Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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.
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).
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.
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).
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.
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:
|
|
-
|
Progum Elastomer Technology Co., Ltd.
|
|
|
-
|
Rubber Best Industry Corp.
|
|
|
-
|
Goodway Rubber Ind Co Ltd
|
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 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.
|
Name
|
|
Age
|
|
Position
|
|
Angelo DeRosa
|
|
76
|
|
Chairman of the Board
|
|
Darren DeRosa
|
|
44
|
|
Chief Executive Officer
|
|
Scott Chichester
|
|
48
|
|
Chief Financial Officer
|
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:
|
|
·
|
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
|
·
|
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
|
|
|
·
|
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
|
|
|
·
|
been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
|
|
|
·
|
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
|
|
·
|
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
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
Name and
Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Totals
($)
|
|
Darren DeRosa,
Chief Executive Officer
|
|
|
2017
|
|
|
$
|
152,210
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
152,210
|
|
|
|
|
|
2018
|
|
|
$
|
157,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
157,500
|
|
Scott Chichester,
Chief Financial Officer
|
|
|
2017
|
|
|
$
|
52,400
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
52,400
|
|
|
|
|
|
2018
|
|
|
$
|
58,400
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
58,400
|
|
Fred Zink,
President of Sterling Seal
|
|
|
2017
|
|
|
$
|
86,160
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
86,160
|
|
|
|
|
|
2018
|
|
|
$
|
55,360
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
55,360
|
|
|
Angelo DeRosa,Chairman of the Board*
|
|
|
2017
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8,000
|
|
|
$
|
8,000
|
|
|
|
|
|
2018
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8,000
|
|
|
$
|
8,000
|
|
*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 $0.03 per share. The Option Agreements also provide for cashless and net exercise,
restrictions on transferability, and certain termination provisions for cause.
Specific grants of options pursuant to
the Option Agreements are as follows:
|
Name and Title of Optionee
|
|
Number of Options Granted
|
|
|
Exercise Period
|
|
|
|
|
|
|
|
|
Angelo DeRosa, Chairman
|
|
|
3,100,000
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
Darren DeRosa, CEO
|
|
|
3,100,000
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
Scott Chichester, CFO*
|
|
|
3,100,000
|
|
|
4 Years
|
|
|
|
|
|
|
|
|
|
Madison Park Advisors Corp.*
|
|
|
500,000
|
|
|
4 Years
|
|
|
|
|
|
|
|
|
|
Fred Zink, SCC Employee
|
|
|
500,000**
|
|
|
4 Years
|
|
|
|
|
|
|
|
|
|
John Magoulis, SCC Employee
|
|
|
500,000
|
|
|
4 Years
|
*Scott Chichester, CFO is the beneficial
owner of Madison Park Advisors.
** Exercised in 2018.
Compensation of Directors
The following table provides information
for 2018 and 2017 regarding all compensation awarded to, earned by or paid to each person who served as a non-employee director
for some portion or all of 2018 and 2017. Other than as set forth in the table, to date we have not paid any fees to or, except
for reasonable expenses for attending Board and committee meetings, reimbursed any expenses of our directors, made any equity or
non-equity awards to directors, or paid any other compensation to directors.
Name and
Principal
Position
|
|
Year
|
|
|
Fees Earned
($)
|
|
|
Stock
Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Totals
($)
|
|
|
Angelo DeRosa,
|
|
|
2017
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Chairman of the Board
|
|
|
2018
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Darren DeRosa,
|
|
|
2017
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Director
|
|
|
2018
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Scott Chichester,
|
|
|
2017
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Director
|
|
|
2018
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
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.
|
Name
|
|
Number of Shares
Beneficially Owned
|
|
|
Percent of Class
(1)
|
|
Angelo DeRosa (2)
1105 Green Grove Road
Neptune, New Jersey 07753
|
|
|
16,702,759
|
(5)
|
|
|
39.80
|
%
|
|
|
|
|
|
|
|
|
|
|
Darren DeRosa (3)
1105 Green Grove Road
Neptune, New Jersey 07753
|
|
|
16,260,000
|
(6)
|
|
|
38.75
|
%
|
|
|
|
|
|
|
|
|
|
|
Scott R. Chichester (4)
80 Pine St. Ste 3302
New York, NY 10005
|
|
|
1,027,000
|
|
|
|
2.45
|
%
|
|
|
|
|
|
|
|
|
|
|
Fred Zink
1105 Green Grove Road
Neptune, New Jersey 07753
|
|
|
35,000
|
|
|
|
.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
All Executive Officers and Directors as a group (4 persons)
|
|
|
34,024,759
|
|
|
|
81.08
|
%
|
|
|
(1)
|
Based on 41,965,540 shares of common stock outstanding as of April 16, 2019.
|
|
|
(2)
|
Angelo DeRosa is the Chairman of the Board of the Company.
|
|
|
(3)
|
Darren DeRosa is the Chief Executive Officer of the Company and a Director.
|
|
|
(4)
|
Scott Chichester is the Chief Financial Officer of the Company and a Director.
|
|
|
(5)
|
Includes 16,432,759 shares issued to Angelo DeRosa and 270,000 shares issued to Darleen DeRosa who is his wife.
|
|
|
(6)
|
Includes 15,990,000 shares issued to Darren DeRosa and 270,000 shares issued to Kaveeta DeRosa who is his wife.
|
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:
|
|
·
|
the director is, or at any time during the past three years was, an employee of the company;
|
|
|
·
|
the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for Board or Board committee service);
|
|
|
·
|
a family member of the director is, or at any time during the past three years was, an executive officer of the company;
|
|
|
·
|
the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
|
|
|
·
|
the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or
|
|
|
·
|
the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.
|
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.
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.
|
Inventory Type
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Finished goods
|
|
$
|
3,145,900
|
|
|
$
|
3,090,939
|
|
|
Raw materials
|
|
|
-
|
|
|
|
-
|
|
|
Work-in-progress
|
|
|
-
|
|
|
|
-
|
|
|
Inventory Reserve
|
|
|
(585,764
|
)
|
|
|
(585,764
|
)
|
|
Net Inventory
|
|
$
|
2,560,136
|
|
|
$
|
2,505,175
|
|
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:
|
Classification
|
|
Estimated
Useful Lives
|
|
Building and leasehold improvements
|
|
10 – 40 years
|
|
Machinery and equipment
|
|
5 – 10 years
|
|
Furniture and fixtures
|
|
5 – 10 years
|
|
Vehicles
|
|
10 years
|
|
Software
|
|
3 years
|
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.
|
|
§
|
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
|
§
|
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc…).
|
|
|
§
|
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
|
The Company’s adoption of FASB ASC
Topic 825, effectively at the beginning of the second quarter in FY 2010, did not have a material impact on the company’s
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:
|
Year
|
|
Instrument
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2018
|
|
Interest rate swap derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
2017
|
|
Interest rate swap derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,176
|
|
|
$
|
2,176
|
|
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:
|
|
|
2018
|
|
|
2017
|
|
|
Land, building & leasehold improvements
|
|
$
|
1,815,726
|
|
|
$
|
1,815,726
|
|
|
Machinery and equipment
|
|
|
990,055
|
|
|
|
1,065,127
|
|
|
Vehicles
|
|
|
246,659
|
|
|
|
246,659
|
|
|
Total property and equipment
|
|
|
3,052,440
|
|
|
|
3,127,512
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
1,420,826
|
|
|
|
1,376,296
|
|
|
Property and equipment, net
|
|
$
|
1,631,614
|
|
|
$
|
1,751,216
|
|
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:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Identified intangible assets (customer lists)
|
|
|
290,097
|
|
|
|
290,097
|
|
|
Impairment of customer lists
|
|
|
(135,773
|
)
|
|
|
(135,773
|
)
|
|
Accumulated amortization
|
|
|
(85,419
|
)
|
|
|
(68,317
|
)
|
|
Intangible assets, net
|
|
$
|
68,905
|
|
|
$
|
86,007
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life
|
|
|
4 years
|
|
|
|
5 years
|
|
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:
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Mortgage payable, due in monthly installments of principal and interest through October 8, 2018. Interest is charged variably at 2.25% above the LIBOR rate. Secured by the assets of the Company and personal guarantee of the Chairman of the Board and the CEO. The note is amortized over a 20-year period but has a 5-year maturity, which will require refinancing in October of 2018.
|
|
$
|
-
|
|
|
$
|
1,085,802
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle loan secured by the vehicle, maturing on September 8, 2022. Interest is charged at 3.99% per annum.
|
|
$
|
12,645
|
|
|
$
|
19,353
|
|
|
Total long-term debt
|
|
|
15,577
|
|
|
|
1,105,155
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion of long-term debt
|
|
|
(3,929
|
)
|
|
|
(1,089,578
|
)
|
|
Long-term debt
|
|
$
|
11,648
|
|
|
$
|
15,577
|
|
Future minimum principal payments due in
each of the years subsequent to December 31, 2018 are as follows:
Years Ending
December 31
|
|
Future Minimum
Principal
Payments
|
|
|
2019
|
|
$
|
3,929
|
|
|
2020
|
|
|
4,089
|
|
|
2021
|
|
|
4,255
|
|
|
2022
|
|
|
3,304
|
|
|
2023
|
|
|
-
|
|
|
Total
|
|
$
|
15,577
|
|
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:
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
|
Vehicles
|
|
$
|
29,328
|
|
|
$
|
21,676
|
|
|
$
|
-
|
|
|
$
|
51,004
|
|
|
Property
|
|
|
5,075
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,075
|
|
|
Subtotal
|
|
$
|
34,403
|
|
|
$
|
21,676
|
|
|
$
|
-
|
|
|
$
|
56,079
|
|
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:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Current Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
32,656
|
|
|
$
|
50,282
|
|
|
Net operating loss carryforward
|
|
|
218,800
|
|
|
|
342,515
|
|
|
Vacation Accrual
|
|
|
2,612
|
|
|
|
9,705
|
|
|
Total
|
|
|
254,068
|
|
|
|
402,502
|
|
|
Valuation Allowance
|
|
|
-
|
|
|
|
-
|
|
|
Current Deferred Tax Asset, net
|
|
|
254,068
|
|
|
|
402,502
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,900
|
|
|
|
67,014
|
|
|
Goodwill
|
|
|
53,552
|
|
|
|
64,065
|
|
|
Total
|
|
|
55,452
|
|
|
|
131,079
|
|
|
Valuation Allowance
|
|
|
-
|
|
|
|
-
|
|
|
Noncurrent Deferred Tax Asset, net
|
|
$
|
309,520
|
|
|
$
|
131,079
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax - Asset, net
|
|
$
|
309,520
|
|
|
$
|
533,581
|
|
The provisions for income taxes for the
years ending December 31 consist of the following:
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Deferred tax expense (benefit)
|
|
$
|
180,007
|
|
|
$
|
(108,139
|
)
|
|
Current provision
|
|
|
44,054
|
|
|
|
(222,114
|
)
|
|
Total Provision for (Benefit of) Income Taxes
|
|
$
|
224,061
|
|
|
$
|
(330,253
|
)
|
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:
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Amount
|
|
|
Impact on
Rate
|
|
|
Amount
|
|
|
Impact on
Rate
|
|
|
Income tax at federal rate
|
|
$
|
33,040
|
|
|
|
21.00
|
%
|
|
$
|
(301,563
|
)
|
|
|
35.00
|
%
|
|
State tax, net of Federal effect
|
|
|
11,013
|
|
|
|
7.00
|
%
|
|
|
(20,304
|
)
|
|
|
2.35
|
%
|
|
Total permanent differences
|
|
|
0
|
|
|
|
-
|
%
|
|
|
180,088
|
|
|
|
(20.90
|
)%
|
|
Effect of 2018 Tax Law and Temporary Diff
|
|
|
224,061
|
|
|
|
142.40
|
%
|
|
|
(188,474
|
)
|
|
|
21.87
|
%
|
|
NOL deduction
|
|
|
(44,053
|
)
|
|
|
(28.00
|
)%
|
|
|
0
|
|
|
|
0
|
%
|
|
Tax credits
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
Valuation allowance
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
Total Provision
|
|
$
|
224,061
|
|
|
|
142.40
|
%
|
|
$
|
(330,253
|
)
|
|
|
38.32
|
%
|
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:
|
Name and Title of Optionee
|
|
Number of Options Granted
|
|
|
Exercise Period
|
|
|
|
|
|
|
|
|
Angelo DeRosa, Chairman
|
|
|
3,100,000
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
Darren DeRosa, CEO
|
|
|
3,100,000
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
Scott Chichester, CFO
|
|
|
3,100,000
|
|
|
4 Years
|
|
|
|
|
|
|
|
|
|
Madison Park Advisors Corp.
|
|
|
500,000
|
|
|
4 Years
|
|
|
|
|
|
|
|
|
|
Fred Zink, SCC Former Employee*
|
|
|
500,000
|
|
|
4 Years
|
|
|
|
|
|
|
|
|
|
John Magoulis, SCC Employee
|
|
|
500,000
|
|
|
4 Years
|
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:
|
|
|
December 31, 2017
|
|
|
|
|
As
Previously
Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term notes payable, related parties
|
|
$
|
-
|
|
|
$
|
52,702
|
|
|
$
|
52,702
|
|
|
Current portion of long-term notes payable
|
|
|
31,183
|
|
|
|
1,058,395
|
|
|
|
1,089,578
|
|
|
Total Current Liabilities
|
|
|
2,197,536
|
|
|
|
1,111,097
|
|
|
|
3,308,633
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable, related parties
|
|
|
1,681,281
|
|
|
|
(52,702
|
)
|
|
|
1,628,579
|
|
|
Long-term notes payable
|
|
|
1,073,972
|
|
|
|
(1,058,395
|
)
|
|
|
15,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
4,952,789
|
|
|
$
|
-
|
|
|
$
|
4,952,789
|
|
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.