Item 1. Financial Statements.
STERLING CONSOLIDATED CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,707
|
|
|
$
|
106,348
|
|
|
Account receivable, net
|
|
|
1,472,472
|
|
|
|
1,384,439
|
|
|
Inventory, net
|
|
|
3,161,668
|
|
|
|
3,337,843
|
|
|
Notes receivable and other current assets
|
|
|
209,462
|
|
|
|
63,582
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,846,309
|
|
|
|
4,892,212
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,507,896
|
|
|
|
1,536,519
|
|
|
Intangible assets, net
|
|
|
101,784
|
|
|
|
105,284
|
|
|
Deferred tax asset
|
|
|
278,567
|
|
|
|
374,193
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,734,556
|
|
|
$
|
6,908,208
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,082,278
|
|
|
$
|
1,341,865
|
|
|
Asset-based line of credit
|
|
|
1,033,053
|
|
|
|
1,044,386
|
|
|
Other liabilities
|
|
|
5,330
|
|
|
|
5,330
|
|
|
Current portion of long-term notes payable, rel. party
|
|
|
52,702
|
|
|
|
52,702
|
|
|
Current portion of long-term notes payable
|
|
|
90,129
|
|
|
|
138,257
|
|
|
Total current liabilities
|
|
|
2,263,492
|
|
|
|
2,582,540
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
Long-term notes payable, related parties
|
|
|
1,125,438
|
|
|
|
1,193,686
|
|
|
Long-term notes payable
|
|
|
1,610,313
|
|
|
|
1,619,175
|
|
|
Total other liabilities
|
|
|
2,735,751
|
|
|
|
2,812,861
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,999,243
|
|
|
|
5,395,401
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized, no shares issued
|
|
|
-
|
|
|
|
-
|
|
|
Common stock, $0.001 par value; 200,000,000 shares authorized, 47,284,689 shares issued and outstanding as of March 31, 2020 and December 31, 2019.
|
|
|
47,285
|
|
|
|
47,285
|
|
|
Additional paid-in capital
|
|
|
2,569,249
|
|
|
|
2,569,249
|
|
|
Accumulated deficit
|
|
|
(881,221
|
)
|
|
|
(1,103,727
|
)
|
|
Total stockholders' equity
|
|
|
1,735,313
|
|
|
|
1,512,807
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
6,734,556
|
|
|
$
|
6,908,208
|
|
See accompanying notes to consolidated financial statements
STERLING CONSOLIDATED CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
For the Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
O-rings and rubber product sales
|
|
$
|
2,364,473
|
|
|
$
|
2,217,708
|
|
|
Freight services
|
|
|
31,181
|
|
|
|
32,730
|
|
|
Total revenues
|
|
|
2,395,654
|
|
|
|
2,250,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
Cost of goods
|
|
|
1,508,614
|
|
|
|
1,531,102
|
|
|
Cost of services
|
|
|
65,904
|
|
|
|
80,185
|
|
|
Total cost of sales
|
|
|
1,574,519
|
|
|
|
1,611,287
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
821,135
|
|
|
|
639,151
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
75,357
|
|
|
|
84,894
|
|
|
General and administrative
|
|
|
368,003
|
|
|
|
454,239
|
|
|
Research and development
|
|
|
-
|
|
|
|
30,000
|
|
|
Total operating expenses
|
|
|
443,360
|
|
|
|
569,133
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
377,775
|
|
|
|
70,018
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,982
|
|
|
|
6,000
|
|
|
Loss on theft
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
Interest expense
|
|
|
(52,004
|
)
|
|
|
(47,571
|
)
|
|
Total other expense
|
|
|
(59,022
|
)
|
|
|
(41,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
318,753
|
|
|
|
28,447
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
96,247
|
|
|
|
8,771
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
222,506
|
|
|
$
|
19,676
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
47,284,689
|
|
|
|
45,157,029
|
|
See accompanying notes to consolidated financial statements
STERLING CONSOLIDATED CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
For the Three Months Ended
December 31
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
222,506
|
|
|
$
|
19,676
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
32,123
|
|
|
|
36,873
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(88,033
|
)
|
|
|
(470,023
|
)
|
|
Inventory
|
|
|
176,175
|
|
|
|
(5,087
|
)
|
|
Prepaids and other current assets
|
|
|
(145,880
|
)
|
|
|
31,681
|
|
|
Deferred tax asset
|
|
|
95,626
|
|
|
|
8,594
|
|
|
Accounts payable and accrued interest payable
|
|
|
(259,587
|
)
|
|
|
176,268
|
|
|
Other liabilities
|
|
|
-
|
|
|
|
(301
|
)
|
|
Net cash provided by (used in) operating activities
|
|
|
32,930
|
|
|
|
(202,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Net cash paid for acquisition of business
|
|
|
-
|
|
|
|
(280,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(280,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Borrowing on asset-based line of credit
|
|
|
78,796
|
|
|
|
487,381
|
|
|
Net paydown on notes payable
|
|
|
(147,119
|
)
|
|
|
(4,936
|
)
|
|
Net paydown on related party note
|
|
|
(68,248
|
)
|
|
|
57,404
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(136,571
|
)
|
|
|
539,849
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(103,641
|
)
|
|
|
57,530
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of period
|
|
|
106,348
|
|
|
|
32,034
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
2,707
|
|
|
$
|
89,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
52,004
|
|
|
$
|
47,571
|
|
|
Cash paid for taxes
|
|
$
|
1,338
|
|
|
$
|
2,191
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Common stock issued for business acquisition
|
|
$
|
-
|
|
|
$
|
500,000
|
|
|
Note payable issued for business acquisition
|
|
$
|
-
|
|
|
$
|
100,000
|
|
See accompanying notes to consolidated financial statements
STERLING CONSOLIDATED CORP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
|
|
|
Common Stock
|
|
|
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance, December 31, 2018
|
|
|
41,965,540
|
|
|
$
|
41,966
|
|
|
$
|
2,074,568
|
|
|
$
|
(1,315,907
|
)
|
|
$
|
800,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued to acquire F&S Distributors, Inc.
|
|
|
5,319,149
|
|
|
|
5,319
|
|
|
|
494,681
|
|
|
|
-
|
|
|
|
500,000
|
|
|
Net income for the 3 months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,676
|
|
|
|
19,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
47,284,689
|
|
|
$
|
47,285
|
|
|
$
|
2,569,249
|
|
|
$
|
(1,296,231
|
)
|
|
$
|
1,320,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
47,284,689
|
|
|
$
|
47,285
|
|
|
$
|
2,569,249
|
|
|
$
|
(1,103,727
|
)
|
|
$
|
1,512,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the 3 months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,506
|
|
|
|
222,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
|
47,284,689
|
|
|
$
|
47,285
|
|
|
$
|
2,569,249
|
|
|
$
|
(881,221
|
)
|
|
$
|
1,735,313
|
|
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2020
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying interim financial statements have been prepared
by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and cash flows as of and for the period ended, and for
all periods presented herein, have been made.
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction
with the financial statements and notes thereto included in the Company’s December 31, 2019 audited financial statements.
The results of operations for the periods ended March 31, 2020 and March 31, 2019 are not necessarily indicative of the operating
results for the full years.
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. We reiterate that COVID 19 has affected our results of operations and the first quarter
2020 financial results are not necessarily indicative of the annual 2020 results.
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.
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
The accounting policies applied by the
Company in these condensed interim financial statements are the same as those applied by the Company in its audited consolidated
financial statements as at and for the year ended December 31, 2019.
ASU 2016-13,
“Financial Instruments - Credit Losses” (Topic 326)
This pronouncement, along with
subsequent ASUs issued to clarify provisions of ASU 2016-13, changes the impairment model for most financial assets and will require
the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be
required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost
basis of the financial asset, resulting in a net presentation of the amount expected The standard was effective for fiscal years
beginning after December 15, 2019. Management has evaluated the impact in 2020 and has concluded the effect is not material to
the Consolidated Financial Statements as a whole.
Use of Estimates
The preparation of consolidated financial
statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed
in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing
basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial
instruments, useful lives of intangible assets and property and equipment, inventory valuations, income taxes, and contingent liabilities,
among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable,
the results of which form the basis for making judgments about the carrying values of assets and
liabilities.
Inventories
Inventories, which are comprised of finished
goods, are stated at the lower of cost (based on weighted average method) 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, which is approximately
20% of the total inventory, 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.
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
MARCH 31, 2020
(unaudited)
|
Inventory Type
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Finished goods
|
|
$
|
3,892,860
|
|
|
$
|
4,069,035
|
|
|
Raw materials
|
|
|
-
|
|
|
|
-
|
|
|
Work-in-progress
|
|
|
|
|
|
|
-
|
|
|
Inventory Reserve
|
|
|
(731,192
|
)
|
|
|
(731,192
|
)
|
|
Net Inventory
|
|
$
|
3,161,668
|
|
|
$
|
3,337,843
|
|
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 only when
the price is fixed or determinable, persuasive evidence of an arrangement exists, shipment of the product has occurred, price is
fixed or determinable and collectability of the resulting receivable is reasonably assured. 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.
Basic and Diluted Earnings per Share
The computation of basic earnings (loss)
per share of common stock is based on the weighted average number of shares outstanding during the periods presented. The computation
of fully diluted earnings (loss) per share includes common stock equivalents outstanding at the balance sheet date. The Company
had 10,800,000 and zero stock options and warrants that would have been included in the fully diluted earnings per share for the
three and 3 month periods ended March 31, 2020 and 2019, respectively.
NOTE 3 – STOCK TRANSACTIONS
In the first quarter of 2019, the Company
issued 5,319,149 shares of common stock as part of the acquisition of F&S Distributors, Inc. that were valued at $500,000.
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
MARCH 31, 2020
(unaudited)
NOTE 4 – 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
|
|
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
MARCH 31, 2020
(unaudited)
NOTE 5 – SUBSEQUENT EVENTS
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.
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
MARCH 31, 2020
(unaudited)
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.
Loss on Theft
In the first quarter of 2020, the Company was subjected to a
fraudulent request for refund from an individual posing as a customer. The Company honored the refund request, but soon discovered
the request was fraudulent. The Company had an initial loss of $92,435 and received $82,435 in the second quarter of 2020 from
a claim with its insurance company. The net loss of $10,000 was recorded in other expense in the consolidated statement of operations
for the 3 months ended March 31, 2020.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Cautionary Notice Regarding Forward
Looking Statements
The information contained in Item 2 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. Actual results may materially differ from those projected in the forward-looking statements
as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made
and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions
will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.
This filing contains a number of forward-looking
statements which reflect management’s current views and expectations with respect to our business, strategies, products,
future results and events, and financial performance. All statements made in this filing other than statements of historical fact,
including statements addressing operating performance, events, or developments which management expects or anticipates will or
may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products,
adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information,
are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements,
but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking.
These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results,
performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied
by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any
future events or circumstances.
Readers should not place undue reliance
on these forward-looking statements, which are based on management’s current expectations and projections about future events,
are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below),
and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future events, or otherwise.
Overview
We were incorporated in the State of Nevada
as Oceanview Acquisition Corp. on January 31, 2011. On May 18, 2012, we amended our Articles of Incorporation to change our name
to Sterling Consolidated Corp.
Our largest subsidiary is Sterling Seal
& Supply, Inc. (“Sterling Seal”), a New Jersey corporation which was incorporated in 1997. Its predecessor was
Sterling Plastic & Rubber Products, Inc., incorporated in New Jersey and was founded in 1970. Sterling Seal engages primarily
in the distribution and sale of O-rings, rubber seals, oil seals, custom molded rubber parts, custom Teflon parts, Teflon rods,
O-ring cord, bonded seals, O-ring kits, and stuffing box sealant.
We also own real property through our subsidiaries
ADDR Properties, LLC (“ADDR”) and Q5 Ventures, LLC (“Q5”). ADDR owns a 28,000 square foot facility in Neptune,
New Jersey, that is primarily used by Sterling Seal for its operations.
In addition, our subsidiary Integrity Cargo
Freight Corporation (“Integrity”) is a freight forwarding business. Integrity shares a facility with Sterling Seal
and manages the importation of Sterling Seal’s products and exports products on behalf of Sterling Seal to various countries.
Currently eighty percent (80%) of Sterling Seal’s imports come from Asia, and ten percent (10%) of the Company’s sales
are exported to various countries. However, all payables are billed and collected in USD, so Sterling does not bear any foreign
exchange risk on open payables.
Results of Operations
Comparison for the three months ended
March 31, 2020 and 2019
Net Revenue
Net revenue increased by approximately
$145,216, or 6.5 %, from $2,250,438 for the three months ended March 31, 2019 to $2,395,654 for the three months ended March 31,
2020. This increase was due primarily to the fact that, in 2020, the Company recorded a full quarter of sales related to its Feb
2019 acquisition of F&S Distributors, Inc., whereas in 2019 the acquisition was made mid-quarter.
Total Cost of Sales
Cost of sales decreased by $36,768 or 2.3%,
from $1,611,287 for the three months ended March 31, 2019 to $1,574,519 for the three months ended March 31, 2020. This decrease
was due primarily to more efficient purchasing and realization of some economies of scale related to the February 2019 acquisition
of F&S Distributors, Inc.
Gross profit
Gross profit increased by $181,984 or 28.5
%, from $639,151 for the three months ended March 31, 2019 to $821,135 for the three months ended March 31, 2020. This increase
was due primarily to a profit margin improvement on o-rings and rubber product sales from 31% for the three months ended March
31, 2019 to 36% for the three months ended March 31, 2020. The profit margin improvement was due to reduced freight expenses resulting
from increased purchasing efficiency coupled with the realization of economies of scale related to the February 2019 acquisition
of F&S Distributors, Inc.
Operating income
Operating income increased by $307,757,
from $70,018 for the three months ended March 31, 2019 to $377,775 for the three months ended March 31, 2020. This increase can
be explained by the above explained increases in net revenue and gross profit, coupled with a decrease of $125,773 in operating
expenses. The reduction in operating expenses is explained by a reduction in legal and professional fees associated with the February
2019 purchase of F&S Distributors, Inc., a reduction of $25,000 in administrative payroll paid to a former executive of F&S
Distributors, Inc. and a reduction in R&D expenses of $30,000.
Other expense
Other expense increased from $41,571 for
the three months ended March 31, 2019 to $59,022 for the three months ended March 31, 2020. This increase was primarily due to
a loss on theft of $10,000 when the Company was defrauded by an individual posing as a customer and the Company mistakenly granted
a fraudulent request to return an overpayment.
Net Income
As a result of the above factors, the Company
showed a net income of $19,676 for the three months ended March 31, 2019, as compared to a net income of $222,506 for the three
months ended March 31, 2020.
Liquidity and Capital Resources
Cash requirements for, but not limited
to, working capital, capital expenditures, and debt repayments have been funded from cash balances on hand, revolver borrowings,
loans from officers, notes payable, CARES ACT loans and cash generated from operations.
On March 31, 2020, we had cash and cash
equivalents of $2,707 as compared to approximately $106,348 as of December 31, 2019, representing a decrease of $103,641. This
decrease can be explained by net cash provided by operating activities of $32,930 primarily attributed to net income of $222,506,
a decrease in inventory of $176,175 offset by a decrease in accounts payable and accrued interest payable of $259,587. This was
offset by net cash used in financing activities of $136,571 attributed to the Company’s business acquisition and net cash
provided by financing activities which was primarily due to a paydown on notes payable of $147,119, a paydown of $68,248 on related
party notes payable, offset by increased borrowing on the asset-based line of credit of $78,796. On March 31, 2020, our working
capital was approximately $2,582,817.
The cash flow from operating activities
increased from net cash used of $202,319 for the quarter ended March 31, 2019 to net cash provided of $32,930 for the quarter ended
March 31, 2020. This increase of $235,249 is primarily attributed to an increase in receivable collections offset by an increase
in paydown of accounts payable.
The cash flow from investing activities
decreased from cash used of $280,000 for the quarter ended March 31, 2019 to $0 for the quarter ended March 31, 2020. This decrease
is attributed to the fact that the Company made a business acquisition in February of 2019 and did not have any such acquisition
activity in the first quarter of 2020.
The cash flow from financing activities
decreased from net cash provided of $539,849 for the quarter ended March 31, 2019 to net cash used of $136,571 for the quarter
ended March 31, 2020. This decrease is primarily attributed to a reduction of borrowing on asset-based line of credit which totaled
487,381 in the first quarter of 2019 coupled with increased paydowns on notes payable and related party notes payable.
Bank Loans
In the 4th quarter 2019,
the Company obtained a mortgage with a New Jersey commercial bank. The mortgage was for $1,650,000 and carries a fixed interest
rate of 5.00% amortized over 25 years with a re-financing required after 5 years. As of March 31, 2020 the Company had a balance
of $1,638,794 outstanding on the note.
The Company currently also utilizes an
asset-based line of credit from a New York-based asset-based lender. The Company was authorized for a line of $2,500,000 and currently
pays 7% per annum in interest. As of March 31, 2020 the Company had a balance of $1,033,053 outstanding on the asset-based
line.
The Company being in arrears on its public
company reporting requirements may be considered a covenant breach by the lender.
In the second quarter of 2020, the Company bolstered its financing
with COVID-19 incentives related to the CARES Act and obtained an Economic Injury Disaster loan from the SBA for $150,000. This
loan has a 30-year term at a fixed interest rate of 3.75%. Additionally, the Company took a Paycheck Protection Program loan in
the amount of $326,100. The PPP loan is at 1% with a term of 2 years and is eligible for forgiveness.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial
Statements, in accordance with accounting principles generally accepted in the United States, requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures pertaining to
contingent assets and liabilities. Note 2, “Significant Accounting Policies,” to the Consolidated Financial Statements
describes the significant accounting policies used to prepare the Consolidated Financial Statements. On an ongoing basis we evaluate
our estimates, including, but not limited to, those related to bad debts, inventories, income taxes, and contingencies. We base
our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual
results may differ from our estimates.
We believe the following accounting policies and estimates are
the most critical. Some of them involve significant judgments and uncertainties and could potentially result in materially different
results under different assumptions and conditions.
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 only when the
price is fixed or determinable, persuasive evidence of an arrangement exists, shipment of the product has occurred, price is fixed
or determinable and collectability of the resulting receivable is reasonably assured. The new revenue standard does not materially
change this calculation method. 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.
Income taxes
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, the Company had no uncertain tax positions.
Fair values of financial instruments
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
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 financial
assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities
measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.
Stock-based compensation
The Company records stock-based compensation
at fair value of the stock provided for services. The 10,300,000 of the stock options outstanding as of March 31, 2020 were fully
vested and therefore, no compensation expense was recorded in the quarters ended March 31, 2020 or 2019.
Recent Accounting Pronouncements
ASU 2016-13,
“Financial Instruments - Credit Losses” (Topic 326)
This pronouncement, along with
subsequent ASUs issued to clarify provisions of ASU 2016-13, changes the impairment model for most financial assets and will require
the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be
required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost
basis of the financial asset, resulting in a net presentation of the amount expected The standard was effective for fiscal years
beginning after December 15, 2019. Management has evaluated the impact in 2020 and has concluded the effect is not material to
the Consolidated Financial Statements as a whole.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
