Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934: |
For the Quarterly Period ended September 30, 2011
| [ ] | TRANSITION REPORT PURSUANT TO 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 Registrant as Specified in its Charter)
| Nevada | 58-2670972 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
602 Nan Fung Tower, Suite 6/F
173 Des Voeux Road Central
Central District, Hong Kong
(Address of Principal Executive Offices)
+(852) 2868-0668
(Registrant’s Telephone Number, Including Area Code)
___________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 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 [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | Smaller Reporting Company | [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares outstanding of each of the issuer’s classes of
common equity, as of September 30, 2011: 22,964,996 shares of Common Stock, par value US $0.001
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
The discussion contained in this 10-Q under the Securities Exchange Act of 1934, as amended, contains forward-looking statements that involve risks and uncertainties. The issuer’s actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “the Company believes,” “management believes” and similar language, including those set forth in the discussions under “Notes to Financial Statements” and “Management’s Discussion and Analysis or Plan of Operation” as well as those discussed elsewhere in this Form 10-Q. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are subject to the “safe harbor” created by the Private Securities Litigation Reform Act of 1995.
| 2 |
TABLE OF CONTENTS
| 3 |
| ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) |
SANCON RESOURCES RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As at September 30, 2011 | As at December 31, 2010 | |||||||
| $ | $ | |||||||
| ASSETS | ||||||||
| Current assets : | ||||||||
| Cash and cash equivalents | 5,866,305 | 6,013,889 | ||||||
| Trade receivables, net | 959,765 | 1,503,849 | ||||||
| Inventory | - | 61,286 | ||||||
| Deferred tax asset | - | 37,617 | ||||||
| Other current assets | 2,058,937 | 301,234 | ||||||
| Advance and prepayment | 142,517 | 82,021 | ||||||
| Held to maturity securities | - | 129,489 | ||||||
| Total current assets | 9,027,524 | 8,129,385 | ||||||
| Property, plant and equipment, net | 704,641 | 1,190,106 | ||||||
| Security deposit | - | 11,179 | ||||||
| Long term deferred expenses | - | 13,448 | ||||||
| TOTAL ASSETS | 9,732,165 | 9,344,118 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Liabilities | ||||||||
| Current liabilities | ||||||||
| Trade payables | 444,316 | 922,626 | ||||||
| Capital lease - current | - | 24,807 | ||||||
| Tax payables | 236,125 | 304,613 | ||||||
| Due to related parties | - | 697,030 | ||||||
| Loan payable - current | 31,918 | 29,224 | ||||||
| Accrued expenses and other payables | 7,888,724 | 540,036 | ||||||
| Total current liabilities | 8,601,083 | 2,518,336 | ||||||
| Long term liability | ||||||||
| Loan payable | 5,559 | 28,805 | ||||||
| Total Liabilities | 8,606,642 | 2,547,141 | ||||||
| Stockholders’ Equity | ||||||||
| Share capital | ||||||||
| Authorized: 500,000,000 common shares, par value $0.001 per share Issued and outstanding: 22,964,996 shares as of September 30, 2011 and December 31, 2010 | 22,965 | 22,965 | ||||||
| Additional paid-in capital | 1.079,200 | 1,079,200 | ||||||
| Deferred compensation | (97,500 | ) | (109,200 | ) | ||||
| Other comprehensive income | 279,810 | 86,098 | ||||||
| Retained earnings | (420,173 | ) | 5,361,208 | |||||
| Total | 864,302 | 6,440,271 | ||||||
| Non-controlling interest | 261,221 | 356,706 | ||||||
| Total stockholders’ equity | 1,125,523 | 6,796,977 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | 9,732,165 | 9,344,118 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-1 |
SANCON RESOURCES RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| For the Three months ended September 30, | For the Nine months ended September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Net revenue | 2,032,426 | 3,354,608 | 9,005,196 | 9,490,416 | ||||||||||||
| Cost of revenue | 1,978,933 | 1,861,857 | 6,226,338 | 4,975,953 | ||||||||||||
| Gross profit | 53,493 | 1,492,751 | 2,778,858 | 4,514,463 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Depreciation | 41,514 | 61,139 | 127,054 | 182,783 | ||||||||||||
| Selling, general and administrative | 8,521,009 | 895,868 | 10,439,857 | 2,695,493 | ||||||||||||
| Total operating expenses | 8,562,523 | 957,007 | 10,566,911 | 2,878,276 | ||||||||||||
| Operating income | (8,509,030 | ) | 535,744 | (7,788,053 | ) | 1,636,187 | ||||||||||
| Other income (expense) | ||||||||||||||||
| Other income/(expense), net | 1,672,582 | 7,671 | 1,673,013 | (1,343 | ) | |||||||||||
| Investment loss prior to acquisition | - | (9 | ) | - | (3,148 | ) | ||||||||||
| Gain on acquisition | - | - | - | 34,805 | ||||||||||||
| Interest income/(expense), net | 5,279 | 2,276 | 5,528 | 4,765 | ||||||||||||
| Total other income | 1,677,861 | 9,938 | 1,678,541 | 35,079 | ||||||||||||
| Income from continued operations before income taxes and discontinued operation | (6,831,169 | ) | 545,682 | (6,109,512 | ) | 1,671,266 | ||||||||||
| Discontinued operation | ||||||||||||||||
| Gain on disposal of a subsidiary | 252,463 | - | 252,463 | - | ||||||||||||
| Gain on discontinued operations | 252,463 | - | 252,463 | - | ||||||||||||
| Income before income taxes and non-controlling interest | (6,578,706 | ) | 545,682 | (5,857,049 | ) | 1,671,266 | ||||||||||
| Less: Income taxes | (7,965 | ) | (6,868 | ) | (19,816 | ) | (18,253 | ) | ||||||||
| Less: Net income attributed to non-controlling interest | 108,881 | 7,474 | 95,485 | (2,153 | ) | |||||||||||
| Net income | (6,477,790 | ) | 546,288 | (5,781,380 | ) | 1,650,860 | ||||||||||
| Other comprehensive item: | ||||||||||||||||
| Foreign currency translation gain/(loss) | (208,420 | ) | 48,318 | (193,712 | ) | 28,300 | ||||||||||
| Net comprehensive income | (6,686,210 | ) | 594,606 | (5,975,092 | ) | 1,679,160 | ||||||||||
| Earnings per share: | ||||||||||||||||
| Basic earnings per share-continued operations | (0.29 | ) | 0.02 | (0.26 | ) | 0.07 | ||||||||||
| Basic earnings per share-discontinued operations | - | - | - | - | ||||||||||||
| Basic earnings per share | (0.29 | ) | 0.02 | (0.26 | ) | 0.07 | ||||||||||
| Basic weighted average shares outstanding | 22,964,996 | 22,964,996 | 22,964,996 | 22,964,996 | ||||||||||||
| Diluted earnings per share-continued operations | (0.29 | ) | 0.02 | (0.26 | ) | 0.07 | ||||||||||
| Diluted earnings per share-discontinued operations | - | - | - | - | ||||||||||||
| Diluted earnings per share | (0.29 | ) | 0.02 | (0.26 | ) | 0.07 | ||||||||||
| Diluted weighted average shares outstanding | 22,964,996 | 22,964,996 | 22,964,996 | 23,041,989 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-2 |
SANCON RESOURCES RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For
the Nine months ended September 30, 2011 | For
the Nine months ended September 30, 2010 | |||||||
| $ | $ | |||||||
| Cash flows from operating activities | ||||||||
| Net income | (5,781,380 | ) | 1,650,860 | |||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | ||||||||
| Depreciation | 127,054 | 182,783 | ||||||
| Investment loss | 252,462 | 3,148 | ||||||
| Gain on acquisition from non-controlling interest | - | (34,805 | ) | |||||
| Loss on disposal of property and equipment | 458,757 | - | ||||||
| Amortization of deferred compensation | - | 11,700 | ||||||
| Options grant for compensation | - | 38,898 | ||||||
| Non-controlling interest | (95,485 | ) | 2,153 | |||||
| Changes in current assets and liabilities, net of business acquisition: | ||||||||
| Decrease (increase) in trade receivables | 544,084 | 6,888 | ||||||
| Decrease (increase) in inventory | 61,286 | (6,591 | ) | |||||
| Decrease (increase) in advance to suppliers | (60,496 | ) | (14,145 | ) | ||||
| Decrease (increase) in other current assets | (1,757,703 | ) | 70,828 | |||||
| Decrease in security deposit | 11,179 | - | ||||||
| Decrease in long term deferred expenses | 13,448 | - | ||||||
| Increase (decrease) in tax payable | (30,871 | ) | (16,990 | ) | ||||
| Increase (decrease) in trade payable | (478,310 | ) | (267,066 | ) | ||||
| Increase (decrease) in other current liabilities | 7,348,688 | 25,159 | ||||||
| Net cash flows provided by operating activities | 612,713 | 1,652,820 | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | (100,346 | ) | (84,957 | ) | ||||
| Investment in Shengrong | - | (149,700 | ) | |||||
| Cash increased from acquisition | - | 158,617 | ||||||
| Net cash flows used in investing activities | (100,346 | ) | (76,040 | ) | ||||
| Cash flows from financing activities | ||||||||
| Shareholders’ loan | (697,030 | ) | 226,972 | |||||
| Held to maturity securities | 129,489 | - | ||||||
| Proceeds from (payment of) mortgage loan | (20,552 | ) | (11,647 | ) | ||||
| Net cash provided by/(used in) financing activities | (588,093 | ) | 215,325 | |||||
| Effect of exchange rate changes on cash | (71,858 | ) | 128,896 | |||||
| Net increase in cash and cash equivalents | (147,584 | ) | 1,921,001 | |||||
| Cash and cash equivalents at start of period | 6,013,889 | 3,703,716 | ||||||
| Cash and cash equivalents at end of period | 5,866,305 | 5,624,717 | ||||||
| Supplemental information for cash expenses | ||||||||
| Cash paid for interest expenses | 2,742 | 7,027 | ||||||
| Cash paid for income taxes | 11,055 | 253 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
Note 1. Nature of Operations
Sancon Resources Recovery, Inc. (“Sancon”, or “the Company”, or “we”, or “us”) is registered in the State of Nevada. 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.
On April 1, 2011, the Company approved an infusion of equity into Sancon Resources Recovery (Shanghai) Co., Ltd. (“Sancon SH”) for a total of $2,000,000, of which Sancon invested $1,400,000 to Sancon SH and the minority shareholder invested $600,000.
On September 15, 2011, one of the subsidiaries, Sancon Recycling Pty. Limited, applied for liquidation.
Note 2. Basis of Presentation
(a) Unaudited Interim Condensed Consolidated Financial Statements
The accompanying unaudited condensed 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, 2010, included in our Annual Report on Form 10K, filed with the Securities and Exchange Commission.
(b) Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include all of the accounts of the Company and all of the subsidiaries under its control, which includes the following companies:
| Registered Name (business is conducted under the registered names) | Domicile | Owner | % held | Status | |||||
| Sancon Recycling Pty Ltd. | Australia | Sancon | 100 | Inactive | |||||
| Sancon Resources Recovery (Shanghai) Co., Ltd. (“Sancon SH” hereinafter) | Shanghai | Sancon | 70 | Active | |||||
| Crossover Solutions Inc. (“CS” hereinafter) | British Virgin Island | Sancon | 100 | Active | |||||
| Sheng Rong Environment Protection Technology Co.,Ltd. (“Shanghai Sheng Rong” hereinafter) | Shanghai | Sancon SH | 52 | Active |
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.
| F-4 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
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.
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 in the period in which impairment is determined to exist.
Held to Maturity Securities
The Company classifies investment in marketable securities as ‘Held to Maturity’. Any declines in the fair value of securities determined to be non temporary in nature are charged to earnings in the period in which that event occurs.
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
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.
The Company now is organized into two business segments while it was three in the last year: material recycling and waste management service.
(1) Material Recycling refers to the activities of collecting and processing of waste materials, then selling them to customers in China. The plant is located in Australia.
(2) Waste management Service refers the activities of providing waste management service with operations located in China.
| F-5 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
Note 3. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax assets and liabilities 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. 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.
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.
Recent pronouncements
In February 2011, the FASB issued ASU 2011-09 which requires that an SEC filer, as defined, evaluate subsequent events through the date that the financial statements are issued. The update also removed the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The adoption of this guidance on January 1, 2011 did not have a material effect on the Company’s financial statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU intends to improve consistency in the application of fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The ASU clarifies the application of existing fair value measurement and disclosure requirements including 1) the application of concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of non-financial assets and are not relevant when measuring the fair value of financial assets or any liabilities, 2) measuring the fair value of an instrument classified in shareholders’ equity from the perspective of a market participant that holds that instrument as an asset, and 3) disclosures about quantitative information regarding the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The guidance in this ASU is effective for the first interim and annual period beginning after December 15, 2011, and should be applied prospectively. Early adoption is not permitted. This ASU will have no impact on our results of operations.
| F-6 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
Note 3. Summary of Significant Accounting Policies (continued)
Recent pronouncements (continued)
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” This ASU is aimed at increasing the prominence of other comprehensive income in the financial statements. The new guidance eliminates the option to present comprehensive income and its components in the Statement of Changes in Shareholders’ Equity, and requires the disclosure of comprehensive income and its components in one of two ways: a single continuous statement or in two separate but consecutive statements. The single continuous statement would present other comprehensive income and its components on the income statement. Under the two-statement approach, the first statement would include components of net income and the second statement would include other comprehensive income and its components. The ASU does not change the items that must be reported in other comprehensive income. This ASU will have no impact on our results of operations.
The guidance in this ASU is effective for the first interim and annual period beginning after December 15, 2011, and should be applied retrospectively for all periods presented in the financial statements. Early adoption is permitted.
In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05”. This ASU defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. The deferral is temporary until the Board reconsiders the operational concerns and needs of financial statement users. The Board has not yet established a timetable for its reconsideration. The requirements to present other comprehensive income in a single continuous statement or two consecutive statements and other requirements of ASU 2011-05, as amended by ASU 2011-12, are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011.
In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities”. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amendments are effective for annual reporting periods beginning on or after January 1, 2013. An entity would be required to provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU will not impact our results of operations.
| F-7 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
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.
(b). Commitments
Office space:
The Company leases office space in Australia and China. The lease for Australia will expire in October 2011 while leases for China expire on various dates between April 2010 and November 2018. Based upon existing leases, without renewals, the minimum lease payments up to expiry are as follows:
| 2011 | 279,311 | |||
| 2012 | 164,707 | |||
| 2013 | 165,868 | |||
| Thereafter | 870,306 | |||
| Total | $ | 1,480,192 |
Equipment:
In December 2009, the company purchased a vehicle by mortgage loan. The annual interest rate is 7.6% with payment term of thirty-six (36) months. The payment is to be made in 35 equal monthly installments of $2,698 each. The balance as of September 30, 2011 amounted to $31,918 with $5,559 as current liability.
The Company pays approximately $2,698 per month under these leases, the last of which will expire in September 2011.
Total minimum lease payments under the above leases are as follows:
| Capital Leases | ||||
| 2011 | 8,417 | |||
| 2012 | 30,864 | |||
| 39,281 | ||||
| Less: Amount representing interest | (1,804 | ) | ||
| Present value of minimum lease payments | 37,477 | |||
| Less: Current portion | (31,918 | ) | ||
| $ | 5,559 | |||
| F-8 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
Note 4. Concentrations and commitments (continued)
(b). Commitments (continued)
Legal Proceeding:
The company is involved in the following litigation:
Dragon Wings Communications Limited, a Hong Kong corporation and Wong Yee Tat, an individual are the first and second plaintiff. They filed a complaint on July 25, 2008 in the District Court of the Hong Kong special Administrative Region, Civil Action No. 3251, against the first defendant, Fintel Group Limited for breach of contract. The Company is the second defendant because plaintiff claimed Fintel Group Limited is a wholly owned subsidiary of the Company. Under the writ, the plaintiff claimed that pursuant to a written stock purchase agreement, the first defendant shall purchase the first plaintiff’s common stock by common shares of Financial Telecom Limited (USA) Inc. (replaced by shares of MKA Capital Inc. from June 2006) or pay to the plaintiff cash of $94,172 in lieu of the shares. Pluses the interest and cost of litigation, the total amount claimed by plaintiff were $104,966. The court adjudged that the first defendant do pay the plaintiffs damages on September 08, 2008 and also adjudged that the second defendant do pay the plaintiffs damages on December 10, 2008. The Company has denied all allegations in the complaint because Fintel Group Limited was not a subsidiary at the time.
Note 5. Property, plant & equipment
The Company’s Property, Plant and Equipment as of September 30, 2011 is as follows:
| Plant and Machinery | Vehicles | Office Equipment | Total | |||||||||||||
| Cost | $ | 448,954 | $ | 669,305 | $ | 41,514 | $ | 1,159,773 | ||||||||
| Accumulated Depreciation | (65,117 | ) | (360,744 | ) | (29,271 | ) | (455,132 | ) | ||||||||
| Net Carrying Value | $ | 383,837 | $ | 308,561 | $ | 12,243 | $ | 704,641 | ||||||||
The Company’s Property, Plant and Equipment as of December 31, 2010 are as follows:
| Plant and Machinery | Vehicles | Office Equipment | Total | |||||||||||||
| Cost | $ | 1,324,477 | $ | 606,877 | $ | 40,847 | $ | 1,972,201 | ||||||||
| Accumulated Depreciation | (479,369 | ) | (282,223 | ) | (20,503 | ) | (782,095 | ) | ||||||||
| Net Carrying Value | $ | 845,108 | $ | 324,654 | $ | 20,344 | $ | 1,190,106 | ||||||||
Included in property and equipment at December 31, 2010 is approximately $58,132 of assets, which are leased under non-cancelable lease 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 $56,321.
Depreciation and amortization expense for the nine months period ended September 30, 2011 and 2010 was $95,806 and $182,783 respectively.
| F-9 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
Note 6. Short Term and Long Term Loan Payable
On November 19, 2009, Sancon SH purchased a vehicle with a total loan principle amount of $86,137, unsecured, with an annual interest rate of 7.6%. The payment is to be made in thirty-six (36) equal monthly installments of $2,698 expiring in November 2011. The Company classified the loan balance under current and noncurrent liabilities respectively in the accompanied financial statements. As of September 30, 2011 and December 31, 2010, short term loan payable amounted to $31,918 and $29,224 and long term loan payable amounted to $5,559 and $28,805 respectively.
For the nine month periods ended September 30, 2011, Sancon SH accrued and paid interest $1,252 on this loan.
The future payment schedule for this term loan is as follows:
| Amount | ||||
| 2011 | 49,538 | |||
| 2012 | 189,883 | |||
| Total | $ | 239,421 | ||
Note 7. Due to related parties
Net amounts due to related parties are as follows:
| September 30, 2011 | December 31, 2010 | |||||||
| Former CEO and major shareholder | $ | - | $ | (53,108 | ) | |||
| Independent Director | - | (5,021 | ) | |||||
| Current CEO | - | (638,901 | ) | |||||
| $ | - | $ | (697,030 | ) | ||||
Note 8. Stockholders equity
Common Stock
On October 15, 2007, the Company entered into a ten year service agreement with Lyons Capital LLC. In connection with this agreement, Lyons Capital LLC will receive 300,000 shares of Restricted, RULE 144 Stock, for services rendered or to be rendered in the future. The Company issued shares on March 10, 2008 and recorded at the fair market value of $156,000. This amount will be amortized over a period of ten years from January 01, 2008. For the nine months periods ended September 30, 2010 and 2009, the Company recorded $11,700 in consulting expense. The unamortized amount of $113,100 was included under deferred compensation as at September 30, 2010.
On January 01, 2008, the Company entered in a four year employment agreement with Mr. Jack Chen, current CEO, which prescribes the issuance of stock in lieu of salary. On April 13, 2009, the Company issued 350,000 shares of Restricted, RULE 144 Stock to Mr. Chen. The shares were recorded at fair market value of $52,500. As of the September 30, 2010, the Company recorded $67,500 in due to related parties. This is a stock subscription liability.
On January 01, 2010, the Company entered in a two year employment agreement with Mr. David Chen, former CEO and major shareholder, which prescribes the issuance of stock in lieu of salary. As of the September 30, 2010, the Company recorded $31,500 in due to related parties. This is a stock subscription liability.
| F-10 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
Note 8. Stockholders equity (continued)
Stock Options
Options outstanding as of September 30, 2011 and related weighted average price and intrinsic value are as follows:
| Exercise Prices | Total Options Outstanding | Weighted Average Remaining Life (Years) | Total Weighted Average Exercise Price | Options Exercisable | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||||||||||||
| $ | 0.33 | 900,000 | 3.25 | $ | 0.33 | 900,000 | $ | 0.33 | $ | 90,000 | ||||||||||||||||
On January 01, 2010, the Company entered in an option agreement with Mr. Jack Chen, current CEO. In connection with this agreement, the Company granted a total of 600,000 options with an exercise price of $0.33 per share. These options expire in 5 years.
On January 01, 2010, the Company entered in an option agreement with Mr. David Chen, former CEO and major shareholder. In connection with this agreement, the Company granted a total of 300,000 options with an exercise price of $0.33 per share. These options expire in 5 years.
The Company valued the stock options by the Black-Scholes model with the following assumptions:
| Expected | Expected | Dividend | Risk Free | Grant Date | ||||||||||||||
| Term | Volatility | Yield | Interest Rate | Fair Value | ||||||||||||||
| 3.25 | 126.68 | % | 0 | % | 1.25 | % | $ | 0.33 | ||||||||||
The following summary presents the options granted, exercised, expired and outstanding at September 30, 2011:
| Options Outstanding | ||||
| Outstanding, December 31, 2010 | 900,000 | |||
| Granted | - | |||
| Forfeited/Canceled | - | |||
| Exercised | - | |||
| Outstanding, September 30, 2011 | 900,000 | |||
For the nine months ended September 30, 2011 and 2010, the Company recognized approximately $0 and $38,898, respectively, as compensation expenses for its stock option plan.
| F-11 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
Note 9. Segmental information
Statement of Financial Accounting Standards No. 131 (“SFAS 131”), (ASC 250) “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 nine months periods ended September 30, 2011 and 2010, the Company is organized into two business segments: (1) material recycling, (2) waste service. The following table presents a summary of operating information and certain quarter-end balance sheet information for the nine months periods ended September 30, 2011 and 2010:
| For the nine month periods ended September 30, | ||||||||
| 2011 | 2010 | |||||||
| Net sales from various areas: | ||||||||
| Material Recycling | $ | 1,665,288 | $ | 2,090,513 | ||||
| Waste Service | 7,339,908 | 7,399,903 | ||||||
| Consolidated | $ | 9,005,196 | $ | 9,490,416 | ||||
| Net income (loss): | ||||||||
| Material Recycling | $ | (294,203 | ) | $ | (59,091 | ) | ||
| Waste Service | (7,482,092 | ) | 1,859,549 | |||||
| Un-allocted | 1,994,915 | (149,598 | ) | |||||
| Consolidated | $ | (5,781,380 | ) | $ | 1,650,860 | |||
| Identifiable assets: | December 31, 2010 | |||||||
| Material Recycling | $ | 753,121 | $ | 833,326 | ||||
| Waste Service | 8,979,044 | 8,509,206 | ||||||
| Un-allocted | - | 1,589 | ||||||
| Consolidated | $ | 9,732,165 | $ | 9,344,118 | ||||
Note 10. Major Customers and Vendors
Our two top customers provided approximately 61% of net sales for the nine month period ended September 30, 2011. Total accounts receivable due from these customers was approximately 86% of total accounts receivable as of September 30, 2011.
Our three major vendors provided approximately 25% of total purchases for the nine month period ended September 30, 2011. Total accounts payable due to these vendors was approximately 44% of total accounts payable as of September 30, 2011.
| F-12 |
SANCON RESOURCES RECOVERY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended September 30, 2011
(UNAUDITED)
Note 11. Income Taxes
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.
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.
Note 12. Held to Maturity Securities
As of September 30, 2011 and December 31, 2010, the investment in securities amounted to $nil and $129,892.
The held to maturity securities of $129,892 was mature on August 22, 2011. So it is classified under current assets in the accompanied financial statements.
| F-13 |
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:
| ● | 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. |
| ● | 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. |
| ● | Results of operations. This section provides an analysis of our results of operations for the nine months period ended September 30, 2011 compared to the same period in 2010. A brief description is provided of transactions and events, including any related party transactions that affect the comparability of the results being analyzed. |
| ● | Liquidity and capital resources. This section provides an analysis of our financial condition and cash flows for the nine months period ended September 30, 2011 and 2010. |
| ● | 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 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.
| 4 |
Dependence upon Management
Our future performance and success is dependent 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 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.
| 5 |
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 4,000 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 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, 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 Shanghai, Guangdong, Zhejiang and Fujian.
The Trend in Chinese Market
The amount of materials recycled in China in 2007 was 142.3 million metric tons. This is expected to increase to 244.8 million metric tons in 2013. Moreover, there are $30-$35 billion waste materials can be recycled but without recycling in China. There are 5 million tons of used steel and iron, over 200,000 tons of non-ferrous metal, 14 million tons of waste paper and a great volume of waste plastic and waste glass that could be recycled and utilized within China each year.
The Chinese Government is emphasizing environmental policies & projects for all sectors and entities. On August 2008, China’s top legislature passed a law to promote circular economy and will come into force on January 1, 2009. The aim of the law is to boost sustainable development through energy saving and reduction of pollutant discharges. At present China’s environmental industry is highly fragmented and at its infancy stage.
Promulgated on 25 February 2009 and effective as of January 1, 2011, the Chinese regulations on the administration of the recovery and disposal of waste electrical and electronic products (“WEEE Regulations”) are aiming at establishing a system for the disposal and recovery of waste electrical and electronic products, facilitating comprehensive utilization of resources and circular economy development, protecting the environment and safeguarding human health.
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 environmental 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 plastic, paper and glass raw materials to our customers. |
| 6 |
| 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) | Sancon has 6 strategically positioned recycling plants and about 40 depots in China and it will enable Sancon to meet the demand for nationwide environmental services. |
| 4) | Industry know-how and management team’s ability to ensure all operating and environmental standards are achieved. Our team’s experience in logistic management and waste management operations are key factors enabling the delivery of a high standard of service to Sancon’s clients. |
Employees
As of September 30, 2011, the Company employed 20 full time and part time people in Australia subsidiaries. Our subsidiary in China employed around 200 full time and part time people. 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.
Results of Operations - Comparison between the nine months ended September 30, 2011 and the same periods in 2010.
Revenue
Revenue is generated by service charges and the sale of recyclable materials. Revenue for the nine months period ended September 30, 2011 were $9,005,196, representing $485,220 or 5% decrease compared to the revenue of $9,490,416 in the same period of 2010. The revenues in the waste service business decreased from $7,399,903 for the nine months period ended September 30, 2010 to $7,339,908 for the nine months period ended September 30, 2011, a decrease of $59,995 or 1%. The revenue in the material recycling business decreased $425,225 or 20% from $2,090,513 for the nine months period ended September 30, 2010 to $1,665,288 for the nine months period ended September 30, 2011.
Cost of Revenue
The cost of revenue is the direct cost for sale of the recycling materials. For the nine months period ended September 30, 2011, the cost of revenue was $6,226,338. It was $1,250,385 or 25% increase as compared to the cost of sales of $4,975,953 for the nine months period ended September 30, 2010. Among which, cost of revenue in the waste service business increased $1,534,732 or 38% from $4,087,304 for the nine months period ended September 30, 2010 to $5,622,036 for the nine months period ended September 30, 2011. The increase was related to our new business of waste cardboard collection which started from June 2010. Cost of revenue in the material recycling business for the nine months period ended September 30, 2011 and 2010 was $604,302 and $888,649 respectively, a decrease of $284,347 or 32%. The decrease of cost of sales in our material recycling business was in line with the sales.
For the nine months period ended September 30, 2011 and 2010, cost of revenue was 69% and 52% of sales respectively.
| 7 |
Gross profit
The gross profit for the nine months period ended September 30, 2011 was $2,778,858, representing $1,735,605 or 38% decrease compared to $4,514,463 for the nine months period ended September 30, 2010. The gross margin reduced from 48% for the nine months period ended September 30, 2010 to 31% for the nine months period ended September 30, 2011. Gross profit in the waste service business decreased $1,594,727 or 48% from $3,312,599 for the nine months period ended September, 2010 to $1,717,872 for the same periods in 2011. The low gross profit in our waste paper collection is the main reason for this decrease. However, our management believes the gross margin will be increased along with the expansion of the market in waste paper collection. Gross profit in the material recycling business decreased $140,878 or 12% from $1,201,864 for the nine months period ended September 30, 2010 to $1,060,986 for the same period in 2011. Our material recycling business still suffers from the global economic crisis.
Selling, general and administrative expenses
Selling, general and administrative expenses increased to $10,439,857 for the nine months period ended September 30, 2011, from $2,695,493 for the nine months period ended September 30, 2010, an increase of $7,744,364 or 287%. The SG&A expenses in the waste service business was $1,403,163 for the nine months period ended September 30, 2010; this number decreased to $9,084,668 for the nine months period ended September 30, 2011. It increased $7,681,505 or 547%. The SG&A expenses in the material recycling business increased $212,457 or 19% from $1,142,732 for the nine months period ended September 30, 2010 to $1,355,189 for the nine months period ended September 30, 2011.
The SG&A expenses were 116% and 28% of the revenue for the nine months period ended September 30, 2011 and 2010 respectively.
Depreciation Expense
Depreciation expense decreased to $127,054 for the nine months period ended September 30, 2011 from $182,783 for the nine months period ended September 30, 2010. It decreased $55,729 or 30%. The decreases were mainly due to the disposal of one of its subsidiaries, Sancon Recycling Pty. Limited in September 2011. The depreciation expense in the waste service business increased $20,651 or 19% to $127,054 for the nine months period ended September 30, 2011 from $106,403 for the nine months period ended September 30, 2010. For the nine months period ended September 30, 2011 and 2010, depreciation expense was 1% and 2% of the revenue respectively.
Other Income (Expense)
For the nine months period ended September 30, 2011, the Company booked net other income of $1,673,013 compared to net other expense of $1,343 for the nine months period ended September 30, 2010, an increase of $1,674,356 or 124,673%.
For the nine months period ended September 30, 2011, net other income was 19% of the revenue while it was (0.01%) for the nine months period ended September 30, 2010.
Income Tax
The income tax was $19,816 for the nine months period ended September 30, 2011, an increase of $1,563 or 9% from $18,253 for the nine months period ended September 30, 2010. For the nine months period ended September 30, 2011 and 2010, income tax was 0.2% of the revenue respectively.
Non-Controlling interest in subsidiaries
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 May 26, 2010, Sancon Shanghai invested an additional RMB1, 000,000 or $151,700 in Shanghai Sheng Rong. Previously, Sancon SH had invested $44,010 (RMB 300,000) in return for a 20% equity interest. After the completion of this current transaction, Sancon SH now holds 52% of the equity interest in Shanghai Sheng Rong. Net loss attributed to non-controlling interest was $(95,485) and $2,153 for the nine months period ended September 30, 2011 and 2010 respectively. For the nine months period ended September 30, 2011 and 2010, no controlling interest was (1%) and 0.02% of the revenue respectively.
Net income
Net income for the nine months period ended September 30, 2011 was $(5,781,380), compared to $1,650,860 for the nine months period ended September 30, 2010, a decrease of $7,432,240 or 450%. The decrease in net income was mainly due to the increase of net loss in the material recycling business of $235,112 or 398%. The net income in the waste service business also decreased $9,341,641 or 502%. For the nine months period ended September 30, 2011, net income was (64%) of the revenue while it was 17% for the nine months period ended September 30, 2010.
| 8 |
Liquidity and Capital Resources
As shown in the accompanying financial statements, the Company has accumulated profit of $(420,173) as of September 30, 2011 compared to $5,361,208 as of December 31, 2010. In addition, we have positive working capital $426,441 as of September 30, 2011 and it was $5,611,049 as of December 31, 2010. It decreased $5,184,608 or 92%. That is mainly due to the increase of $7,348,688 in Accrued expenses and other payables.
Operating Activities
The net cash provided by operating activities for the nine months period ended September 30, 2011 amounted to $612,713 compared to $1,652,820 for the nine months period ended September 30, 2010, a decrease of $1,040,107 or 63%. The increase mainly included trade receivables decrease of $537,196 and other current liabilities increase of $7,323,529.
Investing Activities
Net cash used in investing activities amounted to $100,346 for the nine months period ended September 30, 2011 compared to $76,040 for the nine months period ended September 30, 2010, an increase of $24,306 or 32%. It’s due to the cash decreased from acquisition and the decrease on investment in Sheng Rong Company which occurred in year 2010.
Financing Activities
Net cash used in financing activities amounted to $588,093 and net cash provided by financing activities amounted to $215,325 for the nine months period ended September 30, 2011 and 2010 respectively, a decrease of $803,418 or 373%. The decrease mainly included payments of shareholders’ loans of $697,030.
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.
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.
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Income taxes
We account for income taxes in accordance with SFAS No. 109 (ASC 740), Accounting for Income Taxes. SFAS 109 (ASC 740) 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(ASC 718)”. This statement amends SFAS No. 123(ASC 718), “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(ASC 718) 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 (ASC 718), 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(ASC 718) 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(ASC 718). Results for prior periods have not been restated, as provided for under the modified-prospective method.
As of December 31, 2010, the Company issued 900,000 shares of stock options to directors and accrued $218,751 of related expenses. For the nine months period ended September 30, 2011, the Company did not issue any stock options.
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.
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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 anticipated 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information to be reported under this Item is not required of smaller reporting companies.
ITEM 4T. 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 not effective.
During the nine months ended September 30, 2011, there were no changes in our internal accounting controls or in other factors that materially affected our internal controls over financial reporting.
The company is involved in the following litigation:
Dragon Wings Communications Limited, a Hong Kong corporation and Wong Yee Tat, an individual are the first and second plaintiff. They filed a complaint on July 25, 2008 in the District Court of the Hong Kong special Administrative Region, Civil Action No. 3251, against the first defendant, Fintel Group Limited for breach of contract. The Company is the second defendant because plaintiff claimed Fintel Group Limited is a wholly owned subsidiary of the Company. Under the writ, the plaintiff claimed that pursuant to a written stock purchase agreement, the first defendant shall purchase the first plaintiff’s common stock by common shares of Financial Telecom Limited (USA) Inc. (replaced by shares of MKA Capital Inc. from June 2006) or pay to the plaintiff cash of $94,172 in lieu of the shares. Pluses the interest and cost of litigation, the total amount claimed by plaintiff were $104,966. The court adjudged that the first defendant do pay the plaintiffs damages on September 08, 2008 and also adjudged that the second defendant do pay the plaintiffs damages on December 10, 2008. The Company has denied all allegations in the complaint because Fintel Group Limited was not a subsidiary at the time.
The information to be reported under this Item is not required for smaller reporting companies.
Item 2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
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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.
None.
| (1) | Exhibits: Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits following the signature page of this Form 10-Q, which is incorporated herein by reference. |
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In accordance with the requirements 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. | ||
| Dated: February 11, 2013 | ||
| By: | /s/ Stephen Tang | |
| Stephen Tang | ||
| President and Director | ||
| (Chief Executive Officer) | ||
| Dated: February 11, 2013 | ||
| By: | /s/ Francis Bok | |
| Francis Bok | ||
| Director | ||
| (Chief Financial Officer) | ||
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| Exhibit No. | Description | |
| 31.1* | Certification of President | |
| 31.2* | Certification of Director | |
| 32.1* | Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed Herewith.
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