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EX-32.1 - CERTIFICATION - IGS Capital Group Ltdsancon_10k-ex3201.txt
EX-24.1 - POWER OF ATTORNEY - IGS Capital Group Ltdsancon_10k-ex2401.txt
EX-31.2 - CERTIFICATION - IGS Capital Group Ltdsancon_10k-ex3102.txt
EX-31.1 - CERTIFICATION - IGS Capital Group Ltdsancon_10k-ex3101.txt
EX-21 - SUBSIDIARIES OF THE REGISTRANT - IGS Capital Group Ltdsancon_10k-ex2101.txt


UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year period ended DECEMBER 31, 2009 ----------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ----------------- Commission file number 000-50760 --------- SANCON RESOURCES RECOVERY, INC. (Exact name of small business issuer in its charter) Nevada 58-2670972 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) No 2 Yinqing Lu, Songjiang District, Shanghai, China, 201615 (Address of principal executive offices) (+86) 21 67756099 (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: none Securities registered under Section 12(g) of the Exchange Act: Title of each class: Common Shares Name of Exchange on which registered: OTCBB Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] Check whether the Registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.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 [ ] Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act: Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Check whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act). Yes [ ] No [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 26, 2010 was approximately $10.1 million (based upon a closing sale price of $0.44 per share, as reported on the OTCBB). The issuer's revenues for the fiscal year ended December 31, 2009, were $11 million. 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; 22,964,996 shares issued and outstanding on December 31, 2009. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Sancon Resources Recovery, Inc. FORM 10-K FISCAL YEAR 2009 TABLE OF CONTENTS PART I Item 1. Description of Business 3 Item 2. Description of Property 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Common Equity, Related Stockholder Matters, and Small Business Issues/purchases of Equity Securities 7 Item 6. Management's Discussion and Analysis, or Plan of Operation 8 Item 7. Financial Statements and Supplementary Data 13 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 Item 8A. Controls and Procedures 14 Item 8B. Other Information 14 PART III Item 9. Directors, Executives Officers, Promoters and Control Persons. Compliance with Section 16(a) of the Exchange Act 15 Item 10. Executive Compensation 16 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 17 Item 12. Certain Relationships and Related Transactions 18 Item 13. Principal Accountant Fees and Services 19 Item 14. Exhibits, Financial Statement Schedules 20 SIGNATURES 21 2
-- PART I -- ITEM 1. DESCRIPTION OF BUSINESS BUSINESS COMBINATION AND CORPORATE RESTRUCTURING Effective May 26, 2006, a business combination occurred between Sancon Recycling Pty Ltd. ("SRPL") and MKA Capital Inc. (hereinafter referred to as "MKAC"). The combination was effected by MKAC exchange its seventy-five percent (75%) equity stake in MK Aviation, S.A. (hereinafter referred to as "MKA") for one hundred percent (100%) equity stake in SRPL held by Mr. Jack Chen, Mr. Yiu Lo Chung, Mr. Guy Waters, and associated parties ("the Shareholders"). Meanwhile, the Shareholders exchanged their ownership of 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. Subsequently MKAC was renamed Sancon Resources Recovery, Inc. As a result of the merger, there was a change in control of the public entity MKAC. In accordance with SFAS No. 141, SRPL was the acquiring entity. While the transaction is accounted for using the purchase method of accounting, in substance the Agreement is a recapitalization of the Company's capital structure. For accounting purposes, SRPL accounted for the transaction as a reverse acquisition and SRPL is the surviving entity. SRPL did not recognize goodwill or any intangible assets in connection with the transaction. Effective with the Agreement, the Shareholders will own 14,897,215 shares of MKAC voting common stock or 74.28% of the Registrant's 20,030,370 issued and outstanding voting common stock at the time. 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 MKAC'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. The accompanying financial statements present the historical financial condition, results of operations and cash flows of Sancon as of December 31, 2009. BUSINESS OF THE ISSUER OVERVIEW OF THE COMPANY AND ITS OPERATIONS Sancon Resources Recovery, Inc. is an industrial waste recycling company with operations based in Australia and China. Sancon's main operations and services include industrial waste management consulting, collection and reprocess of recyclable materials such as glass, plastic, cardboard, and paper sourced from suppliers such as Aperio Group and Astron. The recycled materials will then enter into manufacture cycles as raw materials. 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 current economic crisis, Chinese manufacturers are increasingly turning to recycled materials to lower its costs, resulting tremendous demand for recycled materials import. Sancon currently exports more than 4,000 tons of recycled industrial waste material annually to its processing partners and manufacturers in China. The waste management service is another important operation for the Company. Sancon provides full waste management solutions for manufacturing companies; aim to recover recyclable materials instead of dumping them into land-fills. The major customers for Sancon are Chinese manufacturers and recycled material traders such as Pernod Ricard, Hang Mai and Yue Wu, which are located mainly in the Chinese provinces of Shanghai, Guangdong, Zhejiang and Fujian. In order to meet the environmental initiatives set for 2010 Shanghai World Expo and promote the concept of "waste separation and conserve resources," Shanghai Municipal Afforestation Bureau launched the "More Green for Shanghai" campaign. Sancon is the only commercial enterprise that has been invited to participate in this campaign. Sancon will place specially made bins for the collection of waste paper from college campuses and office buildings. New copy paper will be given free of charge to the campaign-participating outlets to encourage and reward recycling. The waste paper collection is expected to reach over a thousand tons in 2010. 3
Sancon has been also awarded a license from the local Chinese Government to collect and process electronic waste such as computers, printers and copiers, as well as electric white goods. The Sancon group comprises the following companies: Registered Name Domicile Owner % held Status (business is conducted under the registered names) Sancon Recycling Pty Ltd. ("Sancon AU" hereinafter) Australia Sancon 100 Active Sancon Resources Recovery (Shanghai) Co., Ltd. ("Sancon SH" hereinafter) Shanghai Sancon 70 Active Crossover Solutions Inc. ("CS" hereinafter) British Virgin Sancon 100 Active Island OUR STRATEGY Chinese waste management market is estimated at $35 billion by 2010 and is dominated by state owned companies largely backward managed, inefficient, lack of technology and with outdated collections. All of which presents enormous opportunities for a dynamic foreign company such as Sancon. Fortune 500 companies like Suez and Veolia is mainly focused on incineration, water and hazardous waste treatment market, where the government has allowed foreign entry, leaving the niche recycling market to specialized recycling company such as Sancon. Our near-term growth strategy is to first expand our recycling and waste management operations in China by setting up larger network of facilities and logistics operations around Australia and China. Secondly, strengthen our relationships with our existing major suppliers to offer large selection of plastic and glass raw materials. And we aim to increase our processing capacity for recycled plastic and glass waste materials at our existing facilities in Australia and China. Thirdly, develop new markets and customers, like electronic waste materials industry, waste battery disposal and new energy. The well established trust on quality control of the recycled materials with Sancon's customers in Australia and China, and our aggressive expansion plans laid the groundwork firmly for long-term growth. 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 1 billion tons annually. 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. In addition to establishing a licensing system for enterprises, the WEEE Regulations set forth labeling obligations on manufacturers and importers, according to which information such as relevant toxic or hazardous substances and methods for recovery/disposal has to be indicated on the products or their introduction manuals. A dedicated governmental fund will be established to be used as allowance for activities of recovery and disposal of electrical and electronic products. Manufacturers of electrical and electronic products, consignees and their agents are required to pay fees which will go directly into the fund. 4
SANCON'S VISIONS AND GOALS The long-term objective of Sancon is to seek and develop further alternative resources recovery solutions, which will help to 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 waste management 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 OUR DISTRIBUTION METHOD AND CUSTOMERS As our ending customers are diversified with geographic areas, we distribute our products into certain wholesalers who have wide connection with different customers in certain geographic area. Due to the distribution method, we depend on these distributors which are located in China. OUR SUPPLIERS We collect recyclable raw materials from commercial and industrial suppliers whenever and wherever possible. As a result, our suppliers are quite diversified. 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 and glass raw materials to our customers. 2) Sancon has 6 strategically positioned recycling plants and 40 depots in China and it will enable Sancon to meet the demand for nationwide environmental services. 3) Working closely with more processing partners in China will add value to our products. 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. INTELLECTUAL PROPERTY None. EMPLOYEES As of December 31, 2009, the Company employed 15 people in Australia subsidiaries. Our joint venture in China employed 20 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 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. 5
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 June 15, 2010. 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 June 15, 2010. In any case, such costs will likely affect adversely the Company's business, financial condition and results of operations. ITEM 2. DESCRIPTION OF PROPERTY The Company leases office space in Australia and China. The lease for Australia and China expire in 2011 and 2018 respectively. The Australian Office is located in 7-9 Graham Road Clayton South 3169 VIC Australia, Rental fee, without GST and outgoing is $150,143 per annum. The size of the whole building is 2,414 square meters. In China, the major office is located in No 2 Yinqing Lu, Songjiang District, Shanghai. The annual rental fee is $148,900 and the size of the whole building is 5,056 aquare meters. The Company also leases many warehouses in more than 40 cities in China. The total annual rental fee for these warehouses is $213,862 for the year 2009. We may need to lease more facilities for our future operation purpose. ITEM 3. LEGAL PROCEEDINGS The company 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 denied all allegations in the complaint because Fintel Group Limited is no longer our subsidiary since November 27, 2006. The Company is consulting lawyers and seeking for the best legal solution. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during fiscal year 2009. 6
-- PART II -- ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market information The Company's stock is assigned the symbol SRRY.OB and is quoted and traded on the OTCBB. The range of low to high closing prices on the OTCBB is shown in the table below (rounded to the nearest cent). This information is taken from MSN Money and CSI. Readers should note OTCBB quotations are a reflection of inter-dealer prices, without retail mark-up, mark-down, or commissions, and may not represent actual transactions. FISCAL 2009 FISCAL 2008 QUARTER $ HIGH CLOSING PRICE $ LOW CLOSING PRICE $ HIGH CLOSING PRICE $ LOW CLOSING PRICE ------- -------------------- ------------------- -------------------- ------------------- First 0.20 0.17 0.23 0.11 Second 0.39 0.13 0.63 0.12 Third 0.44 0.38 0.61 0.38 Fourth 0.53 0.29 0.45 0.16 HOLDERS OF THE COMPANY'S STOCK The Company has issued common stock only. On December 31, 2009, the total number of holders of record as according to our transfer agent was approximately 634. DIVIDENDS We did not pay any cash dividends on our common stock for fiscal year ended on December 31, 2009. UNREGISTERED SALES OF EQUITY SECURITIES date type amount person consideration transaction ---- ---- ------ ------ ------------- ----------- 1-Feb-06 common share 11,283 R. Gorthuis $14,668 Compensation 1-Feb-06 common share 4,003 R. Yan $4,166 Compensation 1-Feb-06 common share 3,753 TWC Corporation Services Limited $3,642 Settlement of debts 1-Feb-06 common share 9,685 Bok, Wai Kee $9,398 Settlement of debts 1-Feb-06 common share 1,028 Ng, Yu Yan Betty $998 Settlement of debts 10-Feb-06 common share 54,539 Mr. Lu Zhao Hui $68,174 Increase investment holdings 10-Feb-06 common share 61,846 Mr. Song Lin $77,308 Increase investment holdings 25-May-06 common share -54,539 Mr. Lu Zhao Hui ($68,174) Decrease investment holdings 25-May-06 common share -61,846 Mr. Song Lin ($77,308) Decrease investment holdings 25-May-06 common share 13,110 R. Gorthuis $12,668 Compensation 25-May-06 common share 8,623 R. Yan $8,332 Compensation 27-Nov-06 common share 250,000 Bear Creek Capital $27,500 Consulting fee 23-Jan-07 common share 250,000 Bear Creek Capital $88,500 Consulting fee 10-Mar-08 common share 1,148,572 Fintel Group Limited $402,000 Increase investment holdings 10-Mar-08 common share 300,000 Lyons Capital LLC $156,000 Consulting fee 21-Apr-08 common share -148,572 Fintel Group Limited ($52,000) Decrease investment holdings 1-Aug-08 common share 50,000 Mr. Xia Chen $7,500 Consulting fee 1-Aug-08 common share 250,000 Mr. Jack Chen $37,500 Compensation 1-Aug-08 common share 300,000 CEOcast, Inc $72,000 Consulting fee 30-Sep-08 common share 300,000 CEOcast, Inc $72,000 Consulting fee 13-Apr-09 common share 350,000 Mr. Jack Chen $52,500 Compensation 7
The number of shares issued was based on the average closing price of our common shares on the OTCBB during certain periods. The shares were exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended, pursuant to Rule 903, as a sale by the issuer in an offshore transaction. No underwriting or other commissions were paid in connection with the issuance of these shares. No forms of conversion or exercise options are attached to the shares. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS or PLAN OF OPERATION The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases such as "anticipate", "intend", "expect" and words and phrases of similar import. We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict, including those set forth in Item 1A above. We encourage you to read those risk factors carefully along with the other information provided in this Report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law. You should read this MD&A in conjunction with the Consolidated Financial Statements and Related Notes in Item 7. OVERVIEW Sancon Resources Recovery, Inc. is an industrial waste recycling company with operations based in Australia and China. Sancon currently exports more than 4,000 tons of recycled industrial waste material annually to its processing partners and manufacturers in China. Sancon's main operations and services include industrial waste management consulting, collection and reprocess of recyclable materials such as glass, plastic, cardboard, and paper before its re-entry into manufacture cycles as raw materials. 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 current economic crisis, Chinese manufacturers are increasingly turning to recycled materials to lower costs, resulting tremendous demand for recycled materials import. The major customers for Sancon are Chinese manufacturers and recycled material traders such as Pernod Ricard, Hang Mai and Yue Wu etc, which are located mainly in the Chinese provinces of Shanghai, Guangdong, Zhejiang and Fujian. PLAN OF OPERATION During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations: o We intend to continue with our marketing strategies to deliver our products in China and provide our waste management service to clients; o Along with the continued plastic and glass materials products we are now processing, we are also developing to process other materials, such as electronic materials, waste battery and new energy. o During the next twelve months, the Company expects to set up larger network of collection and sales in China. o During the next twelve months, the Company is planning to raise additional US$3-4 million cash to facilitate our processing capacity. The capital will be used to some or all of the following activities: 1) acquisition of other companies running similar business in China and the USA; 2) purchase of new equipment to satisfy increasing new type of materials requirements; 3) marketing and general administrative expenses for new operation in China. We may raise such capital through issuing our common stocks or warrants. Our aggressive expansion plan will be replied on such capital support. We cannot assure the successful result of fund raising. As such, we may not execute our initial business strategy or plan as expected, and furthermore, our competitors may stand in a better position than us, which results in an adverse effect on our business, although we believe that currently, even without such funds, we can still run a healthy business within our already occupied markets. 8
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. REVENUE RECOGNITION In accordance with generally accepted accounting principles ("GAAP") in the United States, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that the Company recognizes in the financial statements contained herein. Due to the disposal of subsidiary Guang Cheng Int'l Trading Ltd., the Company now is organized into two business segments while it was three in the last year: material recycling and waste management service. Their revenue recognition is as follows: (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. The revenue is recognized when delivery of the material is occurred and invoice issued. (2) Waste Management Service refers the activities of providing waste management service with operations located in Shanghai China. The revenue is recognized when service is completed and invoice is issued. 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(ASC 740), 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. 9
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 forwabds. 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 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 (ASC 718); 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, 2009 and 2008, 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 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. RESULTS OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER, 2009 AND 2008 Revenue Revenue is generated by service charges and the sale of recyclable materials. Revenues for the year ended December 31, 2009 were $10,997,101 as compared to $10,569,830 of 2008, an increase of $427,271 or 4%. The increases were mainly due to the sales amount contributed from the waste service business. The 10
revenues in the waste service business increased from $8,161,471 for the year ended December 31, 2008 to $ 8,811,955 for the year ended December 31, 2009, an increase of $650,484 or 8%. The revenue in the material recycling business decreased $223,213 or 9% from $2,408,359 for the year ended December 31, 2008 to $2,185,146 for the year ended December 31, 2009. The decrease of revenue in the material recycling business was mainly due to the reduction of economic activities which caused by the current economic crisis. Cost of revenue Cost of revenue is the direct cost for sale of the recycling materials. For the year ended December 31, 2009, it increased to $5,830,774 from $4,660,110 for the year ended December 31, 2008, an increase of $1,170,664 or 25%. Among which, cost of revenue in the waste service business increased $1,295,416 or 36% from $3,640,217 for the year ended December 31, 2008 to $4,935,633 for the year ended December 31, 2009. The increase mainly contained $1,292,195 of shipping expenses. The increase were related to our market expandant and the change of shipping mode that required by the customers. Cost of revenue in the material recycling business for the fiscal year ended 2008 and 2009 was $1,012,393 and $895,141 respectively, a decrease of $117,252 or 12%. The decrease of cost of sales in the material recycling business was in line with the sales. For the fiscal year ended 2008, cost of revenue was 44% of revenue compare to 53% for the fiscal year ended 2009. Gross profit The gross profit for the year ended December 31, 2009 was $5,166,327, representing $743,393 or 13% decrease compared to $5,909,720 for the year ended December 31, 2008. The gross margin reduced from 56% for the year 2008 to 47% for the year 2009. The decrease of the gross profit is mainly due to its reduce in the waste service business of $644,932 or 14%. The increase in cost of sales leads to the decline of gross profit in the waste service business. The gross profit in the material recycling business also decreased $105,961 or 8% from $1,395,966 for the year ended December 31, 2008 to $1,290,005 for the same period in 2009. Due to the current economic crisis, our material recycling business declined a lot compare last year. Selling, general and administrative expenses Selling, general and administrative expenses decreased to $2,860,905 for the year ended December 31, 2009, from $4,226,568 for the year ended December 31, 2008, a decrease of $1,365,663 or 32%. The SG&A expenses in the waste service business was $2,652,532 for the year ended December 31, 2008, however, this number decreased to $1,514,710 for the year ended December 31, 2009. It decreased $1,137,822 or 43% during the period. The decrease was mainly contained $719,253 of consulting fee and $29,157 of meeting fee. The high consulting fee and other SG&A expenses paid during the last year were related to the market developing. From the beginning of this year, these kinds of expenses were reduced gradually. The SG&A expenses in the material recycling business also decrease $90,486 or 7% from $ 1,277,081 for the year ended December 31, 2008 to $1,186,595 for the year 2009. The decrease mainly caused by the decline of sales. The SG&A expenses also included investor relationship expenses which decreased $137,355 or 46% from $296,955 for the year ended December 31, 2008 to $159,600 for the year ended December 31, 2009. The SG&A expenses was 26% of the revenue for the year 2009 while it was 40% for the year 2008. Depreciation Expense Depreciation expense increased to $190,724 for the year ended 2009 from $121,999 for the year 2008. The expenses increased $68,725 or 56% during the year ended on December 31, 2009 as compared to that in 2008. The increases were mainly due to the purchase of plant and machinery for the year 2009. The depreciation expense in the waste service business increased $20,925 or 32% from $66,086 for the year 2008 to $87,011 for the year ended 2009. The depreciation expense in the material recycling business increased $47,800. For the year ended December 31, 2008, depreciation expense was 1% of the revenue while it was 2% for the year ended December 31, 2009. 11
Other Income (Expense) For the year ended December 31, 2009, the Company booked other income of $52,407 compared to $77,062 for the year ended December 31, 2008. The decrease in other income is $24,655 or 32% during the period. The mainly other income received in the year 2009 is tax refund of $44,936. For the year 2008 and 2009, other income was 0.7% and 0.5% of the revenue respectively. Discontinued Operation On March 31, 2009, the company sold 100% equity interest of Guang Cheng Int'l Trading Ltd. ("Guang Cheng") for $1,290 plus the assumption of certain liabilities. Loss on discontinued operation was $1,884 for the year ended December 31, 2009 while it was gain of $6,161 for the year ended December 31, 2008. Income Tax The income tax increased to $ 40,779 for the year ended December 31, 2009 from $17,254 for the year ended December 31, 2008, an increase of $23,525 or 136%. That is because our waste service business contributes $34,349 of income tax for the year ended December 31, 2009 while it was no income tax for the year 2008. For the year ended December 31, 2009 and 2008, income tax was 0.4% and 0.2% of the revenue respectively. Non-Controlling interest in subsidiary 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. Net income of $30,754 and net loss of $25,391 was attributable to Non-Controlling interest for the year ended December 31, 2009 and 2008 respectively. For the year 2009 and 2008, non-controlling interest was 0.3% and 0.2% of the sales respectively. Net loss/income Net income for the year ended December 2009 was $2,093,688, compared to $1,652,513 in 2008, an increase of $441,175 or 27%. The increase is mainly due to the significant increase of net income in the waste service business of $377,670 or 20% although net income in the material recycling business decreased $73,305 or 83%. The dramatic decrease in SG&A expenses in the waste service business was the main reason for the increase of the net income. Net profit margin for the year ended December 31, 2009 was 19% while it was 16% for the year 2008. Liquidity and Capital Resources As shown in the accompanying financial statements, the Company booked accumulated Profit of $3,461,642 as of December 31, 2009 compares to $1,367,955 for the year ended December 31, 2008. In addition, our working capital is $3,387,860 for the year ended December 31, 2009 and it was $1,160,747 for the year ended December 31, 2008. It increased $2,227,113. That is mainly due to the increase of $1,483,207 in cash and cash equivalents and $699,433 in the trade receivables. The strong sales for the year ended December 31, 2009 lead to the great increase in cash and trade receivable. Our ability to continue as a going concern depends on the successful execution of our business plan to maintain the current profitability of the company as a whole. Operating Activities The net cash provided by operating activities for the year ended December 31, 2009 amounted to $1,869,791 compared to $2,556,250 for the year ended December 31, 2008, and decrease $686,459 or 27%. The decrease mainly included trade receivables of $1,024,881 and trade payable of $265,571. These decreases were offset by net income of $441,175 and other current assets of $ 120,853.The payment terms of our accounts receivable is about one month and will not be more than two months. 12
Investing Activities Net cash used in investing activities amounted to $207,859 for the year ended December 31, 2009 compared to $586,132 for the year 2008, a decrease of $378,273 or 65%. It's mainly due to the decrease on purchase of property and equipment and long term investment. For the year ended December 31, 2008, the cash used in purchase of property and equipment was $467,693, however, this number decreased to $197,002 for the same period in 2009. During the year ended December 31, 2009, the Company disposed equipment and received cash of $ 161,354. During the year ended December 31, 2009, the Company invested RMB 300,000 or $44,010 to acquire 20% equity of Sheng Rong and had a loss of $1,332. The company also invested $130,055 on marketable securities for the year 2009. Financing Activities Net cash used in financing activities amounted to $74,284 for the year ended December 31, 2009 compared to obtained $9,954 for the year 2008, a decrease of $84,238 or 846%. The decrease mainly included payment on mortgage loan of $20,229. This decrease was offset by shareholders' loan of $ 145,922. The Company has financed its growth by utilizing cash reserves and loans from directors. Loans from directors are unsecured, and deferred payment term and without interest bearing. The Company's primary use of funds is for the purchase of equipment for operation expansion and working capital. 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. However the management observed increased competition in the material trading business has resulted in decrease margin in these businesses. The Company's operations are not affected by seasonal factors. 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 7. FINANCIAL STATEMENTS Financial statements are attached hereto following beginning on Page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We engaged Kabani & Company, Inc. ("Kabani"), as our new independent accountant on November 27, 2006. The decision to retain Kabani & Company, Inc. was recommended and approved by the Registrant's Board of Directors. During the Registrant's two most recent fiscal years and any subsequent interim period prior to the engagement of Kabani, neither the Registrant nor anyone on the Registrant's behalf consulted with Kabani regarding either (i) The application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on the small business issuer's financial statements and either written or oral advice was provided that was an important factor considered by the small business issuer in reaching a decision as to the accounting, auditing or financial reporting issue, or (ii) Any matter that was the subject of either a "disagreement" or a "reportable event." 13
ITEM 8A. 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. Managements' Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Internal control over financial reporting is a process designed by, or under the supervision of, our chief executive and chief financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009 based on criteria established under the COSO framework, an integrated framework for evaluation of internal controls issued to identify the risks and control objectives related to the evaluation of the control environment by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation described above, management has concluded that our internal control over financial reporting was not effective as of December 31, 2009. We have limited resources and we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we grow we will hire skilled professionals that will enable us to implement adequate segregation of duties within the internal control framework. Our management will also implement additional review procedures designed to ensure that the disclosure provided by the Company meets the current requirements of the applicable filing made under the Exchange Act and methodology to review the statements. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation requirements by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting during the last fiscal quarter or the fourth fiscal quarter for the year ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 8B. OTHER INFORMATION Item a. Unregistered Sales of Equity Securities and Use of Proceeds. None. Item b. Changes in Securities and Use of Proceeds. None Item c. Defaults Upon Senior Securities. None. Item d. 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 e. Other Information. None. 14
-- PART III -- ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS: COMPLIANCE WITH SECTION (16) OF THE EXCHANGE ACT IDENTIFICATION AND BACKGROUNDS OF DIRECTORS AND OFFICERS NAME AGE PRINCIPAL POSITION APPOINTMENT/RESIGNATION DATE Jack Chen 40 CEO, Director November 29, 2002 David Chen 42 Non Executive Chairman June 1, 2006 Cong Yuanli 59 Director June 1, 2006 Maggie Zhang 30 Acting CFO August 1, 2009 MR. JACK CHEN, CHIEF EXECUTIVE OFFICER & DIRECTOR Mr. Chen is currently the CEO of Sancon as well as as the Managing Director of Sancon Recycling Pty Ltd, the wholly owned subsidiary of Sancon Resources Recovery, Inc. and a successful Australia based resources recycling company with presence in Australia and China. With more than eight years of solid industrial experiences in resources recovery sector in Australia and Asia, Mr. Chen is an expert in the collection, processing, trading and reuse of industrial waste materials. Previously, he worked in a management position for a multinational German plastics and chemicals company and later built a successful plastics trading business between Hong Kong and China. MS. MAGGIE ZHANG, ACTING CHIEF FINANCIAL OFFICER Ms. Maggie Zhang joined Sancon in 2008 as Finance Manager of the company. She received a Bachelor Degree of Finance from Nanjing Agriculture University in 2003 and a Master Degree of Accounting and Finance from University of Birmingham in 2005. MR. DAVID CHEN, NON EXECUTIVE CHAIRMAN OF THE BOARD Mr. Chen served as the Non executive Chairman of the Board since June, 2006. Prior to that, Mr. Chen served as the CEO of MKA Capital, Inc. (formally Financial Telecom Limited (USA) Inc.) since its inception in 2004. He is the president and CEO of Shine Media Acquisition Corp. a blank check company listed on OTC Bulletin Board, since its inception in June 2005. He was the former CEO of Hartcourt Companies Inc from 2002 to 2004 (OTCBB: HRCT), a consolidator of IT distribution companies, and CEO of V2 Technology, a leading videoconferencing technology company. Previously, Mr. Chen was the Marketing Director of Time Warner's CNN Asia Pacific unit, Sales Director of Turner Broadcasting Systems Asia, and Managing Director of HelloAsia Inc. Mr. Chen holds a Bachelor of Economics degree from Monash University of Australia. MR. CONG YUANLI, INDEPENDENT DIRECTOR Mr. Cong Yuanli is the Chairman of Landwood Enterprise Holdings Ltd, a China based diversified holding company with businesses in international trading, import/export, real estate investment and financing. Previously he was a director at Hong Kong Landtrade Group, a holding company in real estate investment, international trust financing, hotel investment, and international trading, where he was responsible for the international trading activities. Mr. Cong is an avid fine art, antique and furniture collector and is the owner of Beijing Landwood Gallery and Beijing Yuanhantang Antique Furniture Ltd. Mr. Cong holds Bachelor of Economics and Management degree from Beijing University of Finance and Economics of China. FAMILY RELATIONSHIPS Family relationships among directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers are as follows: Mr. Jack Chen and Mr. David Chen are brothers. 15
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16(a) Beneficial Ownership Reporting Compliance, each person who was at any time during the fiscal year, a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company registered pursuant to section 12 ("reporting person") is required to file Forms 3, 4, and 5 on a timely basis, during the most recent fiscal year or prior fiscal years. Due to lack of knowledge, the relevant beneficial owners did not file on time. They will file Form 3 and Form 5 shortly. CODE OF ETHICS The Company has Standards of Ethical Conduct Policy ("Code of Ethics") that applies to all employees and directors, including the Chairman, Chief Executive Officer, and Chief Financial Officer. The Code of Ethics is filed as Exhibit 14.1 to this 10-K report. AUDIT COMMITTEE FINANCIAL EXPERT The Company's board of directors has determined it does not have at least one audit committee financial expert serving on its audit committee, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. The reason for the lack of an audit committee financial expert is the Company's inability to find a suitable person by the reporting date of this 10-K report. The Company continues its efforts to locate and appoint such a person. ITEM 10 EXECUTIVE COMPENSATION OFFICERS' COMPENSATION Our CEO was compensated approximately $44,000 for the year ended December 31, 2008 and 2009 respectively. In 2007, he was compensated $18,500 and was not compensated for the year ended December 31, 2006. Our CEO also received 350,000 common shares of stock compensation for services rendered for the year ended 2009 while he received 250,000 common shares for the year ended 2008. DIRECTORS' COMPENSATION Our Directors has not been compensated as of December 31, 2009. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS Equity compensation plan information as of December 31, 2009 -------------------------------------------- ----------------------- --------------------- ----------------------- Plan category Number of securities Weighted-average Number of securities to be issued upon exercise price of remaining available exercise of outstanding for future issuance outstanding options, options, warrants under equity warrants and rights compensation plans and rights (excluding securities reflected in column (a) ) (c) (a) (b) -------------------------------------------- ----------------------- --------------------- ----------------------- Equity compensation plans approved by security holders:None - - - -------------------------------------------- ----------------------- --------------------- ----------------------- Equity compensation plans not approved by security holders:None - - - -------------------------------------------- ----------------------- --------------------- ----------------------- Total - - - -------------------------------------------- ----------------------- --------------------- ----------------------- 16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Security ownership of certain beneficial owners The following persons are known to be the beneficial owners of more than 5% of the Company's voting securities, as of December 31, 2009: Title of Class Name and Address of Beneficial Owner Number of Shares Percent of Class(1) Common Stock Mr. Jack Chen 36 Graham St, Surrey Hills, 8,100,000 35.27% VIC 3127, Australia Common Stock Mr. Yiu Lo Chung Unit 1406A, Nanyang Plaza, No. 57, Hung To Road, Kwun 2,000,000 8.71% Tong, Kowloon, Hong Kong Common Stock Mr. Chen Guanliang 2-1,Floor 21, No. 4, Dahuanjiayuan, Huangyan 2,000,000 8.71% District, Taizhou, Zhejiang, China Notes: (1) Based on 22,964,996 issued and outstanding voting common stock as of December 31, 2009. Security ownership of management The following persons are known to be the beneficial owners of the Company's voting securities, as of December 31, 2009: Title of Class Name and Address of Beneficial Owner Number of Shares Percent of Class(1) -------------- ------------------------------------ ---------------- ------------------- Common Stock Mr. Jack Chen 36 Graham St, Surrey Hills, 8,100,000 35.27% VIC 3127, Australia Common Stock Mr. Chen Guanliang 2-1, Floor 21, No. 4, Dahuanjiayuan, Huangyan 2,000,000 8.71% District, Taizhou, Zhejiang, China Common Stock Mr. Yiu Lo Chung Unit 1406A, Nanyang Plaza, No. 57, Hung To Road, Kwun 2,000,000 8.71% Tong, Kowloon, Hong Kong Common Stock Mr. David Chen No 2 Yinqing Lu, Songjiang District, Shanghai China 596,270 2.6% 17
Notes: (1) Based on 22,964,996 issued and outstanding voting common stock as of December 31, 2009. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is no any transaction as of December 31, 2009. 18
ITEM 13. EXHIBITS The following list describes the exhibits filed as part of this Report on Form 10-K. Exhibit Number Note Description of Document 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 Longterms 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 (8) Code of Ethics 16.1 (6) Change in Certifying Accountants 17.1 (5) Correspondence on departure of Directors 20.1 (7) Proxy Statement dated December 6, 2005 21.1 (9) Subsidiaries of the registrant 24.1 (9) Power of Attorney 31.1 (9) 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 (9) 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 (9) 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) Incorporated herein by reference to the registrant's Current Report on Form 8K/A (File No. 000-50760) filed November 29, 2005. (6) Incorporated herein by reference to the registrant's Current Report on Form 8K/A (File No. 000-50760) filed January 25, 2006. (7) Incorporated herein by reference to the registrant's Proxy Statement (File No. 000-50760) filed December 6, 2005. (8) Incorporated herein by reference to the registrant's Annual Report on Form 10-KSB (File No. 000-50760) filed April 26, 2006. (9) Filed herewith. 19
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES During the fiscal year ended December 31, 2009, our principal independent accountant was Kabani & Company, Inc, the services of which were provided in the following categories and amount: AUDIT FEES Kabani & Company, Inc is our independent accountant from November 27, 2006. The aggregate fees billed by Kabani & Company, Inc for professional services rendered for the audit of our financial statements for the year ended December 31, were approximately $102,500. AUDIT RELATED FEES Other than the fees described under the caption "Audit Fees" above, Kabani & Company, Inc did not bill any fees for services rendered to us during fiscal year 2009 for assurance and related services in connection with the audit or review of our financial statements. TAX FEES There were no fees billed by Kabani & Company, Inc for professional services rendered during the fiscal year ended December 31, 2009 for tax compliance, tax advice, and tax planning. ALL OTHER FEES There were no fees billed by Kabani & Company, Inc for other professional services rendered during the fiscal year ended December 31, 2009. 20
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: March 31, 2010 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: March 31, 2010 By: /s/ David Chen -------------------------------- David Chen Chairman Date: March 31, 2010 By: /s/ Jimmy Yiu -------------------------- Jimmy Yiu Independent Director Date: March 31, 2010 By: /s/ Cong Yuanli -------------------------- Cong Yuanl Independent Director Date: March 31, 2010 By: /s/ Jack Chen -------------------------- Jack Chen Director 21
FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2009 and 2008 F-3 Consolidated Statements of Income for the years ended December 31, 2009 and December 31, 2008 F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009 and 2008 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008 F-7 Notes to the Consolidated Financial Statements for the years ended F-9 December 31, 2009 and 2008 F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Sancon Resources Recovery, Inc. We have audited the accompanying consolidated balance sheets of Sancon Resources Recovery, Inc. and its subsidiaries (the "Company") as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sancon Resources Recovery, Inc. and its subsidiaries as of December 31, 2009 and 2008, and the results of its consolidated statements of operations, stockholders' equity, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KABANI & COMPANY, INC. CERTIFIED PUBLIC ACCOUNTANTS Los Angeles, California Date: March 31, 2010 F-2
SANCON RESOURCES RECOVERY, INC. CONSOLIDATED BALANCE SHEETS ASSETS ------ As at --------------------------- December 31, December 31, 2009 2008 ------------ ------------ Current assets Cash and cash equivalents $ 3,703,716 $ 2,220,509 Trade receivables, net 988,673 289,240 Inventory 16,013 7,270 Deferred Tax Asset 33,057 22,107 Other current assets 285,933 61,916 Advance and prepayment 49,502 75,389 Held to maturity securities 129,000 -- Current assets of entity disposed off -- 156,964 ------------ ------------ Total current assets 5,205,894 2,833,395 Property, plant & equipment, net 958,041 927,044 Security deposit 9,824 7,598 Held to maturity securities-non current 129,993 128,938 Investment 42,678 -- ------------ ------------ Total Assets $ 6,346,430 $ 3,896,975 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities Current liabilities Trade payables $ 886,034 $ 747,786 Capital lease - current 15,925 8,735 Accrued expenses and other payables 189,969 252,424 Tax payables 97,779 110,314 Due to related parties 420,504 412,291 Loan Payable-current 26,199 -- Other payables 181,624 116,178 Current liability of entity disposed off -- 24,920 ------------ ------------ Total current liability 1,818,034 1,672,648 Long term liability Capital lease 21,799 29,175 Loan Payable 56,117 -- ------------ ------------ Total liability 1,895,950 1,701,823 ------------ ------------ F-3
SANCON RESOURCES RECOVERY, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) As at ------------------------------ December 31, December 31, 2009 2008 ------------- ------------- Stockholders' Equity Share Capital Authorized: 500,000,000 common shares, par value $0.001 per share.Issued and Outstanding: 22,964,996 shares and 22,614,996 shares as of December 31, 2009 and December 31, 2008 respectively 22,965 22,615 Additional paid-in capital 860,449 808,299 Non-controlling interest 158,583 127,829 Deferred Compensation (124,800) (194,400) Other comprehensive income 71,641 62,854 Retained Earnings 3,461,642 1,367,955 ------------- ------------- Total stockholders' equity 4,450,480 2,195,152 ------------- ------------- Total liabilities & stockholders' equity $ 6,346,430 $ 3,896,975 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. F-4
SANCON RESOURCES RECOVERY, INC. CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 2009 2008 ------------- ------------- Net Sales $ 10,997,101 $ 10,569,830 Cost of sales 5,830,774 4,660,110 ------------- ------------- Gross profit 5,166,327 5,909,720 Operating Expenses Depreciation 190,724 121,999 Selling, General and Administrative 2,860,905 4,226,568 ------------- ------------- Total operating expenses 3,051,629 4,348,567 ------------- ------------- Operating Income 2,114,698 1,561,153 Other Income (Expense) Other income 45,753 45,970 Investment Loss (1,331) -- Interest income 7,985 31,092 ------------- ------------- Total other income (expense) 52,407 77,062 ------------- ------------- Income from continued operations before income taxes and discontinued Operation 2,167,105 1,638,215 Discontinued Operation Gain (loss) from Discontinued Operation (50) 2,341 Gain (loss) on Disposal of a subsidiary (1,834) 3,820 ------------- ------------- Gain (loss)on Discontinued Operations (1,884) 6,161 ------------- ------------- Income before income taxes and non-controlling interest 2,165,221 1,644,376 Less: Income taxes 40,779 17,254 Less: Net income (loss) attributed to non-controlling interest 30,754 (25,391) ------------- ------------- Net income 2,093,688 1,652,513 Other comprehensive item: Foreign currency translation gain 8,787 54,803 ------------- ------------- Net comprehensive income $ 2,102,475 $ 1,707,316 ============= ============= Earnings per share: Basic & diluted earnings per share-continued operations $ 0.09 $ 0.08 ============= ============= Basic & diluted earnings per share-discontinued operations $ (0.00) $ 0.00 ============= ============= Basic & diluted earnings per share $ 0.09 $ 0.08 ============= ============= Basic & diluted weighted average shares outstanding 22,866,229 21,794,722 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. F-5
SANCON RESOURCES RECOVERY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 Additional Non- Other Common Common Paid in controlling Deferred Comprehensive Retained Shares Stock Capital Interest Compensation Income Earnings Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance as of December 20,414,996 $ 20,415 $ 115,499 $ 153,220 $ -- $ 8,051 $ 284,558) $ 12,627 31, 2007 Issuance of shares for 1,000,000 1,000 349,000 -- -- -- -- 350,000 cash received in prior years Issuance of shares for 250,000 250 37,250 -- -- -- -- 37,500 compensation Issuance of shares for 50,000 50 7,450 -- -- -- -- 7,500 services Issuance of shares for 900,000 900 299,100 -- (300,000) -- -- -- deferred compensation Amortization of -- -- -- -- 105,600 -- -- 105,600 deferred compensation Foreign Currency -- -- -- -- -- 54,803 -- 54,803 Translation Non-controlling -- -- -- (25,391) -- -- -- (25,391) stockholders' interest Net income for the year -- -- -- -- -- -- 1,652,513 1,652,513 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance as of December 22,614,996 22,615 808,299 127,829 (194,400) 62,854 1,367,955 2,195,152 31, 2008 Issuance of shares against compensation 350,000 350 52,150 -- -- -- -- 52,500 accrued in 2008 Amortization of -- -- -- -- 69,600 -- -- 69,600 deferred compensation Foreign Currency -- -- -- -- -- 8,787 -- 8,787 Translation Non-controlling -- -- -- 30,754 -- -- -- 30,754 stockholders' interest Net income for the year -- -- -- -- -- -- 2,093,688 2,093,688 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance as of 22,964,996 $ 22,965 $ 860,449 $ 158,583 $ (124,800) $ 71,641 $ 3,461,642 $ 4,450,480 December 31, 2009 =========== =========== =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements F-6
SANCON RESOURCES RECOVERY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2009 2008 ----------- ----------- Cash Flows from Operating Activities Net Income $ 2,093,688 $ 1,652,513 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 190,724 121,999 Loss from investment in Shengrong 1,332 -- Gain on disposal of property and equipment 9,369 -- Shares issued in lieu of compensation & service -- 45,000 Amortization of deferred compensation 69,600 105,600 Stock compensation -- 52,500 Non-controlling interest 30,754 (25,391) Changes in current assets and liabilities: Decrease (increase) in trade receivables (698,143) 326,738 Decrease (increase) in inventory (8,743) (3,507) Decrease (increase) in advance to suppliers 12,447 (11,997) Decrease (increase) in other current assets (99,428) (220,281) Increase (decrease) in tax payable (12,535) (63,428) Increase (decrease) in trade payable 138,248 403,819 Increase (decrease) in other current liabilities 142,478 135,576 ----------- ----------- Net cash provided by continued operations 1,869,791 2,519,141 ----------- ----------- Net cash used in discontinued operations -- 37,109 ----------- ----------- Net cash flows provided by operating activities 1,869,791 2,556,250 ----------- ----------- Cash Flows from Investing Activities Investment in securities (130,055) (128,400) Purchase of property and equipment (197,002) (467,693) Investment in Shengrong (44,010) -- Cash increased from disposal of property and equipment 161,354 -- ----------- ----------- Net cash used in continued operations (209,713) (596,093) ----------- ----------- Net cash provided by discontinued operations 1,854 9,961 ----------- ----------- Net cash flows used in Investing activities (207,859) (586,132) ----------- ----------- Cash Flows from Financing Activities Shareholders' loan (74,098) 71,824 Payment of mortgage loan (186) (20,415) Net cash provided by/(used in) continued operations (74,284) 51,409 ----------- ----------- Net cash used in discontinued operations -- (41,455) ----------- ----------- Net cash flows provided by/(used in) financing activities (74,284) 9,954 ----------- ----------- Effect of exchange rate changes on cash (104,441) 1,793 ----------- ----------- Net Increase in Cash & Cash Equivalent 1,483,207 1,981,865 F-7
SANCON RESOURCES RECOVERY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(CONTINUED) For the years ended December 31, 2009 2008 ---------- ---------- Cash & Cash Equivalent at start of period 2,220,509 238,644 ---------- ---------- Cash & Cash Equivalent at end of period $3,703,716 $2,220,509 ========== ========== Supplemental information for Cash Expenses Cash paid for Interest Expenses $ 3,146 $ 5,823 ========== ========== Cash paid for Income Taxes $ 40,779 $ 78,987 ========== ========== Supplemental information for Non-Cash Financing and Investing activities Issuance of shares against deferred compensation $ -- $ 300,000 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. F-8
SANCON RESOURCES RECOVERY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND NATURE OF OPERATIONS Sancon Resources Recovery, Inc. ("Sancon", or "the Company", or "we", or "us") is registered in 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 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. Since its acquisition, Crossover solution Inc has begun 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 On March 31, 2009, the company sold 100% equity interest of Guang Cheng Int'l Trading Ltd. ("Guang Cheng") for $1,290 plus the assumption of certain liabilities, resulted in loss of $1,884 on disposal of the entity. NOTE 2 PRINCIPLES OF CONSOLIDATION The accompanying 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., Sancon SH (70%) and CS as of and for the year ended December 31, 2009. While the historical results for the year ended December 31, 2008 included Sancon Recycling Pty Ltd., Guang Cheng, Sancon SH (70%) and CS. All material inter-company balances and transactions have been eliminated in consolidation. NOTE 3 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES ---------------- These financial statements are prepared in accordance with accounting principles accepted generally in the United States. 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. CASH AND CASH EQUIVALENTS ------------------------- Cash and cash equivalents include cash in hand and cash in bank accounts mainly used for the business operations with maturities of less than 90 days. F-9
ALLOWANCE FOR BAD DEBTS ----------------------- The Company presents accounts receivable at the net of allowances for doubtful accounts. The allowances are calculated based on detailed review of certain individual customer accounts and an estimation of the overall economic conditions affecting the Company's customer base. The Company reviews a customer's credit history before extending credit. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. No provision for doubtful accounts has been made in these financial statements, as the accounts are considered collectible in full. As at December 31, 2009 and 2008 allowance for bad debt amounted to $0 and $47,170 respectively HELD TO MATURITY SECURITIES --------------------------- Company classifies investment in marketable securities as `Held to Maturity' in accordance with SFAS 115(ASC 320). Non temporary decline in the fair value of securities is charged to earnings while unrealized gains or losses are not recognized as at December 31, 2009 and 2008. As of December 31, 2009 and 2008, the investment in securities amounted to $258,993 and $128,938. The held to maturity securities of $129,000 will be matured on August 19, 2010 and $129,993 will mature on August 22, 2011. So they are classified under current assets and non current assets respectively in the accompanied financial statements. PROPERTY, PLANT & EQUIPMENT --------------------------- Property, plant and equipment are stated at cost, less accumulated depreciation. For our subsidiary in Australia we use declining balance method of depreciation by multiplying annual rates as follows: Plant and Machinery 20.0% Motor Vehicles 22.5% Fixture and Fittings 22.0% For our subsidiary in Shanghai we use straight line method over the following estimated useful lives: Plant and Machinery 10 yrs Motor Vehicles 5 yrs Office equipment 5 yrs Computer 3 yrs IMPAIRMENT OF LONG-LIVED ASSETS ------------------------------- The Company periodically reviews its portfolio of assets for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets ("SFAS 144") (ASC 360)." Such review necessitates estimates of current market values; re-lease rents, residual values and component values. The estimates are based on currently available market data and are subject to fluctuation from time to time. The Company initiates its review periodically, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows (without interest charges) that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in the forecasting of future operating results which are used in the `reparation of projected undiscounted cash flows and, should different conditions prevail, material write downs may occur. There was no impairment in Company's long lived assets as at December 31, 2009 and 2008. F-10
FOREIGN CURRENCY TRANSLATION ADJUSTMENT --------------------------------------- The reporting currency used in the preparation of these consolidated financial statements is U.S. dollars. Local currencies are the functional currencies for the Companies subsidiaries. For the purpose of consolidation: assets and liabilities of subsidiaries with functional currencies other than U.S. dollars are translated into U.S. dollars at the applicable rates of exchange in effect at the balance sheet date; and income and expense items are translated into U.S. dollars at the average applicable rates during the year, while equity is accounted for using historical rates. Translation gains and losses resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income within stockholders' equity as cumulative translation adjustments. Gains and losses resulting from foreign currency transactions are included in results of operations. Foreign currency translation adjustments for the years ended December 31, 2009 and 2008 amounted to $8,787 and $54,803. REVENUE RECOGNITION ------------------- The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104(ASC 605). 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. Due to the disposal of subsidiary Guang Cheng Int'l Trading Ltd., the Company now is organized into two business segments while it was three in the last year: material recycling and waste management service. Their revenue recognition is as follows: (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. The revenue is recognized when delivery of the material is occurred and invoice issued. (2) Waste management Service refers the activities of providing waste management service with operations located in Shanghai China. The revenue is recognized when service is completed and invoice is issued. INCOME TAXES ------------ The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) (ASC 740) 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 SFAS 5 (ASC 450) , 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. 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. F-11
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. COMPREHENSIVE INCOME -------------------- Statement of Financial Accounting Standards No. 130 ("SFAS 130") (ASC 220), "Reporting Comprehensive Income," establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 (ASC 220) requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. As at December 31, 2009 and 2008 other comprehensive income amounted to $71,641 and $62,854 respectively. NON-CONTROLLING INTEREST ------------------------ The Company owns 70% ownership interest in Sancon Resources Recovery (Shanghai) Co., Ltd. As of December 31, 2009, non-controlling interest in Sancon SH amounted to $158,583 compared to $127,829 as of December 31, 2008. STOCK BASED COMPENSATION ------------------------ Effective January 1, 2006, the beginning of SRPL'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 (ASC 718); 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 December 31, 2009 and December 31, 2008, the Company did not issue or make provision through the issuance of stock options to employees and directors. BASIC AND DILUTED 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. STATEMENT OF CASH FLOWS ----------------------- In accordance with Statement of Financial Accounting Standards No. 95 (ASC 230), "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. SEGMENT REPORTING ----------------- The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131") (ASC 250), "Disclosures about Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. SFAS 131 (ASC 250) establishes standards for reporting information regarding operating segments in annual financial statements and requires F-12
selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 (ASC 250) also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. RECLASSIFICATIONS ----------------- Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year. RECENT PRONOUNCEMENTS --------------------- In September 2009, the Financial Accounting Standards Board ("FASB") issued guidance related to revenue recognition for multiple element deliverables which eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the consideration that is attributable to items that already have been delivered. Under the new guidance, the relative selling price method is required to be used in allocating consideration between deliverables and the residual value method will no longer be permitted. This guidance is effective prospectively for revenue arrangements entered into or materially modified in 2011 although early adoption is permitted. A company may elect, but will not be required, to adopt the amendments retrospectively for all prior periods. The Company is currently evaluating this guidance and has not yet determined the impact, if any, that it will have on the consolidated financial statements. In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP")" - a replacement of FASB Statement No. 162), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, "Subsequent Events"), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company's consolidated financial statements. In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, "Accounting for Transfers of Financial Assets") , which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe this pronouncement will impact its financial statements. In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards are effective for us beginning in the first quarter of fiscal year 2010 and we are currently evaluating the impact that adoption will have on our consolidated financial statements. In August 2009, the FASB issued Accounting Standards Update ("ASU") 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards became effective for us beginning in the fourth quarter of fiscal year 2009 and are not expected to have a significant impact on our consolidated financial statements. F-13
NOTE 4. CONCENTRATIONS AND COMMITMENTS (A) CONCENTRATIONS The Company has focused on business in overseas markets, which the Company believes present opportunities. Business with foreign customers is subject to risks related to the economy of the country or region in which such customers are located, which may be weaker than the U.S. economy. On the other hand, foreign economy may remain strong even though the U.S. economy does not. Foreign economic downturn may impact foreign customer's ability to make payments. Furthermore, foreign customers are subject to risks related to currency conversion fluctuations. Foreign laws, regulations and judicial procedures may be more or less protective for the local company's rights than those 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 & CONTINGENCY OFFICE SPACE LEASES ------------------- The Company leases office space in Australia and China. The lease for Australia will expire in October 2011 while leases for China will expire on various dates between January 2010 and November 2018. Based upon existing leases, without renewals, the minimum lease payments up for the next five years after December 31, 2009 to expiry are as follows: 2010 $ 374,643 2011 266,226 2012 161,407 2013 162,544 Thereafter 852,865 ---------------- Total $ 1,817,684 ================ The following schedule shows the composition of total rental expense for all operating leases except those with terms of a month or less that were not renewed: Year Ending December 31 2010 2009 --------- --------- Minimum Rentals $ 374,643 $ 362,762 Contingent Rentals - - Less Sublease Rentals - - EQUIPMENT LEASES: ----------------- 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 $348 each and the final installment of $5,904. The balance as of December 31, 2009 amounted to $7,368 which is 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 $479 each and the final installment of $8,781. The balance as of December 31, 2009 amounted to $16,935 with $4,514 as current liability. F-14
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 forty-eight (48) months. The payment is to be made in 47 equal monthly installments of $420 each and the final installment of $6,904. The balance as of December 31, 2009 amounted to $13,421 with $4,043 as current liability. The Company pays approximately $1,247 per month under these leases, the last of which expires in September 2011. Total minimum lease payments under the above leases for the next five years after December 31, 2009 are as follows: Capital Leases =============================================================== ============= 2010 18,489 2011 22,940 ------------- $ 41,429 Less: Amount representing interest (3,705) Present value of minimum lease payments 37,724 Less: Current portion (15,925) ------------- $ 21,799 ============= LEGAL PROCEEDINGS: ------------------ The company 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. Plus 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 did not receive writ of summons or judgment until February 2009. The Company denied all allegations in the complaint because Fintel Group Limited is no longer our subsidiary since November 27, 2006. The Company accrued $104,966 of potential liability in the accompanied financial statements based on the letter of claim received from the plaintiff. NOTE 5. EQUITY INVESTMENTS INVESTMENT IN SHANGHAI SHENG RONG --------------------------------- On June, 2009, Sancon SH, a 70% owned subsidiary of the company, entered into a investment agreement with Shanghai Sheng Rong Environmental Protection Technology Co.,Ltd. ("Shanghai Sheng Rong') to invest RMB 300,000 or approx. $44,010 in turn held 20% equity interest of Shanghai Sheng Rong. Shanghai Sheng Rong is an environmental service company that operates waste electrical and electronic products in China. Shanghai Sheng Rong was set up on June 19, 2009. As per FASB ASC 323-10-15-8) (formerly APB 18, par. 17), the company uses the equity method for accounting the investment. As of December 31, 2009, the Company booked investment loss of $1,332. The Company's investment in equity for the years ended December 31, 2009 and December 31, 2008 are shown as follows: 12-31-2009 12-31-2008 ------------- ----------- Investment in equity at beginning of year $ -- $ -- Investment during the year 44,010 -- Net loss from equity investment (1,332) -- ------------- ----------- Total investment in equity at December 31, 2009 $ 42,678 $ -- ============= =========== The Company's loss from equity investment for the years ended December 31, 2009 and 2008 are shown as follows: F-15
12-31-2009 12-31-2008 ----------- ------------ Net loss of Shanghai Sheng Rong $ (6,659) $ -- Percentage of ownership in Shanghai Sheng Rong 20% -- ----------- ------------ Loss from equity investment $ (1,332) $ -- =========== ============ NOTE 6 PROPERTIES AND EQUIPMENT Property, plant and 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. As of December 31, 2009, the property and equipment of the Company consisted of the following: Plant and Office Items Machinery Vehicles Equipment Total ------------------------- ----------- ----------- ----------- ----------- Cost $ 815,309 $ 582,924 $ 35,545 $ 1,433,778 Accumulated Depreciation (300,610) (164,230) (10,897) (475,737) ----------- ----------- ----------- ----------- Net Carrying Value $ 514,699 $ 418,694 $ 24,648 $ 958,041 =========== =========== =========== =========== Included in property and equipment is approximately $72,195 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 $40,451. As of December 31, 2008, the property and equipment of the Company consisted of the following: Plant and Office Items Machinery Vehicles Equipment Total ------------------------- ----------- ----------- ----------- ----------- Cost $ 749,355 $ 383,759 $ 24,589 $ 1,157,703 Accumulated Depreciation (143,029) (83,582) (4,048) (230,659) ----------- ----------- ----------- ----------- Net Carrying Value $ 606,326 $ 300,177 $ 20,541 $ 927,044 =========== =========== =========== =========== Included in property and equipment is approximately $55,833 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 $21,960. Depreciation and amortization expense for the years ended December 31, 2009 and December 31, 2008 was $190,724 and $121,999, respectively. NOTE 7 SHORT TERM AND LONG TERM LOAN PAYABLE On November 19, 2009, Sancon SH, a 70% owned subsidiary of the Company, purchased a vehicle with loan from Mercedes-Benz Auto Finance Limited. The total loan principle amount is $84,411, unsecured, with annual interest rate of 7.6% and payment term of thirty-six (36) months. The payment is to be made in thirty-six (36) equal monthly installments of $2,630 each from December 2009 to November 2011. The Company classified the loan balance under current and noncurrent liabilities respectively in the accompanied financial statements. As of December 31, 2009 and 2008, short term loan payable amounted to $26,199 and $0 and long term loan payable amounted to $56,117 and $0 respectively. For the year ended December 31, 2009, Sancon SH accrued and paid interest $535 for the loan. The following is the future payment schedule of the long term loan: Loan payable to Mercedes-Benz Auto Finance Limited, interest at 7.6% annually, equal monthly installment payment of $2,630 each F-16
2010 $ 31,560 2011 31,560 2012 28,930 --------------------- Total $ 92,050 ===================== NOTE 8. RELATED PARTY TRANSACTIONS The amount due to related parties comprised of loan from Mr. Jack Chen, CEO, Mr. David Chen, former CEO and major shareholder, and Jimmy Yiu, independent director of the Company. Included in the amount due to related parties, there are loans due to Mr. David Chen of $6,216 and loans due to Mr. Jimmy Yiu, independent director of the Company, amounting to $5,021 and loans due to Mr. Jack Chen of $409,267. The amounts are interest, unsecured and due on demand. The shareholder's loan of Mr. Jack Chen included amount due from him of $15,000 and amount due to him of $424,267, the net amounting to $409,267. The offsetting amounts due to and due from Mr. Jack Chen are appropriate and comply with FASB Interpretation No. 39(ASC 210). NOTE 9. SEGMENT REPORTING During the years ended December 31, 2009 and 2008, 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 year-end balance sheet information for the years ended December 31, 2009 and 2008: For the Years Ended December 31, 2009 2008 ------------ ------------ Revenues from unaffiliated sources: Material Recycling $ 2,185,146 $ 2,408,359 Waste Service 8,811,955 8,161,471 ------------ ------------ Consolidated $ 10,997,101 $ 10,569,830 ============ ============ Net income (loss): Material Recycling $ 15,000 $ 88,305 Material Trade (1,884) -- Waste Service 2,240,172 1,862,502 Un-allocated (159,600) (298,294) ------------ ------------ Consolidated $ 2,093,688 $ 1,652,513 ============ ============ Identifiable assets: Material Recycling $ 916,399 761,133 Material Trade -- 156,964 Waste Service 5,424,918 2,970,350 Un-allocated 5,113 8,528 ------------ ------------ Consolidated $ 6,346,430 $ 3,896,975 ============ ============ Depreciation and amortization: Material Recycling $ 103,713 $ 55,913 Waste Service 87,011 66,086 Un-allocated -- -- ------------ ------------ Consolidated $ 190,724 $ 121,999 ============ ============ Capital expenditures: Material Recycling $ 38,123 $ 174,174 Waste Service 158,879 293,519 ------------ ------------ Consolidated $ 197,002 $ 467,693 ============ ============ F-17
NOTE 10. STOCKHOLDER'S EQUITY On October 15, 2007, the Company entered into a ten years 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 year ended December 31, 2009, the Company recorded $15,600 in consulting expense. The unamortized amount of $124,800 is included under deferred compensation as at December 31, 2009. On May 15, 2008, the Company entered in a one year service agreement with CEOcast, Inc to provide investor relations services. In connection with this agreement, CEOcast will receive total 600,000 shares of Restricted, RULE 144 Stock. On August 1 and September 30, 2008, the Company issued 300,000 shares to CEOcast separately and recorded at the fair market value of $144,000. This amount will be amortized over a period of twelve months. As of December 31, 2008, the Company recorded $90,000 in consulting expense. The unamortized amount of $54,000 is included under deferred compensation as at December 31, 2008. As of December 31, 2009, the Company recorded $54,000 in consulting expense. There is no unamortized amount under deferred compensation as of December 31, 2009. On January 01, 2008, the Company entered in a four years employment agreement with Mr. Jack Chen, current CEO. In connection with this agreement, Mr. Jack Chen will receive corporate salary of $90,000 per year that paid in stock. On August 01, 2008 and April 13, 2009, the Company issued 250,000 shares and 350,000 shares of Restricted, RULE 144 Stock to Mr. Jack Chen. The shares recorded at the fair market value of $37,500 and $52,500 respectively. As of the December 31, 2009, the Company recorded $90,000 in due to related parties. NOTE 11 INCOME TAXES The Company is registered in the State of Nevada and has operations in primarily five tax jurisdictions - the Australia, Hong Kong, China, British Virgin Island and the United States. For certain operations in the United States of America, the Company has incurred net accumulated operating losses for income tax purposes. The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses from its US public shell as of December 31, 2009 and December 31, 2008. The Company has deferred tax asset from its Australian operations amounted to $33,057 and $22,107 respectively as of December 31, 2009 and 2008. No valuation allowance is recorded against the deferred tax asset as at December 31, 2009 and 2008 under this entity. The components of income before income taxes and non-controlling interest are as follows: 2009 2008 ----------- ----------- Income (loss) subject to Australia $ 21,430 $ 105,559 Income (loss) subject to Hong Kong-Disposed in 2009 (50) (505) Income (loss) subject to China 136,862 (56,316) Income (loss) subject to United States (159,600) (304,455) Income (loss) subject to British Virgin Island 2,168,413 1,896,273 Gain (loss) on Disposal of a subsidiary (1,834) 3,820 ----------- ----------- Net income before income tax and non-controlling interest $ 2,165,221 $ 1,644,376 =========== =========== F-18
United States of America As of December 31, 2009, the Company in the United States of America had approximately $4,892,600 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward 20 years. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carry forwards in certain situations when changes occur in the stock ownership of a company. In the event the Company has a change in ownership, utilization of carry forwards could be restricted. The deferred tax assets for the United States entity at December 31, 2009 consists mainly of net operating loss carry forwards and were fully reserved as the management believes it is more likely than not that these assets will not be realized in the future. The following table sets forth the significant components of the net deferred tax assets for operation in the United States of America as of December 31, 2009 and 2008. 2009 2008 ----------- ----------- Net Operating Loss Carry forwards $ 4,892,600 $ 4,733,000 Total Deferred Tax Assets 1,663,484 1,609,000 Less: Valuation Allowance (1,663,484) (1,609,000) ----------- ----------- Net Deferred Tax Assets $ -- $ -- =========== =========== Hong Kong For the three month periods ended March 31, 2009 and for the year ended December 31, 2008, the Company's Hong Kong subsidiary, which was disposed off on March 31, 2009 had net loss before income tax of $50 and $505. Pursuant to Hong Kong income tax laws, the Company has recorded income tax benefit of $0 and $4,801 for the three month periods ended March 31, 2009 and for the year ended December 31, 2008. Australia As of December 31, 2009 and 2008 the Company's Australian subsidiary had accumulated loss of $2,000 and $17,000. Pursuant to Australian income tax laws, the Company has made income tax provision of $ 6,430 and $17,254 for the years ended December 31, 2009 and 2008 respectively. The following table sets forth the significant components of the net deferred tax assets for operation in the Australia as of December 31, 2009 and 2008. 2009 2008 ------- ------- Net Operating Loss Carry forwards $ 2,000 $17,000 Total Deferred Tax Assets 33,057 22,107 Less: Valuation Allowance -- -- ------- ------- Net Deferred Tax Assets $33,057 $22,107 ======= ======= China As of December 31, 2009 and 2008, the Company's China subsidiary had accumulated profit of $324,513 and $222,000 respectively. The Company has net income of $102,513 during the years ended December 31, 2009. Pursuant to Chinese income tax laws, the Company has made income tax provision of $34,349 and $0 for the years ended December 31, 2009 and 2008. F-19
British Virgin Island The Company's British Virgin Island subsidiary had net profit of $2,168,413 and $1,896,273 for the years ended December 31, 2009 and 2008. There is no income tax levied in British Virgin Island. The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations: ---------------------- 2009 2008 ---------------------- Tax expense (credit) at statutory rate-federal (34)% (34)% State tax expense (credit) net of federal tax (6)% (6)% Valuation allowance 40% 40% Foreign income tax: British Virgin Island -- -- Australia 30% 30% Hongkong 16.5% 16.5% China 25% 25% Valuation allowance (69.6)% (70.4)% ---------------------- Effective tax rate 1.9% 1.1% ================================================================================ In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," ("FIN 48"), an interpretation of FASB Statement No. 109, "Accounting for Income Taxes," ("FASB 109") (ASC 740). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB 109 (ASC 740). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect of applying FIN 48 is to be reported as an adjustment to the opening balance of retained earning in the year of adoption. As of December 31, 2009, the Company does not have any unrecognized tax benefits and no corresponding interest or penalties. The Company's policy is to record interest and penalties as income tax expense. NOTE 12. DISCONTINUED OPERATIONS DISPOSAL OF GUANG CHENG On March 31, 2009, the company sold 100% equity interest of Guang Cheng Int'l Trading Ltd. ("Guang Cheng") for $1,290 plus the assumption of certain liabilities, resulting in total loss of $1,884 on discontinued operations. Following is the Gain/Loss Calculation for disposal of Guang Cheng Int'l Trading Ltd. Guang Cheng Gain/Loss calculation Net assets of the Company as on January 1, 2009 $ 3,174 Gain/(Loss) from discontinued operations from January 1, 2009 through March 31, 2009 (50) ------- Total book value as of March 31, 2009 3,124 Proceeds from disposal 1,290 ------- Loss on Disposal $(1,834) ------- Total Loss on Discontinued Operations $(1,884) ======= F-20
The following table summarized the statement of operation of Guang Cheng for the three-month periods ended March 31, 2009 and for the twelve month periods ended December 31, 2008: For the Three-Month For the Twelve-Month Ended Ended March 31, 2009 December 31,2008 -------------- -------------- Sales $ 46,519 $ 2,138,066 Cost of sales (45,261) (2,093,063) -------------- -------------- Gross Profit 1,258 45,003 Operating expense (1,308) (45,508) Income tax expense (benefit) -- 4,801 -------------- -------------- Net income (loss) $ (50) $ 4,296 ============== ============== DISPOSAL OF DFSL On March 31, 2008, the company sold 100% equity interest of Digital Financial Service Limited ("DFSL") to an individual Mr. Zhu Jun for $7.8 plus the assumption of certain liabilities, due to its continuing losses, resulting in total gain of $1,865 on discontinued operation. Following is the Gain/Loss Calculation for disposal of DFSL. DFSL Gain/Loss calculation Net assets of the Company as on January 1, 2008 $(1,857) Loss from discontinued operations from January 1, 2008 through March 31, 2008 (1,955) ------- Total book value as of March 31, 2008 (3,812) Proceeds from disposal 7.8 ------- Gain on Disposal $ 3,820 ------- Total Gain on Discontinued Operations $ 1,865 ======= The following table summarized the statement of operation of DFSL for the three-month periods ended March 31, 2008: For the Three-Month Ended March 31, 2008 -------------- Sales $ Cost of sales -------------- Gross Profit Operating expense (1,955) Other income (expense) Income tax -------------- Net Loss $ (1,955) ============== F-21
NOTE 13. MAJOR CUSTOMERS AND VENDORS Normally, the payment terms of our accounts receivable is about one month and will not be more than two months. The Company extends credit to its customers based upon its assessment of their credit worthiness and generally does not require collateral. Credit losses have not been significant. Pernod Ricard, our top customers, provided 59% of net revenue for the year ended December 31, 2009. Total accounts receivable due from this customer was approximately 540,029 as of December 31, 2009. Jiangxi Zhongshun, Aperio Group and Astron are our major vendors. Total accounts payable due to these vendors was $625,266 as of December 31, 2009. Pernod Ricard, Wei Er Sha and San Jiang, our three top customers, provided 63% of net revenue for the year ended December 31, 2008, respectively. Total accounts receivable due from these customers was approximately $46,619 as of December 31, 2008. Three Rivers HK Ltd, Tricept Trading Limited and BAF China Ltd are our major vendors. Total accounts payable due to these vendors was $17,999 as of December 31, 2008. NOTE 14. NON-CONTROLLING INTEREST The Company owned 70% interest in Sancon SH. As at December 31, 2009 and 2008 non-controlling interest amounted to $158,583 and $127,829 respectively. F-2