Item 1. Financial Statements.
STERLING CONSOLIDATED CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
97,256
|
|
|
$
|
543,945
|
|
Account receivable, net
|
|
|
1,187,662
|
|
|
|
801,861
|
|
Inventory, net of reserve
|
|
|
2,650,955
|
|
|
|
2,726,016
|
|
Notes receivable and other current assets
|
|
|
47,193
|
|
|
|
41,376
|
|
Total current assets
|
|
|
3,983,066
|
|
|
|
4,113,198
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,683,079
|
|
|
|
2,594,997
|
|
Goodwill and other intangibles
|
|
|
286,230
|
|
|
|
970
|
|
Deferred tax asset
|
|
|
37,296
|
|
|
|
105,695
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,989,671
|
|
|
$
|
6,814,860
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,085,298
|
|
|
$
|
1,369,458
|
|
Notes payable
|
|
|
186,468
|
|
|
|
36,294
|
|
Notes payable related party
|
|
|
51,012
|
|
|
|
50,083
|
|
Bank line of credit
|
|
|
1,113,772
|
|
|
|
1,200,605
|
|
Other liabilities
|
|
|
252,877
|
|
|
|
87,624
|
|
Total current liabilities
|
|
|
2,689,427
|
|
|
|
2,744,064
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
1,177,731
|
|
|
|
1,196,010
|
|
Notes payable (related party)
|
|
|
1,662,599
|
|
|
|
1,662,685
|
|
Total other liabilities
|
|
|
2,840,330
|
|
|
|
2,858,695
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,529,757
|
|
|
|
5,602,759
|
|
|
|
|
|
|
|
|
|
|
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, 40,295,040 and 37,824,040
shares issued and outstanding as of June 30, 2014 and December 31, 2013,
respectively
|
|
|
40,295
|
|
|
|
37,824
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
1,427,160
|
|
|
|
1,309,417
|
|
Accumulated other comprehensive loss
|
|
|
(11,800
|
)
|
|
|
(11,800
|
)
|
Retained earnings (Accumulated deficit)
|
|
|
4,259
|
|
|
|
(123,340
|
)
|
Total stockholders' equity
|
|
|
1,459,914
|
|
|
|
1,212,101
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
6,989,671
|
|
|
$
|
6,814,860
|
|
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
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
O-rings and rubber product sales
|
|
$
|
1,839,616
|
|
|
$
|
1,448,750
|
|
|
$
|
3,552,450
|
|
|
$
|
3,076,636
|
|
Freight services
|
|
|
44,895
|
|
|
|
42,039
|
|
|
|
71,210
|
|
|
|
64,253
|
|
Total revenues
|
|
|
1,884,511
|
|
|
$
|
1,490,789
|
|
|
|
3,623,660
|
|
|
$
|
3,140,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
|
|
|
1,197,065
|
|
|
|
1,014,482
|
|
|
|
2,275,045
|
|
|
|
2,114,304
|
|
Cost of services
|
|
|
53,054
|
|
|
|
36,419
|
|
|
|
109,380
|
|
|
|
96,902
|
|
Total cost of sales
|
|
|
1,250,119
|
|
|
|
1,050,901
|
|
|
|
2,384,425
|
|
|
|
2,211,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
634,392
|
|
|
|
439,888
|
|
|
|
1,239,235
|
|
|
|
929,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
48,229
|
|
|
|
46,356
|
|
|
|
99,764
|
|
|
|
94,977
|
|
General and administrative
|
|
|
501,067
|
|
|
|
519,213
|
|
|
|
890,087
|
|
|
|
777,477
|
|
Total operating expenses
|
|
|
549,296
|
|
|
|
565,569
|
|
|
|
989,851
|
|
|
|
872,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
85,096
|
|
|
|
(125,681
|
)
|
|
|
249,384
|
|
|
|
57,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
118
|
|
|
|
(11,625
|
)
|
|
|
13,901
|
|
|
|
(9,277
|
)
|
Interest expense
|
|
|
(32,320
|
)
|
|
|
(32,854
|
)
|
|
|
(67,287
|
)
|
|
|
(62,234
|
)
|
Total other expense
|
|
|
(32,202
|
)
|
|
|
(44,479
|
)
|
|
|
(53,386
|
)
|
|
|
(71,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
52,894
|
|
|
|
(170,160
|
)
|
|
|
195,998
|
|
|
|
(14,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
11,157
|
|
|
|
(62,709
|
)
|
|
|
68,399
|
|
|
|
(17,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
41,737
|
|
|
|
(107,451
|
)
|
|
|
127,599
|
|
|
|
3,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss) on interest rate swap contract
|
|
|
-
|
|
|
|
4,622
|
|
|
|
-
|
|
|
|
(12,984
|
)
|
Comprehensive income
|
|
$
|
41,737
|
|
|
$
|
(102,829
|
)
|
|
$
|
127,599
|
|
|
$
|
(9,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
39,618,062
|
|
|
|
37,097,521
|
|
|
|
38,811,631
|
|
|
|
37,074,040
|
|
See accompanying notes to consolidated financial statements
STERLING CONSOLIDATED CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
|
|
For the Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net Income
|
|
$
|
127,599
|
|
|
$
|
3,471
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
64,213
|
|
|
|
55,608
|
|
Amortization
|
|
|
4,835
|
|
|
|
-
|
|
Stock issued for services
|
|
|
8,875
|
|
|
|
28,438
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(290,675
|
)
|
|
|
28,066
|
|
Inventory
|
|
|
169,975
|
|
|
|
(68,659
|
)
|
Deferred tax asset
|
|
|
68,399
|
|
|
|
-
|
|
Other assets
|
|
|
(5,643
|
)
|
|
|
(25
|
)
|
Accounts payable and accrued expenses
|
|
|
(353,814
|
)
|
|
|
(39,530
|
)
|
Other liabilities
|
|
|
127,752
|
|
|
|
73,292
|
|
Net cash provided by (used in) operating activities
|
|
|
(78,484
|
)
|
|
|
80,661
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(125,945
|
)
|
|
|
|
|
Purchase of stock of acquired company
|
|
|
(249,505
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(375,450
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Paydown of bank line of credit
|
|
|
(86,833
|
)
|
|
|
-
|
|
Paydown of bank line of credit
|
|
|
-
|
|
|
|
(5,000
|
)
|
Payments on notes payable
|
|
|
(18,105
|
)
|
|
|
(60,368
|
)
|
Net loan (paid)/received - related party
|
|
|
843
|
|
|
|
(20,155
|
)
|
Net proceeds of common stock after issuance costs
|
|
|
111,340
|
|
|
|
-
|
|
Advances to employees
|
|
|
-
|
|
|
|
(2,600
|
)
|
Net cash provided by (used in) financing activities
|
|
|
7,245
|
|
|
|
(88,123
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalent
|
|
|
(446,689
|
)
|
|
|
(7,462
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent at the beginning of period
|
|
|
543,945
|
|
|
|
115,489
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent at the end of period
|
|
$
|
97,256
|
|
|
$
|
108,027
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
67,287
|
|
|
$
|
61,827
|
|
Cash paid for taxes
|
|
$
|
-
|
|
|
$
|
750
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
The Company purchased 100% of the stock of RG Sales Inc. for $400,000.
In conjunction with the acquisition liabilities were assumed as follows:
|
|
|
|
|
|
|
|
|
Fair values of assets acquired
|
|
$
|
507,154
|
|
|
$
|
-
|
|
Cash paid for stock of acquiree
|
|
|
250,000
|
|
|
|
-
|
|
Note payable issued for stock of acquiree
|
|
|
150,000
|
|
|
|
|
|
Contingent consideration
|
|
|
37,500
|
|
|
|
|
|
Liabilities assumed
|
|
|
69,654
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2014
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 June 30,
2014, 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, 2013 audited financial statements. The results
of operations for the periods ended June 30, 2014 and June 30, 2013 are not necessarily indicative of the operating results for
the full years.
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 the first in, first out 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 4% 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.
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, 2013.
There have been no changes in the Company's
significant accounting policies for the periods ended June 30, 2014 as compared to those disclosed in the Company's Annual Report
on Form 10-K for the year ended December 31, 2013.
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2014
NOTE 3 – COMMITMENTS AND CONTINGENCIES
Contingencies
The Company may, from time to time, be
involved in legal proceedings and disputes that arise in the normal course of business. These matters include product liability
actions, patent infringement actions, contract disputes, domestic and international federal, state and local tax reviews and audits,
and other matters. The Company also may be subject to litigation and/or adverse rulings or judgments as a result of certain
contractual indemnification obligations. The Company records a provision for a liability when management believes that it is both
probable that a liability has been incurred and it can reasonably estimate the amount of the loss. The Company believes it has
adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions
to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining
to a particular case.
Additionally, from time to time, the Company
receives inquiries from regulatory agencies informally requesting information or documentation. There can be no assurance in any
given case that such informal review will not lead to further proceedings involving the Company in the future.
The Company is not aware of any pending
disputes, including those outlined above, that would be likely to have a material adverse effect, either individually or in the
aggregate, on its consolidated financial condition, results of operations or liquidity. However, litigation is subject to inherent
uncertainties and costs and unfavorable outcomes could occur. An unfavorable outcome could include the payment of monetary damages,
cash or other settlement, or an injunction prohibiting it from selling one or more products. If an unfavorable resolution were
to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results
of operations or cash flows of the period in which the resolution occurs or on future periods.
Bank Accounts
From time-to-time the Company may carry balances in its corporate
bank accounts above the federally insured limit of $250,000.
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 no stock options
and warrants that would have been included in the fully diluted earnings per share for the three and six month periods ended June
30, 2014 and 2013, respectively.
NOTE 4
-
STOCK ISSUANCE
In April of 2014 the Company issued 180,000 shares of restricted
common stock to one investor at a price of $.075/share for total proceeds of $13,500.
In the second fiscal quarter of 2014, the Company sold 1,900,000
shares of stock through its Equity Credit Facility at an average price of $0.086/share for total proceeds of $165,040. The Company
incurred $66,000 of stock issuance costs related to this sale of stock.
In June of 2013, the Company issued 125,000 shares of restricted
stock to an employee at a price of $.071/share for total compensation of $8,875 which was charged to operations during the second
quarter of 2014.
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2014
NOTE 5- BUSINESS ACQUISITION
On April 1, 2014, the Company acquired RG Sales Inc., a Pennsylvania
distributor of O-rings and rubber products. The transaction was valued at $400,000 with earn-out incentives for sales targets over
the two years from transaction date. The results of operations of RG Sales Inc. were included in the Company’s 2
nd
quarter 2014 earnings. The transaction was structured as a stock purchase.
Pursuant to the stock purchase agreement, the purchase price
consisted of a one-time cash payment of $250,000, the execution of a promissory note of $150,000 which bears interest of 5 percent
per annum and stipulating payments according the following schedule:
|
§
|
$75,000 of principal and $3,750 of interest due on October 1, 2014;
|
|
§
|
$75,000 of principal and $3,750 of interest due on October 1, 2015;
|
The stock purchase agreement stipulates year one earnout payments
as follows:
|
§
|
$50,000 if subsidiary revenues are between $700,000 and $800,000 within
one year after the closing date;
|
|
§
|
$75,000 if subsidiary revenues are between $800,000 and $900,000 within
one year after the closing date;
|
|
§
|
$100,000 if subsidiary revenues are greater than or equal to $900,000
within one year after the closing date.
|
The stock purchase agreement stipulates year two earnout payments
as follows:
|
§
|
$25,000 if subsidiary revenues are between $700,000 and $800,000 between
year one and year two after the closing date;
|
|
§
|
$37,500 if subsidiary revenues are between $800,000 and $900,000 between
year one and year two after the closing date;
|
|
§
|
$50,000 if subsidiary revenues are greater than or equal to $900,000
between year one and year two after the closing date.
|
The total purchase price was allocated
as follows:
Consideration paid:
|
|
|
|
Cash paid
|
|
$
|
250,000
|
|
Face value of promissory note
|
|
|
150,000
|
|
Estimated value of contingent consideration
related to earnout payments
|
|
|
37,500
|
|
Liabilities assumed
|
|
|
69,654
|
|
Total purchase price
|
|
$
|
507,154
|
|
|
|
|
|
|
Consideration received:
|
|
|
|
|
Cash
|
|
$
|
495
|
|
Accounts receivable
|
|
|
95,126
|
|
Inventories
|
|
|
94,914
|
|
Other current assets
|
|
|
172
|
|
Property and equipment, net
|
|
|
26,350
|
|
Identifiable intangible assets
|
|
|
|
|
Customer list
|
|
|
290,097
|
|
Total assets acquired
|
|
$
|
507,154
|
|
STERLING CONSOLIDATED CORP
AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2014
NOTE 6 – SUBSEQUENT EVENTS
In July of 2014 the Company issued 100,000 shares of restricted
common stock to one consultant. The Company valued the stock at $.07/share for total compensation of $7,000.
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 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.
Since going public on February 7, 2013,
the Company has acquired Superior Sales Inc., a North Carolina o-ring custom manufacturer and distributor. As previously disclosed
in a Form 8-K filed with the SEC on April 24, 2014, the Company acquired, on April 1, 2014 RG Sales Inc., a Pennsylvania distributor
of o-rings and rubber products. The Company continues to review acquisition targets as its primary means of expansion.
Recent Financings
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.
In April of 2014, the Company obtained an equity investment
of $13,500 from one investor in exchange for 180,000 shares of restricted common stock.
Commencement of Trading
On April 30, 2013, the Company's common
stock began trading over-the-counter on the OTC QB exchange.
SurePoint Investment Agreement and Registration Statement
on Form S-1
On May 28, 2013, we entered into an investment
agreement, (the “SurePoint Investment Agreement”) with SurePoint Capital, a Delaware limited liability company (“SurePoint”).
Pursuant to the terms of the SurePoint Investment Agreement, SurePoint committed to purchase up to $1,000,000 of our common stock
over a period of up to twenty-four (24) months. From time to time during the twenty-four (24) month period commencing from the
effectiveness of the registration statement, the Company may deliver a put notice to SurePoint which states the dollar amount that
we intend to sell to SurePoint on a date specified in the put notice. The maximum investment amount per notice shall be no more
than $50,000 worth of common stock so long s such amount does not exceed 4.99% of the outstanding shares of the Company. The purchase
price per share to be paid by SurePoint shall be calculated at a ten (10%) discount to the average of the three lowest closing
bids during the five (5) consecutive trading days immediately prior to the receipt by SurePoint of the put notice. The Company
has reserved 4,273,504shares of our common stock for issuance under the SurePoint Investment Agreement. Additionally, the Company
agreed to issue SurePoint 125,000 shares of our common stock.
In connection with the SurePoint Investment
Agreement, the Company also entered into a registration rights agreement with SurePoint, pursuant to which the Company is obligated
to file a registration statement with the Securities and Exchange Commission (the “SEC”) covering 4,398,504 shares
of our common stock underlying the SurePoint Investment Agreement within 21 days after the closing of the transaction.
On June 21, 2013, the Company filed a registration
statement on Form S-1 with the Securities and Exchange Commission (the “SEC”). Under the registration statement, SurePoint
may sell up to 4,398,504 shares of the Company’s common stock based upon the Company delivering put notices.
On July 24, 2013, pursuant to SEC comments,
the Company filed a request to withdraw the registration statement on Form S-1. Following the withdrawal, the Company re-negotiated
the SurePoint Investment Agreement and re-filed a new registration statement on Form S-1 with the SEC on July 30, 2013 for 4,398,504
shares of common stock. The registration statement was declared effective on August 27, 2013.
This registration statement gives the Company
the opportunity to deliver put notices to SurePoint in exchange for cash. The Company intends to use the proceeds to take advantage
of acquisition opportunities that may arise in the future, however the Company cannot make any assurances that these opportunities
will arise.
In October and November of 2013, the Company issued 275,000
shares at a weighted average price of $0.16/share under the SurePoint Investment Agreement.
On January 22, 2014, the Company sold 246,000 shares of stock
at $0.1089/share through its Equity Credit Facility for total proceeds of $26,800. The Company incurred $30,000 of stock issuance
costs related to this sale of stock.
In the second fiscal quarter of 2014, the Company sold 1,900,000
shares of stock through its Equity Credit Facility at an average price of $0.086/share for total proceeds of $165,040. The Company
incurred $66,000 of stock issuance costs related to this sale of stock.
Results of Operations
Comparison for the three months ended
June 30, 2014 and 2013
Net Revenue
Net revenue increased by approximately
$393,722 or approximately 26.4%, from $1,490,789 for the three months ended June 30, 2013 to $1,884,511 for the three months ended
June 30, 2014. This increase is due primarily to the incremental sales from the acquisitions of RG Sales Inc. on April 1, 2014
and Superior Seals Inc. on September 16, 2013.
Total Cost of Sales
Cost of sales increased by $199,218 or
approximately 19.0%, from $1,050,901 for the three months ended June 30, 2013 to $1,250,119 for the three months ended June 30,
2014. The increase in cost of sales was attributed to a commensurate increase in net revenues as described above.
Gross profit
Gross profit increased approximately $194,504,
or approximately 44.2%, from $439,888 for the three months ended June 30, 2013 to $634,392 for the three months ended June 30,
2014. This increase can be attributed to the above described net revenue and cost of sales increases.
Net Income
As a result of the above factors, net income
was $41,737 for the three months ended June 30, 2014, as compared to a net loss of $107,451 for the three months ended June 30,
2013. This increase of $149,188 or approximately 139% is attributed to increased sales and improved profit margins due to more
efficient purchasing. In 2014, the Company purchased more goods internationally which provides better pricing, while in 2013 the
Company made more domestic spot purchases to fill customer orders, which led to a higher proportionate cost of sales.
Comparison for the six months ended
June 30, 2014 and 2013
Net Revenue
Net revenue increased by approximately
$482,771 or approximately 15.4%, from $3,140,889 for the six months ended June 30, 2013 to $3,623,660 for the six months ended
June 30, 2014. This increase is due to the incremental sales of RG Sales Inc. on April 1, 2014 which added approximately $172,000
in incremental sales along with approximately $200,000 from the September 16, 2013 acquisition of Superior Seals, Inc. The remainder
of the net revenue increase is explained by increased organic sales and a strengthening demand for o-rings in the U.S. manufacturing
sector.
Total Cost of Sales
Cost of sales increased by $173,219 or
approximately 7.8%, from $2,211,206 for the six months ended June 30, 2013 to $2,384,425 for the six months ended June 30, 2014.
The increase in cost of sales was attributed to the above described commensurate increase in sales offset by a decrease in cost
per unit due to improved purchasing efficiency by purchasing more goods internationally in 2014 as compared to 2013.
Gross profit
Gross profit increased approximately $309,552,
or approximately 33.3%, from $929,683 for the six months ended June 30, 2013 to $1,239,235 for the six months ended June 30, 2014.
This increase can be attributed to the above described changes in net revenue and cost of sales.
Net Income
As a result of the above described changes
in sales and cost of sales, net income was $127,599 for the six months ended June 30, 2014, as compared to net income of $3,471
for the six months ended June 30, 2013.
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 June 30, 2014, we had cash and cash
equivalents of approximately $97,256 as compared to approximately $543,945 as of December 31, 2013, representing a decrease of
$446,689. This decrease can be explained by net cash used in operating activities of $78,484 primarily attributed to paydown of
accounts payable; net cash used in investing activities of $375,450 due to purchase of stock in RG Sales Inc. and the investment
in leasehold improvements at the Company’s headquarters; and net cash provided by financing activities of $7,245, primarily
attributed to proceeds of common stock purchased through the Company’s equity credit facility offset by paydown of its bank
line of credit of $86,833. At June 30, 2014, our working capital was approximately $1,293,639.
The cash flow from operating activities
decreased from net cash provided of $80,661 for the six months ended June 30, 2013 to net cash used of $78,484 for the six months
ended June 30, 2014. This decrease of $159,145 is primarily attributed to a significant paydown of accounts payable of $353,814
along with a decrease of accounts receivable of $290,675.
The cash flow from financing activities
increased from net cash used of $88,123 for the six months ended June 30, 2013 to net cash provided of $7,245 for the six months
ended June 30, 2014. This increase is primarily attributed to the net proceeds of common stock after issuance costs of $111,340.
Bank Loans
The Company refinanced its debt in 2013
with a New York commercial bank and there are currently a $1.25 million line of credit and a $1,200,000 mortgage outstanding. The
line of credit calls for a variable interest rate of the Wall St. Journal published prime rate plus 1% and requires an annual review.
The mortgage has a variable rate of LIBOR plus 4.25% and is for a 5 year term expiring in October of 2018. As of August 14, 2014,
the Company is in technical violation of one of its bank covenants due to a reported 2013 fiscal loss. The Company is currently
reviewing ways to remedy the broken covenant.
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, 2013, 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 became effective for the Company on January 1, 2012. The adoption has not had 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 became effective for the Company on January 1, 2012 and full retrospective application was required. This amendment did
have a material impact on our financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.