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

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

Concentration of Credit Risk – Amounts due from a single customer represented 15.4% of Accounts Receivable at September 30, 2018.

Inventories- Inventory is comprised of purchased materials and other materials that have been assigned to a job deemed to be work-in-process. As of JuneSeptember 30, 2018 and December 31, 2017, the work-in-process inventory was $948,127$911,625 and $ 676,153, respectively and is included in inventories in the accompanying consolidated balance sheet. We maintain an inventory allowance for slow-moving and unused inventories based on the historical trend and estimates. The allowance was approximately $72,000 and $66,000 at JuneSeptember 30, 2018 and December 31, 2017, respectively.

Common Shares Issued and Earnings (Loss) Per Share - Common shares issued are recorded based on the value of the shares issued or consideration received, including cash, services rendered or other non-monetary assets, whichever is more readily determinable. The Company presents basic and diluted earnings (loss) per share. Basic earnings (loss) per share reflect the actual weighted average number of shares issued and outstanding during the period. Diluted earnings (loss) per share is computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued, such as those issuable upon exercise of outstanding stock options or conversion of convertible securities. In a loss period, the calculation for basic and diluted loss per share is considered to be the same, as the impact of the issuance of any potential common shares would be anti-dilutive. During the three and sixnine months ended JuneSeptember 30, 2018, since the exercise prices of the outstanding stock options were above the average market price of our common stock during the period, the outstanding stock options were considered anti-dilutive. In calculating income (loss) per common share, income attributable to common shareholders is reduced by distributions made to certain noncontrolling interests in the Company’s consolidated subsidiary. A reconciliation of income attributable to common shareholders to the amounts used to calculate income(loss)income per common share - basic and diluted is as follows:included on the face of the consolidated statements of income.

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

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

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

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

Our short-term investments consist of investments in marketable equity related securities and money market funds. All of these marketable securities are accounted for as available-for-sale securities, which are carried at fair value using quoted market prices in active markets for each marketable security. 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 on our Condensed Consolidated Statements of Income. As a result of the adoption of ASU 2016-01, the accumulated deficit for the year ended December 31, 2017 was increased by $1,504 and the net income for the sixnine months ended JuneSeptember 30, 2017 was decreased by $1,476.$1,576.

The tables below present the Company's assets and liabilities measured at fair value on a recurring basis as of JuneSeptember 30, 2018 and December 31, 2017 aggregated by the level in the fair value hierarchy within which those measurements fall.

Recent Accounting Pronouncements- In May 2014, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers”. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”); ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”); and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The Company adopted ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “new revenue standards”) effective January 1, 2018 utilizing the modified retrospective approach and applied the guidance 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. See Note 2, “Revenue Recognition,” for further information.

In February 2016, the FASB issued an accounting standard update ASU 2016-02, “Leases" to replace existing lease accounting guidance. This pronouncement is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. Expenses associated with leases will continue to be recognized in a manner similar to current accounting guidance. This pronouncement is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The adoption is required to be applied on a modified retrospective basis for each prior reporting period presented. The Company has not yet determined the effect that the adoption of this pronouncement may have on its financial position and/or results of operations.

In August 2016, the FASB issued Accounting Standards Update 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”. The standard makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The new standard requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company has adopted this standard effective January 1, 2018. Adoption of this standard did not impact our Consolidated Financial Statements for the current or prior periods presented.

In May 2017, the FASB issued Accounting Standards Update 2017-09, “Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting”, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The standard is to be applied on a prospective basis to an award modified on or after the adoption date. The Company has adopted this standard effective January 1, 2018. Adoption of this standard did not impact our Consolidated Financial Statements.

In June 2018, the FASB issued ASU No.2018-07, "Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting." The FASB issued this update as part of its Simplification Initiative. The amendments in this update expand the scope of Topic 718 to include share-based payments for acquiring goods and services from nonemployees.  An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option model and the attribution of cost.  The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The amendments for this update are effective for public companies for fiscal years beginning after December 15, 2018. Early adoption is permitted but no earlier than the adoption date of Topic 606. An entity should only remeasure liability-classified awards that have not been settled by the date of adoptions and equity classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.  Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date.  The Company believes the adoption of this standard on our consolidated financial statements and related disclosures will not be material.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is in the process of evaluating the impact of the final rule on its consolidated financial statements.

NOTE 2. REVENUE RECOGNITION

Effective January 1, 2018, we recognize revenue in accordance with ASC Topic 606 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. This business 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 payment from the owner. For the remainder of our business, standard terms are that amounts are due 30 days after invoice date. For this business, 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 service.services. The majority of our performance obligations are typically completed within one year.

The following table presents our revenues disaggregated by contracts accounted for using the percentage of completion method. Sales and usage taxes are excluded from revenues:

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed. As of JuneSeptember 30, 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 $14.7$14.6 million.

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.

NOTE 3. CONTRACT ASSETS AND LIABILITIES

Cost of revenue for our long-term contracts includes direct contract costs, such as materials and labor, and indirect costs that are attributable to contract activity. The timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Projects with costs and estimated earnings recognized to date in excess of cumulative billings is reported on the accompanying balance sheet as an asset as costs and estimated earnings in excess of billings. Projects with cumulative billings in excess of costs and estimated earnings recognized to date is reported on the accompanying balance sheet as a liability as billings in excess of costs and estimated earnings. The following is information with respect to uncompleted contracts:

The Company had unbilled revenues of $1,219,379$1,097,565 and $1,043,082 at the end of JuneSeptember 30, 2018 and December 31, 2017, respectively, which are included in CostCosts and estimated earnings in excess of billings on the balance sheet.

NOTE 4. DEBT

In November 2016, BRJ LLC entered into a credit agreement with KeyBank, N.A. Under the credit agreement, BRJ LLC may borrow up to an aggregate amount of $6,000,000 (the “Credit Facility”) under revolving loans and letters of credit, with a sublimit of $500,000 for letters of credit. The Credit Facility is payable upon demand of KeyBank, N.A., or the lenders, or upon acceleration as a result of an event of default. At the closing of the Acquisition, approximately $1,900,000 was drawn under the Credit Facility to pay a portion of the purchase price and costs associated with the Acquisition, with the balance being available for general working capital of BRJ LLC.

Interest under the Credit Facility is payable monthly 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 sixnine months ended JuneSeptember 30, 2018, the Company was in compliance with these covenants.

The effective interest rate on borrowings under the Credit Facility at JuneSeptember 30, 2018 was 3.69%4.69%. The aggregate borrowings outstanding under the Credit Facility at JuneSeptember 30, 2018 were $2,931,526.$2,846,334. In addition, the bank has issued a letter of credit on behalf of the Company in the amount of $250,000 that expires on December 1, 2018.

NOTE 5. STOCKHOLDERS’ EQUITY

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

On March 2, 2017, the Company filed a certificate of amendment (the “Amendment”) to the Company’s Certificate of Incorporation with the Delaware Secretary of State to reduce the number of shares of Common Stock the Company is authorized to issue from 50,000,000 to 3,000,000 shares and to reduce the number of shares of Preferred Stock the Company is authorized to issue from 5,000,000 to 50,000 shares. The Amendment was approved by the Board of Directors of the Company and the holders of a majority of the issued and outstanding shares of Common Stock by written consent in lieu of a meeting.

The Company recorded stock compensation expense for options vesting during the three month periods ended JuneSeptember 30, 2018 and 2017 of $13,878 and $15,397,$15,181, respectively, and during the sixnine month periods ended JuneSeptember 30, 2018 and 2017 of $27,920$41,798 and $31,000,$46,181, respectively.

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

NOTE 6. RELATED PARTY TRANSACTIONS

On April 8, 2016, the Company entered into a Management Services Agreement (the “MSA”) with Ancora Advisors, LLC, whereby Ancora Advisors, LLC agreed to provide specified services to the Company in exchange for a quarterly management fee in an amount equal to 0.14323% of the Company’s stockholders’ equity (excluding cash and cash equivalents) as shown on the Company’s balance sheet as of the end of each fiscal quarter of the Company. The MSA provides that the management fee with respect to each fiscal quarter of the Company is to be paid no later than 10 days following the issuance of the Company’s financial statements for such fiscal quarter, and in any event no later than 60 days following the end of each fiscal quarter. For the sixnine months ended JuneSeptember 30, 2018 and 2017, Ancora Advisors, LLC agreed to waive payment of the management fee, but reserves the right to institute payment of the management fee at its discretion.

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 Capital, LLC agreed to provide specified management, financial and reporting services to us in exchange for an annual management fee in an amount equal to the greater of (i) $75,000 or (ii) five percent (5%) of the annual EBITDA (as defined in the BRJ MSA) of BRJ LLC, payable quarterly in arrears and subject to certain adjustments and offsets set forth in the BRJ MSA. The BRJ MSA may be terminated by BRJ LLC, Lorraine Capital, LLC or Regional Brands at any time upon 60 days’ prior written notice and also terminates upon the consummation of a sale of BRJ LLC. For the sixnine months ended JuneSeptember 30, 2018 and year ended December 31, 2017, theamounts included in expense for fees payable to Lorraine Capital LLCunder the BRJ MSA were approximately $53,000$55,000 and $79,000, respectively, and fees payable were approximate $0 and $36,000 at September 30, 2018 and December 31, 2017, respectively.

BRJ LLC has a relationship with a union qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations that require union installation and repair services. Individuals affiliated with Lorraine Capital, LLC acquired 57% of ADSI’s common stock; the remaining common stock is owned by three of BRJ LLC’s employees. BRJ LLC paid ADSI approximately $823,000$1,370,000 and $898,000$1,298,000 for its services during the sixnine months ended JuneSeptember 30, 2018 and 2017, respectively. In addition, we provide ADSI services utilizing an agreed-upon fee schedule. These services include accounting, warehousing, equipment use, employee benefit administration, risk management coordination and clerical functions. The fee for these services was $21,000$45,000 and $23,250$35,000 during the sixnine months ended JuneSeptember 30, 2018 and 2017, respectively.

NOTE 7. INCOME TAXESTAX

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect when the differences are expected to reverse.  The Company periodically evaluates the likelihood of realization of deferred tax assets, and provides for a valuation allowance when necessary. The Company currently maintains a full valuation allowance on the deferred tax assets associated with certain pre-acquisition losses that are subject to limitations under Internal Revenue Code Section 382.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was passed into law. The Act reducesreduced the US federal corporate income tax rate from a top marginal rate of 35% in 2017 and prior years to 21% in 2018. The Company’s marginal tax rate in 2017 and prior years was 34%.

The Company hashad an effective income tax rate of 23.0%14.8% and 22.8%21.6% for the three and sixnine months ended JuneSeptember 30, 2018, respectively, and 50.4%(86.5)% and 94.0%9.3% for the three and sixnine months ended JuneSeptember 30, 2017, respectively. The 2018 effective income tax rate for the three months ended September 30, 2018 is higherlower than the 2018 federal statutory rate of 21% due primarily to stateadjustments resulting from the filing of the 2017 federal income taxes offset by the dividends received deduction and nontaxabletax return. The effective income of noncontrolling interest. The 2017 effective tax rate is higher thanfor the nine months ended September 30, 2018 approximates the 2018 federal statutory rate of 21%. The effective income tax rate for the three and nine months ended September 30, 2017 differs from the 2017 federal statutory rate of 34% primarily due to the reasons above in addition to provisions forreversal of a portion of the deferred tax valuation allowances.allowance during the three months ended September 30, 2017.

NOTE 8. BUSINESS ACQUISITIONS

Effective June 1, 2018, the Company acquired certain assets of R&D Fabricators, Inc. (R&D) for a purchase price of $200,000.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, and $29,000resulting in goodwill of covenants not to compete. The fair value of the assets acquired approximates the consideration paid.approximately $32,000. The operating results of R&D are included in the accompanying statement of income from the date of acquisition. ProIn light of the size and value of the acquisition and its relative significance to the Company, pro forma disclosures of revenue and earnings isare not material to the Company.included herein.

During the sixnine months ended JuneSeptember 30, 2017, a payment of $1,107,872 was made to the seller in the BRJ Inc. acquisition to satisfy our working capital liability.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”).   The Company desires to avail itself of certain “safe harbor” provisions of the 1995 Reform Act and is therefore including this note to enable it to do so.  Except for the historical information contained herein, this report contains forward-looking statements (identified by the words “estimate,” “project,” “anticipate,” “plan,” “expect,” “intend,” “believe,” “hope,” “strategy” and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements, including, without limitation, those discussed under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, as they may be updated or supplemented from time to time under Part II, Item 1A “Risk Factors” in our Quarterly Reports on Form 10-Q, and those described herein.

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

General

Regional Brands Inc. (formerly 4net Software, Inc.) (“Regional Brands,” the “Company,” “we,” “our” and “us”) was incorporated under the laws of the State of Delaware in 1986 and subsequently became a holding company. In April 2016, in connection with a change in control of the Company, we changed our name to Regional Brands Inc.

Nature of Business

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

On November 1, 2016, we acquired a majority interest in BRJ LLC by contributing $3,808,696 in exchange for 95.22% of BRJ LLC’s preferred membership interest and 76.17% of its common membership interest. In addition, we loaned to BRJ LLC $7,141,304 under a senior subordinated term note which bears interest at 6% per annum and has scheduled annual principal payments with the balance due at maturity in November 2021. The senior subordinated term note is secured by substantially all of BRJ LLC’s assets. BRJ LLC’s minority members contributed $191,304 for the remaining preferred and common membership interests and loaned to BRJ LLC $358,696 on the same terms as the Regional Brands senior subordinated loan pursuant to a participation agreement. The senior subordinated loan is subordinated to BRJ LLC’s Credit Facility.

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

The acquisition by BRJ LLC of the business of BRJ Inc. is being accounted for under the acquisition method of accounting. This results in BRJ LLC allocating the total consideration issued in the acquisition to the fair value of the assets acquired and liabilities assumed as of the acquisition date.

Following the acquisition of the business of BRJ Inc., all of our business operations are being conducted through our consolidated subsidiary BRJ LLC.

Effective June 1, 2018, we acquired certain assets of R&D Fabricators, Inc. (“R&D”) for a purchase price of $200,000.approximately $203,000. R&D is engaged in the business of the fabrication of aluminum curtain walls, store fronts, doors and frames.

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 three months ended JuneSeptember 30, 2018 and 2017

Net Sales: Net sales for the three months ended JuneSeptember 30, 2018 of $11,920,846$10,317,136 were $768,894,$1,709,834, or 6.9%19.9%, higher than net sales of $11,151,952$8,607,302 for 2017. The increase was the result of an increased volume of business due to robust construction activity in the geographic area that we serve and our ability to be flexible with our capacity to meet increased demand.

Cost of sales:Cost of sales for the three months ended JuneSeptember 30, 2018 of $8,566,194$7,700,107 were $842,549$1,899,851 or 10.9%32.8% higher than cost of sales of $7,723,645$5,800,256 in 2017. The increase is primarily due to the increase in net sales 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.  

Gross profit:Gross profit was $3,354,652$2,617,029 or 28.1%25.4% of net sales for the three months ended JuneSeptember 30, 2018 compared to $3,428,307$2,807,046 or 30.7%32.6% of net sales for 2017.

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. We refer to these variances as project mix. Gross2017.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.

During the three months ended JuneSeptember 30, 2017 we had more large projects that had above average gross margins compared to 2018. Additionally, we experienced cost overruns and back charges experienced in 2018 were due to numerous factors, including late delivery of product and inefficiencies in the procurement process. The effect of changes in estimates of contract profit decreased gross profit by approximately $200,000 for the three months ended September 30, 2018 and increased gross profit by approximately $129,000 for the three months ended September 30, 2017.

We have workedcontinue to work to mitigate the impact of these charges and in some instances, have been able to reduce the cost of certain charges from suppliers.  Management has takenis taking steps intended to improve gross margin performance infor the second halfremainder of 2018, including upgrading project management capabilities, improvedimproving review and approval procedures and training.

Selling expenses: Selling expenses remained relatively stable at $1,198,474 for the three months ended JuneSeptember 30, 2018 comparedof $1,082,977 were $87,058, or 7.4% lower than selling expenses of $1,170,035 for 2017. The decrease is primarily due to $1,221,981 for 2017.lower commissions from lower sales in our specialty product line and overall lower incentive compensation costs.

General and administrative expenses:General and administrative expenses remained relatively stable at $1,039,350 for the three months ended JuneSeptember 30, 2018 compared to $1,026,463of $1,032,462 were $99,945, or 10.7% higher than general and administrative expenses of $932,517 for 2017. The primary reason for the increase is due to compensation costs related to the additional employees resulting from the R&D acquisition on June 1, 2018.

Amortization of intangible assets:Amortization of intangible assets was $311,735$331,344 for the three months ended JuneSeptember 30, 2018 compared to $429,167$300,000 for 2017. CertainThe increase is primarily due to the amortization of intangible assets arising fromrelated to the BRJ Inc.June 1, 2018 acquisition were fully amortized in 2017, which is the primary reason for less amortization expense in 2018.of certain assets of R&D.

Other income: Other income was $85,900remained relatively flat at $32,064 for the three months ended JuneSeptember 30, 2018 compared to $23,007$29,239 for 2017. The increase was primarily related to unrealized appreciation in the market value of our investments in marketable equity securities.

Interest Expense:Interest expense during the three months ended JuneSeptember 30, 2018 was $64,048$78,530 compared to $58,479$49,328 for 2017. The increase in interest expense was due primarily to increased debt levels to fund working capital needs for operations and interest rates as compared to the same period in the prior year.

Income tax expense: Income tax expense for the three months ended JuneSeptember 30, 2018 was $19,235 compared to a benefit of $191,633 was $169,167 lower than income tax expense of $360,800$337,000 for 2017. The effective income tax rate was 23.0%14.8% for the three months ended JuneSeptember 30, 2018 compared to 50.4%(86.5)% for 2017. The 2018 effective income tax rate is higherlower than the 2018 federal statutory rate of 21% due primarily to stateadjustments resulting from the filing of the 2017 federal income taxes offset by the dividends received deduction and nontaxable income of noncontrolling interest.tax return. The 2017 effective income tax rate is higher thandiffers from the 2017 federal statutory rate of 34% primarily due to the reasons above in addition to provisions forreversal of a portion of the deferred tax valuation allowances.allowance during the three months ended September 30, 2017.

Net income: As a result of the foregoing, net income for the three months ended JuneSeptember 30, 2018 improved by $286,415 to $641,657was $110,890 compared to $355,242$726,737 for 2017.

Results of Operations for the sixnine months ended JuneSeptember 30, 2018 and 2017

Net Sales: Net sales for the sixnine months ended JuneSeptember 30, 2018 of $20,083,630$30,400,766 were $185,329,$1,895,163, or 0.9%6.6% higher than net sales of $19,898,301$28,505,603 for 2017. The increase was the result of an increased volume of business due to increased construction activity in the geographic area that we serve and our ability to be flexible with our capacity to meet increased demand.

Cost of sales:Cost of sales for the sixnine months ended JuneSeptember 30, 2018 of $14,469,936$22,170,043 were $495,597$2,395,448 or 3.5%12.1% higher than cost of sales of $13,974,339$19,774,595 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.

Gross profit:Gross profit was $5,613,694$8,230,723 or 28.0 %27.1% of net sales for the sixnine months ended JuneSeptember 30, 2018 compared to $5,923,962$8,731,008 or 29.8%30.6% of net sales for 2017. Gross profit decreased by $310,268$500,285 in 2018.

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. We refer to these variances as project mix. Gross2018.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.

During the sixnine months ended JuneSeptember 30, 2017 we had more large projects that had above average gross margins compared to 2018.  Additionally, we experienced cost overruns and back charges experienced in 2018 were due to numerous factors, including late delivery of product and inefficiencies in the procurement process. The effect of changes in estimates of contract profit decreased gross profit by approximately $230,000 and $101,000 for the nine months ended September 30, 2018 and 2017, respectively.

We have workedcontinue to work to mitigate the impact of these charges and in some instances, have been able to reduce the cost of certain charges from suppliers.  Management has takenis taking steps intended to improve gross margin performance infor the second halfremainder of 2018, including upgrading project management capabilities, improvedimproving review and approval procedures and training.

Selling expenses: Selling expenses remained relatively stable at $2,264,187 for the sixnine months ended JuneSeptember 30, 2018 comparedof $3,347,164 were $144,616, or 4.1% lower than selling expenses of $3,491,780 for 2017. The decrease is primarily due to $2,321,745 for 2017.lower commissions from lower sales in our specialty product line and overall lower incentive compensation costs.

General and administrative expenses:General and administrative expenses remained relatively stable at $1,991,062 for the sixnine months ended JuneSeptember 30, 2018 compared to $1,969,326of $3,023,524 were $121,681, or 4.2% higher than general and administrative expenses of $2,901,843 for 2017. The primary reason for the increase is due to compensation costs related to the additional employees resulting from the R&D acquisition on June 1, 2018.

Amortization of intangible assets:Amortization of intangible assets was $611,735$943,079 for the sixnine months ended JuneSeptember 30, 2018 compared to $1,116,667$1,416,667 for 2017. Certain intangible assets arising from the BRJ Inc. acquisition were fully amortized in 2017, which is the primary reason for less amortization expense in 2018.

Other income: Other income was $119,579$151,643 for the sixnine months ended JuneSeptember 30, 2018 compared to $39,157$68,396 for 2017. The increase was primarily related to unrealized appreciation in the market value of our investments in marketable equity securities.securities in 2018.

Interest Expense:Interest expense for the sixnine months ended JuneSeptember 30, 2018 was $114,697$193,227 compared to $119,433$168,761 for 2017. The decreaseincrease in interest expense was due primarily to interest on increased debt levels in 2017 to fund working capital needs for operations and interest rates as compared to the BRJ Inc. acquisition and operations.same period in the prior year.

Income tax expense: Income tax expense for the sixnine months ended JuneSeptember 30, 2018 of $173,912 was $240,088 lower than income tax expense of $414,000$193,147 compared to $77,000 for 2017. The effective income tax rate was 22.8%21.6% for the sixnine months ended JuneSeptember 30, 2018, compared to 94.0% for 2017. The 2018 effective tax rate is higher thanwhich approximates the 2018 federal statutory rate of 21% due primarily to state income taxes offset by the dividends received deduction and nontaxable income of noncontrolling interest.. The 2017 effective income tax rate of 9.3% is higherlower than the 2017 federal statutory rate of 34% primarily due to the reasons above in addition to provisions forreversal of a portion of the deferred tax valuation allowances.allowance during the three months ended September 30, 2017.

Net income: As a result of the foregoing, net income for the sixnine months ended JuneSeptember 30, 2018 improved by $563,853 to $590,166was $701,056 compared to net income of $26,313$753,050 for 2017.

Liquidity and Capital Resources

At JuneSeptember 30, 2018, we had working capital of $11,657,026$12,017,066 compared to working capital of $11,124,271 at December 31, 2017. During the sixnine months ended JuneSeptember 30, 2018 and 2017, our operating activities usedprovided cash of $368,302 compared to providing cash of $1,583,010 during the six months ended June 30, 2017.$21,608 and $2,151,675, respectively. The primary reason for the use ofdecrease in cash provided by operating activities infrom 2017 to 2018 versus providing cash in 2017 was primarily due to the increase in our net operating assets included in working capital.2018 by approximately $1.7 million.

Cash used in investment activities was $753,527$800,037 for the sixnine months ended JuneSeptember 30, 2018 compared to $1,933,470$2,075,418 for the comparable period in 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 remains in process.

Cash provided by financing activities was $1,115,927$978,019 for the sixnine months ended JuneSeptember 30, 2018 compared to cash used of $235,012$806,277 for 2017. Line of credit borrowings provided cash in 2018 and repayments 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 needs, primarily increases in accounts receivable and inventories somewhat offset by an increase in accounts payable.capital.

In November 2016, BRJ LLC entered into a credit agreement with KeyBank, N.A. (the “Credit Facility”). Under the Credit Facility, BRJ LLC may borrow up to an aggregate amount of $6,000,000 under revolving loans and letters of credit, with a sublimit of $500,000 for letters of credit. The Credit Facility is payable upon demand of KeyBank, N.A., or the lenders, or upon acceleration as a result of an event of default. At the closing of the Acquisition, approximately $1,900,000 was drawn under the Credit Facility to pay a portion of the purchase price and costs associated with the Acquisition, with the balance being available for general working capital of BRJ LLC.

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

The Credit Facility is secured by substantially all of BRJ LLC’s assets. The Credit Facility contains customary financial and other covenant requirements, including, but not limited to, a covenant to not permit BRJ LLC’s consolidated fixed charge coverage ratio to exceed 1.15 to 1.00. The Credit Facility also contains customary events of default. For the sixnine months ended JuneSeptember 30, 2018, the Company was in compliance with these covenants.

The effective interest rate on outstanding borrowings under the Credit Facility at JuneSeptember 30, 2018 was 3.69%4.69%. The aggregate borrowings outstanding under the Credit Facility at JuneSeptember 30, 2018 were $2,931,526$2,846,334 compared to $1,812,454 at December 31, 2017. In addition, the bank has issued a letter of credit on behalf of the Company in the amount of $250,000 that expires on December 1, 2018.

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

Off-Balance Sheet Arrangements

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

Inflation

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

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes.  The financial statements as of December 31, 2017 describe the significant accounting policies and methods used in the preparation of the financial statements.  Actual results could differ materially from those estimates and be based on events different from those assumptions.  Future events and their effects cannot be predicted with certainty; estimating, therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired or as additional information is obtained.  Critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our financial statements. A discussion of such critical accounting policies can be found in our Annual Report on Form 10-K for the period ended December 31, 2017. Refer to Note 2 of the Notes to the Consolidated Financial Statements included in this report for the Company’s critical accounting policies with respect to revenue recognition.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 - CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our principal executive and financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, concluded that our disclosure controls and procedures were not effective as of JuneSeptember 30, 2018 due to material weaknesses related to an insufficient compliment of qualified accounting personnel and ineffective controls associated with segregation of duties. Our Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017 as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, and determined our internal controls over financial reporting were not effective due to material weaknesses that exist. The material weaknesses consist of an insufficient complement of qualified accounting personnel and controls associated with segregation of duties.

To address the material weaknesses 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 Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

As discussed above in this Item 4, our internal controls over financial reporting were not effective as of JuneSeptember 30, 2018, as a result of material weaknesses related to an insufficient complement of qualified accounting personnel and controls associated with segregation of duties. These material weaknesses existed as of December 31, 2017, and continued to exist as of JuneSeptember 30, 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 intended to remedy the identified material weaknesses. In that regard, a new outside consultant was engaged and commenced service to the Company during the second quarter of 2018. 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2017, except for the addition of the following which supplements our previously disclosed risk factors.

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 in 2018.  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 higher costs. This, in turn, could adversely impact our profitability or financial condition.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

ITEM 6 – EXHIBITS

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

SIGNATURES

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