RGBD Regional Brands Inc (PK)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NOTE 3. DEBT

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

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

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

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

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

NOTE 4. STOCKHOLDERS’ EQUITY

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

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

NOTE 5. RELATED PARTY TRANSACTIONS

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

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

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

NOTE 6. INCOME TAXES

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

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

NOTE 7. LEASES

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

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