**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**Form 10-Q**

(Mark One)

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

**For the quarterly period ended June 30, 2010**

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______________ to _______________.

**Commission File No. 000-30951**

**SILVERGRAPH INTERNATIONAL, INC.**

(Exact name of registrant as specified in its charter)
|  

 

**Nevada**

(State or other jurisdiction of incorporation or organization)

**67-0695367**

(I.R.S. Employer Identification No.)

**22541 Parkfield, Mission Viejo, CA**

(Address of principal executive offices)

**92692**

(Zip Code)

**     **

**(562) 693-3737**

(Registrant’s telephone number, including area code)

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 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  R    No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   £   No  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company in Rule 12b-2 of the Exchange Act:

 

 

Large accelerated filer £

Accelerated filed £

Non-accelerated filer   £

(Do not check if a smaller reporting company)

Smaller reporting company R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes R    No £

The number of shares outstanding of the registrant’s common stock as of July 25, 2010 was 1,807,368. 

**TABLE OF CONTENTS**

 

 

 

 

 

PAGE

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Income

4

 

Condensed Consolidated Statements of Stockholder’ Deficit

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16

Item 4.

Controls and Procedures

16

 

 

 

 

PART II. OTHER INFORMATION

17

 

 

 

Item 1

Legal Proceedings

17

Item 1A.

Risk Factors

17

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

17

Item 3.

Defaults Upon Senior Securities

17

Item 4.

(Removed and Reserved).

17

Item 5.

Other Information

17

Item 6.

Exhibits

17

 

Signatures

18

2

**PART I. FINANCIAL INFORMATION**

**ITEM.1 FINANCIAL STATEMENTS**

**SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**June 30,**

 

**December 31,**

 

 

**2010**

 

**2009**

 **ASSETS**

 

**(Unaudited)**

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

2,378

$

4,114 

 

 

 

 

 

 

 

 

        Total assets

$

2,378

$

4,114 

 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS’ DEFICIT**

 

 

 

 

 Current liabilities:

 

 

 

 

 

Accounts payable

$

185,803

$

191,651 

 

Accrued expenses

 

5,404

 

5,404 

 

Accrued compensation

 

50,000

 

50,000 

 

Convertible promissory notes

 

251,909

 

218,259 

 

Line of credit

 

41,716

 

41,716 

 

Due to shareholder

 

23,555

 

23,555 

 

        Total current liabilities

$

558,387

$

530,585 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

Common Stock, $0.001 par value, 100,000,000 shares authorized: 

 

 

 

 

 

    1,807,368 and 1,067,368 shares issued and outstanding, respectively

 

1,807

 

1,067 

 

Additional paid-in capital

 

5,829,490

 

5,755,430 

 

Common shares issuable (724,632 and 924,632 shares, respectively)

 

14,480

 

24,480 

 

Accumulated deficit

 

(6,401,786)

 

(6,307,448)

 

     Total stockholders' deficit

 

(556,009)

 

(526,471)

 

 

 

 

 

 

 

 

     Total liabilities and stockholders’ deficit

$

2,378

$

4,114 

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

3

**SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months 

Ended 

June 30, 2010

 

Three Months

 Ended 

June 30, 2009

 

Six Months

 Ended 

June 30, 2010

 

Six Months 

Ended 

June 30, 2009

 

 

 

 

 

 

 

 

 

Revenues

$ 

- 

$ 

- 

$ 

- 

$ 

- 

Cost of sales

 

- 

 

- 

 

- 

 

- 

Gross profit (loss)

 

- 

 

- 

 

- 

 

- 

Operating expenses

 

13,198

 

8,042 

 

22,888

 

34,299 

Operating loss

 

(13,198)

 

(8,042)

 

(22,888)

 

(34,299)

Interest expense - net

 

(38,425)

 

(3,049)

 

(71,450)

 

(9,480)

Gain on fixed asset disposal

 

-

 

-  

 

-

 

11,820

Net loss

$ 

(51,623)

$ 

(11,091)

$ 

(94,338)

$ 

(31,959)

 

  Net loss per share, basic and

   fully diluted

$ 

(0.02)

$ 

(0.01)

$ 

(0.04)

$ 

(0.03)

 

Weighted average shares 

  outstanding, basic and fully 

  diluted

 

2,409,000

 

1,266,176 

 

2,313,500

 

1,146,935 

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

4

SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT**

**SIX MONTHS ENDED JUNE 30, 2010**

**(UNAUDITED)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Additional**

**Common**

 

 

 

**Common**

**Stock**

**Paid-in**

**Shares**

**Accumulated**

 

 

**Shares**

**Amount**

**Capital**

**Issuable**

**Deficit**

**Total**

**Balance, December 31, 2009**

$1,067,368

$1,067

$5,755,430

$24,480 

$(6,307,448)

$(526,471)

Shares issued in private placement

200,000

200

9,800

(10,000)

- 

- 

Shares issued as additional interest on bridge financing

540,000

540

64,260

- 

- 

64,800 

Net loss

-

-

-

- 

(94,338)

(94,338)

**Balance, June 30, 2010**

$1,807,368

$1,807

$5,829,490

$14,480 

$(6,401,786)

$(556,009)

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

5

**SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

(Unaudited)

 

**Operating activities:**

 

 

 

 

 

 

 

 

   Net loss

 

$ 

(94,338)

 

 

$ 

(31,959)

 

   Adjustment to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

         Non cash interest expense

 

 

6,650 

 

 

 

6,650 

 

         Non cash financing costs

 

 

64,800 

 

 

 

- 

 

         Gain on sale of fixed assets

 

 

- 

 

 

 

(11,820)

 

   Changes in assets and liabilities:

 

 

 

 

 

 

 

 

         Accounts payable and accrued expenses

 

 

(5,848)

 

 

 

(33,026)

 

   Net cash used in operating activities

 

 

(28,736)

 

 

 

(70,155)

 

 

 

 

 

 

 

 

 

 

**Investing activities:**

 

 

 

 

 

 

 

 

   Net cash received on sale of fixed assets

 

 

- 

 

 

 

11,820 

 

   Net cash provided by investing activities

 

 

- 

 

 

 

11,820 

 

 

 

 

 

 

 

 

 

 

**Financing activities:**

 

 

 

 

 

 

 

 

   Debt principal payments

 

 

- 

 

 

 

17 

 

   Proceeds from issuance of convertible notes 

 

 

27,000

 

 

 

6,052 

 

   Proceeds for common shares to be issued

 

 

-

 

 

 

7,234 

 

   Related party advances (repayment) 

 

 

-

 

 

 

9,854 

 

   Net cash provided by financing activities

 

 

27,000

 

 

 

23,157 

 

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

(1,736)

 

 

 

(35,178)

 

Cash and cash equivalents, beginning of period

 

 

4,114 

 

 

 

39,539 

 

Cash and cash equivalents, end of period

 

$ 

2,378 

 

 

$ 

4,361 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

     Cash paid for interest

 

$ 

- 

 

 

$ 

- 

 

     Cash paid for income taxes

 

$ 

- 

 

 

$ 

- 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

     Decrease in common shares issuable

 

$ 

10,000 

 

 

$ 

- 

 

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

6

**SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SIX MONTHS ENDED JUNE 30, 2010 AND 2009**

**NOTE 1—BASIS OF PRESENTATION**

The consolidated financial statements included herein are unaudited; such financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the consolidated financial position of Silvergraph International, Inc. at June 30, 2010, the consolidated results of operations for the three and six months ended June 30, 2010 and 2009, and cash flows for the six months ended June 30, 2010 and 2009, respectively. Comprehensive income is equivalent to net income for the three and six month ended June 30, 2010 and 2009, respectively. 

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end and could be materially different than at year-end.  The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full fiscal year.  The accompanying unaudited consolidated financial statements do not include footnotes and certain financial presentations normally required under generally accepted accounting principles. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2009, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 15, 2010. 

**Basis of Consolidation**

The consolidated financial statements include the accounts of Silvergraph International, Inc., and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. 

**Use of Estimates**

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, fair values of prepaid revenue share, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. 

***Going Concern***

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from its operations since its inception and has an accumulated deficit of $6,401,786, and a working capital and stockholders’ deficiency of $556,009 at June 30, 2010.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence. The recovery of the Company’s assets is dependent upon continued operations of the Company.  In addition, the Company's recovery is dependent upon future events, the outcome of which is undetermined. The Company intends to continue to attempt to raise additional capital, but there can be no certainty that such efforts will be successful. 

Primarily as a result of our recurring losses and our lack of liquidity, we have received a report from our independent registered public accounting firm for our financial statements for the year ended December 31, 2009 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern.

7

To continue our operations and to grow our current operations and to make acquisitions, if any, under our current business model during the next twelve months, we will need to secure additional working capital, by way of equity or debt financing, or otherwise.  After this twelve month period, we may need additional financing for working capital, and in the case of acquisitions for payment of seller notes and future earned cash to sellers of acquired companies. There can be no assurance that we will be able to secure sufficient financing or on terms acceptable to us. If adequate funds are not available on acceptable terms, we would need to delay, limit or eliminate some or all of our proposed operations, and we may be unable to successfully promote our products or develop new or enhanced products or prosecute acquisitions, any of which could lower our revenues and net income, if we achieve profitability in the future.  If we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our current stockholders is likely to be diluted, unless some of our current stockholders were to invest in subsequent convertible debt or equity financings, and some of the newly issued securities may also have rights superior to those of the common stock.  Additionally, if we issue or incur debt to raise funds, we may be subject to limitations on our operations.

***Revenue Recognition***

The Company recognizes revenue from gross product sales, including freight charges, and revenues from the license of products, in compliance with current guidance from Financial Accounting Standards Board which require that title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed and determinable, collectability is reasonably assured, and customer acceptance criteria, if any, have been successfully demonstrated. 

***Equity-based compensation***

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs.  Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.  Options vest and expire according to terms established at the grant date.

***Use of Estimates***

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used in the accounting for revenues, allowance for doubtful accounts, product returns and other sales allowances, inventory reserves, depreciation and amortization, lease guarantees, long-lived assets and income taxes. Actual results could differ from those estimates. 

***Earnings (loss) per share***

Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.  In computing diluted earnings per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period.  Options and warrants will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. As the Company had a loss in the three and six months ended June 30, 2010 and 2009, respectively, basic and diluted loss per share are the same.  At both June 30, 2010 and 2009, potentially dilutive securities consisted of outstanding common stock purchase warrants to acquire an aggregate of 212,663 and 12,663 common shares, respectively. 

The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate fair value because of their generally short maturities. 

8

***Recently Issued Accounting Guidance:***

In April 2010, the Financial Accounting Standards Board (FASB) issued new accounting guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This standard is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. Early adoption is permitted; however, adoption of this guidance as of a date other than January 1, 2011 will require the Company to apply this guidance retrospectively effective as of January 1, 2010 and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption. As the Company plans to implement this standard prospectively, the effect of this guidance will be limited to future transactions. The Company does not expect adoption of this standard to have a material impact on its financial position or results of operations as it has no material research and development arrangements which will be accounted for under the milestone method.

In January 2010, the FASB issued new accounting guidance which requires new disclosures regarding transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring presentation on a gross basis of information about purchases, sales, issuances and settlements in Level 3 fair value measurements. The guidance also clarifies existing disclosures regarding level of disaggregation, inputs and valuation techniques. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009.  Disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010.  As this guidance requires only additional disclosure, there should be no impact on the consolidated financial statements of the Company upon adoption.

In October 2009, a new accounting consensus was issued for multiple-deliverable revenue arrangements. This consensus amends existing revenue recognition accounting standards. This consensus provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Previously the existing accounting consensus required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under the existing accounting consensus, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is in the process of evaluating whether the adoption of this standard will have a material effect on its financial position, results of operations or cash flows.

In June 2009, the FASB issued authoritative guidance on consolidation of variable interest entities.  The new guidance is intended to improve financial reporting by requiring additional disclosures about a company’s involvement in variable interest entities.  This new guidance is effective for fiscal years and interim periods beginning after November 15, 2009.  The Company adopted this guidance effective January 3, 2010, and it had no impact on the consolidated financial statements of the Company.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

9

**NOTE 2—CONVERTIBLE PROMISSORY NOTES**

In February 2008 the Company issued 7% convertible promissory notes (the “Notes”) in the aggregate principal amount of $150,000 pursuant to a subscription agreement, dated January 25, 2008, as amended, between Silvergraph and certain accredited investors.  The holders of the Notes are the Company’s two largest shareholders, both of which own more than 10% of the Company’s outstanding common stock.  The subscription agreement provided that the subscribers would purchase a minimum of $100,000 and a maximum of $400,000 of the Notes. In April, 2008, the Company issued an additional $40,000 of the Notes to two accredited investors.    During the twelve months ended December 31, 2009, the Company issued an additional $6,052 of these notes and the aggregate amount outstanding at December 31, 2009 was $196,052 plus accrued interest of $22,207. 

In March 2010, the Company entered into amendment number 8 to the loan agreement.  Pursuant to the amended agreement, the Company received an additional $13,500 from the noteholders to pay for expenses incurred by the Company in filing its Form 10-K Annual Report for the year ended December 31, 2009.  In May 2010, the Company entered into amendment number 9 to the loan agreement.  Pursuant to the amended agreement, the Company received an additional $13,500 from the noteholders to pay for expenses incurred by the Company in filing its Form 10-Q Report for the quarter ended  March 31, 2010.  As of June 30, 2010, the amounts due under the notes payable totaled $251,909 including accrued interest of $28,857.

 The obligations represented by the Notes have been amended by a 1st Amendment dated May 31, 2008; a 2nd Amendment dated June 20, 2008; a 3rd Amendment dated August 31, 2008; a 4th Amendment dated October 31, 2008, a 5th Amendment dated December 15, 2008, a 6th Amendment dated January 31, 2009, a 7th Amendment dated in May, 2009, an 8th amendment dated March 9, 2010 and a 9th amendment dated May 2010 (the “Prior Amendments”) which are incorporated herein by reference.   

As part of the 8th and 9th amendments, the Company agreed to issue to the Holders, pro rata, a total of 540,000 shares of Common Stock of the Company valued at $29,700 and $35,100, respectively. The Company valued the shares based on the stock price at date of amended agreement and recorded the issuance of the shares as additional interest expense.

As of June 30, 2010, and after incorporating the Prior Amendments, the significant terms of the Notes are as follows:

1.  Payments:  The Company will pay all interest due and owing by adding such amounts to the outstanding principal balance of each Note, thereby increasing the outstanding principal balance of each Note.  All the payments-in-kind shall accrue interest as though such amounts were original principal indebtedness. The Company will not pay any principal payments in cash prior to maturity. 

2.  Maturity:  The principal and all accrued interest shall become immediately due and payable upon receipt by the Company of written notice from a majority of the Holders.

3.  Event of Default:  In the event of an occurrence of any event of default specified below, the principal and all accrued interest shall become immediately due and payable without notice.  The occurrence of any of the following events shall constitute an event of default under this Note:

a.  The Company fails to make any payment when due and which failure has not been cured within fifteen (15) days following such failure.

b.  If the Company shall default in the payment or performance of any other material obligation of this Note or other debt of the Company.  

c.  If the Company or an operating wholly-owned subsidiary of the Company shall file a petition to take advantage of any insolvency act; make an assignment for the benefit of its creditors; commence a proceeding for the appointment of a receiver, trustee, liquidator or conservator of itself of a whole or any substantial part of its property; file a petition or answer seeking reorganization or arrangement or similar relief under the federal bankruptcy laws or any other applicable law or statute of the United States of America or of any state.

10

4.  Conversion Rights:

*a  Optional Conversion*.  On or before the payment of the Note in full, the Holder may convert the principal amount owing on this Note, together with all accrued and unpaid interest, into fully paid and nonassessable shares of Common Stock at a conversion price per share the lower of $0.045 per share of common stock or the price per share of common stock (referred to as “X”) derived from the following equation:  X=.95/Y where X is defined as the price per share of common stock and Y is defined as the reverse split ratio declared by the Company’s board of directors. 

b.  *Mandatory Conversion*.  If the Company does not complete a merger transaction with a private company approved by the board of directors (“Private Company”), by the Maturity Date whereby the Private Company owns up to 96% of the surviving entity, the Conversion Price shall automatically be reduced to the lower of (i) $0.002 or (ii) the conversion price that would cause the majority holder of the Notes to own upon conversion the number of shares of common stock of the Company determined to be 59% of the outstanding Common Stock on a fully-diluted basis and the remaining holders of the Notes to own a pro rata number of common shares of common stock of the Company.  

5.  Security:  The notes will be secured by all of the assets of New Era Studios, Inc., the Company’s wholly-owned subsidiary, under a security agreement.  Silvergraph may not prepay the notes and so long as the notes are outstanding, the Company must obtain written approval from the note holders for certain actions identified in the notes, including, but not limited to, the issuance of debt, acquisition or sale of a material asset and issuance of dividends to common stockholders.  The security agreement will be null and void if the notes convert into a majority of Silvergraph’s common stock.  In addition, the holders of the Notes have a right of first refusal on all equity financings contemplated by Silvergraph.

**NOTE 3 – OTHER DEBT**

Included in the Company’s June 30, 2010 and December 31, 2009 balance sheet is $41,716 of debt that was reflected in the balance sheet upon the company’s purchase of assets transaction with Lee Graphics that was consummated in October 2004.  The Company is currently determining whether the Company entered into a contract as a borrower or guarantor under the debt.  If no evidence of such liability is found then the Company may write off the debt in the future. 

**NOTE 4 – DUE TO SHAREHOLDER**

During 2007, the Company received a total of $31,555 of advances from shareholders.  This amount is due upon demand from such shareholders, and bear interest at a rate of ten percent (10%) per annum.  The balances of such advances were $23,555 at June 30, 2010 and December 31, 2009, respectively.  

**NOTE 5 – EQUITY**

** **

Warrants Outstanding

A summary of warrant activity and changes during the six months ended June 30, 2010 is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

Shares

 

Weighted-

Average

Exercise

Price

 

Weighted-

Average

Remaining

Contractual

Term (Years)

 

Outstanding at January 1, 2010

 

 

212,663

 

$

1.29

 

 

4.8

 

     Granted

 

 

-

 

 

-

 

 

-

 

     Cancelled

 

 

-

 

 

-

 

 

-

 

Outstanding and exercisable at June 30, 2010

 

 

212,663

 

$

1.29

 

 

4.8

 

11

Additional information regarding warrants outstanding as of June 30, 2010 is as follows:

 

 

 

 

 

 

 

 

 

 

Exercise Price

Number 

Outstanding

Weighted 

Average Remaining Contractual Life 

(Years)

Number 

Exercisable

Intrinsic Value

 of Warrants at 

June 30,

 2010

$0.50

200,000

4.4

200,000

-

$9.17

7,397

0.5

7,397

-

$23.10

5,266

1.7

4,432

-

$0.50 - $23.10

212,663

4.0

211,829

-

The warrants have no intrinsic value as of June 30, 2010.

**NOTE 6 – INCOME TAXES**

The Company did not provide for any Federal or state income tax expense during the three months ended June 30, 2010 and 2009 as a result of the availability of net operating loss carryforwards. As of June 30, 2010, the Company had provided a 100% valuation allowance with respect to such Federal and state net operating loss carryforwards, as it cannot determine that it is more likely than not that it will be able to realize such deferred tax assets.  This valuation allowance represents the difference in the Company’s effective income tax of 0% and the Federal statutory income tax rate of 34% for the three months ended June 30, 2010.

As of June 30, 2010, for Federal and state income tax purposes, the Company had approximately $2,000,000 in net operating loss carryforwards expiring through 2016.   Internal Revenue Code Section 382 substantially restricts the ability of a corporation to utilize existing net operating losses in the event of a defined "ownership change".  The Company has determined that there will likely be significant limitations on its ability to utilize its net operating loss carryforwards in future periods for Federal income tax purposes due to such ownership changes. 

12

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

***Forward-Looking Statements***

This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. These statements may be found throughout this report and the documents incorporated by reference herein. Any statements (including without limitation statements to the effect that the Company or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. The actual results of Silvergraph International, Inc. may vary materially from those expected or anticipated in these forward-looking statements. The information incorporated by reference under the heading “Risk Factors” in this report provides examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. Because of these and other factors that may affect Silvergraph International, Inc.’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that Silvergraph International, Inc. files from time to time with the Securities and Exchange Commission, or SEC, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

 ***How to Obtain Silvergraph International, Inc. SEC Filings***

All reports filed by Silvergraph International, Inc. with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov.  In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549.  

***Executive Overview***

In 2007, we experienced significant challenges due to the unexpected contraction of our business with our largest client, Home Interiors & Gifts, which subsequently declared bankruptcy in 2008.  As a result, the board of directors determined that we should seek to merge with a larger art company with established sales channels which could benefit from our technology.  In 2008, we evaluated various strategies to best enhance value for our shareholders including the sale to or merger with a larger art or printing organization that would benefit from our technology.   To that end, we entered into discussions with multiple potential targets but were unable to reach definitive agreement with any such target.  In the second half of 2008, we began to wind down our subsidiary New Era Studios, Inc. (“New Era”), and to sell its assets, to pay down its debts and to provide working capital for the Company.  All sales were arms length and to non-affiliated entities.  We also raised $190,000 in interim bridge capital to support our operations and took steps to significantly lower our cost of operations. In 2009, after deciding to wind down the business of New Era, we were largely inactive except for efforts to sell assets and to seek a possible business combination.In 2010 and beyond, we are continuing to pursue and evaluate strategies to enhance shareholder value including the merger with a private company in industries outside the art and printing industries and we are actively winding down New Era.  We continue to take steps to lower our operating costs and continue to sell New Era assets to pay down New Era debts and help fund our working capital needs. However, we cannot guarantee that these actions will ensure our continued operations. 

We will attempt to locate and negotiate with a business entity for the merger of that target company into our company. In certain instances, a target company may wish to become a subsidiary of ours or may wish to contribute assets to us rather than merge. No assurances can be given that we will be successful in locating or negotiating with any target company.  Our company currently  provides a vehicle for a foreign or domestic private company to become a public, reporting company whose securities are qualified for trading in the United States secondary market.

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The selection of a business opportunity in which to participate is complex and extremely risky and will be made by management in the exercise of its business judgment.  There is no assurance that we will be able to identify and acquire any business opportunity which will ultimately prove to be beneficial to our company and shareholders.   

**Results of Operations**

*Quarter ended June 30, 2010 and 2009*

*Revenues.*  We did not have any revenue for the three months ended June 30, 2010 and June 30, 2009.

*Operating expenses.*  Operating expenses consist of general and administrative expenses, which are primarily  professional services such as legal and accounting fees.  Operating expenses increased to $13,198 for the three months ended June 30, 2010 as compared to $8,042 for the same prior of the prior year.   

*Other income (expense).*  Other income (expense) principally consists of interest and financing expense related to outstanding debt and shares issuances offset by non-operational revenues such as a gain on the sale of a fixed asset.   We had other expenses of $38,425 for the three months ended June 30, 2010, compared to other expense of $3,049 for the three months ended June 30, 2009.  

*Net Loss.*  Our net loss for the three months ended June 30, 2010 was $51,623 compared to $11,091 for the three months ended June 30, 2009.  The difference was attributable to the aforementioned lack of revenue and operations.

*Six Months Ended June 30, 2010 and 2009*

*Revenues.*  We did not have any revenue for the six months ended June 30, 2010 and June 30, 2009.

*Operating expenses.*  Operating expenses consist of general and administrative expenses, which are primarily professional services such as legal and accounting fees.  Operating expenses increased to $22,888 for the six months ended June 30, 2010 as compared to $34,299 for the same period of the prior year.   

*Other income (expense).*  Other income (expense) principally consists of interest and financing expense related to outstanding debt and shares issuances offset by non-operational revenues such as a gain on the sale of a fixed asset.   We had other expenses of $71,450 for the six months ended June 30, 2010, compared to other expenses of $9,480 for the six months ended June 30, 2009.  Included in the 2009 period was the sale of a fixed asset which we realized $11,820. Excluding the sale of fixed assets in 2009, the change in balance or increase in other expense of $61,970 related primarily to non-cash financing costs of $64,800 associated with 540,000 shares of common stock issued during the six months ended June 30, 2010.  

*Net Loss.*  Our net loss for the six months ended June 30, 2010 was $94,338 compared to $31,959 for the six months ended June 30, 2009.  The difference was attributable to the aforementioned lack of revenue and operations.

*** Liquidity and Capital Resources***

Working capital as of June 30, 2010 was negative $556,009 as compared to negative working capital of $526,471 as of December 31, 2009. The cash balance at June 30, 2010 was $2,378 compared to $4,114 at December 31, 2009. 

Net cash used in operating activities was $28,736 for the six months ended June 30, 2010, as compared to $70,155 for the six months ended June 30, 2009.  The principal components of our net cash used in operations for the six months ended June 30, 2010 were: (a) a net loss of $94,338, (b) non-cash financing costs of $64,800 related to the issuance of 540,000 shares of common stock, (c) accrued interest on debt of $6,650, and (d) accounts payable and accrued expenses of $(5,848).  During each period presented, we used net cash principally to fund our net losses.

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Net cash provided by investing activities was $Nil for the six months ended June 30, 2010, as compared to $11,820 for the six months ended June 30, 2009.  The change in balance was due to sales of certain fixed assets.  During each period presented, we used net cash principally to fund our net losses.  

Net cash used in financing activities was $27,000 during the six months ended June 30, 2010, as compared to net cash provided by financing activities of $23,157 for the six months ended June 30, 2009.  Net cash provided by financing activities during 2010 was principally related to proceeds received from the issuance of convertible notes.

We have suffered recurring losses from operations and have an accumulated deficit of approximately $6,401,786 and $6,307,448 at June 30, 2010 and December 31, 2009, respectively.  Primarily as a result of our recurring losses and our lack of liquidity, we have received a report from our independent registered public accounting firm for our financial statements for the year ended December 31, 2009 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern.  To continue our operations and to grow our current operations and to make acquisitions, if any, under our current business model during the next twelve months, we will need to secure additional working capital, by way of equity or debt financing, or otherwise.  After this twelve month period, we may need additional financing for working capital, and in the case of acquisitions for payment of seller notes and future earned cash to sellers of acquired companies. There can be no assurance that we will be able to secure sufficient financing or on terms acceptable to us. If adequate funds are not available on acceptable terms, we would need to delay, limit or eliminate some or all of our proposed operations, and we may be unable to successfully promote our products or develop new or enhanced products or prosecute acquisitions, any of which could lower our revenues and net income, if we achieve profitability in the future.  If we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our current stockholders is likely to be diluted, unless some of our current stockholders were to invest in subsequent convertible debt or equity financings, and some of the newly issued securities may also have rights superior to those of the common stock.  Additionally, if we issue or incur debt to raise funds, we may be subject to limitations on our operations.

**Critical Accounting Policies**

Our accounting policies are fully described in Note 1 to our condensed consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

Our results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to bad debt, inventories, investments, intangible assets, income taxes, financing operations, and contingencies and litigation. 

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

**Off-balance Sheet Arrangements**

We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is deemed by our management to be material to investors.

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company currently has no instruments that are sensitive to market risk.

**ITEM 4.  CONTROLS AND PROCEDURES**

***Evaluation of Disclosure Controls and Procedures***

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2010. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the requisite time periods.   While the Company’s disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well designed and administered. 

***Changes in Internal Controls***

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in connection with the evaluation of our internal control performed during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

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**PART II – OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

We know of no material, active or pending legal proceedings which we are a party to, or which our property is subject to.

**ITEM 1A.  RISK FACTORS**

There have been no material changes to the risk factors disclosed in Item 1A. to Part I of our 2009 Form 10-K. 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

On May 11, 2010, we entered into a 9th amendment to an existing loan transaction pursuant to which we received $13,198 in exchange for an obligation to issue to 270,000 shares of common stock.  The loan transaction is with, and the shares were issued to, our two largest shareholders, both of which own more than 10% of our outstanding common stock. The proceeds will be used for working capital purposes.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investors were sophisticated.

On July 22, 2010, we entered into a 10th amendment to an existing loan transaction pursuant to which we received $10,850 in exchange for an obligation to issue to 217,001 shares of common stock.  The loan transaction is with, and the shares were issued to, our two largest shareholders, both of which own more than 10% of our outstanding common stock. The proceeds will be used for working capital purposes.  The issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investors were sophisticated.

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

There are items required to be reported under this Item.

**ITEM 4.  (REMOVED AND RESERVED).**

**ITEM 5. OTHER INFORMATION**

None.

**ITEM 6. EXHIBITS**

No. Description

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

 

 

32.1

 

Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

**SILVERGRAPH INTERNATIONAL, INC**.

By: */s/ James R. Simpson                                  *

         James R. Simpson

         Chief Executive Officer, Secretary

         Principal Financial Officer and Director

Date: August 13, 2010

 

 

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