10-Q/A 1 sancon_10q-063008.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Amendment No. 1 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2008 ------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ___ to _______ Commission file number 000-50760 --------- Sancon Resources Recovery, Inc. (Exact name of small business issuer as specified in its charter) Nevada 58-2670972 (State or other jurisdiction of (IRS Employee incorporation or organization) Identification No.) 1507 Greenland Commercial Centre 1258 Yuyuan Road, Shanghai, China 200050 (Address of principal executive offices) (+61) 3 97922555 (Issuer's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock: par value of $0.001; 21,714,996 shares issued and outstanding on June 30, 2008. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] Sancon Resources Recovery, Inc. FORM 10-Q INDEX PAGE Important Notice...................................................2 2 PART I. FINANCIAL INFORMATION..............................................3 Item 1. Financial Statements (Unaudited)..................................3 Item 2. Management's Discussion and Analysis or Plan of Operation..........10 Item 3. Controls and Procedures............................................16 PART II. OTHER INFORMATION..................................................17 Item 1. Legal Proceedings..................................................17 Item 2. Changes in Securities and Use of Proceeds.........................17 Item 3. Default Upon Senior Securities.....................................17 Item 4. Submission of Matters to a Vote of Security Holders................17 Item 5. Other Information..................................................17 Item 6. Exhibits...........................................................18 Signatures.........................................................19 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the risk of doing business in the People' Republic of China, or PRC, our ability to implement our strategic initiatives, our access to sufficient capital, the effective integration of our subsidiaries in the PRC into a U.S. public company structure, economic, political and market conditions and fluctuations, government and industry regulation, Chinese and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) SANCON RESOURCES RECOVERY, INC. CONSOLIDATED BALANCE SHEETS June 30, 2008 December 31, 2007 (Unaudited) (Audited) ------------ ------------ Assets Current assets Cash and cash equivalents $ 1,448,387 $ 250,470 Trade receivables 287,029 628,616 Advance to suppliers 2,693 - Inventory 35,584 3,763 Prepaid expenses 317,334 81,467 Due from related parties 127,096 73,285 ------------ ------------ Total current assets 2,218,123 1,037,601 Property, plant & equipment, net 603,358 540,691 Security deposit 10,566 9,644 ------------ ------------ Total Assets $ 2,832,047 $ 1,587,936 ============ ============ Liabilities & Stockholders' Equity/ (Deficit) Liabilities Current liabilities Trade payables $ 228,704 $ 402,961 Capital lease -current 11,631 10,206 Accrued expenses 116,464 144,309 Shares to be issued 52,500 350,000 Due to related parties 382,906 327,122 Tax payables 296,796 187,019 Other payables 119,338 105,573 ------------ ------------ Total current liability 1,208,339 1,527,190 Long term liability Capital lease 47,129 48,119 ------------ ------------ Total liability 1,255,468 1,575,309 ------------ ------------ Minority Interest 305,210 153,220 Stockholders' Equity/(Deficit) Share Capital Authorized: 500,000,000 common shares, par value $0.001 per share Issued and Outstanding: 21,714,996 shares and 20,414,996 respectively 21,715 20,415 Additional paid-in capital 509,199 115,499 Deferred compensation (22,500) - Other comprehensive income 56,499 8,051 Accumulated profit/(deficit) 706,456 (284,558) ------------ ------------ Total stockholders' equity/ (deficit) 1,271,369 (140,593) ------------ ------------ Total liabilities & stockholders' equity/ (deficit) $ 2,832,047 $ 1,587,936 ============ ============ The accompanying notes form an integral part of these unaudited financial statements. SANCON RESOURCES RECOVERY, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended June 30, Six months ended June 30, 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Net Sales $ 2,940,268 $ 838,658 $ 5,889,264 $ 1,531,706 Cost of sales 1,581,542 687,689 3,017,428 1,220,064 ------------ ------------ ------------ ------------ Gross profit 1,358,726 150,969 2,871,836 311,642 Operating Expenses Depreciation 40,585 21,343 78,206 35,659 Selling, General and Administrative 817,037 201,550 1,498,349 516,181 ------------ ------------ ------------ ------------ Total operating expenses 857,622 222,893 1,576,555 551,840 ------------ ------------ ------------ ------------ Operating Income (Loss) 501,104 (71,924) 1,295,281 (240,198) Other Income (Expense) Other Income (Expenses) (151,286) 318 (952) 11,069 Interest Income 12,925 1,018 15,379 1,910 ------------ ------------ ------------ ------------ Total Other Income (expense) (138,361) 1,336 14,427 12,979 ------------ ------------ ------------ ------------ Income/(loss) from Continued Operations before Minority Interest and Income Taxes 362,743 (70,588) 1,309,708 (227,219) Minority Interest (68,739) - (151,990) - ------------ ------------ ------------ ------------ Income/(loss) from Continued Operations before Income Taxes 294,004 (70,588) 1,157,718 (227,219) Income Taxes 75,545 2,022 168,569 3,173 ------------ ------------ ------------ ------------ Net Income (Loss) from Continued Operations $ 218,459 $ (72,610) $ 989,149 $ (230,392) Discontinued Operation Gain/ (loss) from Discontinued Operations - 11,456 (1,955) 11,970 Gain on Disposal of Discontinued Operations - - 3,820 - ------------ ------------ ------------ ------------ Total Gain on Disposal of Discontinued Operations - 11,456 1,865 11,970 ------------ ------------ ------------ ------------ Net income (loss) 218,459 (61,154) 991,014 (218,422) Other comprehensive income/(loss) 20,142 (3,670) 42,465 (4,462) ------------ ------------ ------------ ------------ Net Comprehensive income/(loss) $ 238,601 $ (64,824) $ 1,033,479 $ (222,884) ============ ============ ============ ============ Earnings per share Basic & diluted earnings/(loss) per share $ 0.01 $ (0.00) $ 0.05 $ (0.01) Basic & diluted weighted average shares outstanding 21,714,996 20,414,996 21,219,146 20,383,403 ============ ============ ============ ============ The accompanying notes is an integral of these unaudited financial statements. SANCON RESOURCES RECOVERY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the six months periods ended June 30, 2008 2007 ------------ ------------ Cash Flows from Operating Activities Net income (loss) $ 991,014 $ (218,422) Adjustments to reconcile net income (loss) to net cash flows Provided by (used in) operating activities: Depreciation and amortization 78,206 35,659 Shares issued in lieu of compensation 22,500 88,500 Minority interest 151,990 - Changes in current assets and liabilities: Decrease (increase) in trade receivables 341,595 323,230 Decrease (increase) in inventory (31,821) (137,492) Decrease (increase) in advance to suppliers (2,693) (247,678) Decrease (increase) in other current assets (236,789) 49,407 Increase (decrease) in stock based compensation 52,500 - Increase (decrease) in tax payable 109,777 1,046 Increase (decrease) in trade payable (174,257) 141,921 Increase (decrease) in other current liabilities (113,862) (65,769) ------------ ------------ Net cash provided by (used in) continued operations 1,188,160 (29,598) Net cash provided by (used in) discontinued operations (1,865) - ------------ ------------ Net cash flows provided by (used in) operating activities 1,186,295 (29,598) Cash Flows from Investing Activities Purchase of property and equipment (140,873) (25,674) Cash decreased due to investment in convertible notes - (200,000) ------------ ------------ Net cash flows used in investing activities (140,873) (225,674) Cash Flows from Financing Activities Cash acquired due to subscription - 240,000 Loan from related parties 109,595 (59,282) Proceeds from (payment of) mortgage loan 435 34,675 ------------ ------------ Net cash flows (provided by) used in financing activities 110,030 215,393 ------------ ------------ Effect of exchange rate changes on cash 42,465 (4,462) ------------ ------------ Net Increase (decrease )in Cash & Cash Equivalents 1,197,917 (44,341) Cash & Cash Equivalents at start of period 250,470 63,600 ------------ ------------ Cash & Cash Equivalents at end of period $ 1,448,387 $ 19,259 ============ ============ Interest paid $ 12,366 $ 1,865 Income taxes paid $ - $ - The accompanying notes form an integral part of these unaudited financial statements.
Sancon Resources Recovery, Inc. CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the period ended June 30, 2008 (Unaudited) Note 1. Nature of Operations Sancon Resources Recovery, Inc. ("Sancon", or "the Company", or "we", or "us") is registered in good standing under Chapter 78 of the Nevada Statutes, and its common stock is traded on the OTCBB under the symbol SRRY.OB. Sancon Resources Recovery, Inc. is an environmental service and waste management company that operates recycling facilities in China and Australia. Sancon specializes in the collection and recovery of industrial and commercial solid wastes such as plastic, paper, cardboard, and glass. The recycled materials are re-used by Sancon's manufacturing customers in China to make a wide variety of new products including outdoor furniture, construction materials, building materials, road surface, and various new products. Sancon's China operation is licensed by the Chinese government for waste management services, and is certified with ISO 9001 and ISO 14001 standards. Sancon aims to provide solutions to today's soaring raw material cost for manufactures and assists in solving our environmental problems. On August 15, 2007, the Company completed the acquisition of 70% of the equity interest in Sancon Resources Recovery (Shanghai) Co., Ltd by exercising its option to convert $200,000 of convertible promissory note On November 17, 2006 , the company completed the acquisition of 100% equity interest in Crossover Solutions Inc ("Crossover" or "CS") from Fintel Group by paying $1 for the transfer of one share of Crossover Solutions Inc. being the total number of outstanding share of Crossover. Crossover did not have any operations or assets/liability prior to 2008. Therefore, no proforma information has been presented. Since its acquisition, Crossover solution Inc has begin the operation of providing services for management and granulation of waste materials for its clients located in China. On March 31, 2008, the company sold 100% equity interest of Digital Financial Service Limited ("DFSL") for $7.8 plus the assumption of certain liabilities, due to its continuing losses, resulting in gain of $1,865 on disposal of the entity. As of June 30, 2008, the Sancon group comprises of the following companies:
% Registered Name Domicile Owner held Status (business is conducted under the registered names) Sancon Recycling Pty Ltd. Australia Sancon 100 Active Guang Cheng Int'l Trading Ltd. ("Guang Cheng" hereinafter) Hong Kong Sancon 100 Active Sancon Resources Recovery (Shanghai) Co., Ltd. ("Sancon SH" hereinafter) Shanghai Sancon 70 Active Crossover Solutions Inc. ("CS" hereinafter) British Virgin Island Sancon 100 Active
Effective May 26, 2006, a business combination occurred between Sancon Recycling Pty Ltd. ("SRPL") and the Company. The combination was effected an exchange of shares, the Company exchanged its seventy-five percent (75%) equity stake in MK Aviation, S.A. (hereinafter referred to as "MKA") with one hundred percent (100%) equity stake in SRPL held by Mr. Jack Chen, Mr. Yiu Lo Chung and Mr. Guy Waters, ("the Shareholders"). Meanwhile, the Shareholders exchanged its seventy-five percent (75%) equity stake in MK Aviation, S.A. with 14,897,215 shares of the Registrant's common stock from Mr. Kraselnick and associated parties. All references to common stock, share and per share amounts have been retroactively restated to reflect the exchange of 100 shares of SRPL common stock for 14,897,215 shares of the Sancon's common stock outstanding immediately prior to the merger as if the exchange had taken place as of the beginning of the earliest period presented. Effective August 4, 2006, the listed company, MKA Capital Inc., changed its name to Sancon Resources Recovery, Inc. 4 Note 2. Basis of Presentation (a) Interim Consolidated Financial Statements The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America. However, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted or condensed, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of Sancon management, all adjustments of a normal recurring nature necessary for a fair presentation have been included. The results for periods are not necessarily indicative of results for the entire year. These financial statements and accompanying notes should be read in conjunction with our annual financial statements and the notes thereto for the year ended December 31, 2007, included in our Annual Report on Form 10KSB, filed with the Securities and Exchange Commission. (b) Principles of Consolidation The accompanying unaudited consolidated financial statements include all of the accounts of the Company and all of the subsidiaries under its control, which include Sancon Recycling Pty Ltd., Guang Cheng, Sancon SH (70%) and CS as of and for the period ended June 30, 2008. While the historical results for the six months period ended June 30, 2007 only include the Company, Sancon Recycling Pty Ltd., DFSL and Guang Cheng. All material inter-company balances and transactions have been eliminated in consolidation. Note 3. Summary of Significant Accounting Policies USE OF ESTIMATES These financial statements are prepared in accordance with accounting principles accepted generally in the USA. These principles require management to use its best judgment in determining estimates and assumptions that: affect the reported amounts of assets and liabilities; disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate of the ultimate outcome for such items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the relevant accounting rules, typically in the period when new information becomes available to management. Actual results in the future could differ from the estimates made in the prior and current periods. EARNINGS PER SHARE Basic earnings per share ("EPS") is calculated using net earnings (the numerator) divided by the weighted-average number of shares outstanding (the denominator) during the reporting period. Diluted EPS includes the effect from potentially dilutive securities. Diluted EPS is equal to basic EPS for all periods presented, as the Company has no potentially dilutive securities. REVENUE RECOGNITION The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Sales revenue is recognized when the significant risks and rewards of the ownership of goods have been transferred to the buyers. No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably. INCOME TAXES The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations. We regularly assess our position with regard to individual tax exposures and record liabilities for our uncertain tax positions and related interest and penalties according to the principles of FAS 5, Accounting for Contingencies. These accruals reflect management's view of the likely outcomes of current and future audits. The future resolution of these uncertain tax positions may be different from the amounts currently accrued and therefore could impact future tax period expense. The Company has U.S. federal net operating loss carry forwards that if unused could expire in varying amounts in the years through 2020 to 2026. However, as a result of the acquisition, the amount of net operating loss carry forward available to be utilized in reduction of future taxable income was reduced pursuant to the change in control provisions of Section 382 of the Internal Revenue Code. 5 A 100% valuation allowance has been established as a reserve against the deferred tax assets arising from the net operating losses and other net temporary differences since it cannot, at this time, be considered more likely than not that their benefit will be realized in the future. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year. RECLASSIFICATIONS Certain reclassifications have been made in prior period's financial statements to conform to classifications used in the current period. STOCK BASED PAYMENTS During December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the exercise price of the related option. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2005 and has adopted the interim disclosure provisions in its financial reports for the subsequent periods. Effective January 1, 2006, the beginning of Sancon's first fiscal quarter of 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted stock options, since the related purchase discounts exceeded the amount allowed under SFAS 123R for non-compensatory treatment. Compensation expense recognized included: the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R; and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Results for prior periods have not been restated, as provided for under the modified-prospective method. As of June 30, 2008 and 2007, the Company did not issue or make provision through the issuance of stock options to employees and directors. RECENT PRONOUNCEMENTS In September 2006, FASB issued SFAS 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 132(R)". This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements: a. A brief description of the provisions of this Statement b. The date that adoption is required c. The date the employer plans to adopt the recognition provisions of this Statement, if earlier. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements. In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new statement. Therefore, calendar-year 6 companies may be able to adopt FAS 159 for their first quarter 2007 financial statements. The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. Management is currently evaluating the effect of this pronouncement on the financial statements. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements". This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company's fiscal year beginning October 1, 2009. Management is currently evaluating the effect of this pronouncement on financial statements. In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the businesc combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company's fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009. In March 19, 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Currently the Company does not carry any derivative instruments and the adoption of this statement may not have any effect on the financial statements. In May of 2008, FSAB issued SFASB No.162, The Hierarchy of Generally Accepted Accounting Principles. The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. The company does not believe this pronouncement will impact its financial statements. In May of 2008, FASB issued SFASB No. 163, Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60. The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. The company does not believe this pronouncement will impact its financial statements. Note 4. Concentrations and commitments (a). Concentrations The Company has focused on business in overseas markets, which the Company believes present opportunities. A business with a foreign lessee is subject to risks related to the economy of the country or region in which such lessee is located, which may be weaker than the U.S. economy. On the other hand, a foreign economy may remain strong even though the U.S. economy does not. A foreign economic downturn may impact a foreign lessee's ability to make business payments, even though the U.S. and other economies remain stable. Furthermore, foreign lessees are subject to risks related to currency conversion fluctuations. Foreign laws, regulations and judicial procedures may be more or less protective of lessor rights than those which apply in the United States. The Company could experience collection or repossession problems related to the enforcement of its business agreements under foreign local laws and the remedies in foreign jurisdictions. The protections potentially offered by Section 1110 of the Bankruptcy Code do not apply to non-U.S. carriers, and applicable local law may not offer similar protections. 7 (b). Commitments Office space: The Company leases office space in Australia, Hong Kong and Shanghai. The lease for Australia expires in October 2011 while leases for Shanghai expire on various dates from January 2008 to September 2010. Based upon existing leases, without renewals, the minimum lease payments up to expiry are as follows: 2008 $ 124,500 2009 201,000 2010 225,000 2011 86,000 ------------- Total $ 636,500 Equipment: In year 2005, the company purchased a vehicle under capital lease from Toyota Financial Service. The annual interest rate is 7.99% with payment term of sixty (60) months. The payment is to be made in 59 equal monthly installments of $374 each and the final installment of $6,349. The balance as of June 30, 2008 amounted to $13,681 with $3,520 as current liability. In year 2006, the company purchased a vehicle by mortgage loan from CBFC Limited ABN. The annual interest rate is 8.32% with payment term of sixty (60) months. The payment is to be made in 59 equal monthly installments of $516 each and the final installment of $9,444. The balance as of June 30, 2008 amounted to $24,781 with $4,287 as current liability. In September 2007, the company purchased a vehicle by mortgage loan from CBFC Limited ABN. The annual interest rate is 8.6% with payment term of sixty (60) months. The payment is to be made in 59 equal monthly installments of $452 each and the final installment of $7,425. The balance as of June 30, 2008 amounted to $20,298 with $3,824 as current liability. The Company pays approximately $1,341 per month under these leases, the last of which expires in September 2011. Total minimum lease payments under the above leases are as follows: Capital Leases 2009 18,996 2010 23,104 2011 24,672 ------------- $ 66,772 Less: Amount representing interest (8,012) Present value of minimum lease payments 58,760 Less: Current portion (11,631) ------------- $ 47,129 ============= Note 5. Business Combination and Corporate Restructure On November 17, 2006, the company completed the acquisition of 100% equity interest in Crossover Solutions Inc. from Fintel Group for one dollar. No proforma financial information has been presented as the amounts involved were immaterial. Note 6. Property, plant & equipment Property, plant, & equipment are stated at cost, less accumulated depreciation and any impairment in value. The carrying values are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Impairment losses are recognized in the income statement.
Plant and Machinery Vehicles Office Equipment Total At June 30, 2008 Cost $ 414,565 $ 377,624 $ 38,694 $ 830,883 Accumulated Depreciation (157,649) (56,564) (13,312) (227,525) Net Carrying Value $ 256,916 $ 321,060 $ 25,382 $ 603,358
Included in property and equipment is approximately $77,645 of assets, which are leased under non-cancelable leases and accounted for as capital leases, which expire through September 2011. The accumulated depreciation included in the property and equipment for these leases is approximately $27,296. 8 Depreciation and amortization expense for the six months period ended June 30, 2008 and 2007 was $78,206 and $35,659, respectively. Note 7. Due from/to related parties Current Included in the amount due from related parties, there were loans due from Mr.Cheng Guangliang, an officer of a subsidiary of the Company, amounting of $113,377 and due from Mr.Jack Chen, current CEO, amounting of $13,719. Included in the amount due to related parties, there were loans due to Mr.David Chen, former CEO and major shareholder, amounting of $10,158 and loans due to Mr.Jimmy Yiu, director of the Company, amounting of $5,021 and loans due to Mr. Jack Chen of $367,727 without interest, unsecured and due on demand. Guang Cheng International Trading Ltd sold $146,010 worth of goods to Shenzhen Sanjiang Plastic Factory, owned by the father of the sole director of Guang Cheng International Trading Ltd during the period ended June 30, 2008. Note 8. Stockholders equity On April 15, 2007, the Registrant entered into a Share Purchase Agreement to issue and sell 1,000,000 shares of its common stock in an offshore transaction under Regulation S to Fengteng Investment Consulting Management (Shanghai) Co., Limited at US$0.35 per share for gross proceeds of US$350,000. The shares are subject to 144 restriction and proceeds will be used for working capital needs. On March 10, 2008, the Company issued 300,000 shares to Lyons Capital LLC of Restricted, RULE 144 Stock, for services rendered or to be rendered in the future, recorded at the fair market value of $45,000 to be amortized over a period of twelve months. The Company recorded $22,500 in consulting expense for the six month ended June 30, 2008. Note 9. Segmental information Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. During the six months periods ended June 30, 2008, the Company is organized into three business segments: (1) material recycling, (2) material trade, (3) waste service. The following table presents a summary of operating information for the six months periods ended June 30, 2008 and 2007. For the six month period ended June 30, 2008 Material Recycling Material Trade Waste Service Un-allocated Total Sales, net 1,341,943 896,878 3,650,443 -- 5,889,264 Income (loss) from oprs. 136,041 (26,995) 1,251,157 (64,922) 1,295,281 Net income (loss) 146,833 (38,266) 1,094,702 (212,255) 991,014 Total assets 772,772 20,032 1,901,864 137,379 2,832,047 Capital expenditure (39,990) -- (100,883) -- (140,873) Depreciation 44,567 -- 33,639 -- 78,206 During the six months periods ended June 30, 2007, the Company operated under two segments ofmaterial recycling, and material trade. For the six month period ended June 30, 2007 Material Recycling Material Trade Un-allocated Total Sales, net 576,572 955,134 -- 1,531,706 Income (loss) from oprs. (56,590) 15,930 (183,146) (223,806) Net income (loss) (43,996) 13,142 (187,568) (218,422) Total assets 452,104 451,662 170,442 1,074,208 Capital expenditure 25,674 -- -- 25,674 Depreciation 35,659 -- -- 35,659
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Item 2(a). Discussion for the Interim Operations and Financial Condition Introduction Management's discussion and analysis of results of operations and financial condition ("MD&A") is provided as a supplement to the accompanying financial statements and footnotes to help provide an understanding of our financial condition, changes in financial condition and results of operations. The MD&A is organized as follows: o Caution concerning forward-looking statements and risk factors. This section discusses how certain forward-looking statements made by us throughout the MD&A and in the financial statements are based on our present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances. o Overview. This section provides a general description of our business, as well as recent developments that we believe are important in understanding the results of operations and to anticipate future trends in those operations. o Results of operations. This section provides an analysis of our results of operations for the three months and nine months ended June 30, 2008 compared to the same period in 2007. A brief description is provided of transactions and events, including any related party transactions that affect the comparability of the results being analyzed. o Liquidity and capital resources. This section provides an analysis of our financial condition and cash flows for the six months ended June 30, 2008 and 2007. o Critical accounting policies. This section provides an analysis of the significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Caution Concerning Forward-looking Statements and Risk Factors We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock. The following discussion should be read in conjunction with our financial statements and the notes thereto, and the other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain certain forward-looking information. When used in this discussion, the words "believes", "anticipates", "expects", and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of factors beyond our control. We do not undertake to publicly update or revise any of our forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are also urged to carefully review and consider our discussions regarding the various factors, which affect our business, included in this section and elsewhere in this report. Factors that might cause actual results, performance or achievements to differ materially from those projected or implied in such forward-looking statements include, among other things: (i) the impact of competitive products; (ii) changes in law and regulations; (iii) limitations on future financing; (iv) increases in the cost of borrowings and unavailability of debt or equity capital; (v) our inability to gain and/or hold market share; (vi) managing and maintaining growth; (vii) customer demands; (viii) market and industry conditions, (ix) the success of product development and new product introductions into the marketplace; (x) the departure of key members of management; as well as other risks and uncertainties that are described from time to time in our filings with the Securities and Exchange Commission. We provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business and our products. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could adversely affect us. Potential Fluctuations In Periodic Operating Results Our periodic operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside our control, including: the demand for our products; seasonal trends in purchasing, the amount and timing of capital expenditures and other costs relating to the development of our products; price competition or pricing changes in the industry; technical difficulties or system downtime; general economic conditions, and economic conditions specific to the industry. Our results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Particularly at our early 10 stage of development, such accounting treatment can have a material impact on the results for any period. Due to the foregoing factors, among others, it is likely that our operating results will fall below our expectations or those of investors in some future period. Dependence Upon Management Our future performance and success is dependant upon the efforts and abilities of our Management. To a very significant degree, we are dependent upon the continued services of Jack Chen, CEO & Director of the Company. If the Company lost the services of Mr. Chen, or other key employees before we could get qualified replacements that loss could materially adversely affect our business. We do not maintain key man life insurance on any of our Management. Limitation of Liability and Indemnification of Officers and Directors Our officers and directors are required to exercise good faith and high integrity in our Management affairs. Our Articles of Incorporation provide, however, that our officers and directors shall have no liability to our shareholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they violated their duty of loyalty, did not act in good faith, engaged in intentional misconduct or knowingly violated the law, approved an improper dividend or stock repurchase, or derived an improper benefit from the transaction. Our Articles and By-Laws also provide for the indemnification by us of the officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate our business or conduct the internal affairs, provided that in connection with these activities they act in good faith and in a manner that they reasonably believe to be in, or not opposed to, the best interests of the Company, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations. To further implement the permitted indemnification, we have entered into Indemnity Agreements with our officers and directors. Management of Potential Growth We anticipate rapid growth, which will place a significant strain on our managerial, operational, and financial systems resources. To accommodate our current size and manage growth, we must continue to implement and improve our financial strength and our operational systems, and expand, train and manage our sales and distribution base. There is no guarantee that we will be able to effectively manage the expansion of our operations, or that our facilities, systems, procedures or controls will be adequate to support our expanded operations. Our inability to effectively manage our future growth would have a material adverse effect on the Company. Limited Market Due To Penny Stock The Company's stock differs from many stocks, in that it is a "penny stock". The Securities and Exchange Commission has adopted a number of rules to regulate "penny stock". These rules include, but are not limited to, Rules 3a5l-l, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange Act of 1934, as amended. Because our securities probably constitute "penny stock" within the meaning of the rules, the rules would apply to us and our securities. The rules may further affect the ability of owners of our stock to sell their securities in any market that may develop for them. There may be a limited market for penny stocks, due to the regulatory burdens on broker-dealers. The market among dealers may not be active. Investors in penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or commissions charged by the broker-dealers may be greater than any profit a seller may make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. Investors may be unable to reap any profit from any sale of the stock, if they can sell it at all. Stockholders should be aware that, according to the Securities and Exchange Commission Release No. 34- 29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. These patterns include: - Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; - Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; - "Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; - Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and - The wholesale dumping of the same securities by promoters and broker- dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. Furthermore, the "penny stock" designation may adversely affect the development of any public market for the Company's shares of common stock or, if such a market develops, its continuation. Broker-dealers are required to personally determine whether an investment in "penny stock" is suitable for customers. Penny stocks are securities (i) with a price of less than five dollars per share; (ii) that are not traded on a "recognized" national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an issuer with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act and Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor`s account. Potential 11 investors in the Company`s common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock". Rule 15g-9 of the Commission requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for the Company's stockholders to resell their shares to third parties or to otherwise dispose of them. Overview of the Company and its Operations Sancon Resources Recovery, Inc. is an environmental service and waste management company that operates recycling facilities in China and Australia. Sancon specializes in the collection and recovery of industrial and commercial solid wastes such as plastic, paper, cardboard, and glass. The recycled materials are re-used by Sancon's manufacturing customers in China to make a wide variety of new products including outdoor furniture, construction materials, building materials, road surface, and various new products. Sancon's China operation is licensed by the Chinese government for waste management services, and is certified with ISO 9001 and ISO14001 standards. Sancon currently ships more than 25,000 tons of recycled industrial and commercial waste material annually to its customers in China. Sancon's main operations and services include industrial waste management consulting, collection and reprocess of recyclable materials such as plastic, glass, cardboard, and paper sourced from suppliers such as Hella, Toyota, Full Views, Wastech Holdings, Supagas, and Priority etc, before its re-entry into manufacture cycles as raw materials. Sancon also provides its full waste management services to large consumer products maker such as Pernod Ricard. The use of recycled material is both environmentally friendly and is a key part of today's competitive manufacturing process to lower costs. As China gains global manufacturing dominance and oil price soars, Chinese manufacturers are increasingly turning to recycled materials to lower its costs, resulting tremendous demand for recycled materials import. The major customers for Sancon are Chinese manufacturers and recycled material traders which are located mainly in the Chinese provinces of Guangdong, Zhejiang, Fujian and Hong Kong. THE TREND IN CHINESE MARKET According to China National Resources Recycling Association, recyclable solid waste import to China has experienced a dramatic increase in the last 2 decades. During early 1990's, China imported 1-2 million tons of recyclable wastes per year. By 1999, China imported 10 million tons of recyclable solid wastes per year. In 2006, China imported 37 million tons of recyclable wastes. China's total domestic recycled volume is estimated to have reached over 50 million tons in 2007, with an estimated total worth of US$6 billion. The State Development and Reform Commission of China promotes the recycling industry with a four-pronged solution ranging from energy saving and clean production to integrated use of resources and developing environmental protection industry, to accelerate the development of the recycling economy. The concept of recycling economy is included in the 11th Five-year Plan. In addition, policies will be drafted and mechanism will be proposed to promote the development of the recycling economy. Policies will give priority to the recycling and reuse of scrap home appliance, electronic products, waste tires, waste paper and waste packaging, as well as the re-production of machinery and electric products, recycled aluminum, and transformation of wastes into resources. Due to the serious environment pollution problems faced in China, the 11th Five-year plan emphasis energy saving, emission reduction and environmental protection at the highest level ever. At the end of the 11th Five-year plan, the annual production of the environmental industry will exceed 1.1 trillion RMB, of which environmental equipment spending is 120 billion RMB, environmental services is 100 billion RMB, resources recovery is 660 billion RMB, cleaning products spending is 250 billion RMB. In the past 30 years of development, environmental production value in China increased from 0.5% of GDP to the current 1.6%. China will expedite the demonstration and promotion of technologies for energy saving and emission reduction; actively promote the development of the environmental services industry; and also intensify the financial services for the environmental industry; and tax benefit policies for the environmental industry. During the 11th Five-year period, investment for environmental protection will reach 1.4 trillion RMB. Central government financing is investing in environmental industry at annual compound growth rate of 18%. Chinese government set out policies supports 4 key areas: developing a resources recovery and recycling economy; pollution reduction and ecological protection; environment testing instruments; environmental services and the development of the environmental industry. Sancon is uniquely position to benefits from these initiatives as an early mover in the industry and one of the few foreign companies being awarded a waste management license in China. Sancon has for the past years developed one of the largest collection and recovery network in China for commercial wastes and expects to expand into other areas of environmental services. 12 SANCON'S VISIONS AND GOALS The long-term objective of Sancon is to seek and develop further alternative resources recovery solutions, which will protect our environment and maximize sustainable usage for industrial waste materials. At Sancon we believe reducing the environmendal impact of manufactured products is through both professional services offered to manufacturers and commercial entities to increase recyclability of waste materials, and efficient redeployment of waste materials. SERVICES OFFERED TO OUR CLIENTS Sancon strives to take an all-inclusive approach to provide eco-friendly solutions leading to the sustainable use of waste materials. Our services include collection from manufacturing and commercial sites, re-process waste materials to increase recyclability, end-of-life disassembly, redeployment of recyclable materials, and destruction of sensitive materials and products. COMPETITION The markets for the Company's products and services are competitive, and the Company faces competition from a number of sources. Many of the Company's competitors have substantially greater resources than the Company. Those resources may include greater name recognition; larger product lines; complementary lines of business; and greater financial, marketing, information systems, and other resources. The Company can give no assurance competitive pressures will not materially and adversely affect the Company's business, financial condition, and results of operations. But the management has identified several key points which will give Sancon the competitive edge in the market place: 1) Sancon offers large selection of recycled plastic materials to our customers. 2) With the expansion of our operations in Melbourne Australia, Sancon will be able to serve greater number of customers and sell direct to our customs in both Australia and China. 3) Hong Kong trading operation will source recycled materials globally to meet the increasing demand from our customers in China. 4) Expand continuously of our operations in China to offer our services to more industrial and commercial clients. 5) Industry know-how and management team's ability to ensure all operating and environmental standards are achieved. EMPLOYEES As of June 30, 2008, the Company employed 15 people in both Australia and Hong Kong subsidiaries. Our joint venture in China employed 22 people full time, and all other personnel of the China joint venture are employed as sub contractors. To make our work more efficient, we outsourced a few other functions, such as logistics, bookkeeping and administration, to certain professional firms to enable our resource being focused on sales and processing functions. FACTORS THAT MAY AFFECT FUTURE RESULTS The business in which the Company is engaged is capital supportive. Accordingly, the Company's ability to execute its business strategy and to sustain its operations depends upon its ability to maintain or procure capital. There can be no absolute assurance the necessary amount of capital will continue to be available to the Company on favorable terms, or at all. The Company's inability to obtain sufficient capital or to renew its credit facilities would limit the Company's ability to: (i) add new equipment to its portfolio, (ii) fund its working capital needs, and (iii) finance possible future acquisitions. The Company's access to capital may have a material adverse effect on the Company's business, financial condition and/or results of operations. There can be no absolute assurance the Company will be able to effectively manage its existing or the possible future expansion of its operations, or the Company's systems, procedures or controls will be adequate to support the Company's operations. Consequently, the Company's business, financial condition and/or results of operations could be possibly and adversely affected. The Company does not foresee changes in tax laws for the jurisdictions in which the Company and its subsidiaries operate. There can be no absolute assurance that changes will not occur, and therefore no absolute assurance such changes will not materially and adversely affect the Company's business, financial condition and results of operations. As a public company, Sancon is subject to certain regulatory requirements including, but not limited to, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX404"). Such compliance results in significant additional costs to the Company by increased audit and consulting fees, and the time required by management to address the regulations. The SEC has recently delayed the implementation date of SOX404 for non-accelerated filers until the fiscal year ended December 15, 2009. However, should the Company successfully fulfill its plans to procure financing and expand its operations; the Company may come under the accelerated filer definition, and be required to comply with SOX404 before December 15, 2009. In any case, such cocts will likely affect adversely the Company's business, financial condition and results of operations. Results of Operations - Comparison between the three and six months ended June 30, 2008 and same periods of 2007. 13 Sales Sales are generated by service charges and the sale of recyclable materials. The sales in Q2 2008 were $2,940,268, representing a 251% increase compared to the sales of $838,658 in same period of 2007. The sharp increases were mainly due to the significant sales amount contributed from Sancon SH and CS, which started their operation in Q3 2007 and Q1 2008. On August 15, 2007, the Company completed the acquisition of 70% of the equity interest in Sancon Resources Recovery (Shanghai) Co., Ltd by exercising its option to convert $200,000 of convertible promissory note. On November 17, 2006, the company completed the acquisition of 100% equity interest in Crossover Solutions Inc from Fintel Group by paying $1 for the transfer of one share of Crossover Solutions Inc. being the total number of outstanding share of Crossover. Crossover did not have any operations or assets/liability prior to 2008. The both companies are engaged in recycling material trading business. And sales for six months ended on June 30 for the year 2008 and 2007 were $5,889,264 and $1,531,706 respectively. Cost of Sales The cost of sales is the direct cost for sale of the recycling materials. In Q2 2008, the cost of the recyclable materials was $1,581,542. It is 130% increase as compared to the cost of sales of $687,689 in Q2 2007. And cost of sales for six months ended on June 30 for the year 2008 and 2007 were $3,017,428 and $1,220,064 respectively. Selling, General and Administrative Expenses ("SG&A expenses") SG&A expenses increased by $615,487 or 305% to $817,037 in Q2 2008 compared to the same period of 2007. The increase is mainly due to the expanded operation during the three months ended June 30, 2008. SG&A expenses increased by $982,168 to $1,498,349 during six months period ended on June 30, 2008 compared with the same period of year 2007. Depreciation Expense Depreciation expense increased to $40,585 in Q2 2008 from $21,343 in same period of 2007. Depreciation expenses increased from $35,659 to $78,206 during six months period ended on June 30, 2008 compared with same period in year 2007. The increases were due to the purchase of plant and machinery in 2008 to expand its processing capacity. Liquidity and Capital Resources As shown in the accompanying financial statements, the Company has accumulated profit of $706,456 as of June 30, 2008. In addition, we have positive working capital $1,009,784. Operating Activities The net cash provided by operating activities from the six months period ended on June 30, 2008 amounted to $1,186,295 compared to $29,598 used in the same period of year 2007. Investing Activities Net cash used in investing activities amounted to $140,873 during the six months period ended on June 30, 2008 compared to $225,674 during the same period of year 2007. The net cash outflows primarily resulted from the purchase of property and equipment. Financing Activities Net cash provided by financing activities amounted to $110,030 during the three months period ended on June 30, 2008 compared to net cash provided by financing activities of $215,393 during the same period in year 2007. The Company has financed its growth by utilizing cash reserves and loan from directors. Loan from directors usually was unsecured, and no payment term and without interest bearing. The Company's primary use of funds is for the purchase of equipment for operation and the purchase of inventory. Inflation In the opinion of management, inflation has not had a material effect on the Company's financial condition or results of its operations. Trends and uncertainties Management believes there are no known trends, events, or uncertainties that could, or reasonably be expected to, adversely affect the Company's liquidity in the short and long terms, or its net sales, revenues, or income from continuing operations. 14 The Company's operations are not affected by seasonal factors. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors. INCOME TAXES We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period. In addition, as a result of the significant change in the Company's ownership, the Company's future use of its existing net operating losses may be limited. The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year. STOCK-BASED COMPENSATION During December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require 15 prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the exercise price of the related option. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2005 and has adopted the interim disclosure provisions in its financial reports for the subsequent periods. Effective January 1, 2006, the beginning of Sancon's first fiscal quarter of 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted stock options, since the related purchase discounts exceeded the amount allowed under SFAS 123R for non-compensatory treatment. Compensation expense recognized included: the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R; and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Results for prior periods have not been restated, as provided for under the modified-prospective method. As of June 30, 2008 and 2007, the Company did not issue or make provision through the issuance of stock options to employees and directors. For other items paid for by common stock, the value of the transaction is determined by the value of the goods or services received, measured at the time of the transaction. The corresponding stock value, used to determine the number of share to be issued, is the value of the average price for the 20 to 30 days prior to the transaction date. ASSET IMPAIRMENT We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipaded cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate. Item 2(b). Off-Balance Sheet Arrangements There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to investors. ITEM 3. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date, that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission ("SEC") reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to us, including our consolidating subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared. During the three months ended June 30, 2008, there were no changes in our internal accounting controls or in other factors that materially affected our internal controls over financial reporting. 16 PART II. OTHER INFORMATION Item 1. Unregistered Sales of Equity Securities and Use of Proceeds. None Item 2 Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. Matters for a vote of security holders were submitted to security holders in the Company's Proxy Statement, filed upon December 6, 2005. The remainder of the information required by this item is incorporated by reference to the Company's Proxy Statement. Item 5. Other Information. None. 17 Item 6. Exhibits The following list describes the exhibits filed as part of this Report on Form 10-Q.
Exhibit Description of Document Number Note 3.1 (1) Articles of Incorporation of Financial Telecom Limited (USA), Inc. 3.2 (1) Amended and Restated Bylaws of Financial Telecom Limited (USA), Inc. 10.1 (1) Agreement between Hong Kong Futures Exchange Limited and Financial Telecom Limited. 10.2 (1) Market Service Datafeed Agreement between Stock Exchange Information Services Limited and Financial Telecom Limited. 10.3 (2) Option agreement dated December 14, 2004 between Fintel Group Limited and shareholders of Shanghai Long terms Technology Limited. 10.4 (2) Option agreement dated January 5, 2005 between Fintel Group Limited and shareholders of Beijing JCL Technology Commerce Limited. 10.5 (2) Option agreement dated January 20, 2005 between Fintel Group Limited and shareholders of Shanghai Qianhou Computer Technology Limited. 10.6 (2) Independent contractor agreement between Fintel Group Limited and Mr. Sam Chong Keen. 10.7 (2) Independent contractor agreement between Fintel Group Limited and Info Media Company. 10.8 (2) Independent contractor agreement between Fintel Group Limited and China Digital Distribution Limited. 10.9 (3) Sales and purchase agreement dated March 25, 2005 between Fintel Group Limited and shareholders of Enjoy Media Holdings Limited. 10.10 (4) Sales and purchase agreement dated April 25, 2005 between Fintel Group Limited and shareholders of Beijing Genial Technology Co. Ltd. 10.11 (4) Option agreement dated March 7, 2005 between Fintel Group Limited and shareholders of Beijing Sinoskyline technology Trading Co. Ltd. 14.1 (9) Code of Ethics. 16.1 (7) Change in Certifying Accountants. 16.2 (10) Incorporated herein by reference to registrant's Current Report on Form 8K/A (File No. 000-50760) filed July 7, 2006. 17.1 (6) Correspondence on departure of Directors. 20.1 (8) Proxy Statement dated December 6, 2005. 21.1 (5) Subsidiaries of the registrant. 24.1 (5) Power of Attorney. 31.1 (5) Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 (5) Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 (5) Certification of Officers, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
---------------------- (1) Incorporated herein by reference to the registrant's initial Registration Statement on Form 10-SB (File No. 000-50760) filed on May 13, 2004. (2) Incorporated herein by reference to the registrant's Annual Report on Form 10-KSB (File No. 000-50760) filed April 15, 2005. (3) Incorporated herein by reference to the registrant's Quarterly Report of Form 10-QSB (File No. 000-50760) filed May 6, 2005. (4) Incorporated herein by reference to the registrant's Quarterly Report of Form 10-QSB (File No. 000-50760) filed August 6, 2005. (5) Filed herewith. (6) Incorporated herein by reference to the registrant's Current Report on Form 8K/A (File No. 000-50760) filed November 29, 2005. (7) Incorporated herein by reference to the registrant's Current Report on Form 8K/A (File No. 000-50760) filed January 25, 2006. (8) Incorporated herein by reference to the registrant's Proxy Statement (File No. 000-50760) filed December 6, 2005. (9) Incorporated herein by reference to the registrant's Annual Report on Form 10-KSB (File No. 000-50760) filed April 26, 2006. (10) Incorporated herein by reference to the registrant's Current Report on Form 8K/A (File No. 000-50760) filed July 7, 2006. 18 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Sancon Resources Recovery, Inc. Date: August 14, 2008 By: /s/ Jack Chen -------------- Jack Chen Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Sancon Resources Recovery, Inc. Date: August 14, 2008 By: /s/ David Chen -------------- David Chen Chairman Date: August 14, 2008 By: /s/ Jimmy Yiu -------------- Jimmy Yiu Director Date: August 14, 2008 By: /s/ Cong Yuanli --------------- Cong Yuanli Independent Director Date: August 14, 2008 By: /s/ Jack Chen ------------- Jack. Chen Director 19 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack Chen and Klaus Shen, jointly and severally, as his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-Q and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this Form 10-Q has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date /s/ Jack Chen Chief Executive Officer and Director August 14, 2008 ----------------- Jack Chen /s/ Klaus Shen Chief Financial Officer August 14, 2008 ----------------- Klaus Shen