NASDAQ: RCON

For the most recent few years, our capacity
to provide integrated services has been a significant factor for long-term development. We treat simulation measures around fracturing
as our entry point for our integrated service model. To date, we have formed new business modules through our own R&D, investment
in service-team building and developed an integrated services solution for stimulation.

Market Background

China is the world’s second-largest consumer of petroleum products, third-largest importer of petroleum
and sixth-largest producer of petroleum. In the last twenty years, China’s demand for oil has more than tripled, while its
production of oil has only modestly increased. China became a net importer of petroleum in 1983, and, since then, oil production
in China has been focused on meeting the country’s domestic oil consumption requirements. The oil industry in China is dominated
by three state-owned holding companies: China National Petroleum Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec)
and China National Offshore Oil Corporation (CNOOC). Foreign companies have also recently become involved in China’s petroleum
industry; however, according to Chinese law, China’s national oil companies may take a majority (or minority) stake in any
commercial discovery. As a result, the number of major foreign companies involved in the industry is relatively limited. Major
foreign oil companies operating in China include: Agip, Apache, BP, ChevronTexaco, ConocoPhillips, Eni, ExxonMobil, Husky Energy,
Kerr-McGee, Mitsubishi, Royal Dutch Shell, Saudi Aramco, and Total.

In the past, China’s petroleum companies
mined for petroleum by leveraging the country’s abundance of inexpensive labor, rather than focusing on developing new technologies.
For example, a typical, traditional oilfield with an annual capacity of 1,000,000 tons would require between 10,000 and 20,000
laborers. By contrast, when Baker CAC automated oil production products were employed in the mid-1990s to explore and automate
Cainan Oil Field, a desert oilfield in Xinjiang, annual capacity for the field reached 1,500,000 tons, with only 400 employees
needed to manage the oilfield. After the introduction of Baker CAC’s products into China’s petroleum industry, Chinese
companies have also sought to provide automation solutions.

3

In the primary oil recovery stage, oil
pressure in an oil reservoir may be high enough to force oil to the surface. Approximately 20% of oil may be harvested at this
stage. The secondary oil recovery stage accounts for another 5% to 15% of oil recovery and involves such efforts as pumps to extract
petroleum and the injection of water, natural gas, carbon dioxide or other gasses into the oil reservoir to force oil to the surface.
Most oilfields in China have now entered into the tertiary stage of oil recovery, at which oil extraction becomes increasingly
difficult and inefficient. Tertiary recovery generally focuses on decreasing oil viscosity to make extraction easier and accounts
for between 5% and 15% of oil recovery. Our efforts in tertiary recovery focus on reducing water content in crude oil in order
to make extraction more efficient.

Products and Services

We currently provide products and services
to oil and gas field companies, which focus on the development and production of oil and natural gas. Our products and services
described below correlate to the numbered stages of the oilfield production system graphical expression shown below.

Our products and services include:

Equipment for Oil and Gas Production and Transportation

• High-Efficiency
Heating Furnaces (as shown above by process “6”). Crude petroleum contains certain impurities that must be removed
before the petroleum can be sold, including water and natural gas. To remove the impurities and to prevent solidification and
blockage in transport pipes, companies employ heating furnaces. BHD researched, developed and implemented a new oilfield furnace
that is advanced, highly automated, reliable, easily operable, safe and highly heat-efficient (90% efficiency).

• Burner
(as shown above by process “5”). We serve as an agent for the Unigas Burner which is designed and manufactured
by UNIGAS, a European burning equipment production company. The burner we provide has the following characteristics: high degree
of automation; energy conservation; high turn-down ratio; high security and environmental safety.

Oil and Gas Production Improvement Techniques

• Packers
of Fracturing. This utility model is used concertedly with the security joint, hydraulic anchor, and slide bushing of sand
spray in the well. It is used for easy seat sealing and sand-uptake prevention. The utility model reduces desilting volume and
prevents sand uptake which makes the deblocking processes easier to realize. The back flushing is sand-stick proof.

4

• Production
Packer. According to different withdraw points, the production packer separates different oil layers, and protects the oil pipe
from sand and permeability, so as to promote the recovery ratio.

• Sand Prevention in Oil and Water Well. This technique
processes additives that are resistant to elevated temperatures into “resin sand” which is transported to the bottom
of the well via carrying fluid. The “resin sand” goes through the borehole, piling up and compacting at the borehole
and oil vacancy layer. An artificial borehole wall is then formed, functioning as a means of sand prevention. This sand prevention
technique has been adapted to more than 100 wells, including heavy oil wells, light oil wells, water wells and gas wells, with
a 100% success rate and a 98% effective rate.

• Water
Locating and Plugging Technique. High water cut affects the normal production of oilfields. Previously, there was no sophisticated
method for water locating and tubular column plugging in China. The mechanical water locating and tubular column plugging technique
we have developed resolves the problem of high water cut wells. This technique conducts a self-sealing-test during multi-stage
usage and is reliable to separate different production sets effectively. The water location switch forms a complete process by
which the water locating and plugging can be finished in one trip. Our tubular column is adaptable to several oil drilling methods
and is available for water locating and plugging in second and third class layers.

• Fissure
Shaper. This is our proprietary product that is used along with a perforating gun to effectively increase perforation depth by
between 46% and 80%, shape stratum fissures, improve stratum diversion capability and, as a result, improve our ability to locate
oilfields and increase the output of oil wells.

• Fracture
Acidizing. We inject acid to layers under pressure which can form or expand fissures. The treatment process of the acid is defined
as fracture acidizing. The technique is mainly adapted to oil and gas wells that are blocked up relatively deeply, or the ones
in the low permeable zones.

• Electronic
Broken-down Service. This service resolves block-up and freezing problems by generating heat from the electric resistivity
of the drive pipe and utilizing a loop tank composed of an oil pipe and a drive pipe. This technique saves energy and is environmentally
friendly. It can increase the production of oilfields that are in the middle and later periods.

Automation System and Service

• Pumping
Unit Controller. Refers to process “1” above. Functions as a monitor to the pumping unit, and also collects data for
load, pressure, voltage, startup and shutdown control.

• RTU
Used to Monitor Natural Gas Wells. Collects gas well pressure data.

• Wireless
Dynamometer and Wireless Pressure Gauge. Refers to process “1” above. These products replace wired technology with
cordless displacement sensor technology. They are easy to install and significantly reduce the working load associated with cable
laying.

• Electric
Multi-Way Valve for Oilfield Metering Station Flow Control. Refers to process “2” above. This multi-way valve is used
before the test separator to replace the existing three valve manifolds. It facilitates the electronic control of the connection
of the oil lead pipeline with the separator.

• Natural
Gas Flow Computer System. Flow computer system used in natural gas stations and gas distribution stations to measure flow.

• Recon
SCADA Oilfield Monitor and Data Acquisition System. Recon SCADA is a system which applies to the oil well, measurement station,
and the union station for supervision and data collection.

• EPC
Service of Pipeline SCADA System. A service technique for pipeline monitoring and data acquisition after crude oil transmission.

5

• EPC
Service of Oil and Gas Wells SCADA System. A service technique for monitoring and data acquisition of oil wells and natural gas
wells.

• EPC
Service of Oilfield Video Surveillance and Control System. A video surveillance technique for controlling the oil and gas
wellhead area and the measurement station area.

• Technique
Service for “Digital Oilfield” Transformation. Includes engineering technique services such as oil and gas SCADA system,
video surveillance and control system and communication systems.

ISO9000 Certification

We have received ISO9000 certifications
for several of our processes. The International Organization for Standardization consists of a worldwide federation of national
standards bodies for approximately 130 countries, and the ISO9000 certification represents an international consensus of these
standards bodies, with the aim of creating global standards of product and service quality. We have received ISO9000 certification
for the following:

• Nanjing
Recon has received certification for the development and service of RSCADA.

• BHD
has received certification for high efficiency heating furnaces, import burners, and manometer surrogate rendition and service.

Customers

We operate our business by cooperating
with oil companies and their subsidiaries, the petroleum administration bureau and local service companies. Most actual control
of our direct and indirect clients can be traced to Sinopec and CNPC, the two major Chinese state-owned companies responsible for
on-shore petroleum mining and extraction. We have conducted automation projects for plants in three of China’s four highest
producing oilfields, Daqing, Shengli and Xinjiang. We have undertaken the automation projects at the following locations, among
others:

Sinopec

• Jiangsu
Oil Field

• Shengli
Oil Field

• The
Northwest Division

• The
Southwest Division

• Zhongyuan
Oil Field

• Sichuan
Oil Field

• Jianghan
Oil Field

We provide products and services to Sinopec
under a series of agreements, each of which is terminable without notice. We first began to provide services to Sinopec in 1998.
Sinopec accounted for approximately 8.85% and 6.82% of our revenues for the fiscal years ended June 30, 2016 and 2015, respectively,
and any termination of our business relationships with Sinopec would materially harm our operations.

6

CNPC

• Qinghai
Oil Field

• Tuha
Oil Field

• Daqing
Oil Field

• Jidong
Oil Field

• Sichuan
Oil Field

• Xinjiang
Oil Field

• Huabei
Oil Field

• Jilin
Oil Field

We provide products and services to CNPC
under a series of agreements, each of which is terminable without notice. We first began to provide services to CNPC in 2000. CNPC
accounted for approximately 75.36% and 43.09% of our revenues in the fiscal years ended June 30, 2016 and 2015, respectively, and
any termination of our business relationships with CNPC would materially harm our operations.

Our Strengths

• Safety
of products. The automation projects we have conducted have demonstrated that our products are reliable, safe and effective at
automating the petroleum extraction process.

• Efficiency
of technology. We believe our technology increases efficiency and profitability for petroleum companies by enabling them to monitor,
manage and control petroleum extraction; increase the amount of petroleum extracted and reduce impurities in extracted petroleum.

• Ability to leverage our
knowledge of Chinese business culture. Many of our competitors are based outside of China. As the Domestic Companies are
based in China, we are in a unique position to emphasize Chinese culture and business knowledge to obtain new customers and new
agreements with existing customers. We believe that many Chinese businesses, including state-owned companies like Sinopec and
CNPC, would prefer to hire a Chinese company to assist in their business operations if a Chinese company exists with the ability
to fulfill their needs on a timely and cost-efficient basis. In addition, our knowledge of Chinese culture allows us to anticipate
and adapt to Chinese oilfield management methods. We provide our software solutions in Mandarin for the benefit of our Chinese
customers, and all of our customer support is available from Mandarin-fluent personnel.

• Experienced,
successful executive management team. Our executive management team has significant experience and success in the petroleum automation
industry. They will be able to draw on their knowledge of the industry and their relationships in the industry.

• Ability
to leverage China’s cost structure. As a Chinese company, we believe we can operate our business more cost-effectively because
all of our employees, operations and assets are located in China, resulting in lower labor, development, manufacturing and rent
costs than we believe we would incur if we also maintained operations abroad. We expect these costs savings will be reflected
in lower costs to our customers for comparable products.

• Ownership
of our intellectual property. Because we own our intellectual property, we are able to avoid licensing fees or contravening licensing
agreements.

7

Our Strategies

Our goal is to help our customers improve
their efficiency and profitability by providing them with software and hardware solutions and services to improve their ability
to locate productive oil reservoirs, manage the oil extraction process, reduce extraction costs, and enhance recovery from extraction
activities. Key elements of our strategies include:

• Increase
our market share in China. We believe that as the Chinese economy and oil industry continue to develop, Chinese petroleum extraction
automation companies will compete with international businesses at an increasing rate. Consequently, we believe we will have opportunities
to take market share from foreign companies by developing positive business relationships in China’s petroleum mining and
extraction industry. We will also use strategic advertisements, predominantly in China’s northeast and northwest, where
China’s major oilfields are located, to increase our brand awareness and market penetration. We aim to continue developing
new technologies designed to improve petroleum mining and extraction efficiency and profitability for our customers.

• Develop
our own branded products and services and shift our focus away from trading business. Our management believes in the importance
of our own branded products and our services, in light of their higher profit margins and their long-term significance in establishing
the status of our Company in the oil and gas industry. Moreover, the trading business relies on the major clients’ procurement
policies toward agencies, any significant change of which could jeopardize our operating results. Our management therefore believes
that in the long run we will need to focus our growth strategy in developing professional services for the oil and gas industry
in China.

• Focus
on higher-profit subsection of market. While we plan to continue to provide services to all of our clients, we believe that we
may improve our profit margins by focusing a higher portion of our advertising and promotions at those sub-divisions of our industry
that have traditionally held the highest profit margins.

• Offer
services to foreign oilfields contracted by Chinese petroleum companies. As Sinopec and CNPC continue to invest in oilfields in
other countries, we will focus on offering our services in these new locations based on our success in working with the companies
in China.

• Seek
opportunities with foreign companies in China. Even where oilfields in China are partially operated by foreign companies, a significant
number of employees will be Chinese and will benefit from our Chinese-language services. We believe our hardware and software
solutions would be beneficial to any petroleum company doing business in China and plan to continue marketing to foreign companies
entering the Chinese market.

• Provide
services that generate high customer satisfaction levels. Chinese companies in our market are strongly influenced by formal and
informal referrals. We believe that we have the opportunity to expand market share by providing high levels of customer satisfaction
with our current customers, thereby fostering strong customer referrals to support sales activities.

Competition

We face competition from a variety of foreign
and domestic companies involved in the petroleum mining automation industry. While we believe we effectively compete in our market,
our competitors hold a substantial market share.

A few of our existing competitors, as well
as a number of potential new competitors, have significantly greater financial, technical, marketing and other resources than we
do, which could provide them with a significant competitive advantage over us. We cannot guarantee that we will be able to compete
successfully against our current or future competitors in our industry or that competition will not have a material adverse effect
on our business, operating results and financial condition.

8

Our primary domestic competitors include
the following:

• Beijing
Echo Technologies Development Co., Ltd. (“BET”). BET provides a combination of software and hardware products
for industrial automatic control systems in the petroleum industry. BET currently engages in research and development of software
and hardware applied to industrial automatic control systems, manufacturing and installation of industrial automation instruments
and integration of automatic control products.

• Beijing
Golden-Time Petroleum Measurement Technology Co., Ltd. (“BGT”). BGT develops analysis software used in oilfields but
does not yet, to our knowledge, produce a substantial amount of hardware products.

• Anton Oilfield Services
Group (HKEx stock code: 3337) is a leading independent oilfield services provider offering one-stop oil and gas field technical
development services to oil companies. Its services and solutions span across the drilling technology, well completion, downhole
operation, and oil production phases in the development cycle. Its fast growth benefits from the accelerated development of natural
gas in China and the Group’s increased presence in the overseas markets.

Research and Development

We focus our research and development efforts
on improving our development efficiency and the quality of our products and services. As of June 30, 2016, our research and
development team consisted of 38 experienced engineers, developers and programmers. In addition, some of our support employees
regularly participate in our research and development programs.

In the fiscal years ended June 30,
2015 and 2016, we spent approximately ¥4.2 million and ¥6.9 million ($1.0 million), respectively, on research and development
activities.

Intellectual Property

Our success and competitive position is
dependent in part upon our ability to develop and maintain the proprietary aspect of our technology. The reverse engineering, unauthorized
copying, or other misappropriation of our technology could enable third parties to benefit from our technology without paying for
it. We rely on a combination of trademark, trade secret, copyright law and contractual restrictions to protect the proprietary
aspects of the Domestic Companies’ and our technology. We seek to protect the source code to the Domestic Companies’
and our software, documentation and other written materials under trade secret and copyright laws. While we actively take steps
to protect the Domestic Companies’ and our proprietary rights, such steps may not be adequate to prevent the infringement
or misappropriation of the Domestic Companies’ and our intellectual property. This is particularly the case in China where
the laws may not protect our proprietary rights as fully as in the United States.

We license the Domestic Companies’
and our software products under signed license agreements that impose restrictions on the licensee’s ability to utilize the
software and do not permit the re-sale, sublicense or other transfer of the software. Finally, we seek to avoid disclosure of the
Domestic Companies’ and our intellectual property by requiring employees and independent consultants to execute confidentiality
agreements.

Although we develop our software products in conjunction with the Domestic Companies, each software product is based upon middleware developed by third parties. We integrate
this technology, licensed by our customers from third parties in our software products. If our customers are unable to continue
to license any of this third party software, or if the third party licensors do not adequately maintain or update their products,
we would face delays in the releases of our software until equivalent technology can be identified, licensed or developed, and
integrated into our software products. These delays, if they occur, could harm our business, operating results and financial condition.

9

There has been a substantial amount of
litigation in the software industry regarding intellectual property rights. It is possible that in the future third parties may
claim that our current or potential future software solutions infringe their intellectual property. We expect that software product
developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment
grows and the functionality of products in different industry segments overlap. In addition, we may find it necessary to initiate
claims or litigation against third parties for infringement of our proprietary rights or to protect our trade secrets. Although,
along with the Domestic Companies, we may disclaim certain intellectual property representations to our customers, these disclaimers
may not be sufficient to fully protect us against such claims. Any claims, with or without merit, could be time consuming, result
in costly litigation, cause product shipment delays or require the Domestic Companies and us to enter into royalty or license agreements.
Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material
adverse effect on our business, operating results and financial condition.

Our standard software license agreements
contain an infringement indemnity clause under which we agree to indemnify and hold harmless our customers and business partners
against liability and damages arising from claims of various copyright or other intellectual property infringement by the Domestic
Companies’ and our products. We have never lost an infringement claim, and our costs to defend such lawsuits have been insignificant.
Although it is possible that in the future third parties may claim that our current or potential future software solutions or we
infringe on their intellectual property, we do not currently expect a significant impact on our business, operating results, or
financial condition.

We market our products under the following
trademarks which are registered with the PRC Trademark Bureau under the State Administration for Industry and Commerce. We currently
own or have applied for the following trademarks:

1. Trademark of “BHD” valid from November 7,
2003 through November 6, 2023;

2. Trademark of “Recon” of the 7th
classification valid from October 21, 2011 through October 20, 2021;

3. Trademark of “Recon” of the 9th
classification valid from April 21, 2011 through April 20, 2021; and

4. Trademark of “Recon” of the 42nd
classification valid from September 7, 2011 through September 6, 2021.

We currently own or have applied for the following 27 patents registered with the State Intellectual Property
Office which cover our automated products and heating related equipment for the petroleum industry:

1. Patent of fracturing packer valid until August 5,
2018;

2. Patent of pressure phase transition furnace valid
until August 5, 2018;

3. Patent of vacuum furnace phase transition heater
valid until August 5, 2018;

4. Patent of high pressure natural gas water
heater valid until June 30, 2019;

5. Patent of negative pressure heater valid until
June 30, 2019;

6. Patent of water jacket furnace valid until June
30, 2019;

10

7. Patent of tube heating furnace valid until June
30, 2019;

8. Patent of automatically adjusting negative pressure
burner valid until August 5, 2019;

9. Patent of wireless data instrument diagram valid
until December 10, 2018;

10. Patent of hot water furnace valid until April
8, 2021;

11. Patent of multifunctional heating furnace valid
until April 8, 2021;

12. Patent of efficient gas-liquid separator valid
until August 15, 2021;

13. Patent of efficient oil-gas-water separator
valid until October 24, 2021;

14. Patent of room pressure pipeline heater valid
until October 24, 2021;

15. Patent of pneumatic control system valid until
February 9, 2022;

16. Patent of firebox indirect heating furnace valid
until December 14, 2022;

17. Patent of cylindrical-tubular furnace valid
until December 14, 2022;

18. Patent of horizontal type furnace valid until
December 14, 2022;

19. Patent of vertical type furnace valid until
December 13, 2022;

20. Patent of vacuum furnace valid until December
14, 2022;

21. Patent of wireless pressure sensor valid until
November 11, 2023;

22. Patent of wireless start-end module valid until
November 11, 2023; and

23. Six more patent applications related to technology for wastewater treatment and furnaces have been submitted
and are pending approval.

We have registered the following software
products with the State Intellectual Property Office:

1. Recon automated monitoring system version 1 was published
on July 30, 2011;

2. Recon automated maintenance and production-management system version 1 was published on July 10, 2011;

3. Recon SCADA field monitoring and data acquisition system software version 4 was published on January 28, 2011;

4. Recon flow control computer monitoring system software was registered and published on February 8, 2008;

5. Recon SCADA field monitoring and data acquisition
system software version 2 was published on August 18, 2003, and version 3 was registered and published on April 5, 2008;

6. Recon wireless field monitoring and data acquisition system software version 2 was published on January 8, 2011, and
version 1 was registered and published on September 15, 2010;

7. Recon RCNAMT version 1 was published on April 27,
2012; and

11

8. Recon Process Auto version 1 was published on August 25,
2012.

Environmental Matters

We have not incurred material expenses
in connection with compliance with Chinese environmental laws and regulations. We do not anticipate expending any material amounts
for such compliance purposes for the remainder of our current or succeeding fiscal year.

China’s Intellectual Property Rights Enforcement System

In 1998, China established the State Intellectual
Property Office (“SIPO”) to coordinate China’s intellectual property enforcement efforts. SIPO is responsible
for granting and enforcing patents, as well as coordinating intellectual property rights related to copyrights and trademarks.
Protection of intellectual property in China follows a two-track system. The first track is administrative in nature, whereby a
holder of intellectual property rights files a complaint at a local administrative office. Determining which intellectual property
agency can be confusing, as jurisdiction of intellectual property matters is diffused throughout a number of government agencies
and offices, with each typically responsible for the protection afforded by one statute or one specific area of intellectual property-related
law. The second track is a judicial track, whereby complaints are filed through the Chinese court system. Since 1993, China has
maintained various intellectual property tribunals. The total volume of intellectual property related litigation, however, remains
small.

Although there are differences in intellectual
property rights between the United States and China, of most significance to the Company is the inexperience of China in connection
with the development and protection of intellectual property rights. Similar to the United States, China has chosen to protect
software under copyright law rather than trade secrets, patent or contract law. As such, we will attempt to protect our most significant
intellectual property pursuant to Chinese laws that have only recently been adopted. Unlike the United States, which has lengthy
case law related to the interpretation and applicability of intellectual property law, China has a less developed body of relevant
intellectual property case law.

Regulation on Software Products

On March 1, 2009, the Ministry of
Industry and Information Technology of China issued the Administrative Measures on Software Products, or the Software Measures,
which became effective as of April 10, 2009, to strengthen the regulation of software products and to encourage the development
of the Chinese software industry. Under the Software Measures, a software developer must have all software products imported into
or sold in China tested by a testing organization supervised by the Ministry of Industry and Information Technology. The software
industry authorities in provinces, autonomous regions, municipalities and cities with independent planning are in charge of the
registration, report and management of software products. Software products can be registered for five years, and the registration
is renewable upon expiration. Although some of Nanjing Recon’s current software products were registered in 2008, there can
be no guarantee that the registration will be renewed in 2013 or that the Domestic Companies’ and our future products will
be registered.

Regulation of Intellectual Property Rights

China has adopted legislation governing
intellectual property rights, including trademarks and copyrights. China is a signatory to the main international conventions on
intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon
its accession to the WTO in December 2001.

Copyright. China adopted
its first copyright law in 1990. The National People’s Congress amended the Copyright Law in 2001 to widen the scope of works
and rights that are eligible for copyright protection. The amended Copyright Law extends copyright protection to software products,
among others. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. Unlike
patent and trademark registration, copyrighted works do not require registration for protection. Protection is granted to individuals
from countries belonging to the copyright international conventions or bilateral agreements of which China is a member. Nanjing
Recon has ten copyrights for software programs.

12

Trademark. The Chinese Trademark
Law, adopted in 1982 and revised in 1993 and 2001, protects registered trademarks. The Trademark Office under the Chinese State
Administration for Industry and Commerce handles trademark registrations and grants a term of ten years to registered trademarks.
Trademark license agreements must be filed with the Trademark Office for record. China has a “first-to-register” system
that requires no evidence of prior use or ownership. The Domestic Companies and we have registered a number of product names with
the Trademark Office.

Regulations on Foreign Exchange

Foreign Currency Exchange. Under
the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related
foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated
loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency
loans to our PRC subsidiaries.

SAFE issued the Circular on the Relevant
Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of
Foreign-Invested Enterprises (2008), or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign
currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45
on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB
capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within
the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In
addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital
of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital
may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.

Since SAFE Circular 142 has been in place
for more than five years, SAFE decided to further reform the foreign exchange administration system in order to satisfy and facilitate
the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning
the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises
in Certain Areas on August 4, 2014. This circular suspends the application of SAFE Circular 142 in certain areas and allows a foreign-invested
enterprise registered in such areas with a business scope including “investment” to use the RMB capital converted from
foreign currency registered capital for equity investments within the PRC.

SAFE promulgated Circular 59 in November
2010, which tightens the regulation over settlement of net proceeds from overseas offerings, such as our initial public offering,
and requires, among other things, the authenticity of settlement of net proceeds from offshore offerings to be closely examined
and the net proceeds to be settled in the manner described in the offering documents or otherwise approved by our board. Violations
of these SAFE regulations may result in severe monetary or other penalties, including confiscation of earnings derived from such
violation activities, a fine of up to 30% of the RMB funds converted from the foreign invested funds or in the case of a severe
violation, a fine ranging from 30% to 100% of the RMB funds converted from the foreign-invested funds.

13

In November 2012, SAFE promulgated the Circular
of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends
and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign
exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment
of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested
enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for
the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular
on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors
and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment
by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating
to the direct investment in the PRC based on the registration information provided by SAFE and its branches.

Regulation of Dividend Distribution.
The principal regulations governing the distribution of dividends by foreign holding companies include the Foreign Investment Enterprise
Law (1986), as amended, and the Administrative Rules under the Foreign Investment Enterprise Law (2001).

Under these regulations, foreign investment
enterprises in China may pay dividends only out of their retained profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, foreign investment enterprises in China are required to allocate at least 10% of their
respective retained profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered
capital of the enterprises. These reserves are not distributable as cash dividends.

In July 2014, SAFE promulgated SAFE Circular 37, which replaced the former circular commonly known as “SAFE
Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches
of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment
and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets
or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment
to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease
of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that
a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries
of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out
subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute
additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described
above could result in liability under PRC law for evasion of foreign exchange controls.

Regulations on Foreign Investment
in Automation Service Industry and Oil Exploration and Extraction Industry in PRC. In accordance with the Catalogue
of Industries for Guiding Foreign Investment (Revised 2007), the oil and gas automation service industries are in the catalogue
of permitted industries, and thus there are no restrictions on foreign investment in the oil and gas automation industry. In addition
the following industries are encouraged for foreign investment in China:

• Manufacturing of equipment for oil exploration, drilling,
collection and transportation: floating drilling systems and floating production systems with an operating water depth of more
than 1,500 meters and the supporting subsea oil extraction, collection and transportation equipment

• Exploration
and exploitation of oil and natural gas with venture capital (limited to equity joint ventures and cooperative joint ventures);

• Development
and application of new technologies that increase the recovery ratio of crude oil (limited to equity joint ventures and cooperative
joint ventures);

• Development
and application of new oil exploration and exploitation technologies such as geophysical exploration, drilling, well logging,
and downhole operation, etc. (limited to cooperative joint ventures); and

14

• Exploration
and development of unconventional oil resources such as oil shale, oil sands, heavy oil, and excess oil (limited to cooperative
joint ventures).

Employees

As of June 30, 2016, we had 83 employees,
all of whom were based in China. Of the total, 12 were in management, 37 were in technical support and research and development,
17 were engaged in sales and marketing, 11 were in financial affairs, and 6 were in administration and procurement. We believe
that our relations with our employees are good. We have never had a work stoppage, and our employees are not subject to a collective
bargaining agreement.

Insurance

We do not have any business interruption,
litigation or natural disaster insurance coverage for our operations in China. Insurance companies in China offer limited business
insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the
risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure.
Business or product liability claims or potential regulatory actions could materially and adversely affect our business and financial
condition.

We do, however, pay certain required insurance
amounts in connection with our employees’ wages. The amount and types of insurance we must provide under Chinese and local
requirements vary by the location of each of the Domestic Companies. The following table summarizes the types of insurance paid
for each of the Domestic Companies:

Nanjing Recon

Housing Fund

Pension

Unemployment Insurance

Medical Insurance

Occupational Injury Insurance

Maternity Insurance

BHD

Pension

Unemployment Insurance

Medical Insurance

Occupational Injury Insurance