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, and 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.
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 subsidiary ADDR Properties, LLC ("ADDR"). ADDR owns a 28,000 square foot facility in Neptune, New Jersey, that is used by Sterling Seal for its operations and corporate headquarters.
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 ninety percent (90%) 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.
Comparison for the three months ended June 30, 2022 and 2021
Net revenue increased by approximately $1,159,943 or approximately 44%, to $3,811,828 for the three months ended June 30, 2022 from $2,651,885 for the three months ended June 30, 2021. 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 supply chain issues. The Company expects this trend of aggressive buying from its customers to continue through the 4th quarter of 2022.
Cost of sales increased by approximately $1,012,279 or 49%, to $3,064,077 for the three months ended June 30, 2022 from $2,051,798 for the three months ended June 30, 2021. This increase was primarily due to an approximately commensurate increase in sales coupled with increased freight costs.
Gross profit increased by $147,664 or 25%, to $747,751 for the three months ended June 30, 2022 from $600,087 for the three months ended June 30, 2021. This increase was due primarily to higher sales resulting from increased consumer demand offset by higher freight costs.
Operating income decreased to $197,989 for the three months ended June 30, 2022 from income of $219,718 for the three months ended June 30, 2021. This decrease is attributed to the above-described increase in revenues and gross profit offset by an increase of $155,217 in general and administrative costs mainly attributed increases in payroll of $89,986 due to headcount increases and commissions and fees of $41,512.
Other income decreased by $319,102 to expense of $27,086 for the three months ended June 30, 2022, from 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 in the first quarter of 2021.
As a result of the above factors, the Company showed net income of $136,223 for the three months ended June 30, 2022, as compared to net income of $459,756 for the three months ended June 30, 2021. This decrease of $323,533 or 70% is primarily attributed to the aforementioned factors that affected revenues and cost of sales resulting in operating income of $197,989 coupled with the PPP loan forgiveness of $326,100 in the first quarter of 2021, which was absent in the 2022 results.
Comparison for the six months ended June 30, 2022 and 2021
Net revenue increased by approximately $1,772,539 or 35%, to $6,770,778 for the six months ended June 30, 2022 from $4,998,238 for the six months ended June 30, 2021. 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 expects this trend of aggressive buying from its customers to continue through the 4th quarter of 2022.
Cost of sales increased by $1,574,579 or 41%, to $5,401,631 for the six months ended June 30, 2022, from $3,827,052 for the six months ended June 30, 2021. This increase is primarily attributed to increased sales coupled with higher inventory costs due to higher freight costs.
Gross profit increased by $197,960 or approximately 17%, to $1,369,147 for the six months ended June 30, 2022, to $1,171,187 for the six months ended June 30, 2021. This increase was due to an increase in sales offset by a higher cost of rubber products and higher freight costs.
Operating income increased $40,872 to income of $288,355 for the six months ended June 30, 2022, from 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) decreased by $549,875 to expense of $66,552 for the six months ended June 30, 2022, from income of $483,323 for the six months ended June 30, 2021. This decrease is attributed to one time income events including PPP loan forgiveness of $326,100 coupled with the gain on the sale of the Florida real estate of $225,330 recorded in the 1st quarter of 2021 which were absent in the 2022 reporting period.
As a result of the above factors, the Company showed net income of $221,803 for the six months ended June 30, 2022, as compared to a net income of $731,306 for the six months ended June 30, 2021. This decrease is attributed to operational income of $288,355 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.
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, 2022, we had cash and cash equivalents of approximately $33,231 as compared to approximately $569,281 as of December 31, 2021, representing a decrease of $536,050. This decrease can be explained by cash used in operating activities of $71,792 primarily attributed to increased buying of inventory and resultant accounts payable to satisfy increased customer demand; offset by cash used in financing activities of $464,258 which was the result of paydowns of the note payable related party of $604,137, offset by increased borrowing on the line of credit of $159,974.
The cash flow from operating activities decreased from cash provided of $194,729 for the six months ended June 30, 2021 to net cash used of $71,792 for the six months ended June 30, 2022. This decrease of $266,521 is primarily attributed to increased accounts payable and inventory offset by a lesser increase in accounts receivable.
The cash flow from investing activities decreased from net cash provided of $712,500 for the six months ended June 30, 2021 to $0 for the six months ended June 30, 2022. This decrease is explained by the proceeds from the sale of the Florida real estate totaling $712,500 in the first quarter of 2021 which was absent for the 2022 rep.
The cash flow from financing activities increased from net cash used of $872,136 for the six months ended June 30, 2021 to net cash used of $464,258 for the six months ended June 30, 2022. This increase is primarily attributed to the company using the proceeds from the sale of the Florida real estate to pay down a portion of the existing debt (including the asset based line of credit in the amount of $593,851) in the 1st quarter of 2021,
The Company refinanced its debt in 2020 with a commercial bank and obtained a line of credit with a limit of $1,000,000. The line of credit calls for a variable interest rate which is currently at 5.75% per annum and there is an outstanding balance of $560,627 as of June 30, 2022.
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.
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.
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.
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.
? 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.
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.
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.
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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