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, 2009





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.)





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


(Address of principal executive offices)





(972) 722-7351


(Issuer's telephone number)





N/A


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





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





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





reporting company” in Rule 12b-2 of the Exchange Act:





Large Accelerated Filer
[  ]

Accelerated Filer
[  ]Non-Accelerated Filer
[  ]

Smaller Reporting Company
[X]





Indicate by a check mark whether the company is a shell company (as defined by Rule 12b-2 of the Exchange Act:


Yes [    ]   No [ X ].





As of November 4, 2009, 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
21Item 2.
Changes in Securities
21Item 3.
Default upon Senior Securities
21Item 4.
Submission of Matters to a Vote of Security Holders
21Item 5.
Other Information
21Item 6.
Exhibits and Reports on Form 8-K
21

















2





SURFACE COATINGS, INC.
Consolidated Balance Sheets
As of September 30, 2009 and December 31, 2008





As of
September 30, 2009
(Unaudited)


As of
December 31, 2008
(Audited)AssetsCurrent AssetsCash and Cash Equivalents

$
202,904


$
33,123Accounts Receivable (Net of Allowance for Doubtful
Accounts of  $3,911 and $1,850)


43,356



48,587Subscription Receivable


1,000



0Allowances for Estimated Returns


(4,300
)


(3,750
)Prepaid Expense


0



1,000Inventory


69,203



61,977Total Current Assets


312,163



140,937Fixed Assets:Machinery and Equipment


18,613



21,470Leasehold Improvements


1,406



1,406Less: Accumulated Depreciation


(5,550
)


(3,245
)Total Fixed Assets


14,469



19,631Total Assets

$
326,632


$
160,568Liabilities and Stockholders’ Equity (Deficit)Current LiabilitiesAccounts Payable

$
35,966


$
25,238Accrued Expenses


60,684



53,913Bank Overdraft


0



16,892Due to Related Parties


41,430



33,954Note Payable to Shareholder


6,212



0Line-of-Credit


29,709



33,139Subscription Deposits


0



33,150Current Portion of Long-Term Debt


16,476



14,869Total Current Liabilities


190,477



211,155Long-Term LiabilitiesNote Payable To Shareholder


0



14,869Note Payable – Equipment


8,622



11,219Notes Payable to Related Parties


69,833



74,596Less: Current Portion of Long Term Debt


(16,476
)


(14,869
)Total Long-Term Liabilities


61,979



85,815Total Liabilities


252,456



296,970Stockholders’ Equity (Deficit):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 5,000,000 shares issued
and outstanding respectively


5,429



5,000Additional Paid In Capital


265,563



51,492Accumulated Deficit


(196,816
)


(192,894
)Total Stockholders’ Equity (Deficit)


74,176



(136,402
)Total Liabilities and Stockholders’ Equity (Deficit)

$
326,632


$
160,568





See accompanying summary of accounting policies and notes to financial statements.





3








SURFACE COATINGS, INC.
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)








Three Months Ended


Nine Months EndedSeptember 30, 2009


September 30, 2008


September 30, 2009


September 30, 2008RevenueRevenue

$
144,853


$
155,506


$
460,092


$
444,551Cost of Sales


73,576



87,464



228,695



258,190Gross Profit


71,277



68,042



231,397



186,361Operating Expenses:Depreciation Expense


1,075



630



3,227



1,305Advertising Expense


9,444



7,276



22,040



22,430General and Administrative


65,816



64,276



204,193



197,399Total Operating Expenses


76,335



72,182



229,460



221,134Net Operating Income (Loss)


(5,058
)


(4,140
)


1,937



(34,773
)Other Income (Expense)Interest Income


0



0



0



0Loss on Sale of Asset


0



0



(133
)


0Interest Expense


(1,918
)


(2,720
)


(5,726
)


(6,795
)Total Other Income (Expense)


(1,918
)


(2,720
)


(5,859
)


(6,795
)Net (Loss)

$
(6,976
)

$
(6,860
)

$
(3,922
)

$
(41,568
)Basic and Diluted Earnings (Loss) per share

$
0.00


$
( 0.00
)

$
0.00


$
( 0.01
)Weighted Average Shares Outstanding:Basic and Diluted


5,236,544



5,000,000



5,081,028



5,000,000








See accompanying summary of accounting policies and notes to financial statements.








4





SURFACE COATINGS, INC.
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 2009 (Unaudited)
and the Year Ended December 31, 2008 (Audited)








Common Stock


Additional Paid-in


AccumulatedShares


Par Value


Capital


Deficit


TotalsDecember 31, 2007


5,000,000


$
5,000


$
51,492


$
(139,341
)

$
(82,849
)Net Loss














(53,553
)


(53,553
)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














(3,922
)


(3,922)September 30, 2009


5,429,000


$
5,429


$
265,563


$
(196,816
)

$
74,176





See accompanying summary of accounting policies and notes to financial statements.








5








SURFACE COATINGS, INC.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)





Nine Months Ended September 30, 2009


Nine Months Ended September 30, 2008CASH FLOWS FROM OPERATING ACTIVITIESNet Income (Loss)

$
(3,922
)

$
(41,568
)Adjustments to reconcile net deficit to cash used
by operating activities:Depreciation


3,227



1,305Change in assets and liabilities:(Increase) Decrease in Accounts Receivable


5,231



(9,729)(Increase)  in Inventory


(7,226
)


(30,650
)(Increase) Decrease  in Other Assets


1,818



(4,092
)Increase  in Accounts Payable


10,728



24,526(Decrease) in Overdraft


(16,892
)


0Increase  in Accrued Expenses


6,772



25,330Increase/(Decrease) in Line-of-Credit


(3,430
)


4,872CASH FLOWS PROVIDED BY (USED) IN OPERATING ACTIVITIES


(3,694
)


(30,006
)CASH FLOWS USED IN INVESTING ACTIVITIESPurchase of Fixed Assets


0



(8,775
)Sale of fixed assets


1,800



0Loss on Sale of Fixed Asset


(133
)


0CASH FLOWS PROVIDED BY (USED) IN INVESTING ACTIVITIES


1,667



(8,775
)CASH FLOWS FROM FINANCING ACTIVITIESPayments on Shareholder Note


(8,757
)


(7,927
)Cash Received for Sale of Stock


214,500



0Release of Subscription Deposits


(34,150
)


0Capitalized Lease Commitment


0



11,953Payments on Note Payable-Equipment


(2,497
)


0Note from and Amounts Due to Related Party


2,712



42,073CASH FLOWS PROVIDED BY FINANCING ACTIVITIES


171,808



46,099NET INCREASE IN CASH


169,781



7,318Cash, beginning of period


33,123



3,646Cash, end of period

$
202,904


$
10,964SUPPLEMENTAL CASH FLOW INFORMATIONInterest paid

$
5,726


$
6,795Income taxes paid

$
0


$
0








See accompanying summary of accounting policies and notes to financial statements.





6








SURFACE COATINGS, INC.
Notes to the Consolidated Financial Statements
September 30, 2009
(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, 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, 2009 and should be read in conjunction with the Company’s Form 10-K filing for 2008 which
was filed March 31, 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 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:





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 $981 for the quarter ended September 30, 2009 and $0 for the three months ended September 30, 2008.  Returns were $4,278 and $8,280 for the nine month periods ended September 30, 2009 and 2008
respectively.  In accordance with ASC 605 “Revenue Recognition”, (formerly, 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, 2009, the allowance for estimated returns was $4,300.





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 $9,444 and $7,276 in advertising costs for the three months ended September 30, 2009 and 2008, and $22,040 and 22,430 for the nine months ended September 30, 2009 and 2008.





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.





Comprehensive Income:





ASC 220 “Comprehensive Income”, (formerly SFAS No. 130 “Reporting Comprehensive Income”), establishes standards for reporting and display
of comprehensive income





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.











10








Recent 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, 2009 and December 31, 2008 are as follows:





2009


2008Property & Equipment

$
18,613


$
21,470Telephone System


1,406



1,406Less:  Accumulated Depreciation


(5,550
)


(3,245
)Total Fixed Assets

$
14,469


$
19,631








The Company’s fixed assets are depreciated on a straight-line basis over the asset’s useful lives, ranging from five to seven years.   Depreciation expense was $1,075 and $630 for the three months ended September 30, 2009 and 2008 respectively and $3,227 and $1,305 for the nine months ended September 30, 2009
and 2008 respectively.





During the first quarter of 2009,  the Company disposed of an asset with a cost basis of $2,000 and recognized a loss on the sale of the asset of $133.








NOTE 3 – DUE TO RELATED PARTIES





The Company had the following amounts due to related parties as of September 30, 2009 and December 31, 2008:





2009


2008Accounts Payable – Related Parties

$
41,430


$
33,954Advances – Related Parties


0



0Total

$
51,430


$
33,954








These amounts represent accounts payable to a minority shareholder and a cash advance from a minority shareholder. There were no specified terms attached to the advances, and they would be repaid when the Company has the available cash to do so.














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, 2009 was $9,204 and at December 31, 2008 was $14,869.  The
balance at September 30, 2009 is classified as current liability as it is due in March 2010.








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, 2009 the balance on the note was $69,833 with $13,140 classified as short-term as it is due within one year.  The amount due by December 31, 2009 is $3,214.








NOTE 5 – NOTE PAYABLE (CAPITAL LEASES)





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, 2009 and December 31, 2008
was $8,622 and $11,219 respectively, of which $3,336 is due during the next 12 months and is classified as a current liability. At September 30, 2009, capitalized interest associated with the lease was $2,950 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 $30,000 credit limit, and bears an interest rate of 12.24% 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, 2009 and December 31, 2008, the amounts outstanding under this line of credit were $29,709 and $33,139, 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 0 and 0 shares outstanding as of September 30, 2009 and December 31, 2008, respectively.





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 5,000,000 shares issued and outstanding as of September 30, 2009 and December 31, 2008, 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, 2009, the Company raised $214,500 by selling 429,000 shares at $.50 per share.





The Company does not have any stock option plans or stock warrants.








NOTE 8 – COMMITMENTS AND CONTINGENCIES





The Company leases office and warehouse space in Rockwall, Texas at a rate of $1,380 per month.  The payments are made up by a $1,000 per month lease which expires in July 2011, and a $380 month-to-month rent agreement.  Future lease obligations are $3,000 in 2009, $12,000 in 2010 and $7,000 thereafter.








NOTE 9 – INCOME TAXES





The Company has adopted ASC 740-10 “Income Taxes” (formerly SFAS No. 109), whichrequires the use of the liability method in computation of income tax expense and the current and deferred income tax 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.





Deferred tax assets at September 30, 2009 and December 31, 2008 consisted of the following:





2009


2008Net Operating Loss Carryforward

$
66,565


$
65,584Less: Valuation Allowance


(66,565
)


(65,584
)Net Deferred Tax Asset

$
0


$
0























13








The net deferred tax asset generated by the loss carryforward has been fully reserved. The cumulative net operating loss carry-forward is approximately $196,816 at September 30, 2009 and $192,894 at December 31, 2008, and will expire in the years 2025 through 2029.





The difference in the income tax benefit not shown in the consolidated statements of operations and the amount that would result if the U.S. Federal statutory rate of 34% were applied to pre-tax loss for 2009 and 2008 is attributable to the valuation allowance.





The realization of deferred tax benefits is contingent upon future earnings and is fully reserved at September 30, 2009 and December 31, 2008.








NOTE 10 – FINANCIAL CONDITION AND GOING CONCERN





The Company has an accumulated deficit through September 30, 2009 totaling $196,816 and had working capital of $121,686.  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.














14








NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS





In 2009, the FASB issued the following guidance:





SFAS No. 166:  "Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140", which will be integrated into the ASC upon the effective date, which is for the first annual or quarterly period after November 15, 2009.





SFAS No. 167:  "Accounting for Transfers of Financial Assets",which will be integrated into the ASC upon the effective date, which is for the first annual or quarterly period after November 15, 2009.





FSP No. FAS 107-1 and APB 28-1:  “Interim Disclosures about Fair Value of Financial Instruments”, which was codified into ASC 825.





FSP No. FAS 115-2 and FAS 124-2:  “Recognition and Presentation of Other-Than-Temporary Impairments”, which was codified into ASC 320-10-65-4.





FSP No. FAS 157-4:   “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, which was codified
into ASC 820-10-65-4.





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  10, 2009,
which is the date the financial statements were issued.    No reportable subsequent events were noted.













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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.





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, our revenue in 2008 was 220% of 2007 and our margins improved 1.9% points to 43.2%.  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.











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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











RESULTS FOR THE QUARTER ENDED September 30, 2009





Our quarter ended on September 30, 2009.  Any reference to the end of the fiscal quarter refers to the end of the third quarter for the period discussed herein.





REVENUE.  Revenue for the three months ended September 30, 2009, was $144,853 compared to $155,506 for the period ended September 30, 2008.  Revenue for the nine months ended September 30, 2009, was $460,092 compared to $444,551 for the period ended September 30, 2008.  The decrease of $10,653 in the three
month period ending September 30, 2009 was due to slow construction market.  The increase of $15,541for the nine months ending September 30, 2009 was due to service related sales of $28,000 during the second that did not take place in 2008.  This increase was partially off-set by reduced sales due to the recession as there are less construction projects underway of about $12,000.  Year-to-date results without the service related sales are down about 12,000.  Although we
continue to gain new customers each month the pace of growth has slowed and it is becoming increasingly difficult to replaced lost sales due to the economy with new customers.





GROSS PROFIT.  Gross profit for the three months ended September 30, 2009 was $71,277 compared to $68,042 for the three month period ended September 30, 2008.  Gross profit for the nine months ended September 30, 2009 was $231,397 compared to $186,361 for the nine month period ended September 30, 2008.  Margins
improved in the quarter ended September 30, 2009 versus the same period in 2008 from 44% to 49% and on a year-to-date basis margins improved from 42% to 50%.  The service related revenue of $28,000 discussed above impacted the margins in the  nine month periods ended September 30, 2009 by 4% points.  The remaining improvement of 5% and 5% points for the three and nine month periods, respectively, is attributable to product mix (higher margin products) and optimal order sizing (larger
order sized resulting in less waste) plus improved inventory management resulting in lower waste and write-offs.





OPERATING EXPENSES. Total operating expenses, for the three months ended September 30, 2009, were $76,335 compared to expenses for the period ended September 30, 2008 of $72,182.  Total operating expenses, for the nine months ended September 30, 2009, were $229,460 compared to expenses for the period ended September 30, 2008
of $221,134.  The increase in cost in the three month period ended September 30, 2009 of $4,153 is due to increased Advertising ($3,200), Admin costs ($6,300) and Payroll ($7,100) as an additional production employee was working; this was partially off-set by lower Professional Fees ($8,500) due to lower expenses on filing and accounting fees and travel ($6,300) .  The increase in cost in the nine month period ended September 30,2009 of $3,600 is attributable to the increased admin and facility
costs of $12,000 was partially off-set by a decrease in payroll expenses of $9,800.  The above expenses do not include depreciation which was $1,075 and $630 for the three months ended September 30, 2009 and 2008, respectively, and $3,227 and $1,305 for the nine month period ended September 30, 2009 and 2008, respectively.











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NET INCOME (LOSS). Net loss for the three months ended September 30, 2009 was $6,976 compared to the a net loss for the period ended September 30, 2008 of $6,860.   The improvement in gross margins of $3,235, as previously discussed, is attributable to keeping the loss flat versus the prior year although sales were down.   The
increase in expense of $4,200 was off-set by improved product mix of $3,400 and reduced interest expense of $800.





Net loss for the nine months ended September 30, 2009 was $3,922 compared to a net loss for the period ended September 30, 2008 of $41,568.  The improvement of $37,646 is attributable to similar items as discussed above.  Service related margin of $21,200, volume increase $8,000 and favorable mix $12,800 totaling $43,700.  This
improvement was partially off-set by increased operating expenses of $6,400.  Depreciation expense increased $2,000 year-over-year.





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.  Through
September 30, 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 nine months ended September 30, 2009 was negative about $3,700, This is a $26,300 improvement over the same period in 2008.





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, 2009 the Company owes $8,622.





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 2009 to continue in a similar vein as the first nine months with improvement forecasted early in 2010.














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We do not expect any significant change to our debt structure and do not anticipate entering into any off-balance sheet arrangements.  Our equity structure will change with the continued sale of stock under the registration statement at $.50 per share.





Material Changes in Financial Condition





WORKING CAPITAL: Working Capital improved by $191,900 to $120,700 from December 31, 2008 to September 30, 2009.  This improvement is mainly attributable to an increase in cash of $169,800 due to the stock subscription of $214,100 and the reclassing of the subscription receivables to equity of $33,000 and was partially off-set
by the amounts due to Related Parties of $7,500.





STOCKHOLDER’S EQUITY: Stockholder’s Equity increased by $210,600 due to the stock sales of $214,100 and offset by the net loss of $3,900 in the nine month period ended September 30, 2009.





Employees





At September 30, 2009, the Company had three employees.








Item 3: Quantitative and Qualitative Disclosures About Market Risk








Not applicable.





Item 4. Controls and Procedures








Evaluation of Disclosure Controls and Procedures





We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2009.  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, 2009, our Chief Executive and Chief Financial Officer as of September 30, 2009 and as of the date of this Report, has concluded that as of the end of the periods covered by this report, we have identified the following material weakness of our internal controls:











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





·
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)  None





(b)   Exhibits





Exhibit Number                                                      Name
of Exhibit




31.1
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.32.1
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.













SIGNATURES





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





Surface Coatings, Inc.





By /s/  Rick Pietrykowski





Rick Pietrykowski, President, CFO





Date: November 10, 2009


























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