UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)





x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended    March 31, 2011


oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT


For the transition period from ___ to _______





Commission file number      000-50760





Sancon Resources Recovery, Inc.


(Exact name of small business issuer as specified in its charter)


Nevada
58-2670972(State or other jurisdiction of incorporation or organization)
(IRS Employee Identification No.)





No 2 Yinqing Lu, Songjiang District,


Shanghai, China, 201615


(Address of principal executive offices)





(+86) 21 67756099


(Issuer's telephone number)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]     No [ ]





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS


DURING THE PRECEDING FIVE YEARS





Check whether the registrant filed all documents and reports required by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.   Yes [ ]     No [ ]





APPLICABLE ONLY TO CORPORATE ISSUERS





State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:





Common Stock:  par value of $0.001; 22,964,996 shares issued and outstanding on March 31, 2011.





Transitional Small Business Disclosure Format (Check one):  Yes [ ]     No [X]







Sancon Resources Recovery, Inc.





FORM 10-Q


INDEX


PAGEImportant NoticePART I.
FINANCIAL INFORMATION
3Item 1.
Financial Statements  (Unaudited)
3Item 2.
Management's Discussion and Analysis or Plan of Operation
18Item 3.
Controls and Procedures
29PART II.
OTHER INFORMATION
29Item 1.
Legal Proceedings
29Item 2.
Changes in Securities and Use of  Proceeds
29Item 3.
Default Upon Senior Securities
30Item 4.
Submission of Matters to a Vote of Security Holders
30Item 5.
Other Information
30Item 6.
Exhibits
31Signatures
33





1





CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION


Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the risk of doing business in the People' Republic of China, or PRC, our ability to implement our strategic initiatives, our access to sufficient capital, the effective integration of our subsidiaries in the PRC into a U.S. public company structure, economic, political and market conditions and fluctuations, government and industry regulation, Chinese and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.




2


PART I.   FINANCIAL INFORMATION
 ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)




Sancon Resources Recovery, Inc.


Consolidated Balance Sheets


As At March 31, 2011 and December 31, 2010


(Unaudited)





AssetsAs atMarch 31, 2011

December 31, 2010Current assetsCash and cash equivalents

$
6,514,410


$
6,013,889Trade receivables, net


2,060,937



1,503,849Inventory


133,871



61,286Deferred tax asset


83,876



37,617Other current assets


316,654



301,234Advance and prepayment


93,010



82,021Held to maturity securities


129,384



129,489Total current assets


9,332,142



8,129,385Property, plant & equipment, net


1,173,874



1,190,106Security deposit


11,340



11,179Long Term Deferred Expenses


12,103



13,448Total assets

$
10,529,459


$
9,344,118Liabilities and Stockholders' EquityCurrent liabilitiesTrade payables

$
1,138,792


$
922,626Capital lease - current


22,561



24,807Tax payables


461,633



304,613Due to related parties


977,896



697,030Loan Payable - current


29,881



29,224Accrued expenses and other payables


616,131



540,036Total current liability


3,246,894



2,518,336Long term liabilityLoan Payable


21,216



28,805Total liability


3,268,110



2,547,141Stockholders' equityShare CapitalAuthorized: 500,000,000 common shares, parvalue $0.001 per share Issued and Outstanding: 22,964,996 shares as of December 31, 2010 andMarch 31, 2011


22,965



22,965Additional paid-in capital


1,079,200



1,079,200Deferred Compensation


(105,300
)


(109,200
)Other comprehensive income


78,377



86,098Retained Earnings


5,808,911



5,361,208Total


6,884,153



6,440,271Non-controlling interest


377,196



356,706Total stockholders' equity


7,261,349



6,796,977Total liabilities & stockholders' equity

$
10,529,459


$
9,344,118




The accompanying notes are an integral part of these unaudited consolidated financial statements.
  3





Sancon Resources Recovery, Inc.


Consolidated Income Statements
 For the Three-Months Ended March 31, 2011 and March 31, 2010
 (Unaudited)





For the three month periods ended March 31,2011


2010Net sales

$
3,847,147


$
3,068,509Cost of sales


2,472,944



1,538,106Gross profit


1,374,203



1,530,403Operating ExpensesDepreciation


43,280



56,654Selling, general and administrative


853,189



875,659Total operating expenses


896,469



932,313Operating Income


477,734



598,090Other income (expense)Other expense, net


(9,730
)


(13,194
)Investment loss


-



(769
)Interest income (expense), net


(376
)


426Total other income (expense)


(10,106
)


(13,537
)Income from continued operations before incometaxes and non-controlling interest


467,628



584,553Income tax (benefit) expense


(565
)


9,075Net income attributed to non-controlling interest


20,490



8,168Net income


447,703



567,310Other comprehensive item:Foreign currency translation gain (loss)


6,736



(796
)Net comprehensive income

$
454,439


$
566,514Earnings per share:Basic earnings per share

$
0.02


$
0.02Basic weighted average shares outstanding


22,964,996



22,964,996Diluted earnings per share

$
0.02


$
0.02Diluted weighted average shares outstanding


22,697,410



23,098,466




The accompanying notes are an integral part of these unaudited consolidated financial statements.


4





Sancon Resources Recovery, Inc.


Consolidated Statements of Cash Flow
 For the Three-Months Ended March 31, 2011 and March 31, 2010
 (Unaudited)





For the three months periods ended March 312011


2010Cash Flows from Operating ActivitiesNet Income

$
447,703


$
567,310Adjustments to reconcile net income to net cash flowsNon-controlling interest


20,490



8,168Depreciation


68,701



56,654Loss on acquisition


-



769Amortization of deferred compensation


3,900



3,900Options grant for compensation


-



14,469Changes in current assets and liabilitiesIncrease in trade receivables


(557,088
)


(196,756
)Increase in inventory


(72,585
)


(3,433
)Decrease in advance to suppliers


(9,771
)


(6,888
)(Increase) decrease in other current assets


(61,746
)


26,190Increase (decrease) in tax payable


157,020



(3,137
)Increase (decrease) in trade payable


209,234



(32,389
)Increase in other current liabilities


76,095



54,374Net cash provided by operating activities


281,953



489,231Cash Flows from Investing ActivitiesPurchase of property and equipment


(43,314
)


(17,568
)Net cash used in investing activities


(43,314
)


(17,568
)Cash Flows from Financing ActivitiesProceeds from shareholder loans


280,870



22,867Repayments of mortgage loan


(2,246
)


(1,945
)Net cash flows provided by financing activities


278,624



20,922Effect of exchange rate on cash


(16,742
)


(13,798
)Net increase in cash & cash equivalents


500,521



478,788Cash & cash equivalent at start of period


6,013,889


$
3,703,716Cash & cash equivalent at end of period

$
6,514,410


$
4,182,504-Supplemental information for cash flow informationCash paid for interest

$
1,607


$
1,338Cash paid for income taxes

$
(565
)

$
9,075




The accompanying notes are an integral part of these unaudited consolidated financial statements.





5


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Note 1.  Nature of Operations





Sancon Resources Recovery, Inc. ("Sancon", or "the Company", or "we", or "us") is registered in the State of Nevada Sancon Resources Recovery, Inc. is an environmental service and waste management company that operates recycling facilities in China and Australia. Sancon specializes in the collection and recovery of industrial and commercial solid wastes such as plastic, paper, cardboard, and glass.





As of March 31, 2011, the Sancon group comprises of the following companies:





Registered Name (business is conducted under the registered names)
Domicile
Owner
% Held
StatusSancon Recycling Pty Ltd.
Australia
Sancon
100
ActiveSancon Resources Recovery (Shanghai) Co., Ltd. ("Sancon SH" hereinafter)
Shanghai
Sancon
70
ActiveCrossover Solutions Inc. ("CS" hereinafter)
British Virgin Island
Sancon
100
ActiveSheng Rong Environment Protection Technology Co.,Ltd. (“Shanghai Sheng Rong” hereinafter)
Shanghai
Sancon SH
52
Active





Note 2.  Basis of Presentation





(a)
Interim Consolidated Financial Statements





The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America.  However, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted or condensed, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of Sancon management, all adjustments of a normal recurring nature necessary for a fair presentation have been included. The results for periods are not necessarily indicative of results for the entire year. These financial statements and accompanying notes should be read in conjunction with our annual financial statements and the notes thereto for the year ended December 31, 2010, included in our Annual Report on Form 10K, filed with the Securities and Exchange Commission.





(b) Principles of Consolidation





The accompanying unaudited consolidated financial statements include all of the accounts of the Company and all of the subsidiaries under its control, which include Sancon Recycling Pty Ltd., Sancon SH (70%), CS and Shanghai Sheng Rong (52% owned by Sancon SH) as of March 31, 2011. For the same period in 2010, there were Sancon Recycling Pty Ltd., Sancon SH (70%) and CS.  All material inter-company balances and transactions have been eliminated in consolidation.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of liabilities in the normal course of business.




6





Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Note 3.  Summary of Significant Accounting Policies





Use of Estimates





These financial statements are prepared in accordance with accounting principles accepted generally in the USA.  These principles require management to use its best judgment in determining estimates and assumptions that: affect the reported amounts of assets and liabilities; disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period.   Management makes its best estimate of the ultimate outcome for such items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the relevant accounting rules, typically in the period when new information becomes available to management. Actual results in the future could differ from the estimates made in the prior and current periods.





Earnings Per Share





Basic earnings per share ("EPS") is calculated using net earnings (the numerator) divided by the weighted-average number of shares outstanding (the denominator) during the reporting period. Diluted EPS includes the effect from potentially dilutive securities.  Diluted EPS is equal to basic EPS for all periods presented, as the Company has no potentially dilutive securities.





Revenue Recognition





The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Sales revenue is recognized when the significant risks and rewards of the ownership of goods have been transferred to the buyers.  No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.





The Company now is organized into two business segments while it was three in the last year: material recycling and waste management service.





(1) Material Recycling refers to the activities of collecting and processing of waste materials, then selling them to customers in China. The plant is located in Australia.


(2) Waste management Service refers the activities of providing waste management service with operations located in China.





Income Taxes





The Company recognizes 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.


7


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





The Company operates in several countries.  As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.





We regularly assess our position with regard to individual tax exposures and record liabilities for our uncertain tax positions and related interest and penalties. These accruals reflect management's view of the likely outcomes of current and future audits. The future resolution of these uncertain tax positions may be different from the amounts currently accrued and therefore could impact future tax period expense.





The Company has U.S. federal net operating loss carry forwards that if unused could expire in varying amounts in the years through 2020 to 2026. However, as a result of the acquisition, the amount of net operating loss carry forward available to be utilized in reduction of future taxable income was reduced pursuant to the change in control provisions of Section 382 of the Internal Revenue Code.





A 100% valuation allowance has been established as a reserve against the deferred tax assets arising from the net operating losses and other net temporary differences since it cannot, at this time, be considered more likely than not that their benefit will be realized in the future.





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.





Non-controlling Stockholders’ Interest





The Company owns 70% interest in Sancon SH and Sancon SH owns 52% interest in Shanghai Sheng Rong. As at March 31, 2011 and December 31, 2010, Non-controlling interest amounted to $377,196 and $356,706 respectively.





Reclassifications





Certain reclassifications have been made in prior period's financial statements to conform to classifications used in the current period.




Held to maturity securities
 
 Held to maturity debt securities are those debt securities in which the Company has the ability and intent to hold the security until maturity. Held to maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts are amortized or accreted over the life of the related held to maturity or available for sale security as an adjustment to yield using the effective interest method. Such amortization and accretion is included in the “Interest Expense” line item in the consolidated statements of income. Dividend and interest income are recognized when earned.
 
 A decline in the market value of any security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.
 
 The held to maturity securities of $129,384 will mature on August 22, 2011. So they are classified under current assets in the accompanied financial statements





Recent pronouncements





In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this ASU did not have a material impact on its consolidated financial statements.


8


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





In January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.





In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.





In February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The amendment is effective for interim and annual reporting periods in fiscal year ending after June 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.





In March 2010, FASB issued ASU No. 2010-10 –Amendments for Certain Investment Funds. This update defers the effective date of the amendments to the consolidation requirements made by FASB Statement 167 to a reporting entity’s interest in certain types of entities. The deferral will mainly impact the evaluation of reporting enterprises’ interests in mutual funds, private equity funds, hedge funds, real estate investment entities that measure their investment at fair value, real estate investment trusts, and venture capital funds. The ASU also clarifies guidance in Statement 167 that addresses whether fee arrangements represent a variable interest for all service providers and decision makers. The ASU is effective for interim and annual reporting periods in fiscal year beginning after November 15, 2009. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.





In March 2010, FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded Credit Derivatives. Embedded credit-derivative features related only to the transfer of credit risk in the form of subordination of one financial instrument to another are not subject to potential bifurcation and separate accounting as clarified by recently issued FASB guidance. Other embedded credit-derivative features are required to be analyzed to determine whether they must be accounted for separately. This update provides guidance on whether embedded credit-derivative features in financial instruments issued by structures such as collateralized debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and separate accounting. The guidance is effective at the beginning of a company’s first fiscal quarter beginning after June 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.




9


Sancon Resources Recovery, Inc.
 Notes to the Conolidated Financial Statements
 (Unaudited)








Note 4.  Concentrations and commitments





(a). Concentrations





The Company has focused on business in overseas markets, which the Company believes present opportunities. A business with a foreign lessee is subject to risks related to the economy of the country or region in which such lessee is located, which may be weaker than the U.S. economy. On the other hand, a foreign economy may remain strong even though the U.S. economy does not. A foreign economic downturn may impact a foreign lessee's ability to make business payments, even though the U.S. and other economies remain stable. Furthermore, foreign lessees are subject to risks related to currency conversion fluctuations.





Foreign laws, regulations and judicial procedures may be more or less protective of lessor rights than those which apply in the United States. The Company could experience collection or repossession problems related to the enforcement of its business agreements under foreign local laws and the remedies in foreign jurisdictions. The protections potentially offered by Section 1110 of the Bankruptcy Code do not apply to non-U.S. carriers, and applicable local law may not offer similar protections.





(b). Commitments





Office space:





The Company leases office space in Australia and China. The lease for Australia will expire in October 2011 while leases for China will expire on various dates between April 2011 and July 2013.  Based upon existing leases, without renewals, the minimum lease payments up for the next three years after March 31, 2011 to expiry are as follows:





2011

$
342,2292012


57,9512013


17,757Total

$
417,937





The following schedule shows the composition of total rental expense for all operaring leases except those with terms of a month or less that were not renewed:





Year Ending December 312011


2010Minimum Rentals

$
342,229


$
357,488





Equipment:





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 $553 each and the final installment of $10,136. The balance as of March 31, 2011 amounted to $12,965 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 $485 each and the final installment of $7,969. The balance as of March 31, 2011 amounted to $9,596 as current liability.





10





The Company pays approximately $1,038 per month under these leases, the last of which expires in September 2011. Total minimum lease payments under the above leases are as follows:





CapitalLeases2011

$
23,365Less: Amount representing interest


(804)Present value of minimum lease payments

$
22,561





Legal Proceedings:





Dragon Wings Communications Limited, a Hong Kong corporation and Wong Yee Tat, an individual are the first and second plaintiff. They filed a complaint on July 25, 2008 in the District Court of the Hong Kong special Administrative Region, Civil Action No. 3251, against the first defendant, Fintel Group Limited for breach of contract. The Company is the second defendant because plaintiff claimed Fintel Group Limited is a wholly owned subsidiary of the Company. Under the writ, the plaintiff claimed that pursuant to a written stock purchase agreement, the first defendant shall purchase the first plaintiff’s common stock by common shares of Financial Telecom Limited (USA) inc. (replaced by shares of MKA Capital Inc. from June 2006) or pay to the plaintiff cash of $94,172 in lieu of the shares.  Pluses the interest and cost of litigation, the total amount claimed by plaintiff were $104,966.  The court adjudged that the first defendant do pay the plaintiffs damages on September 08, 2008 and also adjudged that the second defendant do pay the plaintiffs damages on December 10, 2008.  The Company has denied all allegations in the complaint because Fintel Group Limited was not a subsidiary at the time of the since November 27, 2006.





On November 19, 2010, an involuntary bankruptcy petition was filed against the company in the United States Bankruptcy Court for Nevada, Case No. 10-54572-gwz. The petitioner is Dragon Wings Communications Limited and the amount of the claim is $149,015.  The Company has retained a Nevada law firm to oppose the involuntary petition and have the case dismissed. The Company accrued $149,015 of potential liability in the accompanied financial statements based on the amount of the claim.




11





Sancon Resources Recovery, Inc.
 Notes to the Conolidated Financial Statements
 (Unaudited)


Note 5. Property, plant & equipment





Property, plant, & equipment are stated at cost, less accumulated depreciation and any impairment in value. The carrying values are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.  Impairment losses are recognized in the income statement.





Below is the table of Property, Plant and Equipment as at March 31, 2011:





Item

Plant and Machinery


Vehicles


Office Equipment


TotalCost

$
1,380,927


$
609,209


$
41,056


$
2,031,192Accumulated Depreciation


(521,493
)


(312,848
)


(22,977
)


(857,318
)Net Carrying Value

$
859,434


$
296,361


$
18,079


$
1,173,874





Included in property and equipment is approximately $58,967 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 $60,609.





As of December 31, 2010, the property and equipment of the Company consisted of the following:





Items

Plant and Machinery


Vehicles


Office Equipment


TotalCost

$
1,324,477


$
606,877


$
40,847


$
1,972,201Accumulated Depreciation


(479,369
)


(282,223
)


(20,503
)


(782,095
)Net Carrying Value

$
845,108


$
324,654


$
20,344


$
1,190,106





Included in property and equipment at December 31, 2010 is approximately $58,132 of assets, which are leased under non-cancelable 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 $56,321.





Depreciation and amortization expense for the Three months period ended March 31, 2011 and 2010 was $68,701 and $56,654 respectively.





Note 6. Short Term and Long Term Loan Payable





On November 19, 2009, Sancon SH purchased a vehicle with a total loan principle amount of $87,576, unsecured, with an annual interest rate of 7.6%. The payment is to be made in thirty-six (36) equal monthly installments of $2,728 expiring in November 2011. The Company classified the loan balance under current and noncurrent liabilities respectively in the accompanied financial statements. As of March 31, 2011 and December 31, 2010, short term loan payable amounted to $29,881 and $29,224 and long term loan payable amounted to $21,216 and $28,805 respectively.




12




Sancon Resources Recovery, Inc.
 Notes to the Conolidated Financial Statements
 (Unaudited)


For the three months ended March 31, 2011, Sancon SH accrued and paid interest $1,107 for the loan.





The future payment schedule for this term loan is as follows:





2011




$
24,5542012





30,010Total

$



$
54,564





Note 7.  Due to related parties




As of March 31, 2011 and December 31, 2010, the Company had a total balance of related party notes payable of $977,896 and $697,030, respectively. The related party notes payable are interest free borrowings from a director, a former CEO, and current the CEO.




Note 8.  Stockholders equity





Common Stock





On October 15, 2007, the Company entered into a ten years service agreement with Lyons Capital LLC. In connection with this agreement, Lyons Capital LLC will receive 300,000 shares of Restricted, RULE 144 Stock, for services rendered or to be rendered in the future. The Company issued shares on March 10, 2008 and recorded at the fair market value of $156,000. This amount will be amortized over a period of ten years from January 01, 2008. For the three months periods ended March 31, 2011, the Company recorded $3,900 in consulting expense. The unamortized amount of $105,300 is included under deferred compensation as at March 31, 2011.





On January 01, 2008, the Company entered in a four years employment agreement with Mr. Jack Chen, current CEO. In connection with this agreement, Mr. Jack Chen will receive corporate salary of $90,000 per year that paid in stock. On August 01, 2008 and April 13, 2009, the Company issued 250,000 shares and 350,000 shares of Restricted, RULE 144 Stock to Mr. Jack Chen. The shares recorded at the fair market value of $37,500 and $52,500 respectively. As of the March 31, 2011, the Company recorded $202,500 in due to related parties. This is a stock subscription liability.





On January 01, 2010, the Company entered in a two years employment agreement with Mr. David Chen, former CEO and major shareholder. In connection with this agreement, Mr. David Chen will receive corporate salary of $42,000 per year that paid in stock. As of the March 31, 2011, the Company recorded $10,500 in due to related parties. This is a stock subscription liability.





Stock Options





Options outstanding as of March 31, 2011 and related weighted average price and intrinsic value are as follows:





Exercise Prices

Total Options Outstanding

Weighted Average Remaining Life (Years)

Total Weighted Average Exercise Price

Options Exercisable

Weighted Average Exercise Price

Aggregate Intrinsic Value$0.33

900,000

3.75

$0.33

900,000

$0.33

$90,000





13


Sancon Resources Recovery, Inc.
 Notes to the Conolidated Financial Statements
 (Unaudited)





On January 01, 2010, the Company entered in an option agreement with Mr. Jack Chen, current CEO. In connection with this agreement, the Company granted a total of 600,000 options with an exercise price of $0.33 per share to Mr. Jack Chen.  These options expire and vest in 5 years.





On January 01, 2010, the Company entered in an option agreement with Mr. David Chen, former CEO and major shareholder. In connection with this agreement, the Company granted a total of 300,000 options with an exercise price of $0.33 per share to Mr. David Chen.  These options expire and vest in 5 years.





The Company valued the stock options by the Black-Scholes model with the following assumptions:





Expected Term

Expected Volatility

Dividend Yield

Risk Free Interest Rate

Grant Date Fair Value3.75

96.29%

0%

2.65%

$
0.33





The following summary presents the options granted, exercised, expired and outstanding at March 31, 2011:





Options

OutstandingOutstanding, December 31, 2010


900,000Granted


-Forfeited/Canceled


-Exercised


-Outstanding, March 31, 2011


900,000





Note 9. Segmental information





Statement of Financial Accounting Standards No. 131 ("SFAS 131"),(ASC 250) "Disclosure About Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.


14


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





During the three months periods ended March 31, 2011 and 2010, the Company is organized into two business segments: (1) material recycling, (2) waste service. The following table presents a summary of operating information and certain quarter-end balance sheet information for the three months periods ended March 31, 2011 and 2010:





For the three months periods ended March 31,2011


2010Revenues from various areas:Material Recycling

$
631,663


$
662,348Waste Service


3,215,484



2,406,161Consolidated

$
3,847,147


$
3,068,509Net income (loss):Material Recycling

$
(47,556
)

$
6,384Waste Service


545,072



612,295Un-allocted


(49,813
)


(51,369
)Consolidated

$
447,703


$
567,310Identifiable assets:





December 31, 2010Material Recycling

$
909,205


$
833,326Waste Service


9,673,971



8,509,206Un-allocted


-53,717



1,586Consolidated

$
10,529,459


$
9,344,118Depreciation and amortization:Material Recycling

$
24,752


$
26,325Waste Service


43,949



30,329Consolidated

$
68,701


$
56,654Capital expenditures:Material Recycling

$
7,275


$
543Waste Service


36,039



17,025Consolidated

$
43,314


$
17,568


15





Note 10 Income Tax





The Company is registered in the State of Nevada and has operations in primarily five four jurisdictions - the Australia, 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 March 31, 2011 and 2010. The Company has deferred tax asset from its Australian operations amounted to $83,876 and $34,034 respectively as of March 31, 2011 and 2010. No valuation allowance is recorded against the deferred tax asset as at March 31, 2011 and 2010 under this entity.





The components of income before income taxes and non-controlling interest are as follows:





For the three months periods ended March 31,2011


2010loss subject to Australia

$
-92,134



6,384Income subject to Hong Kong


-



-Income subject to China


176,050



36,301loss subject to United States


-49,813



-51,369Income subject to British Virgin Island


433,525



593,237$
467,628



584,553





United States of America


As of March 31, 2011, the Company in the United States of America had approximately $5,436,559 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 March 31, 2011 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 March 31, 2011 and 2010.





For the three months periods ended March 31,2011


2010Net Operating Loss Carry forwards

$
5,436,559


$
4,943,969Total Deferred Tax Assets


1,848,430



1,680,949Less: Valuation Allowance


-1,848,430



-1,680,949Net Deferred Tax Assets

$
-


$
-


16


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Australia


As of March 31, 2011 and 2010 the Company’s Australian subsidiary had accumulated loss of $221,873 and income of $4,148. Pursuant to Australian income tax laws, the Company has made income tax provision of negative $44,578 and $0 for the three months periods ended March 31, 2011 and 2010 respectively.





The following table sets forth the significant components of the net deferred tax assets for operation in the Australia as of March 31, 2011 and 2010.





For the three months periods ended March 31,2011


2010Net Operating Loss(income) Carry forwards


221,873


$
(4,148
)Total Deferred Tax Assets


83,876



34,034Less: Valuation Allowance


-



-Net Deferred Tax Assets

$
83,876


$
34,034





China


As of March 31, 2011 and 2010, the Company’s China subsidiary had accumulated profit of $705,178 and $351,242 respectively. The Company has net income before income tax and non-controlling interest of $176,050 during the three months periods ended March 31, 2011. Pursuant to Chinese income tax laws, the Company has made income tax provision of $44,013 and $9,075 for the three months periods ended March 31, 2011 and 2010.





British Virgin Island


The Company’s British Virgin Island subsidiary had net profit of $433,525 and $593,237 for the three months periods ended March 31, 2011 and 2010. 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:





For the three months periods ended March 31,2011


2010Tax expense (credit) at statutory rate-federal



-34
%


-34
%State tax expense (credit) net of federal tax



-6
%


-6
%Valuation allowance



40
%


40
%Foreign income tax:British Virgin Island



-



-Australia



30
%


30
%Shanghai



25
%


25
%Valuation allowance



54.87
%


56.57
%Effective tax rate



-0.13
%


1.57
%





As of March 31, 2011, the Company does not have any unrecognized tax benefits and no corresponding interest or penalties. The Company's policy is to record interest and penalties as income tax expense.





Note 12. Major Customers and Vendors





Our two top customers provided approximately 64% of net sales for the three month ended March 31, 2011. Total accounts receivable due from these customers was approximately 59% of total accounts receivable as of March 31, 2011.





Our Two major vendors provided approximately 22% of total purchases for the three month ended March 31, 2011.  Total accounts payable due to these vendors was approximately 29% of total accounts payable as of March 31, 2011.




17


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





Item 2(a). Discussion for the Interim Operations and Financial Condition





Introduction





Management's discussion and analysis of results of operations and financial condition ("MD&A") is provided as a supplement to the accompanying financial statements and footnotes to help provide an understanding of our financial condition, changes in financial condition and results of operations.  The MD&A is organized as follows:





·
Caution concerning forward-looking statements and risk factors. This section discusses how certain forward-looking statements made by us throughout the MD&A and in the financial statements are based on our present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.


·
Overview. This section provides a general description of our business, as well as recent developments that we believe are important in understanding the results of operations and to anticipate future trends in those operations.


·
Results of operations. This section provides an analysis of our results of operations for the three months period ended March 31, 2011 compared to the same period in 2010. A brief description is provided of transactions and events, including any related party transactions that affect the comparability of the results being analyzed.


·
Liquidity and capital resources. This section provides an analysis of our financial condition and cash flows for the three months period ended March 31, 2011 and 2010.


·
Critical accounting policies. This section provides an analysis of the significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.





Caution Concerning Forward-looking Statements and Risk Factors





We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock.





The following discussion should be read in conjunction with our financial statements and the notes thereto, and the other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain certain forward-looking information. When used in this discussion, the words "believes", "anticipates", "expects", and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of factors beyond our control. We do not undertake to publicly update or revise any of our forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are also urged to carefully review and consider our discussions regarding the various factors, which affect our business, included in this section and elsewhere in this report.




18


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Factors that might cause actual results, performance or achievements to differ materially from those projected or implied in such forward-looking statements include, among other things: (i) the impact of competitive products; (ii) changes in law and regulations; (iii) limitations on future financing; (iv) increases in the cost of borrowings and unavailability of debt or equity capital; (v) our inability to gain and/or hold market share; (vi) managing and maintaining growth; (vii) customer demands; (viii) market and industry conditions, (ix) the success of product development and new product introductions into the marketplace; (x) the departure of key members of management; as well as other risks and uncertainties that are described from time to time in our filings with the Securities and Exchange Commission.





We provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business and our products. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could adversely affect us.





Potential Fluctuations In Periodic Operating Results





Our periodic operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside our control, including: the demand for our products; seasonal trends in purchasing, the amount and timing of capital expenditures and other costs relating to the development of our products; price competition or pricing changes in the industry; technical difficulties or system downtime; general economic conditions, and economic conditions specific to the industry. Our results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Particularly at our early stage of development, such accounting treatment can have a material impact on the results for any period. Due to the foregoing factors, among others, it is likely that our operating results will fall below our expectations or those of investors in some future period.





Dependence Upon Management





Our future performance and success is dependant upon the efforts and abilities of our Management. To a very significant degree, we are dependent upon the continued services of Jack Chen, CEO & Director of the Company. If the Company lost the services of Mr. Chen, or other key employees before we could get qualified replacements that loss could materially adversely affect our business. We do not maintain key man life insurance on any of our Management.





Limitation of Liability and Indemnification of Officers and Directors





Our officers and directors are required to exercise good faith and high integrity in our Management affairs. Our Articles of Incorporation provide, however, that our officers and directors shall have no liability to our shareholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they violated their duty of loyalty, did not act in good faith, engaged in intentional misconduct or knowingly violated the law, approved an improper dividend or stock repurchase, or derived an improper benefit from the transaction. Our Articles and By-Laws also provide for the indemnification by us of the officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate our business or conduct the internal affairs, provided that in connection with these activities they act in good faith and in a manner that they reasonably believe to be in, or not opposed to, the best interests of the Company, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations. To further implement the permitted indemnification, we have entered into Indemnity Agreements with our officers and directors.


19


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Management of Potential Growth





We anticipate rapid growth, which will place a significant strain on our managerial, operational, and financial systems resources. To accommodate our current size and manage growth, we must continue to implement and improve our financial strength and our operational systems, and expand, train and manage our sales and distribution base. There is no guarantee that we will be able to effectively manage the expansion of our operations, or that our facilities, systems, procedures or controls will be adequate to support our expanded operations. Our inability to effectively manage our future growth would have a material adverse effect on the Company.





Limited Market Due To Penny Stock





The Company's stock differs from many stocks, in that it is a "penny stock". The Securities and Exchange Commission has adopted a number of rules to regulate "penny stock". These rules include, but are not limited to, Rules 3a5l-l, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange Act of 1934, as amended. Because our securities probably constitute "penny stock" within the meaning of the rules, the rules would apply to us and our securities. The rules may further affect the ability of owners of our stock to sell their securities in any market that may develop for them. There may be a limited market for penny stocks, due to the regulatory burdens on broker-dealers. The market among dealers may not be active. Investors in penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or commissions charged by the broker-dealers may be greater than any profit a seller may make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. Investors may be unable to reap any profit from any sale of the stock, if they can sell it at all. Stockholders should be aware that, according to the Securities and Exchange Commission Release No. 34- 29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. These patterns include: - Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; - Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; - "Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; - Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and - The wholesale dumping of the same securities by promoters and broker- dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. Furthermore, the "penny stock" designation may adversely affect the development of any public market for the Company's shares of common stock or, if such a market develops, its continuation. Broker-dealers are required to personally determine whether an investment in "penny stock" is suitable for customers. Penny stocks are securities (i) with a price of less than five dollars per share; (ii) that are not traded on a "recognized" national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an issuer with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act and Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor‘s account. Potential investors in the Company‘s common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock". Rule 15g-9 of the Commission requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for the Company's stockholders to resell their shares to third parties or to otherwise dispose of them.


20


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Overview of the Company and its Operations





Sancon Resources Recovery, Inc. is an environmental service and waste management company that operates recycling facilities in China and Australia. Sancon specializes in the collection and recovery of industrial and commercial solid wastes such as plastic, paper, cardboard, and glass. The recycled materials are re-used by Sancon's manufacturing customers in China to make a wide variety of new products including outdoor furniture, construction materials, building materials, road surface, and various new products. Sancon's China operation is licensed by the Chinese government for waste management services, and is certified with ISO 9001 and ISO14001 standards. Sancon currently ships more than 4,000 tons of recycled industrial and commercial waste material annually to its customers in China. Sancon's main operations and services include industrial waste management consulting, collection and reprocess of recyclable materials such as plastic, glass, cardboard, and paper before its re-entry into manufacture cycles as raw materials.  Sancon also provides its full waste management services to large consumer products maker such as Pernod Ricard. The use of recycled material is both environmentally friendly and is a key part of today's competitive manufacturing process to lower costs.  As China gains global manufacturing dominance, Chinese manufacturers are increasingly turning to recycled materials to lower its costs, resulting tremendous demand for recycled materials import. The major customers for Sancon are Chinese manufacturers and recycled material traders which are located mainly in the Chinese provinces of Shanghai, Guangdong, Zhejiang and Fujian.





The Trend in Chinese Market





The amount of materials recycled in China in 2007 was 142.3 million metric tons. This is expected to increase to 244.8 million metric tons in 2013.  Moreover, there are $30-$35 billion waste materials can be recycled but without recycling in China. There are 5 million tons of used steel and iron, over 200,000 tons of non-ferrous metal, 14 million tons of waste paper and a great volume of waste plastic and waste glass that could be recycled and utilized within China each year.





The Chinese Government is emphasizing environmental policies & projects for all sectors and entities. On August 2008, China's top legislature passed a law to promote circular economy and will come into force on January 1, 2009.  The aim of the law is to boost sustainable development through energy saving and reduction of pollutant discharges. At present China’s environmental industry is highly fragmented and at its infancy stage.





Promulgated on 25 February 2009 and effective as of January 1, 2011, the Chinese regulations on the administration of the recovery and disposal of waste electrical and electronic products (“WEEE Regulations”) are aiming at establishing a system for the disposal and recovery of waste electrical and electronic products, facilitating comprehensive utilization of resources and circular economy development, protecting the environment and safeguarding human health.


21


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Sancon's Visions and Goals





The long-term objective of Sancon is to seek and develop further alternative resources recovery solutions, which will protect our environment and maximize sustainable usage for industrial waste materials. At Sancon we believe reducing the environmendal impact of manufactured products is through both professional services offered to manufacturers and commercial entities to increase recyclability of waste materials, and efficient redeployment of waste materials.





Services Offered To Our Clients





Sancon strives to take an all-inclusive approach to provide eco-friendly solutions leading to the sustainable use of waste materials. Our services include collection from manufacturing and commercial sites; re-process waste materials to increase recyclability, end-of-life disassembly, redeployment of recyclable materials, and destruction of sensitive materials and products.





Competition





The markets for the Company's products and services are competitive, and the Company faces competition from a number of sources. Many of the Company's competitors have substantially greater resources than the Company. Those resources may include greater name recognition; larger product lines; complementary lines of business; and greater financial, marketing, information systems, and other resources. The Company can give no assurance competitive pressures will not materially and adversely affect the Company's business, financial condition, and results of operations.





But the management has identified several key points which will give Sancon the competitive edge in the market place:





1)
Sancon offers large selection of plastic,paper and glass raw materials to our customers.


2)
With the expansion of our operations in Melbourne Australia, Sancon will be able to serve greater number of customers and sell direct to our customs in both Australia and China.


3)
Sancon has 6 strategically positioned recycling plants and about 40 depots in China and it will enable Sancon to meet the demand for nationwide environmental services.


4)
Industry know-how and management team’s ability to ensure all operating and environmental standards are achieved. Our team's experience in logistic management and waste management operations are key factors enabling the delivery of a high standard of service to Sancon's clients.





Employees





As of March 31, 2011, the Company employed 20 full time and part time people in Australia subsidiaries. Our subsidiary in China employed around 200 full time and part time people.  To make our work more efficient, we outsourced a few other functions, such as logistics, bookkeeping and administration, to certain professional firms to enable our resource being focused on sales and processing functions.


22


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Factors That May Affect Future Results





The business in which the Company is engaged is capital supportive.  Accordingly, the Company's ability to execute its business strategy and to sustain its operations depends upon its ability to maintain or procure capital. There can be no absolute assurance the necessary amount of capital will continue to be available to the Company on favorable terms, or at all.  The Company's inability to obtain sufficient capital or to renew its credit facilities would limit the Company's ability to: (i) add new equipment to its portfolio, (ii) fund its working capital needs, and (iii) finance possible future acquisitions.  The Company's access to capital may have a material adverse effect on the Company's business, financial condition and/or results of operations.





There can be no absolute assurance the Company will be able to effectively manage its existing or the possible future expansion of its operations, or the Company's systems, procedures or controls will be adequate to support the Company's operations.  Consequently, the Company's business, financial condition and/or results of operations could be possibly and adversely affected.





The Company does not foresee changes in tax laws for the jurisdictions in which the Company and its subsidiaries operate.  There can be no absolute assurance that changes will not occur, and therefore no absolute assurance such changes will not materially and adversely affect the Company's business, financial condition and results of operations.





As a public company, Sancon is subject to certain regulatory requirements including, but not limited to, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX404"). Such compliance results in significant additional costs to the Company by increased audit and consulting fees, and the time required by management to address the regulations.


Results of Operations - Comparison between the three months ended March 31, 2011 and the same periods in 2010.





Revenue





Revenue is generated by service charges and the sale of recyclable materials. Revenue for the three months period ended March 31, 2011 were $3,847,147, representing $778,638 or 25% increase compared to the revenue of $3,068,509 in the same period of 2010. The revenues in the waste service business increased from $2,406,161 for the three months period ended March 31, 2010 to $3,215,484 for the three months period ended March 31, 2011, an increase of $809,323 or 34%.  The revenue in the material recycling business decreased $30,685 or 5% from $662,348 for the three months period ended March 31, 2010 to $631,663 for the three months period ended March 31, 2011.





Cost of Revenue





The cost of revenue is the direct cost for sale of the recycling materials. For the three months period ended March 31, 2011, the cost of revenue was $2,472,944.  It was $934,838 or 61% increase as compared to the cost of sales of $1,538,106 for the three months period ended March 31, 2010.  Among which, cost of revenue in the waste service business increased $954,611 or 76% from $1,262,345 for the three months period ended March 31, 2010 to $2,216,956 for the three months period ended March 31, 2011.  The increase mainly contained $576,866 of materials expenses and $169,836 shipping fee and $165,634 labor fee for sub contractors. The increase was related to our new business of waste cardboard collection which started from June 2010. Cost of revenue in the material recycling business for the three months period ended March 31, 2011 and 2010 was $255,988 and $275,761 respectively, a decrease of $19,773 or 7%.  The decrease of cost of sales in our material recycling business was in line with the sales.


23


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





For the three months period ended March 31, 2011 and 2010, cost of revenue was 64% and 50% of sales respectively.





Gross profit





The gross profit for the three months preiod ended March 31, 2011 was $1,374,203, representing $156,200 or 10% decrease compared to $1,530,403 for the three months preiod ended March 31, 2010.  The gross margin reduced from 50% for the three months preiod ended March 31, 2010 to 36% for the three months preiod ended March 31, 2011. Gross profit in the waste service business decreased $145,288 or 13% from $1,143,816 for the three months preiod ended March 31, 2010 to $998,528 for the same periods in 2011.  The low gross profit in our waste paper collection is the main reason for this decrease.  However, our management believes the gross margin will be increased along with the expansion of the market in waste paper collection.  Gross profit in the material recycling business also decreased $10,912 or 3% from $386,587 for the three months preiod ended March 31, 2010 to $375,675 for the same period in 2011.  Our material recycling business still suffers from the global economic crisis.





Selling, general and administrative expenses





Selling, general and administrative expenses increased to $853,189 for the three months preiod ended March 31, 2011, from $875,659 for the three months preiod ended March 31, 2010, a decrease of $22,470 or 3%.  The SG&A expenses in the waste service business was $478,173 for the three months preiod ended March 31, 2010, this number decreased to $373,104 for the three months preiod ended March 31, 2011.  It decreased $105,069 or 22%. The decrease was mainly contained $195,366 of consulting fee.  That is because we reduce the consulting for the new market expansion.  The SG&A expenses in the material recycling business increased $84,155 or 24% from $346,117 for the three months preiod ended March 31, 2010 to $430,272 for the three months preiod ended March 31, 2011. The increase was mainly contained $50,629 of wages, $15,047 of consulting fee. The SG&A expenses also included investor relationship expenses which decreased $1,556 or 3% from $51,369 for the three months period ended March 31, 2010 to $ 49,813 for the three months period ended March 31, 2011.





The SG&A expenses was 29% of the revenue for the three months preiod ended March 31, 2010 while it was 22% for the three months preiod ended March 31, 2011.





Depreciation Expense





Depreciation expense increased to $68,701 for the three months preiod ended March 31, 2011 from $56,654 for the three months preiod ended March 31, 2010.  It increased $12,047 or 21%.  The increases were mainly due to the purchase of equipment for t the three months preiod ended March 31, 2011.  The depreciation expense in the waste service business increased $13,620 or 45% to $43,949 for the three months preiod ended March 31, 2011 from $30,329 for the three months preiod ended March 31, 2010.  The depreciation expense in the material recycling business decreased $1,573 or 6%.  For the three months preiod ended March 31, 2011 and 2010, depreciation expense was 2% of the revenue respectively.




24




Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Other Income (Expense)


For the three months preiod ended March 31, 2011, the Company booked other expenses of $10,106 compared to $13,537 for the three months preiod ended March 31, 2010.  The decrease in other income is $3,431 or 25%.





For the three months preiod ended March 31, 2011, other income was 0.3% of the revenue whie it was 0.4% for the three months preiod ended March 31, 2010.





Income Tax





The income tax was negative $565 for the three months preiod ended March 31, 2011.  That is mainly because of the deferred tax $44,578 accrued in our material recycling business.  Howver, it was $9,075 for the three months preiod ended March 31, 2010, a decrease of $9,640 or 106%.  For the three months preiod ended March 31, 2011 and 2010, income tax was 0.01% and 0.3% of the revenue respectively.





Non-Controlling interest in subsidiary





On August 15, 2007, the Company completed the acquisition of 70% of the equity interest in Sancon Resources Recovery (Shanghai) Co., Ltd by exercising its option to convert $200,000 of convertible promissory note.  On May 26, 2010, Sancon Shanghai invest an additional RMB1, 000,000 or $151,700 in Shanghai Sheng Rong. Previously, Sancon SH had invested $44,010 (RMB 300,000) in return for a 20% equity interest. After the completion of this current transaction, Sancon SH now holds 52% of the equity interest in Shanghai Sheng Rong.  Noncontrolling interest was $20,490 for the three months preiod ended March 31, 2011 while it was $8,168 for the same periods in 2010. For the three months preiods ended March 31, 2011 and 2010, noncontrolling interest was 0.5% and 0.3% of the revenue respectively.





Net loss/income





Net income for the three months preiod ended March 31, 2011 was $447,703, compared to $567,310 for the three months preiod ended March 31, 2010, a decrease of $119,607 or 21%. The decrease is mainly due to the reduce of net income in the material recycling business of $53,940 or 845%. The net income in the waste service business also decreased $67,223 or 11%.  The net income also included investor relationship expenses which decreased $1,556 or 3%.  Net profit margin for the three months preiod ended March 31, 2011 was 12% while it was 18% for the same period in 2010.





Liquidity and Capital Resources





As shown in the accompanying financial statements, the Company has accumulated profit of $5,808,911 as of March 31, 2011 compared to $5,361,208 as of December 31, 2010. In addition, we have positive working capital $6,085,248 as of March 31, 2011 and it was $5,611,049 as of December 31, 2010.  It increased $474,199. That is mainly due to the increase of $500,521 in cash and cash equivalents. The strong sales for the three months period ended March 31, 2011 lead to the great increase in cash and trade receivable.


25


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Operating Activities





The net cash provided by operating activities for the three months preiod ended March 31, 2011 amounted to $ 281,953 compared to $489,231 for the three months preiod ended March 31, 2010, and decrease $207,278 or 42%. The decrease mainly included trade receivables of $360,332. The decreases were offset by trade payable of $241,623. The payment terms of our accounts receivable is about one month and will not be more than two months.





Investing Activities





Net cash used in investing activities amounted to $43,314 for the three months preiod ended March 31, 2011 compared to $17,568 for the three months preiod ended March 31, 2010, an increase of $25,746 or 147%.  It’s due to the increase on purchase of property and equipment.





Financing Activities





Net cash provided by financing activities amounted to $278,624 and $20,922 for the three months preiod ended March 31, 2011 and 2010 respectively, an increase of $257,702 or 1,232%. The increase mainly included shareholder’s loan of $258,003.





The Company has financed its growth by utilizing cash reserves and loan from directors.  Loan from directors usually was unsecured, and no payment term and without interest bearing. The Company's primary use of funds is for the purchase of equipment for operation and the purchase of inventory.





Inflation





In the opinion of management, inflation has not had a material effect on the Company's financial condition or results of its operations.





Trends and uncertainties





Management believes there are no known trends, events, or uncertainties that could, or reasonably be expected to, adversely affect the Company's liquidity in the short and long terms, or its net sales, revenues, or income from continuing operations.





The Company's operations are not affected by seasonal factors.





Critical Accounting Policies and Estimates





The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment.


26


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Allowance for doubtful accounts




We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors.




Income taxes




We account for income taxes in accordance with SFAS No. 109 (ASC 740), Accounting for Income Taxes. SFAS 109 (ASC 740)  prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period. In addition, as a result of the significant change in the Company's ownership, the Company's future use of its existing net operating losses may be limited.




The Company operates in several countries.  As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.


27


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary.





Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.





Stock-Based Compensation




During December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS 123(ASC 718)". This statement amends SFAS No. 123(ASC 718), "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123(ASC 718) to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the exercise price of the related option. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2005 and has adopted the interim disclosure provisions in its financial reports for the subsequent periods.





Effective January 1, 2006, the beginning of Sancon's first fiscal quarter of 2006, the Company adopted the fair value recognition provisions of SFAS 123R(ASC 718), using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted stock options, since the related purchase discounts exceeded the amount allowed under SFAS 123R(ASC 718) for non-compensatory treatment. Compensation expense recognized included: the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R; and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123(ASC 718). Results for prior periods have not been restated, as provided for under the modified-prospective method.





As of December 31, 2010, the Company issued 900,000 shares of stock options to directors and accrued $218,751 of related expenses.  For the three months preiod ended March 31, 2011, the Company did not issue any stock options.


28


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





For other items paid for by common stock, the value of the transaction is determined by the value of the goods or services received, measured at the time of the transaction.  The corresponding stock value, used to determine the number of share to be issued, is the value of the average price for the 20 to 30 days prior to the transaction date.





Asset Impairment




We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipaded cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate.





Item 2(b).  Off-Balance Sheet Arrangements





There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to investors.





ITEM 3.  CONTROLS AND PROCEDURES





Under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date, that our disclosure controls and procedures were not effective.





During the three months ended March 31, 2011, there were no changes in our internal accounting controls or in other factors that materially affected our internal controls over financial reporting.





PART II.  OTHER INFORMATION





Item 1.  Unregistered Sales of Equity Securities and Use of Proceeds.





None





Item 2   Changes in Securities and Use of Proceeds





None


29


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Item 3.  Defaults Upon Senior Securities.





None.





Item 4.  Submission of Matters to a Vote of Security Holders.





Matters for a vote of security holders were submitted to security holders in the Company's Proxy Statement, filed upon December 6, 2005.  The remainder of the information required by this item is incorporated by reference to the Company's Proxy Statement.





Item 5.  Other Information.





None.





30


Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





Item 6.  Exhibits





The following list describes the exhibits filed as part of this Report on Form 10-Q.





Exhibit Number
Note
Description of Document3.1
(1)
Articles of Incorporation of Financial Telecom Limited (USA), Inc.3.2
(1)
Amended and Restated Bylaws of Financial Telecom Limited (USA), Inc.10.1
(1)
Agreement between Hong Kong Futures Exchange Limited and Financial Telecom Limited.10.2
(1)
Market Service Datafeed Agreement between Stock Exchange Information Services Limited and Financial Telecom Limited.10.3
(2)
Option agreement dated December 14, 2004 between Fintel Group Limited and shareholders of Shanghai Long terms Technology Limited.10.4
(2)
Option agreement dated January 5, 2005 between Fintel Group Limited and shareholders of Beijing JCL Technology Commerce Limited.10.5
(2)
Option agreement dated January 20, 2005 between Fintel Group Limited and shareholders of Shanghai Qianhou Computer Technology Limited.10.6
(2)
Independent contractor agreement between Fintel Group Limited and Mr. Sam Chong Keen.10.7
(2)
Independent contractor agreement between Fintel Group Limited and Info Media Company.10.8
(2)
Independent contractor agreement between Fintel Group Limited and China Digital Distribution Limited.10.9
(3)
Sales and purchase agreement dated March 25, 2005 between Fintel Group Limited and shareholders of Enjoy Media Holdings Limited.10.10
(4)
Sales and purchase agreement dated April 25, 2005 between Fintel Group Limited and shareholders of Beijing Genial Technology Co. Ltd.10.11
(4)
Option agreement dated March 7, 2005 between Fintel Group Limited and shareholders of Beijing Sinoskyline technology Trading Co. Ltd.14.1
(9)
Code of Ethics.16.1
(7)
Change in Certifying Accountants.16.2
(10)
Incorporated herein by reference to registrant's Current Report on Form 8K/A (File No. 000-50760) filed July 7, 2006.17.1
(6)
Correspondence on departure of Directors.20.1
(8)
Proxy Statement dated December 6, 2005.21.1
(5)
Subsidiaries of the registrant.24.1
(5)
Power of Attorney.31.1
(5)
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
(5)
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
(5)
Certification of Officers, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





31





Sancon Resources Recovery, Inc.


Notes to the Conolidated Financial Statements


(Unaudited)





______________________


(1)
Incorporated herein by reference to the registrant's initial Registration Statement on Form 10-SB (File No. 000-50760) filed on May 13, 2004.


(2)
Incorporated herein by reference to the registrant's Annual Report on Form 10-KSB (File No. 000-50760) filed April 15, 2005.


(3)
Incorporated herein by reference to the registrant's Quarterly Report of Form 10-QSB (File No. 000-50760) filed May 6, 2005.


(4)
Incorporated herein by reference to the registrant's Quarterly Report of Form 10-QSB (File No. 000-50760) filed August 6, 2005.


(5)
Filed herewith.


(6)
Incorporated herein by reference to the registrant's Current Report on Form 8K/A (File No. 000-50760) filed November 29, 2005.


(7)
Incorporated herein by reference to the registrant's Current Report on Form 8K/A (File No. 000-50760) filed January 25, 2006.(8)
Incorporated herein by reference to the registrant's Proxy Statement (File No. 000-50760) filed December 6, 2005.(9)
Incorporated herein by reference to the registrant's Annual Report on Form 10-KSB (File No. 000-50760) filed April 26, 2006.(10)
Incorporated herein by reference to the registrant's Current Report on Form 8K/A (File No. 000-50760) filed July 7, 2006.





32


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: May 16, 2011By: /s/ Jack ChenJack ChenChief 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:  May 16, 2011By: /s/ David ChenDavid ChenChairmanDate:  May 16, 2011By:  /s/ Jimmy YiuJimmy YiuIndependent DirectorDate:  May 16, 2011By:  /s/ Cong YuanliCong YuanliIndependent DirectorDate:  May 16, 2011By:  /s/ Jack ChenJack. ChenDirector
  33