STCC Sterling Consolidated Corporation (CE)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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For the quarterly period ended June 30, 2021

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☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.

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Commission File Number: 333-183246

1105 Green Grove Road

Neptune, New Jersey 07753

(Address of principal executive offices)

(732) 918-8004

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year,

if changed since last report)

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

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

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.

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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 ☒

As of September 27, 2021  there were 47,284,689 shares of common stock, $0.001 par value issued and outstanding.

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

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STERLING CONSOLIDATED CORP.

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FORM 10-Q REPORT

June 30, 2021

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See accompanying notes to condensed consolidated financial statements

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See accompanying notes to condensed consolidated financial statements

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See accompanying notes to condensed consolidated financial statements

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STERLING CONSOLIDATED CORP AND AFFILIATES

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Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, useful lives of intangible assets and property and equipment, inventory valuations, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Inventories

Inventories, which are comprised of finished goods, are stated at the lower of cost (based on weighted average method) 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.

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Revenue Recognition

The Company recognizes revenue based on Account Standards Codification ("ASC") 606, Revenue from Contracts with Customers, and all of the related amendments ("new revenue standard"). In the case of Sterling, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, shipment of the product has occurred, price is fixed or determinable and collectability of the resulting receivable is reasonably assured. For provision of third-party freight services provided by Integrity, revenue is recognized on a gross basis in accordance with ASC 606. Revenue is generally recognized when the contracted goods arrive at their destination point. When revenues and expenses straddle a period end due to the time between shipment and delivery, Integrity allocates revenue between reporting periods based on relative transit time in each period with expenses recognized as incurred. Cost of goods is comprised of sale of o-rings and related rubber products. Freight services is comprised of freight forwarding and related services earned by Integrity and rental services is comprised of revenue from rental of commercial space to third parties.

Basic and Diluted Earnings per Share

The computation of basic earnings (loss) per share of common stock is based on the weighted average number of shares outstanding during the periods presented. The computation of fully diluted earnings (loss) per share includes common stock equivalents outstanding at the balance sheet date. The Company had 10,800,000 and 10,800,000 stock options that would have been included in the fully diluted earnings per share for the three and six month periods ended June 30, 2021 and 2020, respectively.

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NOTE 3- CLOSURE OF FLORIDA OFFICE AND SALE OF REAL ESTATE

In the first quarter of 2020, the Company closed down its Florida operations and consolidated the sales accounts with its New Jersey based sales force based out of the Company’s headquarters in Neptune, New Jersey. The Company owns the Florida property unencumbered and intends to sell it in 2020. The closure was an effort to reduce costs and consolidate operations and was not related to COVID-19.

On March 30, 2021 the Company sold its building and land in Apopka, Florida.  The proceeds on the sale were $712,500 and the company recorded a gain on the sale of $225,330.

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NOTE 4 – LOSS ON THEFT

In the first quarter of 2020, the Company was subjected to a fraudulent request for refund from an individual posing as a customer. The Company honored the refund request, but soon discovered the request was fraudulent. The Company had an initial loss of $92,435 and received $82,435 in the second quarter of 2020 from a claim with its insurance company. The net loss of $10,000 was recorded in other expense in the consolidated statement of operations for the 3 months ended March 31, 2020.

NOTE 5 – PPP 1^ST DRAW FORGIVENESS

In May of 2021, the Company’s Paycheck Protection Program draw 1 loan of $326,100 was forgiven in full and was recorded as other income in the accompanying condensed consolidated statement of operations.

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Results of Operations

Comparison for the three months ended June 30, 2021 and 2020

Net Revenue

Net revenue increased by approximately $494,411 or approximately 22.9%, from $2,157,473 for the three months ended June 30, 2020 to $2,651,884 for the three months ended June 30, 2020. This increase was due primarily to selling price increases and larger order sizes from existing customers attempting to build inventory against the current worldwide o-ring inventory shortage. The Company does not expect this trend of aggressive buying from its customers to continue past the 4^th quarter of 2021.

Total Cost of Sales

Cost of sales increased by approximately $53,781 or 2.7%, from $1,997,671 for the three months ended June 30, 2020 to $2,051,798 for the three months ended June 30, 2021. This increase was primarily due to increased sales. The increase in cost of sales is not commensurate with the revenue increases as the Company has raised its selling price due to high demand for its product and the worldwide inventory shortage.

Gross profit

Gross profit increased by $440,284 or 275%, from $159,802 for the three months ended June 30, 2020 to $600,086 for the three months ended June 30, 2020. This increase was due primarily to increased consumer demand resulting in higher sales coupled with selling price increases.

Operating income

Operating income (expense) increased $533,689 from expense of $313,972 for the three months ended June 30, 2020 to income of $219,717 for the three months ended June 30, 2021. This increase is attributed to the above-described increase in revenues and gross profit coupled with a decrease of $93,405 in sales and marketing and general and administrative costs mainly attributed to reductions in depreciation, healthcare and casualty insurance and sales commissions.

Other income (expense)

Other income (expense) increased by $330,366 from an expense of 38,350 for the three months ended June 30, 2020, to income of $292,016 for the three months ended June 30, 2021. This increase is attributed to the PPP loan forgiveness resulting in other income of $326,100.

Net Income

As a result of the above factors, the Company showed net income of $459,755 for the three months ended June 30, 2021, as compared to a net loss of $245,820 for the three months ended June 30, 2020. This increase of $705,575 or 287% is primarily attributed to the aforementioned factors that affected revenues and cost of sales resulting in operating income of $219,717 coupled with the PPP loan forgiveness of $326,100.

Comparison for the six months ended June 30, 2021 and 2020

Net Revenue

Net revenue increased by approximately $445,111 or 9.8%, from $4,553,127 for the six months ended June 30, 2020 to $4,998,238 for the six months ended June 30, 2020. This increase was due primarily to selling price increases and larger order sizes from existing customers attempting to build inventory against the current worldwide o-ring inventory shortage. The Company does not expect this trend of aggressive buying from its customers to continue past the 4^th quarter of 2021.

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Total Cost of Sales

Cost of sales increased by $254,862 or 7.2%, from $3,572,190 for the six months ended June 30, 2020, to $3,827,052 for the six months ended June 30, 2020. This increase is primarily attributed to increased sales coupled with an improved profit margin due to higher selling prices driven by high product demand due to the worldwide o-ring inventory shortage.

Gross profit

Gross profit increased by $190,249 or approximately 19.4%, from $980,937 for the six months ended June 30, 2020, to $1,171,186 for the six months ended June 30, 2021. This increase was due to an increase in sales, coupled with higher selling prices, both as a result of strong customer demand for o-ring products due to the worldwide o-ring inventory shortage.

Operating income

Operating income (expense) increased $184,179 from income of $63,803 for the six months ended June 30, 2020, to income of $247,982 for the six months ended June 30, 2021. This increase is attributed to the above-described increase in revenues and gross profit.

Other Income (Expense)

Other Income (Expense) increased by $580,695 from expense of $97,372 for the six months ended June 30, 2020, to income of $483,323 for the six months ended June 30, 2021. This increase is attributed to PPP loan forgiveness resulting in other income of $326,100 coupled with the gain on the sale of the Florida real estate of $225,330 and a reduction of interest expense of $19,265 due reduced borrowing on the asset-based line of credit.

Net Income

As a result of the above factors, the Company showed net income of $617,847 for the six months ended June 30, 2021, as compared to a net loss of $23,314 for the six months ended June 30, 2020. This increase is attributed to operational income of $247,982 coupled with gains on the PPP loan forgiveness of $326,100 and a gain on the sale of the Florida real estate of $225,330 for the six months ended June 30, 2021.

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, 2021, we had cash and cash equivalents of approximately $206,911 as compared to approximately $171,818 as of December 31, 2020, representing an increase of $35,093. This increase can be explained by cash provided by operating activities of $194,730 primarily attributed to net income of $617,858; This augmented by net cash provided by investing activities of $712,500 attributed to sale of the Florida real estate, offset by cash used in financing activities of $872,136 which was the result of paydowns of the asset-based line of credit of $598,851, notes payable related party of $148,049, and notes payable of $130,236.

The cash flow provided by operating activities increased from $5,512 for the six months ended June 30, 2020 to net cash provided of $194,730 for the six months ended June 30, 2021. This increase of $189,218 is primarily attributed to increased net income from the Company’s operations.

The cash flow from investing activities increased from cash used of $0 for the six months ended June 30, 2020 to net cash provided of $712,500 for the six months ended June 30, 2021. This increase is explained by the proceeds from the sale of the Florida real estate totaling $712,500.

The cash flow from financing activities decreased from net cash used of $66,033 for the six months ended June 30, 2020 to net cash used of $872,136 for the six months ended June 30, 2021. This decrease is primarily attributed to the company using the proceeds from the sale of the Florida real estate to pay down the existing debt and the paydown of the PPP loan due to forgiveness.

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Debt Transactions

Asset Based Loan

The Company refinanced its debt in 2018 with a New York asset based lender and there is an outstanding balance of $518,719. The line of credit calls for a variable interest rate at market rates for the ABL industry.

Mortgage Note

The Company obtained a mortgage on its Neptune, NJ headquarters in the 4th quarter of 2019, offset by a pay down of a portion of its related party note and asset-based line of credit. The mortgage payable is due in monthly installments of principal and interest. Interest is charged at a fixed rate of 5.00%. The mortgage is secured by the assets of the Company and personal guarantee of the Chairman of the Board and the CEO. The note is amortized over a 20-year period but has a 5-year maturity, which will require refinancing in November of 2024.

COVID-19 related financing:

EIDL Note

Additionally, on May 28, 2020, the Company received $150,000 in loan funding from the SBA under the Economic Injury Disaster Loan (“EIDL”) program administered by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note, dated May 28, 2020 (the “EIDL Note”) in the original principal amount of $150,000 with the SBA, the lender.

Under the terms of the EIDL Note, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of the EIDL Note is 30 years, though it may be payable sooner upon an event of default under the EIDL Note. Under the EIDL Note, the Company will be obligated to make equal monthly payments of principal and interest beginning on May 28, 2022 through the maturity date of May 28, 2050. The EIDL Note may be prepaid in part or in full, at any time, without penalty.

The EIDL Note provides for certain customary events of default, including: (i) a failure to comply with any provision of the EIDL Note, the related Loan Authorization and Agreement, or other EIDL loan documents; (ii) a default on any other SBA loan; (iii) a sale or transfer of, or failure to preserve or account to SBA’s satisfaction for, any of the collateral or its proceeds; (iv) a failure of the Company or anyone acting on its behalf to disclose any material fact to SBA; (v) the making of a materially false or misleading representation to SBA by the Company or anyone acting on their behalf; (vi) a default on any loan or agreement with another creditor, if SBA believes the default may materially affect the Company’s ability to pay the EIDL Note; (vii) a failure to pay any taxes when due; (viii) if the Company becomes the subject of a proceeding under any bankruptcy or insolvency law; (ix) if a receiver or liquidator is appointed for any part of the Company’s business or property; (x) the making of an assignment for the benefit of creditors; (xi) has any adverse change in financial condition or business operation that SBA believes may materially affect the Company’s ability to pay the EIDL Note; (xii) effects any reorganization, merger, consolidation, or other transaction changing ownership or business structure without SBA’s prior written consent; or (xiii) becomes the subject of a civil or criminal action that SBA believes may materially affect the Company’s ability to pay the EIDL Note.

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.

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Revenue recognition

The Company recognizes revenue based on Account Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and all of the related amendments (“new revenue standard”). In the case of Sterling, revenue is recognized only when control of the product passes to the customer or the service is provided and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. 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, 2020, the Company had no uncertain tax positions.

Fair values of financial instruments

In January 2010, the FASB ASC Topic 825, Financial Instruments, requires disclosures about fair value of financial instruments in quarterly reports as well as in annual reports. For the Company, this statement applies to certain investments and long-term debt. Also, the FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the value of the Company’s investments and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.

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.

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Stock-based compensation

The Company records stock-based compensation at fair value of the stock provided for services. The 10,300,000 of the stock options outstanding as of June 30, 2021 were fully vested and therefore, no compensation expense was recorded in the quarter ended June 30, 2021.

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

The Company has declared a dividend of its proprietary cryptocurrency, DIMO, that is yet to be distributed. As there is currently no market for the cryptocurrency, the Company has valued the dividend at $0.

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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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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