The accompanying notes
are an integral part of the condensed consolidated financial statements
The accompanying notes
are an integral part of the condensed consolidated financial statements
The accompanying notes
are an integral part of the condensed consolidated financial statements
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Regional Brands Inc. (formerly 4net Software,
Inc.) (“Regional Brands,” the “Company,” “we,” “our” and “us”) was
incorporated under the laws of the State of Delaware in 1986. Regional Brands is a holding company formed to acquire regional companies
with strong brand recognition, stable revenues and profitability. Regional Brands has been pursuing a business strategy whereby
it was seeking to engage in an acquisition, merger or other business combination transaction with undervalued businesses (each,
a “Target Company”) with a history of operating revenues in markets that provide opportunities for growth. On November
1, 2016 (See Note 2) the Company's majority-owned subsidiary acquired substantially all of the assets (the “Acquisition”)
of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty
products for use in commercial and residential buildings. After the acquisition of the business of BRJ Inc. by our majority-owned
subsidiary, B.R. Johnson, LLC (“BRJ LLC”), we are currently focused on considering opportunities for growth of BRJ
LLC through utilizing its balance sheet to provide capital for additional acquisitions of companies that would be complementary
to BRJ LLC. Additionally, we may seek to acquire Target Companies that satisfy the following criteria: (1) established businesses
with viable services or products; (2) an experienced and qualified management team; (3) opportunities for growth and/or expansion
into other markets; (4) are accretive to earnings; (5) offer the opportunity to achieve and/or enhance profitability; and (6) increase
shareholder value.
Basis of
Presentation -
The accompanying condensed consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, these
statements do not include all of the information and footnotes required by U.S. GAAP. In the opinion of management, the
accompanying condensed consolidated balance sheets and related condensed consolidated statements of operations and cash flows
include all adjustments, consisting only of normal recurring items necessary for their fair presentation in accordance with
U.S. GAAP. Interim results are not necessarily indicative of results expected for a full year. For further information
regarding the Company’s accounting policies, please refer to the audited consolidated financial statements and
footnotes for the year ended December 31, 2016 included in the Company’s annual report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 2017. BRJ Inc.’s unaudited Condensed Statement of Operations and
Statement of Cash Flows for the three months ended March 31, 2016 are included as part of this report as supplementary
information as Predecessor information.
Principles of Consolidation
-
The consolidated financial statements include the accounts of Regional Brands Inc. and its majority-owned subsidiary, BRJ LLC.
All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
- The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates
and be based on events different from those assumptions. Future events and their effects cannot be predicted with certainty; estimating,
therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired
or as additional information is obtained. We believe the most significant estimates and judgments are associated with revenue recognition
for our contracts, including estimating costs and the recognition of unapproved change orders and claims.
Common Shares Issued
and
Earnings
(Loss) Per Share
- Common shares issued are recorded based on the value of the shares issued or
consideration received, including cash, services rendered or other non-monetary assets, whichever is more readily determinable.
The Company presents basic and diluted earnings (loss) per share. Basic earnings (loss) per share reflect the actual weighted average
number of shares issued and outstanding during the period. Diluted earnings (loss) per share is computed including the number of
additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation
for basic and diluted loss per share is considered to be the same, as the impact of potential common shares issued is anti-dilutive.
Fair Value of Financial Instruments
- Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, and line of credit. Fair values
were assumed to approximate carrying values for these financial instruments and the line of credit is stated at the carrying value
as the stated interest rate approximates market rates currently available to the Company.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
|
●
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active
markets;
|
|
●
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly
or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active; and
|
|
●
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring
an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
|
The Company’s valuation techniques
used to measure the fair value of money market funds, certificate of deposits, and certain marketable equity securities were derived
from quoted prices in active markets for identical assets or liabilities.
In accordance with the fair value accounting
requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company
has not elected the fair value option for any eligible financial instruments.
The table below presents the Company's
assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, aggregated by the level in the fair
value hierarchy within which those measurements fall.
Assets and Liabilities Measured
at Fair Value on a Recurring Basis at December 31, 2016:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at December 31, 2016
|
|
Marketable Equity Securities
|
|
$
|
952,208
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
952,208
|
|
Money Market Funds
|
|
$
|
3,492,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,492,895
|
|
Certificates of Deposit
|
|
$
|
1,256,216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,256,216
|
|
The table below presents the Company's
assets and liabilities measured at fair value on a recurring basis as of March 31, 2017, aggregated by the level in the fair value
hierarchy within which those measurements fall.
Assets and Liabilities Measured
at Fair Value on a Recurring Basis at March 31, 2017:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at March 31, 2017
|
|
Marketable Equity Securities
|
|
$
|
1,430,954
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,430,954
|
|
Money Market Funds
|
|
$
|
4,289,908
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,289,908
|
|
Change in fiscal year
end.
On December 20, 2016, the Board of Directors of the Company approved a change in the Company’s fiscal year-end,
moving from September 30 to December 31 of each year.
Comprehensive Loss
- Comprehensive
loss is defined as the change in equity of the Company during a period from transactions and other events and circumstances from
non-owner sources. It consists of net income (loss) and other income and losses affecting stockholders’ equity that, under
U.S. GAAP, are excluded from net income (loss). The change in fair value of investments was the only item impacting accumulated
other comprehensive loss for the three months ended March 31, 2017 and 2016.
1 for 1,000 stock split
-
On
July 22, 2016, the Company filed a certificate of amendment (the “Amendment”) to the Company’s Certificate of
Incorporation with the Delaware Secretary of State to effect a 1 for 1,000 reverse stock split (the “Reverse Split”)
of the Company’s issued and outstanding Common Stock and to reduce the number of shares of Common Stock the Company is authorized
to issue from 750,000,000 to 50,000,000 shares. The Reverse Split became effective on July 26, 2016 (the “Effective
Time”). The Amendment, including the Reverse Split, was approved by the Board of Directors of the Company and the holders
of a majority of the issued and outstanding shares of Common Stock by written consent in lieu of a meeting.
As a result of the Reverse Split, at the
Effective Time, every 1,000 shares of the Company’s issued and outstanding Common Stock were automatically combined and reclassified
into one (1) share of Common Stock. The Company rounded up any fractional shares, on account of the Reverse Split, to the
nearest whole share of Common Stock. The Company has prepared the financial, share and per share information included in this quarterly
report on a post-split basis.
Recent Accounting Pronouncements
–
FASB ASU 2015-11, Inventory (Topic
330): “Simplifying the Measurement of Inventory.” This ASU requires inventory within the scope of the guidance to
be measured at the lower of cost or net realizable value. FASB ASU 2015-11 is effective for annual and interim periods
beginning after December 15, 2016, with prospective application required. The Company adopted this guidance during the three
months ended March 31, 2017 and it has not had a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-9
“Revenue from Contracts with Customers” (“ASU 2014-9”). The guidance requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently,
the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, “Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”); ASU No. 2016-10, “Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”); and ASU No. 2016-12,
“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU
2016-12”). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “new
revenue standards”). The new revenue standards will replace most existing revenue recognition guidance in U.S. GAAP
when they become effective and permit the use of either a retrospective or cumulative effect transition method. We are currently
evaluating the alternative methods of adoption and the effect of this guidance on our consolidated financial statements and related
disclosures. We are also in the process of identifying material contracts and revenue streams that are potentially impacted by
this guidance. This guidance is effective January 1, 2018 using a full or modified retrospective approach with early adoption permitted
January 1, 2017.
In March 2016, the FASB issued ASU 2016-09,
“Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” The standard is
intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification
on the statement of cash flows and forfeitures. This pronouncement is effective for fiscal years beginning after December 15, 2016,
and interim periods within those years. The Company adopted this guidance during the three
months ended March 31, 2017 and it has not had a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued an accounting
standard update ASU 2016-02, “Leases" to replace existing lease accounting guidance. This pronouncement is intended
to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities
on the balance sheet for most leases. Expenses associated with leases will continue to be recognized in a manner similar to current
accounting guidance. This pronouncement is effective for annual and interim periods beginning after December 15, 2018, with early
adoption permitted. The adoption is required to be applied on a modified retrospective basis for each prior reporting period presented.
The Company has not yet determined the effect that the adoption of this pronouncement may have on its financial position and/or
results of operations.
NOTE
2. ACQUISITION OF B.R. JOHNSON, INC.
On November 1, 2016, the Company's majority-owned
subsidiary, B.R. Johnson, LLC (“BRJ LLC”) acquired substantially all of the assets (the “Acquisition”)
of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty
products for use in commercial and residential buildings (the “Business”). Following the Acquisition, BRJ LLC will
carry on the Business.
The Acquisition was
consummated pursuant to an Asset Purchase Agreement, dated as of November 1, 2016 (the “APA”). Total
consideration for the Acquisition was approximately $16.5 million including delivery by BRJ LLC of a promissory note for
$2,500,000 to BRJ Inc. (the “Note”), which is subordinate to the Company’s debt agreements, and working
capital adjustments of approximately $1.1 million, which was paid during the three months ended March 31, 2017. The Note
accrues interest at a rate of 5.25% per annum, payable quarterly, with the principal amount of the Note payable in equal
quarterly installments of $62,500 commencing on November 1, 2018 and maturing on November 30, 2021.
The Company provided $10.95 million in
debt and equity financing to complete the Acquisition, including $7.14 million of a subordinated loan and $3.81 million in preferred
equity of BRJ LLC (which is eliminated in consolidation), with the remainder from bank financing, the Note and entities affiliated
with Lorraine Capital, LLC. The Company holds 76.17% of the common membership interests and 95.22% of the preferred membership
interests of BRJ LLC, pursuant to the B.R. Johnson, LLC Limited Liability Company Agreement (the “LLC Agreement”) entered
into by and among Lorraine Capital, LLC (which owns 20% of the common membership interests), Regional Brands and BRJ Acquisition
Partners, LLC (which owns the remaining 3.83% of the common membership interests and 4.78% of the preferred membership interests).
To finance the Acquisition and potential
future acquisitions, on November 1, 2016, we issued 894,393 shares of our Common Stock for aggregate proceeds to us of $12,074,305.50
in a private placement
Unaudited Pro Forma Results
– The unaudited pro forma supplemental information is based on estimates and assumptions which management believes are reasonable
but are not necessarily indicative of the consolidated financial position or results of future periods or the results that actually
would have been realized had the Acquisition occurred as of January 1, 2016. The unaudited pro forma supplemental information
includes incremental interest costs and intangible asset amortization charges as a result of the Acquisition, net of the related
tax effects.
Unaudited pro forma results
for the three months ended March 31, 2016:
|
|
|
|
Net Sales
|
|
$
|
7,629,681
|
|
Gross profit
|
|
|
2,316,340
|
|
Amortization of intangibles
|
|
|
687,500
|
|
Net loss
|
|
$
|
(84,381
|
)
|
Loss per share- basic and diluted
|
|
$
|
(0.09
|
)
|
NOTE
3. CONTRACTS IN PROCESS
Cost of revenue for our long-term contracts
includes direct contract costs, such as materials and labor, and indirect costs that are attributable to contract activity. The
timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion
of certain phases of the work, or when services are provided. Projects with costs and estimated earnings recognized to date in
excess of cumulative billings are reported on the accompanying balance sheet as an asset as costs and estimated earnings in excess
of billings. Projects with cumulative billings in excess of costs and estimated earnings recognized to date are reported on the
accompanying balance sheet as a liability as billings in excess of costs and estimated earnings. The following is information with
respect to uncompleted contracts:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
10,068,483
|
|
|
$
|
8,246,796
|
|
Estimated earnings
|
|
|
2,803,960
|
|
|
|
2,273,388
|
|
|
|
|
12,872,443
|
|
|
|
10,520,184
|
|
Less: billings to date
|
|
|
(11,783,243
|
)
|
|
|
(10,064,806
|
)
|
|
|
$
|
1,089,200
|
|
|
$
|
455,378
|
|
Included on the balance sheet as follows:
|
|
|
|
|
|
|
|
|
Under current assets
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
1,265,289
|
|
|
$
|
894,261
|
|
Under current liabilities
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(176,089
|
)
|
|
|
(438,883
|
)
|
|
|
$
|
1,089,200
|
|
|
$
|
455,378
|
|
Prior to the Acquisition on November 1, 2016 (See Note 2), the
Company did not have any contracts in process.
NOTE
4. DEBT
In November 2016, BRJ LLC entered into
a credit agreement with KeyBank, N.A. Under the credit agreement, BRJ LLC may borrow up to an aggregate amount of $6,000,000 (the
“Credit Facility”) under revolving loans and letters of credit, with a sublimit of $500,000 for letters of credit.
The Credit Facility is payable upon demand of KeyBank, N.A., or the lenders, or upon acceleration as a result of an event of default.
At the closing of the Acquisition, approximately $1,900,000 was drawn under the Credit Facility to pay a portion of the purchase
price and costs associated with the Acquisition, with the balance being available for general working capital of BRJ LLC.
Interest under the Credit Facility is payable
monthly, starting on November 30, 2016, and accrues pursuant to the “base rate” of interest, which is equal to the
highest of (a) KeyBank, N.A.’s prime rate, (b) one-half of one percent (0.50%) in excess of the Federal Funds Effective Rate
of the Federal Reserve Bank of New York, and (c) one hundred (100) basis points in excess of the London Interbank Offered Rate
for loans in Eurodollars with an interest period of one month, plus any applicable margin. The credit agreement also requires the
payment of certain fees, including, but not limited to, letter of credit fees.
The Credit Facility is secured by substantially
all of BRJ LLC’s assets. The Credit Facility contains customary financial and other covenant requirements, including, but
not limited to, a covenant to not permit BRJ LLC’s consolidated fixed charge coverage ratio to exceed 1.15 to 1.00. The Credit
Facility also contains customary events of default.
The effective rate at March 31, 2017 was
3.44%. The aggregate borrowing outstanding under the Credit Agreement at March 31, 2017 was $3,389,956 and, in addition, the bank
has issued a letter of credit on behalf of the Company in the amount of $250,000 that expires in December 1, 2017.
NOTE 5. STOCKHOLDERS’ EQUITY
The Company’s authorized capital
consists of 3,000,000 shares of common stock, par value $0.00001 per share, and 50,000 shares of preferred stock, par value $0.01
per share.
On March 2, 2017, the Company filed a certificate
of amendment (the “Amendment”) to the Company’s Certificate of Incorporation with the Delaware Secretary of State
to reduce the number of shares of Common Stock the Company is authorized to issue from 50,000,000 to 3,000,000 shares and to reduce
the number of shares of Preferred Stock the Company is authorized to issue from 5,000,000 to 50,000 shares. The Amendment was approved
by the Board of Directors of the Company and the holders of a majority of the issued and outstanding shares of Common Stock by
written consent in lieu of a meeting.
The Company recorded stock compensation
expense for options vesting during the three months ended March 31, 2017 of $15,603 ($0 in 2016).
NOTE 6. RELATED PARTY TRANSACTIONS
On April 8, 2016, the Company entered into
a Management Services Agreement (the “MSA”) with Ancora Advisors, LLC, whereby Ancora Advisors, LLC agreed to provide
specified services to the Company in exchange for a quarterly management fee in an amount equal to 0.14323% of the Company’s
stockholders’ equity (excluding cash and cash equivalents) as shown on the Company’s balance sheet as of the end of
each fiscal quarter of the Company. The management fee with respect to each fiscal quarter of the Company is paid no later than
10 days following the issuance of the Company’s financial statements for such fiscal quarter, and in any event no later than
60 days following the end of each fiscal quarter. For the three months ended March 31, 2017, Ancora Advisors, LLC agreed to waive
payment of the management fee, but reserves the right to institute payment of the management fee at its discretion.
The Company’s former president and
principal executive officer had loaned the Company money to fund working capital needs to pay operating expenses. The loans were
repayable upon demand and accrued interest at the rate of 10% per annum. As of March 31, 2016, the aggregate principal loan balance
amounted to $186,196 and such loans had accrued interest of $63,804 through March 31, 2016. On April 8, 2016, the Company issued
to its former president and principal executive officer 18,522 shares of the Company’s Common Stock in full satisfaction
his loans to the Company.
Prior to May 12, 2016, the Company occupied
a portion of the offices occupied by BKF Capital Group, Inc., 31248 Oak Crest Drive, Suite 110, Westlake Village, California 91361
on a month to month basis for a fee of $50 per month paid to BKF Capital Group, Inc. The Company’s former president and principal
executive officer is also the Chairman, CEO and controlling shareholder of BKF Capital Group, Inc.
Effective May 12, 2016, the Company relocated
its principal offices to 6060 Parkland Boulevard, Cleveland, OH 44124. The Company pays no rent for the use of the offices, which
are located at the corporate headquarters of Ancora Advisors, LLC.
On November 1,
2016, in connection with the Acquisition, BRJ LLC entered into a Management Services Agreement (the “BRJ MSA”)
with Lorraine Capital, LLC, a member of BRJ LLC, whereby Lorraine Capital, LLC agreed to provide specified management,
financial and reporting services to us in exchange for an annual management fee in an amount equal to the greater of (i)
$75,000 or (ii) five percent (5%) of the annual EBITDA (as defined in the BRJ MSA) of BRJ LLC, payable quarterly in arrears
and subject to certain adjustments and offsets set forth in the BRJ MSA. The BRJ MSA may be terminated by BRJ LLC, Lorraine
Capital, LLC or Regional Brands at any time upon 60 days’ prior written notice and also terminates upon the
consummation of a sale of BRJ LLC. As of March 31, 2017, $36,000 has been accrued as payable to Lorraine Capital, LLC under
the BRJ MSA for the three months ended March 31, 2017. In addition, during the three months ended March 31, 2017.
approximately $58,000 was paid to members of Lorraine Capital, LLC as compensation for acting in a management function.
We have a relationship with a union qualified
commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations that
require union installation and repair services. In connection with the Acquisition, individuals affiliated with Lorraine Capital,
LLC acquired 57% of ADSI’s common stock; the remaining common stock is owned by three of BRJ Inc.’s employees. We paid
ADSI for its services approximately $467,698 during the three months ended March 31, 2017. In addition, we provide ADSI services
utilizing an agreed-upon fee schedule. These services include accounting, warehousing, equipment use, employee benefit administration,
risk management coordination and clerical functions. The fee for these services was $11,300 during the three months ended March
31, 2017.
NOTE 7. INCOME TAXES
The Company’s amortization
expenses during the three months ended March 31, 2017 exceed the amounts currently deductible for tax purposes. Due to the
uncertainty as to the Company’s ability to generate sufficient taxable income in the future and utilize the net
operating loss carryforwards (NOL) before they expire, and due to the limitation on the availability of the Company's NOL due
to ownership changes, the Company has recorded a valuation allowance to offset the NOLs, and the total net deferred tax
assets, as well. Therefore, the Company has tax expense during the three months ended March 31, 2017.