STERLING CONSOLIDATED Corp - Annual Report: 2018 (Form 10-K)

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2018

For the transition period from ___________ to ___________

Commission file number 333-183246

STERLING CONSOLIDATED CORP.

(Exact name of registrant as specified in its charter)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes ¨    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes ¨    No x

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 x

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 x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K.  

x

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

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 Act).

Yes ¨   No x

Aggregate market value of the voting and non-voting common equity held by non-affiliates (7,383,540) computed by reference to the price at which the common equity was last sold ($0.15), or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2018): $1,107,531.

As of April 16, 2019, the registrant had 41,965,540 shares of its common stock, par value $0.001 per share, issued and outstanding.

Documents Incorporated by Reference: None.

TABLE OF CONTENTS

PART I

Item 1. Business.

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 (the “Company”). We are a holding company, and all of our operations are conducted through our four subsidiaries: Sterling Seal & Supply, Inc. (“Sterling Seal”), ADDR Properties, LLC (“ADDR”), Q5 Ventures, LLC (“Q5”), and Integrity Cargo Freight Corporation (“Integrity”). In June 2012, these four entities became subsidiaries of the Company through an Equity Exchange Agreement by which the shareholders of Sterling Seal, ADDR, Q5, and Integrity became shareholders of the Company and in exchange the Company received all of the authorized and outstanding shares of Sterling Seal, ADDR, Q5, and Integrity. We issued a total of 33,817,040 shares of our common stock to the shareholders of Sterling Seal, ADDR, Q5 and Integrity.

Subsidiaries

Sterling Consolidated Corp. conducts its entire business through its four subsidiaries. Each subsidiary is responsible for a specific business function of the Company. For clarity, an organizational chart of the Company is provided below.

Sterling Seal & Supply, Inc.

Our largest subsidiary is Sterling Seal, a New Jersey corporation which was incorporated in 1997. Its predecessor was Sterling Plastic & Rubber Products, Inc., which was 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.

Sterling Seal is a distributor of O-rings. O-rings are one of the simplest, yet most engineered, precise, and useful seal designs. They are one of the most common and important elements of machine design. O-rings and the other products that Sterling Seal sells are used in a wide variety of industries, including automotive, pump, transmissions, oil and energy, machinery, and packaging. These products are utilized primarily as seals to prevent leakage of liquids or air. Most of the products carried by Sterling Seal are made of rubber, but some are coated and the rubber compound can change upon customer request.

Sterling Seal sells directly to smaller distributors and original equipment manufacturers in need of seals. It offers a catalogue of standard sizes, and will take orders for special sizes not available in the standard catalogue. In order to satisfy the needs of our customers and stay competitive, Sterling Seal always maintains a wide variety of products in substantial quantities at its main warehouse in Neptune, New Jersey, as well as its other facilities in the United States. The products that we hold in inventory at our warehouse are standard products that are most often ordered. If a customer orders a product that is not in our inventory, we order the product from one of our suppliers in China.

We have approximately 3,300 customers that place orders with us for the delivery of O-ring or similar products. Our largest customer is a southeastern U.S. manufacturer/distributor of automotive/industrial products. Other automotive customers are Precision International, Fruedenberg and Sonnax Transmissions.  We stock a variety of rubber seals to service pool filter and pump manufacturers.  We also distribute our products to many resellers of replacement parts and pool stores.  Bay State Pool and Horizon Pool and Spa are two of our larger accounts in the pool industry.

A large portion of our customer base services the plumbing and industrial industries.  These accounts include, Fastenal, Kaman Industrial and Eastern Industrial.  They are localized to service a wide range of products, but they purchase O-Rings and rubber seals from Sterling.

Sterling Seal receives requests for quotations electronically and by fax daily from its various customers. The sales force then reviews each request, and responds with a “quoted” price for delivery and price. If such a quote is accepted, the customer responds with a purchase order for a specific price and delivery.

After a purchase order is accepted and we do not have the ordered product in our inventory, we then contact one of our suppliers. All of our suppliers are located in China. In determining which suppliers to use, we look for suppliers that deliver quality products in a timely manner. We do not have any long term contracts with any of our suppliers. The following is the list of our 10 largest principal suppliers:

O-ring and rubber seals are generally considered commodities, meaning that such goods are fungible and there is little if any distinction between the various producers and suppliers of the products. None of the products sold by Sterling Seal are under patent and there are no intellectual property or licensing issues. Sterling Seal sets itself apart from other similarly situated companies though the variety and quality of its inventory, the price point at which it sells its various products, and its ability to deliver products to customers on time. The time it takes us to deliver the ordered product to a customer will mainly depend on whether we have it in inventory or need to order it from a supplier in China. If we have it in inventory, we can package, ship and distribute the product within two (2) business days.

When orders arrive at Sterling Seal, we ship the products to our customer and invoice on a 45-day basis.

Integrity Cargo Freight Corporation

Our subsidiary, Integrity, is a freight forwarding business. They are primarily responsible for transporting products we order from our suppliers back to our warehouse in Neptune, NJ. After Sterling Seal confirms from its supplier that a product is ready to be picked up, Integrity Cargo is responsible for picking up the products and getting them to the dock and delivered to the Sterling Seal warehouse.

Integrity shares a facility with Sterling Seal and manages the importation of Sterling Seal’s products and its exports to various countries. Currently eighty percent (80%) of Sterling Seal’s imports come from Asia, and ten percent (10%) of the Company’s sales are exported to various countries. However, all payables are billed and collected in USD, so Sterling Seal does not bear any foreign exchange risk on open payables.

We incorporated Integrity in order to vertically integrate our operations and not have to rely on third parties to deliver our products from the supplier. This has resulted in quicker delivery and more predictable delivery times.

This provides the Company with a competitive advantage over other importers of O-rings and seals as we can utilize our own freight company and consolidate our operations. As a result, the Company is able to provide lower prices to its customers. This also provides us with a much greater level of control over our shipping, which expedites lead times and deliveries to our customers.

Entering the freight forwarding market has provided the Company with a competitive advantage as compared with other importing distributors of rubber O-Rings. By having the ability to utilize our own freight company, we are able to consolidate shipments from various sources and ship as frequently as needed, which has resulted in improved efficiencies and delivery times.

Integrity also performs freight forwarding services for third party customers. Integrity currently has about twenty (20) customers for whom performs freight forwarding services. However, roughly fifty percent (50%) of its revenues derive from freight forwarding for Sterling Seal.

Integrity shares a facility and certain overhead costs such as information technology with Sterling Seal, so both entities have lower operational costs due to economies of scale.

ADDR Properties, LLC.

ADDR is one of our two subsidiaries that owns real property. ADDR owns a 28,000 square foot facility in Neptune, NJ. Roughly ninety percent (90%) of this property is used by Sterling Seal as its principal executive office and primary warehouse. The Company does not pay rent to ADDR for the use of this facility. The remaining 3,000 square feet of this facility is rented out to the Children’s Center of Monmouth County.

Q5 Ventures, LLC

Q5 owns a 5,000 square foot facility in Apopka, Florida, which is used by Sterling Seal for its Florida operations. This facility was specifically built for Sterling Seal’s operations. Sterling Seal does not pay rent to Q5.

Competition and Our Competitive Strengths

Rubber is the raw material that we are dependent on in our business. In order to compete in the US, a supplier must import from China. This is due to the fact that manufacturing rubber is a labor intensive project and labor costs are significantly cheaper in China than they are in the United States.

There is a lot of competition in the US for seals and products that we distribute. In order to establish competitive prices, we purchase large quantities of product at a time. It would be too costly for smaller companies or our customers to circumvent us by buying directly from the supplier because the prices are much higher for smaller orders. Importation costs are also high and add to the overall cost of the product.

Business Strategy

Our core business is the importation and distribution of o-rings, seals and other related products. An o-ring is a highly-engineered circular rubber based product that seals any liquid or gas and is used in the automotive, electrical and industrial sectors. O-rings come in 7 standard materials (Teflon, Viton, EPDM, silicone, Aflas, Nbr and urethane) and there are 380 standard sizes for each material. These are known as “standard o-rings”. In 1980, the last major U.S. manufacturer of standard o-rings ceased manufacturing domestically. Since that time, standard o-ring production has been dominated by Chinese manufacturers and the gasket and seal industry is currently a $63.2 billion industry. This has created a highly fragmented market with many small distributors throughout the United States and Europe selling a highly commoditized product.

We currently have an estimated 3,000 customers with an average order of approximately $309 per order. As a result, in order to be able to meet customer expectations, we must carry a large inventory (up to $2.8 million) compared to our annual sales which are approximately $7.1 million. We currently inventory approximately 14,000 different SKUs in 33,000 square feet of our two warehouses.

This is a competitive advantage for us because we are a larger company that has the cash and other resources that enables us to hold inventory at our warehouse. This helps us maintain a competitive advantage because not only do we have the ability of reducing our costs, we can also decrease the amount of time it takes to deliver orders to our customers, provided that we have the product in our warehouse. Stockpiling inventory also requires capital. Currently, we have over two million dollars in inventory to service our current customers’ demands.

For some of our customers, there is a cost incurred as a result of switching from Sterling Seal as a supplier. Because Sterling Seal is an approved supplier for many of our industrial and commercial customers, while other suppliers may not be approved, our customers could face increased costs as a result of switching to another supplier's product. For certain customers, in order to switch from an approved supplier, the product must be tested and approved. In the automotive industry the factories have to be audited and approved in addition to the distributor and their products. Because of the potential for increasing costs, our current customers are unlikely to abandon us.

In addition, many of our customers place small orders throughout the year. It takes a long time to build the business to cover overhead costs. For this reason, it is difficult for a supplier to enter into our industry. Most of Sterling Seal’s accounts are repeat customers with consistent demands for O-rings and custom-molded rubber.

Once we have the product in our warehouse, either if it is already in inventory or if we just received the shipment of the product from China, the Company is able to cost-effectively distribute products to local markets across the United States within two (2) business days because we have established multiple distribution factories over the course of our years of operating. This helps to expedite deliveries and reduce costs. This also gives us an advantage over our competitors. In addition, the vertical integration of our freight forwarding business, Integrity, with our primary operations through Sterling Seal helps us deliver products more cost-effectively.

We currently have relationships with domestic and international distributors. The Company intends to increase sales through acquisitions and investing in complementary corporations.

Blockchain

Our latest strategy is to utilize the Blockchain to build out the first Decentralized International Marketplace for O-rings called “DiMO”. The buildout is planned to be done through use of a proprietary internally developed cryptocurrency,” (also called “DiMO”) using the ERC20 token protocol over the Ethereum platform. A more detailed description of this strategy can be found in the Company’s Regulation A Offering Circular filed with the SEC on February 14, 2018.

Seasonality and Cyclical Nature of Business

We do not experience much seasonality or cyclical nature to our business. Our sales are consistent from month to month. However, we do experience a slight increase in volume at the beginning of the year because most of our customers have a budget and cash available to purchase products for the entire year. Also, during the summer months our sales are a little slower due to factory shutdowns and increased vacations by purchasing agents.

Patents, Trademarks, and Licenses

We have no current plans for any registrations such as patents, trademarks, copyrights, franchises, concessions, royalty agreements or labor contracts. We will assess the need for any copyright, trademark or patent applications on an ongoing basis.

Research and Development Activities and Costs

We are a supplier and distributor of products and, therefore, do not incur any research and development and have no plans to undertake any research and development activities during the next year of operations.

Government Regulation

We are not aware of the need for any governmental approvals of our products. Since we utilize contract manufacturers, regulations will be the responsibility of the contract manufacturers.  Before entering into any manufacturing contract we determine that the manufacturer has met all government requirements.

Environmental Laws (federal, state and local)

We do not believe that we will be subject to any environmental laws either state or federal.  Any laws concerning manufacturing and shipping will be the responsibility of the contract manufacturer.

Marketing

We currently have relationships with several companies located in the United States and overseas. The Company markets its products primarily through word of mouth and referrals from its customers.  We attend several trade shows during the course of the year specifically to market our products. We routinely attend the SEMA show in Las Vegas, NV which is one of the largest supplier shows of its kind for the automotive market.  In addition, we supply distributors and end users with the product necessary for steering wheels and transmissions kits.  Our largest customer is Freudenberg who sells replacements kits to John Deer and Harley Davidson, amongst many other companies. Other automotive customers are Precision International and Sonnax Transmissions. 

Another trade show is the Atlantic City Pool and Spa show.  We stock a variety of rubber seals to service the pool filter and pump manufacturers.  We also distribute our products to many resellers of replacement parts and pool stores.  Bay State Pool and Horizon Pool and Spa are two of our larger accounts in the pool industry.

A large portion of our customer base services the plumbing and industrial industries.  These accounts include, Fastenal, Kaman Industrial and Eastern Industrial.  They are localized to service a wide range of products, but they purchase O-Rings and rubber seals from Sterling Seal.

The marketing for ADDR and Q5, specifically the location of tenants, is through real estate agents.  The current agent of record for both companies is Sheldon Gross Realty, 80 Main Street, West Orange, New Jersey.

Integrity markets through direct sales and referrals only.

Employees

As of April 16, 2019 we have 31 full time employees. Our employees consist of: (i) salespersons; (ii) management and administrative; and (iii) warehouse and shipping operators.

Item 1A. Risk Factors.

Not applicable because we are a smaller reporting company.

Item 1B. Unresolved Staff Comments.

Not applicable because we are a smaller reporting company.

Item 2. Properties.

Our principal executive office is located at 1105 Green Grove Road, Neptune, New Jersey 07753, and our telephone number is (732) 918-8004. This facility is owned by our subsidiary, ADDR, and also serves as the principal executive office for each of our other subsidiaries. The Company does not pay rent to ADDR for the use of this facility.

We have sales offices at 34 North Liberty Street, in West Alexander, PA and 1200 A Corporation Drive, High Point, NC where we rent commercial space on a month-to-month basis.

In addition, we have a sales office located at 48 High Street, Norwell, Massachusetts 02061. This is a home office owned by 2 of our employees. We do not have a lease agreement or pay rent for them to use this as a home office.

In 2016 ADDR also owned a property in Cliffwood Beach, NJ which was rented to unaffiliated 3^rd parties. The property was sold in the 1^st quarter of 2016.

Item 3. Legal Proceedings.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Currently we are not involved in any litigation.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock trades on the OTC Pink under the symbol “STCC”. The OTC Pink is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities.

Approximate Number of Equity Security Holders

As of April 16, 2019, there were approximately 57 stockholders of record. Because shares of our common stock are held by depositaries, brokers and other nominees, the number of beneficial holders of our shares is substantially larger than the number of stockholders of record.

Dividends

Holders of our common stock are entitled to receive dividends if, as and when declared by the Board of Directors (the “Board”) out of funds legally available therefore. We have never declared or paid any dividends on our common stock. We intend to retain any future earnings for use in the operation and expansion of our business. Consequently, we do not anticipate paying any cash dividends on our common stock to our stockholders for the foreseeable future.

On February 14, 2018, the Company declared a property dividend in the form of its own internally developed cryptocurrency called “DiMO”. The dividend is payable on December 13, 2019. The dividend calls for 950 DiMO (the Company’s internally developed Ethereum based cryptocurrency, currently on the Rinkeby test network) to be distributed for each share of Sterling common stock held as of the November 22, 2019 Record Date.

Securities Authorized for Issuance under Equity Compensation Plans

We do not have in effect any compensation plans under which our equity securities are authorized for issuance.  

In the first quarter of 2018, the Company issued 750,000 shares to a consulting firm as partial payment for assistance in developing its proprietary cryptocurrency.

Item 6. Selected Financial Data.

Not applicable because we are a smaller reporting company.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information and financial data discussed below is derived from the audited financial statements of the Company for its fiscal year ended December 31, 2018.  The audited financial statements were prepared and presented in accordance with generally accepted accounting principles in the United States. The information and financial data discussed below is only a summary and should be read in conjunction with the historical financial statements and related notes contained elsewhere in this 10-K. The financial statements contained elsewhere in this 10-K fully represent the Company’s financial condition and operations; however, they are not indicative of the Company’s future performance. 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 10-K.

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, 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 and Q5. ADDR owns a 28,000 square foot facility in Neptune, New Jersey, that is primarily used by Sterling Seal for its operations. Q5 owns a 5,000 square foot facility that is used by Sterling Seal in Florida.

In addition, our subsidiary 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.

Results of Operations

Comparison of the year ended December 31, 2018 and 2017

Revenues

For the years ended December 31, 2018 and 2017 we generated revenues of $7,110,522 and $6,453,230, respectively. This represents an increase of $657,292 or approximately 10.19%. The reason for the increase was a combination of price increases, an increase in online sales in the Company’s online business coupled with overall growth in the industrial economy.

Total Cost of Sales

For the years ended December 31, 2018 and 2017 our overall cost of sales was $4,954,423 and $5,427,997, respectively. This represents a decrease of $473,574 or 8.72%. $444,464 of this difference is explained by the fact that in 2017 the Company had a write-down of obsolete inventory. The remainder is explained by the above-mentioned price increases and higher margins on the increased on-line sales.

Gross profit

For the years ended December 31, 2018 and 2017 our gross profit was $2,156,099 and $1,025,233, respectively. This represents an increase of $1,130,866 or 110.30%. This increase can be attributed to the above described one-time inventory adjustment for obsolete inventory in 2017 noted above, coupled with the price increases and increased higher gross margins on online sales.

Operating Expenses

For the years ended December 31, 2018 and 2017 we incurred operating expenses of $1,846,624 and $1,862,458, respectively. This represents a decrease of $15,834 or 0.8%. This decrease is explained by an increase of $112,500 related to R&D on the Company’s proprietary cryptocurrency offset by a decrease of $120,083 in general and administrative costs. The general and administrative costs decreased due to the fact that in fiscal 2017 the Company had a one-time compensation expense of $517,040 related to the granting of non-qualified stock options, which was then offset by increased salary due to higher headcount and increases in legal costs in 2018 related to the Company’s pending Reg A offering, and other legal matters.

Other Income/(expense)

For the years ended December 31, 2018 and 2017 the Company realized other expense of $152,140 and $24,284, respectively. This represents an increase of $127,756 or 524%. This increase is primarily attributed to a one-time refund of $89,865 in 2017; additionally, the Company suffered a one-time losses in 2018 of $20,498 on the disposal of the Company’s software.  

Net Loss

As a result of the above factors, our net loss was $66,726 for the year ended December 31, 2018, as compared to net loss of $531,356 for the year ended December 31, 2017. While the Company showed an Income before provision for income taxes of $157,335, the income tax expense was increased with a one-time charge related to the 2018 change in the tax laws which reduced the federal corporate tax rate from 35% to 21%, thus forcing the Company to write-down its deferred tax asset creating a tax loss disparate to the taxable income.

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 December 31, 2018, we had cash and cash equivalents of $32,034 as compared to $36,888 as of December 31, 2017, representing an decrease of $4,854. This decrease can be explained by net cash provided by operating activities of $102,510; net cash used in investing activities of $0; and net cash used in financing activities of $107,364. At December 31, 2018 and 2017, our working capital was approximately $466,435 and $28,205 respectively.

The cash flows from operating activities increased from net cash provided of $11,100 for the year ended December 31, 2017 to net cash provided of $102,510 for the year ended December 31, 2018. This increase is primarily attributed to income from operations.

The cash flows from investing activities reflects an increase of capital spending from net cash used of $13,144 for the year ended December 31, 2017 to net cash used of $0 for the year ended December 31, 2018. This increase can be explained by the fact there was no fixed asset purchase in 2018.

The cash flow from financing activities decreased from net cash provided of $32,118 for the year ended December 31, 2017 to net cash used of $107,364 for the year ended December 31, 2018. This decrease is primarily attributed to the fact that the Company paid down its mortgage and line of credit and obtained a new asset-based line of credit.

Bank Loans

On October 8, 2013, the Company obtained a line of credit with a New York City commercial bank. The line was for $1.25 million and carries a variable interest rate of 1.00% above the prime rate as published in the money rate tables of the Wall Street Journal. As of December 31, 2018 and 2017 the published prime rate was 5.50% and 4.50%, respectively. As of December 31, 2018 and 2017, the Company had drawn down $0 and $828,858, respectively, on the bank line of credit.

The Company’s mortgage was paid in full in the 4^th quarter of 2018. The mortgage had a variable rate of LIBOR plus 4.50% and matured in October of 2018.  

The Company refinanced both the line of credit and the mortgage with an asset-based line of credit from a New York-based asset based lender. The Company was authorized for a line of $2,500,000 and currently pays 7% per annum in interest. As of December 31, 2018 the Company had a balance of $1,775,452 outstanding on the asset-based line.

Critical Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A change in management’s estimates or assumptions could have a material impact on the Company’s financial condition and results of operations during the period in which such changes occurred. Significant estimates include the estimated depreciable lives of fixed assets, inventory reserves and allowance for doubtful accounts.

Actual results could differ from those estimates. The Company’s consolidated financial statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition and results of operations for the periods presented.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At times, balances in a single bank account may exceed federally insured limits.

Accounts Receivable

Accounts receivable, if any, are carried at the expected net realizable value. The allowance for doubtful accounts, when determined, will be based on management's assessment of the collectability of specific customer accounts and the aging of the accounts receivables. If there were a deterioration of a major customer's creditworthiness, or actual defaults were higher than historical experience, our estimates of the recoverability of the amounts due to us could be overstated, which could have a negative impact on operations.

Property, Plant and Equipment

Property and Equipment

Property and equipment are carried at historical cost of construction or purchase. Expenditures for maintenance and repairs are charged to operations as incurred. Renewals and betterments that materially extend the life of the assets are capitalized. Leasehold improvements are amortized over the lesser of the base term of the lease or estimated life of the leasehold improvements.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. The Company allocates 50% of its depreciation and amortization expenses to cost of sales.

Depreciation is computed for consolidated financial statement purposes on a straight-line basis over estimated useful lives of the related assets. The estimated useful lives of depreciable assets are:

Inventories

Inventories, which are comprised of finished goods, are stated at the lower of cost (based on the first-in, first-out method for 2017 and the average cost method for 2018) 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.

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.

Expenses

Cost of goods includes inventory costs, warehousing costs, direct labor and a depreciation allocation. Cost of inbound freight is included in cost of goods on the Statements of Operations.

Costs of services include direct costs for Freight services and Rental activities. The direct costs include agent fees, trucking, air and ocean freight and customs fees for the Freight services and repairs and maintenance and property taxes for the rental activities. Additionally, Cost of services includes direct labor for Freight services.

Sales and marketing includes direct labor and direct sales and marketing expenses.

General and administrative expenses include administrative and executive personnel, depreciation and other overhead expenses.

Advertising

Advertising expenses are recorded as sales and marketing expenses when they are incurred.

Income Tax

Sterling Seal and Integrity’s S-Corporation election terminated effective January 1, 2012 in connection with the expectation of the initial public offering of the Company’s common stock in 2012. From Sterling Seal and Integrity's inception in 1997 and 2008, respectively, the Companies were not subject to federal and state income taxes as they were operating under an S-Corporation election. As of January 1, 2012, both Sterling Seal and Integrity became subject to corporate federal and state income taxes.  The consolidated financial statements presented herein, are presented as if all consolidating entities were subject to C-corporation federal and state income taxes for the periods presented.

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, 2018 and 2017, the Company had no uncertain tax positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. The Tax years 2015 and 2016 and 2017 are subject to federal and state tax examination under the current statutes.

Fair Value Measurements

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 consolidated 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 material financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods other than the interest rate swap contract described below. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.

Recent Accounting Pronouncements

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

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities. 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable because we are a smaller reporting company.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None noted.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that, due to the control deficiencies that represent material weaknesses discussed below, 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, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. 

Management's Annual Report on Internal Control Over Financial Reporting.

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and Board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our CEO and CFO have determined and concluded that, as of December 31, 2018, the Company’s internal control over financial reporting was not effective. 

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 December 31, 2018: 

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.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. 

Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report, fourth quarter of the fiscal year ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The following table sets forth the name and age of officers and director as of April 16, 2019. Our Executive officers are elected annually by our Board. Our executive officers hold their offices until they resign, are removed by the Board, or his successor is elected and qualified.  

Set forth below is a brief description of the background and business experience of our executive officer and director for the past five years.

Angelo DeRosa, Chairman of the Board

Angelo DeRosa founded the Company’s predecessor entity, Sterling Plastic & Rubber Products, Inc. in 1970. Angelo currently serves as Chairman of the Board and is responsible for the financing and overall management of the entire organization. He also maintains key relationships with customers, banking institutions and industrial affiliations. Angelo studied Business Administration while attending Fairleigh Dickinson University. He is currently involved in multiple charitable organizations, including serving as treasurer of the Holmdel First Aid.

Darren DeRosa, Chief Executive Officer

Darren DeRosa has served as the chief executive officer of the Company since 2000. Darren runs the day-to-day operations of the Company, including managing business development projects in information technology, logistics and human resources, and seeking out potential acquisition targets. Darren earned a B.A. in Economics from Dickinson University and an M.B.A. from Monmouth University.

Scott Chichester, Chief Financial Officer

Scott R. Chichester CPA is the proprietor of Scott R. Chichester CPA, a New York City based accounting, tax and consulting firm.  Mr. Chichester is experienced in taxation, capital formation and the financial services industry. He focuses his practice in the following areas: (i) corporate taxation; (ii) financial statement preparation and (iii) consulting.  

Prior to establishing the firm in 2001, Mr. Chichester worked in the financial services division as an auditor for Ernst & Young in New York City.  Mr. Chichester then spent 5 years as an accountant in the Equities Controllers Division at Goldman Sachs Group LP.

Mr. Chichester founded DirectPay USA LLC, a payroll company in 2006 and founded Madison Park Advisors LLC, an advisory services company, in 2011. None of these companies are a parent, subsidiary or other affiliate of the registrant.

Other directorships held during the last 5 years:  Global X Funds (2008-2018) (ETF fund complex); 52 funds; ARK Investment Trust (ETF Fund Complex) (2014 – present) 6 funds; None of the funds in the fund complexes are a parent, subsidiary or other affiliate of the registrant; Adeptpros Inc. (CFO and Director since 2014); Bayview Acquisition Corp (2010-August 13, 2012).

Identification of Certain Significant Employees

Fred Zink, President of Sterling Seal

Fred Zink, 67, served as President of Sterling Seal since 2008 and retired in 2018. 

Mr. Zink has worked for Sterling Seal and no other employers for the past five. Additionally, he has never held any other directorships.

Family Relationship

The Company’s Chairman, Angelo DeRosa, is the father of the Company’s Chief Executive Officer, Darren DeRosa.

Involvement in Certain Legal Proceedings

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.

Term of Office

Our officers are appointed by our Board and hold office until removed by the Board.

Code of Ethics

We do not have a code of ethics that applies to our officers, employees and directors.

Corporate Governance

The business and affairs of the Company are managed under the direction of our Board. Each of our directors has attended all meetings either in person or via telephone conference. All communications from stockholders are relayed to the members of the Board.

Role in Risk Oversight

Our Board is primarily responsible for overseeing our risk management processes. The Board receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our Company’s assessment of risks. The Board focuses on the most significant risks facing our Company and our Company’s general risk management strategy, and also ensures that risks undertaken by the Company are consistent with the Board’s appetite for risk. While the board oversees our Company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that our board leadership structure supports this approach.

Section 16(a) Beneficial Ownership Reporting Compliance

The Company does not have a class of securities registered under the Exchange Act and therefore its directors, executive officers, and any persons holding more than ten percent of the Company’s common stock are not required to comply with Section 16 of the Exchange Act.

Item 11. Executive Compensation.

The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the years ended December 31, 2018, and 2017 in all capacities. Our named executive officers for 2018 and 2017 were our Chief Executive Officer, Chief Financial Officer, and the President of Sterling Seal. No other item of compensation was paid to any officer or director of the Company other than reimbursement of expenses.

 Summary Compensation Table

*this is an officer position

Outstanding Equity Awards at Fiscal Year-End Table

On December 26, 2017, Sterling Consolidated Corp. (“SCC” or the “Company”) entered into Non-Qualified Option Agreements (“Option Agreements”) with certain officers, directors employees and consultants, pursuant to the approval of the SCC Board of Directors on December 18, 2017. The Option Agreements provide that the options are fully vested upon issuance, and may be exercised for four or five year periods, depending upon the identity and position of the option grantee. The options may be exercised to purchase the Company’s common stock at an exercise price per option is $0.03 per share. The Option Agreements also provide for cashless and net exercise, restrictions on transferability, and certain termination provisions for cause.

Specific grants of options pursuant to the Option Agreements are as follows:

*Scott Chichester, CFO is the beneficial owner of Madison Park Advisors.

** Exercised in 2018.

 Compensation of Directors

The following table provides information for 2018 and 2017 regarding all compensation awarded to, earned by or paid to each person who served as a non-employee director for some portion or all of 2018 and 2017. Other than as set forth in the table, to date we have not paid any fees to or, except for reasonable expenses for attending Board and committee meetings, reimbursed any expenses of our directors, made any equity or non-equity awards to directors, or paid any other compensation to directors.

Employment Agreements

Currently, the CFO, Scott Chichester is under an employment agreement and is compensated at the rate of $58,400 per year.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The following table provides the names and addresses of each person known to us to own more than 5% of our outstanding shares of common stock as of April 16, 2019, and by the officers and directors, individually and as a group. Except as otherwise indicated, all shares are owned directly and the shareholders listed possesses sole voting and investment power with respect to the shares shown.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The following are the related party transactions in which we have engaged since January 1, 2013:

Throughout the history of the Company, the Chairman, Angelo DeRosa has periodically loaned the company money. The loan has a twenty year term maturing on December 31, 2031 and calls for principal and simple interest to be paid at various yearly intervals at the rate of three percent. For the year ended December 31, 2018, the Company accrued interest of $38,979, paid $245,309 and borrowed $241,950 on the related party note, leaving an ending balance on the note of $1,716,901. For the year ended December 31, 2017, the Company accrued interest of $45,507 and made cash repayments of $45,858 on the related party note, leaving an ending balance on the note of $1,681,281.

Director Independence

We do not have any independent directors. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination.  NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.  The NASDAQ listing rules provide that a director cannot be considered independent if:

Mr. Angelo DeRosa is not considered independent because he is the father of the Company’s Chief Executive Officer, Darren DeRosa.

We do not currently have a separately designated audit, nominating or compensation committee.

Item 14. Principal Accounting Fees and Services.

Audit Fees

For the Company’s fiscal years ended December 31, 2018 and 2017, we were billed approximately $25,000 and $40,000, respectively, for professional services rendered for the audit and review of our financial statements.

Audit Related Fees

There were $9,000, and $9,000 in fees billed for audit related services for the years ended December 31, 2018 and 2017, respectively.

Tax Fees

For the Company’s fiscal years ended December 31, 2018 and 2017, we were billed $0 and $0, respectively, for services rendered for tax compliance, tax advice, and tax planning.

All Other Fees

The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2018 and 2017.

We do not have an audit committee.  Our entire Board pre-approves all services provided by our independent auditors.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this report:

(1) Financial Statements and Reports of Independent Registered Public Accounting Firm, which are set forth in the index to Consolidated Financial Statements on pages F-1 through F-of this report.

(2) Financial Statement Schedule: None.

(3) 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 Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

STERLING CONSOLIDATED CORP.

REPORTS OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

AND

CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended

December 31, 2018 and 2017

TABLE OF CONTENTS

Boyle CPA, LLC

Certified Public Accountants & Consultants

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and

Board of Directors of Sterling Consolidated Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Sterling Consolidated Corp. (the “Company”) as of December 31, 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis of Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Boyle CPA, LLC

We have served as the Company’s auditor since 2019

Bayville, NJ

April 16, 2019

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Sterling Consolidated Corp.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sterling Consolidated Corp. (“the Company”) as of December 31, 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sterling Consolidated Corp. as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Sterling Consolidated Corp. consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal security laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Sadler, Gibb & Associates, LLC

We served as the Company’s auditor from 2013 to 2019.

Salt Lake City, UT

April 17, 2018

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements

STERLING CONSOLIDATED CORP

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements

STERLING CONSOLIDATED CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements

STERLING CONSOLIDATED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018 AND 2017

NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION

On June 8, 2012, in expectation of going public, a share exchange was effected in which Sterling Consolidated Corp., delivered 30,697,040 shares to shareholders of Sterling Seal and Supply, Inc. (“Sterling Seal”); 1,500,000 shares to the shareholders of Integrity Cargo Freight Corporation (“Integrity”); 540,000 shares to the members of Q5 Ventures, LLC (“Q5”) and 1,080,000 shares to the members of ADDR Properties, Inc. (“ADDR”). The existing shareholders of Sterling Consolidated Corp (“Sterling Consolidated” or “the Company”) retained 2,880,000 shares resulting in a total of 36,697,040 shares outstanding post-share exchange. The resultant structure is such that Sterling Consolidated is effectively a holding corporation with 100 percent ownership of Sterling Seal and Supply, Inc., Integrity, Q5 and ADDR. The consolidated financial statements presented herein are presented as if the share exchange had occurred at January 1, 2011.

Organization, Nature of Business, Stock Split, and Principles of Consolidation

Sterling Seal and Supply, Inc.

Sterling Seal and Supply, Inc. (“Sterling Seal”) is a New Jersey corporation founded in 1997 which distributes O-rings and other rubber products worldwide. Since 1980, Sterling and its predecessor, Sterling Plastic and Rubber Products, Inc. (founded in 1969), has been importing products from China for distribution. Sterling Seal focuses on quality and service by initially proving itself as a 2^nd or 3^rd source vendor.

Integrity Cargo Freight Corporation

On January 4, 2008, the principals of Sterling Seal founded Integrity Cargo Freight Corporation (“Integrity”) as a New Jersey Corporation. Integrity is a cargo and freight company that currently manages the importing of Sterling’s products from Asia and export to various other countries. In addition to providing freight forwarding services for the Company, Integrity has third-party customers. Integrity targets the Company’s customer base market but is able to acquire additional customers through the use of agents. Freight forwarding revenues and expenses are included in the operating income on the consolidated statement of operations presented herein.

ADDR Properties, LLC

ADDR Properties, LLC (“ADDR”) is a New Jersey limited liability company (“LLC”) formed on September 17, 2010 as a real estate holding company. ADDR owns a 28,000 square foot warehouse facility in Neptune, NJ and is occupied 90% by Sterling Seal to conduct its operations and 10% by the Children’s Center of Monmouth. The current lease agreement with the Children’s Center is for three (3) years.

The second property managed through ADDR was an investment property in Cliffwood Beach, NJ and was previously occupied by Sterling before the Company moved to its current location. Previously the Company rented this commercial space to other tenants, but sold the property in March of 2016. Rental revenues and expenses are included in other income on the consolidated statements of operations presented herein.

Q5 Ventures, LLC

Q5 Ventures, LLC is a Florida LLC formed on September 6, 2006. The LLC owns the commercial building in Florida from which the Florida division of Sterling operates. The 5,000 square foot facility was designed and built for the Company’s operations in 2008.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

These consolidated financial statements include the accounts of Sterling Consolidated Corp. and its four wholly-owned subsidiaries. The subsidiaries were acquired by Sterling Consolidated Corp. through a share exchange agreement effected on June 8, 2012. The consolidated financial statements presented herein, are presented as if the business combination via share exchange and the stock split in Sterling Seal and Supply, Inc. were effective at the beginning of the periods being reported on. ADDR, Integrity, Q5 and Sterling Seal were under the control of Angelo DeRosa and/or Darren DeRosa for the periods being reported on. All significant intercompany transactions have been eliminated. Hereafter the consolidated accounts of Sterling Consolidated Corp and its subsidiaries are referred to as “the Company”.

Use of Estimates

The preparation of consolidated financial statements in accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A change in management’s estimates or assumptions could have a material impact on the Company’s financial condition and results of operations during the period in which such changes occurred. Significant estimates include the estimated depreciable lives of fixed assets, inventory reserves and allowance for doubtful accounts.

Actual results could differ from those estimates. The Company’s consolidated financial statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition and results of operations for the periods presented.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At times, balances in a single bank account may exceed federally insured limits.

Accounts Receivable

Accounts receivable are carried at the expected net realizable value. The allowance for doubtful accounts is based on management's assessment of the collectability of specific customer accounts and the aging of the accounts receivables. The Company’s accounts receivable is presented net of allowances of $123,090 and $123,090 as of December 31, 2018 and 2017, respectively.

Inventories

On April 1, 2018 the Company elected to change its method of valuing inventory to the average cost method, whereas in all prior years inventory was valued using the FIFO method. Management believes that average cost is preferable under the current economic environment of low inflation. In accordance with ASC 250-10-45-9, the Company determined that it is impracticable to determine the cumulative effect of applying this change retrospectively because detailed records of inventory purchases and sales are no longer available for all periods prior to April 1, 2018. Accordingly, the Company did not recognize a cumulative effect adjustment in retained earnings related to this change. Sufficient information exists to apply the average cost method beginning April 1, 2018. As such, the new method has been applied prospectively to the Company’s inventory balances as of December 31, 2018.

Inventories, which are comprised of finished goods, are stated at the lower of cost (based on the first-in, first-out method for 2017 and the average cost method for 2018) 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, 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 $585,764 and $585,764 as of December 31, 2018 and 2017, respectively.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were $0 and $0 impairments of long-lived assets during the years ended December 31, 2018 and 2017, respectively.

Property and Equipment

Property and equipment are carried at historical cost of construction or purchase. Expenditures for maintenance and repairs are charged to operations as incurred. Renewals and betterments that materially extend the life of the assets are capitalized. Leasehold improvements are amortized over the lesser of the base term of the lease or estimated life of the leasehold improvements.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. The Company allocates 50% of its depreciation and amortization expenses to cost of sales.

Depreciation is computed for consolidated financial statement purposes on a straight-line basis over estimated useful lives of the related assets. The estimated useful lives of depreciable assets are:

Segment Reporting

ASC 280-10 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief decision maker in deciding how to allocate resources and in assessing performance. The Company has one main segment: O-rings and rubber products. Additionally, it has activities in freight services and rental services however, these activities are immaterial to the overall endeavor and therefore, segment information is not presented.

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 a contract with the customer is identified, the performance obligations in the contract are clear, the transaction price is determined, the transaction price is properly allocated and the performance obligations are satisfied. 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. The adaption of ASC 606 has not affected how Sterling has accounted for recognition of revenue under previous guidance and has therefore had no effect on revenue as previously reported in the Company’s interim or annual financial statements.

Cost of Sales

Cost of goods includes inventory costs, warehousing costs, direct labor and a depreciation allocation. Cost of inbound freight of $288,341 and $123,441 for the years ended December 31, 2018 and 2017, respectively, is included in cost of goods on the Statements of Operations.

Costs of services include direct costs for freight services and rental activities. The direct costs include agent fees, trucking, air and ocean freight and customs fees for the freight services and repairs and maintenance and property taxes for the rental activities. Additionally, cost of services includes direct labor for freight services.

Income Taxes

Sterling Seal and Integrity's S-Corporation election terminated effective January 1, 2012 in connection with the expectation of the initial public offering of the Company’s common stock in 2012. From Sterling Seal and Integrity's inception in 1997 and 2008, respectively, the Companies were not subject to federal and state income taxes as they were operating under an S-Corporation election. As of January 1, 2012, the both Sterling and Integrity became subject to corporate federal and state income taxes.  The consolidated financial statements presented herein, are presented as if all consolidating entities were subject to C-corporation federal and state income taxes for the periods presented.

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, 2018 and 2017, the Company had no uncertain tax positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. The tax years 2015 and 2016 and 2017 are subject to federal and state tax examination under the current statutes. 

Fair Value Measurements

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 consolidated 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 material financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods other than the interest rate swap contract described below. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.

Interest Rate Swap Contract

The Company employed an interest rate swap to manage interest rate risk on its variable mortgage note. The Company does not use swaps or other derivatives for trading or speculative purposes. The interest rate swap is recorded on the balance sheet at fair value. Cash flows associated with the interest rate swap are presented in the same category on the consolidated statements of cash flows as the item being hedged.

We designate our fixed-to-floating interest rate swap as a fair value derivative instrument. In 2013 the Company entered into an interest rate swap contract as an economic hedge against interest rate risk through 2018. Hedge accounting treatment per guidance in ASC 815-10 and related subsections was not pursued at inception of the contracts. Changes in the fair value of the derivatives are recorded in current earnings. The derivatives were recorded as a liability on the Company’s balance sheet at an aggregate fair value of $0 and $2,176 as of December 31, 2018 and 2017, respectively. As of December 31, 2018, the swap position was closed out due to the fact that the mortgage was paid in full in the 4^th quarter of 2018.

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31:

The fair value of the interest rate swap is determined using observable market inputs such as current interest rates, and considers nonperformance risk of the Company and that of its counterparts.

Concentration of Credit Risk

As of December 31, 2018 and 2017 one (1) customer represented 7.58% and 14.6% of accounts receivable, respectively. One (1) customer accounted for 11.0% and 8.3% of sales for the years ended December 31, 2018 and 2017, respectively.

Basic and Diluted Earnings (Loss) per Share

Basic earnings (loss) per share are computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the period end stock price is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

Reclassification

Certain balances in previously issued financial statements have been reclassified to be consistent with the current period presentation.

Recently Issued Accounting Standards

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.

NOTE 3 – PROPERTY AND EQUIPMENT

As of December 31, 2018 and 2017 the Company’s property and equipment consisted of the following:

Depreciation expense included as a charge to income for the years ended December 31, 2018 and 2017 was $99,104 and $126,837 respectively. In March of 2017, the Company sold its 2016 Jeep for $26,098 and recognized a loss of $2,505. Additionally, the Company abandoned its website in 2018 due to a change in software which resulted in a loss of $20,498.

NOTE 4 – INTANGIBLE ASSETS

Intangible assets consist of goodwill and of the unamortized portion of identified intangible assets (customer lists) recorded in connection with the asset acquisition. The following table presents the detail of intangible assets for the periods presented:

Amortization expense on definite-lived intangible assets (excluding goodwill) included as a charge to income was $17,102 and $17,202 for the years ended December 31, 2018 and 2017, respectively.

NOTE 5 – LINES OF CREDIT

On October 8, 2013, the Company obtained a line of credit with a New York City commercial bank. The line was for $1.25 million and carries a variable interest rate of 1.00% above the prime rate as published in the money rate tables of the Wall Street Journal. As of December 31, 2018 and 2017 the published prime rate was 5.50% and 4.50%, respectively. The Company retired the debt in the 4^th quarter of 2018. As of December 31, 2018 and 2017, the Company had a balance on the line of $0 and $828,858, respectively.

NOTE 6 – NOTES PAYABLE AND DEBT

At December 31, 2018 and 2017, long-term debt consisted of the following:

Future minimum principal payments due in each of the years subsequent to December 31, 2018 are as follows:

For the years ended December 31, 2018 and 2017, respectively, the Company recognized $46,918 and $37,252 in interest expense on long-term debt.

NOTE 7 – NOTES PAYABLE, RELATED PARTIES

Throughout the history of the Company, the Chairman, Angelo DeRosa has periodically loaned the company money. The loan has a twenty-year term maturing on December 31, 2031 and calls for principal and simple interest to be paid at various yearly intervals at the rate of three percent. For the year ended December 31, 2018, the Company accrued interest of $38,979, paid $245,309 and borrowed $241,950 on the related party note, leaving an ending balance on the note of $1,716,901. For the year ended December 31, 2017, the Company accrued interest of $45,507 and made cash repayments of $45,858 on the related party note, leaving an ending balance on the note of $1,681,281.

NOTE 8 – LEASE COMMITMENTS

The Company owns its offices and warehouse facilities in New Jersey and Florida. The Company's North Carolina and Pennsylvania facilities are currently under a month-to-month lease and have no future commitments.

The future minimum lease payments in the years subsequent to December 31, 2018 are as follows:

NOTE 9 – RETIREMENT PLAN

The Company maintains a defined contribution retirement plan for the benefit of eligible employees. The Company has frozen the retirement plan indefinitely. No employer contributions will be made until the plan is reactivated. As of December 31, 2018 and 2017, $0 and $1,106 was owed under the defined contribution retirement plan, respectively.

NOTE 10 – STOCKHOLDERS’ EQUITY

The Company has authorized 200,000,000 shares of common stock with par value of $0.001. As of December 31, 2018 and 2017 the Company had 41,965,540 and 40,715,540 shares of common stock issued and outstanding, respectively. On May 18, 2012, the Company authorized the issuance of 10,000,000 shares of preferred stock with a par value of $0.001. No shares of preferred stock have been issued as of the date of this filing. 

The holders of the Company’s common stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends of such times and in such amounts as the board from time to time may determine.  Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders.  There is no cumulative voting of the election of directors then standing for election.  The common stock is not entitled to preemptive rights and is not subject to conversion or redemption.  Upon liquidation, dissolution or winding up of the company, the assets legally available for distribution to stockholders are distributable ratably among the holders of the common stock after payment of liquidation preferences, if any, on any outstanding payment of other claims of creditors.

In 2017, the Company did not issue any shares of stock. In 2018 the Company issued 750,000 shares of stock to one consultant as partial payment for consulting and technical advice on development of the Company’s proprietary cryptocurrency. Additionally, one former executive purchased 500,000 shares of stock at $0.03/share by exercising his common stock options.

NOTE 11 – INCOME TAXES

The Company’s deferred tax assets and liabilities consist of the following:

The provisions for income taxes for the years ending December 31 consist of the following:

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax strategies in making this assessment.

The Company accounts for uncertain tax positions based upon authoritative guidance that prescribes a recognition and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return (ASC 740-10). The guidance also provides direction on derecognition and classification of interest and penalties.

Management has evaluated and concluded that there are no material uncertain tax positions requiring recognition in the financial statements for the year ended December 31, 2018.  The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses.

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes as follows:

NOTE 12 – NON-QUALIFIED OPTION GRANTS

On December 26, 2017, Sterling Consolidated Corp. (“SCC” or the “Company”) entered into Non-Qualified Option Agreements (“Option Agreements”) with certain officers, directors employees and consultants, pursuant to the approval of the SCC Board of Directors on December 18, 2017. The Option Agreements provide that the options are fully vested upon issuance, and may be exercised for four or five year periods, depending upon the identity and position of the option grantee. The options may be exercised to purchase the Company’s common stock at an exercise price per option is $0.03 per share. The Option Agreements also provide for cashless and net exercise, restrictions on transferability, and certain termination provisions for cause.

Specific grants of options pursuant to the Option Agreements are as follows:

The Company recognized $517,040 of compensation expense related to the non-qualified option grants in 2017.

*Options exercised in 2018.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

The Company is party to various legal actions arising in the ordinary course of business. Matters that are probable of unfavorable outcomes to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, the Company’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters.

As of the date of this report there are no material pending legal proceedings to which the Company is a party or of which any of its property is the subject, nor are there any such proceedings known to be contemplated by governmental authorities.

NOTE 14 – REVISION OF PRIOR YEAR FINANCIAL STATEMENTS:

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

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

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

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

NOTE 15 – SUBSEQUENT EVENTS

In the first quarter of 2019, the Company acquired F&S Distributors, Inc., a Jackson, NJ distributor that has been in business since 1960. The acquisition was accounted for as an asset purchase and the purchase price was $900,000 with $300,000 paid in cash at closing. The remainder of the purchase price of $600,000 was paid with the issuance of 5,319,149 shares of common stock to the seller.