Attached files
file | filename |
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EX-31.1 - Master Silicon Carbide Industries, Inc. | v166198_ex31-1.htm |
EX-32.1 - Master Silicon Carbide Industries, Inc. | v166198_ex32-1.htm |
EX-31.2 - Master Silicon Carbide Industries, Inc. | v166198_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For the
quarterly period ended September
30, 2009
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For the
transition period from ____________ to ____________
Commission
File Number 000-52988
MASTER SILICON CARBIDE
INDUSTRIES, INC.
(Exact
name of small business issuer as specified in its charter)
Nevada
|
01-
0728141
|
|
(State
or other jurisdiction of
|
(IRS
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
558 Lime Rock Road,
Lakeville, Connecticut 06039
(Address
of principal executive offices)
(860)
435-7000
(Issuer's
telephone number)
Indicate
by check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
Do
not check if a smaller reporting company
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE
ONLY TO CORPORATE ISSUERS
2,671,483
shares of Common Stock of the registrant, par value $.001 per share, were
outstanding as of November 12, 2009.
TABLE OF
CONTENTS
Page
|
|||
PART I FINANCIAL INFORMATION | |||
Item
1.
|
Financial
Statements.
|
F-1 | |
Consolidated
Balance Sheets
|
|||
As
of September 30, 2009 and June 30, 2009
|
F-2 | ||
Consolidated
Statements of Operations and Comprehensive Loss for
|
|||
the
Three Months Ended September 30, 2009 and 2008 (Unaudited)
|
F-3 | ||
Consolidated
Statements of Cash Flows
|
|||
for
the three Months Ended September 30, 2009 and 2008
(Unaudited)
|
F-4 | ||
Notes
to the Interim Consolidated Financial Statements
(Unaudited)
|
F-6 | ||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
3 | |
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
11 | |
Item
4.
|
Controls
and Procedures.
|
11 | |
PART II OTHER INFORMATION | |||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
13 | |
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
13 | |
Item
6.
|
Exhibits
|
13 | |
Signatures
|
14 | ||
Exhibits/Certifications
|
2
PART
I – FINANCIAL INFORMATION
Item
1. Financial Information
Master
Silicon Carbide Industries, Inc.
September
30, 2009
Index to
Consolidated Financial Statements
Contents
|
Page(s)
|
|
Consolidated
Balance Sheets at September 30, 2009 (Unaudited) and June 30,
2009
|
F-2
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the Three Months Ended
September 30, 2009 and 2008 (Unaudited)
|
F-3
|
|
Consolidated
Statements of Cash Flows for the Three Months Ended September 30, 2009 and
2008 (Unaudited)
|
F-4
|
|
Notes
to the Interim Consolidated Financial Statements
(Unaudited)
|
F-6
to F-15
|
F-1
MASTER
SILICON CARBIDE INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
(In
US Dollars)
30-Sep-09
|
30-Jun-09
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 10,641,544 | $ | 1,121,162 | ||||
Notes
receivable
|
64,431 | 15,741 | ||||||
Accounts
receivable
|
103,683 | - | ||||||
Tax
refundable
|
364,803 | 269,861 | ||||||
Inventories
|
545,179 | 720,030 | ||||||
Prepaid
expenses
|
35,865 | 37,623 | ||||||
Total
current assets
|
11,755,505 | 2,164,417 | ||||||
Deposits-fixed
assets
|
3,384,011 | 3,564,478 | ||||||
Other
receivables
|
33,146 | 39,738 | ||||||
Property,
plant and equipment, net
|
986,427 | 999,167 | ||||||
Construction
in progress
|
3,609,303 | 2,654,522 | ||||||
Intangible
assets, net
|
1,438,477 | 1,448,695 | ||||||
Total
assets
|
$ | 21,206,869 | $ | 10,871,017 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 1,434,057 | $ | 888,291 | ||||
Short
term note - related party
|
10,000,000 | - | ||||||
Advance
from customers
|
152,189 | 47,665 | ||||||
Other
payables
|
123,187 | 115,334 | ||||||
Amount
due to related parties
|
871,235 | 859,813 | ||||||
Dividends
accrued
|
150,000 | 150,000 | ||||||
Total
current liabilities
|
12,730,668 | 2,061,103 | ||||||
Total
liabilities
|
12,730,668 | 2,061,103 | ||||||
Redeemable
Preferred Stock ($0.001 par value, 996,186 shares issued) net of discount
of $667,133 at September 30, 2009, liquidation preference of
$10.038 per share and accrued dividends
|
9,332,867 | 9,199,439 | ||||||
Stockholders'
equity (deficit):
|
||||||||
Preferred
Stock, $0.001 par value; 10,000,000 shares authorized; 2,000,000 shares
designated, 996,186 shares issued and outstanding, and classified outside
stockholders' equity above, liquidation preference of $10.038 per share
and accrued dividends
|
- | - | ||||||
Common
stock, $0.001 par value, 100,000,000 shares authorized; 2,522,050 and
2,372,617 shares issued and outstanding, respectively
|
2,522 | 2,373 | ||||||
Additional
paid-in capital
|
4,207,074 | 4,057,224 | ||||||
Deferred
compensation
|
- | (24,900 | ) | |||||
Retained
(deficit)
|
(5,074,820 | ) | (4,429,623 | ) | ||||
Accumulated
other comprehensive income
|
8,558 | 5,401 | ||||||
Total
stockholders’ equity (deficit)
|
(856,666 | ) | (389,525 | ) | ||||
Total
liabilities, redeemable preferred stock and stockholders' equity
(deficit)
|
$ | 21,206,869 | $ | 10,871,017 |
See
accompanying notes to consolidated financial statements
F-2
MASTER
SILICON CARBIDE INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In
US Dollars)
For the Three Months Ended
|
||||||||
30-Sep-09
|
30-Sep-08
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Revenues:
|
||||||||
Revenues
|
$ | 377,897 | $ | 225,985 | ||||
Cost
of revenues
|
428,646 | 174,417 | ||||||
Gross
profit (loss)
|
(50,749 | ) | 51,568 | |||||
General
and administrative expenses
|
372,159 | 94,119 | ||||||
Total
operating expenses
|
372,159 | 94,119 | ||||||
Loss
from operations
|
(422,908 | ) | (42,551 | ) | ||||
Interest
income
|
(7,689 | ) | (13,102 | ) | ||||
Other
expenses (income)
|
(57,836 | ) | 158 | |||||
Total
other (income) expense
|
(65,525 | ) | (12,944 | ) | ||||
Loss
before income taxes
|
(357,383 | ) | (29,607 | ) | ||||
Income
tax provision
|
4,386 | - | ||||||
Net
loss
|
$ | (361,769 | ) | $ | (29,607 | ) | ||
Dividends
and accretion on redeemable preferred stock
|
$ | 283,428 | $ | 48,333 | ||||
Net
loss attributable to common stockholders
|
$ | (645,197 | ) | $ | (77,940 | ) | ||
Comprehensive
loss:
|
||||||||
Net
loss
|
$ | (361,769 | ) | $ | (29,607 | ) | ||
Foreign
currency translation adjustment
|
8,558 | - | ||||||
Comprehensive
loss
|
$ | (353,211 | ) | $ | (29,607 | ) | ||
Basic
and diluted net loss per share
|
$ | (0.26 | ) | $ | (0.06 | ) | ||
Weighted
average common shares outstanding - basic and diluted
|
2,520,426 | 1,282,078 |
See
accompanying notes to consolidated financial statements
F-3
MASTER
SILICON CARBIDE INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
US Dollars)
For the Three Months Ended
|
||||||||
30-Sep-09
|
30-Sep-08
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (361,769 | ) | $ | (29,607 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
|
31,227 | 6,258 | ||||||
Stock
based compensation
|
24,900 | 24,900 | ||||||
Amortization
|
10,547 | 8 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Notes
receivable
|
(48,654 | ) | - | |||||
Accounts
receivable
|
(103,622 | ) | - | |||||
Prepaid
expenses
|
8,375 | (39,193 | ) | |||||
Inventories
|
175,053 | 20,290 | ||||||
Accounts
payable & accrued liabilities
|
545,073 | 452,756 | ||||||
Accrued
expenses and other current liabilities
|
7,800 | 24,867 | ||||||
Advance
from customers
|
104,441 | (129,803 | ) | |||||
Taxes
refundable
|
(94,771 | ) | 27,216 | |||||
Net
cash provided by (used in) operating activities
|
298,600 | 357,692 | ||||||
Cash
flows from investing activities:
|
||||||||
Cash
received from business acquisition
|
- | 23,226 | ||||||
Deposits
- fixed assets and construction in process
|
(789,283 | ) | (1,222 | ) | ||||
Purchase
of intangible - land use right
|
- | (972 | ) | |||||
Due
from related parties
|
11,050 | - | ||||||
Purchase
of goodwill
|
- | (121,150 | ) | |||||
Net
cash used in investing activities
|
(778,233 | ) | (100,118 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Issuance
of stocks with warrants, net of offering costs
|
- | 9,916,909 | ||||||
Proceeds
from related party loans
|
10,000,000 | - | ||||||
Return
of capital to Yili china's stockholder
|
- | (555,096 | ) | |||||
Due
to related parties
|
- | 8,268 | ||||||
Net
cash provided by (used in) financing activities
|
10,000,000 | 9,370,081 | ||||||
Effect
of exchange rate changes on cash
|
15 | 54,348 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
9,520,382 | 9,682,003 | ||||||
Cash
and cash equivalents, beginning of year
|
1,121,162 | 46,081 | ||||||
Cash
and cash equivalents, end of year
|
$ | 10,641,544 | $ | 9,728,084 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid for interest
|
- | - | ||||||
Cash
paid for taxes
|
- | 2,670 | ||||||
Noncash
investing and financing activities:
|
||||||||
Dividends
payable
|
150,000 | - | ||||||
Issued
common stock in exchange of dividend payable
|
133,348 | - |
See
accompanying notes to consolidated financial statements
F-4
MASTER
SILICON CARBIDE INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In
US Dollars)
Common Stock,
$0.001 Par Value
|
Additional Paid-in
|
Deferred
|
Retained
|
Other
accumulated
comprehensive
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Compensation
|
Earnings
|
Income
(Loss)
|
Total
|
||||||||||||||||||||||
Balance
as of June 30, 2009
|
2,372,617 | $ | 2,373 | $ | 4,057,224 | $ | (24,900 | ) | $ | (4,429,623 | ) | $ | 5,401 | $ | (389,525 | ) | ||||||||||||
Series
A preferred stock dividend
|
(283,428 | ) | (283,428 | ) | ||||||||||||||||||||||||
Conversion
of Series A preferred stock dividend on July 1,
2009
|
149,433 | 149 | 149,850 | 149,999 | ||||||||||||||||||||||||
Conversion
of Series A preferred stock dividend on October 1,
2009
|
0 | |||||||||||||||||||||||||||
Amortization
of deferred compensation
|
24,900 | 24,900 | ||||||||||||||||||||||||||
Foreign
currency translation gain
|
3,157 | 3,157 | ||||||||||||||||||||||||||
Net
loss for the year
|
(361,769 | ) | (361,769 | ) | ||||||||||||||||||||||||
Balance
as of September 30, 2009
|
2,522,050 | $ | 2,522 | $ | 4,207,074 | $ | 0 | $ | (5,074,820 | ) | $ | 8,558 | $ | (856,666 | ) |
See
accompanying notes to consolidated financial statements
F-5
Master
Silicon Carbide Industries, Inc.
September
30, 2009
Notes to
the Consolidated Financial Statements (Unaudited)
NOTE
1 - ORGANIZATION AND OPERATIONS
Paragon
SemiTech USA Incorporated (“Paragon New Jersey”) was incorporated on April 10,
2002 under the laws of the State of New Jersey.
Master
Silicon Carbide Industries, Inc., formerly Paragon SemiTech USA, Inc. was
incorporated on May 21, 2007 under the laws of the State of
Delaware. Prior to September 27, 2007, the date of merger with
Paragon New Jersey, the Company was inactive. On September 2, 2008,
Paragon SemiTech USA, Inc., through the acquisition of C3 Capital, Limited, a
company incorporated in the Territory of the British Virgin Islands (“BVI”),
acquired all of the equity interests in Yili Master Carborundum Production Co.,
Ltd. On November 12, 2008, Paragon SemiTech USA, Inc. changed its
name to Master Silicon Carbide Industries, Inc. (“Master” or the
“Company”). The Company believes that the new name will better
identify the Company with the business conducted by its indirectly wholly-owned
subsidiary in China, Yili Master Carborundum Production Co., Ltd., namely, the
production and distribution of silicon carbide.
C3
Capital, Limited (“C3 Capital”), an international business company, was formed
on July 26, 2005 in the British Virgin Islands by the Company. C3 Capital was
inactive prior to September 2, 2008, the date of acquisition of Yili Master
Carborundum Production Co., Ltd.
Yili
Master Carborundum Production Co., Ltd. (“Yili China”) was incorporated on
August 10, 1993 in the People’s Republic of China (“PRC”).
Yili
China engages in the development, manufacturing and distribution of silicon
carbide.
Merger of Paragon New
Jersey
On
September 27, 2007, the Company entered into a Reorganization and Stock Purchase
Agreement (the “Reorganization Agreement”) with Paragon New Jersey. Pursuant to
the Reorganization Agreement, the Company issued 675,000 shares (6,750,000
shares prior to Reverse Split) of its common stock at the time representing
approximately 81.82% of the issued and outstanding shares of its common stock
for the acquisition of all of the outstanding capital stock of Paragon New
Jersey. As a result of the ownership interests of the former
shareholder of Paragon New Jersey, for financial statement reporting
purposes, the merger between the Company and Paragon New Jersey has been treated
as a reverse acquisition with Paragon New Jersey deemed the accounting acquirer
and the Company deemed the accounting acquiree under the purchase method of
accounting in accordance with “Business Combinations” (“FASB
ASC 805”). Such merger is deemed a capital transaction and the net
assets of Paragon New Jersey (the accounting acquirer) are carried forward to
the Company (the legal acquirer and the reporting entity) at their carrying
value before the combination. The acquisition process utilizes the capital
structure of the Company and the assets and liabilities of Paragon New Jersey
which are recorded at historical cost. The equity of the Company is
the historical equity of Paragon New Jersey retroactively restated to reflect
the number of shares issued by the Company in the transaction.
Merger of C3 Capital,
Limited
On
September 2, 2008, pursuant to a Stock Purchase Agreement entered into by the
parties and consummated on such date, Yili Carborundum USA, Inc. (“Yili US”), a
recently formed Delaware corporation which is wholly-owned by the Company, a
Delaware corporation (hereafter referred to as the “Company”, “we” or “us”,
as applicable), acquired from Mr. Tie Li, for a cash purchase price of $10,000,
all of the outstanding capital stock of C3 Capital, Limited, a company
incorporated in the British Virgin Islands (“C3 Capital”). C3 Capital
in turn has an agreement to purchase all of the equity interests of Yili Master
Carborundum Production Co., Ltd. (“Yili China”), a wholly-owned foreign
enterprise (“WOFE”) in the People’s Republic of China (the “PRC”) (“Yili
China”), pursuant to which the Company paid $555,096 in cash for the acquisition
of the equity interests of Yili China with the proceeds of the Private Placement
(as defined below) closed on September 2, 2008. In addition, C3
Capital entered into (i) an agreement to purchase 90% of the equity interests in
Xinjiang Ehe Mining and Metallurgy Co., Ltd., a corporation incorporated under
the laws of the PRC on August 7, 2008 (“Ehe China”) from Mr. Zhigang Gao; and
(ii) a Memorandum of Understanding with Mr. Zhigang Gao and Mr. Ping Li, for an
option to purchase the assets to be secured by Xinjiang Paragon Master Mining
Co., Ltd., a corporation to be formed under the laws of the PRC (“Quartz Mine
China”). Ehe China and Quartz Mine China are currently inactive with no
assets or operations. Ehe China intends to build a 40,000 ton green silicon
carbide project in the Aletai Area of Xinjiang Uygur Autonomous Region of the
PRC pending governmental permissions and approvals and Quartz Mine China intends
to obtain the exploration and mining rights for a quartz mine in Wenquan County
of Xinjiang Uygur Autonomous Region of the PRC.
F-6
Dissolution of Paragon New
Jersey
On March
26, 2009, pursuant to the authorization of Master Silicon Carbide Industries,
Inc., the sole shareholder, Paragon New Jersey was dissolved. Paragon New Jersey
has no assets, has ceased doing business and does not intend to recommence doing
business, and has not made any distribution of cash or property to the
shareholders within the last 24 months and does not intend to have any
distribution following its dissolution.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
presentation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). This basis differs from that used in the statutory accounts of the
Company, which were prepared in accordance with the accounting principles and
relevant financial regulations applicable to enterprises in the PRC. All
necessary adjustments have been made to present the financial statements in
accordance with US GAAP.
In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Due to the
seasonal nature of our business and other factors, interim results are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
The
consolidated financial statements include (i) the accounts of the Company and
(ii) the accounts of its consolidated subsidiaries, C3 Capital, Limited and Yili
China. All inter-company balances and transactions have been
eliminated.
Business combination
In
accordance with FASB ASC 805 “Business Combinations”, the
Company allocates the purchase price of acquired entities to the tangible and
intangible assets acquired and liabilities assumed, based on their estimated
fair values.
Management
makes estimates of fair values based upon assumptions believed to be reasonable.
These estimates are based on historical experience and information
obtained from the management of the acquired companies. Critical estimates in
valuing certain of the intangible assets include but are not limited to: future
expected cash flows from revenues, customer relationships, key management and
market positions, assumptions about the period of time the acquired trade names
will continue to be used in the Company’s combined product portfolio, and
discount rates used to establish fair value. These estimates are
inherently uncertain and unpredictable. Assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur which may
affect the accuracy or validity of such assumptions, estimates or actual
results.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reporting amounts of revenues and expenses
during the reported period. Significant estimates include the
estimated useful lives of property and equipment. Actual results could differ
from those estimates.
Cash
equivalents
The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents. Financial instruments
that potentially subject the Company to concentrations of credit risk consist
principally of cash deposits.
F-7
Accounts
receivable
Trade
accounts receivable are recorded at the invoiced amount, net of an allowance for
doubtful accounts. The allowance for doubtful accounts is the Company’s
best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on
historical write-off experience, customer specific facts and economic
conditions. Bad debt expense if any is included in general and
administrative expenses.
Outstanding
account balances are reviewed individually for collectability. Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance-sheet credit exposure to
its customers.
Inventories
The
Company values inventories, consisting of finished goods, work in process and
raw materials, at the lower of cost or market. Cost is determined on
the weighted average cost method. Cost of work in process and
finished goods comprises direct labor, direct materials, direct production cost
and an allocated portion of production overhead. The Company follows
FASB ASC 330-10-30 “Inventory-Overall-Initial
Measurement” for the allocation of production costs and charges to
inventories. The Company allocates fixed production overheads to
inventories based on the normal capacity of the production facilities expected
to be achieved over a number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned
maintenance. Judgment is required to determine when a production
level is abnormally low (that is, outside the range of expected variation in
production). Factors that might be anticipated to cause an abnormally
low production level include significantly reduced demand, labor and materials
shortages, and unplanned facility or equipment down time. The actual
level of production may be used if it approximates normal
capacity. In periods of abnormally high production, the amount of
fixed overhead allocated to each unit of production is decreased so that
inventories are not measured above cost. The amount of fixed overhead
allocated to each unit of production is not increased as a consequence of
abnormally low production or idle plant and unallocated overheads of
underutilized or idle capacity of the production facilities are recognized as
period costs in the period in which they are incurred rather than as a portion
of the inventory cost.
The
Company regularly reviews raw materials and finished goods inventories on
hand and, when necessary, records a provision for excess or obsolete inventories
based primarily on current selling price and sales prices of confirmed backlog
orders. As of September 30, 2009, the Company determined no reserves for
obsolescence were necessary.
Property, plant and
equipment
Property,
plant and equipment are recorded at cost. Expenditures for major additions and
betterments are capitalized. Maintenance and repairs are charged to
operations as incurred. Depreciation of property, plant and equipment is
computed by the straight-line method (after taking into account their respective
estimated residual values) over the assets estimated useful lives ranging from
five (5) years to twenty (20) years:
Furniture
and office equipment
|
5
years
|
|
Motor
vehicles
|
5-10
years
|
|
Machinery
and equipment
|
10
years
|
|
Building
|
|
20
years
|
Upon sale
or retirement of property, plant and equipment, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
operations. Leasehold improvements, if any, are amortized on a
straight-line basis over the lease period or the estimated useful life,
whichever is shorter. Upon becoming fully amortized, the related cost and
accumulated amortization are removed from the accounts.
Land use
right
Land use
right represents the cost to obtain the right to use certain land in the
PRC. Land use right is carried at cost and amortized on a
straight-line basis over the life of the right of approximately fifty (50)
years. Upon becoming fully amortized, the related cost and
accumulated amortization are removed from the accounts. Land use right is
included in intangible assets on the Balance Sheet.
F-8
Impairment of long-lived
assets
The
Company follows FASB ASC 360-10-35-15 “Impairment or Disposal of
Long-Lived Assets” for its long-lived assets. The Company’s
long-lived assets, which include property, plant and equipment, land use right,
software and production license are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
The Company assesses the recoverability
of its long-lived assets by comparing the projected undiscounted net cash flows
associated with the related long-lived asset or group of long-lived assets over
their remaining estimated useful lives against their respective carrying
amounts. Impairment, if any, is based on the excess of the carrying
amount over the fair value of those assets. Fair value is generally
determined using the asset’s expected future discounted cash flows or market
value, if readily determinable. If long-lived assets are determined
to be recoverable, but the newly determined remaining estimated useful lives are
shorter than originally estimated, the net book values of the long-lived assets
are depreciated over the newly determined remaining estimated useful
lives. The Company determined that there were no impairments of
long-lived assets as of September 30, 2009.
Fair value of financial
instruments
The
Company follows FASB ASC 825-10-50-10 “Financial
Instruments-Overall-Disclosure” for its financial
instruments. The fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction between
willing parties. The carrying amounts of financial assets and liabilities,
such as cash and cash equivalents, accounts receivable, prepayments and other
current assets, accounts payable, customer deposits, taxes payable, accrued
expenses and other current liabilities, approximate their fair values because of
the short maturity of these instruments.
Revenue
recognition
The Company follows the guidance of the
United States Securities and Exchange Commission’s Staff Accounting Bulletin
(“SAB”) No. 101 “Revenue
Recognition” (“SAB No. 101”), as amended by SAB No. 104 (“SAB No. 104”)
for revenue recognition. The Company recognizes revenue when it is
realized or realizable and earned less estimated future doubtful
accounts. The Company considers revenue realized or realizable and
earned when all of the following criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) the product has been shipped or the services have been
rendered to the customer, (iii) the sales price is fixed or determinable, and
(iv) collectability is reasonably assured. The Company derives the
majority of its revenue from sales contracts with customers with revenues being
generated upon the shipment of goods. Persuasive evidence of an arrangement is
demonstrated via invoice, product delivery is evidenced by a warehouse shipping
log as well as a signed bill of lading from the trucking or rail company and
title transfers upon shipment, based on free on board (“FOB”) destination; the
sales price to the customer is fixed upon acceptance of the purchase order and
there is no separate sales rebate, discount, or volume
incentive. When the Company recognizes revenue, no provisions are
made for returns because, historically, there have been very few sales returns
and adjustments that have impacted the ultimate collection of
revenues.
Shipping and handling
costs
The Company accounts for shipping and
handling fees in accordance with the FASB ASC 705 “Cost of Sales and
Services”. Shipping and handling
costs related to costs of raw materials purchased is in included in cost of
revenue. While amounts charged to customers for shipping product are included in
revenues, the related outbound freight costs are included in expenses as
incurred.
Research and
development
Research and development costs are
charged to expense as incurred. Research and development costs
consist primarily of remuneration for research and development staff,
depreciation and maintenance expenses of research and development equipment and
material and testing costs for research and development.
Advertising
costs
Advertising costs are expensed as
incurred.
Stock-based
compensation
The
Company adopted the fair value recognition provisions of FASB ASC 718“Compensation-Stock
Compensation”.
We made
the following estimates and assumptions in determining fair
value:
F-9
|
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.
|
Stock
compensation expense is $24,900 for the three months ended September 30,
2009.
Income
taxes
The
Company accounts for income taxes under FASB ASC 740 “Income
Taxes”. Deferred income tax assets and liabilities are
determined based upon differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance to the extent management
concludes it is more likely than not that the assets will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statements
of operations in the period that includes the enactment date.
The Company adopted the provisions of
FASB ASC 740. The standard addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FASB ASC 740, we may recognize the tax benefit from
an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FASB ASC 740 also provides guidance on
derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. The Company
had no material adjustments to its liabilities for unrecognized income tax
benefits according to the provisions of FASB ASC 740.
Segment
reporting
FASB ASC
280, “Segment
Reporting” requires use of the management approach model for segment
reporting. The management approach model is based on the way a company's
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company.
In
accordance with FASB ASC 280, the Company has reviewed its business activities
and determined that multiple segments do not exist that need to be
reported.
Foreign currency
translation
Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with FASB ASC 830 “Foreign Currency Matters”
and are included in determining net income or loss.
The
financial records of the subsidiaries are maintained in their local currency,
the Renminbi (“RMB”), which is the functional currency of those
subsidiaries. The Company’s functional currency is U.S. dollars.
Assets and liabilities are translated from the local currency into the reporting
currency, U.S. dollars, at the exchange rate prevailing at the balance sheet
date. Revenues and expenses are translated at weighted average
exchange rates for the period to approximate translation at the exchange rates
prevailing at the dates those elements are recognized in the financial
statements. Foreign currency translation gain (loss)
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining accumulated other
comprehensive income in the statement of stockholders’ equity.
F-10
RMB is
not a freely convertible currency. All foreign exchange transactions
involving RMB must take place either through the People’s Bank of China (the
“PBOC”) or other institutions authorized to buy and sell foreign
exchange. The exchange rate adopted for the foreign exchange
transactions are the rates of exchange quoted by the PBOC. Commencing
July 21, 2005, China adopted a managed floating exchange rate regime based
on market demand and supply with reference to a basket of
currencies. The exchange rate of the US dollar against the RMB was
adjusted from approximately RMB 8.28 per US dollar to approximately RMB
8.11 per US dollar on July 21, 2005. Since then, the PBOC
administers and regulates the exchange rate of the US dollar against the RMB
taking into account demand and supply of RMB, as well as domestic and foreign
economic and financial conditions.
Unless
otherwise noted, the rate presented below per U.S. $1.00 was the noon buying
rate for RMB in New York City as reported by the Federal Reserve Bank of New
York on the date of its balance sheets contained in these consolidated financial
statements. Management believes that the difference between RMB vs. US$ exchange
rate quoted by the PBOC and RMB vs. US$ exchange rate reported by the Federal
Reserve Bank of New York were immaterial. Translations do not imply that the RMB
amounts actually represent, or have been or could be converted into, equivalent
amounts in U.S. dollars. Translation of amounts from RMB into United States
dollars (“US$”) has been made at the following exchange rates for the respective
periods:
September 30, 2009
|
||
Balance
sheet
|
RMB
6.8290 to US$1.00
|
|
Statement
of income and comprehensive income
|
RMB
6.8311 to US$1.00
|
June 30, 2009
|
||
Balance
sheet
|
RMB
6.8319 to US$1.00
|
|
Statement
of income and comprehensive income
|
RMB
6.8331 to US$1.00
|
Comprehensive
income
(loss)
The
Company has adopted FASB ASC 220 “Comprehensive
Income”. This statement establishes rules for the reporting of
comprehensive income (loss) and its components. Comprehensive income
(loss), for the Company, consists of net income (loss) and foreign currency
translation adjustments and is presented in the Statements of
Operations and Comprehensive Income (Loss) and Stockholders’
Equity.
Net loss per common
share
Net loss
per common share is computed pursuant to FASB ASC 260 “Earnings per
Share”. Basic net loss per common share is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during each period. Diluted net loss per common share is
computed by dividing net loss by the weighted average number of shares of common
stock and potentially outstanding shares of common stock during each period to
reflect the potential dilution that could occur from common shares issuable
through common stock equivalents.
For
the three months
|
For
the three months
|
|||||||
ended
September 30,
|
ended
September 30,
|
|||||||
2009
|
2008
|
|||||||
Numerator
for basic and diluted net loss per share - Dificit from continuing
operations
|
$ | -645,197 | $ | -77,940 | ||||
Denominator
for basic and diluted net loss per share - Weighted average shares of
common stock outstanding
|
2,520,426 | 1,282,078 | ||||||
Basic
and diluted net loss per share
|
$ | -0.26 | $ | -0.06 |
The
following table shows the weighted-average number of potentially dilutive shares
excluded from the diluted net loss per share calculation for the three months
ended September 30, 2009 and 2008:
F-11
For
the three months ended
|
For
the three months
|
|||||||
September
30, 2009
|
ended
September 30,
|
|||||||
2008
|
||||||||
Series
A preferred stock
|
9,961,860 | 3,031,394 | ||||||
Warrants
|
- | 99,004 | ||||||
Total
|
9,961,860 | 3,130,398 |
Related party
transaction
We lease
our office space at both 558 Lime Rock Road, Lakeville, Connecticut and 420
Lexington Avenue, Suite 860, New York, NY from Kuhns Brothers, Inc. and its
affiliates (“Kuhns Brothers”). Our Chairman and CEO, Mr. Kuhns, is a controlling
shareholder, President, CEO and Chairman of Kuhns Brothers. The lease commenced
on September 1, 2008 for a term of one year with a monthly rent of $7,500, and
such lease is extended for a year with the same rate of rent after September 1,
2009.
Related party
payable
As of
September 30, 2009, the Company owed Changchun Master Company $871,235 whose
stockholder is Zhigang Gao, who is the director of the Company. The loan payable
is non-interest bearing, unsecured, and is payable on demand.
Common
Stock
As of
September 30, 2009, the Company had 2,522,050 shares of Common Stock issued and
outstanding.
On
September 2, 2008, the Company issued to Mr. Zhigang Gao an aggregate of 925,000
shares of Common Stock post-split as an inducement for Mr. Gao’s entry into an
employment agreement with either the Company or Yili China, as the case may be,
to serve as an executive officer of Yili China. The fair value of these common
shares equal to $925,000 and these shares were treated as the stock compensation
cost after acquisition of Yili China.
On
November 12, 2008, the Company effectuated a 1 for 10 reverse split on its
outstanding Common Stock, par value $0.001 (the “Reverse Split”). Immediately
after the Reverse Split, there were approximately a total of 1,925,600 shares of
Common Stock outstanding. Such Reverse Split, however, does not reduce the
number of shares of Common Stock that the Company was authorized to
issue.
On
February 10, 2009, the Company issued an aggregate of 40,000 shares of Common
Stock to a designee of Columbia China Capital Group, Inc. as a result of the
exercise of warrants for 40,000 shares of Common Stock at an exercise price of
$.01.
On May
12, 2009, the Company issued an aggregate of 60,000 shares of Common Stock to a
designee of Columbia China Capital Group, Inc as a result of the exercise of
warrants for 60,000 shares of Common Stock at an exercise price of
$.01.
An
aggregate of 496,450 shares of Common Stock were issued to the holders of Series
A Preferred Stock as the dividends from October 1, 2008 through September 30,
2009.
Redeemable Preferred
Stock
As of
September 30, 2009, the Company had 996,186 shares of Redeemable Series A
Preferred Stock issued and outstanding. On September 2, 2008, the Company
completed the sale to China Hand Fund I, LLC and/or its designees or assignees
of 996,186 units for total proceeds of $10,000,000, each unit consisting of one
share of the Company’s Series A Convertible Preferred Stock and one warrant to
purchase twenty-five shares of the Company’s common stock. The preferred stock
pays annual dividends of 6% regardless of the Company’s profitability. Each
preferred share is convertible into ten shares of common stock. On
December 30, 2010, the Company is required to redeem for cash the outstanding
preferred stock, if not previously converted by the holders, for $10.038 per
share plus accrued but unpaid dividends. Because the Company is
required to redeem the preferred stock on December 30, 2010, if it has not been
previously converted by the holders, the preferred stock is classified outside
of stockholders’ equity.
In
accordance with FASB ASC 470-20-25, “Debt-Debt with Conversion
Options-Recognition,” the Company allocated the proceeds received between
the preferred stock and the warrants. The resulting discount from the face
amount of the preferred stock is being amortized using the effective interest
method over the period to the required redemption date. After allocating a
portion of the proceeds to the warrants, the effective conversion price of the
preferred stock was lower than the market price at the date of issuance and
therefore a beneficial conversion feature was recorded. The dividends on the
preferred stock, together with the periodic accretion of the preferred stock to
its redemption value, are charged to retained earnings.
F-12
Dividend
During
the first quarter of 2010, the Company accrued $150,000 dividend pursuant to the
Certificate of Designation, Preferences and Rights of Series A Convertible
Preferred Stock, dated August 29, 2008. During this first quarter of fiscal year
2010, the Company issued 149,433 shares of common stock , or $150,000 at a fair
market value of Common Stock, as payment of the dividend of Series A Preferred
Stock. As of September 30, 2009, dividend payable remains $150,000
unpaid.
Recently issued accounting
pronouncements
In June
2009 the FASB established the Accounting Standards Codification (“Codification”
or “ASC”) as the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in accordance with generally accepted accounting principles in the
United States (“GAAP”). Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) issued under authority of federal securities laws
are also sources of GAAP for SEC registrants. Existing GAAP was not intended to
be changed as a result of the Codification, and accordingly the change did not
impact our financial statements. The ASC does change the way the guidance is
organized and presented.
Statement
of Financial Accounting Standards (“SFAS”) SFAS No. 165 (ASC Topic 855),
“Subsequent Events”, SFAS No. 166 (ASC Topic 810), “Accounting for Transfers of
Financial Assets – an Amendment of FASB Statement No. 140”, SFAS No. 167 (ASC
Topic 810), “Amendments to FASB Interpretation No. 46(R)”, and SFAS No. 168 (ASC
Topic 105), “The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles – a replacement of FASB Statement No.
162” were recently issued. SFAS No. 165, 166, 167, and 168 have no current
applicability to the Company or their effect on the financial statements would
not have been significant.
Accounting
Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair
Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605),
Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985),
Certain Revenue Arrangements that include Software Elements, and Various other
ASU’s No. 2009-2 through ASU No. 2009-15 which contain technical corrections to
existing guidance or affect guidance to specialized industries or entities were
recently issued. These updates have no current applicability to the Company or
their effect on the financial statements would not have been
significant.
Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.
Going
Concern
As
shown in the accompanying consolidated financial statements, the Company had
minimum working capital and an accumulated deficit incurred through September
30, 2009, which raise substantial doubt about the Company’s ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
The
timing and amount of capital requirements will depend on a number of factors,
including demand for products and services and the availability of opportunities
for expansion through affiliations and other business relationships. Management
intends to seek new capital from new equity securities issuances to provide
funds needed to increase liquidity, fund internal growth, and fully implement
its business plan.
NOTE
3 - ACQUISITION
On
September 2, 2008, pursuant to a Stock Purchase Agreement entered into by the
parties and consummated on such date, Yili US acquired from Mr. Tie Li, for a
cash purchase price of $10,000, all of the outstanding capital stock of C3
Capital, Limited (“C3 Capital”). C3 Capital in turn has an agreement
to purchase all of the equity interests of Yili Master Carborundum Production
Co., Ltd., a wholly-owned foreign enterprise (“WOFE”) in the People’s Republic
of China (the “PRC”) (“Yili China”), pursuant to which the Company
paid $555,096 in cash for the acquisition of the equity interests of Yili
China. The acquisition of Yili China was accounted for using the
purchase method of accounting in accordance with SFAS No. 141 “Business Combinations” by allocating the
purchase price over the assets acquired, including intangible assets, and
liabilities assumed, based on their estimated fair values at the date of
acquisition. The purchase price has been allocated to the assets and
liabilities as follows:
F-13
Cash
|
$ | 23,226 | ||
Accounts
receivable
|
1,208 | |||
Inventory
|
298,640 | |||
assets
|
195,017 | |||
Preperty,
plant and equipment
|
787,554 | |||
Software
|
846 | |||
Production
license
|
688,214 | |||
Accounts
payable
|
(843,040 | ) | ||
Customer
deposits
|
(170,859 | ) | ||
Taxes
payable
|
(63,843 | ) | ||
Accrued
expenses and other
|
(92,871 | ) | ||
Advances
from stockholders
|
(268,996 | ) | ||
Total
purchase price
|
$ | 555,096 |
A
production license was issued by the Chinese government to permit Yili China to
produce silicon carbide in China. The production license was assessed at
$688,214 and will be amortized over the operating period of Yili China from
September 2008 to April 2035. For each month, the amount of amortization is
$2,151.
NOTE
4 – INVENTORIES
Inventories
at September 30, 2009 and June 30, 2009 consisted of the following:
30-Sep-09
|
30-Jun-09
|
|||||||
Raw
materials
|
$ | 70,603 | $ | 58,583 | ||||
Finished
goods
|
430,646 | 537,031 | ||||||
Work
in progress
|
43,930 | 124,416 | ||||||
Total
|
$ | 545,179 | $ |
720,030
|
NOTE
5 – INTANGIBLE ASSETS
On October 28, 2008, the Company
entered into an agreement with the Chinese government, whereby the Company paid
RMB 5,403,579 (equal to $790,934) to acquire the land use right and obtained a
certificate of the land use right until October 27, 2058. The
purchase price is being amortized over the term of the right of approximately
fifty (50) years beginning on November 1, 2008 and amortization expense used in
production is reported in cost of revenues.
Intangible
assets at September 30, 2009 and June 30, 2009 consisted of the
following:
30-Sep-09
|
30-Jun-09
|
|||||||
|
||||||||
Land
use right
|
$ | 790,934 | $ | 790,934 | ||||
Production
license
|
688,214 | 688,214 | ||||||
Software
|
3,041 | 3,041 | ||||||
Less:
accumulated amortization
|
(43,712 | ) | (33,494 | ) | ||||
Total
|
$ | 1,438,477 | $ | 1,448,695 |
F-14
NOTE
6 – PROPERTY AND EQUIPMENT
Property
and equipment at September 30, 2009 and June 30, 2009 consisted of the
following:
30-Sep-09
|
30-Jun-09
|
|||||||
Buildings
|
$ | 243,559 | $ | 243,455 | ||||
Machinery
and equipment
|
614,493 | 604,154 | ||||||
Motor
vehicles
|
202,296 | 202,210 | ||||||
Office
equipment
|
35,543 | 27,532 | ||||||
Less:
accumulated depreciation
|
(109,464 | ) | (78,184 | ) | ||||
Property
and equipment, net
|
$ | 986,427 | $ | 999,167 |
Depreciation
related to property and equipment used in production is reported in cost of
revenues.
NOTE
7 – PRIVATE PLACEMENT
On
September 21, 2009, for the consideration of $10,000,000, the Company sold to
The China Hand Fund I, LLC and/or its successor and assigns, an accredited
investor (the “Investor”) a convertible promissory note, which was automatically
converted into 920,267 shares of Series B Convertible Preferred Stock, par value
$0.001 per share (the “Series B Preferred Stock”) after the effectiveness of the
Reincorporation on November 12, 2009(the “2009 Private
Placement”). The Certificate of Designation, Preferences and Rights of
Series B Convertible Preferred Stock was filed with the State of Nevada on
November 12, 2009, a form of which is incorporated by reference to our Current
Report on Form 8-K filed with the Securities and Exchange Commission on October
27, 2009. The proceeds of this 2009 Private Placement will be used to finish
three new 8,500-ton furnaces of carborundum metallurgy and to buy quartz mine
rights in Ehe.
NOTE 8 -
FOREIGN OPERATIONS
Substantially
all of the Company’s operations are carried out and all of its assets are
located in the PRC. Accordingly, the Company’s business, financial condition and
results of operations may be influenced by the political, economic and legal
environments in the PRC. The Company’s business may be influenced by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency fluctuation and remittances and methods of
taxation, among other things.
NOTE
9 – SUBSEQUENT EVENT
On
November 2, 2009, the Company, formerly a Delaware corporation, completed its
reincorporation to Nevada by a merger of the Registrant with and into its
wholly-owned subsidiary, Master Silicon Carbide Industries, Inc., a newly formed
Nevada corporation (the “Reincorporation”). The Reincorporation effected a
change in the Company’s legal domicile from Delaware to Nevada. The Company’s
business, assets, liabilities, and headquarters are unchanged as a result of the
Reincorporation and all the directors and officers of the Company prior to the
Reincorporation continue- to serve the Company after the
Reincorporation.
After the
Reincorporation of the Company and on November 12, 2009, the Note of $10,000,000
was automatically converted into 920,267 shares of Series B Preferred Stock of
the Company. According to Certificate of Designation of Series B Preferred
Stock, Series B Preferred Stock is redeemable preferred stock.
The
Company has evaluated subsequent events from the balance sheet date through
November 12, 2009.
F-15
Item
2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
The
following discussion of our financial condition and results of operations should
be read in conjunction with our unaudited consolidated financial statements and
the notes to those financial statements appearing elsewhere in this Form
10-Q.
Certain
statements in this Report, and the documents incorporated by reference herein,
constitute forward-looking statements. Such forward-looking statements include
statements, which involve risks and uncertainties, regarding, among other
things, (a) our projected sales, profitability, and cash flows, (b) our growth
strategy, (c) anticipated trends in our industry, (d) our future financing
plans, and (e) our anticipated needs for, and use of, working capital. They are
generally identifiable by use of the words “may,” “will,” “should,”
“anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,”
“ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the
negative of these words or other variations on these words or comparable
terminology. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this filing will in
fact occur. You should not place undue reliance on these forward-looking
statements.
The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statements to reflect events or
circumstances after the date on which the statements are made or to reflect the
occurrence of unanticipated events.
The
"Company", "we," "us," and "our," refer to (i) Master Silicon Carbide
Industries, Inc. (formerly Paragon SemiTech USA, Inc.); (ii) Yili Carborundum
USA, Inc. (“Yili
US”); (iii) C3 Capital, Limited (“C3 Capital”); and
(iv) Yili Master Carborundum Production Co., Ltd. (“Yili
China”).
Overview
Master
Silicon Carbide Industries, Inc., a Nevada corporation, through its indirectly
wholly owned operating subsidiary Yili China, produces and sells in China high
quality “green” silicon carbide and lower-quality “black” silicon carbide
(together, hereinafter referred to as “SiC”). Effective November 12, 2008, we
changed our name from “Paragon SemiTech USA, Inc.” to “Master Silicon Carbide
Industries, Inc.” to better reflect our business of production and sale of SiC.
SiC is a non-metallic compound that has special chemical properties
and a level of hardness that is similar to diamonds, is produced by smelting
(the process of extracting a metal from its ore) quartz sand and refinery coke
at temperatures ranging from approximately 1,600 to 2,500 degrees centigrade in
a graphite electric resistance furnace.
SiC is
primarily used in the superficial treatment industry as an abrasive.
Additionally, because it is an extremely hard, chemically inert, and
heat-resistant substance, SiC has also been widely applied in many growing
industries including mechanical, electronics, material and metallurgical
industries. For example, pure SiC is a natural semiconductor and thus efforts
are underway to explore the possibility of replacing silicon with SiC in the
semiconductor industry. In recent years, SiC has been widely utilized
in the solar energy (photovoltaic) industry, where it is used in precision
cutting, pressure blasting, wire-sawing, and surface preparation, in addition to
other processes.
3
The
Company is currently developing three new 8,500-ton furnaces with an aggregate
production capacity of 25,500 tons per year in Yili Hasake Autonomous State of
Xinjiang Autonomous Region (the “Yili Project”). The
construction of one of these three furnaces is expected to be completed by the
end of November 2009 and we expect another furnace will be built by
the end of December 2009. We anticipate the trial production of our two new
production lines will commence by the end of December 2009. We expect the third
furnace (third production line) will be completed by June 2010.
The
Company’s present SiC production capacity is 3,000 tons per annum. It is
anticipated that our production capacity can reach 20,000 tons per year by the
end of 2009, with the addition of the two new 8,500-ton furnaces.
The
Company is planning a 34,000 ton green SiC project with four furnaces in Ehe of
the Aletai Area of Xinjiang Uygur Autonomous Region of the PRC pending
governmental permissions and approvals (the “Ehe Project”). The
Company selected the site for the project because of its proximity to sources of
electricity, petroleum coke and quartz. The Company plans to construct the
project in two stages. In the first stage, it proposes to construct a smelting
base with an annual capacity of 34,000 tons of Green SiC. In the second stage,
the Company will construct a powder production line and a granulation workshop.
We also plan to acquire a quartz mine in Wenquan County of Xinjiang Uygur
Autonomous Region of the PRC. We will need further financing to commence the Ehe
New Project and the Company plans to finish the construction of the
Ehe Project by year 2012.
On
November 12, 2008, the Company effectuated a 1 for 10 reverse split on its
outstanding Common Stock, par value $0.001 (the “Reverse Split”). The
Reverse Split, however, does not reduce the number of shares of Common Stock
that the Company was authorized to issue.
On
March 24, 2009, the Company approved and caused there to be filed with the State
of New Jersey a Certificate of Dissolution, dissolving Paragon SemiTech USA
Incorporated (“Paragon NJ”),
formerly a wholly owned subsidiary of the Company. Such dissolution of Paragon
NJ was effective on March 26, 2009.
Recent
Developments
On
November 2, 2009, the Company completed the reincorporation from Delaware to
Nevada by a merger with its then wholly-owned subsidiary in Nevada: Master
Silicon Carbide Industries, Inc. (the “Reincorporation”).
On
September 21, 2009, for the consideration of $10,000,000, the Company sold to
The China Hand Fund I, LLC and/or its successors and assigns, an accredited
investor (the “Investor”) a
convertible promissory note, which was automatically converted into 920,267
shares of Series B Convertible Preferred Stock, par value $0.001 per share (the
“Series B Preferred Stock”)
after the effectiveness of the Reincorporation on November 12, 2009 (the “2009 Private
Placement”). The Certificate of Designation, Preferences and Rights of
Series B Convertible Preferred Stock was filed with the State of Nevada on
November 12, 2009, a form of which is incorporated by reference to our Current
Report on Form 8-K filed with the Securities and Exchange Commission on October
27, 2009.
The
proceeds of this 2009 Private Placement will be used to complete the three
furnaces of the Yili Project and to acquire 90% equity interest of Xinjiang
Paragon Master Mining Co., Ltd (“Quartz Mine China”)
from Mr. Zhigang Gao, one of our directors. We are entitled to an option to
purchase Quartze Mine China, pursuant to a Memorandum of Understanding, among C3
Capital, Mr. Zhigang Gao and Mr. Ping Li, dated August 25, 2008. Through Quartz
Mine China, we will purchase the mining rights for a quartz mine in Wenquan
County of Xinjiang Uygur Autonomous Region of the PRC.
In
order to prevent disruption to the construction of our new production lines at
Yili, we have applied for loans of approximately RMB 30,000,000 (or $4,387,960)
from local banks in China. The Company received a loan of RMB 10,000,000 (or
$1,464,500) from Bank of China on October 23, 2009. This loan by Bank of China
is for a term of three years with a yearly interest rate of 5.4%, and Bank of
China has security interest on certain property and equipment of the
Company.
4
On
July 1 and October 1, 2009, pursuant to the Certificate of Designation,
Preferences and Rights of Series A Convertible Preferred Stock, dated August 29,
2008, the Company issued an aggregate of 298,866 shares of Common Stock as
dividends (the “Dividend Shares”), to
the holders of Series A Convertible Preferred Stock (the “Series A Preferred
Stock”) that were issued in a private placement consummated on September
2, 2008 (the “2008
Private Placement”). These 298,866 dividend shares were for the quarters
ended September 30 and June 30, 2009, payable on July 1 and October 1, 2009,
respectively. As of the date of this Report, the Company has issued to the
holders of Series A Preferred an aggregate of 645,884 shares of Common Stock as
Dividend Shares.
Results of Operations for
the Three Months ended September 30, 2009 and 2008
The
following tables and analysis show the operating results of the Company for the
three months ended September 30, 2009 and September 30, 2008. The
financial results for the three months ended September 30, 2008 include
approximately one months of the operating results of Yili China, since the
acquisition of Yili China by the Company was closed on September 4,
2008.
Three months
|
Three months
|
|||||||||||
Ended September
|
Ended September
|
Percentage
|
||||||||||
30,
2009
|
30, 2008
|
Change
|
||||||||||
Revenues
|
$ | 377,897 | $ | 225,985 | 67 | % | ||||||
Cost
of revenues
|
428,646 | 174,417 | 146 | % | ||||||||
Gross
profit (loss)
|
(50,749 | ) | 51,568 | -198 | % | |||||||
General
and administrative expenses
|
372,159 | 94,119 | 295 | % | ||||||||
Total
operating expenses
|
372,159 | 94,119 | 295 | % | ||||||||
Loss
from operations
|
(422,908 | ) | (42,551 | ) | 894 | % | ||||||
Interest
(income)
|
(7,689 | ) | (13,102 | ) | -41 | % | ||||||
Other
expenses(income)
|
(57,836 | ) | 158 | N/A | ||||||||
Total
other (income) expense
|
(65,525 | ) | (12,944 | ) | 406 | % | ||||||
Loss
before income taxes
|
(357,383 | ) | (29,607 | ) | 1107 | % | ||||||
Income
tax provision
|
4,386 | - | N/A | |||||||||
Net
loss
|
$ | (361,769 | ) | $ | (29,607 | ) | 1122 | % |
Net
Revenues
We
generated sales revenues of $377,897 for the three months ended September 30,
2009. The total revenues include the following:
5
Three months ended
|
Three months ended
|
|||||||||||
Item
|
September 30, 2009
|
September 30, 2008
|
Percentage change
|
|||||||||
Green
silicon:
|
||||||||||||
Selling
volume (ton)
|
239 | 138 | 73 | % | ||||||||
Price
in US dollars
|
901.00 | 1,498.50 | -40 | % | ||||||||
Subtotal
|
215,339 | 206,793 | 4 | % | ||||||||
Black
silicon:
|
||||||||||||
Selling
volume (ton)
|
228 | 20 | 1040 | % | ||||||||
Price
in US dollars
|
712.97 | 959.64 | -26 | % | ||||||||
Subtotal
|
162,558 | 19,192 | 747 | % | ||||||||
Total
|
377,897 | 225,985 | 67 | % |
Compared
to the first fiscal quarter last year, the market prices of Green SiC and Black
SiC have decreased dramatically due to the impact of the global financial crisis
on the silicon carbide industry. The market price of Green SiC and Black SiC
decreased by 40% and 26% respectively, compared to the comparable period last
year. However, the market prices of Green SiC are $880, $943 and
$968 per ton in August, September and October of this year,
respectively. Based on this data, the management believes that the
pricing for SiC will start to increase towards the end of 2009.
During
the first fiscal quarter of 2010, the Company produced less Green SiC and more
Black SiC than the comparable period of last year. This is mainly due to two
reasons: firstly, since lower quality silicon was more readily available, the
Company steered its focus more to the production of Black SiC; and secondly, the
Company conducted the technical upgrade for some existing furnaces in this
quarter, such as applying new process formula or operation processes, and it
therefore reduced the operation efficiency and production quality of the
furnaces, which resulted in the production of more Black
SiC. Management believes this technical upgrade will be completed by
the end of November 2009 and the existing furnaces will be producing by the end
of December 2009.
Cost
of Goods Sold
Cost of
goods sold is primarily comprised of the costs of our raw materials and
packaging materials, direct labor, manufacturing overhead expenses,
depreciation, amortization, inventory count loss and freight charges. The raw
materials include quartz, petrol coke and electricity power. These materials
generally account for 8%, 60% and 32% out of total raw material costs. Our cost
of goods sold for the three months ended September 30, 2009 was
$428,646.
Gross
Loss
During
the three months ended September 30, 2009, we had a gross loss of
$50,749. In the same period last year, our gross profit margin was
approximately 23%. The decrease of our profit is due to the following two
reasons: Firstly, the market prices for both Green SiC and Black SiC have
decreased dramatically this year. Secondly, the market price of the Black SiC is
only 79% of that of the Green SiC, yet the production costs of Black SiC and
Green SiC are approximately similar. Although the Company produced more Black
SiC this quarter ended September 30, 2009, we did not generate enough sales
revenues to cover the manufacturing costs. Management believes that after our
two new furnaces start producing by the end of December 2009, our gross profit
margin may reach approximately 20%.
6
General
and Administrative Expenses
Our
operating and administrative expenses consist primarily of rental expenses,
related salaries, business development, depreciation and traveling expenses,
legal and professional expenses. Operating and administrative expenses were
$372,159 for the three months ended September 30, 2009, as compared to $94,119
for the three months ended September 30, 2008, an increase of $278,040. Since
the acquisition of Yili China by the Company that was closed on September 4,
2008, only one month operating expenses of Yili China was included for the three
months ended September 30, 2008. The increase of $278,040 was mainly incurred by
the Company after the acquisition of Yili China, including certain expenses of
outbound freight fee, salaries, office expenses and professional
fees.
Three
Months
|
Three
Months
|
|||||||||||
Ended September
|
Ended September
|
Percentage
|
||||||||||
30,
2009
|
30,
2008
|
Change
|
||||||||||
G&A
|
||||||||||||
Stock-based
compensation
|
$ | 24,900 | $ | 24,900 | 0 | % | ||||||
Shipping
and outbound freight fee
|
30,265 | 2,361 | 1182 | % | ||||||||
Professional
fees
|
94,947 | 7,000 | 1256 | % | ||||||||
Travel
expenses
|
14,833 | 5,873 | 153 | % | ||||||||
Products
tax and related taxes
|
3,743 | 1,018 | 268 | % | ||||||||
Welfare
and benefits
|
104,704 | 33,513 | 212 | % | ||||||||
Social
insurance
|
10,178 | - | ||||||||||
Depreciation
expenses
|
7,175 | 1,290 | 456 | % | ||||||||
Amortization
expenses
|
11,968 | 8 | 149500 | % | ||||||||
Entertainment
|
5,918 | 3,052 | 94 | % | ||||||||
Motor
car expenses
|
7,737 | 1,006 | 669 | % | ||||||||
Office
expenses
|
27,809 | 9,285 | 200 | % | ||||||||
Others
|
27,982 | 4,813 | 481 | % | ||||||||
Total | $ | 372,159 | $ | 94,119 | 295 | % |
Operating
Loss
Our
operating loss is $422,908 for the three months ended September 30, 2009, as
compared to a loss of $42,551 for the comparable period of 2008, an increase of
$380,357. Our operating loss is mainly attributable to the relatively low amount
of net sales for the three months ended September 30, 2009.
Net
Loss
Net loss
for the three months ended September 30, 2009 was $361,769, compared to a loss
of $29,607 for the three months ended September 30, 2008. Such increase of net
loss by $332,162 was a result of the increased total expenses for the three
months ended September 30, 2009 exceeding the revenues generated by the
Company.
Income
Taxes
For the
three months ended September 30, 2009, our business operations were solely
conducted by our subsidiaries incorporated in the PRC and we were governed by
the PRC Enterprise Income Tax Laws. PRC enterprise income tax is
calculated based on taxable income determined under PRC GAAP. In accordance with
the Income Tax Laws, a PRC domestic company is subject to enterprise income tax
at the rate of 25% and value added tax at the rate of 17% for most of the goods
sold.
7
Incorporated
in Xinjiang province 2005, Yili China is subject to enterprise income tax at the
rate of 25%. Income tax provision for the three months ended September 30, 2009
was $4,386 due to the policy of local tax bureau.
Liquidity and Capital
Resources
As of
September 30, 2009, we had cash and cash equivalents of $10,641,545. The
substantial increase of working capital is mostly attributable to the proceeds
of the 2009 Private Placement.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Three Months
|
Three Months
|
|||||||||||
Ended September
|
Ended September
|
Percentage
|
||||||||||
30,
2009
|
30,
2008
|
Change
|
||||||||||
Net
cash provided by (used in) operating activities
|
298,600 | 357,692 | -17 | % | ||||||||
Net
cash used in investing activities
|
(778,233 | ) | (100,118 | ) | 677 | % | ||||||
Net
cash provided by (used in) financing activities
|
10,000,000 | 9,370,081 | 7 | % | ||||||||
Effect
of exchange rate changes on cash
|
15 | 54,348 | -100 | % | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
9,520,382 | 9,682,003 | -2 | % | ||||||||
Cash
and cash equivalents, beginning of year
|
1,121,162 | 46,081 | 2333 | % | ||||||||
Cash
and cash equivalents, end of year
|
10,641,544 | 9,728,084 | 9 | % |
Operating
Activities
Net cash
provided by operating activities was $298,600 for the three months ended
September 30, 2009, compared to an amount of $357,692 net cash that was provided
by operating activities for the three months ended September 30, 2008. The
decrease of net cash provided by operating activities is mainly due to the
reason that the Company paid more cash to purchase raw materials and to pay off
operation expenses than last year.
Investing
Activities
Net cash
used in investing activities for the three months ended September 30, 2009
was $778,233, compared to an amount of $100,118 net cash that was used
in investing activities for the three months ended September 30, 2008. The
cash was mainly used for the construction of new production lines including land
use right, construction costs and new equipment. Since it was the beginning of
the construction for the three months ended September 30, 2008, the Company paid
less money at that time.
Financing
Activities
On
September 21, 2009, the Company received gross proceeds of $10,000,000 by
selling to China Hand Fund I, LLC and/or its successor and assigns a promissory
convertible note, which was automatically converted into 920,267 shares of the
Series B Convertible Preferred Stock of the Company on November 12,
2009.
8
During
the first quarter of the fiscal year of 2009, the Company received gross
proceeds of $10,000,000 from the 2008 Private Placement in which we issued
996,186 shares of a newly designated Series A Convertible Preferred Stock of the
Company, par value $0.001 per share and warrants to purchase an aggregate of
2,490,465 shares of Common Stock post Reverse Split, with par value of $.001 per
share.
Net cash
provided by financing activities for the three months ended September 30, 2009
totaled $10,000,000 as compared to $9,370,081 provided by financing activities
for the corresponding period ended September 30, 2008. The $629,919 difference
is attributable to the Company’s payment to
acquire Yili China in the quarter ended September 30,
2008.
Inventories
Inventories
consisted of the following as of September 30, 2009 and June 30,
2009:
30-Sep-09
|
30-Jun-09
|
|||||||
Raw
materials
|
70,603 | 58,583 | ||||||
Finished
goods
|
430,646 | 537,031 | ||||||
Work
in progress
|
43,930 | 124,416 | ||||||
Total | 545,179 | 720,030 |
Our raw
materials mainly include quartz and petrol coke which account for more than 95%
of total raw materials. Quartz comes from local mining companies and individual
collectors. Quartz in Xinjiang province is 99.99% pure. Petrol coke comes from
the Sinopec Group which is the biggest petrol company in China. We have not, in
recent years, experienced any significant shortages of manufactured raw
materials and normally do not carry inventories of these items in excess of what
is reasonably required to meet our production and shipping schedules. Compared
with the amount at June 30, 2009, the decrease of $174,851 was mainly
attributable to the reason that the company used more work-in-progress to
produce black silicon carbide and sold more finished goods during the first
quarter of 2010.
Property
and Equipment
The
following is a summary of property and equipment at September 30, 2009 and June
30, 2009:
9
30-Sep-09
|
30-Jun-09
|
|||||||
Buildings
|
243,559 | 243,455 | ||||||
Machinery
and equipment
|
614,493 | 604,154 | ||||||
Motor
vehicles
|
202,296 | 202,210 | ||||||
Office
equipment
|
35,543 | 27,532 | ||||||
Less:
accumulated depreciation
|
(109,464 | ) | (78,184 | ) | ||||
Property and equipment, net | 986,427 | 999,167 |
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 $1,434,057 and $888,291 as of September 30, 2009 and June
30, 2009 respectively. Accounts payable primarily resulted from our purchases of
raw materials and equipment. The increase of $545,766 was mainly due to the
purchase of equipment. Our biggest supplier is Yihe Power Center, the payables
to which account for more than 30% of the total amount of accounts payable as of
September 30, 2009.
Critical
Accounting Policies and Estimates
Management's
discussion and analysis of its financial condition and results of operations are
based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company's financial statements reflect the
selection and application of accounting policies which require management to
make significant estimates and judgments. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes that
the following reflect the more critical accounting policies that currently
affect the Company's financial condition and results of operations.
Revenue
Recognition
Product
sales are recognized when the products are shipped and title has
passed. Sales revenue represents the invoiced value of goods, net of
a value added tax (“VAT”). All of the Company's products that are sold in the
PRC are subject to a Chinese VAT at a rate of 17% of the gross sales
price. This VAT may be offset by VAT paid by the Company on raw
materials and other materials included in the cost of producing its finished
products.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded utilizing
the straight-line method over the estimated original useful lives of the
assets. Amortization of leasehold improvements is calculated on a
straight-line basis over the life of the asset or the term of the lease,
whichever is shorter. Major renewals and betterments are capitalized
and depreciated; maintenance and repairs that do not extend the life of the
respective assets are charged to expense as incurred. Upon disposal
of assets, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in income. Depreciation
related to property and equipment used in production is reported in cost of
sales.
10
Long-term
assets of the Company are reviewed annually as to whether their carrying value
has become impaired.
Bad
Debts
The
Company's business operations are conducted in the People's Republic of China.
The Company extends unsecured credit only to its relatively large customers with
a good credit history. Management reviews its accounts receivable on
a regular basis to determine if the bad debt allowance is adequate at each
period-end. Because we only extend trade credits to our largest
customers, who tend to be well-established and large sized businesses, and we
have not experienced any write-off of accounts receivable in the past. We
elected not to provide for any bad debt allowance and consider all accounts
receivable collectable.
Off-Balance
Sheet Arrangements
The
Company has not engaged in any off-balance sheet transactions since its
inception.
Item
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not
applicable.
Item
4. CONTROLS AND
PROCEDURES
Disclosure
Controls and Procedures
Mr. John
Kuhns, our Chief Executive Officer, and Mr. Lin Han, our Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, as of the end of the period covered by this Report.
Based on that evaluation, our officers concluded that due to the material
weaknesses in the internal control over financial reporting as discussed
immediately below, our disclosure controls and procedures were ineffective and
are not adequately designed to ensure that the information required to be
disclosed by us in the reports we submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
applicable rules and forms and that such information was accumulated and
communicated to our Chief Executive Officer and Chief Financial Officer, in a
manner that allowed for timely decisions regarding required
disclosure.
Management
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.
11
An
evaluation of the Company’s internal control over financial reporting was
carried out under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, using the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in its “Internal Control - Integrated Framework.” The COSO
framework summarizes each of the components of a company’s internal control
system, including (i) the control environment, (ii) risk assessment, (iii)
control activities, (iv) information and communication, and (v)
monitoring.
On May 1,
2009, upon the notification by the Company’s management and in consultation with
our auditors, the Board of Directors of the Company concluded that its
previously issued financial statements for the interim period ended September
30, 2008 (“2008 First Quarter 10Q”), should no longer be relied upon due to the
following accounting misstatements:
(i) the
omission of certain audit adjustments in the computation of accumulated
deficit/gain from forgiveness of other payable; (ii) the misclassification of
goodwill to property and equipment; (iii) the misclassification of accounts
payable to accrued expenses; (iv) the misclassification of foreign currency
translation gain/loss; (v) the omission of certain shipping costs;
(vi) the omission of certain professional fees incurred in connection with the
issuance of the Company’s Series A Stock; (vii) the omission of professional
fees incurred in connection with the acquisition of Yili Master Carborundum
Production Co., Ltd., the Company’s wholly-owned subsidiary in China; (viii) the
misclassification of the professional fees that were incurred in connection with
the issuance of Series A Stock previously expended; and (ix) the omission of
dividends on the Series A Stock which were accrued.
As a
result, on May 24, 2009, the Company restated the financial statements contained
in the 2008 First Quarter 10Q by filing with the SEC Amendment No. 1 to such
Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. The
restatements had no effect on the income statement, including net income and
earnings per share for the periods covered by the restated financial
statements.
During
the process of reviewing and assessing the Company’s internal control over
financial reporting, the Company’s management also concluded that the previously
issued financial statements in the Quarterly Report for the period ended
December 31, 2008 (“2008 Second Quarter 10Q”) should not be relied upon due to
the misclassification of Series A Stock as permanent equity. The Company intends
to address the referenced misstatement and to restate such financial statements
in the 2008 Second Quarter 10Q by filing with the SEC an amendment to such 2008
Second Quarter 10Q.
A
material weakness is a significant deficiency in one or more of the internal
control components that alone or in the aggregate precludes our internal
controls from reducing to an appropriately low level of risk the risk that
material misstatements in our financial statements will not be prevented or
detected on a timely basis.
The
Company’s management considered the impact of the foregoing accounting
misstatements on the effectiveness of the Company’s internal control over
financial reporting and determined that they amounted to a material
weakness. As a result, management concluded that the Company's
internal controls over financial reporting were not effective as of September
30, 2009.
Remediation
Initiative
In an
effort to remediate the foregoing deficiencies in the Company’s internal
control, the Company intends to take the following actions: (i) to create
positions in the accounting department of the Company to segregate duties of
recording, authorizing and testing; (ii) to increase our accounting and
financing personnel resources, by retaining more U.S. GAAP knowledgeable
financial professionals; (iii) to provide U.S. GAAP training to our staff in the
accounting department; (iv) to establish an audit committee of the Board of
Directors of the Company, with the responsibility of overseeing the corporate
accounting and financial reporting process and the internal and external audits
of the financial statements of the Company.
12
There is
no assurance that our disclosure controls or our internal controls over
financial reporting can prevent all errors. An internal control
system, no matter how well designed and operated, has inherent limitations,
including the possibility of human error. Because of the inherent
limitations in a cost-effective control system, misstatements due to error may
occur and not be detected. We monitor our disclosure controls
and internal controls and make modifications as necessary. Our intent
in this regard is that our disclosure controls and our internal controls will
improve as systems change and conditions warrant.
Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting
This
Quarterly Report for the period ended September 30, 2009 does not include an
attestation report of our registered public accounting firm, regarding internal
control over financial reporting. Management’s report was not subject to
attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the SEC that permit the Company to provide only Management’s
report in this Annual Report.
Changes
in Internal Controls
There
were no changes in the Company’s internal control over financial reporting that
occurred during our fiscal quarter ended September 30, 2009 that has materially
affected or is reasonably likely to materially affect our internal control over
financial reporting.
PART
II OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Reference
is made to Item 2 of Part I of this Quarterly Report relating to the 2009
Private Placement.
Such
issuance of the Company’s securities was effectuated pursuant to the exemption
from the registration requirements of the Securities Act of 1933 (the “Act”), as
amended, provided by Section 4(2) of the Act and/or Regulation D, and Regulation
S promulgated thereunder.
Item
4. Submission of Matters to a Vote of Security Holders
On
September 30, 2009 by a written consent, the holder of a majority shares of the
Common Stock and Series A Convertible Preferred Stock entitled to vote approved
the Reincorporation.
The
aggregate number of votes which the holders of our Common Stock and Series A
Stock are entitled to vote regarding the approval of the Reincorporation was
12,633,342, of which a majority, or at least 6,316,671, are required to approve
the Reincorporation. The consenting stockholders are collectively the record and
beneficial owners of shares of Common Stock and Series A Stock entitling them to
an aggregate of 9,207,279 votes, representing approximately 73.75% of the of the
total number of votes which could be cast regarding the approval of the
Reincorporation as of the date of the consent on September 30,
2009.
Item
6. EXHIBITS
(a)
Exhibits
13
31.1 –
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Mr. John D. Kuhns.
31.2 –
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Mr. Lin Han.
32.1 –
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Messrs John D. Kuhns and Lin
Han .
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.
MASTER
SILICON CARBIDE INDUSTRIES, INC.
|
|||
Date:
November 13, 2009
|
BY:
|
/s/
John D. Kuhns
|
|
John
D. Kuhns
|
|||
President
and Chief Executive Officer
|
|||
(principal
executive officer)
|
|||
Date:
November 13, 2009
|
BY:
|
/s/ Lin
Han
|
|
Lin
Han
|
|||
Chief
Financial Officer
|
|||
(principal
financial officer and accounting
officer)
|
14