NOTES TO THE 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 6) 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.
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.
Common Shares Issued
and
Earnings (Loss) Per Share
- Common shares issued are recorded based on the value of the shares issued or consideration
received, including cash, services rendered or other non-monetary assets, whichever is more readily determinable. The Company presents
basic and diluted earnings (loss) per share. Basic earnings (loss) per share reflect the actual weighted average number of shares
issued and outstanding during the period. Diluted earnings (loss) per share are computed including the number of additional shares
that would have been outstanding if dilutive potential shares had been issued. In a loss period, the calculation for basic and
diluted earnings (loss) per share is considered to be the same, as the impact of potential common shares issued is anti-dilutive.
Fair Value of Financial Instruments
- 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
|
|
$
|
1,254,010
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,254,010
|
|
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.
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 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 18,400 GDL FD cumulative Preferred Series B Shares for $932,115 and had an unrealized gain of $763.
Also included within short-term investments
on the accompanying balance sheet is a certificate of deposit within a financial institution with a maturity date of six months
at the date of purchase. The adjusted costs of this instrument approximate fair value.
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 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.
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 September 30, 2016 or 2015. The Company recognizes
interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended September 30, 2016 and
2015, the Company recognized no interest and penalties.
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.
Recent Accounting Pronouncements
– In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") No.
2014-15 (“ASU 2014-15”), “Presentation of Financial Statements-Going Concern (Subtopic 205-40) – Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires a Company’s
management to evaluate, at each reporting period, whether there are conditions or events that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide
related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and
interim periods thereafter. The Company is currently evaluating the impact of the adoption of ASU 2014-15 on its financial statements.
In September 2015, the FASB issued ASU
2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” This ASU
simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. The amendments in this
ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in
the reporting period in which the adjustment amounts are determined. For public business entities, the ASU is effective for fiscal
years beginning after December 15, 2015, including interim periods within those fiscal years. The Company is currently evaluating
the impact of the adoption of ASU 2015-16 on its financial statements.
In November 2015, the FASB issued ASU 2015-17,
“Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes by requiring
that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The guidance becomes effective for annual
reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this ASU is not expected to
have a material impact on the Company’s financial position and/or results of operations.
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
revenue standards will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the
use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2017. The Company has not yet selected a transition method and
is currently evaluating the effect that the revenue standards will have on its financial statements and related disclosures.
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, an accounting pronouncement
was issued by the FASB 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. 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.
NOTE 3. 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. During the year ended September 30, 2016, the Company issued stock options that vest in 60 equal monthly
installments and expire in 15 years.
The Company records share based payments
under the provisions of FASB ASC 718"Compensation - Stock Compensation." Stock based compensation expense is recognized
over the requisite service period based on the grant date fair value of the awards. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model.
The Company estimated the expected volatility
based on data used by its peer group of public companies. The expected term was estimated using the simplified method. The
risk-free interest rate assumption was determined using the equivalent U.S. Treasury bonds yield over the expected term. The Company
has never paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. Therefore, the Company
assumed an expected dividend yield of zero.
The following shows the significant assumptions
used to compute the share-based compensation expense for stock options granted during the year ended September 30, 2016:
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 year ended September 30, 2016 is as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2015
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
51,791
|
|
|
$
|
16.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercises
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled/forfeited
|
|
|
9,195
|
|
|
$
|
16.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
42,596
|
|
|
$
|
16.00
|
|
|
14.5 years
|
|
$
|
21,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2016
|
|
|
3,693
|
|
|
$
|
16.00
|
|
|
14.5 years
|
|
$
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest, September 30, 2016
|
|
|
38,903
|
|
|
$
|
16.00
|
|
|
14.5 years
|
|
$
|
19,452
|
|
The Company granted 51,791 options during
the year ended September 30, 2016. No options were exercised during the years ended September 30, 2016. The fair value of options
that vested during the year ended September 30, 2016 amounted to approximately $ 23,212 and the Company recorded stock compensation
expense for options vesting during the year ended September 30, 2016 of $23,212.
The weighted-average grant date fair value
of options granted and vested during the year ended September 30, 2016 was $6.29.
At September 30, 2016, there was approximately
$244,549 of unrecognized compensation cost related to non-vested options. This cost is expected to be recognized over a weighted
average period of approximately 4.5 years.
NOTE 4 - 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 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.
NOTE 5. INCOME TAXES
The income tax provision (benefit) for
the years ended September 30, 2016 and 2015 is summarized in the following table.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,894
|
)
|
|
|
(13,518
|
)
|
State
|
|
|
55,288
|
|
|
|
(2,187
|
)
|
Total deferred
|
|
|
51,394
|
|
|
|
(15,705
|
)
|
Less increase (decrease) in allowance
|
|
|
(51,394
|
)
|
|
|
15,705
|
|
|
|
|
|
|
|
|
|
|
Net deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
The significant components of the deferred
tax assets and liabilities are summarized below.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) :
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
453,892
|
|
|
$
|
505,286
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
453,892
|
|
|
|
505,286
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(453,892
|
)
|
|
|
(505,286
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has approximately $1,291,000
in federal net operating loss carryforwards (“NOL’s”) available to reduce future taxable income.
These carryforwards begin to expire in various years between 2018 and 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 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.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Statutory United States Federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes net of federal benefit
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
Permanent differences
|
|
|
-8.9
|
%
|
|
|
-
|
|
Correct NOL Asset
|
|
|
(96
|
)
|
|
|
-
|
|
Changes in valuation reserves
|
|
|
67.3
|
%
|
|
|
-37.6
|
%
|
|
|
|
|
|
|
|
|
|
Effective tax rate (provision) benefit
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
NOTE 6. SUBSEQUENT EVENTS
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 is
approximately $15.4 million (subject to customary working capital adjustments), including delivery by BRJ LLC of a promissory note
for $2,500,000 to BRJ Inc. (the “Note”), which is subordinate to the Debt Agreements, as described below. The Note
accrues interest at a rate of 5.25% per annum, payable quarterly, with the principal amount of the Note payable in equal quarterly
installments of $62,500 commencing on November 1, 2018 and maturing on November 30, 2021.
The Company provided $10.95 million in
debt and equity financing to complete the Acquisition, including $7.14 million of the Subordinated Loan (as defined below) and
$3.81 million in preferred equity of BRJ LLC 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).
For the purpose of financing the Acquisition and potential future
acquisitions, on November 1, 2016, the Company completed a private placement in which it issued 894,393 shares of its common stock
at a price per share of $13.50 and received aggregate gross proceeds of $12,074,306.
Concurrently with the closing of the Acquisition
and in order to provide financing therefor, BRJ LLC entered into the following debt agreements (the “Debt Agreements”).
Credit Facility
Under its credit agreement with KeyBank,
N.A, 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, $1,500,000 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 BJR 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.
Subordinated Loan
Pursuant to a loan and security agreement
(the “Loan Agreement”) , the Company agreed to loan BRJ LLC $7,500,000 (the “Subordinated Loan”). The Company
participated $358,696 contribution 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.
BRJ Inc. had net sales of approximately $27,613,000 and
net income of $1,700,000 for the year ending December 31, 2015. The Company is in the process of determining the fair value
of assets acquired and liabilities assumed. The assets and liabilities are expected to include working capital items,
equipment, separately identifiable intangible assets, deferred taxes and goodwill, if any. The evaluation will be completed
during the measurement period following the Acquisition.
BRJ LLC will be presented in
the consolidated financial statements of the Company for the periods subsequent to the Acquisition date.