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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

Commission file number:  1-6663

 

CCOM GROUP, INC.

(Exact name of registrant as specified in its charter)

973-427-8224

(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

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CCOM GROUP, INC. AND SUBSIDIARIES

 

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Item 1.

Financial Statements

 

CCOM GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CCOM GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CCOM GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CCOM GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2013

(Unaudited)

 

1.	Summary of Significant Accounting Policies and Practices and Basis of Presentation

 

The condensed consolidated financial statements of CCOM Group, Inc. and subsidiaries (the "Company") included herein have been prepared by the Company and are unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods to which the report relates.  The results of operations for the period ended June 30, 2013 is not necessarily indicative of the operating results that may be achieved for the full year.

 

Certain information and footnote disclosures, normally included in condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted as permitted by the interim reporting requirements of the Securities and Exchange Commission. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2012.

 

We have only one operating segment.

 

Inventory is comprised of finished goods and is stated at the lower of cost (first-in, first-out method) or market.

 

 

On February 5, 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which adds additional disclosure requirements relating to the reclassification of items out of accumulated other comprehensive income. This ASU is effective for the first quarter of 2013. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

 

2.	Stock Options

 

The Company recognizes equity based compensation expense in accordance with established standards for transactions in which an entity exchanges its equity instruments for goods and services. This standard requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.

 

On September 29, 2006, the Company adopted the CCOM Group, Inc. (formerly Colonial Commercial Corp.) 2006 Stock Plan, (the “2006 Plan”).  The 2006 Plan enables the Company to grant equity and equity-linked awards to the Company’s Directors, officers, employees and other persons who provide services to the Company.  The 2006 Plan is intended to allow the Company to provide incentives that will (1) strengthen the desire of highly competent persons to provide services to the Company and (2) further stimulate their efforts on the Company’s behalf.

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The following table summarizes information about stock options at June 30, 2013:

 

 

There were no stock options granted during the three months or six months ended June 30, 2013 and 2012.  For each of the three months and six months ended June 30, 2013 and 2012, the amount of stock based compensation was $0.

 

3.	Equity Transactions

 

During the three months and six months ended June 30, 2013 and 2012, no shares of convertible preferred stock were converted into common stock.

 

No stock options were exercised during the three months or six months ended June 30, 2013 and 2012.

 

4.	Supplemental Cash Flow Information

 

The following is supplemental information relating to the condensed consolidated statements of cash flows: 

 

 

5.	Net Income (Loss) Per Common Share

 

Basic income (loss) per share reflects the amount of earnings (loss) for the period available to common shareholders and holders of participating securities and is based upon the weighted average number of common shares and participating securities outstanding during the period.  Diluted earnings per share reflects, in periods in which they have a dilutive effect, the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock and is computed using the treasury stock method and if-converted method, where applicable.

 

Employee stock options totaling 75,000 for each of the three months and six months ended June 30, 2013 and 2012, respectively, were not included in the net income (loss) per share calculation because their effect would have been anti-dilutive. Convertible preferred stock, convertible into 293,057 shares of common stock for the six months ended June 30, 2013 and 2012, respectively, was not included in the net (loss) per share because its effect would have been anti-dilutive. Convertible notes, in the principal amount of $200,000, convertible into 66,666 shares of common stock, were not included in the net income (loss) per share calculation for each of the three months and six months ended June 30, 2013 and 2012, respectively, because their effect would have been anti-dilutive.

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6.	Financing Arrangements

 

On February 1, 2013, Michael Goldman loaned $500,000 to the Company. Interest accrued on the loan at 4% per annum and the loan was repaid on April 30, 2013. A $500,000 increase in the Borrowing Base that KeyBank made on February 1, 2013 ended on April 30, 2013. On May 1, 2013, Michael Goldman loaned $500,000 to the Company. Interest accrued on the loan at 4% per annum and the loan was repaid on July 29, 2013. A $500,000 increase in the Borrowing Base that KeyBank made on May 1, 2013 ended on July 24, 2013. Both increases to the Borrowing Base were made pursuant to the KeyBank Agreement that provides, in the event the Company then meets the Temporary Increase Conditions, for KeyBank to make up to $500,000 in additional loans to the Company to match loans in the same aggregate amount that one or more Investor Subordinated Creditors (as defined) elect to make.

 

Borrowings bear interest at 2.75% above the Eurodollar Rate (as defined) or 0.25% above the Base Rate (as defined), and are secured by a first lien on substantially all of the Company’s assets, as well as a pledge of the stock of CCOM Group, Inc.’s operating subsidiaries. The facility contains covenants relating to the financial condition of the Company and its business operations. Among other things, the covenants require that as of June 30, 2013, the Company maintain a consolidated net worth of at least $3,232,102, and a Fixed Charge Coverage Ratio (as defined) of 1.1. As of June 30, 2013, the Company’s net worth was $4,912,595 and its Fixed Charge Ratio was 2.15, both exceeding the loan covenants.

 

Michael Goldman is the Chairman of the Board of the Company. Mr. Goldman served as Chief Executive Officer of the Company from February 15, 2013 until his resignation as Chief Executive Officer on July 1, 2013. On July 1, 2013 Peter Gasiewicz was appointed Chief Executive Officer of the Company. Prior to July 1, 2013, Peter Gasiewicz served as President and Chief Operating Officer of the Company. The Company will be considered in default of the KeyBank Agreement in the event Peter Gasiewicz shall cease to hold the position of Chief Executive Officer, or a similar or higher position of the Company and the Company shall fail to hire a replacement consultant or Chief Executive Officer with technical expertise, experience and management skills, in the opinion of KeyBank, necessary for the successful management of the Company. Additionally, the facility restricts, among other things, the payment of dividends, and further restricts, subject to specified exceptions, subordinated debt, purchase of securities, and the merger and sale of the Company. The KeyBank Agreement terminates on October 17, 2014.

 

During the six months ended June 30, 2013, the Company borrowed an aggregate of $49,247,239 and repaid an aggregate of $47,693,583 under the revolving credit facility with KeyBank. As of June 30, 2013, the balance outstanding under the facility was $13,850,836 and availability was $1,383,634.

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The Company believes that the KeyBank credit facility is sufficient to finance its current operating needs. The business of the Company will be materially and adversely affected if KeyBank substantially reduces the amount of the credit availability under the terms of the facility or KeyBank demands payment and the Company is unable to refinance the facility, or if liquidity is otherwise substantially reduced.

 

7.	Litigation

 

(a)	Universal Supply Group, Inc.

 

Universal Supply Group, Inc., a wholly owned subsidiary of the Company, is a New York corporation (“Universal”).  On June 25, 1999, Universal acquired substantially all of the assets of Universal Supply Group, Inc., a New Jersey corporation, including its name, pursuant to the terms of a purchase agreement. The Company filed a copy of the purchase agreement with the Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g) on Form 10KSB, and the Company filed a copy of an amendment to the purchase agreement on July 9, 1999 as Exhibit 10(a)(ii) on Form 8-K. Subsequent to the acquisition, Universal Supply Group, Inc. (the selling corporation) formerly known as Universal Engineering Co., Inc., changed its name to Hilco, Inc.  Hilco, Inc. acquired the assets of Amber Supply Co., Inc., formerly known as Amber Oil Burner Supply Co., Inc., in 1998, prior to Hilco’s sale of assets to Universal.  Hilco, Inc. is hereinafter referred to as the “Universal Predecessor.”  The majority shareholders of Hilco, Inc. were John A. Hildebrandt and Paul H. Hildebrandt.

 

The Company understands that the Universal Predecessor and many other companies have been sued in the Superior Court of New Jersey (Middlesex County) by plaintiffs filing lawsuits alleging injury due to asbestos. As of June 30, 2013, there existed 7 plaintiffs in these lawsuits relating to alleged sales of asbestos products, or products containing asbestos, by the Universal Predecessor. Subsequent to June 30, 2013, 1 action was dismissed, leaving 6 remaining plaintiffs in these lawsuits. The Company never sold any asbestos related products.

 

Of the existing plaintiffs as of June 30, 2013, 1 filed an action in 2013, 2 filed actions in 2012, 3 filed actions in 2011 and 1 filed an action in 2010. There are 212 other plaintiffs that have had their actions dismissed and 17 other plaintiffs that have settled as of June 30, 2013 for a total of $3,364,500 paid by defendants other than Universal. There has been no judgment against the Universal Predecessor.

 

The Company’s Universal subsidiary was named by 38 plaintiffs; of these, 1 filed an action in 2012, 1 filed an action in 2010, 11 filed actions in 2007, 6 filed actions in 2006, 11 filed actions in 2005, 5 filed actions in 2001, 1 filed an action in 2000, and 2 filed actions in 1999. Thirty-five plaintiffs naming Universal have had their actions dismissed and, of the total $3,364,500 of settled actions, 3 plaintiffs naming Universal have settled for $27,500.  No money was paid by Universal in connection with any settlement. Following these dismissed and settled actions no plaintiffs named Universal as of June 30, 2013.

 

As set forth in more detail below, the Company has been indemnified against asbestos-based claims, and insurance companies are defending the interests of the Universal Predecessor and the Company in these cases.

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Based on advice of counsel, the Company believes that none of the litigation that was brought against the Company’s Universal subsidiary through June 30, 2013 is material, and that the only material litigation that was brought against the Universal Predecessor through that date was Rhodes v. A.O. Smith Corporation, filed on April 26, 2004 in the Superior Court of New Jersey, Law Division, Middlesex County, Docket Number MID-L-2979-04AS. The Company was advised that the Rhodes case was settled for $3,250,000 (“Settlement”) under an agreement reached in connection with a $10,000,000 jury verdict that was rendered on August 5, 2005. The Company was not a defendant in the Rhodes case.

 

The Company believes that Rhodes differed from the other lawsuits in that plaintiff established that he contracted mesothelioma as a result of his occupational exposure to asbestos dust and fibers and that a predecessor of the Company was a major supplier of the asbestos containing products that allegedly caused his disease.

 

 

John A. Hildebrandt, Paul H. Hildebrandt and the Universal Predecessor have jointly and severally agreed to indemnify the Company’s Universal subsidiary from and against any and all damages, liabilities and claims due to exposure to asbestos at any time prior to the June 25, 1999 closing of the purchase agreement referred to earlier.  These agreements are set forth in the purchase agreement. Paul H. Hildebrandt, one of the indemnitors, was a Director of the Company from September 29, 2004 to January 28, 2005.

 

The indemnitors may use their own counsel to defend these claims. The indemnitors are not liable for any settlement effected without their consent. The indemnitors may settle and pay money claims without the consent of the Company. There is no indemnification unless claims aggregate $50,000; once this trigger point is reached, indemnification is required for all claims, including the first $50,000, but excluding claims of less than $10,000. The indemnification requirement survives at least until 30 days after the running of any relevant statutes of limitation.

 

The obligation of the indemnitors is joint and several, so that the Company can have recourse against any one or more of these indemnitors, whether or not any other indemnitor has previously defaulted on its obligation to us. There are no other limitations to the Company’s rights to indemnification. The Company cannot be certain that the indemnitors have the financial wherewithal to meet their obligations to indemnify the Company.

 

 

The assets that the Universal Predecessor sold to the Company included its insurance policies and other agreements and contracts. The policies provide coverage for liability accruing during the periods for which premiums were paid. The Universal Predecessor was formed in 1940. Copies of policies are available for each year beginning in 1970 and ending with the closing under the purchase agreement in 1999. Copies of policies for the period from 1940 to 1969 are not available.

 

Insurance companies acknowledge coverage for potential asbestos claims under certain of these policies. Insurance companies under additional policies have reserved their right to deny coverage but have continued to defend and indemnify the Universal Predecessor and the Company under the contested policies.

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There are periods during the years from 1940 to 1999 in which the Universal Predecessor did not have coverage for potential asbestos claims. Subject to litigation, insurance companies may maintain that the existence of these periods’ results in coverage for only a portion of a particular injury that varies with the period during which there was asbestos coverage relating to the injury, and that the balance of any settlement or judgment is to be paid by the insured. As of June 30, 2013, no insurance company has claimed any contribution for a gap in coverage except for a claim for $160 made by one insurance company to the Universal Predecessor in 1995.  The Universal Predecessor asserted that it had no obligation to pay this amount and did not make any payment.

 

Insurance companies have, as of June 30, 2013, defended the Company and the Universal Predecessor, and have paid all settlement amounts and defense costs. Except for $160 referred to above, the insurance companies have not requested any payments from the Company or from the Universal Predecessor.

 

The Company’s Universal subsidiary has not engaged in the sale of asbestos products since its formation in 1997. Its product liability policies for all years since 1998 exclude asbestos claims.

 

 

The RAL Supply Group, Inc., a wholly owned subsidiary of the Company, is a New York corporation (“RAL”), formerly known as RAL Purchasing Corp. On September 30, 2003, RAL acquired substantially all of the assets of The RAL Supply Group, Inc., formerly known as The LAR Acquisition Corp., also a New York corporation, including its name, pursuant to the terms of a purchase agreement. The Company filed a copy of the purchase agreement (“RAL APA”) with the Securities and Exchange Commission on October 15, 2003 as Exhibit 10(a)(i) on Form 8-K.  Subsequent to the acquisition, The RAL Supply Group, Inc. (the selling corporation) changed its name to RSG, Inc. RSG, Inc. is hereinafter referred to as the “RAL Predecessor.”

 

The RAL Predecessor acquired certain assets from Dyson-Kissner-Moran Corporation (“RSG Predecessor”) in 1993, prior to the RAL Predecessor’s sale of assets to RAL.

 

The Company, our RAL subsidiary and other companies have been sued in the Supreme Court of New York (New York County) by a plaintiff alleging injury due to asbestos. The original Complaint was filed on April 19, 2013 and an Amended Complaint naming RAL and the Company was filed on or about June 3, 2013.

 

The RAL Predecessor agreed in the RAL APA to indemnify and hold harmless our RAL subsidiary from and against, among other things, damages that relate to products sold or manufactured or services performed or other actions taken or omitted by the RAL Predecessor prior to the closing of the acquisition. The Company cannot be certain that the indemnitor has the financial wherewithal to meet its obligations to indemnify the Company.

 

The lawsuit alleged injury due to asbestos between 1960 and 1979, prior to RAL Predecessor’s acquisition of assets from the RSG Predecessor and RAL’s acquisition of assets from the RAL Predecessor. The Company never sold any asbestos related products.

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Regardless of indemnification and insurance coverage, management does not in any event consider the Company to be liable for the asbestos-based lawsuits that name the Company or for any other claim that arises as a result of actions or omissions by the Universal Predecessor or RAL Predecessor companies. The Company expressly disclaimed the assumption of any liabilities when the Company purchased the assets of the Universal Predecessor and RAL Predecessor. It is the opinion of management that the existing asbestos litigation will not have a material adverse effect on the Company.  Nevertheless, the Company could be materially and adversely affected if it is held liable for substantial asbestos claims or if it incurs substantial legal or settlement costs. This material and adverse effect would occur if indemnitors fail to honor their indemnification agreements and insurance is not available either because policy limits are exceeded, or because insurance companies successfully deny coverage or claim limitations on their liabilities by reason of gaps in coverage or otherwise.

 

Since management regards as remote the potential payment of any asbestos-based claim, no amounts have been accrued for any period relating to asbestos claims, and no amounts have been recorded for asbestos claims for any period in the condensed consolidated financial statements.

 

 

The Company is periodically involved in other litigation in the ordinary course of business.  The Company vigorously defends all matters in which the Company or its subsidiaries are named defendants and, for insurable losses, maintains significant levels of insurance to protect against adverse judgments, claims or assessments. Although the adequacy of existing insurance coverage or the outcome of any legal proceedings cannot be predicted with certainty, the Company does not believe the ultimate liability associated with any claims or litigation will have a material impact to its financial condition or results of operations.

 

8.	Transactions with Related Persons, Promoters and Certain Control Persons

 

(a)

A subsidiary of the Company leases a warehouse and store in Wharton, New Jersey comprising 27,000 square feet from a company owned by Mr. Paul H. Hildebrandt under a lease that expires July 31, 2017. The Company paid Mr. Hildebrandt’s company $57,884 and $57,144 during the three months ended June 30, 3013 and 2012, respectively. The Company paid Mr. Hildebrandt’s company $116,185 and $114,288 during the six months ended June 30, 3013 and 2012, respectively. William Salek, the Company’s Chief Financial Officer, is the son-in-law of Mr. Hildebrandt.

 

(b)

Pursuant to a secured note dated July 29, 2004, as amended, the Company owes Goldman Associates of New York, Inc. (“Goldman Associates”), the principal amount of $750,000 at June 30, 2013 collateralized by the assets of the Company. The secured note is subordinate to the borrowings under the Company’s credit facility, bears interest at the prime rate plus 2% and is due on January 1, 2014. Michael Goldman is the Chief Executive Officer and Chairman of the Board of Goldman Associates and is Chairman of the Board the Company. Mr. Goldman served as Chief Executive Officer of the Company from February 15, 2013 until his resignation as Chief Executive Officer on July 1, 2013.

 

(c)

Oscar Folger and Jeffrey Folger, of the law firm of Folger & Folger, are counsel to the Company.  Rita Folger, a more than 10% shareholder of the Company, is the wife of Oscar Folger and the mother of Jeffrey Folger.  Professional fees paid to the law firm of Folger & Folger for the three months ended June 30, 2013 and 2012 were $17,813 and $16,107, respectively. Professional fees paid to the law firm of Folger & Folger for the six months ended June 30, 2013 and 2012 were $47,457 and $20,833, respectively.

 

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(d)

Pioneer Realty Holdings, LLC, a New York limited liability company (“Pioneer”), is the owner of the premises located at 836 Route 9, Fishkill, New York, formerly known as 2213 Route 9, Fishkill, New York that is leased to a subsidiary of the Company under a lease that expires on March 31, 2017, subject to two five-year renewal options.

 

William Pagano, a Director of the Company and a more than 10% shareholder of the Company, has a 55% interest in Pioneer and each of Mrs. Folger and Jeffrey Folger has a 20% interest in Pioneer Realty Partners I, LLC, which has a 40% interest in Pioneer. The Company paid Pioneer $70,409 and $69,029 during the three months ended June 30, 2013 and 2012, respectively. The Company paid Pioneer $140,818 and $138,057 during the six months ended June 30, 2013 and 2012, respectively. Mr. Pagano was the Chief Executive Officer of the Company until his retirement on February 15, 2013.

 

(e)	Since his retirement on February 15, 2013, Mr. Pagano has a consulting agreement with the Company that provides for an annual consulting fee of $60,000. Consulting fees of $15,000 and $22,500 were paid pursuant to this agreement during the three and six months ended June 30, 2013, respectively.

 

(f)

Mr. Pagano and Mrs. Folger each hold a $100,000 convertible unsecured note of the Company. The convertible unsecured notes bear interest at the prime rate plus 2% and are due on January 1, 2014. Interest expense on each note was $1,313 for each of the three months ended June 30, 2013 and 2012. Interest expense on each note was $2,625 for each of the six months ended June 30, 2013 and 2012.

 

(g)

Mr. Paul H. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger each hold unsecured notes dated August 20, 2009 in the initial principal amount of $90,000, $171,033, $35,000 and $100,000, respectively. The notes bore interest at 12% per annum and were payable in equal quarterly installments of principal and interest through June 30, 2014. On June 27, 2013, the Company prepaid the remaining principal on the notes to Mr. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger in the amounts of $7,274, $13,824, $2,829 and $8,083, respectively.

 

Interest expense on the notes held by Mr. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger amounted to $273, $518, $106 and $303, respectively, for the three months ended June 30, 2013. Interest expense on the notes held by Mr. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger amounted to $491, $933, $191 and $546, respectively, for the three months ended June 30, 2012.

 

Interest expense on the notes held by Mr. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger amounted to $600, $1,140, $233 and $667, respectively, for the six months ended June 30, 2013. Interest expense on the notes held by Mr. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger amounted to $1,037, $1,970, $403 and $1,152, respectively, for the six months ended June 30, 2012.

 

(h)

On March 1, 2012, the Company borrowed $350,000 from Goldman Associates. Interest accrued on the loan at 4% per annum and the loan was repaid on May 16, 2012 with interest in the amount of $2,956. On May 17, 2012, the Company borrowed $500,000 from Goldman Associates. Interest accrued on the loan at 4% per annum and the loan was repaid on August 10, 2012 with interest in the amount of $4,699. On August 5, 2013, the Company borrowed $500,000 from Goldman Associates at 4% per annum, repayable on November 1, 2013.

 

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(i)

On December 10, 2012, the Company borrowed $500,000 from Michael Goldman. Interest accrued on the loan at 4% per annum and the loan was repaid on January 31, 2013 with interest in the amount of $1,983. On February 1, 2013, the Company borrowed $500,000 from Michael Goldman. Interest accrued on the loan at 4% per annum and the loan was repaid on April 30, 2013 with interest in the amount of $5,000. On May 1, 2013, the Company borrowed $500,000 from Michael Goldman. Interest accrued on the loan at 4% per annum and the loan was repaid on July 29, 2013 with interest in the amount of $4,778.

 

(j)

Mr. Paul H. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger each hold unsecured notes dated October 24, 2012 in the initial principal amount of $200,000, $350,000, $100,000 and $100,000, respectively. Pursuant to the terms of the notes, the first payment was made on April 1, 2013. The notes bear interest at 8% per annum and are payable in equal monthly installments of principal and interest through March 1, 2018. At June 30, 2013 the remaining principal on the notes to Mr. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger was $197,163, $345,033, $98,581 and $98,581, respectively. Interest expense on the notes held by Mr. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger amounted to $9,733, $17,033, $4,867 and $4,867, respectively, for the three months and six months ended June 30, 2013.

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This report on Form 10-Q contains forward-looking statements including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.  Forward-looking statements involve risks and uncertainties, including, but not limited to, technological changes, competitive factors, maintaining customer and vendor relationships, inventory obsolescence and availability, and other risks detailed in the Company's periodic filings with the Securities and Exchange Commission, which could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

 

CCOM Group, Inc. is a New York corporation which was incorporated on October 28, 1964. Unless otherwise indicated, the term “Company” refers to CCOM Group, Inc. and its consolidated subsidiaries. The Company’s operations are conducted through its wholly owned subsidiaries, Universal Supply Group, Inc. (“Universal”), The RAL Supply Group, Inc. (“RAL”), and S&A Supply, Inc (“S&A”). We distribute heating, ventilating and air conditioning equipment (HVAC), parts and accessories, whole-house generators, climate control systems, appliances and plumbing and electrical fixtures and supplies, primarily in New Jersey, New York, Massachusetts and portions of eastern Pennsylvania, Connecticut and Vermont.

 

We supply the Amana air conditioning and heating equipment line in New Jersey (exclusive of Cape May and Cumberland counties), lower portions of New York State, and Western Massachusetts.  At all our locations we also supply, on a non-exclusive basis, the Goodman line of heating and air conditioning equipment, Fraser-Johnston commercial air conditioning equipment, and Honeywell generators. We distribute these products through seven sales locations in New Jersey, eight in New York State, and two in Massachusetts. We use showrooms for the display and sale of kitchen, bathroom and electrical fixtures and accessories at our locations in Fishkill, Middletown, New Windsor and Suffern, New York and Great Barrington and Pittsfield, Massachusetts.

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We have developed a specialty in the design and sale of energy conservation control systems and the fabrication of customized UL listed control panels.  We also supply indoor air quality components and systems.

 

Our in-house staff provides technical assistance and training to customers.  In some cases, we also use vendors’ representatives and outside services. We do not install equipment or systems.

 

During 2012 the Company derived more than 10% of its revenues and during the six months ended June 30, 2013 the Company derived approximately 15% of its revenues from the sale of Speed Queen washer-dryer appliances under a distributorship agreement with the manufacturer. See Management Discussion and Analysis under the Results of Operation for information on the impending termination of this distributorship agreement.

 

Our objective is to become a leading provider of HVAC, plumbing and electrical equipment and accessories to the professional contractor in the northeastern United States by expanding our product offerings and increasing our customer technical and logistical support services.

 

 

Our business is affected by significant outdoor temperature swings. Our sales typically increase during peak heating and cooling demand periods. Demand related to the residential central air conditioning replacement market is highest in the second and third quarters, while demand for heating equipment is usually highest in the fourth quarter. Our business is also affected by general economic conditions in the residential and commercial construction industries.

 

 

The accounting policies below are critical to the Company’s business operations and the understanding of results of operations. The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue for the Company primarily consists of sales of heating, ventilation and air conditioning equipment, parts and accessories, whole-house generators, climate control systems, appliances and plumbing and electrical fixtures and supplies. Revenue is recognized when the earnings process is complete, which is generally upon shipment or delivery of products, and the price is determined and collectability is reasonably assured, in accordance with agreed-upon shipping terms and when title and risk of loss transfers to the customer. The Company has no further obligations subsequent to shipment or delivery. Customers have the right to return defective products, which are substantially covered under the manufacturer’s warranty.  The customer receives a credit from the Company for defective products returned and the Company receives a corresponding credit provided by the manufacturer. The only warranty provided on products sold is the one provided by the manufacturer.

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The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company establishes and monitors the allowance for doubtful accounts based on the credit risk of specific customers, customer concentrations, historical trends and other information. The Company had accounts receivable of $11,595,671, net of an allowance for doubtful accounts of $570,658, as of June 30, 2013. Although the Company believes its allowance is sufficient, if the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

 

The Company writes down its inventories for estimated slow moving and obsolete goods in accordance with the lower of cost or market value, based upon assumptions about future demand and market conditions. A significant sudden increase in the demand for the Company’s products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand. Additionally, the Company’s estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the write-down required for excess and obsolete inventory.

 

Goodwill is reviewed at least annually for impairment. The Company evaluated goodwill for impairment in December 2012. In assessing the recoverability of the Company’s goodwill, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets and liabilities of the reporting unit. The Company considers each subsidiary as a reporting unit. The Company groups assets, including goodwill, by reporting unit and utilizes the income approach (Discounted Cash Flows) to estimate the fair value of long-lived assets. If the Company’s fair value determination changes due to modifications in the underlying assumptions, the Company may be required to record impairment charges related to its goodwill. At June 30, 2013, goodwill on the Company’s books of $1,416,929 related entirely to Universal.

 

The Company accounts for income taxes in accordance with the asset and liability approach for financial accounting and reporting of income taxes. 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 be realized. The realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. However, the deferred tax liability related to goodwill cannot be used in this determination. The Company establishes a valuation allowance for deferred tax assets when it determines that it is more likely than not that the benefits of deferred tax assets will not be realized in future periods.  Based upon this assessment, management had established a valuation allowance of $9,500,000 as of December 31, 2012, resulting in the recognition of a $100,000 deferred tax asset. As of June 30, 2013, management reassessed projected future taxable income and determined that the valuation allowance was adequate.

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The following table summarizes information derived from the Company’s condensed consolidated statements of operations expressed as a percentage of sales for the three months and six ended June 30, 2013 and 2012.

 

 

Results of Operations for the Three Months Ended June 30, 2013 and 2012

 

Sales increased by 12.4%, or $2,705,984, to $24,443,817 for the three months ended June 30, 2013 from $21,737,833 for the same period in 2012. Gross profit increased by 5.6%, or $310,544, to $5,834,727 for the three months ended June 30, 2013 from $5,524,183 for the same period in 2012. Gross profit expressed as a percentage of sales decreased to 23.9% in 2013 compared to 25.4% for the comparable period in 2012. The increases in sales and gross profit were primarily related to an increase in sales of generators and appliances. The decrease in gross margins as a percent of sales was the result of a sales mix of generators and appliances, which are sold at lower margins, along with a decrease in vendor rebates, based on current programs. During 2012 the Company derived more than 10% of its revenues and during the three months ended June 30, 2013 the Company derived approximately 15% of its revenues from the sale of Speed Queen washer-dryer appliances under a distributorship agreement with the manufacturer. In January 2013 the manufacturer asserted that it was terminating the distributorship agreement effective June 1, 2013. In June 2013 the manufacturer and the Company agreed that the distributorship will terminate on May 31, 2014 but would continue on a transitional and declining basis until that date. The Company is shifting its focus towards its more profitable commercial controls and generator and accessory products.

 

Cost of sales excludes the distribution costs of incoming freight, purchasing, receiving, inspection, warehousing and handling costs, as these costs are included in our selling, general and administrative expenses. Our gross margins may not be comparable to those of other entities since some entities may include these distribution costs in the cost of sales. These distribution costs were $102,625 and $106,923 for the three months ended June 30, 2013 and 2012, respectively.

 

Selling, general and administrative expenses increased by 3.3%, or $165,101, to $5,188,210 for the three months ended June 30, 2013 from $5,023,109 for the same period in 2012. The increase in selling, general and administrative expense is primarily related to an $80,762 increase in professional fees, an $80,550 increase in advertising expenses, a $49,557 increase in facility expenses, and a $28,012 increase in hospitalization expenses, partially offset by a $94,650 decrease in rent and property tax expenses. The $28,012 increase in hospitalization expenses is primarily due to a refund of approximately $27,000 recorded during the period ended June 30, 2012.

 

Other income increased 17.6%, or $9,564, to $63,907 for the three months ended June 30, 2013 from $54,343 for the same period in 2012. The increase in other income is primarily related to an increase of service charges collected from customers and gains on the disposal of fixed assets.

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Net interest expense increased by 0.5%, or $724, to $150,162 for the three months ended June 30, 2013 from $149,438 for the same period in 2012.

 

The Company incurred an income tax expense in the amount of $10,500 for the three months ended June 30, 2013 and $0 for the same period in 2012.

 

The Company’s net income increased by 35.4%, or $143,783 to $549,762 for the three months ended June 30, 2013, compared to $405,979 for the same period in 2012. The increase in net income is primarily the result of the $310,544 increase in gross profit, partially offset by the $165,101 increase in selling, general and administrative expenses and an income tax expense in the amount of $10,500.

 

Results of Operations for the Six Months Ended June 30, 2013 and 2012

 

Sales increased by 8.4%, or $3,343,648, to $43,173,255 for the six months ended June 30, 2013 from $39,829,607 for the same period in 2012. Gross profit increased by 5.8%, or $586,201, to $10,658,974 for the six months ended June 30, 2013 from $10,072,773 for the same period in 2012. Gross profit expressed as a percentage of sales decreased to 24.7% in 2013 compared to 25.3% for the comparable period in 2012. The increases in sales and gross profit were primarily related to an increase in sales of generators and appliances. The decrease in gross margins as a percent of sales was the result of a sales mix of generators and appliances, which are sold at lower margins, along with a decrease in vendor rebates, based on current programs, partially offset by an increase in purchase discounts. During 2012 the Company derived more than 10% of its revenues and during the six months ended June 30, 2013 the Company derived approximately 15% of its revenues from the sale of Speed Queen washer-dryer appliances under a distributorship agreement with the manufacturer. In January 2013 the manufacturer asserted that it was terminating the distributorship agreement effective June 1, 2013. In June 2013 the manufacturer and the Company agreed that the distributorship will terminate on May 31, 2014 but would continue on a transitional and declining basis until that date. The Company is shifting its focus towards its more profitable commercial controls and generator and accessory products.

 

Cost of sales excludes the distribution costs of incoming freight, purchasing, receiving, inspection, warehousing and handling costs, as these costs are included in our selling, general and administrative expenses. Our gross margins may not be comparable to those of other entities since some entities may include these distribution costs in the cost of sales. These distribution costs were $221,802 and $220,551 for the six months ended June 30, 2013 and 2012, respectively.

 

Selling, general and administrative expenses increased by 1.9%, or $196,336, to $10,631,793 for the six months ended June 30, 2013 from $10,435,457 for the same period in 2012. The increase in selling, general and administrative expense is primarily related to a $130,079 increase in professional fees, a $63,740 increase in facility expenses, and a $58,525 increase in hospitalization expenses, which is primarily due to a refund of approximately $27,000 recorded during the period ended June 30, 2012. Additionally, the Company incurred a $45,792 increase in advertising expenses and a $41,000 increase in director fees, offset by a $129,569 decrease in rent and property tax expenses and a $73,278 decrease in bad debt expense.

 

Other income increased 4.5%, or $4,837, to $113,429 for the six months ended June 30, 2013 from $108,592 for the same period in 2012. The increase in other income is primarily related to gains on the disposal of fixed assets.

 

Net interest expense decreased by 0.6%, or $1,694, to $301,825 for the six months ended June 30, 2013 from $303,519 for the same period in 2012.

 

The Company incurred an income tax expense in the amount of $21,000 for the six months ended June 30, 2013 and $0 for the same period in 2012.

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The Company’s net loss decreased by 67.3%, or $375,396 to a net loss of $182,215 for the six months ended June 30, 2013, compared to a net loss of $557,611 for the same period in 2012. The decrease in net loss is primarily the result of the $586,201 increase in gross profit, partially offset by the $196,336 increase in selling, general and administrative expenses and an income tax expense in the amount of $21,000.

 

 

 

On February 1, 2013, Michael Goldman loaned $500,000 to the Company. Interest accrued on the loan at 4% per annum and the loan was repaid on April 30, 2013. A $500,000 increase in the Borrowing Base that KeyBank made on February 1, 2013 ended on April 30, 2013. On May 1, 2013, Michael Goldman loaned $500,000 to the Company. Interest accrued on the loan at 4% per annum and the loan was repaid on July 29, 2013. A $500,000 increase in the Borrowing Base that KeyBank made on May 1, 2013 ended on July 24, 2013. Both increases to the Borrowing Base were made pursuant to the KeyBank Agreement that provides, in the event the Company then meets the Temporary Increase Conditions, for KeyBank to make up to $500,000 in additional loans to the Company to match loans in the same aggregate amount that one or more Investor Subordinated Creditors (as defined) elect to make.

 

Borrowings bear interest at 2.75% above the Eurodollar Rate (as defined) or 0.25% above the Base Rate (as defined), and are secured by a first lien on substantially all of the Company’s assets, as well as a pledge of the stock of CCOM Group, Inc.’s operating subsidiaries. The facility contains covenants relating to the financial condition of the Company and its business operations. Among other things, the covenants require that as of June 30, 2013, the Company maintain a consolidated net worth of at least $3,232,102, and a Fixed Charge Coverage Ratio (as defined) of 1.1. As of June 30, 2013, the Company’s net worth was $4,912,595 and its Fixed Charge Ratio was 2.15, both exceeding the loan covenants.

 

Michael Goldman is the Chairman of the Board of the Company. Mr. Goldman served as Chief Executive Officer of the Company from February 15, 2013 until his resignation as Chief Executive Officer on July 1, 2013. On July 1, 2013 Peter Gasiewicz was appointed Chief Executive Officer of the Company. Prior to July 1, 2013, Peter Gasiewicz served as President and Chief Operating Officer of the Company. The Company will be considered in default of the KeyBank Agreement in the event Peter Gasiewicz shall cease to hold the position of Chief Executive Officer, or a similar or higher position of the Company and the Company shall fail to hire a replacement consultant or Chief Executive Officer with technical expertise, experience and management skills, in the opinion of KeyBank, necessary for the successful management of the Company. Additionally, the facility restricts, among other things, the payment of dividends, and further restricts, subject to specified exceptions, subordinated debt, purchase of securities, and the merger and sale of the Company. The KeyBank Agreement terminates on October 17, 2014.

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During the six months ended June 30, 2013, the Company borrowed an aggregate of $49,247,239 and repaid an aggregate of $47,693,583 under the revolving credit facility with KeyBank. As of June 30, 2013, the balance outstanding under the facility was $13,850,836 and availability was $1,383,634.

 

The Company believes that the KeyBank credit facility is sufficient to finance its current operating needs. The business of the Company will be materially and adversely affected if KeyBank substantially reduces the amount of the credit availability under the terms of the facility or KeyBank demands payment and the Company is unable to refinance the facility, or if liquidity is otherwise substantially reduced.

 

As of June 30, 2013, the Company had $449,534 in cash compared with $297,128 at December 31, 2012.

 

Net cash used in operating activities was $1,248,998 for the six months ended June 30, 2013. The net cash used in operating activities for the 2013 period is a result of the net loss of $182,215, changes in operating assets and liabilities of $1,408,799, offset by net non-cash charges of $342,016.

 

Cash flows provided by financing activities of $1,393,514 for the six months ended June 30, 2013 consisted of $1,000,000 in the issuance of notes payable and $1,553,656 in borrowings under the credit facility revolving credit, offset by $1,160,142 in repayments of notes payable.

 

        

Not applicable.

 

 

 

As of the end of the period covered by this report, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.

 

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.