Attached files
file | filename |
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EX-31.1 - Master Silicon Carbide Industries, Inc. | v185453_ex31-1.htm |
EX-32.1 - Master Silicon Carbide Industries, Inc. | v185453_ex32-1.htm |
EX-31.2 - Master Silicon Carbide Industries, Inc. | v185453_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 March 31,
2010
¨
|
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 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. 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
As of May
17, 2010, the registrant had: (i) 2,970,349 shares of Common Stock, par value
$.001 per share (“Common Stock”), issued and outstanding; (ii) 996,186 shares of
Series A Convertible Preferred Stock, par value $.001 per share (“Series A
Stock”), issued and outstanding; and (iii) 920,267 shares of Series B
Convertible Preferred Stock, par value $.001 per share (“Series B Stock”),
issued and outstanding.
TABLE OF
CONTENTS
Page
|
|||
PART I FINANCIAL
INFORMATION
|
|||
Item
1.
|
Financial
Statements.
|
F-1
|
|
Consolidated
Balance Sheets
|
|||
As
of March 31, 2010 (Unaudited) and December 31, 2009
|
F-2
|
||
Consolidated
Statements of Operations and Comprehensive Loss for
|
|||
the
Three Months Ended March 31, 2010 and 2009 (Unaudited)
|
F-3
|
||
Consolidated
Statements of Cash Flows
|
|||
for
the three Months Ended March 31, 2010 and 2009 (Unaudited)
|
F-4
|
||
Notes
to the Interim Consolidated Financial Statements
(Unaudited)
|
F-5
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
3
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
12
|
|
|
|
||
Item
4.
|
Controls
and Procedures.
|
12
|
|
|
|||
PART II OTHER
INFORMATION
|
|
||
|
|||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
13
|
|
|
|||
Item
4.
|
Removed
and Reserved
|
13
|
|
|
|||
Item
6.
|
Exhibits
|
13
|
|
|
|||
Signatures
|
14
|
||
Exhibits/Certifications
|
2
PART
I – FINANCIAL INFORMATION
Item
1. Financial Information
Master
Silicon Carbide Industries, Inc.
March 31,
2010
Index to
Consolidated Financial Statements
Contents |
Page(s)
|
Consolidated
Balance Sheets at March 31, 2010 (Unaudited) and December 31,
2009
|
F-2
|
Consolidated
Statements of Operations and Comprehensive Loss for the Three Months Ended
March
31, 2010 and 2009 (Unaudited)
|
F-3
|
Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2010 and
2009 (Unaudited)
|
F-4
|
Notes
to the Interim Consolidated Financial Statements
(Unaudited)
|
F-5
to F-15
|
F-1
MASTER
SILICON CARBIDE INDUSTRIES, INC.
|
CONSOLIDATED
BALANCE SHEETS
|
(In
US
Dollars)
|
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
(UNAUDITED)
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 6,588,523 | $ | 6,194,047 | ||||
Notes
receivable
|
73,991 | 30,875 | ||||||
Accounts
receivable, net
|
44,276 | 74,400 | ||||||
Tax
refundable
|
644,832 | 617,380 | ||||||
Inventories
|
1,014,131 | 1,001,285 | ||||||
Prepaid
expenses
|
35,320 | 62,723 | ||||||
Total
current assets
|
8,401,073 | 7,980,710 | ||||||
Deposits-fixed
assets
|
3,022,248 | 3,859,366 | ||||||
Other
receivables
|
49,598 | 28,530 | ||||||
Amount
due from related parties
|
1,000,000 | - | ||||||
Property,
plant and equipment, net
|
989,665 | 999,369 | ||||||
Construction
in progress
|
9,408,215 | 7,555,461 | ||||||
Intangible
assets, net
|
1,417,924 | 1,428,078 | ||||||
Total
assets
|
$ | 24,288,723 | $ | 21,851,514 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 1,260,916 | $ | 1,257,657 | ||||
Advance
from customers
|
43,403 | 113,189 | ||||||
Other
payables
|
151,791 | 142,718 | ||||||
Amount
due to related parties
|
860,300 | 860,060 | ||||||
Dividends
accrued
|
150,000 | 150,000 | ||||||
Total
current liabilities
|
2,466,410 | 2,523,624 | ||||||
Long-term
loans
|
4,394,767 | 1,464,515 | ||||||
Total
liabilities
|
6,861,177 | 3,988,139 | ||||||
Redeemable
Preferred Stock-A ($0.001 par value, 996,186 shares issued) net
of
|
||||||||
discount
of $400,277 at March 31, 2010, liquidation preference of
$10.038
|
||||||||
per
share and accrued dividends
|
9,599,723 | 9,466,295 | ||||||
Redeemable
Preferred Stock-B ($0.001 par value, 920,267 shares
issued)
|
||||||||
liquidation
preference of $10.8664 per share
|
10,000,000 | 10,000,000 | ||||||
Stockholders’
equity (deficit):
|
||||||||
Common
stock, $0.001 par value, 100,000,000 shares authorized;
|
||||||||
2,820,916
and 2,671,483 shares issued and outstanding, respectively
|
2,821 | 2,671 | ||||||
Additional
paid-in capital
|
4,197,376 | 4,047,524 | ||||||
Retained
(deficit)
|
(6,385,120 | ) | (5,662,269 | ) | ||||
Accumulated
other comprehensive income
|
12,746 | 9,154 | ||||||
Total
stockholders’ equity (deficit)
|
(2,172,177 | ) | (1,602,920 | ) | ||||
Total
liabilities, redeemable preferred stock and stockholders' equity
(deficit)
|
$ | 24,288,723 | $ | 21,851,514 |
See
accompanying notes to consolidated financial statements
F-2
MASTER
SILICON CARBIDE INDUSTRIES, INC.
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
|
(In
US
Dollars)
|
Three
Months Ended
|
||||||||
3/31/2010
|
3/31/2009
|
|||||||
Revenues:
|
||||||||
Revenues
|
$ | 828,497 | $ | 487,631 | ||||
Cost
of revenues
|
854,307 | 422,534 | ||||||
Gross
profit (loss)
|
(25,810 | ) | 65,097 | |||||
General
and administrative expenses
|
441,652 | 384,485 | ||||||
Total
operating expenses
|
441,652 | 384,485 | ||||||
Loss
from operations
|
(467,462 | ) | (319,388 | ) | ||||
Interest
income
|
27,121 | 23,958 | ||||||
Other
income (expenses)
|
2,921 | (52,076 | ) | |||||
Total
other income (expenses)
|
30,042 | (28,118 | ) | |||||
Loss
before income taxes
|
(437,420 | ) | (347,506 | ) | ||||
Income
tax provision
|
2,003 | 35,383 | ||||||
Net
loss
|
$ | (439,423 | ) | $ | (382,889 | ) | ||
Dividends
and accretion on redeemable preferred stock
|
$ | 283,428 | $ | 283,428 | ||||
Net
loss attributable to common stockholders
|
$ | (722,851 | ) | $ | (666,317 | ) | ||
Comprehensive
loss:
|
||||||||
Net
loss
|
$ | (439,423 | ) | $ | (382,889 | ) | ||
Foreign
currency translation adjustment
|
3,592 | (15,695 | ) | |||||
Comprehensive
loss
|
$ | (435,831 | ) | $ | (398,584 | ) | ||
Basic
and diluted net loss per share
|
$ | (0.26 | ) | $ | (0.31 | ) | ||
Weighted
average common shares outstanding - basic and diluted
|
2,819,256 | 2,143,749 |
See
accompanying notes to consolidated financial statements
F-3
Three
Months Ended
|
||||||||
3/31/2010
|
3/31/2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (439,423 | ) | $ | (382,889 | ) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
provided
by (used in) operating activities:
|
||||||||
Depreciation
|
30,846 | 26,328 | ||||||
Stock
based compensation
|
- | 24,900 | ||||||
Amortization
|
10,370 | 20,181 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Notes
receivable - trade
|
(43,105 | ) | (51,771 | ) | ||||
Accounts
receivable
|
30,143 | 57,067 | ||||||
Other
receivables
|
(21,058 | ) | (32,740 | ) | ||||
Prepaid
expenses
|
27,415 | (54,317 | ) | |||||
Inventories
|
(12,566 | ) | (121,808 | ) | ||||
Accounts
payable and accrued liabilities
|
10,243 | (270,697 | ) | |||||
Other
current liabilities
|
1,668 | 2,130 | ||||||
Advance
from customers
|
(69,812 | ) | (557,659 | ) | ||||
Taxes
refundable
|
(27,246 | ) | (29,195 | ) | ||||
Net
cash provided by (used in) operating activities
|
(502,525 | ) | (1,370,470 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Deposits
- fixed assets and construction in progress
|
(1,033,235 | ) | (2,348,312 | ) | ||||
Due
from related parties
|
(1,000,000 | ) | - | |||||
Net
cash used in investing activities
|
(2,033,235 | ) | (2,348,312 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from loans
|
2,929,587 | - | ||||||
Due
to related parties
|
- | 867,320 | ||||||
Net
cash provided by financing activities
|
2,929,587 | 867,320 | ||||||
Effect
of exchange rate changes on cash
|
649 | (6,621 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
394,476 | (2,858,083 | ) | |||||
Cash
and cash equivalents, beginning of year
|
6,194,047 | 6,817,950 | ||||||
Cash
and cash equivalents, end of year
|
$ | 6,588,523 | $ | 3,959,867 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid for interest
|
- | - | ||||||
Cash
paid for taxes
|
2,003 | - | ||||||
Noncash
investing and financing activities:
|
||||||||
Conversion
of Series A preferred stock dividend
|
150,000 | - |
See
accompanying notes to consolidated financial statements
F-4
Master
Silicon Carbide Industries, Inc.
March 31,
2010
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”).
Master
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 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”). The reverse 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-5
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. The corporation
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.
Reincorporation
On
November 2, 2009, Master Silicon Carbide Industries, Inc. (the “Registrant”),
formerly a Delaware corporation, completed its reincorporation in 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 Registrant’s
legal domicile from Delaware to Nevada. The Registrant’s business, assets,
liabilities, and headquarters were unchanged as a result of the Reincorporation
and the directors and officers of the Registrant prior to the Reincorporation
continued to serve the Registrant after the reincorporation. In addition, the
Registrant’s stockholders automatically became stockholders of Master Silicon
Carbide Industries, Inc. on a share-for-share basis. The Registrant’s shares
will continue to be traded on the Over-the-Counter Bulletin Board under the
symbol “MAST”.
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
operating subsidiaries 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.
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.
These
consolidated financial statements have been prepared on a going concern basis.
The Company has incurred losses since inception resulting in an accumulated
deficit of $6,385,120, but future profit is anticipated in the development of
its business. The Company’s ability to continue as a going concern is dependent
upon the ability of the Company to generate profitable operations in the future
and/or to obtain the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they come due.
Management intends to address the going concern issue by funding future
operations through the sale of equity capital.
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.
F-6
Cash and cash
equivalents
For
purpose of the statements of cash flows, cash and cash equivalents include cash
on hand and demand deposits held by banks. Deposits held in financial
institutions in the PRC are not insured by any government entity or
agency.
As of
March 31, 2010, the cash balance in financial institutions in the United States
was $3,916,115. Accounts at these financial institutions are insured by the
Federal Deposit insurance Corporation (“FDIC”) up to $250,000. At March 31,
2010, the Company had deposits that were in excess of the FDIC insurance
limit.
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 March 31, 2010, the Company determined reserves for obsolescence
were immaterial.
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.
F-7
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.
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 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 March 31, 2010.
Redeemable preferred
stock
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 $1.0038 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, in accordance with EITF Topic D-98, 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.
On
September 21, 2009, the Company entered into a Note Purchase Agreement with
Vicis Capital Master Fund and/or its successor and assigns, an accredited
investor (the “Investor”) where in consideration of $10,000,000, the Investor
purchased from the Company a convertible promissory note in a principal amount
of $10,000,000, (the “Note”). The Note was due on December 31, 2009,
and was automatically convertible into 920,267 shares of the Series B
Convertible Preferred Stock of Master Silicon Carbide Industries, Inc., a Nevada
corporation (“MSCI Nevada”), within three business days after the Company merged
into MSCI Nevada, completing the Company’s reincorporation from Delaware to
Nevada on or around November 2, 2009 (the “Reincorporation”). Each preferred
share is convertible into ten shares of common stock. On December 31, 2011, the
Company is required to redeem for cash the outstanding preferred stock, if not
previously converted by the holders, for $1.087 per share. Because the Company
is required to redeem the preferred stock on December 31, 2011, if it has not
been previously converted by the holders, in accordance with EITF Topic D-98,
the preferred stock is classified outside of stockholders’ equity.
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.
F-8
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 FASB ASC 705 “Cost of Sales and
Services”.
Shipping and handling costs related to costs of raw materials purchased is
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:
|
Ø
|
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.
|
|
Ø
|
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.
|
|
Ø
|
Expected
Volatility – The expected volatility is calculated by considering, among
other things, the expected volatilities of public companies engaged in
similar industries.
|
|
Ø
|
Expected
Dividend – The Black-Scholes valuation model calls for a single expected
dividend yield as an input.
|
|
Ø
|
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.
|
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.
F-9
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 parent’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.
RMB is
not a fully 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:
March 31, 2010
|
||
Balance
sheet
|
RMB
6.8263 to US$1.00
|
|
Statement
of operations and comprehensive loss
|
RMB
6.8269 to US$1.00
|
December 31, 2009
|
||
Balance
sheet
|
RMB
6.8282 to US$1.00
|
|
Statement
of operations and comprehensive loss
|
RMB
6.8310 to US$1.00
|
F-10
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
three months
ended
March
31, 2010
|
For
three months
ended
March
31, 2009
|
|||||||
Numerator for basic and diluted net loss per share - Deficit from continuing operations | $ | -722,851 | $ | -666,317 | ||||
Denominator
for basic and diluted net loss per share - Weighted average shares of
common stock outstanding
|
2,819,256 | 2,143,749 | ||||||
Basic and diluted net loss per share | $ | -0.26 | $ | -0.31 |
The
following table shows the weighted-average number of potentially dilutive shares
excluded from the diluted net loss per share calculation for three months ended
March 31, 2010 and March 31, 2009:
For
three months
ended
March
31, 2010
|
For
three months
ended
March
31, 2009
|
|||||||
Series
A preferred stock
|
9,961,860 | 9,961,860 | ||||||
Series
B preferred stock
|
9,202,670 | - | ||||||
Warrants
|
- | 77,001 | ||||||
Total
|
19,164,530 | 10,038,861 |
Common
Stock
As of
March 31, 2010, the Company had 2,820,916 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 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 was
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. All
references to Common Stock in these financial statements are to post-Reverse
Split shares.
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
$.001.
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
$.001.
F-11
From
September 2, 2008 through March 31, 2010, an aggregate of 795,316 shares of
Common Stock were issued to the holders of Series A Preferred Stock as
dividends.
Dividend
During
the first quarter of 2010, the Company accrued $150,000 in dividends pursuant to
the Certificate of Designation, Preferences and Rights of Series A Convertible
Preferred Stock, dated August 29, 2008. During the first quarter of 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 March 31, 2010, 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. 2010-18 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 an
accumulated deficit incurred through March 31, 2010, which raises 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 – INVENTORIES
Inventories
at March 31, 2010 and December 31, 2009 consisted of the following:
F-12
31-Mar-10
|
31-Dec-09
|
|||||||
Raw
materials
|
$ | 382,360 | $ | 471,690 | ||||
Finished
goods
|
512,684 | 462,314 | ||||||
Work
in progress
|
119,087 | 67,281 | ||||||
Total
|
$ | 1,014,131 | $ | 1,001,285 |
NOTE
4 – RELATED PARTY TRANSACTIONS
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.
On
February 10, 2010, the Company (“Creditor”) signed a loan agreement with China
Silicon Corporation, a Delaware corporation (“Debtor”) to extend a loan of One
Million U.S. Dollars (US$1,000,000) to Debtor to fund working capital needs. The
actual controlling shareholder of Creditor and Debtor is the same one. The
interest rate of this loan is six percent (6%) per annum. Debtor promises to pay
to Creditor the principal sum of One Million U.S. Dollars on December 31, 2010.
Debtor delivered a promissory note of US$1,000,000 to Creditor.
As of
March 31, 2010, the Company owed Changchun Master Company $860,300 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.
NOTE
5 – DEPOSITS – FIXED ASSETS
Deposits
to purchase fixed assets included the deposits to establish the buildings and
equipment for the three production lines. Deposits at March 31, 2010 and
December 31, 2009 consisted of the following:
31-Mar-10
|
31-Dec-09
|
|||||||
Deposit
for buildings
|
$ | 662,658 | $ | 1,469,348 | ||||
Deposit
for equipment
|
2,359,590 | 2,390,018 | ||||||
Total
|
$ | 3,022,248 | $ | 3,859,366 |
NOTE
6 – INTANGIBLE ASSETS
On
October 28, 2008, the Company entered into an agreement with the Chinese
government, whereby the Company paid RMB 5,403,579 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 March 31, 2010 and December 31, 2009 consisted of the
following:
31-Mar-10
|
31-Dec-09
|
|||||||
Land
use right
|
$ | 791,582 | $ | 790,934 | ||||
Production
license
|
688,104 | 688,214 | ||||||
Software
|
3,043 | 3,041 | ||||||
Less:
accumulated amortization
|
(64,805 | ) | (54,111 | ) | ||||
Total
|
$ | 1,417,924 | $ | 1,428,078 |
Amortization
expense for the three months ended March 31, 2010 was $10,370.
F-13
NOTE
7 – PROPERTY AND EQUIPMENT
Property
and equipment at March 31, 2010 and December 31, 2009 consisted of the
following:
31-Mar-10
|
31-Dec-09
|
|||||||
Buildings
|
$ | 244,040 | $ | 243,972 | ||||
Machinery
and equipment
|
616,667 | 614,565 | ||||||
Motor
vehicles
|
236,999 | 236,933 | ||||||
Office
equipment
|
64,639 | 45,691 | ||||||
Less:
accumulated depreciation
|
(172,680 | ) | (141,792 | ) | ||||
Property
and equipment, net
|
$ | 989,665 | $ | 999,369 |
Depreciation
related to property and equipment used in production is reported in cost of
revenues. Depreciation expense for the three months ended March 31, 2010 was
$30,846, of which $8,052 was included in G&A expense and $22,794 was
included in cost of revenue.
NOTE
8 – CONSTRUCTION IN PROGRESS
Construction
in progress consists of capitalized costs associated with the construction of
production lines that are not yet in service and therefore not yet being
depreciated. All facilities purchased for installation, self-made or
subcontracted, are accounted for under construction-in-progress.
Construction-in-progress is recorded at acquisition cost, including cost of
facilities, installation expenses and the interest capitalized during the course
of construction for the purpose of financing the project. Upon completion and
readiness for use of the project, the cost of construction-in-progress is to be
transferred to fixed assets.
31-Mar-10
|
31-Dec-09
|
|||||||
Buildings
|
$ | 2,601,010 | $ | 1,235,278 | ||||
Construction
in progress
|
3,115,953 | 3,020,106 | ||||||
Equipment
|
2,837,866 | 2,586,123 | ||||||
Capitalized
interest
|
110,089 | 17,730 | ||||||
Others
|
743,297 | 696,224 | ||||||
Total
|
9,408,215 | $ | 7,555,461 |
Capitalized
interest for the three months ended March 31, 2010 was $92,359.
NOTE
9 – LONG-TERM LOANS
On
October 23, 2009, Yili China borrowed a three-year long-term loan with principal
of $1,464,515 from the Yili branch, Bank of China with an interest rate at 6.48%
annually and the maturity date on October 21, 2012. On January 4, 2010, Yili
China borrowed a three-year long-term loan with principal of $2,930,252 from the
Yili branch, Bank of China with an interest rate at 6.48% annually and the
maturity date on January 3, 2013. These loans are secured by the building,
machinery and equipment of Yili China. The principal amount will be due at
maturity date.
F-14
Interest
|
Maturity
|
Interest payments | ||||||||||||||||||||||
Rate
|
Date
|
Amount
|
2010
|
2011
|
2012
|
2013
|
||||||||||||||||||
Yili branch, Bank of
China
|
6.48%
|
22-Oct-12
|
$ | 1,464,515 | $ | 94,901 | $ | 94,901 | $ | 79,084 | $ | - | ||||||||||||
Yili branch, Bank of
China
|
6.48%
|
|
3-Jan-13
|
2,930,252 | 187,799 | 189,880 | 189,880 | 2,081 | ||||||||||||||||
$ | 4,394,767 | $ | 282,700 | $ | 284,781 | $ | 268,964 | $ | 2,081 |
NOTE
10 - FOREIGN OPERATIONS
Substantially
all of the Company’s operations are carried out and substantially most 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
11 – SUBSEQUENT EVENT
On April
1, 2010, an aggregate of 149,433 shares of Common Stock were issued to the
holders of Series A Preferred Stock as dividends.
On April
14, 2010, the Company extended a loan (the “Second Loan”) of $1,172,500 to China
Silicon Corporation, to which it had previously extended a loan of $1,000,000 on
February 10, 2010. The actual controlling shareholder of the Company and
China Silicon Corporation is the same one. The Second Loan was interest free and
was repaid on April 21, 2010.
The
Company has evaluated subsequent events from the balance sheet date through when
the report is issued.
F-15
Item
2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Through
our indirectly wholly-owned operating subsidiary Yili China, we produce and sell
in China high quality “green” silicon carbide and lower-quality “black” silicon
carbide (together, hereinafter referred to as “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.
The
Company’s present SiC production capacity is 20,000 tons per annum. It is
anticipated that our production capacity can reach 28,500 tons per year by the
end of July 2010, when the construction of the third 8,500-ton production line
in Yili Hasake Autonomous State of Xinjiang Autonomous Region of China is
finished.
The
Company has developed several proprietary techniques utilized during the
smelting process of SiC. The carbon monoxide gas recovery technology, among
other things that were developed by the Company can collect the waste carbon
monoxide gas created during the smelting process and reuse it to produce heat
which reduces energy costs. The Company plans to patent this technique in the
future.
The
Company is planning a 34,000 ton green SiC project in the Aletai Area of
Xinjiang Uygur Autonomous Region of the PRC pending governmental approvals. The
Company selected the site at Aletai for the project because of its proximity to
sources of electricity, petroleum and quartz.
Recent
Developments
The
Company received a loan of RMB 20,000,000 from Bank of China on January 4, 2010.
This bank loan by Bank of China is for a term of three years with a yearly
interest rate of 6.48%, and Bank of China has security interest on certain
property, facilities and equipment of Yili China.
On February 10, 2010, our Board of
Directors approved to change the Company’s fiscal year end from June 30 to
December 31 of each year. On March 31, 2010, the Company filed with the
Securities and Exchange Commission the transition report on Form 10-K, covering
the transition period from July 1, 2009 through December 31, 2009.
3
On
February 10, 2010, the Company signed a loan agreement with China Silicon
Corporation, a Delaware corporation (“CSC”) to extend a loan of One Million U.S.
Dollars (US $1,000,000) to fund CSC’s working capital needs (the “First Loan”).
The interest rate of this loan is six percent (6%) per annum. CSC agrees to pay
to the Company the principal sum of One Million U.S. Dollars on December 31,
2010. On April 14, 2010, the Company extended another loan (the “Second Loan”)
of $1,172,500 to CSC. The Second Loan was made in support of a potential
acquisition of CSC and to support its working capital position. The Second
Loan was interest free and was repaid on April 21, 2010. Such two loans are
related party transactions since the Company and CSC share a majority
shareholder, certain officers and directors.
Results of Operations for
the Three Months ended March 31, 2010 and 2009
The
following tables and analysis show the operating results of the Company for the
three months ended March 31, 2010 and 2009.
Three
Months
Ended
March
31, 2010
|
Three
Months
Ended
March
31, 2009
|
Percentage
change
|
|||||||||
Revenues
|
$ | 828,497 | $ | 487,631 |
70%
|
||||||
Cost
of revenues
|
854,307 | 422,534 |
102%
|
||||||||
Gross
(loss) profit
|
(25,810 | ) | 65,097 |
-140%
|
|||||||
General
and administrative expenses
|
441,652 | 384,485 |
15%
|
||||||||
Total
operating expenses
|
441,652 | 384,485 |
15%
|
||||||||
Loss
from operations
|
(467,462 | ) | (319,388 | ) |
46%
|
||||||
Interest
(income)
|
(27,121 | ) | (23,958 | ) |
13%
|
||||||
Other
expenses (income)
|
(2,921 | ) | 52,076 |
-105.6%
|
|||||||
Total
other (income) expense
|
(30,042 | ) | 28,118 |
-207%
|
|||||||
Loss
before income taxes
|
(437,420 | ) | (347,506 | ) |
26%
|
||||||
Income
tax provision
|
2,003 | 35,383.00 |
-94%
|
||||||||
Net
loss
|
$ | (439,423 | ) | $ | (382,889 | ) |
15%
|
4
Net
Revenues
We
generated sales revenues of $828,497 for the three months ended March 31, 2010,
compared to $487,631 for the same period in 2009, representing an increase of
$340,866, or 70%. A breakdown of total revenues is set forth in the following
table:
Item
|
Three
Months
Ended
March
31, 2010
|
Three
Months
Ended
March
31, 2009
|
Percentage
change
|
|||
Green
silicon:
|
||||||
Selling
volume (ton)
|
716
|
449
|
59%
|
|||
Average
price in US dollars
|
1,042.31
|
997.28
|
5%
|
|||
Subtotal
|
746,291
|
447,779
|
67%
|
|||
|
||||||
Black
silicon:
|
|
|||||
Selling
volume (ton)
|
120
|
102
|
18%
|
|||
Average
price in US dollars
|
685.05
|
390.71
|
75%
|
|||
Subtotal
|
82,206
|
39,852
|
106%
|
|||
|
||||||
Total
|
828,497
|
487,631
|
70%
|
During
the first quarter of 2010, the main reason for the 70% increase in our sales
revenue is that our first new 8,500-ton production line was in trial production
and began to produce green SiC. However, the trial production will not be
finished until May 2010.
During
the first quarter of 2010, the first new 8,500-ton production line was in trial
production and the second 8,500-ton production line was not yet in trial
production as the raw material feeding system was not yet completed. In this
trial production period, for the first new line, the output of green SiC was
relatively low for the following reasons: (i) it usually takes three to four
months for a new production line to reach full manufacturing capacity, and (ii)
we had a minor problem with the furnace and crane that caused us to stop
production for 2 weeks. The Company has already fixed these problems. The output
of the first new 8,500-ton production line was 652 tons of green SiC in the
first quarter of 2010.
Compared
to the same period last year, the market prices of green SiC and black SiC have
increased due to the recovery of the silicon carbide industry from the global
economic recession in 2009. The market price of green SiC and black SiC
increased by 5% and 75% respectively, compared to the three months ended March
31, 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% of total raw material costs. Our cost of
goods sold for the three months ended March 31, 2010 was $854,307, compared to
the same period last year, an increase of $431,773 or nearly
102%.
5
The
increase of cost of goods sold was due to the following two reasons. First, our
total revenue increased nearly 70%, the cost of goods sold increased
accordingly. Second, during the trial production period, the output was low, yet
the quantity of the consumed raw materials was large and the fixed cost of
production was relatively high. The production cost during first quarter
increased nearly 30%, compared with the same period last year. Also, during the
first quarter of 2010, the price of petrol coke, one of our main raw materials,
increased nearly 50%; therefore it increased the unit production cost of our
products.
Gross
Loss
During
the first quarter of 2010, we had a gross loss of $25,810. In the same period
last year, our gross profit margin was approximately 13%. The decrease of our
profit is due to the following two reasons: (1) during the trial production
period, the output of green SiC was not high enough to offset the substantial
increase of the fixed costs and, (2) during the first quarter, the price of
petrol coke increased nearly 50%; therefore it increased the unit production
cost of our products. Management believes that after our two new production
lines are in full capacity at the end of May 2010, our gross profit margin may
reach approximately 15%.
General
and Administrative Expenses
Our
general and administrative expenses consist primarily of rental expenses,
related salaries, business development, depreciation, travel expenses, and legal
and professional expenses. General and administrative expenses were $441,652 for
the three months ended March 31, 2010, as compared to $384,485 for the three
months ended March 31, 2009, an increase of $57,167. This increase was mainly
due to the increased operating expenses such as new employee’s salaries and
welfare, increased freight fee and professional fee due to Yili China‘s
expanding production and sales.
Three
Months
Ended
March
31, 2010
|
Three
Months
Ended
March
31, 2009
|
Percentage
change
|
|||||||||
G&A
expenses
|
|||||||||||
Stock-based
compensation
|
$ | - | $ | 24,900 |
-100%
|
||||||
Shipping
and outbound freight fee
|
52,884 | 39,942 |
32%
|
||||||||
Professional
fees
|
46,292 | 31,606 |
46%
|
||||||||
Travel
expenses
|
6,742 | 22,910 |
-71%
|
||||||||
Products
tax and related taxes
|
1,435 | 844 |
70%
|
||||||||
Welfare
and benefits
|
138,854 | 107,126 |
30%
|
||||||||
Social
insurance
|
13,193 | 1,479 |
792%
|
||||||||
Depreciation
expenses
|
8,052 | 3,870 |
108%
|
||||||||
Amortization
expenses
|
3,917 | 3,753 |
4%
|
||||||||
Entertainment
|
49,981 | 10,025 |
399%
|
||||||||
Motor
car expenses
|
13,179 | 9,424 |
40%
|
||||||||
Office
expenses
|
65,332 | 62,546 |
4%
|
||||||||
Others
|
41,791 | 66,060 |
-37%
|
||||||||
Total
|
$ | 441,652 | $ | 384,485 |
15%
|
6
Operating
Loss
Our
operating loss was $467,462 for the three months ended March 31, 2010, as
compared to a loss of $319,388 for the comparable period of 2009, an increase of
$148,074. Our operating loss was mainly attributable to the relatively high
amount of production cost of green SiC and general and administrative expenses
for the three months ended March 31, 2010.
Income
Taxes
Our
business operations are 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 in 2005, Yili China is subject to enterprise income tax at
the rate of 25%. There was no income tax provision for Yili China during the
first quarter of 2010. Income tax provision of $2,003 for the three months ended
March 31, 2010 was income tax in the US.
Net
Loss
Net loss
for the three months ended March 31, 2010 was $439,423, compared to a loss of
$382,889 for the three months ended March 31, 2009. Such increase of net loss by
$56,534 was a result of the increased total expenses and cost for the three
months ended March 31, 2010 exceeding the increased revenues generated by the
Company. Since the first new 8,500-ton production line was in trial production
and the price of raw materials increased, the production cost of green SiC was
higher than the same period last year. Therefore, the cost of goods sold was
higher than the sales revenues. Also, due to our expanded production and sales,
the general and administrative expenses have also increased. All these reasons
contributed to a higher net loss compared to the same period last
year.
7
Liquidity and Capital
Resources
As of
March 31, 2010, we had cash and cash equivalents of $6,588,523. The following
table sets forth a summary of our cash flows for the periods
indicated:
Three
Months
Ended
March
31, 2010
|
Three
Months
Ended
March
31, 2009
|
Percentage
change
|
|||||||||
Net
cash provided by (used in) operating activities
|
$ | (502,525 | ) | $ | (1,370,470 | ) |
-63%
|
||||
Net
cash used in investing activities
|
(2,033,235 | ) | (2,348,312 | ) |
-13%
|
||||||
Net
cash provided by (used in) financing activities
|
2,929,587 | 867,320 |
238%
|
||||||||
Effect
of exchange rate changes on cash
|
649 | (6,621 | ) |
-110%
|
|||||||
Net
increase (decrease) in cash and cash equivalents
|
394,476 | (2,858,083 | ) |
-114%
|
|||||||
Cash
and cash equivalents, beginning of period
|
6,194,047 | 6,817,950 |
-9%
|
||||||||
Cash
and cash equivalents, end of period
|
$ | 6,588,523 | $ | 3,959,867 |
66%
|
Operating
Activities
Net cash
used in operating activities was $502,525 for the three months ended March 31,
2010, compared to an amount of $1,370,470 net cash that was used in operating
activities for the three months ended March 31, 2009. The decrease of net cash
used in operating activities was mainly due to the reason that the Company paid
less cash to purchase raw materials than the same period last year. In addition,
advances from customers decreased substantially in the three months ended March
31, 2010.
Investing
Activities
Net cash
used in investing activities for the three months ended March 31, 2010 was
$2,033,235, compared to an amount of $2,348,312 net cash that was used
in investing activities for the three months ended March 31, 2009. The cash
was partly used for the construction of new production lines including
construction costs and new equipment. Furthermore, during the three months ended
March 31, 2010, the Company made a loan of $1,000,000 to China Silicon
Corporation, as discussed in the “Related Party Transaction” below.
8
Financing
Activities
Net cash
provided by financing activities for the three months ended March 31, 2010
totaled $2,929,587, as compared to $867,320 provided by financing activities for
the corresponding period ended March 31, 2009. The increased $2,062,267 of the
cash provided by financing activities was mainly attributable to a bank loan of
$2,929,587 that the Company received on January 4, 2010 from Bank of
China.
Inventories
Inventories
consisted of the following as of March 31, 2010 and December 31,
2009:
31-Mar-10
|
31-Dec-09
|
|||||||
Raw
materials
|
382,360 | 471,690 | ||||||
Finished
goods
|
512,684 | 462,314 | ||||||
Work
in progress
|
119,087 | 67,281 | ||||||
Total
|
1,014,131 | 1,001,285 |
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. The amount
on March 31, 2010 was very similar to the amount on December 31,
2009.
Property
and Equipment
The
following is a summary of property and equipment at March 31, 2010 and December
31, 2009:
31-Mar-10
|
31-Dec-09
|
|||||||
Buildings
|
244,040 | 243,972 | ||||||
Machinery
and equipment
|
616,667 | 614,565 | ||||||
Motor
vehicles
|
236,999 | 236,933 | ||||||
Office
equipment
|
64,639 | 45,691 | ||||||
Less:
accumulated depreciation
|
(172,680 | ) | (141,792 | ) | ||||
Property
and equipment, net
|
989,665 | 999,369 |
9
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.
Accounts
Payable
Accounts
payable amounted to $1,260,916 and $1,257,657 as of March 31, 2010 and December
31, 2009, respectively. Accounts payable primarily resulted from our purchases
of raw materials and equipment. The increase of $3,259 in accounts payable was
mainly due to our increased purchase of raw materials. 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 March 31, 2010.
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.
10
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.
Recent
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. 2010-18 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.
Related
Party Transactions
On
February 10, 2010, the Company signed a loan agreement with China Silicon
Corporation, a Delaware corporation (“CSC”) to extend a loan of One Million U.S.
Dollars (US $1,000,000) to fund CSC’s working capital needs (the “First Loan”).
The interest rate of this loan is six percent (6%) per annum. CSC agrees to pay
to the Company the principal sum of One Million U.S. Dollars on December 31,
2010. On April 14, 2010, the Company extended another loan (the “Second Loan”)
of $1,172,500 to CSC. The Second Loan was made in support of a potential
acquisition of CSC and to support its working capital position. The Second
Loan was interest free and was repaid on April 21, 2010. Such two loans are
related party transactions since the Company and CSC share a majority
shareholder, certain officers and directors.
Off-Balance
Sheet Arrangements
The
Company has not engaged in any off-balance sheet transactions since its
inception.
11
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 of March 31, 2010
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.
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 March 31, 2010.
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.
Changes
in Internal Controls
There
were no changes in the Company’s internal control over financial reporting that
occurred during the three months period ended March 31, 2010 that has materially
affected or is reasonably likely to materially affect our internal control over
financial reporting.
12
PART
II OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
During
the three-month period ended March 31, 2010, the Company has issued to the
holders of Series A Convertible Preferred Stock of the Company (“Series A
Stock”) an aggregate of 149,433 shares of Common Stock as dividend shares of the
Series A Stock. An additional 149,433 shares were issued as dividend shares of
the Series A Stock on April 1, 2010.
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. Removed and Reserved
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 .
13
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:
May 17, 2010
|
BY:
|
/s/
John D. Kuhns
|
|
John
D. Kuhns
|
|||
President
and Chief Executive Officer
|
|||
(principal
executive officer)
|
|||
Date:
May 17, 2010
|
BY:
|
/s/ Lin
Han
|
|
Lin
Han
|
|||
Chief
Financial Officer
|
|||
(principal
financial officer and accounting officer)
|
14