The accompanying notes are an integral part
of the condensed consolidated financial statements
The accompanying notes are an integral part
of the condensed consolidated financial statements
The accompanying notes are an integral part
of the condensed consolidated financial statements
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Regional Brands Inc. (formerly 4net Software,
Inc.) (“Regional Brands,” the “Company,” “we,” “our” and “us”) was
incorporated under the laws of the State of Delaware in 1986. Regional Brands is a holding company formed to acquire regional companies
with strong brand recognition, stable revenues and profitability. Regional Brands has been pursuing a business strategy whereby
it seeks to engage in an acquisition, merger or other business combination transaction with undervalued businesses (each, a “Target
Company”) with a history of operating revenues in markets that provide opportunities for growth. On November 1, 2016 (See
Note 2) the Company's majority-owned subsidiary acquired substantially all of the assets (the “Acquisition”) of B.R.
Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty products
for use in commercial and residential buildings. After the acquisition of the business of BRJ Inc. by our majority-owned subsidiary,
B.R. Johnson, LLC (“BRJ LLC”), we are currently focused on considering opportunities for growth of BRJ LLC through
utilizing its balance sheet to provide capital for additional acquisitions of companies that would be complementary to BRJ LLC.
Additionally, we may seek to acquire Target Companies that satisfy the following criteria: (1) established businesses with viable
services or products; (2) an experienced and qualified management team; (3) opportunities for growth and/or expansion into other
markets; (4) are accretive to earnings; (5) offer the opportunity to achieve and/or enhance profitability; and (6) increase shareholder
value.
Basis of Presentation -
The
accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“U.S. GAAP”) for interim financial information. Accordingly, these statements do not include all of
the information and footnotes required by U.S. GAAP. In the opinion of management, the accompanying condensed consolidated balance
sheets and related condensed consolidated statements of operations and cash flows include all adjustments, consisting only of normal
recurring items necessary for their fair presentation in accordance with U.S. GAAP. Interim results are not necessarily indicative
of results expected for a full year. For further information regarding the Company’s accounting policies, please refer to
the audited consolidated financial statements and footnotes for the year ended December 31, 2016 included in the Company’s
annual report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017. The unaudited Condensed Statement
of Operations and Statement of Cash Flows for the nine months ended September 30, 2016 of BRJ Inc., as predecessor to the Company,
are included in this report as supplementary information.
Principles of Consolidation
-
The consolidated financial statements include the accounts of Regional Brands Inc. and its majority-owned subsidiary, BRJ LLC.
All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
- The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates
and be based on events different from those assumptions. Future events and their effects cannot be predicted with certainty; estimating,
therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired
or as additional information is obtained. We believe the most significant estimates and judgments are associated with revenue recognition
for our customer contracts in process, including estimating costs and the recognition of unapproved change orders and claims.
Common Shares Issued and Earnings
(Loss) Per Share
- Common shares issued are recorded based on the value of the shares issued or consideration received,
including cash, services rendered or other non-monetary assets, whichever is more readily determinable. The Company presents basic
and diluted earnings (loss) per share. Basic earnings (loss) per share reflect the actual weighted average number of shares issued
and outstanding during the period. Diluted earnings (loss) per share is computed including the number of additional shares that
would have been outstanding if dilutive potential shares had been issued, such as those issuable upon exercise of outstanding stock
options or conversion of convertible securities. In a loss period, the calculation for basic and diluted loss per share is considered
to be the same, as the impact of the issuance of any potential common shares would be anti-dilutive. During the three and nine
months ended September 30, 2017, since the exercise prices of the outstanding stock options were above the average market price
of our common stock during the period, the outstanding stock options were considered anti-dilutive.
Fair Value of Financial Instruments
- Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, and line of credit. Fair values
approximate carrying values for these financial instruments and the line of credit is stated at the carrying value as the stated
interest rate approximates market rates currently available to the Company.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
|
●
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
●
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
●
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
The Company’s valuation techniques
used to measure the fair value of money market funds, certificate of deposits, and certain marketable equity securities were derived
from quoted prices in active markets for identical assets or liabilities.
In accordance with the fair value accounting
requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company
has not elected the fair value option for any eligible financial instruments.
The table below presents the Company's
assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, aggregated by the level in the fair
value hierarchy within which those measurements fall.
Assets and Liabilities Measured
at Fair Value on a Recurring Basis at December 31, 2016:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at December 31, 2016
|
|
Marketable Equity Securities
|
|
$
|
952,208
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
952,208
|
|
Money Market Funds
|
|
$
|
3,492,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,492,895
|
|
Certificates of Deposit
|
|
$
|
1,256,216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,256,216
|
|
The table below presents the Company's assets and liabilities
measured at fair value on a recurring basis as of September 30, 2017, aggregated by the level in the fair value hierarchy within
which those measurements fall.
Assets and Liabilities Measured
at Fair Value on a Recurring Basis at September 30, 2017:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at September 30, 2017
|
|
Marketable Equity Securities
|
|
$
|
1,794,413
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,794,413
|
|
Money Market Funds
|
|
$
|
4,019,092
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,019,092
|
|
Change in fiscal year end.
On December 20, 2016, the Board of Directors of the Company approved a change in the Company’s fiscal year-end, moving from
September 30 to December 31 of each year.
Comprehensive Income (Loss)
-
Comprehensive income (loss) is defined as the change in equity of the Company during a period from transactions and other events
and circumstances from non-owner sources. It consists of net income (loss) and other income and losses affecting stockholders’
equity that, under U.S. GAAP, are excluded from net income (loss). The change in fair value of investments was the only item impacting
other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016.
1 for 1,000 stock split
-
On
July 22, 2016, the Company filed a certificate of amendment (the “Amendment”) to the Company’s Certificate of
Incorporation with the Delaware Secretary of State to effect a 1 for 1,000 reverse stock split (the “Reverse Split”)
of the Company’s issued and outstanding Common Stock and to reduce the number of shares of Common Stock the Company is authorized
to issue from 750,000,000 to 50,000,000 shares. The Reverse Split became effective on July 26, 2016 (the “Effective
Time”). The Amendment, including the Reverse Split, was approved by the Board of Directors of the Company and the holders
of a majority of the issued and outstanding shares of Common Stock by written consent in lieu of a meeting.
As a result of the Reverse Split, at the
Effective Time, every 1,000 shares of the Company’s issued and outstanding Common Stock were automatically combined and reclassified
into one (1) share of Common Stock. The Company rounded up any fractional shares, on account of the Reverse Split, to the
nearest whole share of Common Stock. The Company has prepared the financial, share and per share information included in this quarterly
report on a post-split basis.
Recent Accounting Pronouncements
–
FASB ASU 2015-11, Inventory (Topic 330):
“Simplifying the Measurement of Inventory.” This ASU requires inventory within the scope of the guidance to be measured
at the lower of cost or net realizable value. FASB ASU 2015-11 is effective for annual and interim periods beginning after December
15, 2016, with prospective application required. The Company adopted this guidance during the nine months ended September 30, 2017
and it has not had a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-9
“Revenue from Contracts with Customers” (“ASU 2014-9”). The guidance requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Subsequently,
the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, “Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”); ASU No. 2016-10, “Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”); and ASU No. 2016-12,
“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU
2016-12”). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “new
revenue standards”). The new revenue standards will replace most existing revenue recognition guidance in U.S. GAAP
when they become effective and permit the use of either a retrospective or cumulative effect transition method. We are currently
evaluating the alternative methods of adoption and the effect of this guidance on our consolidated financial statements and related
disclosures. We are also in the process of identifying material contracts and revenue streams that are potentially impacted by
this guidance. This guidance is effective January 1, 2018 using a full or modified retrospective approach with early adoption permitted
January 1, 2017.
In March 2016, the FASB issued ASU 2016-09,
“Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” The standard is
intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification
on the statement of cash flows and forfeitures. This pronouncement is effective for fiscal years beginning after December 15, 2016,
and interim periods within those years. The Company adopted this guidance during the nine months ended September 30, 2017 and it
has not had a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued an accounting
standard update ASU 2016-02, “Leases" to replace existing lease accounting guidance. This pronouncement is intended
to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities
on the balance sheet for most leases. Expenses associated with leases will continue to be recognized in a manner similar to current
accounting guidance. This pronouncement is effective for annual and interim periods beginning after December 15, 2018, with early
adoption permitted. The adoption is required to be applied on a modified retrospective basis for each prior reporting period presented.
The Company has not yet determined the effect that the adoption of this pronouncement may have on its financial position and/or
results of operations.
NOTE
2. ACQUISITION OF B.R. JOHNSON, INC.
On November 1, 2016, the Company's majority-owned
subsidiary, B.R. Johnson, LLC (“BRJ LLC”) acquired substantially all of the assets (the “Acquisition”)
of B.R. Johnson, Inc. (“BRJ Inc.”), a seller and distributor of windows, doors and related hardware as well as specialty
products for use in commercial and residential buildings (the “Business”). Following the Acquisition, BRJ LLC has carried
on the Business.
The Acquisition was consummated pursuant
to an Asset Purchase Agreement, dated as of November 1, 2016 (the “APA”). Total consideration for the Acquisition was
approximately $16.5 million including delivery by BRJ LLC of a promissory note for $2,500,000 to BRJ Inc. (the “Note”),
which is subordinate to the Company’s debt agreements, and working capital adjustments of approximately $1.1 million, which
were paid during the six months ended June 30, 2017. The Note accrues interest at a rate of 5.25% per annum, payable quarterly,
with the principal amount of the Note payable in equal quarterly installments of $62,500 commencing on November 1, 2018 and maturing
on November 30, 2021.
The Company provided $10.95 million in
debt and equity financing to complete the Acquisition, including $7.14 million of a subordinated loan to BRJ Inc. and $3.81 million
in preferred equity of BRJ LLC (which is eliminated in consolidation), with the remainder from bank financing, the Note and entities
affiliated with Lorraine Capital, LLC. The Company holds 76.17% of the common membership interests and 95.22% of the preferred
membership interests of BRJ LLC, pursuant to the B.R. Johnson, LLC Limited Liability Company Agreement (the “LLC Agreement”)
entered into by and among Lorraine Capital, LLC (which owns 20% of the common membership interests), Regional Brands and BRJ Acquisition
Partners, LLC (which owns the remaining 3.83% of the common membership interests and 4.78% of the preferred membership interests).
To finance the Acquisition and potential
future acquisitions, on November 1, 2016, we issued 894,393 shares of our Common Stock for aggregate proceeds to us of $12,074,306
in a private placement.
Unaudited Pro Forma Results
– The unaudited pro forma supplemental information is based on estimates and assumptions which management believes are reasonable
but are not necessarily indicative of the consolidated financial position or results of future periods or the results that actually
would have been realized had the Acquisition occurred as of January 1, 2016. The unaudited pro forma supplemental information
includes incremental interest costs and intangible asset amortization charges as a result of the Acquisition, net of the related
tax effects.
Unaudited pro forma results for the three and nine months ended
September 30, 2016:
|
|
Three
|
|
|
Nine
|
|
|
|
months
|
|
|
months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
September
30, 2016
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,422,123
|
|
|
$
|
26,257,787
|
|
Gross profit
|
|
|
2,721,585
|
|
|
|
7,780,138
|
|
Amortization of intangibles
|
|
|
729,167
|
|
|
|
1,416,667
|
|
Net income to common shareholders
|
|
$
|
119,164
|
|
|
$
|
558,546
|
|
Earnings per common share-basic and diluted
|
|
$
|
0.13
|
|
|
$
|
0.62
|
|
NOTE
3. CONTRACTS IN PROCESS
Cost of revenue for our contracts in process
includes direct contract costs, such as materials and labor, and indirect costs that are attributable to contract activity. The
timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion
of certain phases of the work, or when services are provided. Projects with costs and estimated earnings recognized to date in
excess of cumulative billings are reported on the accompanying balance sheet as an asset as costs and estimated earnings in excess
of billings. Projects with cumulative billings in excess of costs and estimated earnings recognized to date are reported on the
accompanying balance sheet as a liability as billings in excess of costs and estimated earnings. The following is information with
respect to uncompleted contracts:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
11,486,314
|
|
|
$
|
8,246,796
|
|
Estimated earnings
|
|
|
3,912,693
|
|
|
|
2,273,388
|
|
|
|
|
15,399,007
|
|
|
|
10,520,184
|
|
Less: billings to date
|
|
|
(14,743,564
|
)
|
|
|
(10,064,806
|
)
|
|
|
$
|
655,443
|
|
|
$
|
455,378
|
|
Included on the balance sheet as follows:
|
|
|
|
|
|
|
|
|
Under current assets
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
967,599
|
|
|
$
|
894,261
|
|
Under current liabilities
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(312,156
|
)
|
|
|
(438,883
|
)
|
|
|
$
|
655,443
|
|
|
$
|
455,378
|
|
Prior to the Acquisition on November 1, 2016 (See Note 2), the
Company did not have any contracts in process.
NOTE
4. DEBT
In November 2016, BRJ LLC entered into
a credit agreement with KeyBank, N.A. Under the credit agreement, BRJ LLC may borrow up to an aggregate amount of $6,000,000 (the
“Credit Facility”) under revolving loans and letters of credit, with a sublimit of $500,000 for letters of credit.
The Credit Facility is payable upon demand of KeyBank, N.A., or the lenders, or upon acceleration as a result of an event of default.
At the closing of the Acquisition, approximately $1,900,000 was drawn under the Credit Facility to pay a portion of the purchase
price and costs associated with the Acquisition, with the balance being available for general working capital of BRJ LLC.
Interest under the Credit Facility is payable
monthly, starting on November 30, 2016, and accrues pursuant to the “base rate” of interest, which is equal to the
highest of (a) KeyBank, N.A.’s prime rate, (b) one-half of one percent (0.50%) in excess of the Federal Funds Effective Rate
of the Federal Reserve Bank of New York, and (c) one hundred (100) basis points in excess of the London Interbank Offered Rate
for loans in Eurodollars with an interest period of one month, plus any applicable margin. The credit agreement also requires the
payment of certain fees, including, but not limited to, letter of credit fees.
The Credit Facility is secured by substantially
all of BRJ LLC’s assets. The Credit Facility contains customary financial and other covenant requirements, including, but
not limited to, a covenant to not permit BRJ LLC’s consolidated fixed charge coverage ratio to exceed 1.15 to 1.00. The Credit
Facility also contains customary events of default.
The effective interest rate on borrowings
under the Credit Facility at September 30, 2017 was 3.69%. The aggregate borrowings outstanding under the Credit Facility at September
30, 2017 were $1,592,757 and, in addition, the bank has issued a letter of credit on behalf of the Company in the amount of $250,000
that expires on December 1, 2017.
NOTE 5. STOCKHOLDERS’ EQUITY
The Company’s authorized capital
consists of 3,000,000 shares of common stock, par value $0.00001 per share, and 50,000 shares of preferred stock, par value $0.01
per share.
On March 2, 2017, the Company filed a certificate
of amendment (the “Amendment”) to the Company’s Certificate of Incorporation with the Delaware Secretary of State
to reduce the number of shares of Common Stock the Company is authorized to issue from 50,000,000 to 3,000,000 shares and to reduce
the number of shares of Preferred Stock the Company is authorized to issue from 5,000,000 to 50,000 shares. The Amendment was approved
by the Board of Directors of the Company and the holders of a majority of the issued and outstanding shares of Common Stock by
written consent in lieu of a meeting.
The Company recorded stock compensation
expense for options vesting during the three and nine months ended September 30, 2017 of $15,181 and $46,181, respectively ($23,212
and $23,212, respectively, during the same periods in 2016).
On June 15, 2017, the Company’s stockholders
approved and adopted the Company’s Amended and Restated 2016 Equity Incentive Plan (the “Amended and Restated Equity
Incentive Plan”). The amendment modified the Company’s 2016 Equity Incentive Plan to, among other things, (1) provide
the Board of Directors with the authority to grant awards in the form of restricted stock and restricted stock units, (2) set the
maximum number of shares available for issuance under the Amended and Restated Equity Incentive Plan at 130,000 shares of the Company’s
common stock, par value $0.00001 per share, and (3) adopt certain other technical amendments.
NOTE 6. RELATED PARTY TRANSACTIONS
On April 8, 2016, the Company entered into
a Management Services Agreement (the “MSA”) with Ancora Advisors, LLC, whereby Ancora Advisors, LLC agreed to provide
specified services to the Company in exchange for a quarterly management fee in an amount equal to 0.14323% of the Company’s
stockholders’ equity (excluding cash and cash equivalents) as shown on the Company’s balance sheet as of the end of
each fiscal quarter of the Company. The management fee with respect to each fiscal quarter of the Company is paid no later than
10 days following the issuance of the Company’s financial statements for such fiscal quarter, and in any event no later than
60 days following the end of each fiscal quarter. For the nine months ended September 30, 2017, Ancora Advisors, LLC agreed to
waive payment of the management fee, but reserves the right to institute payment of the management fee at its discretion.
The Company’s former president and
principal executive officer had loaned the Company money to fund working capital needs to pay operating expenses. The loans were
repayable upon demand and accrued interest at the rate of 10% per annum. As of March 31, 2016, the aggregate principal loan balance
amounted to $186,196 and such loans had accrued interest of $63,804 through March 31, 2016. On April 8, 2016, the Company issued
to its former president and principal executive officer 18,522 shares of the Company’s Common Stock in full satisfaction
his loans to the Company.
Prior to May 12, 2016, the Company occupied
a portion of the offices occupied by BKF Capital Group, Inc., 31248 Oak Crest Drive, Suite 110, Westlake Village, California 91361
on a month to month basis for a fee of $50 per month paid to BKF Capital Group, Inc. The Company’s former president and principal
executive officer is also the Chairman, CEO and controlling shareholder of BKF Capital Group, Inc.
Effective May 12, 2016, the Company relocated
its principal offices to 6060 Parkland Boulevard, Cleveland, OH 44124. The Company pays no rent for the use of the offices, which
are located at the corporate headquarters of Ancora Advisors, LLC.
On November 1, 2016, in connection with
the Acquisition, BRJ LLC entered into a Management Services Agreement (the “BRJ MSA”) with Lorraine Capital, LLC, a
member of BRJ LLC, whereby Lorraine Capital, LLC agreed to provide specified management, financial and reporting services to us
in exchange for an annual management fee in an amount equal to the greater of (i) $75,000 or (ii) five percent (5%) of the annual
EBITDA (as defined in the BRJ MSA) of BRJ LLC, payable quarterly in arrears and subject to certain adjustments and offsets set
forth in the BRJ MSA. The BRJ MSA may be terminated by BRJ LLC, Lorraine Capital, LLC or Regional Brands at any time upon 60 days’
prior written notice and also terminates upon the consummation of a sale of BRJ LLC. For the nine months ended September 30, 2017,
the fees payable to Lorraine Capital LLC were approximately $144,000.
BRJ LLC has a relationship with a union
qualified commercial window subcontractor, Airways Door Service, Inc. (“ADSI”), which is advantageous to us in situations
that require union installation and repair services. Regarding the Acquisition, individuals affiliated with Lorraine Capital, LLC
acquired 57% of ADSI’s common stock; the remaining common stock is owned by three of BRJ LLC’s employees. BRJ LLC paid
ADSI for its services approximately $400,000 and $1,298,000, respectively, during the three months and nine months ended September
30, 2017. In addition, we provide ADSI services utilizing an agreed-upon fee schedule. These services include accounting, warehousing,
equipment use, employee benefit administration, risk management coordination and clerical functions. The fee for these services
was $11,850 and $35,100 respectively, during the three months and nine months ended September 30, 2017.
NOTE 7. INCOME TAXES
We account for income taxes using the
asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be
in effect when the differences are expected to reverse. The Company periodically evaluates the likelihood of realization
of deferred tax assets, and provides for a valuation allowance when necessary. With recent consistency in earnings, a strong earnings
history of B.R. Johnson, Inc., a recent acquisition, and favorable projections, the Company has reversed its valuation allowance
on deferred tax assets associated with activity beginning with the acquisition of B.R. Johnson, Inc., but exclusive of pre-acquisition
losses that are subject to limitations under Internal Revenue Code Section 382.
The Company has an effective income tax rate of
9.3% for the nine-months ended September 30, 2017. This effective tax rate is substantially lower than the federal statutory
rate of 34% due to the reversal of a portion of the valuation allowance during the quarter.