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.
Noncash transactions include the recording of a right-of-use
asset and related lease liability of approximately $1.2 million upon the adoption of the new lease accounting standard effective
January 1, 2019 and $0.3 million for leases entered into during the six months ended June 30, 2019.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Regional Brands Inc. (“the Company”,
“we” and “us”) is a holding company formed to acquire substantial ownership in regional companies with
strong brand recognition, stable revenues and profitability. The Company has been pursuing a business strategy whereby it is 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, the Company's majority-owned
subsidiary, B.R. Johnson, LLC (“BRJ LLC”) acquired (the “Acquisition”) substantially all of the assets
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 carried
on the business and operations of BRJ Inc.
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, changes in stockholders’ equity 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,
2018 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 14,
2019.
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, 2019 and December 31, 2018, the work-in-process inventory was $842,000 and $ 414,000, respectively and is included in inventories
in the accompanying consolidated balance sheets. We maintain an inventory allowance for slow-moving and unused inventories based
on the historical trend and estimates. The allowance was $111,000 and $69,500 at June 30, 2019 and December 31, 2018, respectively.
Revenue Recognition -
We
recognize revenue 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. The portion of the business utilizing the POC method 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
and payment 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 payments from the owner. For the remainder
of our business, standard terms require that amounts due are paid 30 days after invoice date. For the business accounted for using
the POC method, 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 services. The majority of our performance obligations are typically completed within one year.
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.
Sales and usage taxes are excluded from
revenues. Costs incurred on jobs in process include all direct material and labor costs and certain indirect costs. General and
administrative and precontract costs are charged to expense as incurred.
Due to the various estimates inherent in
our contract accounting, actual results could differ from those estimates. Revisions in estimated profits for contracts accounted
for under the POC method are made in the period
in which circumstances requiring the
revision become known. During the three and six months ended June 30, 2019, the effect of changes in estimated contract costs decreased
gross profit by approximately $147,000 and $259,000, respectively, decreased net income by approximately $109,000 and $191,000,
respectively, and decreased income per common share (net of income taxes) by $0.09 and $0.15, respectively. During the three and
six months ended June 30, 2018, the effect of changes in estimated contract costs decreased gross profit by approximately $80,000
and $170,000, respectively, decreased net income by approximately $59,000 and $126,000, respectively, and decreased income per
common share (net of income taxes) by $0.05 and $0.10, 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, 2019 and 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 per common
share, income attributable to common shareholders is reduced by distributions made to certain noncontrolling interests in the Company’s
consolidated subsidiary.
There were no distributions made or accrued through June 30, 2019 and 2018 that would reduce
income attributable to common stockholders.
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. All
of our marketable equity securities and money market funds are carried at fair value and unrealized gains or losses on the securities
are recognized as a component of other income included in our condensed consolidated statements of income.
The table below presents the Company's
assets and liabilities measured at fair value 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, 2019
|
|
Marketable Equity Securities
|
|
$
|
2,160,321
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,160,321
|
|
Money Market Funds
|
|
$
|
5,316,470
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,316,470
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at December 31, 2018
|
|
Marketable Equity Securities
|
|
$
|
2,194,216
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,194,216
|
|
Money Market Funds
|
|
$
|
5,207,517
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,207,517
|
|
New Accounting Pronouncements Adopted
- We adopted Accounting Standard Update ASU 2016-02 (Topic ASC 842), “Leases”, as required, effective January 1, 2019,
using the modified retrospective approach without adjusting comparative periods. ASC 842 retains the two-model approach to
classifying leases as operating or finance leases (formerly, capital leases); however, most leases, regardless of classification
type, are recorded on the balance sheet. When a lessee records a lease on the balance sheet, it will recognize a lease liability
based on the present value of the future lease payments, with an offsetting entry to recognize a right-of-use (ROU) asset. A lessee
uses a discount rate to determine the present value based on the rate implicit in the lease, if readily determinable, or the lessee’s
incremental borrowing rate.
We utilized the practical expedients provided
by the guidance including the package of practical expedients to not reassess whether contracts contain a lease, lease classification,
and direct costs. Since our current lease agreements, which include real estate and vehicles, are operating leases, they will
continue to be accounted for as operating leases under the new standard. Accordingly, lease expense is recognized on a straight-line
basis over the lease term. We have elected not to record leases with terms of 12 months or less on the balance sheet.
We adopted ASU 2018-07, "Compensation
- Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting" effective January 1, 2019, as
required. The FASB issued this update as part of its simplification initiative. The amendments in this update expand the scope
of Topic 718 to include share-based payments for acquiring goods and services from nonemployees. Since we have issued a relatively
small number of stock options to nonemployees, the adoption of this standard on our condensed consolidated financial statements
and related disclosures was not material.
New Accounting Pronouncements Issued
-
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. This ASU requires an
entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables,
from an “incurred loss” to a “current expected credit loss” model. The standard will be effective for fiscal
years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company
is currently assessing the effect that this ASU will have on its financial position, results of operations, and disclosures. No
other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations,
financial condition, or liquidity.
NOTE 2. REVENUES AND CONTRACTS IN PROCESS
The following table presents
our revenues disaggregated by contracts accounted for using the percentage of completion method:
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Contracts under percentage of completion
|
|
$
|
7,888,406
|
|
|
$
|
6,584,736
|
|
All other
|
|
|
4,037,953
|
|
|
|
5,336,110
|
|
Total revenue
|
|
$
|
11,926,359
|
|
|
$
|
11,920,846
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Contracts under percentage of completion
|
|
$
|
11,491,614
|
|
|
$
|
10,885,302
|
|
All other
|
|
|
7,549,714
|
|
|
|
9,198,328
|
|
Total revenue
|
|
$
|
19,041,328
|
|
|
$
|
20,083,630
|
|
Projects with costs and estimated earnings
recognized to date in excess of cumulative billings is reported on the accompanying condensed consolidated 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 condensed consolidated 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,
2019
|
|
|
December 31,
2018
|
|
Costs incurred on uncompleted contracts
|
|
$
|
15,772,605
|
|
|
$
|
9,619,587
|
|
Estimated earnings
|
|
|
6,104,907
|
|
|
|
3,499,758
|
|
|
|
|
21,877,512
|
|
|
|
13,119,345
|
|
Less billings to date
|
|
|
19,736,038
|
|
|
|
12,304,947
|
|
|
|
$
|
2,141,474
|
|
|
$
|
814,398
|
|
|
|
|
|
|
|
|
|
|
Included on balance sheet as follows:
|
|
|
|
|
|
|
|
|
Under current assets
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
2,958,499
|
|
|
$
|
1,329,640
|
|
Under current liabilities
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
$
|
(817,025
|
)
|
|
$
|
(515,242
|
)
|
|
|
$
|
2,141,474
|
|
|
$
|
814,398
|
|
The Company had unbilled revenues of approximately
$2.1 million and $0.9 million at the end of June 30, 2019 and December 31, 2018, respectively, which are included in Cost and estimated
earnings in excess of billings on the condensed consolidated balance sheet.
Remaining performance obligations represent
the transaction price of firm orders for which work has not been performed. As of June 30, 2019, 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 $14.6 million.
NOTE
3. DEBT
Under its credit agreement with KeyBank,
N.A., 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.
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 requiring BRJ LLC’s consolidated fixed charge coverage ratio to not exceed 1.15 to 1.00. The Credit
Facility also contains customary events of default. For the six months ended June 30, 2019, the Company was in compliance with
these covenants.
The effective interest rate on borrowings
under the Credit Facility at June 30, 2019 was 4.88%. The aggregate borrowings outstanding under the Credit Facility at June 30,
2019 were $4,528,273. 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, 2019.
NOTE 4. 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.
The Company recorded stock compensation
expense for options vesting during the three month periods ended June 30, 2019 and 2018 of $13,878 and during the six month periods
ended June 30, 2019 and 2018 of $27,756 and $27,920, respectively.
NOTE 5. RELATED PARTY TRANSACTIONS
The Company has a Management Services Agreement
(the “MSA”) with Ancora Advisors, LLC, whereby Ancora Advisors, LLC provides 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 condensed consolidated 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 six months ended June 30, 2019 and 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.
BRJ LLC has a Management Services Agreement
(the “BRJ MSA”) with Lorraine Capital, LLC (“Lorraine”), a member of BRJ LLC, whereby Lorraine provides
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
or Regional Brands at any time upon 60 days’ prior written notice and also terminates upon the consummation of a sale of
BRJ LLC. BRJ LLC recorded expenses for Lorraine management fees in the amount of approximately $50,000 and $53,000 for the three
and six months ended June 30, 2018, respectively . There were no expenses for such fees during the three and six months ended June
30, 2019, respectively. As of June 30, 2019 there were no amounts payable and at December 31, 2018, $39,000 was payable to Lorraine
under the BRJ MSA.
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 acquired 57% of ADSI’s common stock;
the remaining common stock is owned by three of BRJ LLC’s employees. BRJ LLC paid ADSI for its services approximately $761,000
and $402,000 for the three months ended June 30, 2019 and 2018, respectively and $1,284,000 and $823,000 for the six months ended
June 30, 2019 and 2018, 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 approximately $38,000 and $29,000 during the three months ended June 30, 2019 and 2018, respectively
and $67,000 and $58,000 during the six months ended June 30, 2019 and 2018, respectively.
NOTE 6. 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 had an effective income tax
rate of 25.4% and 24.2% for the three and six months ended June 30, 2019, respectively, and 23.0% and 22.8% for the three
and six months ended June 30, 2018, respectively. The effective tax rate was greater than the federal statutory rate
of 21% due primarily to state income taxes.
NOTE 7. LEASES
Lease expense was approximately $127,500
and $95,100 for the three months ended June 30, 2019 and 2018, respectively, and $241,300 and $190,200 for the six months ended
June 30, 2019 and 2018, respectively. The right-of-use asset and related lease liability was approximately $1.2 million as of January
1, 2019. The lease terms range in length from 36 to 72 months. Certain leases contain renewal options that we are not reasonably
certain to exercise and therefore have been excluded from the future minimum lease payments. The weighted-average remaining lease
term as of January 1, 2019 was 3.9 years and at June 30, 2019 was 3.6 years. The weighted-average discount rate used to determine
the present value of future lease payments is 4.9%. Because the implicit rate in each lease is not readily determinable, the Company
uses its incremental borrowing rate to determine the present value of lease payments.
The future minimum lease payments under
the lease agreements for the rest of 2019 and yearly thereafter and a reconciliation to the amount of the net present value of
such payments at June 30, 2019 is as follows:
2019
|
|
$
|
240,054
|
|
2020
|
|
|
480,108
|
|
2021
|
|
|
434,108
|
|
2022
|
|
|
123,492
|
|
2023
|
|
|
108,592
|
|
2024
|
|
|
51,956
|
|
Total
|
|
|
1,438,310
|
|
Discount on future lease payments
|
|
|
(116,022
|
)
|
Lease Liability at June 30, 2019
|
|
|
1,322,288
|
|
Less amount classified as current
|
|
|
(507,053
|
)
|
|
|
$
|
815,235
|
|