NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION
On June 8, 2012, in expectation of
going public, a share exchange was effected in which Sterling Consolidated Corp., delivered 30,697,040 shares to shareholders of
Sterling Seal and Supply, Inc. (“Sterling Seal”); 1,500,000 shares to the shareholders of Integrity Cargo Freight
Corporation (“Integrity”); 540,000 shares to the members of Q5 Ventures, LLC (“Q5”) and 1,080,000 shares
to the members of ADDR Properties, Inc. (“ADDR”). The existing shareholders of Sterling Consolidated Corp (“Sterling
Consolidated” or “the Company”) retained 2,880,000 shares resulting in a total of 36,697,040 shares outstanding
post-share exchange. The resultant structure is such that Sterling Consolidated is effectively a holding corporation with 100 percent
ownership of Sterling Seal and Supply, Inc., Integrity, Q5 and ADDR. The consolidated financial statements presented
herein are presented as if the share exchange had occurred at January 1, 2011.
Organization, Nature of Business, Stock
Split, and Principles of Consolidation
Sterling Seal and Supply, Inc.
Sterling Seal and Supply, Inc. (“Sterling
Seal”) is a New Jersey corporation founded in 1997 which distributes O-rings and other rubber products worldwide. Since 1980,
Sterling and its predecessor, Sterling Plastic and Rubber Products, Inc. (founded in 1969), has been importing products from
China for distribution. Sterling Seal focuses on quality and service by initially proving itself as a 2nd or 3rd source
vendor.
Integrity Cargo Freight Corporation
On January 4, 2008, the principals
of Sterling Seal founded Integrity Cargo Freight Corporation (“Integrity”) as a New Jersey Corporation. Integrity is
a cargo and freight company that currently manages the importing of Sterling’s products from Asia and export to various other
countries. In addition to providing freight forwarding services for the Company, Integrity has third-party customers. Integrity
targets the Company’s customer base market but is able to acquire additional customers through the use of agents. Freight
forwarding revenues and expenses are included in the operating income on the consolidated statement of operations presented herein.
ADDR Properties, LLC
ADDR Properties, LLC (“ADDR”)
is a New Jersey limited liability company (“LLC”) formed on September 17, 2010 as a real estate holding company.
ADDR owns a 28,000 square foot warehouse facility in Neptune, NJ and is occupied 90% by Sterling Seal to conduct its operations.
The second property managed through ADDR
was an investment property in Cliffwood Beach, NJ and was previously occupied by Sterling before the Company moved to its current
location. Previously the Company rented this commercial space to other tenants, but sold the property in March of 2016. Rental
revenues and expenses are included in other income on the consolidated statements of operations presented herein.
Q5 Ventures, LLC
Q5 Ventures, LLC is a Florida LLC formed
on September 6, 2006. The LLC owns the commercial building in Florida from which the Florida division of Sterling operates.
The 5,000 square foot facility was designed and built for the Company’s operations in 2008.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
These consolidated financial statements
include the accounts of Sterling Consolidated Corp. and its four wholly-owned subsidiaries. The subsidiaries were acquired by Sterling
Consolidated Corp. through a share exchange agreement effected on June 8, 2012. The consolidated financial statements presented
herein, are presented as if the business combination via share exchange and the stock split in Sterling Seal and Supply, Inc.
were effective at the beginning of the periods being reported on. ADDR, Integrity, Q5 and Sterling Seal were under the control
of Angelo DeRosa and/or Darren DeRosa for the periods being reported on. All significant intercompany transactions have been eliminated.
Hereafter the consolidated accounts of Sterling Consolidated Corp and its subsidiaries are referred to as “the Company”.
Use of Estimates
The preparation of consolidated financial
statements in accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A change in
management’s estimates or assumptions could have a material impact on the Company’s financial condition and results
of operations during the period in which such changes occurred. Significant estimates include the estimated depreciable lives of
fixed assets, inventory reserves and allowance for doubtful accounts.
Actual results could differ from those
estimates. The Company’s consolidated financial statements reflect all adjustments that management believes are necessary
for the fair presentation of their financial condition and results of operations for the periods presented.
Cash and Cash Equivalents
For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
At times, balances in a single bank account may exceed federally insured limits.
Accounts Receivable
Accounts receivable are carried at the
expected net realizable value. The allowance for doubtful accounts is based on management's assessment of the collectability of
specific customer accounts and the aging of the accounts receivables. The Company’s accounts receivable is presented net
of allowances of $123,090 and $123,090 as of December 31, 2019 and 201, respectively.
Inventories
Inventories, which are comprised of finished
goods, are stated at the lower of cost (based on the first-in, first-out method) or net realizable value. Cost does not include
shipping and handling fees, which are charged directly to income. The Company provides for estimated losses from obsolete or slow-moving
inventories, and writes down the cost of inventory at the time such determinations are made. Reserves are estimated based upon
inventory on hand, historical sales activity, industry trends, the business environment and the expected net realizable value.
The net realizable value is determined based upon current awareness of market prices. The Company recorded an inventory reserve
of $731,192 and $585,764 as of December 31, 2019 and 2018, respectively.
Inventory Type
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Finished goods
|
|
$
|
4,069,035
|
|
|
$
|
3,145,900
|
|
Raw materials
|
|
|
-
|
|
|
|
-
|
|
Work-in-progress
|
|
|
-
|
|
|
|
-
|
|
Inventory Reserve
|
|
|
(731,192
|
)
|
|
|
(585,764
|
)
|
Net Inventory
|
|
$
|
3,337,843
|
|
|
$
|
2,560,136
|
|
Long-Lived Assets
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. There
were $0 and $0 impairments of long-lived assets during the years ended December 31, 2019 and 2018, respectively.
Property and Equipment
Property and equipment are carried at historical
cost of construction or purchase. Expenditures for maintenance and repairs are charged to operations as incurred. Renewals and
betterments that materially extend the life of the assets are capitalized. Leasehold improvements are amortized over the lesser
of the base term of the lease or estimated life of the leasehold improvements. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in
income for the period. The Company allocates 50% of its depreciation and amortization expenses to cost of sales.
Depreciation is computed for consolidated
financial statement purposes on a straight-line basis over estimated useful lives of the related assets. The estimated useful lives
of depreciable assets are:
Classification
|
|
Estimated
Useful Lives
|
Building and leasehold improvements
|
|
10 – 40 years
|
Machinery and equipment
|
|
5 – 10 years
|
Furniture and fixtures
|
|
5 – 10 years
|
Vehicles
|
|
10 years
|
Software
|
|
3 years
|
Segment Reporting
ASC 280-10 defines
operating segments as components of a company about which separate financial information is available that is evaluated regularly
by the chief decision maker in deciding how to allocate resources and in assessing performance. The Company has one
main segment: O-rings and rubber products. Additionally, it has activities in freight services and rental services
however, these activities are immaterial to the overall endeavor and therefore, segment information is not presented.
Revenue Recognition
The Company recognizes
revenue based on Account Standards Codification (“ASC”) 606, Revenue from Contracts with Customers,
and all of the related amendments (“new revenue standard”). In the case of Sterling, revenue is recognized when control
of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company
expects to receive in exchange for those goods or services.. For provision of third-party freight services provided by Integrity,
revenue is recognized on a gross basis in accordance with ASC 606. Revenue is generally recognized when the contracted goods arrive
at their destination point. When revenues and expenses straddle a period end due to the time between shipment and delivery, Integrity
allocates revenue between reporting periods based on relative transit time in each period with expenses recognized as incurred.
Cost of goods is comprised of sale of o-rings and related rubber products. Freight services is comprised of freight forwarding
and related services earned by Integrity and rental services is comprised of revenue from rental of commercial space to third parties.
Cost of Sales
Cost of goods includes inventory costs,
warehousing costs, direct labor and a depreciation allocation. Cost of inbound freight of $567,699 and $288,341 for the years ended
December 31, 2019 and 2018, respectively, is included in cost of goods on the Statements of Operations.
Costs of services include direct costs
for freight services and rental activities. The direct costs include agent fees, trucking, air and ocean freight and customs fees
for the freight services and repairs and maintenance and property taxes for the rental activities. Additionally, cost of services
includes direct labor for freight services.
Income Taxes
Sterling Seal and Integrity's S-Corporation
election terminated effective January 1, 2012 in connection with the expectation of the initial public offering of the Company’s
common stock in 2012. From Sterling Seal and Integrity's inception in 1997 and 2008, respectively, the Companies were not
subject to federal and state income taxes as they were operating under an S-Corporation election. As of January 1, 2012,
the both Sterling and Integrity became subject to corporate federal and state income taxes. The consolidated financial statements
presented herein, are presented as if all consolidating entities were subject to C-corporation federal and state income taxes for
the periods presented.
Under the asset and liability method prescribed
under ASC 740, Income Taxes, The Company uses the liability method of accounting for income taxes. The
liability method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet
date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial
statements. The resulting deferred tax assets or liabilities have been adjusted to reflect changes in tax laws as they
occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
The Company recognizes the financial statement
benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in
an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount to be recognized in the financial
statements will be the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the
threshold, no financial statement benefit is recognized. As of December 31, 2019 and 2018, the Company had no uncertain tax
positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative
expenses. The tax years 2016 and 2017 and 2018 are subject to federal and state tax examination under the current statutes.
Fair Value Measurements
In January 2010, the FASB ASC Topic
825, Financial Instruments, requires disclosures about fair value of financial instruments in quarterly
reports as well as in annual reports. For the Company, this statement applies to certain investments and long-term debt. Also,
the FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value for financial
reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
Various inputs are considered when determining
the value of the Company’s investments and long-term debt. The inputs or methodologies used for valuing securities
are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized
in the three broad levels listed below.
|
§
|
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
§
|
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc…).
|
|
§
|
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
|
The Company’s adoption of FASB ASC
Topic 825, effectively at the beginning of the second quarter in FY 2010, did not have a material impact on the company’s
consolidated financial statements.
The carrying value of financial assets
and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured
on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no material
financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods other than the interest
rate swap contract described below. Financial assets and liabilities measured on a recurring basis are those that are adjusted
to fair value each time a financial statement is prepared.
Interest Rate Swap Contract
The Company employed an interest rate swap
to manage interest rate risk on its variable mortgage note. The Company does not use swaps or other derivatives for trading or
speculative purposes. The interest rate swap is recorded on the balance sheet at fair value. Cash flows associated with the interest
rate swap are presented in the same category on the consolidated statements of cash flows as the item being hedged.
We designate our fixed-to-floating interest
rate swap as a fair value derivative instrument. In 2013 the Company entered into an interest rate swap contract as an economic
hedge against interest rate risk through 2018. Hedge accounting treatment per guidance in ASC 815-10 and related subsections was
not pursued at inception of the contracts. Changes in the fair value of the derivatives are recorded in current earnings. The derivatives
were recorded as a liability on the Company’s balance sheet at an aggregate fair value of $0 and $2,176 as of December 31,
2018 and 2017, respectively. As of December 31, 2018, the swap position was closed out due to the fact that the mortgage was
paid in full in the 4th quarter of 2018.
The following are the major categories
of assets and liabilities measured at fair value on a recurring basis as of December 31:
Year
|
|
|
Instrument
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
2018
|
|
|
Interest rate swap derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the interest rate swap
is determined using observable market inputs such as current interest rates, and considers nonperformance risk of the Company and
that of its counterparts.
Concentration of Credit Risk
As of December 31, 2019 and 2018
one (1) customer represented 8.94% and 7.58% of accounts receivable, respectively. One (1) customer accounted for 5.7%
and 11.0% of sales for the years ended December 31, 2019 and December 31, 2018, respectively.
Basic and Diluted Earnings (Loss) per
Share
Basic earnings (loss) per share are computed
by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding
(denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period
using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the period
end stock price is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants.
Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
Reclassification
Certain balances in previously issued
financial statements have been reclassified to be consistent with the current period presentation.
Recently Issued Accounting Standards
On January 1, 2019, the Company adopted
a new accounting standard issued by the Financial Accounting Standards Board (“FASB”) on accounting for leases using
the modified retrospective method. This new accounting standard requires a lessee to recognize an asset and liability for most
leases on its balance sheet. The Company elected the optional transition method that allowed for a cumulative-effect adjustment
to the opening balance of retained earnings recorded on January 1, 2019 and did not restate previously reported results in the
comparative periods. The Company also elected the package of practical expedients, which among other things, allowed it to carry
forward its historical lease classification. The new standard provides a number of optional practical expedients in transition.
We elected the ‘package of practical expedients', which permits us not to reassess under the new standard our prior conclusions
about lease identification, lease classification and initial direct costs. We elected all of the new standard's available transition
practical expedients that are applicable. The new standard also provides practical expedients for an entity's ongoing accounting.
We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we
will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing
short-term leases of those assets in transition. As all of the Company’s leases were for less than 12 months, adoption of
the lease standard did not have a material impact on the Company’s financial statements or results of operations.
NOTE 3 – PROPERTY AND EQUIPMENT
As of December 31, 2019 and 2018 the
Company’s property and equipment consisted of the following:
|
|
2019
|
|
|
2018
|
|
Land, building & leasehold improvements
|
|
$
|
1,828,870
|
|
|
$
|
1,815,726
|
|
Machinery and equipment
|
|
|
1,005,090
|
|
|
|
990,055
|
|
Vehicles
|
|
|
220,481
|
|
|
|
246,659
|
|
Total property and equipment
|
|
|
3,054,441
|
|
|
|
3,052,440
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
1,517,922
|
|
|
|
1,420,826
|
|
Property and equipment, net
|
|
$
|
1,536,519
|
|
|
$
|
1,631,614
|
|
Depreciation expense included as a charge
to income for the years ended December 31, 2019 and 2018 was $ and $97,096 respectively. In 2018 the Company abandoned
its website due to a change in software which resulted in a loss of $20,498.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consist of goodwill and
of the unamortized portion of identified intangible assets (customer lists) recorded in connection with the asset acquisition.
The following table presents the detail of intangible assets for the periods presented:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Identified intangible assets (customer lists)
|
|
|
340,097
|
|
|
|
290,097
|
|
Impairment of customer lists
|
|
|
(135,773
|
)
|
|
|
(135,773
|
)
|
Accumulated amortization
|
|
|
(99,040
|
)
|
|
|
(85,419
|
)
|
Intangible assets, net
|
|
$
|
105,284
|
|
|
$
|
68,905
|
|
Weighted-average remaining life
|
|
|
7 years
|
|
|
|
5 years
|
|
Amortization expense on definite-lived
intangible assets (excluding goodwill) included as a charge to income was $13,621 and $17,102 for the years ended December 31,
2019 and 2018, respectively.
NOTE 5 – BUSINESS ACQUISITION
On February 12, 2019 the Company acquired
F & S Distributors, Inc., a New Jersey, distributor of o-rings and rubber products. The consideration paid consisted
of $300,000 cash and 5,319,149 shares of common stock that were valued at $500,000 on the date of acquisition and a note payable
carried by the seller, for $100,000 payable in two equal installments of $50,000 paid 12 months after closing and another $50,000
paid 18 months after closing. The acquisition was accounted for under the purchase method of accounting.
The following assets and liabilities were acquired as part of
the transaction:
Assets Acquired
|
|
|
|
Cash
|
|
$
|
20,000
|
|
Accounts receivable
|
|
|
312,418
|
|
Inventory
|
|
|
763,822
|
|
Inventory reserve
|
|
|
(145,428
|
)
|
Security deposit
|
|
|
9,961
|
|
Client list
|
|
|
50,000
|
|
Equipment
|
|
|
2,000
|
|
Total assets acquired
|
|
|
1,012,773
|
|
Liabilities Acquired
|
|
|
|
|
Accounts payable
|
|
|
112,773
|
|
Net Assets Acquired
|
|
$
|
900,000
|
|
NOTE 6 – LINES OF CREDIT
On October 8, 2013, the Company obtained
a line of credit with a New York City commercial bank. The line was for $1.25 million and carried a variable interest rate of 1.00%
above the prime rate as published in the money rate tables of the Wall Street Journal. As of December 31, 2018
the published prime rate was 5.50%, respectively. The Company retired the debt in the 4th quarter of 2018.
On December 19, 2018, the Company entered into a Loan Agreement
with Access Capital, Inc. (“Access Capital”). Pursuant to the agreement, Access Capital provided the Company with asset
based financing of up to $2.5 million based on a formulaic review and analysis of the Company’s accounts receivable and inventory.
The loan carries a variable interest rate of 1.50% above the prime rate, the prime rate shall
mean the prime or “Base Rate” of Citibank. The loan incurs an annual fee equal to 1% of the Capital Availability Amount
on the Closing Date and on each anniversary of the Closing Date. The loan maturity is three years from the date on which any Company
first received the proceeds of the initial Advances. At December 31, 2019 and 2018, the Company had $1,044,386 and $1,775,452 outstanding
on this lone agreement.
NOTE 7– NOTES PAYABLE AND DEBT
At December 31, 2019 and 2018, long-term
debt consisted of the following:
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
Mortgage payable, due in monthly installments of principal and interest Interest is charged at a fixed rate of 5.00%. Secured by the assets of the Company and personal guarantee of the Chairman of the Board and the CEO. The note is amortized over a 20-year period but has a 5-year maturity, which will require refinancing in November of 2024.
|
|
$
|
1,645,784
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable related to F&S acquisition, matures in 2020.
|
|
|
100,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Vehicle loan secured by the vehicle, maturing on September 8, 2022. Interest is charged at 3.99% per annum.
|
|
|
11,648
|
|
|
|
15,577
|
|
Total long-term debt
|
|
|
1,757,432
|
|
|
|
15,577
|
|
|
|
|
|
|
|
|
|
|
Less current portion of long-term debt
|
|
|
(138,257
|
)
|
|
|
(3,929
|
)
|
Long-term debt
|
|
$
|
1,619,175
|
|
|
$
|
11,648
|
|
Future minimum principal payments due in each of the years subsequent
to December 31, 2019 are as follows:
Years Ending
December 31
|
|
Future Minimum
Principal
Payments
|
|
2020
|
|
$
|
138,257
|
|
2021
|
|
|
40,169
|
|
2022
|
|
|
41,055
|
|
2023
|
|
|
39,862
|
|
2023
|
|
|
1,498,089
|
|
Total
|
|
$
|
1,757,432
|
|
For the years ended December 31, 2019
and 2018, respectively, the Company recognized $550 and $46,918 in interest expense on long-term debt.
NOTE 8 – NOTES PAYABLE, RELATED
PARTIES
Throughout the history of the Company,
the Chairman, Angelo DeRosa has periodically loaned the company money. The loan has a twenty-year term maturing on December 31,
2031 and calls for principal and simple interest to be paid at various yearly intervals at the rate of three percent. For the year
ended December 31, 2019, the Company accrued interest of $45,719, paid $566,232 and borrowed $50,000 on the related party
note, leaving an ending balance on the note of $1,246,388. For the year ended December 31, 2018, the Company accrued interest
of $38,979, paid $245,309 and borrowed $241,950 on the related party note, leaving an ending balance on the note of $1,716,901.
NOTE 9 – LEASE COMMITMENTS
The Company owns its offices and warehouse
facilities in New Jersey and Florida. The Company's North Carolina and Pennsylvania facilities are currently under a month-to-month
lease and have no future commitments.
The future minimum lease payments in the years subsequent to
December 31, 2019 are as follows:
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
Vehicles
|
|
$
|
21,676
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
21,676
|
|
Property
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Subtotal
|
|
$
|
21,676
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
21,676
|
|
NOTE 10 – RETIREMENT PLAN
The Company maintains a defined contribution
retirement plan for the benefit of eligible employees. The Company has frozen the retirement plan indefinitely. No employer contributions
will be made until the plan is reactivated. As of December 31, 2019 and 2018, $0 and $0 was owed under the defined contribution
retirement plan, respectively.
NOTE 11 – STOCKHOLDERS’ EQUITY
The Company has authorized 200,000,000
shares of common stock with par value of $0.001. As of December 31, 2019 and 2018 the Company had 47,284,689 and 41,965,540
shares of common stock issued and outstanding, respectively. On May 18, 2012, the Company authorized the issuance of 10,000,000
shares of preferred stock with a par value of $0.001. No shares of preferred stock have been issued as of the date of this filing.
The holders of the Company’s common
stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends of such times and
in such amounts as the board from time to time may determine. Holders of common stock are entitled to one vote for each
share held on all matters submitted to a vote of shareholders. There is no cumulative voting of the election of directors
then standing for election. The common stock is not entitled to preemptive rights and is not subject to conversion or
redemption. Upon liquidation, dissolution or winding up of the company, the assets legally available for distribution
to stockholders are distributable ratably among the holders of the common stock after payment of liquidation preferences, if any,
on any outstanding payment of other claims of creditors.
In 2018 the Company issued 750,000 shares
of stock to one consultant as partial payment for consulting and technical advice on development of the Company’s proprietary
cryptocurrency. Additionally, one former executive purchased 500,000 shares of stock at $0.03/share by exercising his common stock
options. In 2019, the Company issued 5,319,149 shares of stock for the acquisition of F&S Distributors, Inc.
NOTE 12 – INCOME TAXES
The Company’s deferred tax assets
and liabilities consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
32,656
|
|
|
$
|
32,656
|
|
Net operating loss carryforward
|
|
|
185,841
|
|
|
|
218,800
|
|
Vacation Accrual
|
|
|
2,612
|
|
|
|
2612
|
|
R&D Credits
|
|
|
277,000
|
|
|
|
-
|
|
Total
|
|
|
498,809
|
|
|
|
254,068
|
|
Valuation Allowance
|
|
|
(165,173
|
)
|
|
|
-
|
|
Current Deferred Tax Asset, net
|
|
|
332,936
|
|
|
|
254,068
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(10,777
|
)
|
|
|
1,900
|
|
Goodwill
|
|
|
52,034
|
|
|
|
53,552
|
|
Total
|
|
|
41,257
|
|
|
|
55,452
|
|
Valuation Allowance
|
|
|
-
|
|
|
|
-
|
|
Noncurrent Deferred Tax Asset, net
|
|
$
|
374,193
|
|
|
$
|
309,520
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax - Asset, net
|
|
$
|
374,193
|
|
|
$
|
309,520
|
|
The provisions for income taxes for the
years ending December 31 consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax expense (benefit)
|
|
$
|
64,673
|
|
|
$
|
180,007
|
|
Current provision
|
|
|
(61,217
|
)
|
|
|
44,054
|
|
Total provision for (benefit of) Income Taxes
|
|
$
|
3,456
|
|
|
$
|
224,061
|
|
In assessing the realization of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax strategies in making this assessment.
The Company accounts for uncertain tax
positions based upon authoritative guidance that prescribes a recognition and measurement process for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return (ASC 740-10). The guidance also provides direction
on derecognition and classification of interest and penalties.
Management has evaluated and concluded
that there are no material uncertain tax positions requiring recognition in the financial statements for the year ended December 31,
2019. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and
penalties as selling, general and administrative expenses.
The items accounting for the difference
between income taxes computed at the federal statutory rate and the provision for income taxes as follows:
|
|
2019
|
|
|
2018
|
|
|
|
Amount
|
|
|
Impact on Rate
|
|
|
Amount
|
|
|
Impact on Rate
|
|
Income tax at federal rate
|
|
$
|
45,284
|
|
|
|
21.00
|
%
|
|
$
|
33,040
|
|
|
|
21.00
|
%
|
State tax, net of Federal effect
|
|
|
15,095
|
|
|
|
7.00
|
%
|
|
|
11,013
|
|
|
|
7.00
|
%
|
Total permanent differences
|
|
|
0
|
|
|
|
-
|
%
|
|
|
0
|
|
|
|
-
|
%
|
Effect of 2018 Tax Law and Temporary Diff
|
|
|
0
|
|
|
|
-
|
%
|
|
|
224,061
|
|
|
|
142.40
|
%
|
NOL deduction
|
|
|
(56,923
|
)
|
|
|
(26.40
|
)%
|
|
|
(44,053
|
)
|
|
|
(28.00
|
)%
|
Tax credits
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Valuation allowance
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Total Provision
|
|
$
|
3,456
|
|
|
|
1.60
|
%
|
|
$
|
224,061
|
|
|
|
142.40
|
%
|
NOTE 13 – COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions
arising in the ordinary course of business. Matters that are probable of unfavorable outcomes to the Company and which can be reasonably
estimated are accrued. Such accruals are based on information known about the matters, the Company’s estimates of the outcomes
of such matters and its experience in contesting, litigating and settling similar matters.
As of the date of this report there are
no material pending legal proceedings to which the Company is a party or of which any of its property is the subject, nor are there
any such proceedings known to be contemplated by governmental authorities.
NOTE 14 – SUBSEQUENT EVENTS
COVID-19
In the first quarter of 2020 the Company
was affected by COVID-19. The COVID-19 pandemic has caused us to modify our business practices (including employee travel, employee
work locations, and reduction of physical participation in meetings, events and conferences), and we may take further actions as
may be required by government authorities or that we determine are in the best interests of our employees, customers and business
partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be
satisfactory to government authorities.
The extent to which COVID-19 impacts our
business, results of operations and financial condition will depend on future developments, which are uncertain and cannot be predicted,
including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat
its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the coronavirus
outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic
impact, including any recession that has occurred or may occur in the future.
COVID-19 related financing
PPP Note
On April 21, 2020, Sterling Seal &
Supply, Inc. (“Sterling Seal”), a wholly owned subsidiary of Sterling Consolidated Corp. (the “Company”),
received loan proceeds in the amount of approximately $326,100 under the Paycheck Protection Program (the “PPP”). The
PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) and administered
by the U.S. Small Business Administration (the “SBA”), provides for loans to qualifying businesses for amounts up to
2.5 times of the average monthly payroll expenses of the qualifying business. The unsecured loan (the “PPP Loan”) is
evidenced by a promissory note (the “PPP Note”) issued by Sterling Seal, dated April 21, 2020, in the principal
amount of $326,100 with TrustBank (the “Lender”),
Under the terms of the PPP Note and the
PPP, interest accrues on the outstanding principal at the rate of 1.0% per annum with a deferral of payments for the first six
months. The term of the PPP Note is two years, though it may be payable sooner in connection with an event of default under the
PPP Note. To the extent the amount of the PPP Loan is not forgiven under the PPP, Sterling Seal will be obligated to make equal
monthly payments of principal and interest beginning after a six-month deferral period provided in the PPP Note and through April 21,
2022.
The CARES Act and the PPP provide a mechanism
for forgiveness of up to the full amount borrowed. Under the PPP, Sterling Seal may apply for forgiveness for all or a part of
the PPP Loan. The amount of PPP Loan proceeds eligible for forgiveness is based on a formula that takes into account a number of
factors, including: (i) the amount of PPP Loan proceeds that are used by Sterling Seal during the eight-week period after
the PPP Loan origination date for certain specified purposes including payroll costs, interest on certain mortgage obligations,
rent payments on certain leases, and certain qualified utility payments, provided that at least 75% of the PPP Loan amount is used
for eligible payroll costs; (ii) Sterling Seal maintaining or rehiring employees, and maintaining salaries at certain levels;
and (iii) other factors established by the SBA. Subject to the other requirements and limitations on PPP Loan forgiveness,
only that portion of the PPP Loan proceeds spent on payroll and other eligible costs during the covered eight-week period will
qualify for forgiveness. Although Sterling Seal currently intends to use the entire amount of the PPP Loan for qualifying expenses,
no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
The PPP Note may be prepaid in part or
in full, at any time, without penalty. The PPP Note provides for certain customary events of default, including Sterling Seal’s:
(i) failure to make a payment when due under the PPP Note; (ii) breach of the terms of the PPP Note; (iii) default
on any other loan with the Lender; (iv) filing of a bankruptcy petition by or against Sterling Seal; (v) reorganization
merger, consolidation or other change in ownership or business structure without the Lender’s prior written consent; (vi) adverse
change in financial condition or business operation that the Lender believes may affect Sterling Seal’s ability to pay the
PPP Note; and (vii) default on any loan or agreement with another creditor, if the Lender believes the default may materially
affect Sterling Seal’s ability to pay the PPP Note. Upon the occurrence of an event of default, the Lender has customary
remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing
from Sterling Seal, and file suit and obtain judgment against Sterling Seal. The foregoing description of the PPP Note does not
purport to be complete is qualified in its entirety by reference to the full text of the PPP Note, a copy of which is filed as
Exhibit 10.1 to this Current Report on Form 8-K.
EIDL Note
Additionally, on May 28, 2020, the
Company received $150,000 in loan funding from the SBA under the Economic Injury Disaster Loan (“EIDL”) program administered
by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note, dated May 28,
2020 (the “EIDL Note”) in the original principal amount of $150,000 with the SBA, the lender.
Under the terms of the EIDL Note, interest
accrues on the outstanding principal at the rate of 3.75% per annum. The term of the EIDL Note is 30 years, though it may be payable
sooner upon an event of default under the EIDL Note. Under the EIDL Note, the Company will be obligated to make equal monthly payments
of principal and interest beginning on May 28, 2021 through the maturity date of May 28, 2051. The EIDL Note may be prepaid
in part or in full, at any time, without penalty.
The EIDL Note provides for certain customary
events of default, including: (i) a failure to comply with any provision of the EIDL Note, the related Loan Authorization
and Agreement, or other EIDL loan documents; (ii) a default on any other SBA loan; (iii) a sale or transfer of, or failure
to preserve or account to SBA’s satisfaction for, any of the collateral or its proceeds; (iv) a failure of the Company
or anyone acting on its behalf to disclose any material fact to SBA; (v) the making of a materially false or misleading representation
to SBA by the Company or anyone acting on their behalf; (vi) a default on any loan or agreement with another creditor, if
SBA believes the default may materially affect the Company’s ability to pay the EIDL Note; (vii) a failure to pay any
taxes when due; (viii) if the Company becomes the subject of a proceeding under any bankruptcy or insolvency law; (ix) if
a receiver or liquidator is appointed for any part of the Company’s business or property; (x) the making of an assignment
for the benefit of creditors; (xi) has any adverse change in financial condition or business operation that SBA believes may
materially affect the Company’s ability to pay the EIDL Note; (xii) effects any reorganization, merger, consolidation,
or other transaction changing ownership or business structure without SBA’s prior written consent; or (xiii) becomes
the subject of a civil or criminal action that SBA believes may materially affect the Company’s ability to pay the EIDL Note.
Closure of Florida Operations
In the first quarter of 2020, the Company
closed down its Florida operations and consolidated the sales accounts with its New Jersey based sales force based out of the Company’s
headquarters in Neptune, New Jersey. The Company owns the Florida property unencumbered and intends to sell it in 2020. The closure
was an effort to reduce costs and consolidate operations and was not related to COVID-19.