidated financial statements in conformity with accounting principles generally accepted in United States of America (“US
GAAP”), which requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant accounting
estimates reflected in the Company’s unaudited condensed consolidated financial statements include allowance for doubtful
accounts related to trade accounts receivable, other receivables and purchase advances, allowance for inventory, the useful lives
of property and equipment, valuation allowance for deferred tax assets, impairment assessment for long-lived assets and investment
and the fair value of share- based payments. Since the use of estimates is an integral component of the financial reporting process,
actual results could differ from those estimates.

 

The key assumptions underlying the Company’s
accounting for material arrangements and the reasonably likely material effects of resolving any uncertainties on the Company’s
allowance for doubtful accounts related to purchase advances. The production of the Company’s products requires custom-made
equipment from its suppliers. To ensure that it can secure the required customized equipment, the Company often needs to make full
prepayment for its intended purchases. As a standard practice in the petroleum extraction industry, the Company generally must
submit a bid in order to secure the sales contract. The bidding process generally takes between one month to one year and the timing
depends on the size of the overall project, which timing and size are generally controlled by its client. In order to secure timely
purchase delivery and to meet its product delivery schedule, the Company normally prepays for the purchase advances if the Company
believes that it is more than likely to win the bid for the sales contract which is accounted as pre-contract costs. After winning
the bid and securing the sale contract, the Company normally needs to deliver its products approximately within one week to six
months. Based on the Company’s historical experience, the Company generally is able to realize its purchase advances on the
customized equipment that it orders. If it subsequently confirms that the Company is unable to secure the planned contracts with
a customer after making the advance payments for these planed contracts, the Company evaluates the probable recoverability of the
pre-contract cost and charges to expenses when the Company determines that the recovery of such pre-contract cost is improbable.

 

 

Fair Values of Financial Instruments

 

The US GAAP accounting standards regarding
fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value.

 

The three levels of inputs are defined as
follows:

 

Level 1 inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument. 

 

Level 3 inputs to the valuation methodology
are unobservable.

 

The carrying amounts reported in the unaudited
condensed consolidated balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable,
accrued liabilities, advances from customers, investment payable, short-term bank loan and short-term borrowings approximate fair
value because of the immediate or short-term maturity of these financial instruments.

 

The fair value of long-term receivables
is determined using a present value technique by discounting the future expected contractual cash flows using current rates at
which similar instruments would be issued at the measurement date. The Company estimated the fair value of Investment in unconsolidated
entity using the income approach which was determined using Level 3 fair value inputs. The utilization of the income approach
to determine fair value requires estimates of future operating results and cash flows discounted using an estimated discount rate.
Cash flow projections are based on management’s estimates of revenue growth rates and operating margins, taking into consideration
industry and market conditions. The fair value of long-term receivables is determined using a present value technique by discounting
the future expected contractual cash flows using current rates at which similar instruments would be issued at the measurement
date. The Company estimated the fair value of the purchase price of investment in unconsolidated entity using Level 1 fair value
inputs of the market price of the common stock on the date of the purchase.

 

Revenue Recognition

 

The Company previously recognized revenue
when the following four criteria are met: (1) persuasive evidence of an arrangement, (2) delivery has occurred or services have
been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Delivery does not occur
until products have been shipped or services have been provided to the customers and the customers have signed a completion and
acceptance report, risk of loss has transferred to the customers, customers’ acceptance provisions have lapsed, or the Company
has objective evidence that the criteria specified in customers’ acceptance provisions have been satisfied. The sales price
is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. And with adoption
of ASC 606, “Revenue from Contracts with Customers”, revenue is recognized when all of the following five steps
are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine
the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each
performance obligation is satisfied. The Company applied the new revenue standard from July 1, 2018 and adopted a modified retrospective
approach upon the adoption. The core principle underlying the new revenue recognition ASU is that the Company will recognize revenue
to represent the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects
to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether
revenue should be recognized at a point in time or over time, based on when goods or service is provided to a customer.

 

The Company has completed its assessment
of the impact of the new standard and adopted the new standard for all open contracts as of July 1, 2018 using the modified retrospective
transition method, and applied the guidance to report new disclosures surrounding the Company’s recognition of revenue. The
adoption of the new standard did not have a material impact on the financial position of the Company, the results of its operations
or its cash flows as of and for the six months ended December 31, 2018, and the Company’s internal controls over financial
reporting. There was no cumulative effect of adopting the standard at the date of initial application in retained earnings. The
Company’s Revenue Recognition accounting policy has been updated for the new standard. Revenue is measured as the amount
of consideration the Company expects to receive in exchange for transferring goods or providing services.

 

 

The following table provides changes to
the opening balances of certain current assets accounts resulting from the adoption of the new guidance.

 

    June 30,
2018
    Impact of
Adoption
    July
1,
2018
(As adjusted)
    July 1,
2018
 
    RMB     RMB     RMB     U.S. Dollars  
Inventories   ¥ 7,972,115     ¥ (7,972,115 )   ¥     $  
Other receivables     824,709       (824,709 )            
Purchase advances     5,334,829       (5,334,829 )            
Contract costs           14,131,653       14,131,653       2,054,751  
Total current assets   ¥ 14,131,653     ¥     ¥ 14,131,653     $ 2,054,751  

 

Purchase Advances

 

Purchase advances are the amounts prepaid
to suppliers for business activities, such as standard raw materials, supplies and services.

 

As of December 31, 2018, the Company prepaid approximately ¥10.05
million ($1.5 million) purchase advances to its suppliers as compared to approximately ¥12.7 million at June 30, 2018. Usually,
this type of prepayments will be expensed when those products or services have been rendered or consumed.

 

Contract costs

 

The Company recognizes an asset from the
costs incurred to fulfill a contract when those costs meet all of the following criteria: (i) the costs relate directly to a contract
or to an anticipated contract that the Company can specifically identify; (ii) the costs generate or enhance resources of the Company
that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; (iii) the costs are expected
to be recovered.

 

  Pre-Contract Costs – Pre-contract costs are the amounts prepaid to suppliers for purchases of customized equipment in anticipation of obtaining planned contracts for the Company’s hardware and software revenues. If it subsequently confirms that the Company is unable to secure the planned contracts with a customer after making the advance payments for these planed contracts, the Company evaluates the probable recoverability of the pre-contract cost and charges to expenses when the Company determines that the recovery of such pre-contract cost is improbable.

 

  Executed Contract Costs – Direct costs, such as material, labor, depreciation and amortization and subcontracting costs and indirect costs allocable to contracts include the costs of contract supervision, tools and equipment, supplies, quality control and inspection, insurance, repairs and maintenance for quality assurance purposes before clients’ initial acceptance. Once products are delivered, installed and debugged for intended use and accepted by a client, which may last from weeks to months (this process is decided by the client’s individual project construction arrangement), the Company records revenue based on the contract or the final clients’ acceptance. Minor costs for repair during the maintenance period after initial acceptance are recorded as cost of goods sold as they are incurred. All other general and administrative costs and selling costs are charged to expenses as incurred. The Company generally ships its products approximately one week to six months after production begins and the timing depends on the size of the overall project.

 

 

Performance Obligations

 

Performance obligations include delivery
of product and installation of product. The Company recognizes revenue when performance obligations under the terms of a contract
with its customer are satisfied. This occurs when the control of the goods and services have been transferred to the customer.
Accordingly, revenue for sale of goods is generally recognized upon shipment or delivery depending on the shipping terms of the
underlying contract. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring
goods and providing installation services.

 

Amounts billed to customers for shipping
and handling activities to fulfill the Company’s promise to transfer the goods are included in Sales, and costs incurred
by the Company for the delivery of goods are classified as Cost of sales in the Condensed Consolidated Statements of Operations
and Comprehensive Loss. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are
excluded from revenue. The Company generally offers assurance-type warranties for its products. The specific terms and conditions
of those warranties vary depending upon the product. The Company estimates the costs that may be incurred under its warranties
and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the warranty
liability include historical product-failure experience and estimated repair costs for identified matters. The Company periodically
assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount accrued for expected
returns and warranty claims was immaterial as of December 31, 2018.

 

Practical Expedients Elected

 

Incremental Costs of Obtaining a Contract
– The Company has elected the practical expedient permitted in ASC 340-40-25-4, which permits an entity to recognize incremental
costs to obtain a contract as an expense when incurred if the amortization period will be less than one year.

 

Significant Financing Component – The Company
has elected the practical expedient permitted in ASC 606-10-32-18, which allows an entity to not adjust the promised amount of
consideration for the effects of a significant financing component if a contract has a duration of one year or less. As the Company’s
contracts are typically less than one year in length, consideration will not be adjusted. The Company’s contracts include
a standard payment term of 90 days to 180 days, relying on the contract terms, consequently there is no significant financing
component within contracts.

 

Trade Accounts and Other Receivables

 

Accounts receivable are carried at original
invoiced amount less a provision for any potential uncollectible amounts. Accounts are considered past due when the related receivables
are more than a year old. Provision is made against trade accounts and other receivables to the extent they are considered to be
doubtful. Accounts are written off after extensive efforts at collection. Other receivables arise from transactions with non-trade
customers.

 

Share-Based Compensation

 

Share-based compensation cost is measured
at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line
basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses using
the Black-Scholes valuation model estimated at the grant date based on the award’s fair value.

 

Recently enacted accounting pronouncements

 

In August 2018, the FASB issued ASU 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,”
to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value
measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy
for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires
disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. The Company expects that the adoption of this ASU will not have a material impact on the Company’s
unaudited condensed consolidated financial statements.

 

 

In August 2018, the FASB issued ASU No.
2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” (ASU 2018-15), to align the requirements for
capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementation
costs relating to internal-use software. The update requires entities in a hosting arrangement that is a service contract to follow
the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset and which costs to expense. ASU
2018-15 is effective for the Corporation on January 1, 2020 and may be applied using either the retrospective or prospective approach.
Early adoption is permitted. Company expects that the adoption of this ASU will not have a material impact on the Company’s
unaudited condensed consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-16, “Derivatives
and Hedging (Topic 815).” ASU 2018-16 amends guidance to permit the use of the Overnight Index Swap rate based on the
Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The standard
became effective for the Company on January 1, 2019. Company expects that the adoption of this ASU will not have a material impact
on the Company’s unaudited condensed consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-17,
“Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities”. The new
standard changes how entities evaluate decision-making fees under the variable interest entity guidance. The new standard is effective
for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted
in any interim period after issuance. The standard should be applied on a modified retrospective basis through a cumulative-effect
adjustment directly to retained earnings at the beginning of the period of adoption. Company expects that the adoption of this
ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In November 2018, the FASB issued ASU 2018-19, “Codification
Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from
operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases
should be accounted for in accordance with Accounting Standard Codification (“ASC”) 842, Leases. Company expects that
the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842), to increase the transparency and comparability about leases among entities. The new guidance requires
lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional
disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018,
and requires a modified retrospective approach to adoption assuming the Company will remain an emerging growth company at that
date. Early adoption is permitted. In September 2017, the FASB issued ASU No. 2017-13, which to clarify effective dates that public
business entities and other entities were required to adopt ASC Topic 842 for annual reporting. A public business entity that otherwise
would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial
statements or financial information in another entity’s filing with the SEC adopting ASC Topic 842 for annual reporting periods
beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.
ASU No. 2017-13 also amended that all components of a leveraged lease be recalculated from inception of the lease based on the
revised after tax cash flows arising from the change in the tax law, including revised tax rates. The difference between the amounts
originally recorded and the recalculated amounts must be included in income of the year in which the tax law is enacted. The Company
has not early adopted this update and it will become effective on January 1, 2020. The Company is currently evaluating the impact
of this new standard on its unaudited consolidated financial statements and related disclosures.

 

The Company does not believe other recently
issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed
consolidated financial position, statements of operations and cash flows.

 

 

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,
and subsidiaries of these VIEs.

 

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

 

Six Months Ended December 31, 2018 Compared to Six Months
Ended December 31, 2017

 

During the six months ended December 31, 2018, we continued
optimizing resource allocation and adjusting our business structure. We saw an obvious improvement on our operating margin during
this period and we believe this trend will continue and strengthen our competitiveness in the future.

 

1)             To
cope with uncertainty and diversify industry risks, we leveraged our technology from oilfield service sector to other broaden energy
industry, thus we i) successfully expanded our automation business to coal chemical industry, mainly by serving China Energy Investment
Corporation (“China Energy”) through the Shenhua Group Corporation Limited (“Shenhua Group”). As of the date
of this report, we have achieved about RMB33.38 million   orders; and ii) entered into civilian and general industrial
furnaces market and energy management service market through subsidiaries of BHD;

 

2)             To
follow the trend of comprehensive utilization of energy, we also expanded our business and technology to new energy market. We
introduced more solar technology in our current equipment to make them more efficient and cost beneficial. We also brought our
technology and experience to polycrystalline silicon production factories, of which about RMB 14 million   contracts
have been achieved but not yet finished by the date of this report. We expect this project in Xinjiang province to be completed
by end of fiscal year 2019; and

 

3)            Eventually
we completed the construction of Gan Su BHD’s comprehensive disposal treatment project and obtained a hazardous waste operating
permit issued by the Jiuquan Environmental Protection Bureau in Gansu province. This project has an annual processing capacity
of 60,000 tons of oily waste and is currently the only such treatment facility located in Yumen city. We expect to generate RMB
60 million in revenue from this project for calendar year 2019 with a 50% gross margin.

 

Revenue

 

    For the Six Months Ended  
    December 31,  
                Increase/     Percentage  
    2017     2018     (Decrease)     Change  
Automation product and software   ¥ 13,602,598     ¥ 28,954,379     ¥ 15,351,781       112.9 %
Equipment and accessories     39,212,432       10,312,238       (28,900,194 )     (73.7 )%
Oilfield environmental protection     431,697       3,005,112       2,573,415       596.1 %
Total revenue   ¥ 53,246,727     ¥ 42,271,729     ¥ (10,974,998 )     (20.6 )%

 

 

Our total revenues for the six months ended
December 31, 2018 were approximately ¥42.3 million ($6.1 million), a decrease of approximately ¥11.0 million ($1.6
million)
or 20.6% from ¥53.2 million for the same period
in 2017. The overall decrease in revenue was mainly due to the decreased revenue from equipment and accessories segments, offsetting
by an increased revenue from automation product and software and oilfield environmental protection segments.

 

  (1) Revenue from automation product and software increased by ¥15.4 million or 112.9%, mainly affected by more expenditure on surface projects. The increased revenue was mainly due to the automation business projects for China Energy, We recorded ¥9.4 million revenue from these projects during the six months ended December 31, 2018. In addition, there is an increase in revenue of ¥3.8 million we generated from providing oilfield automation services to CNPC and China Petroleum and Chemical Corporation (“SINOPEC”) during the six months ended December 31, 2018.

 

  (2) Revenue from equipment and accessories decreased by ¥28.9 million or 73.7%. For the six months ended December 31, 2017, to occupy the market, we accepted some low-margin contracts, resulting a higher revenue. We didn’t continue this type of temporary business in the same period of fiscal year 2019 and the revenue from furnaces decreased dramatically. We believe this decision will not hurt our business as our normal business cycle has been established and margin from furnaces segment increased, even though with less revenue. We believe revenue from this segment will rebound in the coming year.

 

  (3) Revenue from oilfield environmental protection increased by ¥2.6 million or 596.1% as requirement of oilfield companies increased and the customers’ demand for environmental protection increased.

 

Cost of revenue

 

    For the Six Months Ended  
    December 31,  
                Increase/     Percentage  
    2017     2018     (Decrease)     Change  
Automation product and software   ¥ 11,058,778     ¥ 18,549,248     ¥ 7,490,470       67.7 %
Equipment and accessories     35,826,598       6,609,414       (29,136,184 )     (81.3 )%
Oilfield environmental protection     313,229       1,794,975       1,481,746       473.1 %
Total cost of revenue   ¥ 47,198,605     ¥ 27,034,637     ¥ (20,163,968 )     (42.7 )%

 

Our cost of revenues decreased from ¥47.2
million for the six months ended December 31, 2017 to ¥27.0 million ($3.9 million) for the same period in 2018, a decrease
of ¥20.2 million ($2.9 million) or 42.7%. This decrease was mainly caused by significant decrease in cost of revenue incurred
in equipment and accessories.

 

For the six months ended December 31, 2017
and 2018, cost of revenue from automation product and software was approximately ¥11.1 million and ¥18.5 million ($2.7
million), respectively, representing an increase of approximately 7.5 million ($1.1 million) or 67.7%. The increase in cost of
revenue from automation product and software was primarily attributable to business of China Energy contracts, which results in
an amount of ¥7.5 million increase in cost of revenues in this segment.

 

For the six months ended December 31, 2017
and 2018, cost of revenue from equipment and accessories was approximately ¥35.8 million and ¥6.6 million ($1.0 million),
respectively, representing a decrease of approximately ¥29.1 million ($4.2 million) or 81.3%. The decrease in cost of revenue
from equipment and accessories was primarily attributable to quickly decreased sales of heating related products with low margin
to general industry clients.

 

 

For the six months ended December 31, 2017
and 2018, cost of revenue from oilfield environmental protection was approximately ¥0.3 million and ¥1.8 million ($0.3
million), respectively, representing an increase of approximately ¥1.5 million ($0.2 million) or 473.1%. The increase in cost
of revenue was mainly due to the increased oily sludge treatment processing projects during
the six months ended December 31, 2018.
We expect this part will increase in the coming year as our new subsidiary Gan Su
BHD runs.

 

Gross Profit

 

    For the Six Months Ended  
    December 31,  
    2017     2018     Increase/     Percentage  
    Gross Profit     Margin %     Gross Profit     Margin %     (Decrease)     Change  
Automation product and software   ¥ 2,543,820       18.7 %   ¥ 10,405,131       35.9 %   ¥ 7,861,311       309.0 %
Equipment and accessories     3,385,834       8.6 %     3,621,824       35.1 %     235,990       7.0 %
Oilfield environmental protection     118,468       27.4 %     1,210,137       40.3 %     1,091,669       921.5 %
Total gross profit and margin %   ¥ 6,048,122       11.4 %   ¥ 15,237,092       36.0 %   ¥ 9,188,970       151.9 %

 

Our gross profit increased to ¥15.2
million ($2.2 million) for the six months ended December 31, 2018 from ¥6.0 million for the same period in 2017. Our gross
profit as a percentage of revenue increased to 36.0% for the six months ended December 31, 2018 from 11.4% for the same period
in 2017. The main reason of the increase in gross profit was that the revenue increase was higher than the cost of revenue increase
for our automation product and software and oilfield environmental protection segments. As our business improved with industry
recovering and enhancement of our cost control, our margin improved to normal level, while the margin of last year was lower because
we undertook some exploiting business with higher level of resource input leading to a lower margin than usual.

 

For
the six months ended December 31, 2017 and 2018, gross profit from automation product and software was approximately ¥2.5 million
and ¥10.4 million ($1.5 million), respectively, representing an increase of approximately ¥7.9 million ($1.1 million) or
309.0%. The increase in gross profit from automation product and software was primarily due to 1) more revenue generated from oilfield
automation services for SINOPEC
’s Jidong projects
with higher gross margin; and 2) higher percentage of business from China Energy with only simple treatment thus with higher margin.

 

For the six months ended December 31, 2017
and 2018, gross profit from equipment and accessories was approximately ¥3.4 million and ¥3.6 million ($0.5 million), respectively,
representing an increase of approximately ¥0.2 million ($0.03 million) or 7.0%. The main reason of the increase in gross profit
from equipment and accessories was that the decrease in cost of revenue was higher than the decrease in revenue, as the Company
sold a larger number of equipment and accessories with lower margin during the six months ended December 31, 2017 according to
the Company’s new business development plan.

 

For the six months ended December 31, 2017
and 2018, gross profit from oilfield environmental protection was approximately ¥0.1 million and ¥1.2 million ($0.2 million),
respectively, representing an increase of approximately ¥1.1 million ($0.2 million) or 921.5%. The increase in gross profit
from oilfield environmental protection was primarily attributable to the increase in revenue, as discussed above.

 

Operating Expenses

 

    For the Six Months Ended  
    December 31,  
                Increase /     Percentage  
    2017     2018     (Decrease)     Change  
Selling and distribution expenses   ¥ 2,981,637     ¥ 4,909,361     ¥ 1,927,724       64.7 %
% of revenue     5.6 %     11.6 %     6.0 %      
General and administrative expenses     18,672,141       18,903,138       230,997       1.2 %
% of revenue     35.1 %     44.7 %     9.6 %      
Provision for (net recovery of) doubtful accounts     80,539       (1,494,707 )     (1,575,246 )     (1,955.9 )%
% of revenue     0.2 %     (3.5 )%     (3.7 )%      
Research and development expenses     1,819,720       1,654,702       (165,018 )     (9.1 )%
% of revenue     3.4 %     3.9 %     0.5 %      
Operating expenses   ¥ 23,554,037     ¥ 23,972,494     ¥ 418,457       1.8 %

 

Selling and Distribution Expenses.
Selling and distribution expenses consist primarily of salaries and related expenditures of the Company’s sales and marketing
departments, sales commissions, costs of marketing programs including traveling expenses, advertising and trade shows, and rental
expense, as well as shipping charges. Selling expenses increased by ¥1.9 million ($0.3 million) for the six
months ended December 31, 2018
 compared to the same period in 2017. This increase was primarily due to an increase
in traveling expense, shipping cost and service fees as we expanded our market to new basements of China Energy projects and new
industries. Selling expenses were 11.6% of total revenues for the six months ended December 31, 2018 and 5.6% of total revenues
in the same period of 2017.

 

General and Administrative Expenses.
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
operations. General and administrative expenses increased by 1.2% or ¥0.2 million ($0.03 million), from ¥18.7 million in
the six months ended December 31, 2017 to ¥18.9 million ($2.7 million)
in the same period of 2018. The increase in general and administrative expenses was
mainly due to an increase in
stock-based compensation expense and audit fees, while the increase was partially offset by
the decrease in investor relationship expenses during the six months ended December 31, 2018. General
and administrative expenses accounted 44.7% of total revenues in the six months ended December 31, 2018 and 35.1% of total revenues
for the same period of last year.

 

Provision for doubtful accounts.
Provision for doubtful accounts is the estimated amount of bad debt that will arise as a result of lower collectability from account
receivables, other receivables and purchase advances. We recorded a provision for doubtful accounts of ¥0.08 million for the
six months ended December 31, 2017 and 
recorded reversal of provision for doubtful accounts of ¥1.5 million ($0.2
million) for the same period in 2018. The decrease in provision of doubtful accounts was mainly resulted by the management’s
effort to collect the long outstanding receivables. Management plans to continue to monitor account receivables to maintain the
provision at a lower level.

 

Research and development (“R&D”)
expenses
. Research and development expenses consist primarily of salaries and related expenditures for research and development
projects. Research and development expenses decreased from approximately ¥1.8 million for the six months ended December 31,
2017 to ¥1.7 million ($0.2 million) for the same period of 2018. This decrease was primarily due to less research and development
expenses spent on design of chemical products used for waste water treatment and digital oilfield models and platform. The Company
was focusing on the transformation of advanced R&D results into projects, which were undertaken by Gan Su BHD and Qing Hai
BHD.

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Net Loss 

 

    For the Six Months Ended  
    December 31,  
                Increase /     Percentage  
    2017     2018     (Decrease)     Change  
Loss from operations   ¥ (17,505,915 )   ¥ (8,735,402 )   ¥ 8,770,513       (50.1 )%
Other expense, net     (89,775 )     (1,208,035 )     (1,118,260 )     1,245.6 %
Loss before income taxes     (17,595,690 )     (9,943,437 )     7,652,253       (43.5 )%
Provision for income taxes     9,282       2,002       (7,280 )     (78.4 )%
Net loss     (17,604,972 )     (9,945,439 )     7,659,533       (43.5 )%
Less: Net (loss) income attributable to non-controlling
interest
    (618,162 )     138,804       756,966       (122.5 )%
Net loss attributable to Recon Technology, Ltd   ¥ (16,986,810 )   ¥ (10,084,243 )   ¥ 6,902,567       (40.6 )%

 

Loss from operations.  Loss
from operations was ¥8.7 million ($1.3 million) for the six months ended December 31, 2018, compared to a loss of ¥17.5
million for the same period of 2017. This ¥8.8 million ($1.3 million) decrease in loss from operations was primary due to an
increase in gross profit, as well as an increase in reversal of doubtful accounts and partial offset by an increase in selling
and distribution expenses as discussed above.

 

Other expense. Other expense, net
was ¥1.2 million ($0.2 million) for the six months ended December 31, 2018, compared to other expense, net of ¥0.09 million
for the same period of 2017. The ¥1.1 million ($0.2 million)   increase in other expense, net was primarily due to
the increased loss from investment in unconsolidated entity of ¥0.8 million ($0.1 million) for the six months ended December
31, 2018.

 

Net loss. As a result of the
factors described above, net loss was ¥9.9 million ($1.4 million) for the six months ended December 31, 2018, a decrease of
¥7.7 million ($1.1 million) from net loss of ¥17.6 million for the same period of 2017.

 

Liquidity and Capital Resources

 

As of December 31, 2018, we had cash in
the amount of approximately ¥12.0 million ($1.7 million). As of June 30, 2018, we had cash in the amount of approximately ¥45.3
million.

 

Indebtedness. As of December 31,
2018, except for approximately ¥1.0 million ($0.1 million) of short-term borrowings from third party, ¥5.9 million ($0.9
million) of short-term borrowings from related parties, and ¥8.6 million ($1.2 million) of long-term borrowings from a related
party, and except that Gan Su BHD has a production line under construction in progress which the main construction of the project
has completed, based on the management’s best estimation, the expected completion date will be in April 2019, we did not
have any other finance leases or purchase commitments, guarantees or other material contingent liabilities.

 

Holding Company Structure. We are
a holding company with no operations of our own. All of our operations are conducted through our Domestic Companies. As a result,
our ability to pay dividends and to finance any debt that we may incur is dependent upon the receipt of dividends and other distributions
from the Domestic Companies. In addition, Chinese legal restrictions permit payment of dividends to us by our Domestic Companies
only out of their respective accumulated net profits, if any, determined in accordance with Chinese accounting standards and regulations.
Under Chinese law, our Domestic Companies are required to set aside a portion (at least 10%) of their after-tax net income (after
discharging all cumulated loss), if any, each year for compulsory statutory reserve until the amount of the reserve reaches 50%
of our Domestic Companies’ registered capital. These funds may be distributed to shareholders at the time of each Domestic
Company’s wind up.

 

 

Off-Balance Sheet Arrangements. We
have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties.
In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’
equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover,
we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or engages in leasing, hedging or research and development services with us.

 

Capital Resources. To date we have
financed our operations primarily through cash flows from operations, short-term and long-term borrowings due to related parties.
As of December 31, 2018, we had total assets of ¥158.7 million ($23.1 million), which includes cash of ¥12.0 million ($1.7
million), net accounts receivable due from third parties of ¥41.0 million ($6.0 million), and working capital of ¥58.8
million ($8.5 million). Shareholders’ equity amounted to ¥98.6 million ($14.3 million).

 

Cash from Operating Activities. Net
cash used in operating activities was ¥27.0 million ($3.9 million) for the six months ended December 31, 2018. This was an
increase of approximately ¥14.3 million ($2.1 million) compared to net cash used operating activities of approximately ¥12.7
million for the six months ended December 31, 2017. The increase in net cash used in operating activities for the six months ended
December 31, 2018 was primarily attributable to the net loss available to the Company in the amount of ¥9.9 million ($1.4 million),
and reconciled by restricted shares issued for management resulting in expenses of ¥9.5 million ($1.4 million) and net recovery
of doubtful accounts of ¥1.5 million ($0.2 million), and an increase in trade account receivable, inventories, other receivables
and purchase advances, partly offset by a decrease in other payables.

 

Cash from Investing Activities. Net
cash used in investing activities was approximately ¥8.5 million ($1.2 million) for the six months ended December 31, 2018,
representing an increase in cash used in investing activities of approximately ¥1.1 million ($0.2 million) compared to the
same period in 2017. This increase was due to an increase in the Company’s payments and prepayments for construction in progress
and investment in unconsolidated entity.

 

Cash from Financing Activities. Net cash provided by
financing activities amounted to ¥1.0 million ($0.1 million) for the six months ended December 31, 2018, as compared to net
cash provided by financing activities of $24.5 million for the same period in 2017. During the six months ended December 31, 2018,
we repaid ¥5.0 million ($0.7 million) in short-term borrowings to related parties, received ¥5.0 million ($0.7 million)
in short-term borrowings from related parties and received ¥1.0 million ($0.1 million) in short-term borrowings from one third-party.
We also received ¥0.5 million ($0.07 million) capital contribution by a non-controlling shareholder during the six months ended
December 31, 2018.

 

Working Capital.  Total working
capital as of December 31, 2018 amounted to ¥58.8 million ($8.5 million), compared to ¥74.8 million as of June 30, 2018.
The decrease in working capital was mainly due to the Company used cash on construction of new product capability and equity investment.
Total current assets as of December 31, 2018 amounted to ¥99.0 million ($14.4 million), a slight decrease of ¥1.8 million
($0.3 million) compared to approximately ¥100.8 million at June 30, 2018. The decrease in total current assets at December
31, 2018 compared to June 30, 2018 was mainly due to a decrease in cash, partially offset by an increase in trade account receivable,
contract costs and other receivables.

 

Current liabilities amounted to
¥40.2 million ($5.8 million) at December 31, 2018, in comparison to ¥26.0 million at June 30, 2018. This increase of current
liabilities was attributable mainly to an increase in trade accounts payable as a result of the increased purchases for undergoing
contracts, investment payable and other payables, partially offset by a decrease in short-term borrowings-related parties.

 

Capital Needs. 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.

 

 

Exhibits

 

The following documents are filed herewith:

 

Exhibit

Number

  Document
     
99.1   Unaudited Condensed Consolidated Financial Statements for the Six Months Ended December 31, 2017 and 2018
99.2   Press release dated February 27, 2019 titled “Recon Technology Reports Financial Results for the First Six Months of Fiscal Year 2019”

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  RECON TECHNOLOGY, LTD  
     
February 27, 2019 By: /s/ Shenping Yin  
    Shenping Yin  
    Chief Executive Officer  
    (Principal Executive Officer) and  
    Duly Authorized Officer  

 

  

 

 Exhibit
99.1

 

RECON TECHNOLOGY,
LTD

 

PAGE
   
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
 
   
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2018 and December 31, 2018
F-2
   
Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Loss for the six months ended December 31, 2017 and 2018
F-3
   
Unaudited Condensed Consolidated Statements
of Cash Flows for the six months ended December 31, 2017 and 2018
F-4
   
Notes to the Unaudited Condensed Consolidated
Financial Statements
F-5

 

 

RECON TECHNOLOGY, LTD

CONDENSED BALANCE SHEETS

(UNAUDITED)

 

    As of
June 30
    As of
December 31
    As of
December 31
 
    2018     2018     2018  
    RMB     RMB     U.S. Dollars  
ASSETS                        
Current assets                        
Cash   ¥ 45,340,578     ¥ 11,981,820     $ 1,742,164  
Notes receivable     3,995,962       3,778,526       549,400  
Trade accounts receivable, net     24,254,007       38,946,200       5,662,801  
Inventories, net     6,758,841       289,129       42,040  
Other receivables, net     7,320,953       10,095,750       1,467,928  
Purchase advances, net     12,654,546       10,055,617       1,462,093  
Contract costs, net           23,234,870       3,378,364  
Prepaid expenses     509,682       634,271       92,223  
Total current assets     100,834,569       99,016,183       14,397,013  
                         
Property and equipment, net     3,171,109       2,876,833       418,293  
Construction in progress     11,779,784       21,428,767       3,115,756  
Land use right, net     1,335,126       1,321,507       192,148  
Investment in unconsolidated entity           30,804,506       4,478,994  
Long-term trade accounts receivable, net     4,212,829       2,077,829       302,118  
Prepayments for construction in progress     474,100       1,194,200       173,637  
Total Assets   ¥ 121,807,517     ¥ 158,719,825     $ 23,077,959  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
                         
Current liabilities                        
Trade accounts payable   ¥ 8,754,347     ¥ 15,452,084     $ 2,246,743  
Other payables     3,255,810       6,220,334       904,437  
Other payable- related parties     3,211,457       3,214,579       467,402  
Accrued payroll and employees’ welfare     600,434       885,569       128,762  
Investment payables           6,400,000       930,564  
Taxes payable     431,913       1,077,241       156,632  
Short-term borrowings           1,031,507       149,982  
Short-term borrowings – related parties     9,018,065       5,198,977       755,934  
Long-term borrowings – related party – current portion     719,895       749,671       109,003  
Total Current Liabilities     25,991,921       40,229,962       5,849,459  
                         
Long-term borrowings – related party     8,943,834       8,578,305       1,247,291  
Total Liabilities     34,935,755       48,808,267       7,096,750  
                         
Commitments and Contingencies                        
                         
Equity                        
Common stock, ($ 0.0185 U.S. dollar par value, 100,000,000 shares authorized; 20,940,633 shares and 18,380,349 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively)     2,279,510       2,603,392       378,535  
Additional paid-in capital     207,490,280       238,656,305       34,700,774  
Statutory reserve     4,148,929       4,148,929       603,257  
Accumulated deficit     (139,424,980 )     (149,509,223 )     (21,738,733 )
Accumulated other comprehensive income     1,516,093       2,711,421       394,242  
Total stockholders’ equity     76,009,832       98,610,824       14,338,075  
Non-controlling interests     10,861,930       11,300,734       1,643,134  
Total equity     86,871,762       109,911,558       15,981,209  
Total Liabilities and Equity   ¥ 121,807,517     ¥ 158,719,825     $ 23,077,959  

 

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

 

 

RECON TECHNOLOGY, LTD

CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

(UNAUDITED)

 

    For the six months ended  
    December 31,  
    2017     2018     2018  
    RMB     RMB     USD  
                   
Revenues   ¥ 53,246,727     ¥ 42,271,729     $ 6,146,335  
                         
Cost of revenues and related tax     47,198,605       27,034,637       3,930,853  
                         
Gross profit     6,048,122       15,237,092       2,215,482  
                         
Selling and distribution expenses     2,981,637       4,909,361       713,824  
General and administrative expenses     18,672,141       18,903,138       2,748,528  
Provision for (net recovery of) doubtful accounts     80,539       (1,494,707 )     (217,331 )
Research and development expenses     1,819,720       1,654,702       240,595  
Operating expenses     23,554,037       23,972,494       3,485,616  
                         
Loss from operations     (17,505,915 )     (8,735,402 )     (1,270,134 )
                         
Other income (expenses)                        
Subsidy income     212,005       55,706       8,100  
Interest income     6,299       32,109       4,669  
Interest expense     (284,060 )     (856,571 )     (124,546 )
Loss from investment in unconsolidated entity           (844,369 )     (122,772 )
Foreign exchange transaction gain (loss)     (2,671 )     17,651       2,566  
Other income (expense), net     (21,348 )     387,439       56,334  
Other expenses, net     (89,775 )     (1,208,035 )     (175,649 )
Loss before income tax     (17,595,690 )     (9,943,437 )     (1,445,783 )
Income tax expenses     9,282       2,002       291  
Net loss     (17,604,972 )     (9,945,439 )     (1,446,074 )
                         
Less: Net (loss) income
attributable to non-controlling interests
    (618,162 )     138,804       20,182  
                         
Net loss attributable
to Recon Technology, Ltd
  ¥ (16,986,810 )   ¥ (10,084,243 )   $ (1,466,256 )
                         
Comprehensive loss                        
Net loss     (17,604,972 )     (9,945,439 )     (1,446,074 )
Foreign currency translation adjustment     72,268       1,195,328       173,801  
Comprehensive loss     (17,532,704 )     (8,750,111 )     (1,272,273 )
Less: Comprehensive (loss) income
attributable to non-controlling interests
    (618,162 )     138,804       20,182  
Comprehensive loss attributable
to Recon Technology, Ltd
  ¥ (16,914,542 )   ¥ (8,888,915 )   $ (1,292,455 )
                         
Loss per common share – basic and diluted   ¥ (2.21 )   ¥ (0.56 )   $ (0.08 )
Weighted – average shares -basic and diluted     7,673,960       18,093,034       18,093,034  

 

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

 

 

RECON TECHNOLOGY, LTD

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

    For the six months ended December 31,  
      2017        2018     2018  
    RMB     RMB     U.S. Dollars  
                   
Cash flows from operating activities:                        
Net loss   ¥ (17,604,972 )   ¥ (9,945,439 )   $ (1,446,074 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Depreciation and amortization     481,782       515,457       74,948  
Gain from disposal of equipment     (21,470 )            
Provision for (net recovery of) doubtful accounts     80,539       (1,494,707 )     (217,332 )
Provision for (reversal of) slow moving inventories     (68,384 )     65,380       9,506  
Share based compensation     3,550,685       4,672,881       679,440  
Restricted shares issued for management     6,083,148       4,867,036       707,670  
Loss from investment in unconsolidated entity           844,369       122,772  
Restricted shares issued for services     1,937,867       516,194       75,055  
Changes in operating assets and liabilities:                        
Notes receivable     318,950       217,436       31,615  
Trade accounts receivable, net     (4,506,281 )     (11,251,794 )     (1,636,018 )
Inventories, net     (759,373 )     (1,778,189 )     (258,550 )
Other receivable, net     (1,102,598 )     (6,468,866 )     (940,577 )
Purchase advance, net     (7,471,023 )     (12,594,395 )     (1,831,233 )
Prepaid expense     (574,226 )     (124,589 )     (18,115 )
Trade accounts payable     4,078,075       740,274       107,636  
Other payables     175,367       3,244,115       471,696  
Other payables-related parties     858,195       3,122       454  
Accrued payroll and employees’ welfare     (11,224 )     285,135       41,459  
Taxes payable     1,819,793       645,328       93,831  
Net cash used in operating activities     (12,735,150 )     (27,041,252 )     (3,931,817 )
                         
Cash flows from investing activities:                        
Investment in unconsolidated entity     (2,000,000 )     (3,815,080 )     (554,715 )
Purchases of property and equipment     (278,432 )     (283,129 )     (41,167 )
Proceeds from disposal of equipment     32,000              
Payments for land use right     (1,322,300 )            
Payments and prepayments for construction in progress     (3,837,842 )     (4,411,620 )     (641,452 )
Net cash used in investing activities     (7,406,574 )     (8,509,829 )     (1,237,334 )
                         
Cash flows from financing activities:                        
Proceeds from short-term bank loans     45,000              
Proceeds from short-term borrowings     4,600,000       1,031,507       149,982  
Repayments of short-term borrowings     (3,000,000 )            
Proceeds from short-term borrowings-related parties     16,188,318       5,000,000       727,003  
Repayments of short-term borrowings-related parties     (20,256,326 )     (5,000,000 )     (727,003 )
Proceeds from long-term borrowings-related party     10,000,000              
Repayments of long-term borrowings-related party     (51,969 )     (334,513 )     (48,638 )
Proceeds from sale of common stock, net of issuance costs     15,310,741              
Refund of capital contribution by a non-controlling shareholder           (200,000 )     (29,080 )
Capital contribution by non-controlling shareholders     1,700,000       500,000       72,700  
Net cash provided by financing activities     24,535,764       996,994       144,964  
                         
Effect of exchange rate fluctuation on cash     67,620       1,195,329       173,802  
                         
Net increase (decrease) in cash     4,461,660       (33,358,758 )     (4,850,385 )
Cash at beginning of period     3,809,279       45,340,578       6,592,548  
Cash at end of period   ¥ 8,270,939     ¥ 11,981,820     $ 1,742,163  
                         
Supplemental cash flow information                        
Cash paid during the period for interest   ¥ 294,998     ¥ 805,613     $ 117,137  
Cash paid during the period for taxes   ¥ 9,282     ¥ 2,002     $ 291  
                         
Non-cash investing and financing activities                        
Shares issued to settle salary payable   ¥ 1,554,908     ¥     $  
Issuance of common stock in exchange of interest of FGS, net of issuance costs           21,433,796       3,166,487  
Investment payables in exchange of interest of FGS           6,400,000       930,564  
Payable for Construction in Progress   ¥ 2,712,518     ¥ 5,957,463     $ 866,219  

 

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

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

 

Organization – Recon Technology,
Ltd (the “Company”) was incorporated under the laws of the Cayman Islands on August 21, 2007 as a limited liability
company. The Company provides specialized oilfield equipment, automation systems, tools, chemicals and field services to petroleum
companies mainly in the People’s Republic of China (the “PRC”).

 

The Company, along with its wholly-owned subsidiaries, Recon
Technology Co., Limited (“Recon HK”), Jining Recon Technology Ltd. (“Recon JN”), Recon Investment Ltd.
(“Recon IN”) and Recon Hengda Technology (Beijing) Co., Ltd. (“Recon BJ”), conducts its business through
the following PRC legal entities (“Domestic Companies”) that are consolidated as variable interest entities (“VIEs”)
and operate in the Chinese oilfield equipment & service industry:

 

  1. Beijing BHD Petroleum Technology Co., Ltd. (“BHD”),

 

  2. Nanjing Recon Technology Co., Ltd. (“Nanjing Recon”).

 

The Company has signed Exclusive Technical Consulting Service
Agreements with each of the Domestic Companies, which are its VIEs, and Equity Interest Pledge Agreements and Exclusive Equity
Interest Purchase Agreements with their shareholders. Through these contractual arrangements, the Company has the ability to substantially
influence each of the Domestic Companies’ daily operations and financial affairs, appoint their senior executives and approve
all matters requiring shareholder approval. As a result of these contractual arrangements, which enable the Company to control
the Domestic Companies, the Company is considered as the primary beneficiary of each Domestic Company. Thus, the Company is able
to absorb 90% of net interest or 100% of net loss of those VIEs.

 

On December 17, 2015, Huang Hua BHD Petroleum Equipment Manufacturing
Co. LTD, a fully owned subsidiary established by BHD was organized under the laws of the PRC.

 

As of this report, BHD invested a total of ¥14.6 million
in Gan Su BHD Environmental Technology Co., Ltd (“Gan Su BHD”). Gan Su BHD was established on May 23, 2017, with registered
capital of ¥50 million. The paid in capital was ¥18,580,000 ($2,701,543) as of December 31, 2018. Based on its revised
chapter dated August 11, 2017, BHD owns an interest of 51% of Gan Su BHD, which is focusing on oilfield sewage treatment and oily
sludge disposal projects.

 

As of this report, BHD invested a total of ¥3.5 million
in Qing Hai BHD New Energy Technology Co., Ltd. (“Qinghai BHD”). Qinghai BHD was established on October 16, 2017, with
registered capital of ¥50 million. The paid in capital was ¥3,450,000 ($501,632) as of December 31, 2018. BHD owns an interest
of 55% of Qinghai BHD previously, however, based on an agreement signed by the shareholders of Qinghai BHD dated October 23, 2018,
each of the other two individual shareholders agreed to reduce 10% of their equity interests. As a result, Qinghai BHD returned
¥200,000 paid in capital back to one of the individual shareholders. After the new arrangement, BHD owns a total interest of
75% of Qinghai BHD. The remaining paid in capital should be contributed by BHD and the other individual shareholder is ¥34,050,000
($4,950,891) and ¥12,500,000 ($1,817,508), respectively. Based on its chapter dated September 29, 2017, the remaining paid
in capital will be injected before September 29, 2036.

 

Nature of Operations – The Company engaged
in (1) providing equipment, tools and other components and parts related to oilfield production and management, including simple
installations in connection with some projects; (2) services to improve production and efficiency of exploited oil wells, (3) developing
and selling its own specialized industrial automation control and information solutions, and (4) design, test and implement solution
of sewage and oily sludge treatment, production and sales of related integrated equipment and project services.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2. LIQUIDITY

 

As reflected in the Company’s unaudited condensed consolidated
financial statements, the Company had recurring net losses for the six months ended December 31, 2017 and 2018. In assessing its
liquidity, management monitors and analyzes the Company’s cash on-hand and its ability to generate sufficient revenue sources
in the future to support its operating and capital expenditure commitments. The Company plans to fund its continuing operations
through identifying new prospective joint venture and strategic alliance opportunities for new revenue sources, financial supports
by major shareholders and reducing costs to improve profitability and to replenish working capital. Management believes that the
foregoing measures collectively will provide sufficient liquidity for the Company to meet its future liquidity and capital obligations.

 

NOTE 3. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation – The accompanying
unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“US GAAP”) and have been consistently applied.

 

Principles of Consolidation – The unaudited
condensed consolidated financial statements include the accounts of the Company, all the subsidiaries and VIEs of the Company.
All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.

 

Variable Interest Entities – A VIE is
an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated
financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated
by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact
the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that
could potentially be significant to the VIE. The Company performs ongoing assessments to determine whether an entity should be
considered a VIE and whether an entity previously identified as a VIE continues to be a VIE and whether the Company continues to
be the primary beneficiary.

 

Assets recognized as a result of consolidating VIEs do not represent
additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized
as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they
represent claims against the specific assets of the consolidated VIEs.

 

Currency Translation – The Company’s
functional currency is the Chinese Yuan (“RMB”) and the accompanying unaudited condensed consolidated financial statements
have been expressed in Chinese Yuan. The unaudited condensed consolidated financial statements as of and for the six months ended
December 31, 2018 have been translated into United States dollars (“U.S. dollars”) solely for the convenience of the
readers. The translation has been made at the rate of ¥6.8776 = US$1.00, the approximate exchange rate prevailing on December
31, 2018. These translated U.S. dollar amounts should not be construed as representing Chinese Yuan amounts or that the Chinese
Yuan amounts have been or could be converted into U.S. dollars.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Estimates and assumptions – The
preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted
in United States of America (“US GAAP”), which requires that management make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual
experience when necessary. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial
statements include allowance for doubtful accounts related to trade accounts receivable, other receivables and purchase advances,
allowance for inventory, the useful lives of property and equipment, valuation allowance for deferred tax assets, impairment assessment
for long-lived assets and investment and the fair value of share- based payments. Since the use of estimates is an integral component
of the financial reporting process, actual results could differ from those estimates.

 

The key assumptions underlying the Company’s accounting
for material arrangements and the reasonably likely material effects of resolving any uncertainties on the Company’s allowance
for doubtful accounts related to purchase advances. The production of the Company’s products requires custom-made equipment
from its suppliers. To ensure that it can secure the required customized equipment, the Company often needs to make full prepayment
for its intended purchases. As a standard practice in the petroleum extraction industry, the Company generally must submit a bid
in order to secure the sales contract. The bidding process generally takes between one month to one year and the timing depends
on the size of the overall project, which timing and size are generally controlled by its client. In order to secure timely purchase
delivery and to meet its product delivery schedule, the Company normally prepays for the purchase advances if the Company believes
that it is more than likely to win the bid for the sales contract which is accounted as pre-contract costs. After winning the bid
and securing the sale contract, the Company normally needs to deliver its products approximately within one week to six months.
Based on the Company’s historical experience, the Company generally is able to realize its purchase advances on the customized
equipment that it orders. If it subsequently confirms that the Company is unable to secure the planned contracts with a customer
after making the advance payments for these planed contracts, the Company evaluates the probable recoverability of the pre-contract
cost and charges to expenses when the Company determines that the recovery of such pre-contract cost is improbable.

 

Fair Values of Financial Instruments – The
US GAAP accounting standards regarding fair value of financial instruments and related fair value measurements define fair value,
establish a three-level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value.

 

The three levels of inputs are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the financial instrument.  

Level 3 inputs to the valuation methodology are unobservable.

 

The carrying amounts reported in the unaudited condensed consolidated
balance sheets for trade accounts receivable, other receivables, purchase advances, trade accounts payable, accrued liabilities,
advances from customers, investment payable, short-term bank loan and short-term borrowings approximate fair value because of the
immediate or short-term maturity of these financial instruments.

 

The fair value of long-term receivables is determined using
a present value technique by discounting the future expected contractual cash flows using current rates at which similar instruments
would be issued at the measurement date. The Company estimated the fair value of the purchase price of investment in unconsolidated
entity using Level 1 fair value inputs of the market price of the common stock on the date of the purchase. 

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Trade Accounts and Other Receivables – Accounts
receivable are carried at original invoiced amount less a provision for any potential uncollectible amounts. Accounts are considered
past due when the related receivables are more than a year old. Provision is made against trade accounts and other receivables
to the extent they are considered to be doubtful. Accounts are written off after extensive efforts at collection. Other receivables
arise from transactions with non-trade customers.

 

Notes Receivable – Notes receivable
represent short-term notes receivables issued by reputable financial institutions that entitle the Company to receive the full-face
amount from the financial institutions at maturity, which generally range from three to six months from the date of issuance. 

 

Purchase Advances – Purchase advances are the
amounts prepaid to suppliers for business activities, such as standard raw materials, supplies and services, this type of prepayments
will be expensed when those products or services have been rendered or consumed.

 

Contract costs  The Company recognizes
an asset from the costs incurred to fulfill a contract when those costs meet all of the following criteria: (i) the costs relate
directly to a contract or to an anticipated contract that the Company can specifically identify; (ii) the costs generate or enhance
resources of the Company that will be used in satisfying (or in continuing to satisfy) performance obligations in the future;
(iii) the costs are expected to be recovered.

 

Pre-Contract Costs 
Pre-contract costs are the amounts prepaid to suppliers for purchases of customized equipment in anticipation of obtaining planned
contracts for the Company’s hardware and software revenues. If it subsequently confirms that the Company is unable to secure
the planned contracts with a customer after making the advance payments for these planed contracts, the Company evaluates the
probable recoverability of the pre-contract cost and charges to expenses when the Company determines that the recovery of such
pre-contract cost is improbable.

 

Executed Contract Costs  
Direct costs, such as material, labor, depreciation and amortization and subcontracting costs and indirect costs allocable to
contracts include the costs of contract supervision, tools and equipment, supplies, quality control and inspection, insurance,
repairs and maintenance for quality assurance purposes before clients’ initial acceptance. Once products are delivered,
installed and debugged for intended use and accepted by a client, which may last from weeks to months (this process is decided
by the client’s individual project construction arrangement), the Company records revenue based on the contract or the final
clients’ acceptance. Minor costs for repair during the maintenance period after initial acceptance are recorded as cost
of goods sold as they are incurred. All other general and administrative costs and selling costs are charged to expenses as incurred.
The Company generally ships its products approximately one week to six months after production begins and the timing depends on
the size of the overall project.

 

Inventories – Inventories are
stated at the lower of cost or net realizable value, on a first-in-first-out basis. The methods of determining inventory costs
are used consistently from year to year. Allowance for inventory obsolescence is provided when the market value of certain inventory
items is lower than the cost.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Property
and Equipment
 – Property and equipment are stated at cost. Depreciation on motor vehicles and office equipment
is computed using the straight-line method over the estimated useful lives of the assets, which range from two to ten years. Leasehold
improvements are amortized over the shorter of the lease term or the estimated useful life of the assets.

 

Items   Useful life
Motor vehicles   5-10 years
Office equipment   2-5 years
Production equipment   10 years

 

Land Use Rights – According to the Chinese
laws and regulations regarding land use rights, land in urban districts is owned by the State, while land in the rural areas and
suburban areas, except otherwise provided for by the State, is collectively owned by individuals designated as resident farmers
by the State. In accordance with the legal principle that land ownership is separate from the right to the use of the land, the
government grants individuals and companies the rights to use parcels of land for a specified period of time. Land use rights which
are usually prepaid, are stated at cost less accumulated amortization. Amortization is provided over the life of the land use rights,
using the straight-line method. The estimated useful life is 50 years, based on the term of the land use rights.

 

Long-Lived Assets – Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset
group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows
expected to be generated by the asset. There were no impairments at June 30, 2018 and December 31, 2018.

 

Long-term investments 

 

 

Cost method investment – For an investee over
which the Company does not have significant influence and a controlling interest, the Company carries the investment at cost and
recognizes income for any dividend received from the distribution of the investee’s earnings.

 

The Company reviews its cost method investment for impairment
whenever an event or circumstance indicates that an other-than-temporary impairment has occurred. The Company considers available
quantitative and qualitative evidence in evaluating potential impairment of its cost method investment. An impairment charge is
recorded if the carrying amount of an investment exceeds its fair value and such excess is determined to be other-than temporary.

 

 

Equity method investment
For an investee over which the Company has the ability to exercise significant
influence, but does not have a controlling interest, the Company accounted for those using the equity method. Significant influence
is generally considered to exist when the Company has an ownership interest in the voting stock of the investee between 20% and
50%. Other factors, such as representation on the investee’s board of directors, voting rights and the impact of commercial
arrangements, are also considered in determining whether the equity method of accounting is appropriate.

 

An
impairment charge is recorded if the carrying amount of the investment exceeds its fair value and this condition is determined
to be other-than temporary. The Company did not record impairment losses on its equity method investment during the six months
ended December 31, 2018 and 2017.
The Company recorded approximately ¥844,369 ($122,772) investment loss on its equity
method investment in unconsolidated entity during the six months ended December 31, 2018.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Revenue Recognition – The Company previously
recognized revenue when the following four criteria are met: (1) persuasive evidence of an arrangement, (2) delivery has occurred
or services have been provided, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Delivery
does not occur until products have been shipped or services have been provided to the customers and the customers have signed a
completion and acceptance report, risk of loss has transferred to the customers, customers’ acceptance provisions have lapsed,
or the Company has objective evidence that the criteria specified in customers’ acceptance provisions have been satisfied.
The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. And
with adoption of ASC 606, “Revenue from Contracts with Customers”, revenue is recognized when all of the following
five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue
when (or as) each performance obligation is satisfied. The Company applied the new revenue standard from July 1, 2018 and adopted
a modified retrospective approach upon the adoption. The core principle underlying the new revenue recognition ASU is that the
Company will recognize revenue to represent the transfer of goods or services to customers in an amount that reflects the consideration
to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance
obligations and determine whether revenue should be recognized at a point in time or over time, based on when goods or service
is provided to a customer.

 

The Company has completed its assessment of the impact of the
new standard and adopted the new standard for all open contracts as of July 1, 2018 using the modified retrospective transition
method, and applied the guidance to report new disclosures surrounding the Company’s recognition of revenue. The adoption
of the new standard did not have a material impact on the financial position of the Company, the results of its operations or its
cash flows as of and for the six months ended December 31, 2018, and the Company’s internal controls over financial reporting.
There was no cumulative effect of adopting the standard at the date of initial application in retained earnings. The Company’s
Revenue Recognition accounting policy has been updated for the new standard. Revenue is measured as the amount of consideration
the Company expects to receive in exchange for transferring goods or providing services. See Note 24 for disaggregated revenues.

 

The following table provides changes to the opening balances
of certain current assets accounts resulting from the adoption of the new guidance.

 

    June 30,     Impact of    

July 1,

2018

   

July 1,

 
    2018     Adoption     (As adjusted)     2018  
    RMB     RMB     RMB     U.S. Dollars  
Inventories   ¥ 7,972,115     ¥ (7,972,115 )   ¥     $  
Other receivables     824,709       (824,709 )            
Purchase advances     5,334,829       (5,334,829 )            
Contract costs           14,131,653       14,131,653       2,054,751  
Total current assets   ¥ 14,131,653     ¥     ¥ 14,131,653     $ 2,054,751  

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Performance Obligations – Performance obligations
include delivery of product and installation of product. The Company recognizes revenue when performance obligations under the
terms of a contract with its customer are satisfied. This occurs when the control of the goods and services have been transferred
to the customer. Accordingly, revenue for sale of goods is generally recognized upon shipment or delivery depending on the shipping
terms of the underlying contract. Revenue is measured as the amount of consideration the Company expects to receive in exchange
for transferring goods and providing installation services.

 

Amounts billed to customers for shipping and handling activities
to fulfill the Company’s promise to transfer the goods are included in Sales, and costs incurred by the Company for the delivery
of goods are classified as Cost of sales in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Sales,
value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company
generally offers assurance-type warranties for its products. The specific terms and conditions of those warranties vary depending
upon the product. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount
of such costs at the time product revenue is recognized. Factors that affect the warranty liability include historical product-failure
experience and estimated repair costs for identified matters. The Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary. The amount accrued for expected returns and warranty claims was immaterial as
of December 31, 2018.

 

Practical Expedients Elected

 

Incremental Costs of Obtaining a Contract – The Company has
elected the practical expedient permitted in ASC 340-40-25-4, which permits an entity to recognize incremental costs to obtain
a contract as an expense when incurred if the amortization period will be less than one year.

 

Significant Financing Component – The Company has elected the
practical expedient permitted in ASC 606-10-32-18, which allows an entity to not adjust the promised amount of consideration for
the effects of a significant financing component if a contract has a duration of one year or less. As the Company’s contracts
are typically less than one year in length, consideration will not be adjusted. The Company’s contracts include a standard
payment term of 90 days to 180 days, consequently there is no significant financing component within contracts.

 

Share-Based Compensation – Share-based compensation
cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight–line
basis over the requisite service period for the entire award. The Company has elected to recognize compensation expenses using
the Black-Scholes valuation model estimated at the grant date based on the award’s fair value.

 

Research and Development Expenses – Research
and development expenses relating to improving development efficiency and the quality of the Company’s products and services,
including s design of downhole automation platform systems and chemical products used for waste water treatment, are expensed as
incurred.

 

Shipping and Handling Costs – Shipping
and handling cost incurred to ship products to customers are included in selling and distribution expenses. Shipping and handling
expenses were ¥231,522 and ¥451,086 ($65,588) for the six months ended December 31, 2017 and 2018, respectively.

 

Income Taxes – Provisions for income taxes
are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between
the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred
tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period
in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company has not been subject to any
income taxes in the United States or the Cayman Islands.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would
be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
The Company has no uncertain tax position as of June 30, 2018 and December 31, 2018.

 

As of December 31, 2018, the tax years ended December 31, 2014
through December 31, 2018 for the Company’s People’s Republic of China (“PRC”) subsidiaries remain open
for statutory examination by PRC tax authorities.

 

Loss per Share – Loss Per Share (“EPS”) is
computed by dividing net loss by the weighted average number of ordinary shares outstanding. Diluted EPS are computed by dividing
net loss by the weighted-average number of ordinary shares and dilutive potential ordinary share equivalents outstanding.

 

Potentially dilutive ordinary shares consist
of ordinary shares issuable upon the conversion of ordinary stock options, restricted shares and warrants (using the treasury stock
method). The effect from options, restricted shares and warrants would have been anti-dilutive due to the fact that the Company
incurred a net loss for the six months ended December 31, 2017 and 2018.

 

Reclassification –
Certain prior year amounts had been reclassified to conform to the current period presentation. These reclassifications have no
effect on the results of operations and cash flows previously reported.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,”
to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value
measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy
for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires
disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. The Company expects that the adoption of this ASU will not have a material impact on the Company’s
unaudited condensed consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-17, “Consolidation
(Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities”. The new standard changes how
entities evaluate decision-making fees under the variable interest entity guidance. The new standard is effective for fiscal years
beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period
after issuance. The standard should be applied on a modified retrospective basis through a cumulative-effect adjustment directly
to retained earnings at the beginning of the period of adoption. Company expects that the adoption of this ASU will not have a
material impact on the Company’s unaudited condensed consolidated financial statements.

 

In November 2018, the FASB issued ASU 2018-19, “Codification
Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from
operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases
should be accounted for in accordance with Accounting Standard Codification (“ASC”) 842, Leases. Company expects that
the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic
842), to increase the transparency and comparability about leases among entities. The new guidance requires lessees to recognize
a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about
leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a
modified retrospective approach to adoption assuming the Company will remain an emerging growth company at that date. Early adoption
is permitted. In September 2017, the FASB issued ASU No. 2017-13, which to clarify effective dates that public business entities
and other entities were required to adopt ASC Topic 842 for annual reporting. A public business entity that otherwise would not
meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements
or financial information in another entity’s filing with the SEC adopting ASC Topic 842 for annual reporting periods beginning
after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. ASU No.
2017-13 also amended that all components of a leveraged lease be recalculated from inception of the lease based on the revised
after tax cash flows arising from the change in the tax law, including revised tax rates. The difference between the amounts originally
recorded and the recalculated amounts must be included in income of the year in which the tax law is enacted. The Company has not
early adopted this update and it will become effective on January 1, 2020. The Company is currently evaluating the impact of this
new standard on its unaudited consolidated financial statements and related disclosures.

 

The Company does not believe other recently issued but not
yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated
financial position, statements of operations and cash flows.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4. TRADE ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consisted of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Third Party   RMB     RMB     U.S. Dollars  
Trade accounts receivable   ¥ 27,319,241     ¥ 40,571,035     $ 5,899,053  
Allowance for doubtful accounts     (3,065,234 )     (1,624,835 )     (236,252 )
Total – third-party, net   ¥ 24,254,007     ¥ 38,946,200     $ 5,662,801  

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Third Party – long-term   RMB     RMB     U.S. Dollars  
Beijing Yabei Nuoda Science and Technology Co. Ltd. *   ¥ 4,400,000     ¥ 2,400,000     $ 348,962  
Allowance for doubtful accounts     (187,171 )     (322,171 )     (46,844 )
Total – long-term trade accounts receivable, net   ¥ 4,212,829     ¥ 2,077,829     $ 302,118  

 

*The receivable from Beijing Yabei Nuoda
was recognized primarily from the sale of automation system and services based on written contracts. Based on the repayment agreement
signed in August, 2018, the outstanding balance was to be collected in five installments during the period from December 2018 to
December 2020. During the six months ended December 31, 2018, the Company received ¥1,050,000 ($152,671) as scheduled. Based
on the repayment agreement, the Company expects to collect ¥2,904,978 ($422,386) before December 31, 2019 and ¥2,400,000
($348,962) before December 31, 2020, respectively. No interest is required per the settlement agreement.

 

Provision made for doubtful accounts of accounts receivables
due from third party was ¥323,984 for the six months ended December 31, 2017, and net recovery of provision made for doubtful
accounts of accounts receivables due to third party was ¥1,305,399 ($189,805) for the six months ended December 31, 2018.

 

Movement of allowance for doubtful accounts is as follows:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Beginning balance   ¥ 4,265,505     ¥ 3,252,405     $ 472,901  
Charge to (reversal of) expense     (1,013,100 )     (1,305,399 )     (189,805 )
Ending balance   ¥ 3,252,405     ¥ 1,947,006     $ 283,096  

 

NOTE 5. NOTES RECEIVABLE

 

Notes receivables represented the non-interest bearing commercial
bills the Company received from the customers for the purpose of collection of sales amount, which ranged from three to six months
from the date of issuance. As of June 30, 2018 and December 31, 2018, notes receivable were ¥3,995,962 and ¥3,778,526
($549,400), respectively, As of June 30, 2018 and December 31, 2018, no notes were guaranteed or collateralized.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Other receivables, net consisted of the following:

 

Third Party   June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Current Portion   RMB     RMB     U.S. Dollars  
Loans to third parties (A)     2,640,469       4,460,470       648,554  
Business advances to officers and staffs (B)     1,787,866       1,367,029       198,767  
Deposits for projects     1,665,002       2,097,228       304,938  
VAT recoverable     1,438,949       2,261,158       328,774  
Others     690,597       781,515       113,633  
Allowance for doubtful accounts     (901,930 )     (871,650 )     (126,738 )
Total   ¥ 7,320,953     ¥ 10,095,750     $ 1,467,928  

 

Net recovery of provision for doubtful accounts of other receivables
was ¥87,829 and ¥330,280 ($48,023) for the six months ended December 31, 2017 and 2018, respectively. 

 

  (A) Loans to third-parties are mainly used for short-term funding to support the Company’s external business partners. These loans are due on demand bearing no interest.

 

  (B) Business advances to officers and staffs represent advances for business travel and sundry expenses related to oilfield or on-site installation and inspection of products through customer approval and acceptance.

 

Movement of allowance for doubtful accounts is as follows:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Beginning balance   ¥ 1,505,419     ¥ 901,930     $ 131,141  
Charge to (reversal of) expense     109,302       (330,280 )     (48,023 )
Add (less): reversal of  write-off (write-off)      (712,791 )     300,000       43,620  
Ending balance   ¥ 901,930     ¥ 871,650     $ 126,738  

 

NOTE 7. PURCHASE ADVANCES, NET

 

The Company purchased products and services from third parties
during the normal course of business. Purchase advances, net consisted of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Third Party   RMB     RMB     U.S. Dollars  
Capitalized pre-contract costs   ¥ 1,508,491     ¥     $  
Capitalized contract costs     4,221,942              
Prepayment for others     7,376,745       10,482,617       1,524,179  
Allowance for doubtful accounts     (452,632 )     (427,000 )     (62,086 )
Total   ¥ 12,654,546     ¥ 10,055,617     $ 1,462,093  

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Net recovery of provision for doubtful accounts of purchase
advances was ¥155,616 for the six months ended December 31, 2017. Provision for doubtful accounts of purchase advances was
¥140,972 ($20,497) for the six months ended December 31, 2018. The Company recorded allowance for these advances and will continue
to try to collect or get inventories delivered. These payments were advanced for certain customized equipment of the planned projects.
As those projects were delayed or canceled or there is rare chance to be profitable, the Company decided to suspend those projects
and recorded allowances related to advanced payments for those projects as the Company may not be able to receive those funds back.
Management is still making efforts to collect partially or negotiate with venders for some other alternative solutions to minimize
the Company’s loss.

 

Movement of allowance for doubtful accounts is as follows:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Beginning balance   ¥ 401,790     ¥ 452,632     $ 65,813  
Charge to expense     62,556       140,972       20,497  
Less: write-off     (11,714 )     (166,604 )     (24,224 )
Ending balance   ¥ 452,632     ¥ 427,000     $ 62,086  

 

NOTE 8. INVENTORIES

 

Inventories consisted of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Small component parts   ¥ 55,726     ¥ 55,726     $ 8,103  
Purchased goods and raw materials     59,328       278,356       40,473  
Work in process and goods on site     5,155,215              
Finished goods     2,888,096       1,354,571       196,956  
Allowance for slow moving inventory     (1,399,524 )     (1,399,524 )     (203,492 )
Total inventories, net   ¥ 6,758,841     ¥ 289,129     $ 42,040  

 

Net recovery of provision for slow moving inventory was ¥68,384
for the six months ended December 31, 2017. Provisions for slow moving inventory was ¥65,380 ($9,506) for the six months ended
December 31, 2018.

 

Movement of allowance for slow-moving inventories is as follows:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Beginning balance   ¥ 4,024,663     ¥ 1,399,524     $ 203,492  
Charge to cost of sales     65,245       65,380       9,506  
Less: write-off     (2,690,384 )     (65,380 )     (9,506 )
Ending balance   ¥ 1,399,524     ¥ 1,399,524     $ 203,492  

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Motor vehicles   ¥ 4,456,156     ¥ 4,493,993     $ 653,429  
Office equipment and fixtures     1,239,914       1,288,274       187,316  
Production equipment     1,609,500       1,726,431       251,024  
Total property and equipment     7,305,570       7,508,698       1,091,769  
Less: Accumulated depreciation     (4,134,461 )     (4,631,865 )     (673,476 )
Property and equipment, net   ¥ 3,171,109     ¥ 2,876,833     $ 418,293  
Construction in progress   ¥ 11,779,784     ¥ 21,428,767     $ 3,115,756  

 

On August 4, 2017, Gan Su BHD purchased the land use right of
state-owned construction land in Yumen, Gan Su, in the amount of ¥1,361,969 ($198,031). The land use right was intended to
establish production line of the oily sludge disposal projects. As of December 31, 2018, the main construction of the project has
completed, and the total cost incurred in the project was ¥21,428,767 ($3,115,756). Currently, the project is under testing stage
and the management expects the project will be ready for its intended use in April 2019.

 

Depreciation expenses were ¥468,559 and ¥501,837 ($72,968)
for the six months ended December 31, 2017 and 2018, respectively.

 

Gain from property and equipment disposal was ¥21,470 and
¥Nil for the six months ended December 31, 2017 and 2018, respectively.

 

NOTE 10 – LAND USE RIGHTS

 

Land use rights consisted of the following

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Land use rights     1,361,969       1,361,969       198,031  
Less: accumulated amortization     (26,843 )     (40,462 )     (5,883 )
Land use rights, net   ¥ 1,335,126     ¥ 1,321,507     $ 192,148  

 

As of June 30, 2018 and December 31, 2018, no land use
rights are collateralized or pledged.

 

Amortization expenses were ¥13,223 and ¥13,620 ($1,980)
for the six months ended December 31, 2017 and 2018, respectively.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The estimated future amortization expenses are as follows:

 

   

Twelve months ending

December 31,

 
    RMB     U.S. Dollars  
2019   ¥ 27,239     $ 3,961  
2020     27,239       3,961  
2021     27,239       3,961  
2022     27,239       3,961  
2023     27,239       3,961  
Thereafter     1,185,312       172,343  
Total   ¥ 1,321,507     $ 192,148  

 

NOTE 11 – INVESTMENT IN UNCONSOLIDATED
ENTITY

 

On December 15, 2017, the Company signed a subscription agreement
with Future Gas Station (Beijing) Technology, Ltd (“FGS”). Established in January 2016, FGS is a service company focusing
on providing new technical applications and data operations to gas stations of oil companies such as PetroChina Co., Ltd. With
its DT Refuel mobile application, FGS provides solutions to gas stations to improve their operations and their customers’ experience.
Pursuant to the subscription agreement, Recon held 8% equity interest of FGS. As of June 30, 2018, Recon has invested ¥4,037,736
($609,948) in FGS as terms and conditions are achieved based on mutually-agreed payment schedule. Based on the financial results
of FGS for the year ended June 30, 2018, FGS was in the loss position and has accumulated deficit in equity. Based on the management’s
assessment, the Company does not expect to recover the investment in the near future. Therefore, the Company considered that there
was other than temporary impairment and recorded a full impairment of the investment. As a result, the Company recorded ¥4,037,736
($587,089) impairment loss during the year ended June 30, 2018.

 

On August 21, 2018, the Company entered into a definitive investment
agreement and a supplemental agreement (collectively, the “Agreement”) with FGS and the other shareholders of FGS.
Following full performance under the Agreement, Recon will own 43% of FGS. As consideration for increasing its affiliates’
interest in FGS from 8% to 43%, the Company will (1) pay a total of RMB 10 million in cash to FGS and (2) issue 2,435,284 restricted
ordinary shares of the Company (the “Restricted Shares”) to the other shareholders of FGS within 30 days after FGS
finalizes recording the Company’s corresponding interest at the local governmental agency. If FGS does not reach certain
performance goals, the Company has the right to cancel all of the Restricted Shares and without further payment or
The Restricted Shares are also subject to lock-up period requirements that vary for each of FGS shareholders, from one year to
three years following issuance of the Restricted Shares. FGS has finalized recording Recon’s corresponding interest at the
local governmental agency, and Recon has issued 2,435,284 Restricted Shares in total to the other shareholders of FGS in August
2018.

 

As of December 31, 2018, the Company has the investment amount
of ¥35,686,611 ($5,188,855) in FGS, of which RMB 7.6 million was paid in cash, and owns 43% interests of FGS and recorded an
accumulated ¥4,037,736 ($587,089) impairment loss. The investments are accounted for using the equity method because the Company
has significant influence, but no control of FGS. The Company recorded loss of ¥844,369 ($122,772) for the six months ended
December 31, 2018 from the investment, which was included in “Loss from investment in unconsolidated entity” in the
unaudited condensed consolidated statements of operations and comprehensive loss. As of the date of this report, operation of FGS
was under normal running and stick to its business plan.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12. OTHER PAYABLES

 

Other payables consisted of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Third Party   RMB     RMB     U.S. Dollars  
Service   ¥ 1,356,676     ¥ 519,818     $ 75,579  
Distributors and employees     90,130       305,255       44,384  
Funds collected on behalf of others     895,022              
Advances from customers     157,856       4,620,831       671,872  
Accrued expenses     411,898       393,274       57,182  
Others     344,228       381,156       55,420  
Total   ¥ 3,255,810     ¥ 6,220,334     $ 904,437  

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Related Party   RMB     RMB     U.S. Dollars  
Expenses paid by the major shareholders   ¥ 2,767,349     ¥ 2,493,178     $ 362,510  
Due to family member of the owner of BHD     193,143       470,000       68,338  
Due to management staff for costs incurred on behalf of the Company     250,965       251,401       36,554  
Total   ¥ 3,211,457     ¥ 3,214,579     $ 467,402  

 

NOTE 13. TAXES PAYABLE

 

Taxes payable consisted of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
VAT payable   ¥ 382,361     ¥ 1,021,097     $ 148,469  
Income tax payable     43,556       43,556       6,333  
Other taxes payable     5,996       12,588       1,830  
Total taxes payable   ¥ 431,913     ¥ 1,077,241     $ 156,632  

 

NOTE 14. SHORT-TERM BORROWINGS

 

Short-term borrowings due to third party consisted of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Short-term borrowings due to third party:   RMB     RMB     U.S. Dollars  
Short-term borrowing, 10% annual interest, due on September 8, 2019           1,031,507       149,982  
Total short-term borrowings due to third party   ¥     ¥ 1,031,507     $ 149,982  

 

Interest expense for short-term borrowings due to third party
were ¥Nil and ¥31,507 ($4,581) for the six months ended December 31, 2017 and 2018, respectively.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Short-term borrowings due to related parties consisted of the
following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Short-term borrowings due to related parties:   RMB     RMB     U.S. Dollars  
Short-term borrowing from a Founder, 5.65% annual interest, due on December 15, 2018 *   ¥ 5,011,782     ¥     $  
Short-term borrowing from a Founder, 5.65% annual interest, due on March 31, 2019     4,006,283       4,006,283       582,516  
Short-term borrowing from a Founder, 5.65% annual interest, due on December 19, 2019           1,192,694       173,418  
Total short-term borrowings due to related parties   ¥ 9,018,065     ¥ 5,198,977     $ 755,934  

 

No short-term borrowings due to related parties were guaranteed
or collateralized at June 30, 2018 and December 31, 2018.

 

Interest expense for short-term borrowings due to related parties
were ¥142,080 and ¥257,145 ($37,389) for the six months ended December 31, 2017 and 2018, respectively.

 

* The Company repaid the loan in full on
maturity date. 

 

NOTE 15. LONG-TERM BORROWINGS DUE TO
RELATED PARTY

 

Long-term borrowings due to related party consisted of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
Long-term borrowings due to related party:   RMB     RMB     U.S. Dollars  
Long-term borrowing from a Founder, monthly payments of ¥126,135 inclusive of interest at 8.90%, ten years loan, due in November 2027.   ¥ 9,663,729     ¥ 9,327,976     ¥ 1,356,294  
Less: current portion     (719,895 )     (749,671 )     (109,003 )
Total long-term borrowings due to related party   ¥ 8,943,834     ¥ 8,578,305     $ 1,247,291  

 

Interest expense for long-term borrowings due to related party
was ¥140,570 and ¥421,058 ($61,222) for the six months ended December 31, 2017 and 2018, respectively.

 

The future maturities of long-term borrowings
due to related party at December 31, 2018 are as follows:

 

   

Twelve months ending

December 31,

 
    RMB     U.S. Dollars  
2019   ¥ 749,671     $ 109,003  
2020     781,523       113,634  
2021     853,987       124,170  
2022     933,170       135,683  
2023     1,019,695       148,264  
Thereafter     4,989,930       725,540  
Total   ¥ 9,327,976     $ 1,356,294  

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16. ORDINARY SHARES

 

Stock offering 

 

On November 11, 2017, The Company issued 221,268 shares for
unpaid management’s salary of ¥1,554,908 ($226,085) based on the stock closing price of $1.06 on the same day.

 

On November 20, 2017,
the Company entered into a securities purchase agreement (the “Agreement”) with the Chairman of board of the Company
(“Chairman”), pursuant to which the Chairman agreed to purchase an aggregate of 3 million unregistered restricted shares
for gross proceeds of $4.8 million, a per-share purchase price of $1.60. After deducting the placement agent’s commission
and other estimated offering expenses payable by the Company, the net proceeds to the Company were approximately $4.5 million.
The purchase price was paid in two installments of $2.4 million each. The first installment was paid on November 20, 2017, and
the second installment was paid on January 19, 2018. The Chairman used his own personal funds to pay the purchase price amount.
The Chairman designated Xinhaixin International Holdings Limited (“Xinhaixin”) to receive the shares. On January 19,
2018, the Company issued the 3 million shares to Xinhaixin, the wholly owned company of the Chairman.

 

On January 22, 2018, The
Company and certain institutional investors entered into a securities purchase agreement in connection with an offering, pursuant
to which the Company agreed to sell an aggregate of 3,592,500 ordinary shares. The purchase price was $1.66 per ordinary share
and all shares were issued on January 24, 2018. The aggregate gross proceeds was $5,963,550. After deducting the placement agent’s
commission and other estimated offering expenses payable by the Company, the net proceeds to the Company were approximately $5.3
million. The Company is using the net proceeds of the offering for general corporate purposes and working capital.

 

On August 21, 2018, the Company entered into a definitive investment
agreement and a supplemental agreement (collectively, the “Agreement”) with FGS and the other shareholders of FGS.
Following full performance under the Agreement, Recon will own 43% of FGS. As consideration for increasing its affiliates’
interest in FGS from 8% to 43%, the Company will (1) pay a total of RMB 10 million in cash to FGS and (2) issue 2,435,284 restricted
ordinary shares of the Company (the “Restricted Shares”) to the other shareholders of FGS within 30 days after FGS
finalizes recording the Company’s corresponding interest at the local governmental agency. If FGS does not reach certain
performance goals, the Company has the right to cancel without further payment part or all of the Restricted Shares. The Restricted
Shares are also subject to lock-up period requirements that vary for each FGS shareholder, from one year to three years following
issuance of the Restricted Shares. FGS has finalized recording Recon’s corresponding interest at the local governmental
agency, and Recon issued 2,435,284 Restricted Shares in total to the other shareholders of FGS at a price of $1.2875 per restricted
share on September 21, 2018.

 

Appropriated Retained Earnings – According
to the Memorandum and Articles of Association, the Company is required to transfer a certain portion of its net profit, as determined
under PRC accounting regulations, from current net income to the statutory reserve fund. In accordance with the PRC Company Law,
companies are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and
regulations, to the statutory reserves until such reserves reach 50% of the registered capital or paid-in capital of the companies.
As of June 30, 2018 and December 31, 2018, the balance of total statutory reserves was ¥4,148,929 and ¥4,148,929 ($603,257),
respectively.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 17. STOCK-BASED COMPENSATION

 

Stock-Based Awards Plan

 

2015 Incentive Plan 
The Company granted options to purchase 400,000 ordinary shares to its employees and non-employee director on January 31, 2015.
The options have an excise price of $1.65, which was equal to the share price of the Company’s ordinary shares at January
31, 2015, which vested equally over a period of three years, with one third vesting on January 31, 2016. The options expire ten
years after the date of grant, on January 31, 2025. The Company recognizes compensation cost for awards with graded vesting on
a straight-line basis over the requisite service period for the entire award. The grant date fair value of the options was ¥10.13
($1.65) per share.

 

The following is a summary of the stock options activity:

 

Stock Options   Shares     Weighted
Average
Exercise Price
Per Share
 
Outstanding as of June 30, 2017     815,600     $ 3.04  
Granted            
Forfeited            
Exercised            
Outstanding as of June 30, 2018     815,600     $ 3.04  
Granted            
Forfeited            
Exercised            
Outstanding as of December 31, 2018     815,600     $ 3.04  

 

The following is a summary of the status of options outstanding
and exercisable at December 31, 2018:

 

Outstanding Options     Exercisable Options  
Average Exercise
Price
    Number     Average
Remaining
Contractual
life (Years)
    Average Exercise
Price
    Number     Average
Remaining
Contractual
life (Years)
 
$ 6.00       193,000       0.58     $ 6.00       193,000       0.58  
$ 2.96       222,600       3.24     $ 2.96       222,600       3.24  
$ 1.65       400,000       6.09     $ 1.65       400,000       6.09  
          815,600                                  

 

The Share-based compensation expense recorded for stock options
granted were ¥730,513 and ¥Nil for the six months ended December 31, 2017 and 2018, respectively. No unrecognized share-based
compensation for stock options as of December 31, 2018.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Restricted Shares to Senior Management

 

As of December 31, 2018, the Company has granted restricted
shares of common stock to senior management as follows:

 

On January 31, 2015, the Company granted 150,000 restricted
shares to the CEO and 150,000 restricted shares to the CTO at an aggregate value of $495,000, based on the stock closing price
of $1.65 at January 31, 2015. These restricted shares were vested over three years with one third of the shares vesting every year
from the grant date. All granted shares under this plan are fully vested on January 31, 2018.

 

On October 18, 2015, the Company granted 800,000 restricted
shares to its employees and non-employee director as compensation cost for awards. The fair value of the restricted shares was
$704,000 based on the closing stock price $0.88 at October 18, 2015. These restricted shares were vested over three years with
one third of the shares vesting every year from the grant date. As of June 30, 2017, 19,000 shares were forfeited and went back
to the incentive pool due to some staffs’ resignation. All granted shares under this plan are fully vested on October 18,
2018.

 

On July 27, 2016, the Company granted 876,000 restricted shares
to its employees and non-employee director as compensation cost for awards. The fair value of the restricted shares was $963,600
based on the closing stock price $1.10 at July 27, 2016. The Company also re-granted the previously forfeited 19,000 to its employees.
These restricted shares will vest over three years with one third of the shares vesting every year from the grant date. As of December
31, 2018, 596,667 shares were vest and 298,333 will not be vested until July 27, 2019.

 

On December 9, 2016, the Company approved management’s new plan
based on future performance for the three fiscal years from 2017 to 2019. The Company also agreed on front-issuing of shares based
on the optimism situation, thus non-vested 3.01 million shares were issued to management on January 23 2017. The fair value of
the restricted shares was $4,063,500 based on the closing stock price $1.35 at December 9, 2016. 800,000 shares was vested during
the year ended June 30, 2018 based on the financial results for the year ended June 30, 2017. 960,000 shares was vested during
the six months ended December 31, 2018 based on the financial results for the year ended June 30, 2018. Prior to the filing of
the interim report, the remaining shares of 1,250,000 under this plan may not be sold, transferred, hypothecated, voted or otherwise
used for any purpose, and any shares that are not earned as stated above will be automatically cancelled without payment by the
transfer agent of the Company.

 

On October 13, 2017, the Company granted 900,000 restricted
shares to its employees as compensation cost for awards. The fair value of the restricted shares was $919,800 based on the closing
stock price $1.02 at October 13, 2017. These restricted shares will vest over three years with one third of the shares vesting
every year from the grant date. First one third with 300,000 shares were vest on October 13, 2018. 600,000 will not be vested until
October 13, 2019 and 2020, respectively.

 

On August 21, 2018, the Company granted 1,956,000 restricted
shares to its employees as compensation cost for awards. The fair value of the restricted shares was $2,523,240 based on the closing
stock price $1.29 at August 21, 2018. These restricted shares will vest over three years with one third of the shares vesting every
year from the grant date. The above-mentioned shares will not vested until August 21, 2019, 2020 and 2021, respectively.

 

663,667 and Nil restricted shares were issued and outstanding
for the six months ended December 31, 2017 and 2018, respectively, for all the plans mentioned above.

 

The share-based compensation expense recorded for restricted
shares issued for management were ¥8,903,320 and ¥9,539,917 ($1,387,110) for the six months ended December 31, 2017 and
2018, respectively. The total unrecognized share-based compensation expense of restricted shares issued for management as of December
31, 2018 was approximately ¥27.06 million ($3.93 million), which is expected to be recognized over a weighted average period
of approximately 1.89 years.

        

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Restricted Shares for service

 

As of December 31, 2018, the Company has granted
restricted ordinary shares to consultants as follows:

 

On July 27, 2016, the Company approved the grant of 250,000
restricted shares with a value of $275,000 based on the closing stock price of $1.10 on July 27, 2016 to designees of an independent
consulting firm as compensation for advisory services. The vesting period of these shares was one year from the date of contract. 250,000
shares were issued under this plan on October 27, 2016.

 

On November 10, 2016, the Company approved the grant of 330,000
restricted shares with a value of $300,993 based on the closing stock price of $0.9121 on November 10, 2016 to a company as payment
for development of software and models. The vesting period of these shares was three-month from the date of contract. Those restricted
shares were issued on January 23, 2017.

 

On March 31, 2017, the Company approved the grant of 200,000
restricted shares with a value of $256,020 based on the closing stock price of $1.2801 on March 31, 2017 to designees of an independent
consulting firm as payment for accounting management and consulting service. The vesting period of these shares was two-year from
the date of contract. 175,000 restricted shares were vested as of December 31, 2018. The 200,000 restricted shares were issued
on November 17, 2017 and September 13, 2018, respectively.

 

On April 5, 2017, the Company approved the grant of 300,000
restricted shares with a value of $390,000 based on the closing stock price of $1.30 on April 5, 2017 to a company as payment for
promotion PR/IR service. The vesting period of these shares was one year from the date of contract. 300,000 restricted shares were
vested and no shares were issued as of date of this report.

 

On April 24, 2017, the Company approved the grant of 500,000
restricted shares with a value of $555,050 to a company to prepare research report for online gas selling platform. The fair value
of those restricted shares was based on the closing stock price of $1.101 on June 15, 2017 when the service was fully rendered
to the Company. All granted shares under this plan are fully vested by June 15, 2017 and issued on November 17, 2017.

 

On August 27, 2017, the Company approved the grant of 25,000
restricted shares with a value of $32,000 based on the closing stock price of $1.28 on August 27 to a company as payment for promotion
PR/IR service. The vesting period of these shares was one year from the date of contract. 8,611 restricted shares were vested as
of December 31, 2018 and 25,000 shares were issued under this plan on August 27, 2018.

 

The Share-based compensation expense recorded for restricted
shares issued for service were ¥1,937,867 and ¥516,194 ($75,055) for the six months ended December 31, 2017 and 2018, respectively.
The total unrecognized share-based compensation expense of restricted shares issued for service as of December 31, 2018 was approximately
¥0.36 million ($0.05 million), which is expected to be recognized over a weighted average period of approximately 0.41 years.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Following is a summary of the restricted
shares granted:

 

Restricted stock grants   Shares  
Non-vested as of June 30, 2017     4,925,667  
Granted     900,000  
Vested     (1,783,667 )
Non-vested as of June 30, 2018     4,042,000  
Granted     1,981,000  
Vested     (1,877,278 )
Non-vested as of December 31,
2018
    4,145,722  

 

The following is a summary of the status of restricted stock
at December 31, 2018:

 

Outstanding Restricted Shares
Fair Value per
Share
    Number     Average
Remaining
Amortization
Period (Years)
$ 1.10       298,333       0.57
$ 1.02       600,000       1.79
$ 1.29       1,956,000       2.64
$ 1.35       1,250,000       0.50
$ 1.28       25,000       0.25
$ 1.28       16,389       0.65
          4,145,722        

 

NOTE 18. INCOME TAX

 

The Company is not subject to any income taxes in the United
States or the Cayman Islands and had minimal operations in jurisdictions other than the PRC. BHD and Nanjing Recon are subject
to PRC’s income taxes as PRC domestic companies. The Company follows Implementing Rules for the Enterprise Income Tax Law
(“Implementing Rules”), which took effect on January 1, 2008 and unified the income tax rate for domestic-invested
and foreign-invested enterprises at 25%.

 

Nanjing Recon was approved as a government-certified high –technology company and is subject to a reduced income tax
rate of 15% through November 30, 2019.

 

As approved by the domestic tax authority in the PRC, BHD was
recognized as a government-certified high technology company on November 25, 2009 and is subject to a reduced income tax rate of
15% through November 25, 2018. BHD reapplied for high-technology enterprise review approval and is still under the government’s verification procedures.

  

Loss before provision for income taxes consisted of:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Outside China areas   ¥ (21,599,806 )   ¥ (13,003,210 )   ¥ (1,890,676 )
China     (23,759,198 )     3,059,773       444,893  
Total   ¥ (45,359,004 )   ¥ (9,943,437 )   $ (1,445,783 )

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Deferred tax asset, net is comprised of the following:

 

    June 30, 
2018
    December 31, 
2018
    December 31, 
2018
 
    RMB     RMB     U.S. Dollars  
Allowance for doubtful receivables   ¥ 703,545     ¥ 421,839     ¥ 61,336  
Impairment loss from investment in unconsolidated entity     605,660       605,660       88,063  
Operating loss from investment in unconsolidated entity           126,655       18,416  
Net operating loss carryforwards     6,911,270       7,204,458       1,047,533  
Less: Valuation allowance     (8,220,475 )     (8,358,612 )     (1,215,348 )
Deferred income tax assets, net   ¥     ¥     $  

  

The Company’s income tax expense is comprised of the
following:

 

    For the six months ended December 31,  
    2017     2018     2018  
    RMB     RMB     U.S. Dollars  
Current income tax provision   ¥ 9,282     ¥ 2,002     $ 291  
Income tax expenses   ¥ 9,282     ¥ 2,002     $ 291  

 

NOTE 19. NON-CONTROLLING INTEREST

 

Non-controlling interest consisted of the following:

 

    As of June 30, 2018  
          Nanjing     Gan Su     Qinghai              
    BHD     Recon     BHD     BHD     Total     Total  
    RMB     RMB     RMB     RMB     RMB     U.S. Dollars  
Paid-in capital   ¥ 1,651,000     ¥ 200,000     ¥ 3,500,000     ¥ 200,000     ¥ 5,551,000     $ 838,544  
Unappropriated retained earnings     3,152,687       3,491,859       (548,899 )     (754,014 )     5,341,633       806,918  
Accumulated other comprehensive loss     (18,850 )     (11,853 )                 (30,703 )     (4,638 )
Total non-controlling interests   ¥ 4,784,837     ¥ 3,680,006     ¥ 2,951,101     ¥ (554,014 )   ¥ 10,861,930     $ 1,640,824  

 

    As of December 31, 2018  
          Nanjing     Gan Su     Qinghai              
    BHD     Recon     BHD     BHD     Total     Total  
    RMB     RMB     RMB     RMB     RMB     U.S. Dollars  
Paid-in capital   ¥ 1,651,000     ¥ 200,000     ¥ 4,000,000     ¥     ¥ 5,851,000     $ 850,739  
Unappropriated retained earnings     3,152,687       3,965,837       (824,328 )     (813,759 )     5,480,437       796,859  
Accumulated other comprehensive loss     (18,850 )     (11,853 )                 (30,703 )     (4,464 )
Total non-controlling interests   ¥ 4,784,837     ¥ 4,153,984     ¥ 3,175,672     ¥ (813,759 )   ¥ 11,300,734     $ 1,643,134  

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 20. CONCENTRATIONS

 

For the six months ended December 31, 2017, CNPC represented
approximately 52.5 % and another customer represented approximately
36.2% of the Company’s revenue, respectively.  

 

For the six months ended December 31, 2018, CNPC represented
approximately 44.1% and another customer represented approximately 22.3% of the Company’s revenue, respectively. At December
31, 2018, CNPC accounted for 48.3% and another three customers accounted for 14.0%, 11.8% and 11.8% of the Company’s trade
accounts receivable, net, respectively.

 

NOTE 21. COMMITMENTS AND CONTINGENCY

 

 

The Company entered into six non-cancellable operating lease
agreements for office spaces and factories. Future payments under such leases are as follows as of December 31, 2018:

 

Twelve months ending December 31, 2018,   RMB     U.S. Dollars  
2019   ¥ 2,646,366     $ 384,783  
2020     538,000       78,226  
Total   ¥ 3,184,366     $ 463,009  

 

Rent expense for the six months ended December 31, 2017 and
2018 were ¥1,219,562 and ¥1,249,655 ($181,701), respectively.

 

(b) Contingency

 

The Labor Contract Law of the PRC requires employers to assure
the liability of severance payments if employees are terminated and have been working for the employers for at least two years
prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of the service provided by
the employees. As of December 31, 2018, the Company estimated its severance payments of approximately ¥2.9 million ($0.4
million) which has not been reflected in its unaudited condensed consolidated financial statements, because management cannot predict
what the actual payment, if any, will be in the future.

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 22. RELATED PARTY TRANSACTIONS
AND BALANCES

 

Leases from related parties – The Company
has various agreements for the lease of office space owned by the Founders and their family members. The terms of the agreement
state that the Company will continue to lease the property at a monthly rent of ¥140,000 with annual rental expense at ¥1.68
million ($0.24 million). The details of leases from related parties are as below:

 

            Monthly Rent     Monthly Rent  
Lessee   Lessor   Rent Period   RMB     USD  
Nanjing Recon   Yin Shenping   April 1, 2018 – March 31, 2020   ¥ 60,000     $ 8,724  
BHD   Chen Guangqiang   January 1, 2018 – December 31, 2018     22,500       3,272  
BHD   Mr. Chen’s family member   January 1, 2018 – December 31, 2018     47,500       6,907  
Recon-BJ   Yin Shenping   July 1, 2018 – June 30, 2019     10,000       1,454  

  

Short-term borrowings from related parties 
The Company borrowed ¥9,018,065 and ¥5,198,977 ($755,934) from the Founders and their family members as of June 30, 2018
and December 31, 2018, respectively. For the specific terms and interest rates of the borrowings, see Note 14.

 

Long-term borrowings from related parties 
The Company borrowed ¥9,663,729 and ¥9,327,976 ($1,356,294) from the Founder as of June 30, 2018 and December 31, 2018,
respectively. For the specific terms and interest rates of the borrowings, see Note 15.

 

Expenses paid by the owner on behalf of Recon – Shareholders
of our VIEs paid certain operating expenses for the Company. As of June 30, 2018 and December 31, 2018, ¥2,767,349 and ¥2,493,178
($362,510) was due to them, respectively. See Note 12.

  

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE
23. Variable Interest Entities

 

VIEs are generally entities that lack sufficient equity to finance
their activities without additional financial support from other parties or whose equity holders lack adequate decision making
ability. All VIEs and their subsidiaries with which the Company is involved must be evaluated to determine the primary beneficiary
of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

Summary information regarding consolidated VIEs is as follows:

  

   

June 30,

2018

    December 31,
2018
    December 31,
2018
 
    RMB     RMB     U.S. Dollars  
ASSETS                        
Current Assets                        
Cash and cash equivalents   ¥ 7,336,672     ¥ 3,865,097     $ 561,987  
Notes receivable     3,995,962       3,778,526       549,400  
Trade accounts receivable, net     24,254,007       38,946,200       5,662,801  
Purchase advances, net     12,654,546       10,055,617       1,462,093  
Other assets     14,281,461       33,685,781       4,897,933  
Total current assets   ¥ 62,522,648     ¥ 90,331,221     $ 13,134,214  
                         
Non-current assets     20,966,716       38,905,071       5,656,821  
Total Assets   ¥ 83,489,364     ¥ 129,236,292     $ 18,791,035  
                         
LIABILITIES                        
Trade accounts payable   ¥ 8,754,347     ¥ 15,452,084     $ 2,246,743  
Taxes payable     278,184       923,511       134,279  
Other liabilities     14,730,356       22,240,865       3,233,835  
Total current liabilities     23,762,887       38,616,460       5,614,857  
                         
Non-current liabilities     8,943,834       8,578,305       1,247,291  
Total Liabilities   ¥ 32,706,721     ¥ 47,194,765     $ 6,862,148  

 

The financial performance of VIEs reported in the
unaudited condensed consolidated statement of operations and comprehensive loss for the six months ended December 31, 2017
includes revenues of ¥53,246,727, operating expenses of ¥10,875,676, and net loss of ¥4,920,229. The financial
performance of VIEs reported in the unaudited condensed consolidated statement of operations and comprehensive loss for the
six months ended December 31, 2018 includes revenues of ¥42,271,729 ($6,146,335), operating expenses of ¥10,552,138
($1,534,287), and net income of ¥3,268,099 ($475,184).

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE
24.
SEGMENT REPORTING

 

ASC 280, “Segment Reporting,” establishes standards
for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure
as well as information about geographical areas, business segments and major customers in financial statements for details on the
Company’s business segments. The Company uses the “management approach” in determining reportable operating segments.
The management approach considers the internal organization and reporting used by the Company’s chief operating decision
maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.
Management, including the chief operating decision maker, reviews operation results by the revenue of different products. Based
on management’s assessment, the Company has determined that it has three operating segments: automation product and software,
equipment and accessories and oilfield environmental protection.

 

The following tables present summary information by segment
for the six months ended December 31, 2017 and 2018, respectively:

 

    For the six months ended December 31,  
    2017     2018     2018  
    RMB     RMB     U.S. Dollars  
Automation product and software   ¥ 13,602,598     ¥ 28,954,379     $ 4,209,984  
Equipment and accessories     39,212,432       10,312,238       1,499,406  
Oilfield environmental protection     431,697       3,005,112       436,945  
Total revenue   ¥ 53,246,727     ¥ 42,271,729     $ 6,146,335  

 

All the Company’s revenue was generated
from its business operation in China.

 

    For the six months ended December 31, 2018  
    Automation
product and
software
    Equipment
and
accessories
    Oilfield
environmental
protection
    Total  
    RMB     RMB     RMB     RMB  
Revenue   ¥ 28,954,379     ¥ 10,312,238     ¥ 3,005,112     ¥ 42,271,729  
Cost of revenue and related tax     18,549,248       6,690,414       1,794,975       27,034,637  
Gross profit   ¥ 10,405,131     ¥ 3,621,824     ¥ 1,210,137     ¥ 15,237,092  
Depreciation and amortization   ¥ 34,489     ¥ 467,348     ¥ 13,620     ¥ 515,457  
Total capital expenditures   ¥ 55,554     ¥ 227,575     ¥ 4,411,620     ¥ 4,694,749  

 

    For the six months ended December 31, 2017  
    Automation
product and
software
    Equipment
and
accessories
    Oilfield
environmental
protection
    Total  
    RMB     RMB     RMB     RMB  
Revenue   ¥ 13,602,598     ¥ 39,212,432     ¥ 431,697     ¥ 53,246,727  
Cost of revenue and related tax     11,058,778       35,826,598       313,229       47,198,605  
Gross profit   ¥ 2,543,820     ¥ 3,385,834     ¥ 118,468     ¥ 6,048,122  
Depreciation and amortization   ¥ 19,379     ¥ 449,180     ¥ 13,223     ¥ 481,782  
Total capital expenditures   ¥ 10,368     ¥ 268,064     ¥ 5,160,142     ¥ 5,438,574  

 

 

RECON TECHNOLOGY,
LTD

NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

    June 30,
2018
    December 31,
2018
    December 31,
2018
 
    RMB     RMB     U.S. Dollars  
Total assets:                        
Automation product and software   ¥ 53,284,643     ¥ 78,723,338     $ 11,446,421  
Equipment and accessories     40,365,472       43,604,664       6,340,145  
Oilfield environmental protection     28,157,402       36,391,823       5,291,393  
Total Assets   ¥ 121,807,517     ¥ 158,719,825     $ 23,077,959  

 

NOTE
25. SUBSEQUENT EVENTS

 

On February 21, 2019, the Company’s board of directors
approved transferring the VIEs and VIE-controlled companies from Jining Recon Technology Ltd. (“Recon JN”) to Recon
Hengda Technology (Beijing) Co., Ltd. (“Recon BJ”). Both Recon JN and Recon BJ are the Registrant’s wholly owned
subsidiaries in China. The Company has started VIE transfer process and the liquidation process of Recon JN. At the completion
of the transfer, the Company plans to officially dissolve Recon JN at the end of February 2019. The Registrant does not expect
any negative impact of this process on its operation.

 

 

Exhibit 99.2

 

Recon
Technology Reports Financial Results for the First Six Months of Fiscal Year 2019

 

 

BEIJING, Feb. 27, 2019 /PRNewswire/
— Recon Technology, Ltd
. (Nasdaq: RCON) (“Recon” or the “Company”), a China-based independent
solutions integrator in the oilfield service, environmental protection, electric power and coal chemical industries, today announced
its financial results for the first six months of fiscal year 2019.

 

Management Commentary

 

Mr. Shenping
Yin, co-founder and CEO of Recon stated, “During the first six months of our 2019 fiscal year, our total revenues decreased
from RMB53.2 million to RMB42.3 million as compared to the same period last year, largely because of the discontinuation of our
temporary business in low-margin equipment and accessories offerings which we conducted in the same period last year. We did not
conduct this business this year as our new factories are in stable operation and we are allocating our resources to more effective
business. However, our gross profit and gross margin increased from the same period last year,
primarily because of our
automation product and software and oilfield environmental protection segments. Our operational results were improved as we continue
to focus on higher margin business.

 

Mr. Yin continued, “As our operations
improved and loss narrowed during this period compared to the same period in 2018, we continue to maintain our prior expectation
for fiscal year 2019 to achieve up to RMB 101 million in revenue because of the rapid development of our China Energy Investment
Corporation (“China Energy”) projects and our launch of several new factories and business lines. As
of today, we have received orders of RMB 33.38 million from China Energy and the total value of the contracts with China Energy
which we will perform or are performing exceeds RMB 19 million.

 

First Six Months
of Fiscal 2019 Financial Highlights (all comparable to the prior year period):

 

    For the Six Months Ended December 31,  
(RMB millions, except per share data)   2018     2017     % Change  
Revenue     42.3       53.2       -20.6 %
 Automation product and software     29.0       13.6       112.9 %
 Equipment and accessories     10.3       39.2       -73.7 %
 Oilfield environmental protection     3.0       0.4       596.1 %
Gross profit     15.2       6.0       151.9 %
Gross margin     36.0 %     11.4 %     24.6 pp
Loss from operations     (8.7 )     (17.5 )     -50.1 %
Net loss attributable to Recon Technology, Ltd     (10.1 )     (17.0 )     -40.6 %
Adjusted EBITDA     0.9       (5.2 )     116.8 %
Loss per share     (0.56 )     (2.21 )     -74.8 %
Adjusted EPS     (0.03 )     (0.70 )     -95.7 %

*Note: pp represents percentage points

 

 

· Total revenues for the six months ended December 31, 2018 decreased by 20.6% to RMB42.3 million ($6.1 million).

 

· The revenue of automation product and software for the six months ended December 31, 2018 increased by 112.9% to RMB29.0 million
($4.2 million).

 

· Gross profit for the six months ended December 31, 2018 increased by 151.9% to RMB15.2 million ($2.2 million). Gross profit
margin for the six months ended December 31, 2018 increased by 24.6 percentage points to 36.0%.

 

· Net loss attributable to Recon for the six months ended December 31, 2018 was RMB10.1 million ($1.5 million), or RMB0.56 ($0.08) per
basic and diluted share, compared to RMB17.0 million, or RMB2.21 per basic and diluted share, for the six months ended December
31, 2017.

 

First Six Months Fiscal 2019 Financial Results

 

Revenue

 

Total revenues for
the six months ended December 31, 2018 decreased by RMB11.0 million, or 20.6% to RMB42.3 million ($6.1 million) from RMB53.2
million for the six months ended December 31, 2017. The decrease in total revenues was mainly due to the decreased revenue from
equipment and accessories segments, offset by increased revenue from the automation product and software and oilfield environmental
protection segments.

 

Revenue from automation
product and software increased by RMB15.4 million, or 112.9% to RMB29.0 million ($4.2 million) for the six months ended December
31, 2018 from RMB13.6 million for the six months ended December 31, 2017. The increased revenue was mainly due to automation business
projects for China Energy. The Company recorded RMB 9.4 million revenue from these projects during the six months ended December
31, 2018.

 

Revenue from equipment
and accessories decreased by RMB28.9 million, or 73.7% to RMB10.3 million ($1.5 million) for the six months ended December 31,
2018 from RMB39.2 million for the six months ended December 31, 2017. For the six months ended December 31, 2017, the Company accepted
some low-margin contracts. The Company did not engage in this type of temporary business in the same period of fiscal year 2019
and the revenue from these low-margin business decreased dramatically. Gross margin from this segment increased by 26.5 percentage
points to 35.1% for the six months ended December 31, 2018 from 8.6% from the six months ended December 31, 2017.

 

Revenue from oilfield
environmental protection increased by RMB2.6 million, or 596.1% to RMB3.0 million ($0.4 million) for the six months ended December
31, 2018 from RMB0.4 million for the six months ended December 31, 2017, as service requirements from oilfield companies have increased
during the period.

 

Cost and Margin

 

Total cost of revenues
decreased by RMB20.2 million ($2.9 million), or 42.7%, to RMB27.0 million ($3.9 million) for the six months ended December 31,
2018 from RMB47.2 million for the six months ended December 31, 2017. The decrease was mainly caused by significant decrease
in cost of revenue incurred in equipment and accessories.

 

 

Cost of revenue from
automation product and software increased by RMB7.5 million ($1.1 million), or 67.7% to RMB18.5 million ($2.7 million) for the
six months ended December 31, 2018 from RMB11.0 million for the six months ended December 31, 2017. The increase was primarily
attributable to a significant increase from business of China Energy contracts, which resulted in an amount of RMB7.5 million increase
in cost of revenues in this segment.

 

Cost of revenue from
equipment and accessories decreased by RMB29.1 million ($4.2 million), or 81.3% to RMB6.6 million ($1.0 million) for the six months
ended December 31, 2018 from RMB35.8 million for the six months ended December 31, 2017. The decrease was primarily attributable
to quickly decreased sales of heating related products with low margin to general industry clients.

 

Cost of revenue from
oilfield environmental protection increased by RMB1.5 million ($0.2 million), or 473.1% to RMB1.8 million ($0.3 million) for the
six months ended December 31, 2018 from RMB0.3 million for the six months ended December 31, 2017. The increase was mainly
due to the increased oily sludge treatment processing projects during the six months ended December 31, 2018. The Company expects
this part will increase in the coming year as its new subsidiary Gan Su BHD has begun its trial operation.

 

Gross profit increased
by RMB9.2 million, or 151.9% to RMB15.2 million ($2.2 million) for the six months ended December 31, 2018 from RMB6.0 million
from the six months ended December 31, 2017. Gross margin increased by 24.6 percentage points to 36.0% for the six months ended
December 31, 2018 from 11.4% from the six months ended December 31, 2017. The main reason of the increase in gross margin and gross
profit was that as the recovered industry caused the Company’s clients to have higher budgets on operations and the clients
were more willing to launch higher-expenditure projects which produced higher margins to the Company. In addition, the Company
entered into official operation of some new high-margin businesses in energy consumption market during this year.

 

Operating
Expenses
 

 

Selling and distribution
expenses increased by RMB1.9 million, or 64.7% to RMB4.9 million ($0.7 million) for the six months ended December 31, 2018 from
RMB3.0 million for the six months ended December 31, 2017. This increase was primarily due to an increase in traveling expense,
shipping cost and service fees as the Company expanded its market of China Energy projects and new industries.

 

General and administrative
expenses increased by RMB0.2 million, or 1.2% to RMB18.9 million ($2.7 million) for the six months ended December 31, 2018
from RMB18.7 million for the six months ended December 31, 2017. The increase in general and administrative expenses was mainly
due to an increase in stock-based compensation expense and audit fees, while the increase was partially offset by the decrease
in investor relationship expenses during the six months ended December 31, 2018. 

 

Reversal of provision
for doubtful accounts was RMB1.5 million ($0.2 million) for the six months ended December 31, 2018, compared to provision for doubtful
accounts of RMB0.08 million for the six months ended December 31, 2017. The decrease in provision of doubtful accounts was resulted
from management’s successful collection of long-outstanding receivables. Management will continue to monitor accounts receivable
to maintain the provision at a lower level.

 

 

Net Loss

 

Loss from operations
was RMB8.7 million ($1.3 million) for the six months ended December 31, 2018, compared to a loss of RMB17.5 million for the six
months ended December 31, 2017. This RMB8.8 million ($1.3 million) decrease in loss from operations was primary due to an increase
in gross profit, as well as an increase in reversal of doubtful accounts and partially offset by an increase in selling and distribution
expenses as discussed above.

 

Other expense, net
was RMB1.2 million ($0.2 million) for the six months ended December 31, 2018, compared to other expense, net of RMB0.09 million
for the six months ended December 31, 2017. The RMB1.1 million ($0.2 million) increase in other expense, net was primarily due
to the increased loss from investment in unconsolidated entity of RMB0.8 million ($0.1 million). The Company made a deal to invest
into Future Gas Station (Beijing) Technology, Ltd (“FGS”) on December 2017 and increased its investment into FGS with
additional RMB10 million in cash and issued 2,435,284 restricted ordinary shares of Recon (the “Restricted Shares”)
to the other shareholders of FGS. As of December 31, 2018, the Company recorded an investment loss of RMB0.8 million with equity
method as FGS was still in its developing period and earned a net loss.

 

Net loss attributable
to Recon for the six months ended December 31, 2018 was RMB10.1 million ($1.5 million), or RMB0.56 ($0.08) per basic
and diluted share, compared to RMB17.0 million, or RMB2.21 per basic and diluted share for the six months ended December 31, 2017.

 

EBITDA

 

Adjusted EBITDA income was RMB0.9 million for the six months
ended December 31, 2018, compared to an adjusted EBITDA loss of RMB 5.2 million for the same period last year. Please see the section
titled “Non-GAAP Financial Measures” below for a discussion of this metric, which we believe may be informative for
investors but which is not a GAAP financial measure.

 

Financial Condition

 

As of December 31,
2018, the Company had cash of RMB12.0 million ($1.7 million), compared to RMB45.3 million as of June 30, 2018. As of December 31,
2018, the Company had working capital of RMB58.8 million ($8.5 million), compared to RMB74.8 million as of June 30, 2018.

 

Net cash used in operating
activities was RMB27.0 million ($3.9 million) for the six months ended December 31, 2018, compared to RMB12.7 million for the six
months ended December 31, 2017. Net cash used in investing activities was RMB8.5 million ($1.2 million) for the six months ended
December 31, 2018, compared to RMB7.4 million for the six months ended December 31, 2017. Net cash provided by financing activities
was RMB1.0 million ($0.1 million) for the six months ended December 31, 2018, compared to RMB24.5 million for the six months ended
December 31, 2017.

 

Exchange Rate

 

The translation of
RMB amounts into U.S. dollars are included solely for the convenience of readers and have been made at the rate of RMB6.8776 to $1.00,
the approximate exchange rate prevailing on December 31, 2018.

 

 

Non-GAAP Financial Measures

 

In addition to the Company’s U.S. GAAP results, this press
release includes a discussion of adjusted EBITDA and adjusted earnings (loss) per share, which are non-GAAP financial measures.
The Company’s management defines adjusted EBITDA as earnings before interest expense, income taxes, depreciation, and amortization
expense, and non-recurring expenses. All of the omitted items are either (i) non-cash items or (ii) items that the Company
does not consider in assessing the Company’s ongoing operating performance. Because adjusted EBITDA omits non-cash items,
the Company’s management believes that adjusted EBITDA is less susceptible to variances in actual performance resulting from
depreciation, amortization, and other non-cash charges and more reflective of other factors that affect its operating performance.
The Company’s management defines adjusted earnings per share by eliminating from earnings (loss) per share the impact of
a number of non-recurring items the Company does not consider indicative of its ongoing performance. Recon’s management believes
that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating
results and trends and in comparing the Company’s financial measures with other competitors, many of which present similar
non-GAAP financial measures to investors.

 

    For the Six Months Ended December 31,  
    2017     2018  
    RMB     RMB  
Reconciliation of adjusted EBITDA to net loss                
     Net loss     (17,604,972 )     (9,945,439 )
     Provision (benefit) for income taxes     9,282       2,002  
     Interest expense and foreign currency adjustment     286,731       838,920  
     Provision for (reversal of) slow moving inventories     (68,384 )     65,380  
     Restricted shares issued for services     1,937,867       516,194  
     Provision for (net recovery of) doubtful accounts     80,539       (1,494,707 )
     Loss from investment in unconsolidated entity           844,369  
     Share based compensation     3,550,685       4,672,881  
     Restricted shares issued for management     6,083,148       4,867,036  
     Depreciation and amortization     481,782       515,457  
Adjusted EBITDA     (5,243,322 )     882,093  

 

 

    For the Six Months Ended December 31,  
    2017     2018  
    RMB     RMB  
Reconciliation of net loss attributable to Recon Technology, Ltd            
to adjusted net loss attributable to common shareholders                
     Net loss attributable to Recon Technology, Ltd     (16,986,810 )     (10,084,243 )
Special items:                
     Restricted shares issued for services     1,937,867       516,194  
     Provision for (net recovery of) doubtful accounts     80,539       (1,494,707 )
     Provision for (reversal of) slow moving inventories     (68,384 )     65,380  
     Loss from investment in unconsolidated entity           844,369  
     Share based compensation     3,550,685       4,672,881  
     Restricted shares issued for management     6,083,148       4,867,036  
Adjusted net loss attributable to common stockholders     (5,402,955 )     (613,090 )
                 
Reconciliation of U.S. GAAP loss per share                
to non U.S. GAAP adjusted loss per share                
U.S. GAAP loss per share                
    Basic and diluted     (2.21 )     (0.56 )
Impact of special items on earnings per share                
    Basic and diluted     1.51       0.53  
Non U.S. GAAP adjusted loss per share                
    Basic and diluted     (0.70 )     (0.03 )

 

  

About Recon Technology,
Ltd.

 

Recon
Technology, Ltd. (RCON) is China’s first non-state-owned oil and gas field service company listed on
NASDAQ. Recon supplies China’s largest oil exploration companies, Sinopec (SNP) and CNPC, with advanced automated technologies,
efficient gathering and transportation equipment and reservoir stimulation measure for increasing petroleum extraction levels,
reducing impurities and lowering production costs. Through the years, RCON has taken leading positions on several segmented markets
of the oil and gas filed service industry. RCON also has developed stable long-term cooperation relationship with its major clients,
and its products and service are also well accepted by clients. For additional information please visit: www.recon.cn.

 

Forward Looking
Statements

 

Forward-Looking
Statements in this press release, which are not historical facts, are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Our actual results, performance or achievements may differ materially from those expressed
or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words
such as “may,” “could,” “expect,” “intend,” “plan,” “seek,”
“anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,”
“likely,” “will,” “would” and variations of these terms and similar expressions, or the negative
of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that,
while considered reasonable by us and our management, are inherently uncertain. Factors that may cause actual results to differ
materially from current expectations include, among others, levels of spending in our industry as well as consumer confidence generally;
changes in the competitive environment in our industry and the markets where we operate; our ability to access the capital markets;
the results of cooperation between parties to cooperation agreements; and other risks discussed in the Company’s filings with the
U.S. Securities and Exchange Commission, including our Annual Report on Form 20-F, which filings are available from the SEC. We
caution you not to place undue reliance on any forward-looking statements, which are made as of the date of this press release.
We undertake no obligation to update publicly any of these forward-looking statements to reflect actual results, new information
or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent
required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking statements
.

 

 

For more information,
please contact:

 

In China:

 

Ms. Jia
Liu  

Chief Financial Officer
Recon Technology, Ltd.
Phone: +86 (10) 8494-5799 
Email: info@recon.cn

 

In the United
States:

 

Ms. Tina Xiao
President 
Ascent Investor Relations LLC 
Phone: +1-917-609-0333 
Email: tina.xiao@ascent-ir.com

 

 

RECON TECHNOLOGY, LTD

CONDENSED BALANCE SHEETS

(UNAUDITED)

 

    As of
June 30
    As of
December 31
    As of
December 31
 
    2018     2018     2018  
    RMB     RMB     U.S. Dollars  
ASSETS                        
Current assets                        
Cash   ¥ 45,340,578     ¥ 11,981,820     $ 1,742,164  
Notes receivable     3,995,962       3,778,526       549,400  
Trade accounts receivable, net     24,254,007       38,946,200       5,662,801  
Inventories, net     6,758,841       289,129       42,040  
Other receivables, net     7,320,953       10,095,750       1,467,928  
Purchase advances, net     12,654,546       10,055,617       1,462,093  
Contract costs, net           23,234,870       3,378,364  
Prepaid expenses     509,682       634,271       92,223  
Total current assets     100,834,569       99,016,183       14,397,013  
                         
Property and equipment, net     3,171,109       2,876,833       418,293  
Construction in progress     11,779,784       21,428,767       3,115,756  
Land use right, net     1,335,126       1,321,507       192,148  
Investment in unconsolidated entity           30,804,506       4,478,994  
Long-term trade accounts receivable, net     4,212,829       2,077,829       302,118  
Prepayments for construction in progress     474,100       1,194,200       173,637  
Total Assets   ¥ 121,807,517     ¥ 158,719,825     $ 23,077,959  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY                        
                         
Current liabilities                        
Trade accounts payable   ¥ 8,754,347     ¥ 15,452,084     $ 2,246,743  
Other payables     3,255,810       6,220,334       904,437  
Other payable- related parties     3,211,457       3,214,579       467,402  
Accrued payroll and employees’ welfare     600,434       885,569       128,762  
Investment payables           6,400,000       930,564  
Taxes payable     431,913       1,077,241       156,632  
Short-term borrowings           1,031,507       149,982  
Short-term borrowings – related parties     9,018,065       5,198,977       755,934  
Long-term borrowings – related party – current portion     719,895       749,671       109,003  
Total Current Liabilities     25,991,921       40,229,962       5,849,459  
                         
Long-term borrowings – related party     8,943,834       8,578,305       1,247,291  
Total Liabilities     34,935,755       48,808,267       7,096,750  
                         
Commitments and Contingencies                        
                         
Equity                        
Common stock, ($ 0.0185 U.S. dollar par value, 100,000,000 shares authorized; 20,940,633 shares and 18,380,349 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively)     2,279,510       2,603,392       378,535  
Additional paid-in capital     207,490,280       238,656,305       34,700,774  
Statutory reserve     4,148,929       4,148,929       603,257  
Accumulated deficit     (139,424,980 )     (149,509,223 )     (21,738,733 )
Accumulated other comprehensive income     1,516,093       2,711,421       394,242  
Total stockholders’ equity     76,009,832       98,610,824       14,338,075  
Non-controlling interests     10,861,930       11,300,734       1,643,134  
Total equity     86,871,762       109,911,558       15,981,209  
Total Liabilities and Equity   ¥ 121,807,517     ¥ 158,719,825     $ 23,077,959  

 

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

 

 

RECON TECHNOLOGY, LTD

CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

(UNAUDITED)

 

    For the six months ended  
    December 31,  
    2017     2018     2018  
    RMB     RMB     USD  
                   
Revenues   ¥ 53,246,727     ¥ 42,271,729     $ 6,146,335  
                         
Cost of revenues and related tax     47,198,605       27,034,637       3,930,853  
                         
Gross profit     6,048,122       15,237,092       2,215,482  
                         
Selling and distribution expenses     2,981,637       4,909,361       713,824  
General and administrative expenses     18,672,141       18,903,138       2,748,528  
Provision for (net recovery of) doubtful accounts     80,539       (1,494,707 )     (217,331 )
Research and development expenses     1,819,720       1,654,702       240,595  
Operating expenses     23,554,037       23,972,494       3,485,616  
                         
Loss from operations     (17,505,915 )     (8,735,402 )     (1,270,134 )
                         
Other income (expenses)                        
Subsidy income     212,005       55,706       8,100  
Interest income     6,299       32,109       4,669  
Interest expense     (284,060 )     (856,571 )     (124,546 )
Loss from investment in unconsolidated entity           (844,369 )     (122,772 )
Foreign exchange transaction gain (loss)     (2,671 )     17,651       2,566  
Other income (expense), net     (21,348 )     387,439       56,334  
Other expenses, net     (89,775 )     (1,208,035 )     (175,649 )
Loss before income tax     (17,595,690 )     (9,943,437 )     (1,445,783 )
Income tax expenses     9,282       2,002       291  
Net loss     (17,604,972 )     (9,945,439 )     (1,446,074 )
                         
Less: Net (loss) income
attributable to non-controlling interests
    (618,162 )     138,804       20,182  
                         
Net loss attributable
to Recon Technology, Ltd
  ¥ (16,986,810 )   ¥ (10,084,243 )   $ (1,466,256 )
                         
Comprehensive loss                        
Net loss     (17,604,972 )     (9,945,439 )     (1,446,074 )
Foreign currency translation adjustment     72,268       1,195,328       173,801  
Comprehensive loss     (17,532,704 )     (8,750,111 )     (1,272,273 )
Less: Comprehensive (loss) income
attributable to non-controlling interests
    (618,162 )     138,804       20,182  
Comprehensive loss attributable
to Recon Technology, Ltd
  ¥ (16,914,542 )   ¥ (8,888,915 )   $ (1,292,455 )
                         
Loss per common share – basic and diluted   ¥ (2.21 )   ¥ (0.56 )   $ (0.08 )
Weighted – average shares -basic and diluted     7,673,960       18,093,034       18,093,034  

 

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

 

 

RECON TECHNOLOGY, LTD

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

    For the six months ended December 31,  
      2017        2018     2018  
    RMB     RMB     U.S. Dollars  
                   
Cash flows from operating activities:                        
Net loss   ¥ (17,604,972 )   ¥ (9,945,439 )   $ (1,446,074 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Depreciation and amortization     481,782       515,457       74,948  
Gain from disposal of equipment     (21,470 )            
Provision for (net recovery of) doubtful accounts     80,539       (1,494,707 )     (217,332 )
Provision for (reversal of) slow moving inventories     (68,384 )     65,380       9,506  
Share based compensation     3,550,685       4,672,881       679,440  
Restricted shares issued for management     6,083,148       4,867,036       707,670  
Loss from investment in unconsolidated entity           844,369       122,772  
Restricted shares issued for services     1,937,867       516,194       75,055  
Changes in operating assets and liabilities:                        
Notes receivable     318,950       217,436       31,615  
Trade accounts receivable, net     (4,506,281 )     (11,251,794 )     (1,636,018 )
Inventories, net     (759,373 )     (1,778,189 )     (258,550 )
Other receivable, net     (1,102,598 )     (6,468,866 )     (940,577 )
Purchase advance, net     (7,471,023 )     (12,594,395 )     (1,831,233 )
Prepaid expense     (574,226 )     (124,589 )     (18,115 )
Trade accounts payable     4,078,075       740,274       107,636  
Other payables     175,367       3,244,115       471,696  
Other payables-related parties     858,195       3,122       454  
Accrued payroll and employees’ welfare     (11,224 )     285,135       41,459  
Taxes payable     1,819,793       645,328       93,831  
Net cash used in operating activities     (12,735,150 )     (27,041,252 )     (3,931,817 )
                         
Cash flows from investing activities:                        
Investment in unconsolidated entity     (2,000,000 )     (3,815,080 )     (554,715 )
Purchases of property and equipment     (278,432 )     (283,129 )     (41,167 )
Proceeds from disposal of equipment     32,000              
Payments for land use right     (1,322,300 )            
Payments and prepayments for construction in progress     (3,837,842 )     (4,411,620 )     (641,452 )
Net cash used in investing activities     (7,406,574 )     (8,509,829 )     (1,237,334 )
                         
Cash flows from financing activities:                        
Proceeds from short-term bank loans     45,000              
Proceeds from short-term borrowings     4,600,000       1,031,507       149,982  
Repayments of short-term borrowings     (3,000,000 )            
Proceeds from short-term borrowings-related parties     16,188,318       5,000,000       727,003  
Repayments of short-term borrowings-related parties     (20,256,326 )     (5,000,000 )     (727,003 )
Proceeds from long-term borrowings-related party     10,000,000              
Repayments of long-term borrowings-related party     (51,969 )     (334,513 )     (48,638 )
Proceeds from sale of common stock, net of issuance costs     15,310,741              
Refund of capital contribution by a non-controlling shareholder           (200,000 )     (29,080 )
Capital contribution by non-controlling shareholders     1,700,000       500,000       72,700  
Net cash provided by financing activities     24,535,764       996,994       144,964  
                         
Effect of exchange rate fluctuation on cash     67,620       1,195,329       173,802  
                         
Net increase (decrease) in cash     4,461,660       (33,358,758 )     (4,850,385 )
Cash at beginning of period     3,809,279       45,340,578       6,592,548  
Cash at end of period   ¥ 8,270,939     ¥ 11,981,820     $ 1,742,163  
                         
Supplemental cash flow information                        
Cash paid during the period for interest   ¥ 294,998     ¥ 805,613     $ 117,137  
Cash paid during the period for taxes   ¥ 9,282     ¥ 2,002     $ 291  
                         
Non-cash investing and financing activities                        
Shares issued to settle salary payable   ¥ 1,554,908     ¥     $  
Issuance of common stock in exchange of interest of FGS, net of issuance costs           21,433,796       3,166,487  
Investment payables in exchange of interest of FGS           6,400,000       930,564  
Payable for Construction in Progress   ¥ 2,712,518     ¥ 5,957,463     $ 866,219  

 

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

 

 





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