UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the fiscal year ended December 31, 2018

or

¨ Transitional Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the transition period from __________ to _______

Commission File Number: 033-13110-NY

Regional Brands Inc.

(Exact name of Registrant as specified in its charter)

Delaware	11-2831380
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6060 Parkland Boulevard Cleveland, Ohio	44124
(Address of principal executive offices)	(Zip code)

(216) 825-4000

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act

Yes ¨  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes x  No ¨

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. (Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)

Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or 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  x     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 aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2018) was $11,530,764.

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

Regional Brands Inc.

Table of Contents

ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	5
ITEM 1B.	UNRESOLVED STAFF COMMENTS	11
ITEM 2.	PROPERTIES	11
ITEM 3.	LEGAL PROCEEDINGS	12
ITEM 4.	MINE SAFETY DISCLOSURES	12
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	12
ITEM 6.	SELECTED FINANCIAL DATA	13
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS	14
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	18
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	18
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE	18
ITEM 9A.	CONTROLS AND PROCEDURES	18
ITEM 9B.	OTHER INFORMATION	20
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	20
ITEM 11.	EXECUTIVE COMPENSATION	22
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS	24
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND  DIRECTOR INDEPENDENCE	25
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	26
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	27
ITEM 16.	Form 10-K Summary	28

PART I

ITEM 1 - BUSINESS

Regional Brands 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. Our corporate office is located at 6060 Parkland Boulevard, Cleveland, Ohio 44124 and our telephone number is (216) 825-4000. Our corporate website address is http://www.regionalbrandsinc.com. Information contained on our website is not a part of this annual report.

Regional Brands Inc. is a holding company formed to acquire substantial ownership in regional companies with strong brand recognition, stable revenues and profitability. Regional Brands has been pursuing a business strategy whereby it 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. After the acquisition of the business of B.R. Johnson, Inc. (“BRJ Inc.”) by our majority-owned subsidiary, B.R. Johnson, LLC (“BRJ LLC”), we are currently focused on considering opportunities for growth of BRJ LLC through utilizing its balance sheet to provide capital for additional acquisitions of companies that would be complementary to BRJ LLC. Additionally, we may seek to acquire Target Companies that satisfy the following criteria: (1) established businesses with viable services or products; (2) an experienced and qualified management team; (3) opportunities for growth and/or expansion into other markets; (4) are accretive to earnings; (5) offer the opportunity to achieve and/or enhance profitability; and (6) increase shareholder value.

On November 1, 2016, our majority-owned subsidiary, BRJ LLC, acquired substantially all of the assets (the “Acquisition”) of BRJ Inc., a seller and distributor of windows, doors and related hardware as well as specialty products for use in commercial and residential buildings (the “Business”).

The Acquisition was consummated pursuant to an Asset Purchase Agreement, dated as of November 1, 2016 (the “APA”). Total consideration for the Acquisition 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 Debt Agreements (as defined below) and working capital adjustments of approximately $1.1 million. We provided $10.95 million in debt and equity financing to complete the Acquisition, including $7.14 million of the Subordinated Loan (as defined below) and $3.81 million in preferred equity of BRJ LLC.

Concurrently with the closing of the Acquisition, BRJ LLC entered into a senior secured revolving credit facility to borrow up to $6,000,000 (the “Credit Facility”) pursuant to that certain Credit and Security Agreement, dated November 1, 2016 (the “Credit Agreement”), with the lenders named therein and KeyBank, N.A. as agent for such lenders. BRJ LLC also entered into that certain Loan and Security Agreement, dated November 1, 2016 (the “Loan Agreement and, together with the Credit Facility, the “Debt Agreements”), pursuant to which it received a $7,500,000 loan that is subordinate to the Credit Facility (the “Subordinated Loan”). To finance the Acquisition and potential future acquisitions, we issued 894,393 shares of our common stock for aggregate proceeds to us of $12,074,311 in a private placement (the “Private Placement”) with 93 accredited investors, pursuant to the terms of a Subscription Agreement, dated as of November 1, 2016 (the “Subscription Agreement”). The foregoing transactions are collectively hereinafter referred to as the “Transactions”.

Following the Acquisition, all of operations of the Business are conducted through our majority-owned subsidiary BRJ LLC. We hold 76.17% of the common membership interests and 95.22% of the preferred membership interests of BRJ LLC pursuant to the B.R. Johnson, LLC Limited Liability Company Agreement (the “LLC Agreement”) entered into by and among Lorraine Capital, LLC (which owns 20% of the common membership interests), Regional Brands Inc. and BRJ Acquisition Partners, LLC (which owns the remaining 3.83% of the common membership interests and 4.78% of the preferred membership interests). Lorraine Capital, LLC and BRJ Acquisition Partners, LLC are collectively referred to as the “Lorraine Parties”.

Forward Looking Information

This report contains statements about future events and expectations that are characterized as “forward-looking statements.”  Forward-looking statements are based upon management’s beliefs, assumptions, and expectations.  Forward-looking statements involve risks and uncertainties that may cause our actual results, performance, and financial condition to be materially different from the expectations of future results, performance, and financial condition we express or imply in such forward-looking statements.  You are cautioned not to put undue reliance on forward-looking statements.  We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

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Business Overview

B.R. Johnson, Inc. was founded by Benjamin “Ben” R. Johnson in 1928.  Some of the original products sold by BRJ Inc. were steel windows, rolling self-storing screens, kitchen cabinets, and Modernfold operable wall partitions, a product it still distributes principally in the Upstate New York market.  Over the course of the following decades, BRJ Inc. added commercial steel doors, hardware, and residential and commercial windows.   We believe BRJ Inc. has built a reputation of only distributing products that are the best in their respective category. Product categories include:

· Commercial doors and hardware;

· Commercial windows;

· Specialty division; consisting of operable partitions, movable glass walls, fire and smoke containment systems and gymnasium equipment;

· Residential windows;

· Residential hardware; and

· Aftermarket door sales.

Industry Overview

According to an industry study published by the international business research company, The Freedonia Group, the total United States window and door market (measured by sales at the manufacturers’ level) was estimated to be valued at approximately $34.3 billion in sales in 2021.

One key factor in driving our growth is the relative strength of new housing and renovation activity in our markets, including investment in new and replacement windows and doors. If construction spending in window and door intensive commercial segments expands, specifically office, retail, and lodging structures, we expect that would will also fuel sales of our products.

Regional variations in economic activity influence the level of demand for windows and door products across the United States. Of particular importance are regional differences in the level of construction and renovation activity. Demographic trends, including population growth and migration, contribute to the regional variations through their influence on regional new construction activity.

Our Growth Strategy

We target customer groups and emphasize product categories where we believe we are well positioned in comparison to our competitors. These include aftermarket door service and installation; commercial window customers with demanding installation requirements; and products requiring proprietary know-how and installation skills.

Commercial door and hardware remains a highly competitive product category. Our strategy is to defend our market share so that our volume remains at sufficient levels to achieve the best pricing from our suppliers, thus enabling us to maintain acceptable profit margins in this segment.

Currently, we operate primarily in the Upstate New York market and we plan to expand our geographic reach through ongoing business development efforts by our Rochester, NY and recently opened Buffalo, NY sales offices.

Our Products and Services

Commercial Windows: We have a long history of building restoration and new construction experience in a wide range of commercial window applications. We utilize multiple approaches that take advantage of the wide range of product offerings we have available to us from our extensive roster of suppliers and we draw on the experience gained from the diverse types of projects we have successfully performed.

We operate as a multi-line commercial window distributor and installer of high-performance architectural aluminum, clad wood, fiberglass, vinyl and steel replica windows, as well as curtainwall, storefront and entrance products.

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While we specialize in creating commercial window solutions for existing buildings and historical renovations, we are also experienced in the requirements of new construction, navigating the technical, administrative and schedule demands of that industry segment.

Our team of salespeople, project managers, technical services and installation personnel work closely with our customers to provide an integrated project delivery approach that we believe is most appropriate to balance performance, aesthetics, budgetary and schedule needs.

We offer our commercial window customers:

· Replacement and historical renovation;

· New construction - windows, curtainwall, storefront and entrances;

· Design development;

· Budgets, detailing and mock-ups;

· Installation; and

· Service across New York, including Buffalo, Rochester, Syracuse, Albany, Ithaca and Binghamton.

Commercial Doors and Hardware: We are a value added distributor and installer of commercial doors, frames and hardware characterized by a dedicated group of professionals with specialized knowledge to respond quickly to customer needs. We have provided the Upstate New York building industry with hollow metal steel doors and frames for over 40 years and commercial hardware since the mid-1980’s.

  We provide commercial door and hardware customers:

· Custom hollow metal door and frame welding and fabrication;

· What we believe to be the largest commercial solid core wood door inventory in Central New York;

· A large available selection of commercial and institutional hardware;

· Specialty overhead and rolling doors;

· Field service and installed sales;

· Budgets and specification consulting; and

· New construction, installation, replacement and service.

Commercial Specialty Products: We distribute, install and service products that require a strong emphasis on architectural promotion. Our commercial specialty products sales personnel have been trained to know all aspects of each product from layout and design. Some of our personnel provide classroom training to architects and building and fire code officials to maintain their license in New York State. As a result, we believe that we are a trusted resource to the entire Upstate New York community of architects and building and fire code officials. The products we represent are nationally and internationally recognized as industry leaders and are sold across the entire Upstate New York region where we have salespeople active in each major market from Buffalo to Albany. Our seasoned tradesmen round out our ability to provide installation services, inspections and preventative maintenance.

Specialty products and services include:

· Modernfold - Operable partitions, movable glass walls and accordion doors;

· Skyfold - vertically folding operable walls;

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· Smoke containment alternatives to elevator vestibules;

· Smoke Guard - fire and smoke containment systems;

· Gymnasium equipment;

· Safe-Path (safety device for gym partitions);

· Service; and

· Inspections and preventative maintenance.

Residential Windows and Door: We specialize in new construction, installation and replacement windows and doors for homes in Upstate New York. While currently a much smaller part of our operations, we have been providing builders and homeowners in Upstate New York with quality building products since 1928.

We offer our customers a wide selection of products to best meet their requirements from the following manufacturers:

· Integrity from Marvin windows and doors made from fiberglass material called Ultrex.

· Marvin Windows & Doors can be made to order products with craftsman quality construction and customizable options.

· Kasson & Keller windows and doors, including EcoShield high-efficiency, low-maintenance windows.

· Norwood, a division of West-Wood Industries, wood windows and doors, including, Norwood’s Permaglass window line.

· Therma-Tru Doors, fiberglass and steel exterior door systems, including the Fiber-Classic® wood grained door.  

· Anderson Windows and Doors which feature windows and doors for most residential needs.

Sales and Marketing

As a result of our longstanding and leading position in the Upstate New York market, we have developed relationships with owners, architects, and developers and, we believe, a reputation for providing products and services that best suit the customers’ needs, positioning us well in comparison to our competitors.

Our customer service team strives to respond to opportunities with our customers at an early stage and quote opportunities quickly with the best solution for our customers based on our access to multiple suppliers. We prioritize opportunities based on the competitive advantages we identify, often where customers’ needs involve a level of complexity.

We maintain an extensive inventory of commercial door and hardware items. This frequently allows us to react to smaller negotiated and non-bid sales opportunities quickly with product we have in stock. With larger projects, we seek to utilize manufacturer service centers to provide fabrication when possible to minimize pass-through in our facility.

Other sales and marketing activities include attending industry related trade shows, targeted engagement with social media, and search engine optimization for our website.

Customers

Our customers are varied and encompass building owners, building tenants (with long term property rights) and contractors who serve them. We have customers who place orders that we book and ship, such as in the commercial door and hardware category. These same customers may have large projects from time to time such as commercial window projects that take several months (occasionally over a year ) to complete. Commercial customers include: owners of educational buildings, K-12 school districts, private schools and public and private colleges and universities; owners of multi-family housing, including senior housing, both private and public; other building owners, including retail health care and institutional buildings, casinos and hotels; and energy performance contractors. Our residential windows, doors and door hardware customers are generally contractors or developers serving the Upstate New York market.

4

Strategic Alliances

We view Lorraine Capital, LLC, and Ancora Advisors, LLC (“Ancora”), as strategic sources for identifying opportunities for new business in Western New York and Northeast Ohio. We also believe that Lorraine Capital, LLC and Ancora can assist us with sourcing capital to meet funding that may be needed for our expansion or take advantage of consolidation opportunities with competitors through acquisitions. In addition, we have a relationship with a union qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations that require union installation labor. Individuals affiliated with Lorraine Capital, LLC acquired 57% of ADSI’s common stock in connection with the Acquisition.

Competition

Our products are sold under highly competitive conditions. Currently, we operate principally in the Upstate New York market and we compete with a number of companies, some of which have greater financial resources than us. The principal competitive factors in the markets we serve include price, product quality, delivery and the ability to customize to customer specifications. We encounter different competitive environments in each of our product categories. In some of the product categories, there are fewer competitors, in part due to the reduction of new entrants to the market. In addition, many of our suppliers find it economical to have a limited number of vendors in any geographic area. In the residential market segment, we face intense competition from big-box stores, large independent chains and online retailers where we seek to differentiate our products and services with high-end quality products that meet the specialized installation requirements of our customers. In addition, certain product manufacturers sell and distribute their products directly to customers or enter into exclusive supply arrangements with other distributors.

Suppliers

We operate as a multi-line product distributor and installer across the entire Upstate New York region for nationally and internationally recognized industry leading brands. Our ability to offer a wide variety of products to our customers is dependent upon our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and responsible sourcing, as well as our need to access products in a timely and efficient manner. Generally, our products are obtainable from various sources and in sufficient quantities.

Employees

BRJ LLC employed 96 people full-time and 1 person part-time as of March 1, 2019. Regional Brands has no employees other than its Chief Executive Officer.

ITEM 1A – RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following material risks, together with the other matters described in this Annual Report on Form 10-K and in our financial statements and the related notes thereto in evaluating our current business and future performance. We cannot assure you that any of the events discussed in the risk factors below will not occur. If we are not able to successfully address any of the following risks or difficulties, we could experience significant changes in our business, operations and financial performance. In such circumstances, the trading price of our common stock could decline, and in some cases, such declines could be significant, and you could lose part or all of your investment. In addition to the risks described below, other unforeseeable risks and uncertainties or factors that we currently believe are immaterial may also adversely affect our operating results, and there may be other risks that may arise in the future. Certain statements contained in this Annual Report on Form 10-K (including certain statements used in the discussion of our risk factors) constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements” in this Annual Report on Form 10-K for important limitations and guidelines regarding reliance on forward-looking statements.

5

Risks Related to Our Business and Industry

There can be no assurance that our future operations will result in net income.

There can be no assurance that our future operations will result in net income. If we do not increase our revenues or maintain or improve our gross margins, our business will be harmed. We may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow more slowly than we anticipate, our gross margins decline, or our operating expenses exceed our expectations, our operating results will suffer. The prices we charge for products and services may decrease, which would reduce our revenues and harm our business. If we are unable to sell products at acceptable prices relative to our costs, or if we fail to supply on a timely basis new products and services from which we can derive additional revenues, our financial results will suffer.

Uncertain economic conditions may adversely affect demand for our products and services.

Our revenue and gross margin depend significantly on general economic conditions and the demand for building products in the markets in which we operate. Economic weakness and constrained construction and renovation spending in prior periods has resulted, and may result in the future, in decreased revenue, gross margin, earnings and growth rates. Substantially all of our revenues and profitability are derived from our customers and clients in New York State, which makes us highly susceptible to disruptions or downturns in local economic conditions. Ongoing economic volatility and uncertainty affect our business in a number of other ways, including making it more difficult to accurately forecast demand for our products and services beyond the short term and effectively build our revenue. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. Delays or reductions in building products spending could have a material adverse effect on demand for our products and services, and consequently our results of operations, financial condition, cash flows and stock price.

We may not timely identify or effectively respond to consumer needs, expectations, or trends, which could adversely affect our relationship with customers, our reputation and the demand for our products and services.

The success of our business depends in part on our ability to identify and respond promptly to evolving trends in demographics; consumer preferences, expectations and needs; and unexpected weather conditions, while also managing appropriate inventory levels and maintaining an excellent customer experience. It is difficult to successfully predict the products and services our customers will demand. To the extent that the housing and home improvement market strengthens, resulting changes in demand will put further pressure on our ability to meet customer needs and expectations and maintain high service levels. Any failure to meet the individual needs and expectations of our customers may result in the erosion of our customer base.

Our industry is highly cyclical, and prolonged periods of weak demand or excess supply may reduce our net sales and/or margins, which may cause us to incur losses or reduce our net income.

The building products distribution industry is subject to cyclical market pressures. Prices of building products are determined by overall supply and demand in the market. Market prices of building products historically have been volatile and cyclical, and we have limited ability to control the timing and amount of pricing changes. Demand for building products is driven mainly by factors outside of our control, such as general economic and political conditions, interest rates, availability of financing, the state of the credit markets, high levels of unemployment and foreclosures, the construction, repair and remodeling markets, industrial markets, weather, and population growth. The supply of building products fluctuates based on available manufacturing capacity, and excess capacity in the industry can result in significant declines in market prices for those products. To the extent that prices and volumes experience a sustained or sharp decline, our net sales and margins likely would decline as well.

Additionally, many of the building products which we distribute are widely available from other distributors or manufacturers, including big-box stores and online retailers. At times, the purchase price for any one or more of the products we distribute may fall below our purchase costs, requiring us to incur short-term losses on product sales.

All of these factors could adversely affect demand for our products and services, our costs of doing business and our financial performance.

Product shortages, loss of key suppliers, and our dependence on third-party suppliers and manufacturers could affect our financial health.

Our ability to offer a wide variety of products to our customers is dependent upon our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and responsible sourcing, as well as our need to access products in a timely and efficient manner. Generally, our products are obtainable from various sources and in sufficient quantities. However, the loss of, or a substantial decrease in the availability of, products from our suppliers or the loss of key supplier arrangements could adversely impact our financial condition, operating results, and cash flows.

6

Disruptions in our supply chain and other factors affecting the distribution of our products could adversely impact our business.

A disruption within our supply chain network could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased costs or damage to our reputation. Such disruptions may result from damage or destruction to our warehouse facility; weather-related events; natural disasters; third-party strikes, lock-outs, work stoppages or slowdowns; supply or shipping interruptions or costs; or other factors beyond our control. Any such disruption could negatively impact our financial performance or financial condition.

The inflation or deflation of commodity prices could affect our prices, demand for our products, our sales and profit margins.

Prices of certain commodity products, including lumber and other raw materials, are historically volatile and are subject to fluctuations arising from changes in supply and demand, labor costs, competition, market speculation, government regulations, periodic delays in delivery and other factors. Rapid and significant changes in commodity prices may affect the demand for our products, our sales and our profit margins.

Our industry is highly competitive. If we are unable to compete effectively, our net sales and operating results will be reduced.

The building products distribution industry is highly competitive, particularly in the residential sector. Competitive factors in our industry include pricing, availability of product, level of service, delivery capabilities, customer relationships, geographic coverage and breadth of product offerings. Also, we believe that financial stability is an important factor considered by suppliers and customers in choosing distributors for their products and affects the favorability of the terms on which we are able to obtain our products from our suppliers and sell our products to our customers.

Some of our competitors are part of larger companies, and therefore have access to greater financial and other resources than those to which we have access. In addition, certain product manufacturers sell and distribute their products directly to customers. We also face growing competition from online and multichannel retailers. Additional manufacturers of products distributed by us may elect to sell and distribute directly to end-users in the future or enter into exclusive supply arrangements with other distributors. Competitive pressures from one or more of our competitors or our inability to adapt effectively and quickly to a changing competitive landscape could affect our prices, our margins or demand for our products and services. If we are unable to timely and appropriately respond to these competitive pressures, our net sales and net income will be reduced.

Our business operations could suffer significant losses from natural disasters, catastrophes, fire or other unexpected events.

We operate our business primarily out of a single facility. While we maintain insurance, including business interruption insurance, our warehouse facility could be materially damaged by natural disasters, fire, adverse weather conditions, or other unexpected events, which could materially disrupt our business. We could incur uninsured losses and liabilities arising from such events, including damage to our reputation, and/or suffer material losses in operational capacity, which could have a material adverse impact on our business, financial condition, and results of operations.

We are subject to information technology security risks and business interruption risks, and may incur increasing costs in an effort to minimize those risks.

Our business employs information technology systems to secure confidential information, such as employee data, including social security numbers and personal health data. Security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, interruption of our business operations, and a loss of confidence in our security measures; all of which could harm our business. We may also be subject to phishing attacks, wherein individuals may fraudulently purport to be an agent of a reputable company in order to induce our employees to reveal information or obtain resources. We are also susceptible to malware, ransomware, denial of service, and other attacks that could adversely affect our information technology systems. As cyber attacks become more sophisticated generally, we may incur significant costs to strengthen our systems from outside intrusions, and/or obtain insurance coverage related to the threat of such attacks. In addition, we could be adversely affected if any of our significant customers or suppliers experiences any similar events that disrupt their business operations or damage their reputation.

Additionally, our business is reliant upon information technology systems to, among other things, manage and route our sales calls, manage inventories and accounts receivable, make purchasing decisions, monitor our results of operations, and place orders with our vendors and process orders from our customers. Disruption in these systems could materially impact our ability to buy and sell our products, as well as generally operate our business.

7

Our cash flows and capital resources may be insufficient to make required payments on our substantial indebtedness or to maintain acceptable liquidity.

Our subsidiary BRJ LLC has a substantial amount of debt which could have important consequences to you. For example, it could:

· make it difficult for us to satisfy our debt obligations;

· make us more vulnerable to general adverse economic and industry conditions;

· limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, and other general corporate requirements;

· expose us to interest rate fluctuations because the interest rate on the debt under our revolving credit facility is variable;

· require us to dedicate a substantial portion of our cash flows to payments on our debt, thereby reducing the availability of our cash flows for operations and other purposes;

· limit our flexibility in planning for, or reacting to, changes in our business, and the industry in which we operate; and

· place us at a competitive disadvantage compared to competitors that may have proportionately less debt, and therefore may be in a better position to obtain favorable credit terms.

In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows, and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business, and other factors, many of which are beyond our control. These factors include, among others:

· economic and demand factors affecting the building products distribution industry;

· external factors affecting availability of credit;

· pricing pressures;

· increased operating costs;

· competitive conditions; and

· other operating difficulties.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital, or restructure our debt. Obtaining additional capital or restructuring our debt could be accomplished in part through new or additional borrowings or placements of debt or equity securities. There is no assurance that we could obtain additional capital or refinance our debt on terms acceptable to us, or at all. If we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on the disposition of such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. We may incur substantial additional indebtedness in the future. Our incurring additional indebtedness would intensify the risks described above.

8

The instruments governing our indebtedness restrict our ability to dispose of assets and the use of proceeds from any such disposition.

Our obligations under the Debt Agreements are secured by security interests in all of the assets of our operating subsidiary, BRJ LLC, including its inventories, accounts receivable, and proceeds from those items. The foregoing encumbrances, as well as covenants in the Debt Agreements, limit our ability to dispose of material assets or operations. Accordingly, we may not be able to consummate any disposition of assets or obtain the net proceeds which we could realize from such disposition, and these proceeds may not be adequate to meet the debt service obligations when due. In the event of our breach of the Debt Agreements, we may be required to repay any outstanding amounts earlier than anticipated, and the lenders may foreclose on their security interests in our assets or otherwise exercise their remedies with respect to such interests.

The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business, including requiring us to maintain a maximum fixed charge coverage ratio.

Our Debt Agreements contain various restrictive covenants and restrictions, including financial covenants that limit management’s discretion in operating our business. In particular, these instruments limit our ability to, among other things:

· incur additional debt;

· grant liens on assets;

· make investments, including capital expenditures;

· sell or acquire assets outside the ordinary course of business;

· engage in transactions with affiliates; and

· make fundamental business changes.

The Credit Facility also requires us to maintain a fixed charge coverage ratio of 1.15 to 1.00. If we fail to comply with the restrictions in the Debt Agreements or any other current or future financing agreements, a default may allow the creditors under the relevant instruments to accelerate the related debts and to exercise their remedies under these agreements, which typically will include the right to declare the principal amount of that debt, together with accrued and unpaid interest, and other related amounts, immediately due and payable, to exercise any remedies the creditors may have to foreclose on assets that are subject to liens securing that debt, and to terminate any commitments they had made to supply further funds. The exercise of any default remedies by our creditors would have a material adverse effect on our ability to finance working capital needs and capital expenditures.

Affiliates of Ancora control a significant portion of our outstanding common stock and may have conflicts of interest with other stockholders.

Ancora, a private investment firm, and investment partnerships and individuals affiliated with Ancora beneficially owned approximately 36.4% of our outstanding common stock as of March 1, 2019. As a result, Ancora is able to exert significant influence on the election of our directors, our corporate and management policies, and the outcome of most corporate transactions or other matters submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales, and other significant corporate transactions. This concentrated ownership position limits other stockholders’ ability to influence corporate matters and, as a result, we may take actions that some of our stockholders may not view as beneficial.

Three of our four directors, including our Chief Executive Officer, are affiliated with Ancora. The interests of Ancora may not coincide with the interests of other holders of our common stock. Additionally, Ancora is in the business of making investments in companies, and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Ancora may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Ancora continues to own a significant amount of the outstanding shares of our common stock, it will continue to be able to strongly influence our decisions, including potential mergers or acquisitions, asset sales, and other significant corporate transactions.

We may need additional capital in the future to fund our business.

We may require additional capital in the future to service and repay our debt, or fund our operations, expansion and acquisitions, depending upon the growth of our revenues and our business strategy. If we engage in future equity financings, dilution to our existing stockholders may result. If we raise debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds, our ability to fund our operations, take advantage of strategic opportunities, or otherwise respond to competitive pressures could be significantly limited. Without sufficient funding or revenue, we may have to curtail, cease, or dispose of, one or more of our operations and would have a material adverse effect on our business, financial condition, and future prospects.

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Additional tax expense or additional tax exposures could affect the company's future profitability and cash flow.

The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017. The Tax Act significantly revamped U.S. taxation of corporations, including a reduction of the federal income tax rate from 35% to 21%, a limitation on interest deductibility, and a new tax regime for foreign earnings. The limitation on interest deductibility, or other adverse changes resulting from the Tax Act, might offset the benefit from the reduced tax rate, and our future effective tax rates and/or cash taxes may increase, even significantly, or not decrease much, compared to recent or historical trends. Many of the provisions of the Tax Act are highly complex and may be subject to further interpretive guidance from the Internal Revenue Service (“IRS”) or others. Some of the provisions of the Tax Act may be changed by a future Congress. Although we cannot predict the nature or outcome of such future interpretive guidance, or actions by a future Congress, they could adversely impact our financial condition, results of operations and cash flows.

Costs associated with new tariffs could adversely impact our profitability or financial condition.

New tariffs have led to higher raw material costs, which in turn have resulted in cost increases by many of our suppliers. If this continues, our margin may be negatively impacted, particularly if we are unable to incorporate the cost increases into our contract bids or if construction activity generally slows as a result of the higher costs. This, in turn, could adversely impact our profitability or financial condition.

Risks Related to Our Common Stock

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.

We have not paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock would depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.

There is limited trading activity in our common stock and an active trading market for our shares may never develop or be sustained. As a result, investors in our common stock must bear the economic risk of holding those shares for an indefinite period of time.

Our common stock is traded on the OTC Pink marketplace under the symbol “RGBD.” Although our common stock is quoted on the OTC, trading of our common stock is extremely limited and sporadic and at very low volumes. We do not now, and may not in the future, meet the initial listing standards of any national securities exchange. We presently anticipate that our common stock will continue to be quoted on OTC Pink or another over-the-counter quotation system for the foreseeable future. In those venues, our stockholders may find it difficult to obtain accurate quotations as to the market value of their shares of our common stock and may find few buyers to purchase their stock and few market makers to support its price. As a result of these and other factors, investors may be unable to resell shares of our Common Stock at or above the price for which they purchased them, or at all. Further, an inactive market may also impair our ability to raise capital by selling additional equity in the future and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

Shares of our common stock that have not been registered under federal securities laws are subject to resale restrictions imposed by Rule 144, including those set forth in Rule 144(i) which apply to a former “shell company.”

Prior to the acquisition of the business of BRJ Inc., we were deemed a “shell company” under applicable SEC rules and regulations, because we had no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets. Pursuant to Rule 144 (“Rule 144”), promulgated under the Securities Act, sales of the securities of a former shell company, such as us, under that rule are not permitted until at least 12 months have elapsed from the date on which we file a registration statement on Form 10, reflecting our status as a non-shell company, with the SEC. As a result, most of our stockholders will be forced to hold their shares of our common stock at least until the end of the 12-month period after which we file a registration statement on Form 10, before they are eligible to sell those shares, and even after that 12-month period, sales may not be made under Rule 144 unless we and the selling stockholder are in compliance with other requirements of Rule 144. Further, it may be more difficult for us to raise funding to support our operations through the sale of debt or equity securities unless we agree to register such securities under the Securities Act, which could cause us to expend additional time and cash resources. Additionally, our previous status as a shell company could also limit our use of our securities to pay for any acquisitions we may seek to pursue in the future. The lack of liquidity of our securities as a result of the inability to sell under Rule 144 for a longer period of time could cause the market price of our securities to decline.

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A sale of a substantial number of shares of our common stock may cause the price of the common stock to decline.

Because there is a limited trading market for our common stock, our common shares are relatively less liquid and therefore more susceptible to price fluctuations than many other companies’ shares. If any holder of a significant amount of our common stock were to sell all or a portion of its holdings of our common stock at once or within short periods of time, or there was an expectation that such a sale was imminent, then the market price of our common stock could be negatively affected.

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, 2018, 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. Based on our Management’s evaluation of our disclosure controls and procedures and the continued existence of the material weaknesses as of December 31, 2018, our Management concluded that our disclosure controls and procedures were not effective as of December 31, 2018.

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 and, in 2018, continued the implementation of steps intended to remedy the identified material weaknesses. See “Item 9A-Controls and Procedures.” 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. Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes. Controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

Our principal offices are at 6060 Parkland Boulevard, Cleveland, OH 44124. We do not pay for the use of the offices, which are located at the corporate headquarters of Ancora.

BRJ LLC operates out of a 42,000 square foot facility in East Syracuse, NY pursuant to a lease through 2021with rent payments totaling $276,000 per year. BRJ LLC also leases a sales office in Rochester, NY with rent payments of $30,000 per year and a 11,075 square foot warehouse and sales office in Buffalo, NY with rent payments of approximately $54,000 per year.

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ITEM 3 - LEGAL PROCEEDINGS

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

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable. 

PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the OTC Pink marketplace under the trading symbol “RGBD”. The closing price of our common stock on March 1, 2019 was $13.01.

The table below sets forth the range of quarterly high and low closing bid quotations for our common stock for the years ended December 31, 2018 and 2017. The quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Trading on the OTC markets is limited and the prices quoted by brokers are not a reliable indication of the value of our common stock.

	Low		High
Year ended December 31, 2018
First Quarter through March 31	$	14.00	$	15.50
Second Quarter through June 30	$	14.00	$	15.50
Third Quarter through September 30	$	14.00	$	15.00
Fourth Quarter through December 31	$	14.00	$	15.00
Year ended December 31, 2017
First Quarter through March 31	$	15.00	$	15.00
Second Quarter through June 30	$	15.00	$	15.00
Third Quarter through September 30	$	15.00	$	15.00
Fourth Quarter through December 31	$	15.00	$	15.00

Issued and Outstanding Shares

Our authorized capital currently consists of 3,000,000 shares of common stock, par value $0.00001 per share, and 50,000 shares of preferred stock, par value $0.01 per share. As of March 1, 2019, we had 1,274,603 shares of common stock outstanding and no shares of preferred stock outstanding.

Holders of Record

As of March 1, 2019, there were approximately 222 holders of record of our common stock. This number does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.

Recent Sales of Unregistered Securities

We did not sell any unregistered securities during the year ended December 31, 2018.

Shares Repurchased by the Registrant

We did not purchase or repurchase any of our securities in the year ended December 31, 2018.

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Transfer Agent

The transfer agent and registrar for our common stock is Standard Registrar and Transfer Company, Inc., 440 East 400 South, Suite 200, Salt Lake City, UT 84111.

Securities authorized for issuance under equity compensation plans

On April 8, 2016, we adopted the 2016 Equity Incentive Plan (the “Equity Incentive Plan”), which was amended and restated as of June 15, 2017. The maximum number of shares of our common stock available for issuance under the Equity Incentive Plan through the grant of non-qualified stock options, restricted stock, restricted stock units and other awards is 130,000 shares. Awards may be granted to employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its related companies. The purpose of the Equity Incentive Plan is to enable us to attract, motivate and retain key employees and directors and to provide an additional incentive for such individuals through stock ownership and other rights that promote and recognize the financial success and growth of our company.

The following table sets forth information as of December 31, 2018 regarding equity compensation plans under which our equity securities are authorized for issuance.

Equity Plan Compensation Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders (1)		42,596	$	16.00		87,404
Total		42,596				87,404

(1)  Pursuant to our 2016 Equity Incentive Plan

ITEM 6 – SELECTED FINANCIAL DATA

This item is not applicable to us as a smaller reporting company.

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ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

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

Nature of Business

Regional Brands Inc. is a holding company formed to acquire regional companies with strong brand recognition, stable revenues and profitability. In April 2016, we sold an aggregate amount of 370,441 shares of common stock for the aggregate purchase price of $5,000,000 (including the cancellation of certain indebtedness) and the transactions resulted in a change of control of the Company. Subsequent to the change in control, we have been pursuing a business strategy whereby 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. After the acquisition of the business of BRJ Inc. by Regional Brands’ majority-owned subsidiary, BRJ LLC, Regional Brands is currently focused on considering opportunities for growth of BRJ LLC through utilizing its balance sheet to provide capital for additional acquisitions of companies that would be complementary to BRJ LLC. Additionally, Regional Brands may seek to acquire Target Companies that satisfy the following criteria: (1) established businesses with viable services or products; (2) an experienced and qualified management team; (3) opportunities for growth and/or expansion into other markets; (4) are accretive to earnings; (5) offer the opportunity to achieve and/or enhance profitability; and (6) increase shareholder value.

On November 1, 2016, we acquired a majority interest in BRJ LLC by contributing $3,808,696 in exchange for 95.22% of BRJ LLC’s preferred membership interest and 76.17% of its common membership interest. In addition, we loaned to BRJ LLC $7,141,304 under a senior subordinated term note which bears interest at 6% per annum and has scheduled annual principal payments with the balance due at maturity in five years. The senior subordinated term note is secured by substantially all of BRJ LLC’s assets. BRJ LLC’s minority members contributed $191,304 for the remaining preferred and common membership interests and loaned to BRJ LLC $358,696 on the same terms as the Regional Brands senior subordinated loan pursuant to a participation agreement.

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

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

Items Affecting the Comparability of Our Financial Results

Comparisons presented in the Results of Operations sections discussed below are with respect to the same period of the prior year, unless otherwise noted. The industry we operate in is highly competitive and accordingly our pricing and margins, especially on larger projects, can vary depending on multiple factors including the customer or general contractor relationship. In the gross margin discussions below, we refer to these variances as “project mix”.

Results of Operations for the years ended December 31, 2018 and 2017:

Net Sales: Net sales for 2018 of $39,987,861 were $3,060,577, or 8.3%, higher than net sales of $36,927,284 for 2017. This was primarily the result of an increased volume, particularly with our door and hardware and commercial window customers, due to increased construction activity in the geographic area that we serve and our ability to be flexible with our capacity to meet higher demand.

Cost of sales: Cost of sales for 2018 of $28,780,366 was $3,440,377, or 13.6%,higher than cost of sales of $25,339,989 in 2017. The increase is primarily due to the increase in net sales when compared to 2017 and higher costs on several projects in 2018 when compared to 2017. Additionally, new tariffs have led to higher raw material costs, which in turn have resulted in cost increases by many of our suppliers in 2018.

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Gross profit: Gross profit was $11,207,495, or 28.0%, of net sales for 2018 compared to $11,587,295, or 31.4%, of net sales for 2017. Gross profit decreased by $379,800 in 2018. Gross profit as a percentage of net sales and gross profit dollars were lower in 2018 compared to 2017 because our project mix in 2017 had higher than average margins and several projects in 2018 were negatively impacted by additional costs. We experienced cost overruns and back charges in 2018 due to numerous factors, including inefficiencies in the procurement process. Gross profit percentages decreased most notably with our commercial window and door and hardware customers.  Revisions in estimated profits for contracts accounted for under the percentage of completion method are made in the periodin which circumstances requiring the revision become known. The effect of changes in estimated contract costs decreased gross profit by approximately $197,000 and $193,000 in 2018 and 2017, respectively.

Management continues to take steps intended to improve future gross margin performance, including upgrading project management capabilities, improving review and approval procedures and training.

Selling expenses: Selling expenses for 2018 of $4,508,387 were $216,184, or 4.6%, lower than selling expenses of $4,724,571 for 2017. The decrease is primarily due to lower commissions paid to sales personnel resulting from lower sales in our specialty product line and overall lower incentive compensation costs.

General and administrative expenses: General and administrative expenses for 2018 of $3,951,957 were $129,555, or 3.4%, higher than general and administrative expenses of $3,822,402 for 2017. The increase is primarily due to increased compensation and occupancy expenses associated with our acquisition of R&D in June of 2018, partially offset by lower incentive compensation costs, professional fees, and insurance expense. 

Amortization of intangible assets: Amortization of intangible assets was $1,251,022 for 2018 compared to $1,716,667 for 2017. Certain intangible assets arising from the BRJ Inc. acquisition became fully amortized in 2017, which is the primary reason for less amortization expense in 2018.

Other income: Other income was $128,032 for 2018 compared to $103,905 for 2017. The increase was primarily related to higher dividends from our investments in marketable equity securities in 2018.

Interest Expense: Interest expense for 2018 was $263,548 compared to $223,749 for 2017. The increase in interest expense was due primarily to increased borrowings under our line of credit to fund operating working capital needs and payments under our long term subordinated notes and increased interest rates as compared to 2017.

Income tax expense: Income tax expense for 2018 was $306,182 compared to $364,072 for 2017. The effective income tax rate was 22.1% for 2018, compared to the federal statutory rate of 21%. The 2017 effective income tax rate of 29.7% is lower than the 2017 federal statutory rate of 34% primarily due to the reversal of a portion of the deferred tax valuation allowance during 2017, partially offset by the effect of the remeasurement of deferred tax assets resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017.

Net income: As a result of the foregoing, net income for 2018 was $1,079,607 compared to $861,133 for 2017.

Liquidity and Capital Resources

At December 31, 2018, we had working capital of $12,360,534 compared to $11,124,271 at December 31, 2017. During 2018, net cash provided by operating activities was $1,117,969, primarily due to net income adjusted by noncash items totaling approximately $2,537,000 partially offset by the combination of an increase in accounts receivable and decrease in accrued expenses and other current liabilities totaling approximately $1,528,000. During 2017, net cash provided by operating activities was $2,681,489, primarily due to net income adjusted by noncash items totaling approximately $2,458,000.

Cash used in investment activities was $947,865 for 2018 compared to $2,359,923 for 2017. The primary uses of cash from investment activities was for the purchase of equipment, certain assets of R&D Fabricators, Inc. and short-term investments in 2018 and the purchase of equipment and short-term investments and the payment of the working capital liability in connection with the BRJ Inc. acquisition in 2017. The primary reason for the increase in purchases of equipment in 2018 relates to the implementation of an enterprise resource planning system that is expected to be completed and operational in 2019.

Cash provided by financing activities was $683,846 for 2018 compared to cash used of $720,461 for 2017. Line of credit borrowings provided cash in 2018 and repayments of line of credit borrowings and distributions to noncontrolling interests used cash in 2017. Line of credit borrowings in 2018 were used to fund increased net operating assets that are included in working capital.

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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.

Interest under the Credit Facility is payable monthly, starting on November 30, 2016, and accrues pursuant to the “base rate” of interest, which is equal to the highest of (a) KeyBank, N.A.’s prime rate, (b) one-half of one percent (0.50%) in excess of the Federal Funds Effective Rate of the Federal Reserve Bank of New York, and (c) one hundred (100) basis points in excess of the London Interbank Offered Rate for loans in Eurodollars with an interest period of one month, plus any applicable margin. The credit agreement also requires the payment of certain fees, including, but not limited to, letter of credit fees.

The Credit Facility is secured by substantially all of BRJ LLC’s assets. The Credit Facility contains customary financial and other covenant requirements, including, but not limited to, a covenant to not permit BRJ LLC’s consolidated fixed charge coverage ratio to exceed 1.15 to 1.00. The Credit Facility also contains customary events of default.

The effective interest rate on the Credit Facility at December 31, 2018 was 4.94%. The aggregate borrowing outstanding under the Credit Facility at December 31, 2018 was $2,691,376 ($1,812,454 at December 31, 2017). The bank has issued a letter of credit on behalf of the Company in the amount of $250,000 that expires on December 1, 2019.

Under the Loan Agreement, we agreed to loan BRJ LLC $7,500,000. We participated $358,696 of the Subordinated Loan to BRJ Acquisition Partners, LLC, an entity owned by individuals affiliated with BRJ Inc. and Lorraine Capital, LLC. The Subordinated Loan accrues interest at a rate of 6% per annum, payable quarterly on the first day of each calendar quarter. BRJ LLC is required to repay a portion of the principal amount of the Subordinated Loan on each anniversary of the execution of the Loan Agreement. The Subordinated Loan matures on November 1, 2021 and is secured by substantially all BRJ LLC’s assets. The Subordinated Loan and the security interest created under the Loan Agreement are subordinated to the Credit Facility and the security interest of the lenders under the Credit Facility. All of the covenants contained in the Credit Agreement are incorporated by reference in the Loan Agreement. The Loan Agreement contains customary events of default, including in the case of an event of default under the Credit Facility.

On November 1, 2016, BRJ LLC issued a $2,500,000 subordinated promissory note to BRJ Inc. as part of the purchase price for the Acquisition (the “Note”). The Note is payable to BRJ Inc. and accrues interest at a rate of 5.25% per annum, payable quarterly, with the principal amount of the Note payable in equal quarterly installments of $62,500 commencing on November 1, 2018 and maturing on November 30, 2021. The Note is subordinated to the Credit Facility and the Loan Agreement.

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

Off-Balance Sheet Arrangements

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

Inflation

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

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes.  The financial statements as of December 31, 2018 describe the significant accounting policies and methods used in the preparation of the financial statements.  Actual results could differ from those estimates and be based on events different from those assumptions.  Future events and their effects cannot be predicted with certainty; estimating, therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired or as additional information is obtained.  The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our financial statements:

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

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

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

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

Revenue Recognition

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

Performance obligations for the remainder of our business are generally supported by written contracts or purchase orders which require the delivery of goods or services and the revenue is recognized upon shipment of those goods or performance of the services. Standard terms are that amounts are due 30 days after invoice date. The majority of our performance obligations are typically completed within one year.

Acquisitions

We account for our acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations.

When we acquire a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at their respective estimated fair values. We record any premium over the fair value of net assets acquired as goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in determining their fair value. The way we characterize the assets has important implications, as long-lived assets with definitive lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment. With respect to determining the fair value of assets, the most subjective estimates involve valuations of long-lived assets, such as property, plant, and equipment as well as identified intangible assets. We use all available information to make these fair value determinations and may engage independent valuation specialists to assist in the fair value determination of the acquired long-lived assets. The fair values of long-lived assets are determined using valuation techniques that use discounted cash flow methods, independent market appraisals and other acceptable valuation techniques. 

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Recent Accounting Pronouncements

Refer to Note 1 to the notes to our consolidated financial statements included in this Form 10-K for our assessment of Recent Accounting Pronouncements.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to us as a smaller reporting company.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our audited financial statements for the years ended December 31, 2018 and 2017 follow Item 16, beginning at page F-1.

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None. 

ITEM 9A - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company has established disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and, as such, is accumulated and communicated to the Company’s management, including our principal executive and financial officer, to allow timely decisions regarding required disclosure. Management, together with our principal executive and financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of December 31, 2018.  Based on the evaluation of management, including the principal executive and financial officer, due to material weaknesses in our internal control over financial reporting as described below, our disclosure controls and procedures were not effective as of December 31, 2018. In light of the material weaknesses in internal control over financial reporting, we performed additional analyses and other post-closing procedures and utilized more resources to ensure that our financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).  Notwithstanding these material weaknesses, management believes that the financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

Under the supervision and with the participation of our management, including the principal executive and financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018, based upon Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

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As of December 31, 2017, we did not maintain effective internal controls due to material weaknesses related to an insufficient compliment of qualified accounting personnel and ineffective controls associated with segregation of duties. As a result of these material weaknesses, during 2018, we were unable to file our quarterly report on Form 10-Q for the quarter ended March 31, 2018 on a timely basis. The lack of segregation of duties had not been fully remediated at December 31, 2018, however, we began implementation of the remediation steps described below under “Remediation of the Material Weaknesses”.

Because of these material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2018 based on criteria described in Internal Control – Integrated Framework (2013) issued by COSO.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report

Remediation of the Material Weaknesses

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

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

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

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

· Implementing, in 2019, a new accounting system at our operating subsidiary, B.R. Johnson, LLC, that has certain built in internal controls.

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

Changes in Internal Control over Financial Reporting

While changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2018 as the Company began implementation of the remediation steps described above, we believe that there were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

·  Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes.

·  Controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override.

·  The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

·  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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

ITEM 9B – OTHER INFORMATION

None.

PART III

ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS and CORPORATE GOVERNANCE

Directors and Executive Officers

The names, ages and positions of our directors and executive officers are as follows

Name	Age	Position
Carl Grassi	59	Chairman of the Board
Fred DiSanto	56	Chief Executive Officer and Director
Brian Hopkins	42	Director
Jeff Anderson	49	Director and Secretary

All directors hold office until the election and qualification of their successors, or their earlier resignation, removal or death. Officers are elected by the Board and serve at the discretion of the Board until their successors are elected and qualified.

The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:

Carl Grassi has been a director and Chairman of the Board since November 2016. Mr. Grassi is the chairman of the law firm McDonald Hopkins LLC, where he has worked as an attorney since July 1992. Mr. Grassi is corporate counsel and business advisor to a number of middle-market and growth companies. Mr. Grassi also authors the Small Business “Tax Tips” column for Crain’s Cleveland Business and has written articles for other publications. Mr. Grassi earned his law degree from Cleveland-Marshall College of Law and his Bachelor’s degree from John Carroll University. Mr. Grassi is a Certified Public Accountant and is a former director of Mace Security International, Inc, which designs and manufactures a wide range of security products. Mr. Grassi has been a director of DiVal, Inc. d/b/a W. F. Hann & Sons, an HVAC plumbing contractor, since 2003. The Board believes that Mr. Grassi’s substantial experience as an accomplished attorney, negotiator and general counsel to companies will enable him to bring a wealth of strategic, legal and business acumen to the Board, well qualifying him to serve as a director.

Fred DiSanto has been a member of our Board and our Chief Executive Officer since November 2016. Mr. DiSanto also has served on the Board of Managers of BRJ LLC since November 2016. Mr. DiSanto has worked at Ancora, a registered investment advisor, since June 2005, was named its Chief Executive Officer in January 2006 and was later named its Chairman in December 2014. He was the former President and Chief Operating Officer of Maxus Investment Group (“Maxus”) from 1998 until 2000, during which time he was responsible for the marketing, sales and financial operations. Mr. DiSanto began his investment career in 1985 and held various executive position before joining Maxus. Mr. DiSanto is currently on the boards of Alithya Group Inc. and The Eastern Company. He is also on the Executive Committee for the Board of Trustees at Case Western Reserve University and is a current Trustee of the Greater Cleveland Sports Commission. Mr. DiSanto earned a Bachelor of Science degree in management science from Case Western Reserve University and a Master in Business Administration degree from Case Western Reserve University, Weatherhead School of Management (Cleveland, Ohio). The Board believes that Mr. DiSanto’s qualifications to serve on the Board include his substantial financial expertise and his prior experience as an executive officer of several companies.

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Brian Hopkins has been a member of our Board since April 2016 and served as our President and Chief Executive Officer from April 2016 until November 1,2016. Mr. Hopkins has been a Partner and Portfolio Manager at Ancora since September 2003. He is a Managing Director of Corporate Development and a member of the Executive Committee at Ancora. In his role as Portfolio Manager, he is responsible for making investment decisions for the firm’s alternative products. Prior to joining Ancora, Mr. Hopkins was an Investment Associate with Primus Capital Partners, one of the largest private equity firms in the Midwest, from August 2001 to September 2003. Before joining Primus, he worked in the Investment Banking Division of Deutsche Bank in London as an Associate from August 1998 to June 2001. Mr. Hopkins is a former director of First Menasha Bancshares (OTC: FMBJ) and current board member of Wayne Savings Bancshares, Inc. Mr. Hopkins earned a Bachelor of Science degree in finance from Georgetown University. The Board believes that Mr. Hopkins’ substantial management and investment experience well qualify him to serve as a director.

Jeff Anderson has been a member of our Board since April 2016. Mr. Anderson joined Ancora in May 2010 as an Analyst and Portfolio Manager. Prior to joining Ancora full-time, he served as a consultant to Ancora. Mr. Anderson managed a special situations portfolio for Millennium Partners in New York from May 2006 to November 2008. He spent six years at the investment firm Kellogg Group in New York, working in the Specialist Operations Group on the floor of the New York Stock Exchange from January 2000 to October 2000, before working in the firm’s proprietary trading operation from October 2000 to March 2006. Mr. Anderson graduated with a Bachelor of Arts degree from Wilfrid Laurier University in Ontario, Canada. Mr. Anderson is a Chartered Financial Analyst. The Board believes that Mr. Anderson’s extensive business and capital markets experience well qualify him to serve as a director.

Board Committees

The Board does not currently have a compensation committee or nominations and corporate governance committee. The Board has an audit committee comprised of all of the directors and chaired by Mr. Anderson. The audit committee assists the Board in monitoring (i) the integrity of the Company’s financial statements, (ii) the independence, performance and qualifications of the Company’s auditors, (iii) the Company’s compliance with legal and regulatory requirements related to the Company’s financial statements and accounting policies, and (iv) assessing risk associated with the Company’s financial condition and performance.

Indebtedness of Directors and Executive Officers

None of our directors or executive officers or their respective associates or affiliates is currently indebted to us.

Family Relationships

There are no family relationships among our directors and executive officers.

Legal Proceedings

As of the date of this current report, there is no material proceeding to which any of our directors, executive officers, affiliates or stockholders is a party adverse to us.

Code of Ethics

The Board adopted a Code of Ethics for the Company, a copy of which was attached as Exhibit 14 to the Form 10-K for the year ended September 30, 2004 and is incorporated herein by reference.

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ITEM 11 - EXECUTIVE COMPENSATION

Summary Compensation Table

The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer, who was our only “named executive officer” in the years indicated.

Name & Principal Position	Year		Salary  ($)		Bonus ($)		Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($)		All Other Compensation ($)			Total ($)
Fred DiSanto		2018		-		-		-		-		-		-		20,000	(1)		20,000
Chief Executive Officer		2017		-		-		-		-		-		-		-			-

(1) Mr. DiSanto earned $20,000 in fees for his services as a director of the Company.

We do not currently have an employment agreement in place with our Chief Executive Officer, nor do we currently intend to provide compensation to our Chief Executive Officer in his capacity as such.

Our Chief Executive Officer also is a director of the Company and, in 2018, our directors earned $20,000 in fees as compensation for their service.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information regarding our outstanding equity awards held by two directors as of December 31, 2018. None of our other directors, or our named executive officer, held any outstanding equity awards as of December 31, 2018.

	Option awards									Stock awards
Name	Number of securities underlying unexercised options (#) exercisable		Number of securities underlying unexercised options (#) unexercisable		Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)		Option exercise price ($)		Option expiration date	Number of shares or units of stock  that have not vested  (#)		Market value of shares of units of stock that have not vested  ($)		Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)		Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)
Brian Hopkins		4,987		4,364		-	$	16.00	4/8/2031		-		-		-		-
Jeff Anderson		4,987		4,364		-	$	16.00	4/8/2031		-		-		-		-

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Equity Incentive Plan

On April 8, 2016, we adopted the 2016 Equity Incentive Plan (the “Equity Incentive Plan”), which was amended and restated as of June 15, 2017. The maximum number of shares of our common stock available for issuance under the Equity Incentive Plan through the grant of non-qualified stock options, restricted stock, restricted stock units and other awards is 130,000 shares. The purpose of the Equity Incentive Plan is to enable us to attract, motivate and retain key employees and directors and to provide an additional incentive for such individuals through stock ownership and other rights that promote and recognize the financial success and growth of our company.

The Equity Incentive Plan is to be administered by the Board. Subject to the other provisions of the Equity Incentive Plan, the Board has the authority, in its discretion: (i) to grant nonqualified stock options, restricted stock, restricted stock units and other awards, referred to collectively as “Awards”; (ii) to determine the terms and conditions of each Award granted (which need not be identical); (iii) to interpret the Equity Incentive Plan and all Awards granted thereunder; and (iv) to make all other determinations necessary or advisable for the administration of the Equity Incentive Plan. The persons eligible for participation in the Equity Incentive Plan as recipients of Awards include employees, consultants and non-employee directors to our company or any subsidiary or affiliate of our company. In selecting participants, and determining the number of shares of common stock covered by each Award, the Board may consider any factors that it deems relevant.

As of December 31, 2018, we had 42,596 options outstanding under the Equity Incentive Plan.

Director Compensation

The following table sets forth the total compensation of our directors for the year ended December 31, 2018:

Name	Fees Earned or Or Paid in Cash  ($)		Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Non- Qualified Deferred Compensation Earnings ($)		All Other Compensation ($)		Total ($)
Carl Grassi		20,000		-		-		-		-		-		20,000
Fred DiSanto		20,000		-		-		-		-		-		20,000
Brian Hopkins		20,000		-		-		-		-		-		20,000
Jeff Anderson		20,000		-		-		-		-		-		20,000

In 2018, our directors earned $20,000 in fees as compensation for their service. Beginning in 2019, these fees will be earned and paid to directors in equal quarterly installments.

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ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the beneficial ownership of our common stock as of March 1, 2019 by (a) each person who is known by us to beneficially own 5% or more of our common stock, (b) each of our present directors and executive officers, and (c) all of our present directors and executive officers as a group.

Name(1)	Number of Shares Beneficially Owned		Percentage of Shares Beneficially Owned(2)
Executive Officers and Directors:
Carl Grassi (3)		37,037		2.9	%
Fred DiSanto(4)		420,776		33.0
Brian Hopkins(5)		9,313		*
Jeff Anderson(5)		9,313		*
All executive officers and directors as a group (4 persons)		476,439		37.4	%
5% Stockholders:
Ancora Advisors, LLC(6)		396,333		31.1	%

* Less than one percent of outstanding shares.

(1) The address of each person is c/o Regional Brands Inc., 6060 Parkland Boulevard Cleveland, Ohio 44124.

(2) The calculation in this column is based upon 1,274,603 shares of common stock outstanding on March 1, 2019. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock that are currently convertible or exercisable or that are convertible or exercisable within 60 days of March 1, 2019 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

(3) The Shares owned by The Laura L.Grassi Restatement of Trust UAD 3/10/2005, of which Laura L. Grassi, Mr. Grassi's wife, is the trustee.

(4) Includes 259,305 shares owned directly by Merlin Partners LP, 122,786 shares owned directly by Ancora Catalyst Fund LP, 14,242 shares subject to options held by Ancora that are currently exercisable or exercisable within 60 days of March 1, 2019, and 18,147 shares owned directly by Mr. DiSanto’s wife. Ancora is the general partner of each of Merlin Partners LP and Ancora Catalyst Fund LP. Mr. DiSanto is the Chief Executive Officer of Ancora. By virtue of this relationship, Mr. DiSanto may be deemed to beneficially own the shares of common stock owned directly by Merlin Partners LP and Ancora Catalyst Fund LP. Mr. DiSanto disclaims beneficial ownership of the shares that he does not directly own.

(5) Includes 5,610 shares subject to options that are currently exercisable or exercisable within 60 days of March 1, 2019.

(6) Includes 259,305 shares owned directly by Merlin Partners LP, 122,786 shares owned directly by Ancora Catalyst Fund LP, and 14,242 shares subject to options held by Ancora that are currently exercisable or exercisable within 60 days of March 1, 2019. Ancora is the general partner of each of Merlin Partners LP and Ancora Catalyst Fund LP. By virtue of this relationship, Ancora may be deemed to beneficially own the shares of common stock owned directly by Merlin Partners LP and Ancora Catalyst Fund LP. Ancora disclaims beneficial ownership of the shares that it does not directly own.

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ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Management Services Agreements

Ancora

On April 8, 2016 we entered into a Management Services Agreement (the “MSA”) with Ancora, whereby Ancora agreed to provide specified services to us in exchange for a quarterly management fee in an amount equal to 0.14323% of our stockholders’ equity (excluding cash and cash equivalents) as shown on our balance sheet as of the end of each of our fiscal quarters. The management fee with respect to each fiscal quarter is payable no later than 10 days following the issuance of our financial statements for such fiscal quarter, and in any event no later than 60 days following the end of each fiscal quarter. For the fiscal year ended December 31, 2018, Ancora agreed to waive payment of the management fees.

Lorraine Capital, LLC

On November 1, 2016, in connection with the Transactions, BRJ LLC entered into a Management Services Agreement (the “BRJ MSA”) with Lorraine Capital, LLC, a member of BRJ LLC, whereby Lorraine Capital, LLC agreed to provide specified management, financial and reporting services to us in exchange for an annual management fee in an amount equal to the greater of (i) $75,000 or (ii) five percent (5%) of the annual EBITDA (as defined in the BRJ MSA) of BRJ LLC, payable quarterly in arrears and subject to certain adjustments and offsets set forth in the BRJ MSA. The BRJ MSA may be terminated by BRJ LLC, Lorraine Capital, LLC or Regional Brands at any time upon 60 days’ prior written notice and also terminates upon the consummation of a sale of BRJ LLC.

Under its LLC Agreement, BRJ LLC is overseen by a five-member Board of Managers, with three of the initial managers nominated by Lorraine Capital, LLC and two of the initial managers nominated by Regional Brands. In the event the BRJ MSA is terminated for any reason, then either Regional Brands or (in the event the BRJ MSA is terminated by Regional Brands) Lorraine Capital, LLC may elect to have BRJ LLC repurchase the Lorraine Parties’ entire membership interest in BRJ LLC for the fair market value thereof as determined by an independent appraiser (or the amount the Lorraine Parties’ would have received upon the closing of a Qualified Offer, if one is then outstanding). If the membership interests of the Lorraine Parties are so redeemed, Regional Brands will be entitled to remove all of the members of the Board of Managers nominated by Lorraine Capital, LLC and will have the sole right to appoint the full Board of Managers. If the Lorraine Parties’ membership interests are not so redeemed (other than due to a breach of the LLC Agreement), Lorraine Capital, LLC will retain the right to appoint two members of the Board of Managers and Regional Brands will have the right to appoint three members of the Board of Managers. In either of the foregoing cases, the Lorraine Parties’ consent will no longer be required to make any major decisions that would have otherwise required the consent of all of the members under the LLC Agreement. During the years ended December 31, 2018 and 2017, BRJ LLC recorded expenses for Lorraine management fees in the amount of $93,000 and $118,000, respectively. As of December 31, 2018 and 2017, $39,000 and $36,000, respectively, was payable to Lorraine under the BRJ MSA.

Registration Rights Agreement

On April 8, 2016, we entered into a Registration Rights Agreement (the “RRA”) among us and the Purchasers. Under the RRA, we granted to the Purchasers certain registration rights related to the aggregate 370,441 shares of our common stock issued pursuant to the SPA and agreed to certain customary obligations regarding the registration of such shares, including indemnification.

Loan Agreement

Under the Loan Agreement, we agreed to loan $7,500,000 to our subsidiary BRJ LLC. We participated $358,696 of the Subordinated Loan to BRJ Acquisition Partners, LLC, an entity owned by individuals affiliated with BRJ Inc. and Lorraine Capital, LLC. The Subordinated Loan accrues interest at a rate of 6% per annum, payable quarterly on the first day of each calendar quarter. BRJ LLC is required to repay a portion of the principal amount of the Subordinated Loan on each anniversary of the execution of the Loan Agreement. The Subordinated Loan matures on November 1, 2021 and is secured by substantially all of BRJ LLC’s assets. The Subordinated Loan and the security interest created under the Loan Agreement are subordinated to the Credit Facility and the security interest of the lenders under the Credit Facility. All of the covenants contained in the Credit Agreement are incorporated by reference in the Loan Agreement. The Loan Agreement contains customary events of default, including in the case of an event of default under the Credit Facility. See “Note 6. Debt - Senior Subordinated Debt” in the notes to our consolidated financial statements included in this Form 10-K for more information regarding amounts repaid by BRJ LLC under the Subordinated Loan during the years ended December 31, 2018 and 2017.

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Airways Door Service, Inc.

We have a relationship with a union qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations that require union installation and repair services. In connection with the Acquisition, individuals affiliated with Lorraine Capital, LLC acquired 57% of ADSI’s common stock; the remaining common stock is owned by three of BRJ Inc.’s employees. We paid ADSI for its services approximately $1,780,000 and $1,708,000 during the years ended December 31, 2018 and 2017, respectively. In addition, BRJ LLC provides ADSI services utilizing an agreed-upon fee schedule. These services include accounting, warehousing, equipment use, employee benefit administration, risk management coordination and clerical functions. The fee for these services was approximately $55,000 and $50,000 during the years ended December 31, 2018 and 2017, respectively.

Director Independence

We are not currently listed on any national securities exchange that has a requirement that any members of the Board of Directors be independent. However, in evaluating the independence of its members, the Board of Directors utilizes the definition of independence in the rules promulgated by NASDAQ. We believe that Mr. Grassi qualifies as an independent director, as that term is defined by NASDAQ rules.

ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees

Audit fees consist of fees for professional services rendered for the audit of the Company’s consolidated financial statements included in the Company’s reports on Form 10-K and review of financial statements included in its Forms 10-Q, and for services that are normally provided by the auditor in connection with statutory and regulatory filings or engagements.  The aggregate fees billed or to be billed by our principal accountant, Freed Maxick CPAs, P.C. for the audit of the Company’s consolidated financial statements for the years ended December 31, 2018 and 2017 was $88,000 and $84,000, respectively. The Company was not required to have an audit of its internal controls over financial reporting.

Audit Related Fees

There were no audit related fees in 2018 or 2017.

Tax Fees

The aggregate fees billed for professional services rendered by our principal accountant, Freed Maxick CPAs, P.C., for preparation of tax returns during the years ended December 31, 2018 and 2017 was $15,800 and $21,900, respectively.

All Other Fees

There were no other fees incurred in 2018. During 2017, our principal accountant, Freed Maxick CPAs, P.C., billed us $2,400 for work performed in conjunction with SEC correspondence.

Our audit committee pre-approves all auditing services and permissible non-audit services provided to us by our independent registered public accounting firm. All fees listed above were pre-approved by either the audit committee or the Board in accordance with this policy.

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ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(3) Exhibits

The following exhibits are hereby filed as part of this Annual Report on Form 10-K or incorporated by reference.

2.1 Asset Purchase Agreement, dated as of November 1, 2016, by and among B. R. Johnson, Inc., William A. Harfosh, Michael V. Howard, Anthony C. Minieri, Arthur P. Brillanti, B.R. Johnson, LLC, William J. Maggio, Charles A. Rider, Richard F. Gioia and Justin M. Reich (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on November 8, 2016).

3.1	Certificate of Incorporation of Regional Brands Inc., as amended (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
3.2	Amended and Restated Bylaws of Regional Brands Inc., as amended (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
3.3	Certificate of Amendment to the Certificate of Incorporation of Regional Brands Inc. (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Company on March 3, 2017).
4.1	Form of Subscription Agreement of Regional Brands Inc., dated as of November 1, 2016 (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.1	Credit and Security Agreement, dated as of November 1, 2016, by and among B.R. Johnson, LLC, the lending institutions party thereto and KeyBank National Association (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.2	Subordinated Promissory Note, dated as of November 1, 2016, issued by B.R. Johnson, LLC in favor of B. R. Johnson, Inc. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.3	Loan and Security Agreement, dated as of November 1, 2016, by and between B.R. Johnson, LLC and Regional Brands Inc. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.4	Management Services Agreement, dated as of November 1, 2016, by and between B.R. Johnson, LLC, and Lorraine Capital, LLC (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.5	Limited Liability Company Agreement of B.R. Johnson, LLC, dated as of November 1, 2016, by and among Lorraine Capital, LLC, Regional Brands Inc. and BRJ Acquisition Partners, LLC (Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the Company on November 8, 2016).
10.6	Securities Purchase Agreement among the Company and Merlin Partners LP, Ancora Catalyst Fund LP, and Steven N. Bronson, dated as of April 8, 2016 (Incorporated by reference to Exhibit 10.25 to the Current Report on Form 8-K filed by the Company on April 8, 2016).
10.7	Registration Rights Agreement among the Company and Merlin Partners LP, Ancora Catalyst Fund LP, and Steven N. Bronson, dated as of April 8, 2016 (Incorporated by reference to Exhibit 10.26 to the Current Report on Form 8-K filed by the Company on April 8, 2016).

10.8	Management Services Agreement between the Company and Ancora Advisors, LLC, dated as of April 8, 2016 (Incorporated by reference to Exhibit 10.27 to the Current Report on Form 8-K filed by the Company on April 8, 2016).
10.9#	Regional Brands Inc. Amended and Restated 2016 Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on June 21, 2017).

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14.1	Code of Ethics (Incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004).
21.1*	Subsidiaries of Regional Brands Inc.
31.1*	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and15d-14(a)
31.2*	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and15d-14(a)
32**	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. 1350
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.

** This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

# Indicates management contract or compensatory plans or arrangements required to be filed as an exhibit to this Annual Report on Form 10-K.

ITEM 16 - FORM 10-K SUMMARY

Not applicable.

28

REGIONAL BRANDS INC.

FINANCIAL STATEMENTS

CONTENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Financial Statements
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-4
Consolidated Statements of Changes in Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to the Consolidated Financial Statements	F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Regional Brands Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Regional Brands Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, changes in stockholders' equity and cash flows for the years then ended and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Freed Maxick CPAs, P.C.

We have served as the Company’s auditor since 2016.

Buffalo, New York

March 14, 2019

F-2

REGIONAL BRANDS INC. 

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	5,207,517		$	4,353,567
Short-term investments		2,194,216			1,967,145
Accounts receivable, net of allowance for doubtful accounts		7,773,564			6,557,158
Inventories, net		1,163,866			1,242,723
Costs and estimated earnings in excess of billings on uncompleted contracts		1,329,640			1,238,370
Prepaid expenses and other current assets		478,859			447,539
Total current assets		18,147,662			15,806,502
Equipment, net		1,027,812			572,568
Intangibles, net		3,400,000			4,600,000
Goodwill		3,045,481			3,013,287
Other assets		297,174			144,729
Deferred taxes		349,339			288,791
Total assets	$	26,267,468		$	24,425,877
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,495,549		$	1,357,647
Accrued expenses and other current liabilities		806,281			1,081,868
Line of credit		2,691,376			1,812,454
Current portion of senior subordinated note		28,680			23,900
Current portion of subordinated term note		250,000			62,500
Billings in excess of costs and estimated earnings on uncompleted contracts		515,242			343,862
Total current liabilities		5,787,128			4,682,231
Senior subordinated note, net		220,529			224,063
Subordinated term note		2,187,500			2,437,500
Total liabilities		8,195,157			7,343,794
Commitments  (Note 11)
Stockholders' equity:
Preferred stock $.01 par value, 50,000 shares authorized; issued and outstanding -none		-			-
Common stock $.00001 par value, 3,000,000  shares authorized and 1,274,603 shares issued and outstanding, respectively		13			13
Additional paid-in capital		20,428,933			20,373,257
Accumulated deficit		(2,183,276	)		(3,203,781	)
Total Regional Brands Inc. stockholders' equity		18,245,670			17,169,489
Noncontrolling interest in consolidated subsidiary		(173,359	)		(87,406	)
Total  stockholders’ equity		18,072,311			17,082,083
Total liabilities and stockholders' equity	$	26,267,468		$	24,425,877

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

F-3

REGIONAL BRANDS INC.

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
	2018			2017
Net Sales	$	39,987,861		$	36,927,284
Cost of sales		28,780,366			25,339,989
Gross profit		11,207,495			11,587,295
Operating expenses:
Selling		4,508,387			4,724,571
General and administrative		3,951,957			3,822,402
Amortization of intangible assets		1,251,022			1,716,667
Total operating expenses		9,711,366			10,263,640
Operating income		1,496,129			1,323,655
Other income (expense):
Other income		128,032			103,905
Interest expense		(263,548	)		(223,749	)
Interest income		25,176			21,394
		(110,340	)		(98,450	)
Income before income taxes		1,385,789			1,225,205
Income tax expense		306,182			364,072
Net income		1,079,607			861,133
Less: Income to noncontrolling interest		59,102			51,009
Income attributable to common stockholders		1,020,505			810,124
Distributions to certain noncontrolling stockholders		(119,560	)		(197,016	)
Income available to common stockholders	$	900,945		$	613,108
Income per common share- basic and diluted	$	0.71		$	0.48
Weighted average common shares outstanding - basic and diluted		1,274,603			1,274,603

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

F-4

REGIONAL BRANDS INC.

 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

	Common Stock				Additional		Accumulated			Noncontrolling			Stockholders’
	Shares		Amount		Paid-in capital		Deficit			Interest			Equity
Balance at January 1, 2017		1,274,603	$	13	$	20,311,645	$	(4,013,905	)	$	107,480		$	16,405,233
Noncontrolling interest distribution		-		-		-		-			(245,895	)		(245,895	)
Stock based compensation		-		-		61,612		-			-			61,612
Net income		-		-		-		810,124			51,009			861,133
Balance at December 31, 2017		1,274,603		13		20,373,257		(3,203,781	)		(87,406	)		17,082,083
Noncontrolling interest distribution		-		-		-		-			(145,055	)		(145,055	)
Stock based compensation		-		-		55,676		-			-			55,676
Net income		-		-		-		1,020,505			59,102			1,079,607
Balance at December 31, 2018		1,274,603	$	13	$	20,428,933	$	(2,183,276	)	$	(173,359	)	$	18,072,311

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

F-5

REGIONAL BRANDS INC.

 CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2018			2017
Cash flows from operating activities:
Net income	$	1,079,607		$	861,133
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation		55,676			61,612
Depreciation and amortization		175,278			122,503
Amortization of debt issuance costs		25,146			25,146
Amortization of intangible assets		1,251,022			1,716,667
Unrealized loss (gain) on investments		7,231			(3,960	)
Change in allowance for doubtful accounts		-			(50,000	)
Change in inventory obsolescence reserve		4,000			5,500
Loss on sale of equipment		-			7,831
Deferred income taxes		(60,549	)		(288,791	)
Changes in operating assets and liabilities:
Accounts receivable		(1,216,406	)		(789,789	)
Inventories		74,857			346,041
Costs & estimated earnings in excess of billings on uncompleted contracts		(91,270	)		(344,109	)
Prepaid expenses and other assets		(183,939	)		(246,666	)
Accounts payable		137,902			890,399
Accrued expenses and other current liabilities		(311,966	)		462,993
Billings in excess of costs and estimated earnings on uncompleted contracts		171,380			(95,021	)
Net cash provided by operating activities		1,117,969			2,681,489
Cash flows from investment activities:
Purchase of equipment		(535,347	)		(241,074	)
Business acquisition		(203,216	)		-
Working capital liability due to Seller		-			(1,107,872	)
Purchase of short- term investments		(234,302	)		(1,010,977	)
Proceeds from equipment sales		25,000			-
Net cash used by investment activities		(947,865	)		(2,359,923	)
Cash flows from financing activities:
Repayment of senior subordinated note		(23,900	)		(14,310	)
Repayment of subordinated term note		(62,500	)		-
Net borrowings (repayments) on line of credit		878,922			(460,256	)
Noncontrolling interest distributions		(108,676	)		(245,895	)
Net cash provided (used) by financing activities		683,846			(720,461	)
Net increase (decrease) in cash and cash equivalents		853,950			(398,895	)
Cash  and cash equivalents at beginning of  year		4,353,567			4,752,462
Cash and cash equivalents at end of year	$	5,207,517		$	4,353,567
Cash paid for:
Income taxes	$	131,000		$	863,000
Interest	$	257,200		$	307,900
Non-cash investing and financing activities:
Accrued distribution to noncontrolling shareholder	$	36,379		$	-

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

F-6

REGIONAL BRANDS INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Regional Brands Inc. (“the Company”, “we” and “us”) is a holding company formed to acquire substantial ownership in regional companies with strong brand recognition, stable revenues and profitability. The Company has been pursuing a business strategy whereby it 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, the Company's majority-owned subsidiary, B.R. Johnson, LLC (“BRJ LLC”) acquired (the “Acquisition”) substantially all of the assets of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty products for use in commercial and residential buildings (the “Business”). Following the Acquisition, BRJ LLC carried on the business and operations of BRJ Inc.

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 $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 “Subordinated term note”), which is subordinate to the loan described below. The Company provided $10.95 million in debt and equity financing to complete the Acquisition, including $7.14 million of the subordinated loan (the " Senior subordinated note") and $3.81 million in preferred equity of BRJ LLC with the remainder from bank financing, the Subordinated term 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).

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

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

Common Shares Issued and Earnings 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 per share. Basic earnings per share reflect the actual weighted average number of shares issued and outstanding during the period. Diluted earnings 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. In calculating income per common share, income attributable to common shareholders is reduced by distributions made to certain noncontrolling interests in the Company’s consolidated subsidiary.

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

F-7

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 tables below presents the Company's assets and liabilities measured at fair value on a recurring basis aggregated by the level in the fair value hierarchy within which those measurements fall.

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

Assets	Level 1		Level 2		Level 3		December 31, 2017
Marketable Equity Securities	$	1,967,145	$	-	$	-	$	1,967,145
Money Market Funds	$	4,353,567	$	-	$	-	$	4,353,567

The Company did not have any fair value measurements within Level 2 or Level 3 of the fair value hierarchy as of December 31, 2018 or 2017.

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 in the accompanying balance sheet are money market funds and certificates of deposit whose adjusted costs approximate fair value. 

Short-Term Investments – The Company’s investments consist of investments in marketable equity related securities and money market funds, which 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 using quoted market prices in active markets for each marketable security. Prior to 2018, any unrealized gains or losses on these securities were recognized through other comprehensive income (loss).  Beginning on January 1, 2018 with the adoption of Accounting Standards Update ("ASU") 2016-01, all of our marketable equity securities and money market funds will continue to be carried at fair value as noted above, with any unrealized gains or losses on the securities recognized as a component of other income included in our Consolidated Statements of Income. As a result of the adoption of ASU 2016-01, the accumulated deficit as of December 31, 2017 was increased by $1,504 and the net income for 2017 was increased by $3,960.

F-8

Revenue Recognition - The Company adopted ASC Topic 606, revenue recognition, effective January 1, 2018 and utilized the modified retrospective approach and applied the guidance in Topic 606 to those contracts which were not completed as of that date. The adoption of Topic 606 did not impact the timing of revenue recognition in our Consolidated Financial Statements for the current or prior interim or annual periods. Accordingly, no adjustments have been made to opening retained earnings or prior period results.

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

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

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

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

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

Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates. Revisions in estimated profits for contracts accounted for under the POC method are made in the periodin which circumstances requiring the revision become known. During 2018, the effect of changes in estimated contract costs decreased gross profit by approximately $197,000, decreased net income by approximately $146,000 and decreased income per common share (net of income taxes) by $0.11. During 2017, the effect of changes in estimated contract costs decreased gross profit by approximately $193,000, decreased net income by approximately $119,000 and decreased income per common share (net of income taxes) by $0.09.

Accounts Receivable and Allowance for Doubtful Accounts- Accounts receivable are recorded at their invoiced amount, net of any allowance for doubtful accounts, and do not bear interest. We may be exposed to potential credit risk if our customers should encounter financial difficulties. The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts receivable balances, credit quality of our customers, current economic conditions and other factors that may affect the customers’ ability to pay. As of December 31, 2018 and 2017, our allowance for doubtful accounts was $100,000. As of December 31, 2018 and 2017, we had billed retainage receivables of $654,000 and $769,000, respectively, included in accounts receivable in the accompanying consolidated balance sheets.

Inventories- Inventory is valued at the lower of cost (first-in, first-out) or net realizable value. Inventory included in the accompanying consolidated balance sheets is comprised of purchased materials and other materials that have been assigned to a job deemed to be work-in-process. As of December 31, 2018 and 2017, the work-in-process inventory was approximately $414,000 and $676,000, respectively. We maintain an inventory allowance for slow-moving and unused inventories based on the historical trend and estimates. The allowance was approximately $70,000 and $66,000 as of December 31, 2018 and 2017, respectively.

F-9

Equipment- Equipment is stated at cost. Depreciation and amortization is computed using straight-line methods at rates adequate to amortize the cost of the various classes of assets over their estimated service lives, ranging from two to fifteen years.

Long lived assets, Identifiable Intangible Assets and Goodwill - Long lived assets, identifiable intangibles assets and goodwill are reviewed periodically for impairment or when events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. With respect to goodwill, the Company tests for impairment on an annual basis or in interim periods if an event occurs or circumstances change that may indicate the fair value is below its carrying amount. Factors that could trigger an impairment review, include the following: (a) significant underperformance relative to expected historical or projected future operating results; (b) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (c) significant negative industry or economic trends.

Impairments of long-lived assets are recognized if future undiscounted cash flows from operations are not expected to be sufficient to recover the carrying value of the long-lived assets. The carrying amounts are then reduced to fair value, which is typically determined by using a discounted cash flow model.

When performing its evaluation of goodwill and identifiable intangible assets for impairment, the Company may elect to perform a qualitative assessment that considers economic, industry and company-specific factors. If, after completing the assessment, it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company proceeds to a quantitative test. The Company may also elect to perform a quantitative test instead of a qualitative test.

Quantitative testing requires a comparison of the fair value of the reporting unit to its carrying value. The Company uses the discounted cash flow method to estimate the fair value of the reporting unit. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth rate and the weighted average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured.

There were no impairment charges in any of the periods presented in the accompanying consolidated statements of income.

Acquisitions- We account for our acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations.

When we acquire a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at their respective estimated fair values. We record any premium over the fair value of net assets acquired as goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in determining their fair value. The way we characterize the assets has important implications, as long-lived assets with definitive lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment. With respect to determining the fair value of assets, the most subjective estimates involve valuations of long-lived assets, such as property, plant, and equipment as well as identified intangible assets. We use all available information to make these fair value determinations and may engage independent valuation specialists to assist in the fair value determination of the acquired long-lived assets. The fair values of long-lived assets are determined using valuation techniques that use discounted cash flow methods, independent market appraisals and other acceptable valuation techniques.

Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions. As of December 31, 2017, two customers accounted for 33% of the accounts receivable. There were no such concentrations of customer accounts receivable balances at the end of 2018.

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.

F-10

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 benefits at December 31, 2018 and 2017. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense. During 2018 and 2017, the Company recognized no interest and penalties.

Recent Accounting Pronouncements

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 Company will adopt the new guidance effective January 1, 2019 using the modified retrospective approach without adjusting comparative periods.  We will utilize the practical expedients provided by the guidance including the package of practical expedients to not reassess whether the contract contains a lease, lease classification, and direct costs.  Accordingly, since our current lease agreements (see Note 11), which include real estate and vehicles, are operating leases, they will continue to be accounted for as operating leases under the new standard.  Upon adoption, we have estimated that we will record right-of-use-assets and lease liabilities of approximately $1.2 million.  We do not expect to record any cumulative effect adjustment at the date of adoption. 

NOTE 2. ACQUISITIONS

Effective June 1, 2018, the Company acquired certain assets of R&D Fabricators, Inc. (R&D) for a purchase price of approximately $203,000. R&D is engaged in the business of the fabrication of aluminum curtain walls, store fronts, doors and frames.  The fair value of assets acquired include $120,000 of equipment and $51,000 of acquired backlog, resulting in goodwill of approximately $32,000. The operating results of R&D are included in the accompanying statement of income from the date of acquisition. In light of the size and value of the acquisition and its relative insignificance to the Company, pro forma disclosures of revenue and earnings are not included herein.

During 2017, a payment of $1,107,872 was made to the seller in the BRJ Inc. acquisition to satisfy our working capital liability.

NOTE 3. REVENUES AND CONTRACTS IN PROCESS

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

	Year Ended December 31,
	2018		2017
Contracts under percentage of completion	$	21,505,493	$	21,888,150
All other		18,482,368		15,039,134
Total revenue	$	39,987,861	$	36,927,284

F-11

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

	December 31
	2018			2017
Costs incurred on uncompleted contracts	$	9,619,587		$	8,404,168
Estimated Earnings		3,499,758			3,695,967
		13,119,345			12,100,135
Less billings to date		(12,304,947	)		(11,205,627	)
	$	814,398		$	894,508
Included on balance sheet as follows:
Under current assets:
Costs and estimated earnings in excess of billings on uncompleted contracts	$	1,329,640		$	1,238,370
Under current liabilities:
Billings in excess of costs and estimated earnings on uncompleted contracts	$	(515,242	)	$	(343,862	)
	$	814,398		$	894,508

Certain amounts in the table above and the associated amounts included in the balance sheet as of December 31, 2017 have been reclassified to conform to the December 31, 2018 presentation. The Company had unbilled revenues of $942,885 and $1,194,234 at December 31, 2018 and 2017, respectively, which are included in Costs and estimated earnings in excess of billings on the balance sheet.

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed. As of December 31, 2018, the aggregate amounts of the transaction prices allocated to the remaining performance obligations, for contracts to be recognized using the percentage of completion method, were $14 million.

NOTE 4. EQUIPMENT

Equipment is summarized as follows:

	Estimated	December 31,
	Useful Life	2018			2017
Vehicles	3 – 5 years	$	348,058		$	377,024
Warehouse and shop tools and equipment	2 – 15 years		327,155			175,547
Office and showroom furniture and computer equipment	2 – 7 years		152,384			113,803
Computer software	2 – 5 years		503,408			41,664
			1,331,005			708,038
Less accumulated depreciation and amortization			(303,193	)		(135,470	)
		$	1,027,812		$	572,568

Included in computer software are costs of approximately $423,000 for an enterprise resource planning system that will be implemented and placed into service in 2019. Such costs include $50,000 of internal labor. Amortization of the computer software will begin once the asset is placed into service.

F-12

NOTE 5. INTANGIBLE ASSETS

Intangible assets that arose from acquisitions consist of the following:

	Estimated	December 31,
	life	2018			2017
Covenants not to compete	5 years	$	6,000,000		$	6,000,000
Less : accumulated amortization			(2,600,000	)		(1,400,000	)
Net		$	3,400,000		$	4,600,000

Future amortization expense for the years ending December 31,

2019	$	1,200,000
2020		1,200,000
2021		1,000,000
Total	$	3,400,000

NOTE 6. DEBT

Credit Facility

In November 2016, BRJ LLC entered into a credit agreement with KeyBank, N.A. Under the credit agreement, BRJ LLC may borrow up to an aggregate amount of $6,000,000 (the “Credit Facility”) under revolving loans and letters of credit, with a sublimit of $500,000 for letters of credit. The Credit Facility is payable upon demand of KeyBank, N.A., or the lenders, or upon acceleration as a result of an event of default.

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 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. For the year December 31, 2018, the Company was in compliance with these covenants.

The effective interest rate at December 31, 2018 was 4.94% (3.94% at December 31, 2017). The aggregate borrowings outstanding under the Credit Facility at December 31, 2018 were $2,691,376 ($1,812,454 at December 31, 2017). As of December 31, 2018, the amount borrowed is net of the cash sweep account totaling approximately $169,000 (none at the end of 2017). The bank has also issued a letter of credit on behalf of the Company in the amount of $250,000 that expires on December 1, 2019.

Senior Subordinated Debt

BRJ LLC borrowed an aggregate of $7,500,000 (the “Subordinated Loan”) pursuant to a Loan and Security Agreement (the “Loan Agreement") with the Company. The Company provided $7,141,304 of the funding and $358,696 was participated. The Subordinated Loan accrues interest at a rate of 6% per annum, payable quarterly on the first day of each calendar quarter. BRJ LLC is required to repay a portion of the principal amount of the Subordinated Loan on each anniversary of the execution of the Loan Agreement. The Subordinated Loan matures on November 1, 2021 and is secured by substantially all of BRJ LLC’s assets. The Subordinated Loan and the security interest created under the Loan Agreement are subordinated to the Credit Facility and the security interest of the lenders under the Credit Facility. All of the covenants contained in the Credit Agreement are incorporated by reference in the Loan Agreement. The Loan Agreement contains customary events of default, including in the case of an event of default under the Credit Facility.

BRJ LLC incurred costs of $125,730 in connection with the borrowings. This amount is treated as debt discount and adjusted with the carrying value of debt. The debt discount is being amortized over the life of the debt. Amortization expense was $25,146 during each of 2018 and 2017, respectively, and the unamortized debt discount balance at December 31, 2018 and 2017 was $71,247 and $96,393, respectively.

F-13

During 2018 and 2017, BRJ LLC repaid $500,000 and $300,000, respectively, of the borrowings including $476,100 and $285,660, respectively, to the Company with the balance paid to BRJ Acquisition Partners, LLC.

The amount of the debt that was participated, net of the unamortized debt discount, is shown in the accompanying balance sheet as Senior Subordinated Debt and had a balance outstanding of $249,209 and $247,963, respectively, at December 31, 2018 and 2017.

Subordinated term note

On November 1, 2016, BRJ LLC issued a $2,500,000 subordinated promissory note to BRJ Inc. as part of the purchase price for the Acquisition (the “Note”). The Note is payable to BRJ Inc. and accrues interest at a rate of 5.25% per annum, payable quarterly, with the principal amount of the Note payable in equal quarterly installments of $62,500 commencing on November 1, 2018 and maturing on November 30, 2021. The Note is subordinated to the Credit Facility and the Loan Agreement.

Scheduled maturities of long-term debt at December 31, 2018 are as follows:

2019	$	278,680
2020		283,460
2021		2,195,816
		2,757,956
Less: Debt financing costs, net		(71,247	)
	$	2,686,709

NOTE 7. STOCKHOLDERS’ EQUITY

On March 2, 2017, the Company filed a certificate of amendment to the Company’s Certificate of Incorporation with the Delaware Secretary of State to reduce the number of authorized shares to be issued of the Company’s common stock, par value $0.00001 per share, from 50,000,000 to 3,000,000 shares and to reduce the number of authorized shares to be issued of Preferred Stock, par value $.01 per share, 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.

On November 1, 2016, BRJ LLC sold 4.78% of its preferred membership interests for aggregate net proceeds of $128,534. This amount is included in noncontrolling interest in the accompanying consolidated financial statements. BRJ LLC’s Limited Liability Company Agreement provides for distributions of available cash to be made to the preferred members until they receive a cumulative preferred return of five percent per annum, compounded annually, on their unreturned preferred capital.

NOTE 8. EQUITY INCENTIVE PLAN

On April 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “Equity Incentive Plan”), which was amended and restated as of June 15, 2017. 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, restricted stock, restricted stock units and other awards is 130,000. 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 expenses related to all stock-based awards. Such awards include options, warrants and stock grants. The Company did not grant any options during 2018 and 2017. Prior to 2017, the Company issued stock options that vest in 60 equal monthly installments and expire after15 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.

F-14

The following shows the significant assumptions used to compute the share-based compensation expense for stock options revalued during 2018 which were granted to non-employees during 2016:

Volatility	40.0	%
Expected term	7 years
Risk-free interest rate	2.51	%
Expected dividend yield	0	%

There were no options granted, exercised, cancelled or forfeited during 2018 and 2017. A summary of all stock options is as follows:

			Weighted		Weighted
			Average		Average	Aggregate
			Exercise		Contractual	Intrinsic
	Options		Price		Life	Value
Outstanding, December 31, 2018 and 2017		42,596	$	16.00	12.3 years	$	-
Exercisable, December 31, 2018		22,790	$	16.00	12.3 years	$	-
Expected to vest, December 31, 2018		19,806	$	16.00	12.3 years	$	-

During 2018 and 2017, the fair value of options that vested amounted to approximately $55,676 and $ 61,612 respectively, and stock compensation expense for options vested was $55,676 and $61,612, respectively. The weighted-average grant date fair value of options vested during 2018 and 2017 was $5.58 and $7.08, respectively.

At December 31, 2018, there was approximately $111,000 of unrecognized compensation cost related to non-vested options. This cost is expected to be recognized over a weighted average period of approximately 2.3 years.

NOTE 9. EMPLOYEE RETIREMENT PLAN

The Company maintains a defined contribution retirement plan under Section 401(K) of the Internal Revenue Code. All full-time employees of BRJ LLC are eligible to participate. The company made contributions to the plan totaling approximately $114,000 and $117,000 during 2018 and 2017, respectively.

NOTE 10. RELATED PARTY TRANSACTIONS

On April 8, 2016, the Company entered into a Management Services Agreement (the “MSA”), between the Company and Ancora Advisors, LLC (“Ancora”), whereby Ancora 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 payable 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 2018 and 2017, Ancora agreed to waive payment of the management fees.

On November 1, 2016, in connection with the Acquisition, BRJ LLC entered into a Management Services Agreement (the “BRJ MSA”) with Lorraine Capital, LLC, (“Lorraine”) a member of BRJ LLC, whereby Lorraine agreed to provide specified management, financial and reporting services to BRJ LLC in exchange for an annual management fee in an amount equal to the greater of (i) $75,000 or (ii) five percent (5%) of the annual EBITDA (as defined in the BRJ MSA) of BRJ LLC, payable quarterly in arrears and subject to certain adjustments and offsets set forth in the BRJ MSA. The BRJ MSA may be terminated by BRJ LLC, Lorraine or Regional Brands at any time upon 60 days’ prior written notice and also terminates upon the consummation of a sale of BRJ LLC. During 2018 and 2017, BRJ LLC recorded expenses for Lorraine management fees in the amount of $93,000 and $118,000, respectively. As of December 31, 2018 and 2017, $39,000 and $36,000, respectively, was payable to Lorraine under the BRJ MSA.

BRJ LLC has a relationship with a union qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous in situations that require union installation and repair services. In connection with the Acquisition, individuals affiliated with Lorraine acquired 57% of ADSI’s common stock; the remaining common stock is owned by three of BRJ LLC’s employees. BRJ LLC paid ADSI for its services approximately $1,780,000 and $1,708,000 during 2018 and 2017, respectively. In addition, BRJ LLC provides ADSI services utilizing an agreed-upon fee schedule. These services include accounting, warehousing, equipment use, employee benefit administration, risk management coordination and clerical functions. The fee for these services was approximately $55,000 and $50,000 for 2018 and 2017, respectively.

F-15

NOTE 11. COMMITMENTS

The Company leases its primary facility in East Syracuse, NY under a five year agreement that expires on October 31, 2021 with an option to extend the term for an additional five years. The Company also leases a facility in Rochester, NY that expires on July 31, 2019 and a facility in Buffalo, NY that expires on December 31, 2023. Rent expense for these facilities amounted to $319,000 and $306,000 for 2018 and 2017, respectively. The minimum lease payments under the agreements are as follows:

2019	$	345,000
2020		330,000
2021		284,000
2022		54,000
2023		54,000
Total	$	1,067,000

The Company also leases delivery vehicles under noncancellable operating leases that expire in 2024. The minimum lease payments in 2019 through 2024 are approximately $50,000 per year.

The Company is a member of a captive insurance entity, to provide for the potential liabilities for certain risks including workers’ compensation, general liability, and automotive. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors and severity factors. As of December 31, 2018 and 2017 no liability has been recorded because a material liability for additional costs is considered remote. As a member of the captive insurance entity, the Company was required to provide an equity contribution of $30,000 and dividend pool contributions of $167,000 which are included in other assets in the accompanying balance sheets as of December 31, 2018. Also, as a member of the captive, we are entitled to dividends when we have favorable experience resulting in a positive dividend pool balance.  The dividends are payable starting in 2020, subject to the approval of the captives' Board of Directors.  The amount of cumulative dividends earned each year will increase or decrease depending on claims experience.  In 2018, the Company recognized a dividend receivable of $100,000 due to favorable claims experience, which is included in Other assets in the Consolidated Balance Sheet.  The dividend income was recorded as a reduction of insurance expense which is part of General & Administrative Expenses in the Consolidated Statements of Income.

NOTE 12. INCOME TAXES

The income tax provision (benefit) for 2018 and 2017 is summarized in the following table.

	Year Ended December 31,
	2018			2017
Current:
Federal	$	270,445		$	548,082
State		96,286			104,781
Total current		366,731			652,863
Deferred
Federal		229,019			(37,338	)
State		(7,772	)		(38,625	)
Total deferred		221,247			(75,963	)
Less decrease in valuation allowance		(281,796	)		(212,828	)
Net deferred		(60,549	)		(288,791	)
Total income tax provision	$	306,182		$	364,072

F-16

The significant components of the deferred tax assets and liabilities are summarized below.

	Year Ended December 31,
	2018			2017
Deferred tax assets (liabilities):
Net operating loss carryforwards	$	—		$	281,796
Investment in subsidiary		335,402			303,801
Stock compensation		42,869			—
Other		1,989			—
Total		380,260			585,597
Less valuation allowance		—			(281,796	)
Total deferred tax assets		380,260			303,801
Deferred tax liabilities
State income taxes		(18,246	)		—
Prepaid expenses		(12,675	)		(15,010	)
Total deferred tax liabilities		(30,921	)		(15,010	)
Net deferred income tax assets	$	349,339		$	288,791

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent (the Company’s marginal tax rate in 2017 and prior years was 34%) to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; and (3) changing rules related to usage and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017. The Company recorded $131,000 of income tax expense in 2017 related to the remeasurement of its net deferred tax asset at December 31, 2017, which represented a 10.3% increase in the 2017 effect tax rate.

The Company has federal net operating loss carryforwards (“NOL’s”) that are subject to Internal Revenue Code Section 382 ("Section 382"), which 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 occurred. 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. Due to the uncertainty of realizing the Section 382 NOL’s, a full valuation allowance was recorded to offset the related deferred tax asset. In 2018, it was determined that the company will be unable to utilize any of its Section 382 NOL’s to offset future taxable income and accordingly, wrote off its related deferred tax assets and reduced the related valuation allowance.

During 2017, the Company 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 Section 382. This was due to a recent consistency in earnings, a strong earnings history of B.R. Johnson, Inc., which was a recent acquisition, and favorable projections.

The Company files income tax returns in the U.S. federal jurisdiction and in certain states. The tax years 2015-2017 generally remain open to examination by these taxing authorities.

F-17

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 income is summarized in the following table.

	Year Ended December 31,
	2018			2017
Statutory United States Federal rate		21.0	%		34.0	%
State income taxes, net of federal benefit		4.4			3.2
Permanent differences and other adjustments		(3.3	)		(1.0	)
Write off of NOL Asset		20.3			—
Changes in valuation reserves		(20.3	)		(16.7	)
Change in tax rate		-			10.3
Effective tax rate		22.1	%		29.8	%

F-18

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		REGIONAL BRANDS INC.
March 14, 2019	By:	/s/ Fred DiSanto
		Fred DiSanto
		Chief Executive Officer
		(Principal Executive, Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

March 14, 2019	By:	/s/ Fred DiSanto
		Fred DiSanto
		Chief Executive Officer and Director
		(Principal Executive, Financial and Accounting Officer)
March 14, 2019	By:	/s/ Carl Grassi
		Carl Grassi
		Chairman of the Board
March 14, 2019	By:	/s/ Brian Hopkins
		Brian Hopkins
		Director
March 14, 2019	By:	/s/ Jeff Anderson
		Jeff Anderson
		Director