UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
S	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2013.
£	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)(Zip Code)

 

(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 o

 

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 o

 

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (do not check if smaller reporting company)	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

As of November 19, 2013, there were 37,674,040 shares of common stock, $0.001 par value issued and outstanding.

 

 

 

 

 

 

STERLING CONSOLIDATED CORP.

TABLE OF CONTENTS

FORM 10-Q REPORT

September 30, 2013

			Page Number
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.		F-2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		8
Item 4.	Controls and Procedures.		9
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.		10
Item 1A.	Risk Factors.		10
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		10
Item 3.	Defaults Upon Senior Securities.		10
Item 4.	Mine Safety Disclosures		10
Item 5.	Other Information.		10
Item 6.	Exhibits.		10
SIGNATURES			11

 

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2013				2012
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	77,226			$	115,489
Account receivable, net of allowance			1,033,662				871,132
Inventory, net of reserve			2,372,061				2,307,413
Notes receivable			43,176				40,601
Investment			100				75
Other current assets			1,100				-
Total current assets			3,527,325				3,334,710
Property and equipment, net			2,601,999				2,684,299
Intangible asset, net			970				-
Deferred tax asset			7,776				7,776
Total assets		$	6,138,070			$	6,026,785
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	1,045,378			$	1,139,681
Notes payable (current portion)			132,228				130,905
Notes payable related party (current portion)			50,083				62,151
Bank line of credit			894,591				839,591
Interest rate swap contract			11,800				1,724
Other liabilities			208,854				76,971
Total current liabilities			2,342,934				2,251,023
Other liabilities
Notes payable			808,386				900,761
Notes payable (related party)			1,654,145				1,614,952
Total other liabilities			2,462,531				2,515,713
Total liabilities			4,805,465				4,766,736
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, 37,399,040 and 37,074,040 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively.			37,399				37,074
Accumulated other comprehensive loss			(11,800	)			(1,724	)
Additional paid-in capital			1,249,192				1,175,079
Retained earnings			57,814				49,620
Total stockholders' equity			1,332,605				1,260,049
Total liabilities and stockholders' equity		$	6,138,070			$	6,026,785

 

See accompanying notes to consolidated financial statements

 

 

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2013				2012				2013				2012
Revenues
O-rings and rubber product sales		$	1,546,716			$	1,380,002			$	4,623,352			$	4,503,506
Freight services			40,676				31,749				104,929				88,850
Rental services			15,984				18,427				39,054				50,573
Total revenues		$	1,603,376			$	1,430,178			$	4,767,335			$	4,642,929
Cost of sales
Cost of goods			1,090,241				1,081,137				3,129,584				3,205,182
Cost of services			120,209				67,390				257,068				201,819
Total cost of sales			1,210,450				1,148,527				3,386,652				3,407,001
Gross profit			392,926				281,651				1,380,683				1,235,928
Operating expenses
Sales and marketing			10,333				14,788				35,310				35,519
General and administrative			330,572				255,879				1,253,010				932,968
Total operating expenses			340,905				270,667				1,288,320				968,487
Operating income			52,021				10,984				92,363				267,441
Other income and expense
Other income			3,269				27,572				10,879				47,799
Other expense			-				-				-				-
Interest expense			(29,377	)			(36,788	)			(91,611	)			(92,059	)
Total other income and (expense)			(26,108	)			(9,216	)			(80,732	)			(44,260	)
Income before provision for income taxes			25,913				1,768				11,631				223,181
Provision for income taxes			21,190				722				3,437				91,169
Net income			4,723				1,046				8,194				132,012
Other comprehensive income/(loss)
Unrealized gain/(loss) on interest rate swap contract			2,908				-				(10,076	)			(4,699	)
Comprehensive income/(loss)		$	7,631			$	1,046			$	(1,882	)		$	127,313
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			37,231,649				36,882,590				37,142,721				36,589,801

 

See accompanying notes to consolidated financial statements

 

 

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended
		Sep 30,				Sep 30,
		2013				2012
Cash flows from operating activities
Net Income		$	8,194			$	132,012
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			88,300				70,717
Stock issued for services			28,438				48,000
Changes in operating assets and liabilities:
Accounts receivable			(106,368	)			119,696
Inventory			27,188				(217,232	)
Deferred tax asset			-				(17,503	)
Other assets			(25	)			(51,291	)
Accounts payable and accrued interest payable			(151,944	)			(249,996	)
Other liabilities			131,883				118,363
Net cash provided by (used in) operating activities			25,666				(47,234	)
Cash flows from investing activities
Cash paid for acquisition			(52,427	)			-
Net cash used in investing activities			(52,427	)			-
Cash flows from financing activities
Net drawdown (paydown) on bank line of credit			55,000				(110,699	)
Payments on notes payable			(91,052	)			(76,064	)
Net loan made by related party			27,125				-
Proceeds from sale of common stock			-				239,212
Advances to employees			(2,575	)			-
Net cash provided by (used in) financing activities			(11,502	)			52,449
Net change in cash and cash equivalent			(38,263	)			5,215
Cash and cash equivalents at the beginning of period			115,489				29,676
Cash and cash equivalents at the end of period		$	77,226			$	34,891
Supplemental disclosures of cash flow information:
Cash paid for interest		$	91,611			$	92,059
Cash paid for taxes		$	750			$	-
Supplemental non-cash investing activities:
The Company purchased all of the assets of Superior Seals and Service Inc. for $108,000. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired		$	165,642
Cash paid for assets			62,000
Stock issued for assets			46,000
Liabilities assumed			57,642

 

See accompanying notes to consolidated financial statements

 

 

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

 

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 March 31, 2012, 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, 2012 audited financial statements.  The results of operations for the periods ended September 30, 2013 and September 30, 2012 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.

 

Inventory

 

Inventories, which are comprised of finished goods, are stated at the lower of cost (based on the last-in, first-out method) or market. Cost does not include outbound 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. The Company recorded an inventory reserve of $85,070 as of September 30 2013 and December 31 2012, respectively.

 

		As of September 30, 2013				As of December 31, 2012
Raw materials		$	0			$	0
Finished goods			2,457,131				2,392,483
Work in process			0				0
Subtotal			2,457,131				2,392,483
Reserve for obselesence			(85,070	)			(85,070	)
Total			2,372,061				2,307,413

 

Basic and Diluted Earnings Per Share

 

The computation of basic earnings per share of common stock is based on the weighted average number of shares outstanding during the periods presented. There were no common stock equivalents outstanding as of September 30, 2013 and December 31, 2012.

 

		For the 9 months ended				For the 9 months ended
		September 30, 2013				September 30, 2012
Net income applicable to common shareholders		$	8,194			$	132,012
Weighted average shares outstanding			37,142,721				36,589,801
Weighted average fully diluted shares outstanding			37,142,721				36,589,801
Basic earnings per share		$	0.00			$	0.00
Fully diluted earnings per share		$	0.00			$	0.00

 

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, 2012.

 

There have been no changes in the Company's significant accounting policies for the periods ended September 30, 2013 as compared to those disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

 

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.

 

 

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

 

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.

 

NOTE 4- STOCK ISSUANCE

 

On May 28, 2013 the Company entered into an agreement whereby it can “put” stock to a hedge fund at a 10% discount to the average of the lowest 3 bids during a 5 day lookback period. As an integral part of this Agreement, the Company has issued 125,000 shares of common stock at $0.2275/share as a commitment fee to the counterparty. $28,438 has been charged to operations for the quarter ended June 30, 2013.

 

On September 16, 2013 as part of the consideration paid in an asset purchase agreement to acquire a North Carolina based o-ring distributor and rubber products manufacturer, the Company issued 200,000 shares of the Company’s common stock (See Note 5).

 

NOTE 5 – BUSINESS ACQUISITION

 

On September 16, 2013 the Company acquired Superior Seals and Service Inc., a North Carolina, distributor and manufacturer of o-rings and rubber products. The consideration paid consisted of $62,000 cash and 200,000 shares of common stock that were valued at $46,000 on the date of acquisition. The acquisition was accounted for under the purchase method of accounting and $970 of goodwill was recorded as a result of the transaction.

 

The following assets and liabilities were acquired as part of the transaction:

 

Assets Acquired
Cash		$	9,573
Accounts receivable			56,162
Inventory			91,837
Office equipment			1,000
Mfg. equipment			5,000
Security deposit			1,100
Goodwill			970
Total assets acquired			165,642
Liabilities Acquired
Accounts payable and accrued expenses			57,642
Net Assets Acquired		$	108,000

 

NOTE 6 – SUBSEQUENT EVENTS

 

The Company has evaluated events and transactions subsequent to the audited financial statements dated September 30, 2013 and noted the following:

 

In October and November of 2013 the Company issued 275,000 shares at a weighted average price of $0.16/share under its Investment Agreement with Surepoint Capital.

 

 

  

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. ADDR owned another property in Cliffwood Beach, New Jersey, that was rented out to tenants. On April 29, 2013, the Company entered into a sales agreement to sell the Cliffwood Beach property. The sale price is $650,000 and contains various contingencies. The property has a book value of $644,435 as of the date of sale. 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.

 

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.

 

Results of Operations

 

Comparison for the three months ended September 30, 2013 and 2012

 

Net Revenue

 

Net revenue increased by approximately $173,198 or approximately 12.1%, from $1,430,178 for the three months ended September 30, 2012 to $1,603,376 for the three months ended September 30, 2013. This increase is due primarily to consistent sales, marketing and servicing of our existing accounts as well as improvement and increased orders from the automotive sector of the economy.

 

Total Cost of Sales

 

Cost of sales increased by $61,923 or approximately 5.4%, from $1,148,527 for the three months ended September 30, 2013 to $1,210,450 for the three months ended September 30, 2012. The increase in cost of sales was attributed to the above mentioned increase in sales partially offset by lower cost of raw materials due to reduced petroleum product prices.

 

Gross profit

 

Gross profit increased approximately $111,275, or approximately 39.5%, from $281,651 for the three months ended September 30, 2012 to $392,926 for the three months ended September 30, 2013. This increase can be attributed to the above described sales increase combined with a petroleum product price decrease.

 

Net Income

 

As a result of the above factors, net income was a gain of $4,723 for the three months ended September 30, 2013, as compared to net income of $1,046 for the three months ended September 30, 2012. This increase of $3,471 or approximately 331% is attributed to increased sales and decreased cost of goods sold.

  

Comparison for the nine months ended September 30, 2013 and 2012

 

Net Revenue

 

Net revenue increased by approximately $124,406 or approximately 2.7%, from $4,642,929 for the nine months ended September 30, 2012 to $4,767,335 for the nine months ended September 30, 2013. This increase is due primarily to consistent sales, marketing and servicing of our existing accounts as well as improvement and increased orders from the automotive sector of the economy.

 

Total Cost of Sales

 

Cost of sales decreased by $20,439 or approximately 0.6%, from $3,407,001 for the nine months ended September 30, 2012 to $3,386,652 for the six months ended September 30, 2012. The decrease in cost of sales was attributed to lower cost of raw materials due to reduced petroleum product prices.

 

Gross profit

 

Gross profit increased approximately $144,755, or approximately 11.7%, from $1,235,928 for the nine months ended September 30, 2012 to $1,380,683 for the nine months ended September 30, 2013. This increase can be primarily attributed to the above described decrease in cost of sales combined with an increase in sales.

 

Net Income

 

As a result of the above factors, net income was $8,194 for the nine months ended September 30, 2013, as compared to net income of $132,012 for the nine months ended September 30, 2012. This decrease of $123,818, or approximately 94%, is attributed to an increase in Selling, General and Administrative expenses. The General and Administrative expenses increased primarily due to an increase in administrative and professional fees related to becoming a public company, an increase in stock-based compensation and an increase in salaries, travel and utilities.

 

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 September 30, 2013, we had cash and cash equivalents of approximately $77,226 as compared to approximately $115,489 as of December 31, 2012, representing a decrease of $38,263. This decrease can be explained by net cash used from investing activities of $52,427, attributed to cash paid for a business acquisition; an increase of net cash provided by operating activities of $25,666; and cash used in financing activities of $11,502. At September 30, 2013, our working capital was approximately $1,184,391.

 

The cash flow from operating activities increased from net cash used of ($47,234) for the nine months ended September 30, 2012 to net cash provided of $25,666 for the nine months ended September 30, 2013. This increase of $72,900 is primarily attributed to increased collection of accounts receivable.

 

The cash flow from financing activities decreased from $0 for the nine months ended September 30, 2012 to net cash used of ($52,427) for the nine months ended September 30, 2013. This decrease was due to cash used to make a business acquisition of an existing o-ring distributor.

 

The cash flow from financing activities decreased from net cash provided of $52,449 for the nine months ended September 30, 2012 to net cash used of ($11,502) for the nine months ended September 30, 2013. This decrease is primarily attributed to a reduction of proceeds from the sale of common stock of $239,212 due to closing of the securities offering executed in the first quarter of 2012.

 

Bank Loans 

 

As of period end, there were 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 and is under a pending contract of sale.  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 0.25% above the 1 month LIBOR rate.  The balance outstanding as of September 30, 2013 was $894,591.

 

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.

 

As of September 30, 2013, the Company was in compliance with the provisions of the loan under a 60-day extension against default granted September 28, 2013.

 

In October 2013, the Company refinanced all of the PNC loans with a $1,200,000 mortgage at 4.25% per annum, and a $1,250,000 line of credit, both with a New York City private and commercial bank.

 

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, 2012, 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.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4.

Controls and Procedures.

 

Disclosure Controls and Procedures

 

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

 

As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board ("PCAOB"), a material weakness is a deficiency or combination of deficiencies that result in a more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of September 30, 2013:

 

(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 but did hire an SEC financial reporting expert to independently review our recent registration statement on Form S-1 that resulted in SEC notification of effectiveness on February 7, 2013. We plan to address the other control deficiencies in the near future. 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 Quarterly 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 September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

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

 

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

 

As previously disclosed on the Current Report on Form 8-K filed with the SEC on September 26, 2013, the Company issued 200,000 shares of common stock in conjunction with our purchase of all the assets of Superior Seals and Service Inc. on September 16, 2013.

 

The Company issued the shares in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Rule 506(b) of Regulation D. The Company’s reliance on Section 4(2) of the Securities Act was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the stock took place directly between the offeree and the Company.

 

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
3.1		Articles of Incorporation. (1)
3.2		Bylaws. (2)
10.1		Asset Purchase Agreement, dated September 16, 2013. (3)
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

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

 

* Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1)     Incorporated by reference to the registration statement filed with the SEC on August 10, 2012. (2)     Incorporated by reference to the registration statement filed with the SEC on January 18, 2013. (3)     Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 26, 2013.

 

  

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
		(Duly Authorized Officer and Principal Executive
		Officer)
		Dated: November 19, 2013
	By:	/s/Scott Chichester
		Scott Chichester,
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)
		Dated: November 19, 2013