Company Quick10K Filing
Regional Brands
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 1 $-0
10-Q 2019-11-08 Quarter: 2019-09-30
10-Q 2019-08-08 Quarter: 2019-06-30
10-Q 2019-05-09 Quarter: 2019-03-31
10-K 2019-03-14 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-06-27 Quarter: 2018-03-31
10-K 2018-03-30 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-06-30
10-Q 2017-05-12 Quarter: 2017-03-31
10-K 2016-12-29 Annual: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-13 Quarter: 2016-03-31
10-Q 2016-02-16 Quarter: 2015-12-31
10-K 2016-01-06 Annual: 2015-09-30
10-Q 2015-08-13 Quarter: 2015-06-30
10-Q 2015-05-12 Quarter: 2015-03-31
10-Q 2015-02-12 Quarter: 2014-12-31
10-K 2014-12-29 Annual: 2014-09-30
10-Q 2014-08-13 Quarter: 2014-06-30
10-Q 2014-05-13 Quarter: 2014-03-31
10-Q 2014-02-13 Quarter: 2013-12-31
10-K 2014-01-10 Annual: 2013-09-30
10-Q 2013-08-13 Quarter: 2013-06-30
10-Q 2013-05-09 Quarter: 2013-03-31
10-Q 2012-08-09 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2011-12-23 Annual: 2011-09-30
10-Q 2011-08-05 Quarter: 2011-06-30
10-Q 2011-05-11 Quarter: 2011-03-31
10-Q 2011-02-14 Quarter: 2010-12-31
10-K 2010-12-07 Annual: 2010-09-30
10-Q 2010-08-12 Quarter: 2010-06-30
10-Q 2010-05-13 Quarter: 2010-03-31
10-Q 2010-02-16 Quarter: 2009-12-31
8-K 2020-01-07 Officers
8-K 2019-12-16 Officers
8-K 2019-09-05 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-03-19 Regulation FD
8-K 2018-12-18 Shareholder Vote
RGBD 2019-09-30
Note 1. Nature of Business and Summary of Significant Accounting Policies
Note 2. Revenues and Contracts in Process
Note 3. Debt
Note 4. Stockholders' Equity
Note 5. Related Party Transactions
Note 6. Income Taxes
Note 7. Leases
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6 - Exhibits
EX-31.1 tm1919523d1_ex31-1.htm
EX-31.2 tm1919523d1_ex31-2.htm
EX-32.1 tm1919523d1_ex32-1.htm

Regional Brands Earnings 2019-09-30

RGBD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
SCTF 0 0 0 0 -0 -0 -0 3.0 -33%
MBCC 216 243 112 0 -7 10 215 0% 21.5 -3%
SEK 302,033 283,794 0 0 0 0 -0 0%
DAVEY 570 398 1,095 98 32 97 161 9% 1.7 6%
VDI 1,766 1,288 779 0 465 632 222 0% 0.4 26%
RMES 1 1 0 0 -0 -0 -0 0.5 -13%
TCT 210 12 13 0 11 11 -200 0% -18.3 5%
AIGT 48 28 17 0 2 -1 -7 0% 13.5 5%
CNHC 12,949 11,626 877 0 149 771 5,714 0% 7.4 1%
HRGG 122 98 0 0 0 2 15 0% 8.5 0%

10-Q 1 tm1919523d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

or

  

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                   to                                

 

Commission File Number: 33-13110-NY

 

Regional Brands Inc.
(Exact name of registrant as specified in its charter)

 

DELAWARE 11-2831380
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)
   
6060 Parkland Boulevard
Cleveland, Ohio
44124
(Address of principal executive offices) (Zip Code)

 

(216) 825-4000
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.) Yes ¨    No x

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  ¨      Accelerated Filer   ¨       Non-Accelerated Filer  ¨        Smaller Reporting Company   x

 

Emerging Growth Company   ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨     No   x

 

The number of shares outstanding of the registrant’s Common Stock, $0.00001 par value per share, was 1,274,603 as of October 31, 2019.

 

 

 

 

 

REGIONAL BRANDS INC.

INDEX

 

  Page
   
PART I - FINANCIAL INFORMATION:  
     
Item 1. Financial Statements (unaudited)  
  Condensed Consolidated Balance Sheets 2
  Condensed Consolidated Statements of Income 3
  Condensed Consolidated Statements of Changes in Stockholders’ Equity 4
  Condensed Consolidated Statements of Cash Flows 5
  Notes to The Condensed Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
     
Item 4. Controls and Procedures 18
     
PART II - OTHER INFORMATION: 20
     
Item 1. Legal Proceedings 20
     
Item 1A. Risk Factors 20
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
     
Item 3. Defaults Upon Senior Securities 20
     
Item 4. Mine Safety Disclosures 20
     
Item 5. Other Information 20
     
Item 6. Exhibits 20
     
SIGNATURES   21

 

- 1 -

 

 

REGIONAL BRANDS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   As of 
   September 30,   December 31, 
   2019   2018 
   (unaudited)     
ASSETS          
Current Assets:          
Cash and cash equivalents  $5,543,910   $5,207,517 
Short-term investments   2,048,103    2,194,216 
Accounts receivable, net of allowance for doubtful accounts   9,776,046    7,773,564 
Inventories, net   1,675,374    1,163,866 
Costs and estimated earnings in excess of billings on uncompleted contracts   2,666,768    1,329,640 
Prepaid expenses and other current assets   410,601    478,859 
Total current assets   22,120,802    18,147,662 
           
Equipment, net   1,171,406    1,027,812 
Right-of-use assets-leases   1,218,163    - 
Intangible assets, net   2,500,000    3,400,000 
Goodwill   3,045,481    3,045,481 
Deferred income taxes   381,729    349,339 
Other assets   354,079    297,174 
Total assets  $30,791,660   $26,267,468 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities:          
Accounts payable  $2,667,645   $1,495,549 
Accrued expenses and other current liabilities   528,500    806,281 
Line of credit   4,432,419    2,691,376 
Current portion of lease liability   429,829    - 
Current portion of senior subordinated note   28,680    28,680 
Current portion of subordinated term note   250,000    250,000 
Billings in excess of costs and estimated earnings on uncompleted contracts   934,998    515,242 
Total current liabilities   9,272,071    5,787,128 
           
Lease liability   788,334    - 
Senior subordinated note, net   239,388    220,529 
Subordinated term note   2,000,000    2,187,500 
Total liabilities   12,299,793    8,195,157 
           
Stockholders’ equity:          
Preferred stock, issued and outstanding-none   -    - 
Common stock, issued and outstanding-1,274,603 shares   13    13 
Additional paid-in capital   20,469,489    20,428,933 
Accumulated deficit   (1,812,802)   (2,183,276)
Total Regional Brands, Inc. stockholders' equity   18,656,700    18,245,670 
Noncontrolling interest in consolidated subsidiary   (164,833)   (173,359)
Total stockholders’ equity   18,491,867    18,072,311 
Total liabilities and stockholders' equity  $30,791,660   $26,267,468 

 

The accompanying notes are an integral part of the condensed consolidated financial statements. 

 

- 2 -

 

 

REGIONAL BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   For the three months ended   For the nine months ended 
   September 30,   September 30,   September 30,   September 30, 
   2019   2018   2019   2018 
Net Sales  $11,489,491   $10,317,136   $30,530,819   $30,400,766 
Cost of sales   8,514,012    7,700,107    22,094,746    22,170,043 
Gross profit   2,975,479    2,617,029    8,436,073    8,230,723 
                     
Operating expenses:                    
Selling   1,257,061    1,082,977    3,582,303    3,347,164 
General and administrative   1,166,319    1,032,462    3,478,487    3,023,524 
Amortization of intangible assets   300,000    331,344    900,000    943,079 
Total operating expenses   2,723,380    2,446,783    7,960,790    7,313,767 
                     
Operating income   252,099    170,246    475,283    916,956 
                     
Other income (expense):                    
Other income   48,182    32,064    231,014    151,643 
Interest expense   (88,958)   (78,530)   (219,965)   (193,227)
Interest income   6,345    6,345    19,035    18,831 
    (34,431)   (40,121)   30,084    (22,753)
                     
Income before income taxes   217,668    130,125    505,367    894,203 
                     
Income tax expense   49,820    19,235    119,574    193,147 
                     
Net income   167,848    110,890    385,793    701,056 
                     
Less income allocated to noncontrolling interest   7,369    3,586    15,319    31,835 
                     
Income attributable to common stockholders   160,479    107,304    370,474    669,221 
Distributions to certain noncontrolling interests   -    (16,729)   -    (63,664)
Income available to common stockholders  $160,479   $90,575   $370,474   $605,557 
                     
Income per common share- basic and diluted  $0.13   $0.07   $0.29   $0.48 
                     
Weighted average common shares outstanding - basic and diluted   1,274,603    1,274,603    1,274,603    1,274,603 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

- 3 -

 

 

REGIONAL BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

   Common Stock   Additional   Accumulated   Noncontrolling   Stockholders' 
   Shares   Amount   Paid-in Capital   Deficit   Interest   Equity 
Balance at January 1, 2019   1,274,603   $13   $20,428,933   $(2,183,276)  $(173,359)  $18,072,311 
Stock based compensation       -   13,878   -   -   13,878 
Net loss for period       -   -   (274,984)  (21,842)  (296,826)
Noncontrolling interest distribution       -   -   -   (3,640)  (3,640)
Balance at March 31, 2019   1,274,603   13   20,442,811   (2,458,260)  (198,841)  17,785,723 
Stock based compensation       -   13,878   -   -   13,878 
Net income for period       -   -   484,979   29,792   514,771 
Balance at June 30, 2019   1,274,603   13   20,456,689   (1,973,281)  (169,049)  18,314,372 
Stock based compensation            12,800            12,800 
Net income for the period                 160,479   7,369   167,848 
Noncontrolling interest distribution            -   -   (3,153)  (3,153)
Balance at September 30, 2019   1,274,603   $13   $20,469,489   $(1,812,802)  $(164,833)  $18,491,867 
                               
Balance January 1, 2018   1,274,603   $13   $20,373,257   $(3,203,781)  $(87,406)  $17,082,083 
Stock based compensation       -   14,042   -   -   14,042 
Net loss for period       -   -   (44,806)  (6,685)  (51,491)
Balance at March 31, 2018   1,274,603   13   20,387,299   (3,248,587)  (94,091)  17,044,634 
Stock based compensation       -   13,878   -   -   13,878 
Net income for period       -   -   606,723   34,934   641,657 
Noncontrolling interest distribution       -   -   -   (50,080)  (50,080)
Balance at June 30, 2018   1,274,603   13   20,401,177   (2,641,864)  (109,237)  17,650,089 
Stock based compensation            13,878   -   -   13,878 
Net income for period            -   107,304   3,586   110,890 
Noncontrolling interest distribution            -   -   (27,841)  (27,841)
Balance at September 30, 2018  $1,274,603   $13   $20,415,055   $(2,534,560)  $(133,492) 

 $

17,747,016 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

- 4 -

 

 

REGIONAL BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the   For the 
   nine months   nine months 
   ended   ended 
   September 30,
2019
   September 30,
2018
 
Cash flows from operating activities:          
Net income  $385,793   $701,056 
Adjustments to reconcile net income to net cash (used) provided by operating activities:          
Stock based compensation   40,556    41,798 
Depreciation and amortization   194,283    126,728 
Amortization of debt issuance costs   18,859    18,859 
Amortization of intangibles   900,000    943,079 
Deferred income taxes   (32,390)   (54,950)
Unrealized loss (gain) on investments   3,721    (63,064)
Gain on sale of equipment   (4,006)   - 
Change in inventory obsolescence reserve   41,500    6,500 
Changes in operating assets and liabilities:          
Accounts receivable   (2,002,482)   (1,402,277)
Inventories   (553,008)   (331,946)
Costs and estimated earnings in excess of billings on uncompleted contracts   (1,337,128)   (1,398,039)
Prepaid expenses and other assets   11,352    (262,685)
Accounts payable   1,172,096    728,626 
Accrued expenses and other current liabilities   (266,664)   (193,706)
Billings in excess of costs and estimated earnings on uncompleted contracts   419,756    1,161,629 
Net cash (used) provided by operating activities   (1,007,762)   21,608 
           
Cash flows from investment activities:          
Purchase of equipment   (339,571)   (387,519)
Business acquisitions   -    (203,216)
Equipment sales proceeds   5,700    25,000 
Sale (purchase) of short-term investments   142,393    (234,302)
Net cash used by investment activities   (191,478)   (800,037)
           
Cash flows from financing activities:          
Distribution to noncontrolling interest   (17,910)   (55,861)
Borrowings from line of credit, net   1,741,043    1,033,880 
Payments under subordinated term note   (187,500)   - 
Net cash provided by financing activities   1,535,633    978,019 
Net increase in cash and cash equivalents   336,393    199,590 
           
Cash and cash equivalents at beginning of period   5,207,517    4,353,567 
           
Cash and cash equivalents at end of period  $5,543,910   $4,553,157 
           
Cash paid for:          
Income taxes  $185,000   $91,000 
Interest  $212,000   $179,000 

 

- 5 -

 

 

REGIONAL BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

 

   For the
nine months
ended  
September 30, 2019
   For the
nine months
ended
September 30, 2018
 
Noncash transactions:                  
Accrued distribution to noncontrolling interest  $-   $22,000 

 

Noncash transactions include the recording of a right-of-use asset and related lease liability of approximately $1.2 million upon the adoption of the new lease accounting standard effective January 1, 2019 and $0.3 million for leases entered into during the nine months ended September 30, 2019.

 

The accompanying notes are an integral part of the condensed consolidated financial statements. 

 

- 6 -

 

 

 

REGIONAL BRANDS, INC.

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Regional Brands Inc. (“the Company”, “we” and “us”) is a holding company formed to acquire substantial ownership in regional companies with strong brand recognition, stable revenues and profitability. The Company has been pursuing a business strategy whereby it is seeking to engage in an acquisition, merger or other business combination transaction with undervalued businesses (each, a “Target Company”) with a history of operating revenues in markets that provide opportunities for growth.

 

On November 1, 2016, the Company's majority-owned subsidiary, B.R. Johnson, LLC (“BRJ LLC”) acquired (the “Acquisition”) substantially all of the assets of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty products for use in commercial and residential buildings (the “Business”). Following the Acquisition, BRJ LLC carried on the business and operations of BRJ Inc.

 

Basis of Presentation - The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by U.S. GAAP. In the opinion of management, the accompanying condensed consolidated balance sheets and related condensed consolidated statements of income, changes in stockholders’ equity and cash flows include all adjustments, consisting only of normal recurring items necessary for their fair presentation in accordance with U.S. GAAP. Interim results are not necessarily indicative of results expected for a full year. For further information regarding the Company’s accounting policies, please refer to the audited consolidated financial statements and footnotes for the year ended December 31, 2018 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2019.

 

Principles of Consolidation   - The consolidated financial statements include the accounts of Regional Brands Inc. and its majority-owned subsidiary, BRJ LLC. All intercompany balances and transactions have been eliminated in consolidation. The Company has a controlling interest in its subsidiary, BRJ LLC. BRJ LLC has preferred and common membership interests that are not controlled by the Company. Earnings and losses of BRJ LLC are attributed to the noncontrolling interests and distributions are made in accordance with the B.R. Johnson LLC Limited Liability Company Agreement.

  

Use of Estimates - The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates and be based on events different from those assumptions. Future events and their effects cannot be predicted with certainty; estimating, therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired or as additional information is obtained. We believe the most significant estimates and judgments are associated with revenue recognition for our customer contracts in process, including estimating costs and the recognition of unapproved change orders and claims.

 

Inventories - Inventory is comprised of purchased materials and other materials that have been assigned to a job deemed to be work-in-process. As of September 30, 2019 and December 31, 2018, the work-in-process inventory was $889,000 and $414,000, respectively and is included in inventories in the accompanying consolidated balance sheets. We maintain an inventory allowance for slow-moving and unused inventories based on historical trends and estimates. The allowance was $111,000 and $69,500 at September 30, 2019 and December 31, 2018, respectively.

 

Revenue Recognition - We recognize revenue when the following criteria are met: 1) A contract with the customer has been identified; 2) Performance obligations in the contract have been identified; 3) The transaction price has been determined; 4) The transaction price has been allocated to the performance obligations; and 5) Revenue is recognized when (or as) performance obligations are satisfied.

 

- 7 -

 

 

A portion of our revenue is derived from long-term contracts and is recognized using the percentage of completion (“POC”) method, primarily based on the percentage that actual costs-to-date bear to total estimated costs to complete each contract. We utilize the cost-to-cost approach to estimate POC as we believe this method is less subjective than relying on assessments of physical progress. Under the cost-to-cost approach, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue and is a significant factor in the accounting for contracts. Significant estimates that impact the cost to complete each contract are costs of materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontractor or supplier progress; liquidated damages; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. The portion of the business utilizing the POC method is related to the distribution and installation of commercial windows and specialty products which are supported by specific written contracts which include contract price, scope and payment terms and are signed by both parties. Our contract price is fixed for the scope of work specified and we generally have no variable consideration. We frequently negotiate change orders for additional work to be performed which typically relate to the initial performance obligation. Our customer payment terms are typical for our industry. For most contracts under the POC method, progress payments, less retainage, are made shortly after the contractor receives payments from the owner. For the remainder of our business, standard terms require that amounts due are paid 30 days after invoice date. For the business accounted for using the POC method, we have determined that we have one performance obligation due to the high degree of inter-dependability and highly integrated nature of the work. Performance obligations for the remainder of our business are generally supported by written contracts or purchase orders which require the delivery of goods or services and the revenue is recognized upon shipment of those goods or performance of the services. The majority of our performance obligations are typically completed within one year.

  

We have elected the practical expedients for not adjusting the promised amount of consideration for the effects of financing components when, at contract inception, the period between the transfer of good or service and when the customer pays is expected to be less than one year and for recognizing incremental costs of obtaining a contract as incurred as they would otherwise have been amortized over one year or less.

 

We have made an accounting policy election to treat any common carrier shipping and handling activities as a fulfillment cost, rather than a separate obligation or promised service.

 

Sales and usage taxes are excluded from revenues. Costs incurred on jobs in process include all direct material and labor costs and certain indirect costs. General and administrative and precontract costs are charged to expense as incurred.

 

Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates. Revisions in estimated profits for contracts accounted for under the POC method are made in the period in which circumstances requiring the revision become known. During the three and nine months ended September 30, 2019, the effect of changes in estimated contract costs decreased gross profit by approximately $320,000 and $398,000, respectively, decreased net income by approximately $236,000 and $294,000, respectively, and decreased income per common share (net of income taxes) by $0.19 and $0.23, respectively. During the three and nine months ended September 30, 2018, the effect of changes in estimated contract costs decreased gross profit by approximately $200,000 and $230,000, respectively, decreased net income by approximately $148,000 and $170,000, respectively, and decreased income per common share (net of income taxes) by $0.12 and $0.13, respectively.

  

Common Shares Issued and Earnings (Loss) Per Share - Common shares issued are recorded based on the value of the shares issued or consideration received, including cash, services rendered or other non-monetary assets, whichever is more readily determinable. The Company presents basic and diluted earnings (loss) per share. Basic earnings (loss) per share reflect the actual weighted average number of shares issued and outstanding during the period. Diluted earnings (loss) per share is computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued, such as those issuable upon exercise of outstanding stock options or conversion of convertible securities. In a loss period, the calculation for basic and diluted loss per share is considered to be the same, as the impact of the issuance of any potential common shares would be anti-dilutive. During the three and nine months ended September 30, 2019 and 2018, since the exercise prices of the outstanding stock options were above the average market price of our common stock during the period, the outstanding stock options were considered anti-dilutive. In calculating income per common share, income attributable to common stockholders is reduced by distributions made to certain noncontrolling interests in the Company’s consolidated subsidiary (There were no such distributions made or accrued through September 30, 2019 and $16,729 and $63,664 was accrued or paid during the three and nine month periods ended September 30, 2018, respectively).

 

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Fair Value of Financial Instruments - Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, and line of credit. Fair values were assumed to approximate carrying values for these financial instruments because of their immediate or short-term maturity and the fair value of the line of credit approximates the carrying value as the stated interest rate approximates market rates currently available to the Company.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

 

  · Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

 

  · Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

 

  · Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The Company’s valuation techniques used to measure the fair value of money market funds, certificate of deposits, and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities.

 

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments.

 

Our short-term investments consist of investments in marketable equity related securities and money market funds. All of these marketable securities are accounted for as available-for-sale securities, which are carried at fair value using quoted market prices in active markets for each marketable security. All of our marketable equity securities and money market funds are carried at fair value and unrealized gains or losses on the securities are recognized as a component of other income included in our condensed consolidated statements of income.

 

The table below presents the Company's assets and liabilities measured at fair value aggregated by the level in the fair value hierarchy within which those measurements fall.

   

Assets  Level 1   Level 2   Level 3   Balance at
September 30, 2019
 
Marketable Equity Securities  $2,048,103   $-   $-   $2,048,103 
Money Market Funds  $5,543,910   $-   $-   $5,543,910 

 

Assets  Level 1   Level 2   Level 3   Balance at
December 31, 2018
 
Marketable Equity Securities  $2,194,216   $-   $-   $2,194,216 
Money Market Funds  $5,207,517   $-   $-   $5,207,517 

 

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New Accounting Pronouncements Adopted - We adopted Accounting Standard Update ASU 2016-02 (Topic ASC 842), “Leases”, as required, effective January 1, 2019, using the modified retrospective approach without adjusting comparative periods. ASC 842 retains the two-model approach to classifying leases as operating or finance leases (formerly, capital leases); however, most leases, regardless of classification type, are recorded on the balance sheet. When a lessee records a lease on the balance sheet, it will recognize a lease liability based on the present value of the future lease payments, with an offsetting entry to recognize a right-of-use (ROU) asset. A lessee uses a discount rate to determine the present value based on the rate implicit in the lease, if readily determinable, or the lessee’s incremental borrowing rate.

 

We utilized the practical expedients provided by the guidance including the package of practical expedients to not reassess whether contracts contain a lease, lease classification, and direct costs. Since our current lease agreements, which include real estate and vehicles, are operating leases, they will continue to be accounted for as operating leases under the new standard. Accordingly, lease expense is recognized on a straight-line basis over the lease term. We have elected not to record leases with terms of 12 months or less on the balance sheet.

 

We adopted ASU 2018-07, "Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting" effective January 1, 2019, as required. The FASB issued this update as part of its simplification initiative. The amendments in this update expand the scope of Topic 718 to include share-based payments for acquiring goods and services from nonemployees. Since we have issued a relatively small number of stock options to nonemployees, the adoption of this standard on our condensed consolidated financial statements and related disclosures was not material.

 

New Accounting Pronouncements Issued - In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. This ASU requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The standard will be effective for our fiscal year beginning in 2023, including interim periods within such fiscal years. Early adoption is permitted. The Company is currently assessing the effect that this ASU will have on its financial position, results of operations, and disclosures. No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.

 

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NOTE 2. REVENUES AND CONTRACTS IN PROCESS

 

The following table presents our revenues disaggregated by contracts accounted for using the percentage of completion method:

 

   Three Months Ended September 30, 
   2019   2018 
Contracts under percentage of completion  $6,254,573   $5,383,752 
All other   5,234,918    4,933,384 
Total revenue  $11,489,491   $10,317,136 

 

   Nine Months Ended September 30, 
   2019   2018 
Contracts under percentage of completion  $17,746,187   $16,269,054 
All other   12,784,632    14,131,712 
Total revenue  $30,530,819   $30,400,766 

 

Projects with costs and estimated earnings recognized to date in excess of cumulative billings are reported on the accompanying condensed consolidated balance sheet as an asset referred to 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 condensed consolidated balance sheet as a liability referred to as Billings in excess of costs and estimated earnings. The following is information with respect to uncompleted contracts:

 

   September 30,
2019
   December 31,
2018
 
Costs incurred on uncompleted contracts  $18,990,775   $9,619,587 
Estimated earnings   7,539,340    3,499,758 
    26,350,115    13,119,345 
Less billings to date   24,618,345    12,304,947 
   $1,731,770   $814,398 
           
Included on balance sheet as follows:          
Under current assets          
Costs and estimated earnings in excess of billings on uncompleted contracts  $2,666,768   $1,329,640 
Under current liabilities          
Billings in excess of costs and estimated earnings on uncompleted contracts  $(934,998)  $(515,242)
   $1,731,770   $814,398 

 

The Company had unbilled revenues of approximately $1.8 million and $0.9 million at the end of September 30, 2019 and December 31, 2018, respectively, which are included in Cost and estimated earnings in excess of billings on the condensed consolidated balance sheet.

 

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed. As of September 30, 2019, the aggregate amount of the transaction prices allocated to the remaining performance obligations, for contracts to be recognized using the percentage of completion method, was $18.5 million.

 

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NOTE 3. DEBT

 

BRJ LLC has a Credit and Security Agreement with KeyBank, N.A., dated November 1, 2016 (“Credit Facility”) that includes revolving loans and letters of credit with a sublimit of $500,000 for letters of credit. On September 5, 2019, BRJ LLC entered into a First Amendment Agreement (the “Amendment”) which amended the Credit Facility. The Amendment provides for, among other things, an increase in the maximum borrowing amount available pursuant to the revolving credit facility under the Credit Facility from $6,000,000 to (1) $8,000,000 for the period beginning September 5, 2019 and ending December 31, 2019 and (2) $7,000,000 on January 1, 2020 and thereafter.

 

The Credit Facility is payable upon demand of KeyBank, N.A., or the lenders, or upon acceleration as a result of an event of default. 

 

Interest under the Credit Facility is payable monthly and accrues pursuant to the “base rate” of interest, which is equal to the highest of (a) KeyBank, N.A.’s prime rate, (b) one-half of one percent (0.50%) in excess of the Federal Funds Effective Rate of the Federal Reserve Bank of New York, and (c) one hundred (100) basis points in excess of the London Interbank Offered Rate for loans in Eurodollars with an interest period of one month, plus any applicable margin. The Credit Facility also requires the payment of certain fees, including, but not limited to, letter of credit fees.

 

The Credit Facility is secured by substantially all of BRJ LLC’s assets. The Credit Facility contains customary financial and other covenant requirements, including, but not limited to, a covenant requiring BRJ LLC’s consolidated fixed charge coverage ratio to not exceed 1.15 to 1.00. The Credit Facility also contains customary events of default. For the nine months ended September 30, 2019, the Company was in compliance with these covenants.

 

The effective interest rate on borrowings under the Credit Facility at September 30, 2019 was 4.38%. The aggregate borrowings outstanding under the Credit Facility at September 30, 2019 were $4,432,419. In addition, the bank has issued letters of credit on behalf of the Company in the amount of $250,000 that expires on December 1, 2019 and $100,000 that expires on May 1, 2020.

 

NOTE 4. STOCKHOLDERS’ EQUITY

 

The Company’s authorized capital consists of 3,000,000 shares of common stock, par value $0.00001 per share, and 50,000 shares of preferred stock, par value $0.01 per share.

  

The Company recorded stock compensation expense for options vesting during the three month periods ended September 30, 2019 and 2018 of $12,800 and $13,878, respectively, and during the nine month periods ended September 30, 2019 and 2018 of $40,556 and $41,798, respectively.

 

NOTE 5. RELATED PARTY TRANSACTIONS

 

The Company has a Management Services Agreement (the “MSA”) with Ancora Advisors, LLC, whereby Ancora Advisors, LLC provides specified services to the Company in exchange for a quarterly management fee in an amount equal to 0.14323% of the Company’s stockholders’ equity (excluding cash and cash equivalents) as shown on the Company’s condensed consolidated balance sheet as of the end of each fiscal quarter of the Company. The management fee with respect to each fiscal quarter of the Company is paid no later than 10 days following the issuance of the Company’s financial statements for such fiscal quarter, and in any event no later than 60 days following the end of each fiscal quarter. For the nine months ended September 30, 2019 and 2018, Ancora Advisors, LLC agreed to waive payment of the management fee, but reserves the right to institute payment of the management fee at its discretion.

 

BRJ LLC has a Management Services Agreement (the “BRJ MSA”) with Lorraine Capital, LLC (“Lorraine”), a member of BRJ LLC, whereby Lorraine provides specified management, financial and reporting services to us in exchange for an annual management fee in an amount equal to the greater of (i) $75,000 or (ii) five percent (5%) of the annual EBITDA (as defined in the BRJ MSA) of BRJ LLC, payable quarterly in arrears and subject to certain adjustments and offsets set forth in the BRJ MSA. The BRJ MSA may be terminated by BRJ LLC, Lorraine or Regional Brands at any time upon 60 days’ prior written notice and also terminates upon the consummation of a sale of BRJ LLC. BRJ LLC recorded expenses for Lorraine management fees in the amount of approximately $1,000 and $55,000 for the three and nine months ended September 30, 2018, respectively. There were no expenses for such fees during the three and nine months ended September 30, 2019, respectively. As of September 30, 2019 there were no amounts payable and at December 31, 2018, $39,000 was payable to Lorraine under the BRJ MSA. 

 

BRJ LLC has a relationship with a union qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations that require union installation and repair services. Individuals affiliated with Lorraine acquired 57% of ADSI’s common stock; the remaining common stock is owned by three of BRJ LLC’s employees. BRJ LLC paid ADSI for its services approximately $812,000 and $547,000 for the three months ended September 30, 2019 and 2018, respectively and $2,096,000 and $1,370,000 for the nine months ended September 30, 2019 and 2018, respectively. In addition, we provide ADSI services utilizing an agreed-upon fee schedule. These services include accounting, warehousing, equipment use, employee benefit administration, risk management coordination and clerical functions. The fee for these services was approximately $38,000 and $15,000 during the three months ended September 30, 2019 and 2018, respectively and $96,000 and $45,000 during the nine months ended September 30, 2019 and 2018, respectively.

 

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NOTE 6. INCOME TAXES

 

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect when the differences are expected to reverse.  The Company periodically evaluates the likelihood of realization of deferred tax assets, and provides for a valuation allowance when necessary.

  

The Company had an effective income tax rate of 22.9% and 23.7% for the three and nine months ended September 30, 2019, respectively, and 14.8% and 21.6% for the three and nine months ended September 30, 2018, respectively.  The effective income tax rate was greater than the federal statutory rate of 21% for the three and nine months ended September 30, 2019 due primarily to state income taxes. The effective income tax rate for the three months ended September 30, 2018 is lower than the 2018 federal statutory rate of 21% due primarily to adjustments resulting from the filing of the 2017 federal income tax return. The effective income tax rate for the nine months ended September 30, 2018 approximates the 2018 federal statutory rate of 21%.

 

NOTE 7. LEASES

 

Lease expense was approximately $127,500 and $101,100 for the three months ended September 30, 2019 and 2018, respectively, and $368,800 and $291,300 for the nine months ended September 30, 2019 and 2018, respectively. The right-of-use assets and related lease liability was approximately $1.2 million as of January 1, 2019. The lease terms range in length from 36 to 72 months. Certain leases contain renewal options that we are not reasonably certain to exercise and therefore have been excluded from the future minimum lease payments. The weighted-average remaining lease term as of January 1, 2019 was 3.9 years and at September 30, 2019 was 3.4 years. The weighted-average discount rate used to determine the present value of future lease payments is 4.9%. Because the implicit rate in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of lease payments.

 

The future minimum lease payments under the lease agreements for the rest of 2019 and yearly thereafter and a reconciliation to the amount of the net present value of such payments at September 30, 2019 are as follows:

 

2019  $120,027 
2020   480,108 
2021   434,108 
2022   123,492 
2023   108,592 
2024   51,956 
Total   1,318,283 
Discount on future lease payments   (100,120)
Lease Liability at September 30, 2019   1,218,163 
Less amount classified as current   (429,829)
   $788,334 

 

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”).   The Company desires to avail itself of certain “safe harbor” provisions of the 1995 Reform Act and is therefore including this note to enable it to do so.  Except for the historical information contained herein, this report contains forward-looking statements (identified by the words “estimate,” “project,” “anticipate,” “plan,” “expect,” “intend,” “believe,” “hope,” “strategy” and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements, including, without limitation, those discussed under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, as they may be updated or supplemented from time to time under Part II, Item 1A “Risk Factors” in our Quarterly Reports on Form 10-Q, and those described herein.

 

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results of operations and financial condition and should be read in conjunction with the financial statements and footnotes that appear elsewhere in this report.

  

Nature of Business

 

Regional Brands Inc. (“the Company”, “we” and “us”) is a holding company formed to acquire substantial ownership in regional companies with strong brand recognition, stable revenues and profitability. The Company has been pursuing a business strategy whereby it is seeking to engage in an acquisition, merger or other business combination transaction with undervalued businesses (each, a “Target Company”) with a history of operating revenues in markets that provide opportunities for growth.

 

On November 1, 2016, the Company's majority-owned subsidiary, B.R. Johnson, LLC (“BRJ LLC”) acquired (the “Acquisition”) substantially all of the assets of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty products for use in commercial and residential buildings (the “Business”). Following the Acquisition, BRJ LLC carried on the business and operations of BRJ Inc.

 

All of our business operations are being conducted through our consolidated subsidiary BRJ LLC.

 

Items Affecting the Comparability of Our Financial Results

 

Comparisons presented in the Results of Operations sections discussed below are with respect to the same period of the prior year, unless otherwise noted. The industry we operate in is highly competitive and accordingly our pricing and margins, especially on larger projects, can vary depending on multiple factors including the customer or general contractor relationship. These variances, which we call project mix, can impact the comparability of gross margins from period to period.

 

Results of Operations for the three months ended September 30, 2019 and 2018

 

Net Sales: Net sales were $11,489,491 for the three months ended September 30, 2019, an increase of $1,172,355, or 11.4%, when compared to $10,317,136 for 2018. Sales of commercial windows were up by approximately $1 million, while sales of other products were up by approximately $0.2 million.

 

Cost of sales: Cost of sales were $8,514,012 for the three months ended September 30, 2019, an increase of $813,905 or 10.6%, when compared to $7,700,107 for 2018. The primary reason for the increase was due to the corresponding increase in net sales.

 

Gross profit: Gross profit was $2,975,479 or 25.9% of net sales for the three months ended September 30, 2019 compared to $2,617,029 or 25.4% of net sales for 2018. The increase of $358,450 gross profit is primarily related to higher sales volumes and improved margins as a percent of sales on the sale of our door, frame, hardware and aftermarket products.

 

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Selling expenses: Selling expenses were $1,257,061 for the three months ended September 30, 2019, an increase of $174,084, or 16.1%, when compared to $1,082,977 for 2018. The increase is primarily due to higher commission expense related to higher sales of our specialty products.

 

General and administrative expenses: General and administrative expenses were $1,166,319 for the three months ended September 30, 2019, an increase of $133,857, or 13.0%, when compared to $1,032,462 for 2018. The increase is primarily due to planned higher wages, costs associated with the enterprise resource planning system that was placed in service in the second quarter of 2019, including depreciation expense and costs associated with our new office in Buffalo and our facility from our R&D acquisition, partially offset by a lower bonus expense and professional fees.

 

Amortization of intangible assets: Amortization of intangible assets was $300,000 for the three months ended September 30, 2019 compared to $331,344 for 2018. Certain intangible assets arising from the R&D acquisition were fully amortized by the end of 2018, which is the primary reason for less amortization expense in 2019.

 

Other income: Other income was $48,182 for the three months ended September 30, 2019, an increase of $16,118 when compared to $32,064 for 2018. The increase was primarily related to increased realized gains on the sale of investments and dividends, including dividends received related to the Company’s investment in a captive insurance entity, partially offset by unrealized losses in the market value of our investments in marketable equity securities.

 

Interest Expense: Interest expense for the three months ended September 30, 2019 was $88,958 compared to $78,530 for 2018. The increase was due to increased debt levels to fund working capital needs for operations.

 

Income tax expense: Income tax expense for the three months ended September 30, 2019 of $49,820 was $30,585 higher than income tax expense of $19,235 for 2018 due primarily to higher income before income taxes in 2019. The effective income tax rate was 22.9% and 14.8% for the three months ended September 30, 2019 and 2018, respectively. The effective income tax rate for 2019 differed from the federal statutory rate of 21% due primarily to state income taxes. The 2018 effective income tax rate is lower than the federal statutory rate of 21% due primarily to adjustments resulting from the filing of the 2017 federal income tax return.

 

Net income: As a result of the foregoing, net income for the three months ended September 30, 2019 increased by $56,958 to $167,848 compared to $110,890 for 2018.

 

Results of Operations for the nine months ended September 30, 2019 and 2018

  

Net Sales: Net sales were $30,530,819 for the nine months ended September 30, 2019, which are comparable to net sales of $30,400,766 for 2018. Sales of commercial windows and specialty products were up by approximately $1.9 million, but were offset by a decline in sales of door, frame and hardware products.

 

Cost of sales: Cost of sales was $8,514,012 for the three months ended September 30, 2019, an increase of $813,905 or 10.6%, when compared to $7,700,107 for 2018. The primary reason for the increase was due to the corresponding increase in net sales.

 

Gross profit: Gross profit was $8,436,073 or 27.6% of net sales for the nine months ended September 30, 2019 compared to $8,230,723 or 27.1% of net sales for 2018. Gross profit increased by $205,350 in 2019 primarily due to the increase in net sales when compared to 2018 and the improvement in gross profit as a percentage of sales in our higher margin commercial windows products.

 

Selling expenses: Selling expenses were $3,582,303 for the nine months ended September 30, 2019, an increase of $235,139, or 7.0%, compared to $3,347,164 for 2018. The increase was primarily due to higher commission expense on higher sales of specialty products and planned higher wages.

 

General and administrative expenses: General and administrative expenses were $1,166,319 for the three months ended September 30, 2019, an increase of $133,857, or 13.0%, when compared to $1,032,462 for 2018. The increase is primarily due to planned higher wages, costs associated with the enterprise resource planning system that was placed in service in the second quarter of 2019, including depreciation expense and costs associated with our new office in Buffalo, partially offset by a lower bonus expense and professional fees.

 

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Amortization of intangible assets: Amortization of intangible assets was $900,000 for the nine months ended September 30, 2019 compared to $943,079 for 2018. Certain intangible assets arising from the R&D acquisition were fully amortized by the end of 2018, which is the primary reason for less amortization expense in 2019.

 

Other income: Other income was $231,014 for the nine months ended September 30, 2019, an increase of $79,371 when compared to $151,643 for 2018. The increase was primarily related to increased realized gains on the sale of investments and dividends, including dividends received related to the Company’s investment in a captive insurance entity, partially offset by unrealized losses in the market value of our investments in marketable equity securities.

 

Interest Expense: Interest expense for the nine months ended September 30, 2019 was $219,965 compared to $193,227 for 2018. The increase was due to increased debt levels to fund working capital needs for operations.

 

Income tax expense: Income tax expense for the nine months ended September 30, 2019 of $119,574 was $73,573 lower than income tax expense of $193,147 for 2018 due primarily to lower income before income taxes in 2019. The effective income tax rate was 23.7% and 21.6% for the nine months ended September 30, 2019 and 2018, respectively. The effective income tax rate differed from the federal statutory rate of 21% in both periods due primarily to state income taxes and in 2018, the rate was somewhat offset by adjustments resulting from the filing of the 2017 federal income tax return.

 

Net income: As a result of the foregoing, net income for the nine months ended September 30, 2019 decreased by $315,263 to $385,793 compared to $701,056 for 2018.

 

Liquidity and Capital Resources

 

At September 30, 2019, we had working capital of $12,848,731 compared to working capital of $12,360,534 at December 31, 2018. During the nine months ended September 30, 2019, our operating activities used cash of $1,007,762 compared to $21,608 of cash provided by our operating activities in 2018. The primary reason for the use of cash by operating activities was due to the increase in our net operating assets included in working capital somewhat offset by non-cash expenses related to depreciation and amortization of equipment and intangible assets.

 

Cash used in investment activities was $191,478 for the nine months ended September 30, 2019 compared to $800,037 for the comparable period in 2018. The primary uses of cash by investment activities in 2019 was for the purchase of equipment, somewhat offset by the proceeds from the sale of short-term investments and in 2018 the purchase of equipment, certain assets of R&D Fabricators, Inc. and short-term investments. The major reasons for the purchases of equipment in each period relates to the cost of the implementation of our enterprise resource planning system that was placed into service in the second quarter of 2019.

 

Cash provided by financing activities was $1,535,633 and $978,019 for the nine months ended September 30, 2019 and 2018, respectively. Line of credit borrowings provided cash in both periods and in 2019, required payments under the subordinated term loan were made. Line of credit borrowings in both periods were used to fund operating working capital needs.

 

BRJ LLC has a Credit and Security Agreement with KeyBank, N.A., dated November 1, 2016 (“Credit Facility”). On September 5, 2019, BRJ LLC entered into a First Amendment Agreement (the “Amendment”) which amended the Credit Facility. The Amendment provides for, among other things, an increase in the maximum borrowing amount available pursuant to the revolving credit facility under the Credit Facility from $6,000,000 to (1) $8,000,000 for the period beginning September 5, 2019 and ending December 31, 2019 and (2) $7,000,000 on January 1, 2020 and thereafter. The Credit Facility also includes a sublimit of $500,000 for letters of credit.

 

The Credit Facility is payable upon demand of KeyBank, N.A., or the lenders, or upon acceleration as a result of an event of default. 

 

Interest under the Credit Facility is payable monthly and accrues pursuant to the “base rate” of interest, which is equal to the highest of (a) KeyBank, N.A.’s prime rate, (b) one-half of one percent (0.50%) in excess of the Federal Funds Effective Rate of the Federal Reserve Bank of New York, and (c) one hundred (100) basis points in excess of the London Interbank Offered Rate for loans in Eurodollars with an interest period of one month, plus any applicable margin. The Credit Facility also requires the payment of certain fees, including, but not limited to, letter of credit fees.

 

The Credit Facility is secured by substantially all of BRJ LLC’s assets. The Credit Facility contains customary financial and other covenant requirements, including, but not limited to, a covenant requiring BRJ LLC’s consolidated fixed charge coverage ratio to not exceed 1.15 to 1.00. The Credit Facility also contains customary events of default. For the nine months ended September 30, 2019, the Company was in compliance with these covenants. 

 

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The effective interest rate on outstanding borrowings under the Credit Facility at September 30, 2019 was 4.38%. The aggregate borrowings outstanding under the Credit Facility at September 30, 2019 were $4,432,419 compared to $2,691,376 at December 31, 2018. In addition, the bank has issued letters of credit on behalf of the Company in the amount of $250,000 that expires on December 1, 2019 and $100,000 that expires on May 1, 2020.

  

Based on current plans, management anticipates that the cash on hand, the expected cash flows from our majority-owned subsidiary BRJ LLC, and the availability under the Credit Facility will satisfy our capital requirements and fund our operations for at least the next 12 months.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.

 

Inflation

 

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the last two years.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes.  The financial statements as of December 31, 2018 describe the significant accounting policies and methods used in the preparation of the financial statements.  Additionally, we adopted Accounting Standard Update (ASU) 2016-02 (Topic ASC 842), “Leases”, as required, effective January 1, 2019, using the modified retrospective approach without adjusting comparative periods. ASC 842 retains the two-model approach to classifying leases as operating or finance leases (formerly, capital leases); however, most leases, regardless of classification type, are recorded on the balance sheet. When a lease is recorded on our balance sheet, we recognize a lease liability based on the present value of the future lease payments, with an offsetting entry to recognize a right-of-use (ROU) asset. We use a discount rate to determine the present value based on the rate implicit in the lease, if readily determinable, or our incremental borrowing rate. Actual results could differ materially from those estimates and be based on events different from those assumptions.  Future events and their effects cannot be predicted with certainty; estimating, therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired or as additional information is obtained.  Critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our financial statements. A discussion of such critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2018. Other than the adoption of Topic ASC 842, there have been no material changes to such critical accounting policies as of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

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ITEM 4 - CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company has established disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and, as such, is accumulated and communicated to the Company’s management, including our principal executive and financial officer, to allow timely decisions regarding required disclosure. Management, together with our principal executive and financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation of management, including the principal executive and financial officer, due to material weaknesses in our internal control over financial reporting related to an insufficient compliment of qualified accounting personnel and ineffective controls associated with segregation of duties, our disclosure controls and procedures were not effective as of September 30, 2019. In light of the material weaknesses in internal control over financial reporting, 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 Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented.

 

Remediation of the Material Weaknesses

 

The Company is in the process of remediating the material weaknesses in order to strengthen our overall internal controls. Such remediation plan includes the following:

 

  · A consultant with specific accounting and financial reporting expertise was hired during the second quarter of 2018, which provides the Company with additional resources.

 

  · Enhancing the timeliness, formality and rigor of our financial statement preparation, review and reporting process.

 

  · Enhancing our review process for significant accounts, transactions and reconciliations to provide controls to mitigate segregation of duties issues.

 

  · In the second quarter of 2019, we implemented a new accounting system at our operating subsidiary, B.R. Johnson, LLC, that has certain built in internal controls.

 

The Company is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in our controls.  The Company is in the process of implementing these steps, however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the material weaknesses described above will continue to exist.

 

Changes in Internal Control Over Financial Reporting

 

While changes in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2019 as the Company is in the process of implementing the remediation steps described above, we believe that there were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2019, that have materially affected the Company’s internal control over financial reporting.

 

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Inherent Limitations on Effectiveness of Controls

 

The Company’s management, including the principal executive and financial officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent or detect all errors and all fraud. A control system, regardless of how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met.  These inherent limitations include the following:

 

  · Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes.
     
  · Controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override.
     
  · The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
     
  · Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings .

 

There are currently no pending or threatened material legal proceedings against us.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2018, except for the following which supplements our previously disclosed risk factors.

 

Difficulties in implementing our enterprise resource planning system may disrupt our business.

 

We placed into service an enterprise resource planning, or “ERP”, system at our operating subsidiary in the second quarter of 2019. The complexities and business process changes associated with such an ERP implementation can result in various difficulties including problems processing and fulfilling orders, customer disruptions and lost business. While we believe the potential difficulties associated with implementing our ERP system have been addressed or can be mitigated, there can be no assurance that we will not experience disruptions or inefficiencies in our business operations as a result of the implementation, which could have a material adverse effect on our business, financial condition or results of operations.

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

ITEM 6 – EXHIBITS

 

 

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 Label Linkbase Document
 
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

* This certification is deemed not filed for purposes of Section 18 of 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.

 

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SIGNATURES

 

Pursuant to the requirements 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.
      
November 8, 2019 By:  /s/ Fred DiSanto
     Fred DiSanto
     Chief Executive Officer
     (Principal Executive, Financial and Accounting Officer)

 

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