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 Item 7. Financial Statements and Supplementary Data 8 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 18 Item 14. Exhibits, Financial Statement Schedules 19
SIGNATURES 20
-- 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, 2008.
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, Hong Kong 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 Three Rivers HK Ltd, Tricept Trading Limited and BAF China Ltd etc. 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 25,000 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, Wei Er Sha and San Jiang etc, which are located mainly in the Chinese provinces of Guangdong, Zhejiang, Fujian and Hong Kong.
On August 13, 2008, the Company has entered into an agreement with China's largest manufacturer of personal computers to collect and process all waste packaging materials resulting from the delivery and installation of computers at all of its corporate clients in China. The Company will provide on-site collection of the materials, and recycle the waste packaging into reusable packaging materials. The computer maker will also share the profit from the sale of the recycled materials. This business is in the developmental stage now and is expected to bring significant increase on the Company's sales and net profit in the future.
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 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. The well established trust on quality control of the recycled materials with Sancon's customers in 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 50 million tons in 2007, with an estimated total worth of US$6 billion.
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.
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 Hong Kong and China, such as Three Rivers, Team Smart, Gwong Yan, China Sanyou Group, Zhejiang Walsar Group, etc.
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 30 depots in China and it will enable Sancon to meet the demand for nationwide environmental services. 3) Hong Kong trading operation will source recycled materials globally to meet the increasing demand from our customers in China. 4) Working closely with more processing partners in China will add value to our products. 5) 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, 2008, the Company employed 15 people in both Australia and Hong Kong 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 functions, such as book keeping and administration, to certain professional firms to enable our resource being focused on sales and processing functions.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The business in which the Company is engaged is capital supportive. Accordingly, the Company's ability to execute its business strategy and to sustain its operations depends upon its ability to maintain or procure capital. There can be no absolute assurance the necessary amount of capital will continue to be available to the Company on favorable terms, or at all. The Company's inability to obtain sufficient capital or to renew its credit facilities would limit the Company's ability to: (i) add new equipment to its portfolio, (ii) fund its working capital needs, and (iii) finance possible future acquisitions. The Company's access to capital may have a material adverse effect on the Company's business, financial condition and/or results of operations.
There can be no absolute assurance the Company will be able to effectively manage its existing or the possible future expansion of its operations, or the Company's systems, procedures or controls will be adequate to support the Company's operations. Consequently, the Company's business, financial condition and/or results of operations could be possibly and adversely affected.
The Company does not foresee changes in tax laws for the jurisdictions in which the Company and its subsidiaries operate. There can be no absolute assurance that changes will not occur, and therefore no absolute assurance such changes will not materially and adversely affect the Company's business, financial condition and results of operations.
As a public company, Sancon is subject to certain regulatory requirements including, but not limited to, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX404"). Such compliance results in significant additional costs to the Company by increased audit and consulting fees, and the time required by management to address the regulations. The SEC has recently delayed the implementation date of SOX404 for non-accelerated filers until the fiscal year ended December 31, 2009. However, should the Company successfully fulfill its plans to procure financing and expand its operations; the Company may come under the accelerated filer definition, and be required to comply with SOX404 before December 31, 2009. 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 2018. The Australian Office is located in 7-9 Graham Road Clayton South 3169 VIC Australia, Rental fee, without GST and outgoing is $114,740 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 $339,195. 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 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 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 2008.
-- 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.
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
ITEM 7. FINANCIAL STATEMENTS
Financial statements are attached hereto following beginning on Page.
ITEM 8
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."
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, 2008 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, 2008. Our financial statements for the period ended June 30, 2008 were restated as we missed to include the financial results of one of our subsidiary for the three months period ended March 31, 2008. In addition 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.
In September 2008, the Company appointed an Accounting Manager experienced in US GAAP to prepare financial statement and control our accounting and financial reporting process. Furthermore, our management implemented 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 year ended December 31, 2008 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.
-- PART III --
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS: COMPLIANCE WITH SECTION (16) OF THE EXCHANGE ACT
IDENTIFICATION AND BACKGROUNDS OF DIRECTORS AND OFFICERS
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.
GARY LI, CHIEF FINANCIAL OFFICER
Mr. Li joined Sancon in 2006 as the general manager of Sancon Resources Recovery (Shanghai) Co. Ltd., and in charge of Sancon's China operations. He served as the CFO of the Company since August, 2008. Mr. Li has more than ten years of experiences in accounting, operational management and project development. Mr. Li received an Associate degree of Accounting from Victoria University (Australia) in 1998, a bachelor degree of Business from Swinburne University (Australia) in 1999, a master of information Technology degree from Swinburne University (Australia) in 2001.
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.
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
ITEM 10 EXECUTIVE COMPENSATION
OFFICERS' COMPENSATION
Our CEO was compensated approximately $44,000 and $18,500 for the year ended December 31, 2008 and 2007 and was not compensated for the year ended December 31, 2006 and 2005. Our CEO also received 250,000 common shares of stock compensation for services rendered for the year ended 2008 while he did not received any stock compensation for the year ended 2007.
DIRECTORS' COMPENSATION
Our Directors has not been compensated as of December 31, 2008.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity compensation plan information as of December 31, 2008
Notes: (1) Based on 22,614,996 issued and outstanding voting common stock as of December 31, 2008. .
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no any transaction as of December 31, 2008.
ITEM 13 EXHIBITS
The following list describes the exhibits filed as part of this Report on Form 10-K.
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(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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During the fiscal year ended December 31, 2008, 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 period ended March 31, June 30, September 30, 2008 were approximately $12,500, respectively, and for services performed in connection with the Company's annual financial statement on Form 10-K filed for the year ended December 31, 2008 were approximately $65,000.
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 2008 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, 2008 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, 2008.
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: April 03, 2009 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: April 03, 2009 By: /s/ David Chen ------------------------------- David Chen Chairman
Date: April 03, 2009
By: /s/ Jimmy Yiu ------------------------------- Jimmy Yiu Director
Date: April 03, 2009 By: /s/ Cong Yuanli ------------------------------- Cong Yuanl Independent Director
Date: April 03, 2009 By: /s/ Jack Chen ------------------------------- Jack Chen Director
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007
Consolidated Statements of Operations for the years ended December 31, 2008 and December 31, 2007
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2008 and December 31, 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and December 31, 2007
Notes to the Consolidated Financial Statements for the years ended December 31, 2008 and December 31, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Sancon Resources Recovery, Inc.
We have audited the accompanying consolidated balance sheets of Sancon Resources Recovery, Inc., a Nevada Corporation (the "Company") as of December 31, 2008 and December 31, 2007 and the related consolidated statements of operations, consolidated statements of stockholders' equity (deficit) and consolidated statements of cash flows for the years ended December 31, 2008 and December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sancon Resources Recovery, Inc as of December 31, 2008 and December 31, 2007 and the results of its operations and its cash flows for the years ended December 31, 2008 and December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ Kabani & Company, Inc. CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California March 13, 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
NOTE 1 NATURE OF OPERATIONS
Sancon Resources Recovery, Inc. ("Sancon", or "the Company", or "we", or "us") is registered in good standing under Chapter 78 of the Nevada Statutes in April 2003, and its common stock is traded on the OTCBB under the symbol SRRY.OB. Sancon Resources Recovery, Inc. is an environmental service and waste management company that operates recycling facilities in China and Australia. Sancon specializes in the collection and recovery of industrial and commercial solid wastes such as plastic, paper, cardboard, and glass. The recycled materials are re-used by Sancon's manufacturing customers in China to make a wide variety of new products including outdoor furniture, construction materials, building materials, road surface, and various new products. Sancon's China operation is licensed by the Chinese government for waste management services, and is certified with ISO 9001 and ISO 14001 standards. Sancon aims to provide solutions to today's soaring raw material cost for manufactures and assists in solving our environmental problems.
On August 15, 2007, the Company completed the acquisition of 70% of the equity interest in Sancon Resources Recovery (Shanghai) Co., Ltd by exercising its option to convert $200,000 of convertible promissory note (See note 3).
On November 17, 2006, the company completed the acquisition of 100% equity interest in Crossover Solutions Inc ("Crossover" or "CS") from Fintel Group by paying $1 for the transfer of one share of Crossover Solutions Inc. being the total number of outstanding share of Crossover. Crossover did not have any operations or assets/liability prior to 2008.
Since its acquisition, Crossover solution Inc has begin the operation of providing services for management and granulation of waste materials for its clients located in China.
On March 31, 2008, the company sold 100% equity interest of Digital Financial Service Limited ("DFSL") for $7.8 plus the assumption of certain liabilities, due to its continuing losses, resulting in gain of $1,865 on disposal of the entity (See note 11)
As of December 31, 2008, the Sancon group comprises of the following companies:
NOTE 2 BASIS OF PRESENTATION
Principles of Consolidation
The accompanying unaudited consolidated financial statements include all of the accounts of the Company and all of the subsidiaries under its control, which include Sancon Recycling Pty Ltd., Guang Cheng, Sancon SH (70%) and CS as of and for the year ended December 31, 2008. While the historical results for the year ended December 31, 2007 only include Sancon Recycling Pty Ltd., Guang Cheng and Sancon SH (70%). All material inter-company balances and transactions have been eliminated in consolidation.
NOTE 3 BUSINESS ACQUISITION
The Company invested in the Convertible Note of US$200,000, which was issued on June 1, 2007 by Sancon Resource Recovery (Shanghai) Co., Ltd. ("Sancon SH"), a corporation organized under the laws of the People's Republic of China. The convertible note with 0% interest bearing shall become due and payable on the first anniversary of the issue date. At any time prior to the issue date, at the option of Sancon in its sole discretion, the convertible note may be converted into 70% equity interest in Sancon SH.
On August 15, 2007, the Company exercised its conversion right to convert its convertible note with face value of $200,000 into 70% equity interest of Sancon Resource Recovery (Shanghai) Co., Ltd., pursuant to the terms of Convertible Note issued on June 1, 2007.
Sancon Resource Recovery (Shanghai) Co., Ltd was established in March 2007, in Shanghai, China, focuses on the recycling of wasted wine bottle in China. Sancon SH started operations on April 1, 2007.
Mr. Jack Chen is a CEO, Director and Shareholder of the Company, owned 23% shares in the Company also owned 100% of Sancon SH . The acquisition is resulted in recapitalization of the Company, using the carrying values of assets and liabilities at the time when Company converted its note receivable into 70% equity interest in Sancon Shanghai as both the entities were related to each other through a common shareholder.
A summarized financial position for the acquired company, Sancon SH, at the acquisition date, is provided below.
Sancon Resource Recovery (Shanghai) Co., Ltd. Summary Statement of Financial Position At August 15, 2007
Amount
Cash $ 253,549 Other Current Assets 32,447 Property & Equipment 68,957 Current Liabilities (73,268) --------- Net Assets 281,685 Net Assets Acquired (70%) $ 197,180 =========
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE YEAR ENDED DECEMBER 31, 2007
The following un-audited pro forma consolidated financial information for the year ended December 31, 2007 as presented below, reflects the results of operations of the Company assuming the acquisition occurred on April 1, 2007. These pro forma results have been prepared for information purposes only and do not purport to be indicative of what operating results would have been had the acquisitions actually taken place on April 1, 2007 and may not be indicative of future operating results.
Year ended December 31, 2007 (Unaudited) Revenue $ 6,075,111
Operating loss $ (257,041) ------------------
Net loss $ (333,551) ==================
Basic and fully diluted gain/(loss) per share $ (0.02) ==================
NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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.
(b) 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
(c) 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." 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, 2008 and 2007.
(d) Foreign Currency Translation
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, 2008 and 2007 amounted to $54,803 and $9,298.
(e) 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.
(f) Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized when the significant risks and rewards of the ownership of goods have been transferred to the buyers. No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.
The Company is organized into three business segments: material recycling, material trade 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) Material Trade refers the activities of buying and selling of materials with operations located in Hong Kong. The revenue is recognized when delivery to customer is occurred and invoice is issued. (3) 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.
(g) Income Taxes
The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.
We regularly assess our position with regard to individual tax exposures and record liabilities for our uncertain tax positions and related interest and penalties according to the principles of FAS 5, ACCOUNTING FOR CONTINGENCIES. These accruals reflect management's view of the likely outcomes of current and future audits. The future resolution of these uncertain tax positions may be different from the amounts currently accrued and therefore could impact future tax period expense.
The Company has U.S. federal net operating loss carry forwards that if unused could expire in varying amounts in the years through 2020. However, as a result of the acquisition, the amount of net operating loss carry forward available to be utilized in reduction of future taxable income was reduced pursuant to the change in control provisions of Section 382 of the Internal Revenue Code.
A 100% valuation allowance has been established as a reserve against the deferred tax assets arising from the net operating losses and other net temporary differences since it cannot, at this time, be considered more likely than not that their benefit will be realized in the future.
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.
(h) Allowance for Doubtful Accounts
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, 2008 and 2007 allowance for bad debt amounted to $47,170 and $0 respectively
(i) Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 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.
(j) Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "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 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, 2008 and 2007 other comprehensive income amounted to $62,854 and $8,051 respectively.
(k) Reclassifications
Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year.
(l) Stock based payments
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, using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted stock options, since the related purchase discounts exceeded the amount allowed under SFAS 123R for non-compensatory treatment. Compensation expense recognized included: the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R; and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Results for prior periods have not been restated, as provided for under the modified-prospective method.
As of December 31, 2008 and December 31, 2007, the Company did not issue or make provision through the issuance of stock options to employees and directors.
(m) Recent Pronouncements
In September 2006, FASB issued SFAS 158 `Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
1. A brief description of the provisions of this Statement 2. The date that adoption is required 3. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Management is currently evaluating the effect of this pronouncement on the financial statements.
In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new statement. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements. The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. Management is currently evaluating the effect of this pronouncement on the financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements". This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company on January 1, 2009.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for the Company on January 1, 2009.
In March 19, 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Currently the Company does not carry any derivative instruments and the adoption of this statement may not have any effect on the financial statements.
In May 2008, FASB issued SFASB No.162, "The Hierarchy of Generally Accepted Accounting Principles". The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. The Company does not believe this pronouncement will impact its financial statements.
In May 2008, FASB issued SFASB No. 163, "Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60". The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. The Company does not believe this pronouncement will impact its financial statements.
On December 30, 2008 FASB issued FIN 48-3, "Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises". This FSP defers the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, for certain non-public enterprises as defined in paragraph 289, as amended, of FASB Statement No. 109, Accounting for Income Taxes, including non-public not-for-profit organizations. However, non-public consolidated entities of public enterprises that apply U. S. GAAP are not eligible for the deferral. Nonpublic enterprises that have applied the recognition, measurement, and disclosure provisions of Interpretation 48 in a full set of annual financial statements issued prior to the issuance of this FSP also are not eligible for the deferral. This FSP shall be effective upon issuance. The Company does not believe this pronouncement will impact its financial statements.
On January 12, 2009 FASB issued FSP EITF 99-20-01, "Amendment to the Impairment Guidance of EITF Issue No. 99-20". This FSP amends the impairment guidance in EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets," to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance. The FSP shall be effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The Company does not believe this pronouncement will impact its financial statements.
(n) Marketable Securities
Company classifies investment in marketable securities as `Held to Maturity' in accordance with SFAS 115. 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, 2008 investment in securities amounted to $128,938 and gross unrecognized holding loss amounted to $14,192.
The marketable securities will be matured on August 19, 2010 and classified under non current assets in the accompanied financial statements.
Note 5. 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: The Company leases office space in Australia and China. The lease for Australia expires in October 2011 while leases for China expire on various dates between January 2009 to November 2018. Based upon existing leases, without renewals, the minimum lease payments up to expiry are as follows:
2009 $ 611,638 2010 286,588 2011 245,654 2012 161,407 2013 162,544 Thereafter 732,000 ---------- Total $2,199,831 ==========
Equipment: In year 2005, the company purchased a vehicle under capital lease from Toyota Financial Service. The annual interest rate is 7.99% with payment term of sixty (60) months. The payment is to be made in 59 equal monthly installments of $269 each and the final installment of $4,566. The balance as of December 31, 2008 amounted to $8,349 with $2,652 as current liability.
In year 2006, the company purchased a vehicle by mortgage loan from CBFC Limited ABN. The annual interest rate is 8.32% with payment term of sixty (60) months. The payment is to be made in 59 equal monthly installments of $371 each and the final installment of $6,791. The balance as of December 31, 2008 amounted to $16,310 with $3,213 as current liability.
In September 2007, the company purchased a vehicle by mortgage loan from CBFC Limited ABN. The annual interest rate is 8.6% with payment term of forty-eight (48) months. The payment is to be made in 47 equal monthly installments of $325 each and the final installment of $5,3395. The balance as of December 31, 2008 amounted to $13,251 with $2,870 as current liability.
The Company pays approximately $964 per month under these leases, the last of which expires in September 2011.
Total minimum lease payments under the above leases are as follows:
Capital Leases =============================================================================== 2009 11,614 2010 14,258 2011 17,742 - ------------------------------------------------------------------------------- $ 43,614 Less: Amount representing interest (5,704) Present value of minimum lease payments 37,910 Less: Current portion (8,735) - ------------------------------------------------------------------------------- $ 29,175 - ----------------------------------------------------------------===============
Legal Proceeding:
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 under Commitment & Contingency in the accompanied financial statements based on the letter of claim received from the plaintiff.
Note 6. Depreciable Assets
Property, Plant 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.
Below is the table of Property, Plant and Equipment for the fiscal year ended 2008:
Plant and Office Total 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.
Below is the table of Property, Plant and Equipment for the fiscal year ended 2007:
Plant and Office Total Machinery Vehicles Equipment Total ----- --------- -------- --------- ----- Cost 374,084 282,025 33,901 690,010 Accumulated Depreciation (116,415) (22,728) (10,176) (149,319) - ------------------------------------------------------------------------------- Net Carrying Value 257,669 259,297 23,725 540,691 ===============================================================================
Included in property and equipment is approximately $67,821 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 $18,180.
Depreciation and amortization expense for the year ended December 31, 2008 and December 31, 2007 was $121,999 and $80,656, respectively.
Note 7. Related Party Transactions
The shareholders' loans were due from Mr. Cheng Guangliang, currently the contracted Manager of GuangCheng, one of company's subsidiary..
The shareholders' loans were due to Mr. Jack Chen, currently CEO and Director of the Company, Mr. David Chen, former CEO and Shareholder of the Company and Mr. Jimmy Yu, Director of the Company.
Included in the amount due from related parties, there were loans due from Mr.Cheng Guangliang, of $108,690. The company made a loan to Mr. Cheng Guangliang for purpose of undertaking business activities of Guangcheng such as Material trading. Such loan is guaranteed by Mr. Chen Guangliang on a personal basis. The loan is unsecured, interest free and due on demand.
Included in the amount due to related parties, there were loans due to Mr. David Chen of $15,243 and loans due to Mr. Jimmy Yiu, director of the Company, amounting of $5,021 and loans due to Mr. Jack Chen of $392,027 (net) without 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 $407,027. We combined these two amounts and result in loans due to Mr. Jack Chen of $392,027. The offsetting amounts due to and due from Mr. Jack Chen are appropriate and comply with FASB Interpretation No. 39.
During the year ended December 31, 2008, Guang Cheng (Company's subsidiary), made purchased amounted to $947,458 from Three Rivers HK Ltd, a company owned by the manager of Guang Cheng.
During the year ended December 31, 2008, Guang Cheng (Company's subsidiary), made sales amounted to $721,880 to Shenzhen Sanjiang Plastic Factory, a company owned by the father of the manager of Guang Cheng. As at December 31, 2008, accounts receivable from the Shenzhen Sanjiang Plastic Factory amounted to $2,557.
Guang Cheng International Trading Ltd sold $703,344 worth of goods to Shenzhen Sanjiang Plastic Factory, owned by the father of the sole director of Guang Cheng International Trading Ltd during the year ended December 31, 2007. No accounts receivable outstanding from Shenzhen Sanjiang Plastic Factory as at December 31, 2007.
Note 8. Segmental Information
During the years ended December 31, 2008 and 2007, the Company is organized into three business segments: (1) material recycling, (2) material trade, (3) waste service. The following table presents a summary of operating information and certain year-end balance sheet information for the years ended December 31, 2008 and 2007:
YEARS ENDED DECEMBER 31 2008 2007 ------------ ------------ Revenues from various areas: Material Recycling $ 2,408,359 $ 1,467,867 Material Trade 2,138,066 2,212,590 Waste Service 8,161,471 1,101,652 ------------ ------------ Consolidated $ 12,707,896 $ 4,782,109 ============ ============
Net income (loss): Material Recycling $ 88,305 $ (82,971) Material Trade 6,161 (64,666) Waste Service 1,862,502 226,489 Un-allocated (304,455) (246,695) ------------ ------------ Consolidated $ 1,652,513 $ (167,843) ============ ============
Identifiable assets: Material Recycling $ 761,133 $ 586,374 Material Trade 153,979 14,829 Waste Service 2,970,350 893,538 Un-allocated 11,513 93,195 ------------ ------------ Consolidated $ 3,896,975 $ 1,587,936 ============ ============
Depreciation and amortization: Material Recycling $ 55,913 $ 69,591 Material Trade -- -- Waste Service 66,086 11,065 Un-allocated -- -- ------------ ------------ Consolidated $ 121,999 $ 80,656 ============ ============
Capital expenditures: Material Recycling $ 174,174 $ 53,612 Material Trade -- -- Waste Service 293,519 137,100 Un-allocated -- -- ------------ ------------ Consolidated $ 467,693 $ 190,712 ============ ============
Note 9. Stockholders' Equity
On April 15, 2007, the Company entered into a Share Purchase Agreement to issue and sells 1,000,000 shares of its common stock in an offshore transaction under Regulation S to Fengteng Investment Consulting Management (Shanghai) Co., Limited at US$0.35 per share for gross proceeds of US$350,000. The shares are subject to 144 restriction and proceeds will be used for working capital needs. The shares were part of shares to be issued as at December 31, 2007 and issued during the year ended December 31, 2008.
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. As of December 31, 2008, the Company recorded $15,600 in consulting expense. The unamortized amount of $140,400 is included under deferred compensation as at December 31, 2008.
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.
On August 1, 2008, the Company issued 50,000 shares to Mr. Xia Chen of Restricted, RULE 144 Stock for services rendered, recorded at the fair market value of $7,500.
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, the Company issued 250,000 shares of Restricted, RULE 144 Stock to Mr. Jack Chen. The shares recorded at the fair market value of $37,500. As of the December 31, 2008, the Company recorded $90,000 in expense and $52,500 in accrued expenses.
Note 10. 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, 2008 and December 31, 2007. The Company has deferred tax asset from its Australian operations amounted to $22,107. No valuation allowance is recorded against the deferred tax asset as at December 31, 2008 under this entity.
The components of income before income taxes and after minority interest are as follows:
2008 2007 ---------- ---------- Income (loss) subject to Australia 105,559 (81,603) Income (loss) subject to Hong Kong (505) (36,913) Income (loss) subject to Shanghai (33,771) 270,096 Income (loss) subject to United States (304,455) (178,748) Income (loss) subject to British Virgin Island 1,896,273 -- - ------------------------------------------------------------------------------- 1,663,101 (27,168)
United States of America As of December 31, 2008, the Company in the United States of America had approximately $4,733,000 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, 2008 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, 2008 and 2007.
2008 2007
Net Operating Loss Carry forwards 4,733,000 4,408,000 Total Deferred Tax Assets 1,609,000 1,498,600 Less: Valuation Allowance (1,609,000) (1,498,600) Net Deferred Tax Assets -- --
Hong Kong As of December 31, 2008, the Company's Hong Kong subsidiary had accumulated profit of $3,175. Pursuant to Hong Kong income tax laws, the Company has recorded income tax benefit of $4,801 for the year ended December 31, 2008.
Australia As of December 31, 2008 the Company's Australian subsidiary had accumulated loss of $17,000. Pursuant to Australian income tax laws, the Company has made income tax provision of $17,254 for the year ended December 31, 2008.
The following table sets forth the significant components of the net deferred tax assets for operation in the Australia as of December 31, 2008 and 2007.
2008 2007
Net Operating Loss Carryforwards 17,000 106,000 Total Deferred Tax Assets 22,107 32,000 Less: Valuation Allowance -- (32,000) Net Deferred Tax Assets 22,107 --
China As of December 31, 2008 the Company's China subsidiary had accumulated profit of $222,000. The Company has net loss of $85,000 during the year ended December 31, 2008. Pursuant to Chinese income tax laws, the Company has not made income tax provision for the year ended December 31, 2008.
British Virgin Island As of December 31, 2008 the Company's British Virgin Island subsidiary had net profit of 1,897,000 for the year ended December 31, 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:
2008 2007 --------- --------- 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 33% 33% Hongkong 16.5% 17.5% Shanghai 25% 33% Change in valuation allowance (1,008.33)% 332.5% ----------- ----------- Effective tax rate (933.83)% 416% =========== ===========
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"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB 109. 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, 2008, 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..
Not 11. Discontinued Operations
On March 31, 2008, the company sold 100% equity interest of Digital Financial Service Limited ("DFSL") to individual Mr. Zhu Jun 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.
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 through March 31, 2008 (1,955) -------
Total book value (negative) of March 31, 2008 (3,812)
Proceeds from disposal 7.8
------- Gain on Disposal $ 3,820 -------
------- Total Gain on Discontinued Operations $ 1,865 -------
DECEMBER 31, 2007 -----------------
CURRENT ASSETS OF ENTITY DISPOSED OFF COMPRISED OF FOLLOWING: - -------------------------------------------------------------
Cash and cash equivalents 11,826 Due from related parties (65) ------------- TOTAL ASSETS $ 11,761 ------------- Current liability of entity disposed off comprised of following: Tax payables 5,529 Due to related parties 19,230 Other payables 4,006 ------------- TOTAL LIABILITY $ 28,765 -------------
Note 12. Major Customers and Vendors
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.
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.
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 13. Minority Interest
The Company owned 70% interest in Sancon Shanghai. As at December 31, 2008 and 2007 minority interest amounted to $127,829 and $153,220.
Note 14. Subsequent Event
On March 15, 2009, the Board of Directors of the Company decided to discontinue the operations of GuangCheng (100% owned subsidiary of the Company). The Company entered into a shares purchase agreement to sell GuangCheng. This transaction is expected to finish before the end of April, 2009.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is no any transaction as of December 31, 2008.
ITEM 13
ITEM 13 EXHIBITS
The following list describes the exhibits filed as part of this Report on Form 10-K.
- ----------------------
(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.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During the fiscal year ended December 31, 2008, 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 period ended March 31, June 30, September 30, 2008 were approximately $12,500, respectively, and for services performed in connection with the Company's annual financial statement on Form 10-K filed for the year ended December 31, 2008 were approximately $65,000.
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 2008 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, 2008 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, 2008.
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: April 03, 2009 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: April 03, 2009 By: /s/ David Chen ------------------------------- David Chen Chairman
Date: April 03, 2009
By: /s/ Jimmy Yiu ------------------------------- Jimmy Yiu Director
Date: April 03, 2009 By: /s/ Cong Yuanli ------------------------------- Cong Yuanl Independent Director
Date: April 03, 2009 By: /s/ Jack Chen ------------------------------- Jack Chen Director
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007
Consolidated Statements of Operations for the years ended December 31, 2008 and December 31, 2007
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2008 and December 31, 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and December 31, 2007
Notes to the Consolidated Financial Statements for the years ended December 31, 2008 and December 31, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Sancon Resources Recovery, Inc.
We have audited the accompanying consolidated balance sheets of Sancon Resources Recovery, Inc., a Nevada Corporation (the "Company") as of December 31, 2008 and December 31, 2007 and the related consolidated statements of operations, consolidated statements of stockholders' equity (deficit) and consolidated statements of cash flows for the years ended December 31, 2008 and December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sancon Resources Recovery, Inc as of December 31, 2008 and December 31, 2007 and the results of its operations and its cash flows for the years ended December 31, 2008 and December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ Kabani & Company, Inc. CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California March 13, 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
NOTE 1 NATURE OF OPERATIONS
Sancon Resources Recovery, Inc. ("Sancon", or "the Company", or "we", or "us") is registered in good standing under Chapter 78 of the Nevada Statutes in April 2003, and its common stock is traded on the OTCBB under the symbol SRRY.OB. Sancon Resources Recovery, Inc. is an environmental service and waste management company that operates recycling facilities in China and Australia. Sancon specializes in the collection and recovery of industrial and commercial solid wastes such as plastic, paper, cardboard, and glass. The recycled materials are re-used by Sancon's manufacturing customers in China to make a wide variety of new products including outdoor furniture, construction materials, building materials, road surface, and various new products. Sancon's China operation is licensed by the Chinese government for waste management services, and is certified with ISO 9001 and ISO 14001 standards. Sancon aims to provide solutions to today's soaring raw material cost for manufactures and assists in solving our environmental problems.
On August 15, 2007, the Company completed the acquisition of 70% of the equity interest in Sancon Resources Recovery (Shanghai) Co., Ltd by exercising its option to convert $200,000 of convertible promissory note (See note 3).
On November 17, 2006, the company completed the acquisition of 100% equity interest in Crossover Solutions Inc ("Crossover" or "CS") from Fintel Group by paying $1 for the transfer of one share of Crossover Solutions Inc. being the total number of outstanding share of Crossover. Crossover did not have any operations or assets/liability prior to 2008.
Since its acquisition, Crossover solution Inc has begin the operation of providing services for management and granulation of waste materials for its clients located in China.
On March 31, 2008, the company sold 100% equity interest of Digital Financial Service Limited ("DFSL") for $7.8 plus the assumption of certain liabilities, due to its continuing losses, resulting in gain of $1,865 on disposal of the entity (See note 11)
As of December 31, 2008, the Sancon group comprises of the following companies:
NOTE 2 BASIS OF PRESENTATION
Principles of Consolidation
The accompanying unaudited consolidated financial statements include all of the accounts of the Company and all of the subsidiaries under its control, which include Sancon Recycling Pty Ltd., Guang Cheng, Sancon SH (70%) and CS as of and for the year ended December 31, 2008. While the historical results for the year ended December 31, 2007 only include Sancon Recycling Pty Ltd., Guang Cheng and Sancon SH (70%). All material inter-company balances and transactions have been eliminated in consolidation.
NOTE 3 BUSINESS ACQUISITION
The Company invested in the Convertible Note of US$200,000, which was issued on June 1, 2007 by Sancon Resource Recovery (Shanghai) Co., Ltd. ("Sancon SH"), a corporation organized under the laws of the People's Republic of China. The convertible note with 0% interest bearing shall become due and payable on the first anniversary of the issue date. At any time prior to the issue date, at the option of Sancon in its sole discretion, the convertible note may be converted into 70% equity interest in Sancon SH.
On August 15, 2007, the Company exercised its conversion right to convert its convertible note with face value of $200,000 into 70% equity interest of Sancon Resource Recovery (Shanghai) Co., Ltd., pursuant to the terms of Convertible Note issued on June 1, 2007.
Sancon Resource Recovery (Shanghai) Co., Ltd was established in March 2007, in Shanghai, China, focuses on the recycling of wasted wine bottle in China. Sancon SH started operations on April 1, 2007.
Mr. Jack Chen is a CEO, Director and Shareholder of the Company, owned 23% shares in the Company also owned 100% of Sancon SH . The acquisition is resulted in recapitalization of the Company, using the carrying values of assets and liabilities at the time when Company converted its note receivable into 70% equity interest in Sancon Shanghai as both the entities were related to each other through a common shareholder.
A summarized financial position for the acquired company, Sancon SH, at the acquisition date, is provided below.
Sancon Resource Recovery (Shanghai) Co., Ltd. Summary Statement of Financial Position At August 15, 2007
Amount
Cash $ 253,549 Other Current Assets 32,447 Property & Equipment 68,957 Current Liabilities (73,268) --------- Net Assets 281,685 Net Assets Acquired (70%) $ 197,180 =========
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE YEAR ENDED DECEMBER 31, 2007
The following un-audited pro forma consolidated financial information for the year ended December 31, 2007 as presented below, reflects the results of operations of the Company assuming the acquisition occurred on April 1, 2007. These pro forma results have been prepared for information purposes only and do not purport to be indicative of what operating results would have been had the acquisitions actually taken place on April 1, 2007 and may not be indicative of future operating results.
Year ended December 31, 2007 (Unaudited) Revenue $ 6,075,111
Operating loss $ (257,041) ------------------
Net loss $ (333,551) ==================
Basic and fully diluted gain/(loss) per share $ (0.02) ==================
NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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.
(b) 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
(c) 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." 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, 2008 and 2007.
(d) Foreign Currency Translation
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, 2008 and 2007 amounted to $54,803 and $9,298.
(e) 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.
(f) Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized when the significant risks and rewards of the ownership of goods have been transferred to the buyers. No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.
The Company is organized into three business segments: material recycling, material trade 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) Material Trade refers the activities of buying and selling of materials with operations located in Hong Kong. The revenue is recognized when delivery to customer is occurred and invoice is issued. (3) 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.
(g) Income Taxes
The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.
We regularly assess our position with regard to individual tax exposures and record liabilities for our uncertain tax positions and related interest and penalties according to the principles of FAS 5, ACCOUNTING FOR CONTINGENCIES. These accruals reflect management's view of the likely outcomes of current and future audits. The future resolution of these uncertain tax positions may be different from the amounts currently accrued and therefore could impact future tax period expense.
The Company has U.S. federal net operating loss carry forwards that if unused could expire in varying amounts in the years through 2020. However, as a result of the acquisition, the amount of net operating loss carry forward available to be utilized in reduction of future taxable income was reduced pursuant to the change in control provisions of Section 382 of the Internal Revenue Code.
A 100% valuation allowance has been established as a reserve against the deferred tax assets arising from the net operating losses and other net temporary differences since it cannot, at this time, be considered more likely than not that their benefit will be realized in the future.
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.
(h) Allowance for Doubtful Accounts
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, 2008 and 2007 allowance for bad debt amounted to $47,170 and $0 respectively
(i) Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 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.
(j) Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "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 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, 2008 and 2007 other comprehensive income amounted to $62,854 and $8,051 respectively.
(k) Reclassifications
Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year.
(l) Stock based payments
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, using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted stock options, since the related purchase discounts exceeded the amount allowed under SFAS 123R for non-compensatory treatment. Compensation expense recognized included: the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R; and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Results for prior periods have not been restated, as provided for under the modified-prospective method.
As of December 31, 2008 and December 31, 2007, the Company did not issue or make provision through the issuance of stock options to employees and directors.
(m) Recent Pronouncements
In September 2006, FASB issued SFAS 158 `Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
1. A brief description of the provisions of this Statement 2. The date that adoption is required 3. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Management is currently evaluating the effect of this pronouncement on the financial statements.
In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new statement. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements. The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. Management is currently evaluating the effect of this pronouncement on the financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements". This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company on January 1, 2009.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for the Company on January 1, 2009.
In March 19, 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Currently the Company does not carry any derivative instruments and the adoption of this statement may not have any effect on the financial statements.
In May 2008, FASB issued SFASB No.162, "The Hierarchy of Generally Accepted Accounting Principles". The pronouncement mandates the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. The Company does not believe this pronouncement will impact its financial statements.
In May 2008, FASB issued SFASB No. 163, "Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60". The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. The Company does not believe this pronouncement will impact its financial statements.
On December 30, 2008 FASB issued FIN 48-3, "Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises". This FSP defers the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, for certain non-public enterprises as defined in paragraph 289, as amended, of FASB Statement No. 109, Accounting for Income Taxes, including non-public not-for-profit organizations. However, non-public consolidated entities of public enterprises that apply U. S. GAAP are not eligible for the deferral. Nonpublic enterprises that have applied the recognition, measurement, and disclosure provisions of Interpretation 48 in a full set of annual financial statements issued prior to the issuance of this FSP also are not eligible for the deferral. This FSP shall be effective upon issuance. The Company does not believe this pronouncement will impact its financial statements.
On January 12, 2009 FASB issued FSP EITF 99-20-01, "Amendment to the Impairment Guidance of EITF Issue No. 99-20". This FSP amends the impairment guidance in EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets," to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance. The FSP shall be effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The Company does not believe this pronouncement will impact its financial statements.
(n) Marketable Securities
Company classifies investment in marketable securities as `Held to Maturity' in accordance with SFAS 115. 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, 2008 investment in securities amounted to $128,938 and gross unrecognized holding loss amounted to $14,192.
The marketable securities will be matured on August 19, 2010 and classified under non current assets in the accompanied financial statements.
Note 5. 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: The Company leases office space in Australia and China. The lease for Australia expires in October 2011 while leases for China expire on various dates between January 2009 to November 2018. Based upon existing leases, without renewals, the minimum lease payments up to expiry are as follows:
2009 $ 611,638 2010 286,588 2011 245,654 2012 161,407 2013 162,544 Thereafter 732,000 ---------- Total $2,199,831 ==========
Equipment: In year 2005, the company purchased a vehicle under capital lease from Toyota Financial Service. The annual interest rate is 7.99% with payment term of sixty (60) months. The payment is to be made in 59 equal monthly installments of $269 each and the final installment of $4,566. The balance as of December 31, 2008 amounted to $8,349 with $2,652 as current liability.
In year 2006, the company purchased a vehicle by mortgage loan from CBFC Limited ABN. The annual interest rate is 8.32% with payment term of sixty (60) months. The payment is to be made in 59 equal monthly installments of $371 each and the final installment of $6,791. The balance as of December 31, 2008 amounted to $16,310 with $3,213 as current liability.
In September 2007, the company purchased a vehicle by mortgage loan from CBFC Limited ABN. The annual interest rate is 8.6% with payment term of forty-eight (48) months. The payment is to be made in 47 equal monthly installments of $325 each and the final installment of $5,3395. The balance as of December 31, 2008 amounted to $13,251 with $2,870 as current liability.
The Company pays approximately $964 per month under these leases, the last of which expires in September 2011.
Total minimum lease payments under the above leases are as follows:
Capital Leases =============================================================================== 2009 11,614 2010 14,258 2011 17,742 - ------------------------------------------------------------------------------- $ 43,614 Less: Amount representing interest (5,704) Present value of minimum lease payments 37,910 Less: Current portion (8,735) - ------------------------------------------------------------------------------- $ 29,175 - ----------------------------------------------------------------===============
Legal Proceeding:
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 under Commitment & Contingency in the accompanied financial statements based on the letter of claim received from the plaintiff.
Note 6. Depreciable Assets
Property, Plant 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.
Below is the table of Property, Plant and Equipment for the fiscal year ended 2008:
Plant and Office Total 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.
Below is the table of Property, Plant and Equipment for the fiscal year ended 2007:
Plant and Office Total Machinery Vehicles Equipment Total ----- --------- -------- --------- ----- Cost 374,084 282,025 33,901 690,010 Accumulated Depreciation (116,415) (22,728) (10,176) (149,319) - ------------------------------------------------------------------------------- Net Carrying Value 257,669 259,297 23,725 540,691 ===============================================================================
Included in property and equipment is approximately $67,821 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 $18,180.
Depreciation and amortization expense for the year ended December 31, 2008 and December 31, 2007 was $121,999 and $80,656, respectively.
Note 7. Related Party Transactions
The shareholders' loans were due from Mr. Cheng Guangliang, currently the contracted Manager of GuangCheng, one of company's subsidiary..
The shareholders' loans were due to Mr. Jack Chen, currently CEO and Director of the Company, Mr. David Chen, former CEO and Shareholder of the Company and Mr. Jimmy Yu, Director of the Company.
Included in the amount due from related parties, there were loans due from Mr.Cheng Guangliang, of $108,690. The company made a loan to Mr. Cheng Guangliang for purpose of undertaking business activities of Guangcheng such as Material trading. Such loan is guaranteed by Mr. Chen Guangliang on a personal basis. The loan is unsecured, interest free and due on demand.
Included in the amount due to related parties, there were loans due to Mr. David Chen of $15,243 and loans due to Mr. Jimmy Yiu, director of the Company, amounting of $5,021 and loans due to Mr. Jack Chen of $392,027 (net) without 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 $407,027. We combined these two amounts and result in loans due to Mr. Jack Chen of $392,027. The offsetting amounts due to and due from Mr. Jack Chen are appropriate and comply with FASB Interpretation No. 39.
During the year ended December 31, 2008, Guang Cheng (Company's subsidiary), made purchased amounted to $947,458 from Three Rivers HK Ltd, a company owned by the manager of Guang Cheng.
During the year ended December 31, 2008, Guang Cheng (Company's subsidiary), made sales amounted to $721,880 to Shenzhen Sanjiang Plastic Factory, a company owned by the father of the manager of Guang Cheng. As at December 31, 2008, accounts receivable from the Shenzhen Sanjiang Plastic Factory amounted to $2,557.
Guang Cheng International Trading Ltd sold $703,344 worth of goods to Shenzhen Sanjiang Plastic Factory, owned by the father of the sole director of Guang Cheng International Trading Ltd during the year ended December 31, 2007. No accounts receivable outstanding from Shenzhen Sanjiang Plastic Factory as at December 31, 2007.
Note 8. Segmental Information
During the years ended December 31, 2008 and 2007, the Company is organized into three business segments: (1) material recycling, (2) material trade, (3) waste service. The following table presents a summary of operating information and certain year-end balance sheet information for the years ended December 31, 2008 and 2007:
YEARS ENDED DECEMBER 31 2008 2007 ------------ ------------ Revenues from various areas: Material Recycling $ 2,408,359 $ 1,467,867 Material Trade 2,138,066 2,212,590 Waste Service 8,161,471 1,101,652 ------------ ------------ Consolidated $ 12,707,896 $ 4,782,109 ============ ============
Net income (loss): Material Recycling $ 88,305 $ (82,971) Material Trade 6,161 (64,666) Waste Service 1,862,502 226,489 Un-allocated (304,455) (246,695) ------------ ------------ Consolidated $ 1,652,513 $ (167,843) ============ ============
Identifiable assets: Material Recycling $ 761,133 $ 586,374 Material Trade 153,979 14,829 Waste Service 2,970,350 893,538 Un-allocated 11,513 93,195 ------------ ------------ Consolidated $ 3,896,975 $ 1,587,936 ============ ============
Depreciation and amortization: Material Recycling $ 55,913 $ 69,591 Material Trade -- -- Waste Service 66,086 11,065 Un-allocated -- -- ------------ ------------ Consolidated $ 121,999 $ 80,656 ============ ============
Capital expenditures: Material Recycling $ 174,174 $ 53,612 Material Trade -- -- Waste Service 293,519 137,100 Un-allocated -- -- ------------ ------------ Consolidated $ 467,693 $ 190,712 ============ ============
Note 9. Stockholders' Equity
On April 15, 2007, the Company entered into a Share Purchase Agreement to issue and sells 1,000,000 shares of its common stock in an offshore transaction under Regulation S to Fengteng Investment Consulting Management (Shanghai) Co., Limited at US$0.35 per share for gross proceeds of US$350,000. The shares are subject to 144 restriction and proceeds will be used for working capital needs. The shares were part of shares to be issued as at December 31, 2007 and issued during the year ended December 31, 2008.
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. As of December 31, 2008, the Company recorded $15,600 in consulting expense. The unamortized amount of $140,400 is included under deferred compensation as at December 31, 2008.
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.
On August 1, 2008, the Company issued 50,000 shares to Mr. Xia Chen of Restricted, RULE 144 Stock for services rendered, recorded at the fair market value of $7,500.
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, the Company issued 250,000 shares of Restricted, RULE 144 Stock to Mr. Jack Chen. The shares recorded at the fair market value of $37,500. As of the December 31, 2008, the Company recorded $90,000 in expense and $52,500 in accrued expenses.
Note 10. 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, 2008 and December 31, 2007. The Company has deferred tax asset from its Australian operations amounted to $22,107. No valuation allowance is recorded against the deferred tax asset as at December 31, 2008 under this entity.
The components of income before income taxes and after minority interest are as follows:
2008 2007 ---------- ---------- Income (loss) subject to Australia 105,559 (81,603) Income (loss) subject to Hong Kong (505) (36,913) Income (loss) subject to Shanghai (33,771) 270,096 Income (loss) subject to United States (304,455) (178,748) Income (loss) subject to British Virgin Island 1,896,273 -- - ------------------------------------------------------------------------------- 1,663,101 (27,168)
United States of America As of December 31, 2008, the Company in the United States of America had approximately $4,733,000 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, 2008 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, 2008 and 2007.
2008 2007
Net Operating Loss Carry forwards 4,733,000 4,408,000 Total Deferred Tax Assets 1,609,000 1,498,600 Less: Valuation Allowance (1,609,000) (1,498,600) Net Deferred Tax Assets -- --
Hong Kong As of December 31, 2008, the Company's Hong Kong subsidiary had accumulated profit of $3,175. Pursuant to Hong Kong income tax laws, the Company has recorded income tax benefit of $4,801 for the year ended December 31, 2008.
Australia As of December 31, 2008 the Company's Australian subsidiary had accumulated loss of $17,000. Pursuant to Australian income tax laws, the Company has made income tax provision of $17,254 for the year ended December 31, 2008.
The following table sets forth the significant components of the net deferred tax assets for operation in the Australia as of December 31, 2008 and 2007.
2008 2007
Net Operating Loss Carryforwards 17,000 106,000 Total Deferred Tax Assets 22,107 32,000 Less: Valuation Allowance -- (32,000) Net Deferred Tax Assets 22,107 --
China As of December 31, 2008 the Company's China subsidiary had accumulated profit of $222,000. The Company has net loss of $85,000 during the year ended December 31, 2008. Pursuant to Chinese income tax laws, the Company has not made income tax provision for the year ended December 31, 2008.
British Virgin Island As of December 31, 2008 the Company's British Virgin Island subsidiary had net profit of 1,897,000 for the year ended December 31, 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:
2008 2007 --------- --------- 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 33% 33% Hongkong 16.5% 17.5% Shanghai 25% 33% Change in valuation allowance (1,008.33)% 332.5% ----------- ----------- Effective tax rate (933.83)% 416% =========== ===========
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"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB 109. 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, 2008, 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..
Not 11. Discontinued Operations
On March 31, 2008, the company sold 100% equity interest of Digital Financial Service Limited ("DFSL") to individual Mr. Zhu Jun 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.
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 through March 31, 2008 (1,955) -------
Total book value (negative) of March 31, 2008 (3,812)
Proceeds from disposal 7.8
------- Gain on Disposal $ 3,820 -------
------- Total Gain on Discontinued Operations $ 1,865 -------
DECEMBER 31, 2007 -----------------
CURRENT ASSETS OF ENTITY DISPOSED OFF COMPRISED OF FOLLOWING: - -------------------------------------------------------------
Cash and cash equivalents 11,826 Due from related parties (65) ------------- TOTAL ASSETS $ 11,761 ------------- Current liability of entity disposed off comprised of following: Tax payables 5,529 Due to related parties 19,230 Other payables 4,006 ------------- TOTAL LIABILITY $ 28,765 -------------
Note 12. Major Customers and Vendors
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.
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.
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 13. Minority Interest
The Company owned 70% interest in Sancon Shanghai. As at December 31, 2008 and 2007 minority interest amounted to $127,829 and $153,220.
Note 14. Subsequent Event
On March 15, 2009, the Board of Directors of the Company decided to discontinue the operations of GuangCheng (100% owned subsidiary of the Company). The Company entered into a shares purchase agreement to sell GuangCheng. This transaction is expected to finish before the end of April, 2009.