Item 1. Financial Statements.
STERLING CONSOLIDATED CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
45,827
|
|
|
$
|
106,348
|
|
|
Account receivable, net
|
|
|
1,272,756
|
|
|
|
1,384,439
|
|
|
Inventory, net
|
|
|
2,944,326
|
|
|
|
3,337,843
|
|
|
Notes receivable and other current assets
|
|
|
127,508
|
|
|
|
63,582
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,390,417
|
|
|
|
4,892,212
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,475,771
|
|
|
|
1,536,519
|
|
|
Intangible assets, net
|
|
|
101,784
|
|
|
|
105,284
|
|
|
Deferred tax asset
|
|
|
385,344
|
|
|
|
374,193
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,353,316
|
|
|
$
|
6,908,208
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
876,320
|
|
|
$
|
1,341,865
|
|
|
Asset-based line of credit
|
|
|
853,470
|
|
|
|
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
|
|
|
258,477
|
|
|
|
138,257
|
|
|
Total current liabilities
|
|
|
2,046,299
|
|
|
|
2,582,540
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
Long-term notes payable, related parties
|
|
|
962,253
|
|
|
|
1,193,686
|
|
|
Long-term notes payable
|
|
|
1,855,271
|
|
|
|
1,619,175
|
|
|
Total other liabilities
|
|
|
2,817,524
|
|
|
|
2,812,861
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,863,823
|
|
|
|
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 June 30, 2020 and December 31, 2019.
|
|
|
47,285
|
|
|
|
47,285
|
|
|
Additional paid-in capital
|
|
|
2,569,249
|
|
|
|
2,569,249
|
|
|
Accumulated deficit
|
|
|
(1,127,041
|
)
|
|
|
(1,103,727
|
)
|
|
Total stockholders' equity
|
|
|
1,489,493
|
|
|
|
1,512,807
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
6,353,316
|
|
|
$
|
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 June 30,
|
|
|
For the Six Months Ended,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
O-rings and rubber product sales
|
|
$
|
2,112,057
|
|
|
|
2,022,107
|
|
|
$
|
4,476,530
|
|
|
$
|
4,239,815
|
|
|
Freight services
|
|
|
45,416
|
|
|
|
41,356
|
|
|
|
76,597
|
|
|
|
74,086
|
|
|
Total revenues
|
|
|
2,157,473
|
|
|
$
|
2,063,463
|
|
|
|
4,553,127
|
|
|
|
4,313,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
|
|
|
1,932,632
|
|
|
|
1,689,017
|
|
|
|
3,441,246
|
|
|
|
3,220,119
|
|
|
Cost of services
|
|
|
65,039
|
|
|
|
64,623
|
|
|
|
130,944
|
|
|
|
144,808
|
|
|
Total cost of sales
|
|
|
1,997,671
|
|
|
|
1,753,640
|
|
|
|
3,572,190
|
|
|
|
3,364,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
159,802
|
|
|
|
309,823
|
|
|
|
980,937
|
|
|
|
948,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
15,900
|
|
|
|
(144
|
)
|
|
|
91,257
|
|
|
|
84,750
|
|
|
General and administrative
|
|
|
457,874
|
|
|
|
384,548
|
|
|
|
825,877
|
|
|
|
838,787
|
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
Total operating expenses
|
|
|
473,774
|
|
|
|
384,404
|
|
|
|
917,134
|
|
|
|
953,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(313,972
|
)
|
|
|
(74,581
|
)
|
|
|
63,803
|
|
|
|
(4,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,981
|
|
|
|
(4,794
|
)
|
|
|
5,963
|
|
|
|
1,206
|
|
|
Loss on theft
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
Interest expense
|
|
|
(41,331
|
)
|
|
|
(32,968
|
)
|
|
|
(93,335
|
)
|
|
|
(80,539
|
)
|
|
Total other expense
|
|
|
(38,350
|
)
|
|
|
(37,762
|
)
|
|
|
(97,372
|
)
|
|
|
(79,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(352,322
|
)
|
|
|
(112,343
|
)
|
|
|
(33,569
|
)
|
|
|
(83,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) income taxes
|
|
|
(106,502
|
)
|
|
|
(31,945
|
)
|
|
|
(10,255
|
)
|
|
|
(23,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(245,820
|
)
|
|
$
|
(80,398
|
)
|
|
$
|
(23,314
|
)
|
|
$
|
(60,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
47,284,689
|
|
|
|
47,284,689
|
|
|
|
47,284,689
|
|
|
|
45,760,356
|
|
See accompanying notes to consolidated financial statements
STERLING CONSOLIDATED CORP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
|
|
|
Common
Stock
|
|
|
Additional Paid-
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in
Capital
|
|
|
Accumulated Deficit
|
|
|
Total
|
|
|
Balance, December 31, 2019
|
|
|
47,284,689
|
|
|
$
|
47,285
|
|
|
$
|
2,569,249
|
|
|
$
|
(1,103,727
|
)
|
|
$
|
1,512,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the 6 months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,314
|
)
|
|
|
(23,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
|
|
47,284,689
|
|
|
$
|
47,285
|
|
|
$
|
2,569,249
|
|
|
$
|
(1,127,041
|
)
|
|
$
|
1,489,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
41,965,540
|
|
|
$
|
41,966
|
|
|
$
|
2,074,568
|
|
|
$
|
(1,315,907
|
)
|
|
$
|
800,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued to acquire F&S Distributors, Inc.
|
|
|
5,319,149
|
|
|
|
5,319
|
|
|
|
494,681
|
|
|
|
|
|
|
|
500,000
|
|
|
Net
income for the 6 months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,722
|
)
|
|
|
(60,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
|
|
47,284,689
|
|
|
$
|
47,285
|
|
|
$
|
2,569,249
|
|
|
$
|
(1,376,629
|
)
|
|
$
|
1,239,905
|
|
STERLING CONSOLIDATED CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
For the Six Months Ended
June 30
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,314
|
)
|
|
$
|
(60,722
|
)
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
64,248
|
|
|
|
69,558
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
111,683
|
|
|
|
(318,723
|
)
|
|
Inventory
|
|
|
393,517
|
|
|
|
19,804
|
|
|
Prepaids and other current assets
|
|
|
(63,926
|
)
|
|
|
(5,945
|
)
|
|
Deferred tax asset
|
|
|
(11,151
|
)
|
|
|
(24,330
|
)
|
|
Accounts payable and accrued interest payable
|
|
|
(465,545
|
)
|
|
|
307,976
|
|
|
Other liabilities
|
|
|
-
|
|
|
|
999
|
|
|
Net cash provided by (used in) operating activities
|
|
|
5,512
|
|
|
|
(11,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
(Paydown) borrowing on asset-based line of credit
|
|
|
(190,916
|
)
|
|
|
332,826
|
|
|
Net borrowing on notes payable
|
|
|
356,316
|
|
|
|
-
|
|
|
Net paydown on related party note
|
|
|
(231,433
|
)
|
|
|
(69,394
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
(66,033
|
)
|
|
|
263,432
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(60,521
|
)
|
|
|
(27,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of period
|
|
|
106,348
|
|
|
|
32,034
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
45,827
|
|
|
$
|
4,083
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
93,335
|
|
|
$
|
80,539
|
|
|
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 AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 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, 2020 audited financial statements. The results of operations
for the periods ended June 30, 2020 and June 30, 2019 are not necessarily indicative of the operating results for the full years.
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, 2020.
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) or market. 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)
JUNE 30, 2020
(unaudited)
|
Inventory Type
|
|
June 30, 2020
|
|
|
December 31,
2019
|
|
|
Finished goods
|
|
$
|
3,673,820
|
|
|
$
|
4,069,035
|
|
|
Raw materials
|
|
|
-
|
|
|
|
-
|
|
|
Work-in-progress
|
|
|
1,698
|
|
|
|
-
|
|
|
Inventory Reserve
|
|
|
(731,192
|
)
|
|
|
(731,192
|
)
|
|
Net Inventory
|
|
$
|
2,944,326
|
|
|
$
|
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 10,800,000
stock options that would have been included in the fully diluted earnings per share for the three and six month periods ended June 30,
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)
JUNE 30, 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)
JUNE 30, 2020
(unaudited)
NOTE 5 – DEBT TRANSACTIONS
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 second 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.
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)
JUNE 30, 2020
(unaudited)
NOTE 5 – DEBT TRANSACTIONS, continued
COVID-19 related financing, continued
PPP Note, continued
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, 2022 through the maturity date of May 28, 2050. 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.
STERLING CONSOLIDATED CORP AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (continued)
JUNE 30, 2020
(unaudited)
NOTE 6 – SUBSEQUENT EVENTS
Closure of Florida Operations and Sale of Property
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 owned the Florida property unencumbered and sold the property for $712,500 on March 30,
2021. The closure was an effort to reduce costs and consolidate operations and was not related to COVID-19.
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 June
30, 2020 and 2019
Net Revenue
Net revenue increased by approximately $94,010
or approximately 5%, from $2,063,463 for the three months ended June 30, 2019 to $2,157,473 for the three months ended June 30, 2020.
This increase was due primarily to residual purchase orders made toward the end of the first quarter 2020 offset by diminished sales toward
the latter half of the second quarter due to the effects of COVID 19 on the world supply chain.
Total Cost of Sales
Cost of sales increased by approximately $244,031
or approximately 14%, from $1,753,640 for the three months ended June 30, 2019 to $1,997,671 for the three months ended June 30, 2020.
This increase was primarily due to COVID 19 related inefficiencies.
Gross profit
Gross profit decreased by $150,021 or approximately
48%, from $309,823 for the three months ended June 30, 2020 to $159,802 for the three months ended June 30, 2020. This decrease was due
primarily to the aforementioned increase in cost of sales.,
Net Income
As a result of the above factors, the Company
showed a net loss of $245,820 for the three months ended June 30, 2020, as compared to a net loss of $80,398 for the three months ended
June 30, 2019. This increased loss of $165,422 or approximately 206% is primarily attributed to the aforementioned factors that affected
cost of sales coupled with an increase in general and administrative costs of $73,326 due to increased headcount.
Comparison for the six months ended June
30, 2020 and 2019
Net Revenue
Net revenue increased by approximately $239,226
or approximately 6%, from $4,313,901 for the six months ended June 30, 2019 to $4,553,127 for the six months ended June 30, 2020. This
increase was due primarily due to robust sales in the first quarter of 2020 that trended lower in the 2nd quarter 2020 due
to the effects of COVID 19 on the world supply chain.
Total Cost of Sales
Cost of sales increased by approximately $207,263
or approximately 6%, from $3,364,927 for the six months ended June 30, 2019 to $3,572,190 for the six months ended June 30, 2020. This
increase is commensurate with the increase in net revenue.
Gross profit
Gross profit increased by $31,693 or approximately
3%, from $948,974 for the six months ended June 30, 2019 to $980,937 for the six months ended June 30, 2020. This increase was due primarily
to robust sales and profit in the 1st quarter of 2020 offset by a sales slowdown in the 2nd quarter of 2020 due
to the effects of COVID 19.
Net Income
As a result of the above factors, the Company
showed a net loss of $23,314 for the six months ended June 30, 2020, as compared to a net loss of $60,722 for the six months ended June
30, 2019. This decreased loss of $37,408 or approximately 62% is primarily attributed to the robust sales and profitability in the 1st
quarter of 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 and cash generated from operations.
On June 30, 2020, we had cash and cash equivalents
of approximately $45,827 as compared to approximately $106,348 as of December 31, 2019, representing a decrease of $60,521. This decrease
can be explained by cash provided by operating activities of $5,512 primarily attributed to a decrease in inventory of $393,517, decrease
of accounts receivable of $ 111,683, offset by a decrease in accounts payable and accrued interest payable of $465,545. This was offset
by net cash used in financing activities of $66,033 attributed to paydown of notes payable related party of $231,433 and the asset-based
line of credit of $190,916, offset by a net increase in notes payable primarily attributed to CARES Act incentive loans.
The cash flow used in operating activities increased
from net cash used of $11,383 for the six months ended June 30, 2019 to net cash provided of $5,512 for the six months ended June 30,
2020. This increase of $16,895 is primarily attributed to a decreased net loss.
The cash flow from investing activities decreased
from cash used of $280,000 for the quarter ended June 30, 2019 to net cash used of $0 for the quarter ended June 30, 2020. This decrease
is explained by the Company’s February 2019 business acquisition compared to no 2020 business acquisition activity.
The cash flow from financing activities decreased
from net cash provided of $263,432 for the quarter ended June 30, 2019 to net cash used of $66,033 for the quarter ended June 30, 2020.
This decrease is primarily attributed to a repayment of borrowings on asset-based line of credit and related party note in the amount
of $190,916 and 231,433 respectively.
Debt Transactions
Asset Based Loan
The Company refinanced its debt in 2018 with a
New York asset based lender and there is currently an outstanding balance of $853,470. The line of credit calls for a variable interest
rate at market rates for the ABL industry.
Mortgage Note
The Company obtained a mortgage on its Neptune,
NJ headquarters in the 4th quarter of 2019, offset by a pay down of a portion of its related party note and asset-based line of credit.
The mortgage payable is due in monthly installments of principal and interest. Interest is charged at a fixed rate of 5.00%. The mortgage
is 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.
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, 2022 through the maturity date of May 28, 2050. 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.
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
control of the product passes to the customer or the service is provided and is recognized at an amount that reflects the
consideration expected to be received in exchange for such goods or services. 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.
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Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
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Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc…).
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Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
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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 June 30, 2020 were fully vested and
therefore, no compensation expense was recorded in the quarter ended June 30, 2020.
Recent Accounting Pronouncements
The Company’s management has considered
all recent accounting pronouncements. Management believes that these recent pronouncements will not have a material effect on the Company’s
financial statements.
Off-Balance Sheet Arrangements
The Company has declared a dividend of its proprietary cryptocurrency,
DIMO, that is yet to be distributed. As there is currently no market for the cryptocurrency, the Company has valued the dividend at $0.
