STERLING CONSOLIDATED Corp - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2014

For the transition period from _______ to _______.

Commission File Number: 333-183246

STERLING CONSOLIDATED CORP.

(Exact name of registrant as specified in its charter)

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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

Yes ¨ No x

As of November 19, 2014, there were 40,395,040 shares of common stock, $0.001 par value issued and outstanding.

STERLING CONSOLIDATED CORP.

TABLE OF CONTENTS

FORM 10-Q REPORT

June 30, 2014

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

NOTE 1 – BASIS OF PRESENTATION

The accompanying interim financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows as of and for the period ended June 30, 2014, and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2013 audited financial statements.  The results of operations for the periods ended September 30, 2014 and September 30, 2013 are not necessarily indicative of the operating results for the full years.

Use of Estimates

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

Inventories

Inventories, which are comprised of finished goods, are stated at the lower of cost (based on the first in, first out method) or market. Cost does not include shipping and handling fees, which are charged directly to income. The Company provides for estimated losses from obsolete or slow-moving inventories, which is approximately 4% of the total inventory, and writes down the cost of inventory at the time such determinations are made. Reserves are estimated based upon inventory on hand, historical sales activity, industry trends, the business environment, and the expected net realizable value. The net realizable value is determined based upon current awareness of market prices.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

The accounting policies applied by the Company in these condensed interim financial statements are the same as those applied by the Company in its audited consolidated financial statements as at and for the year ended December 31, 2013.

There have been no changes in the Company's significant accounting policies for the periods ended September 30, 2014 as compared to those disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

NOTE 3 – COMMITMENTS AND CONTINGENCIES

Contingencies

The Company may, from time to time, be involved in legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, patent infringement actions, contract disputes, domestic and international federal, state and local tax reviews and audits, and other matters. The Company also may be subject to litigation and/or adverse rulings or judgments as a result of certain contractual indemnification obligations. The Company records a provision for a liability when management believes that it is both probable that a liability has been incurred and it can reasonably estimate the amount of the loss. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Additionally, from time to time, the Company receives inquiries from regulatory agencies informally requesting information or documentation. There can be no assurance in any given case that such informal review will not lead to further proceedings involving the Company in the future.

The Company is not aware of any pending disputes, including those outlined above, that would be likely to have a material adverse effect, either individually or in the aggregate, on its consolidated financial condition, results of operations or liquidity. However, litigation is subject to inherent uncertainties and costs and unfavorable outcomes could occur. An unfavorable outcome could include the payment of monetary damages, cash or other settlement, or an injunction prohibiting it from selling one or more products. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods.

Cash and Cash Equivalents

From time-to-time the Company may carry balances in its corporate bank accounts above the federally insured limit of $250,000.

Basic and Diluted Earnings per Share

The computation of basic earnings (loss) per share of common stock is based on the weighted average number of shares outstanding during the periods presented. The computation of fully diluted earnings (loss) per share includes common stock equivalents outstanding at the balance sheet date. The Company had no stock options and warrants that would have been included in the fully diluted earnings per share for the three and nine month periods ended September 30, 2014 and 2013, respectively.  

N0TE 4- STOCK ISSUANCE

In July of 2014, the Company issued 100,000 shares of restricted stock to an employee at a price of $.07/share for total compensation of $7,000 which was charged to operations during the third quarter of 2014.

NOTE 5- BUSINESS ACQUISITION

On April 1, 2014, the Company acquired RG Sales Inc., a Pennsylvania distributor of O-rings and rubber products. The transaction was valued at $400,000 with earn-out incentives for sales targets over the two years from transaction date. The results of operations of RG Sales Inc. were included in the Company’s 2^nd quarter 2014 earnings. The transaction was structured as a stock purchase.

Pursuant to the stock purchase agreement, the purchase price consisted of a one-time cash payment of $250,000, the execution of a promissory note of $150,000 which bears interest of 5 percent per annum and stipulating payments according the following schedule:

The stock purchase agreement stipulates year one earnout payments as follows:

The stock purchase agreement stipulates year two earnout payments as follows:

The total purchase price was allocated as follows:

NOTE 6 – SUBSEQUENT EVENTS

The Company reviewed any significant transactions that would qualify for subsequent event reporting. None were noted.

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

Cautionary Notice Regarding Forward Looking Statements

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

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

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

Overview

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

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

We also own real property through our subsidiaries ADDR Properties, LLC (“ADDR”) and Q5 Ventures, LLC (“Q5”). ADDR owns a 28,000 square foot facility in Neptune, New Jersey, that is primarily used by Sterling Seal for its operations. ADDR also owns another property in Cliffwood Beach, New Jersey, that was previously occupied by Sterling Seal and is now rented out to tenants. Q5 owns a 5,000 square foot facility that is used by Sterling Seal in Florida.

In addition, our subsidiary Integrity Cargo Freight Corporation (“Integrity”) is a freight forwarding business. Integrity shares a facility with Sterling Seal and manages the importation of Sterling Seal’s products and exports products on behalf of Sterling Seal to various countries.

Since going public on February 7, 2013, the Company has acquired Superior Sales Inc., a North Carolina o-ring custom manufacturer and distributor. As previously disclosed in a Form 8-K filed with the SEC on April 24, 2014, the Company acquired, on April 1, 2014 RG Sales Inc., a Pennsylvania distributor of o-rings and rubber products. The Company continues to review acquisition targets as its primary means of expansion.

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 4,273,504 shares of our common stock for issuance under the SurePoint Investment Agreement. Additionally, the Company agreed to issue SurePoint 125,000 shares of our common stock.

In connection with the SurePoint Investment Agreement, the Company also entered into a registration rights agreement with SurePoint, pursuant to which the Company is obligated to file a registration statement with the Securities and Exchange Commission (the “SEC”) covering 4,398,504 shares of our common stock underlying the SurePoint Investment Agreement within 21 days after the closing of the transaction.

On June 21, 2013, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (the “SEC”). Under the registration statement, SurePoint may sell up to 4,398,504 shares of the Company’s common stock based upon the Company delivering put notices.

On July 24, 2013, pursuant to SEC comments, the Company filed a request to withdraw the registration statement on Form S-1. Following the withdrawal, the Company re-negotiated the SurePoint Investment Agreement and re-filed a new registration statement on Form S-1 with the SEC on July 30, 2013 for 4,398,504 shares of common stock. The registration statement was declared effective on August 27, 2013.

This registration statement gives the Company the opportunity to deliver put notices to SurePoint in exchange for cash. The Company intends to use the proceeds to take advantage of acquisition opportunities that may arise in the future, however the Company cannot make any assurances that these opportunities will arise.

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

On January 22, 2014, the Company sold 246,000 shares of stock at $0.1089/share through its Equity Credit Facility for total proceeds of $26,800. The Company incurred $30,000 of stock issuance costs related to this sale of stock.

In the second fiscal quarter of 2014, the Company sold 1,900,000 shares of stock through its Equity Credit Facility at an average price of $0.086/share for total proceeds of $165,040. The Company incurred $66,000 of stock issuance costs related to this sale of stock.

The S1 for the Equity Credit Facility went stale as of October 31, 2014 however the Company intends to reactivate the Facility by filing a post-effective amendment in November 2014.

Results of Operations

Comparison for the three months ended September 30, 2014 and 2013 

Net Revenue

Net revenue increased by approximately $55,063 or approximately 3.5%, from $1,587,392 for the three months ended September 30, 2013 to $1,642,455 for the three months ended September 30, 2014. This increase is due primarily to the incremental sales from the acquisitions of RG Sales Inc. on April 1, 2014 and Superior Seals Inc. on September 16, 2013.

Total Cost of Sales

Cost of sales decreased by $52,768 or approximately 4.5%, from $1,179,450 for the three months ended September 30, 2013 to $1,126,682 for the three months ended September 30, 2014. The increase in cost of sales was attributed to an approximately commensurate increase in net revenues as described above.

Gross profit

Gross profit increased approximately $107,831, or approximately 26.4%, from $407,942 for the three months ended September 30, 2013 to $515,773 for the three months ended September 30, 2014. This increase can be attributed to the above described increase in net revenue coupled with a decrease in cost of sales. In 2014, the Company purchased more goods internationally which provides better pricing, while in 2013 the Company made more domestic spot purchases to fill customer orders, which led to a higher proportionate cost of sales.Net Income

As a result of the above factors, the Company posted a net loss of $11,616 for the three months ended September 30, 2014, as compared to net income of $4,723 for the three months ended September 30, 2013. This decrease of $16,339 or approximately 346% is attributed to increased general and administrative costs related to increased headcount and the costs of maintaining two additional locations.

Comparison for the nine months ended September 30, 2014 and 2013

Net Revenue

Net revenue increased by approximately $537,834 or approximately 11.4%, from $4,728,281 for the nine months ended September 30, 2013 to $5,266,115 for the nine months ended September 30, 2014. This increase is due to the incremental sales of RG Sales Inc. acquired on April 1, 2014 which added approximately $347,000 in incremental sales along with approximately $266,000 from the September 16, 2013 acquisition of Superior Seals, Inc.

Total Cost of Sales

Cost of sales increased by $216,492 or approximately 6.6%, from $3,294,615 for the nine months ended September 30, 2013 to $3,511,107 for the nine months ended September 30, 2014. The increase in cost of sales was attributed to the above described commensurate increase in sales offset by a decrease in cost per unit due to improved purchasing efficiency by purchasing more goods internationally in 2014 as compared to 2013.

Gross profit

Gross profit increased approximately $321,342, or approximately 24%, from $1,341,303 for the nine months ended September 30, 2013 to $1,514,676 for the nine months ended September 30, 2014. This increase can be attributed to the above described changes in net revenue and cost of sales.

Net Income

As a result of the above described changes in sales and cost of sales, net income was $115,983 for the nine months ended September 30, 2014, as compared to net income of $8,194 for the nine months ended September 30, 2013.

Liquidity and Capital Resources

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

At September 30, 2014, we had cash and cash equivalents of approximately $76,729 as compared to $543,945 as of December 31, 2013, representing a decrease of $467,216. This decrease can be explained by net cash used in operating activities of $84,722 primarily attributed to paydown of accounts payables; net cash used in investing activities of $374,482 due to purchase of stock in RG Sales Inc. and the investment in leasehold improvements at the Company’s headquarters; and net cash used in financing activities of $8,012 primarily attributed to proceeds of common stock purchased through the Company’s equity credit facility offset by paydown of its bank line of credit of $86,833. At September 30, 2014, our working capital was approximately $1,300,506.

The cash flow from operating activities decreased from net cash provided of $25,666 for the nine months ended September 30, 2013 to net cash used of $84,722 for the nine months ended September 30, 2014. This decrease of $110,388 is primarily attributed to a significant paydown of accounts payable of $319,786 along with a decrease of accounts receivable of $163,693 and a decrease in inventory of $153,147.

The cash flow from financing activities increased from net cash used of $11,502 for the nine months ended September 30, 2013 to net cash used of $8,012 for the nine months ended September 30, 2014. This increase is primarily attributed to the net proceeds of common stock after issuance costs of $111,340 offset by paydown on the line of credit and note to shareholder.

Bank Loans

The Company refinanced its debt in 2013 with a New York commercial bank and there are currently a $1.25 million line of credit and a $1,200,000 mortgage outstanding. The line of credit calls for a variable interest rate of the Wall St. Journal published prime rate plus 1% and requires an annual review. The mortgage has a variable rate of LIBOR plus 4.25% and is for a 5 year term expiring in October of 2018. As of August 14, 2014, the Company is in technical violation of one of its bank covenants due to a reported 2013 fiscal loss. The Company is currently reviewing ways to remedy the broken covenant and expects to obtain a waiver from the 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, 2013, management considered that the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

Fair values of financial instruments

The carrying amounts reported in the consolidated financial statements for current assets and currently liabilities approximate fair value due to the short-term nature of these financial instruments. The carrying amount of long-term loans approximates fair value since the interest rate associated with the debt approximates the current market interest rate.

The Company adopted ASC 820-10, “Fair Value Measurements and Disclosures”, which establishes a single authoritative definition of fair value and a framework for measuring fair value and expands disclosure of fair value measurements for both financial and nonfinancial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows) and the cost approach (cost to replace the service capacity of an asset or replacement cost). For purposes of ASC 820-10-15, nonfinancial assets and nonfinancial liabilities would include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in ASC-820-10-15-15-1A.

Stock-based compensation

The Company records stock-based compensation at fair value of the stock provided for services. The Company currently does not have any issued and outstanding stock options or other derivatives.

Recent Accounting Pronouncements

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”. The update clarifies the guidance on a creditor’s evaluation of whether it has granted a concession as well as clarifying the guidance when a creditor’s evaluation of whether a debtor is experiencing financial difficulties. The guidance clarifies when a Company should record impairment due to concessions or the financial difficulties of the debtor. The new standard is effective for fiscal years and interim periods ending after June 15, 2011. The guidance should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The adoption did not have a material effect on the Company’s consolidated financial position or results of operations.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements”. ASU 2011-03 applies to transactions where the seller transfers financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in this guidance remove from the assessment of effective control the criteria requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms even in the event of default by the transferee and the collateral maintenance guidance related to that criterion. The new standard is effective for fiscal years and interim periods ending after December 15, 2011 and should be applied on a prospective basis. The adoption does not have a material effect on the Company’s consolidated financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”. The amendment results in a consistent definition of fair value and ensures the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards (“IFRS”). This amendment changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This amendment became effective for the Company on January 1, 2012. The adoption has not had a material effect on the Company’s consolidated financial position or results of operations.

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Comprehensive Income (Topic 220), and Presentation of Comprehensive Income”. ASU 2011-05 amends the presentation of other comprehensive income and the Statement of Consolidated Operations. Under this amendment, entities will be required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of which reporting option is selected, the Company is required to present on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. The current option to report other comprehensive income and its components in the statement of changes in equity has been eliminated. This amendment became effective for the Company on January 1, 2012 and full retrospective application was required. This amendment did have a material impact on our financial statements.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements. 

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 June 30, 2014:

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. In the second quarter of 2014, we have invested in a sophisticated cloud based inventory management and general ledger software that should improve our internal controls. The implementation is scheduled for the third quarter of 2014. We plan to address the 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 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 September 30, 2014 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.

None

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

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.