SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

 

 

(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)

 

2010 Industrial Blvd., Suite 605, Rockwall, Texas 75087

 

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 December 13, 2011, there were 5,429,000 shares of Common Stock of the issuer outstanding.

 

 

EXPLANATORY NOTE

 

This Second Amendment on Form 10-K/A (this “Amendment”) amends Surface Coatings Inc.’s (the “Registrant”) Annual Report on Form 10-K  for the fiscal year ended December 31, 2010, which the Registrant previously filed with the Securities and Exchange Commission on March 7, 2011 (the “Original Filing”), and it’s First Amendment, filed on November 1, 2011.  

 

The Registrant is filing this Amendment because management was made aware of a deficiency contained within the Original Filing, and it’s First Amendment, namely the filings did not include the financial statements and footnotes in ITEM 8 of Form 10-K.

 

The Registrant has re-submitted certifications:

• EXHIBIT 31.1: CHIEF EXECUTIVE OFFICER CERTIFICATION (paragraphs 1 through 3)
• EXHIBIT 31.2: CHIEF FINANCIAL OFFICER CERTIFICATION (paragraphs 1 through 3)
• EXHIBIT 32.1: CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Except as set forth above, the Original Filing has not been amended, updated or otherwise modified. 

 

The company acknowledges that:

• The Company is responsible for the adequacy and accuracy of the disclosure in the filings;
• Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings: and
• The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States

 

 

 

ITEM 8

 

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 Surface Coatings, 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

 

 

 

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.

 

 

 

 

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.

 

 

 

 

 

 

 

 

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 (USED IN)  OPERATING ACTIVITIES			9,387				(41,290	)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Fixed Assets			0				1,800
Loss on Sale of Fixed Asset			0				0
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 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.

 

 

 

SURFACE COATINGS, INC. Notes to the Consolidated Financial Statements December 31, 2010

 

 

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.

 

 

 

 

 

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.

 

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.

 

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.

 

 

 

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 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.

 

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, therefore, 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.

 

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.

 

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:	Richard Pietrykowski
	Richard Pietrykowski
	Chief Executive Officer & Chief Financial Officer
Dated: December 14, 2011