Noncash transactions include the recording of a right-of-use asset and related lease liability of approximately $1.2 million upon the adoption of the new lease accounting standard effective January 1, 2019 and $0.3 million for leases entered into during the six months ended June 30, 2019.

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

REGIONAL BRANDS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Regional Brands Inc. (formerly 4net Software, Inc.) (“Regional Brands,” the “Company,” “we,” “our”Company”, “we” and “us”) was incorporated under the laws of the State of Delaware in 1986. Regional Brands is a holding company formed to acquire substantial ownership in regional companies with strong brand recognition, stable revenues and profitability. Regional BrandsThe Company has been pursuing a business strategy whereby it seeksis 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 (the “Acquisition”) of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty products for use in commercial and residential buildings. Afterbuildings (the “Business”). Following the acquisition ofAcquisition, BRJ LLC carried on the business and operations of BRJ Inc. by our majority-owned subsidiary, B.R. Johnson, LLC (“BRJ LLC”), we are currently focused on considering opportunities for growth of BRJ LLC through utilizing its balance sheet to provide capital for additional acquisitions of companies that would be complementary to BRJ LLC. Additionally, we may seek to acquire Target Companies that satisfy the following criteria: (1) established businesses with viable services or products; (2) an experienced and qualified management team; (3) opportunities for growth and/or expansion into other markets; (4) are accretive to earnings; (5) offer the opportunity to achieve and/or enhance profitability; and (6) increase shareholder value.

Basis of Presentation -The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by U.S. GAAP. In the opinion of management, the accompanying condensed consolidated balance sheets and related condensed consolidated statements of income, changes in stockholders’ equity and cash flows include all adjustments, consisting only of normal recurring items necessary for their fair presentation in accordance with U.S. GAAP. Interim results are not necessarily indicative of results expected for a full year. For further information regarding the Company’s accounting policies, please refer to the audited consolidated financial statements and footnotes for the year ended December 31, 20172018 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2018.14, 2019.

Restatement of Income Per Common Share– During the preparation of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, it was determined that distributions made in 2017 to the holders of certain noncontrolling interests in the Company’s consolidated subsidiary pursuant to the subsidiary’s limited liability company agreement should have reduced the amount of income available to common shareholders that was in the Company’s income (loss) per common share calculations. This has resulted in the restatement of income (loss) per common share for the quarters ended June 30, September 30 and the year ended December 31, 2017, respectively. The restatement has no effect on the amounts previously reported in 2017 on the Consolidated Balance Sheet, net income (loss) included in the Consolidated Statements of Income, Statements of Changes in Stockholders’ Equity (Deficiency) or the Consolidated Statements of Cash Flows. Additionally, the restatement had no effect on the quarters ended March 31, 2018 and 2017.

The effect of the restatement on the applicable 2017 periods is as follows:

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

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

Inventories- Inventory is comprised of purchased materials and other materials that have been assigned to a job deemed to be work-in-process. As of June 30, 20182019 and December 31, 2017,2018, the work-in-process inventory was $948,127$842,000 and $ 676,153,414,000, respectively and is included in inventories in the accompanying consolidated balance sheet.sheets. We maintain an inventory allowance for slow-moving and unused inventories based on the historical trend and estimates. The allowance was approximately $72,000$111,000 and $66,000$69,500 at June 30, 20182019 and December 31, 2017,2018, respectively.

Revenue Recognition -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 and payment terms and are signed by both parties. Our contract price is fixed for the scope of work specified and we generally have no variable consideration. We frequently negotiate change orders for additional work to be performed which typically relate to the initial performance obligation. Our customer payment terms are typical for our industry. For most contracts under the POC method, progress payments, less retainage, are made shortly after the contractor receives payments from the owner. For the remainder of our business, standard terms require that amounts due are paid 30 days after invoice date. For the business accounted for using the POC method, we have determined that we have one performance obligation due to the high degree of inter-dependability and highly integrated nature of the work. Performance obligations for the remainder of our business are generally supported by written contracts or purchase orders which require the delivery of goods or services and the revenue is recognized upon shipment of those goods or performance of the services. The majority of our performance obligations are typically completed within one year.

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

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

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

Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates. Revisions in estimated profits for contracts accounted for under the POC method are made in the period in which circumstances requiring the revision become known. During the three and six months ended June 30, 2019, the effect of changes in estimated contract costs decreased gross profit by approximately $147,000 and $259,000, respectively, decreased net income by approximately $109,000 and $191,000, respectively, and decreased income per common share (net of income taxes) by $0.09 and $0.15, respectively. During the three and six months ended June 30, 2018, the effect of changes in estimated contract costs decreased gross profit by approximately $80,000 and $170,000, respectively, decreased net income by approximately $59,000 and $126,000, respectively, and decreased income per common share (net of income taxes) by $0.05 and $0.10, 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 six months ended June 30, 2019 and 2018, since the exercise prices of the outstanding stock options were above the average market price of our common stock during the period, the outstanding stock options were considered anti-dilutive. In calculating income (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 ofThere were no distributions made or accrued through June 30, 2019 and 2018 that would reduce income attributable to common shareholders to the amounts used to calculate income(loss) per common share - basic and diluted is as follows:stockholders.  

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, allAll of our marketable equity securities and money market funds will continue to beare carried at fair value as noted above, with anyand unrealized gains or losses on the securities are recognized as a component of other income included onin our Condensed Consolidated Statementscondensed 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 six months ended June 30, 2017 was decreased by $1,476.income.

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

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

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

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

New Accounting Pronouncements Issued -In May 2014,June 2016, the FASB issued ASU 2014-9 “Revenue from Contracts with Customers”2016-13, “Financial Instruments - Credit Losses”. The new guidanceThis ASU requires an entity to recognize the amountchange its accounting approach in determining impairment of revenuecertain financial instruments, including trade receivables, from an “incurred loss” 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”.“current expected credit loss” model. 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 iswill be effective for fiscal years beginning after December 15, 2017, and2019, including interim periods within thosesuch fiscal years. The new standard requiresEarly 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.permitted. The Company has adoptedis currently assessing the effect that this standardASU will have on its financial position, results of operations, and disclosures. No other recently issued or effective January 1, 2018. AdoptionASUs had, or are expected to have, a material effect on the Company's results of this standard did not impact our Consolidated Financial Statements for the currentoperations, financial condition, or prior periods presented.liquidity.

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.

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. The majority of our performance obligations are typically completed within one year.

NOTE 2. REVENUES AND CONTRACTS IN PROCESS

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:method:

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed. As of June 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 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 condensed consolidated 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 condensed consolidated 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 $1,219,379approximately $2.1 million and $1,043,082$0.9 million at the end of June 30, 20182019 and December 31, 2017,2018, respectively, which are included in Cost and estimated earnings in excess of billings on the condensed consolidated balance sheet.

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed. As of June 30, 2019, 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 $14.6 million.

NOTE 4.3. DEBT

In November 2016, BRJ LLC entered into aUnder its 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 permitrequiring BRJ LLC’s consolidated fixed charge coverage ratio to not exceed 1.15 to 1.00. The Credit Facility also contains customary events of default. For the six months ended June 30, 2018,2019, the Company was in compliance with these covenants.

The effective interest rate on borrowings under the Credit Facility at June 30, 20182019 was 3.69%4.88%. The aggregate borrowings outstanding under the Credit Facility at June 30, 20182019 were $2,931,526.$4,528,273. 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, 2018.2019.

NOTE 5.4. STOCKHOLDERS’ EQUITY

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

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 June 30, 20182019 and 20172018 of $13,878 and $15,397, respectively, and during the six month periods ended June 30, 2019 and 2018 of $27,756 and 2017 of $27,920, and $31,000, 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 6.5. RELATED PARTY TRANSACTIONS

On April 8, 2016, theThe Company entered intohas a Management Services Agreement (the “MSA”) with Ancora Advisors, LLC, whereby Ancora Advisors, LLC agreed to provideprovides specified services to the Company in exchange for a quarterly management fee in an amount equal to 0.14323% of the Company’s stockholders’ equity (excluding cash and cash equivalents) as shown on the Company’s condensed consolidated balance sheet as of the end of each fiscal quarter of the Company. The 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 six months ended June 30, 20182019 and 2017,2018, Ancora Advisors, LLC agreed to waive payment of the management fee, but reserves the right to institute payment of the management fee at its discretion.

On November 1, 2016, in connection with the Acquisition, BRJ LLC entered intohas a Management Services Agreement (the “BRJ MSA”) with Lorraine Capital, LLC (“Lorraine”), a member of BRJ LLC, whereby Lorraine Capital, LLC agreed to provideprovides 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. ForBRJ LLC recorded expenses for Lorraine management fees in the amount of approximately $50,000 and $53,000 for the three and six months ended June 30, 2018, respectively . There were no expenses for such fees during the three and yearsix months ended June 30, 2019, respectively. As of June 30, 2019 there were no amounts payable and at December 31, 2017, the fees2018, $39,000 was payable to Lorraine Capital LLC were approximately $53,000 and $36,000, respectively.under the BRJ MSA. 

BRJ LLC has a relationship with a union qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations that require union installation and repair services. Individuals affiliated with Lorraine 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 and $898,000 for its services duringapproximately $761,000 and $402,000 for the three months ended June 30, 2019 and 2018, respectively and $1,284,000 and $823,000 for the six months ended June 30, 20182019 and 2017,2018, respectively. In addition, we provide ADSI services utilizing an agreed-upon fee schedule. These services include accounting, warehousing, equipment use, employee benefit administration, risk management coordination and clerical functions. The fee for these services was $21,000approximately $38,000 and $23,250$29,000 during the three months ended June 30, 2019 and 2018, respectively and $67,000 and $58,000 during the six months ended June 30, 20182019 and 2017,2018, respectively.

NOTE 7.6. INCOME TAXES

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect when the differences are expected to reverse.  The Company periodically evaluates the likelihood of realization of deferred tax assets, and provides for a valuation allowance when necessary. The Company 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 reduces the US federal corporate income tax rate from a top marginal rate of 35% in 2017 and prior to 21% in 2018. The Company’s marginal tax rate in 2017 and prior was 34%.

The Company hashad an effective income tax rate of 25.4% and 24.2% for the three and six months ended June 30, 2019, respectively, and 23.0% and 22.8% for the three and six months ended June 30, 2018, respectively, and 50.4% and 94.0% for the three and six months ended June 30, 2017, respectively.  The 2018 effective tax rate is higherwas greater than 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 tax rate is higher than the 2017 federal statutory rate of 34% primarily due to the reasons above in addition to provisions for deferred tax valuation allowances.taxes.

NOTE 8. BUSINESS ACQUISITIONS7. LEASES

EffectiveLease expense was approximately $127,500 and $95,100 for the three months ended June 1,30, 2019 and 2018, the Company acquired certain assets of R&D Fabricators, Inc. (R&D)respectively, and $241,300 and $190,200 for a purchase price of $200,000. 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, $51,000 of acquired backlog and $29,000 of covenants not to compete. The fair value of the assets acquired approximates the consideration paid. The operating results of R&D are included in the accompanying statement of income from the date of acquisition. Pro forma disclosures of revenue and earnings is not material to the Company.

During the six months ended June 30, 2017,2019 and 2018, respectively. The right-of-use asset and related lease liability was approximately $1.2 million as of January 1, 2019. The lease terms range in length from 36 to 72 months. Certain leases contain renewal options that we are not reasonably certain to exercise and therefore have been excluded from the future minimum lease payments. The weighted-average remaining lease term as of January 1, 2019 was 3.9 years and at June 30, 2019 was 3.6 years. The weighted-average discount rate used to determine the present value of future lease payments is 4.9%. Because the implicit rate in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of lease payments.

The future minimum lease payments under the lease agreements for the rest of 2019 and yearly thereafter and a payment of $1,107,872 was madereconciliation to the seller inamount of the BRJ Inc. acquisition to satisfy our working capital liability.net present value of such payments at June 30, 2019 is as follows:

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, 2017,2018, 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 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. 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 haveThe Company has been pursuing a business strategy whereby we have beenit is seeking to engage in an acquisition, merger or other business combination transaction with undervalued businesses (each, a “Target Company”) with a history of operating revenues in markets that provide opportunities for growth. 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, wethe Company's majority-owned subsidiary, B.R. Johnson, LLC (“BRJ LLC”) 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(the “Acquisition”) substantially all of the assets of B.R. Johnson, Inc. (“BRJ LLC’s assets. BRJ LLC’s minority members contributed $191,304Inc.”), 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 remaining preferred and common membership interests and loaned toAcquisition, BRJ LLC $358,696carried 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 and operations 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., allAll of our business operations are being conducted through our consolidated subsidiary BRJ LLC.

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

Results of Operations for the three months ended June 30, 2018 and 2017

Net Sales: Net sales for the three months ended June 30, 2018 of $11,920,846 were $768,894, or 6.9%, higher than net sales of $11,151,952 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 June 30, 2018 of $8,566,194 were $842,549 or 10.9% higher than cost of sales of $7,723,645 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 or 28.1% of net sales for the three months ended June 30, 2018 compared to $3,428,307 or 30.7% 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 theseThese variances, as project mix. Gross profit as a percentage of net sales and gross profit dollars were lower in 2018 compared to 2017 because ourwhich we call project mix, in 2017 had higher than averagecan impact the comparability of gross margins and several projects in 2018 were negatively impacted by additional costs.from period to period.

DuringResults of Operations for the three months ended June 30, 2017 we had more large projects that had above average gross margins, compared to 2018.   Additionally, cost overruns2019 and back charges experienced in 2018 were due to numerous factors, including late delivery of product and inefficiencies in the procurement process. 

We have worked to mitigateNet Sales: Net sales for the impactthree months ended June 30, 2019 of these charges$11,926,359 were approximately the same as net sales of $11,920,846 for 2018. Sales of commercial windows and specialty products were up by approximately $1.5 million, which were offset by a decline in some instances, have been able to reducesales of door, frame and hardware products.

Cost of sales:Cost of sales for the three months ended June 30, 2019 of $8,521,692 were approximately the same as cost of certain charges from suppliers.  Management has taken steps to improve gross margin performancesales of $8,566,194 in 2018.

Gross profit:Gross profit was $3,404,667 or 28.5% of net sales for the second halfthree months ended June 30, 2019 which is approximately the same as the 2018 amounts of 2018, including upgrading project management capabilities, improved review and approval procedures and training.$3,354,652 or 28.1%.

Selling expenses: Selling expenses remained relatively stable at $1,198,474$1,219,061 for the three months ended June 30, 2018,2019, compared to $1,221,981$1,198,474 for 2017.2018.

General and administrative expenses:General and administrative expenses remained relatively stable at $1,039,350were $1,245,782 for the three months ended June 30, 2018,2019, an increase of $206,432, or 19.9% when compared to $1,026,463$1,039,350 for 2017. 2018. The increase is primarily due to planned higher wages, costs associated with the enterprise resource planning system that was placed in service in the second quarter of 2019 and costs associated with our new office in Buffalo and our facility from our R&D acquisition, partially offset by a lower bonus expense.

Amortization of intangible assets:Amortization of intangible assets was $311,735$300,000 for the three months ended June 30, 20182019 compared to $429,167$311,735 for 2017.2018. Certain intangible assets arising from the BRJ Inc.R&D acquisition were fully amortized in 2017,by the end of 2018, which is the primary reason for less amortization expense in 2018.2019.

Other income: Other income was $85,900$114,610 for the three months ended June 30, 20182019, an increase of $28,710 when compared to $23,007$85,900 for 2017.2018. The increase was primarily related to unrealizedincreased realized gains on the sale of investments and dividends, including dividends received related to the Company’s investment in a captive insurance entity, partially offset by decreased appreciation in the market value of our investments in marketable equity securities.

Interest Expense:Interest expense during the three months ended June 30, 20182019 was $64,048$71,130 compared to $58,479$64,048 for 2017.2018. The increase in interest expense was due to increased debt levels to fund working capital needs for operations and increased interest rates as compared to the same period in the prior year.2018.

Income tax expense: Income tax expense for the three months ended June 30, 20182019 of $191,633$174,878 was $169,167$16,755 lower than income tax expense of $360,800$191,633 for 2017.2018 due primarily to lower income before income taxes in 2019. The effective income tax rate was 25.4% and 23.0% for the three months ended June 30, 2019 and 2018, compared to 50.4% for 2017.respectively. The 2018 effective income tax rate is higher thandiffered from the 2018 federal statutory rate of 21% in both periods due primarily to state income taxes offset by the dividends received deduction and nontaxable income of noncontrolling interest. The 2017 effective tax rate is higher than the 2017 federal statutory rate of 34% primarily due to the reasons above in addition to provisions for deferred tax valuation allowances.taxes.

Net income: As a result of the foregoing, net income for the three months ended June 30, 2018 improved2019 decreased by $286,415$126,886 to $514,771 compared to $641,657 compared to $355,242 for 2017.2018.

Results of Operations for the six months ended June 30, 20182019 and 20172018

Net Sales: Net sales for the six months ended June 30, 20182019 of $20,083,630$19,041,328 were $185,329,$1,042,302, or 0.9% higher5.2% lower than net sales of $19,898,301$20,083,630 for 2017.2018. Sales of commercial windows and specialty products were up by approximately $0.9 million, but were more than offset by a decline in sales of door, frame and hardware products.

Cost of sales:Cost of sales for the six months ended June 30, 20182019 of $14,469,936$13,580,734 were $495,597$ 889,202 or 3.5% higher6.1% lower than cost of sales of $13,974,339$14,469,936 in 2017.2018. The increasedecrease is primarily due to the increasedecrease 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 $5,613,694$ 5,460,594 or 28.0 %28.7% of net sales for the six months ended June 30, 20182019 compared to $5,923,962$5,613,694 or 29.8%28.0% of net sales for 2017.2018. Gross profit decreased by $310,268$153,100 in 2018.

The industry we operate2019 primarily due to the decrease 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. 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 six months ended June 30, 2017 we had more large projects that had above average gross margins,when compared to 2018. Additionally, cost overruns and back charges experienced in 2018 were due to numerous factors, including late delivery of product and inefficiencies in the procurement process. 

We have worked 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 taken steps to improve gross margin performance in the second half of 2018, including upgrading project management capabilities, improved review and approval procedures and training.

Selling expenses: Selling expenses remained relatively stable at $2,264,187$2,325,242 for the six months ended June 30, 20182019 compared to $2,321,745$2,264,187 for 2017.2018.

General and administrative expenses:General and administrative expenses remained relatively stable at $1,991,062 for the six months ended June 30, 20182019 were $2,312,168, an increase of $321,106, or 16.1% when compared $1,991,062 for 2018. The increase is primarily due to $1,969,326 for 2017. planned higher wages, costs associated with the enterprise resource planning system that was placed in service in the second quarter of 2019 and costs associated with our new office in Buffalo and our facility from our R&D acquisition, partially offset by lower professional fees and bonus expense.

Amortization of intangible assets:Amortization of intangible assets was $611,735$600,000 for the six months ended June 30, 20182019 compared to $1,116,667$611,735 for 2017.2018. Certain intangible assets arising from the BRJ Inc.R&D acquisition were fully amortized in 2017,by the end of 2018, which is the primary reason for less amortization expense in 2018.2019.

Other income: Other income was $119,579$182,832 for the six months ended June 30, 20182019, an increase of $63,253 when compared to $39,157$119,579 for 2017.2018. The increase was primarily related to unrealizedincreased realized gains on the sale of investments and dividends, including dividends received related to the Company’s investment in a captive insurance entity, partially offset by decreased appreciation in the market value of our investments in marketable equity securities.

Interest Expense:Interest expense for the six months ended June 30, 20182019 was $114,697$131,007 compared to $119,433$114,697 for 2017.2018. The decrease in interest expenseincrease was due to interest on increased debt levels in 2017 to fund working capital needs for operations and increased interest rates as compared to the BRJ Inc. acquisition and operations.same period in 2018.

Income tax expense: Income tax expense for the six months ended June 30, 20182019 of $173,912$69,754 was $240,088$104,158 lower than income tax expense of $414,000$173,912 for 2017.2018 due primarily to lower income before income taxes in 2019. The effective income tax rate was 24.2% and 22.8% for the six months ended June 30, 2019 and 2018, compared to 94.0% for 2017.respectively. The 2018 effective income tax rate is higher thandiffered from the 2018 federal statutory rate of 21% in both periods due primarily to state income taxes offset by the dividends received deduction and nontaxable income of noncontrolling interest. The 2017 effective tax rate is higher than the 2017 federal statutory rate of 34% primarily due to the reasons above in addition to provisions for deferred tax valuation allowances.taxes.

Net income: As a result of the foregoing, net income for the six months ended June 30, 2018 improved2019 decreased by $563,853$372,221 to $217,945 compared $590,166 compared to net income of $26,313 for 2017.2018.

Liquidity and Capital Resources

At June 30, 2018,2019, we had working capital of $11,657,026$12,310,831 compared to working capital of $11,124,271$12,360,534 at December 31, 2017.2018. Working capital was reduced in 2019 by approximately $0.5 million due to the adoption of the new lease accounting standard adopted as of January 1, 2019. During the six months ended June 30, 2019 and 2018, our operating activities used cash of $1,348,211 and $368,302, compared to providing cash of $1,583,010 during the six months ended June 30, 2017.respectively. The primary reason for the use of cash by operating activities in 2018 versus providing cash in 2017 was due to the increase in our net operating assets included in working capital.

Cash used in investment activities was $753,527$244,266 for the six months ended June 30, 20182019 compared to $1,933,470$753,527 for the comparable period in 2017.2018. The primary uses of cash fromby investment activities in 2019 was for the purchase of equipment, somewhat offset by the proceeds from the sale of short-term investments and in 2018 the purchase of equipment, certain assets of R&D Fabricators, Inc. and short-term investments in 2018 andinvestments. The major reasons for the purchasepurchases of equipment short-term investments andin each period relates to the paymentcost of the working capital liabilityimplementation of our enterprise resource planning system that was placed into service in connection with the BRJ Inc. acquisition in 2017.second quarter of 2019.

Cash provided by financing activities was $1,701,430 and $1,115,927 for the six months ended June 30, 2019 and 2018, compared to cash used of $235,012 for 2017.respectively. Line of credit borrowings provided cash in 2018both periods and repayments used cash in 2017.2019, required payments under the subordinated term loan were made. Line of credit borrowings in 2018both periods were used to fund operating working capital needs, primarily increases in accounts receivable and inventories somewhat offset by an increase in accounts payable.needs.

In November 2016, BRJ LLC entered intohas a credit agreement with KeyBank, N.A. (the “Credit Facility”). Under the Credit Facility, BRJ LLC and 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 permitrequiring BRJ LLC’s consolidated fixed charge coverage ratio to not exceed 1.15 to 1.00. The Credit Facility also contains customary events of default. For the six months ended June 30, 2018,2019, the Company was in compliance with these covenants.

The effective interest rate on outstanding borrowings under the Credit Facility at June 30, 20182019 was 3.69%4.88%. The aggregate borrowings outstanding under the Credit Facility at June 30, 20182019 were $2,931,526$4,528,273 compared to $1,812,454$2,691,376 at December 31, 2017.2018. 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, 2018.2019.

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

Off-Balance Sheet Arrangements

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

Inflation

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

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes.  The financial statements as of December 31, 20172018 describe the significant accounting policies and methods used in the preparation of the financial statements.  Additionally, we adopted Accounting Standard Update (ASU) 2016-02 (Topic ASC 842), “Leases”, as required, effective January 1, 2019, using the modified retrospective approach without adjusting comparative periods. ASC 842 retains the two-model approach to classifying leases as operating or finance leases (formerly, capital leases); however, most leases, regardless of classification type, are recorded on the balance sheet. When a lease is recorded on our balance sheet, we recognize a lease liability based on the present value of the future lease payments, with an offsetting entry to recognize a right-of-use (ROU) asset. We use a discount rate to determine the present value based on the rate implicit in the lease, if readily determinable, or our incremental borrowing rate. 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 periodyear ended December 31, 2017. Refer2018. Other than the adoption of Topic ASC 842, there have been no material changes to Note 2 of the Notes to the Consolidated Financial Statements included in this report for the Company’ssuch critical accounting policies with respect to revenue recognition.as of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 - CONTROLS AND PROCEDURES

We maintainEvaluation 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 our 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 SEC’s rules and forms of the Securities and thatExchange Commission and, as such, information is accumulated and communicated to ourthe Company’s 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.

Ourtogether with our principal executive and financial officer, after evaluatingevaluated the effectiveness of the Company’s “disclosuredisclosure controls and procedures” (asprocedures, as defined in Rule 13a-15(e) of the 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 controls10-Q. Based on the evaluation of management, including the principal executive and procedures were not effective as of June 30, 2018financial officer, due to material weaknesses in our internal control over financial reporting related to an insufficient compliment of qualified accounting personnel and ineffective controls associated with segregation of duties. Our Management evaluatedduties, our disclosure controls and procedures were not effective as of June 30, 2019. In light of the effectiveness of ourmaterial weaknesses in 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.

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:

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 is in the process of implementing 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

As discussed aboveWhile changes in this Item 4, ourthe Company’s internal controlscontrol over financial reporting were not effective as ofoccurred during the quarter ended June 30, 2018,2019 as a resultthe Company is in the process 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 ofimplementing 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 June 30, 2018.2019, that have materially affected the Company’s internal control over financial reporting.

In response to

Inherent Limitations on Effectiveness of Controls

The Company’s management, including the material weaknesses identified above, our Management, with assistance of an outside consultantprincipal executive and oversight fromfinancial officer, does not expect that the Company’s audit committee, has continued to monitordisclosure controls and review ourprocedures or the Company’s internal control environmentover financial reporting will prevent or detect all errors and evaluate potential solutions intended to remedyall fraud. A control system, regardless of how well conceived and operated, can provide only reasonable, not absolute, assurance that the identified material weaknesses. In that regard, a new outside consultant was engaged and commenced service toobjectives of the Company duringcontrol system will be met.  These inherent limitations include the second quarter of 2018. following: