**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**Form 10-Q**

(Mark One)

[X]

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

**For the quarterly period ended March 31, 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)

**    **   **                                                                                                               **

(Former name, former address and former fiscal year, if changed since last report)

The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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:

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 May 14, 2010 was 1,537,368. 

1

**INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

 

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

15

Item 4.

Controls and Procedures

15

 

 

 

 

PART II. OTHER INFORMATION

16

 

 

 

Item 1

Legal Proceedings

16

Item 1A.

Risk Factors

16

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

16

Item 3.

Defaults Upon Senior Securities

16

Item 4.

(Removed and Reserved).

16

Item 5.

Other Information

16

Item 6.

Exhibit

16

 

Signatures

17

2

**PART I. FINANCIAL INFORMATION**

 

**ITEM.1 FINANCIAL STATEMENTS**

**SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

 

 

 

 

 

 

 

 

 

 

**March 31,**

 

**December 31**

**ASSETS**

 

**2010**

 

**2009**

 

 

**(Unaudited)**

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

9,076

$

4,114 

 

 

 

 

 

 

 

 

        Total assets

$

9,076

$

4,114 

 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS’ DEFICIT**

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

192,803

$

191,651 

 

Accrued expenses

 

5,404

 

5,404 

 

Accrued compensation

 

50,000

 

50,000 

 

Convertible promissory notes

 

235,084

 

218,259 

 

Line of credit

 

41,716

 

41,716 

 

Due to shareholder

 

23,555

 

23,555 

 

        Total current liabilities

 

548,562

 

530,585 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

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

 

 

 

 

 

    1,537,440 and 1,067,440 shares issued and outstanding, respectively

 

1,537

 

1,067 

 

Additional paid-in capital

 

5,794,660

 

5,755,430 

 

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

 

14,480

 

24,480 

 

Accumulated deficit

 

(6,350,163)

 

(6,307,448)

 

     Total stockholders' deficit

 

(539,486)

 

(526,471)

 

 

 

 

 

 

 

 

     Total liabilities and stockholders’ deficit

$

9,076

$

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**

 

 

 

 

 

 

 

 

 

 

 

 

**Three months ended**

**March 31, 2010**

** **

**Three months ended**

**March 31, 2009**

 

 

**(Unaudited)**

** **

**(Unaudited)**

Revenues

$

- 

$

- 

Cost of sales

 

- 

 

- 

Gross profit 

 

- 

 

- 

Operating expenses

 

9,690 

 

26,257 

Operating loss

 

(9,690)

 

(26,257)

Other (expense) income  

 

(33,025)

 

5,389 

Net loss

$

(42,715)

$

(20,868)

Net loss per share, basic and fully diluted

$

(0.02)

$

(0.02)

Weighted average shares outstanding, 

  basic and fully diluted

 

2,038,000 

 

1,067,440 

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

4

**SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT**

**THREE MONTHS ENDED MARCH 31, 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 related to bridge financing

270,000

270

29,430

- 

- 

29,700 

Net loss

-

-

-

- 

(42,715)

(42,715)

**Balance, March 31, 2010**

$

1,537,368

$

1,537

$

5,794,660

$

14,480 

$

(6,350,163)

$

(539,486)

5

**SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Three Months ended March 31,**

 

 

**2010**

** **

**2009**

 

 

** **

**(Unaudited)**

** **

** **

** **

**(Unaudited)**

 

**Operating activities**:

 

 

 

 

 

 

 

 

Net loss

 

$

(42,715)

 

 

$

(20,868)

 

Adjustment to reconcile net loss to net cash used in 

operating activities:

 

 

 

 

 

 

 

 

Gain on sale of fixed assets

 

 

 

 

 

 

(11,820)

 

Accrued interest on debt

 

 

3,325

 

 

 

3,325 

 

Non-cash financing costs

 

 

29,700

 

 

 

-

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

1,152

 

 

 

(17,981)

 

     Net cash used in operating activities

 

 

(8,538)

 

 

 

(47,344)

 

 

 

 

 

 

 

 

 

 

**Investing activities:**

 

 

 

 

 

 

 

 

Proceeds received on sale of fixed assets 

 

 

-

 

 

 

11,820 

 

    Net cash provided by investing activities

 

 

-

 

 

 

11,820 

 

 

 

 

 

 

 

 

 

 

**Financing activities:**

 

 

 

 

 

 

 

 

Debt principal payments

 

 

-

 

 

 

(170)

 

Proceeds from issuance of convertible notes 

 

 

13,500

 

 

 

- 

 

    Net cash provided by (used in) financing activities

 

 

13,500

 

 

 

(170)

 

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

4,962

 

 

 

(35,694)

 

Cash and cash equivalents, beginning of period

 

 

4,114

 

 

 

39,539 

 

Cash and cash equivalents, end of period

 

$

9,076

 

 

$

3,845 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

-

 

 

$

- 

 

Cash paid for income taxes

 

$

-

 

 

$

- 

 

 

 

 

 

 

 

 

 

 

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**

**THREE MONTHS ENDED MARCH 31, 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 March 31, 2010, the consolidated results of operations for the three months ended March 31, 2010 and 2009, and cash flows for the three months ended March 31, 2010 and 2009, respectively. Comprehensive income is equivalent to net income for the three month ended March 31, 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 three months ended March 31, 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 and our 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 $6,350,163, and a working capital and stockholders’ deficiency of $539,486 at March 31, 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.

7

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.

***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 months ended March 31, 2010 and 2009, respectively, basic and diluted loss per share are the 

8

same.  At both March 31, 2010 and 2009, potentially dilutive securities consisted of outstanding common stock purchase warrants to acquire an aggregate of 14,178 common shares. 

**Fair Value of Financial Instruments**

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. 

***Recently Issued Accounting Guidance:***

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe the adoption of this new guidance will not have a material impact on our financial statements.

In January 2010, the FASB issued guidance on improving disclosures about fair value measurements to add new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 rollforward. The guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to present the Level 3 rollforward on a gross basis, which is effective for fiscal years beginning after December 15, 2010. The adoption of this guidance was limited to the form and content of disclosures, and will not have a material impact on our consolidated results of operations and financial condition.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and 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.

**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. 

9

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.  As of March 31, 2010, the amounts due under the notes payable totaled $235,084 including accrued interest of $25,532.

 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 and an 8th amendment dated March 9, 2010 (the “Prior Amendments”) which are incorporated herein by reference.   

As part of the 8th amendment, the Company agreed to issue to the Holders, pro rata, a total of 270,000 shares of Common Stock of the Company valued at $29,700. 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 March 31, 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.

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. 

10

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 March 31, 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 March 31, 2010 and December 31, 2009, respectively.  

**NOTE 5 – EQUITY**

** **

Warrants Outstanding

A summary of warrant activity and changes during the quarter ended March 31, 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 March 31, 2010

 

 

212,663

 

$

1.29

 

 

4.8

 

11

Additional information regarding warrants outstanding as of March 31, 2010 is as follows:

 

 

 

 

 

Exercise Price

Number 

Outstanding

Weighted 

Average Remaining Contractual Life 

(Years)

Number 

Exercisable

Intrinsic Value

 of Warrants at 

March 31,

 2010

$0.50

200,000

4.7

200,000

-

$9.17

7,397

0.8

7,397

-

$23.10

5,266

2.0

4,432

-

$0.50 - $23.10

212,663

4.3

211,829

-

The warrants have no intrinsic value as of March 31, 2010.

**NOTE 6 – INCOME TAXES**

The Company did not provide for any Federal or state income tax expense during the three months ended March 31, 2010 and 2009 as a result of the availability of net operating loss carryforwards. As of March 31, 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 March 31, 2010.

As of March 31, 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. 

13

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.

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 March 31, 2010 and 2009*

*Revenues.*  We did not have any revenue for the three months ended March 31, 2010 and March 31, 2009.

*Operating expenses.*  Operating expenses consist of selling and marketing expenses, which are primarily salaries, commissions and promotional expenses, and general and administrative expenses, which are primarily salaries and bonuses, rent expense, depreciation and professional services such as legal and accounting fees.  Operating expenses decreased by $16,567 or 63% to $9,690 for the three months ended March 31, 2010 versus $26,257 for the three months ended March 31, 2009.  Due to the lack of revenues as discussed above, we continue to focus on implementing significant cost reduction which allows us to evaluate, select, and implement our revised strategic plan.      

*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 $33,025 for the three months ended March 31, 2010, compared to other income of $5,389 for the three months ended March 31, 2009.  Included in 2009 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 $26,594 related primarily to non-cash financing costs of $29,700 associated with 270,000 shares of common stock issued during the three months ended March 31, 2010.  

*Net Loss.*  Our net loss for the three months ended March 31, 2010 was ($42,715) compared to ($20,868) for the three months ended March 31, 2009.  The difference was attributable to the aforementioned lack of revenue and operations.

***Liquidity and Capital Resources***

Working capital as of March 31, 2010 was negative $539,486 as compared to negative working capital of $526,471 as of December 31, 2009. The cash balance at March 31, 2010 was $9,076 compared to $4,114 at December 31, 2009. 

Net cash used in operating activities was $8,538 for the three months ended March 31, 2010, as compared to $47,334 for the three months ended March 31, 2009.  The principal components of our net cash used in operations for the three months ended March 31, 2010 were: (a) a net loss of ($42,715), (b) non-cash financing costs of $29,700 related to the issuance of 270,000 shares of common stock, (c) accrued interest on debt of $3,325, and (d) accounts payable and accrued expenses of $1,152.  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 three months ended March 31, 2010, as compared to $11,820 for the three months ended March 31, 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 $13,500 during the three months ended March 31, 2010, as compared to net cash provided by financing activities of $170 for the three months ended March 31, 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 $6,350,163 and $6,307,448 at March 31, 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.

**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 the end of the period covered by this quarterly report on Form 10-Q. 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 2008 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 $14,500 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.

**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

Chief Executive Officer Certification

32.1

Section 1350 Certification

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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: May 17, 2010

 

 

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