Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Cautionary Notice Regarding Forward
Looking Statements
The information contained in Item 2 contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements
as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made
and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions
will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.
This filing contains a number of forward-looking
statements which reflect management’s current views and expectations with respect to our business, strategies, products,
future results and events, and financial performance. All statements made in this filing other than statements of historical fact,
including statements addressing operating performance, events, or developments which management expects or anticipates will or
may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products,
adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information,
are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements,
but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking.
These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results,
performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied
by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any
future events or circumstances.
Readers should not place undue reliance
on these forward-looking statements, which are based on management’s current expectations and projections about future events,
are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below),
and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future events, or otherwise.
Overview
We were incorporated in the State of Nevada
as Oceanview Acquisition Corp. on January 31, 2011. On May 18, 2012, we amended our Articles of Incorporation to change our name
to Sterling Consolidated Corp.
Our largest subsidiary is Sterling Seal
& Supply, Inc. (“Sterling Seal”), a New Jersey corporation which was incorporated in 1997. Its predecessor was
Sterling Plastic & Rubber Products, Inc., incorporated in New Jersey and founded in 1970. Sterling Seal engages primarily in
the distribution and sale of O-rings, rubber seals, oil seals, custom molded rubber parts, custom Teflon parts, Teflon rods, O-ring
cord, bonded seals, O-ring kits, and stuffing box sealant.
We also own real property through our subsidiaries
ADDR Properties, LLC (“ADDR”) and Q5 Ventures, LLC (“Q5”). ADDR owns a 28,000 square foot facility in Neptune,
New Jersey, that is primarily used by Sterling Seal for its operations.
In addition, our subsidiary Integrity Cargo
Freight Corporation (“Integrity”) is a freight forwarding business. Integrity shares a facility with Sterling Seal
and manages the importation of Sterling Seal’s products and exports products on behalf of Sterling Seal to various countries.
Currently 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 does not bear any foreign
exchange risk on open payables.
Results of Operations
Comparison for the three months ended
June 30, 2016 and 2015
Revenue
Revenue decreased by approximately $129,505
or approximately 7.7%, from $1,685,863 for the three months ended June 30, 2015 to $1,556,358 for the three months ended June 30,
2016. This decrease is due primarily to a slow-down in the mining sector which reduced demand for o-rings and reduction in sales
to two larger clients due to technological advances in their product manufacturing.
Total Cost of Sales
Cost of sales decreased by approximately
$85,004 or approximately 7%, from $1,199,866 for the three months ended June 30, 2015 to $1,114,862 for the three months ended
June 30, 2016. The decrease in cost of sales was attributed to a commensurate decrease in revenues.
Gross profit
Gross profit decreased approximately $44,501,
or approximately 9.2%, from $485,997 for the three months ended June 30, 2015 to $441,496 for the three months ended June 30, 2016.
This decrease can be attributed primarily to the above described revenue and cost of sales decreases.
Net Loss
As a result of the above factors, our net
income was $685 for the three months ended June 30, 2016, as compared to net loss of $16,242 for the three months ended June 30,
2015. This was an increase of $16,927 or approximately 104%.
Comparison for the six months ended
June 30, 2016 and 2015
Revenue
Revenue decreased by approximately $385,060
or approximately 11.3%, from $3,423,529 for the six months ended June 30, 2015 to $3,038,469 for the six months ended June 30,
2016. This decrease is due to decreased demand for o-rings in the mining sector and reduction in purchases from two customers due
to technological advances in their products that reduced the need for o-rings.
Total Cost of Sales
Cost of sales decreased by $246,393 or
approximately 10.0%, from $2,462,911 for the six months ended June 30, 2015 to $2,216,518 for the six months ended June 30, 2016.
The decrease in cost of sales was attributed to a commensurate decrease in sales.
Gross profit
Gross profit decreased approximately $138,667,
or approximately 14%, from $960,618 for the six months ended June 30, 2015 to $821,951 for the six months ended June 30, 2016.
This decrease can be attributed to the above described changes in revenue and cost of sales.
Net Loss
As a result of the above described changes
in revenue and cost of sales, our net loss was $73,232 for the six months ended June 30, 2016, as compared to a net loss of $73,097
for the six months ended June 30, 2015. This was an increased loss in the amount of $135 or approximately 0%. This relative unchanging
position can be explained by reduced general and administrative costs attributed to a reduction in professional fees coupled with
reduced headcount, partially offset by a one-time loss on the sale of the Company’s Cliffwood Beach building in the amount
of $39,910.
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 June 30, 2016, we had cash and cash
equivalents of approximately $62,323 as compared to approximately $31,429 as of December 31, 2015, representing an increase of
$30,894. This increase can be explained by net cash used by operating activities of $99,709 primarily attributed to a decrease
in other assets of $77,664; net cash provided by investing activities of $562,327 due to the sale of the Company’s Cliffwood
Beach building and net cash used in financing activities of $431,724, primarily attributed to paying down the Company’s line
of credit. At June 30, 2016, our working capital was approximately $1,470,973.
The cash flow from operating activities
decreased from net cash provided of $107,986 for the six months ended June 30, 2015 to net cash used of $99,709 for the six months
ended June 30, 2016. This decrease of $207,695 is primarily attributed to an increase in prepaid software costs and other assets
of $77,664 coupled with reductions of accounts payable and accrued expenses of $29,479, other liabilities of $40,242 and deferred
tax assets of $26,534.
The cash flow from investing activities
increased from net cash used of $76,880 for the six months ended June 30, 2015 to net cash provided of $562,327 for the six months
ended June 30, 2016. This increase is primarily attributed to the fact that in the 6 months ended June 30, 2016 the company sold
its Cliffwood Beach building.
The cash flow from financing activities
decreased from net cash provided of $40,135 for the six months ended June 30, 2015 to net cash used of $431,724 for the six months
ended June 30, 2016. This decrease is primarily attributed to paying down approximately $411,000 of the Company’s line of
credit.
Bank Loans
The Company refinanced its debt in 2013
with a New York commercial bank and there are currently a $1.25 million line of credit and a $1,200,000 mortgage outstanding. The
line of credit calls for a variable interest rate of the Wall St. Journal published prime rate plus 1% and requires an annual review.
The mortgage has a variable rate of LIBOR plus 4.25% and is for a 5-year term expiring in October of 2018. The Company is currently
out of compliance with one of its covenants and has requested a waiver from the bank.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial
Statements, in accordance with accounting principles generally accepted in the United States, requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures pertaining to
contingent assets and liabilities. Note 2, “Significant Accounting Policies,” to the Consolidated Financial Statements
describes the significant accounting policies used to prepare the Consolidated Financial Statements. On an ongoing basis we evaluate
our estimates, including, but not limited to, those related to bad debts, inventories, income taxes, and contingencies. We base
our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual
results may differ from our estimates.
We believe the following accounting policies
and estimates are the most critical. Some of them involve significant judgments and uncertainties and could potentially result
in materially different results under different assumptions and conditions.
Revenue recognition
The Company recognizes
revenue based on Account Standards Codification
(“ASC”) 605 “Revenue Recognition”
which
contains Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements’
and No. 104, “Revenue Recognition”. In the case of Sterling, revenue is recognized only when the price is fixed
or determinable, persuasive evidence of an arrangement exists, shipment of the product has occurred, price is fixed or determinable
and collectability of the resulting receivable is reasonably assured. For provision of third-party freight services provided
by Integrity, revenue is recognized on a gross basis in accordance with ASC 605-45 " Revenue Recognition: Principal Agent
Considerations " since Integrity is the primary obligor in its shipping arrangements. Revenue is generally recognized when
the contracted goods arrive at their destination point. When revenues and expenses straddle a period end due to the time between
shipment and delivery, Integrity allocates revenue between reporting periods based on relative transit time in each period with
expenses recognized as incurred. Cost of goods is comprised of sale of o-rings and related rubber products. Freight services is
comprised of freight forwarding and related services earned by Integrity and Rental services is comprised of revenue from rental
of commercial space to third parties.
Income taxes
Under the asset and liability method prescribed
under
ASC 740, Income Taxes
, the Company uses the liability method of accounting for income taxes. The liability
method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date
to the differences between the tax basis of assets and liabilities and their reported amounts on the financial
statements. The resulting deferred tax assets or liabilities have been adjusted to reflect changes in tax laws as they
occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
The Company recognizes the financial statement
benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in
an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount to be recognized in the financial
statements will be the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the
threshold, no financial statement benefit is recognized. As of December 31, 2015, the Company had no uncertain tax positions.
Fair values of financial instruments
In January 2010, the FASB ASC Topic 825,
Financial Instruments
, requires
disclosures about fair value of financial instruments in quarterly reports as
well as in annual reports. For the Company, this statement applies to certain investments and long-term debt. Also,
the FASB ASC Topic 820,
Fair Value Measurements and Disclosures,
clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
Various inputs are considered when determining
the value of the Company’s investments and long-term debt. The inputs or methodologies used for valuing securities
are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized
in the three broad levels listed below.
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Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
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Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).
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Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
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The Company’s adoption of FASB ASC
Topic 825, effectively at the beginning of the second quarter in FY 2010, did not have a material impact on the company’s
financial statements.
The carrying value of financial assets
and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured
on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial
assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities
measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.
Stock-based compensation
The Company records stock-based compensation
at fair value of the stock provided for services. The Company currently does not have any issued and outstanding stock options
or other derivatives.
Recent Accounting Pronouncements
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 have no off-balance sheet arrangements.
