IGS Capital Group Ltd. (IGSC)

[PMS Girl]

2007 Annual Report

http://www.sec.gov/Archives/edgar/data/1288195/000101968708001477/sancon_10ksb-123107.txt

-Apr-2008

Annual Report



ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases such as "anticipate", "intend", "expect" and words and phrases of similar import. We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict, including those set forth in Item 1A above. We encourage you to read those risk factors carefully along with the other information provided in this Report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.

You should read this MD&A in conjunction with the Consolidated Financial Statements and Related Notes in Item 7.

OVERVIEW

Sancon Resources Recovery, Inc. is an industrial waste recycling company with operations based in Australia, Hong Kong and China. Sancon currently exports more than 25,000 tons of recycled industrial waste material annually to its processing partners and manufacturers in China. Sancon's main operations and services include industrial eco-friendly consulting, collection and reprocess of recyclable materials such as plastic, cardboard, and paper before its re-entry into manufacture cycles as raw materials. The use of recycled material is both environmentally friendly and is a key part of today's competitive manufacturing process to lower costs. As China gains global manufacturing dominance and oil price soars, Chinese manufacturers are increasingly turning to recycled materials to lower costs, resulting tremendous demand for recycled materials import. The major markets for Sancon are Chinese manufacturers located mainly in the provinces of Guangdong, Zhejiang and Fujian in China. PLAN OF OPERATION During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:

o We intend to continue with our marketing strategies to deliver our products in China;

o Along with the continued plastic materials products we are now processing, we are also developing to process other materials, such as glasses, electronic materials.
o During the next twelve months, the Company expects to set up new processing center in China.
o During the next twelve months, the Company is planning to raise additional US$1-2 million cash to facilitate our processing capacity. The capital will be used to some or all of the following activities: 1) acquisition of other companies running similar business in China; 2) purchase of new equipment to satisfy increasing new type of materials requirements; 3) marketing and general administrative expenses for new launched operation of China. We may raise such capital through issuing our common stocks or warrants.

Our aggressive expansion plan will be replied on such capital support. We can not assure the successful result of fund raising. As such, we may not execute our initial business strategy or plan as expected, and furthermore, our competitors may stand in a better position than us, which results in an adverse effect on our business, although we believe that currently, even without such funds, we can still run a healthy business within our already occupied markets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

REVENUE RECOGNITION

In accordance with generally accepted accounting principles ("GAAP") in the United States, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that the Company recognizes in the financial statements contained herein.

SALE OF GOODS

Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

INCOME TAXES

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period. In addition, as a result of the significant change in the Company's ownership, the Company's future use of its existing net operating losses may be limited. The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.

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

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

STOCK-BASED COMPENSATION

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

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

As of December 31, 2007 and 2006, the Company did not issue or make provision through the issuance of stock options to employees and directors.

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

ASSET IMPAIRMENT

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

RESULTS OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER, 2007

Revenue

Revenues for the year ended December 31, 2007 were $6,070,830 as compared to $3,447,402 of 2006, an increase of $2,623,428 or 76%. The sharp increases were mainly due to the significant sales amount contributed from DFSL, Guangcheng and Shanghai. During the 12 months ended December 31, 2007, the Company set up its wholly-owned subsidiary Guangcheng in Hong Kong, restructured DFSL's business and exercised its conversion right to convert 70% equity interest in Sancon Shanghai. The three companies are engaged in recycling material trading business.

Cost of revenue

Cost of revenue for the year ended December 31, 2007 increased to $4,620,101 from $2,929,141 for the year ended December 31, 2006, an increase of $1,690,960 or 58%. The significant increase of cost of sales is in line with the sales during the year ended December 31, 2006.

Gross profit

The gross profit for the year ended December 31, 2007 is $932,468, representing 180% increase compared to $518,261 for 2006. And the gross margin rose from 15.0% in 2006 to 35.6% in 2007. The rise of the gross margin is mainly due to that the margin from trading business new incorporate subsidiary in Shanghai.

Selling, general and administrative expenses

Selling, general and administrative expenses increased to $1,383,660 for the year ended December 31, 2007, from $514,872 in 2006, an increase of $868,788 or 169%. The significant increase of Selling, general and administrative expenses are mainly resulted from the increment of Selling, general and administrative expenses in DFSL, Guangcheng and Sancon SH due to their newly started business during 2007 and the expenses related to US listing costs.

Depreciation Expense

Depreciation expense increased to $80,656 in 2007 from $41,604 in 2006. The expenses increased $39,052 or 94% during the year ended on December 31, 2007 as compared to that in 2006. The increases were due to the purchase of plant and machinery in 2007 to expand its processing capacity.

Net loss/income

Net loss in 2007 was $167,843, compared to a net income of $17,902 in 2006. The decrease is mainly contributed to the significant net loss from Sancon Australia, DFSL and Guangcheng in year 2007.

Liquidity and Capital Resources

As shown in the accompanying financial statements, the Company still suffered accumulated loss of $284,558 as of December 31, 2007. In addition, our working capital is negative $489,589.

Our ability to continue as a going concern depends on the success of our plan to seek funding sources and the success of our future operations.

Operating Activities

The net cash provided by operating activities in the year ended on December 31, 2007 amounted to $218,237 compared to $29,232 in the year ended December 31, 2006. The net cash inflow from operating activities was mainly due to the depreciation and amortization $80,656, shares issued for services $88,500, minority interest $67,947 and increase in tax payable $153,620, by netting of net operating loss of $167,843, increase in trade receivables of $183,435.

Investing Activities

Net cash used in investing activities amounted to $190,712 in the year ended on December 31, 2007 compared to $185,446 in 2006. The net cash outflow primarily consisted of the cash outflow resulting from the purchase of property and equipment of $190,712.

Financing Activities

Net cash obtained by financing activities amounted to $143,469 in the year ended on December 31, 2007 compared to $148,768 in 2006. The net cash inflow was due to the increase of cash acquired due to subscription of $350,000 and decrease of loan from shareholders amounting $195,014.

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.

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.

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.