Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION - SURFACE COATINGS, INC. | ex32one.htm |
| EX-31.2 - CERTIFICATION - SURFACE COATINGS, INC. | ex31two.htm |
| EX-31.1 - CERTIFICATION - SURFACE COATINGS, INC. | ex31one.htm |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2010
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
From the transition period from ___________ to ____________.
Commission File Number 333-145831
SURFACE COATINGS, INC.
(Exact name of small business issuer as specified in its charter)
| Nevada | 20-8611799 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
2007 Industrial Blvd., Suite B, Rockwall, Texas 75087
(Address of principal executive offices)
(972) 722-7351
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (s229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] | Accelerated Filer [ ] | ||
| Non-Accelerated Filer [ ] | Smaller Reporting Company [X] |
Indicate by a check mark whether the company is a shell company (as defined by Rule 12b-2 of the Exchange Act: Yes [ ] No [ X ].
As of February 24, 2011, there were 5,429,000 shares of Common Stock of the issuer outstanding.
PART I
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to in this annual report as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this annual report as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in this annual report. Factors that can cause or contribute to these differences include those described under the headings “Risk Factors” and “Management Discussion and Analysis and Plan of Operation.”
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statement you read in this annual report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified in this annual report which would cause actual results to differ before making an investment decision. We are under no duty to update any of the forward-looking statements after the date of this annual report or to conform these statements to actual results.
ITEM 1. DESCRIPTION OF BUSINESS
Surface Armor, LLC was formed in 2005 and our stated goal is to serve the ever-expanding market of protecting expensive finishes and all types of surfaces from damage during manufacturing processes, shipping, handling and installation. In February 2007 Surface Coatings, Inc. was created with the express purpose to acquire Surface Armor, LLC. The shareholders are the same as Surface Armor, LLC and therefore there was no cash consideration in the transaction. Consequently the Surface Armor, LLC operations became Surface Coatings, Inc.
The company offers the most progressive and complete solutions to our customer’s temporary surface protection needs. Our business model is set-up to serve The Americas from our facility in Rockwall, Texas where we inventory and convert all our materials and products. Our warehouse is climate controlled ensuring consistent quality in the Texas heat in the summer and the freeze/thaw weather pattern in the winter.
We inventory a wide assortment of self-adhering, bulk films and convert them into rolls at customer-specified widths, lengths, and quantities. We specialize in providing custom products, in reasonable quantities, at standard prices, and at off-the-shelf turnaround times. This model has enabled us to gain traction in the market place while we grow our business. Providing the converted product is just one part of our product offering – the other, service. We have a customer focused, server-based relationship model that assists our customers in finding solutions to their surfacing needs as well as any out-of-the-ordinary problems.
As is the case in many industries, efficiency is critical, and the construction business is no different. Contractors are under increasing pressure to complete projects and therefore are more aware of damage done to already completed work. Our products are solutions to real needs that companies experience every day.
With respect to our competitive position in the industry, it is our belief that the surface protection industry is served by at least 30 foreign and domestic manufacturers of films and tapes, the world-wide markets for coatings based on annual sales of paint, coatings, adhesives, sealants and related products is approximately $75 billion. Of this amount, the US Market accounts for approximately $30 billion. These sales represent manufacturers and distributors. We distribute the product and as such serve the small manufacturer and contractor. Our competitive position in the industry is defined by our ability to deliver timely and of a high quality coupled with price competitiveness. To that end, fiscal year 2010 sales were impacted by the national recession but were still ahead of 2009 by 44% and 2009 sales were 2% ahead of those of fiscal year 2008. Consequently, we believe our business model affirms our competitive position in the industry relative to the customers we are targeting. Historically, customers primarily purchased from local distributors. With the broad reach of the internet, low order quantity customers, that don’t require direct assistance from a local distributor, prospect the web for an effective product at a reasonable price. Once a film/tape has been approved for use in production, customers are slow to change to another product as the cost of evaluating a new product can exceed the potential savings to be gained by changing.
Because we do not have field sales people knocking on high-volume prospects’ doors, we don’t really compete on a head to head basis. Our competitive position is based on servicing the customer needs:
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Low order minimum quantity
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Fast turnaround
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High quality
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Due to our growth we have not experienced any significant seasonality. There is some seasonality in the construction market (February and November) but the manufacturing market is more consistent. As we grow we continue to market to both industries thereby decreasing the impact of seasonality.
The company currently serves a customer base of 1,052 accounts, yielding an average gross margin per sale of 39.5% and we do not have any contracts or arrangements of consequence with any customer or supplier. Our customers are primarily small manufacturers and contractors which order by phone for direct shipment to the location they need the product. In our market research, we have learned that many customers utilize our web site to determine our product offerings and pricing and then pick up the phone and order the product. Consequently, the web site allows us to not be confined to any geographic market area and through nationwide shipping and delivery companies we are able to service customers from coast to coast.
Business Strategy
Objective:
Our objective is to become a leading distributor of temporary surface protection tapes. We plan to achieve this objective by continuing to implement our business strategy, which includes the primary elements we discuss below.
Marketing and Sales:
Our marketing efforts target manufacturers and processors of metals, plastics and glass. We generate a significant amount of our revenues through web based advertising. We continue to supplement search engine advertising with traditional advertising and marketing channels to accelerate sales growth.
Customers:
We rely heavily on repeat customers. Our management is responsible for developing and maintaining successful long-term relationships with key customers. We are not dependent on any one customer. Rather, we have built up a customer base which we market to and have developed into steady repeat customers.
Government Regulation:
At the present time there are no federal government regulations are in effect that would impact our business operations.
Our Qualifications:
Our qualifications are our reputation and experience in the surface protection industry.
Industry and Competitors
An industry founder, competitor and primary manufacturer of surface protection products is 3M Corporation, a NYSE publicly traded company. 3M products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries around the world. Management believes the confidence of wholesalers, retailers, jobbers, distributors and dealers in 3M and its products — a confidence developed through long association with skilled marketing and sales representatives — has contributed significantly to 3M’s position in the marketplace and to its growth. 3M has 169 sales offices worldwide, with 10 in the United States and 159 internationally.
3M is not a supplier to the Company. Our primary raw materials are adhesive-backed films and kraft-paper cores. Our primary supplier of films is Main Tape out of Cranbury, NJ (80%). Our primary supplier of cores is T and S Products out of Dallas, Texas (100%). Both materials are readily available. We are significantly dependent upon Main Tape as a supplier due to the performance characteristics of the proprietary adhesives. We do have backup suppliers, specifically Surface Guard in Illinois, with reasonably comparable products, however, to convert our customer base over to a new supplier’s products would be a high effort undertaking.
Management has identified and believes that the surface protection industry is served by at least 30 foreign and domestic manufacturers of films and tapes. Historically, customers primarily purchased from local distributors. With the broad reach of the internet, low order quantity customers, that don’t require direct assistance from a local distributor, prospect the web for an effective product at a reasonable price. Once a film/tape has been approved for use in production, customers are slow to change to another product as the cost of evaluating a new product can exceed the potential savings to be gained by changing.
Prospects find us on the web and our method of competition is:
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Provide price quotes within the hour (industry average is 24-72 hours)
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Ship samples within 24 hours (industry average is 7-14 days)
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Ship orders within 48 hours (industry response ranges from several days to three weeks)
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Few competitors are able to respond as rapidly as we are, giving us a competitive edge
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Future products and services:
At the present time, we do not have plans to develop or market additional products or services.
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Sources and Availability of Raw Material:
Our primary raw materials are adhesive-backed films and kraft-paper cores. Our primary supplier of films is Main Tape out of Cranbury, NJ (90%). Our primary supplier of cores is T and S Products out of Dallas, Texas (100%). Both materials are readily available. We are significantly dependent upon Main Tape as a supplier due to the performance characteristics of the proprietary adhesives. We do have backup suppliers, Specifically Surface Guard in Illinois, with reasonably comparable products, however, to convert our customer base over to a new supplier’s products would be a high effort undertaking.
Dependence on One or a Few Major Customers:
We are not dependent on any one or a few major customers.
Costs and Effects of Compliance with Environmental Laws:
We are not aware of nor do we anticipate any environmental laws with which we will have to comply.
Number of Employees:
We have four employees, the President, two fulltime production people and one sales/admin person. The duties of the President, who spends 100% of his time on the company, are to solicit business by implementing the marketing initiatives and developing customers as well as business strategy. The day to day duties are performed by the President and his staff.
Operations and Technology:
We are not subject to a dependence on technology.
Research and Development:
The Company does not have any products in development that will require the use of a material amount of the assets of the company. Since inception, the company has spent zero ($0) on company-sponsored research and development. As we are a distributor and converter of surface protection tapes, we do not anticipate spending any funds on research and development in the future.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate facilities are in a 7,500 s.f. facility of which 6,750 s.f. is production/warehouse space. We are currently running one shift and utilizing about 60% of the non-office space. Adding a second and/or third shift will increase capacity significantly when market demands require additional capacity.
Our new facility dramatically improves our operating efficiency and growth potential. The facility has truck height as well as ground height loading docks, ample amounts of 3 phase electrical power that enables more sophisticated production equipment, and climate control for raw materials, including paperboard cores and cartons, all within one building.
In November of 2009 we signed a 5 year lease with an option to extend the lease by an additional 5 years
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2010, the Company is not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting on December 22, 2009 and elected Richard Pietrykowski as the sole director of the Company.
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PART II
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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
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The common stock is currently quoted over the counter bulletin board (ITC BB) under the symbol SCTZ.OB.
At December 31, 2010, we had approximately 62 record holders of our common stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.
Dividends
We have not paid cash dividends on any class of common equity since formation and we do not anticipate paying any dividends on our outstanding common stock in the foreseeable future.
Warrants
The Company has no warrants outstanding.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable for smaller reporting companies.
ITEM 7. MANAGEMENT DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION
SUMMARY OF 2010
2010 was a successful year for the Company as we saw revenue increase 44% ($267,000) versus 2009 after a marginal increase in 2009 versus 2008 of 2% ($10,000). The increase was driven by both new customer sales ($150,000) and organic growth ($117,000). A change in marketing strategy during the fiscal second quarter to industrial purchasing websites is credited with driving new customer growth. Our existing customers saw the manufacturing industry bounce back from the recessionary economy and began placing larger and more frequent orders. To gain the new customers we gave up margin, as can be seen in our gross profit discussion, but has provided us with a solid sales base for 2011.
RESULTS FOR THE FISCAL YEAR ENDING DECEMBER 31 2010
REVENUE. Revenue for the twelve months ended December 31, 2010 was $870,856 compared to $603,517 for the twelve months ended December 31, 2009. The increase in revenue for the twelve month period is attributed to the manufacturing industry returning and a new marketing campaign geared toward industrial web-sites. Existing customers increased 19% versus fiscal 2009 or $117,000 and new customers added $150,000 or 17% of total revenue.
GROSS PROFIT. Gross profit for the twelve months ended December 31, 2010 was $343,710 compared to $307,886 for the same period in 2009. Margins deteriorated during the year from 51.0% to 39.5%. The reduction of 11.5% points is directly related to gaining large industrial accounts due to aggressive pricing; we were able to gain back part of this margin decline later in the year but not a significant amount to return the year to a profit.
OPERATING EXPENSES. Total operating expenses for the twelve months ended December 31, 2010 were $356,569 compared to expenses for the period ended December 31, 2009 of $338,853. The increase is mainly attributable to increased payroll and commissions costs of $27,700 (due to increased revenue) and increased advertising expense of $5,900 (which helped drive revenue increase); these increases were partially offset by lower travel of $7,900, lower professional fees of $4,300 and lower computer expenses of $2,800; resulting in a net increase of about $18,000.
NET INCOME (LOSS). Net loss for the twelve months ended December 31, 2010 was $22,071 compared to the period ended December 31, 2009 of $42,153. The increased revenue did not flow through to net income due to the increase in cost of sales as discussed above.
LIQUIDITY AND CAPITAL RESOURCES. Surface Coatings filed on Form S-1, a registration statement with the U.S. Securities & Exchange Commission in order to raise funds to develop their business. The registration statement became effective in October 14, 2008, and the post-effective amendment became effective on June 29, 2009. The offering closed in 2009 and as of December 31, 2009, the Company raised $214,500 by selling 429,000 shares at $.50 per share.
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In addition to the preceding, the Company plans for liquidity needs on a short term and long term basis as follows:
Short Term Liquidity:
The company relies on funding operations through operating cash flows. Net Cash from Operating Activities for the year ended December 31, 2010 was positive about $9,000, This is an improvement over the same period in 2009 of about $50,000 (2009 was negative $41,300).
Long Term Liquidity:
The long term liquidity needs of the Company are projected to be met primarily through the Net Cash from Operating Activities. If there is a need the Company will seek additional working capital either through private placements, public offerings and/or bank financing, or additional loans from Management if there is need for liquidity.
Capital Resources
In April 2008, the Company entered into a capital lease agreement that has a term of four years, ending May 2012. The general purpose of the loan agreement was to purchase a cutting machine that the company uses in daily operations. As of December 31, 2010 the Company owes $4,452.
With the limited operating history of our Company and the strong growth recorded in 2008 and 2010 and the recession in 2009 we have not been able to track true seasonal trends. 2010 saw strong growth in the second half of 2010 and skews seasonal analysis.
We do not expect any significant change to our debt structure and do not anticipate entering into any off-balance sheet arrangements.
Material Changes in Financial Condition
WORKING CAPITAL: Working Capital reduced by $38,600 to $42,000 from December 31, 2009 to December 31, 2010. This decline is mainly attributable to three significant categories of decline and one category of improvement: Customer prepayments of $33,500, decreased cash of $20,500, and increased accounts payable / accrued expenses of $30,000; these were offset by an increase in accounts receivable of $49,900.
STOCKHOLDER’S EQUITY: Stockholder’s Equity increased by the amount of the net loss of $22,071.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, together with the independent auditors' report thereon of The Hall Group, CPAs appear on pages F-1 through F-14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2010. This evaluation was accomplished under the supervision and with the participation of our chief executive officer / principal executive officer, and chief financial officer / principal financial officer who concluded that our disclosure controls and procedures are not effective to ensure that all material information required to be filed in the annual report on Form 10-KSB has been made known to them.
Disclosure, controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by in our reports filed under the Securities Exchange Act of 1934, as amended (the "Act") is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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Based upon an evaluation conducted for the period ended December 31, 2010, our Chief Executive and Chief Financial Officer as of December 31, 2010 and as of the date of this Report, has concluded that as of the end of the periods covered by this report, we have identified the following material weakness of our internal controls:
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Reliance upon independent financial reporting consultants for review of critical accounting areas and disclosures and material non-standard transaction.
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Lack of sufficient accounting staff which results in a lack of segregation of duties necessary for a good system of internal control.
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In order to remedy our existing internal control deficiencies, as our finances allow, we will hire additional accounting staff.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance 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 accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management 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.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework at December 31, 2010. Based on its evaluation, our management concluded that, as of December 31, 2010, our internal control over financial reporting was not effective because of limited staff and a need for a full-time chief financial officer. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting
We have not yet made any changes in our internal controls over financial reporting that occurred during the period covered by this report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
| Name | Age | Position |
| Richard Pietrykowski | 62 | Director, president, Secretary and Treasurer |
Richard Pietrykowski:
Mr. Pietrykowski entered the U.S. Air Force upon graduation from high school in 1966. He served on active duty for seven years as an aircraft weapons technician, a computer maintenance specialist, and as a technical instructor. After receiving an honorable discharge in 1973 he joined a daily newspaper in West Bend, Wisconsin as Systems and Production Manager. In 1981 Mr. Pietrykowski was recruited by a specialty printing company in Milwaukee, Wisconsin as National Systems and Production Manager. In 1989 Mr. Pietrykowski was hired as the Electric Prepress Manager for a color trade shop in Madison, Wisconsin where he was employed for four years. He then joined Perry Printing, a magazine and catalog printer as the Prepress Systems Engineer. He remained with Perry Printing for four years and in 1997.
Mr. Pietrykowski was recruited by Serigraph, Inc in West Bend, Wisconsin. He was with Serifraph, Inc. for seven years. During that time he served as Director of Graphic Services and Director of Digital Printing for Serigraph. Additionally, he served as General Manager of Serigraph's subsidiary company, Carvel Print, in Queretaro, Mexico for over a year as part of a turnaround team. Following Serigraph, Mr. Pietrykowski provided Electronic Prepress Systems and Prepress Operations Management consulting services to Discover Color and Imperial Lithograph in Madison and Milwaukee, Wisconsin, respectively. In August of 2005 he founded Surface Armor, LLC that is wholly owned by Surface Coatings, Inc., for which he serves as President.
ITEM 11. EXECUTIVE COMPENSATION
Following is what our officers received in 2010 and 2009 as compensation.
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Capacity Served
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Aggregate Remuneration
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Richard Pietrykowski
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Director, President, Secretary and Treasurer
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2010: $42,400
2009: $42,400
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Jeannie Pietrykowski
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Director
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2010: $30,300
2009: $29,200
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During the twelve months ended December 31, 2010, Mr. Pietrykowski also received $33,000 in sales commission. At December 31, 2010 Mr Pietrykowski was owed $56,075 in accrued sales commission. At February 15, 2011 commissions due Mr Pietrykowski was $53,041.
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ITEM 12.
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SECUIRTY OWNERSHIP OF MANANGEMENT AND BENEFICIAL OWNERS
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As of December 31, 2010 the following persons are known to the Company to own 5% or more of the Company's Voting Stock:
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Title / Relationship to Issuer
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Name of Owner
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Number of Shares Owned
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Percent of Total
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Director, President, Secretary and Treasurer
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Richard Pietrykowski
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1,800,000
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33.2
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(Former) Director, (Former) Vice-President
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John Donahoe
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2,700,000
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49.7
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION
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Trinity Heritage Construction, LLC: The Company’s former Vice-President, who is a shareholder of the company, is also an officer and shareholder in Trinity Heritage Construction, LLC.
As of December 31, 2008, the Company owed $74,596 under two note agreements with Trinity Heritage Construction, L.L.C (“Trinity”), a related party:
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$54,596 was advanced from Trinity to fund operations (“Trinity Operations Note”). This note had an interest rate of 10% and was due in full on March 1, 2010.
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$20,000 was borrowed from Trinity in 2005 and 2006 as start-up capital (“Trinity Advance Note”). This note had an interest of 10% and was due in full on March 1, 2010.
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On July 31, 2010 the Company, its former Vice President and Director, John Donahue and Trinity (of which Mr. Donahue is also an officer and shareholder), agreed to combine the Trinity Operations Note and the Trinity Advance Note into one note. The new note is for a total of $73,000, ($63,594 of principal and $9,406 of accrued interest) at an interest rate of 6% per annum, payable over five years with monthly payments of $1,405.90 beginning on August 1, 2010 and ending on July 1, 2014. At December 31, 2010 the balance on the note was $53,248 with $14,133 classified as short-term as it is due within one year.
The Company’s President: The President has loaned the Company $33,028 since inception and the balance was converted into a note on January 2, 2007. This note bears interest at a rate of 10% and requires monthly payments of $1,066 for 36 months. The total amount owed at December 31, 2010 and 2009 was $0 and $3,145, respectively.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by our auditors, for the audit of the registrant's annual financial statements and review of the financial statements included in the registrant's Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years 2010 and 2009 was $14,170 and $11,000 respectively.
(2) AUDIT-RELATED FEES
Fees charged in connection with filing quarterly Form 10-Q’s was $10,150 in 2010 and $7,950 in 2009.
(3) TAX FEES
NONE
(4) ALL OTHER FEES
The Company paid $0 in 2010 and $8,785 in 2009 related to S-1 and S-1/A filings.
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
The Securities and Exchange Commission has adopted rules implementing Section 407 of the Sarbanes-Oxley Act of 2002 requiring public companies to disclose information about “audit committee financial experts.” As of the date of this Annual report, we do not have a standing Audit Committee. The functions of the Audit Committee are currently assumed by our Board of Directors. Additionally, we do not have a member of our Board of Directors that qualifies as an “audit committee financial expert.” For that reason, we do not have an audit committee financial expert.
(6) If greater than 50 percent, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees.
Not applicable.
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PART IV
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ITEM 15.
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EXHIBITS, FINANICAL STATEMENTS AND REPORTS ON FORM 8-K
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(a) The following documents are filed as part of this report: Included in Part II, Item 7 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the Years Ended December 31, 2010 and December 31, 2009
Consolidated Statement of Changes in Stockholders’ Equity For the Years Ended December 31, 2010 and December 31, 2009
Consolidated Statements of Cash Flows For the Years Ended December 31, 2010 and December 31, 2009
Notes to the Consolidated Financial Statements
(b) The company did not file any Form 8-K’s in 2010.
(c) Exhibits
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Description
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31.1
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Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Management of
Surface Coatings, Inc.
Rockwall, Texas
We have audited the accompanying consolidated balance sheets of Surface Coatings, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, cash flows and stockholders’ equity for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
We were not engaged to examine management’s assertion about the effectiveness of Kingdom Koncrete, Inc.’s internal control over financial reporting as of December 31, 2010 and 2009 and, accordingly, we do not express an opinion thereon.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Surface Coatings, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company has suffered significant losses and will require additional capital to develop its business until the Company either (1) achieves a level of revenues adequate to generate sufficient cash flows from operations; or (2) obtains additional financing necessary to support its working capital requirements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ The Hall Group, CPAs
The Hall Group, CPAs
Dallas, Texas
March 2, 2011
11
|
SURFACE COATINGS, INC.
Consolidated Balance Sheets
As of December 31, 2010 and 2009
|
|
As of
December 31, 2010
|
As of
December 31, 2009
|
|||||||
|
Assets
|
||||||||
|
Current Assets
|
||||||||
|
Cash and Cash Equivalents
|
$
|
114,494
|
$
|
134,959
|
||||
|
Accounts Receivable (Net of Allowance for Doubtful
Accounts of $7,220 and $5,905)
|
88,463
|
38,604
|
||||||
|
Allowance for Estimated Returns
|
(6,845
|
)
|
(2,110
|
)
|
||||
|
Prepaid Expenses
|
0
|
0
|
||||||
|
Inventory
|
57,464
|
55,686
|
||||||
|
Total Current Assets
|
253,576
|
227,139
|
||||||
|
Fixed Assets:
|
||||||||
|
Machinery and Equipment
|
18,327
|
18,327
|
||||||
|
Leasehold Improvements
|
1,406
|
1,406
|
||||||
|
Less: Accumulated Depreciation
|
(10,645
|
)
|
(6,341
|
)
|
||||
|
Total Fixed Assets
|
9,088
|
13,392
|
||||||
|
Total Assets
|
$
|
262,664
|
$
|
240,531
|
||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Current Liabilities
|
||||||||
|
Accounts Payable
|
$
|
33,028
|
$
|
16,647
|
||||
|
Accrued Expenses
|
73,050
|
59,405
|
||||||
|
Due to Related Parties
|
22,047
|
32,047
|
||||||
|
Customer Deposit
|
33,462
|
0
|
||||||
|
Current Portion of Note Payable to Shareholder
|
17,469
|
16,669
|
||||||
|
Current Portion of Note Payable to President
|
0
|
3,145
|
||||||
|
Current Portion of Capital Lease Obligation
|
3,336
|
0
|
||||||
|
Line-of-Credit
|
29,503
|
18,935
|
||||||
|
Total Current Liabilities
|
211,895
|
146,848
|
||||||
|
Long-Term Liabilities
|
||||||||
|
Capital Lease Obligation - Equipment
|
1,116
|
7,788
|
||||||
|
Notes Payable to Related Parties (net of current portion)
|
35,779
|
49,950
|
||||||
|
Total Long-Term Liabilities
|
36,895
|
57,738
|
||||||
|
Total Liabilities
|
248,790
|
204,586
|
||||||
|
Stockholders’ Equity:
|
||||||||
|
Preferred stock, $.001 par value, 20,000,000 shares
authorized, -0- shares issued and outstanding
|
0
|
0
|
||||||
|
Common stock, $.001 par value, 50,000,000 shares
authorized, 5,429,000 and 5,429,000 shares issued
and outstanding, respectively
|
5,429
|
5,429
|
||||||
|
Paid In Capital
|
265,563
|
265,563
|
||||||
|
Accumulated Deficit
|
(257,118
|
)
|
(235,047
|
)
|
||||
|
Total Stockholders’ Equity
|
13,874
|
35,945
|
||||||
|
Total Liabilities and Stockholders’ Equity
|
$
|
262,664
|
$
|
240,531
|
||||
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
12
|
SURFACE COATINGS, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2010 and 2009
|
|
Year Ended
|
||||||||
|
December 31, 2010
|
December 31, 2009
|
|||||||
|
Revenue
|
$
|
870,856
|
$
|
603,517
|
||||
|
Cost of Sales
|
527,146
|
295,631
|
||||||
|
Gross Profit
|
343,710
|
307,886
|
||||||
|
Operating Expenses:
|
||||||||
|
Depreciation Expense
|
4,811
|
4,305
|
||||||
|
Advertising Expense
|
37,009
|
31,104
|
||||||
|
General and Administrative
|
319,560
|
307,749
|
||||||
|
Total Operating Expenses
|
361,380
|
343,158
|
||||||
|
Net Operating Income (Loss)
|
(17,670
|
)
|
(35,272
|
)
|
||||
|
Other Income (Expense)
|
||||||||
|
Loss on Sale of Asset
|
0
|
(133
|
)
|
|||||
|
Interest Expense
|
(4,401
|
)
|
(6,748
|
)
|
||||
|
Total Other Income (Expense)
|
(4,401
|
)
|
(6,881
|
)
|
||||
|
Net Income (Loss)
|
$
|
(22,071
|
)
|
$
|
(42,153
|
)
|
||
|
Basic and Diluted Earnings (Loss) per share
|
$
|
(0.00
|
)
|
$
|
( 0.01
|
)
|
||
|
Weighted Average Shares Outstanding:
|
||||||||
|
Basic and Diluted
|
5,429,000
|
5,168,376
|
||||||
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
13
|
SURFACE COATINGS, INC.
Consolidated Statement of Stockholders' Equity
For the Years Ended
December 31, 2010 and 2009
|
|
Common Stock
|
Additional
Paid-in
|
Accumulated
Deficit
|
||||||||||||||||||
|
Shares
|
Par Value
|
Capital
|
Totals
|
|||||||||||||||||
|
Stockholders’ Equity,
December 31, 2008
|
5,000,000
|
$
|
5,000
|
$
|
51,492
|
$
|
(192,894)
|
$
|
(136,402
|
)
|
||||||||||
|
Shares Issued for Cash
|
429,000
|
429
|
214,071
|
214,500
|
||||||||||||||||
|
Net (Loss)
|
(42,153)
|
(42,153
|
)
|
|||||||||||||||||
|
Stockholders’ Equity,
December 31, 2009
|
5,429,000
|
$
|
5,429
|
$
|
265,563
|
$
|
(235,047)
|
$
|
35,945
|
|||||||||||
|
Net (Loss)
|
(22,071)
|
(22,071)
|
||||||||||||||||||
|
Stockholders’ Equity,
December 31, 2010
|
5,429,000
|
$
|
5,429
|
$
|
265,563
|
$
|
(257,118)
|
$
|
13,874
|
|||||||||||
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
14
|
SURFACE COATINGS, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2010 and 2009
|
|
Year Ended December 31, 2010
|
Year Ended December 31, 2009
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net Income (Loss)
|
$
|
(22,071
|
)
|
$
|
(42,153
|
)
|
||
|
Adjustments to reconcile net deficit to cash used
by operating activities:
|
||||||||
|
Depreciation
|
4,304
|
4,305
|
||||||
|
Bad Debt Expense
|
(11,167
|
)
|
0
|
|||||
|
Change in Assets and Liabilities:
|
||||||||
|
Increase (Decrease) in Allowance for Sales Returns
|
4,735
|
(1,640
|
)
|
|||||
|
(Increase) Decrease in Accounts Receivable
|
(38,692
|
)
|
9,983
|
|||||
|
(Increase) in Due from Related Parties
|
0
|
(1,907
|
)
|
|||||
|
(Increase) Decrease in Inventory
|
(1,778
|
)
|
6,291
|
|||||
|
Increase (Decrease) in Accounts Payable
|
16,381
|
(8,591
|
)
|
|||||
|
Increase in Accrued Expenses
|
13,645
|
5,492
|
||||||
|
Increase (Decrease) in Line-of-Credit
|
10,568
|
(14,204
|
)
|
|||||
|
Increase in Other Liabilities
|
33,462
|
1,134
|
||||||
|
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
9,387
|
(41,290
|
)
|
|||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Sale of Fixed Assets
|
0
|
1,800
|
||||||
|
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
|
0
|
1,800
|
||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Payments on Shareholder Note
|
(3,145
|
)
|
(28,716
|
)
|
||||
|
Proceeds from Sale of Stock
|
0
|
214,500
|
||||||
|
Capitalized Lease Commitment
|
(3,336
|
)
|
(3,331
|
)
|
||||
|
Release of Subscription Deposit
|
|
0
|
|
|
(33,150)
|
|||
|
Payments on Note to Related Parties
|
(23,371)
|
(7,977)
|
||||||
|
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
(29,852)
|
|
141,326
|
||||
|
NET INCREASE (DECREASE) IN CASH
|
(20,465
|
)
|
101,836
|
|||||
|
Cash, beginning of period
|
134,959
|
33,123
|
||||||
|
Cash, end of period
|
$
|
114,494
|
$
|
134,959
|
||||
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
||||||||
|
Interest paid
|
$
|
4,401
|
$
|
6,748
|
||||
|
Income taxes paid
|
$
|
0
|
$
|
0
|
||||
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
15
|
SURFACE COATINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
|
NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Activities, History and Organization:
Surface Coatings, Inc. (“Surface Coatings”, the “Company”) is the parent company of Surface Armor, LLC, (“Surface Armor”) a company incorporated under the laws of the State of Texas on July 19, 2005. The Company operates as a converter and distributor of temporary surface protection tapes, mainly to the construction industry and for the past five years has been developing its business. The Company is located in Texas and sells its product locally as a distributor and throughout the U.S. over the internet.
Surface Coatings is a private holding company established under the laws of Nevada on February 12, 2007, and was formed in order to acquire 100% of the outstanding membership interests of Surface Armor. On February 15, 2007, Surface Coatings issued 5,000,000 shares of common stock in exchange for a 100% equity interest in Surface Armor. As a result of the share exchange, Surface Armor became the wholly owned subsidiary of Surface Coatings. As a result, the members of Surface Armor owned a majority of the voting stock of Surface Coatings. The transaction was accounted for as a reverse merger whereby Surface Armor was considered to be the accounting acquirer as its members retained control of Surface Coatings after the exchange, although Surface Coatings is the legal parent company. The share exchange was treated as a recapitalization of Surface Coatings. As such, Surface Armor, (and its historical financial statements) is the continuing entity for financial reporting purposes. The financial statements have been prepared as if Surface Coatings had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock. The share exchange transaction was effected to change the state of incorporation to allow the opportunity for a reduction of franchise taxes under the new Texas franchise tax calculations and to facilitate the initial public offering. At the time of the exchange transaction, Surface Coatings had no assets or liabilities and Surface Armor had assets of approximately $57,000 with equity of approximately $19,500.
The capital structure of Surface Coatings is presented as a consolidated entity as if the transaction had been effected in 2005 to consistently reflect the number of shares outstanding. However, the capital structure as presented is different that the capital structure that appears in the historical statements of Surface Armor, LLC in earlier periods due to the recapitalization accounting.
During 2008, the Company filed a Form S-1 to register the sale of their common stock. The registration was declared effective on Ocotber 14, 2008. Since then the Company has filed a post effective amendment reducing their minimum amount under the registration from $75,000 to $50,000 which was approved on September 30, 2009. The offering closed in 2009 and as of December 31, 2009, the Company raised $214,500 by selling 429,000 shares at $.50 per share.
The Company operates on a calendar year-end. Due to the nature of their operations, the Company operates in only one business segment.
16
Significant Accounting Policies:
The Company’s management selects accounting principles generally accepted in the United States of America and adopts methods for their application. The application of accounting principles requires the estimating, matching and timing of revenue and expense.
The financial statements and notes are representations of the Company’s management which is responsible for their integrity and objectivity. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.
FASB Accounting Standards Codification:
In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance concerning the organization of authoritative guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). This new guidance created the FASB Accounting Standards Codification (“Codification”). The Codification has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification became effective for the Company in its quarter ended September 30, 2009. As the Codification is not intended to change or alter existing U.S. GAAP, it did not have any impact on the Company’s consolidated financial statements. On its effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative.
Basis of Presentation:
The Company prepares its financial statements on the accrual basis of accounting. All intercompany balances and transactions are eliminated. Investments in subsidiaries are reported using the equity method.
Cash and Cash Equivalents:
Cash and cash equivalents includes cash in banks with original maturities of three months or less and are stated at cost which approximates market value, which in the opinion of management, are subject to an insignificant risk of loss in value.
Recently Issued Accounting Pronouncements:
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Reclassification:
Certain prior year amounts have been reclassified in the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows to conform to current period presentation. These reclassifications were not material to the consolidated financial statements and had no effect on net earnings reported for any period.
Fair Value of Financial Instruments:
In accordance with the reporting requirements of ASC 820, “Fair Value Measurements” (formerly SFAS No. 157, Disclosures About Fair Value of Financial Instruments”), the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments.
The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate their fair values due to the short-term maturities of these instruments. The carrying amount of the Company’s marketable securities and capital leases approximate fair value due to the stated interest rates approximating market rates.
17
Accounts Receivable:
Accounts receivable are carried at their face amount, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates accounts receivable and establishes the allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions, based on a history of write offs and collections. The Company’s policy is generally not to charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payments have not been received within agreed upon invoice terms and a provision is made for all accounts greater than 60 days from invoice date. Write-offs are recorded at a time when a customer receivable is deemed uncollectible. The Company has a large number of customers in various industries and geographies and establishes reasonable credit lines to limit credit risk.
Fair Value of Financial Instruments:
In accordance with the reporting requirements of ASC 820, “Fair Value Measurements” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 157, “Disclosures About Fair Value of Financial Instruments”), the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments.
The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate their fair values due to the short-term maturities of these instruments. The carrying amount of the Company’s marketable securities and capital leases approximate fair value due to the stated interest rates approximating market rates.
Accounts receivable are carried at their face amount, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates accounts receivable and establishes the allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions, based on a history of write offs and collections. The Company’s policy is generally not to charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payments have not been received within agreed upon invoice terms and a provision is made for all accounts greater than 60 days from invoice date. Write-offs are recorded at a time when a customer receivable is deemed uncollectible. The Company has a large number of customers in various industries and geographies and establishes reasonable credit lines to limit credit risk.
Inventory Valuation:
Inventory is comprised of goods purchased for resale; therefore the Company has no raw materials or work in process. The Company uses the specific identification and FIFO (“First In, First Out”) methods for inventory tracking and valuation. Inventory is stated at the lower of cost or market value.
Fixed Assets:
Fixed assets are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is calculated on a straight-line basis over five to seven years.
Revenue Recognition:
The Company recognizes revenue from the sale of products in accordance with ASC 605-15 “Revenue Recognition” (formerly Securities and Exchange Commission Staff Accounting Bulletin No. 104 ("SAB 104")), "Revenue Recognition in Financial Statements." Revenue will be recognized only when all of the following criteria have been met:
|
●
|
Persuasive evidence of an arrangement exists;
|
|
|
●
|
Ownership and all risks of loss have been transferred to buyer, which is generally upon shipment;
|
|
|
●
|
The price is fixed and determinable; and
|
|
|
●
|
Collectability is reasonably assured
|
All inventory is shipped to customers FOB shipping point. The risk of loss transfers to the customer at the time of shipment. Currently all revenue is generated from the sale of products and no revenue is earned from services rendered.
The Company’s return policy allows customers to return products for up to 15 days after shipment. Customer returns were approximately $14,800 and $5,900 for the years ended December 31, 2010 and 2009, respectively. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," revenue is recorded net of a reserve to estimate returns, markdowns, price concessions and warranty costs. Such reserve is based on management's evaluation of historical experience and company and industry trends. As of December 31, 2010 and 2009, the allowance for estimated returns was $6,845 and $2,110, respectively.
Revenue is recorded net of any sales taxes charged to customers.
18
Cost of Goods Sold:
The types of costs included in Cost of Goods Sold are:
|
●
|
Direct material costs
|
|
|
●
|
Purchasing, receiving and inspection
|
|
|
●
|
Ingoing and outgoing freight
|
Advertising:
The Company incurred $37,009 and $31,104 in advertising costs for the years ended December 31, 2010 and 2009, respectively.
Income Taxes:
The Company has adopted ASC 740-10 “Income Taxes” (formerly SFAS No. 109), which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes payable. There are no provisions for current taxes due to net available operating losses.
Comprehensive Income:
ASC 220 “Comprehensive Income”, (formerly SFAS No. 130, "Reporting Comprehensive Income"), establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. For the years ended December 31, 2010 and 2009, the Company had no items of other comprehensive income. Therefore, the net loss equals comprehensive loss for the periods then ended.
Earnings per Share:
Earnings per share (basic) is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period covered. As the Company has no potentially dilutive securities, fully diluted earnings per share is identical to earnings per share (basic).
NOTE 2 – FIXED ASSETS
Fixed Assets at December 31, 2010 and December 31, 2009 are as follows:
|
December 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Property & Equipment
|
$
|
18,327
|
$
|
18,327
|
||||
|
Telephone System
|
1,406
|
1,406
|
||||||
|
Less: Accumulated Depreciation
|
(10,645
|
)
|
(6,341
|
)
|
||||
|
Total Fixed Assets
|
$
|
9,088
|
$
|
13,392
|
||||
The Company’s fixed assets are depreciated on a straight-line basis over the asset’s useful lives, ranging from five to seven years. Depreciation expense was $4,304 and $4,305 for the years ended December 31, 2010 and 2009. Capitalized lease amortization expense for the three months ended September 30, 2010 and 2009 was $286 and $857 for the nine months ended September 30, 2010 and 2009.
At December 31, 2010, there was a $8,775 capital lease asset included in fixed assets with a remaining capitalized lease obligation of $4,452. At December 31, 2010, capitalized interest associated with the lease was $1,523.
NOTE 3 – DUE TO RELATED PARTIES
The Company had $22,047 and $32,047 due to a minority shareholder as of December 31, 2010 and December 31, 2009 respectively.
NOTE 4 – NOTES PAYABLE TO RELATED PARTIES
Note Payable to Shareholder:
19
The Company’s President has loaned the Company $33,028 since inception and the balance was converted into a note on January 2, 2007. This note bears interest at a rate of 10% and requires monthly payments of $1,066 for 36 months. The total amount owed at December 31, 2010 was $0 and at December 31, 2009 was $3,145.
Notes Payable to Related Parties:
As of December 31, 2008, the Company owed $74,596 under two note agreements with Trinity Heritage Construction, L.L.C (“Trinity”), a related party:
|
|
●
|
$54,596 was advanced from Trinity to fund operations (“Trinity Operations Note”). This note had an interest rate of 10% and was due in full on March 1, 2010.
|
|
|
●
|
$20,000 was borrowed from Trinity in 2005 and 2006 as start-up capital (“Trinity Advance Note”). This note had an interest of 10% and was due in full on March 1, 2010.
|
On July 31, 2009 the Company, one of its Vice Presidents and Directors, John Donahue and Trinity (of which Mr. Donahue is also an officer and shareholder), agreed to combine the Trinity Operations Note and the Trinity Advance Note into one note. The new note is for a total of $73,000, ($63,594 of principal and $9,406 of accrued interest) at an interest rate of 6% per annum, payable over five years with monthly payments of $1,405.90 beginning on August 1, 2009 and ending on July 1, 2014. At December 31, 2010 the balance on the note was $53,248 with $14,133 classified as short-term as it is due within one year. The current portion as of December 31, 2009 was $16,669.
NOTE 5 – LINE OF CREDIT
The Company has a line of credit (“LOC”) with Bank of America. The LOC has a $36,000 credit limit, and bears an interest rate of 7.24% per annum. The Company is required to make monthly payments equal to 1% of the outstanding balance plus the interest expense for the previous month. As of December 31, 2010 and December 31, 2009, the amounts outstanding under this line of credit were $29,503 and $18,935, respectively.
NOTE 6 – EQUITY
The Company is authorized to issue 20,000,000 preferred shares at a par value of $.001 per share. There were no shares outstanding as of December 31, 2010 and 2009.
The Company is authorized to issue 50,000,000 common shares at a par value of $.001 per share. These shares have full voting rights. There were 5,429,000 and 5,429,000 shares issued and outstanding as of December 31, 2010 and 2009, respectively.
On June 29, 2009 the Company’s post-effective amendment, to the registration statement which became effective in October, 2008, became effective. The offering closed in 2009 and as of September 30, 2010, the Company raised $214,500 by selling 429,000 shares at $.50 per share.
The Company does not have any stock option plans or stock warrants.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
The Company leases a 7,500 square foot office and warehouse facility in Rockwall, Texas. The Company signed a five year lease in November 2009 at a rate of $2,250 per month. The Company has no other lease obligations. The Company’s future lease obligations are as follows:
|
Future
Obligation
|
||||
|
2011
|
27,000
|
|||
|
2012
|
27,000
|
|||
|
2013
|
27,000
|
|||
|
2014
|
24,750
|
|||
|
Total
|
$
|
105,750
|
||
NOTE 8 – INCOME TAXES
The Company has adopted ASC 740-10 “Income Taxes” (formerly SFAS No. 109), which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes payable (deferred tax liability) or benefit (deferred tax asset). Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
20
The cumulative tax effect at the expected tax rate of 25% of significant items comprising the Company’s net deferred tax amounts as of December 31, 2010 and December 31, 2009 are as follows:
Deferred tax asset related to:
|
December 31,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Prior Year
|
$
|
79,916
|
65,584
|
|||||
|
Tax Benefit for Current Period
|
5,514
|
14,332
|
||||||
|
Net Operating Loss Carryforward
|
$
|
85,430
|
$
|
79,916
|
||||
|
Less: Valuation Allowance
|
(85,430
|
)
|
(79,916
|
)
|
||||
|
Net Deferred Tax Asset
|
$
|
0
|
$
|
0
|
||||
The cumulative net operating loss carry-forward is approximately $257,000 at December 31, 2010 and $235,000 at December 31, 2009, and will expire in the years 2025 through 2030. The realization of deferred tax benefits is contingent upon future earnings and the net deferred tax asset has been fully reserved at December 31, 2010.
NOTE 9 – FINANCIAL CONDITION AND GOING CONCERN
The Company has an accumulated deficit through December 31, 2010 of approximately $257,000 and had working capital of approximately $42,000. Because of this accumulated deficit, the Company will require additional working capital to develop its business operations.
The Company has experienced no loan defaults, labor stoppages, legal proceedings or any other operating interruption in 2010. Therefore, these items will not factor into whether the business continues as a going concern, and accordingly, Management has not made any plans to dispose of assets or factor receivables to assist in generating working capital.
The Company intends to raise additional working capital either through private placements, public offerings and/or bank financing, or additional loans from Management if there is need for liquidity. Management may also consider reducing administrative costs and suspending all bonus and incentive programs. There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placement, public offerings and/or bank financing necessary to support the Company’s working capital requirements. To the extent that funds generated from private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not generated from operations, financing is not available, or the Management cannot loan sufficient funds, the Company may not be able to continue its operations.
Management believes that the efforts it has made to promote its operation will continue for the foreseeable future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS
In 2010, the FASB issued the following guidance:
On January 1, 2010, the Company adopted Accounting Standard Update (“ASU”) 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.” This ASU is intended to improve the information provided in financial statements concerning transfers of financial assets, including the effects of transfers on financial position, financial performance and cash flows, and any continuing involvement of the transferor with the transferred financial assets. The Company does not have a program to transfer financial assets; therefore, this ASU had no impact on the Company’s consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amended the consolidation guidance applicable to variable interest entities and required additional disclosures concerning an enterprise’s continuing involvement with variable interest entities. The Company does not have variable interest entities; therefore, this ASU had no impact on the Company’s consolidated financial statements.
21
On January 1, 2010, the Company adopted ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2 and separate disclosures about activity relating to Level 3 measurements and clarifies existing disclosure requirements related to the level of disaggregation and input and valuation techniques. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or the related disclosures.
Management has reviewed these new standards and believes they had or will have no material impact on the financial statements of the Company.
NOTE 11 – SUBSEQUENT EVENTS
In May 2009, the FASB issued ASC 855-10, “Subsequent Events”, (formerly SFAS No. 165, “Subsequent Events,” which establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The pronouncement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether that date represents the date the financial statements were issued or were available to be issued. In conjunction with the preparation of these financial statements, an evaluation of subsequent events was performed through March 1, 2011, which is the date the financial statements were issued. No reportable events were noted.
|
NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (formally SFAS No. 157), defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 was effective for our financial assets and liabilities on January 1, 2008. The FASB delayed the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008.
SFAS 157’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The Standard classifies these inputs into the following hierarchy:
Level 1 Inputs – Quoted prices for identical instruments in active markets.
Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs – Instruments with primarily unobservable value drivers.
As of December 31, 2010, the Company had no instruments with Level 1 or Level 2 inputs.
The Company had notes payable to shareholders and related parties totaling $75,295 at December 31, 2010, which are valued using Level 3 inputs. Due to the short maturity of these obligations (one less than one year, the other less than five years), the carrying value of these notes approximates the fair value in all material respects.
As of December 31, 2010, the Company did not have any other financial instruments.
22
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned hereunto duly authorized.
|
SURFACE COATINGS, INC.
|
||
| By: /s/ | Richard Pietrykowski | |
| Richard Pietrykowski | ||
| Chief Executive Officer & Chief Financial Officer | ||
Dated: March 2, 2010
23
PART III
ITEM 13.- Exhibits and Reports on Form 8-K
|
|
(a)
|
Exhibits
|
|
No.
|
Description
|
|
31.1
|
Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.
|
24