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 June 30, 2011

 

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 A, 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)

 

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:

 

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 August 8, 2011, there were 5,429,000 shares of Common Stock of the issuer outstanding.

 

 

 

TABLE OF CONTENTS

 

 

	PART I FINANCIAL STATEMENTS
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis or Plan of Operation	16

 

	PART II OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 2.	Changes in Securities	19
Item 3.	Default upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits and Reports on Form 8-K	19

 

 

 

 

 

 

 

 

 

SURFACE COATINGS, INC.  Consolidated Balance Sheets  As of June 30, 2011 and December 31, 2010

 

		As of June 30, 2011 (Unaudited)				As of December 31, 2010 (Audited)
Assets
Current Assets
Cash and Cash Equivalents		$	121,044			$	114,494
Accounts Receivable (Net of Allowance for Doubtful         Accounts of  $1,937 and $7,220)			109,160				88,463
Allowance for Estimated Returns			(1,400	)			(6,845	)
Prepaid Expenses			6,285				0
Inventory			71,789				57,464
Total Current Assets			306,878				253,576
Fixed Assets:
Machinery and Equipment			18,327				18,327
Leasehold Improvements			1,406				1,406
Less: Accumulated Depreciation			(12,727	)			(10,645	)
Total Fixed Assets			7,006				9,088
Total Assets		$	313,884			$	262,664
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable		$	53,209			$	33,028
Accrued Expenses			57,126				73,050
Due to Related Parties			22,047				22,047
Customer Deposits			0				33,462
Current Portion of Notes Payable to Shareholders			20,274				17,469
Current Portion of Capital Lease Obligation			2,784				3,336
Line-of-Credit			19,506				29,503
Total Current Liabilities			174,946				211,895
Long-Term Liabilities
Capital Lease Obligation - Equipment			0				1,116
Notes Payable to Related Parties (net of current portion)			46,049				35,779
Total Long-Term Liabilities			46,049				36,895
Total Liabilities			220,995				248,790
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			(178,103	)			(257,118	)
Total Stockholders’ Equity			92,889				13,874
Total Liabilities and Stockholders’ Equity		$	313,884			$	262,664

 

 

 

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

 

 

 

 

SURFACE COATINGS, INC. Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)

 

 

		Three Months Ended								Six Months Ended
		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Revenue		$	400,084			$	176,926			$	793,089			$	312,325
Cost of Sales			238,476				101,782				497,207				171,973
Gross Profit			161,608				75,144				295,882				140,352
Operating Expenses:
Depreciation Expense			1,005				1,075				1,360				2,152
Advertising Expense			15,435				7,303				24,778				19,930
General and Administrative			94,872				66,135				189,217				146,642
Total Operating Expenses			111,312				74,513				214,355				168,724
Net Operating Income (Loss)			50,296				631				80,527				(28,372	)
Other Income (Expense)
Loss on Sale of Asset			0				0				0				0
Interest Expense			(712	)			(1,813	)			(1,512	)			(2,813	)
Total Other Income (Expense)			(712	)			(1,813	)			(1,512	)			(2,813	)
Net Income (Loss)		$	49,584			$	(1,182	)		$	79,015			$	(31,185	)
Basic and Diluted Earnings (Loss) per share		$	0.01			$	(  0.00	)		$	0.01			$	(0.01	)
Weighted Average Shares Outstanding:
Basic and Diluted			5,429,000				5,236,544				5,429,000				5,081,028

 

 

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

 

 

 

 

 

 

		Common Stock								Additional  Paid-in				Accumulated
		Shares				Par  Value				Capital				Deficit				Totals
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
Net Income															79,015				79,015
Stockholders’ Equity, June 30, 2011			5,429,000			$	5,429			$	265,563			$	(178,103	)		$	92,889

 

 

 

 

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

 

 

 

 

 

 

SURFACE COATINGS, INC. Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2011 and June 30, 2010 (Unaudited)

 

		Six Months Ended June 30, 2011				Six Months Ended June 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)		$	79,015			$	(31,185	)
Adjustments to reconcile net deficit to cash used by operating activities:
Depreciation			2,082				2,152
Bad Debt Expense			(13,414	)			0
Allowance for Estimated Returns			(5,445	)			1,905
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable			(7,283	)			(24,320	)
(Increase)   in Inventory			(14,325	)			(2,306	)
Decrease   in Other Assets			0				1,627
Increase   in Accounts Payable			20,181				25,685
(Increase) in Prepaid Expense			(6,285	)			0
Increase   in Accrued Expenses			(15,924	)			7,823
Increase (Decrease) in Other Liabilities			(33,462	)			5,900
Increase (Decrease) in Line-of-Credit			(9,997	)			4,863
CASH FLOWS PROVIDED BY (USED) IN OPERATING ACTIVITIES			(4,857	)			( 7,856	)
CASH FLOWS FROM INVESTING ACTIVITIES
None			0				0
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES			0				0
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Shareholder Note			0				(3,145	)
Note Payable from Sharehoder			20,000				0
Payments on Capitalized Lease Commitment			(1,668	)			(1,668	)
Payments on Note to President			0				(2,942	)
Payments on Note to Related Parties			(6,925	)			(3,633	)
CASH FLOWS PROVIDED BY  (USED IN) FINANCING ACTIVITIES			11,407				(11,388	)
NET (DECREASE) IN CASH			6,550				(19,244	)
Cash, beginning of period			114,494				134,959
Cash, end of period		$	121,044			$	115,715
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid		$	1,512			$	2,813
Income taxes paid		$	0			$	0

 

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.

 

 

 

SURFACE COATINGS, INC. Notes to the Consolidated Financial Statements June 30, 2011 (Unaudited)

 

 

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.  As of June 30, 2011 and December 31, 2010, 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.

 

 

 

 

 

Unaudited Interim Financial Statements:

 

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable Securities and Exchange Commission (“SEC”) regulations for interim financial information. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary to present fairly the balance sheets, statements of operations and statements of cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations. It is presumed that users of this interim financial information have read or have access to the audited financial statements and footnote disclosure for the preceding fiscal year contained in the fiscal year 2010 Form 10-K.   Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 and should be read in conjunction with the Company’s Form 10-K filing for 2010.

 

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.

 

 

 

 

 

 

Fair Value of Financial Instruments:

 

In accordance with the reporting requirements of ASC 820, “Fair Value Measurements” 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:

 

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 $1,400 and $6,845 for the three months ended June 30, 2011 and December 31, 2010, respectively. In accordance with ASC740-10, 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 June 30, 2011, the allowance for estimated returns was $1,400.

 

Revenue is recorded net of any sales taxes charged to customers.

 

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 $15,435 and $7,303 in advertising costs for the three months ended June 30, 2011 and 2010, respectively and $24,778 and $19,930 for the six months ended June 30, 2011 and 2010, respectively.

 

Income Taxes:

 

The Company has adopted ASC 740-10 “Income Taxes”, 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”, establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements.  For the quarters ended June 30, 2011 and 2010, the Company had no items of other comprehensive income. Therefore, the net profit equals comprehensive profit for the periods then ended.

 

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.

 

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).

 

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.

 

 

NOTE 2 – FIXED ASSETS

 

Fixed Assets at June 30, 2011 and December 31, 2010 are as follows:

 

		June 30,				December 31,
		2011				2010
Property & Equipment		$	18,327			$	18,327
Telephone System			1,406				1,406
Less:   Accumulated Depreciation			(12,727	)			(10,645	)
Total Fixed Assets		$	7,006			$	9,088

 

 

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 $1,005 and $1,075 for the three months ended June 30, 2011 and 2010, respectively and $1,361 and $2,152 for the six months ended June 30, 2011 and 2010.  Capitalized lease amortization expense for the six months ended June 30, 2011 and 2010 was $571.

 

At June 30, 2011, there was a $8,775 capital lease asset included in fixed assets with a remaining capitalized lease obligation of $2,784.  At June 30, 2011, capitalized interest associated with the lease was $951.

 

On May 9, 2011 the Company entered into a capital lease agreement with an affiliate of the President for machinery. The equipment will be delivered in August and payments will commence on August 9, 2011. The capital lease is for $69,200, payable over 36 months at 12% interest, with monthly payments of principal and interest of $2,278. The Company has the option to buy the equipment for $1 at the end of the lease.

 

 

NOTE 3 – DUE TO RELATED PARTIES

 

The Company had $22,047 due to a minority shareholder as of June 30, 2011 and December 31, 2010. 

 

In May 2011, the Company entered into a lease with an affiliate of the Company’s president. See Note 5 for additional information.

 

Additionally, in May 2011, an affiliate of the Company’s president loaned the Company $20,000. See Note 4 for additional information.

  

 

NOTE 4 – NOTES PAYABLE TO RELATED PARTIES

 

Note Payable to Shareholder:

 

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 June 30, 2011 was $0 and at December 31, 2010 was $0.  

 

On May 31, 2011, the Company’s President loaned the Company $20,000. This note bears interest at a rate of 6% and requires monthly payments of $607 for 36 months. The total amount owed at June 30, 2011 was $20,000, of which $6,468 was classified as short-term as it is due within one year.

 

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 June 30, 2011 the balance on the note was $46,323 with $13,806 classified as short-term as it is due within one year.  The current portion as of December 31, 2010 was $16,669.

 

 

NOTE 5 – CAPITAL LEASE OBLIGATION

 

In June 2008, the Company entered into a capital lease agreement for the lease of equipment.  The lease requires monthly payments of $278 for four years.  At the end of the lease term, the Company is entitled to purchase the equipment for $1.  The total amount owed at June 30, 2011 and December 31, 2010 was $2,784 and $4,452 respectively, of which $2,784 is due during the next 12 months and is classified as a current liability. At June 30, 2011, capitalized interest associated with the lease was $951 and is included in fixed assets.

 

On May 9, 2011 the Company entered into a capital lease agreement with an affiliate of the President for machinery. The equipment will be delivered in August and payments will commence on August 9, 2011. The capital lease is for $69,200, payable over 36 months at 12% interest, with monthly payments of principal and interest of $2,278. The Company has the option to buy the equipment for $1 at the end of the lease.

 

 

NOTE 6 – 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 June 30, 2011 and December 31, 2010, the amounts outstanding under this line of credit were $19,506 and $29,503, respectively.

 

 

NOTE 7 – EQUITY

 

The Company is authorized to issue 20,000,000 preferred shares at a par value of $.001 per share.  There were no preferred shares outstanding as of June 30, 2011 and December 31, 2010.

 

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 June 30, 2011 and December 31, 2010, respectively.

 

On June 29, 2009 the Company’s post-effective amendment, to the registration statement which became effective in October, 2008, became effective.  As of December 31, 2009, 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 8 – 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 lease expense for the three months ended June 30, 2011 and 2010 were $6,750 and $6,750, respectively and the lease expense for the six months ended June 30, 2011 and 2010 were $13,500 and $13,500, respectively. The Company has no other lease obligations. 

 

 

NOTE 9 – 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.

 

 

 

 

The cumulative tax effect at the expected tax rate of 25% of significant items comprising the Company’s net deferred tax amounts as of June 30, 2011 and December 31, 2010 are as follows:

 

Deferred tax asset related to:

 

		June 30,				December 31,
		2011				2010
Prior Year		$	85,430				79,916
Tax Benefit for Current Period			0				5,514
Utilization of NOL			(19,750	)			0
Net Operating Loss Carryforward		$	65,680			$	85,430
Less: Valuation Allowance			(65,680	)			(85,430	)
Net Deferred Tax Asset		$	0			$	0

 

 

The cumulative net operating loss carry-forward is approximately $178,000 at June 30, 2011 and $257,000 at December 31, 2010, and will expire in the years 2025 through 2031.    The realization of deferred tax benefits is contingent upon future earnings, therefore, the net deferred tax asset has been fully reserved.

 

 

 

 

NOTE 10 – FINANCIAL CONDITION AND GOING CONCERN

 

The Company has an accumulated deficit through June 30, 2011 totaling $178,103 and had working capital of $131,932.  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 11 – SUBSEQUENT EVENTS

 

In May 2009, the FASB issued ASC 855-10, “Subsequent Eventswhich 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 August 15, 2011, which is the date the financial statements were issued. No reportable events were noted.

 

 

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS

 

This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company’s actual results could differ materially from those set forth on the forward looking statements as a result of the risks set forth in the Company’s filings with the Securities and Exchange Commission, general economic conditions, and changes in the assumptions used in making such forward looking statements.

 

General

 

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 customers’ 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.

 

In 2008, we filed a registration statement with the U.S. Securities & Exchange Commission in order to raise funds to expand our business and execute our business plan. The filing became effective in October 2008 which gave us the opportunity to sell up to 1,000,000 shares of common stock at $0.50 per share. On June 29, 2009 the Company’s post-effective amendment, to the registration statement became effective lowering the minimum required shares sold to 100,000 or $50,000.  As of December 31, 2009, the Company raised $214,500 by selling 429,000 shares at $.50 per share.

 

The first six months of 2011 have been strong as the economy continues to rebound. Sales have been strong through the second quarter and we expect this trend to continue throughout the summer as the weather improves. A strong advertising campaign last year has generated many leads. We are confident in the current business environment and expect volume to continue increasing.

 

 

RESULTS FOR THE QUARTER ENDED June 30, 2011

 

Our quarter ended on June 30, 2011.  Any reference to the end of the fiscal quarter refers to the end of the first quarter for the period discussed herein.

 

REVENUE.  Revenue for the three months ended June 30, 2011, was $400,084 compared to $176,926 for the period ended June 30, 2010 and revenue for the six months ended June 30, 2011, was $793,089 compared to $312,325 for the period ended June 30, 2010.  The increases of $223,158 and $480,764 for the three months and six months ended June 30, 2011, respectively, was due to increased marketing efforts, particularly web-based banner advertisements, and a strong rebound in the construction supply in the three and six month periods versus the same periods last year.

 

GROSS PROFIT.  Gross profit for the three months ended June 30, 2011 was $161,608 compared to $75,144 for the three month period ended June 30, 2010.  Gross profit increase of $86,464 is due to volume (increased sales) of $94,800 and offset by reduced margins of $8,400. Margins decreased in the quarter ended June 30, 2011 versus the same period in 2010 from 42.5% to 40.4%. This decrease of 2.1% is attributable to product mix. .

 

Gross profit for the six months ended June 30, 2011 was $295,882 compared to $140,352 for the six month period ended June 30, 2010.  Gross profit increase of $155,530 is due to volume (increased sales) of $215,900 and offset by reduced margins of $60,400. Margins decreased year-to-date versus the same period in 2010 from 44.9% to 37.3%. This decrease of 7.6% is attributable to product mix and lower price points on high volume sales (volume discounts).

 

OPERATING EXPENSES. Total operating expenses, for the three months ended June 30, 2011, were $110,307 compared to expenses for the period ended June 30, 2010 of $73,437.  The increase in cost in the three month period ended June 30, 2011 of about $36,870 is due to increased computer costs $12,000 (added workstations), advertising $8,000, bonus $7,000, fees $6,000 and state franchise taxes $3,000. All but the increased computer expenses are variable and change in relation to sales.  The above expenses do not include depreciation which was $1,005 and $1,075 for the three months ended June 30, 2011 and 2010, respectively. 

 

 

 

Total operating expenses, for the six months ended June 30, 2011, were $213,995 compared to expenses for the period ended June 30, 2010 of $168,724.  The increase in cost in the six month period ended June 30, 2011 of about $47,400 is due to increased bonus $16,000, computer expenses $13,000, other facilities fees and state franchise taxes $6,000.  The above expenses do not include depreciation which was $1,360 and $2,152 for the six months ended June 30, 2011 and 2010, respectively.  

 

NET INCOME (LOSS). Net income for the three months ended June 30, 2011 was $49,584 compared to net loss for the period ended June 30, 2010 of ($1,182).   Net income for the six months ended June 30, 2011 was $79,015 compared to a net loss for the period ended June 30, 2010 of ($31,185). The increases of $50,766 and $110,200 for both the three and six month periods, respectively, is due to increased volume 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 was closed in 2009 and through  December 31, 2009, the Company raised $214,500 by selling 429,000 shares at $.50 per share.

 

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.  When this is not plausible the Company looks to shareholder advances, and if necessary, related party advances. Net Cash from Operating Activities for the six months ended June 30, 2011 was negative $4,857.

 

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 June 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 June 30, 2011 the Company owes $2,784.

 

With the limited operating history of our Company and the strong growth recorded in 2008 and the recession in 2009/2010 and and a rebound in the construction market in 2011 we have not been able to track true seasonal trends.  We expect our business to trend with the construction market which typically sees improvements in the second and third quarters as the weather improves.

 

 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 increased by about $87,000 to $131,932 from December 31, 2010 to June 30, 2011.  This increase is mainly attributable to favorable changes in accounts receivable $21,000, inventory $14,000, accrued expenses $16,000, customer deposits $33,000, allowances and other assets $12,000, the line-of-credit $10,000 and cash of approximately $7,000; offset by an unfavorable changes in accounts payable $19,000.

 

STOCKHOLDER’S EQUITY: Stockholder’s Equity increased by approximately $79,000, as a result of the net income for the period.

 

Employees

 

At June 30, 2011, the Company had five and a half equivalent full time employees.

 

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

 

 

 

 

Item 4. 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 June 30, 2011.  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 quarterly Form 10-Q has been made known to them.

 

For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seg.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  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.

 

Based upon an evaluation conducted for the period ended June 30, 2011, our Chief Executive and Chief Financial Officer as of June 30, 2011 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:

 

● Reliance upon independent financial reporting consultants for review of critical accounting areas and disclosures and material non-standard transaction.

 

● Lack of sufficient accounting staff which results in a lack of segregation of duties necessary for a good system of internal control.

 

In order to remedy our existing internal control deficiencies, as our finances allow, we will hire additional accounting staff.

 

 

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-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

PART II

 

Items No. 1, 2, 3, 4, 5 - Not Applicable.

 

 

Item No. 6 - Exhibits and Reports on Form 8-K

 

(a)     None

 

(b)   Exhibits

 

Exhibit Number		Name of Exhibit
31.1	Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Surface Coatings, Inc.

 

By /s/  Rick Pietrykowski

 

Rick Pietrykowski, President, CFO

 

Date: August 15, 2011