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 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 Properties, LLC (“ADDR”) and Q5 Ventures, LLC (“Q5”). ADDR owns a 28,000 square foot facility in Neptune,
New Jersey, that is primarily used by Sterling Seal for its operations. ADDR used to own another property in Cliffwood Beach, New
Jersey, that was previously occupied by Sterling Seal and is now rented out to tenants. In March of 2016, the Company sold its
commercial building in Cliffwood Beach. The sale price was $625,000 and the Company recognized a loss on the sale of $39,910. Q5
owns a 5,000 square foot facility that is used by Sterling Seal in Florida.
In addition, our subsidiary Integrity Cargo
Freight Corporation (“Integrity”) is a freight forwarding business. Integrity shares a facility with Sterling Seal
and manages the importation of Sterling Seal’s products and exports products on behalf of Sterling Seal to various countries.
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
September 30, 2017 and 2016
Net Revenue
Net revenue
increased by approximately $202,701 or approximately 14.6%, from $1,384,248 for the three months ended September 30, 2016 to $
1,586,949
for the three months ended September 30, 2017. This increase was due primarily to increased demand
from the industrial sector.
Total Cost of Sales
Cost of sales increased by $485,274 or
approximately 15%, from $3,136,832 for the nine months ended September 30, 2016 to $3,622,106 for the nine months ended September
30, 2017. The increase in cost of sales was attributed to a commensurate increase in sales.
Gross profit
Gross profit
decreased by $93,718 or approximately 20.2%, from $
463,934
for the three months ended September
30, 2016 to $370,216 for the three months ended September 30, 2017. This decrease was due primarily to the above described increase
in higher labor due to increased warehouse headcount in the current quarter.
Net Income
As a result of the above factors, the Company
showed a net income of $83,161 for the three months ended September 30, 2017, as compared to a net loss of $13,888 for the three
months ended September 30, 2016. This increase of $97,049or approximately 699% is primarily attributed to the above described increase
in sales coupled with an increase in other income of $99,694 composed of a write-off of a vendor payable of $78,973 plus a refund
on a copier lease of $20,547. Additionally, general and administrative costs decreased by $30,449 over the same period which was
primarily attributed to a decrease of $21,431 in legal and accounting costs coupled with a decrease of approximately $17,000 in
payroll due to decreased administrative headcount.
Comparison for the nine months ended
September 30, 2017 and 2016
Revenue
Revenue increased by approximately $517,278
or approximately 12%, from $4,422,717 for the nine months ended September 30, 2016 to $4,939,995 for the nine months ended September
30, 2017. This increase is due to increased demand for o-rings in the industrial sector.
Total Cost of Sales
Cost of sales increased by $485,274 or
approximately 15%, from $3,136,832 for the nine months ended September 30, 2016 to $3,622,106 for the nine months ended September
30, 2017. The increase in cost of sales was attributed to a commensurate increase in sales.
Gross profit
Gross profit increased by approximately
$32,004 or approximately 2%, from $1,285,885 for the nine months ended September 30, 2016 to $1,317,889 for the nine months ended
September 30, 2017. This increase 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 income was $157,662 for the nine months ended September 30, 2017, as compared to a net loss
of $87,120 for the nine months ended September 30, 2016. This was an increase of $244,782 or approximately 281%. This increase
can be explained by increased sales coupled with the previously described reduced general and administrative costs and increase
of $99,521 increase in other income in the third quarter.
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, revolving borrowings,
loans from officers, notes payable and cash generated from operations.
On September 30, 2017, we had cash and
cash equivalents of approximately $14,264 as compared to approximately $6,814 as of December 31, 2016, representing an increase
of $7,450. This increase can be explained by net cash provided by operating activities of $36,907 primarily attributed to an increase
in accounts receivable of $246,129 and an increase of inventory of $207,323 offset by an increase in accounts payable of $318,366;
net cash flows used in investing activities of $32,984 from the purchase of fixed assets; and net cash provided by financing activities
of $3,527 primarily attributed to a net borrowing of a bank line of credit in the amount of $30,000 offset by a paydown on notes
payable of $65,084 and a proceeds from related party loan of $38,611. On September 30, 2017, our working capital was approximately
$1,660,420.
The cash flow from operating activities
increased from net cash used of $118,109 for the quarter ended September 30, 2016 to net cash provided of $36,907 for the quarter
ended September 30, 2017. This increase of $155,016 is primarily attributed to an increase in net income.
The cash flow from investing activities
decreased from cash provided of $589,712 for the quarter ended September 30, 2016 to net cash used of $32,984. This decrease is
attributed to the fact that in the 1
st
quarter of 2016, the Company realized cash on the sale of its Cliffwood Beech
property in the amount of $562,237. In August 2017, the Company purchased a new HVAC unit for $13,144.
The cash flow from financing activities
increased from net cash used of $482,353 for the quarter ended September 30, 2016 to net cash provided of $3,527 for the quarter
ended September 30, 2017. This is primarily attributed to the fact that the Company made a large paydown on the bank line of credit
(sourced from the sale do the Cliffwod Beach property) in the amount of $411,000 in the first quarter of 2016.
Bank Loans
The cash flow from financing activities
increased from net cash used of $482,353 for the quarter ended September 30, 2016 to net cash provided of $3,527 for the quarter
ended September 30, 2017. This is primarily attributed to the fact that the Company made a large paydown on the bank line of credit
(sourced from the sale of the Cliffwood Beach property) in the amount of $411,000 in the first quarter of 2016.
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 Seal, 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 September 30, 2017, 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.
