UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
¨
Annual
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
or
x
Transitional
Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from October
1, 2016 to December 31, 2016
Commission File Number: 33-131110-NY
Regional Brands Inc.
(Exact name of Registrant as specified in
its charter)
Delaware
|
22-1895668
|
(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)
Securities registered pursuant to Section
12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer as defined in Rule 405 of the Securities Act
Yes
¨
No
x
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
x
No
¨
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.
Yes
¨
No
x
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files)
Yes
¨
No
x
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
¨
Accelerated
Filer
¨
Non-Accelerated Filer
¨
Smaller
Reporting Company
x
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 aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal
quarter (June 30, 2016) was $178,380.
The number of shares outstanding of the registrant’s
Common Stock, $0.00001 par value per share, was 1,274,603 as of March 17, 2017.
Regional Brands Inc.
Table of Contents
PART I
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 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. 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
is a transition report and includes financial information from October 1, 2016 to December 31, 2016 (the "Transition Period
2016"). For comparative purposes, an unaudited consolidated statement of operations and comprehensive loss and a statement
of cash flows are included for the period October 1, 2015 to December 31, 2015 (the "Transition Period 2015"). The Transition
Period 2015 has not been audited and is derived from the books and records of the Company. In the opinion of management, the Transition
Period 2015 reflects all adjustments necessary to present the financial position and the results of operations in accordance with
generally accepted accounting principles.
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 is 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
will be 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;
|
|
·
|
Specialty division; consisting of operable partitions, movable glass walls, fire and smoke containment systems and gymnasium equipment
|
|
·
|
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 $24.3 billion in sales in 2014.
In the same study, a rebound in housing completions and building
construction expenditures is expected to drive approximately 6% growth per year in the industry through 2018. This would represent
a rebound from the 2009-2014 period, with growth expected to be driven by both residential and non-residential building construction
activity.
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 sales office.
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 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;
|
|
·
|
Budgets, detailing and mock-ups;
|
|
·
|
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;
|
|
·
|
Safe-Path (safety device for gym partitions);
|
|
·
|
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:
|
·
|
Andersen Windows, Inc., a part of Andersen Corporation, is the largest window and door manufacturer in North America. The flagship Andersen® brand is the most recognized and most used brand in the window and patio door industry.
|
|
·
|
Eagle Window & Door, an Andersen Window & Door company, manufactures a complete line of high quality aluminum-clad wood windows (also known as Andersen E-series windows) and doors.
|
|
·
|
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.
|
|
·
|
Sierra Pacific Industries, a third-generation, family-owned and operated forest products company based in northern California and the state of Washington, which in August 2014 acquired Hurd Windows and Superseal to complement its own Sierra Pacific product line.
|
|
·
|
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 87 people full-time and 1 person part-time
as of March 6, 2017. Regional Brands has no employees other than its CEO.
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.
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 34.5% of our outstanding common stock as of March 17, 2017.
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.
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 have a material adverse effect on our business and operating results 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 control over financial reporting as of the end of each
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, 2016 as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, and has determined
our controls 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. Due to the material weaknesses
in internal control over financial reporting and disclosure controls and procedures, there may be errors in the Company’s
financial statements and in the accompanying footnote disclosures that could require restatements. As a result, investors may lose
confidence in our reported financial information and disclosure, which could negatively impact our stock price.
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 – UNRESOLVED STAFF COMMENTS
None.
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 - LEGAL PROCEEDINGS
There are currently no pending or threatened material legal
proceedings against us.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable
PART II
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 17, 2017 was $15.00.
The table below sets forth the range of
quarterly high and low closing bid quotations for our common stock for the Transition Period ended December 31, 2016 and
for fiscal years ended September 30, 2016 and 2015 and give 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:
|
|
Low
|
|
|
High
|
|
Transition Period Ended December 31, 2016
|
|
$
|
14.25
|
|
|
$
|
16.50
|
|
|
|
|
|
|
|
|
|
|
Year ending September 30, 2016
|
|
|
|
|
|
|
|
|
First Quarter through December 31
|
|
$
|
30.00
|
|
|
$
|
64.00
|
|
Second Quarter through March 31
|
|
$
|
20.10
|
|
|
$
|
40.00
|
|
Third Quarter through June 30
|
|
$
|
35.00
|
|
|
$
|
80.00
|
|
Fourth Quarter through September 30
|
|
$
|
13.00
|
|
|
$
|
75.00
|
|
|
|
|
|
|
|
|
|
|
Year ending September 30, 2015
|
|
|
|
|
|
|
|
|
First Quarter through December 31
|
|
$
|
30.00
|
|
|
$
|
70.00
|
|
Second Quarter through March 31
|
|
$
|
40.00
|
|
|
$
|
50.00
|
|
Third Quarter through June 30
|
|
$
|
50.00
|
|
|
$
|
50.00
|
|
Fourth Quarter through September 30
|
|
$
|
50.00
|
|
|
$
|
90.00
|
|
Issued and Outstanding Shares
Our authorized capital currently consists of 3,000,000
shares of common stock, par value $0.00001 per share, and 5,000 shares of preferred stock, par value $0.01 per share. As
of March 17, 2017, we had 1,274,603 shares of common stock outstanding and no shares of preferred stock outstanding.
Holders of Record
As of March 14, 2017, 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 have not paid any dividends on our common stock during the
Transition Period 2016 and 2015, and the fiscal years ended September 30, 2016 and 2015, and we do not intend to pay any dividends
on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
For the purpose of financing the Acquisition and potential future
acquisitions, on November 1, 2016, we completed a private placement in which we issued 894,393 shares of our common stock at a
price per share of $13.50 to 93 accredited investors (the “Private Placement”). We received gross proceeds from the
Private Placement of $12,074,311. No placement agent or other financial intermediary was engaged or compensated in connection with
the Private Placement. The shares of common stock issued in the Private Placement were exempt from registration under Section 4(a)(2)
of the Securities Act of 1933, as amended (the “Securities Act”), as a sale by an issuer not involving a public offering.
Share Repurchased by the Registrant
We did not purchase or repurchase any of our securities in the
Transition Period 2016 and 2015 and fiscal years ended September 30, 2016 and 2015.
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”). 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 is 135,000 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 following table sets forth information
as of December 31, 2016 regarding equity compensation plans under which our equity securities are authorized for issuance.
Equity Plan Compensation Information
Plan Category
|
|
Number of securities
to be issued upon
exercise of
outstanding
options, warrants
and rights
|
|
|
Weighted
average
exercise price
of
outstanding
options,
warrants
and rights
|
|
|
Number of securities
remaining available
for
future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders (1)
|
|
|
42,596
|
|
|
$
|
16.00
|
|
|
|
92,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
42,596
|
|
|
|
|
|
|
|
92,404
|
|
(1) Pursuant to our 2016 Equity Incentive Plan
ITEM 6 – SELECTED FINANCIAL DATA
This item is not applicable to us as a smaller reporting company.
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 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
is a transition report and includes financial information from October 1, 2016 to December 31, 2016 (the "Transition Period
2016"). For comparative purposes, an unaudited consolidated statement of operations and comprehensive loss and a statement
of cash flows are included for the period October 1, 2015 to December 31, 2015 (the "Transition Period 2015"). The Transition
Period 2015 has not been audited and is derived from the books and records of the Company. In the opinion of management, the Transition
Period 2015 reflects all adjustments necessary to present the financial position and the results of operations in accordance with
generally accepted accounting principles.
Results of Operations: For the Transition Period 2016 and
Transition Period 2015.
Net Sales:
In Transition Period 2016, the Company
had net sales of $6,748,263 due to inclusion of BRJ LLC's operations from November 1, 2016, the date of acquisition. Until
the acquisition of BRJ Inc., the Company did not have any sales.
Cost of sales:
The Company had cost of sales of $4,951,678
due to inclusion of BRJ LLC's operations during the Transition Period 2016.
Selling:
As of result of BRJ LLC's operations in
Transition Period 2016, the Company had selling expenses of $713,019. There were no selling expenses during the Transition
Period 2015.
General and administrative
increased by $509,231
from $6,305 in Transition Period 2015 to $515,536 in Transition Period 2016. Approximately $462,643 of this increase was
due to BRJ LLC’s operations and the remainder of the increase was due to higher levels of activities subsequent to our
change in control in April 2016.
Amortization of intangible assets:
Amortization of intangibles
arising from the BRJ Inc. acquisition amounted to $458,334 in Transition Period 2016.
Interest Expense:
The interest expense in
Transition Period 2016 increased by $132,600 from $4,568 to $137,168. The increase in interest expense was due to increased
debt levels to fund the BRJ Inc. acquisition and operations. In connection with the bank borrowing, the Company incurred
expenses of approximately $100,000 that was charged to operations as interest expenses during the Transition Period ended
December 31, 2016 as a result of a demand line of credit.
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.
Net loss:
As a result of the foregoing, the net loss for the Transition
Period 2016 increased by $509,842 to $520,049 compared to a net loss of $10,207 incurred during the Transition Period 2015. During
the Transition Period 2016, we had an unrealized loss on investments of $6,227 resulting in comprehensive loss of $505,222
to common shareholders, after a loss of $21,054 to noncontrolling interest.
Results of Operations: For the Fiscal Years Ended September
30, 2016 and September 30, 2015
Revenues:
We did not generate any sales during the fiscal years ended
September 30, 2016 and 2015.
General and Administrative Expenses:
Our general and administrative expenses for the fiscal year
ended September 30, 2016 increased by $68,530 to $91,274 compared to the fiscal year ended September 30, 2015. The increase was
due to higher levels of activities subsequent to our change in control in April 2016.
Other (income) expense
During the fiscal year ended September 30, 2016, our net other
income was $16,821 compared to net other expense of $17,016 during the comparable period of 2015. The increase in net other income
was due to dividends income received from our investments and due to reduction of interest expense upon repayment of debt. Investments
were made with the proceeds from the sale of common stock in April 2016.
Net loss:
As a result of the foregoing, the net loss for the fiscal year
ended September 30, 2016 increased by $34,693 to $74,453 compared to a net loss of $39,760 incurred during the fiscal year ended
September 30, 2015. During the fiscal year ended September 30, 2016, we had an unrealized gain on investments of $763 resulting
in comprehensive loss of $73,690.
Liquidity and Capital Resources
At December 31, 2016, we had working capital of $9,239,594 compared
to working capital of approximately $4,712,877 at September 30, 2016. The increase in working capital is primarily due to the
proceeds we received from the sale of common stock in November 2016. During the Transition Period ended December 31, 2016, our
operating activities used cash of approximately $780,000 compared to approximately $4,000 used during the Transition Period
ended December 31, 2015.
During the Transition Period ended December 31, 2016, our operations,
after adjusting for non-cash items, used approximately $25,000 of cash. Changes in working capital items used approximately
$755,000 of cash during the Transition Period ended December 31, 2016. During the Transition Period ended December 31, 2015, our
operations used approximately $10,000 of cash, and working capital items provided approximately $6,000 of cash.
In the past we had satisfied our working capital needs from
borrowings from our former president and principal executive officer. We had borrowed $7,600 and $32,900, respectively, during
the years ended September 30, 2016 and September 30, 2015. 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, 2016 was 3.19%. The aggregate
borrowing outstanding under the Credit Agreement at December 31, 2016 was $2,272,710 and, in addition, the bank has issued a letter
of credit on behalf of the Company in the amount of $250,000 that expires in December 1, 2017.
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 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.
On November 1, 2016, BJR 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.
B.R. Johnson, Inc.
(Predecessor to Regional Brands Inc.)
Overview
Following the acquisition of BRJ Inc., all
of our business operations will be conducted through our consolidated subsidiary BRJ LLC. We are considered the accounting successor
to BRJ Inc. Our financial statements, prior to the acquisition, will be presented on the predecessor basis of accounting.
BRJ Inc.'s fiscal year was December 31. The
following analysis is for the results of ten months ended October 31, 2016, until Regional Brand's acquisition, compared to the
year ended December 31, 2015.
Results of Operations
Results of Operations for the Ten Months Ended October
31, 2016 as Compared to the Year Ended December 31, 2015
Net sales:
Net sales
for the ten months ended October 31, 2016 was $28,410,708 and net sales during the year ended December 31, 2015 was $27,612,825.
On a pro forma basis net sales for the full year 2016 increased by $7,546,146 or 27.3% to $35,158,971 from $27,612,825. The increase
in 2016 was due to higher contract volume as a result of sharply increased construction activity in our primary market area –
Upstate New York.
Cost of sales:
Cost of sales during
the ten months ended October 31, 2016 was $19,875,441 compared to $19,234,166 during the year ended December 31, 2015. On a pro
forma basis, cost of sales for the full year 2016 increased by 29.1% or $5,592,953 to $24,827,119. The increase in cost of sales
in 2016 was due to higher net sales in 2016. As a percentage of net sales pro forma cost of sales in 2016 was 70.6% compared to
69.7% in 2015.
Selling expenses:
Selling expenses
during the ten months ended was $3,473,272 compared to $3,960,768 during the year ended December 31, 2015. On a pro forma basis,
the selling expenses during full year 2016 was $4,186,291 compared to $3,960,768. The increase in selling expenses in 2016 was
due to additional compensation costs arising from increased net sales.
General and administrative:
General
and administrative expenses during the ten months ended October 31, 2016 was $2,229,069 and $2,709,955 during the year ended
December 31, 2015. On a pro forma basis the general and administrative expenses during the full year 2016 was $2,691,712
compared to $2,709,955 in 2015.
Liquidity and Capital Resources
At October 31, 2016, BRJ Inc. had working capital of
$7,594,514 compared to working capital of approximately $5,710,756 at December 31, 2015. The increase in working capital
was primarily due operating profits during the ten months ended October 31, 2016. During the ten months ended October 31,
2016, operating activities provided cash of approximately $2,964,000 compared to cash of approximately $79,000 provided
during the year ended December 31, 2015.
During the ten months ended October 31, 2016, BRJ
Inc.’s operations, after adjusting for non-cash items, provided approximately $2,981,000 of cash. Changes in working
capital items used approximately $17,000 of cash during the ten months ended October 31, 2016. During the year ended December
31, 2015, BRJ Inc.’s operations provided approximately $1,839,000 of cash, and working capital items used approximately
$1,760,000 of cash.
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, 2016 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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited financial statements for the Transition Period ended
December 31, 2016 and for the years ended September 30, 2016 and 2015 follow Item 14, beginning at page F-1.
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 - 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 period covered by this transition report, concluded that our
disclosure controls and procedures were effective. Our Management evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2016 as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, and has determined our controls
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.
Management excluded the BRJ LLC's business from its report on
internal control over financial reporting.
To address the material weaknesses
we performed additional analyses and other post-closing procedures and retained the services of a consultant 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
There was no change in our internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the Transition Period ended
December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B – OTHER INFORMATION
None
PART III
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
|
|
57
|
|
Chairman of the Board
|
|
|
|
|
|
Fred DiSanto
|
|
54
|
|
Chief Executive Officer and Director
|
|
|
|
|
|
Brian Hopkins
|
|
40
|
|
Director
|
|
|
|
|
|
Jeff Anderson
|
|
46
|
|
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 currently 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 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 currently a director of First Menasha
Bancshares (OTC: FMBJ). 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 an audit committee, compensation
committee or nominations and corporate governance committee.
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.
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 - 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”) for the Transition Period (T 2016)
ended December 31, 2016 and for the fiscal years ended September 30, 2016 (2016) and 2015 (2015).
Name &
Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Change in
Pension
Value and
Non-
Qualified
Deferred
Compensation
Earnings ($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Fred DiSanto
(1)
|
|
T2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
CEO
|
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Brian Hopkins
|
|
T2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Former Pres. and CEO
(2) and (4)
|
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
4,898
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
4,898
|
|
|
|
2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Steven N. Bronson
(3)
|
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Former Pres. and CEO
|
|
2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Fred DiSanto was appointed to his position on November 1, 2016.
|
(2)
|
Brian Hopkins was appointed to his positions on April 8, 2016 and resigned from them on November 1, 2016.
|
(3)
|
Steven N. Bronson was appointed to his positions in September 1998 and resigned from them on April 8, 2016. In September 2002, we entered into an agreement with Mr. Bronson, which provided that, effective October 1, 2002, Mr. Bronson waived and would not receive a salary from our company.
|
(4)
|
Value of option awards is the dollar amount recognized for financial statements reporting purposes.
|
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 as of December 31, 2016:
|
|
Option awards
|
|
Stock awards
|
|
Name
|
|
Number of
securities
underlying
unexercised
options
(#)
exercisable
|
|
|
Number of
securities
underlying
unexercised
options
(#)
unexercisable
|
|
|
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration
date
|
|
Number
of shares
or units
of stock
that have
not
vested
(#)
|
|
|
Market
value of
shares of
units of
stock
that have
not
vested
($)
|
|
|
Equity
incentive
plan
awards:
Number
of
unearned
shares,
units or
other
rights that
have not
vested
(#)
|
|
|
Equity
incentive
plan
awards:
Market or
payout
value of
unearned
shares,
units or
other
rights that
have not
vested
($)
|
|
Brian Hopkins
|
|
|
1,247
|
|
|
|
8,104
|
|
|
|
-
|
|
|
$
|
16.00
|
|
|
4/8/2031
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeff Anderson
|
|
|
1,247
|
|
|
|
8,104
|
|
|
|
-
|
|
|
$
|
16.00
|
|
|
4/8/2031
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Compensation of Directors
The table below summarizes the compensation paid by us to directors
for the Transition Period ended December 31, 2016.
Director Compensation Table
We did not compensate our directors during the Transition Period
ended December 31, 2016.
Equity Incentive Plan
On April 8, 2016, we adopted the 2016 Equity Incentive Plan
(the “Equity Incentive Plan”). 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 is 135,000 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, 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, 2016, we have 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 - 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 17, 2017 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.
Name
(1)
|
|
Number of
Shares
Beneficially
Owned
|
|
|
Percentage of
Shares
Beneficially
Owned
(2)
|
|
|
|
|
|
|
|
|
Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl Grassi
(3)
|
|
|
37,037
|
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
Fred DiSanto
(4)
|
|
|
431,131
|
|
|
|
33.7
|
%
|
|
|
|
|
|
|
|
|
|
Brian Hopkins
(5)
|
|
|
5,729
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Jeff Anderson
(5)
|
|
|
5,729
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (4 persons)
|
|
|
479,626
|
|
|
|
37.4
|
%
|
|
|
|
|
|
|
|
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ancora Advisors, LLC
(6)
|
|
|
394,096
|
|
|
|
30.8
|
%
|
*
|
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 17, 2017. 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 17, 2017 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, 5,143 shares subject to options held by Ancora that are currently exercisable or exercisable within 60 days of March 17, 2017, 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 2,026 shares subject to options that are currently exercisable or exercisable within 60 days of March 17, 2017.
|
(6)
|
Includes 259,305 shares owned directly by Merlin Partners LP, 129,648 shares owned directly by Ancora Catalyst Fund LP, and 5,143 shares subject to options held by Ancora that are currently exercisable or exercisable within 60 days of March 17, 2017. 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 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Loans from Former Chief Executive Officer
Since February 3, 2009, our former president and principal executive
officer, Steven N. Bronson, had loaned our 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 $65,464 through March 31, 2016. On April 8, 2016, pursuant to a Securities
Purchase Agreement (the “SPA”), dated as such date, among our company, Merlin Partners LP and Ancora Catalyst Fund
LP (affiliates of Ancora), and Steven N. Bronson (collectively, the “Purchasers”), we issued to Mr. Bronson 18,522
shares of our common stock in full satisfaction for Mr. Bronson’s loans to us.
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 transition period ended December 31, 2016 and for the fiscal year ended September 30, 2016, Ancora agreed to
waive payment of the management fee.
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. As of December 31, 2016, $36,000 has been accrued
as payable to Lorraine Capital, LLC under the BRJ MSA.
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.
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 370,441shares of our common stock issued pursuant to the SPA and agreed to
certain customary obligations regarding the registration of such shares, including indemnification.
Leases
Prior to May 12, 2016, we 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. Steven N. Bronson, our former Chairman and CEO, is also the Chairman,
CEO and controlling shareholder of BKF Capital Group, Inc.
Effective May 12, 2016, we relocated our principal offices
to 6060 Parkland Boulevard, Cleveland, OH 44124. We pay 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 BJR 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 $277,500 during the 2016 Transition Period. 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 $7,500 during the 2016 Transition
Period.
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.
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 annual financial statements 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 Transition Period ended December
31, 2016 by our principal accountant, Freed Maxick CPAs, P.C was $21,000. The aggregate fees billed or to be billed
for professional services rendered by our principal accountant, Freed Maxick CPAs, P.C. for audit for the year ended
September 30, 2016 was $7,500. The aggregate fees billed or to be billed for professional services rendered by our
former principal accountant, Anton and Chia, LLP, for audit and review services for the year ended September 30,
2015 was $18,019. For the Transition Period ended December 31, 2016 and the fiscal years ended September 30, 2016
and 2015, the Company was not required to have an audit of its internal controls over financial reporting.
Audit Related Fees
During the Transition Period 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.
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 Transition Period
ended December 31, 2016 and fiscal years ended September 30, 2016 and 2015 were $0, $0 and $0, respectively. The
aggregate fees billed for professional services rendered by our former principal accountant, Anton and Chia, LLP, for
preparation of tax returns during the fiscal years ended September 30, 2016 and 2015 were $0 and $0, respectively.
All Other Fees
During the Transition Period ended December 31, 2016, our principal
accountant, Freed Maxick CPAs, billed us $33,500 for the due diligence work preformed 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 years ended September 30, 2016 and 2015 were
$0 and $0, respectively.
We do not have an Audit Committee. Our Board 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 in accordance with this policy.
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. 2016 Equity Incentive Plan, dated April 8, 2016 (Incorporated by reference to Exhibit 10.28 to the Current Report on Form 8-K filed by the Company on April 8, 2016).
|
|
|
|
|
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.
|
**
|
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.
We have audited the accompanying consolidated
balance sheets of Regional Brands Inc. as of December 31, 2016 and September 30, 2016, and the related consolidated statements
of operations and comprehensive loss, changes in stockholders’ equity (deficiency) and cash flows for the three month period
ended December 31, 2016 and for the year ended September 30, 2016. 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 consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Regional Brands Inc. as of December
31, 2016 and September 30, 2016, and the results of its operations and its cash flows for the three month period ended December
31, 2016 and the year ended September 30, 2016 in conformity with U.S. generally accepted accounting principles.
/s/ Freed Maxick CPAs, P.C.
Buffalo, New York
March 31, 2017
|
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and
Stockholders of 4Net Software,
Inc.
We have audited the accompanying
balance sheet of 4Net Software, Inc. (the "Company") as of September 30, 2015, and the related statements of operations,
stockholders' deficit, and cash flows for the year then ended. 4Net Software Inc's management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements
of the Company as of September 30, 2014 and for the year then ended were audited by other auditors, whose report dated December
29, 2014, expressed an unqualified opinion on those financial statements.
We conducted our audit 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 audit 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 audit provides 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 4Net Software, Inc. as of September
30, 2015, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has no principal operations or significant revenue producing activities, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard to these matters is also described in Note 1. The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton and Chia, LLP
|
|
|
|
Anton and Chia, LLP
|
|
Newport Beach, CA
|
|
January 6, 2016
|
|
REGIONAL BRANDS INC.
CONSOLIDATED BALANCE SHEETS
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,752,462
|
|
|
$
|
2,525,988
|
|
|
$
|
1,495
|
|
Short-term investments
|
|
|
952,208
|
|
|
|
2,186,889
|
|
|
|
-
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
5,717,369
|
|
|
|
-
|
|
|
|
-
|
|
Inventories, net
|
|
|
1,594,264
|
|
|
|
-
|
|
|
|
-
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
894,261
|
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
248,935
|
|
|
|
-
|
|
|
|
-
|
|
Total current assets
|
|
|
14,159,499
|
|
|
|
4,712,877
|
|
|
|
1,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment, net
|
|
|
461,828
|
|
|
|
-
|
|
|
|
-
|
|
Intangibles, net
|
|
|
6,316,666
|
|
|
|
-
|
|
|
|
-
|
|
Goodwill
|
|
|
3,013,287
|
|
|
|
-
|
|
|
|
-
|
|
Other assets
|
|
|
96,667
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
24,047,947
|
|
|
$
|
4,712,877
|
|
|
$
|
1,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
467,248
|
|
|
$
|
-
|
|
|
$
|
3,206
|
|
Accrued expenses and other current liabilities
|
|
|
618,844
|
|
|
|
-
|
|
|
|
-
|
|
Line of credit
|
|
|
2,272,710
|
|
|
|
-
|
|
|
|
-
|
|
Current portion of senior subordinated note
|
|
|
14,348
|
|
|
|
-
|
|
|
|
-
|
|
Working capital liability due to Seller
|
|
|
1,107,872
|
|
|
|
-
|
|
|
|
-
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
438,883
|
|
|
|
-
|
|
|
|
-
|
|
Related party note and interest payable
|
|
|
-
|
|
|
|
-
|
|
|
|
234,934
|
|
Total current liabilities
|
|
|
4,919,905
|
|
|
|
-
|
|
|
|
238,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior subordinated note
|
|
|
222,809
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated term note
|
|
|
2,500,000
|
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
|
7,642,714
|
|
|
|
-
|
|
|
|
238,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock $.01 par value, authorized 5,000,000 issued and outstanding -none
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock $.00001 par value, 50,000,000
authorized and 1,274,603, 380,205 and 9,764 shares issued and outstanding, respectively
|
|
|
13
|
|
|
|
4
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
20,311,645
|
|
|
|
8,221,556
|
|
|
|
3,198,347
|
|
Accumulated deficit
|
|
|
(4,008,441
|
)
|
|
|
(3,509,446
|
)
|
|
|
(3,434,993
|
)
|
Accumulated other comprehensive gain(loss)
|
|
|
(5,464
|
)
|
|
|
763
|
|
|
|
-
|
|
Total Regional Brands Inc. stockholders' equity (deficit)
|
|
|
16,297,753
|
|
|
|
4,712,877
|
|
|
|
(236,645
|
)
|
Noncontrolling interest in consolidated subsidiary
|
|
|
107,480
|
|
|
|
-
|
|
|
|
-
|
|
Total stockholders
equity (deficit)
|
|
|
16,405,233
|
|
|
|
4,712,877
|
|
|
|
(236,645
|
)
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
24,047,947
|
|
|
$
|
4,712,877
|
|
|
$
|
1,495
|
|
The accompanying notes are an integral part
of the consolidated financial statements
REGIONAL BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Transition Periods Ended December 31,
2016 and 2015)
(Fiscal Years ended September 30, 2016
and September 30, 2015)
|
|
|
|
|
Transition Period
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
|
From October 1, 2015
|
|
|
|
|
|
|
|
|
|
From October 1, 2016
|
|
|
to
|
|
|
|
|
|
|
|
|
|
to
|
|
|
December 31, 2015
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
|
December 31, 2016
|
|
|
(unaudited)
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
6,748,263
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of sales
|
|
|
4,951,678
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,796,585
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
713,019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
515,536
|
|
|
|
6,305
|
|
|
|
91,274
|
|
|
|
22,744
|
|
Amortization of intangible assets
|
|
|
458,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
1,686,889
|
|
|
|
6,305
|
|
|
|
91,274
|
|
|
|
22,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
109,696
|
|
|
|
(6,305
|
)
|
|
|
(91,274
|
)
|
|
|
(22,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
4,941
|
|
|
|
666
|
|
|
|
18,332
|
|
|
|
(650
|
)
|
Interest expense
|
|
|
(137,168
|
)
|
|
|
(4,568
|
)
|
|
|
(1,511
|
)
|
|
|
(16,366
|
)
|
Interest income
|
|
|
4,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Acquisition transaction related costs
|
|
|
(500,849
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(628,945
|
)
|
|
|
(3,902
|
)
|
|
|
16,821
|
|
|
|
(17,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(519,249
|
)
|
|
|
(10,207
|
)
|
|
|
(74,453
|
)
|
|
|
(39,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(520,049
|
)
|
|
|
(10,207
|
)
|
|
|
(74,453
|
)
|
|
|
(39,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Loss to noncontrolling interest
|
|
|
(21,054
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss attributable to common stockholders
|
|
|
(498,995
|
)
|
|
|
(10,207
|
)
|
|
|
(74,453
|
)
|
|
|
(39,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments
|
|
|
(6,227
|
)
|
|
|
-
|
|
|
|
763
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to common stockholders
|
|
$
|
(505,222
|
)
|
|
$
|
(10,207
|
)
|
|
$
|
(73,690
|
)
|
|
$
|
(39,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share per common share- basic and diluted
|
|
$
|
(0.51
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(4.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
969,915
|
|
|
|
9,261
|
|
|
|
186,887
|
|
|
|
9,764
|
|
The accompanying notes are an integral part
of the consolidated financial statements
REGIONAL BRANDS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
(Transition Period Ended December 31,
2016)
(Fiscal Years ended September 30, 2016
and September 30, 2015)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Stockholders'
|
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in
capital
|
|
|
Deficit
|
|
|
Gain
(Loss)
|
|
|
Interest
|
|
|
(Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2014
|
|
|
9,764
|
|
|
$
|
1
|
|
|
$
|
3,198,347
|
|
|
$
|
(3,395,233
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(196,885
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,760
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,760
|
)
|
Balance at September 30, 2015
|
|
|
9,764
|
|
|
|
1
|
|
|
|
3,198,347
|
|
|
|
(3,434,993
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(236,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
351,919
|
|
|
|
3
|
|
|
|
4,749,997
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,750,000
|
|
Issuance of common stock to satisfy notes payable
|
|
|
18,522
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
23,212
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,212
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,453
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,453
|
)
|
Unrealized gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
763
|
|
|
|
|
|
|
|
763
|
|
Balance at September 30, 2016
|
|
|
380,205
|
|
|
$
|
4
|
|
|
$
|
8,221,556
|
|
|
$
|
(3,509,446
|
)
|
|
$
|
763
|
|
|
$
|
-
|
|
|
$
|
4,712,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
894,393
|
|
|
|
9
|
|
|
|
12,074,302
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,074,311
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
15,787
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,787
|
|
Noncontrolling interest, net of expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128,534
|
|
|
|
128,534
|
|
Fractional shares issued in reverse stock split
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(498,995
|
)
|
|
|
|
|
|
|
(21,054
|
)
|
|
|
(520,049
|
)
|
Unrealized loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,227
|
)
|
|
|
-
|
|
|
|
(6,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
1,274,603
|
|
|
$
|
13
|
|
|
$
|
20,311,645
|
|
|
$
|
(4,008,441
|
)
|
|
$
|
(5,464
|
)
|
|
$
|
107,480
|
|
|
$
|
16,405,233
|
|
The accompanying notes are an integral part
of the consolidated financial statements
REGIONAL BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Transition Periods Ended December 31,
2016 and 2015)
(Fiscal Years ended September 30, 2016
and September 30, 2015)
|
|
|
|
|
Transition Period
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
|
From October 1, 2015
|
|
|
|
|
|
|
|
|
|
From October 1,
2016
|
|
|
to
|
|
|
|
|
|
|
|
|
|
to
|
|
|
December 31, 2015
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
|
December
31, 2016
|
|
|
(unaudited)
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(520,049
|
)
|
|
$
|
(10,207
|
)
|
|
$
|
(74,453
|
)
|
|
$
|
(39,760
|
)
|
Adjustments to reconcile
net loss to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
15,787
|
|
|
|
-
|
|
|
|
23,212
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
16,689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of debt issuance costs
|
|
|
4,191
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of intangibles
|
|
|
458,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Changes in operating
assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(354,941
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Inventories
|
|
|
(218,144
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Costs and estimated earnings in excess of
billings on uncompleted contracts
|
|
|
(331,006
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other assets
|
|
|
(133,417
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accounts payable
|
|
|
(181,626
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued expenses and other current liabilities
|
|
|
211,963
|
|
|
|
6,568
|
|
|
|
4,260
|
|
|
|
6,866
|
|
Working capital liability due to Seller
|
|
|
8,287
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Billings in excess of
costs and estimated earnings on uncompleted contracts
|
|
|
244,236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net cash used by operating
activities
|
|
|
(779,696
|
)
|
|
|
(3,639
|
)
|
|
|
(46,981
|
)
|
|
|
(32,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investment activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(30,805
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Business acquisition
|
|
|
(12,900,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchase of short- term investments
|
|
|
(25,557
|
)
|
|
|
-
|
|
|
|
(2,186,126
|
)
|
|
|
-
|
|
Short-term investments reclassified
as cash and cash equivalents
|
|
|
1,254,011
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net cash used by investment
activities
|
|
|
(11,702,351
|
)
|
|
|
-
|
|
|
|
(2,186,126
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
12,074,311
|
|
|
|
-
|
|
|
|
4,750,000
|
|
|
|
-
|
|
Proceeds from senior subordinated note
|
|
|
358,696
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Financing costs related to senior subordinated
note
|
|
|
(125,730
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sale of subsidiary interest to noncontrolling
interest, net of expenses
|
|
|
128,534
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Borrowings from line of credit
|
|
|
2,272,710
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds from related party
note payable
|
|
|
-
|
|
|
|
3,500
|
|
|
|
7,600
|
|
|
|
32,900
|
|
Net
cash provided by financing activities
|
|
|
14,708,521
|
|
|
|
3,500
|
|
|
|
4,757,600
|
|
|
|
32,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
2,226,474
|
|
|
|
(139
|
)
|
|
|
2,524,493
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
2,525,988
|
|
|
|
1,495
|
|
|
|
1,495
|
|
|
|
1,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
4,752,462
|
|
|
$
|
1,356
|
|
|
$
|
2,525,988
|
|
|
$
|
1,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest
|
|
$
|
111,700
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of related party note payable and
accrued interest by issuance of common shares
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
250,000
|
|
|
$
|
-
|
|
Subordinated term note- seller note to finance
a business acquisition
|
|
$
|
2,500,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Working capital payment liability to the
seller for a business acquisition
|
|
$
|
1,099,585
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 (See Note 2) the Company's majority-owned subsidiary acquired substantially all of the assets (the
“Acquisition”) of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related
hardware as well as specialty products for use in commercial and residential buildings.
Basis Of Presentation at
September 30, 2015
-
The accompanying financial statements were prepared on the basis of accounting principles
applicable to a going concern which contemplates the realization of assets and extinguishment of liabilities in the normal
course of business. As shown in the accompanying financial statements, the Company had accumulated a deficit of approximately
$3.4 million through September 30, 2015. As of September 30, 2015 the Company had no principal operations or
significant revenue producing activities, which raised substantial doubt about its ability to continue as a going concern.
The Company's financial statements did not include any adjustments related to the carrying value of assets or the amount and
classification of liabilities that might have been necessary should the Company be unable to continue as a going concern. The
Company's ability to establish itself as a going concern was dependent on its ability to merge with another entity. The
outcome of this matter could not be determined at that time.
As detailed in other Notes to the Financial
Statements, subsequent to September 30, 2015, the Company has raised additional capital and its majority-owned subsidiary acquired
substantially all of the assets 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 is a transition report and includes financial information
from October 1, 2016 to December 31, 2016 (the "Transition Period 2016"). For comparative purposes, an unaudited consolidated
statement of operations and comprehensive loss and a statement of cash flows are included for the period October 1, 2015 to December
31, 2015 (the "Transition Period 2015"). The Transition Period 2015 has not been audited and is derived from the books
and records of the Company. In the opinion of management, the Transition Period 2015 reflects all adjustments necessary to present
the financial position and the results of operations in accordance with generally accepted accounting principles.
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 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 and the line of credit is stated
at 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 September 30, 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 September 30, 2016:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at September
30, 2016
|
|
Marketable Equity Securities
|
|
$
|
932,878
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
932,878
|
|
Money Market Funds
|
|
$
|
2,525,988
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,525,988
|
|
Certificates of Deposit
|
|
$
|
1,254,011
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,254,011
|
|
The Company does not have any fair value measurements
within Level 2 or Level 3 of the fair value hierarchy as of September 30, 2016.
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:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at December 31, 2016
|
|
Marketable Equity Securities
|
|
$
|
952,208
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
952,208
|
|
Money Market Funds
|
|
$
|
3,492,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,492,895
|
|
Certificates of Deposit
|
|
$
|
1,256,216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,256,216
|
|
The Company does 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
September 30, 2016, the Company purchased cumulative GDL FD Cumulative Preferred Series B Shares for $932,115 and had an
unrealized gain of $763. During the transition period ended December 31, 2016, the Company purchased 1,000 Special
Opportunity FD INC PFD Convertible Series 3.5% for $25,557.
During the Transition Period ended December 31, 2016, the Company
had an unrealized loss of $6,227.
Comprehensive Loss
-
Comprehensive 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 loss for the transition periods ended December 31,
2016 and 2015 and for the years ended September 30, 2016 and 2015.
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 is 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.
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 FASB 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 December 31,
2016, our allowance was doubtful accounts was $150,000 and none at September 30, 2016 and 2015. As of December 31, 2016 we had
retainage receivable of $367,081, and none at September 30, 2016 and 2015, 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 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 December 31, 2016, the work-in-process inventory
was $942,340 included in inventories in the accompanying balance sheet. 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 December 31, 2016.
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 transition period ended December 31, 2016 was $16,689. There was no depreciation expense for the fiscal
years ended September 30, 2016 and 2015 and for the transition period ended December 31, 2015.
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.
Assessment for possible
impairment is based on the Company’s ability to recover the carrying value of the long-lived asset from the expected future
pre-tax cash flows. The expected future pre-tax cash flows are estimated based on historical experience, knowledge and market data.
Estimates of future cash flows require the Company to make assumptions and to apply judgment, including forecasting future sales,
capital investments and expenses and estimating the useful lives of assets. If the expected future cash flows related to the long-lived
assets are less than the assets’ carrying value, an impairment charge is recognized for the difference between estimated
fair value and carrying value.
When performing its evaluation
of goodwill for impairment, if the Company concludes qualitatively that it is not more likely than not that the fair value of the
reporting unit is less than its carrying amount, then the two-step impairment test is not required. If the Company is unable to
reach this conclusion, then the Company would perform the two-step impairment test. Initially, the fair value of the reporting
unit is compared to its carrying amount. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting
unit, the Company is required to perform a second step, as this is an indication that the reporting unit goodwill may be impaired.
In this step, the Company compares the implied fair value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill and recognizes a charge for impairment to the extent the carrying value exceeds the implied fair value. The implied
fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized)
and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation
is the implied fair value of the reporting unit goodwill.
There are inherent assumptions
and estimates used in developing future cash flows requiring management judgment in applying these assumptions and estimates to
the analysis of identifiable intangibles and asset impairment including projecting revenues, interest rates and the cost of capital.
Many of the factors used in assessing fair value are outside the Company's control and it is reasonably likely that assumptions
and estimates will change in future periods. These changes can result in future impairments. In the event the Company's planning
assumptions are modified resulting in impairment to the Company's assets, the associated expense would be included in the consolidated
statements of operations, which could materially impact the Company's business, financial condition and results of operations.
No impairment test was required as of December 31, 2016.
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, 2016, two customers accounted for 24% of the accounts receivable.
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, 2016 and September 30, 2016 or 2015. The Company recognizes
interest accrued and penalties related to unrecognized tax benefits in tax expense. During the transition periods ended December
31, 2016 and 2015 and the fiscal years ended September 30, 2016 and 2015, the Company recognized no interest and penalties.
Recent Accounting Pronouncements
–
FASB ASU 2015-11, Inventory (Topic 330): “Simplifying
the Measurement of Inventory”. This ASU requires inventory within the scope of the guidance be measured at the lower of cost
or net realizable value. FASB ASU 2015-11 is effective for annual and interim periods beginning after December 15, 2016, with prospective
application required. Early adoption is permitted. The Company is evaluating the potential impact of this ASU on the financial
statements.
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 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. We are currently evaluating the alternative methods of
adoption and the effect of this guidance on our consolidated financial statements and related disclosures. We are also in the
process of identifying material contracts and revenue streams that are potentially impacted by this guidance. This guidance
is effective January 1, 2018 using a full or modified retrospective approach with early adoption permitted January 1,
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. This pronouncement is effective for fiscal years beginning after December 15, 2016, and interim
periods within those years, with early adoption permitted. The Company is currently evaluating the impact that ASU 2016-09 will
have on its financial statements and related disclosures.
In February 2016, the FASB issued an accounting standard update
ASU 2016-02, “Leases" to replace existing lease accounting guidance. This pronouncement is intended to provide enhanced
transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance
sheet for most leases. Expenses associated with leases will continue to be recognized in a manner similar to current accounting
guidance. This pronouncement is effective for annual and interim periods beginning after December 15, 2018, with early adoption
permitted. The adoption is required to be applied on a modified retrospective basis for each prior reporting period presented.
The Company has not yet determined the effect that the adoption of this pronouncement may have on its financial position and/or
results of operations.
In April 2015, the FASB issued ASU 2015-03,
“Simplifying the Presentation of Debt Issuance Costs”, which requires all costs incurred to issue debt to be presented
in the balance sheet as a direct deduction from the carrying value of the debt. The Company adopted the provisions of this ASU
for the transition period ended December 31, 2016. The adoption of this ASU resulted in the presentation of debt issuance
costs on our balance sheet being treated as a direct reduction of the carrying amount of the debt liability. See Note 6,
Debt for the relevant disclosures.
In January 2017, the FASB issued ASU 2017-04,
“Intangibles — Goodwill and Other (Topic 350),” which simplifies the subsequent measurement of goodwill by eliminating
Step 2 from the goodwill impairment test. Under the new guidance, an entity will recognize an impairment charge for the amount
by which the carrying value exceeds the fair value. This standard is effective for annual or any interim goodwill impairment tests
in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. The Company is evaluating its implementation approach and assessing the
impact of ASU 2017-04 on our financial position and results of operations.
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 will carry on 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 Company’s debt agreements, as described below,
and working capital adjustments of approximately $1.1 million. 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 a subordinated loan and $3.81
million in preferred equity of BRJ LLC which is eliminated in consolidation with the remainder from bank financing, the
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).
Purchase price
|
|
|
|
|
Amount paid as cash consideration
|
|
$
|
12,900,000
|
|
Subordinated term note- seller note
|
|
|
2,500,000
|
|
Working capital payment
|
|
|
1,099,585
|
|
Total purchase price
|
|
$
|
16,499,585
|
|
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 certain
covenants not to compete, which management estimates has a useful life of five years. Amortization expense amounted to
$200,000 during the transition period ended December 31, 2016 and is estimated to be $1,200,000 in 2017 and in each of the
succeeding years until fully amortized in November 2021. In addition, the Company allocated $775,000 to unbilled backlog,
which management estimates has a useful life of six months. During the transition period ended December 31, 2016, $258,834
was amortized and the balance of $516,166 will be amortized in 2017. After allocation of fair values to identifiable assets
and liabilities, the excess of the purchase price amounting to $3,013,287 was allocated to goodwill. The amortization of
goodwill will be deductible for tax purposes. The following table summarizes the allocation of the purchase price for the
acquisition of BRJ Inc.
Accounts receivable
|
|
$
|
5,362,428
|
|
Inventories
|
|
|
1,376,120
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
563,255
|
|
Prepaid expenses and other current assets
|
|
|
115,518
|
|
Equipment
|
|
|
447,712
|
|
Covenants not to compete
|
|
|
6,000,000
|
|
Unbilled backlog
|
|
|
775,000
|
|
Goodwill
|
|
|
3,013,287
|
|
Other assets
|
|
|
96,667
|
|
Accounts payable
|
|
|
(648,874
|
)
|
Accrued expenses and other current liabilities
|
|
|
(406,881
|
)
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(194,647
|
)
|
|
|
|
|
|
|
|
$
|
16,499,585
|
|
BRJ LLC's operating
results are included from the date of acquisition, November 1, 2016, and portions of subordinated debt and equity are
eliminated in consolidation.
Unaudited Pro
Forma Results
– The unaudited pro forma supplemental information is based on estimates and assumptions which management
believes are reasonable but are not necessarily indicative of the consolidated financial position or results of future periods
or the results that actually would have been realized had the acquisition occurred as of January 1, 2015. The unaudited
pro forma supplemental information includes incremental interest costs and intangible asset amortization charges as a result of
the acquisition, net of the related tax effects.
Unaudited pro forma results for the years ended December 31,
|
|
|
|
|
|
2015
|
|
|
2016
|
|
Net Sales
|
|
$
|
27,612,825
|
|
|
$
|
35,158,971
|
|
Gross profit
|
|
|
8,378,659
|
|
|
|
10,331,852
|
|
Amortization of intangibles
|
|
|
1,975,000
|
|
|
|
1,200,000
|
|
Net income (loss)
|
|
$
|
(521,053
|
)
|
|
$
|
1,143,113
|
|
Earnings (loss) per share- basic
|
|
$
|
(0.58
|
)
|
|
$
|
1.26
|
|
Earnings (loss) per share- diluted
|
|
$
|
(0.58
|
)
|
|
|
1.20
|
|
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:
|
|
December 31, 2016
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
8,246,796
|
|
|
|
|
|
|
Estimated earnings
|
|
|
2,273,388
|
|
|
|
|
|
|
|
|
|
10,520,184
|
|
|
|
|
|
|
Less: billings to date
|
|
|
(10,064,806
|
)
|
|
|
|
|
|
|
|
$
|
455,378
|
|
Included on the balance sheet as follows:
|
|
|
|
|
Under current assets
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
894,261
|
|
|
|
|
|
|
Under current liabilities
|
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(438,883
|
)
|
|
|
|
|
|
|
|
$
|
455,378
|
|
Prior to acquisition of BRJ Inc. on November 1, 2016 (See
Note 2), the Company did not have any contracts in process.
NOTE
4. EQUIPMENT
Equipment is summarized as follows:
|
|
Estimated
Useful Life
|
|
December 31, 2016
|
|
Vehicles
|
|
3 years
|
|
$
|
188,019
|
|
|
|
|
|
|
|
|
Warehouse and shop tools and equipment
|
|
2 – 15 years
|
|
|
170,510
|
|
|
|
|
|
|
|
|
Office and showroom furniture and computer equipment
|
|
2 – 7 years
|
|
|
95,145
|
|
|
|
|
|
|
|
|
Computer software
|
|
2 – 5 years
|
|
|
24,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478,517
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(16,689
|
)
|
|
|
|
|
$
|
461,828
|
|
Prior to acquisition of BRJ Inc. on November 1, 2016 (See
Note 2), the Company did not have any equipment.
NOTE
5. INTANGIBLE ASSETS
Intangible
assets arose from the BRJ Inc. acquisition (See Note 2) and consist of the following:
|
|
Estimated
|
|
December 31,
|
|
|
|
life
|
|
2016
|
|
Covenants not to compete
|
|
5 years
|
|
$
|
6,000,000
|
|
Unbilled backlog
|
|
6 months
|
|
|
775,000
|
|
|
|
|
|
|
6,775,000
|
|
Less : accumulated amortization
|
|
|
|
|
(458,334
|
)
|
Net
|
|
|
|
$
|
6,316,666
|
|
Amortization expense related to these intangible assets amounted
to $458,334 during the transition period ended December 31, 2016.
Future amortization expense for the years ending December 31,
|
|
|
|
|
2017
|
|
$
|
1,716,166
|
|
2018
|
|
|
1,200,000
|
|
2019
|
|
|
1,200,000
|
|
2020
|
|
|
1,200,000
|
|
2021
|
|
|
1,000,000
|
|
Total
|
|
$
|
6,316,166
|
|
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.
The effective rate at December 31, 2016
was 3.19%. The aggregate borrowing outstanding under the Credit Facility at December 31, 2016 was $2,272,710 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, 2017. 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 this borrowing. 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 of five years. Amortization expense was $4,191 during the
transition period ending December 31, 2016, and the unamortized debt discount balance at December 31, 2016 was $121,539.
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 $237,157 at December 31, 2016
.
Subordinated Term Note
On November 1, 2016, BJR 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 debt at December 31, 2016 are:
2017
|
|
$
|
14,348
|
|
2018
|
|
|
86,413
|
|
2019
|
|
|
278,696
|
|
2020
|
|
|
283,478
|
|
2021
|
|
|
2,195,761
|
|
|
|
$
|
2,858,696
|
|
Less: Debt financing costs, net
|
|
|
121,539
|
|
|
|
$
|
2,737,157
|
|
NOTE 7. STOCKHOLDERS’ EQUITY (DEFICIENCY)
The Company’s authorized capital consists of 50,000,000
shares of common stock, par value $0.00001 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share.
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 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 $12,074,306.
On November 1,
2016, BRJ LLC sold 4.78% of its preferred membership interests for aggregate net proceeds of $128,534, and 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.
NOTE 8. EQUITY INCENTIVE PLAN
On April 8, 2016, the Company adopted the 2016 Equity Incentive
Plan (the “Equity Incentive Plan”). 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 is 135,000. 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 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 fiscal year ended September 30, 2016:
Volatility
|
|
|
52.1
|
%
|
Expected term
|
|
|
7 years
|
|
Risk-free interest rate
|
|
|
1.47
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
A summary of all stock option activity for the transition period
ended December 31, 2016 is as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
42,596
|
|
|
$
|
16.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercises
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled/forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
42,596
|
|
|
$
|
16.00
|
|
|
14.3 years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
5,814
|
|
|
$
|
16.00
|
|
|
14.3 years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest, December 31, 2016
|
|
|
36,782
|
|
|
$
|
16.00
|
|
|
14.3 years
|
|
$
|
-
|
|
The
Company granted 51,791 options during the fiscal year ended September 30, 2016. No options were exercised during the fiscal
year ended September 30, 2016 or the transition period ended December 31, 2016. The fair value of options that vested during the
fiscal 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 transition period ended December 31,
2016, the Company did not grant any options and the fair value of options that vested during the transition period ended
December 31, 2016 amounted to approximately $15,787 and the Company recorded compensation expense for options vested during
the transition period ended December 31, 2016 of $15,787.
The weighted-average grant date fair value of options granted
and vested during the transition period ended December 31, 2016 and during the fiscal year ended September 30, 2016 was $7.41 and
$6.29, respectively.
At December 31, 2016, there was approximately $277,730 of unrecognized
compensation cost related to non-vested options. This cost is expected to be recognized over a weighted average period of approximately
4.2 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 transition period ended December 31, 2016 and for the fiscal year year
ended September 30, 2016, Ancora Advisors, LLC agreed to waive payment of the management fee.
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. As of December 31, 2016, $36,000 has been accrued
as payable to Lorraine Capital, LLC under the BRJ MSA.
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 $277,500 during the transition period ended December 31, 2016. 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 $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 $51,000 during the transition period ended December 31, 2016. The minimum lease
payments during our fiscal years under the lease are as follows:
2017
|
|
$
|
306,000
|
|
2018
|
|
|
306,000
|
|
2019
|
|
|
293,500
|
|
2020
|
|
|
276,000
|
|
2021
|
|
|
230,000
|
|
Total
|
|
$
|
1,411,500
|
|
The Company also leases automobiles and
delivery vehicles under noncancellable operating leases that expire in 2018. The minimum lease payments for the years ending December
31, 2017 and 2018 are $67,314 and $44,390, respectively.
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, 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 December 31, 2016.
NOTE 11. INCOME TAXES
The income tax provision (benefit) for the transition periods
ended December 31, 2016 and 2015 and for the fiscal years ended September 30, 2016 and 2015 is summarized in the following table.
|
|
Transition period ended
|
|
|
Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
800
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(145,397
|
)
|
|
|
(3,470
|
)
|
|
|
(3,894
|
)
|
|
|
(13,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
(23,759
|
)
|
|
|
(561
|
)
|
|
|
55,288
|
|
|
|
(2,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(169,156
|
)
|
|
|
(4,031
|
)
|
|
|
51,394
|
|
|
|
(15,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less increase (decrease) in allowance
|
|
|
169,156
|
|
|
|
4,031
|
|
|
|
(51,394
|
)
|
|
|
15,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The significant components of the deferred
tax assets and liabilities are summarized below.
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) :
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
452,780
|
|
|
$
|
453,892
|
|
|
$
|
505,286
|
|
Investment in subsidiary
|
|
|
189,030
|
|
|
|
|
|
|
|
|
|
|
|
|
641,810
|
|
|
|
453,892
|
|
|
|
505,286
|
|
Less valuation allowance
|
|
|
(623,047
|
)
|
|
|
(453,892
|
)
|
|
|
(505,286
|
)
|
Total deferred tax assets
|
|
|
18,763
|
|
|
|
-
|
|
|
|
-
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(18,763
|
)
|
|
|
-
|
|
|
|
-
|
|
Total Deferred Tax Liabilities
|
|
|
(18,763
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has approximately $1,180,000 in federal net operating
loss carryforwards (“NOLs”) available to reduce future taxable income. These carryforwards begin to expire in
various years between 2018 and 2031. Due to the uncertainty as to the Company’s ability to generate sufficient taxable income
in the future and utilize the NOLs before they expire, the Company has recorded a valuation allowance to fully offset the NOLs,
and the total net deferred tax assets, as well.
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. A full valuation allowance has been established for the Company's deferred tax assets, including net operating
losses and any other corporate tax attributes.
During the transition periods ended December
31, 2016 and 2015 and during fiscal years ended September 30, 2016 and 2015 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 2013-2015 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.
|
|
Transition period ended
|
|
|
Fiscal Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory United States Federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes net of federal benefit
|
|
|
4.4
|
%
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
Permanent differences and other adjustments
|
|
|
-6.0
|
%
|
|
|
-
|
|
|
|
-8.9
|
%
|
|
|
-
|
|
Correct NOL Asset
|
|
|
-
|
|
|
|
-
|
|
|
|
-96.0
|
%
|
|
|
-
|
|
Changes in valuation reserves
|
|
|
-32.4
|
%
|
|
|
-37.6
|
%
|
|
|
67.3
|
%
|
|
|
-37.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate (provision) benefit
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
NOTE 12. SUBSEQUENT EVENTS
On March 2, 2017, the
Company filed a certificate of amendment (the “Amendment”) to the Company’s Certificate of Incorporation with
the Delaware Secretary of State to reduce the number of shares of the Company’s common stock, par value $0.00001 per share
(the “Common Stock”), the Company is authorized to issue from 50,000,000 to 3,000,000 shares and to reduce the number
of shares of Preferred Stock the Company is authorized to issue from 5,000,000 to 50,000 shares. The Amendment was approved by
the Board of Directors of the Company and the holders of a majority of the issued and outstanding shares of Common Stock by written
consent in lieu of a meeting.
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
|
|
As of
|
|
|
|
October 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,883,212
|
|
|
$
|
903,607
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
5,362,428
|
|
|
|
6,129,890
|
|
Inventories, net
|
|
|
1,376,120
|
|
|
|
1,302,878
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
563,255
|
|
|
|
380,544
|
|
Prepaid expenses and other current assets
|
|
|
116,389
|
|
|
|
89,766
|
|
Total current assets
|
|
|
9,301,404
|
|
|
|
8,806,685
|
|
|
|
|
|
|
|
|
|
|
Equipment, net
|
|
|
423,212
|
|
|
|
403,035
|
|
Other assets
|
|
|
181,928
|
|
|
|
85,160
|
|
Total assets
|
|
$
|
9,906,544
|
|
|
$
|
9,294,880
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
648,876
|
|
|
$
|
862,014
|
|
Accrued expenses and other current liabilities
|
|
|
463,367
|
|
|
|
524,232
|
|
Accrued distributions to stockholders
|
|
|
400,000
|
|
|
|
1,384,200
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
194,647
|
|
|
|
325,663
|
|
Total current liabilities
|
|
|
1,706,890
|
|
|
|
3,096,109
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,706,890
|
|
|
|
3,096,109
|
|
|
|
|
|
|
|
|
|
|
Commitments (Note 7)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Class A, voting, $100 par value, 200 shares authorized, 100 shares issued and outstanding
|
|
|
10,000
|
|
|
|
10,000
|
|
Class B, non-voting, $0.01 par value 200 shares authorized, 100 shares issued and outstanding
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
311,686
|
|
|
|
311,686
|
|
Retained earnings
|
|
|
7,877,967
|
|
|
|
5,877,084
|
|
Total stockholders' equity
|
|
|
8,199,654
|
|
|
|
6,198,771
|
|
Total liabilities and stockholders' equity
|
|
$
|
9,906,544
|
|
|
$
|
9,294,880
|
|
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
|
|
For the period
|
|
|
|
|
|
|
From January 1, 2016
|
|
|
For the year
|
|
|
|
to
|
|
|
ended
|
|
|
|
October 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
28,410,708
|
|
|
$
|
27,612,825
|
|
Cost of sales
|
|
|
19,875,441
|
|
|
|
19,234,166
|
|
Gross profit
|
|
|
8,535,267
|
|
|
|
8,378,659
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
|
3,473,272
|
|
|
|
3,960,768
|
|
General and administrative
|
|
|
2,229,069
|
|
|
|
2,709,955
|
|
Total operating expenses
|
|
|
5,702,341
|
|
|
|
6,670,723
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,832,926
|
|
|
|
1,707,936
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
7,957
|
|
|
|
(11,811
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,840,883
|
|
|
$
|
1,696,125
|
|
|
|
|
|
|
|
|
|
|
Retained earnings at beginning of period
|
|
$
|
5,877,084
|
|
|
$
|
6,095,959
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders
|
|
|
(840,000
|
)
|
|
|
(1,915,000
|
)
|
|
|
|
|
|
|
|
|
|
Retained earnings at end of period
|
|
$
|
7,877,967
|
|
|
$
|
5,877,084
|
|
|
|
|
|
|
|
|
|
|
Earnings per share per share- basic and diluted
|
|
$
|
14,204
|
|
|
$
|
8,481
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
200
|
|
|
|
200
|
|
The accompanying notes are an integral part
of the financial statements
B.R. Johnson, Inc.
(Predecessor to Regional Brands, Inc.)
STATEMENTS OF CASH FLOWS
|
|
For the period
|
|
|
|
|
|
|
From January 1, 2016
|
|
|
For the year
|
|
|
|
to
|
|
|
ended
|
|
|
|
October 31, 2016
|
|
|
December 31, 2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,840,883
|
|
|
$
|
1,696,125
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
139,836
|
|
|
|
168,137
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
(25,000
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
767,462
|
|
|
|
(1,905,272
|
)
|
Inventories
|
|
|
(73,242
|
)
|
|
|
(219,983
|
)
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(182,711
|
)
|
|
|
215,365
|
|
Prepaid expenses and other assets
|
|
|
(123,391
|
)
|
|
|
(1,679
|
)
|
Accounts payable
|
|
|
(213,138
|
)
|
|
|
264,477
|
|
Accrued expenses and other current liabilities
|
|
|
(60,865
|
)
|
|
|
(346,594
|
)
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(131,016
|
)
|
|
|
233,491
|
|
Net cash provided by operating activities
|
|
|
2,963,818
|
|
|
|
79,067
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investment activities:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(160,013
|
)
|
|
|
(218,267
|
)
|
Net cash used by investment activities
|
|
|
(160,013
|
)
|
|
|
(218,267
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments of stockholders' distribution
|
|
|
(1,824,200
|
)
|
|
|
(2,086,800
|
)
|
Net cash used by financing activities
|
|
|
(1,824,200
|
)
|
|
|
(2,086,800
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
979,605
|
|
|
|
(2,226,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
903,607
|
|
|
|
3,129,607
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
1,883,212
|
|
|
$
|
903,607
|
|
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:
|
|
October 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
7,927,907
|
|
|
$
|
760,868
|
|
|
|
|
|
|
|
|
|
|
Estimated earnings
|
|
|
2,317,440
|
|
|
|
52,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,245,347
|
|
|
|
813,332
|
|
|
|
|
|
|
|
|
|
|
Less: billings to date
|
|
|
(9,876,739
|
)
|
|
|
(758,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
368,608
|
|
|
$
|
54,881
|
|
|
|
|
|
|
|
|
|
|
Included on the balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
563,255
|
|
|
$
|
380,544
|
|
|
|
|
|
|
|
|
|
|
Under current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(194,647
|
)
|
|
|
(325,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
368,608
|
|
|
$
|
54,881
|
|
NOTE 3. EQUIPMENT
Equipment is summarized as follows:
|
|
Estimated
Useful
Life
|
|
October 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Vehicles
|
|
3 years
|
|
$
|
410,752
|
|
|
$
|
508,014
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse and shop tools and equipment
|
|
2 – 15 years
|
|
|
393,693
|
|
|
|
390,703
|
|
|
|
|
|
|
|
|
|
|
|
|
Office and showroom furniture and computer equipment
|
|
2 – 7 years
|
|
|
325,387
|
|
|
|
323,298
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer software
|
|
2 – 5 years
|
|
|
143,069
|
|
|
|
132,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,272,901
|
|
|
|
1,354,722
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(849,689
|
)
|
|
|
(951,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
423,212
|
|
|
$
|
403,035
|
|
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:
2016 (two months)
|
|
$
|
12,746
|
|
2017 (year)
|
|
|
67,314
|
|
2018 (year)
|
|
|
44,390
|
|
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
|
|
Ten month
period ended
October 31,
2016
|
|
|
Year ended
December 31,
2015
|
|
Schedule of non-cash financing activities for the periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accrued stockholder distributions
|
|
$
|
984,200
|
|
|
$
|
(171,800
|
)
|
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 31, 2017
|
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 31, 2017
|
By:
|
/s/ Fred DiSanto
|
|
|
Fred DiSanto
|
|
|
Chief Executive Officer and Director
|
|
|
(Principal Executive, Financial and Accounting Officer)
|
|
|
|
March 31, 2017
|
By:
|
/s/ Carl Grassi
|
|
|
Carl Grassi
|
|
|
Chairman of the Board
|
|
|
|
March 31, 2017
|
By:
|
/s/ Brian Hopkins
|
|
|
Brian Hopkins
|
|
|
Director
|
|
|
|
March 31, 2017
|
By:
|
/s/ Jeff Anderson
|
|
|
Jeff Anderson
|
|
|
Director
|
Regional Brands (PK) (USOTC:RGBD)
과거 데이터 주식 차트
부터 8월(8) 2024 으로 9월(9) 2024
Regional Brands (PK) (USOTC:RGBD)
과거 데이터 주식 차트
부터 9월(9) 2023 으로 9월(9) 2024