SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q








(Mark One)





[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended September 30, 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 A, Rockwall, Texas 75087


(Address of principal executive offices)





(972) 722-7351


(Issuer's telephone number)





N/A


(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:.  Yes [ X ]   No [     ].





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:





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 November 12, 2010, there were 5,429,000 shares of Common Stock of the issuer outstanding.




















TABLE OF CONTENTS








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





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























2








SURFACE COATINGS, INC.

Consolidated Balance Sheets

As of September 30, 2010 and December 31, 2009





As of

September 30, 2010

(Unaudited)


As of

December 31, 2009

(Audited)AssetsCurrent AssetsCash and Cash Equivalents

$
69,478


$
134,959Accounts Receivable (Net of Allowance for Doubtful

Accounts of  $7,220 and $5,905)


133,181



38,604Allowance for Estimated Returns


(2,655
)


(2,110
)Prepaid Expenses


2,314



0Inventory


61,144



55,686Total Current Assets


263,462



227,139Fixed Assets:Machinery and Equipment


18,327



18,327Leasehold Improvements


1,406



1,406Less: Accumulated Depreciation


(9,569
)


(6,341
)Total Fixed Assets


10,164



13,392Total Assets

$
273,626


$
240,531Liabilities and Stockholders’ EquityCurrent LiabilitiesAccounts Payable

$
63,120


$
16,647Accrued Expenses


91,006



59,405Due to Related Parties


22,047



32,047Current Portion of Note Payable to Shareholder


13,928



16,669Current Portion of Note Payable to President


0



3,145Current Portion of Capital Lease Obligation


3,336



0Line-of-Credit


26,226



18,935Total Current Liabilities


219,663



146,848Long-Term LiabilitiesCapital Lease Obligation - Equipment


5,286



7,788Notes Payable to Related Parties (net of current portion)


39,407



49,950Total Long-Term Liabilities


44,693



57,738Total Liabilities


264,356



204,586Stockholders’ Equity:Preferred stock, $.001 par value, 20,000,000 shares

authorized, -0- shares issued and outstanding


0



0Common stock, $.001 par value, 50,000,000 shares

authorized, 5,429,000 and 5,429,000  shares issued

and outstanding,  respectively


5,429



5,429Paid In Capital


265,563



265,563Accumulated Deficit


(261,722
)


(235,047
)Total Stockholders’ Equity


9,270



35,945Total Liabilities and Stockholders’ Equity

$
273,626


$
240,531











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








3








SURFACE COATINGS, INC.

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)








Three Months Ended


Nine Months EndedSeptember 30, 2010


September 30, 2009


September 30,

2010


September 30,

2009Revenue

$
282,723


$
144,853


$
595,048


$
460,092Cost of Sales


178,789



73,576



350,762



228,695Gross Profit


103,934



71,277



244,286



231,397Operating Expenses:Depreciation Expense


1,078



1,075



3,230



3,227Advertising Expense


8,168



9,444



28,098



22,040General and Administrative


88,880



65,816



235,522



204,193Total Operating Expenses


98,126



76,335



266,850



229,460Net Operating Income (Loss)


5,808



(5,058
)


(22,564
)


1,937Other Income (Expense)Loss on Sale of Asset


0







0



(133
)Interest Expense


(1,298
)


(1,918
)


(4,111
)


(5,726
)Total Other Income (Expense)


(1,298
)


(1,918
)


(4,111
)


(5,859
)Net Income (Loss)

$
4,510


$
(6,976
)

$
(26,675
)

$
(3,922)Basic and Diluted Earnings (Loss) per share

$
(0.00
)

$
( 0.00
)

$
(0.01
)

$
(0.00
)Weighted Average Shares Outstanding:Basic and Diluted


5,429,000



5,236,544



5,429,000



5,081,028








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














4





SURFACE COATINGS, INC.

Consolidated Statement of Stockholders' Equity

For the Nine Months Ended September 30, 2010 (Unaudited)

and the Year Ended December 31, 2009 (Audited)








Common Stock


Additional

Paid-in


AccumulatedShares


Par Value


Capital


Deficit


TotalsStockholders’ Equity,

December 31, 2008


5,000,000


$
5,000


$
51,492


$
(192,894
)

$
(136,402
)Shares Issued for Cash


429,000



429



214,071







214,500Net (Loss)














(42,153
)


(42,153
)Stockholders’ Equity,

December 31, 2009


5,429,000


$
5,429


$
265,563


$
(235,047
)

$
35,945Net (Loss)














(26,675
)


(26,675
)Stockholders’ Equity,

September 30, 2010


5,429,000


$
5,429


$
265,563


$
(261,722
)

$
9,270














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











5











SURFACE COATINGS, INC.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2010 and 2009

(Unaudited)





Nine months ended September 30, 2010


Nine Months Ended

September 30, 2009CASH FLOWS FROM OPERATING ACTIVITIESNet Income (Loss)

$
(26,675
)

$
(3,922
)Adjustments to reconcile net deficit to cash used

by operating activities:Depreciation


3,228



3,227Bad Debt Expense


4,920



0Change in Assets and Liabilities:(Increase) Decrease in Accounts Receivable


(99,497
)


5,231(Increase)  in Inventory


(5,458
)


(7,226
)(Increase) Decrease  in Other Assets


(1,769
)


1,818Increase  in Accounts Payable


46,473



10,728(Decrease) in Overdraft


0



(16,892
)Increase  in Accrued Expenses


31,601



6,772Increase (Decrease) in Line-of-Credit


7,291



(3,430
)CASH FLOWS (USED IN)  OPERATING ACTIVITIES


(39,886
)


(3,694
)CASH FLOWS FROM INVESTING ACTIVITIESSale of Fixed Assets


0



1,800Loss on Sale of Fixed Asset


0



(133
)CASH FLOWS PROVIDED BY INVESTING ACTIVITIES


0



1,667CASH FLOWS FROM FINANCING ACTIVITIESRelease of Subscription Deposit


0



(34,150
)Payments on Shareholder Note


(3,145
)


(8,757
)Proceeds from Sale of Stock






214,500Capitalized Lease Commitment


(2,502
)


0Payments on Note to President


0



(2,497
)Payments on Note  to Related Parties


(19,948
)


2,712CASH FLOWS PROVIDED BY  (USED IN) FINANCING ACTIVITIES


(25,595
)


171,808NET INCREASE IN CASH


(65,481
)


169,781Cash, beginning of period


134,959



33,123Cash, end of period

$
69,478


$
202,904SUPPLEMENTAL CASH FLOW INFORMATIONInterest paid

$
4,111


$
5,726Income taxes paid

$
0


$
0








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











6








SURFACE COATINGS, INC.

Notes to the Consolidated Financial Statements

September 30, 2010

(Unaudited)








NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES





Nature of Activities, History and Organization:





Surface Coatings, Inc. (“Surface Coatings”, the “Company”) is the parent company of Surface Armor, LLC, (“Surface Armor”) a company incorporated under the laws of the State of Texas on July 19, 2005.  The Company operates as a converter and distributor of temporary surface protection tapes, mainly to the construction industry and for the past two years has been developing its business. The Company is located in Texas and sells its product locally as a distributor and throughout the U.S. over the internet.





Surface Coatings is a private holding company established under the laws of Nevada on February 12, 2007, and was formed in order to acquire 100% of the outstanding membership interests of Surface Armor.  On February 15, 2007, Surface Coatings issued 5,000,000 shares of common stock in exchange for a 100% equity interest in Surface Armor.  As a result of the share exchange, Surface Armor became the wholly owned subsidiary of Surface Coatings.  As a result, the members of Surface Armor owned a majority of the voting stock of Surface Coatings.  The transaction was accounted for as a reverse merger whereby Surface Armor was considered to be the accounting acquirer as its members retained control of Surface Coatings after the exchange, although Surface Coatings is the legal parent company.  The share exchange was treated as a recapitalization of Surface Coatings.  As such, Surface Armor, (and its historical financial statements) is the continuing entity for financial reporting purposes. The financial statements have been prepared as if Surface Coatings had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.  The share exchange transaction was effected to change the state of incorporation to allow the opportunity for a reduction of franchise taxes under the new Texas franchise tax calculations and to facilitate the initial public offering.  At the time of the exchange transaction, Surface Coatings had no assets or liabilities and Surface Armor had assets of approximately $57,000 with equity of approximately $19,500.





The capital structure of Surface Coatings is presented as a consolidated entity as if the transaction had been effected in 2005 to consistently reflect the number of shares outstanding. However, the capital structure as presented is different that the capital structure that appears in the historical statements of Surface Armor, LLC in earlier periods due to the recapitalization accounting.





During 2008, the Company filed a Form S-1 to register the sale of their common stock.  The registration was declared effective on Ocotber 14, 2008.  Since then the Company has filed a post effective amendment reducing their minimum amount under the registration from $75,000 to $50,000 which was approved on September 30, 2009.  As of September 30, 2010 and 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.














7







Unaudited Interim Financial Statements:





The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable Securities and Exchange Commission (“SEC”) regulations for interim financial information. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary to present fairly the balance sheets, statements of operations and statements of cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations. It is presumed that users of this interim financial information have read or have access to the audited financial statements and footnote disclosure for the preceding fiscal year contained in the on Form S-1/A that was effective on October 14, 2008.   Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 and should be read in conjunction with the Company’s Form 10-K filing for 2009.





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.














8







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.





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.














9







The Company’s return policy allows customers to return products for up to 15 days after shipment.  Customer returns were $2,655 and $981 for the three months ended September 30, 2010 and 2009, respectively, and $7,966 and $4,278 for the Nine months ended September 30, 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 September 30, 2010, the allowance for estimated returns was $2,655.





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 $8,168 and $9,444 in advertising costs for the three months ended September 30, 2010 and 2009, and $28,098 and $22,040 for the nine months ended September 30, 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 quarters ended September 30, 2010 and 2009, the Company had no items of other comprehensive income. Therefore, the net loss equals comprehensive loss for the periods then ended.





Reclassification:





Certain prior year amounts have been reclassified in the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows to conform to current period presentation.  These reclassifications were not material to the consolidated financial statements and had no effect on net earnings reported for any period.





Earnings per Share:





Earnings per share (basic) is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period covered.  As the Company has no potentially dilutive securities, fully diluted earnings per share is identical to earnings per share (basic).




















10







Recently Issued Accounting Pronouncements:





The Company  does not expect  the  adoption  of  recently  issued  accounting pronouncements  to have a significant  impact on the Company’s  results of  operations, financial position or cash flow.





Use of Estimates:





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.








NOTE 2 – FIXED ASSETS





Fixed Assets at September 30, 2010 and December 31, 2009 are as follows:





September 30,


December 31,2010


2009Property & Equipment

$
18,327


$
18,327Telephone System


1,406



1,406Less:  Accumulated Depreciation


(9,569
)


(6,341
)Total Fixed Assets

$
10,164


$
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 $791 for the three months ended September 30, 2010 and 2009; and $3,230 and $3,227 for the nine months ended September 30, 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 September 30, 2010, there was a $8,775 capital lease asset included in fixed assets with a remaining capitalized lease obligation of $5,286.  At September 30, 2010, capitalized interest associated with the lease was $1,808.








NOTE 3 – DUE TO RELATED PARTIES





The Company had $22,047 and $32,047 due to a minority shareholder as of September 30, 2010 and December 31, 2009.














11








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 September 30, 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 September 30, 2010 the balance on the note was $53,335 with $13,928 classified as short-term as it is due within one year.  The current portion as of December 31, 2009 was $16,669.





NOTE 5 – CAPITAL LEASE OBLIGATION





In June 2008, the Company entered into a capital lease agreement for the lease of equipment.  The lease requires monthly payments of $278 for four years.  At the end of the lease term, the Company is entitled to purchase the equipment for $1.  The total amount owed at September 30, 2010 and December 31, 2009 was $5,286 and $7,788 respectively, of which $3,336 is due during the next 12 months and is classified as a current liability. At September 30, 2010, capitalized interest associated with the lease was $1,808 and is included in fixed assets.








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 September 30, 2010 and December 31, 2009, the amounts outstanding under this line of credit were $26,226 and $18,935, respectively.

















12








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 September 30, 2010 and December 31, 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 September 30, 2010 and December 31, 2009, respectively.





On June 29, 2009 the Company’s post-effective amendment, to the registration statement which became effective in October, 2008, became effective.  As of 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

Obligation2010

$
6,7502011


27,0002012


27,0002013


27,0002014


24,750Total

$
112,500








NOTE 9 – INCOME TAXES





The Company has adopted ASC 740-10 “Income Taxes” (formerly SFAS No. 109), which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes payable (deferred tax liability) or benefit (deferred tax asset).   Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.





The cumulative tax effect at the expected tax rate of 25% of significant items comprising the Company’s net deferred tax amounts as of September 30, 2010 and December 31, 2009 are as follows:





Deferred tax asset related to:





September 30,


December 31,2010


2009Prior Year

$
79,916



65,584Tax Benefit for Current Period


6,669



14,332Net Operating Loss Carryforward

$
86,585


$
79,916Less: Valuation Allowance


(86,585
)


(79,916
)Net Deferred Tax Asset

$
0


$
0








The cumulative net operating loss carry-forward is approximately $259,645 at September 30, 2010 and $232,970 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.








13






NOTE 10 – FINANCIAL CONDITION AND GOING CONCERN





The Company has an accumulated deficit through September 30, 2010 totaling $261,722 and had working capital of $43,799.  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 2009.  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 – RECENT ACCOUNTING PRONOUNCEMENTS





Recently, the FASB issued the following guidance:





Recently Adopted Accounting 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.






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Accounting Guidance Issued But Not Adopted as of September 30, 2010





In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force,” which amends the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. This ASU is effective for fiscal years beginning on or after June 15, 2010, which is January 1, 2011 for the Company. The Company is currently evaluating the impact of adopting the guidance.





Management has reviewed these new standards and believes that they will have no material impact on the financial statements of the Company.








NOTE 12 – 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 November 12, 2010, which is the date the financial statements were issued. No reportable events were noted.





In September 2010 the Company incurred a loss of $13,028 related to a fraudulent credit card scheme.  The Company completed a number of sales transactions in September and in October learned that the cards were stolen.  The Company booked a provision of $13,028 to cover the loss of revenue/product it incurred under the fraudulent scheme










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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS





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





General





Surface Armor, LLC was formed in 2005 and our stated goal is to serve the ever-expanding market of protecting expensive finishes and all types of surfaces from damage during manufacturing processes, shipping, handling and installation.   In February 2007 Surface Coatings, Inc. was created with the express purpose to acquire Surface Armor, LLC.  The shareholders are the same as Surface Armor, LLC and therefore there was no cash consideration in the transaction.  Consequently the Surface Armor, LLC operations became Surface Coatings, Inc.





The company offers the most progressive and complete solutions to our customers’ temporary surface protection needs.  Our business model is set-up to serve The Americas from our facility in Rockwall, Texas where we inventory and convert all our materials and products.  Our warehouse is climate controlled ensuring consistent quality in the Texas heat in the summer and the freeze/thaw weather pattern in the winter.





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





The first nine months of 2010 have been challenging as the cold, wet weather in the fiscal first quarter negatively impacted revenue.  In the second fiscal quarter, including a record month in June, we experienced improved revenues and trend lines.  In the second fiscal quarter we saw a significant increase due to the construction industry building inventory and our improved marketing. We have made a tactical decision to advertise more in news print and on web banners.  We believe that this effort has aided us in generating additional business that otherwise would not be in our results.




RESULTS FOR THE QUARTER ENDED September 30, 2010





Our quarter ended on September 30, 2010.  Any reference to the end of the fiscal quarter refers to the end of the second quarter for the period discussed herein.





REVENUE.  Revenue for the three months ended September 30, 2010, was $282,723 compared to $144,853 for the period ended September 30, 2009.  The increase of $137,870 was due to the continuation of the rebounding of the construction market in the third quarter of 2010 (plus customers are also building inventory) and our marketing efforts





Revenue for the nine months ended September 30, 2010, was $595,048 compared to $460,092 for the period ended September 30, 2009.  The increase is due to the strong fiscal third quarter.  The fiscal first quarter was down due to the cold winter North Texas.  In the second fiscal quarter the construction market rebounded from a dismal first quarter.





GROSS PROFIT.  Gross profit for the three months ended September 30, 2010 was $103,934 compared to $71,277 for the three month period ended September 30, 2009.  Margins decreased in the quarter ended September 30, 2010 versus the same period in 2009 from 49% to 37% and in the nine months ended September 30, 2010 versus 2009, from 50% to 41%.  This decrease of 12% (3 months) and 9% (6 months) is attributable to product mix and less economical order sizes.





OPERATING EXPENSES. Total operating expenses, for the three months ended September 30, 2010, were $97,048 compared to expenses for the period ended September 30, 2009 of $75,260.  The increase in cost in the three month period ended September 30, 2010 of about $22,000 is due to increased payroll, advertising, rent and merchant fees; these increases were partially off-set by a decrease in travel and professional fees.  The above expenses do not include depreciation which was $1,078 and $1,075 for the three months ended September 30, 2010 and 2009, respectively.





Total operating expenses, for the nine months ended September 30, 2010, were $263,620 compared to expenses for the period ended September 30, 2009 of $226,233.  The increase is cost of about $37,000 is due to increased payroll, advertising, rent and merchant fees; these increases were partially off-set by a decrease in travel and professional fees.  The above expenses do not include depreciation which was $3,230 and $3,227 for the nine months ended September 30, 2010 and 2009, respectively.






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NET INCOME (LOSS). Net income for the three months ended September 30, 2010 was $4,510 compared to net loss for the period ended September 30, 2009 of $6,976.   The increase of $11,486 is due to increased volume ($67,000), off-set partially by product mix ($34,000) and increased operating expenses (about $22,000), off-set partially by increased volume ($6,500).





Net loss for the nine months ended September 30, 2010 was $26,675 compared to a net loss for the nine months ended September 30, 2009 of $3,922.  The reduction of $22,753 is due to product mix ($53,000) and increased operating expenses (about $37,000), partially off-set by increased volume ($67,000).





LIQUIDITY AND CAPITAL RESOURCES. Surface Coatings filed on Form S-1, a registration statement with the U.S. Securities & Exchange Commission in order to raise funds to develop their business. The registration statement became effective in October 14, 2008, and the post-effective amendment became effective on June 29, 2009.  The offering was closed in 2009 and through  December 31, 2009, the Company raised $214,500 by selling 429,000 shares at $.50 per share.





In addition to the preceding, the Company plans for liquidity needs on a short term and long term basis as follows:





Short Term Liquidity:


The company relies on funding operations through operating cash flows.  When this is not plausible the Company looks to shareholder advances, and if necessary, related party advances. Net Cash from Operating Activities for the nine months ended September 30, 2010 was negative $39,886.





Long Term Liquidity:


The long term liquidity needs of the Company are projected to be met primarily through the Net Cash from Operating Activities. If there is a need the Company will seek additional working capital either through private placements, public offerings and/or bank financing, or additional loans from Management if there is need for liquidity.








Capital Resources





In June 2008, the Company entered into a capital lease agreement that has a term of four years, ending May 2012.  The general purpose of the loan agreement was to purchase a cutting machine that the company uses in daily operations.  As of September 30, 2010 the Company owes $5,286.





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





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 decreased by about $36,500 to $43,799 from December 31, 2009 to September 30, 2010.  This decrease is mainly attributable to a decrease in cash of about $65,500 and an increase in accounts payable and accrued expenses of about $78,000; these were partially off-set by an increase in accounts receivable of about $95,000 and a decrease in inventory of about $14,000.








STOCKHOLDER’S EQUITY: Stockholder’s Equity decreased by approximately $26,700 due to the net loss for the year.





Employees





At September 30, 2010, the Company had four employees.








Item 3: Quantitative and Qualitative Disclosures About Market Risk





Not applicable.














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Item 4. Controls and Procedures





Evaluation of Disclosure Controls and Procedures





We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2010.  This evaluation was accomplished under the supervision and with the participation of our chief executive officer / principal executive officer, and chief financial officer / principal financial officer who concluded that our disclosure controls and procedures are not effective to ensure that all material information required to be filed in the quarterly Form 10-Q has been made known to them.





For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seg.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  Disclosure, controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by in our reports filed under the Securities Exchange Act of 1934, as amended (the "Act") is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.





Based upon an evaluation conducted for the period ended September 30, 2010, our Chief Executive and Chief Financial Officer as of September 30, 2010 and as of the date of this Report, has concluded that as of the end of the periods covered by this report, we have identified the following material weakness of our internal controls:





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





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





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








Changes in Internal Controls over Financial Reporting





We have not yet made any changes in our internal controls over financial reporting that occurred during the period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




















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PART II





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








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





(a)     A Form 8-K was filed on April 1, 2010 announcing the appointment of Jeannie Pietrykowski as Vice-President and Treasurer.





(b)   Exhibits





Exhibit Number

Name of Exhibit31.1
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.32.1
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.

















SIGNATURES





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





Surface Coatings, Inc.





By /s/  Rick Pietrykowski





Rick Pietrykowski, President, CFO





Date: November 12, 2010











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