UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.

 

Commission File Number: 333-183246

 

STERLING CONSOLIDATED CORP.

(Exact name of registrant as specified in its charter)

 

Nevada	45-1840913
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

1105 Green Grove Road

Neptune, New Jersey 07753

(Address of principal executive offices)

 

(732) 918-8004

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

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

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	Smaller reporting company x
	Emerging growth company ¨

   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of March 5, 2021 there were 47,284,689 shares of common stock, $0.001 par value issued and outstanding.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common	STCC	OTC

 

 

STERLING CONSOLIDATED CORP.

TABLE OF CONTENTS

FORM 10-Q REPORT

March 31, 2020

 

		Page  Number
PART I - FINANCIAL INFORMATION		F-2
Item 1.	Financial Statements.	F-2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	7
Item 4.	Controls and Procedures.	7
PART II - OTHER INFORMATION		9
Item 1.	Legal Proceedings.	9
Item 1A.	Risk Factors.	9
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	9
Item 3.	Defaults Upon Senior Securities.	9
Item 4.	Mine Safety Disclosures	9
Item 5.	Other Information.	9
Item 6.	Exhibits.	10
SIGNATURES		11

 

 

PART I - FINANCIAL INFORMATION

 

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 4^th 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a Smaller Reporting Company and are not required to provide the information under this item.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that due to material weaknesses the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure.

 

As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board ("PCAOB"), a material weakness is a deficiency or combination of deficiencies that result in a more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of March 31, 2020:

 

 

(1)

Lack of an independent audit committee or audit committee financial expert. Although our board of directors serves as the audit committee it has no independent directors These factors are counter to corporate governance practices as defined by the various stock exchanges and may lead to less supervision over management.

 

(2)

We do not have sufficient experience from our accounting personnel with the requisite U.S. GAAP public company reporting experience that is necessary for adequate controls and procedures.

 

(3)

Need for greater integration, oversight, communication and financial reporting of the books and records of our satellite offices.

 

Our management determined that these deficiencies constituted material weaknesses.

 

Due to our small size, we were not able to immediately take any action to remediate these material weaknesses. Notwithstanding the assessment that our Internal Controls over Financial Reporting was not effective and that there were material weaknesses identified herein, we believe that our consolidated financial statements contained in this Annual Report fairly present our financial position, results of operations and cash flows for the years covered thereby in all material respects.

 

Changes in Internal Control

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors.

 

We are a Smaller Reporting Company and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

 

Item 6. Exhibits.

 

Exhibit Number		Exhibit Title
31.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *		XBRL Instance Document
101.SCH *		XBRL Taxonomy Schema
101.CAL *		XBRL Taxonomy Calculation Linkbase
101.DEF *		XBRL Taxonomy Definition Linkbase
101.LAB *		XBRL Taxonomy Label Linkbase
101.PRE *		XBRL Taxonomy Presentation Linkbase

 

* Filed herewith.

 

** In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	STERLING CONSOLIDATED CORP.
	By:	/s/ Darren DeRosa
		Darren DeRosa,
		Chief Executive Officer
		(Principal Executive Officer)
		Dated: March 5, 2021
	By:	/s/ Scott Chichester
		Scott Chichester,
		Chief Financial Officer
		(Principal Financial and Accounting Officer)
		Dated: March 5, 2021