Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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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. ADDR also owns another property in Cliffwood Beach, New
Jersey, that was previously occupied by Sterling Seal and is now rented out to tenants. Q5 owns a 5,000 square foot facility that
is used by Sterling Seal in Florida.
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.
Recent Financings
Private Placements
In January of 2012, Sterling Seal and Supply,
Inc. conducted a private placement under Rule 506 of Regulation D. In the offering, Sterling Seal and Supply, Inc. sold a total
of 697,040 shares of common stock at $0.30 per share to 36 investors prior to the June 8, 2012 share exchange agreement for total
proceeds of $209,112.
In June 2012, Sterling Consolidated Corp.
conducted a private placement selling an additional 100,333 shares to 2 investors for a total investment of $30,100.
In December of 2012, Sterling Consolidated Corp. obtained an
equity investment of $35,000 in exchange for 116,667 shares from one investor.
Subsequent Events
Sale of Cliffwood Beach Property
On April 29, 2013, the Company entered
into a sales agreement to sell the Cliffwood Beach property. The sale price is for $650,000 and contains various contingencies.
The property has a book value of $644,435 as of March 31, 2013.
Commencement of Trading
On April 30, 2013 the Company's common
stock began trading over-the-counter on the OTC QB exchange.
Results of Operations
Comparison for the three months ended
March 31, 2013 and 2012
Net Revenue
Net revenue decreased by approximately
$78,282 or approximately 4.5%, from $1,741,432 for the three months ended March 31, 2012 to $1,663,150 for the three months ended
March 31, 2013. This decrease is due primarily to a customer that placed large stocking orders in the first quarter of 2012 and
is still liquidating that stock.
Total Cost of Sales
Cost of sales decreased by $115,005 or
approximately 9.73%, from $1,181,737 for the three months ended March 31, 2013 to $1,066,732 for the three months ended March 31,
2012. The decrease in cost of sales was attributed to a corresponding decrease in sales coupled with a decrease in o-ring prices.
Gross profit
Gross profit increased approximately $36,723,
or approximately 6.6%, from $559,695 for the three months ended March 31, 2012 to $596,418 for the three months ended March 31,
2013. This increase can be attributed to the above described decrease in cost of sales mitigated by a lesser decrease in net revenue.
Net Income
As a result of the above factors, net income
was $110,922 for the three months ended March 31, 2013, as compared to net income of $92,639 for the three months ended March 31,
2012. This increase of $18,283 or approximately 19.7% is attributed to the above described increase in gross profit against relatively
unchanged operating expenses.
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.
At March 31, 2013, we had cash and cash
equivalents of approximately $74,541 as compared to approximately $115,489 as of December 31, 2012, representing a decrease of
$40,948. This decrease can be explained by net cash used from financing activities of $32,675, primarily attributed to paydown
of notes payable of $38,402; and net cash used in operating activities of $8,273 primarily attributed to an increase of accounts
payable of $242,331 offset by a decrease of other liabilities of $148,428. At March 31, 2013, our working capital was approximately
$1,199,369.
The cash flow from operating activities
decreased from $154,003 for the quarter ended March 31, 2012 to ($8,273) for the quarter ended March 31, 2013. This decrease of
$162,276 is primarily attributed to a significant paydown of accounts payable of $297,388 offset by an increase of other liabilities
of $131,436.
The cash flow from financing activities
decreased from net cash provided of $59,503 for the quarter ended March 31, 2012 to net cash used of $32,675 for the quarter ended
March 31, 2013. This decrease is primarily attributed to a reduction of proceeds of common stock due to closing of the securities
offering executed in the first quarter of 2012.
Bank Loans
There are three outstanding loans with
PNC bank. We secured a $950,000 mortgage in 2009 to refinance the Cliffwood Beach property, which currently is owned by ADDR
Properties. The instrument is an interest rate swap for 15 years at 5.5%.
Additionally, Sterling Seal & Supply
uses a Line of Credit from PNC Bank. The total line is for $900,000 and the term is 3% above the 1 month LIBOR rate.
The current balance outstanding is $859,909.
In September of 2012, Sterling Seal and
Supply, Inc. refinanced its existing equipment loan with a private noteholder by taking out a term loan for $250,000 with PNC Bank.
The loan has a four year term and pays interest at 3.9%.
A financial covenant requires that the
Company does not have a "Debt Service Coverage Ratio" of less than 1.25 measured annually at fiscal year end. "Debt
Service Coverage Ratio is defined by the lender as: (Net Income + Depreciation Expense + Amortization Expense + Rent Expense +
Other Non-Cash Items)/(Prior Year Current Portion of Long Term Debt + Interest Expense). If the financial covenant is not met,
the lender has the right to call the loan and/or not renew the line of credit. The Company estimates it is currently in compliance
with this financial covenant. Additionally, there is a cross default provision, whereby a default on either the line of credit,
mortgage or equipment note payable would enable the bank to call any or all of the three loans. The bank has required that the
company subordinate $1,200,000 of the loan outstanding to the Chairman, Angelo DeRosa until September 30, 2013.
There is no guarantee that PNC Bank would
give the Company a waiver if it were to go into default on this financial covenant. If the Company were to default, all three bank
loans could be called. If such an event were to occur, it could jeopardize the Company’s ability to operate and the Company’s
assets would be at risk.
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”) 605 “Revenue Recognition”
which contains Securities and Exchange
Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements’ and No. 104,
“Revenue Recognition”. 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 Integrity, revenue is 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,
a formula is employed to recognize a portion of the revenue to better match the expenses in the period.
Revenue is recognized at the date of service
rendered to customers when a formal arrangement exists, the price is fixed or determinable, the services rendered, no other significant
obligations of the Company exist and collectability is reasonably assured. Payments received before satisfaction of all of the
relevant criteria for revenue recognition are recorded as unearned revenue.
Income taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will
not be realized.
The Company applied the provisions of ASC
740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated
with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until
the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit
period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to
the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations
for the given period. At December 31, 2011, management considered that the Company had no uncertain tax positions, and will continue
to evaluate for uncertain positions in the future.
Fair values of financial instruments
The carrying amounts reported in the consolidated
financial statements for current assets and currently liabilities approximate fair value due to the short-term nature of these
financial instruments. The carrying amount of long-term loans approximates fair value since the interest rate associated with the
debt approximates the current market interest rate.
The Company adopted ASC 820-10, “Fair
Value Measurements and Disclosures”, which establishes a single authoritative definition of fair value and a framework for
measuring fair value and expands disclosure of fair value measurements for both financial and nonfinancial assets and liabilities.
This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does
not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flows) and the cost approach (cost to replace the service
capacity of an asset or replacement cost). For purposes of ASC 820-10-15, nonfinancial assets and nonfinancial liabilities would
include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined
in ASC-820-10-15-15-1A.
Stock-based compensation
The Company records stock-based compensation
at fair value of the stock provided for services. The Company currently does not have any issued and outstanding stock options
or other derivatives.
Recent Accounting Pronouncements
In April 2011, the FASB issued ASU 2011-02,
“Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”.
The update clarifies the guidance on a creditor’s evaluation of whether it has granted a concession as well as clarifying
the guidance when a creditor’s evaluation of whether a debtor is experiencing financial difficulties. The guidance clarifies
when a Company should record impairment due to concessions or the financial difficulties of the debtor. The new standard is effective
for fiscal years and interim periods ending after June 15, 2011. The guidance should be applied retrospectively to restructurings
occurring on or after the beginning of the fiscal year of adoption. The adoption did not have a material effect on the Company’s
consolidated financial position or results of operations.
In April 2011, the FASB issued ASU 2011-03,
“Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements”. ASU 2011-03 applies
to transactions where the seller transfers financial assets that both entitle and obligate the transferor to repurchase or redeem
the financial assets before their maturity. The amendments in this guidance remove from the assessment of effective control the
criteria requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed
terms even in the event of default by the transferee and the collateral maintenance guidance related to that criterion. The new
standard is effective for fiscal years and interim periods ending after December 15, 2011 and should be applied on a prospective
basis. The adoption does not have a material effect on the Company’s consolidated financial position or results of operations.
In May 2011, the FASB issued ASU 2011-04,
“Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and IFRS”. The amendment results in a consistent definition of fair value and ensures the fair value measurement and
disclosure requirements are similar between GAAP and International Financial Reporting Standards (“IFRS”). This amendment
changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value
measurements. This amendment will be effective for the Company on January 1, 2012. Based on current operations, the adoption is
not expected to have a material effect on the Company’s consolidated financial position or results of operations.
In June 2011, the Financial Accounting
Standards Board (“FASB”) issued ASU 2011-05, “Comprehensive Income (Topic 220), and Presentation of Comprehensive
Income”. ASU 2011-05 amends the presentation of other comprehensive income and the Statement of Consolidated Operations.
Under this amendment, entities will be required to present the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate
but consecutive statements. Regardless of which reporting option is selected, the Company is required to present on the face of
the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income
in the statements where the components of net income and the components of other comprehensive income are presented. The current
option to report other comprehensive income and its components in the statement of changes in equity has been eliminated. This
amendment will be effective for the Company on January 1, 2012 and full retrospective application is required. The Company does
not anticipate that this amendment will have a material impact on its financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.