STERLING CONSOLIDATED CORP. 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
Our largest subsidiary is
We also own real property through our subsidiaries
In addition, our subsidiary
Results of Operations
Comparison for the three months ended
Net Revenue
Net revenue increased by approximately
3
Total Cost of Sales
Cost of sales increased by approximately
Gross profit
Gross profit decreased by
Net Income
As a result of the above factors, the Company showed a net loss of
Comparison for the six months ended
Net Revenue
Net revenue increased by approximately
Total Cost of Sales
Cost of sales increased by approximately
Gross profit
Gross profit increased by
Net Income
As a result of the above factors, the Company showed a net loss of
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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.
On
The cash flow used in operating activities increased from net cash used of
The cash flow from investing activities decreased from cash used of
The cash flow from financing activities decreased from net cash provided of
Debt Transactions Asset Based Loan
The Company refinanced its debt in 2018 with a
Mortgage Note
The Company obtained a mortgage on its
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COVID-19 related financing:
PPP Note
On
Under the terms of the PPP Note and the PPP, interest accrues on the outstanding
principal at the rate of 1.0% per annum with a deferral of payments for the
first six months. The term of the PPP Note is two years, though it may be
payable sooner in connection with an event of default under the PPP Note. To the
extent the amount of the PPP Loan is not forgiven under the PPP, Sterling Seal
will be obligated to make equal monthly payments of principal and interest
beginning after a six-month deferral period provided in the PPP Note and through
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, Sterling Seal may apply for forgiveness for all or a part of the PPP Loan. The amount of PPP Loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including: (i) the amount of PPP Loan proceeds that are used by Sterling Seal during the eight-week period after the PPP Loan origination date for certain specified purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 75% of the PPP Loan amount is used for eligible payroll costs; (ii) Sterling Seal maintaining or rehiring employees, and maintaining salaries at certain levels; and (iii) other factors established by the SBA. Subject to the other requirements and limitations on PPP Loan forgiveness, only that portion of the PPP Loan proceeds spent on payroll and other eligible costs during the covered eight-week period will qualify for forgiveness. Although Sterling Seal currently intends to use the entire amount of the PPP Loan for qualifying expenses, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
The PPP Note may be prepaid in part or in full, at any time, without penalty. The PPP Note provides for certain customary events of default, including Sterling Seal's: (i) failure to make a payment when due under the PPP Note; (ii) breach of the terms of the PPP Note; (iii) default on any other loan with the Lender; (iv) filing of a bankruptcy petition by or against Sterling Seal; (v) reorganization merger, consolidation or other change in ownership or business structure without the Lender's prior written consent; (vi) adverse change in financial condition or business operation that the Lender believes may affect Sterling Seal's ability to pay the PPP Note; and (vii) default on any loan or agreement with another creditor, if the Lender believes the default may materially affect Sterling Seal's ability to pay the PPP Note. Upon the occurrence of an event of default, the Lender has customary remedies and may, among other things, require immediate payment of all amounts owed under the PPP Note, collect all amounts owing from Sterling Seal, and file suit and obtain judgment against Sterling Seal. The foregoing description of the PPP Note does not purport to be complete is qualified in its entirety by reference to the full text of the PPP Note, a copy of which is filed as Exhibit 10.1 to this Current Report on Form 8-K.
EIDL Note
Additionally, on
Under the terms of the EIDL Note, interest accrues on the outstanding principal
at the rate of 3.75% per annum. The term of the EIDL Note is 30 years, though it
may be payable sooner upon an event of default under the EIDL Note. Under the
EIDL Note, the Company will be obligated to make equal monthly payments of
principal and interest beginning on
The EIDL Note provides for certain customary events of default, including: (i) a failure to comply with any provision of the EIDL Note, the related Loan Authorization and Agreement, or other EIDL loan documents; (ii) a default on any other SBA loan; (iii) a sale or transfer of, or failure to preserve or account to SBA's satisfaction for, any of the collateral or its proceeds; (iv) a failure of the Company or anyone acting on its behalf to disclose any material fact to SBA; (v) the making of a materially false or misleading representation to SBA by the Company or anyone acting on their behalf; (vi) a default on any loan or agreement with another creditor, if SBA believes the default may materially affect the Company's ability to pay the EIDL Note; (vii) a failure to pay any taxes when due; (viii) if the Company becomes the subject of a proceeding under any bankruptcy or insolvency law; (ix) if a receiver or liquidator is appointed for any part of the Company's business or property; (x) the making of an assignment for the benefit of creditors; (xi) has any adverse change in financial condition or business operation that SBA believes may materially affect the Company's ability to pay the EIDL Note; (xii) effects any reorganization, merger, consolidation, or other transaction changing ownership or business structure without SBA's prior written consent; or (xiii) becomes the subject of a civil or criminal action that SBA believes may materially affect the Company's ability to pay the EIDL Note.
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Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements, in accordance with
accounting principles generally accepted in
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") 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 control of the product passes to the customer or the service is provided and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. The new revenue standard does not materially change this calculation method. 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.
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
7
Fair values of financial instruments
In
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 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 10,300,000 of the stock options outstanding as of
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
The Company has declared a dividend of its proprietary cryptocurrency, DIMO,
that is yet to be distributed. As there is currently no market for the
cryptocurrency, the Company has valued the dividend at
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