Annual Report for Fiscal Year Ending June 30, 2026 (Form 20-F)

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis of our company's financial condition and results of operations should be read in conjunction with our 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 have been providing 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") and their affiliates, hereafter referred to as the domestic companies (the "Domestic Companies"), which are established under the laws of the PRC. From 2017, we have been providing service to companies in other power energy industries such as the electronic power industry and the renewable energy industry. As the Company contractually controls the Domestic Companies, we serve as the center of strategic management, financial control and human resources allocation. To this end, our company and our subsidiaries, Recon Investment Ltd. ("Recon-IN"), Recon Hengda Technology (Beijing) Co., Ltd. ("Recon-BJ"), Shandong Recon Renewable Resources Technology Co., Ltd. ("Recon-SD") and Guangxi Recon Renewable Resources Co., Ltd. ("Recon - GX") are contractually engaged with the following PRC VIE companies and their subsidiaries: Beijing BHD Petroleum Technology Co., Ltd. ("BHD"), Future Gas Station (Beijing) Technology, Ltd. ("FGS"), Nanjing Recon Technology Co., Ltd. ("Nanjing Recon"), Gan Su BHD Environmental Technology Co. Ltd. ("Gan Su BHD"), and Huang Hua BHD Petroleum Equipment Manufacturing Co. Ltd. ("HH BHD") (collectively, the "Domestic Companies"), which provide services designed to automate and enhance the extraction of and facilitate the sale of petroleum products. 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 2018, our business has been expanding to the downstream of the energy industry- the civil and industrial heating furnaces market, electric and coal chemical industry and the energy service management industry. As we acquired major equity interest of FGS in year 2021, we also extend our business to fuel market. We derive our revenue 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 wastewater and oily sludge treatment, (4) downhole services, production enhancement, engineering and project services for aforementioned, and (5) platform development services for gas stations and other entities that will provide services under the scenario of refuel.

We entered into the wasted plastic chemical recycling business in year 2023 and established two new wholly-owned subsidiaries, Shandong Recon Renewable Resources Technology Co., Ltd ("Recon-SD") on October 10, 2023, and Guangxi Recon Renewable Resources Co., Ltd. ("Recon-GX") on February 22, 2024 through Recon-IN to serve customers located in different areas.

Recent Developments

On July 1, 2026, the board of directors of the Company approved a 1-for-200 share consolidation of the Company's Class A Ordinary Shares (the "2026 Reverse Stock Split"), pursuant to the authority granted by the Company's shareholders at the annual general meeting held on February 13, 2026 (the "2026 AGM"), which became effective on August 18, 2026 and reflected on the Nasdaq Capital Market as of the open of business on that date.

Pursuant to the At-The-Market Issuance Sales Agreement dated July 28, 2026 with Pacific Century Securities LLC and the Company's effective Form F-3 shelf registration statement (Registration No. 333-292540), as of the date of this report, the Company sold an aggregate of 1,848,443 Class A Ordinary Shares through the sales agent for total gross proceeds of $8,732,665 (calculated on a post 2026 Reverse Stock Split basis). Proceeds from the offering are intended for general corporate purposes, including working capital, operating expenses, capital expenditures, potential acquisitions, business-development activities and other strategic initiatives consistent with the Company's growth plans.

On September 16, 2026, the Company regained compliance with Nasdaq's minimum bid price listing rule. The Company previously received a Nasdaq notice dated May 4, 2026, advising that it failed to maintain the minimum $1.00 bid price requirement. From September 1, 2026 to September 15, 2026, the closing bid price of the Company's Class A ordinary shares was at or above $1.00 for ten consecutive business days.

Recent Industry Developments and Business Outlook

From the second half of 2025 to the first half of 2026, international crude oil market was under the triple pressure of oversupply, weak demand, and fading geopolitical premiums. International oil prices saw their center of gravity shift significantly downward compared with the previous fiscal year, with the annual trading range narrowing and prices stabilizing at lower levels. OPEC+ production cuts were effectively offset by output increases from the Americas, keeping physical supply ample. Geopolitical impacts became less acute, risk premiums returned to neutral, and a strong US dollar continued to weigh on oil prices. On the domestic front, the accelerating substitution of new energy sources squeezed refined oil product consumption. In response, Chinese oil companies adopted strategies of "compensating for price drops with higher volumes, replacing oil with natural gas, and substituting fuels with petrochemicals." Crude output remained resilient, with growth slowing but no substantial production cuts occurring. Despite external uncertainties, the Company's operations during the period remained stable and orderly, reflecting its solid operational foundation, adaptive management capabilities, and continued alignment with national energy strategies. Looking ahead, the Company remains vigilant in navigating market dynamics while focusing on long-term sustainable development.

At the same time, we believe that the demand from oilfield customers for green, low-carbon, digitized and intelligent solutions to improve recovery and production efficiency will continue to rise, in order to ensure a continuous and stable supply of high-quality oil and gas resources to meet market demand.

With plastic waste ballooning into a global environmental crisis, and oil and chemical companies focus more on ESG management, we see increasing opportunities on circular economy and a growing market demand for sustainable and recycled materials, in which products and materials are reused, remanufactured and recycled. Chemical recycling plays an important role in achieving these goals by preserving the value of plastic materials. Beginning in early calendar year 2023, we have been participating in the chemical recycling of low-value plastics and initiated a 40,000-ton-per-year waste plastic chemical recycling project ("Recon Plastic Chemical Recycling Project" or "the Project"). We have signed purchase intentions with some multinational and local chemical companies, and based on these demands, we have started the construction of our plants. As of the end of fiscal year 2026, the main construction work of the plant had been substantially completed. On September 28, 2026, the Company held a commissioning and ignition ceremony for the Recon Plastic Chemical Recycling Project in Weifang, Shandong Province, marking the commencement of the trial production phase. The Company has substantially obtained all approvals, permits and qualifications required for production, and the Company will continue to provide updates on the progress of the commencement of production.

Growth Strategy

As a small company focused on the Chinese market, 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 larger 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 to 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. While consolidating our domestic foundation, we actively expanded our offshore oilfield business this year, successfully extending our service footprint to the international market. This initiative has not only effectively broadened our business boundaries and development potential but also significantly enhanced our resilience against risks associated with reliance on a single market.

Currently, as more markets in China's energy industry are open to non-state-owned companies, we are also seeking for opportunities in other markets. We believe our experience and deep knowledge of the energy industry, especially in oil and gas, will always be the long-term foundation for the company's growth. By tapping into technological advances in recent years, such as solar energy and the Smart Industry and Industrial Internet, which is bringing about a fundamental change in the way factories and workplaces function by making them safer, more efficient, more flexible and more environmentally friendly. We expect to create more profitable business lines.

Also, to diversify our revenue stream and lower the risk of concentration, we will continue to seek new opportunities in other industries by leveraging our knowledge of intelligent equipment and the "internet of things" (IoT), which is a crucial component of the Smart Industry and Industrial Internet.

We also see threatens from climate changes and opportunities from sustainable investments. We have also begun to engage in green, low-carbon and recyclable resource businesses to secure our long-term growth.

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 2026 which are reasonably likely to have a material effect on our net revenue, income from operations, profitability, liquidity or capital resources, or would cause the disclosed financial information to be not necessarily indicative of future operating results or financial condition.

Factors Affecting Our Results of Operations

Major 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 consolidated financial statements in conformity with 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 revenue and expenses during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. On an ongoing basis, management reviews these estimates and assumptions using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates. In accordance with ASC 250, the changes in estimates will be recognized in the same period of changes in facts and circumstances. The Company bases its estimates on past experiences and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Significant accounting estimates reflected in the Company's consolidated financial statements include allowance for credit losses related to 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, goodwill and investment in unconsolidated entity, the discount rate for lease and investment, valuation of the convertible notes, price purchase allocation for business combination and the fair value of share-based payments. 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 credit losses 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 planned 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 U.S. 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.

Accounting guidance also describes three main approaches to measure the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

The carrying amounts reported in the consolidated balance sheets for short-term investments, accounts receivable, notes receivable, other receivables, purchase advances, contract cost, accounts payable, other payable, accrued liabilities, contract liabilities, short-term bank loans and short-term borrowings - related parties approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts of the long-term borrowings is estimated using discounted cash flow models, which discount future principal and interest payments at current market interest rates for similar debt instruments with comparable credit risk and maturities. The carrying amount may approximate fair value only if the stated interest rates are consistent with prevailing market rates at the reporting date. The fair value of loans to third parties is estimated by discounting expected future cash flows at current market rates applicable to instruments with similar credit profiles and terms. The carrying amount, which is measured at amortized cost less any allowance for credit losses, may differ from fair value if market interest rates or credit conditions have changed significantly since origination.

Investment in Unconsolidated Entity

The Company's investments in unconsolidated entities are equity interests over which the Company has no control, joint control, or significant influence (the "Investments"). Pursuant to US GAAP (ASC 321 and ASC 323), the accounting treatment is determined by the Company's influence over investees and the availability of readily determinable fair values.

For investments where the Company holds less than 20% of voting equity interests and has concluded it lacks significant influence, the Investments are accounted for under ASC 321-10-35-2's measurement alternative. The measurement alternative applies because the Investments' fair values are not readily determinable (no active/comparable market, and reliable estimates are impracticable). Initially measured at cost, subsequent carrying amounts are adjusted for impairments, observable price changes in orderly transactions for the same/similar securities, and cash dividends.

The Company evaluates impairments annually. A qualitative assessment identifies impairment indicators; if present, fair value is estimated under ASC 820 using appropriate valuation techniques (e.g., DCF, comparable transactions) with relevant inputs. Pursuant to ASC 321-10-50-3, the Investments' carrying amounts, impairments, cumulative price adjustments, and explanatory information are disclosed in the Note 12.

Revenue Recognition

Revenue Recognition - In accordance with 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 core principle underlying the new revenue recognition Accounting Standards Update ("ASU") is that the Company recognizes 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. The Company identifies contractual performance obligations and determines whether revenue should be recognized at a point in time or over time, based on when goods or services are provided to a customer.

Payment terms and conditions vary according to the type of contract, although the Company generally requires customers to pay within one year of the satisfaction of performance obligations. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the contracts do not include a significant financing component. The Company assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent.

Disaggregation of Revenue

Revenue are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The following items represent the Company's revenue disaggregated by revenue source. In accordance with ASC 606-10-50-5, the Company selects categories to present disaggregated revenue that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors and delivery conditions of products and fulfillment of obligations.

The Company's disaggregation of revenue for the years ended June 30, 2024, 2025 and 2026 is disclosed in Note 30.

Automation Products and Software; Equipment, Accessories and Others

The Company generates revenue primarily through delivery of standard or customized products and equipment, including automation products, furnaces and related accessories. Revenue is recognized when products are delivered, and acceptance reports are signed off by customers.

The sale of automation products or specialized equipment when combined with services represent a single performance obligation for the development and construction of a single asset. The Company may also provide design or installation services to clients as there may be such obligation in contracts. The promises to transfer the goods and provision of services are not separately identifiable, which is evidenced by the fact that the Company provides significant services of integrating the goods and services into a single deliverable for which the customer has contracted. For such sales arrangements, the Company recognizes revenue using input method, based on the relationship between actual costs incurred compared to the total estimated costs for the contract. Such method is adopted because the Company believes it best depicts the transfer of goods and services to the customer.

Oilfield Environmental Protection Service

The Company provides wastewater treatment products and related service to oilfield and chemical industry companies and generates revenue from special equipment, self-developed chemical products and supporting service, transfer. Revenue is recognized when contract obligations have been performed. For such sales arrangements, the Company recognizes revenue when products are delivered, on-site assistance services rendered, and acceptance reports are signed off by customers. Such method is adopted because the Company believes it best depicts the transfer of services to the customer.

The Company provides oily sludge disposal and treatment services to oilfield companies and generates revenue from treatment services of oily sludge. Revenue is recognized when contract obligations have been performed. For such sales arrangements, the Company recognizes revenue using output method, based on the percentage-of-completion method. Such method is adopted because the Company believes it best depicts the transfer of services to the customer.

Platform Outsourcing Services

The Company provides online platform development and maintenance services to gas stations in various provinces in China. The Company believes that customers receive and consume the economic benefits simultaneously as the Company fulfills its performance obligations and that the operation and maintenance services are continuous in nature, with customers receiving ongoing benefits throughout the service period. The Company invoices customers at the end of each month based on fixed service fees and classifies this portion of revenue as revenue recognized over time.

The Company also provides API (application programming interface) port export services and related maintenance services to business partners in various industries that may have transactions in the fueling scenario. As the Company does not create or enhance assets controlled by its customers during the provision of its services and its customers do not simultaneously receive and consume services, the Company recognizes revenue at a single point in time when the online transaction is completed. The Company's services enable terminal users of various mobile applications operated by its customers or partners to complete refueling transactions in cash or online through various payment channels; when each transaction, including refueling and payment, is completed, the Company is entitled to charge, at pre-set rates, each transaction amount as a service fee and recognize the underlying amount as revenue. Related fees are generally billed monthly on a per-transaction basis.

Arrangements with Multiple Performance Obligations

Contracts with customers may include multiple performance obligations. For such arrangements, the Company will allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost-plus margin.

Contract Balances

The Company's contract balances include contract costs, net and contract liabilities from contracts with customers, and the following table provides information about contract balances:

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Contract Costs, Net - 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; and (iii) the costs are expected to be recovered.

Contract Liabilities - Contract liabilities are recognized for contracts where payment has been received in advance of performance under the contract. The Company's contract liabilities consist primarily of the Company's unsatisfied performance obligations as of the balance sheet dates. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met. The amount of revenue recognized during the years ended June 30, 2024, 2025 and 2026 that was previously included within contract liability balances was ¥1,489,311, ¥761,824 and ¥3,634,649 ($535,681), respectively.

Performance Obligations

Performance obligations include delivery of products and provision of services. 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, and revenue for provision of services is recognized upon the service rendered. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods and providing services.

Amounts billed to customers for shipping and handling activities to fulfill the Company's promise to transfer the goods are included in revenue, and costs incurred by the Company for the delivery of goods are classified as cost of sales in the consolidated statements of operations and comprehensive income (loss). Sales, value added, 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 June 30, 2026.

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 and not significant.

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 majorly less than one year in length, consideration will not be adjusted. For the Company's contracts include a standard payment term of 90 days to 180 days; consequently, there is no significant financing component within contracts. There are also some new contracts that will not be completed within one year from year 2025, the Company did calculation and the amount was not material as of June 30, 2026.

Accounts Receivable, Net, Other Receivables, Net and Loans to Third Parties

Accounts receivables are carried at original invoiced amount less a provision for any potential uncollectible amounts. In July 2020, the Company adopted ASU 2016 13, Topics 326 Credit Loss, Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology, as its accounting standard for its accounts receivable and other receivables. Other receivables and loan to third parties arise from transactions with non-trade customers.

Accounts receivable, other receivables and loan to third parties are recognized and carried at carrying amount less an allowance for credit loss, if any. The Company maintains an allowance for credit losses resulting from the inability of its trade and non-trade customers ("customers") to make required payments based on contractual terms. The Company reviews the collectability of its receivables on a regular and ongoing basis. The Company has also included in calculation of allowance for credit losses. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also considers external factors to the specific customer, including current conditions and forecasts of economic conditions. In the event the Company recovers amounts previously reserved for, the Company will reduce the specific allowance for credit losses.

The Company evaluates the creditworthiness of all of its customers individually before accepting them and continuously monitors the recoverability of accounts receivable, other receivables and loan to third parties. If there are any indicators that a customer may not make payment, the Company may consider making provision for non-collectability for that particular customer. At the same time, the Company may cease further sales or services to such customer. The following are some of the factors that the Company considers in determining whether to discontinue sales, record as contra revenue or allowance for credit losses:

The Company considers the following factors when determining whether to permit a longer payment period or provide other concessions to 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 valuation model estimated at the grant date based on the award's fair value.

Warrants

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant's specific terms and applicable authoritative guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 480, Distinguishing Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging ("ASC 815"). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company's own Class A Ordinary Shares and whether the warrant holders could potentially require "net cash settlement" in a circumstance outside of the Company's control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the consolidated statements of operations.

Results of Operations

The following consolidated results of operations include the results of operations of the Company and the Domestic Companies.

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

Year Ended June 30, 2026 Compared to Year Ended June 30, 2025

Revenue

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Our total revenue for the year ended June 30, 2026 were approximately ¥109.9 million ($16.2 million), an increase of approximately ¥43.6 million ($6.4 million) or 65.8% from ¥66.3 million for the same period in 2025.

Cost of revenue

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Our total cost of revenue increased from ¥51.0 million for the year ended June 30, 2025 to ¥73.4 million ($10.8 million) for the same period in 2026.

For the years ended June 30, 2025 and 2026, cost of revenue from automation product and software was approximately ¥28.6 million and ¥47.2 million ($7.0 million), respectively, representing an increase of approximately ¥18.6 million ($2.7 million) or 65.0%. The increase in cost of revenue from automation product and software was primarily attributable to increased revenue of automation products and software.

For the years ended June 30, 2025 and 2026, cost of revenue from equipment and accessories was approximately ¥13.2 million and ¥20.4 million ($3.0 million), respectively, representing an increase of approximately ¥7.2 million ($1.1 million) or 54.7%. The increase in costs of revenue was primarily driven by expanded business activity, mirroring the same factor behind the growth in revenue.

For the years ended June 30, 2025 and 2026, cost of revenue from oilfield environmental protection was approximately ¥8.5 million and ¥5.7 million ($0.8 million), respectively, representing a decrease of approximately ¥2.8 million ($0.4 million) or 33.1%. While actively pursuing new business opportunities in a constrained market, the Company undertook testing projects. Given their high uncertainty, equipment costs for these projects were fully expensed upon purchase in the prior period, resulting in lower costs in the current period compared to the prior period.

For the years ended June 30, 2025 and 2026, cost of revenue from platform outsourcing services was approximately ¥0.6 million and ¥nil, respectively, representing a decrease of approximately ¥0.6 million ($0.1 million) or 100.0%. The reason for the decrease is consistent with that of the revenue decline.

Gross Profit

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Our total gross profit increased to ¥36.5 million ($5.4 million) for the year ended June 30, 2026 from ¥15.2 million for the same period in 2025. Our gross profit as a percentage of revenue increased to 33.2% for the year ended June 30, 2026 from 23.0% for the same period in 2025.

For the years ended June 30, 2025 and 2026, our gross profit from automation product and software was approximately ¥5.5 million and ¥22.5 million ($3.3 million), respectively, representing an increase in gross profit of approximately ¥17.0 million ($2.5 million) or 310.4%. The gross margin expansion to 32.3% was primarily driven by the higher-margin overseas oilfield projects, which contributed ¥44.2 million of revenue, representing approximately 63% of automation segment revenue for fiscal 2026. Excluding the overseas projects, our domestic automation gross margin remained relatively stable.

For the years ended June 30, 2025 and 2026, gross profit from equipment and accessories was approximately ¥5.2 million and ¥7.4 million ($1.1 million), respectively, representing an increase of approximately ¥2.2 million ($0.3 million) or 42.4%. The increase in gross profit was consistent with the change in revenue. The gross margin for equipment and accessories has remained relatively stable in this period.

For the years ended June 30, 2025 and 2026, gross profit from oilfield environmental protection was approximately ¥1.7 million and ¥6.6 million ($1.0 million), respectively, representing an increase of ¥4.9 million ($0.7 million) or 277.0%. The lower gross profit in fiscal 2025 was mainly due to testing projects, where the related equipment used for these projects was fully expensed as it was consumed during execution, when we were not sure that revenue from these projects could be recognized. The increase in gross margin from 16.9% to 53.4% was mainly attributable to the absence, in fiscal 2026, of the one-time testing project costs that were fully expensed as incurred in fiscal 2025, when revenue recognition for those testing projects remained uncertain. Excluding the impact of such one-time testing costs, the normalized gross margin for fiscal 2025 would have been higher, and the fiscal 2026 margin of 53.4% reflects a normal standard in settlement prices for certain wastewater treatment clients together with a more favorable project mix.

For the years ended June 30, 2025 and 2026, gross profit from platform outsourcing services was approximately ¥2.8 million and ¥nil, respectively, representing a decrease of approximately ¥2.8 million ($0.4 million) or 100.0%. The decrease in gross profit was consistent with the change in revenue.

Operating Expenses

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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. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statement of operations. Selling expenses decreased by 43.6%, or ¥4.1 million ($0.6 million), from ¥9.3 million in the year ended June 30, 2025 to ¥5.2 million ($0.8 million) in the same period of 2026. The decrease was primarily attributable to reduced payroll expenses and entertainment expenses, as well as travel costs, due to a more concentrated client base in fiscal year 2026 and travel expenses related to overseas oilfield operations are borne by clients. Selling expenses accounted for 4.8% of total revenue for the year ended June 30, 2026, compared to 14.1% of total revenue for the same period in 2025.

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 11.8%, or ¥5.8 million ($0.9 million), from ¥49.6 million in the year ended June 30, 2025 to ¥55.4 million ($8.2 million) in the same period of 2026. The increase was primarily due to higher severance compensation for FGS employees and the expensing of deferred financing costs during the year ended June 30, 2026. General and administrative expenses accounted for 50.5% of total revenue for the year ended June 30, 2026 and 74.9% of total revenue for the same period of 2025.

Allowance for (net recovery of) credit losses. Allowance for credit losses is the estimated amount of bad debt that will arise as a result of lower collectability from account receivables, other receivables, purchase advances, loans to third parties and contract assets. We recorded net recovery of credit losses of ¥2.9 million for the year ended June 30, 2025 as compared to net provision for credit losses of ¥4.1 million ($0.6 million) for the same period in 2026. The increase of net provision for credit losses was mainly due to the extended aging profile of receivables from certain customers, which led to allowance for credit losses, and the Company's decision, on a prudent basis, to recognize a full allowance for credit losses against a loan to third party. Management plans to continue to monitor and maintain the provision at a lower risk level.

Research and development ("R&D") expenses. R&D expenses consist primarily of salaries and related expenditures for research and development projects. R&D expenses decreased by 21.7%, or ¥3.6 million ($0.5 million) from ¥16.4 million for the year ended June 30, 2025 to ¥12.9 million ($1.9 million) for the same period of 2026. R&D expenses accounted for 11.7% of total revenue in the year ended June 30, 2026 and 24.8% of total revenue for the same period of 2025. The decrease is primarily attributable to a reduction in the number of R&D projects initiated, and the fact that newly launched projects have not yet entered the phase of substantial investment.

Net Loss

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Loss from operations. Loss from operations was ¥41.2 million ($6.1 million) for the year ended June 30, 2026, compared to a loss of ¥57.3 million for the same period of 2025. This ¥16.1 million ($2.4 million) decrease in operating losses was mainly driven by higher gross profit, as previously discussed.

Change in fair value of warrant liability. The Company classified the warrants issued in connection with common share offering as liabilities at their fair value and adjusted the warrant instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statement of operations. Gain in change in fair value of warrant liability was ¥6,226 and ¥671 ($99) for the years ended June 30, 2025 and 2026, respectively. The primary reason for the decrease in the fair value gain of the warrant liability was the change in the fair value assessment price.

Interest income, net. Net interest income was ¥10.9 million ($1.6 million) for the year ended June 30, 2026, compared to net interest income of ¥12.3 million for the same period of 2025. The ¥1.4 million ($0.2 million) decrease in net interest income was primarily attributable to the Company's receipt of partial repayments of loans to third parties, partially offset by interest income from outstanding loans to third parties, during the year ended June 30, 2026.

Other income (expenses), net. Other net expenses was ¥1.3 million ($0.2 million) for the year ended June 30, 2026, compared to other net income of ¥1.3 million for the same period of 2025. The ¥2.6 million ($0.4 million) decrease other net income was primarily due to the closure of Qinghai BHD and the disposal of 51% equity interest in MSJ, which together resulted in a total loss on equity shares investments of ¥1.1 million. Additionally, following the closure of the Qinghai office, ¥0.6 million in payables that could no longer be settled was recognized as income, ¥0.2 million in receivables that could not be collected was written off as a loss and an increase in foreign exchange transaction expenses of ¥1.0 million due to the fluctuation of exchange rate of RMB against US dollars during the year ended June 30, 2026 compared to the same period of 2025.

Net loss. As a result of the factors described above, net loss was ¥31.6 million ($4.7 million) for the year ended June 30, 2026, a decrease of ¥12.1 million ($1.8 million) from net loss of ¥43.7 million for the same period of 2025.

Liquidity and Capital Resources

As of June 30, 2026, we had cash in the amount of approximately ¥29.7 million ($4.4 million) and short-term investment in bank fixed income product of approximately ¥9.0 million ($1.3 million). As of June 30, 2025, we had cash in the amount of approximately ¥98.9 million and short-term investment in bank fixed income product of approximately ¥3.6 million ($0.5 million).

Indebtedness. As of June 30, 2026, we had ¥11.3 million ($1.7 million) of short-term bank loans, ¥20.0 million ($3.0 million) of short-term borrowings from related parties, ¥1.2 million ($0.2 million) of short-term lease payable due to third parties, ¥1.7 million ($0.2 million) of short-term lease payable due to related parties, ¥2.3 million ($0.3 million) of long-term lease payable to third parties, ¥1.0 million ($0.2 million) of long-term lease payable to related parties, ¥30.6 million ($4.5 million) of contractual purchase commitments, and a liability of severance payments of ¥8.3 million ($1.2 million) which is very unlikely to be incurred in the foreseeable future. Other than indebtedness listed above, we did not have any other finance leases, 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 the 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 the Domestic Companies only out of their respective accumulated net profits, if any, determined in accordance with Chinese accounting standards and regulations. Under Chinese law, the 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 the 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 primarily financed our operations primarily through cash on hand, which was raised through previous offerings and cash provided by investing activities. As of June 30, 2026, we had total assets of ¥639.4 million ($94.2 million), which includes cash of ¥29.7 million ($4.4 million), short-term investments of ¥9.0 million ($1.3 million), accounts receivable, net of ¥46.1 million ($6.8 million), loans to third parties of ¥330.0 million ($48.6 million) and net contract costs of ¥25.1 million ($3.7 million) and working capital of ¥145.2 million ($21.4 million). Shareholders' equity amounted to ¥566.3 million ($83.5 million).

Loans to Third Parties. As of June 30, 2026, our loans to third parties amounted to ¥330.0 million ($48.6 million), representing approximately 52% of our total assets, and consisted of ¥46.4 million ($6.8 million) of short-term loans and ¥283.7 million ($41.8 million) of long-term loans. These loans are extended primarily to support our external business partners and to earn interest income. While we periodically review the collectability of these loans and believe, based on our evaluation of the creditworthiness of the relevant debtors and our relationships with them, that the associated risk is relatively low, a substantial portion of our assets is concentrated in loans to a limited number of third parties, which exposes us to a significant concentration of credit risk. In October 2025 and June 2026, we entered into several special-purpose agreements to provide aggregate loans of ¥262.0 million to three domestic companies to facilitate our participation in industrial park projects; these loans bear interest at 4.5% and 4.2% per annum, each with a 20-year term, and the recoverability of the loans is dependent upon the successful implementation and performance of the underlying projects. As of the date of this report, our long-term third-party loans were covered by collateral with an aggregate fair value of approximately ¥800.0 million ($117.9 million); however, the realizable value of such collateral, and the timing and amount of any repayment, remain subject to the financial condition of the relevant debtors, the performance of the underlying projects and prevailing market conditions, and there can be no assurance that these loans will be repaid in full or on a timely basis. Any failure by the borrowers to repay these loans, or any material impairment in the carrying value of these loans, could have a material adverse effect on our financial condition, results of operations and liquidity.

Cash from Operating Activities. Net cash used in operating activities was ¥58.8 million ($8.7 million) for the year ended June 30, 2026. This was an increase of approximately ¥25.0 million ($3.7 million) compared to net cash used in operating activities of approximately ¥33.8 million for the same period in 2025. The net cash used in operating activities for the year ended June 30, 2026 was primarily attributable to the net loss in the amount of ¥31.6 million ($4.7 million) due to the reasons discussed above, reconciled by an increase in accounts receivable of ¥12.1 million ($1.8 million), and a decrease in purchase advances of ¥43.5 million ($6.4 million), a decrease in contract costs of ¥29.7 million ($4.4 million), an increase in trade accounts payable of ¥4.2 million ($0.6 million) (excluding construction-related payables).

Cash from Investing Activities. Net cash used in investing activities was approximately ¥128.9 million ($19.0 million) for the year ended June 30, 2026. This was an increase of approximately ¥162.6 million ($24.0 million) compared to net cash provided by investing activities of approximately ¥33.7 million for the same period in 2025, which was due to a decrease of ¥83.7 million in net cash inflows related to redemption of short-term investments, a ¥43.7 million increase in expenditures on construction in progress, and a ¥25.7 million increase in net cash outflows from payments made for loans to third parties.

Cash from Financing Activities. Net cash provided by financing activities amounted to ¥119.7 million ($17.6 million) for the year ended June 30, 2026, as compared to net used in financing activities of ¥3.3 million for the same period in 2025. The increase in net cash from financing activities was mainly due to proceeds from sale of common stock, net of issuance costs.

Working Capital. Total working capital as of June 30, 2026 amounted to ¥145.2 million ($21.4 million), compared to ¥295.6 million as of June 30, 2025. Total current assets as of June 30, 2026 amounted to ¥229.0 million ($33.7 million), a decrease of ¥127.2 million ($18.7 million) compared to approximately ¥356.2 million at June 30, 2025. The decrease in total current assets at June 30, 2026 compared to June 30, 2025 was mainly due to a decrease in cash and loans to third parties-short term, partially offset by an increase in purchase advances. For the year ended June 30, 2026, the Company had approximately ¥58.8 million ($8.7 million) cash out flow from the operating activities, and as of June 30, 2026, our total future minimum purchase commitment under the non-cancellable purchase contracts were amounted to ¥30.6 million ($4.5 million). As of June 30, 2026, the Company had cash in the amount of approximately ¥29.7 million ($4.4 million) for the next operating cycle ending June 30, 2027. Based on the historical trends and the capital requirements of the new plant we are building, management believes that the Company will have sufficient working capital for its operations at least 12 months from the issuance date of this report.

Current liabilities. Current liabilities amounted to ¥83.7 million ($12.3 million) at June 30, 2026, in comparison to ¥60.6 million at June 30, 2025.

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.

Tabular Disclosure of Contractual Obligations

Below is a table setting forth all our contractual obligations as of June 30, 2026, which consists of our short-term loan agreements, operating lease obligations and due to related party:

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