SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

THREE MONTHS ENDED MARCH 31, 2011

(UNAUDITED)

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

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SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The consolidated financial statements included herein are unaudited; such financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the consolidated financial position of Silvergraph International, Inc. at March 31, 2011, the consolidated results of operations for the three months ended March 31, 2011 and 2010, and cash flows for the three months ended March 31, 2011 and 2010, respectively. Comprehensive income is equivalent to net income for the three month ended March 31, 2011 and 2010, respectively.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end and could be materially different than at year-end.  The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full fiscal year.  The accompanying unaudited consolidated financial statements do not include footnotes and certain financial presentations normally required under generally accepted accounting principles. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2010, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 15, 2011.

Basis of Consolidation

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

Use of Estimates

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

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from its operations since its inception and has an accumulated deficit of $6,452,153, and a working capital and stockholders’ deficiency of $554,611 at March 31, 2011.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence. The recovery of the Company’s assets is dependent upon continued operations of the Company.  In addition, the Company's recovery is dependent upon future events, the outcome of which is undetermined. The Company intends to continue to attempt to raise additional capital, but there can be no certainty that such efforts will be successful.

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Primarily as a result of our recurring losses and our lack of liquidity, we have received a report from our independent registered public accounting firm for our financial statements for the year ended December 31, 2010 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern.

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

Earnings (loss) per share

Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.  In computing diluted earnings per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period.  Options and warrants will have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. As the Company had a loss in the three months ended March 31, 2011 and 2010, respectively, basic and diluted loss per share are the same.  At both March 31, 2011 and 2010, potentially dilutive securities consisted of outstanding common stock purchase warrants to acquire an aggregate of 214,178 and 14,178 common shares, respectively

Recently Issued Accounting Guidance:

Recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the AICPA did not or is not believed by management to have a material impact on the Company's present or future consolidated financial statements.

NOTE 2—CONVERTIBLE PROMISSORY NOTES

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

In March 2010, the Company entered into amendment number 8 to the loan agreement.  Pursuant to the amended agreement, the Company received an additional $13,500 from the noteholders to pay for expenses incurred by the Company in filing its Form 10-K Annual Report for the year ended December 31, 2009.  In May 2010, the Company entered into amendment number 9 to the loan agreement.  Pursuant to the amended agreement, the Company received an additional $13,500 from the noteholders to pay for expenses incurred by the Company in filing its Form 10-Q Report for the quarter ended June 30, 2010.  In July 2010, the Company entered into

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amendment number 10 to the loan agreement.  Pursuant to the amended agreement, the Company received an additional $10,850 from the noteholders to pay for expenses incurred by the Company in filing its Form 10-Q Report for the quarter ended September 30, 2010.  As of December 31, 2010, the amounts due under the notes payable totaled $269,409 including accrued interest of $35,507.

 The obligations represented by the Notes have been amended by a 1st Amendment dated May 31, 2008; a 2nd Amendment dated June 20, 2008; a 3rd Amendment dated August 31, 2008; a 4th Amendment dated October 31, 2008, a 5th Amendment dated December 15, 2008, a 6th Amendment dated January 31, 2009, a 7th Amendment dated May, 2009, an 8^th amendment dated March 9, 2010, a 9^th amendment dated May 2010 and a 10^th amendment dated July 2010 (the “Prior Amendments”) which are incorporated herein by reference.   

As part of the 8^th, 9^th and 10^th amendments, the Company agreed to issue to the Holders, pro rata, a total of 757,001 shares of Common Stock of the Company valued at $29,700, $35,100 and $28,210 respectively. The Company valued the shares based on the stock price at date of amended agreement and recorded the issuance of the shares as additional interest expense.

As of March 31, 2011, and after incorporating the Prior Amendments, the significant terms of the Notes are as follows:

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

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

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

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

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

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

4.  Conversion Rights:

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

b.  Mandatory Conversion.  If the Company does not complete a merger transaction with a private company approved by the board of directors (“Private Company”), by the Maturity Date whereby the Private Company owns up to 96% of the surviving entity, the Conversion Price shall automatically be reduced to the lower of (i) $0.002 or

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(ii) the conversion price that would cause the majority holder of the Notes to own upon conversion the number of shares of common stock of the Company determined to be 59% of the outstanding Common Stock on a fully-diluted basis and the remaining holders of the Notes to own a pro rata number of common shares of common stock of the Company.  

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

NOTE 3 – OTHER DEBT

Included in the Company's March 31, 2011 and December 31, 2010 balance sheets is approximately $41,716 of debt that was reflected in the balance sheet upon the company's reverse merger transaction with Lee Graphics that was consummated in October 2004. The Company is currently determining whether the Company entered into a contract as a borrower or guarantor under the liability.  If no evidence of such liability is found then the Company may write off the liability in the future.

NOTE 4 – EQUITY

Warrants Outstanding

A summary of warrant activity and changes for the three months ended March 31, 2011 is presented below:

Additional information regarding warrants outstanding as of March 31, 2011 is as follows:

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NOTE 5 – COMMITMENTS AND CONTINGENCIES

From time to time, the Company is involved in various legal proceedings arising from the normal course of its business activities. Any adverse outcome from these matters is currently not expected to have a material adverse impact on the results of operations, cash flows or financial position of the Company, either individually or in the aggregate.

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

Forward-Looking Statements

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

 
How to Obtain Silvergraph International, Inc. SEC Filings

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

Executive Overview

Since 2009, we have been relatively inactive, after deciding to wind up the business of its subsidiary, New Era.  Up until 2009, through our operating subsidiary, New Era, we developed and distributed wall art to the $12.5 billion U.S. mass wall art market.  From inception through 2004, we focused our activity on developing and refining our patent-pending and proprietary technology with only modest, non-strategic, sales and revenue.

Results of Operations

Quarter ended March 31, 2011 and 2010

Revenues and Cost of Sales  As noted above, we have been relatively inactive since 2009 and, as a result, have had no revenue or cost of sales since before that time, including during the three months ended March 31, 2011 and 2010.

Operating expenses.    Operating expenses consist of selling and marketing expenses, which are primarily professional services such as legal and accounting fees.  Operating expenses were $409 and $9,690 for the three months ended March 31, 2011 and 2010, respectively.         

Other income (expense).    Other income (expense) principally consists of interest expense.  We had other expenses of $3,325 and $33,025 for both the three months ended March 31, 2011 and 2010, respectively.  The interest expense is related to outstanding debt.   

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Net Loss  We had a net loss of $3,734 for the three months ended March 31, 2011, compared to $42,715 for the three months ended March 31, 2010.  This significant decrease in our net loss is primarily a result of the significant decrease in our other expense related to the issuance of shares of common stock in the three months ended March 31, 2010 as opposed to no stock issuances in the corresponding period in 2011.    

Liquidity and Capital Resources

Working capital as of March 31, 2011 was negative $554,611 as compared to negative working capital of $550,887 as of December 31, 2010.  The cash balance at March 31, 2011 was $1,046 compared to $1,455 at December 31, 2010.

Net cash used in operating activities was $409 for the three months ended March 31, 2011, as compared to $8,538 for the three months ended March 31, 2010.  During each period presented, we used net cash principally to fund our net losses.

Net cash provided by investing activities was $Nil for the three months ended March 31, 2011 and 2010.   

Net cash provided by financing activities was $Nil and $13,500 for the three months ended March 31, 2011 and 2010, respectively.   Net cash provided by financing activities during 2010 was related to proceeds received from the issuance of convertible notes.

We have suffered recurring losses from operations and have an accumulated deficit of approximately $6,452,153 and $6,448,419 at March 31, 2011 and December 31, 2010, respectively.  Primarily as a result of our recurring losses and our lack of liquidity, we have received a report from our independent registered public accounting firm for our financial statements for the year ended December 31, 2010 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern.  To continue our operations and to grow our current operations and to make acquisitions, if any, under our current business model during the next twelve months, we will need to secure additional working capital, by way of equity or debt financing, or otherwise.  After this twelve month period, we may need additional financing for working capital, and in the case of acquisitions for payment of seller notes and future earned cash to sellers of acquired companies. There can be no assurance that we will be able to secure sufficient financing or on terms acceptable to us. If adequate funds are not available on acceptable terms, we would need to delay, limit or eliminate some or all of our proposed operations, and we may be unable to successfully promote our products or develop new or enhanced products or prosecute acquisitions, any of which could lower our revenues and net income, if we achieve profitability in the future.  If we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our current stockholders is likely to be diluted, unless some of our current stockholders were to invest in subsequent convertible debt or equity financings, and some of the newly issued securities may also have rights superior to those of the common stock.  Additionally, if we issue or incur debt to raise funds, we may be subject to limitations on our operations.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2011. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized,

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and reported within the requisite time periods.   While the Company’s disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well designed and administered.

Changes in Internal Controls

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A.  RISK FACTORS

There have been no material changes to the risk factors disclosed in Item 1A. to Part I of our 2008 Form 10-K.

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

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.  (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

Beach Freeman Lim & Cleland

On April 1, 2011, we entered into an Acknowledgment and Release with Beach Freeman Lim & Cleland, a California limited liability partnership (“Beach”), under which we agreed to issue Beach 75,600 shares of our common stock, restricted in accordance with Rule 144, in exchange for Beach agreeing to accept the shares in full satisfaction of any and all amounts we owe Beach.  As of March 31, 2011, we owed Beach approximately $75,589.75 for past services they provided to us.  We expect to issue the shares during the three months ended June 30, 2011, and in connection with the issuance remove the $75,589.75 we owed Beach from our Balance Sheet in the next quarter.

11th Amendment

On April 11, 2011, we entered into an 11th amendment to that certain loan agreement with our two largest shareholders, Antaeus Capital Partners, Inc. and Thomas G. Schuster.  Under the 11th amendment, those two shareholders loaned us an additional $17,750 in exchange for our agreement to issue the two of them a total of 88,751 shares of our common stock, restricted in accordance with Rule 144.   

ITEM 6. EXHIBITS

No. Description

31.1

Chief Executive Officer and Chief Financial Officer Certification

32.1

Section 1350 Certification

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SIGNATURES

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

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