REGIONAL BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,347,665
|
|
|
$
|
4,353,567
|
|
Short-term investments
|
|
|
2,264,718
|
|
|
|
1,967,145
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
8,602,045
|
|
|
|
6,557,158
|
|
Inventories, net
|
|
|
1,516,018
|
|
|
|
1,242,723
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
1,439,404
|
|
|
|
1,087,218
|
|
Prepaid expenses and other current assets
|
|
|
509,263
|
|
|
|
447,539
|
|
Total current assets
|
|
|
18,679,113
|
|
|
|
15,655,350
|
|
|
|
|
|
|
|
|
|
|
Equipment, net
|
|
|
933,005
|
|
|
|
572,568
|
|
Intangibles, net
|
|
|
4,068,265
|
|
|
|
4,600,000
|
|
Goodwill
|
|
|
3,013,287
|
|
|
|
3,013,287
|
|
Deferred income taxes
|
|
|
330,465
|
|
|
|
288,791
|
|
Other assets
|
|
|
197,177
|
|
|
|
144,729
|
|
Total assets
|
|
$
|
27,221,312
|
|
|
$
|
24,274,725
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,406,155
|
|
|
$
|
1,357,647
|
|
Accrued expenses and other current liabilities
|
|
|
854,082
|
|
|
|
1,081,868
|
|
Line of credit
|
|
|
2,931,526
|
|
|
|
1,812,454
|
|
Current portion of senior subordinated note
|
|
|
23,900
|
|
|
|
23,900
|
|
Current portion of subordinated term note
|
|
|
187,500
|
|
|
|
62,500
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
618,924
|
|
|
|
192,710
|
|
Total current liabilities
|
|
|
7,022,087
|
|
|
|
4,531,079
|
|
|
|
|
|
|
|
|
|
|
Senior subordinated note, net
|
|
|
236,636
|
|
|
|
224,063
|
|
Subordinated term note
|
|
|
2,312,500
|
|
|
|
2,437,500
|
|
Total liabilities
|
|
|
9,571,223
|
|
|
|
7,192,642
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock $.01 par value, authorized 50,000, issued and outstanding -none
|
|
|
-
|
|
|
|
-
|
|
Common stock $.00001 par value, 3,000,000 authorized and 1,274,603 shares issued and outstanding
|
|
|
13
|
|
|
|
13
|
|
Additional paid-in capital
|
|
|
20,401,177
|
|
|
|
20,373,257
|
|
Accumulated deficit
|
|
|
(2,641,864
|
)
|
|
|
(3,203,781
|
)
|
Total Regional Brands, Inc. stockholders' equity
|
|
|
17,759,326
|
|
|
|
17,169,489
|
|
Noncontrolling interest in consolidated subsidiary
|
|
|
(109,237
|
)
|
|
|
(87,406
|
)
|
Total stockholders’ equity
|
|
|
17,650,089
|
|
|
|
17,082,083
|
|
Total liabilities and stockholders' equity
|
|
$
|
27,221,312
|
|
|
$
|
24,274,725
|
|
See Accompanying Notes to Consolidated Financial
Statements.
REGIONAL BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
11,920,846
|
|
|
$
|
11,151,952
|
|
|
$
|
20,083,630
|
|
|
$
|
19,898,301
|
|
Cost of sales
|
|
|
8,566,194
|
|
|
|
7,723,645
|
|
|
|
14,469,936
|
|
|
|
13,974,339
|
|
Gross profit
|
|
|
3,354,652
|
|
|
|
3,428,307
|
|
|
|
5,613,694
|
|
|
|
5,923,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,198,474
|
|
|
|
1,221,981
|
|
|
|
2,264,187
|
|
|
|
2,321,745
|
|
General and administrative
|
|
|
1,039,350
|
|
|
|
1,026,463
|
|
|
|
1,991,062
|
|
|
|
1,969,326
|
|
Amortization of intangible assets
|
|
|
311,735
|
|
|
|
429,167
|
|
|
|
611,735
|
|
|
|
1,116,667
|
|
Total operating expenses
|
|
|
2,549,559
|
|
|
|
2,677,611
|
|
|
|
4,866,984
|
|
|
|
5,407,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
805,093
|
|
|
|
750,696
|
|
|
|
746,710
|
|
|
|
516,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
85,900
|
|
|
|
23,007
|
|
|
|
119,579
|
|
|
|
39,157
|
|
Interest expense
|
|
|
(64,048
|
)
|
|
|
(58,479
|
)
|
|
|
(114,697
|
)
|
|
|
(119,433
|
)
|
Interest income
|
|
|
6,345
|
|
|
|
818
|
|
|
|
12,486
|
|
|
|
4,365
|
|
|
|
|
28,197
|
|
|
|
(34,654
|
)
|
|
|
17,368
|
|
|
|
(75,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
833,290
|
|
|
|
716,042
|
|
|
|
764,078
|
|
|
|
440,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
191,633
|
|
|
|
360,800
|
|
|
|
173,912
|
|
|
|
414,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
641,657
|
|
|
|
355,242
|
|
|
|
590,166
|
|
|
|
26,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less income to noncontrolling interest
|
|
|
34,934
|
|
|
|
32,663
|
|
|
|
28,249
|
|
|
|
18,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common shareholders
|
|
$
|
606,723
|
|
|
$
|
322,579
|
|
|
$
|
561,917
|
|
|
$
|
7,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share- basic and diluted (restated for the 2017 periods)
|
|
$
|
0.44
|
|
|
$
|
0.23
|
|
|
$
|
0.40
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
1,274,603
|
|
|
|
1,274,603
|
|
|
|
1,274,603
|
|
|
|
1,274,603
|
|
See Accompanying Notes to Consolidated Financial
Statements.
REGIONAL BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited)
|
|
For the
|
|
|
For the
|
|
|
|
six months
|
|
|
six months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
590,166
|
|
|
$
|
26,313
|
|
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
27,920
|
|
|
|
31,000
|
|
Depreciation and amortization
|
|
|
78,963
|
|
|
|
54,872
|
|
Amortization of debt issuance costs
|
|
|
12,573
|
|
|
|
12,573
|
|
Amortization of intangibles
|
|
|
611,735
|
|
|
|
1,116,667
|
|
Deferred income taxes
|
|
|
(41,674
|
)
|
|
|
-
|
|
Unrealized (gain) loss on investments
|
|
|
(63,271
|
)
|
|
|
1,476
|
|
Change in allowance for doubtful accounts
|
|
|
-
|
|
|
|
(50,000
|
)
|
Change in inventory obsolescence reserve
|
|
|
6,500
|
|
|
|
50,000
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,044,887
|
)
|
|
|
(572,627
|
)
|
Inventories
|
|
|
(279,795
|
)
|
|
|
162,655
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(352,186
|
)
|
|
|
(424,145
|
)
|
Prepaid expenses and other assets
|
|
|
(114,347
|
)
|
|
|
(187,735
|
)
|
Accounts payable
|
|
|
1,048,508
|
|
|
|
1,056,973
|
|
Accrued expenses and other current liabilities
|
|
|
(274,721
|
)
|
|
|
509,031
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
426,214
|
|
|
|
(204,043
|
)
|
Net cash (used) provided by operating activities
|
|
|
(368,302
|
)
|
|
|
1,583,010
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investment activities:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(344,225
|
)
|
|
|
(73,884
|
)
|
Business acquisitions
|
|
|
(200,000
|
)
|
|
|
(1,107,872
|
)
|
Equipment sales proceeds
|
|
|
25,000
|
|
|
|
-
|
|
Purchase of short- term investments
|
|
|
(234,302
|
)
|
|
|
(751,714
|
)
|
Net cash used by investment activities
|
|
|
(753,527
|
)
|
|
|
(1,933,470
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Distribution to noncontrolling shareholder
|
|
|
(3,145
|
)
|
|
|
(37,173
|
)
|
Borrowings from line of credit
|
|
|
1,119,072
|
|
|
|
(197,839
|
)
|
Net cash provided (used) by financing activities
|
|
|
1,115,927
|
|
|
|
(235,012
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(5,902
|
)
|
|
|
(585,472
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
4,353,567
|
|
|
|
4,752,462
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
4,347,665
|
|
|
$
|
4,166,990
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
625
|
|
|
$
|
169,000
|
|
Interest
|
|
$
|
114,500
|
|
|
$
|
107,000
|
|
|
|
|
|
|
|
|
|
|
Noncash Transactions:
|
|
|
|
|
|
|
|
|
Accrued distribution to noncontrolling shareholder
|
|
$
|
46,935
|
|
|
$
|
-
|
|
See Accompanying Notes to Consolidated Financial
Statements.
Regional Brands Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
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 substantial
ownership in regional companies with strong brand recognition, stable revenues and profitability. Regional Brands has been pursuing
a business strategy whereby it seeks 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 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 income 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, 2017 included in the Company’s annual report on Form 10-K
filed with the Securities and Exchange Commission on March 30, 2018.
Restatement of Income Per Common
Share
– During the preparation of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, it
was determined that distributions made in 2017 to the holders of certain noncontrolling interests in the Company’s
consolidated subsidiary pursuant to the subsidiary’s limited liability company agreement should have reduced the amount
of income available to common shareholders that was in the Company’s income (loss) per common share calculations.
This has resulted in the restatement of income (loss) per common share for the quarters ended June 30, September 30 and the
year ended December 31, 2017, respectively. The restatement has no effect on the amounts previously reported in 2017 on the
Consolidated Balance Sheet, net income (loss) included in the Consolidated Statements of Income, Statements of Changes in
Stockholders’ Equity (Deficiency) or the Consolidated Statements of Cash Flows. Additionally, the restatement had no
effect on the quarters ended March 31, 2018 and 2017.
The effect of the restatement on the applicable 2017 periods is
as follows:
Income (loss) per common share
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
Six Months Ended
|
|
|
Three Months Ended
|
|
- basic and diluted
|
|
December 31, 2017
|
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As originally reported
|
|
$
|
0.63
|
|
|
$
|
0.56
|
|
|
$
|
0.01
|
|
|
$
|
0.56
|
|
|
$
|
0.25
|
|
Adjustment
|
|
$
|
(0.15
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
As adjusted
|
|
$
|
0.48
|
|
|
$
|
0.48
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.50
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income attributable to common shareholders to the amounts
used to calculate Income (loss) available to common shareholders is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common shareholders
|
|
$
|
810,124
|
|
|
$
|
718,431
|
|
|
$
|
7,616
|
|
|
$
|
710,815
|
|
|
$
|
322,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to certain noncontrolling interests
|
|
$
|
(197,016
|
)
|
|
$
|
(99,346
|
)
|
|
$
|
(27,228
|
)
|
|
$
|
(72,118
|
)
|
|
$
|
(27,228
|
)
|
Income (loss) available to common shareholders
|
|
$
|
613,108
|
|
|
$
|
619,085
|
|
|
$
|
(19,612
|
)
|
|
$
|
638,697
|
|
|
$
|
295,351
|
|
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. The Company has a controlling interest in its
subsidiary, BRJ LLC. BRJ LLC has preferred and common membership interests that are not controlled by the Company. Earnings and
losses of BRJ LLC are attributed to the noncontrolling interests and distributions are made in accordance with the B.R. Johnson
LLC Limited Liability Company Agreement.
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 customer contracts in process, including estimating costs and the recognition of unapproved change orders and claims.
Inventories
- Inventory is comprised
of purchased materials and other materials that have been assigned to a job deemed to be work-in-process. As of June 30, 2018 and
December 31, 2017, the work-in-process inventory was $948,127 and $ 676,153, respectively and is included in inventories in the
accompanying consolidated balance sheet. We maintain an inventory allowance for slow-moving and unused inventories based on the
historical trend and estimates. The allowance was approximately $72,000 and $66,000 at June 30, 2018 and December 31, 2017, respectively.
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, such as those issuable
upon exercise of outstanding stock options or conversion of convertible securities. In a loss period, the calculation for
basic and diluted loss per share is considered to be the same, as the impact of the issuance of any potential common shares
would be anti-dilutive. During the three and six months ended June 30, 2018, since the exercise prices of the outstanding
stock options were above the average market price of our common stock during the period, the outstanding stock options were
considered anti-dilutive. In calculating income (loss) per common share, income attributable to common shareholders is
reduced by distributions made to certain noncontrolling interests in the Company’s consolidated subsidiary. A
reconciliation of income attributable to common shareholders to the amounts used to calculate income(loss) per common share -
basic and diluted is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common shareholders
|
|
$
|
606,723
|
|
|
$
|
322,579
|
|
|
$
|
561,917
|
|
|
$
|
7,616
|
|
|
|
|
|
Distributions to certain noncontrolling interests
|
|
$
|
(46,935
|
)
|
|
$
|
(27,228
|
)
|
|
$
|
(46,935
|
)
|
|
$
|
(27,228
|
)
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
559,788
|
|
|
$
|
295,351
|
|
|
$
|
514,982
|
|
|
$
|
(19,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding- basic and diluted
|
|
|
1,274,603
|
|
|
|
1,274,603
|
|
|
|
1,274,603
|
|
|
|
1,274,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share-basic and
diluted
|
|
$
|
0.44
|
|
|
$
|
0.23
|
|
|
$
|
0.40
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
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 because of their immediate or short-term maturity and
the fair value of the line of credit approximates 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.
Our short-term investments consist of investments
in marketable equity related securities and money market funds. All of these marketable securities are accounted for as available-for-sale
securities, which are carried at fair value using quoted market prices in active markets for each marketable security. Prior
to 2018, any unrealized gains or losses on these securities were recognized through other comprehensive income (loss). Beginning
on January 1, 2018 with the adoption of Accounting Standards Update ("ASU") 2016-01, all of our marketable equity securities
and money market funds will continue to be carried at fair value as noted above, with any unrealized gains or losses on the securities
recognized as a component of other income included on our Condensed Consolidated Statements of Income. As a result of the adoption
of ASU 2016-01, the accumulated deficit for the year ended December 31, 2017 was increased by $1,504 and the net income for the
six months ended June 30, 2017 was decreased by $1,476.
The tables below present the Company's assets
and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 aggregated by the level in
the fair value hierarchy within which those measurements fall.
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at June 30, 2018
|
|
Marketable Equity Securities
|
|
$
|
2,264,718
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,264,718
|
|
Money Market Funds
|
|
$
|
4,347,665
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,347,665
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at December 31, 2017
|
|
Marketable Equity Securities
|
|
$
|
1,967,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,967,145
|
|
Money Market Funds
|
|
$
|
4,353,567
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,353,567
|
|
Recent Accounting Pronouncements
- In May 2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers”. The new 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 adopted ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the
“new revenue standards”) effective January 1, 2018 utilizing the modified retrospective approach and applied the guidance
to those contracts which were not completed as of that date. The adoption of Topic 606 did not impact the timing of revenue recognition
in our Consolidated Financial Statements for the current or prior interim or annual periods. Accordingly, no adjustments have
been made to opening retained earnings or prior period results. See Note 2, “Revenue Recognition,” for further information.
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.
In August 2016, the FASB issued Accounting
Standards Update 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”.
The standard makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement
of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. The new standard requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company
would be required to apply the amendments prospectively as of the earliest date practicable. The Company has adopted this standard
effective January 1, 2018. Adoption of this standard did not impact our Consolidated Financial Statements for the current or prior
periods presented.
In May 2017, the FASB issued Accounting Standards
Update 2017-09, “Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting”, which
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. The standard is effective for fiscal years beginning after December 15, 2017 and interim periods within
those fiscal years. The standard is to be applied on a prospective basis to an award modified on or after the adoption date. The
Company has adopted this standard effective January 1, 2018. Adoption of this standard did not impact our Consolidated Financial
Statements.
NOTE 2. REVENUE RECOGNITION
Effective January 1, 2018, we recognize revenue
in accordance with ASC Topic 606 when the following criteria are met: 1) Contract with the customer has been identified; 2) Performance
obligations in the contract have been identified; 3) Transaction price has been determined; 4) The transaction price has been allocated
to the performance obligations; and 5) Revenue is recognized when (or as) performance obligations are satisfied.
A portion of our revenue is derived from long-term
contracts and is recognized using the percentage of completion (“POC”) method, primarily based on the percentage that
actual costs-to-date bear to total estimated costs to complete each contract. We utilize the cost-to-cost approach to estimate
POC as we believe this method is less subjective than relying on assessments of physical progress. Under the cost-to-cost approach,
the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue
and is a significant factor in the accounting for contracts. Significant estimates that impact the cost to complete each contract
are costs of materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontractor
or supplier progress; liquidated damages; contract disputes, including claims; achievement of contractual performance requirements;
and contingency, among others. This business is related to the distribution and installation of commercial windows and specialty
products which are supported by specific written contracts which include contract price, scope, payments terms and are signed by
both parties. Our contract price is fixed for the scope of work specified and we generally have no variable consideration. We frequently
negotiate change orders for additional work to be performed which typically relate to the initial performance obligation. Our customer
payment terms are typical for our industry. For most contracts under the POC method, progress payments, less retainage, are made
shortly after the contractor receives payment from the owner. For the remainder of our business, standard terms are that amounts
are due 30 days after invoice date. For this business, we have determined that we have one performance obligation due to the high
degree of inter-dependability and highly integrated nature of the work. Performance obligations for the remainder of our business
are generally supported by written contracts or purchase orders which require the delivery of goods or services and the revenue
is recognized upon shipment of those goods or performance of the service. The majority of our performance obligations are typically
completed within one year.
The following table presents our revenues disaggregated
by contracts accounted for using the percentage of completion method. Sales and usage taxes are excluded from revenues:
|
|
Quarter Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Contracts under percentage of completion
|
|
$
|
6,584,736
|
|
|
$
|
7,356,193
|
|
All other
|
|
|
5,336,110
|
|
|
|
3,795,759
|
|
Total revenue
|
|
$
|
11,920,846
|
|
|
$
|
11,151,952
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Contracts under percentage of completion
|
|
$
|
10,885,302
|
|
|
$
|
12,043,619
|
|
All other
|
|
|
9,198,328
|
|
|
|
7,854,682
|
|
Total revenue
|
|
$
|
20,083,630
|
|
|
$
|
19,898,301
|
|
Remaining performance obligations represent
the transaction price of firm orders for which work has not been performed. As of June 30, 2018, the aggregate amounts of the transaction
prices allocated to the remaining performance obligations, for contracts to be recognized using the percentage of completion method,
were $14.7 million.
We have elected the practical expedients for
not adjusting the promised amount of consideration for the effects of financing components when, at contract inception, the period
between the transfer of good or service and when the customer pays is expected to be less than one year and for recognizing incremental
costs of obtaining a contract as incurred as they would otherwise have been amortized over one year or less.
We have made an accounting policy election
to treat any common carrier shipping and handling activities as a fulfillment cost, rather than a separate obligation or promised
service.
NOTE 3.
CONTRACT ASSETS AND LIABILITIES
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 is 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 is 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:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
9,800,255
|
|
|
$
|
8,404,168
|
|
Estimated earnings
|
|
|
2,832,693
|
|
|
|
3,695,967
|
|
|
|
|
12,632,948
|
|
|
|
12,100,135
|
|
Less billings to date
|
|
|
11,812,468
|
|
|
|
11,205,627
|
|
|
|
$
|
820,480
|
|
|
$
|
894,508
|
|
|
|
|
|
|
|
|
|
|
Included on balance sheet as follows:
|
|
|
|
|
|
|
|
|
Under current assets
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
1,439,404
|
|
|
$
|
1,087,218
|
|
Under current liabilities
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
$
|
(618,924
|
)
|
|
$
|
(192,710
|
)
|
|
|
$
|
820,480
|
|
|
$
|
894,508
|
|
The Company had unbilled revenues of $1,219,379
and $1,043,082 at the end of June 30, 2018 and December 31, 2017, respectively, which are included in Cost and estimated earnings
in excess of billings on the balance sheet.
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 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. For the six months ended June 30, 2018, the Company was in compliance with
these covenants.
The effective interest rate on borrowings under
the Credit Facility at June 30, 2018 was 3.69%. The aggregate borrowings outstanding under the Credit Facility at June 30, 2018
were $2,931,526. In addition, the bank has issued a letter of credit on behalf of the Company in the amount of $250,000 that expires
on December 1, 2018.
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 month periods ended June 30, 2018 and 2017 of $13,878 and $15,397, respectively, and during
the six month periods ended June 30, 2018 and 2017 of $27,920 and $31,000, respectively.
On June 15, 2017, the Company’s stockholders
approved and adopted the Company’s Amended and Restated 2016 Equity Incentive Plan (the “Amended and Restated Equity
Incentive Plan”). The amendment modified the Company’s 2016 Equity Incentive Plan to, among other things, (1) provide
the Board of Directors with the authority to grant awards in the form of restricted stock and restricted stock units, (2) set the
maximum number of shares available for issuance under the Amended and Restated Equity Incentive Plan at 130,000 shares of the Company’s
common stock, par value $0.00001 per share, and (3) adopt certain other technical amendments.
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 MSA provides that the management fee with respect to each fiscal quarter of the Company
is to be 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 six months ended June 30, 2018 and 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.
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. For the six months ended June 30, 2018 and year
ended December 31, 2017, the fees payable to Lorraine Capital LLC were approximately $53,000 and $36,000, respectively.
BRJ LLC has 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. Individuals affiliated with Lorraine Capital, LLC acquired 57% of ADSI’s
common stock; the remaining common stock is owned by three of BRJ LLC’s employees. BRJ LLC paid ADSI approximately $823,000
and $898,000 for its services during the six months ended June 30, 2018 and 2017, respectively. 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 $21,000 and $23,250 during the six months ended
June 30, 2018 and 2017, respectively.
NOTE 7. INCOME TAXES
We account for income taxes using the
asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws
that may be in effect when the differences are expected to reverse. The Company periodically evaluates the likelihood
of realization of deferred tax assets, and provides for a valuation allowance when necessary. The Company currently maintains
a full valuation allowance on the deferred tax assets associated with certain pre-acquisition losses that are subject to
limitations under Internal Revenue Code Section 382.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax
Act”) was passed into law. The Act reduces the US federal corporate income tax rate from a top marginal rate of 35% in
2017 and prior to 21% in 2018. The Company’s marginal tax rate in 2017 and prior was 34%.
The Company has an effective income tax rate
of 23.0% and 22.8% for the three and six months ended June 30, 2018, respectively, and 50.4% and 94.0% for the three and six
months ended June 30, 2017, respectively. The 2018 effective tax rate is higher than the 2018 federal statutory rate of 21%
due primarily to state income taxes offset by the dividends received deduction and nontaxable income of noncontrolling interest.
The 2017 effective tax rate is higher than the 2017 federal statutory rate of 34% primarily due to the reasons above in addition
to provisions for deferred tax valuation allowances.
NOTE 8. BUSINESS ACQUISITIONS
Effective June 1, 2018, the Company acquired certain assets of R&D
Fabricators, Inc. (R&D) for a purchase price of $200,000. R&D is engaged in the business of the fabrication of aluminum
curtain walls, store fronts, doors and frames. The fair value of assets acquired include $120,000 of equipment, $51,000 of
acquired backlog and $29,000 of covenants not to compete. The fair value of the assets acquired approximates the consideration
paid. The operating results of R&D are included in the accompanying statement of income from the date of acquisition. Pro forma
disclosures of revenue and earnings is not material to the Company.
During the six months ended June 30, 2017, a payment of $1,107,872
was made to the seller in the BRJ Inc. acquisition to satisfy our working capital liability.
ITEM 2 - MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995
Reform Act”). The Company desires to avail itself of certain “safe harbor” provisions of the
1995 Reform Act and is therefore including this note to enable it to do so. Except for the historical information contained
herein, this report contains forward-looking statements (identified by the words “estimate,” “project,”
“anticipate,” “plan,” “expect,” “intend,” “believe,” “hope,”
“strategy” and similar expressions), which are based on our current expectations and speak only as of the date made.
These forward-looking statements are subject to various risks, uncertainties and factors that could cause actual results to differ
materially from the results anticipated in the forward-looking statements, including, without limitation, those discussed under
Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, as they
may be updated or supplemented from time to time under Part II, Item 1A “Risk Factors” in our Quarterly Reports on
Form 10-Q, and those described herein.
The following discussion and analysis provides
information that our management believes is relevant to an assessment and understanding of our results of operations and financial
condition and should be read in conjunction with the financial statements and footnotes that appear elsewhere in this report.
General
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 and subsequently became a holding company. In April 2016, in connection
with a change in control of the Company, we changed our name to Regional Brands Inc.
Nature of Business
Regional Brands is a holding company formed
to acquire substantial ownership in regional companies with strong brand recognition, stable revenues and profitability. In April
2016, we sold an aggregate of 370,441 shares of common stock for the aggregate purchase price of $5,000,000 (including the cancellation
of certain indebtedness) and the transactions resulted in a change of control of the Company. Subsequent to the change in control,
we have been pursuing a business strategy whereby we have been 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. Since the acquisition of the business of BRJ Inc. by Regional Brands’ majority-owned
subsidiary, BRJ LLC, Regional Brands has 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, Regional
Brands 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.
On November 1, 2016, we acquired a majority
interest in BRJ LLC by contributing $3,808,696 in exchange for 95.22% of BRJ LLC’s preferred membership interest and 76.17%
of its common membership interest. In addition, we loaned to BRJ LLC $7,141,304 under a senior subordinated term note which bears
interest at 6% per annum and has scheduled annual principal payments with the balance due at maturity in November 2021. The senior
subordinated term note is secured by substantially all of BRJ LLC’s assets. BRJ LLC’s minority members contributed
$191,304 for the remaining preferred and common membership interests and loaned to BRJ LLC $358,696 on the same terms as the Regional
Brands senior subordinated loan pursuant to a participation agreement. The senior subordinated loan is subordinated to BRJ LLC’s
Credit Facility.
BRJ LLC, on November 1, 2016, acquired the
business of BRJ Inc. in an asset purchase transaction in exchange for $14,000,000 in cash (including working capital adjustments
of approximately $1,100,000) and a subordinated note of $2,500,000. BRJ LLC has continued to operate the business of BRJ Inc. as
a consolidated subsidiary of Regional Brands.
The acquisition by BRJ LLC of the business
of BRJ Inc. is being accounted for under the acquisition method of accounting. This results in BRJ LLC allocating the total consideration
issued in the acquisition to the fair value of the assets acquired and liabilities assumed as of the acquisition date.
Following the acquisition of the business of
BRJ Inc., all of our business operations are being conducted through our consolidated subsidiary BRJ LLC.
Effective June 1, 2018, we acquired certain
assets of R&D Fabricators, Inc. (“R&D”) for a purchase price of $200,000. R&D is engaged in the business
of the fabrication of aluminum curtain walls, store fronts, doors and frames.
Comparisons presented in the Results of Operations sections discussed
below are with respect to the same period of the prior year, unless otherwise noted.
Results of Operations for the three months ended June 30, 2018
and 2017
Net Sales:
Net sales for the three months
ended June 30, 2018 of $11,920,846 were $768,894, or 6.9%, higher than net sales of $11,151,952 for 2017. The increase was the
result of an increased volume of business due to robust construction activity in the geographic area that we serve and our ability
to be flexible with our capacity to meet increased demand.
Cost of sales:
Cost of sales for the
three months ended June 30, 2018 of $8,566,194 were $842,549 or 10.9% higher than cost of sales of $7,723,645 in 2017. The increase
is primarily due to the increase in net sales and higher costs on several projects in 2018 when compared to 2017. Additionally,
new tariffs have led to higher raw material costs, which in turn have resulted in cost increases by many of our suppliers in 2018.
Gross profit:
Gross profit was $3,354,652 or 28.1% of net
sales for the three months ended June 30, 2018 compared to $3,428,307 or 30.7% of net sales for 2017.
The industry we operate in is highly competitive
and accordingly our pricing and margins, especially on larger projects, can vary depending on multiple factors including the customer
or general contractor relationship. We refer to these variances as project mix. Gross profit as a percentage of net sales
and gross profit dollars were lower in 2018 compared to 2017 because our project mix in 2017 had higher than average margins and
several projects in 2018 were negatively impacted by additional costs.
During the three months ended June 30,
2017 we had more large projects that had above average gross margins, compared to 2018. Additionally, cost overruns
and back charges experienced in 2018 were due to numerous factors, including late delivery of product and inefficiencies in
the procurement process.
We have worked to mitigate the impact of these
charges and in some instances, have been able to reduce the cost of certain charges from suppliers. Management has taken
steps to improve gross margin performance in the second half of 2018, including upgrading project management capabilities, improved
review and approval procedures and training.
Selling expenses:
Selling expenses remained
relatively stable at $1,198,474 for the three months ended June 30, 2018, compared to $1,221,981 for 2017.
General and administrative expenses:
General
and administrative expenses remained relatively stable at $1,039,350 for the three months ended June 30, 2018, compared to $1,026,463
for 2017.
Amortization of intangible assets:
Amortization
of intangible assets was $311,735 for the three months ended June 30, 2018 compared to $429,167 for 2017. Certain intangible assets
arising from the BRJ Inc. acquisition were fully amortized in 2017, which is the primary reason for less amortization expense in
2018.
Other income:
Other income was $85,900
for the three months ended June 30, 2018 compared to $23,007 for 2017. The increase was primarily related to unrealized appreciation
in the market value of our investments in marketable equity securities.
Interest Expense:
Interest expense during
the three months ended June 30, 2018 was $64,048 compared to $58,479 for 2017. The increase in interest expense was due to increased
debt levels to fund working capital needs for operations as compared to the same period in the prior year.
Income tax expense:
Income tax expense
for the three months ended June 30, 2018 of $191,633 was $169,167 lower than income tax expense of $360,800 for 2017. The effective
income tax rate was 23.0% for the three months ended June 30, 2018 compared to 50.4% for 2017. The 2018 effective tax rate is higher
than the 2018 federal statutory rate of 21% due primarily to state income taxes offset by the dividends received deduction and
nontaxable income of noncontrolling interest. The 2017 effective tax rate is higher than the 2017 federal statutory rate of 34%
primarily due to the reasons above in addition to provisions for deferred tax valuation allowances.
Net income:
As a result of the foregoing,
net income for the three months ended June 30, 2018 improved by $286,415 to $641,657 compared to $355,242 for 2017.
Results of Operations for the six months ended June 30, 2018
and 2017
Net Sales:
Net sales for the six months
ended June 30, 2018 of $20,083,630 were $185,329, or 0.9% higher than net sales of $19,898,301 for 2017.
Cost of sales:
Cost of sales for the
six months ended June 30, 2018 of $14,469,936 were $495,597 or 3.5% higher than cost of sales of $13,974,339 in 2017. The increase
is primarily due to the increase in net sales when compared to 2017 and higher costs on several projects in 2018 when compared
to 2017. Additionally, new tariffs have led to higher raw material costs, which in turn have resulted in cost increases by many
of our suppliers in 2018.
Gross profit:
Gross profit was $5,613,694 or 28.0 % of net
sales for the six months ended June 30, 2018 compared to $5,923,962 or 29.8% of net sales for 2017. Gross profit decreased by $310,268
in 2018.
The industry we operate in is highly competitive
and accordingly our pricing and margins, especially on larger projects, can vary depending on multiple factors including the customer
or general contractor relationship. We refer to these variances as project mix. Gross profit as a percentage of net sales
and gross profit dollars were lower in 2018 compared to 2017 because our project mix in 2017 had higher than average margins and
several projects in 2018 were negatively impacted by additional costs.
During the six months ended June 30, 2017
we had more large projects that had above average gross margins, compared to 2018. Additionally, cost overruns and
back charges experienced in 2018 were due to numerous factors, including late delivery of product and inefficiencies in the
procurement process.
We have worked to mitigate the impact of these
charges and in some instances, have been able to reduce the cost of certain charges from suppliers. Management has taken
steps to improve gross margin performance in the second half of 2018, including upgrading project management capabilities, improved
review and approval procedures and training.
Selling expenses:
Selling expenses remained
relatively stable at $2,264,187 for the six months ended June 30, 2018 compared to $2,321,745 for 2017.
General and administrative expenses:
General
and administrative expenses remained relatively stable at $1,991,062 for the six months ended June 30, 2018 compared to $1,969,326
for 2017.
Amortization of intangible assets:
Amortization
of intangible assets was $611,735 for the six months ended June 30, 2018 compared to $1,116,667 for 2017. Certain intangible assets
arising from the BRJ Inc. acquisition were fully amortized in 2017, which is the primary reason for less amortization expense in
2018.
Other income:
Other income was $119,579
for the six months ended June 30, 2018 compared to $39,157 for 2017. The increase was primarily related to unrealized appreciation
in the market value of our investments in marketable equity securities.
Interest Expense:
Interest expense for
the six months ended June 30, 2018 was $114,697 compared to $119,433 for 2017. The decrease in interest expense was due to interest
on increased debt levels in 2017 to fund the BRJ Inc. acquisition and operations.
Income tax expense:
Income tax expense
for the six months ended June 30, 2018 of $173,912 was $240,088 lower than income tax expense of $414,000 for 2017. The effective
income tax rate was 22.8% for the six months ended June 30, 2018 compared to 94.0% for 2017. The 2018 effective tax rate is higher
than the 2018 federal statutory rate of 21% due primarily to state income taxes offset by the dividends received deduction and
nontaxable income of noncontrolling interest. The 2017 effective tax rate is higher than the 2017 federal statutory rate of 34%
primarily due to the reasons above in addition to provisions for deferred tax valuation allowances.
Net income:
As a result of the foregoing,
net income for the six months ended June 30, 2018 improved by $563,853 to $590,166 compared to net income of $26,313 for 2017.
Liquidity and Capital Resources
At June 30, 2018, we had working capital of
$11,657,026 compared to working capital of $11,124,271 at December 31, 2017. During the six months ended June 30, 2018, our operating
activities used cash of $368,302 compared to providing cash of $1,583,010 during the six months ended June 30, 2017. The primary
reason for the use of cash by operating activities in 2018 versus providing cash in 2017 was due to the increase in our net operating
assets included in working capital.
Cash used in investment activities was $753,527
for the six months ended June 30, 2018 compared to $1,933,470 for the comparable period in 2017. The primary uses of cash from
investment activities was for the purchase of equipment, certain assets of R&D Fabricators, Inc. and short-term investments
in 2018 and the purchase of equipment, short-term investments and the payment of the working capital liability in connection with
the BRJ Inc. acquisition in 2017.
Cash provided by financing activities was $1,115,927
for the six months ended June 30, 2018 compared to cash used of $235,012 for 2017. Line of credit borrowings provided cash in 2018
and repayments used cash in 2017. Line of credit borrowings in 2018 were used to fund working capital needs, primarily increases
in accounts receivable and inventories somewhat offset by an increase in accounts payable.
In November 2016, BRJ LLC entered into a credit
agreement with KeyBank, N.A. (the “Credit Facility”). Under the Credit Facility, BRJ LLC may borrow up to an aggregate
amount of $6,000,000 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 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 Facility 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. For the six months ended June 30, 2018, the Company was in compliance with
these covenants.
The effective interest rate on
outstanding borrowings under the Credit Facility at June 30, 2018 was 3.69%. The aggregate borrowings outstanding under the
Credit Facility at June 30, 2018 were $2,931,526 compared to $1,812,454 at December 31, 2017. In addition, the bank has
issued a letter of credit on behalf of the Company in the amount of $250,000 that expires on December 1, 2018.
Based on current plans, management anticipates
that the cash on hand, the expected cash flows from our majority-owned subsidiary BRJ LLC, and the availability under the Credit
Facility will satisfy our capital requirements and fund our operations for at least the next 12 months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.
Inflation
Although our operations are influenced by general
economic conditions, we do not believe that inflation had a material effect on our results of operations during the last two years.
Critical Accounting Policies
The preparation of financial statements and
related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the
amounts reported in our financial statements and accompanying notes. The financial statements as of December 31, 2017
describe the significant accounting policies and methods used in the preparation of the financial statements. 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. Critical
accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our financial
statements. A discussion of such critical accounting policies can be found in our Annual Report on Form 10-K for the period ended
December 31, 2017. Refer to Note 2 of the Notes to the Consolidated Financial Statements included in this report for the Company’s
critical accounting policies with respect to revenue recognition.