ITEM 1 - BUSINESS
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. Our corporate office is located at 6060 Parkland Boulevard, Cleveland, Ohio 44124 and our telephone number is (216) 825-4000. Our corporate website address is http://www.regionalbrandsinc.com. Information contained on our website is not a part of this annual report.
Regional Brands Inc. 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. After the acquisition of the business of B.R. Johnson, Inc. (“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.
Forward Looking Information
This report contains statements about future events and expectations that are characterized as “forward-looking statements.” Forward-looking statements are based upon management’s beliefs, assumptions, and expectations. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance, and financial condition to be materially different from the expectations of future results, performance, and financial condition we express or imply in such forward-looking statements. You are cautioned not to put undue reliance on forward-looking statements. We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
Change in fiscal year end.
On December 20, 2016, the Board of Directors of the Company approved a change in the Company’s fiscal year-end, moving from September 30 to December 31 of each year. This Form 10-K includes financial information from October 1, 2016 to December 31, 2016 (the "Transition Period 2016").
Description of Acquisition
On November 1, 2016, our majority-owned subsidiary, BRJ LLC, acquired substantially all of the assets (the “Acquisition”) of 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”).
The Acquisition was consummated pursuant to an Asset Purchase Agreement, dated as of November 1, 2016 (the “APA”). Total consideration for the Acquisition was approximately $16.5 million, including delivery by BRJ LLC of a promissory note for $2,500,000 to BRJ Inc. (the “Note”), which is subordinate to the Debt Agreements (as defined below) and working capital adjustments of approximately $1.1 million. We provided $10.95 million in debt and equity financing to complete the Acquisition, including $7.14 million of the Subordinated Loan (as defined below) and $3.81 million in preferred equity of BRJ LLC.
Concurrently with the closing of the Acquisition, BRJ LLC entered into a senior secured revolving credit facility to borrow up to $6,000,000 (the “Credit Facility”) pursuant to that certain Credit and Security Agreement, dated November 1, 2016 (the “Credit Agreement”), with the lenders named therein and KeyBank, N.A. as agent for such lenders. BRJ LLC also entered into that certain Loan and Security Agreement, dated November 1, 2016 (the “Loan Agreement and, together with the Credit Facility, the “Debt Agreements”), pursuant to which it received a $7,500,000 loan that is subordinate to the Credit Facility (the “Subordinated Loan”). To finance the Acquisition and potential future acquisitions, we issued 894,393 shares of our common stock for aggregate proceeds to us of $12,074,311 in a private placement (the “Private Placement”) with 93 accredited investors, pursuant to the terms of a Subscription Agreement, dated as of November 1, 2016 (the “Subscription Agreement”). The foregoing transactions are collectively hereinafter referred to as the “Transactions”.
Following the Acquisition, all of operations of the Business are conducted through our majority-owned subsidiary BRJ LLC. We hold 76.17% of the common membership interests and 95.22% of the preferred membership interests of BRJ LLC pursuant to the B.R. Johnson, LLC Limited Liability Company Agreement (the “LLC Agreement”) entered into by and among Lorraine Capital, LLC (which owns 20% of the common membership interests), Regional Brands Inc. and BRJ Acquisition Partners, LLC (which owns the remaining 3.83% of the common membership interests and 4.78% of the preferred membership interests). Lorraine Capital, LLC and BRJ Acquisition Partners, LLC are collectively referred to as the “Lorraine Parties”.
Business Overview
B.R. Johnson, Inc. was founded by Benjamin “Ben” R. Johnson in 1928. Some of the original products sold by BRJ Inc. were steel windows, rolling self-storing screens, kitchen cabinets, and Modernfold operable wall partitions, a product it still distributes principally in Upstate New York State market. Over the course of the following decades, BRJ Inc. added commercial steel doors, hardware, and residential and commercial windows. We believe BRJ Inc. has built a reputation of only distributing products that are the best in their respective category. Product categories include:
· Commercial doors and hardware;
· Commercial windows;
· Specialty division; consisting of operable partitions, movable glass walls, fire and smoke containment systems and gymnasium equipment
· Residential windows;
· Residential hardware; and
· Aftermarket door sales.
Industry Overview
According to an industry study published by the international business research company, The Freedonia Group, the total United States window and door market (measured by sales at the manufacturers’ level) was estimated to be valued at approximately $34.3 billion in sales in 2021.
One key factor driving growth will be continued strength in new housing and renovation activity, including investment in new and replacement windows and doors. Expanding construction spending in window and door intensive commercial segments, specifically office, retail, and lodging structures, will also fuel sales.
Regional variations in economic activity influence the level of demand for windows and door products across the United States. Of particular importance are regional differences in the level of construction and renovation activity. Demographic trends, including population growth and migration, contribute to the regional variations through their influence on regional new construction activity.
Our Growth Strategy
We target customer groups and emphasize product categories where we believe we are well positioned in comparison to our competitors. These include aftermarket door service and installation; commercial window customers with demanding installation requirements; and products requiring proprietary know-how and installation skills.
Commercial door and hardware remains a highly competitive product category. Our strategy is to defend our market share so that our volume remains at sufficient levels to achieve the best pricing from our suppliers, thus enabling us to maintain acceptable profit margins in this segment.
Currently, we are in principally in the Upstate New York State market and we plan to expand our geographic reach through ongoing business development efforts by our Rochester, NY and newly opened Buffalo, NY sales offices.
Our Products and Services
Commercial Windows: We have a long history of building restoration and new construction experience in a wide range of commercial window applications. We utilize multiple approaches that take advantage of the wide range of product offerings we have available to us from our extensive roster of suppliers and we draw on the experience gained from the diverse types of projects we have successfully performed.
We operate as a multi-line commercial window distributor and installer of high-performance architectural aluminum, clad wood, fiberglass, vinyl and steel replica windows, as well as curtainwall, storefront and entrance products.
While we specialize in creating commercial window solutions for existing buildings and historical renovations, we are also experienced in the requirements of new construction, navigating the technical, administrative and schedule demands of that industry segment.
Our team of salesmen, project managers, technical services and installation personnel work closely with our customers to provide an integrated project delivery approach that is most appropriate to balance performance, aesthetics, budgetary and schedule needs.
We offer our commercial window customers:
· Replacement and historical renovation;
· New construction - windows, curtainwall, storefront and entrances;
· Design development;
· Budgets, detailing and mock-ups;
· Installation; and
· Service across New York, including Buffalo, Rochester, Syracuse, Albany, Ithaca and Binghamton.
Commercial Doors and Hardware: We are a value added distributor and installer of commercial doors, frames and hardware characterized by a dedicated group of professionals with specialized knowledge to respond quickly to customer needs. We have provided the Upstate New York building industry with hollow metal steel doors and frames for over 40 years and commercial hardware since the mid-1980’s.
We provide commercial door and hardware customers:
· Custom hollow metal door and frame welding and fabrication;
· The largest commercial solid core wood door inventory in Central New York;
· A large available selection of commercial and institutional hardware;
· Specialty overhead and rolling doors;
· Field service and installed sales;
· Budgets and specification consulting; and
· New construction, installation, replacement and service.
Commercial Specialty Products: We distribute, install and service products that require a strong emphasis on architectural promotion. Our sales personnel have been trained to know all aspects of each product from layout and design to providing classroom training to architects and building and fire code officials to maintain their license in New York State. As a result we are a trusted resource to the entire Upstate New York community of architects and building and fire code officials. The products we represent are nationally and internationally recognized as industry leaders and sold across the entire Upstate New York region where we have salesmen active in each major market from Buffalo to Albany. Our seasoned tradesmen round out our ability to provide installation services, inspections and preventative maintenance.
Specialty products and services include:
· Modernfold - Operable partitions, movable glass walls and accordion doors;
· Skyfold - vertically folding operable walls;
· Renlita Doors - custom designed vertical and horizontal doors;
· Smoke containment alternatives to elevator vestibules;
· Smoke Guard - fire and smoke containment systems;
· Gymnasium equipment;
· Safe-Path (safety device for gym partitions);
· Service; and
· Inspections and preventative maintenance.
Residential Windows and Door: We specialize in new construction, installation and replacement windows and doors for homes in Upstate New York. We have been providing builders and homeowners in Upstate New York with quality building products since 1928.
We offer our customers a wide selection of products to best meet their requirements from the following manufacturers:
· Integrity from Marvin manufactures windows and doors made from a revolutionary fiberglass material called Ultrex that outlasts and outperforms the competition.
· Marvin Windows & Doors offer made to order products with craftsman quality construction and customizable options.
· Halfway between Utica and Albany, Kasson & Keller has been manufacturing windows and doors in nearby Fonda, NY since 1954, including EcoShield high-efficiency, low-maintenance windows.
· Norwood, a division of West-Wood Industries, is a family-owned manufacturer of some of the finest wood windows and doors in North America. In addition, Norwood’s Permaglass window line is manufactured from protruded fiberglass for when wood is not the most suitable material for a customer’s application.
· Therma-Tru Doors, which first created the fiberglass entry door category 25 years ago with the introduction of the Fiber-Classic® wood-grained door. Today, Therma-Tru is the nation’s leading manufacturer of fiberglass and steel exterior door systems, and a preferred brand of entry doors by builders and remodelers.
Sales and Marketing
As a result of our longstanding and leading position in the Upstate New York market, we have developed relationships with owners, architects, and developers and a reputation for providing products and services that best suit the customers’ needs, positioning us well in comparison to our competitors.
Our customer service team responds to opportunities with our customers at an early stage and responds to quote opportunities quickly with the best solution for our customers based on access to multiple suppliers. We prioritize opportunities based on the competitive advantages we identify, often where customers’ needs involve a level of complexity.
We remain one of the few in our business that maintains an extensive inventory of commercial door and hardware items. This allows us to react to the smaller negotiated and non-bid opportunities quickly with product in stock. With larger projects, we seek to utilize manufacturer service centers to provide fabrication when possible to minimize pass-through in our facility.
Other sales and marketing activities include attending industry related trade shows, targeted engagement with social media, and search engine optimization for our website.
Customers
Our customers are varied and encompass building owners, building tenants (with long term property rights) and contractors who serve them. We have customers who place orders that we book and ship, such as in the commercial door and hardware category. These same customers may have large projects from time to time such as commercial window projects that take several months (occasionally over a year ) to complete. Commercial customers include: owners of educational buildings, K-12 school districts, private schools and public and private colleges and universities; owners of multi-family housing, including senior housing, both private and public; other building owners, including retail health care and institutional buildings, casinos and hotels; and energy performance contractors. Our residential windows, doors and door hardware customers are generally contractors or developers serving this market.
Strategic Alliances
We view Lorraine Capital, LLC, and Ancora Advisors, LLC (“Ancora”), as strategic sources for identifying opportunities for new business in Western New York and Northeast Ohio. We also believe that Lorraine Capital, LLC and Ancora can assist us with sourcing capital to meet our expansion requirements or take advantage of consolidation opportunities with competitors through acquisitions. In addition, we have a relationship with a union qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations that require union installation labor. Individuals affiliated with Lorraine Capital, LLC acquired 57% of ADSI’s common stock in connection with the Acquisition.
Competition
Our products are sold under highly competitive conditions. Currently, we are principally in the Upstate New York State market and we compete with a number of companies, some of which have greater financial resources than us. The principal competitive factors in the markets we serve include price, product quality, delivery and the ability to customize to customer specifications. We encounter different competitive environments in each of our product categories. In some of the product categories, there is a reduction in the number of competitors, in part due to the reduction of new entrants to the market. In addition, many of our suppliers find it economical to have a limited number of vendors in any geographic area. In the residential market segment, we face intense competition from big-box stores, large independent chains and online retailers where we differentiate our products and services with high-end quality products that meet the specialized installation requirements of our customers. In addition, certain product manufacturers sell and distribute their products directly to customers or enter into exclusive supply arrangements with other distributors.
Suppliers
We operate as a multi-line product distributor and installer across the entire Upstate New York region for nationally and internationally recognized industry leading brands. Our ability to offer a wide variety of products to our customers is dependent upon our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and responsible sourcing, as well as our need to access products in a timely and efficient manner. Generally, our products are obtainable from various sources and in sufficient quantities.
Employees
BRJ LLC employed 84 people full-time and 1 person part-time as of March 9, 2018. Regional Brands has no employees other than its CEO.
ITEM 1A
ITEM 1A - RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled “Forward-Looking Statements” for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.
Risks Relating to Our Business and Industry
There can be no assurance that our future operations will result in net income.
There can be no assurance that our future operations will result in net income. Our failure to increase our revenues or maintain or improve our gross margins will harm our business. We may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate, our gross margins decline or our operating expenses exceed our expectations, our operating results will suffer. The prices we charge for products and services may decrease, which would reduce our revenues and harm our business. If we are unable to sell products at acceptable prices relative to our costs, or if we fail to supply on a timely basis new products and services from which we can derive additional revenues, our financial results will suffer.
Uncertain economic conditions may adversely affect demand for our products.
Our revenue and gross margin depend significantly on general economic conditions and the demand for building products in the markets in which we operate. Economic weakness and constrained construction and renovation spending has resulted, and may result in the future, in decreased revenue, gross margin, earnings and growth rates. All of our revenues and profitability are derived from our clients in New York State, which makes us highly susceptible to disruptions or downturns in local economic conditions. Ongoing economic volatility and uncertainty affect our business in a number of other ways, including making it more difficult to accurately forecast client demand beyond the short term and effectively build our revenue. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. Delays or reductions in building products spending could have a material adverse effect on demand for our products and services, and consequently our results of operations, financial condition, cash flows and stock price.
We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect our relationship with customers, our reputation and the demand for our products and services.
The success of our business depends in part on our ability to identify and respond promptly to evolving trends in demographics; consumer preferences, expectations and needs; and unexpected weather conditions, while also managing appropriate inventory levels and maintaining an excellent customer experience. It is difficult to successfully predict the products and services our customers will demand. As the housing and home improvement market continues to recover, resulting changes in demand will put further pressure on our ability to meet customer needs and expectations and maintain high service levels. Our failure to meet the individual needs and expectations of our customers may result in the erosion of our customer base.
Our industry is highly cyclical, and prolonged periods of weak demand or excess supply may reduce our net sales and/or margins, which may cause us to incur losses or reduce our net income.
The building products distribution industry is subject to cyclical market pressures. Prices of building products are determined by overall supply and demand in the market. Market prices of building products historically have been volatile and cyclical, and we have limited ability to control the timing and amount of pricing changes. Demand for building products is driven mainly by factors outside of our control, such as general economic and political conditions, interest rates, availability of financing, the state of the credit markets, high levels of unemployment and foreclosures, the construction, repair and remodeling markets, industrial markets, weather, and population growth. The supply of building products fluctuates based on available manufacturing capacity, and excess capacity in the industry can result in significant declines in market prices for those products. To the extent that prices and volumes experience a sustained or sharp decline, our net sales and margins likely would decline as well.
Additionally, many of the building products which we distribute are widely available from other distributors or manufacturers, including big-box stores and online retailers. At times, the purchase price for any one or more of the products we distribute may fall below our purchase costs, requiring us to incur short-term losses on product sales.
All of these factors could adversely affect demand for our products and services, our costs of doing business and our financial performance.
Product shortages, loss of key suppliers, and our dependence on third-party suppliers and manufacturers could affect our financial health.
Our ability to offer a wide variety of products to our customers is dependent upon our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and responsible sourcing, as well as our need to access products in a timely and efficient manner. Generally, our products are obtainable from various sources and in sufficient quantities. However, the loss of, or a substantial decrease in the availability of, products from our suppliers or the loss of key supplier arrangements could adversely impact our financial condition, operating results, and cash flows.
Disruptions in our supply chain and other factors affecting the distribution of our products could adversely impact our business.
A disruption within our supply chain network could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased costs or damage to our reputation. Such disruptions may result from damage or destruction to our warehouse facility; weather-related events; natural disasters; third-party strikes, lock-outs, work stoppages or slowdowns; supply or shipping interruptions or costs; or other factors beyond our control. Any such disruption could negatively impact our financial performance or financial condition.
The inflation or deflation of commodity prices could affect our prices, demand for our products, our sales and our profit margins.
Prices of certain commodity products, including lumber and other raw materials, are historically volatile and are subject to fluctuations arising from changes in supply and demand, labor costs, competition, market speculation, government regulations, periodic delays in delivery and other factors. Rapid and significant changes in commodity prices may affect the demand for our products, our sales and our profit margins.
Our industry is highly competitive. If we are unable to compete effectively, our net sales and operating results will be reduced.
The building products distribution industry is highly competitive, particularly in the residential sector. Competitive factors in our industry include pricing, availability of product, level of service, delivery capabilities, customer relationships, geographic coverage, and breadth of product offerings. Also, financial stability is important to suppliers and customers in choosing distributors for their products, and affects the favorability of the terms on which we are able to obtain our products from our suppliers and sell our products to our customers.
Some of our competitors are part of larger companies, and therefore have access to greater financial and other resources than those to which we have access. In addition, certain product manufacturers sell and distribute their products directly to customers. We also face growing competition from online and multichannel retailers. Additional manufacturers of products distributed by us may elect to sell and distribute directly to end-users in the future or enter into exclusive supply arrangements with other distributors. Competitive pressures from one or more of our competitors or our inability to adapt effectively and quickly to a changing competitive landscape could affect our prices, our margins or demand for our products and services. If we are unable to timely and appropriately respond to these competitive pressures, our net sales and net income will be reduced.
Our business operations could suffer significant losses from natural disasters, catastrophes, fire or other unexpected events.
We operate our business primarily out of a single facility. While we maintain insurance, including business interruption insurance, our warehouse facility could be materially damaged by natural disasters, fire, adverse weather conditions, or other unexpected events, which could materially disrupt our business. We could incur uninsured losses and liabilities arising from such events, including damage to our reputation, and/or suffer material losses in operational capacity, which could have a material adverse impact on our business, financial condition, and results of operations.
Increased IT security threats and more sophisticated and targeted computer crime could pose a risk to our information technology and cybersecurity systems.
Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and the confidentiality, availability and integrity of our data. While we attempt to mitigate these risks through employee training, monitoring of our networks and systems, and maintenance of backup and protective systems, our systems remain potentially vulnerable to advanced persistent threats. Depending on their nature and scope, such threats could potentially lead to the compromising of confidential information, improper use of our systems, manipulation and destruction of data, and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.
Our cash flows and capital resources may be insufficient to make required payments on our substantial indebtedness or to maintain acceptable liquidity.
We have a substantial amount of debt which could have important consequences to you. For example, it could:
· make it difficult for us to satisfy our debt obligations;
· make us more vulnerable to general adverse economic and industry conditions;
· limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, and other general corporate requirements;
· expose us to interest rate fluctuations because the interest rate on the debt under our revolving credit facility is variable;
· require us to dedicate a substantial portion of our cash flows to payments on our debt, thereby reducing the availability of our cash flows for operations and other purposes;
· limit our flexibility in planning for, or reacting to, changes in our business, and the industry in which we operate; and
· place us at a competitive disadvantage compared to competitors that may have proportionately less debt, and therefore may be in a better position to obtain favorable credit terms.
In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows, and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business, and other factors, many of which are beyond our control. These factors include, among others:
· economic and demand factors affecting the building products distribution industry;
· external factors affecting availability of credit;
· pricing pressures;
· increased operating costs;
· competitive conditions; and
· other operating difficulties.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital, or restructure our debt. Obtaining additional capital or restructuring our debt could be accomplished in part through new or additional borrowings or placements of debt or equity securities. There is no assurance that we could obtain additional capital or refinance our debt on terms acceptable to us, or at all. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on the disposition of such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. We may incur substantial additional indebtedness in the future. Our incurring additional indebtedness would intensify the risks described above.
The instruments governing our indebtedness restrict our ability to dispose of assets and the use of proceeds from any such disposition.
Our obligations under the Debt Agreements are secured by security interests in all of the assets of our operating subsidiary, BRJ LLC, including its inventories, accounts receivable, and proceeds from those items. The foregoing encumbrances, as well as covenants in the Debt Agreements, limit our ability to dispose of material assets or operations. Accordingly, we may not be able to consummate any disposition of assets or obtain the net proceeds which we could realize from such disposition, and these proceeds may not be adequate to meet the debt service obligations when due. In the event of our breach of the Debt Agreements, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interests in our assets or otherwise exercise their remedies with respect to such interests.
The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business, including requiring us to maintain a maximum fixed charge coverage ratio.
Our Debt Agreements contain various restrictive covenants and restrictions, including financial covenants that limit management’s discretion in operating our business. In particular, these instruments limit our ability to, among other things:
· incur additional debt;
· grant liens on assets;
· make investments, including capital expenditures;
· sell or acquire assets outside the ordinary course of business;
· engage in transactions with affiliates; and
· make fundamental business changes.
The Credit Facility also requires us to maintain a fixed charge coverage ratio of 1.15 to 1.00. If we fail to comply with the restrictions in the Debt Agreements or any other current or future financing agreements, a default may allow the creditors under the relevant instruments to accelerate the related debts and to exercise their remedies under these agreements, which typically will include the right to declare the principal amount of that debt, together with accrued and unpaid interest, and other related amounts, immediately due and payable, to exercise any remedies the creditors may have to foreclose on assets that are subject to liens securing that debt, and to terminate any commitments they had made to supply further funds. The exercise of any default remedies by our creditors would have a material adverse effect on our ability to finance working capital needs and capital expenditures.
Affiliates of Ancora control a significant portion of our outstanding common stock and may have conflicts of interest with other stockholders.
Ancora, a private investment firm, and investment partnerships and individuals affiliated with Ancora beneficially owned approximately 34.8% of our outstanding common stock as of March 9, 2018. As a result, Ancora is able to exert significant influence on the election of our directors, our corporate and management policies, and the outcome of most corporate transactions or other matters submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales, and other significant corporate transactions. This concentrated ownership position limits other stockholders’ ability to influence corporate matters and, as a result, we may take actions that some of our stockholders may not view as beneficial.
Three of our four directors and our Chief Executive Officer are affiliated with Ancora. The interests of Ancora may not coincide with the interests of other holders of our common stock. Additionally, Ancora is in the business of making investments in companies, and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Ancora may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Ancora continues to own a significant amount of the outstanding shares of our common stock, it will continue to be able to strongly influence our decisions, including potential mergers or acquisitions, asset sales, and other significant corporate transactions.
We may not have sufficient working capital in the long term.
It is likely we may require additional funds in the long term depending upon the growth of our revenues and our business strategy. We can give no assurance that we will be able to obtain sufficient debt or equity capital now or in the future to support our operations. Should we be unable to raise sufficient debt or equity capital, we could be forced to cease operations.
These and other factors could affect our business, financial condition and results of operations. Also, it is possible that our financial results may be below the expectations of public market analysts.
Additional tax expense or additional tax exposures could affect the company's future profitability and cash flow.
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017. The Tax Act significantly revamped U.S. taxation of corporations, including a reduction of the federal income tax rate from 35% to 21%, a limitation on interest deductibility, and a new tax regime for foreign earnings. The limitation on interest deductibility, or other adverse changes resulting from the Tax Act, might offset the benefit from the reduced tax rate, and our future effective tax rates and/or cash taxes may increase, even significantly, or not decrease much, compared to recent or historical trends. Many of the provisions of the Tax Act are highly complex and may be subject to further interpretive guidance from the IRS or others. Some of the provisions of the Tax Act may be changed by a future Congress. Although we cannot predict the nature or outcome of such future interpretive guidance, or actions by a future Congress, they could adversely impact our financial condition, results of operations and cash flows.
Risks Related to our Common Stock
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have not paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock would depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.
There is a limited market for our common stock which may make it more difficult to dispose of your stock.
Our common stock is currently quoted on the OTC marketplace. There is a limited trading market for our common stock. Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of our common stock to sell shares of our common stock, or the prices at which holders may be able to sell their common stock. Because of its limited trading volume, the price of our common stock may experience significant volatility for reasons that may be unrelated to our business or financial performance.
A sale of a substantial number of shares of our common stock may cause the price of the common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act and disclosure controls and procedures in accordance with Section 302 of the Sarbanes-Oxley Act could result in material misstatements in our financial statements, and cause stockholders to lose confidence in our financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to evaluate the effectiveness of its internal controls, and Section 302 of the Sarbanes-Oxley Act of 2002 requires the Company to evaluate its disclosure controls and procedures, in each case as of the end of each fiscal year, and to include a management report assessing the effectiveness of the Company’s internal control over financial reporting in each Annual Report on Form 10-K.
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017 as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, and determined that our internal controls were not effective due to material weaknesses. The identified material weaknesses related to an insufficient complement of qualified accounting personnel and ineffective controls associated with segregation of duties. Based on our Management’s evaluation of our disclosure controls and procedures and the continued existence of the material weaknesses as of December 31, 2017, our Management concluded that our disclosure controls and procedures were not effective as of December 31, 2017.
In response to the material weaknesses identified above, our Management, with assistance of an outside consultant and oversight from the Company’s audit committee, has continued to monitor and review our control environment and evaluate potential solutions intended to remedy the identified material weaknesses. If the material weaknesses are not effectively remediated, or if additional material weaknesses or significant deficiencies in our internal controls, or in our disclosure controls and procedures, are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results. This could result in stockholders losing confidence in our reported financial information or disclosure, which could negatively impact our stock price, or in securities litigation, and the diversion of significant management and financial resources.
We do not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 2
ITEM 2 - PROPERTIES
Our principal offices are at 6060 Parkland Boulevard, Cleveland, OH 44124. We do not pay for the use of the offices, which are located at the corporate headquarters of Ancora.
BRJ LLC operates out of a 42,000 square foot facility in East Syracuse, NY pursuant to a lease through 2020 with rent payments totaling $276,000 a year. It also has a 2,200 square foot sales office in Rochester, NY.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
There are currently no pending or threatened material legal proceedings against us.
ITEM 4
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC marketplace under the trading symbol “RGBD”. The closing price of our common stock on March 9, 2018 was $15.00.
The table below sets forth the range of quarterly high and low closing bid quotations for our common stock for the fiscal year ended December 31, 2017, the transition period ended December 31, 2016 and the fiscal year ended September 30, 2016 and gives effect to our 1 for 1,000 reverse stock split on July 26, 2016. The quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:
Issued and Outstanding Shares
Our authorized capital currently 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. As of March 9, 2018, we had 1,274,603 shares of common stock outstanding and no shares of preferred stock outstanding.
Holders of Record
As of March 9, 2018, there were approximately 220 holders of record of our common stock. This number does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.
Dividends
We did not pay any dividends on our common stock during the fiscal year ended December 31, 2017, the transition period ended December 31, 2016 and the fiscal year ended September 30, 2016, and we do not intend to pay any dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities during the fiscal year ended December 31, 2017.
Share Repurchased by the Registrant
We did not purchase or repurchase any of our securities in the fiscal year ended December 31, 2017, Transition Period ended December 31, 2016 and fiscal year ended September 30, 2016.
Transfer Agent
The transfer agent and registrar for our common stock is Standard Registrar and Transfer Company, Inc., 440 East 400 South, Suite 200, Salt Lake City, UT 84111.
Securities authorized for issuance under equity compensation plans
On April 8, 2016, we adopted the 2016 Equity Incentive Plan (the “Equity Incentive Plan”), which was amended and restated as of June 15, 2017. The maximum number of shares of our common stock available for issuance under the Equity Incentive Plan through the grant of non-qualified stock options, restricted stock, restricted stock units and other awards is 130,000 shares. Awards may be granted to employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its related companies. The purpose of the Equity Incentive Plan is to enable us to attract, motivate and retain key employees and directors and to provide an additional incentive for such individuals through stock ownership and other rights that promote and recognize the financial success and growth of our company.
The following table sets forth information as of December 31, 2017 regarding equity compensation plans under which our equity securities are authorized for issuance.
Equity Plan Compensation Information
(1) Pursuant to our 2016 Equity Incentive Plan
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
This item is not applicable to us as a smaller reporting company.
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 special 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 this Annual Report, 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 Inc. is a holding company formed to acquire regional companies with strong brand recognition, stable revenues and profitability. In April 2016, we sold an aggregate amount 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. After the acquisition of the business of BRJ Inc. by Regional Brands’ majority-owned subsidiary, BRJ LLC, Regional Brands is 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, 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 five years. 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.
BRJ LLC, on November 1, 2016, acquired the business of BRJ Inc. in an asset purchase transaction in exchange for cash of $14,000,000 (including working capital adjustments of approximately $1,100,000) and a subordinated note of $2,500,000. BRJ LLC will continue to operate the business of BRJ Inc. as a consolidated subsidiary of Regional Brands.
The acquisition by BRJ LLC 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 BRJ Inc., all of our business operations are being conducted through our consolidated subsidiary BRJ LLC.
Change in fiscal year end.
On December 20, 2016, the Board of Directors of the Company approved a change in the Company’s fiscal year-end, moving from September 30 to December 31 of each year. This Form 10-K includes financial information for the year ended December 31, 2017, the period from October 1, 2016 to December 31, 2016 (the "Transition Period 2016") and the fiscal year ended September 30, 2016.
Items Affecting the Comparability of Our Financial Results
Our future results of operations and cash flows will not be comparable to our historical results for the reasons described below.
As previously discussed, on November 1, 2016 our majority-owned subsidiary, BRJ LLC, acquired substantially all the assets of BRJ Inc. BRJ LLC is currently our only operating company and therefore generates all of sales and substantially all of our expenses and profits. As a result, operations and cash flows prior to November 1, 2016 are not comparable to results after that date as results of the Company for the fiscal year ended September 30, 2016 do not include results of the predecessor, BRJ Inc. and the transition period from October 1, 2016 to December 31, 2016 includes activity for BRJ Inc. from November 1, 2016 to December 31, 2016. Management believes that the financial results for the full year 2017 are the best baseline for future operations and cash flows. Therefore, the following Management Discussion and Analysis focuses on comparing the results of operations for the year ended December 31, 2017 with the 2016 period which includes the Transition Period 2016 and results of BRJ Inc. for the 10 month period ended October 31, 2016.
Given the significance of the acquisition on prior period activity, certain expenses such as acquisition transaction related costs, amortization of intangible assets and interest expense will not be comparative to historical costs of the predecessor or holding company and these changes have been identified below.
Results of Operations:
Net Sales: The Company had net sales of $36,927,284 and $6,748,263 during the year ended December 31, 2017 and the Transition Period 2016, respectively. Net sales of the predecessor for the ten-month period ended October 31, 2016 were $28,410,708. On a pro forma basis, net sales for the full year 2016 were $35,158,971, resulting in an increase in 2017 of $1,768,313, or 5%. The increase was primarily due to higher contract volume associated with increased construction activity in our primary market area - Upstate New York. Until the acquisition of BRJ, Inc., the Company had no sales.
Cost of Sales: The Company had cost of sales of $25,339,989 and $4,951,678 during the year ended December 31, 2017 and the Transition Period 2016, respectively. Cost of sales for the predecessor for the ten-month period ended October 31, 2016 were $19,875,441. On a pro forma basis, cost of sales for the full year 2016 were $24,827,119, resulting in an increase in 2017 of $512,870, or 2.1%. Cost of sales as a percent to sales was 68.6% in 2017 and 70.6% in 2016. The lower cost of sales as a percent to sales in 2017 was the result of a mix of higher margin jobs during 2017 as compared to 2016.
Selling, General & Administration Expenses: The Company had selling, general and administration expenses of $8,546,973 and $1,228,555 during the year ended December 31, 2017 and the Transition Period, respectively. Selling, general and administration expenses for the predecessor for the ten-month period ended October 31, 2016 were $5,702,341. On a pro forma basis, selling, general and administration expenses for the full year 2016 were $6,930,896, resulting in an increase in 2017 of $1,616,077, or 23.3%. The increase was due in part to certain acquisition related costs not historically incurred by the predecessor company including management, audit, legal, and recruiting fees of approximately $500,000. In addition, we incurred additional compensation costs, including the implementation of a new company-wide bonus plan at the BRJ level, of approximately $583,000 as we work to retain and attract talented employees to position ourselves for growth.
Amortization of intangible assets: Amortization of intangible assets arose solely from assets acquired in the BRJ Inc. acquisition, and amounted to $1,716,667 for 2017, as compared $458,334 for 2016 (attributable to the Transition Period 2016). The increase was due to the full year impact of the amortization in 2017.
Interest Expense: Interest expense was $223,749 in 2017, an increase of $86,581 over interest expense during the Transition Period 2016. The increase in interest expense was due to increased debt levels to fund the BRJ Inc. acquisition and operations that were outstanding for the full year in 2017, as compared to two months, during the Transition Period 2016. In connection with the Credit Facility described below in “Liquidity and Capital Resources”, the Company incurred expenses of approximately $100,000 that were charged to operations as interest expense during the Transition Period ended December 31, 2016.
Acquisition transaction related costs: We incurred $500,849 of transaction costs for the BRJ Inc. acquisition consisting principally of professional fees during the Transition Period 2016. No such expenses were incurred in 2017.
Net income:
As a result of the foregoing, net income for the year ended December 31, 2017 was $857,173, an increase of $1,377,222 compared to the net loss of $520,049 incurred during the Transition Period ended December 31, 2016. During the year ended December 31, 2017, we had an unrealized gain on investments of $3,960 resulting comprehensive income of $806,164, after income to our noncontrolling interest of $51,009.
Liquidity and Capital Resources
At December 31, 2017, we had working capital of $11,124,271 compared to working capital of approximately $9,239,594 at December 31, 2016. The increase in working capital is primarily due to our cash flows from operating activities. During the year ended December 31, 2017, net cash provided by operating activities was approximately $2,681,000. We used approximately $2,360,000 of those cash flows for investment activities which included the payment of consideration of approximately $1,110,000 to the former owners of BRJ Inc. to settle the remaining working capital liability resulting from the BRJ acquisition. We also used approximately $720,000 for financing activities which included a net reduction on our working capital line of credit of approximately $460,000.
During the transition period ended December 31, 2016, our operations, used approximately $788,000 of cash. Changes in working capital items resulted in cash used of approximately $763,000 during the transition period ended December 31, 2016. During the fiscal year ended September 30, 2016, our operations used approximately $47,000 of cash, and working capital items provided approximately $4,000 of cash.
In the past we had satisfied our working capital needs from borrowings from our former president and principal executive officer. We borrowed $7,600 during the year ended September 30, 2016. In April 2016, we issued to our former president and principal executive officer 18,522 shares of our common stock in full satisfaction of his loans and accrued interest thereon in the aggregate amount of approximately $250,000.
On April 8, 2016, we entered into and closed a Securities Purchase Agreement (the “SPA”) among us and Merlin Partners LP, Ancora Catalyst Fund LP, and Steven N. Bronson (collectively the “Purchasers”), whereby we sold to the Purchasers the aggregate amount of 370,441 shares of common stock for the aggregate purchase price of $5,000,000 (including the cancellation of all indebtedness that had been loaned to the Company by Mr. Bronson to fund operating expenses). In connection with the SPA, we changed our name from 4Net Software, Inc. to Regional Brands Inc. The transactions contemplated by the SPA resulted in a change of control of the Company from Steven N. Bronson to Merlin Partners LP, which purchased 240,786 shares of common stock for the aggregate purchase price of $3,250,000, and Ancora Catalyst Fund LP, which purchased 92,610 shares of common stock for the aggregate purchase price of $1,250,000. Merlin Partners LP and Ancora Catalyst Fund LP are affiliates of Ancora. We purchased short-term investment securities for approximately $2,186,000 with proceeds from the sale of common stock.
In November 2016, we completed a private placement and issued 894,393 shares of common stock and received gross proceeds of approximately $12,000,000. In connection with the acquisition of BRJ Inc., we used funds from the private placement to acquire 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 and also loaned to BRJ LLC $7,141,304 under a senior subordinated term note.
In November 2016, BRJ LLC entered into a credit agreement with KeyBank, N.A. Under the credit agreement, BRJ LLC may borrow up to an aggregate amount of $6,000,000 (the “Credit Facility”) under revolving loans and letters of credit, with a sublimit of $500,000 for letters of credit. The Credit Facility is payable upon demand of KeyBank, N.A., or the lenders, or upon acceleration as a result of an event of default. At the closing of the Acquisition, approximately $1,900,000 was drawn under the Credit Facility to pay a portion of the purchase price and costs associated with the Acquisition, with the balance being available for general working capital of BRJ LLC.
Interest under the Credit Facility is payable monthly, starting on November 30, 2016, and accrues pursuant to the “base rate” of interest, which is equal to the highest of (a) KeyBank, N.A.’s prime rate, (b) one-half of one percent (0.50%) in excess of the Federal Funds Effective Rate of the Federal Reserve Bank of New York, and (c) one hundred (100) basis points in excess of the London Interbank Offered Rate for loans in Eurodollars with an interest period of one month, plus any applicable margin. The credit agreement also requires the payment of certain fees, including, but not limited to, letter of credit fees.
The Credit Facility is secured by substantially all of BRJ LLC’s assets. The Credit Facility contains customary financial and other covenant requirements, including, but not limited to, a covenant to not permit BRJ LLC’s consolidated fixed charge coverage ratio to exceed 1.15 to 1.00. The Credit Facility also contains customary events of default.
The effective rate at December 31, 2017 was 3.94%. The aggregate borrowing outstanding under the Credit Agreement at December 31, 2017 was $1,812,454 ($2,272,710 at December 31, 2016) 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.
Under the Loan Agreement, we agreed to loan BRJ LLC $7,500,000. We participated $358,696 of the Subordinated Loan to BRJ Acquisition Partners, LLC, an entity owned by individuals affiliated with BRJ Inc. and Lorraine Capital, LLC. The Subordinated Loan accrues interest at a rate of 6% per annum, payable quarterly on the first day of each calendar quarter. BRJ LLC is required to repay a portion of the principal amount of the Subordinated Loan on each anniversary of the execution of the Loan Agreement. The Subordinated Loan matures on November 1, 2021 and is secured by substantially all BRJ LLC’s assets. The Subordinated Loan and the security interest created under the Loan Agreement are subordinated to the Credit Facility and the security interest of the lenders under the Credit Facility. All of the covenants contained in the Credit Agreement are incorporated by reference in the Loan Agreement. The Loan Agreement contains customary events of default, including in the case of an event of default under the Credit Facility.
On November 1, 2016, BRJ LLC issued a $2,500,000 subordinated promissory note to BRJ Inc. as part of the purchase price for the Acquisition (the “Note”). The Note is payable to BRJ Inc. and accrues interest at a rate of 5.25% per annum, payable quarterly, with the principal amount of the Note payable in equal quarterly installments of $62,500 commencing on November 1, 2018 and maturing on November 30, 2021. The Note is subordinated to the Credit Facility and the Loan Agreement.
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 BRJ LLC’s credit agreement will satisfy our capital requirements and fund our operations for 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 accounting principles generally accepted in the United States 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 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. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our financial statements:
Fair Value of Financial Instruments - 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 FASB 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.
Share-Based Payments
We record our common shares issued 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.
Revenue Recognition- 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 follow the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Revenue Recognition Topic 605-35 for accounting policies relating to our use of the POC method, estimating costs, and revenue recognition, including the recognition of incentive fees, unapproved change orders and claims, and combining and segmenting contracts. 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 cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts in progress. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates.
Costs incurred on jobs in process include all direct material and labor costs and certain indirect costs. General and administrative costs are charged to expense as incurred.
The balance of our revenue is related to fulfilling orders for the products we distribute which do not meet the criteria for revenue recognition under the POC method; revenue for these orders is recognized at the time of shipment.
Acquisitions
We account for our acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations.
When we acquire a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at their respective estimated fair values. We record any premium over the fair value of net assets acquired as goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in determining their fair value. The way we characterize the assets has important implications, as long-lived assets with definitive lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment. With respect to determining the fair value of assets, the most subjective estimates involve valuations of long-lived assets, such as property, plant, and equipment as well as identified intangible assets. We use all available information to make these fair value determinations and may engage independent valuation specialists to assist in the fair value determination of the acquired long-lived assets. The fair values of long-lived assets are determined using valuation techniques that use discounted cash flow methods, independent market appraisals and other acceptable valuation techniques.
Recent Accounting Pronouncements
Refer to Note 1 to the notes to our consolidated financial statements included in this Form 10-K for our assessment of Recent Accounting Pronouncements.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited financial statements for the year ended December 31, 2017, the transition period ended December 31, 2016 and for the year ended September 30, 2016 follow Item 16, beginning at page.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On November 1, 2016, upon the closing of the Transactions, we dismissed Anton and Chia, LLP (“A&C”), as our independent registered public accounting firm, which was recommended and approved by our Board of Directors (the “Board”) on November 1, 2016. A&C audited our financial statements for the fiscal year ended September 30, 2015. The reason for the replacement of A&C was that, following the Acquisition, BRJ LLC will carry on the business formerly conducted by BRJ Inc., and the current independent registered public accountants of BRJ Inc. is the firm of Freed Maxick CPAs, P.C. (“Freed Maxick”). We believe that it is in our best interest to have Freed Maxick continue to work with our business, and we therefore retained Freed Maxick as our new independent registered public accounting firm effective November 1, 2016. Freed Maxick is located at 424 Main Street, Suite 800, Buffalo, New York 14202.
The decision to change auditors and the appointment of Freed Maxick was recommended and approved by our Board. During our two most recent fiscal years, and the subsequent interim periods, prior to November 1, 2016, we did not consult Freed Maxick regarding either: (i) the application of accounting principles to a specified transaction, completed or proposed, or the type of audit opinion that might be rendered on our company’s financial statements, or (ii) any matter that was either the subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
A&C’s report on our financial statements for the fiscal year ended September 30, 2015 did not contain any adverse opinion or disclaimer of opinion and was not qualified as audit scope or accounting principles, however such year-end report did contain a modification paragraph that expressed substantial doubt about our ability to continue as a going concern.
During the fiscal year ended September 30, 2015 and the subsequent interim periods prior to November 1, 2016, (i) there were no disagreements between us and A&C on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of A&C, would have caused A&C to make reference to the subject matter of the disagreement in connection with its reports and (ii) there were no “reportable events,” as described in Item 304(a)(1)(iv) of Regulation S-K of the Securities Act or the Securities Exchange Act of 1934, as amended. The decision to replace A&C was not the result of any disagreement between us and A&C on any matter of accounting principle or practice, financial statement disclosure or audit procedure. Our Board deemed it in our best interest to change independent auditors following the closing of the Transactions.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our evaluation of internal control over financial reporting includes using the 2013 COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.
Our principal executive and financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the year covered by this report, concluded that our disclosure controls and procedures were not effective as of December 31, 2017 due to material weaknesses related to an insufficient compliment of qualified accounting personnel and ineffective controls associated with segregation of duties. Our Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017 as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, and has determined our internal controls over financial reporting were not effective due to material weaknesses that exist. The material weaknesses consist of an insufficient complement of qualified accounting personnel and controls associated with segregation of duties.
To address the material weaknesses we performed additional analyses and other post-closing procedures and utilized more resources to ensure that our financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Notwithstanding these material weaknesses, management believes that the financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented.
This annual report does not include an attestation report of the company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
As discussed above in this Item 9A, our internal controls over financial reporting were not effective as of December 31, 2017, as a result of material weaknesses related to an insufficient complement of qualified accounting personnel and controls associated with segregation of duties. These material weaknesses existed as of December 31, 2016 and through 2017, and continued to exist as of December 31, 2017.
In response to the material weaknesses identified above, our Management, with assistance of an outside consultant and oversight from the Company’s audit committee, has continued to monitor and review our control environment and evaluate potential solutions intended to remedy the identified material weaknesses.
There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
None
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS and CORPORATE GOVERNANCE
Directors and Executive Officers
The names, ages and positions of our directors and executive officers are as follows
Name
Age
Position
Carl Grassi
Chairman of the Board
Fred DiSanto
Chief Executive Officer and Director
Brian Hopkins
Director
Jeff Anderson
Director and Secretary
The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:
Carl Grassi became our Chairman of the Board in November 2016. Mr. Grassi is the chairman of the law firm McDonald Hopkins LLC, where he has worked as an attorney since July 1992. Mr. Grassi is corporate counsel and business advisor to a number of middle-market and growth companies. Mr. Grassi also authors the Small Business “Tax Tips” column for Crain’s Cleveland Business and has written other articles for national publications. Mr. Grassi earned his law degree from Cleveland-Marshall College of Law and his Bachelor’s degree from John Carroll University. Mr. Grassi is a Certified Public Accountant and is a former director of Mace Security International, Inc ,which designs and manufactures a wide range of security products. The Board believes that Mr. Grassi’s substantial experience as an accomplished attorney, negotiator and general counsel to companies will enable him to bring a wealth of strategic, legal and business acumen to the Board, well qualifying him to serve as a director.
Fred DiSanto became a member of our Board and our Chief Executive Officer in November 2016. Mr. DiSanto has worked at Ancora, a registered investment advisor, since June 2005, was named its Chief Executive Officer in January 2006 and was later named its Chairman in December 2014. He was the former President and Chief Operating Officer of Maxus Investment Group (“Maxus”) from 1998 until 2000, during which time he was responsible for the marketing, sales and financial operations. When Maxus was sold to Fifth Third Bank in January 2001, and until June 2005, Mr. DiSanto served as Executive Vice President and Manager of the Fifth Third Bank’s Investment Advisors Division overseeing investment management, private banking and trust and banking services. Prior to Maxus, Mr. DiSanto was Managing Partner at Gelfand Partners Asset Management from 1991 until its merger with Maxus in 1997. He began his investment career in 1985 with McDonald Investments in Institutional Equity Sales. Mr. DiSanto is currently on the boards of Medical Mutual of Ohio, Case Western Reserve University, The Cleveland Film Commission, WF Hann and Sons, Edgewater Technology, Inc. and The Eastern Company. He is also on the Executive Committee for the Board of Trustees at Case Western Reserve University. Mr. DiSanto is a former Chairman of the Board of Regents of St. Ignatius High School and former Chairman and current Trustee of the Greater Cleveland Sports Commission. He is a past Board Member of Lorain National Bank (LNBB), Parkview Federal Savings Bank (PVFC) and Axia NetMedia (AXX). Mr. DiSanto earned a Bachelor of Science degree in management science from Case Western Reserve University and a Master in Business Administration degree from Case Western Reserve University, Weatherhead School of Management (Cleveland, Ohio). The Board believes that Mr. DiSanto’s qualifications to serve on the Board include his substantial financial expertise and his prior experience as an executive officer of several companies.
Brian Hopkins has been a member of our Board since April 2016 and served as our President and Chief Executive Officer from April 2016 until November 1,2016. Mr. Hopkins has been a Partner and Portfolio Manager at Ancora since September 2003. He is a Managing Director of Corporate Development and a member of the Executive Committee at Ancora. In his role as Portfolio Manager, he is responsible for making investment decisions for the firm’s alternative products. Prior to joining Ancora, Mr. Hopkins was an Investment Associate with Primus Capital Partners, one of the largest private equity firms in the Midwest, from August 2001 to September 2003. Before joining Primus, he worked in the Investment Banking Division of Deutsche Bank in London as an Associate from August 1998 to June 2001. Mr. Hopkins is a former director of First Menasha Bancshares (OTC: FMBJ) and current board member of Wayne Savings Bancshares, Inc. Mr. Hopkins earned a Bachelor of Science degree in finance from Georgetown University. The Board believes that Mr. Hopkins’ substantial management and investment experience well qualify him to serve as a director.
Jeff Anderson has been a member of our Board since April 2016. Mr. Anderson joined Ancora in May 2010 as an Analyst and Portfolio Manager. He focuses on special situations such as liquidations, bankruptcies and spinoffs. Prior to joining Ancora full-time, he served as a consultant to Ancora. Mr. Anderson managed a special situations portfolio for Millennium Partners in New York from May 2006 to November 2008. He spent six years at the investment firm Kellogg Group in New York, working in the Specialist Operations Group on the floor of the New York Stock Exchange from January 2000 to October 2000, before working in the firm’s proprietary trading operation from October 2000 to March 2006. Mr. Anderson graduated with a Bachelor of Arts degree from Wilfrid Laurier University in Ontario, Canada. Mr. Anderson is a CFA charterholder. The Board believes that Mr. Anderson’s extensive business and capital markets experience well qualify him to serve as a director
Term of Office
Directors are elected to hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Officers of the Company are appointed by the Board. Each officer holds office until his successor is elected and qualified or until his earlier resignation or removal.
Board Committees
The Board does not currently have a compensation committee or nominations and corporate governance committee. The Board formed an audit committee during 2017, comprised of all of the directors and chaired by Mr. Anderson. The audit committee assists the Board in monitoring (i) the integrity of the Company’s financial statements, (ii) the independence, performance and qualifications of the Company’s auditors, (iii) the Company’s compliance with legal and regulatory requirements related to the Company’s financial statements and accounting policies, and (iv) assessing risk associated with the Company’s financial condition and performance.
Director Compensation
We currently do not provide cash compensation for our directors nor do we intend to provide cash compensation to our directors for the foreseeable future. On April 8, 2016, under the 2016 Equity Incentive Plan and pursuant to the SPA, we granted options to purchase 9,351 shares of common stock to each of Messrs. Hopkins and Anderson. If the Board deems compensation to our directors to be appropriate in the future, we expect that such compensation would be granted in the form of equity awards under our 2016 Equity Incentive Plan.
Indebtedness of Directors and Executive Officers
None of our directors or executive officers or their respective associates or affiliates is currently indebted to us.
Family Relationships
There are no family relationships among our directors and executive officers.
Legal Proceedings
As of the date of this current report, there is no material proceeding to which any of our directors, executive officers, affiliates or stockholders is a party adverse to us.
Code of Ethics
The Board adopted a Code of Ethics for the Company, a copy of which was attached as Exhibit 14 to the Form 10-K for the year ended September 30, 2004 and is incorporated herein by reference.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer and our other highest paid executive officers (collectively, our “named executive officers”) in the years indicated.
(1)Fred DiSanto was appointed to his position on November 1, 2016.
Employment Agreements
We do not currently have an employment agreement in place with our Chief Executive Officer, nor do we currently intend to provide compensation to our Chief Executive Officer in his capacity as such.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information regarding our outstanding equity awards made to directors as of December 31, 2017. None of our named executive officers held any outstanding equity awards as of December 31, 2017.
Compensation of Directors
We did not compensate our directors during the fiscal year ended December 31, 2017.
Equity Incentive Plan
On April 8, 2016, we adopted the 2016 Equity Incentive Plan (the “Equity Incentive Plan”), which was amended and restated as of June 15, 2017. The maximum number of shares of our common stock available for issuance under the Equity Incentive Plan through the grant of non-qualified stock options, restricted stock, restricted stock units and other awards is 130,000 shares. The purpose of the Equity Incentive Plan is to enable us to attract, motivate and retain key employees and directors and to provide an additional incentive for such individuals through stock ownership and other rights that promote and recognize the financial success and growth of our company.
The Equity Incentive Plan is to be administered by the Board. Subject to the other provisions of the Equity Incentive Plan, the Board has the authority, in its discretion: (i) to grant nonqualified stock options, restricted stock, restricted stock units and other awards, referred to collectively as “Awards”; (ii) to determine the terms and conditions of each Award granted (which need not be identical); (iii) to interpret the Equity Incentive Plan and all Awards granted thereunder; and (iv) to make all other determinations necessary or advisable for the administration of the Equity Incentive Plan. The persons eligible for participation in the Equity Incentive Plan as recipients of Awards include employees, consultants and non-employee directors to our company or any subsidiary or affiliate of our company. In selecting participants, and determining the number of shares of common stock covered by each Award, the Board may consider any factors that it deems relevant.
As of December 31, 2017, we had 42,596 options outstanding under the Equity Incentive Plan. In connection with the closing of the transactions under the SPA, we granted options to purchase 23,738 shares of common stock to Ancora and options to purchase 9,351 shares of common stock to each of Messrs. Hopkins, Anderson and Bronson, of which Mr. Bronson forfeited options to purchase 9,195 shares of common stock upon his resignation as a director on May 16, 2016.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial ownership of our common stock as of March 9, 2018 by (a) each person who is known by us to beneficially own 5% or more of our common stock, (b) each of our present directors and executive officers, and (c) all of our present directors and executive officers as a group.
*Less than one percent of outstanding shares.
(1)The address of each person is c/o Regional Brands Inc., 6060 Parkland Boulevard Cleveland, Ohio 44124.
(2)The calculation in this column is based upon 1,274,603 shares of common stock outstanding on March 9, 2018. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock that are currently convertible or exercisable or that are convertible or exercisable within 60 days of March 9, 2018 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(3)The Shares owned by The Laura L.Grassi Restatement of Trust UAD 3/10/0505, of which Laura L. Grassi, Mr. Grassi's wife, is the trustee.
(4)Includes 259,305 shares owned directly by Merlin Partners LP, 129,648 shares owned directly by Ancora Catalyst Fund LP, 8,203 shares subject to options held by Ancora that are currently exercisable or exercisable within 60 days of March 9, 2018, and 18,147 shares owned directly by Mr. DiSanto’s wife. Ancora is the general partner of each of Merlin Partners LP and Ancora Catalyst Fund LP. Mr. DiSanto is the Chief Executive Officer of Ancora. By virtue of this relationship, Mr. DiSanto may be deemed to beneficially own the shares of common stock owned directly by Merlin Partners LP and Ancora Catalyst Fund LP. Mr. DiSanto disclaims beneficial ownership of the shares that he does not directly own.
(5)Includes 4,039 shares subject to options that are currently exercisable or exercisable within 60 days of March 9, 2018.
(6)Includes 259,305 shares owned directly by Merlin Partners LP, 129,648 shares owned directly by Ancora Catalyst Fund LP, and 8,203 shares subject to options held by Ancora that are currently exercisable or exercisable within 60 days of March 9, 2018. Ancora is the general partner of each of Merlin Partners LP and Ancora Catalyst Fund LP. By virtue of this relationship, Ancora may be deemed to beneficially own the shares of common stock owned directly by Merlin Partners LP and Ancora Catalyst Fund LP. Ancora disclaims beneficial ownership of the shares that it does not directly own.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Management Services Agreements
Ancora
On April 8, 2016, in connection with the transactions contemplated by the SPA, we entered into a Management Services Agreement (the “MSA”) with Ancora, whereby Ancora agreed to provide specified services to us in exchange for a quarterly management fee in an amount equal to 0.14323% of our stockholders’ equity (excluding cash and cash equivalents) as shown on our balance sheet as of the end of each of our fiscal quarters. The management fee with respect to each fiscal quarter is paid no later than 10 days following the issuance of our financial statements for such fiscal quarter, and in any event no later than 60 days following the end of each fiscal quarter. For the fiscal year ended December 31, 2017, Ancora agreed to waive payment of the management fees.
Lorraine Capital, LLC
On November 1, 2016, in connection with the Transactions, 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.
Under its LLC Agreement, BRJ LLC is overseen by a five-member Board of Managers, with three of the initial managers nominated by Lorraine Capital, LLC and two of the initial managers nominated by Regional Brands. In the event the BRJ MSA is terminated for any reason, then either Regional Brands or (in the event the BRJ MSA is terminated by Regional Brands) Lorraine Capital, LLC may elect to have BRJ LLC repurchase the Lorraine Parties’ entire membership interest in BRJ LLC for the fair market value thereof as determined by an independent appraiser (or the amount the Lorraine Parties’ would have received upon the closing of a Qualified Offer, if one is then outstanding). If the membership interests of the Lorraine Parties are so redeemed, Regional Brands will be entitled to remove all of the members of the Board of Managers nominated by Lorraine Capital, LLC and will have the sole right to appoint the full Board of Managers. If the Lorraine Parties’ membership interests are not so redeemed (other than due to a breach of the LLC Agreement), Lorraine Capital, LLC will retain the right to appoint two members of the Board of Managers and Regional Brands will have the right to appoint three members of the Board of Managers. In either of the foregoing cases, the Lorraine Parties’ consent will no longer be required to make any major decisions that would have otherwise required the consent of all of the members under the LLC Agreement. During the year ended December 31, 2017, BRJ LLC paid $118,000 in management fees to Lorraine Capital, LLC. As of December 31, 2017 and 2016, $36,000 has been accrued as payable to Lorraine Capital, LLC under the BRJ MSA.
Registration Rights Agreement
On April 8, 2016, we entered into a Registration Rights Agreement (the “RRA”) among us and the Purchasers, pursuant to the terms of the SPA. Under the RRA, we granted to the Purchasers certain registration rights related to the aggregate 370,441 shares of our common stock issued pursuant to the SPA and agreed to certain customary obligations regarding the registration of such shares, including indemnification.
Leases
Effective May 12, 2016, we relocated our principal offices to 6060 Parkland Boulevard, Cleveland, OH 44124. During the year ended December 31, 2017, we paid no rent for the use of the offices, which are located at the corporate headquarters of Ancora.
Loan Agreement
Under the Loan Agreement, we agreed to loan $7,500,000 to our subsidiary BRJ LLC. We participated $358,696 of the Subordinated Loan to BRJ Acquisition Partners, LLC, an entity owned by individuals affiliated with BRJ Inc. and Lorraine Capital, LLC. The Subordinated Loan accrues interest at a rate of 6% per annum, payable quarterly on the first day of each calendar quarter. BRJ LLC is required to repay a portion of the principal amount of the Subordinated Loan on each anniversary of the execution of the Loan Agreement. The Subordinated Loan matures on November 1, 2021 and is secured by substantially all of BRJ LLC’s assets. The Subordinated Loan and the security interest created under the Loan Agreement are subordinated to the Credit Facility and the security interest of the lenders under the Credit Facility. All of the covenants contained in the Credit Agreement are incorporated by reference in the Loan Agreement. The Loan Agreement contains customary events of default, including in the case of an event of default under the Credit Facility.
Airways Door Service, Inc.
We have a relationship with a union qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations that require union installation and repair services. In connection with the Acquisition, individuals affiliated with Lorraine Capital, LLC acquired 57% of ADSI’s common stock; the remaining common stock is owned by three of BRJ Inc.’s employees. We paid ADSI for its services approximately $1,707,770 during the year ended December 31, 2017. In addition, we provide ADSI services utilizing an agreed-upon fee schedule. These services include accounting, warehousing, equipment use, employee benefit administration, risk management coordination and clerical functions. The amount of fees paid by ADSI to us for these services was $49,950 during the year ended December 31, 2017.
Director Independence
As our common stock is currently traded on the OTC, we are not subject to the rules of any national securities exchange which require that a majority of a listed company’s directors and specified committees of the board of directors meet independence standards prescribed by such rules, and thus we have not determined that any of our directors are independent under any such standards.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
Audit fees consist of fees for professional services rendered for audit and review services of the Company’s consolidated financial statements included in the Company’s reports on Form 10-K and review of financial statements included in its Forms 10-Q, and for services that are normally provided by the auditor in connection with statutory and regulatory filings or engagements. The aggregate fees billed or to be billed for the audit of the Company’s consolidated financial statements for the year ended December 31, 2017 was $84,000. The aggregate fees billed for the audit of the consolidated financial statements for the transition period ended December 31, 2016 and the fiscal year ended September 30, 2016 by our principal accountant, Freed Maxick CPAs, P.C was $21,000. The Company was not required to have an audit of its internal controls over financial reporting.
Audit Related Fees
During the year ended December 31, 2016, our principal accountant Freed Maxick CPAs billed us $112,500 for the audits and reviews of B.R. Johnson, LLC and its predecessor's financial statements for the years ended December 31, 2015, 2014, six months ended June 30, 2016 and 2015, for the ten months ended October 31, 2016 and two months ended December 31, 2016. There were no audit related fees in 2017.
Tax Fees
The aggregate fees billed for professional services rendered by our principal accountant, Freed Maxick CPAs, P.C., for preparation of tax returns during the year ended December 31, 2017 was $3,700. There were no amounts billed during the transition period ended December 31, 2016 or fiscal year ended September 30, 2016.
All Other Fees
During the year ended December 31, 2017, our principal accountant, Freed Maxick CPAs, P.C., billed us $2,400 for work performed in conjunction with SEC correspondence. During the Transition Period ended December 31, 2016, our principal accountant, Freed Maxick CPAs, billed us $33,500 for the due diligence work performed for us in connection with our acquisition of BRJ Inc. The aggregate other fees billed for professional services rendered by our principal accountant, Freed Maxick CPAs, P.C., and our former principal accountant, Anton and Chia, LLP, during the fiscal year ended September 30, 2016 was $0.
Our audit committee pre-approves all auditing services and permissible non-audit services provided to us by our independent registered public accounting firm. All fees listed above were pre-approved by either the audit committee or the Board in accordance with this policy.
ITEM 15
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits
The following exhibits are hereby filed as part of this Annual Report on Form 10-K or incorporated by reference.
2.1 Asset Purchase Agreement, dated as of November 1, 2016, by and among B. R. Johnson, Inc., William A. Harfosh, Michael V. Howard, Anthony C. Minieri, Arthur P. Brillanti, B.R. Johnson, LLC, William J. Maggio, Charles A. Rider, Richard F. Gioia and Justin M. Reich (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
3.1 Certificate of Incorporation of Regional Brands Inc., as amended (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
3.2 Amended and Restated Bylaws of Regional Brands Inc., as amended (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
3.3 Certificate of Amendment to the Certificate of Incorporation of Regional Brands Inc. (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Company on March 3, 2017).
4.1 Form of Subscription Agreement of Regional Brands Inc., dated as of November 1, 2016 (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.1 Credit and Security Agreement, dated as of November 1, 2016, by and among B.R. Johnson, LLC, the lending institutions party thereto and KeyBank National Association (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.2 Subordinated Promissory Note, dated as of November 1, 2016, issued by B.R. Johnson, LLC in favor of B. R. Johnson, Inc. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.3 Loan and Security Agreement, dated as of November 1, 2016, by and between B.R. Johnson, LLC and Regional Brands Inc. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.4 Management Services Agreement, dated as of November 1, 2016, by and between B.R. Johnson, LLC, and Lorraine Capital, LLC (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.5 Limited Liability Company Agreement of B.R. Johnson, LLC, dated as of November 1, 2016, by and among Lorraine Capital, LLC, Regional Brands Inc. and BRJ Acquisition Partners, LLC (Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.6 Securities Purchase Agreement among the Company and Merlin Partners LP, Ancora Catalyst Fund LP, and Steven N. Bronson, dated as of April 8, 2016 (Incorporated by reference to Exhibit 10.25 to the Current Report on Form 8-K filed by the Company on April 8, 2016).
10.7 Registration Rights Agreement among the Company and Merlin Partners LP, Ancora Catalyst Fund LP, and Steven N. Bronson, dated as of April 8, 2016 (Incorporated by reference to Exhibit 10.26 to the Current Report on Form 8-K filed by the Company on April 8, 2016).
10.8 Management Services Agreement between the Company and Ancora Advisors, LLC, dated as of April 8, 2016 (Incorporated by reference to Exhibit 10.27 to the Current Report on Form 8-K filed by the Company on April 8, 2016).
10.9# Regional Brands Inc. Amended and Restated 2016 Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on June 21, 2017).
10.10 Fourth Amended and Restated Consolidated Loan Agreement between Steven N. Bronson and 4net Software, Inc., dated December 19, 2012. (Incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K, dated December 28, 2012).
14.1 Code of Ethics. (Incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004).
16.1 Letter from Anton and Chia, LLP (Incorporated by reference to Exhibit 16.1 to the Current Report on Form 8-K/A filed by the Company on November 18, 2016).
21.1* Subsidiaries of Regional Brands Inc.
31.1* Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and15d-14(a)
31.2* Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and15d-14(a)
32** Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. 1350
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.
** This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
# Indicates management contract or compensatory plans or arrangements required to be filed as an exhibit to this Annual Report on Form 10-K.
ITEM 16 - FORM 10-K SUMMARY
Not applicable.
REGIONAL BRANDS INC.
FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Regional Brands Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Regional Brands Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity (deficiency) and cash flows for the year ended December 31, 2017, three month period ended December 31, 2016 and for the year ended September 30, 2016, and the related notes to the consolidated financial statement (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the year ended December 31, 2017, three month period ended December 31, 2016 and for the year ended September 30, 2016, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Freed Maxick CPAs, P.C.
We have served as the Company’s auditor since 2016.
Buffalo, New York
March 30, 2018
REGIONAL BRANDS INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements
REGIONAL BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
The accompanying notes are an integral part of the consolidated financial statements
REGIONAL BRANDS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
The accompanying notes are an integral part of the consolidated financial statements
REGIONAL BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements
REGIONAL BRANDS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Regional Brands Inc. (formerly 4net Software, Inc.) (the "Company') was incorporated under the laws of the State of Delaware in 1986. Regional Brands Inc. 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 was seeking to engage in an acquisition, merger or other business combination transaction with undervalued businesses (each, a “Target Company”) with a history of operating revenues in markets that provide opportunities for growth. On November 1, 2016 (Note 2) the Company's majority-owned subsidiary acquired substantially all 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.
Change in fiscal year end.- On December 20, 2016, the Board of Directors of the Company approved a change in the Company’s fiscal year-end, moving from September 30 to December 31 of each year. This Form 10-K includes financial information for the year ended December 31, 2017, the period from October 1, 2016 to December 31, 2016 (the "Transition Period 2016") and the fiscal year ended September 30, 2016.
Principles of Consolidation - The consolidated financial statements include the accounts of Regional Brands Inc and its majority-owned subsidiary, B.R. Johnson, LLC (“BRJ LLC”). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“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 from those estimates and be based on events different from those assumptions. Future events and their effects cannot be predicted with certainty; estimating, therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired or as additional information is obtained. We believe the most significant estimates and judgments are associated with revenue recognition for our contracts, including estimating costs and the recognition of unapproved change orders and claims.
Common Shares Issued and Earnings (Loss) Per Share - Common shares issued are recorded based on the value of the shares issued or consideration received, including cash, services rendered or other non-monetary assets, whichever is more readily determinable. The Company presents basic and diluted earnings (loss) per share. Basic earnings (loss) per share reflect the actual weighted average number of shares issued and outstanding during the period. Diluted earnings (loss) per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation for basic and diluted earnings (loss) per share is considered to be the same, as the impact of potential common shares issued is anti-dilutive.
Fair Value of Financial Instruments - Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, and line of credit. Fair values were assumed to approximate carrying values for these financial instruments 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.
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:
The Company did not have any fair value measurements within Level 2 or Level 3 of the fair value hierarchy as of December 31, 2017.
The table below presents the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2016:
The Company did not have any fair value measurements within Level 2 or Level 3 of the fair value hierarchy as of December 31, 2016.
Cash Equivalents - All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Amounts included in cash equivalents on the accompanying balance sheet are money market funds and a certificate of deposit whose adjusted costs approximate fair value.
Short-Term Investments - The Company’s investments are classified as available for sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the classifications at each balance sheet date. The investments are classified as either short-term or long-term based on the nature of each security and its availability for use in current operations. The investments are carried at fair value with unrealized gains and losses reported separately in other comprehensive income (loss). Realized gains and losses are calculated using the original cost of those investments. During the year ended December 31, 2017, the Company purchased common stock for $109,387 and preferred shares for $901,590 and had an unrealized gain of $3,960. During the transition period ended December 31, 2016, the Company purchased preferred shares for $25,557 and had an unrealized loss of $6,227. During the year ended September 30, 2016, the Company purchased preferred shares for $932,115 and had an unrealized gain of $763.
Comprehensive Income (Loss) - Comprehensive income (loss) is defined as the change in equity of the Company during a period from transactions and other events and circumstances from non-owner sources. It consists of net income (loss) and other income and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income (loss). The change in fair value of investments was the only item impacting accumulated other comprehensive income (loss) for the year ended December 31, 2017, transition period ended December 31, 2016 and for the year ended September 30, 2016.
1 for 1,000 stock split- On July 22, 2016, the Company filed a certificate of amendment (the “Amendment”) to the Company’s Certificate of Incorporation with the Delaware Secretary of State to effect a 1 for 1,000 reverse stock split (the “Reverse Split”) of the Company’s issued and outstanding Common Stock and to reduce the number of shares of Common Stock the Company was authorized to issue from 750,000,000 to 50,000,000 shares. The Reverse Split became effective on July 26, 2016 (the “Effective Time”). The Amendment, including the Reverse Split, was approved by the Board of Directors of the Company and the holders of a majority of the issued and outstanding shares of Common Stock by written consent in lieu of a meeting.
As a result of the Reverse Split, at the Effective Time, every 1,000 shares of the Company’s issued and outstanding Common Stock were automatically combined and reclassified into one (1) share of Common Stock. The Company rounded up any fractional shares, on account of the Reverse Split, to the nearest whole share of Common Stock. The Company has prepared the financial, share and per share information included in this annual report on a post-split basis.
Reduction of Authorized Shares- On March 2, 2017, the Company filed a certificate of 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 reduce the number of shares of Preferred Stock the Company is authorized to issue from 5,000,000 to 50,000 shares. The amendment became effective on March 2, 2017. 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.
Revenue Recognition- 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 follow the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Revenue Recognition Topic 605-35 for accounting policies relating to our use of the POC method, estimating costs, and revenue recognition, including the recognition of incentive fees, unapproved change orders and claims, and combining and segmenting contracts. 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 cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts in progress. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates.
Costs incurred on jobs in process include all direct material and labor costs and certain indirect costs. General and administrative costs are charged to expense as incurred.
The balance of our revenue is related to fulfilling orders for the products we distribute which do not meet the criteria for revenue recognition under the POC method; revenue for these orders is recognized at the time of shipment.
Accounts Receivable and Allowance for Doubtful Accounts- Accounts receivable are recorded at their invoiced amount, net of any allowance for doubtful accounts, and do not bear interest. Our billed and unbilled revenue may be exposed to potential credit risk if our customers should encounter financial difficulties. The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts receivable balances, credit quality of our customers, current economic conditions and other factors that may affect the customers’ ability to pay. The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts receivable balances, credit quality of our customers, current economic conditions and other factors that may affect the customers’ ability to pay. As of December 31, 2017 and December 31, 2016, our allowance was doubtful accounts was $100,000 and $150,000, respectively. As of December 31, 2017 and 2016, we had retainage receivable of $769,000 and $367,081, respectively, included in accounts receivable in the accompanying consolidated balance sheets.
Precontract Costs- Precontract costs are charged to operations as incurred.
Inventories- Inventory is valued at the lower of cost (first-in, first-out) or net realizable value. Inventory is comprised of purchased materials and other materials that have been assigned to a job deemed to be work-in-process. As of December 31, 2017 and 2016, the work-in-process inventory was $676,153 and $942,340, respectively, 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 approximately $66,000 and $60,000 as of December 31, 2017 and December 31, 2016, respectively.
Equipment- Equipment is stated at cost. Depreciation and amortization is computed using straight-line methods at rates adequate to amortize the cost of the various classes of assets over their estimated service lives, ranging from two to fifteen years. Depreciation and amortization the year ended December 31, 2017 was $122,503. Depreciation and amortization expense for the transition period ended December 31, 2016 was $16,689. There was no depreciation or amortization expense for the year ended September 30, 2016.
Long lived assets, Identifiable Intangible Assets and Goodwill - Long lived assets, identifiable intangibles assets and goodwill are reviewed periodically for impairment or when events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. With respect to goodwill, the Company tests for impairment on an annual basis or in interim periods if an event occurs or circumstances change that may indicate the fair value is below its carrying amount. Factors that could trigger an impairment review, include the following: (a) significant underperformance relative to expected historical or projected future operating results; (b) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (c) significant negative industry or economic trends.
Impairments of long-lived assets are recognized if future undiscounted cash flows from operations are not expected to be sufficient to recover the carrying value of the long-lived assets. The carrying amounts are then reduced to fair value, which is typically determined by using a discounted cash flow model.
When performing its evaluation of goodwill and identifiable intangible assets for impairment, the Company may elect to perform a qualitative assessment that considers economic, industry and company-specific factors. If, after completing the assessment, it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company proceeds to a quantitative test. The Company may also elect to perform a quantitative test instead of a qualitative test.
Quantitative testing requires a comparison of the fair value of the reporting unit to its carrying value. The Company uses the discounted cash flow method to estimate the fair value of the reporting unit. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth rate and the weighted average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the evaluation of goodwill for impairment. The new standard does not change how goodwill impairment is identified rather, how goodwill impairment is measured. Under the new standard, goodwill impairment is calculated as the amount by which the reporting unit’s carrying value exceeds its fair value and it eliminates the need to calculate the implied value of goodwill by assigning the fair value of the reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination and subtracting that implied fair value from the actual goodwill balance. The Company elected to adopt the new standard for future goodwill impairment tests during the year ended December 31, 2017.
There were no impairment charges in any of the periods presented in the accompanying consolidated statements of operations and comprehensive income (loss).
Business Combinations- We account for our acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations.
When we acquire a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at their respective estimated fair values. We record any premium over the fair value of net assets acquired as goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in determining their fair value. The way we characterize the assets has important implications, as long-lived assets with definitive lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment. With respect to determining the fair value of assets, the most subjective estimates involve valuations of long-lived assets, such as property, plant, and equipment as well as identified intangible assets. We use all available information to make these fair value determinations and may engage independent valuation specialists to assist in the fair value determination of the acquired long-lived assets. The fair values of long-lived assets are determined using valuation techniques that use discounted cash flow methods, independent market appraisals and other acceptable valuation techniques.
Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions. As of December 31, 2017 and 2016, two customers accounted for 33% and 24% of the accounts receivable, respectively.
Share-Based Compensation Expense - The Company accounts for stock-based compensation under the provisions of FASB ASC 718 “Stock Compensation.” This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service in exchange for the award, which is usually the vesting period. The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 “Equity - Based Payment to Non-Employees” and accordingly the value of the stock compensation to non-employees is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.
Income Taxes - The Company accounts for income taxes with the recognition of estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carryforwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized in the immediate future.
The Company reviews tax positions taken to determine if it is more likely than not that the position would be sustained upon examination resulting in an uncertain tax position. The Company did not have any material unrecognized tax benefit at December 31, 2017 and December 31, 2016. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the year ended December 31, 2017, transition period ended December 31, 2016 and year ended September 30, 2016, the Company recognized no interest and penalties.
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 must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “new revenue standards”). The revenue standards will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard on January 1, 2018 will not have a material impact on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. Entities will no longer be able to use the cost method of accounting for equity securities. However, for equity investments without readily determinable fair values, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. The pronouncement also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. The adoption of this standard is not expected to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued an accounting standard update ASU 2016-02, “Leases” to replace existing lease accounting guidance. This pronouncement is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. Expenses associated with leases will continue to be recognized in a manner similar to current accounting guidance. This pronouncement is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The adoption is required to be applied on a modified retrospective basis for each prior reporting period presented. The Company has not yet determined the effect that the adoption of this pronouncement may have on its financial position and/or results of operations.
Newly Adopted Accounting Pronouncements- In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventory by using only the lower of cost and net realizable value. This standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and must be applied on a retrospective basis. We adopted the new accounting standard in the first quarter of 2017. There was no material impact to the Company’s financial statements as a result of adopting this new accounting standard.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The guidance becomes effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this ASU required the classification of deferred tax assets as long term on the accompanying consolidated balance sheets for the year ended December 31, 2017.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company as of January 1, 2017. There was no material impact to the Company’s financial statements as a result of adopting this new accounting standard.
NOTE 2- ACQUISITION OF B.R. JOHNSON, INC.
On November 1, 2016, the Company's majority-owned subsidiary, B.R. Johnson, LLC (“BRJ LLC”) acquired substantially all of the assets (the “Acquisition”) of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty products for use in commercial and residential buildings (the “Business”). Following the Acquisition, BRJ LLC carried on the business and operations of BRJ Inc.
The Acquisition was consummated pursuant to an Asset Purchase Agreement, dated as of November 1, 2016 (the “APA”). Total consideration for the Acquisition was approximately $15.4 million (subject to customary working capital adjustments), including delivery by BRJ LLC of a promissory note for $2,500,000 to BRJ Inc. (the “Subordinated term note”), which is subordinate to the debt agreements, as described below. The Note accrues interest at a rate of 5.25% per annum, payable quarterly, with the principal amount of the Note payable in equal quarterly installments of $62,500 commencing on November 1, 2018 and maturing on November 30, 2021.
The Company provided $10.95 million in debt and equity financing to complete the Acquisition, including $7.14 million of the subordinated loan (the " Senior subordinated note") and $3.81 million in preferred equity of BRJ LLC with the remainder from bank financing, the Subordinated term note and entities affiliated with Lorraine Capital, LLC. The Company holds 76.17% of the common membership interests and 95.22% of the preferred membership interests of BRJ LLC, pursuant to the B.R. Johnson, LLC Limited Liability Company Agreement (the “LLC Agreement”) entered into by and among Lorraine Capital, LLC (which owns 20% of the common membership interests), Regional Brands Inc. and BRJ Acquisition Partners, LLC (which owns the remaining 3.83% of the common membership interests and 4.78% of the preferred membership interests).
Allocation of Purchase Price - The purchase price was determined in accordance with the accounting treatment of the acquisition as a business combination in accordance with FASB ASC 805. Under the guidance, the fair value of the consideration was determined and the assets and liabilities of the acquired business, BRJ Inc., have been recorded at their fair values at the date of the acquisition. The excess of the purchase price over the estimated fair values has been recorded as goodwill.
The allocation of purchase price to the assets acquired and liabilities assumed at the date of the acquisition is presented in the table below. This allocation is based upon valuations using management’s estimates and assumptions. The Company allocated $6,000,000 of the purchase price to intangible assets relating to the covenants not to compete, which management estimates has a life of five years. Amortization expense amounted to $1,200,000 for year ended December 31, 2017 and $200,000 during the transition period ended December 31, 2016 and is estimated to be $1,200,000 in each of the succeeding years until fully amortized in November 2021. In addition, the Company allocated $775,000 to unbilled backlog, which the management estimated had a life of six months. During the transition period ended December, 31, 2016, $258,834 was amortized and the balance $516,166 was amortized during year ended December 31, 2017. After allocation of fair values to identifiable assets and liabilities, the excess of purchase price amounting to $3,013,287 was allocated to goodwill. The following table summarizes the allocation of the purchase price for the acquisition of BRJ, Inc.
BRJ LLC's operating results are included from the date of acquisition, November 1, 2016, and portions of the subordinated debt and equity are eliminated in consolidation.
NOTE 3- CONTRACTS IN PROCESS
Cost of revenue for our long-term contracts includes direct contract costs, such as materials and labor, and indirect costs that are attributable to contract activity. The timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Projects with costs and estimated earnings recognized to date in excess of cumulative billings 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:
Prior to acquisition of BRJ Inc. on November 1, 2016 (Note 2), the Company did not have any contracts in process.
NOTE 4- EQUIPMENT
Equipment is summarized as follows:
Prior to acquisition of BRJ Inc. on November 1, 2016 (Note 2), the Company did not have any equipment.
NOTE 5- INTANGIBLE ASSETS
Intangible assets arose from BRJ Inc. acquisition. (Note 2) and consist of the following:
Amortization expense related to these intangible assets amounted to $1,716,667 for the year ended December 31, 2017 and $458,334 during the transition period ended December 31, 2016.
NOTE 6-DEBT
Credit Facility
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 year December 31, 2017, the Company was in compliance with these covenants.
The effective rate at December 31, 2017 was 3.94% (3.19% at December 31, 2016). The aggregate borrowing outstanding under the Credit Facility at December 31, 2017 was $1,812,454 ($2,272,710 at December 31, 2016) 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. In connection with Credit Facility, the Company incurred expenses of approximately $100,000 that was charged to operations as interest expenses during the transition period ended December 31, 2016.
Senior Subordinated Debt
BRJ LLC borrowed an aggregate of $7,500,000 (the “Subordinated Loan”) pursuant to a Loan and Security Agreement (the “Loan Agreement") with the Company. The Company provided $7,141,304 of the funding and $358,696 was participated. The Subordinated Loan accrues interest at a rate of 6% per annum, payable quarterly on the first day of each calendar quarter. BRJ LLC is required to repay a portion of the principal amount of the Subordinated Loan on each anniversary of the execution of the Loan Agreement. The Subordinated Loan matures on November 1, 2021 and is secured by substantially all of BRJ LLC’s assets. The Subordinated Loan and the security interest created under the Loan Agreement are subordinated to the Credit Facility and the security interest of the lenders under the Credit Facility. All of the covenants contained in the Credit Agreement are incorporated by reference in the Loan Agreement. The Loan Agreement contains customary events of default, including in the case of an event of default under the Credit Facility.
BRJ LLC incurred expenses of $125,730 in connection with the borrowings. This amount is treated as debt discount and adjusted with the carrying value of debt. The debt discount is being amortized over the life of the debt. Amortization expense was $25,146 during the year ended December 31, 2017 and $4,191 during the transition period ended December 31, 2016, and the unamortized debt discount balance at December 31, 2017 was $96,197 ($121,343 at December 31, 2016).
During the year ended December 31, 2017, BRJ LLC repaid $300,000 of the borrowings including $285,660 to the Company.
The amount of the debt that was participated, net of the unamortized debt discount, is shown in the accompanying balance sheet as Senior Subordinated Debt and had a balance outstanding of $247,963 at December 31, 2017 ($237,157 at December 31, 2016).
Subordinated term note
On November 1, 2016, BRJ LLC issued a $2,500,000 subordinated promissory note to BRJ Inc. as part of the purchase price for the Acquisition (the “Note”). The Note is payable to BRJ Inc. and accrues interest at a rate of 5.25% per annum, payable quarterly, with the principal amount of the Note payable in equal quarterly installments of $62,500 commencing on November 1, 2018 and maturing on November 30, 2021. The Note is subordinated to the Credit Facility and the Loan Agreement.
Scheduled maturities of long-term debt at December 31, 2017 are as follows:
NOTE 7. STOCKHOLDERS’ EQUITY
On July 22, 2016, the Company filed a certificate of amendment to the Company’s Certificate of Incorporation with the Delaware Secretary of State, which became effective on July 26, 2016, to reduce the number of shares of the Company’s common stock, par value $0.00001 per share, the Company is authorized to issue from 750,000,000 to 50,000,000 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.
On March 2, 2017, the Company filed another certificate of amendment to the Company’s Certificate of Incorporation with the Delaware Secretary of State to reduce the number of shares of the Company’s common stock, par value $0.00001 per share, 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, par value $.01 per share, 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.
On April 8, 2016, the Company entered into and closed a Securities Purchase Agreement (the “SPA”) among the Company and Merlin Partners LP, Ancora Catalyst Fund LP, and Steven N. Bronson (collectively the “Purchasers”), whereby the Company sold to the Purchasers the aggregate amount of 370,441 shares of Common Stock for the aggregate purchase price of approximately $5,000,000 (including the cancellation of all indebtedness that had been loaned to the Company by Mr. Bronson to fund operating expenses). In connection with the SPA, the Company changed its name from 4Net Software, Inc. to Regional Brands Inc. The transactions contemplated by the SPA resulted in a change of control of the Company from Steven N. Bronson to Merlin Partners LP, which purchased 240,786 shares of Common Stock of the Company for the aggregate purchase price of $3,250,000.00, and Ancora Catalyst Fund LP, which purchased 92,610 shares of Common Stock of the Company for the aggregate purchase price of $1,250,000.00. Merlin Partners LP and Ancora Catalyst Fund LP are affiliates of Ancora Advisors, LLC a registered investment advisor and a related party.
On April 8, 2016, the Company entered into a Registration Rights Agreement (the “RRA”) among the Company and the Purchasers, pursuant to the terms of the SPA. Under the RRA, the Company granted to the Purchasers certain registration rights related to the aggregate 370,441 shares of the Company's common stock issued pursuant to the SPA and agreed to certain customary obligations regarding the registration of such shares, including indemnification.
On November 1, 2016, the Company completed a private placement in which it issued 894,393 shares of its common stock and received aggregate gross proceeds of $12,074,311.
On November 1, 2016, BRJ LLC sold 4.78% of its preferred membership interests for aggregate net proceeds of $128,534. This amount is included in noncontrolling interest in the accompanying consolidated financial statements. BRJ LLC’s Limited Liability Company Agreement provides for distributions of available cash to be made to the preferred members until they receive a cumulative preferred return of five percent per annum, compounded annually, on their unreturned preferred capital. During the year ended December 31, 2017, BRJ LLC distributed $1,218,234 including $245,895 to noncontrolling interests.
NOTE 8. EQUITY INCENTIVE PLAN
On April 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “Equity Incentive Plan”), which was amended and restated as of June 15, 2017. The maximum number of shares of the Company's common stock available for issuance under the Equity Incentive Plan through the grant of non-qualified stock options, restricted stock, restricted stock units and other awards is 130,000. Awards may be granted to employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its related companies. Stock based compensation includes expense charges related to all stock-based awards. Such awards include options, warrants and stock grants. The Company did not grant any options during the year ended December 31, 2017 or during the transition period ended December 31, 2016. During the fiscal year ended September 30, 2016, the Company issued stock options that vest in 60 equal monthly installments and expire in 15 years.
The Company records share based payments under the provisions of FASB ASC 718 "Compensation - Stock Compensation." Stock based compensation expense is recognized over the requisite service period based on the grant date fair value of the awards. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.
The Company estimated the expected volatility based on data used by its peer group of public companies. The expected term was estimated using the simplified method. The risk-free interest rate assumption was determined using the equivalent U.S. Treasury bonds yield over the expected term. The Company has never paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. Therefore, the Company assumed an expected dividend yield of zero.
The following shows the significant assumptions used to compute the share-based compensation expense for stock options granted during the year ended September 30, 2016:
A summary of all stock option activity at December 31, 2017 is as follows:
The Company granted 51,791 options during the year ended September 30, 2016. No options were exercised during the year ended December 31, 2017, transition period ended December 31, 2016 or year ended September 30, 2016. The fair value of options that vested during the year ended September 30, 2016 amounted to approximately $23,212 and the Company recorded stock compensation expense for options vesting during the year ended September 30, 2016 of $23,212. During the years ended December 31, 2017 and transition period ended December 31, 2016, the Company did not grant any options and the fair value of options that vested amounted to approximately $61,612 and $15,787, respectively, and the Company recorded compensation expense for options vested of $61,612 and $15,787, respectively.
The weighted-average grant date fair value of options granted and vested during the year ended September 30, 2016 was $6.29. The weighted-average grant date fair value of options vested during the year ended December 31, 2017 and transition period ended December 31, 2016 was $7.08 and $7.41, respectively.
At December 31, 2017, there was approximately $201,000 of unrecognized compensation cost related to non-vested options. This cost is expected to be recognized over a weighted average period of approximately 3.2 years.
NOTE 9 - RELATED PARTY TRANSACTIONS
On April 8, 2016, the Company entered into a Management Services Agreement (the “MSA”), between the Company and 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 shareholders’ 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 fiscal year ended December 31, 2017, the transition period ended December 31, 2016 and the fiscal year ended September 30, 2016, Ancora agreed to waive payment of the management fees.
The Company’s former president and principal executive officer had loaned the Company money to fund working capital needs to pay operating expenses. The loans were repayable upon demand and accrued interest at the rate of 10% per annum. As of March 31, 2016, the aggregate principal loan balance amounted to $186,196 and such loans had accrued interest of $63,804 through March 31, 2016. On April 8, 2016, pursuant to the SPA, the Company issued to its former president and principal executive officer 18,522 shares of the Company’s Common Stock in full satisfaction his loans to the Company.
Prior to May 12, 2016, the Company occupied a portion of the offices occupied by BKF Capital Group, Inc., 31248 Oak Crest Drive, Suite 110, Westlake Village, California 91361 on a month to month basis for a fee of $50 per month paid to BKF Capital Group, Inc. The Company’s former president and principal executive officer is also the Chairman, CEO and controlling shareholder of BKF Capital Group, Inc.
Effective May 12, 2016, the Company relocated its principal offices to 6060 Parkland Boulevard, Cleveland, OH 44124. The Company pays no rent for the use of the offices, which are located at the corporate headquarters of Ancora Advisors, LLC.
On November 1, 2016, in connection with the Acquisition, BRJ LLC entered into a Management Services Agreement (the “BRJ MSA”) with Lorraine Capital, LLC, a member of BRJ LLC, whereby Lorraine Capital, LLC agreed to provide specified management, financial and reporting services to us in exchange for an annual management fee in an amount equal to the greater of (i) $75,000 or (ii) five percent (5%) of the annual EBITDA (as defined in the BRJ MSA) of BRJ LLC, payable quarterly in arrears and subject to certain adjustments and offsets set forth in the BRJ MSA. The BRJ MSA may be terminated by BRJ LLC, Lorraine Capital, LLC or Regional Brands at any time upon 60 days’ prior written notice and also terminates upon the consummation of a sale of BRJ LLC. During the year ended December 31, 2017 BRJ LLC paid $118,000 in management fees to Lorraine Capital, LLC. As of December 31, 2017 and 2016, $36,000 has been accrued as payable to Lorraine Capital, LLC 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. In connection with the Acquisition, individuals affiliated with Lorraine Capital, LLC acquired 57% of ADSI’s common stock; the remaining common stock is owned by three of BRJ Inc.’s employees. BRJ LLC paid ADSI for its services approximately $1,707,770 during the year ended December 31, 2017 and $277,500 during the transition period ended December 31, 2016. In addition, BRJ LLC provides 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 $49,950 during the year ended December 31, 2017 and $7,500 during the transition period ended December 31, 2016.
NOTE 10- COMMITMENTS
The Company leases its primary facility in East Syracuse, NY under a five year agreement that expires on October 31, 2021 with an option to extend the term for an additional five years. The Company also leases a facility in Rochester, NY that expires on July 31, 2019. Rent expense for these facilities amounted to $306,000 for the year ended December 31, 2017 and $51,000 during the transition month period ended December 31, 2016. The minimum lease payments under the agreements are as follows:
The Company also leases automobiles and delivery vehicles under noncancellable operating leases that expire in 2018. The minimum lease payments for the year ending December 31, 2018 is $36,113.
The Company is a member of a captive insurance entity, to provide for the potential liabilities for certain risks including workers’ compensation, general liability, and automotive. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors and severity factors. As of December 31, 2017 and 2016 no liability has been recorded because a material liability for additional costs is considered remote. As a member of the captive insurance entity, the Company was required to provide an equity contribution of $30,000 and a dividend pool contributions of $114,728, which are included in other assets on the accompanying balance sheets as of December 31, 2017.
NOTE 11- INCOME TAXES
The income tax provision (benefit) for the year ended December 31, 2017, transition period ended December 31, 2016 and fiscal year ended September 30, 2016 is summarized in the following table.
The significant components of the deferred tax assets and liabilities are summarized below.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; and (3) changing rules related to usage and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017. The effect of the rate change attributable to the Tax Act on the Company’s effective tax rate was a 10.3% (or $131,000) decrease in the net deferred tax asset.
The Company has approximately $1,290,000 in federal net operating loss carryforwards (“NOL’s”) available to reduce future taxable income. These carryforwards begin to expire in various years between 2018 and 2037.
Internal Revenue Code Section 382 ("Section 382") imposes limitations on the availability of a company's net operating losses and other corporate tax attributes as certain significant ownership changes occur. As a result of the historical equity instrument issuances by the Company, a Section 382 ownership change may have occurred and a study will be required to determine the date of the ownership change, if any. The amount of the Company's net operating losses and other tax attributes incurred prior to any ownership change may be limited based on the Company's value. With recent consistency in earnings, a strong earnings history of B.R. Johnson, Inc., a recent acquisition, and favorable projections, the Company has reversed its valuation allowance, during the quarter ended September 30, 2017, on deferred tax assets associated with activity beginning with the acquisition of B.R. Johnson, Inc., but exclusive of pre-acquisition losses that are subject to limitations under Section 382.
During the fiscal year ended December 31, 2017, transition period ended December 31, 2016 and fiscal year ended September 30, 2016 the Company had no unrecognized tax benefits. The Company’s policy is to recognize interest accrued and penalties related to unrecognized tax benefits in tax expense.
The Company files income tax returns in the U.S. federal jurisdiction and in the states of California and Florida. The tax years 2014-2016 generally remain open to examination by these taxing authorities.
A reconciliation of the income tax provision using the statutory U.S. income tax rate compared with the actual income tax provision reported on the consolidated statements of operations is summarized in the following table.
B.R. Johnson, Inc.
FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
B.R. Johnson, Inc.
East Syracuse, New York
We have audited the accompanying balance sheets of B.R. Johnson, Inc. as of October 31, 2016 and December 31, 2015, and the related statements of income and retained earnings, and cash flows for the ten month period ended October 31, 2016 and the year ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of B.R. Johnston, Inc. at October 31, 2016 and December 31, 2015, and the results of its operations and its cash flows for the ten month period ended October 31, 2016 and the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ Freed Maxick CPAs, P.C.
Buffalo, New York
March 31, 2017
B.R. Johnson, Inc.
(Predecessor to Regional Brands, Inc.)
BALANCE SHEETS
The accompanying notes are an integral part of the financial statements
B.R. Johnson, Inc.
(Predecessor to Regional Brands, Inc.)
STATEMENTS OF INCOME AND RETAINED EARNINGS
The accompanying notes are an integral part of the financial statements
B.R. Johnson, Inc.
(Predecessor to Regional Brands, Inc.)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements
BR Johnson, Inc.
(Predecessor to Regional Brands Inc.)
Notes to Financial Statements
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business- B.R. Johnson, Inc. (”BRJ Inc.” or the “Company”) is a seller and distributor of windows, doors and related hardware as well as specialty products for use in commercial and residential buildings markets. We grant credit to our customers, the majority of which are in New York State and include construction contractors, residential homebuilders, colleges and universities, health care institutions, municipalities, private developers, performance contractors and individual homeowners. On November 1, 2016, substantially all of our assets and operations were sold for $16,500,000 which included a seller’s note of $2,500,000 and working capital adjustments of approximately $1,100,000.
Basis of Presentation- The accompanying Financial Statements (“Financial Statements”) are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Interim Financial Information- The accompanying interim balance sheet as of October 31, 2016, the interim statements of income and retained earnings and statements of cash flows for the ten months ended October 31, 2016 have been prepared on the same basis as the annual financial statements, and in the opinion of our management, reflect all adjustments, which only include normal recurring adjustments, necessary to present fairly the balance sheet as of October 31, 2016 and the statements of income and retained earnings and statements of cash flows for the ten months ended October 31, 2016. The results of operations for the ten months ended October 31, 2016 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2016, or for any other future annual or interim period.
Use of Estimates- The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe the most significant estimates and judgments are associated with revenue recognition for our contracts, including estimating costs and the recognition of unapproved change orders and claims.
Revenue Recognition- 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 follow the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Revenue Recognition Topic 605-35 for accounting policies relating to our use of the POC method, estimating costs, and revenue recognition, including the recognition of incentive fees, unapproved change orders and claims, and combining and segmenting contracts. 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 cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts in progress. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates.
Costs incurred on jobs in process include all direct material and labor costs and certain indirect costs. General and administrative costs are charged to expense as incurred.
The balance of our revenue is related to fulfilling orders for the products we distribute which do not meet the criteria for revenue recognition under the POC method; revenue for these orders is recognized at the time of shipment.
Accounts Receivable and Allowance for Doubtful Accounts- Accounts receivable are recorded at their invoiced amount, net of any allowance for doubtful accounts, and do not bear interest. The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other factors that may affect the customers’ abilities to pay. As of October 31, 2016 and December 31, 2015, our allowance for doubtful accounts was $150,000. As of October 31, 2016, and December 31, 2015 we had retainage receivable of $429,908 and $305,857, respectively, included in accounts receivable in the accompanying balance sheets.
Precontract Costs- Precontract costs are charged to operations as incurred.
Inventories- Inventory is valued at the lower of cost (first-in, first-out) or market. Inventory is comprised of purchased materials and other materials that have been assigned to a job deemed to be work-in-process. As of October 31, 2016 and December 31, 2015 the work-in-process inventory was $704,854 and $687,566, respectively, and included in inventories in the accompanying balance sheets. We maintain an inventory allowance for slow-moving and unused inventories based on the historical trend and estimates. The allowance was $60,000 as of October 31, 2016 and December 31, 2015.
Equipment- Equipment is stated at cost. Depreciation and amortization is computed using straight-line methods at rates adequate to amortize the cost of the various classes of assets over their estimated service lives, ranging from two to fifteen years. Depreciation and amortization expense for the ten months ended October 31, 2016 was $139,836, and $168,137 for the year ended December 31, 2015. The Company reviews equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value.
Fair Value of Financial Instruments- Financial instruments consist of accounts receivable, accounts payable, and line of credit. Accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment. As of October 31, 2016 and December 31, 2015, the Company has not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.
Concentrations- We maintain our cash balances at a commercial bank in New York State. The accounts are insured by the Federal Deposit Insurance Corporation. While the Company attempts to limit any financial exposure, its deposit balances may exceed federally insured limits.
Income Taxes - We elected effective 1989 to be taxed as an S corporation for federal and state income tax purposes. Our earnings are included on the individual stockholders’ income tax returns. Historically, we have made distributions to our stockholders in amounts sufficient to satisfy their income tax liabilities resulting from including our income in their personal tax returns.
Earnings Per Share (“EPS”)- Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding for the period. We did not have any dilutive securities outstanding during the ten month period ended October 31, 2016 and the year ended December 31, 2015.
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 must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “new revenue standards”). The new revenue standards will replace most of existing revenue recognition guidance in U.S. GAAP when they become effective and permit the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We have not yet selected a transition method and are currently evaluating the effect that the new revenue standards will have on our financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” The guidance requires that certain inventory, including inventory measured using the first-in-first-out method, be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the effect that the updated standard will have on our financial statements and related disclosures.
In February 2016, the FASB issued an accounting standard update ASU 2016-02, “Leases”, which requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We have not yet evaluated or determined the effect of the standard on our ongoing financial reporting.
NOTE 2. CONTRACTS IN PROCESS
Cost of revenue for our long-term contracts includes direct contract costs, such as materials and labor, and indirect costs that are attributable to contract activity. The timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Projects with costs and estimated earnings recognized to date in excess of cumulative billings are reported on the accompanying balance sheet as an asset as costs and estimated earnings in excess of billings. Projects with cumulative billings in excess of costs and estimated earnings recognized to date are reported on the accompanying balance sheet as a liability as billings in excess of costs and estimated earnings. The following is information with respect to uncompleted contracts:
NOTE 3. EQUIPMENT
Equipment is summarized as follows:
NOTE 4. LINE OF CREDIT- BANK
As of October 31, 2016 and December 31, 2015, we had a $4,000,000 demand line of credit with a bank. The line was secured by the Company’s assets and interest was charged at the bank’s prime rate. The bank’s prime rate was 3.5% at October 31, 2016 and December 31, 2015. The line was terminated upon sale of our assets and operations on November 1, 2016. As of October 31, 2016 and December 31, 2015, the Company did not have any borrowings under the line.
NOTE 5. EMPLOYEE RETIREMENT PLAN
We maintain a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. All full-time employees are eligible to participate. The total plan expense was $115,542 for the ten-month period ended October 31, 2016 and $124,340 for the year ended December 31, 2015. During 2015, we increased the employer 401(k) match from 1.5% to 3.0%.
NOTE 6. RELATED PARTY TRANSACTIONS
Our shareholders are owners of approximately 57% of the common stock of an affiliated company named Airways Door Service, Inc. (ADSI). The remaining common stock is owned by three of our employees. ADSI provides us installation and repair services. The Company paid ADSI approximately $1,197,000 during the ten months ended October 31, 2016 and $1,395,520 for these services during the year ended December 31, 2015. 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 $37,000 for the ten months ended October 31, 2016 and $47,350 during the year ended December 31, 2015. As of October 31, 2016, $3,725 was included within accounts receivable on the accompanying balance sheet.
NOTE 7. COMMITMENTS
We lease our primary facility in East Syracuse, NY from an entity that is owned by our shareholders. Rent expense for the facility amounted to $230,000 during the ten-month period ended October 31, 2016, and $356,400 for the year ended December 31, 2015. The rental payments were pursuant to a lease agreement with this related entity that provides for monthly rent payments totaling $356,400 per year through 2015. Effective January 1, 2016, the Company has executed a five year lease extension through 2020 with monthly rent payments totaling $276,000 per year. We also lease a facility in Rochester, NY that calls for monthly rental expense of $2,500 under a lease agreement that expires on July 31, 2019. Total rent expense for the ten-month period ended October 31, 2016 was approximately $20,000 and was approximately $24,000 for the year ended December 31, 2015. We lease automobiles and delivery vehicles under noncancellable operating leases that expire in 2018. The minimum lease payments under the vehicle leases are as follows:
During the ten months ended October 31, 2016, we entered into a captive insurance entity, to provide for the potential liabilities for certain risks including workers’ compensation, general liability, and automotive. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors and severity factors. As of October 31, 2016 no liability has been recorded because a material liability for additional costs is considered remote. As a member of the captive insurance entity, the Company was required to provide an equity contribution of $30,000 and a dividend pool contribution of $66,667, which are included in other assets on the accompanying balance sheets as of October 31, 2016.
NOTE 8. STATEMENT OF CASH FLOWS- SUPPLEMENTAL DISCLOSURE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGIONAL BRANDS INC.
March 30, 2018 By: /s/ Fred DiSanto
Fred DiSanto
Chief Executive Officer
(Principal Executive, Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
March 30, 2018 By: /s/ Fred DiSanto
Fred DiSanto
Chief Executive Officer and Director
(Principal Executive, Financial and Accounting Officer)
March 30, 2018 By: /s/ Carl Grassi
Carl Grassi
Chairman of the Board
March 30, 2018 By: /s/ Brian Hopkins
Brian Hopkins
Director
March 30, 2018 By: /s/ Jeff Anderson
Jeff Anderson
Director