Master Silicon Carbide Industries, Inc. - FORM 10-Q

Attached files

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EX-31.1 - Master Silicon Carbide Industries, Inc.	v166198_ex31-1.htm
EX-32.1 - Master Silicon Carbide Industries, Inc.	v166198_ex32-1.htm
EX-31.2 - Master Silicon Carbide Industries, Inc.	v166198_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ____________ to ____________

Commission File Number 000-52988

MASTER SILICON CARBIDE INDUSTRIES, INC.

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

Nevada		01- 0728141
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

558 Lime Rock Road, Lakeville, Connecticut 06039

(Address of principal executive offices)

(860) 435-7000

(Issuer's telephone number)

Indicate by check mark whether the issuer (1) 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 x 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o Do not check if a smaller reporting company	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS

2,671,483 shares of Common Stock of the registrant, par value $.001 per share, were outstanding as of November 12, 2009.

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION

Item 1.	Financial Statements.	F-1

	Consolidated Balance Sheets
	As of September 30, 2009 and June 30, 2009	F-2

	Consolidated Statements of Operations and Comprehensive Loss for
	the Three Months Ended September 30, 2009 and 2008 (Unaudited)	F-3

	Consolidated Statements of Cash Flows
	for the three Months Ended September 30, 2009 and 2008 (Unaudited)	F-4

	Notes to the Interim Consolidated Financial Statements (Unaudited)	F-6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	3

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	11

Item 4.	Controls and Procedures.	11

PART II OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13

Item 4.	Submission of Matters to a Vote of Security Holders	13

Item 6.	Exhibits	13

Signatures		14

Exhibits/Certifications

PART I – FINANCIAL INFORMATION

Item 1. Financial Information

Master Silicon Carbide Industries, Inc.

September 30, 2009

Index to Consolidated Financial Statements

Contents		Page(s)

Consolidated Balance Sheets at September 30, 2009 (Unaudited) and June 30, 2009		F-2

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended September 30, 2009 and 2008 (Unaudited)		F-3

Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2009 and 2008 (Unaudited)		F-4

Notes to the Interim Consolidated Financial Statements (Unaudited)		F-6 to F-15

F-1

MASTER SILICON CARBIDE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In US Dollars)

	30-Sep-09			30-Jun-09
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	10,641,544		$	1,121,162
Notes receivable		64,431			15,741
Accounts receivable		103,683			-
Tax refundable		364,803			269,861
Inventories		545,179			720,030
Prepaid expenses		35,865			37,623

Total current assets		11,755,505			2,164,417

Deposits-fixed assets		3,384,011			3,564,478
Other receivables		33,146			39,738
Property, plant and equipment, net		986,427			999,167
Construction in progress		3,609,303			2,654,522
Intangible assets, net		1,438,477			1,448,695

Total assets	$	21,206,869		$	10,871,017

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued liabilities	$	1,434,057		$	888,291
Short term note - related party		10,000,000			-
Advance from customers		152,189			47,665
Other payables		123,187			115,334
Amount due to related parties		871,235			859,813
Dividends accrued		150,000			150,000

Total current liabilities		12,730,668			2,061,103

Total liabilities		12,730,668			2,061,103

Redeemable Preferred Stock ($0.001 par value, 996,186 shares issued) net of discount of $667,133 at September 30, 2009, liquidation preference of $10.038 per share and accrued dividends		9,332,867			9,199,439

Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 10,000,000 shares authorized; 2,000,000 shares designated, 996,186 shares issued and outstanding, and classified outside stockholders' equity above, liquidation preference of $10.038 per share and accrued dividends		-			-

Common stock, $0.001 par value, 100,000,000 shares authorized; 2,522,050 and 2,372,617 shares issued and outstanding, respectively		2,522			2,373
Additional paid-in capital		4,207,074			4,057,224
Deferred compensation		-			(24,900	)
Retained (deficit)		(5,074,820	)		(4,429,623	)
Accumulated other comprehensive income		8,558			5,401

Total stockholders’ equity (deficit)		(856,666	)		(389,525	)

Total liabilities, redeemable preferred stock and stockholders' equity (deficit)	$	21,206,869		$	10,871,017

See accompanying notes to consolidated financial statements

F-2

MASTER SILICON CARBIDE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In US Dollars)

	For the Three Months Ended
	30-Sep-09			30-Sep-08
	(Unaudited)			(Unaudited)
Revenues:
Revenues	$	377,897		$	225,985
Cost of revenues		428,646			174,417

Gross profit (loss)		(50,749	)		51,568

General and administrative expenses		372,159			94,119

Total operating expenses		372,159			94,119

Loss from operations		(422,908	)		(42,551	)

Interest income		(7,689	)		(13,102	)
Other expenses (income)		(57,836	)		158

Total other (income) expense		(65,525	)		(12,944	)

Loss before income taxes		(357,383	)		(29,607	)

Income tax provision		4,386			-

Net loss	$	(361,769	)	$	(29,607	)

Dividends and accretion on redeemable preferred stock	$	283,428		$	48,333

Net loss attributable to common stockholders	$	(645,197	)	$	(77,940	)

Comprehensive loss:

Net loss	$	(361,769	)	$	(29,607	)

Foreign currency translation adjustment		8,558			-

Comprehensive loss	$	(353,211	)	$	(29,607	)

Basic and diluted net loss per share	$	(0.26	)	$	(0.06	)

Weighted average common shares outstanding - basic and diluted		2,520,426			1,282,078

See accompanying notes to consolidated financial statements

F-3

MASTER SILICON CARBIDE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In US Dollars)

	For the Three Months Ended
	30-Sep-09			30-Sep-08
	(Unaudited)			(Unaudited)

Cash flows from operating activities:
Net loss	$	(361,769	)	$	(29,607	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		31,227			6,258
Stock based compensation		24,900			24,900
Amortization		10,547			8
Changes in operating assets and liabilities:
Notes receivable		(48,654	)		-
Accounts receivable		(103,622	)		-
Prepaid expenses		8,375			(39,193	)
Inventories		175,053			20,290
Accounts payable & accrued liabilities		545,073			452,756
Accrued expenses and other current liabilities		7,800			24,867
Advance from customers		104,441			(129,803	)
Taxes refundable		(94,771	)		27,216

Net cash provided by (used in) operating activities		298,600			357,692

Cash flows from investing activities:
Cash received from business acquisition		-			23,226
Deposits - fixed assets and construction in process		(789,283	)		(1,222	)
Purchase of intangible - land use right		-			(972	)
Due from related parties		11,050			-
Purchase of goodwill		-			(121,150	)

Net cash used in investing activities		(778,233	)		(100,118	)

Cash flows from financing activities:
Issuance of stocks with warrants, net of offering costs		-			9,916,909
Proceeds from related party loans		10,000,000			-
Return of capital to Yili china's stockholder		-			(555,096	)
Due to related parties		-			8,268

Net cash provided by (used in) financing activities		10,000,000			9,370,081

Effect of exchange rate changes on cash		15			54,348

Net increase (decrease) in cash and cash equivalents		9,520,382			9,682,003

Cash and cash equivalents, beginning of year		1,121,162			46,081

Cash and cash equivalents, end of year	$	10,641,544		$	9,728,084

Supplemental disclosures of cash flow information:
Cash paid for interest		-			-
Cash paid for taxes		-			2,670

Noncash investing and financing activities:

Dividends payable		150,000			-
Issued common stock in exchange of dividend payable		133,348			-

See accompanying notes to consolidated financial statements

F-4

MASTER SILICON CARBIDE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(In US Dollars)

	Common Stock, $0.001 Par Value				Additional Paid-in		Deferred			Retained			Other accumulated comprehensive
	Shares		Amount		Capital		Compensation			Earnings			Income (Loss)		Total

Balance as of June 30, 2009		2,372,617	$	2,373	$	4,057,224	$	(24,900	)	$	(4,429,623	)	$	5,401	$	(389,525	)

Series A preferred stock dividend											(283,428	)				(283,428	)
Conversion of Series A preferred stock dividend on July 1, 2009		149,433		149		149,850										149,999
Conversion of Series A preferred stock dividend on October 1, 2009																0
Amortization of deferred compensation								24,900								24,900
Foreign currency translation gain														3,157		3,157
Net loss for the year											(361,769	)				(361,769	)

Balance as of September 30, 2009		2,522,050	$	2,522	$	4,207,074	$	0		$	(5,074,820	)	$	8,558	$	(856,666	)

See accompanying notes to consolidated financial statements

F-5

Master Silicon Carbide Industries, Inc.

September 30, 2009

Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1 - ORGANIZATION AND OPERATIONS

Paragon SemiTech USA Incorporated (“Paragon New Jersey”) was incorporated on April 10, 2002 under the laws of the State of New Jersey.

Master Silicon Carbide Industries, Inc., formerly Paragon SemiTech USA, Inc. was incorporated on May 21, 2007 under the laws of the State of Delaware. Prior to September 27, 2007, the date of merger with Paragon New Jersey, the Company was inactive. On September 2, 2008, Paragon SemiTech USA, Inc., through the acquisition of C3 Capital, Limited, a company incorporated in the Territory of the British Virgin Islands (“BVI”), acquired all of the equity interests in Yili Master Carborundum Production Co., Ltd. On November 12, 2008, Paragon SemiTech USA, Inc. changed its name to Master Silicon Carbide Industries, Inc. (“Master” or the “Company”). The Company believes that the new name will better identify the Company with the business conducted by its indirectly wholly-owned subsidiary in China, Yili Master Carborundum Production Co., Ltd., namely, the production and distribution of silicon carbide.

C3 Capital, Limited (“C3 Capital”), an international business company, was formed on July 26, 2005 in the British Virgin Islands by the Company. C3 Capital was inactive prior to September 2, 2008, the date of acquisition of Yili Master Carborundum Production Co., Ltd.

Yili Master Carborundum Production Co., Ltd. (“Yili China”) was incorporated on August 10, 1993 in the People’s Republic of China (“PRC”).

Yili China engages in the development, manufacturing and distribution of silicon carbide.

Merger of Paragon New Jersey

On September 27, 2007, the Company entered into a Reorganization and Stock Purchase Agreement (the “Reorganization Agreement”) with Paragon New Jersey. Pursuant to the Reorganization Agreement, the Company issued 675,000 shares (6,750,000 shares prior to Reverse Split) of its common stock at the time representing approximately 81.82% of the issued and outstanding shares of its common stock for the acquisition of all of the outstanding capital stock of Paragon New Jersey. As a result of the ownership interests of the former shareholder of Paragon New Jersey, for financial statement reporting purposes, the merger between the Company and Paragon New Jersey has been treated as a reverse acquisition with Paragon New Jersey deemed the accounting acquirer and the Company deemed the accounting acquiree under the purchase method of accounting in accordance with “Business Combinations” (“FASB ASC 805”). Such merger is deemed a capital transaction and the net assets of Paragon New Jersey (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the combination. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Paragon New Jersey which are recorded at historical cost. The equity of the Company is the historical equity of Paragon New Jersey retroactively restated to reflect the number of shares issued by the Company in the transaction.

Merger of C3 Capital, Limited

On September 2, 2008, pursuant to a Stock Purchase Agreement entered into by the parties and consummated on such date, Yili Carborundum USA, Inc. (“Yili US”), a recently formed Delaware corporation which is wholly-owned by the Company, a Delaware corporation (hereafter referred to as the “Company”, “we” or “us”, as applicable), acquired from Mr. Tie Li, for a cash purchase price of $10,000, all of the outstanding capital stock of C3 Capital, Limited, a company incorporated in the British Virgin Islands (“C3 Capital”). C3 Capital in turn has an agreement to purchase all of the equity interests of Yili Master Carborundum Production Co., Ltd. (“Yili China”), a wholly-owned foreign enterprise (“WOFE”) in the People’s Republic of China (the “PRC”) (“Yili China”), pursuant to which the Company paid $555,096 in cash for the acquisition of the equity interests of Yili China with the proceeds of the Private Placement (as defined below) closed on September 2, 2008. In addition, C3 Capital entered into (i) an agreement to purchase 90% of the equity interests in Xinjiang Ehe Mining and Metallurgy Co., Ltd., a corporation incorporated under the laws of the PRC on August 7, 2008 (“Ehe China”) from Mr. Zhigang Gao; and (ii) a Memorandum of Understanding with Mr. Zhigang Gao and Mr. Ping Li, for an option to purchase the assets to be secured by Xinjiang Paragon Master Mining Co., Ltd., a corporation to be formed under the laws of the PRC (“Quartz Mine China”). Ehe China and Quartz Mine China are currently inactive with no assets or operations. Ehe China intends to build a 40,000 ton green silicon carbide project in the Aletai Area of Xinjiang Uygur Autonomous Region of the PRC pending governmental permissions and approvals and Quartz Mine China intends to obtain the exploration and mining rights for a quartz mine in Wenquan County of Xinjiang Uygur Autonomous Region of the PRC.

F-6

Dissolution of Paragon New Jersey

On March 26, 2009, pursuant to the authorization of Master Silicon Carbide Industries, Inc., the sole shareholder, Paragon New Jersey was dissolved. Paragon New Jersey has no assets, has ceased doing business and does not intend to recommence doing business, and has not made any distribution of cash or property to the shareholders within the last 24 months and does not intend to have any distribution following its dissolution.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). This basis differs from that used in the statutory accounts of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Due to the seasonal nature of our business and other factors, interim results are not necessarily indicative of the results that may be expected for the entire fiscal year.

The consolidated financial statements include (i) the accounts of the Company and (ii) the accounts of its consolidated subsidiaries, C3 Capital, Limited and Yili China. All inter-company balances and transactions have been eliminated.

Business combination

In accordance with FASB ASC 805 “Business Combinations”, the Company allocates the purchase price of acquired entities to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values.

Management makes estimates of fair values based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from revenues, customer relationships, key management and market positions, assumptions about the period of time the acquired trade names will continue to be used in the Company’s combined product portfolio, and discount rates used to establish fair value. These estimates are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Significant estimates include the estimated useful lives of property and equipment. Actual results could differ from those estimates.

Cash equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits.

F-7

Accounts receivable

Trade accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense if any is included in general and administrative expenses.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure to its customers.

Inventories

The Company values inventories, consisting of finished goods, work in process and raw materials, at the lower of cost or market. Cost is determined on the weighted average cost method. Cost of work in process and finished goods comprises direct labor, direct materials, direct production cost and an allocated portion of production overhead. The Company follows FASB ASC 330-10-30 “Inventory-Overall-Initial Measurement” for the allocation of production costs and charges to inventories. The Company allocates fixed production overheads to inventories based on the normal capacity of the production facilities expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Judgment is required to determine when a production level is abnormally low (that is, outside the range of expected variation in production). Factors that might be anticipated to cause an abnormally low production level include significantly reduced demand, labor and materials shortages, and unplanned facility or equipment down time. The actual level of production may be used if it approximates normal capacity. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of abnormally low production or idle plant and unallocated overheads of underutilized or idle capacity of the production facilities are recognized as period costs in the period in which they are incurred rather than as a portion of the inventory cost.

The Company regularly reviews raw materials and finished goods inventories on hand and, when necessary, records a provision for excess or obsolete inventories based primarily on current selling price and sales prices of confirmed backlog orders. As of September 30, 2009, the Company determined no reserves for obsolescence were necessary.

Property, plant and equipment

Property, plant and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property, plant and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives ranging from five (5) years to twenty (20) years:

Furniture and office equipment		5 years
Motor vehicles		5-10 years
Machinery and equipment		10 years
Building		20 years

Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations. Leasehold improvements, if any, are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Land use right

Land use right represents the cost to obtain the right to use certain land in the PRC. Land use right is carried at cost and amortized on a straight-line basis over the life of the right of approximately fifty (50) years. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts. Land use right is included in intangible assets on the Balance Sheet.

F-8

Impairment of long-lived assets

The Company follows FASB ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets” for its long-lived assets. The Company’s long-lived assets, which include property, plant and equipment, land use right, software and production license are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company determined that there were no impairments of long-lived assets as of September 30, 2009.

Fair value of financial instruments

The Company follows FASB ASC 825-10-50-10 “Financial Instruments-Overall-Disclosure” for its financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, prepayments and other current assets, accounts payable, customer deposits, taxes payable, accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments.

Revenue recognition

The Company follows the guidance of the United States Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition” (“SAB No. 101”), as amended by SAB No. 104 (“SAB No. 104”) for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned less estimated future doubtful accounts. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The Company derives the majority of its revenue from sales contracts with customers with revenues being generated upon the shipment of goods. Persuasive evidence of an arrangement is demonstrated via invoice, product delivery is evidenced by a warehouse shipping log as well as a signed bill of lading from the trucking or rail company and title transfers upon shipment, based on free on board (“FOB”) destination; the sales price to the customer is fixed upon acceptance of the purchase order and there is no separate sales rebate, discount, or volume incentive. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

Shipping and handling costs

The Company accounts for shipping and handling fees in accordance with the FASB ASC 705 “Cost of Sales and Services”. Shipping and handling costs related to costs of raw materials purchased is in included in cost of revenue. While amounts charged to customers for shipping product are included in revenues, the related outbound freight costs are included in expenses as incurred.

Research and development

Research and development costs are charged to expense as incurred. Research and development costs consist primarily of remuneration for research and development staff, depreciation and maintenance expenses of research and development equipment and material and testing costs for research and development.

Advertising costs

Advertising costs are expensed as incurred.

Stock-based compensation

The Company adopted the fair value recognition provisions of FASB ASC 718“Compensation-Stock Compensation”.

We made the following estimates and assumptions in determining fair value:

F-9

Valuation and Amortization Method – We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term – The expected term represents the weighted-average period that our stock-based awards are expected to be outstanding. We applied the “Simplified Method” as defined in the Securities and Exchange Commission’s Staff Accounting Bulletins No. 107 and 110.

Expected Volatility – The expected volatility is calculated by considering, among other things, the expected volatilities of public companies engaged in similar industries.

Expected Dividend – The Black-Scholes valuation model calls for a single expected dividend yield as an input.

Risk-Free Interest Rate – The Company bases the risk-free interest rate on the implied yield currently available on United States Treasury zero-coupon issues with an equivalent remaining term.

Stock compensation expense is $24,900 for the three months ended September 30, 2009.

Income taxes

The Company accounts for income taxes under FASB ASC 740 “Income Taxes”. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

The Company adopted the provisions of FASB ASC 740. The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FASB ASC 740, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of FASB ASC 740.

Segment reporting

FASB ASC 280, “Segment Reporting” requires use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

In accordance with FASB ASC 280, the Company has reviewed its business activities and determined that multiple segments do not exist that need to be reported.

Foreign currency translation

Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with FASB ASC 830 “Foreign Currency Matters” and are included in determining net income or loss.

The financial records of the subsidiaries are maintained in their local currency, the Renminbi (“RMB”), which is the functional currency of those subsidiaries. The Company’s functional currency is U.S. dollars. Assets and liabilities are translated from the local currency into the reporting currency, U.S. dollars, at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Foreign currency translation gain (loss) resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining accumulated other comprehensive income in the statement of stockholders’ equity.

F-10

RMB is not a freely convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC. Commencing July 21, 2005, China adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The exchange rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per US dollar to approximately RMB 8.11 per US dollar on July 21, 2005. Since then, the PBOC administers and regulates the exchange rate of the US dollar against the RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.

Unless otherwise noted, the rate presented below per U.S. $1.00 was the noon buying rate for RMB in New York City as reported by the Federal Reserve Bank of New York on the date of its balance sheets contained in these consolidated financial statements. Management believes that the difference between RMB vs. US$ exchange rate quoted by the PBOC and RMB vs. US$ exchange rate reported by the Federal Reserve Bank of New York were immaterial. Translations do not imply that the RMB amounts actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars. Translation of amounts from RMB into United States dollars (“US$”) has been made at the following exchange rates for the respective periods:

September 30, 2009
Balance sheet		RMB 6.8290 to US$1.00
Statement of income and comprehensive income		RMB 6.8311 to US$1.00

June 30, 2009
Balance sheet		RMB 6.8319 to US$1.00
Statement of income and comprehensive income		RMB 6.8331 to US$1.00

Comprehensive income (loss)

The Company has adopted FASB ASC 220 “Comprehensive Income”. This statement establishes rules for the reporting of comprehensive income (loss) and its components. Comprehensive income (loss), for the Company, consists of net income (loss) and foreign currency translation adjustments and is presented in the Statements of Operations and Comprehensive Income (Loss) and Stockholders’ Equity.

Net loss per common share

Net loss per common share is computed pursuant to FASB ASC 260 “Earnings per Share”. Basic net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period to reflect the potential dilution that could occur from common shares issuable through common stock equivalents.

	For the three months		For the three months
	ended September 30,		ended September 30,
	2009		2008

Numerator for basic and diluted net loss per share - Dificit from continuing operations	$	-645,197	$	-77,940

Denominator for basic and diluted net loss per share - Weighted average shares of common stock outstanding		2,520,426		1,282,078

Basic and diluted net loss per share	$	-0.26	$	-0.06

The following table shows the weighted-average number of potentially dilutive shares excluded from the diluted net loss per share calculation for the three months ended September 30, 2009 and 2008:

F-11

	For the three months ended		For the three months
	September 30, 2009		ended September 30,
			2008


Series A preferred stock		9,961,860		3,031,394
Warrants		-		99,004
Total		9,961,860		3,130,398

Related party transaction

We lease our office space at both 558 Lime Rock Road, Lakeville, Connecticut and 420 Lexington Avenue, Suite 860, New York, NY from Kuhns Brothers, Inc. and its affiliates (“Kuhns Brothers”). Our Chairman and CEO, Mr. Kuhns, is a controlling shareholder, President, CEO and Chairman of Kuhns Brothers. The lease commenced on September 1, 2008 for a term of one year with a monthly rent of $7,500, and such lease is extended for a year with the same rate of rent after September 1, 2009.

Related party payable

As of September 30, 2009, the Company owed Changchun Master Company $871,235 whose stockholder is Zhigang Gao, who is the director of the Company. The loan payable is non-interest bearing, unsecured, and is payable on demand.

Common Stock

As of September 30, 2009, the Company had 2,522,050 shares of Common Stock issued and outstanding.

On September 2, 2008, the Company issued to Mr. Zhigang Gao an aggregate of 925,000 shares of Common Stock post-split as an inducement for Mr. Gao’s entry into an employment agreement with either the Company or Yili China, as the case may be, to serve as an executive officer of Yili China. The fair value of these common shares equal to $925,000 and these shares were treated as the stock compensation cost after acquisition of Yili China.

On November 12, 2008, the Company effectuated a 1 for 10 reverse split on its outstanding Common Stock, par value $0.001 (the “Reverse Split”). Immediately after the Reverse Split, there were approximately a total of 1,925,600 shares of Common Stock outstanding. Such Reverse Split, however, does not reduce the number of shares of Common Stock that the Company was authorized to issue.

On February 10, 2009, the Company issued an aggregate of 40,000 shares of Common Stock to a designee of Columbia China Capital Group, Inc. as a result of the exercise of warrants for 40,000 shares of Common Stock at an exercise price of $.01.

On May 12, 2009, the Company issued an aggregate of 60,000 shares of Common Stock to a designee of Columbia China Capital Group, Inc as a result of the exercise of warrants for 60,000 shares of Common Stock at an exercise price of $.01.

An aggregate of 496,450 shares of Common Stock were issued to the holders of Series A Preferred Stock as the dividends from October 1, 2008 through September 30, 2009.

Redeemable Preferred Stock

As of September 30, 2009, the Company had 996,186 shares of Redeemable Series A Preferred Stock issued and outstanding. On September 2, 2008, the Company completed the sale to China Hand Fund I, LLC and/or its designees or assignees of 996,186 units for total proceeds of $10,000,000, each unit consisting of one share of the Company’s Series A Convertible Preferred Stock and one warrant to purchase twenty-five shares of the Company’s common stock. The preferred stock pays annual dividends of 6% regardless of the Company’s profitability. Each preferred share is convertible into ten shares of common stock. On December 30, 2010, the Company is required to redeem for cash the outstanding preferred stock, if not previously converted by the holders, for $10.038 per share plus accrued but unpaid dividends. Because the Company is required to redeem the preferred stock on December 30, 2010, if it has not been previously converted by the holders, the preferred stock is classified outside of stockholders’ equity.

In accordance with FASB ASC 470-20-25, “Debt-Debt with Conversion Options-Recognition,” the Company allocated the proceeds received between the preferred stock and the warrants. The resulting discount from the face amount of the preferred stock is being amortized using the effective interest method over the period to the required redemption date. After allocating a portion of the proceeds to the warrants, the effective conversion price of the preferred stock was lower than the market price at the date of issuance and therefore a beneficial conversion feature was recorded. The dividends on the preferred stock, together with the periodic accretion of the preferred stock to its redemption value, are charged to retained earnings.

F-12

Dividend

During the first quarter of 2010, the Company accrued $150,000 dividend pursuant to the Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock, dated August 29, 2008. During this first quarter of fiscal year 2010, the Company issued 149,433 shares of common stock , or $150,000 at a fair market value of Common Stock, as payment of the dividend of Series A Preferred Stock. As of September 30, 2009, dividend payable remains $150,000 unpaid.

Recently issued accounting pronouncements

In June 2009 the FASB established the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.

Statement of Financial Accounting Standards (“SFAS”) SFAS No. 165 (ASC Topic 855), “Subsequent Events”, SFAS No. 166 (ASC Topic 810), “Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140”, SFAS No. 167 (ASC Topic 810), “Amendments to FASB Interpretation No. 46(R)”, and SFAS No. 168 (ASC Topic 105), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” were recently issued. SFAS No. 165, 166, 167, and 168 have no current applicability to the Company or their effect on the financial statements would not have been significant.

Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and Various other ASU’s No. 2009-2 through ASU No. 2009-15 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

Going Concern

As shown in the accompanying consolidated financial statements, the Company had minimum working capital and an accumulated deficit incurred through September 30, 2009, which raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

The timing and amount of capital requirements will depend on a number of factors, including demand for products and services and the availability of opportunities for expansion through affiliations and other business relationships. Management intends to seek new capital from new equity securities issuances to provide funds needed to increase liquidity, fund internal growth, and fully implement its business plan.

NOTE 3 - ACQUISITION

On September 2, 2008, pursuant to a Stock Purchase Agreement entered into by the parties and consummated on such date, Yili US acquired from Mr. Tie Li, for a cash purchase price of $10,000, all of the outstanding capital stock of C3 Capital, Limited (“C3 Capital”). C3 Capital in turn has an agreement to purchase all of the equity interests of Yili Master Carborundum Production Co., Ltd., a wholly-owned foreign enterprise (“WOFE”) in the People’s Republic of China (the “PRC”) (“Yili China”), pursuant to which the Company paid $555,096 in cash for the acquisition of the equity interests of Yili China. The acquisition of Yili China was accounted for using the purchase method of accounting in accordance with SFAS No. 141 “Business Combinations” by allocating the purchase price over the assets acquired, including intangible assets, and liabilities assumed, based on their estimated fair values at the date of acquisition. The purchase price has been allocated to the assets and liabilities as follows:

F-13

Cash	$	23,226
Accounts receivable		1,208
Inventory		298,640
assets		195,017
Preperty, plant and equipment		787,554
Software		846
Production license		688,214
Accounts payable		(843,040	)
Customer deposits		(170,859	)
Taxes payable		(63,843	)
Accrued expenses and other		(92,871	)
Advances from stockholders		(268,996	)
Total purchase price	$	555,096

A production license was issued by the Chinese government to permit Yili China to produce silicon carbide in China. The production license was assessed at $688,214 and will be amortized over the operating period of Yili China from September 2008 to April 2035. For each month, the amount of amortization is $2,151.

NOTE 4 – INVENTORIES

Inventories at September 30, 2009 and June 30, 2009 consisted of the following:

	30-Sep-09		30-Jun-09

Raw materials	$	70,603	$	58,583

Finished goods		430,646		537,031

Work in progress		43,930		124,416

Total	$	545,179	$	720,030

NOTE 5 – INTANGIBLE ASSETS

On October 28, 2008, the Company entered into an agreement with the Chinese government, whereby the Company paid RMB 5,403,579 (equal to $790,934) to acquire the land use right and obtained a certificate of the land use right until October 27, 2058. The purchase price is being amortized over the term of the right of approximately fifty (50) years beginning on November 1, 2008 and amortization expense used in production is reported in cost of revenues.

Intangible assets at September 30, 2009 and June 30, 2009 consisted of the following:

	30-Sep-09			30-Jun-09


Land use right	$	790,934		$	790,934

Production license		688,214			688,214

Software		3,041			3,041

Less: accumulated amortization		(43,712	)		(33,494	)

Total	$	1,438,477		$	1,448,695

F-14

NOTE 6 – PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2009 and June 30, 2009 consisted of the following:

	30-Sep-09			30-Jun-09

Buildings	$	243,559		$	243,455

Machinery and equipment		614,493			604,154

Motor vehicles		202,296			202,210

Office equipment		35,543			27,532

Less: accumulated depreciation		(109,464	)		(78,184	)

Property and equipment, net	$	986,427		$	999,167

Depreciation related to property and equipment used in production is reported in cost of revenues.

NOTE 7 – PRIVATE PLACEMENT

On September 21, 2009, for the consideration of $10,000,000, the Company sold to The China Hand Fund I, LLC and/or its successor and assigns, an accredited investor (the “Investor”) a convertible promissory note, which was automatically converted into 920,267 shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”) after the effectiveness of the Reincorporation on November 12, 2009(the “2009 Private Placement”). The Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock was filed with the State of Nevada on November 12, 2009, a form of which is incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 27, 2009. The proceeds of this 2009 Private Placement will be used to finish three new 8,500-ton furnaces of carborundum metallurgy and to buy quartz mine rights in Ehe.

NOTE 8 - FOREIGN OPERATIONS

Substantially all of the Company’s operations are carried out and all of its assets are located in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency fluctuation and remittances and methods of taxation, among other things.

NOTE 9 – SUBSEQUENT EVENT

On November 2, 2009, the Company, formerly a Delaware corporation, completed its reincorporation to Nevada by a merger of the Registrant with and into its wholly-owned subsidiary, Master Silicon Carbide Industries, Inc., a newly formed Nevada corporation (the “Reincorporation”). The Reincorporation effected a change in the Company’s legal domicile from Delaware to Nevada. The Company’s business, assets, liabilities, and headquarters are unchanged as a result of the Reincorporation and all the directors and officers of the Company prior to the Reincorporation continue- to serve the Company after the Reincorporation.

After the Reincorporation of the Company and on November 12, 2009, the Note of $10,000,000 was automatically converted into 920,267 shares of Series B Preferred Stock of the Company. According to Certificate of Designation of Series B Preferred Stock, Series B Preferred Stock is redeemable preferred stock.

The Company has evaluated subsequent events from the balance sheet date through November 12, 2009.

F-15

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q.

Certain statements in this Report, and the documents incorporated by reference herein, constitute forward-looking statements. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

The "Company", "we," "us," and "our," refer to (i) Master Silicon Carbide Industries, Inc. (formerly Paragon SemiTech USA, Inc.); (ii) Yili Carborundum USA, Inc. (“Yili US”); (iii) C3 Capital, Limited (“C3 Capital”); and (iv) Yili Master Carborundum Production Co., Ltd. (“Yili China”).

Overview

Master Silicon Carbide Industries, Inc., a Nevada corporation, through its indirectly wholly owned operating subsidiary Yili China, produces and sells in China high quality “green” silicon carbide and lower-quality “black” silicon carbide (together, hereinafter referred to as “SiC”). Effective November 12, 2008, we changed our name from “Paragon SemiTech USA, Inc.” to “Master Silicon Carbide Industries, Inc.” to better reflect our business of production and sale of SiC. SiC is a non-metallic compound that has special chemical properties and a level of hardness that is similar to diamonds, is produced by smelting (the process of extracting a metal from its ore) quartz sand and refinery coke at temperatures ranging from approximately 1,600 to 2,500 degrees centigrade in a graphite electric resistance furnace.

SiC is primarily used in the superficial treatment industry as an abrasive. Additionally, because it is an extremely hard, chemically inert, and heat-resistant substance, SiC has also been widely applied in many growing industries including mechanical, electronics, material and metallurgical industries. For example, pure SiC is a natural semiconductor and thus efforts are underway to explore the possibility of replacing silicon with SiC in the semiconductor industry. In recent years, SiC has been widely utilized in the solar energy (photovoltaic) industry, where it is used in precision cutting, pressure blasting, wire-sawing, and surface preparation, in addition to other processes.

The Company is currently developing three new 8,500-ton furnaces with an aggregate production capacity of 25,500 tons per year in Yili Hasake Autonomous State of Xinjiang Autonomous Region (the “Yili Project”). The construction of one of these three furnaces is expected to be completed by the end of November 2009 and we expect another furnace will be built by the end of December 2009. We anticipate the trial production of our two new production lines will commence by the end of December 2009. We expect the third furnace (third production line) will be completed by June 2010.

The Company’s present SiC production capacity is 3,000 tons per annum. It is anticipated that our production capacity can reach 20,000 tons per year by the end of 2009, with the addition of the two new 8,500-ton furnaces.

The Company is planning a 34,000 ton green SiC project with four furnaces in Ehe of the Aletai Area of Xinjiang Uygur Autonomous Region of the PRC pending governmental permissions and approvals (the “Ehe Project”). The Company selected the site for the project because of its proximity to sources of electricity, petroleum coke and quartz. The Company plans to construct the project in two stages. In the first stage, it proposes to construct a smelting base with an annual capacity of 34,000 tons of Green SiC. In the second stage, the Company will construct a powder production line and a granulation workshop. We also plan to acquire a quartz mine in Wenquan County of Xinjiang Uygur Autonomous Region of the PRC. We will need further financing to commence the Ehe New Project and the Company plans to finish the construction of the Ehe Project by year 2012.

On November 12, 2008, the Company effectuated a 1 for 10 reverse split on its outstanding Common Stock, par value $0.001 (the “Reverse Split”). The Reverse Split, however, does not reduce the number of shares of Common Stock that the Company was authorized to issue.

On March 24, 2009, the Company approved and caused there to be filed with the State of New Jersey a Certificate of Dissolution, dissolving Paragon SemiTech USA Incorporated (“Paragon NJ”), formerly a wholly owned subsidiary of the Company. Such dissolution of Paragon NJ was effective on March 26, 2009.

Recent Developments

On November 2, 2009, the Company completed the reincorporation from Delaware to Nevada by a merger with its then wholly-owned subsidiary in Nevada: Master Silicon Carbide Industries, Inc. (the “Reincorporation”).

On September 21, 2009, for the consideration of $10,000,000, the Company sold to The China Hand Fund I, LLC and/or its successors and assigns, an accredited investor (the “Investor”) a convertible promissory note, which was automatically converted into 920,267 shares of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”) after the effectiveness of the Reincorporation on November 12, 2009 (the “2009 Private Placement”). The Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock was filed with the State of Nevada on November 12, 2009, a form of which is incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 27, 2009.

The proceeds of this 2009 Private Placement will be used to complete the three furnaces of the Yili Project and to acquire 90% equity interest of Xinjiang Paragon Master Mining Co., Ltd (“Quartz Mine China”) from Mr. Zhigang Gao, one of our directors. We are entitled to an option to purchase Quartze Mine China, pursuant to a Memorandum of Understanding, among C3 Capital, Mr. Zhigang Gao and Mr. Ping Li, dated August 25, 2008. Through Quartz Mine China, we will purchase the mining rights for a quartz mine in Wenquan County of Xinjiang Uygur Autonomous Region of the PRC.

In order to prevent disruption to the construction of our new production lines at Yili, we have applied for loans of approximately RMB 30,000,000 (or $4,387,960) from local banks in China. The Company received a loan of RMB 10,000,000 (or $1,464,500) from Bank of China on October 23, 2009. This loan by Bank of China is for a term of three years with a yearly interest rate of 5.4%, and Bank of China has security interest on certain property and equipment of the Company.

On July 1 and October 1, 2009, pursuant to the Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock, dated August 29, 2008, the Company issued an aggregate of 298,866 shares of Common Stock as dividends (the “Dividend Shares”), to the holders of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) that were issued in a private placement consummated on September 2, 2008 (the “2008 Private Placement”). These 298,866 dividend shares were for the quarters ended September 30 and June 30, 2009, payable on July 1 and October 1, 2009, respectively. As of the date of this Report, the Company has issued to the holders of Series A Preferred an aggregate of 645,884 shares of Common Stock as Dividend Shares.

Results of Operations for the Three Months ended September 30, 2009 and 2008

The following tables and analysis show the operating results of the Company for the three months ended September 30, 2009 and September 30, 2008. The financial results for the three months ended September 30, 2008 include approximately one months of the operating results of Yili China, since the acquisition of Yili China by the Company was closed on September 4, 2008.

	Three months			Three months
	Ended September			Ended September			Percentage
		30, 2009			30, 2008		Change
Revenues	$	377,897		$	225,985			67	%
Cost of revenues		428,646			174,417			146	%

Gross profit (loss)		(50,749	)		51,568			-198	%

General and administrative expenses		372,159			94,119			295	%

Total operating expenses		372,159			94,119			295	%

Loss from operations		(422,908	)		(42,551	)		894	%

Interest (income)		(7,689	)		(13,102	)		-41	%
Other expenses(income)		(57,836	)		158			N/A

Total other (income) expense		(65,525	)		(12,944	)		406	%

Loss before income taxes		(357,383	)		(29,607	)		1107	%

Income tax provision		4,386			-			N/A

Net loss	$	(361,769	)	$	(29,607	)		1122	%

Net Revenues

We generated sales revenues of $377,897 for the three months ended September 30, 2009. The total revenues include the following:

	Three months ended		Three months ended
Item	September 30, 2009		September 30, 2008		Percentage change
Green silicon:
Selling volume (ton)		239		138		73	%
Price in US dollars		901.00		1,498.50		-40	%
Subtotal		215,339		206,793		4	%

Black silicon:
Selling volume (ton)		228		20		1040	%
Price in US dollars		712.97		959.64		-26	%
Subtotal		162,558		19,192		747	%

Total		377,897		225,985		67	%

Compared to the first fiscal quarter last year, the market prices of Green SiC and Black SiC have decreased dramatically due to the impact of the global financial crisis on the silicon carbide industry. The market price of Green SiC and Black SiC decreased by 40% and 26% respectively, compared to the comparable period last year. However, the market prices of Green SiC are $880, $943 and $968 per ton in August, September and October of this year, respectively. Based on this data, the management believes that the pricing for SiC will start to increase towards the end of 2009.

During the first fiscal quarter of 2010, the Company produced less Green SiC and more Black SiC than the comparable period of last year. This is mainly due to two reasons: firstly, since lower quality silicon was more readily available, the Company steered its focus more to the production of Black SiC; and secondly, the Company conducted the technical upgrade for some existing furnaces in this quarter, such as applying new process formula or operation processes, and it therefore reduced the operation efficiency and production quality of the furnaces, which resulted in the production of more Black SiC. Management believes this technical upgrade will be completed by the end of November 2009 and the existing furnaces will be producing by the end of December 2009.

Cost of Goods Sold

Cost of goods sold is primarily comprised of the costs of our raw materials and packaging materials, direct labor, manufacturing overhead expenses, depreciation, amortization, inventory count loss and freight charges. The raw materials include quartz, petrol coke and electricity power. These materials generally account for 8%, 60% and 32% out of total raw material costs. Our cost of goods sold for the three months ended September 30, 2009 was $428,646.

Gross Loss

During the three months ended September 30, 2009, we had a gross loss of $50,749. In the same period last year, our gross profit margin was approximately 23%. The decrease of our profit is due to the following two reasons: Firstly, the market prices for both Green SiC and Black SiC have decreased dramatically this year. Secondly, the market price of the Black SiC is only 79% of that of the Green SiC, yet the production costs of Black SiC and Green SiC are approximately similar. Although the Company produced more Black SiC this quarter ended September 30, 2009, we did not generate enough sales revenues to cover the manufacturing costs. Management believes that after our two new furnaces start producing by the end of December 2009, our gross profit margin may reach approximately 20%.

General and Administrative Expenses

Our operating and administrative expenses consist primarily of rental expenses, related salaries, business development, depreciation and traveling expenses, legal and professional expenses. Operating and administrative expenses were $372,159 for the three months ended September 30, 2009, as compared to $94,119 for the three months ended September 30, 2008, an increase of $278,040. Since the acquisition of Yili China by the Company that was closed on September 4, 2008, only one month operating expenses of Yili China was included for the three months ended September 30, 2008. The increase of $278,040 was mainly incurred by the Company after the acquisition of Yili China, including certain expenses of outbound freight fee, salaries, office expenses and professional fees.

	Three Months		Three Months
	Ended September		Ended September		Percentage
	30, 2009		30, 2008		Change
G&A
Stock-based compensation	$	24,900	$	24,900		0	%
Shipping and outbound freight fee		30,265		2,361		1182	%
Professional fees		94,947		7,000		1256	%
Travel expenses		14,833		5,873		153	%
Products tax and related taxes		3,743		1,018		268	%
Welfare and benefits		104,704		33,513		212	%
Social insurance		10,178		-
Depreciation expenses		7,175		1,290		456	%
Amortization expenses		11,968		8		149500	%
Entertainment		5,918		3,052		94	%
Motor car expenses		7,737		1,006		669	%
Office expenses		27,809		9,285		200	%
Others		27,982		4,813		481	%
Total	$	372,159	$	94,119		295	%

Operating Loss

Our operating loss is $422,908 for the three months ended September 30, 2009, as compared to a loss of $42,551 for the comparable period of 2008, an increase of $380,357. Our operating loss is mainly attributable to the relatively low amount of net sales for the three months ended September 30, 2009.

Net Loss

Net loss for the three months ended September 30, 2009 was $361,769, compared to a loss of $29,607 for the three months ended September 30, 2008. Such increase of net loss by $332,162 was a result of the increased total expenses for the three months ended September 30, 2009 exceeding the revenues generated by the Company.

Income Taxes

For the three months ended September 30, 2009, our business operations were solely conducted by our subsidiaries incorporated in the PRC and we were governed by the PRC Enterprise Income Tax Laws. PRC enterprise income tax is calculated based on taxable income determined under PRC GAAP. In accordance with the Income Tax Laws, a PRC domestic company is subject to enterprise income tax at the rate of 25% and value added tax at the rate of 17% for most of the goods sold.

Incorporated in Xinjiang province 2005, Yili China is subject to enterprise income tax at the rate of 25%. Income tax provision for the three months ended September 30, 2009 was $4,386 due to the policy of local tax bureau.

Liquidity and Capital Resources

As of September 30, 2009, we had cash and cash equivalents of $10,641,545. The substantial increase of working capital is mostly attributable to the proceeds of the 2009 Private Placement.

The following table sets forth a summary of our cash flows for the periods indicated:

	Three Months			Three Months
	Ended September			Ended September			Percentage
	30, 2009			30, 2008			Change
Net cash provided by (used in) operating activities		298,600			357,692			-17	%

Net cash used in investing activities		(778,233	)		(100,118	)		677	%
Net cash provided by (used in) financing activities		10,000,000			9,370,081			7	%
Effect of exchange rate changes on cash		15			54,348			-100	%
Net increase (decrease) in cash and cash equivalents		9,520,382			9,682,003			-2	%
Cash and cash equivalents, beginning of year		1,121,162			46,081			2333	%

Cash and cash equivalents, end of year		10,641,544			9,728,084			9	%

Operating Activities

Net cash provided by operating activities was $298,600 for the three months ended September 30, 2009, compared to an amount of $357,692 net cash that was provided by operating activities for the three months ended September 30, 2008. The decrease of net cash provided by operating activities is mainly due to the reason that the Company paid more cash to purchase raw materials and to pay off operation expenses than last year.

Investing Activities

Net cash used in investing activities for the three months ended September 30, 2009 was $778,233, compared to an amount of $100,118 net cash that was used in investing activities for the three months ended September 30, 2008. The cash was mainly used for the construction of new production lines including land use right, construction costs and new equipment. Since it was the beginning of the construction for the three months ended September 30, 2008, the Company paid less money at that time.

Financing Activities

On September 21, 2009, the Company received gross proceeds of $10,000,000 by selling to China Hand Fund I, LLC and/or its successor and assigns a promissory convertible note, which was automatically converted into 920,267 shares of the Series B Convertible Preferred Stock of the Company on November 12, 2009.

During the first quarter of the fiscal year of 2009, the Company received gross proceeds of $10,000,000 from the 2008 Private Placement in which we issued 996,186 shares of a newly designated Series A Convertible Preferred Stock of the Company, par value $0.001 per share and warrants to purchase an aggregate of 2,490,465 shares of Common Stock post Reverse Split, with par value of $.001 per share.

Net cash provided by financing activities for the three months ended September 30, 2009 totaled $10,000,000 as compared to $9,370,081 provided by financing activities for the corresponding period ended September 30, 2008. The $629,919 difference is attributable to the Company’s payment to acquire Yili China in the quarter ended September 30, 2008.

Inventories

Inventories consisted of the following as of September 30, 2009 and June 30, 2009:

	30-Sep-09		30-Jun-09

Raw materials		70,603		58,583

Finished goods		430,646		537,031

Work in progress		43,930		124,416

Total		545,179		720,030

Our raw materials mainly include quartz and petrol coke which account for more than 95% of total raw materials. Quartz comes from local mining companies and individual collectors. Quartz in Xinjiang province is 99.99% pure. Petrol coke comes from the Sinopec Group which is the biggest petrol company in China. We have not, in recent years, experienced any significant shortages of manufactured raw materials and normally do not carry inventories of these items in excess of what is reasonably required to meet our production and shipping schedules. Compared with the amount at June 30, 2009, the decrease of $174,851 was mainly attributable to the reason that the company used more work-in-progress to produce black silicon carbide and sold more finished goods during the first quarter of 2010.

Property and Equipment

The following is a summary of property and equipment at September 30, 2009 and June 30, 2009:

	30-Sep-09			30-Jun-09

Buildings		243,559			243,455

Machinery and equipment		614,493			604,154

Motor vehicles		202,296			202,210

Office equipment		35,543			27,532

Less: accumulated depreciation		(109,464	)		(78,184	)

Property and equipment, net		986,427			999,167

Accounts Payable

Accounts payable amounted to $1,434,057 and $888,291 as of September 30, 2009 and June 30, 2009 respectively. Accounts payable primarily resulted from our purchases of raw materials and equipment. The increase of $545,766 was mainly due to the purchase of equipment. Our biggest supplier is Yihe Power Center, the payables to which account for more than 30% of the total amount of accounts payable as of September 30, 2009.

Critical Accounting Policies and Estimates

Management's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company's financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that the following reflect the more critical accounting policies that currently affect the Company's financial condition and results of operations.

Revenue Recognition

Product sales are recognized when the products are shipped and title has passed. Sales revenue represents the invoiced value of goods, net of a value added tax (“VAT”). All of the Company's products that are sold in the PRC are subject to a Chinese VAT at a rate of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing its finished products.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded utilizing the straight-line method over the estimated original useful lives of the assets. Amortization of leasehold improvements is calculated on a straight-line basis over the life of the asset or the term of the lease, whichever is shorter. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property and equipment used in production is reported in cost of sales.

Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired.

Bad Debts

The Company's business operations are conducted in the People's Republic of China. The Company extends unsecured credit only to its relatively large customers with a good credit history. Management reviews its accounts receivable on a regular basis to determine if the bad debt allowance is adequate at each period-end. Because we only extend trade credits to our largest customers, who tend to be well-established and large sized businesses, and we have not experienced any write-off of accounts receivable in the past. We elected not to provide for any bad debt allowance and consider all accounts receivable collectable.

Off-Balance Sheet Arrangements

The Company has not engaged in any off-balance sheet transactions since its inception.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Mr. John Kuhns, our Chief Executive Officer, and Mr. Lin Han, our Chief Financial Officer, 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 Exchange Act, as of the end of the period covered by this Report. Based on that evaluation, our officers concluded that due to the material weaknesses in the internal control over financial reporting as discussed immediately below, our disclosure controls and procedures were ineffective and are not adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, in a manner that allowed for timely decisions regarding required disclosure.

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

An evaluation of the Company’s internal control over financial reporting was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its “Internal Control - Integrated Framework.” The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.

On May 1, 2009, upon the notification by the Company’s management and in consultation with our auditors, the Board of Directors of the Company concluded that its previously issued financial statements for the interim period ended September 30, 2008 (“2008 First Quarter 10Q”), should no longer be relied upon due to the following accounting misstatements:

(i) the omission of certain audit adjustments in the computation of accumulated deficit/gain from forgiveness of other payable; (ii) the misclassification of goodwill to property and equipment; (iii) the misclassification of accounts payable to accrued expenses; (iv) the misclassification of foreign currency translation gain/loss; (v) the omission of certain shipping costs; (vi) the omission of certain professional fees incurred in connection with the issuance of the Company’s Series A Stock; (vii) the omission of professional fees incurred in connection with the acquisition of Yili Master Carborundum Production Co., Ltd., the Company’s wholly-owned subsidiary in China; (viii) the misclassification of the professional fees that were incurred in connection with the issuance of Series A Stock previously expended; and (ix) the omission of dividends on the Series A Stock which were accrued.

As a result, on May 24, 2009, the Company restated the financial statements contained in the 2008 First Quarter 10Q by filing with the SEC Amendment No. 1 to such Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. The restatements had no effect on the income statement, including net income and earnings per share for the periods covered by the restated financial statements.

During the process of reviewing and assessing the Company’s internal control over financial reporting, the Company’s management also concluded that the previously issued financial statements in the Quarterly Report for the period ended December 31, 2008 (“2008 Second Quarter 10Q”) should not be relied upon due to the misclassification of Series A Stock as permanent equity. The Company intends to address the referenced misstatement and to restate such financial statements in the 2008 Second Quarter 10Q by filing with the SEC an amendment to such 2008 Second Quarter 10Q.

A material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate precludes our internal controls from reducing to an appropriately low level of risk the risk that material misstatements in our financial statements will not be prevented or detected on a timely basis.

The Company’s management considered the impact of the foregoing accounting misstatements on the effectiveness of the Company’s internal control over financial reporting and determined that they amounted to a material weakness. As a result, management concluded that the Company's internal controls over financial reporting were not effective as of September 30, 2009.

Remediation Initiative

In an effort to remediate the foregoing deficiencies in the Company’s internal control, the Company intends to take the following actions: (i) to create positions in the accounting department of the Company to segregate duties of recording, authorizing and testing; (ii) to increase our accounting and financing personnel resources, by retaining more U.S. GAAP knowledgeable financial professionals; (iii) to provide U.S. GAAP training to our staff in the accounting department; (iv) to establish an audit committee of the Board of Directors of the Company, with the responsibility of overseeing the corporate accounting and financial reporting process and the internal and external audits of the financial statements of the Company.

There is no assurance that our disclosure controls or our internal controls over financial reporting can prevent all errors. An internal control system, no matter how well designed and operated, has inherent limitations, including the possibility of human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected. We monitor our disclosure controls and internal controls and make modifications as necessary. Our intent in this regard is that our disclosure controls and our internal controls will improve as systems change and conditions warrant.

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

This Quarterly Report for the period ended September 30, 2009 does not include an attestation report of our registered public accounting firm, regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only Management’s report in this Annual Report.

Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2009 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Reference is made to Item 2 of Part I of this Quarterly Report relating to the 2009 Private Placement.

Such issuance of the Company’s securities was effectuated pursuant to the exemption from the registration requirements of the Securities Act of 1933 (the “Act”), as amended, provided by Section 4(2) of the Act and/or Regulation D, and Regulation S promulgated thereunder.

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

On September 30, 2009 by a written consent, the holder of a majority shares of the Common Stock and Series A Convertible Preferred Stock entitled to vote approved the Reincorporation.

The aggregate number of votes which the holders of our Common Stock and Series A Stock are entitled to vote regarding the approval of the Reincorporation was 12,633,342, of which a majority, or at least 6,316,671, are required to approve the Reincorporation. The consenting stockholders are collectively the record and beneficial owners of shares of Common Stock and Series A Stock entitling them to an aggregate of 9,207,279 votes, representing approximately 73.75% of the of the total number of votes which could be cast regarding the approval of the Reincorporation as of the date of the consent on September 30, 2009.

Item 6. EXHIBITS

(a) Exhibits

31.1 – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Mr. John D. Kuhns.

31.2 – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Mr. Lin Han.

32.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Messrs John D. Kuhns and Lin Han .

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

	MASTER SILICON CARBIDE INDUSTRIES, INC.

Date: November 13, 2009		BY:	/s/ John D. Kuhns
			John D. Kuhns
			President and Chief Executive Officer
			(principal executive officer)

Date: November 13, 2009		BY:	/s/ Lin Han
			Lin Han
			Chief Financial Officer
			(principal financial officer and accounting officer)

Master Silicon Carbide Industries, Inc. - FORM 10-Q - November 13, 2009

Attached files

Master Silicon Carbide Industries, Inc. Reports