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EX-32.1 - EXHIBIT 32.1 - Regional Brands Inc.tv478674_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Regional Brands Inc.tv478674_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Regional Brands Inc.tv478674_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2017

 

or

  

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

 

For the transition period from                                                  to                                

 

Commission File Number: 33-131110-NY

 

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

 

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

 

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

 

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 Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

Emerging Growth Company  ¨

 

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

 

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

 

The number of shares outstanding of the registrant’s Common Stock, $0.00001 par value per share, was 1,274,603 as of November 9, 2017.

 

 

 

 

 

 

Regional Brands Inc.

 

INDEX

 

  Page
   
PART I - FINANCIAL INFORMATION:  
   
Item 1. Financial Statements (unaudited)  
  Condensed Consolidated Balance Sheets 3
  Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 4
  Condensed Consolidated Statements of Cash Flows 5
  Notes to Interim Condensed Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
     
Item 4. Controls and Procedures 17
     
PART II - OTHER INFORMATION: 18
     
Item 1. Legal Proceedings 18
     
Item 1A. Risk Factors 18
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
     
Item 3. Defaults Upon Senior Securities 18
     
Item 4. Mine Safety Disclosures 19
     
Item 5. Other Information 19
     
Item 6. Exhibits 19
   
SIGNATURES 20

 

 2 

 

 

REGIONAL BRANDS INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   As of 
         
   September 30,   December 31, 
   2017   2016 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $4,022,442   $4,752,462 
Short-term investments   1,794,413    952,208 
Accounts receivable, net of allowance for doubtful accounts of $100,000 ($150,000 - 2016)   6,309,149    5,717,369 
Inventories, net   1,385,282    1,594,264 
Costs and estimated earnings in excess of billings on uncompleted contracts   967,599    894,261 
Prepaid expenses and other current assets   261,286    248,935 
Total current assets   14,740,171    14,159,499 
           
Equipment, net   516,837    461,828 
Intangibles, net   4,900,000    6,316,666 
Goodwill   3,013,287    3,013,287 
Deferred tax asset   535,000    - 
Other assets   144,728    96,667 
Total assets  $23,850,023   $24,047,947 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities:          
Accounts payable  $1,113,150   $467,248 
Accrued expenses and other current liabilities   997,804    618,844 
Line of credit   1,592,757    2,272,710 
Current portion of senior subordinated note   14,348    14,348 
Working capital liability due to Seller   -    1,107,872 
Billings in excess of costs and estimated earnings on uncompleted contracts   312,156    438,883 
Total current liabilities   4,030,215    4,919,905 
           
Senior subordinated note   241,668    222,809 
Subordinated term note   2,500,000    2,500,000 
Total liabilities   6,771,883    7,642,714 
           
Commitments          
           
Stockholders' equity          
Preferred stock $.01 par value, authorized 50,000, issued and outstanding -none   -    - 
Common stock $.00001 par value, 3,000,000 authorized and 1,274,603 shares issued and outstanding   13    13 
Additional paid-in capital   20,357,826    20,311,645 
Accumulated deficit   (3,288,434)   (4,008,441)
Accumulated other comprehensive loss   (7,040)   (5,464)
Total Regional Brands, Inc. stockholders' equity   17,062,365    16,297,753 
Noncontrolling interest in consolidated subsidiary   15,775    107,480 
Total stockholders’ equity   17,078,140    16,405,233 
Total liabilities and stockholders' equity  $23,850,023   $24,047,947 

 

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

 

 3 

 

  

REGIONAL BRANDS INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

  

           B.R. Johnson, Inc.           B.R. Johnson, Inc. 
           (Predecessor to           (Predecessor to 
           Regional Brands, Inc.)           Regional Brands, Inc.) 
   For the   For the   For the   For the   For the   For the 
   three months   three months   three months   nine months   nine months   nine 
   ended   ended   ended   ended   ended   ended 
   September 30, 2017   September 30, 2016   September 30, 2016   September 30, 2017   September 30, 2016   September 30, 2016 
                         
Net Sales  $8,607,302   $-   $8,422,123   $28,505,603   $-   $26,257,787 
Cost of sales   5,800,256    -    5,700,538    19,774,595    -    18,387,649 
 Gross profit   2,807,046    -    2,721,585    8,731,008    -    7,870,138 
                               
Operating expenses:                              
Selling   1,170,035    -    1,109,174    3,491,780    -    3,125,914 
General and administrative   932,517    26,684    581,969    2,901,843    84,969    1,979,844 
Amortization of intangible assets   300,000    -    -    1,416,667    -    - 
Total operating expenses   2,402,552    26,684    1,691,143    7,810,290    84,969    5,105,758 
                               
Operating income (loss)   404,494    (26,684)   1,030,442    920,718    (84,969)   2,764,380 
                               
Other income (expense):                              
Other income   29,339    6,900    5,373    69,972    17,666    12,955 
Interest expense   (49,328)    -    (1,340)   (168,761)   -    (1,340)
Interest income   5,332    4,267    -    9,697    3,057    - 
    (14,657)   11,167    4,033    (89,092)   20,723    11,615 
                               
Income (loss) before income taxes   389,837    (15,517)   1,034,475    831,626    (64,246)   2,775,995 
                               
Income tax benefit (expense)   337,000   -    -    (77,000)   -    - 
                               
Net income (loss)   726,837    (15,517)   1,034,475    754,626    (64,246)   2,775,995 
                               
Less income to noncontrolling interest   15,922    -         34,619    -      
Net income (loss) attributable to common shareholders   710,915    (15,517)        720,007    (64,246)     
                               
Other comprehensive income (loss):                              
Unrealized gain (loss) on investments   (100)   5,150         (1,576)   763      
                               
Comprehensive income (loss) attributable to common shareholders  $710,815   $(10,367)       $718,431   $(63,483)     
                               
                               
Earnings (loss) per share per common share- basic and diluted  $0.56   $(0.04)  $5,172   $0.56   $(0.26)  $13,880 
                               
Weighted average common shares outstanding - basic and diluted   1,274,603    379,702    200    1,274,603    246,723    200 

 

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

 

 4 

 

  

REGIONAL BRANDS INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

           B.R. Johnson, Inc. 
           (Predecessor to 
   For the   For the   Regional Brands, Inc.) 
   nine months   nine months   For the nine months 
   ended   ended   ended 
   September 30, 2017   September 30, 2016   September 30, 2016 
             
Cash flows from operating activities:               
   Net income (loss)  $754,626   $(64,246)  $2,775,995 
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:               
Stock based compensation   46,181    23,212    - 
Depreciation and amortization and gain on disposal of equipment   68,755    -    128,627 
Amortization of debt issuance costs   18,859    -    - 
Amortization of intangibles   1,416,667    -    - 
Change in allowance for doubtful accounts   (50,000)   -    - 
Change in inventory obsolence reserve   43,000    -    - 
Change in deferred tax benefit   (535,000)   -    - 
Changes in operating assets and liabilities               
Accounts receivable   (541,780)   -    134,959 
Inventories   165,982    -    (270,813)
Costs and estimated earnings in excess of billings on uncompleted contracts   (73,338)   -    (1,365,626)
Prepaid expenses and other assets   (60,412)   -    (212,920)
Accounts payable   645,902    -    (325,436)
Accrued expenses and other current liabilities   378,960    (2,308)   (135,491)
Billings in excess of costs and estimated earnings on uncompleted contracts   (126,727)   -    1,003,079 
Net cash provided (used ) by operating activities   2,151,675    (43,342)   1,732,374 
                
Cash flows from investment activities:               
Purchase of equipment   (123,765)   -    (159,663)
Business acquisition- payment of working capital liability to Seller   (1,107,872)   -    - 
Purchase of short-term investments   (843,781)   (2,186,126)   - 
Net cash used by investment activities   (2,075,418)   (2,186,126)   (159,663)
                
Cash flows from financing activities:               
Repayment from line of credit   (679,953)   -    - 
Proceeds from related party note payable   -    4,100    - 
Proceeds from sale of common stock        4,750,000    - 
Distribution to noncontrolling interest   (126,324)        - 
Stockholders' distribution   -    -    (1,824,200)
Net cash provided (used) by financing activities   (806,277)   4,754,100    (1,824,200)
                
Net increase (decrease) in cash   (730,020)   2,524,632    (251,489)
                
Cash at beginning of period   4,752,462    1,356    903,607 
                
Cash at end of period  $4,022,442   $2,525,988   $652,118 
                
Cash paid for :               
Income taxes  $169,000   $-   $- 
Interest  $107,000   $-   $- 
                
Non-cash investing and financing activities:               
Repayment of related party note payable and accrued interest by issuance of common shares  $-   $250,000   $- 

 

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

 

 5 

 

  

Regional Brands Inc.

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

Regional Brands Inc. (formerly 4net Software, Inc.) (“Regional Brands,” the “Company,” “we,” “our” and “us”) was incorporated under the laws of the State of Delaware in 1986. Regional Brands is a holding company formed to acquire regional companies with strong brand recognition, stable revenues and profitability. Regional Brands has been pursuing a business strategy whereby it seeks to engage in an acquisition, merger or other business combination transaction with undervalued businesses (each, a “Target Company”) with a history of operating revenues in markets that provide opportunities for growth. 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. After the acquisition of the business of 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.

 

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 operations 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, 2016 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017. The unaudited Condensed Statement of Operations and Statement of Cash Flows for the nine months ended September 30, 2016 of BRJ Inc., as predecessor to the Company, are included in this report as supplementary information.

 

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.

 

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.

 

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, 2017, 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.

 

 6 

 

 

Fair Value of Financial Instruments - Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, and line of credit. Fair values 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 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 table below presents the Company's assets and liabilities measured at fair value on a recurring basis as of September 30, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2017:

 

Assets  Level 1   Level 2   Level 3   Balance at September 30, 2017 
Marketable Equity Securities  $1,794,413   $   $   $1,794,413 
Money Market Funds  $4,019,092   $   $   $4,019,092 

 

 7 

 

 

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.

 

Comprehensive Income (Loss) - Comprehensive income (loss) is defined as the change in equity of the Company during a period from transactions and other events and circumstances from non-owner sources. It consists of net income (loss) and other income and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income (loss). The change in fair value of investments was the only item impacting other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016.

 

1 for 1,000 stock split- On July 22, 2016, the Company filed a certificate of amendment (the “Amendment”) to the Company’s Certificate of Incorporation with the Delaware Secretary of State to effect a 1 for 1,000 reverse stock split (the “Reverse Split”) of the Company’s issued and outstanding Common Stock and to reduce the number of shares of Common Stock the Company 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 quarterly report on a post-split basis.

 

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 to 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. The Company adopted this guidance during the nine months ended September 30, 2017 and it has not had a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers” (“ASU 2014-9”). The 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. The Company adopted this guidance during the nine months ended September 30, 2017 and it has not had a material impact on the Company’s consolidated financial statements.

 

 8 

 

 

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.

 

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 has carried 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, and working capital adjustments of approximately $1.1 million, which were paid during the six months ended June 30, 2017. 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 to BRJ Inc. 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 and BRJ Acquisition Partners, LLC (which owns the remaining 3.83% of the common membership interests and 4.78% of the preferred membership interests).

 

To finance the Acquisition and potential future acquisitions, on November 1, 2016, we issued 894,393 shares of our Common Stock for aggregate proceeds to us of $12,074,306 in a private placement.

 

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, 2016. 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 three and nine months ended September 30, 2016:

 

   Three   Nine 
   months   months 
   ended   ended 
   September
30, 2016
   September
30, 2016
 
         
Net sales  $8,422,123   $26,257,787 
Gross profit   2,721,585    7,780,138 
Amortization of intangibles   729,167    1,416,667 
Net income to common shareholders  $119,164   $558,546 
Earnings per common share-basic and diluted  $0.13   $0.62 

 

 9 

 

  

NOTE 3. CONTRACTS IN PROCESS

 

Cost of revenue for our contracts in process 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:

 

   September 30,   December 31, 
   2017   2016 
         
Costs incurred on uncompleted contracts  $11,486,314   $8,246,796 
Estimated earnings   3,912,693    2,273,388 
    15,399,007    10,520,184 
Less: billings to date   (14,743,564)   (10,064,806)
   $655,443   $455,378 
Included on the balance sheet as follows:          
Under current assets          
Costs and estimated earnings in excess of billings on uncompleted contracts  $967,599   $894,261 
Under current liabilities          
Billings in excess of costs and estimated earnings on uncompleted contracts   (312,156)   (438,883)
   $655,443   $455,378 

 

Prior to the Acquisition on November 1, 2016 (See Note 2), the Company did not have any contracts in process.

 

NOTE 4. DEBT

 

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.

 

 10 

 

 

The effective interest rate on borrowings under the Credit Facility at September 30, 2017 was 3.69%. The aggregate borrowings outstanding under the Credit Facility at September 30, 2017 were $1,592,757 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.

 

NOTE 5. 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.

 

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 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.

 

The Company recorded stock compensation expense for options vesting during the three and nine months ended September 30, 2017 of $15,181 and $46,181, respectively ($23,212 and $23,212, respectively, during the same periods in 2016).

 

On June 15, 2017, the Company’s stockholders approved and adopted the Company’s Amended and Restated 2016 Equity Incentive Plan (the “Amended and Restated Equity Incentive Plan”). The amendment modified the Company’s 2016 Equity Incentive Plan to, among other things, (1) provide the Board of Directors with the authority to grant awards in the form of restricted stock and restricted stock units, (2) set the maximum number of shares available for issuance under the Amended and Restated Equity Incentive Plan at 130,000 shares of the Company’s common stock, par value $0.00001 per share, and (3) adopt certain other technical amendments.

 

NOTE 6. RELATED PARTY TRANSACTIONS

 

On April 8, 2016, the Company entered into a Management Services Agreement (the “MSA”) with 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 stockholders’ 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 nine months ended September 30, 2017, 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.

 

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, 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.

 

 11 

 

 

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. For the nine months ended September 30, 2017, the fees payable to Lorraine Capital LLC were approximately $144,000.

 

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. Regarding 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 LLC’s employees. BRJ LLC paid ADSI for its services approximately $400,000 and $1,298,000, respectively, during the three months and nine months ended September 30, 2017. In addition, we provide ADSI services utilizing an agreed-upon fee schedule. These services include accounting, warehousing, equipment use, employee benefit administration, risk management coordination and clerical functions. The fee for these services was $11,850 and $35,100 respectively, during the three months and nine months ended September 30, 2017.

 

NOTE 7. 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 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. With recent consistency in earnings, a strong earnings history of B.R. Johnson, Inc., a recent acquisition, and favorable projections, the Company has reversed its valuation allowance on deferred tax assets associated with activity beginning with the acquisition of B.R. Johnson, Inc., but exclusive of pre-acquisition losses that are subject to limitations under Internal Revenue Code Section 382.

 

The Company has an effective income tax rate of 9.3% for the nine-months ended September 30, 2017.  This effective tax rate is substantially lower than the federal statutory rate of 34% due to the reversal of a portion of the valuation allowance during the quarter.

 

 12 

 

 

ITEM 2 - 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 note to enable it to do so.  Except for the historical information contained herein, this report contains forward-looking statements (identified by the words “estimate,” “project,” “anticipate,” “plan,” “expect,” “intend,” “believe,” “hope,” “strategy” and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements, including, without limitation, those discussed under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the transition period ended December 31, 2016, as they may be updated or supplemented from time to time under Part II, Item 1A “Risk Factors” in our Quarterly Reports on Form 10-Q, and those described herein.

 

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

 

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 is a holding company formed to acquire regional companies with strong brand recognition, stable revenues and profitability. In April 2016, we sold an aggregate of 370,441 shares of common stock for the aggregate purchase price of $5,000,000 (including the cancellation of certain indebtedness) and the transactions resulted in a change of control of the Company. Subsequent to the change in control, we have been pursuing a business strategy whereby we have been seeking to engage in an acquisition, merger or other business combination transaction with undervalued businesses (each, a “Target Company”) with a history of operating revenues in markets that provide opportunities for growth. Since the acquisition of the business of BRJ Inc. by Regional Brands’ majority-owned subsidiary, BRJ LLC, Regional Brands has 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 November 2021. 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. The senior subordinated loan is subordinated to BRJ LLC’s Credit Facility.

 

 13 

 

 

BRJ LLC, on November 1, 2016, acquired the business of BRJ Inc. in an asset purchase transaction in exchange for $14,000,000 in cash (including working capital adjustments of approximately $1,100,000) and a subordinated note of $2,500,000. BRJ LLC has continued to operate the business of BRJ Inc. as a consolidated subsidiary of Regional Brands.

 

The acquisition by BRJ LLC of the business 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 the business 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.

 

Results of Operations: For the three and nine months ended September 30, 2017 and September 30, 2016.

 

Certain of the results discussed below are presented both on an actual basis, and a pro forma basis as if the acquisition of the business of BRJ Inc. had occurred on January 1, 2016 (see Note 2 of the condensed consolidated financial statements included in this report). Comparisons presented in the discussion below are with respect to the same period of the prior year, unless otherwise noted.

 

Net Sales: During the three and nine months ended September 30, 2017, the Company had net sales of $8,607,302 and $28,505,603, respectively, 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. On a pro forma basis, the Company’s net sales for the three months ended September 30, 2017 increased by $185,179, or 2.2%, to $8,607,302 from $8,422,123. For the nine months ended September 30, 2017, on a pro forma basis, the Company’s net sales increased by $2,247,816, or 8.6%, to $28,505,603 from $26,257,787. The increases in 2017 were primarily due to higher contract volume as a result of sharply increased construction activity in our primary market area – Upstate New York.

 

Cost of sales: The Company had cost of sales of $5,800,256 and $19,774,595, respectively, during the three and nine months ended September 30, 2017 due to inclusion of BRJ LLC's operations. On a pro forma basis, cost of sales for the three months ended September 30, 2017 increased by 1.7%, or $99,718. For the nine months ended September 30, 2017, on a pro forma basis, cost of sales increased by 7.5%, or $1,386,946. The increases in cost of sales in 2017 were primarily due to higher net sales in 2017. As a percentage of net sales, cost of sales during the three and nine months ended September 30, 2017 were 67.4% and 69.4%, respectively, compared to 67.7% and 70%, respectively, for the same periods in 2016.

 

Selling: As of result of the inclusion of BRJ LLC's operations during the three and nine months ended September 30, 2017, the Company had selling expenses of $1,170,035 and $3,491,780, respectively. There were no selling expenses during the three and nine months ended September 30, 2016. On a pro forma basis, the selling expenses during the three months ended September 30, 2017 were $1,170,035 compared to $1,109,174 in 2016. For the nine months ended September 30, 2017, on a pro forma basis, the selling expenses increased from $3,125,914 to $3,491,780. The increases in selling expenses in 2017 were due to additional compensation costs arising from increased net sales.

 

General and administrative: General and administrative expenses increased by $905,883 from $26,684 in the three months ended September 30, 2016 to $932,517 during the three months ended September 30, 2017. $866,303 of this increase was due to inclusion of 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. For the nine months ended September 30, 2017, the Company’s general and administrative expenses increased by $2,816,874. Of this increase, $2,645,730 was due to inclusion of BRJ LLC’s operations and the remainder was due to higher levels of activities subsequent to our change in control in April 2016. On a pro forma basis, the general and administrative expenses for BRJ LLC’s operations, during the three and nine months ended September 30, 2017 were, $932,517 and $2,901,843, respectively, compared to $581,969 and $1,979,844, respectively, for the same periods in 2016.

 

 14 

 

 

Amortization of intangible assets: Amortization of intangibles arising from the BRJ Inc. acquisition amounted to $300,000 and $1,416,667, respectively, during the three and nine months ended September 30, 2017.

 

Interest Expense: The interest expense during the three and nine months ended September 30, 2017 increased by $49,828 and $168,761, respectively. The increases in interest expense were due to increased debt levels to fund the BRJ Inc. acquisition and operations.

 

Net income (loss): As a result of the foregoing, the net income for the three months ended September 30, 2017 increased by $742,354 to $726,837 compared to a net loss of $15,517 incurred during the three months ended September 30, 2016. For the nine months ended September 30, 2017, net income increased by $818,872 to $754,626 compared to a loss of $64,246 during the nine months ended September 30, 2016. During the three months ended September 30, 2017, we had an unrealized loss on investments of $100 resulting in comprehensive income of $710,815 to common stockholders, after income of $15,922 to noncontrolling interest. During the nine months ended September 30, 2017, we had an unrealized loss on investments of $1,576 resulting in comprehensive income of $718,431 to common stockholders, after income of $34,619 to noncontrolling interest.

 

Liquidity and Capital Resources

 

At September 30, 2017, we had working capital of $10,709,956 compared to working capital of $9,239,594 at December 31, 2016. The increase in working capital is primarily due to operational profits from BRJ LLC’s business. During the nine months ended September 30, 2017, our operating activities provided cash of approximately $2,152,000 compared to approximately $43,000 used during the nine months ended September 30, 2016.

 

During the nine months ended September 30, 2017, our operations, after adjusting for non-cash items, generated approximately $1,763,000 of cash. Changes in working capital items generated approximately $389,000 of cash during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, our operations, after adjusting for non-cash items, used approximately $41,000 of cash, and working capital items used approximately $2,000 of cash.

 

During the nine months ended September 30, 2017, the Company paid approximately $1.1 million in settlement of working capital to the seller of BRJ Inc. and purchased short term investments for approximately $844,000.

 

In November 2016, BRJ LLC entered into a credit agreement with KeyBank, N.A. (the “Credit Facility”). Under the Credit Facility, BRJ LLC may borrow up to an aggregate amount of $6,000,000 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 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 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 interest rate on outstanding borrowings under the Credit Facility at September 30, 2017 was 3.69%. The aggregate borrowings outstanding under the Credit Facility at September 30, 2017 were $1,592,757 and, in addition, KeyBank, N.A. has issued a letter of credit on behalf of BRJ LLC in the amount of $250,000 that expires on December 1, 2017.

 

 15 

 

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Inflation

 

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

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes.  The financial statements as of December 31, 2016 describe the significant accounting policies and methods used in the preparation of the financial statements.  Actual results could differ materially from those estimates and be based on events different from those assumptions.  Future events and their effects cannot be predicted with certainty; estimating, therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired or as additional information is obtained.  Critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our financial statements. A discussion of such critical accounting policies can be found in our Annual Report on Form 10-K for the transition period ended December 31, 2016. There have been no material changes to such critical accounting policies as of the Quarterly Report on Form 10-Q for the period ended September 30, 2017.

 

 16 

 

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4 - CONTROLS AND PROCEDURES

 

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, as amended (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 principal executive and financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report, concluded that our disclosure controls and procedures were not effective, and further concluded that our disclosure controls and procedures were not effective as of the end of the period ended December 31, 2016 and quarters ended March 31, 2017 and June 30, 2017. Our management concluded that our disclosure controls and procedures were not effective due to material weaknesses in our internal controls over financial reporting that existed as of December 31, 2016, and continued to exist as of March 31, 2017, June 30, 2017 and September 30, 2017. As disclosed in our Annual Report on Form 10-K for the period ended December 31, 2016, the material weaknesses consist of an insufficient complement of qualified accounting personnel and controls associated with segregation of duties.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Changes in Internal Control Over Financial Reporting

 

As discussed above in this Item 4 and in our Annual Report on Form 10-K for the period ended December 31, 2016, our internal controls over financial reporting were not effective as of December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017, as a result of material weaknesses related to an insufficient complement of qualified accounting personnel and controls associated with segregation of duties.

 

In response to the material weaknesses identified above, our Management, with assistance of an outside consultant and oversight from the Company’s audit committee, has continued to monitor and review our control environment and evaluate potential solutions intended to remedy the identified material weaknesses. The potential solutions being evaluated as of September 30, 2017 included steps that, if implemented, would expand the resources available and implement additional controls to the financial reporting process.

 

There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the transition period ended December 31, 2016, as supplemented by the disclosure in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, except for the following which revises and supplements our previously disclosed risk factors:

 

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act and disclosure controls and procedures in accordance with Section 302 of the Sarbanes-Oxley Act could result in material misstatements in our financial statements, and cause stockholders to lose confidence in our financial reporting.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to evaluate the effectiveness of its internal controls, and Section 302 of the Sarbanes-Oxley Act of 2002 requires the Company to evaluate its disclosure controls and procedures, in each case as of the end of each fiscal year, and to include a management report assessing the effectiveness of the Company’s internal control over financial reporting in each Annual Report on Form 10-K.

 

Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2016 as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, and determined that our internal controls were not effective due to material weaknesses. The identified material weaknesses related to an insufficient complement of qualified accounting personnel and ineffective controls associated with segregation of duties. The material weaknesses continued to exist as of March 31, 2017, June 30, 2017 and September 30, 2017. Based on our Management’s evaluation of our disclosure controls and procedures and the continued existence of the material weaknesses as of September 30, 2017, our Management concluded that our disclosure controls and procedures were not effective as of December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017.

 

In response to the material weaknesses identified above, our Management, with assistance of an outside consultant and oversight from the Company’s audit committee, has continued to monitor and review our control environment and evaluate potential solutions intended to remedy the identified material weaknesses. If the material weaknesses are not effectively remediated, or if additional material weaknesses or significant deficiencies in our internal controls, or in our disclosure controls and procedures, are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results. This could result in stockholders losing confidence in our reported financial information or disclosure, which could negatively impact our stock price, or in securities litigation, and the diversion of significant management and financial resources.

 

We do not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

  

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

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Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None.

 

ITEM 6 – EXHIBITS

 

31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1* Certification of Principal Executive and Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS XBRL Instance Document
   
101.SCH  XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

* This certification is deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    REGIONAL BRANDS INC.
     
November 14, 2017 By: /s/ Fred DiSanto
    Fred DiSanto
    Chief Executive Officer
    (Principal Executive, Financial and Accounting Officer)

 

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