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, 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 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 26, 2012, there were 5,579,000 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. In 2011, our business continued to grow as the economy recovered, resulting in a net profit. 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:

 

·

Low order minimum quantity

·

Fast turnaround

·

High quality

 

 

 

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 40.1% 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 (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.

 

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:

·

Provide price quotes within the hour (industry average is 24-72 hours)

·

Ship samples within 24 hours (industry average is 7-14 days)

·

Ship orders within 48 hours (industry response ranges from several days to three weeks)

·

Few competitors are able to respond as rapidly as we are, giving us a competitive edge

 

Future products and services:

At the present time, we do not have plans to develop or market additional products or services.

 

 

 

 

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 five employees, the President, two fulltime production people and two sales/admin people. 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, 2011, 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 June 28, 2011 and elected Richard Pietrykowski as the sole director of the Company.

 

 

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

 

The common stock is currently quoted over the counter bulletin board (ITC BB) under the symbol SCTZ.OB.

 

At December 31, 2011, we had approximately 58 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 2011

 

2011 was another successful year for the Company as we saw revenue increase 140% ($581,831) versus 2010. The purchase of a new perforator has helped to vertically integrate more of our manufacturing, driving costs down while speeding up the time between order and delivery. In addition to new customers, we have seen our current customers increase their orders far more this year than in the past. Our strategy to decrease our margin to attract new customers has shown its effectiveness in the results this year.

 

RESULTS FOR THE FISCAL YEAR ENDING DECEMBER 31 2011

 

REVENUE. Revenue for the twelve months ended December 31, 2011 was $1,452,687 compared to $870,856 for the twelve months ended December 31, 2010. The increase in revenue for the twelve month period is attributed to a continued rebound in the economy, particularly in the industrial manufacturing sector. Our marketing spending has been specifically geared to industrial websites and we continue to see a payoff from it.

 

GROSS PROFIT. Gross profit for the twelve months ended December 31, 2011 was $589,412 compared to $343,710 for the same period in 2010. Margins slightly increased this year from 39.5% to 40.6%. This is because of increased efficiency in our warehouse, and a new perforator that has lowered the cost of perforated material.

 

OPERATING EXPENSES. Total operating expenses for the twelve months ended December 31, 2011 were $481,188 compared to expenses for the period ended December 31, 2010 of $361,380. The increase is mainly attributable to installation of a new computer system for an increase of $22,851, and continued aggressive spending on advertising, increasing our advertising expense by $34,704. The benefits of this spending can be seen in our increase in revenues.

 

NET INCOME (LOSS). Net income for the twelve months ended December 31, 2011 was $102,938 compared to a loss for the period ended December 31, 2010 of $22,071.

 

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.

 

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, 2011 was positive about $16,000 This is an improvement over the same period in 2010 of about $7,000 (2010 was $9,000).

 

 

 

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, 2011 the Company owes $1,116 on this lease. In May 2011, the Company entered into a lease agreement with an affiliate of the President of the Company for an additional cutting machine that the Company uses in daily operations. As of December 31, 2011, the Company owes $56,820 on this lease.

 

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 $97,817 to $139,498 from December 31, 2010 to December 31, 2011.

 

STOCKHOLDER’S EQUITY: Stockholder’s Equity increased by the amount of the net income of $102,938 and the issuance of $22,500 of common stock in exchange for consulting services.

 

 

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, 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 annual report on Form 10-K 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.

Based upon an evaluation conducted for the period ended December 31, 2011, our Chief Executive and Chief Financial Officer as of December 31, 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.

 

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, 2011. Based on its evaluation, our management concluded that, as of December 31, 2011, 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.

 

 

 

 

PART III.

 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

 

Name	Age	Position
Richard Pietrykowski	63	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 2011 and 2010 as compensation.

 

Name	Capacity Served	Aggregate Remuneration
Richard Pietrykowski	Director, President Secretary and Treasurer	2011: $44,400
		2010: $42,400
Jeannie Pietrykowski	Director	2011: $34,500
		2010: $30,300

 

 

During the twelve months ended December 31, 2011, Mr. Pietrykowski also received $47,146 in sales commission. At December 31, 2011 Mr. Pietrykowski was owed $27,055 in accrued sales commission.

 

 

ITEM 12. SECUIRTY OWNERSHIP OF MANANGEMENT AND BENEFICIAL OWNERS

 

As of December 31, 2011 the following persons are known to the Company to own 5% or more of the Company's Voting Stock:

 

Title / Relationship to Issuer	Name of Owner	Number of Shares Owned	Percent of Total
Director, President, Secretary and Treasurer	Richard Pietrykowski	1,800,000	32.2%
(Former) Director, (Former) Vice-President	John Donahoe	2,700,000	48.4%

 

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION

 

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:

 

• $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, 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, 2011 the balance on the note was $39,153 with $14,981 classified as short-term as it is due within one year.

 

The Company’s President: On May 31, 2011, the Affiliate of 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 December 31, 2011 was $8,077, of which $6,997 was classified as short-term as it is due within one year.

 

In May 2011, the Company entered into a capital lease with an affiliate of the Company’s president. The lease is for $63,300, payable over 36 months at 14% interest, with monthly payments of $2,160.

 

 

 

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 2011 and 2010 was $17,138 and $14,170 respectively.

 

(2) AUDIT-RELATED FEES

 

Fees charged in connection with filing quarterly Form 10-Q’s was $10,150 in 2011 and $10,150 in 2010.

 

(3) TAX FEES

 

NONE

 

(4) ALL OTHER FEES

 

None

 

(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.

 

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANICAL STATEMENTS AND REPORTS ON FORM 8-K

 

(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, 2011 and 2010

 

Consolidated Statements of Operations for the Years Ended December 31, 2011 and December 31, 2010

 

Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2011 and December 31, 2010

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and December 31, 2010

 

Notes to the Consolidated Financial Statements

 

(b) The Company did not file any Form 8-K’s in 2011.

 

(c) 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.

 

 

 

 

 

 

 

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, 2011 and 2010, 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, 2011 and 2010 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, 2011 and 2010, 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 10 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 10.  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 27, 2012

 

 

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

 

		As of December 31, 2011				As of December 31, 2010
Assets
Current Assets
Cash and Cash Equivalents		$	116,451			$	114,494
Accounts Receivable (Net of Allowance for Doubtful         Accounts of  $1,937 and $7,220)			91,791				88,463
Allowance for Estimated Returns			(1,400	)			(6,845	)
Prepaid Expenses			5,852				0
Inventory			88,751				57,464
Total Current Assets			301,445				253,576
Fixed Assets:
Machinery and Equipment			81,627				18,327
Leasehold Improvements			1,406				1,406
Less: Accumulated Depreciation			(17,904	)			(10,645	)
Total Fixed Assets			65,129				9,088
Total Assets		$	366,574			$	262,664
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable		$	53,048			$	33,028
Accrued Expenses			37,876				73,050
Due to Related Parties			22,047				22,047
Customer Deposit			0				33,462
Current Portion of Notes Payable to Related Parties			21,978				17,469
Current Portion of Capital Lease Obligation			1,116				3,336
Current Portion of Capital Lease Obligation – Related  Party			18,904				0
Line-of-Credit			6,978				29,503
Total Current Liabilities			161,947				211,895
Long-Term Liabilities
Capital Lease Obligation			0				1,116
Capital Lease Obligation –  Related Party			40,064				0
Notes Payable to Related Parties (net of current portion)			25,253				35,779
Total Long-Term Liabilities			65,317				36,895
Total Liabilities			227,264				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, 5,579,000 and 5,429,000  shares issued   and outstanding,  respectively			5,579				5,429
Paid In Capital			287,913				265,563
Accumulated Deficit			(154,182	)			(257,118	)
Total Stockholders’ Equity			139,310				13,874
Total Liabilities and Stockholders’ Equity		$	366,574			$	262,664

 

 

 

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, 2011 and 2010

 

 

		Year Ended
		December 31, 2011				December 31, 2010
Revenue		$	1,452,687			$	870,856
Cost of Sales			863,275				527,146
Gross Profit			589,412				343,710
Operating Expenses:
Depreciation Expense			7,259				4,811
Advertising Expense			71,713				37,009
General and Administrative			402,218				319,560
Total Operating Expenses			481,190				361,380
Net Operating Income (Loss)			108,222				(17,670	)
Other (Expense)
Interest Expense			(5,286	)			(4,401	)
Total Other (Expense)			(5,286	)			(4,401	)
Net Income (Loss)		$	102,936			$	(22,071	)
Basic and Diluted Earnings (Loss) per share		$	0.02			$	(0.00	)
Weighted Average Shares Outstanding:
Basic and Diluted			5,448,315				5,429,000

 

 

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

 

 

 

 

 

SURFACE COATINGS, INC. Consolidated Statement of Stockholders' Equity For the Years Ended December 31, 2011 and 2010

 

 

			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
Shares Issued for Services			150,000				150				22,350								22,500
Net Income															102,936				102,936
Stockholders’ Equity, December 31, 2011			5,579,000			$	5,579			$	287,913			$	(154,182	)		$	139,310

 

 

 

 

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, 2011 and 2010

 

		Year Ended December 31, 2011				Year Ended December 31,  2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)		$	102,936			$	(22,071	)
Adjustments to reconcile net deficit to cash used by operating activities:
Depreciation			7,259				4,304
Stock Issued for Services			22,500				0
Bad Debt Expense			0				(11,167	)
Change in Assets and Liabilities:
Increase (Decrease)  in Allowance for Sales Returns			(5,445	)			4,735
(Increase) in Accounts Receivable			(3,328	)			(38,692	)
(Increase)  in Inventory			(31,287	)			(1,778	)
(Increase) in Prepaid Expenses and Other Assets			(5,852	)			0
Increase  in Accounts Payable			20,020				16,381
Increase  in Accrued Expenses			(35,174	)			13,645
Increase (Decrease) in Line-of-Credit			(22,525	)			10,568
Increase (Decrease) in Other Liabilities			(33,462	)			33,462
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES			15,642				9,387
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Fixed Assets			(63,300	)			0
CASH FLOWS (USED IN) INVESTING ACTIVITIES			(63,300	)			0
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Capital Lease Financing			63,300				0
Proceeds from  Note to Related Party			20,000				0
Payments on Capital Leases			(7,668	)			(3,336	)
Payments on Notes to Related Parties			(26,017	)			(26,516	)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITES			49,615				(29,852	)
NET INCREASE IN CASH			1,957				(20,465	)
Cash, beginning of period			114,494				134,959
Cash, end of period		$	116,451			$	114,494
SUPPLEMENTAL CASH FLOW INFORMATION
Stock Issued for Services		$	22,500			$	0
Interest paid		$	5,286			$	4,401
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, 2011

 

 

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, and (“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 October 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 accounting policies used conform to generally accepted accounting principles which have been consistently applied in the preparation of these financial statements.

 

 

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.

 

Management believes that all adjustments necessary for a fair statement of the results for the years ended December 31, 2011 and 2010 have been made.

 

 

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.

 

Fair Value of Financial Instruments:

 

Accounting Standards Codification (“ASC”)  Topic 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements.  In general, fair value of financial instruments is based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s credit worthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.

 

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.

 

Property and Equipment:

 

Property and equipment 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”.     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 $1,400 and $14,800 for the years ended December 31, 2011 and 2010, respectively.  In accordance with ASC 740-10, 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 December 31, 2011 and 2010, the allowance for estimated returns was $1,400 and $6,845, 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 $71,713 and $37,009 in advertising costs for the years ended December 31, 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 years ended December 31, 2011 and 2010, 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, 2011 and 2010 are as follows:

 

		Dec 31,				Dec 31,
		2011				2010
Property & Equipment		$	81,627			$	18,327
Telephone System			1,406				1,406
Less:  Accumulated Depreciation			(17,904	)			(10,645	)
Total Fixed Assets		$	65,129			$	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 $7,259 and $4,304 for the years ended December 31, 2011 and 2010, respectively. Capitalized lease amortization expense was $1,142 and $1,142 for the years ended December 31, 2011 and 2010, respectively.

 

At December 31, 2011, there was $8,775, for the first capital lease asset included in fixed assets with a remaining capitalized lease obligation of $1,116.   On May 9, 2011 the Company entered into a capital lease agreement with an affiliate of the President for machinery. The equipment was placed in service in October, 2011. The capital lease is for $63,300, payable over 36 months at 14% interest, with monthly payments of principal and interest of $2,160. The Company has the option to buy the equipment for $1 at the end of the lease. This second capital lease asset is included in fixed assets with a remaining capitalized lease obligation of $58,820.

 

 

NOTE 3 – DUE TO RELATED PARTIES

 

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

 

 

NOTE 4 – NOTES PAYABLE TO RELATED PARTIES

 

Note Payable to Shareholder:

 

On May 31, 2011, the Affiliate of 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 December 31, 2011 was $8,077, of which $6,997 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 $1,406 beginning on August 1, 2009 and ending on July 1, 2014.  At December 31, 2011 the balance on the note was $39,154 with $14,980 classified as short-term as it is due within one year.  

 

 

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 December 31, 2011 and December 31, 2010 was $1,116 and $4,452 respectively, of which $1,116 is due during the next 12 months and is classified as a current liability. At December 31, 2011, capitalized interest associated with the lease was $381 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 was delivered in October, 2011 and payments commenced on October 7, 2011. The capital lease is for $63,300 payable over 36 months at 14% interest, with monthly payments of principal and interest of $2,160. The Company has the option to buy the equipment for $1 at the end of the lease. The total amount owed at December 31, 2011, was $56,820 of which $18,940 is due during the next 12 months and is classified as a current liability.

 

 

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 December 31, 2011 and December 31, 2010, the amounts outstanding under this line of credit were $6,978 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 shares outstanding as of December 31, 2011 and 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 5,579,000 and 5,429,000 shares issued and outstanding as of December 31, 2011 and 2010, 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 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 Company has no other lease obligations.    The Company’s future lease obligations are as follows:

 

		Future Obligation
2012		$	27,000
2013			27,000
2014			24,750
Total		$	78,750

 

 

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, 2011 and December 31, 2010 are as follows:

 

 

 

Deferred tax asset related to:

 

		December 31,				December 31,
		2011				2010
Prior Year		$	85,430			$	79,916
Utilization of NOL			(25,734	)			0
Tax Benefit for Current Period			0				5,514
Net Operating Loss Carryforward		$	59,696			$	85,430
Less: Valuation Allowance			(59,696	)			(85,430	)
Net Deferred Tax Asset		$	0			$	0

 

The cumulative net operating loss carry-forward is approximately $154,000 at December 31, 2011 and $257,000 at December 31, 2010, 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, 2011.

 

 

NOTE 10 – FINANCIAL CONDITION AND GOING CONCERN

 

The Company has an accumulated deficit through December 31, 2011 of approximately $154,182 and had working capital of approximately $139,498.  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 2011.  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 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 27, 2012, 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” 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, 2011, the Company had no instruments with Level 1 or Level 2 inputs.

 

The Company had notes payable to shareholders and related parties and capital leases totaling $107,315 at December 31, 2011, 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, 2011, 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: /s/ Richard Pietrykowski

Richard Pietrykowski

Chief Executive Officer & Chief Financial Officer

 

Dated: March 28, 2012

 

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.