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 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, 2017 included
in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2018.
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 customer contracts in process, 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, 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 months ended March 31, 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.
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,
but any unrealized gains or losses on the securities are now recognized as a component of other income included on our Condensed
Consolidated Statements of Operations. 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 loss for the three months ended March 31, 2018 was increased by $1,232.
The table below
presents the Company's assets and liabilities measured at fair value on a recurring basis as of December 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 December 31, 2017:
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
|
|
The table below presents the Company's
assets and liabilities measured at fair value on a recurring basis as of March 31, 2018, 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, 2018:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at March
31, 2018
|
|
Marketable
Equity Securities
|
|
$
|
2,189,059
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,189,059
|
|
Money Market
Funds
|
|
$
|
4,226,898
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,226,898
|
|
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 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 is 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
Ending
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
Contracts under percentage of completion
|
|
$
|
4,300,565
|
|
|
$
|
4,687,426
|
|
All other
|
|
|
3,862,219
|
|
|
|
4,058,923
|
|
Total revenue
|
|
$
|
8,162,784
|
|
|
$
|
8,746,349
|
|
Remaining performance obligations represent
the transaction price of firm orders for which work has not been performed. As of March 31, 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 $13.4 million.
We have elected
the practical expedients for not adjusting the promised amount of consideration for the effects of financing components when,
at contract exception, 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 costs, 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:
|
|
March
31,
2018
|
|
|
December
31,
2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
10,190,546
|
|
|
$
|
8,404,168
|
|
Estimated Earnings
|
|
|
4,048,326
|
|
|
|
3,695,967
|
|
|
|
|
14,238,872
|
|
|
|
12,100,135
|
|
Less billings to date
|
|
|
13,118,729
|
|
|
|
11,205,627
|
|
|
|
$
|
1,120,143
|
|
|
$
|
894,508
|
|
|
|
|
|
|
|
|
|
|
Included on balance sheet as follows:
|
|
|
|
|
|
|
|
|
Under current assets
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings
on uncompleted contracts
|
|
$
|
1,490,821
|
|
|
$
|
1,087,218
|
|
Under current liabilities
|
|
|
|
|
|
|
|
|
Billings in excess of costs
and estimated earnings on uncompleted contracts
|
|
$
|
(370,678
|
)
|
|
$
|
(192,710
|
)
|
|
|
$
|
1,120,143
|
|
|
$
|
894,508
|
|
The Company had
unbilled revenues of $765,093 and $1,043,082 at the end of March 31, 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, 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. For the quarter ended March 31, 2018, the
Company was in compliance with these covenants.
The effective interest
rate on borrowings under the Credit Facility at March 31, 2018 was 4.00%. The aggregate borrowings outstanding under the Credit
Facility at March 31, 2018 were $2,016,263 and, 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 period ended March 31, 2018 and 2017 of $14,042 and $15,603,
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 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, 2018, 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.
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. For
the three months ended March 31, 2018 and year ended December 31, 2017, the fees payable to Lorraine Capital LLC were approximately
$3,300 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
$421,401 and $467,698 for its services during the three months ended March 31, 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 $14,850 and $11,300 during
the three months ended March 31, 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 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.
The Company has an effective income
tax rate of 25.42% for the three months ended March 31,2018
.
The effective tax rate is greater than
the federal statutory rate of 21% due to state taxes, nondeductible permanent differences, and the dividends received deduction.