UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




FORM 10-Q








(Mark One)





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





For the quarterly period ended    September 30, 2010




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 o





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 o     No o





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 September 30, 2010.





Transitional Small Business Disclosure Format (Check one):  Yes oNo x





Sancon Resources Recovery, Inc.


FORM 10-Q





INDEX





PAGEPART I.
FINANCIAL INFORMATION
4Item 1.
Financial Statements  (Unaudited)
4Item 2.
Management's Discussion and Analysis or Plan of Operation
17Item 3.
Controls and Procedures
25PART II.
OTHER INFORMATION
25Item 1.
Legal Proceedings
25Item 2.
Changes in Securities and Use of  Proceeds
25Item 3.
Default Upon Senior Securities
26Item 4.
Submission of Matters to a Vote of Security Holders
26Item 5.
Other Information
26Item 6.
Exhibits
27Signatures
28




2


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.


3


PART I.   FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)


SANCON RESOURCES RECOVERY, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)





AssetsAs atSeptember 30, 2010





December 31, 2009Current assetsCash and cash equivalents

$
5,624,717





$
3,703,716Trade receivables, net


981,785






988,673Inventory


22,604






16,013Deferred Tax Asset


35,907






33,057Other current assets


172,208






285,933Advance and prepayment


115,467






49,502Held to maturity securities


129,892






129,000Total current assets


7,082,580






5,205,894Property, plant & equipment, net


1,215,711






958,041Security deposit


30,820






9,824Held to maturity securities-non current


-






129,993Investment


-






42,678Long Term Deferred Expenses


14,792






-Goodwill


27,688






-Total Assets

$
8,371,591






$
6,346,430Liabilities and Stockholders' EquityLiabilitiesCurrent liabilitiesTrade payables

$
742,572






$
886,034Capital lease - current


2,398







15,925Tax payables


80,789







97,779Due to related parties


700,504







420,504Loan Payable-current


28,298







26,199Accrued expenses and other payables


396,752







371,593Total current liability


1,951,313







1,818,034Long term liabilityCapital lease


23,679







21,799Loan Payable


35,841







56,117Total liability


2,010,833







1,895,950
  4
 SANCON RESOURCES RECOVERY, INC.
 CONSOLIDATED BALANCE SHEETS (Continued) (UNAUDITED)
  As atSeptember 30, 2010



December 31, 2009Stockholders' EquityShare CapitalAuthorized: 500,000,000 common shares, par value $0.001 per shareIssued and Outstanding: 22,964,996 shares as of September 30, 2010 and December 31, 2009

22,965




22,965Additional paid-in capital

899,347




860,449Deferred Compensation

(113,100
)



(124,800
)Other comprehensive income

99,941




71,641Retained Earnings

5,112,502




3,461,642Total

6,021,655




4,291,897Non-controlling interest

339,103




158,583Total stockholders' equity

6,360,758




4,450,480Total liabilities & stockholders' equity
$
8,371,591



$
6,346,430The accompanying notes are an integral part of these unaudited consolidated financial statements





5


SANCON RESOURCES RECOVERY, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)For the three months periods ended September 30,


For the nine months periods ended September 30,2010


2009


2010


2009Net Revenue

$
3,354,608


$
2,811,917


$
9,490,416


$
8,149,544Cost of Revenue


1,861,857



1,617,521



4,975,953



4,224,110Gross profit


1,492,751



1,194,396



4,514,463



3,925,434Operating ExpensesDepreciation


61,139



54,958



182,783



145,268Selling, General and Administrative


895,868



588,521



2,695,493



2,108,126Total operating expenses


957,007



643,479



2,878,276



2,253,394Operating Income


535,744



550,917



1,636,187



1,672,040Other Income (Expense)Other income /(Expense),net


7,671



(43,380
)


(1,343
)


(5,729
)Investment loss prior to acquisition


(9
)


3,019



(3,148
)


4,432Gain on acquisition


-



-



34,805



-Interest income /(Expense),net


2,276



-



4,765



-Total other income


9,938



(40,361
)


35,079



(1,297
)Income from continued operations beforeincome taxes and discontinued Operation


545,682



510,556



1,671,266



1,670,743Discontinued OperationLoss from Discontinued Operation


-



-



-



(50
)Loss on Disposal of a subsidiary


-



-



-



(1,834
)Loss on Discontinued Operations


-



-



-



(1,884
)Income before income taxes and non-controlling interest


545,682



510,556



1,671,266



1,668,859Less:Income taxes


6,868



1,348



18,253



37,360Less: Net income attributed to non-controlling interest


(7,474
)


5,196



2,153



20,045Net income


546,288



504,012



1,650,860



1,611,454


6


SANCON RESOURCES RECOVERY, INC.CONSOLIDATED STATEMENTS OF INCOME(Continued)

(UNAUDITED)  For the three months periods ended September 30,


For the nine months periods ended September 30,2010


2009


2010


2009Other comprehensive item:Foreign currency translation gain/(loss)


48,318



17,099



28,300



50,159Net comprehensive income

$
594,606


$
521,111


$
1,679,160


$
1,661,613Earnings per share:Basic  earnings per share-continued operations

$
0.02


$
0.02


$
0.07


$
0.07Basic earnings per share-discontinued operations

$
-


$
-


$
-


$
-Basic  earnings per share

$
0.02


$
0.02


$
0.07


$
0.07Basic  weighted average shares outstanding


22,964,996



22,964,996



22,964,996



22,833,746Diluted earnings per share-continued operations

$
0.02


$
0.02


$
0.07


$
0.07Diluted earnings per share-discontinued operations

$
-


$
-


$
-


$
-Diluted earnings per share

$
0.02


$
0.02


$
0.07


$
0.07Diluted weighted average shares outstanding


22,964,996



22,964,996



23,041,989



22,833,746The accompanying notes are an integral part of these unaudited consolidated financial statements





7


SANCON RESOURCES RECOVERY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)For the nine months periods ended September 30,2010


2009Cash Flows from Operating ActivitiesNet Income

$
1,650,860


$
1,611,454Adjustments to reconcile net income to net cash flowsprovided by operating activities:Depreciation


182,783



145,268Investment loss


3,148



-Gain on acquisition from noncontrolling interest


(34,805
)


-Gain on disposal of property and equipment


-



9,362Amortization of deferred compensation


11,700



65,700Options grant for compensation


38,898



-Non-controlling interest


2,153



20,045Changes in current assets and liabilities,net of business acquisition:Decrease (increase) in trade receivables


6,888



(687,017
)Decrease (increase) in inventory


(6,591
)


753Decrease (increase) in advance to suppliers


(14,145
)


7,247Decrease (increase) in other current assets


70,828



(145,176
)Increase (decrease) in tax payable


(16,990
)


(496
)Increase (decrease) in trade payable


(267,066
)


247,596Increase (decrease) in other current liabilities


25,159



35,554Net cash flows provided by operating activities


1,652,820



1,310,290Cash Flows from Investing ActivitiesPurchase of property and equipment


(84,957
)


(285,529
)Investment in Shengrong


(149,700
)


(43,813
)Cash increased from disposal of property and equipment


-



152,969Cash increased from acquisition


158,617



-Net cash used in continued operations


(76,040
)


(176,373
)Net cash provided by discontinued operations


-



1,854Net cash flows used in Investing activities


(76,040
)


(174,519
)Cash Flows from Financing ActivitiesShareholders’ loan


226,972



(80,347
)Proceeds from (Payment of) mortgage loan


(11,647
)


1,808Net cash flows provided by/(used in) financing activities


215,325



(78,539
)Effect of exchange rate changes on cash


128,896



(27,219
)Net Increase in Cash & Cash Equivalent


1,921,001



1,030,013Cash & Cash Equivalent at start of period

$
3,703,716


$
2,220,509Cash & Cash Equivalent at end of period

$
5,624,717


$
3,250,5220Supplemental information for Cash ExpensesCash paid for Interest Expenses

$
7,027


$
2,397Cash paid for Income Taxes

$
253


$
14,174The accompanying notes are an integral part of these unaudited consolidated financial statements


8


Sancon Resources Recovery, Inc.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


For the nine month periods ended September 30, 2010


(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.





Note 2.  Basis of Presentation





Unaudited 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, 2009, 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 includes 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





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.





Note 3.  Summary of Significant Accounting Policies





Use of Estimates





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





Property, Plant & Equipment





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







9





The Company classifies investment in marketable securities as `Held to Maturity'. Any declines in the fair value of securities determined to be non temporary in nature are charged to earnings in the period in which that event ocurrs.





Earnings Per Share





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





Revenue Recognition





Sales revenue is recognized when the significant risks and rewards of the ownership of goods have been transferred to the buyers.  No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.





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





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


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





Income Taxes





The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.





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





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





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





Reclassifications





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





Recent pronouncements





In 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.





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.


10


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.




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.


11







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





(b). Commitments





Office space:


The Company leases office space in Australia and China. The lease for Australia will expire in October 2011 while leases for China expire on various dates between April 2010 and November 2018. Based upon existing leases, without renewals, the minimum lease payments up to expiry are as follows:





2010

$
150,4372011


279,3112012


164,7072013


165,868Thereafter


870,306Total

$
1,630,629





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





Year Ending December 312010


2009Minimum Rentals

$
150,437


$
122,328Contingent Rentals


-



-Less Sublease Rentals


-



-





Equipment:





In July 2005, the company purchased a vehicle under capital lease from Toyota Financial Service. The annual interest rate is 7.99% with payment term of sixty (60) months. The payment is to be made in 59 equal monthly installments of $378 each and the final installment of $6,413. This lease was paid in full as of September 30, 2010.





In October 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 $521 each and the final installment of $9,538. The balance as of September 30, 2010 amounted to $14,756 with $1,264 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 $456 each and the final installment of $7,499. The balance as of September 30, 2010 amounted to $11,321 with $1,134 as current liability.





The Company pays approximately $977 per month under these leases, the last of which will expire in September 2011.





Total minimum lease payments under the above leases are as follows:





CapitalLeases2010

$
2,9972011


24,91827,915Less: Amount representing interest


(1,838
)Present value of minimum lease payments


26,077Less: Current portion


(2,398
)$
23,679





12










The company is involved in the following litigation as of September 30, 2010:





The Company has been named a second defendant to a breach of contract claim made against a first defendant. Under the writ, the plaintiffs claim that pursuant to a written stock purchase agreement, the first defendant was required to purchase plaintiff’s common stock or pay plaintiff cash of $94,172 in lieu of the shares. The Company has been named because plantiffs claim that the first defendant is a wholly-owned subsidiary of the Company. On December 10, 2008, the court found in the favor of plantiffs on for total compensation of $104,966, which is the cash in lieu of shares and interest and litigation costs.  The Company has denied all allegations in the complaint, noting that first defendant was fully divested on November 27, 2006.  The Company has accrued $104,966 of potential liability in the accompanied financial statements based on the judgement of the court.





Note 5. Discontinued operation





DISPOSAL OF GUANG CHENG





On March 31, 2009, the company sold 100% equity interest of Guang Cheng Int'l Trading Ltd. (“Guang Cheng”) for $1,290 plus the assumption of certain liabilities, resulting in total loss of $1,884 on discontinued operations.





Following is the Gain/Loss Calculation for disposal of Guang Cheng Int'l Trading Ltd.





Net assets of the Company as on January 1, 2009

$
3,174Gain/(Loss) from discontinued operations from January 1, 2009 through March 31, 2009


(50
)Total book value as of March 31, 2009


3,124Proceeds from disposal


1,290Loss on Disposal

$
(1,834
)Total Loss on Discontinued Operations

$
(1,884
)





Note 6   Equity investment and acquisition





Investment in Shanghai Sheng Rong





On May 26, 2010, the Company’s subsidiary Sancon Shanghai entered into an investment agreement with Shanghai Sheng Rong to invest an additional RMB1,000,000 or $146,289 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. Shanghai Sheng Rong was formed on June 19, 2009 as an environmental services company that operates waste management and recycling services in China. This investment is accounted for using the equity method of invesetment.





As at September 30, 2010 and December 31, 2009 Non-controlling interest amounted to $339,103 and $158,583 respectively.





Note 7. Property, plant & equipment





The Company’s Property, Plant and Equipment as of September 30, 2010 is as follows:





Plant and Machinery


Vehicles


Office Equipment


TotalCost

$
1,259,457


$
614,992


$
38,541


$
1,912,990Accumulated Depreciation


(422,653
)


(256,767
)


(17,859
)


(697,279
)Net Carrying Value

$
836,803.77


$
358,225


$
20,682


$
1,215,711





Included in property and equipment is approximately $78,419 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 $50,487.





The Company’s Property, Plant and Equipment as of December 31, 2009 are as follows:





Plant and Machinery


Vehicles


Office Equipment


TotalCost

$
815,309


$
582,924


$
35,545


$
1,433,778Accumulated Depreciation


(300,610
)


(164,230
)


(10,897
)


(475,737
)Net Carrying Value

$
514,699


$
418,694


$
24,648


$
958,041








13


Included in property and equipment is approximately $72,195 of assets, which are leased under non-cancelable leases and accounted for as capital leases, which expire through September 2011. The accumulated depreciation included in the property and equipment for these leases is approximately $40,451.





Depreciation and amortization expense for the nine months period ended September 30, 2010 and 2009 was $182,783 and $145,268 respectively.





Note 8. Short Term and Long Term Loan Payable





On November 19, 2009, Sancon SH purchased a vehicle with a total loan principle amount of $86,137, unsecured, with an annual interest rate of 7.6%. The payment is to be made in thirty-six (36) equal monthly installments of $2,683 expiring in November 2011. The Company classified the loan balance under current and noncurrent liabilities respectively in the accompanied financial statements. As of September 30, 2010 and December 31, 2009, short term loan payable amounted to $28,298 and $26,199 and long term loan payable amounted to $35,841 and $56,117 respectively.





For the nine month periods ended September 30, 2010, Sancon SH accrued and paid interest $4,752 on this loan.





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


Amount2010

$
8,0502011


32,2002012


29,517Total

$
69,768





Note 9.  Due to related parties





Net amounts due to related parties are as follows:





September 30, 2010


December 31, 2009Former CEO and major shareholder

$
35,324


$
(6,216
)Independent Director


5,021



5,021Current CEO


660,159



409,267$
700,504


$
420,504





Note 10.  Stockholders equity





Common Stock





On October 15, 2007, the Company entered into a ten year service agreement with Lyons Capital LLC. In connection with this agreement, Lyons Capital LLC will receive 300,000 shares of Restricted, RULE 144 Stock, for services rendered or to be rendered in the future. The Company issued shares on March 10, 2008 and recorded at the fair market value of $156,000. This amount will be amortized over a period of ten years from January 01, 2008. For the nine months periods ended September 30, 2010 and 2009, the Company recorded $11,700 in consulting expense. The unamortized amount of $113,100 was included under deferred compensation as at September 30, 2010.





On January 01, 2008, the Company entered in a four year employment agreement with Mr. Jack Chen, current CEO, which prescribes the issuance of stock in lieu of salary. On April 13, 2009, the Company issued 350,000 shares of Restricted, RULE 144 Stock to Mr. Chen. The shares were recorded at fair market value of $52,500. As of the September 30, 2010, the Company recorded $67,500 in due to related parties. This is a stock subscription liability.




On January 01, 2010, the Company entered in a two year employment agreement with Mr. David Chen, former CEO and major shareholder, which prescribes the issuance of stock in lieu of salary. As of the September 30, 2010, the Company recorded $31,500 in due to related parties. This is a stock subscription liability.   14


Stock Options





Options outstanding as of September 30, 2010 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



4.25


$
0.33



900,000


$
0.33


$
90,000





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





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





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





Expected

Expected
Dividend
Risk Free
Grant DateTerm

Volatility
Yield
Interest Rate
Fair Value4.25

126.68%
0%
1.25%
$
0.33








The following summary presents the options granted, exercised, expired and outstanding at September 30, 2010:





Options

OutstandingOutstanding, December 31, 2009


0Granted


900,000Forfeited/Canceled


-Exercised


-Outstanding, September 30, 2010


900,000





For the nine months ended September 30, 2010 and 2009, the Company recognized approximately $38,898 and $0, respectively, as compensation expenses for its stock option plan.








Note 11. 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.





15


During the nine months periods ended September 30, 2010 and 2009, the Company is organized into two business segments: (1) material recycling, (2) waste service. The following table presents a summary of operating information and certain quarter-end balance sheet information for the nine months periods ended September 30, 2010 and 2009:





For the nine month periods ended September 30,2010


2009Net sales from various areas:Material Recycling

$
2,090,513


$
1,541,322Waste Service


7,399,903



6,608,222Consolidated

$
9,490,416


$
8,149,544Net income (loss):Material Recycling

$
(59,091
)

$
35,052Waste Service


1,859,549



1,711,486Un-allocted



(149,598
)


(135,084
)Consolidated

$
1,650,860


$
1,611,454Identifiable assets:






December 31, 2009Material Recycling

$
875,225


$
916,399Waste Service


7,491,247



5,424,918Un-allocted



5,119



5,113Consolidated

$
8,371,591


$
6,346,430Depreciation and amortization:Material Recycling

$
76,380


$
75,101Waste Service


106,403



70,167Consolidated

$
182,783


$
145,268Capital expenditures:Material Recycling

$
25,272


$
186,239Waste Service


59,685



99,290Consolidated

$
84,957


$
285,529





Note 12. Major Customers and Vendors





Our two top customers provided approximately 65% of net sales for the nine month period ended September 30, 2010. Total accounts receivable due from these customers was approximately 69% of total accounts receivable as of September 30, 2010.





Our three major vendors provided approximately 55% of total purchases for the nine month period ended September 30, 2010.  Total accounts payable due to these vendors was approximately 44% of total accounts payable as of September 30, 2010.





Note 13. Income Taxes





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





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





Note 14. Held to Maturity Securities





As of September 30, 2010 and December 31, 2009, the investment in securities amounted to $129,892 and $258,993.




The held to maturity securities of $129,892 will mature on August 22, 2011. So it is classified under current assets in the accompanied financial statements.


16




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 and nine months period ended September 30, 2010 compared to the same period in 2009. A brief description is provided of transactions and events, including any related party transactions that affect the comparability of the results being analyzed.




Liquidity and capital resources. This section provides an analysis of our financial condition and cash flows for the nine months period ended September 30, 2010 and 2009.




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





Caution Concerning Forward-looking Statements and Risk Factors





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





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





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





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





Potential Fluctuations In Periodic Operating Results





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


17





Dependence Upon Management





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





Limitation of Liability and Indemnification of Officers and Directors





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





Management of Potential Growth





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





Limited Market Due To Penny Stock





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


18





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 and current economic crisis, 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





According to China National Resources Recycling Association, recyclable solid waste import to China has experienced a dramatic increase in the last 2 decades. During early 1990’s, China imported 1-2 million tons of recyclable wastes per year. By 1999, China imported 10 million tons of recyclable solid wastes per year. In 2006, China imported 37 million tons of recyclable wastes. China’s total domestic recycled volume is estimated to have reached over 1 billion tons annually.





The State Development and Reform Commission of China promotes the recycling industry with a four-pronged solution ranging from energy saving and clean production to integrated use of resources and developing environmental protection industry, to accelerate the development of the recycling economy.  The concept of recycling economy is included in the 11th Five-year Plan.





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.





Due to the serious environment pollution problems faced in China, the 11th Five-year plan emphasis energy saving, emission reduction and environmental protection at the highest level ever.  At the end of the 11th Five-year plan, the annual production of the environmental industry will exceed 1.1 trillion RMB, of which environmental equipment spending is 120 billion RMB, environmental services is 100 billion RMB, resources recovery is 660 billion RMB, cleaning products spending is 250 billion RMB.





In the past 30 years of development, environmental production value in China increased from 0.5% of GDP to the current 1.6%. China will expedite the demonstration and promotion of technologies for energy saving and emission reduction; actively promote the development of the environmental services industry; and also intensify the financial services for the environmental industry; and tax benefit policies for the environmental industry.  During the 11th Five-year period, investment for environmental protection will reach 1.4 trillion RMB. Central government financing is investing in environmental industry at annual compound growth rate of 18%. Chinese government set out policies supports 4 key areas: developing a resources recovery and recycling economy; pollution reduction and ecological protection; environment testing instruments; environmental services and the development of the environmental industry.





Sancon is uniquely position to benefits from these initiatives as an early mover in the industry and one of the few foreign companies being awarded a waste management license in China.  Sancon has for the past years developed one of the largest collection and recovery network in China for commercial wastes and expects to expand into other areas of environmental services.





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.


19




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:





Sancon offers large selection of plastic and glass raw materials to our customers.


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.


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.


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





Employees





As of September 30, 2010, the Company employed 15 people in Australia subsidiaries. Our joint venture in China employed 20 people full time, and all other personnel of the China joint venture are employed as sub contractors.  To make our work more efficient, we outsourced a few other functions, such as logistics, bookkeeping and administration, to certain professional firms to enable our resource being focused on sales and processing functions.





Factors That May Affect Future Results





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





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





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





As a public company, Sancon is subject to certain regulatory requirements including, but not limited to, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX404"). Such compliance results in significant additional costs to the Company by increased audit and consulting fees, and the time required by management to address the regulations. The SEC has recently delayed the implementation date of SOX404 for non-accelerated filers until the fiscal year ended December 31, 2010. However, should the Company successfully fulfill its plans to procure financing and expand its operations; the Company may come under the accelerated filer definition, and be required to comply with SOX404 before June 15, 2011.  In any case, such cocts will likely affect adversely the Company's business, financial condition and results of operations.





Results of Operations - Comparison between the three and nine months ended September 30, 2010 and the same periods in 2009.


20





Revenue





Revenue is generated by service charges and the sale of recyclable materials. Revenue for the three months period ended September 30, 2010 were $3,354,608 representing $542,691 or 19% increase compared to the sales of $2,811,917 in the same period of 2009. The revenues in the waste service business increased from $2,188,996 for the three months period ended September 30, 2009 to $2,610,355 for the three months period ended June 30, 2010, an increase of $421,359 or 19%.  The revenue in the material recycling business also increased $121,332 or 19% from $622,921 for the three months period ended September 30, 2009 to $744,253 for the three months period ended June 30, 2010.  The increase in revenue in waste service is partially because of acquisition of Shanghai Sheng Rong in May 2010. Although suffering the global economic crisis, our material recycling business is getting better.





Revenue for the nine months period ended September 30, 2010 were $9,490,416, representing $1,340,872 or 16% increase compared to the revenue of $8,149,544 in the same period of 2009. The revenues in the waste service business increased from $6,608,222 for the nine months period ended September 30, 2009 to $7,399,903 for the nine months period ended September 30, 2010, an increase of $791,681 or 12%.  The revenue in the material recycling business also increased $549,191 or 36% from $1,541,322 for the nine months period ended September 30, 2009 to $2,090,513 for the nine months period ended September 30, 2010.  The increase in revenue in waste service is partially because of acquisition of Shanghai Sheng Rong in May 2010. Our new cardboard collection business also contributes to the revenue increase.





Cost of Revenue





The cost of revenue is the direct cost for sale of the recycling materials. For the three months period ended September 30, 2010, the cost of revenue was $1,861,857. It was $244,336 or 15% increase as compared to the cost of sales of $1,617,521 for the three months period ended September 30, 2009. Among which, the cost of revenue in the waste service business increased $224,191 or 17% from $1,351,673 for the three months period ended September 30, 2009 to $1,575,864 for the three months period ended September 30, 2010. The increase mainly contained $224,287 of raw material expenses for our new cardboard business. Cost of revenue in the material recycling business for the three months period ended September 30, 2009 and 2010 was $265,848 and $285,993 respectively, an inecrease of $20,145 or 8%. The increase of cost of sales was in line with the sales.





For the three months period ended September 30, 2010 and 2009, cost of revenue was 56% and 58% of sales respectively.





For the nine months period ended September 30, 2010, the cost of revenue was $4,975,953. It was $751,843 or 18% increase as compared to the cost of sales of $4,224,110 for the nine months period ended September 30, 2009.  Among which, the cost of revenue in the waste service business increased 474,899 or 13% from $3,612,405 for the nine months period ended September 30, 2009 to $4,087,304 for the nine months period ended September 30, 2010.  The increase mainly contained $295,557 of labor service fee for sub contractors. This cost was related to our Chinese market expandant.  Cost of revenue in the material recycling business for the nine months period ended September 30, 2010 and 2009 was $888,649 and $611,705 respectively, an increase of $276,944 or 45%.





For the nine months period ended September 30, 2010 and 2009, cost of revenue was 52% of sales respectively.





Gross profit





The gross profit for the three months period ended September 30, 2010 was $1,492,751, representing $298,355 or 25% increase compared to $1,194,396 for the three months period ended September 30, 2009. The gross margin increased from 42% for the three months period ended September 30, 2009 to 44% for the three months period ended September 30, 2010. Gross profit in the waste service business increased $197,168 or 24% from $837,323 for the three months period ended September 30, 2009 to $1,034,491 for the same periods in 2010. Gross profit in the material recycling business increased $101,187 or 28% from $357,073 for the three months period ended September 30, 2009 to $458,260 for the same period in 2010. The increase in revenue becomes the main reason for the growth in gross profit.





The gross profit for the nine months period ended September 30, 2010 was $4,514,463, representing $589,029 or 15% increase compared to $3,925,434 for the nine months period ended September 30, 2009.  The gross margin was 48% for the nine months period ended September 30, 2010 and 2009. Gross profit in the waste service business increased $316,782 or 11% from $2,995,817 for the nine months period ended September 30, 2009 to $3,312,599 for the same periods in 2010. Gross profit in the material recycling business increased $272,247 or 29% from $929,617 for the nine months period ended September 30, 2009 to $1,201,864 for the same period in 2010.




21






Selling, general and administrative expenses increased to $895,868 for the three months period ended September 30, 2010, from $588,521 for the three months period ended September 30, 2009, an increase of $307,347 or 52%.  The SG&A expenses in the waste service business was $247,001 for the three months period ended September 30, 2009, this number increased to $436,545 for the three months period ended September 30, 2010. It increased $189,544 or 77%. The SG&A expenses in the material recycling business increased $95,224 or 30% from $315,120 for the three months period ended September 30, 2009 to $410,344 for the three months period ended September 30, 2010. The increase was mainly contained $53,303 of wages, $15,957 and $16,157 of equipment repair expenses of freight outwards. The SG&A expenses also included investor relationship expenses and option expenses which increased $22,579 or 86% from $26,400 for the three months period ended September 30, 2009 to $48,979 for the three months period ended September 30, 2010.





The SG&A expenses was 27% and 21% of the revenue for the three months period ended September 30, 2010 and 2009.





Selling, general and administrative expenses increased to $2,695,493 for the nine months period ended September 30, 2010 from $2,108,126 for the nine months period ended September 30, 2009, an increase of $587,367 or 28%.  The SG&A expenses in the waste service business was $1,161,356 for the nine months period ended September 30, 2009, this number increased to $1,403,163 for the nine months period ended September 30, 2010.  It increased $241,807 or 21%.  The increase was mainly contained $204,076 of consulting fee which is for developing new market and customer and $45,000 of director’s compensation. The SG&A expenses in the material recycling business increased $329,162 or 40% from $813,570 for the nine months period ended September 30, 2009 to $1,142,732 for the nine months period ended September 30, 2010. The increase was mainly contained $134,033 of wages, $78,289 of freight outwards $26,765 of consulting fee and $34,346 of hire equipment expenses. The SG&A expenses also included investor relationship expenses and option expenses which increased $16,398 or 12% from $133,200 for the nine months period ended September 30, 2009 to $149,598 for the nine months period ended September 30, 2010





The SG&A expenses was 26% of the revenue for the nine months period ended September 30, 2009 while it was 28% for the nine months period ended September 30, 2010.





Depreciation Expense





Depreciation expense increased to $61,139 for the three months period ended September 30, 2010 from $54,958 for the three months period ended September 30, 2009.  It increased $6,181 or 11%. The depreciation expense in the waste service business increased $6,118 or 22% to $33,828 for the three months period ended September 30, 2010 from $27,710 for the three months period ended September 30, 2009. For the three months period ended September 30, 2010 and 2009, depreciation expense was 2% of the revenue respectively.





Depreciation expense increased to $182,783 for the nine months period ended September 30, 2010 from $145,268 for the nine months period ended September 30, 2009.  It increased $37,515 or 26%. The increases were mainly due to the acquisition of Shanghai Sheng Rong in May 2010 and the purchase of plant and machinery. The depreciation expense in the waste service business increased $36,236 or 52% to $106,403 for the nine months period ended September 30, 2010 from $70,167 for the nine months period ended September 30, 2009. For the nine months period ended September 30, 2010 and 2009, depreciation expense was 2% of the revenue respectively.





Other Income (Expense)





For the three months period ended September 30, 2010, the Company booked other income of $9,938 compared to other loss of $40,361 for the three months period ended September 30, 2009.  The increase in other income is $50,299 or 125%.





For the three months period ended September 30, 2010, other income was 0.3% of the revenue while it was 1% for the three months period ended September 30, 2009.




For the nine months period ended September 30, 2010, the Company booked other income of $35,079 compared to other loss of $1,297 for the nine months period ended September 30, 2009.  The increase in other income is $36,376. That is mainly because of the gain on acquisition.





For the nine months period ended September 30, 2010, other income was 0.4% of the revenue while it was 0.02% for the nine months period ended September 30, 2009.





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 SH completed the acquisition of 52% of the equity interest in Shanghai Sheng Rong. Noncontrolling interest was $(7,474) for the three months period ended September 30, 2010 while it was $5,196 for the same periods in 2009. Noncontrolling interest was $2,153 for the nine months period ended September 30, 2010 while it was $20,045 for the same periods in 2009.


22





For the three months periods ended September 30, 2010 and 2009, noncontrolling interest was 0.22% and 0.18% of the revenue respectively





For the nine months periods ended September 30, 2010 and 2009, noncontrolling interest was 0.02% and 0.2% of the revenue respectively.





Discontinued Operation





On March 31, 2009, the company sold 100% equity interest of Guang Cheng Int'l Trading Ltd. (“Guang Cheng”) for $1,290 plus the assumption of certain liabilities.





There was no discontinued operation for the nine months period ended September 30, 2010. During the same period in 2009, loss on discontinued operation was $1,884.





Income Tax





The income tax increased to $6,868 for the three months period ended September 30, 2010 from $1,348 for the three months period ended September 30, 2009, an increase of $5,520 or 409%.  That is because the profit in the material service business increased.  For the three months period ended September 30, 2010 and 2009, income tax was 0.2% and 0.05% of the revenue respectively.





The income tax decreased to $18,253 for the nine months period ended September 30, 2010 from $37,360 for the nine months period ended September 30, 2009, a decrease of $19,107 or 51%.  That is because the profit in the material recycling business decreased.  For the nine months period ended September 30, 2010 and 2009, income tax was 0.2% and 0.5% of the revenue respectively.





Net income





Net income for the three months period ended September 30, 2010 was $546,288, compared to $504,012 for the three months period ended September 30, 2009, an increase of $42,276 or 8%. Net profit margin for the three months period ended September 30, 2010 was 16% while it was 18% for the same period in 2009.





Net income for the nine months period ended September 30, 2010 was $1,650,860, compared to $1,611,454 for the nine months period ended September 30, 2009, an increase of $39,406 or 2%. Net profit margin for the nine months period ended September 30, 2010 was 17% while it was 20% for the same period in 2009.





Liquidity and Capital Resources





As shown in the accompanying financial statements, the Company has accumulated profit of $5,112,502 as of September 30, 2010 compared to $3,461,642 as of December 31, 2009. In addition, we have positive working capital $5,131,267 as of September 30, 2010 and it was $3,387,860 as of December 31, 2009.  It increased $1,743,407. That is mainly due to the increase of $1,921,001 in cash and cash equivalents. The strong sales for the nine months period ended September 30, 2010 lead to the great increase in cash and cash equivalents.





Operating Activities





The net cash provided by operating activities for the nine months period ended September 30, 2010 amounted to $1,652,820 compared to $1,310,290 for the nine months period ended September 30, 2009, and increase $342,530 or 26%. The increase mainly included trade receivables of $693,905 and other current asset of $216,004. The increases were offset by trade payable of $514,662. 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 $76,040 for the nine months period ended September 30, 2010 compared to $174,519 for the nine months period ended September 30, 2009, a decrease of $98,479 or 56%.  It’s mainly due to the decrease on purchase of property and equipment.  For the nine months period ended September 30, 2009, the cash used in purchase of property and equipment was $285,529, however, this number decreased to $84,957 for the same period in 2010.





Financing Activities





Net cash provided by financing activities amounted to $215,325 for the nine months period ended September 30, 2010. For the nine months period ended September 30, 2009, net cash used in financing activities was $78,539, an increase of $293,864 or 374%. The increase mainly included shareholder’s loan of $307,319.


23





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.





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 using 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.


24





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




The Company accounts for stock-based compensation using the intrinsic value method. 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.


As of September 30, 2010, the Company issued 900,000 shares of stock options to directors and accrued $38,898 expenses.





As of September 30, 2009, the Company did not issue or make provision through the issuance of stock options to employees and directors.





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





Asset Impairment




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





Item 2(b).  Off-Balance Sheet Arrangements





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





ITEM 3.  CONTROLS AND PROCEDURES





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





During the nine months period ended September 30, 2010, 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


25





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.


26





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.


______________________


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


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


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


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


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.


27





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: November 15, 2010
By:
/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: November 15, 2010
By:
/s/ David ChenDavid ChenChairman
  Sancon Resources Recovery, Inc.Date: November 15, 2010
By:
/s/ Jimmy YiuJimmy YiuIndependent Director
  Sancon Resources Recovery, Inc.Date: November 15, 2010
By:
/s/ Cong YuanliCong YuanliIndependent Director
 Sancon Resources Recovery, Inc.Date: November 15, 2010
By:
/s/ Jack ChenJack ChenDirector
 28