10-Q 1 tv501049_10q.htm FORM 10-Q

 

 

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 June 30, 2018
   
¨ 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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ¨ (Do not check if a smaller reporting company) 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 August 20, 2018 there were 41,465,540 shares of common stock, $0.001 par value issued and outstanding.

 

 

 

 

 

 

STERLING CONSOLIDATED CORP.

TABLE OF CONTENTS

FORM 10-Q REPORT

June 30, 2018

 

  Page
Number
PART I - FINANCIAL INFORMATION F-1
Item 1. Financial Statements. F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 6
Item 4. Controls and Procedures. 6
     
PART II - OTHER INFORMATION 8
Item 1. Legal Proceedings. 8
Item 1A. Risk Factors. 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 8
Item 3. Defaults Upon Senior Securities. 8
Item 4. Mine Safety Disclosures 8
Item 5. Other Information. 8
Item 6. Exhibits. 8
     
SIGNATURES 9

 

 2 

 

  

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2018   2017 
   (Unaudited)   (Revised) 
ASSETS          
Current assets          
 Cash and cash equivalents  $30,082   $36,888 
 Account receivable, net   853,299    756,914 
 Inventory, net   2,203,824    2,505,175 
 Notes receivable and other current assets   20,380    37,861 
 Derivative asset   632    - 
           
Total current assets   3,108,217    3,336,838 
           
Property and equipment, net   1,668,213    1,751,216 
Intangible assets, net   77,379    86,007 
Deferred tax asset   585,375    533,581 
           
 Total assets  $5,439,184   $5,707,642 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Accounts payable and accrued expenses  $1,179,567   $1,272,926 
Bank line of credit   828,858    828,858 
Other liabilities   20,661    62,393 
Derivative liability   -    2,176 
Current portion of long-term notes payable, related parties   52,702    52,702 
Current portion of long-term notes payable   1,075,950    1,089,578 
Total current liabilities   3,157,738    3,308,633 
           
Other liabilities          
Long-term notes payable, related parties   1,536,313    1,628,579 
Long-term notes payable   13,632    15,577 
Total other liabilities   1,549,945    1,644,156 
           
Total liabilities   4,707,683    4,952,789 
           
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, 41,465,540 and 40,715,540 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively   41,466    40,716 
Additional paid-in capital   2,060,068    1,963,318 
Accumulated deficit   (1,370,033)   (1,249,181)
Total stockholders' equity   731,501    754,853 
           
Total liabilities and stockholders' equity  $5,439,184   $5,707,642 

 

See accompanying notes to consolidated financial statements

 

 F - 1 

 

  

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    For the Three Months Ended
June 30
    For the Six Months Ended
June 30
 
    2018     2017     2018     2017  
                         
Revenues                                
O-rings and rubber product sales   $ 1,480,441       1,513,824     $ 3,234,797       3,257,283  
Freight services     40,922       55,878       84,022       95,763  
Total revenues     1,521,363     $ 1,569,702       3,318,819     $ 3,353,046  
                                 
Cost of sales                                
Cost of goods     1,115,133       1,115,889       2,375,164       2,275,733  
Cost of services     40,767       69,497       110,991       129,640  
Total cost of sales     1,155,900       1,185,386       2,486,155       2,405,373  
                                 
Gross profit     365,463       384,316       832,664       947,673  
                                 
Operating expenses                                
Sales and marketing     60,460       59,772       150,637       108,814  
General and administrative     305,834       314,038       663,862       658,419  
Research and development     -       -       112,500       -  
Total operating expenses     366,294       373,810       926,999       767,233  
                                 
Operating income (loss)     (831 )     10,506       (94,335 )     180,440  
                                 
Other income (expense)                                
Other income     1,404       5,108       4,516       14,494  
Loss on sale of vehicle             (2,502 )             2,502   
Gain on interest rate swap     436       2,390       2,809       7,429  
Loss on disposal of software     -       -       (20,498 )     -  
Interest expense     (32,921 )     (39,161 )     (65,138 )     (75,256 )
Total other expense     (31,081 )     (34,165 )     (78,311 )     (55,835 )
                                 
Income (loss) before provision for income taxes     (31,912 )     (23,659 )     (172,646 )     124,605  
                                 
Provision (benefit) for income taxes     (10,762 )     (9,201 )     (51,794 )     50,104  
                                 
Net income (loss)   $ (21,150 )   $ (14,458 )   $ (120,852 )   $ 74,501  
                                 
Net income (loss) 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     41,465,540       40,715,540       41,216,921       40,715,540  

 

See accompanying notes to consolidated financial statements

 

 F - 2 

 

  

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Six Months Ended
June 30
 
   2018   2017 
Cash flows from operating activities          
Net income (loss)  $(120,852)  $74,501 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization   71,133    60,288 
Loss on disposal of software   20,498    - 
Loss on sale of vehicle   -    2,502 
Gain on swap   (2,808)   (7,429)
Stock for services   97,500    - 
Changes in operating assets and liabilities:          
Accounts receivable   (96,385)   (234,409)
Inventory   301,351    (104,323)
Prepaids and other current assets   17,481    - 
Deferred tax asset   (51,794)   50,104 
Other assets   -    (53,474)
Accounts payable and accrued interest payable   (93,359)   285,536 
Other liabilities   (41,732)   702 
Net cash provided by operating activities   101,033    73,998 
           
Cash flows from investing activities          
Purchase of fixed and intangible assets   -    (19,840)
Net cash used in investing activities   -    (19,840)
           
Cash flows from financing activities          
Net borrowing of bank line of credit   -    30,000 
Payments on notes payable   (15,573)   (57,322)
Net payments on related party note   (92,266)   (11,302)
           
Net cash used in financing activities   (107,839)   (38,624)
           
Net change in cash and cash equivalents   (6,806)   15,534 
           
Cash and cash equivalents at the beginning of period   36,888    6,814 
           
Cash and cash equivalents at the end of period  $30,082   $22,348 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $65,138    72,929 
Cash paid for taxes  $750   $750 

 

See accompanying notes to consolidated financial statements

 

 F - 3 

 

  

STERLING CONSOLIDATED CORP AND AFFILIATES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

 

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, 2017 audited financial statements.  The results of operations for the periods ended June 30, 2018 and June 30, 2017 are not necessarily indicative of the operating results for the full years.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

The accounting policies applied by the Company in these condensed interim financial statements are the same as those applied by the Company in its audited consolidated financial statements as at and for the year ended December 31, 2017.

 

On January 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, and all of the related amendments (“new revenue standard”). Under this method, we are required to recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The adjustment was not material, and therefore was not made. This results in no restatement of prior periods, which continue to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new revenue standard to continue to be immaterial on an ongoing basis.

  

The impact of recording this change as of January 1, 2018 resulted in no change to deferred revenue at that date and no corresponding change in retained earnings,. The impact of adopting the new revenue standard in 2018 did not create a material impact on our financial statements.

 

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 entirely 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 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.

 

Inventory Type   June 30, 2018     Dec. 31, 2017  
Finished goods   $ 2,789,588     $ 3,090,939  
Raw materials     -       -  
Work-in-progress     -       -  
Inventory Reserve     (585,764 )     (585,764)  
Net Inventory   $ 2,203,824     $ 2,505,175  

 

Stock-based Transactions

 

The Company records stock-based compensation at fair value of the stock provided for services. The 10,800,000 of the stock options outstanding as of June 30, 2018 were fully vested and therefore, no compensation expense was recorded in the quarter ended June 30, 2018. 

 

 F - 4 

 

  

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”).   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.

 

Research and Development

 

The Company currently is engaged in the research and development of the DiMO marketplace and its own cryptocurrency, also called, “DiMO”. The DiMO marketplace is being planned by the Company to serve the o-ring industry and intends to utilize blockchain technology. The DiMO currency will be the currency used in this marketplace once the marketplace is built out.

 

Currently, the Company is expensing all technical costs related to the development of DiMO and the DiMO marketplace to research and development. The Company has recognized $112,500 and $0 in these research and development costs and for the 6 months ended June 30, 2018 and June 30, 2017, respectively.

 

Basic and Diluted Earnings per Share

 

The Company has adopted ASC Update 2017-11, Earnings Per Share (Topic 260), (the “new pronouncement”) for the period ended June 30, 2018. This new pronouncement calls for a change in the accounting for “down round” feature equity linked instruments such as option, warrants and convertible notes. “Down round” features are features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Previous accounting guidance required a fair value measurement each accounting period on an ongoing basis and treatment of the instrument as a derivative liability with the change in the value of the liability recognized on the income statement. The new pronouncement requires that the effect of the down round feature is treated as a dividend and as a reduction of income available to commons shareholders in basic EPS. While the Company has 10,800,000 options currently outstanding as of June 30, 2018, all of these options are at a fixed price and were fully vested upon issuance on December 27, 2017. Consequently, they do not have “down round” features and the earnings per share calculations are unaffected by the new pronouncement.

 

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 unless anti-dilutive. The Company had 10,800,000 and zero common stock equivalents from stock options and warrants that were considered anti-dilutive and were therefore excluded in the computation of fully diluted earnings (loss) per share as of June 30, 2018 and 2017, respectively.

 

NOTE 3 – STOCK TRANSACTIONS

 

On January 29, 2018, the Company signed a stock for services agreement for services completed February 14, 2018, authorizing the issuance of 750,000 shares of stock to a consultant at a valuation of $.13/share related to its development of DiMO, the Company’s proprietary cryptocurrency. $97,500 was expensed to research and development for the 3 months ended March 31, 2018   and zero was expensed in the second quarter of 2018. In the second quarter of 2018, these 750,000 shares authorized and subscribed in the first quarter of 2018, were issued.

 

Regulation A Offering and Property Dividend

 

On February 14, 2018, the Company declared a property dividend of its internally developed cryptocurrency, DiMO. The dividend called for 950 DiMO per share of common stock to be distributed to shareholders of record as of October 26, 2018 with a payment date of December 14, 2018.

 

Additional Cryptocurrency Dividend Metrics

 

Forfeiture of Dividend by Company Executives:

 

In order to not skew the metrics of the crypto dividend distribution, Angelo and Darren DeRosa, the Company’s Chairman of the Board and Chief Executive Officer and Director, respectively, have agreed to forego the rights to receive the dividend on all but 4,100,000 shares each of their common stock.

 

Company Holdbacks

 

The Company plans to retain 9,858,851,528 DiMO tokens as an initial reserve to be used for working capital and general business purposes. Additionally, the Company plans to retain a number of DiMO tokens equal to 25% of the total DiMO tokens distributed on the planned dividend payment date of December 14, 2018.

 

Since it still has not been distributed, the Company has assigned a zero value to the internally developed cryptocurrency and therefore has $0 recorded for Dividend Payable and has recorded a $0 gain/loss on the dividend from declaration date of February 14 to June 30, 2018. Consequently, the cryptodividend payable is not currently creating any adjustment to net income available for common shareholders or the calculated EPS.

 

 F - 5 

 

  

On February 14, 2018, the Company filed a registration statement under Regulation A to offer up to 55,555,555 shares of common stock at an offering price of $0.90/share. The Company has received 15 comments on this offering from the SEC   which it is currently addressing. Until such time as the offering is approved by the SEC, no Regulation A stock will be sold.

 

NOTE 4   – NOTES PAYABLE

 

The mortgage on the Company’s headquarters in Neptune, NJ matures in October of 2018 at which time the Company would require a full refinance of the principal balance due. As of June 30, 2018 the principal balance due was $1,075,950. The Company has been served a notice of default in August 2018 prior to the re-finance due to failing to meet its net income financial covenant. The Company is currently working with the noteholder to re-finance the mortgage.

 

NOTE 5 – REVISION OF PRIOR YEAR FINANCIAL STATEMENTS:

 

The Company’s reclassification of its mortgage from non-current to current as of the year ended December 31, 2017 based on the fact that it requires a mandatory re-finance in October 2018, resulted in no change of net income.

 

In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited consolidated financial statements. Accordingly, these changes are disclosed herein and will be disclosed prospectively.

 

As a result of the aforementioned correction of accounting reclassifications, the relevant annual financial statements have been revised as follows:

 

Effects on financials for the year ended December 31, 2017:

 

    December 31, 2017  
    As
Previously
Reported
    Adjustment     As Revised  
Balance Sheet                        
Current Liabilities                        
Current portion of long-term notes payable, related parties   $ -     $ 52,702     $ 52.702  
Current portion of long-term notes payable     31,183       1,058,395       1,089,578  
Total Current Liabilities     2,197,536       1,111,097       3,308,633  
Other Liabilities                        
Long-term notes payable, related parties     1,681,281       (52,702)       1,628,579  
Long-term notes payable     1,073,972       (1,058,395 )     15,577  
                         
Total  Liabilities   $ 4,952,789     $ -     $ 4,952,789  

 

NOTE 6  – SUBSEQUENT EVENTS

 

The Company reviewed any significant transactions that would qualify for subsequent event reporting up through August 20, 2018. None were noted.

 

 F - 6 

 

  

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Cautionary Notice Regarding Forward Looking Statements

 

The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

 

This filing contains a number of forward-looking statements which reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Overview

 

We were incorporated in the State of Nevada as Oceanview Acquisition Corp. on January 31, 2011. On May 18, 2012, we amended our Articles of Incorporation to change our name to Sterling Consolidated Corp.

 

Our largest subsidiary is Sterling Seal & Supply, Inc. (“Sterling Seal”), a New Jersey corporation which was incorporated in 1997. Its predecessor was Sterling Plastic & Rubber Products, Inc., incorporated in New Jersey and was founded in 1970. Sterling Seal engages primarily in the distribution and sale of O-rings, rubber seals, oil seals, custom molded rubber parts, custom Teflon parts, Teflon rods, O-ring cord, bonded seals, O-ring kits, and stuffing box sealant.

 

We also own real property through our subsidiaries ADDR Properties, LLC (“ADDR”) and Q5 Ventures, LLC (“Q5”). ADDR owns a 28,000 square foot facility in Neptune, New Jersey, that is primarily used by Sterling Seal for its operations.

 

In addition, our subsidiary Integrity Cargo Freight Corporation (“Integrity”) is a freight forwarding business. Integrity shares a facility with Sterling Seal and manages the importation of Sterling Seal’s products and exports products on behalf of Sterling Seal to various countries. Currently eighty percent (80%) of Sterling Seal’s imports come from Asia, and ten percent (10%) of the Company’s sales are exported to various countries. However, all payables are billed and collected in USD, so Sterling does not bear any foreign exchange risk on open payables.

 

Results of Operations

 

Comparison for the three months ended June 30, 2018 and 2017

 

Net Revenue

 

Net revenue decreased by approximately $48,339 or approximately 3.08 %, from $1,569,702 for the three months ended June 30, 2017 to $1,521,363 for the three months ended June 30, 2018. This decrease was due primarily to decreased product demand across the o-ring sector.

 

 3 

 

  

Total Cost of Sales

 

Cost of sales decreased by approximately $29,486 or approximately 2.49 %, from $1,185,386 for the three months ended June 30, 2017 to $1,155,900 for the three months ended June 30, 2018. This decrease was due primarily to a decrease of $28,730 in freight costs attributed to Integrity Cargo’s reduced sales.

 

Gross profit

 

Gross profit decreased by approximately $18,853 or approximately 4.91 %, from $384,316 for the three months ended June 30, 2017 to $365,463 for the three months ended June 30, 2018. This decrease was due primarily to the above described decreases in sales, and corresponding decrease in cost of goods sold. Gross margin remained constant at approximately 24%.  

 

Net Loss

 

As a result of the above factors, the Company showed a net loss of $21,150 for the three months ended June 30, 2018, as compared to a net loss of $14,458 for the three months ended June 30, 2017. This increase of $6,692 or approximately 46.29 % is attributed the factors described above.

 

Comparison for the six months ended June 30, 2018 and 2017

 

Revenue

 

Revenue decreased by approximately $34,227 or approximately 1.02%, from $3,353,046 for the six months ended June 30, 2017 to $3,318,819 for the six months ended June 30, 2018. This decrease is due to a relatively flat demand for o-rings across the industrial sector.

 

Total Cost of Sales

 

Cost of sales increased by $80,782 or approximately 3.36 %, from $2,405,373 for the six months ended June 30, 2017 to $2,486,155 for the six months ended June 30, 2018. The increase in cost of sales was attributed to an increase in warehouse head count and general price increases in rubber.

 

Gross profit

 

Gross profit decreased approximately $115,009 or approximately 12.14 %, from $947,673 for the six months ended June 30, 2017 to $832,664 for the six months ended June 30, 2018. This decrease can be attributed to the above described changes in revenue and cost of sales. Additionally, it can be noted that gross margin decreased from approximately 28% to 25% primarily due to increased headcount in warehouse staff.

 

Net Loss

 

As a result of the above described changes in revenue and cost of sales, our net loss was $ 120,852 for the six months ended June 30, 2018, as compared to a net income of $74,501 for the six months ended June 30, 2017. This was a decrease of $195,353 or approximately 262.22%. This decrease can be explained by decreased sales coupled with increased cost of goods sold, research and development expense of $112,500 and loss on disposal of software of $20,498 incurred in the first quarter.

 

Liquidity and Capital Resources

 

Cash requirements for, but not limited to, working capital, capital expenditures, and debt repayments have been funded from cash balances on hand, revolver borrowings, loans from officers, notes payable and cash generated from operations.

 

On June 30, 2018, we had cash and cash equivalents of approximately $30,082 as compared to approximately $36,888 as of December 31, 2017, representing a decrease of $6,806. This decrease can be explained by net cash provided by operating activities of $101,033 primarily attributed to a decrease in inventory of $301,351 offset by increases in accounts receivable of $96,385 and a decrease in accounts payable of $93,359; and net cash used in financing activities of $107,839 primarily attributed to paydown of loans to related party in the amount of $92,266. On June 30, 2018, our working capital was approximately $49,521.

 

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The cash flow provided by operating activities increased from $73,998 for the six months ended June 30, 2017 to net cash provided of $101,033 for the six months ended June 30, 2018. This increase of $27,035 is primarily attributed to a reduction of inventory due to decreased purchases offset by a corresponding increase in accounts receivable and a decrease in accounts payable.

 

The cash flow from investing activities increased from cash used of $19,840 for the six months ended June 30, 2017 to net cash used of $0 for the six months ended June 30, 2018. This increase is attributed to the fact that in the six months ended 2017, the Company purchased $19,840 in fixed assets and did not make any fixed asset purchases in the six months ended 2018.

 

The cash flow from financing activities increased from net cash used of $38,624 for the six months ended June 30, 2017 to net cash used of $107,839for the six months ended June 30, 2018. This increase is primarily attributed to a paydown on the related party loan in the amount of $92,266.  

 

Bank Loans

 

The Company refinanced its debt in 2013 with a New York commercial bank and there are currently a $828,858  line of credit and a $1,072,098 mortgage outstanding. The Company is currently prohibited from drawing down on this line any further. 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. The Company is currently in violation of one of its financial covenants and has been served a notice of default for the mortgage. The Company expects to refinance the mortgage and line of credit by its due refinance date of October of 2018.

 

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”).  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, 2017, the Company had no uncertain tax positions.

 

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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 10,800,000 of the stock options outstanding as of June 30, 2018 were fully vested and therefore, no compensation expense was recorded in the quarter ended June 30, 2018. 

 

Recent Accounting Pronouncements

 

The Company’s management has considered all recent accounting pronouncements. Management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.

 

Off-Balance Sheet Arrangements

 

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.

 

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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 June 30, 2018:

 

(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 June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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.

 

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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: August 20, 2018
     
  By: /s/ Scott Chichester
    Scott Chichester,
    Chief Financial Officer
    (Principal Financial and Accounting Officer)
     
    Dated: August 20, 2018

 

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