ALJ REGIONAL HOLDINGS INC - Quarter Report: 2021 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37689

ALJ REGIONAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		13-4082185
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

244 Madison Avenue, PMB #358

New York, NY 10016

(Address of principal executive offices, Zip code)

(888) 486-7775

(Registrant’s telephone number, including area code)

Title of class of registered securities

Common Stock, par value $0.01 per share

Ticker Symbol

ALJJ

Name of exchange on which registered

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller Reporting Company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of common stock, $0.01 par value per share, outstanding as of February 1, 2022, was 42,408,830.

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FORWARD-LOOKING STATEMENTS

The statements included in this Form 10-Q regarding future financial performance, results and conditions and other statements that are not historical facts, including, among others, the statements regarding competition, the Company’s intention to retain earnings for use in the Company’s business operations, the Company’s ability to continue to fund its operations and service its indebtedness, the adequacy of the Company’s accrual for tax liabilities, management’s projection of continued taxable income, and the Company’s ability to offset future income against net operating loss carryovers, constitute forward-looking statements. The words “can,” “could,” “may,” “will,” “would,” “plan,” “future,” “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements are based on current expectations and are subject to risks and uncertainties. Actual results or events could differ materially from those set forth or implied by such forward-looking statements and related assumptions due to certain important factors, including, without limitation, the risks set forth under the caption “Risk Factors” below, which are incorporated herein by reference. Some, but not all, of the forward-looking statements contained in this Form 10-Q include, among other things, statements about the following:

•

any statements regarding our expectations for future performance;

•

our ability to integrate business acquisitions;

•

our ability to compete effectively;

•

statements regarding future revenue and the potential concentration of such revenue coming from a limited number of customers;

•

our ability to meet customer needs;

•

our expectations that interest expense will increase;

•

our expectations that we will continue to have non-cash compensation expenses;

•

our expectation that we will be in compliance with the required covenants pursuant to our loan agreements;

•

regulatory compliance costs;

•

our ability to manage cost cutting activities;

•

the potential adverse impact of the novel coronavirus disease (“COVID-19”) pandemic on our business, operations and the markets and communities in which we and our customers, vendors and employees operate;

•

our ability to manage ongoing supply chain disruptions and constraints due primarily to the restriction of employee movements, key material and labor shortages, and transportation constraints;

•

our ability to improve margins and profitability on contracts we enter into; and

•

the other matters described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company is also subject to general business risks, including results of tax audits, adverse state, federal or foreign legislation and regulation, changes in general economic conditions, the Company’s ability to retain and attract key employees, acts of war or global terrorism and unexpected natural disasters. Any forward-looking statements included in this Form 10-Q are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statements.

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ALJ REGIONAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED DECEMBER 31, 2021

INDEX

		Page

	PART I – FINANCIAL INFORMATION	4

Item 1	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations (unaudited)	5
	Condensed Consolidated Statements of Cash Flows (unaudited)	6
	Condensed Consolidated Statements of Equity (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4	Controls and Procedures	36

	PART II – OTHER INFORMATION	37

Item 1	Legal Proceedings	37

Item 1A	Risk Factors	37

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3	Defaults Upon Senior Securities	51

Item 4	Mine Safety Disclosures	51

Item 5	Other Information	51

Item 6	Exhibits	52

	Signatures	53

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PART I. FINANCIAL INFORMATION

Item 1 - Financial Statements

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	December 31,			September 30,
	2021			2021
ASSETS
Current assets:
Cash and cash equivalents	$	2,069		$	2,276
Accounts receivable, net of allowance for doubtful accounts of $83 on both December 31, 2021 and September 30, 2021		59,831			68,572
Inventories, net		7,505			7,654
Prepaid expenses and other current assets		8,999			10,894
Total current assets		78,404			89,396
Property and equipment, net		61,797			63,930
Operating lease right-of-use assets		28,441			29,048
Intangible assets, net		29,462			30,611
Collateral deposits		487			487
Other assets		1,019			1,181
Total assets	$	199,610		$	214,653
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,158		$	15,241
Accrued expenses		24,610			26,211
Income taxes payable		479			181
Deferred revenue and customer deposits		2,359			4,053
Term loans, net of deferred loan costs - current installments		2,634			2,692
Finance lease obligations - current installments		776			765
Operating lease obligations - current installments		4,776			4,722
Current portion of workers' compensation reserve		710			710
Other current liabilities		4,353			4,353
Total current liabilities		54,855			58,928
Line of credit, net of deferred loan costs		11,525			5,490
Term loans, less current portion, net of deferred loan costs		92,672			93,484
Deferred revenue, less current portion		148			369
Workers' compensation reserve, less current portion		1,749			1,749
Finance lease obligations, less current installments		134			332
Operating lease obligations, less current installments		31,843			32,767
Deferred tax liabilities, net		706			852
Other non-current liabilities		2,750			8,106
Total liabilities		196,382			202,077
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.01 par value; authorized – 100,000 shares; 42,409 and 42,406 issued and outstanding on December 31, 2021 and September 30, 2021, respectively		424			424
Additional paid-in capital		288,399			288,355
Accumulated deficit		(285,595	)		(276,203	)
Total stockholders’ equity		3,228			12,576
Total liabilities and stockholders’ equity	$	199,610		$	214,653

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

	Three Months Ended December 31,
	2021			2020
Net revenue	$	103,082		$	111,137
Costs and expenses:
Cost of revenue		89,164			93,159
Selling, general, and administrative expense		20,183			17,055
Loss (gain) on disposal of assets, net		26			(67	)
Total operating expenses		109,373			110,147
Operating (loss) income		(6,291	)		990
Other (expense) income:
Interest expense, net		(2,705	)		(2,582	)
Total other expense, net		(2,705	)		(2,582	)
Loss from continuing operations before income taxes		(8,996	)		(1,592	)
Provision for income taxes		(396	)		(292	)
Net loss from continuing operations		(9,392	)		(1,884	)
Net loss from discontinued operations, net of income taxes		—			(203	)
Net loss	$	(9,392	)	$	(2,087	)
Loss per share of common stock–basic and diluted:
Continuing operations	$	(0.22	)	$	(0.04	)
Discontinued operations	$	—		$	—
Net loss per share ⁽¹⁾	$	(0.22	)	$	(0.05	)
Weighted average shares of common stock outstanding– basic and diluted		42,407			42,318

⁽¹⁾	Amounts may not add due to rounding.

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Three Months Ended December 31,
	2021			2020
Operating activities
Net loss	$	(9,392	)	$	(2,087	)
Adjustments to reconcile net loss to cash (used for) provided by operating activities:
Depreciation and amortization expense		5,430			5,032
Interest expense and other bank fees accreted to term loans		—			560
Amortization of deferred loan costs		320			185
Stock-based compensation expense		71			48
Provision for bad debts and obsolete inventory		(2	)		(176	)
Loss (gain) on disposal of assets, net		26			(67	)
Deferred income taxes		(146	)		(27	)
Changes in operating assets and liabilities:
Accounts receivable, net		8,741			(7,765	)
Inventories, net		151			512
Prepaid expenses, collateral deposits, and other current assets		1,895			(294	)
ROU assets/ROU liabilities		(263	)		(104	)
Other assets		162			(1,554	)
Accounts payable		(1,068	)		(1,494	)
Accrued expenses		(1,628	)		5,717
Income tax payable		298			10
Deferred revenue and customer deposits		(1,915	)		(95	)
Other current liabilities and other non-current liabilities		(5,356	)		3,674
Discontinued operations, net		—			926
Cash (used for) provided by operating activities		(2,676	)		3,001
Investing activities
Capital expenditures		(2,174	)		(2,606	)
Proceeds from sales of assets		—			20
Discontinued operations, net		—			(7	)
Cash used for investing activities		(2,174	)		(2,593	)
Financing activities
Payments on term loans		(950	)		(2,566	)
Proceeds from (payments on) line of credit, net		6,035			(537	)
Deferred loan costs		(240	)		—
Payments on finance leases		(202	)		(775	)
Cash provided by (used for) financing activities		4,643			(3,878	)
Change in cash and cash equivalents		(207	)		(3,470	)
Cash and cash equivalents at beginning of the year		2,276			6,050
Cash and cash equivalents at end of the year	$	2,069		$	2,580

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Three Months Ended December 31,
	2021		2020
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,304	$	2,072
Taxes	$	256	$	22

Non-cash investing and financing activities:
Capital equipment purchases financed with term loans	$	—	$	500

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(in thousands)

	Three Months Ended December 31,
	2021			2020
Common stock
Balance, beginning of period	$	424		$	422
Issuance of common stock upon cashless exercise of stock options		—			1
Balance, end of period	$	424		$	423
Additional paid in capital
Balance, beginning of period	$	288,355		$	288,193
Stock-based compensation expense - options		44			17
Balance, end of period	$	288,399		$	288,210
Accumulated deficit
Balance, beginning of period	$	(276,203	)	$	(271,560	)
Net loss		(9,392	)		(2,087	)
Balance, end of period	$	(285,595	)	$	(273,647	)
Total stockholders' equity	$	3,228		$	14,986

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively herein as “ALJ” or “Company”) is a holding company. During the three months ended December 31, 2021, ALJ consisted of the following wholly-owned subsidiaries:

•

Faneuil, Inc. (including its subsidiaries, “Faneuil”). Faneuil is a leading provider of call center services, back-office operations, staffing services, and toll collection services to government and regulated commercial clients across the United States, focusing on the healthcare, utility, transportation, and toll revenue collection industries. Faneuil is headquartered in Hampton, Virginia. ALJ acquired Faneuil in October 2013.

•

Phoenix Color Corp. (including its subsidiaries, “Phoenix”). Phoenix is a leading manufacturer of book components, educational materials and related products producing value-added components, heavily illustrated books and commercial specialty products using a broad spectrum of materials and decorative technologies. Phoenix is headquartered in Hagerstown, Maryland. ALJ acquired Phoenix in August 2015.

ALJ owned a third segment, Floors-N-More, LLC, d/b/a, Carpets N’ More (“Carpets”), which was sold during February 2021. Carpets was a floor covering retailer in Las Vegas, Nevada, and a provider of multiple products for the commercial, retail and home builder markets including all types of flooring, countertops, cabinets, window coverings and garage/closet organizers. ALJ acquired and disposed of Carpets in April 2014 and February 2021, respectively. See Basis of Presentation below.

ALJ manages its business and corporate structure through two operating segments: Faneuil and Phoenix.

Basis of Presentation

Overall

The accompanying condensed consolidated financial statements include the accounts of ALJ and its subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information. All intercompany transactions and balances have been eliminated in consolidation. The financial information included herein is unaudited, and reflects all adjustments which are, in the opinion of management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. Interim financial results are not necessarily indicative of financial results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with ALJ’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the SEC on December 20, 2021.

Discontinued Operations

In January 2021, ALJ entered into a Purchase and Sale Agreement (“PSA”), by and among the Company, Superior Interior Finishes, LLC, a Nevada limited liability company (“Superior”) and Carpets, pursuant to which the Company agreed to sell 100% of the membership interests of Carpets to Superior for an aggregate purchase price of $0.5 million (the “Purchase Price”) in cash (the “Transaction”). At the time of the PSA, Superior was 100% owned by Steve Chesin, the Chief Executive Officer of Carpets. The Company entered into the PSA because its Carpets business segment had been deemed a non-core holding and had underperformed over the past several years. The Transaction, which was approved by a committee of the Board comprised solely of certain independent directors of the Company, closed in February 2021. As such, Carpets’ results of operations and cash flows were classified as discontinued operations in ALJ’s financial statements for the three months ended December 31, 2020. See Note 4 for additional information about the divestiture of Carpets.

Asset Purchase Agreement

On December 21, 2021, ALJ entered into an agreement to sell the assets of Faneuil’s tolling and transportation vertical and health benefit exchange vertical (the “Asset Sale”) for a purchase price to be paid at closing of $140.0 million, less an indemnification escrow amount of approximately $15.0 million. Faneuil is also eligible to receive additional earn-out payments based upon the performance of certain customer agreements in an aggregate amount of up to $25.0 million. The completion of the Asset Sale is subject to certain closing conditions, including, among others, the receipt of certain requisite consents from customers and landlords.

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As the divestiture of Faneuil’s tolling and transportation vertical and health benefit exchange vertical does not represent a strategic shift with a major effect on ALJ’s operations and financial results, the transaction does not meet the criteria for treatment as discontinued operations pursuant to Accounting Standards Codification (“ASC”) 205-20-45, Presentation of Financial Statements — Discontinued Operations — Other Presentation Matters. Because of the closing conditions discussed above, the associated assets did not meet the held-for-sale criteria as defined by ASC 360-10-45-9, Long-Lived Assets Classified as Held for Sale on December 31, 2021.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Although actual results could differ materially from those estimates, such estimates are based on the best information available to management and management’s best judgments at the time. Significant estimates and assumptions by management are used for, but are not limited to, determining the fair value of assets and liabilities, including intangible assets acquired and allocation of acquisition purchase prices, estimated useful lives of certain assets, recoverability of long-lived and intangible assets, the recoverability of goodwill, the realizability of deferred tax assets, stock-based compensation, the likelihood of material loss as a result of loss contingencies, customer lives used for revenue recognition, the allowance for doubtful accounts and inventory reserves, and calculation of insurance reserves. The inputs into certain of these estimates and assumptions include the consideration of the economic impact of the COVID-19 pandemic. Actual results may differ materially from estimates. As the impact of the COVID-19 pandemic continues to develop, many of these estimates could require increased judgment and carry a higher degree of variability and volatility, and may change materially in future periods.

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Pronouncements Adopted

Internal-Use Software

In August 2018, the Financial Accounting Standards Boards (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to provide guidance on implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU 2018-15 aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, ASU 2018-15 amends ASC 350, Intangibles–Goodwill and Other, to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in such a CCA. ALJ adopted ASU 2018-15 on October 1, 2021. The impact of ASU 2018-15 on ALJ’s consolidated financial statements and related disclosures was not material.

Debt with Conversion and Other Options

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ALJ adopted ASU 2020-06 on October 1, 2021 using the full retrospective basis. The impact of ASU 2020-06 on ALJ’s consolidated financial statements and related disclosures was not material.

Accounting Standards Not Yet Adopted

Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. ASU 2021-04 will be effective for ALJ on October 1, 2022. ALJ does not anticipate the adoption of ASU 2021-04 to significantly impact its consolidated financial statements and related disclosures.

Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if it had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. ASU 2021-08 will be effective for ALJ on October 1, 2023. The adoption impact of the new standard will depend on the magnitude of future acquisitions. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date.

3. REVENUE RECOGNITION

Disaggregation of Revenue

Revenue by contract type was as follows for the three months ended December 31, 2021 and 2020:

	Three Months Ended December 31,
(in thousands)	2021		2020
Faneuil:
Healthcare	$	33,501	$	38,843
Transportation		25,282		20,095
Utility		13,161		13,064
Government		1,924		12,529
Other		911		1,438
Total Faneuil	$	74,779	$	85,969
Phoenix:
Publisher
MSA	$	21,021	$	19,114
Non-MSA		5,034		4,193
Commercial
MSA		188		90
Non-MSA		2,060		1,771
Total Phoenix	$	28,303	$	25,168
Total consolidated revenue, net	$	103,082	$	111,137

Substantially all of Faneuil revenue is recognized over time and substantially all of Phoenix revenue is recognized at a point in time.

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Contract Assets and Liabilities

The following table provides information about consolidated contract assets and contract liabilities at the end of each reporting period:

	December 31,		September 30,
(in thousands)	2021		2021
Contract assets:
Unbilled revenue ⁽¹⁾	$	642	$	1,169
Total contract assets	$	642	$	1,169
Contract liabilities:
Deferred revenue	$	2,506	$	4,422
Accrued rebates and material rights ⁽²⁾		4,526		3,145
Total contract liabilities	$	7,032	$	7,567

⁽¹⁾

Included in prepaid expenses and other current assets. Unbilled revenue represents rights to consideration for services provided when the right is conditioned on something other than passage of time (for example, meeting a milestone for the right to bill under the cost-to-cost measure of progress). Unbilled revenue is transferred to accounts receivable when the rights become unconditional.

⁽²⁾	Included in accrued expenses.

The following table provides changes in consolidated contract assets and contract liabilities from September 30, 2021 to December 31, 2021:

(in thousands)	Contract Assets			Contract Liabilities
Balance, September 30, 2021	$	1,169		$	7,567
Additions to contract assets		574			—
Transfer from contract assets to accounts receivable		(1,101	)		—
Revenue recognized		—			(5,200	)
Accrued rebates		—			1,381
Cash received from customer		—			3,284
Balance, December 31, 2021	$	642		$	7,032

Deferred Revenue and Remaining Performance Obligations

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from call center services, including non-refundable payments made prior to operations. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. Customers are typically invoiced for these agreements in regular installments and revenue is recognized ratably over the contractual service period. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter. Deferred revenue does not represent the total contract value of annual or multi-year non-cancellable agreements.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, not to receive financing from customers. Any potential financing fees are considered de minimis.

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue. Transaction price allocated to the remaining performance obligation is influenced by several factors, including the timing of renewals and average contract terms. The Company applied practical expedients to exclude amounts related to performance obligations that are billed and recognized as they are delivered, optional purchases that do not represent material rights, and any estimated amounts of variable consideration that are subject to constraint in accordance with the new revenue standard.

The Company has elected to apply the optional exemption for the disclosure of remaining performance obligations for contracts that have an original expected duration of one year or less, are billed and recognized as services are delivered and/or variable consideration

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

allocated entirely to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. This primarily consists of call center services that are billed monthly based on the services performed each month.

Costs to Obtain a Contract

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The costs to obtain a contract capitalized under the new revenue standard are primarily sales commissions paid to our sales force personnel. Capitalized costs may also include portions of fringe benefits and payroll taxes associated with compensation for incremental costs to acquire customer contracts and incentive payments to partners. These costs are amortized over the term of the contract or the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. The Company expenses sales commissions when incurred if the amortization period of the sales commission is one year or less. The accounting for incremental costs of obtaining a contract with a customer is consistent with the accounting under previous guidance.

During the three months ended December 31, 2021, the Company did not incur any costs to obtain a contract. During the three months ended December 31, 2020, the Company capitalized $0.1 million of costs to obtain a contract. During both the three months ended December 31, 2021 and 2020, the Company amortized $0.1 million of these costs, which was included in selling, general, and administrative expense. The net book value of costs to obtain a contract was $0.2 million on December 31, 2021, of which $0.1 million was in prepaid expenses and other current assets, and $0.1 million was in other assets. The net book value of costs to obtain a contract was $0.2 million on September 30, 2021, of which $0.1 million was in prepaid expenses and other current assets, and $0.1 million was in other assets.

Costs to Fulfill a Contract

The Company also capitalizes costs incurred to fulfill its contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to cost of revenue as the Company satisfies its performance obligations by transferring the service to the customer. These costs are amortized on a systematic basis over the expected period of benefit.

During the three months ended December 31, 2021 and 2020, the Company capitalized $2.2 million and $6.0 million, respectively, of costs to fulfill a contract. The amortization of costs to fulfill contracts, which comprise set-up/transition activities, for the three months ended December 31, 2021 and 2020 was $3.3 million and $4.4 million, respectively. The net book value of the costs to fulfill a contract on December 31, 2021 totaled $1.8 million of which $1.4 million was in prepaid expenses and other current assets, and $0.4 million was in other assets. The net book value of the costs to fulfill a contract on September 30, 2021 totaled $2.9 million, of which $0.5 million was in prepaid expenses and other current assets, and $2.4 million was in other assets.

Capitalized costs to obtain and fulfill a contract are periodically reviewed for impairment. ALJ did not incur any impairment losses during the three months ended December 31, 2021 or 2020.

4. CARPETS DIVESTITURE

As previously discussed in Note 1, ALJ sold Carpets during February 2021.

The following table presents information regarding certain components of loss from discontinued operations, net of income taxes:

	Three Months Ended
(in thousands)	December 31, 2020
Net revenue	$	8,693
Operating loss		(202	)
Loss before income taxes		(202	)
Income tax expense		1
Loss from discontinued operations, net of income taxes		(203	)

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The following table presents certain components of cash flows of discontinued operations:

	Three Months Ended
(in thousands)	December 31, 2020
Operating activities
Depreciation and amortization expense	$	125
Provision for obsolete inventory		14
Changes in operating assets and liabilities:
Accounts receivable, net		773
Inventories, net		(10	)
Prepaid expenses, collateral deposits, and other current assets		(194	)
Other assets and liabilities, net		218
Investing activities
Capital expenditures		(7	)

5. CONCENTRATION RISKS

Cash

The Company maintains its cash balances in accounts, which, at times, may exceed federally insured limits. The Company has not experienced any loss in such accounts and believes there is little exposure to any significant credit risk.

Major Customers and Accounts Receivable

ALJ Consolidated. The percentages of ALJ consolidated net revenue derived from its significant customers were as follows:

	Three Months Ended December 31,
	2021			2020
Customer A		11.5	%	**
Customer B	**				10.1	%

**	Less than 10% of ALJ consolidated net revenue.

Faneuil. The percentages of Faneuil net revenue derived from its significant customers were as follows:

	Three Months Ended December 31,
	2021			2020
Customer A		15.8	%	**
Customer B		12.1			13.0	%
Customer C		11.1		**

**	Less than 10% of Faneuil net revenue.

Accounts receivable from significant customers during the three months ended December 31, 2021 totaled $23.2 million on December 31, 2021. As of December 31, 2021, all Faneuil accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

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Phoenix. The percentages of Phoenix net revenue derived from its significant customers were as follows:

	Three Months Ended December 31,
	2021			2020
Customer A		24.0	%		19.5	%
Customer B		22.6			23.9
Customer C		10.3			14.7

Accounts receivable from significant customers during the three months ended December 31, 2021 totaled $3.9 million on December 31, 2021. As of December 31, 2021, all Phoenix accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to most customers.

Supplier Risk

ALJ has only one segment, Phoenix, that purchases inventory. Phoenix had suppliers that represented more than 10% of both Phoenix and consolidated ALJ inventory purchases as follows:

	Three Months Ended December 31,
	2021			2020
Supplier A		19.7	%		21.3	%
Supplier B	**			11.1

**	Less than 10% of both Phoenix and consolidated ALJ inventory purchases.

If these suppliers were unable to provide materials on a timely basis, Phoenix management believes alternative suppliers could provide the required supplies with minimal disruption to the business.

6. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Accounts Receivable, Net

The following table summarizes accounts receivable at the end of each reporting period:

	December 31,			September 30,
(in thousands)	2021			2021
Accounts receivable	$	58,345		$	68,450
Unbilled receivables		1,569			205
Accounts receivable		59,914			68,655
Less: allowance for doubtful accounts		(83	)		(83	)
Accounts receivable, net	$	59,831		$	68,572

Inventories, Net

The following table summarizes inventories at the end of each reporting period:

	December 31,			September 30,
(in thousands)	2021			2021
Raw materials	$	5,747		$	5,941
Semi-finished goods/work in process		1,716			1,691
Finished goods		61			94
Inventories		7,524			7,726
Less: allowance for obsolete inventory		(19	)		(72	)
Inventories, net	$	7,505		$	7,654

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Property and Equipment

The following table summarizes property and equipment at the end of each reporting period:

	December 31,			September 30,
(in thousands)	2021			2021
Machinery and equipment	$	39,543		$	39,837
Leasehold improvements		29,436			30,849
Building and improvements		16,874			16,874
Computer and office equipment		16,546			23,575
Software		11,868			16,533
Land		9,267			9,267
Furniture and fixtures		5,867			7,749
Construction and equipment in process		2,964			1,376
Vehicles		360			360
Property and equipment		132,725			146,420
Less: accumulated depreciation and amortization		(70,928	)		(82,490	)
Property and equipment, net	$	61,797		$	63,930

Property and equipment depreciation and amortization expense, including amounts related to finance leased assets, was $4.3 million and $3.8 million for the three months ended December 31, 2021 and 2020, respectively.

Intangible Assets

The following tables summarize identified intangible assets at the end of each reporting period:

				December 31, 2021
(in thousands)	Weighted Average Original Life (Years)	Weighted Average Remaining Life (Years)		Gross		Accumulated Amortization			Net
Customer relationships	12.0		5.2	$	33,590	$	(19,323	)	$	14,267
Trade names	27.6		21.9		10,240		(2,703	)		7,537
Supply agreements	11.9		8.8		7,610		(3,237	)		4,373
Technology	8.0		5.6		3,400		(1,027	)		2,373
Non-compete agreements	6.6		3.9		1,550		(638	)		912
Totals				$	56,390	$	(26,928	)	$	29,462

				September 30, 2021
(in thousands)	Weighted Average Original Life (Years)	Weighted Average Remaining Life (Years)		Gross		Accumulated Amortization			Net
Customer relationships	12.0		5.4	$	33,590	$	(18,621	)	$	14,969
Trade names	27.6		22.1		10,240		(2,604	)		7,636
Supply agreements	11.9		9.0		7,610		(3,055	)		4,555
Technology	8.0		5.8		3,400		(921	)		2,479
Non-compete agreements	6.6		4.1		1,550		(578	)		972
Totals				$	56,390	$	(25,779	)	$	30,611

Intangible asset amortization expense was $1.1 million and $1.3 million for the three months ended December 31, 2021 and 2020, respectively.

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The following table presents expected future amortization expense as of December 31, 2021:

(in thousands)	Estimated Future Amortization
Fiscal 2022 (remaining)	$	3,447
Fiscal 2023		4,596
Fiscal 2024		4,457
Fiscal 2025		4,144
Fiscal 2026		3,475
Thereafter		9,343
Total	$	29,462

Accrued Expenses

The following table summarizes accrued expenses at the end of each reporting period:

	December 31,		September 30,
(in thousands)	2021		2021
Accrued compensation and related taxes	$	11,640	$	14,484
Rebates payable		4,526		3,145
Acquisition contingent consideration		2,500		2,500
Legal		2,000		2,000
Bank overdraft		1,738		1,366
Medical and benefit-related payables		1,325		1,198
Other		426		1,275
Accrued board of director fees		263		131
Interest payable		192		112
Total accrued expenses	$	24,610	$	26,211

Workers’ Compensation Reserve

The Company is self-insured for certain workers’ compensation claims as discussed below. The current portion of workers’ compensation reserve is disclosed with accrued expenses. The non-current portion of workers’ compensation reserve is disclosed with other non-current liabilities.

Faneuil. Faneuil is self-insured for workers’ compensation claims up to $500,000 per incident. Reserves have been provided for workers’ compensation based upon insurance coverages, third-party actuarial analysis, and management’s judgment.

Phoenix. Phoenix maintains a fully insured plan for workers’ compensation claims.

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7. LOSS PER SHARE

The following table summarizes basic and diluted loss per share of common stock for each period presented:

	Three Months Ended December 31,
(in thousands, except per share amounts)	2021			2020
Net loss from continuing operations	$	(9,392	)	$	(1,884	)
Net loss from discontinued operations, net of income taxes		—			(203	)
Net loss	$	(9,392	)	$	(2,087	)
Loss per share of common stock–basic and diluted:
Continuing operations		(0.22	)		(0.04	)
Discontinued operations		—			—
Net loss per share ⁽¹⁾		(0.22	)		(0.05	)
Weighted average shares of common stock outstanding– basic and diluted		42,407			42,318
Anti-dilutive shares excluded from diluted net loss per share calculation:
Convertible debt		11,158			10,933
Warrants		1,611			2,908
Employee stock option grants		1,410			1,465
Total		14,179			15,306

⁽¹⁾	Amounts may not add due to rounding.

8. DEBT

ALJ’s components of debt and the respective interest rate at the end of each reporting period were as follows:

	December 31, 2021						September 30, 2021
(in thousands)	Interest Rate			Balance			Interest Rate			Balance
Line of credit:
Amended PNC Revolver		5.25	%	$	11,525			5.25	%	$	5,490
Amended PNC Revolver LIBOR		4.00			—			4.00			—
Line of credit, net of deferred loan costs				$	11,525					$	5,490
Current portion of term loans:
Current portion of Blue Torch Term Loan		8.50		$	3,800			8.50		$	3,800
Less: deferred loan costs					(1,166	)					(1,108	)
Current portion of term loans, net of deferred loan costs				$	2,634					$	2,692
Term loans, less current portion:
Blue Torch Term Loan, less current portion		8.50		$	89,300			8.50		$	90,250
Convertible Promissory Notes		8.25			6,026			8.25			6,026
Less: deferred loan costs					(2,654	)					(2,792	)
Term loans, less current portion, net of deferred loan costs				$	92,672					$	93,484

Total line of credit and term loans				$	106,831					$	101,666

Term Loan

In June 2021, ALJ replaced its existing debt by entering into a new term loan (“Blue Torch Term Loan”) with Blue Torch Finance, LLC for an aggregate principal amount of $95.0 million. The Blue Torch Term Loan, which matures on June 29, 2025, requires annual principal payments of $3.8 million paid in equal quarterly installments on the last business day of each fiscal quarter. The Blue Torch Term Loan bears interest at a floating rate based on the London Interbank Offered Rate (“LIBOR”), subject to a minimum of 1.75% per year, plus an applicable margin of 6.75% per year.

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Subject to certain exceptions, the Blue Torch Term Loan is secured by substantially all of the Company’s assets, includes customary representations, warranties and covenants, including, among other things, restrictions on ALJ’s ability to incur additional indebtedness, dispose of assets, incur liens, make investments, pay dividends or other distributions, and enter into certain transactions with their affiliates, in each case subject to specified exceptions.

Subject to certain exceptions, the Blue Torch Term Loan has a prepayment penalty of 3.00%, 2.00%, and 1.00% of the outstanding principal balance if ALJ prepays the loan during year one, year two, and year three, respectively.

Credit Facility

In connection with the Blue Torch Term Loan, ALJ amended and restated in its entirety its existing credit facility (“Amended PNC Revolver”). The Amended PNC Revolver provides for total borrowing capacity of $32.5 million, which includes (i) revolving borrowings, and (ii) the issuance of letters of credit. The letters of credit have a sublimit of $15.0 million. The Amended PNC Revolver matures June 29, 2025.

Amounts outstanding under the Amended PNC Revolver bear interest at a floating rate based on (i) the highest of (a) 2.75% per year, (b) the Federal Funds Open Rate plus 0.50% per year, (c) the LIBOR plus 1.00% per year, or (d) the prime lending rate of PNC, plus (ii) an applicable margin. The applicable margin is either 2.00% or 3.00% per year depending on whether or not ALJ meets certain debt covenant criteria set forth in the Amended PNC Revolver, respectively.

Under the Amended PNC Revolver, ALJ has the ability to lock into a lower rate for a fixed period of time, e.g. one month, for a fixed amount of borrowings under the Amended PNC Revolver. This lower rate is the LIBOR, subject to a minimum of 1.00% per year, plus an applicable margin of 3.00% per year.

The Amended PNC Revolver is secured by substantially all of the Company’s assets, includes customary representations, warranties and covenants, including, among other things, restrictions on ALJ’s ability to incur additional indebtedness, dispose of assets, incur liens, make investments, pay dividends or other distributions, and enter into certain transactions with their affiliates, in each case subject to specified exceptions.

Subject to certain exceptions, the Amended PNC Revolver has a prepayment penalty of 1.00%, 0.50%, and 0.25% of the total outstanding commitment, $32.5 million, if ALJ prepays the loan during year one, year two, and year three, respectively.

On December 31, 2021, ALJ had an unused borrowing capacity of $17.4 million.

Convertible Promissory Notes

In June 2021, ALJ issued convertible promissory notes in an aggregate principal amount of $6.0 million (the “Convertible Promissory Notes”) to two investors, including ALJ’s Chief Executive Officer and Chairman of the Board, Jess Ravich.

The Convertible Promissory Notes accrue interest at the rate of 8.25% per year, compounded monthly with interest payable in cash quarterly in arrears on the last day of each calendar quarter on the outstanding principal balance until such principal amount is paid in full or until conversion. The principal and accrued interest owed under the Convertible Promissory Notes are convertible, at the option of the holders, into shares of the Company’s common stock, at any time prior to November 28, 2023, at a conversion price equal to the equal to the quotient of all amounts due under each Convertible Promissory Note divided by the conversion rate of $0.54 per common share.

The Convertible Promissory Notes are (i) subordinate to the Blue Torch Term Loan and the Amended PNC Revolver, (ii) unsecured, and (iii) have a maturity date of November 28, 2023, subject to extension under certain circumstances.

Financial Covenant Compliance

The Blue Torch Term Loan and the Amended PNC Revolver include certain financial covenants. As of December 31, 2021, ALJ was in compliance with all financial covenants.

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Estimated Future Minimum Principal Payments

Estimated future minimum principal payments for the Blue Torch Term Loan and the Convertible Promissory Notes are as follows (in thousands):

Year Ending December 31,	Line of Credit		Blue Torch Term Loan		Convertible Promissory Notes		Total
2022	$	—	$	3,800	$	—	$	3,800
2023		—		3,800		6,026		9,826
2024		—		3,800		—		3,800
2025*		11,525		81,700		—		93,225
Total	$	11,525	$	93,100	$	6,026	$	110,651

*	The majority of this amount is the final balloon payment due on June 29, 2025.

9. COMMITMENTS AND CONTINGENCIES

Employment Agreements

ALJ maintains employment agreements with certain key executive officers that provide for a base salary and an annual bonus, with annual bonus amounts to be determined by the Board of Directors or the Chief Executive Officer. The agreements also provide for involuntary termination payments, which include base salary, performance bonus, medical premiums, stock options, non-competition provisions, and other terms and conditions of employment. On December 31, 2021, contingent termination payments related to base salary and medical premiums totaled $1.1 million.

Surety Bonds

As part of Faneuil’s normal course of operations, certain customers require surety bonds guaranteeing the performance of a contract. On December 31, 2021, the face value of such surety bonds, which represents the maximum cash payments that Faneuil’s surety would be obligated to pay under certain circumstances of non-performance, was $41.8 million. To date, Faneuil has not made any non-performance payments to any of its sureties.

Letters of Credit

The Company had letters of credit totaling $3.5 million outstanding on December 31, 2021.

Litigation, Claims, and Assessments

Marshall v. Faneuil, Inc.

On July 31, 2017, plaintiff Donna Marshall (“Marshall”) filed a proposed class action lawsuit in the Superior Court of the State of California for the County of Sacramento against Faneuil and ALJ. Marshall, a previously terminated Faneuil employee, alleges various California state law employment-related claims against Faneuil. Faneuil has answered the complaint and removed the matter to the United States District Court for the Eastern District of California; however, Marshall filed a motion to remand the case back to state court, which has been granted. In connection with the above, an amended complaint was filed by certain plaintiffs to add a claim for penalties under the California Private Attorneys General Act (the “PAGA Claim”). Faneuil demurred to the PAGA Claim and it was eventually dismissed by the trial court.

A mediation was held on March 11, 2021 and the parties are negotiating a settlement.

Harris v. Faneuil

Lois Harris, an employee of Faneuil in Georgia, filed a collective action complaint on April 18, 2021 in the United States District Court for the Northern District of Georgia. Harris alleges, on behalf of herself and other current and former non-exempt Call Center Agent employees who received nondiscretionary bonuses for periods in which they worked overtime hours, that Faneuil violated the

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Fair Labor Standards Act by failing to include nondiscretionary bonuses in the regular rate of pay when calculating the overtime rate for Harris and other similarly-situated persons. Faneuil has engaged counsel to defend it in this action. The Company does not believe the resolution of this complaint will have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

Other Litigation

The Company has been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company concluded as of December 31, 2021 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

Environmental Matters

The operations of Phoenix are subject to various laws and related regulations governing environmental matters. Under such laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as investigation of property damage. Phoenix incurs ongoing expenses associated with the performance of appropriate monitoring and remediation at certain of its locations.

10. LEASES

ALJ has operating leases for facilities, equipment, and vehicles, and finance leases for equipment. Over 95% of operating leases are for facilities. Many of the Company’s facilities leases contain renewal options and rent escalation clauses.

The Company determines if an arrangement is a lease at inception and recognizes a finance or operating lease liability and right-of-use asset in the Company’s Consolidated Balance Sheet. Right-of-use assets and lease liabilities for both operating and finance leases are recognized based on present value of lease payments over the lease term at commencement date.

In instances where the lease does not provide an implicit rate, the Company estimates an incremental borrowing rate (“IBR”) based on the information available at commencement date to determine the present value of lease payments. ALJ does not have a published credit rating because it has no publicly traded debt. However, the Company does have several privately held debt instruments that were taken into consideration. The Company generates its IBR, using a synthetic credit rating model that estimates the likelihood (probability) of a borrower receiving a given credit rating based on relevant credit factors or predictor variables. It is based on a regression analysis using selected financial ratios of publicly traded industry comparable companies and the companies’ credit ratings. The estimated IBR is then adjusted for (i) the length of the lease term, and (ii) the effect of designating specific collateral with a value equal to the unpaid lease payments. Finally, ALJ applies the estimated IBR on a lease-by-lease basis as each lease has different start and end dates and has different assumptions regarding purchase or renewal options.

For facilities leases, ALJ accounts for non-lease components such as maintenance, taxes, and insurance, separately. For equipment leases, ALJ accounts for lease and non-lease components as a single lease component. The difference between the operating lease right-of-use assets and operating lease liabilities primarily relates to adjustments for deferred rent and tenant improvement allowances.

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The following table presents the location of the ROU assets and liabilities in the Consolidated Balance Sheet and ALJ’s weighted-average lease term and discount rate:

(dollars in thousands)	December 31, 2021			September 30, 2021
Finance Leases:
Property and equipment, at cost	$	1,575		$	1,575
Less accumulated amortization		(1,198	)		(977	)
Property and equipment, net	$	377		$	598
Finance lease obligations, current portion	$	776		$	765
Finance lease obligations, less current portion		134			332
Total finance lease liabilities	$	910		$	1,097
Operating Leases:
Operating lease right-of-use assets	$	28,441		$	29,048
Operating lease obligations - current installments	$	4,776		$	4,722
Operating lease obligations, less current installments		31,843			32,767
Total operating lease obligations	$	36,619		$	37,489
Weighted average remaining lease term (years):
Finance		1.1			1.1
Operating		6.7			6.7
Weighted average discount rate:
Finance		6.0	%		6.0	%
Operating		10.6	%		10.6	%

The following table presents the components of lease cost and the location of such cost in ALJ’s Consolidated Statements of Operations:

		Three Months Ended December 31,
(in thousands)	Statement of Operations Location	2021		2020
Finance Leases:
Amortization of finance lease assets	Selling, general, and administrative expense	$	221	$	312
Amortization of finance lease assets	Cost of revenue		—		114
Interest on finance lease liabilities	Interest expense		15		52
Total finance lease cost			236		478
Operating Leases:
Operating lease cost	Selling, general, and administrative expense		1,679		1,757
Operating lease cost	Cost of revenue		255		319
Variable lease cost	Selling, general, and administrative expense		355		222
Short-term lease cost	Selling, general, and administrative expense		—		9
Total operating lease cost			2,289		2,307
Total lease cost		$	2,525	$	2,785

The following table presents supplemental cash flow information related to leases:

(In thousands)	Three Months Ended December 31,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for finance leases	$	15	$	52
Operating cash flows used for operating leases - continuing operations		1,227		1,241
Financing cash flows used for finance leases		202		775
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		411		—

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Maturities of lease liabilities as of December 31, 2021 are as follows (in thousands):

Year Ending December 31,	Finance Leases			Operating Leases
2022	$	810		$	8,366
2023		135			7,798
2024		—			6,936
2025		—			6,913
2026		—			6,712
Thereafter		—			15,030
Total lease payments		945			51,755
Less: imputed interest		(35	)		(15,136	)
Total present value of lease payments	$	910		$	36,619

Reported as of December 31, 2021
Current	$	776		$	4,776
Non-current		134			31,843
Total	$	910		$	36,619

11. EQUITY

Common Stock

ALJ issued less than 0.1 million shares of common stock upon the cashless exercise of stock options during both the three months ended December 31, 2021 and 2020.

Preferred Stock

In August 2018, ALJ shareholders approved the amendment and restatement of ALJ’s Restated Certificate of Incorporation to eliminate the preferred stock and authorize the issuance of 5.0 million shares of blank check preferred stock. ALJ had no preferred stock outstanding on December 31, 2021 or September 30, 2021.

Equity Incentive Plans

In July 2016, ALJ shareholders approved ALJ’s Omnibus Equity Incentive Plan (“2016 Plan”), which allows ALJ and its subsidiaries to grant securities of ALJ to officers, employees, directors, or consultants. ALJ believes that equity-based compensation is fundamental to attracting, motivating, and retaining highly qualified dedicated employees who have the skills and experience required to achieve business goals. Further, ALJ believes the 2016 Plan aligns the compensation of directors, officers, and employees with shareholder interest.

The 2016 Plan is administered by ALJ’s Compensation, Nominating and Corporate Governance Committee (“Committee”) of the Board. The maximum aggregate number of common stock shares that may be granted under the 2016 Plan is 2.0 million. The 2016 Plan generally provides for the grant of qualified or nonqualified stock options, restricted stock and restricted stock units, unrestricted stock, stock appreciation rights, performance awards and other awards. The Committee has full discretion to set the vesting criteria. The exercise price of a stock option may not be less than 100% of the fair market value of ALJ’s common stock on the date of grant. The 2016 Plan prohibits the repricing of outstanding stock options without prior shareholder approval. The term of stock options granted under the 2016 Plan may not exceed ten years. Awards are subject to accelerated vesting upon a change in control in the event the acquiring company does not assume the awards. The Board may amend, alter, or discontinue the 2016 Plan, but shall obtain shareholder approval of any amendment as required by applicable law or stock exchange listing requirements. As of December 31, 2021, there were 1.4 million options available for future grant under the 2016 Plan.

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock-Based Compensation.

The following table sets forth the total stock-based compensation expense included in selling, general, and administrative expense on the Statements of Operations:

	Three Months Ended December 31,
(in thousands)	2021		2020
Stock options	$	44	$	17
Common stock awards		27		31
Total stock-based compensation expense	$	71	$	48

On December 31, 2021, ALJ had $0.1 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 2.7 years.

Stock Option Awards.

ALJ issued 200,000 options during the three months ended December 31, 2021. The fair value of the options was $0.1 million using the following assumptions: expected option life of 6.2 years, volatility of 56.46%, dividend yield of 0.00%, and annual risk-free interest rate of 1.18%.

ALJ had no option grants during the three months ended December 31, 2020.

Common Stock Awards. Members of ALJ’s Board of Directors receive a director compensation package that includes an annual common stock award. In connection with such awards, ALJ recorded stock-based compensation expense of less than $0.1 million for both the three months ended December 31, 2021 and 2020.

Common Stock Options and Warrants Outstanding on December 31, 2021

On December 31, 2021, ALJ had 1.4 million stock options with a weighted average exercise price of $3.48 outstanding and warrants exercisable to purchase 1.6 million shares of common stock with a weighted average exercise price of $0.56 outstanding.

The “intrinsic value” of options is the excess of the value of ALJ stock over the exercise price of such options. The total intrinsic value of options outstanding (of which all are vested or expected to vest) and the total intrinsic value of options exercisable was $0.1 million on December 31, 2021.

12. INCOME TAX

ALJ recorded a provision for income taxes of $0.4 million and $0.3 million for the three months ended December 31, 2021 and 2020, respectively. ALJ’s effective tax rate for the three months ended December 31, 2021 was (4.0%), as a result of generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. ALJ’s effective tax rate for the three months ended December 31, 2020 was (16.0%), which was also due to generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. The increase in ALJ’s effective tax rate was attributable to an increase in forecasted operating losses, as well as changes to the valuation allowance recorded against net deferred tax assets.

ALJ recorded a provision for income taxes for discontinued operations of less than $0.1 million during the three months ended December 31, 2020.

13. RANSOMWARE INCIDENT

On August 18, 2021, Faneuil detected a ransomware attack (“Security Event”) that accessed and encrypted certain files on certain servers utilized by Faneuil in the provision of its call center services.

Promptly upon detection of the Security Event, Faneuil launched an investigation, engaged legal counsel and other incident response professionals, and notified law enforcement. Faneuil immediately implemented a series of containment and remediation measures to

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

address this situation and reinforce the security of its information technology systems. Faneuil worked with industry-leading cybersecurity professionals to immediately respond to the threat, defend its information technology systems, and conduct remediation.

Although Faneuil quickly and actively managed the Security Event, such event caused disruption to parts of Faneuil’s business, including certain aspects of its provision of call center services. Faneuil carries insurance, including cyber insurance, commensurate with the size and the nature of its operations. Although Faneuil actively communicated with customers and worked to minimize disruption, Faneuil cannot guarantee that customer relationships were not harmed as a result of the Security Event.

As a result of the Security Event, Faneuil incurred expenses of approximately $0.2 million, recorded in selling, general, and administrative expense during the three months ended December 31, 2021. As of December 31, 2021, Faneuil’s insurance recovery receivable was approximately $1.1 million, included with other current assets on the Consolidated Balance Sheet, for amounts that are considered probable for recovery. The insurance proceeds are expected to be received before March 31, 2022.

Should Faneuil expect to receive additional insurance recoveries, above the $1.1 million insurance recovery receivable on December 31, 2021, they will be recorded when considered probable for recovery.

14. REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION

Reportable Segments

As discussed in Note 1, ALJ has organized its business along two reportable segments (Faneuil and Phoenix), together with a corporate group for certain support services. ALJ’s operating segments are aligned on the basis of products, services, and industry. The Chief Operating Decision Maker (“CODM”) is ALJ’s Chief Executive Officer. The CODM manages the business, allocates resources to, and assesses the performance of each operating segment using information about its net revenue and segment adjusted EBITDA. ALJ defines segment adjusted EBITDA as segment net loss before depreciation and amortization, interest expense, net, acquisition/disposition-related expenses, restructuring and cost reduction initiatives, Security Event expenses, stock-based compensation, gain on disposal of assets, net, bank fees accreted to term loans, loan amendment expenses, and provision for income taxes. Such amounts are detailed in ALJ’s segment reconciliation below. The accounting policies for segment reporting are the same as for ALJ as a whole.

The following tables present ALJ’s segment information for the three months ended December 31, 2021 and 2020:

	Three Months Ended December 31, 2021
(in thousands)	Faneuil			Phoenix		ALJ			Consolidated
Net revenue	$	74,779		$	28,303	$	—		$	103,082
Segment adjusted EBITDA - continuing operations	$	(1,816	)	$	5,121	$	(1,438	)	$	1,867
Depreciation and amortization										(5,430	)
Interest expense, net										(2,705	)
Acquisition/disposition-related expenses										(2,388	)
Provision for income taxes										(396	)
Security Event expenses										(168	)
Restructuring and cost reduction initiatives										(75	)
Stock-based compensation										(71	)
Loss on disposal of assets, net										(26	)
Net loss									$	(9,392	)

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Three Months Ended December 31, 2020
(in thousands)	Faneuil		Phoenix		ALJ			Consolidated
Net revenue	$	85,969	$	25,168	$	—		$	111,137
Segment adjusted EBITDA - continuing operations	$	3,637	$	4,047	$	(1,241	)	$	6,443
Depreciation and amortization									(5,032	)
Interest expense, net									(2,582	)
Bank fees accreted to term loans									(300	)
Benefit from income taxes									(292	)
Loan amendment expenses									(88	)
Restructuring and cost reduction initiatives									(52	)
Stock-based compensation									(48	)
Gain on disposal of assets, net									67
Net loss from continuing operations									(1,884	)
Net loss from discontinued operations									(203	)
Net loss								$	(2,087	)

Geographic Information

Substantially all of the Company’s assets were located in the United States. Substantially all of the Company’s revenue was earned in the United States.

Depreciation and amortization, interest expense, net, restructuring and cost reduction initiatives, bank fees accreted to term loans, loan amendment expenses, Security Event expenses, stock-based compensation, gain on disposal of assets, net, and benefit from income taxes.

15. SUBSEQUENT EVENT

Stock Purchase Agreement

On February 3, 2022, ALJ entered into a stock purchase agreement (the “Stock Purchase Agreement”) with LSC Communications Book LLC, a Delaware limited liability company (“Purchaser”), and Phoenix, ALJ’s wholly owned subsidiary. Purchaser has agreed, subject to the terms and conditions set forth in the Stock Purchase Agreement, to acquire all of the outstanding shares of common stock of Phoenix (the “Sale Transaction”). If the closing date of the Sale Transaction is on or before April 15, 2022, the purchase price to be paid at closing is approximately $134.8 million. If the closing date is after April 15, 2022 but on or before May 15, 2022, the purchase price will be decreased by $1.0 million, and if the closing date is after May 15, 2022, the purchase price will be decreased by an additional $1.0 million. Concurrently with the execution of the Stock Purchase Agreement, the Purchaser and Jess Ravich, the Company’s Chief Executive Officer and largest stockholder, entered into a voting and support agreement pursuant to which Mr. Ravich agreed, subject to the terms and conditions set forth therein, to vote all shares of the Company’s common stock beneficially owned by him in favor of the Sale Transaction and against any competing transaction proposal.

The completion of the Sale Transaction is subject to certain customary closing conditions, including, among others, (a) the expiration of the waiting period applicable to the Sale Transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (b) the accuracy of the parties’ respective representations and warranties in the Stock Purchase Agreement, subject to specified materiality qualifications, (c) compliance by the parties with their respective covenants in the Stock Purchase Agreement in all material respects, (d) the absence of a Material Adverse Effect (as defined in the Stock Purchase Agreement), (e) the approval by ALJ stockholders of the Sale Transaction, and (f) no order being brought to enjoin the consummation of the Sale Transaction. Consummation of the Sale Transaction is not subject to a financing condition. The Stock Purchase Agreement also contains representations, warranties, covenants and indemnities that are customary for transactions of this type. ALJ, Purchaser, and Phoenix may terminate the Stock Purchase Agreement under certain specified circumstances, including, among others, if the Sale Transaction is not consummated by June 15, 2022.

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. MD&A is organized as follows:

•

Overview. Discussion of our business and overall analysis of financial and other highlights affecting us to provide context for the remainder of MD&A.

•

Results of Operations. An analysis comparing our financial results for the three months ended December 31, 2021 to the three months ended December 31, 2020.

•

Liquidity and Capital Resources. An analysis comparing our cash flows for the three months ended December 31, 2021 to the three months ended December 31, 2020, and discussion of our financial condition and liquidity.

•

Contractual Obligations. Discussion of contractual obligations on December 31, 2021.

•

Off-Balance Sheet Arrangements. Discussion of off-balance sheet arrangements on December 31, 2021.

•

Critical Accounting Policies and Estimates. Discussion of the significant estimates and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses, and related disclosure of contingent assets and liabilities.

The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in “Part I, Item 1 – Financial Statements.” The following discussion contains a number of forward-looking statements that involve risks and uncertainties. Words such as "anticipates," "expects," "intends," "goals," "plans," "believes," "seeks," "estimates," "continues," "may," "will," "should," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements are based on our current expectations and could be affected by the risk and uncertainties described in “Part II, Item 1A - Risk Factors.” Our actual results may differ materially.

Overview

ALJ Regional Holdings, Inc. (“ALJ” or “we”) is a holding company that operates Faneuil, Inc. (“Faneuil”) and Phoenix Color Corp. (“Phoenix”). Additionally, ALJ operated Floors-N-More, LLC, d/b/a Carpets N’ More (“Carpets”) through February 2021. With several members of our senior management and Board of Directors coming from long careers in the professional services industry, ALJ is focused on acquiring and operating exceptional businesses.

We continue to see our business evolve as we execute our strategy of buying attractively valued assets and selling existing assets when advantageous. In analyzing the financial impact of any potential acquisition, we focus on earnings, operating margin, cash flow and return on invested capital targets. We hire successful and experienced management teams to run each of our operating companies and incentivize them to drive higher profits. We are focused on increasing our net revenue at each of our operating subsidiaries by investing in sales and marketing, expanding into new products and markets, and evaluating and executing on tuck-in acquisitions, while continually examining our cost structures to drive higher profits.

In January 2021, we entered into a Purchase and Sale Agreement (“PSA”), by and among ALJ, Superior Interior Finishes, LLC, a Nevada limited liability company (“Purchaser” or “Superior”) and Carpets, pursuant to which ALJ agreed to sell 100% of the membership interests of Carpets to the Purchaser for an aggregate purchase price of $0.5 million (the “Purchase Price”) in cash (the “Transaction”). At the time of the PSA, Superior was 100% owned by Steve Chesin, the Chief Executive Officer of Carpets. ALJ entered into the PSA because its Carpets business segment had been deemed a non-core holding and had underperformed over the past several years. The Transaction, which was approved by a committee of the Board comprised solely of certain independent directors of the Company, closed in February 2021. As such, the results of operations, assets, liabilities, and cashflows of Carpets were classified as discontinued operations in ALJ’s financial statements for the three months ended December 31, 2020. See “Part I, Item 1 - Financial Statements – Note 4. Divestitures – Carpets Divestiture” for additional information about the divestiture of Carpets.

In June 2021, we replaced the Cerberus Term Loan with the Blue Torch Term Loan and amended the Cerberus/PNC Financing Agreement to (i) significantly reduce principal payments, (ii) consolidate debt, (iii) update financial covenants, and (iv) extend the maturity dates under both the Blue Torch Term Loan and the Amended PNC Revolver from November 2023 to June 2025. See “Part I, Item 1 - Financial Statements – Note 8. Debt” for additional information.

In December 2021, we entered into a definitive agreement to sell the assets of Faneuil’s tolling and transportation vertical and health benefit exchange vertical (the “Asset Sale”) for a purchase price to be paid at closing of $140.0 million, less an indemnification escrow amount of approximately $15.0 million. Faneuil is also eligible to receive additional earn-out payments based upon the

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performance of certain customer agreements in an aggregate amount of up to $25.0 million based upon the performance of certain

customer agreements. The completion of the Asset Sale is subject to certain closing conditions, including, among others, the receipt

of certain requisite consents from customers and landlords.

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Three Months Ended December 31, 2021 Compared to Three Months Ended December 31, 2020

The following table sets forth certain Condensed Consolidated Statements of Operations data in dollars and as a percentage of net revenue for each period as follows:

	Three Months Ended December 31, 2021						Three Months Ended December 31, 2020
				% of						% of
(in thousands, except per share amounts)	Dollars			Net Revenue			Dollars			Net Revenue
Net revenue⁽¹⁾
Faneuil	$	74,779			72.5	%	$	85,969			77.4	%
Phoenix		28,303			27.5			25,168			22.6
Consolidated net revenue		103,082			100.0			111,137			100.0
Cost of revenue ⁽²⁾
Faneuil		67,525			90.3			73,877			85.9
Phoenix ⁽³⁾		21,639			76.5			19,282			76.6
Consolidated cost of revenue		89,164			86.5			93,159			83.8
Selling, general, and administrative expense ⁽²⁾
Faneuil		9,313			12.5			8,481			9.9
Phoenix		3,052			10.8			3,152			12.5
ALJ		3,897			—			1,675			—
Consolidated selling, general, and administrative expense		16,262			15.8			13,308			12.0
Depreciation and amortization expense ⁽²⁾
Faneuil		3,385			4.5			3,214			3.7
Phoenix⁽⁴⁾		536			1.9			533			2.1
Consolidated depreciation and amortization expense		3,921			3.8			3,747			3.4
Loss (gain) on disposal of assets, net		26			—			(67	)		(0.1	)
Total consolidated operating expenses		109,373			106.1			110,147			99.1
Consolidated operating (loss) income		(6,291	)		(6.1	)		990			0.9
Interest expense		(2,705	)		(2.6	)		(2,582	)		(2.3	)
Provision for income taxes		(396	)		(3.8	)		(292	)		(2.6	)
Net loss from continuing operations		(9,392	)		(9.1	)		(1,884	)		(1.7	)
Net loss from discontinued operations		—			—			(203	)		(0.2	)
Net loss	$	(9,392	)		(9.1	)	$	(2,087	)		(1.9	)
Loss per share of common stock–basic and diluted	$	(0.22	)				$	(0.05	)

⁽¹⁾	Percentage is calculated as segment net revenue divided by consolidated net revenue.

⁽²⁾	Percentage is calculated as a percentage of the respective segment net revenue.

⁽³⁾	Includes depreciation expense of $1.5 million and $1.3 million for the three months ended December 31, 2021 and December 31, 2020, respectively.

⁽⁴⁾	Primarily amortization of intangible assets. Total depreciation and amortization expense for Phoenix, including depreciation expense captured in cost of revenue, was $2.0 million and $1.8 million for the three months ended December 31, 2021 and December 31, 2020, respectively.

⁽⁵⁾	Percentage is calculated as a percentage of consolidated net revenue.

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Net Revenue

	Three Months Ended December 31,
(in thousands)	2021		2020		$ Change			% Change
Faneuil	$	74,779	$	85,969	$	(11,190	)		(13.0	)%
Phoenix		28,303		25,168		3,135			12.5
Consolidated net revenue	$	103,082	$	111,137	$	(8,055	)		(7.2	)%

Faneuil Net Revenue

Faneuil net revenue for the three months ended December 31, 2021 was $74.8 million, a decrease of $11.2 million, or 13.0%, compared to net revenue of $86.0 million for the three months ended December 31, 2020. The decrease was mainly attributable to a $10.6 million reduction driven by the completion of customer contracts and a $0.6 million net decrease in existing customer call volumes.

The following table reflects the amount of Faneuil’s backlog, which represents multi-year contract deliverables, by the year Faneuil expects to recognize such net revenue:

	As of December 31,
(in millions)	2021		2020
Within one year	$	206.2	$	241.2
Between one year and two years		130.7		170.4
Between two years and three years		84.2		120.6
Between three years and four years		24.1		86.3
Thereafter		14.2		55.2
Total Faneuil backlog	$	459.4	$	673.7

The decrease in total Faneuil backlog from December 31, 2021 compared to December 31, 2020 was primarily the result of negotiating an early termination of a large unprofitable contract and revenue recognition of contract backlog on December 31, 2020.

Phoenix Net Revenue

Phoenix net revenue for the three months ended December 31, 2021 was $28.3 million, an increase of $3.1 million, or 12.5%, compared to net revenue of $25.2 million for the three months ended December 31, 2020. The increase was primarily attributable to higher component sales primarily related to trade and education.

The following table reflects the amount of Phoenix’s backlog, which represents executed contracts that contain minimum volume commitments over multiple years for future product deliveries, by the year Phoenix expects to recognize such net revenue:

	As of December 31,
(in millions)	2021		2020
Within one year	$	72.7	$	69.8
Between one year and two years		58.7		64.8
Between two years and three years		43.3		52.6
Between three years and four years		43.3		43.3
Thereafter		41.5		84.9
Total Phoenix backlog	$	259.5	$	315.4

The decrease in Phoenix backlog on December 31, 2021 compared to December 31, 2020 was primarily driven by product delivery in the normal course of business for purchase orders outstanding on December 31, 2020.

For further discussion of our subsidiaries’ backlog, see “Part II, Item 1A. Risk Factors - Risks Related to our Business Generally and our Common Stock - We may not receive the full amounts estimated under the contracts in our backlog, which could reduce our net revenue in future periods below the levels anticipated. This makes backlog an uncertain indicator of future operating results.”

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Cost of Revenue

	Three Months Ended December 31,
(in thousands)	2021			2020			$ Change			% Change
Faneuil	$	67,525		$	73,877		$	(6,352	)		(8.6	)%
As a percentage of segment net revenue		90.3	%		85.9	%
Phoenix		21,639			19,282			2,357			12.2
As a percentage of segment net revenue		76.5	%		76.6	%
Consolidated cost of revenue	$	89,164		$	93,159		$	(3,995	)		(4.3	)%

Faneuil Cost of Revenue

Faneuil cost of revenue for the three months ended December 31, 2021 was $67.5 million, a decrease of $6.4 million, or 8.6%, compared to cost of revenue of $73.9 million for the three months ended December 31, 2020. The decrease in cost of revenue was a direct result of the decreased net revenue. During the three months ended December 31, 2021, as compared to the three months ended December 31, 2020, cost of revenue as a percentage of segment net revenue increased to 90.3% from 85.9%, respectively, as a result of supplementing Faneuil’s call center workforce with more costly subcontract labor during the three months ended December 31, 2021.

Phoenix Cost of Revenue

Phoenix cost of revenue for the three months ended December 31, 2021 was $21.6 million, an increase of $2.4 million, or 12.2%, compared to cost of revenue of $19.3 million for the three months ended December 31, 2020. During the three months ended December 31, 2021, as compared to the three months ended December 31, 2020, cost of revenue as a percentage of segment net revenue was consistent at 76.5% and 76.6%, respectively. Phoenix experiences normal fluctuations to cost of revenue as a percentage of net revenue as a result of changes to the mix of products sold. Additionally, certain costs do not fluctuate directly with net revenue.

Selling, General, and Administrative Expense

	Three Months Ended December 31,
(in thousands)	2021		2020		$ Change			% Change
Faneuil	$	9,313	$	8,481	$	832			9.8	%
Phoenix		3,052		3,152		(100	)		(3.2	)
ALJ		3,897		1,675		2,222			132.7
Consolidated selling, general and administrative expense	$	16,262	$	13,308	$	2,954			22.2	%

Faneuil Selling, General, and Administrative Expense

Faneuil selling, general, and administrative expense for the three months ended December 31, 2021 was $9.3 million, an increase of $0.8 million, or 9.8%, compared to selling, general, and administrative expense of $8.5 million for the three months ended December 31, 2020. The increase was primarily attributable to higher medical insurance claims under Faneuil’s self-insurance medical plan, somewhat offset by the reduction of performance-based bonuses for selling, general, and administrative personnel. During the three months ended December 31, 2021 compared to the three months ended December 31, 2020, selling, general, and administrative expense as a percentage of segment net revenue increased to 12.5% from 9.9% mostly due to the decrease in net revenue. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.

Phoenix Selling, General, and Administrative Expense

Phoenix selling, general, and administrative expense for the three months ended December 31, 2021 was $3.1 million, a decrease of $0.1 million, or 3.2%, compared to selling, general, and administrative expense of $3.2 million for the three months ended December 31, 2020. Selling, general, and administrative expense as a percentage of segment net revenue decreased to 10.8% for the three months ended December 31, 2021 from 12.5% for the three months ended December 31, 2020, which was mainly attributable to the increase in net revenue. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.

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ALJ Selling, General, and Administrative Expense

ALJ selling, general, and administrative expense for the three months ended December 31, 2021 was $3.9 million, an increase of $2.2 million, or 132.7%, compared to selling, general, and administrative expense of $1.7 million for the three months ended December 31, 2020. The increase was mainly attributable to acquisition/disposition-related legal fees. We expect selling, general, and administrative expense to fluctuate in the future as we comply with new and updated SEC reporting requirements.

Depreciation and Amortization Expense

	Three Months Ended December 31,
(in thousands)	2021		2020		$ Change		% Change
Faneuil	$	3,385	$	3,214	$	171		5.3	%
Phoenix		536		533		3		0.6
Consolidated depreciation and amortization expense	$	3,921	$	3,747	$	174		4.6	%

Faneuil Depreciation and Amortization Expense

Faneuil depreciation and amortization expense was consistent at $3.4 million and $3.2 million for the three months ended December 31, 2021 and December 31, 2020, respectively. Because certain Faneuil contracts require capital investments, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Phoenix Depreciation and Amortization Expense

Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets. Depreciation and amortization expense was consistent at $0.5 million for both the three months ended December 31, 2021 and December 31, 2020, respectively.

Interest Expense

Interest expense was consistent at $2.7 million and $2.6 million for the three months ended December 31, 2021 and December 31, 2020, respectively. Interest expense was impacted by lower interest rates offset by higher amortization of deferred loan costs, which were both attributable to our debt refinance in June 2021.

Provision for Income Taxes

We recorded a provision for income taxes of $0.4 million and $0.3 million for the three months ended December 31, 2021 and 2020, respectively. Our effective tax rate for the three months ended December 31, 2021 was (4.0%), as a result of generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. Our effective tax rate for the three months ended December 31, 2020 was (16.0%), which was also due to generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. The increase in our effective tax rate was attributable to an increase in forecasted operating losses, as well as changes to the valuation allowance recorded against net deferred tax assets.

Net Loss from Discontinued Operations

As a result of the sale of Carpets in February 2021, we had no discontinued operations during the three months ended December 31, 2021, compared to a $0.2 million net loss from discontinued operations during the three months ended December 31, 2020, which was attributable to the operations of Carpets.

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Segment Adjusted EBITDA

Segment adjusted EBITDA is a financial measure used by our management and chief operating decision maker (“CODM”) to manage the business, allocate resources, and assess the performance of each operating segment. ALJ defines segment adjusted EBITDA as segment net loss before depreciation and amortization, interest expense, net, acquisition/disposition-related expenses, restructuring and cost reduction initiatives, Security Event expenses, stock-based compensation, gain on disposal of assets, net, bank fees accreted to term loans, loan amendment expenses, and provision for income taxes. The following table summarizes segment adjusted EBITDA.

	Three Months Ended December 31,
(in thousands)	2021			2020			$ Change			% Change
Faneuil	$	(1,816	)	$	3,637		$	(5,453	)		(149.9	)%
Phoenix		5,121			4,047			1,074			26.5
ALJ		(1,438	)		(1,241	)		(197	)		(15.9	)
Segment adjusted EBITDA	$	1,867		$	6,443		$	(4,576	)		(71.0	)%

Faneuil Segment Adjusted EBITDA

Faneuil segment adjusted EBITDA loss was $1.8 million for the three months ended December 31, 2021 compared to segment adjusted EBITDA of $3.6 million for the three months ended December 31, 2020. Segment adjusted EBITDA decreased $5.5 million, or 149.9%, driven by the wind-down of certain contracts, higher medical insurance claims under Faneuil’s self-insurance medical plan, and the usage of more costly subcontract labor to supplement the call center workforce.

Phoenix Segment Adjusted EBITDA

Phoenix recognized segment adjusted EBITDA of $5.1 million for the three months ended December 31, 2021 compared to $4.0 million for the three months ended December 31, 2020. Segment adjusted EBITDA increased by $1.1 million, or 26.5%, driven by higher sales volumes from book components.

ALJ Segment Adjusted EBITDA

ALJ segment adjusted EBITDA loss for the three months ended December 31, 2021 was ($1.4) million compared to segment adjusted EBITDA loss of ($1.2) million for the three months ended December 31, 2020. ALJ segment adjusted EBITDA loss for three months ended December 31, 2021 was impacted by increased bonus expense.

Seasonality

Faneuil

Faneuil experiences seasonality within its various lines of business. For example, during the end of the calendar year through the end of the first calendar quarter, Faneuil generally experiences higher revenue with its healthcare customers as the customer contact centers increase operations during the enrollment periods of the healthcare exchanges. Faneuil’s revenue from its healthcare customers generally decreases during the remaining portion of the year after the enrollment period. Seasonality is less prevalent in the transportation industry, though there is typically an increase in volume during the summer months.

Phoenix

There is seasonality to Phoenix’s business. Education book component sales (school and college) traditionally peak in the first and second quarters of the calendar year. Other book sales traditionally peak in the third quarter of the calendar year. Book sales also traditionally peak in the third quarter of the calendar year. The fourth quarter of the calendar year traditionally has been Phoenix’s weakest quarter. These seasonal factors are not significant.

Liquidity and Capital Resources

Historically, our principal sources of liquidity have been cash provided by operations and borrowings under various debt arrangements. On December 31, 2021, our principal sources of liquidity included cash and cash equivalents of $2.1 million and an unused borrowing capacity of $17.4 million on our line of credit. Our principal uses of cash have been for acquisitions, and capital expenditures to support Faneuil’s customers and Phoenix’s increased manufacturing capacity. We anticipate these uses will continue to be our principal uses of liquidity in the future.

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Global financial and credit markets have been volatile in recent years and has been further exacerbated by COVID-19 since March 2020. Future adverse conditions of these markets could negatively affect our ability to secure funds or raise capital at a reasonable cost or at all. For additional discussion of our various debt arrangements see Contractual Obligations below.

In summary, our cash flows for each period were as follows:

	Three Months Ended December 31,
(in thousands)	2021			2020
Cash (used for) provided by operating activities	$	(2,676	)	$	3,001
Cash used for investing activities		(2,174	)		(2,593	)
Cash provided by (used for) financing activities		4,643			(3,878	)
Change in cash and cash equivalents	$	(207	)	$	(3,470	)

For the three months ended December 31, 2021, we recognized a net loss of $9.4 million, used cash for operating activities of $2.7 million, used cash for investing activities of $2.2 million, and generated cash from financing activities of $4.6 million.

For the three months ended December 31, 2020, we recognized net loss of $2.1 million, generated cash from operating activities of $3.0 million, used cash for investing activities of $2.6 million, and used cash for financing activities of $3.9 million.

Operating Activities

Cash used for operating activities of $2.7 million during the three months ended December 31, 2021 was the result of our $9.4 million net loss, $5.7 million addback of net non-cash expenses, and $1.0 million of net cash provided by changes in operating assets and liabilities. The most significant component of net non-cash expenses was depreciation and amortization expense of $5.4 million. The most significant components of changes in operating assets and liabilities were mostly attributable to the timing of cash receipts from Faneuil’s customers and repayment of 50%, or $4.2 million, of payroll-related taxes, which were deferred in previous reporting periods under the CARES Act.

Cash provided by operating activities of $3.0 million during the three months ended December 31, 2020 was the result of our $2.1 million net loss, $5.6 million addback of net non-cash expenses, and $0.5 million of net cash provided by changes in operating assets and liabilities. The most significant component of net non-cash expenses was depreciation and amortization expense of $5.0 million. The most significant components of changes in operating assets and liabilities were mostly attributable to the timing of Faneuil’s significant new customer implementations and included accounts receivable of $7.8 million, other assets of $1.6 million, and accounts payable of $1.5 million, which used cash. The CARES Act allowed us to defer payment for $8.4 million of payroll-related taxes, of which $4.2 million is recorded in accrued expenses and $4.2 million is recorded in other non-current liabilities at December 31, 2020.

Cash used for operations for the three months ended December 31, 2021, compared to cash provided by operations for the three months ended December 31, 2020, was impacted by the timing of the repayment and deferral of payroll-related taxes under the CARES Act.

Investing Activities

For the three months ended December 31, 2021, our investing activities used $2.2 million of cash, of which $1.7 million was used to upgrade Phoenix’s printer equipment, and $0.5 million was used to purchase computer equipment and software to support Faneuil’s existing customers.

For the three months ended December 31, 2020, our investing activities used $2.6 million of cash, of which $2.5 million was used to purchase equipment, software, and leasehold improvements for Faneuil’s new and existing customers, and $0.1 million was used to purchase capital equipment in the normal course of operations.

Our investing activities during the three months ended December 31, 2021, compared to the three months ended December 31, 2020, were consistent and a result of normal ongoing business.

Financing Activities

For the three months ended December 31, 2021, our financing activities provided $4.6 million of cash as a result of drawing down on our line of credit to pay short-term liabilities, including the repayment of the CARES Act payroll-related taxes discussed above.

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For the three months ended December 31, 2020, our financing activities used $3.9 million of cash. We used $0.5 million to pay down our line of credit, $0.8 million for finance lease payments, and $2.6 million to pay down our term loans.

Cash used for financing activities for the three months ended December 31, 2021 compared to cash provided by financing activities for the three months ended December 31, 2020 was impacted by the payment of short-term liabilities, which required us to draw on our line of credit facility.

Contractual Obligations

The following table summarizes our significant contractual obligations on December 31, 2021, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

	Payments due by Period
			Less Than		One – Three		Four – Five		More than Five
(in thousands)	Total		One Year		Years		Years		Years
Term loan ⁽¹⁾	$	93,100	$	3,800	$	7,600	$	81,700	$	—
Operating lease obligations ⁽²⁾		36,619		4,776		10,813		9,999		11,030
Other liabilities ⁽³⁾		7,709		3,210		4,499		—		—
Convertible Promissory Notes ⁽¹⁾		6,026		—		6,026		—		—
Line of credit ⁽¹⁾		11,525		—		0		11,525		—
Finance lease obligations ⁽¹⁾		910		776		134		—		—
Total contractual cash obligations ⁽⁴⁾	$	155,889	$	12,562	$	29,072	$	103,224	$	11,030

⁽¹⁾	Refer to “Part I, Item 1. Financial Statements – Note 8. Debt.”

⁽²⁾	Refer to “Part I, Item 1. Financial Statements – Note 10. Leases.”

⁽³⁾

Amounts represent future cash payments to satisfy our short- and long-term workers’ compensation reserve, short- and long-term acquisition-related deferred and contingent liabilities, and other long-term liabilities recorded on our consolidated balance sheets. It excludes deferred revenue and non-cash items. Short- and long-term acquisition-related deferred and contingent payments are included in the table at total fair value, as defined by generally accepted accounting principles, of $4.7 million. As of December 31, 2021, the total maximum amount of acquisition-related deferred and contingent cash payments was $5.0 million.

⁽⁴⁾

Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the short-term portions of our term loan, short-term portion of acquisition-related deferred and contingent payments, equipment financing agreement, and workers’ compensation reserve.

Off-Balance Sheet Arrangements

On December 31, 2021, we had two types of off-balance sheet arrangements.

Surety Bonds. As part of Faneuil’s normal course of operations, certain customers require surety bonds guaranteeing the performance of a contract. On December 31, 2021, the face value of such surety bonds, which represents the maximum cash payments that Faneuil would have to make under certain circumstances of non-performance, was approximately $41.8 million.

Letters of Credit. ALJ had letters of credit totaling $3.5 million outstanding on December 31, 2021.

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Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period. We regularly evaluate our estimates and assumptions related to the fair value of assets and liabilities, including intangible assets acquired and allocation of purchase price, useful lives, carrying value and recoverability of long-lived and intangible assets, and revenue recognition. Certain accounting policies are considered "critical accounting policies" because they are particularly dependent on estimates made by us about matters that are inherently uncertain and could have a material impact on our consolidated financial statements. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

For a complete summary of our critical accounting policies, please refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended September 30, 2021, filed with the SEC on December 20, 2021 (“Fiscal 2021 Form 10-K”).

For a complete summary of our significant accounting policies, please refer to “Part IV. Exhibits, Financial Statement Schedules –Note 2. Summary of Significant Accounting Policies,” included in our Fiscal 2021 Form 10-K. There have been no changes to our accounting policies during the three months ended December 31, 2021.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting decisions regarding required disclosure.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company has been named in, and from time to time may become named in, various lawsuits or threatened actions that are incidental to our ordinary business. For additional information regarding such matters, see “Part I, Item 1. Financial Statements – Note 9. Commitments and Contingencies - Litigation, Claims, and Assessments.”

Item 1A. Risk Factors

The following risk factors and other information included in this Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be significantly harmed.

Risks Related to Faneuil

The closing of Faneuil’s sale of its transportation and healthcare business is subject to various risks and uncertainties, may not be completed in accordance with expected plans or on the currently contemplated terms or timeline, or at all.

On December 21, 2021, we entered into an asset purchase agreement (the “Purchase Agreement”) with, among others, TTEC Government Solutions, LLC (“TTEC”) and Faneuil pursuant to which TTEC has agreed, subject to the terms and conditions set forth in the Purchase Agreement, to acquire the assets of Faneuil’s tolling and transportation vertical and health benefit exchange vertical (the “Asset Sale”) for a purchase price to be paid at closing of $140.0 million, less an indemnification escrow amount of approximately $15.0 million. Faneuil is also eligible to receive additional earn-out payments based upon the performance of certain customer agreements in an aggregate amount of up to $25.0 million. The sale is expected to close by the second fiscal quarter of 2022.

The completion of the Asset Sale is subject to regulatory approvals and customary closing conditions, including, among others, (a) the receipt of certain requisite consents, including requisite consents to effect the transfer of customer contracts representing not less than ninety-five percent (95%) of trailing twelve (12)-month revenue, (b) the accuracy of the parties’ respective representations and warranties in the Purchase Agreement, subject to specified materiality qualifications, (c) compliance by the parties with their respective covenants in the Purchase Agreement in all material respects, and (d) the absence of a Material Adverse Effect (as defined in the Purchase Agreement). The parties may terminate the Purchase Agreement under certain specified circumstances, including, among others, if the Asset Sale is not consummated by April 30, 2022.

We cannot assure you that the conditions to the closing of the Asset Sale will be satisfied and, if those conditions are neither satisfied nor, where permissible, waived on a timely basis or at all, we may be unable to complete the Asset Sale, or such completion may be delayed or completed on terms that are less favorable, perhaps materially, to us than the terms currently contemplated.

Whether or not the proposed Asset Sale is completed, the announcement and pendency of the Asset Sale may be disruptive to our and Faneuil’s businesses and may adversely affect parties’ existing relationships with current and prospective employees, customers and business partners. Uncertainties related to the pending Asset Sale may also impair Faneuil’s ability to attract, retain and motivate key personnel and could divert the attention of Faneuil’s management and other employees from its day-to-day business and operations in preparation for and during the Asset Sale. If Faneuil is unable to effectively manage these risks, the business, results of operations, financial condition and prospects of Faneuil’s businesses would be adversely affected. This may in turn adversely affect our results of operations and financial condition and the trading price of our common stock if the sale is not completed.

If the proposed Asset Sale is delayed or not completed for any reason, including due to our, Faneuil’s or TTEC’s inability to satisfy the closing conditions set forth in the Purchase Agreement or industry or economic conditions outside of the parties’ control, including those related to the ongoing COVID-19 pandemic, investor confidence could decline and we and Faneuil could face negative publicity and possible litigation. In addition, in the event of a failed transaction, we will have expended significant management resources in an effort to complete the Asset Sale and we will have incurred significant transaction costs. Accordingly, if the Asset Sale is not completed on the timeline or terms currently contemplated, or at all, our business, results of operations, financial condition, cash flows and stock price may be adversely affected.

Faneuil is subject to uncertainties regarding healthcare reform that could materially and adversely affect that aspect of our business.

Since its adoption into law in 2010, the Affordable Care Act has been challenged before the U.S. Supreme Court, and several bills have been and continue to be introduced in Congress to delay, defund, or repeal implementation of or amend significant provisions of the Affordable Care Act. In addition, there continues to be ongoing litigation over the interpretation and implementation of certain

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provisions of the law. New tax reform legislation enacted on December 22, 2017 (“Tax Reform Law”) includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate,” which could lead to fewer enrollments in healthcare exchanges. Further significant changes to, or repeal of, the Affordable Care Act could materially and adversely affect that aspect of Faneuil’s business.

Economic downturns, reductions in government funding and other program-related and contract-related risks could have a negative effect on Faneuil’s business.

Demand for the services offered by Faneuil has been, and is expected to continue to be, subject to significant fluctuations due to a variety of factors beyond its control, including economic conditions, particularly since contracts for major programs are performed over extended periods of time. During economic downturns, the ability of both private and governmental entities to make expenditures may decline significantly. We cannot be certain that economic or political conditions will be generally favorable or that there will not be significant fluctuations adversely affecting Faneuil as a whole, or key industry segments targeted by Faneuil. In addition, Faneuil’s operations are, in part, dependent upon state government funding. Significant changes in the level of state government funding, changes in personnel at government authorities, the failure of applicable government authorities to take necessary actions, opposition by third parties to particular programs, any delay in the state government budget process or a state government shutdown could have an unfavorable effect on Faneuil’s business, financial position, results of operations and cash flows.

Faneuil’s profitability is dependent in part on Faneuil’s ability to estimate correctly, obtain adequate pricing, and control its cost structure related to fixed “price per call” contracts.

A significant portion of Faneuil’s revenues are derived from commercial and government contracts awarded through competitive bidding processes. Many of these contracts are extremely complex and require the investment of significant resources in order to prepare accurate bids and pricing based on both current and future conditions, such as the cost of labor, that could impact profitability of such contracts. Our success depends on Faneuil’s ability to (i) accurately estimate the resources and costs that will be required to implement and service any contracts we are awarded, sometimes in advance of the final determination of such contracts’ full scope and design, and (ii) negotiate adequate pricing for call center services that provide a reasonable return to our shareholders based on such estimates. Additionally, in order to attract and retain certain contracts, we are sometimes required to make significant capital and other investments to enable us to perform our services under those contracts, such as facility leases, information technology equipment purchases, labor resources, and costs incurred to develop and implement software. If Faneuil is unable to accurately estimate its costs to provide call center services, obtain adequate pricing, or control costs for fixed “price per call” contracts, it could materially adversely affect our results of operations and financial condition.

Faneuil’s dependence on a small number of customers could adversely affect its business or results of operations.

Faneuil derives a substantial portion of its revenue from a relatively small number of customers. For additional information regarding Faneuil customer concentrations, see “Part I, Item 1. Financial Statements – Note 5. Concentration Risks.” We expect the largest customers of Faneuil to continue to account for a substantial portion of its total net revenue for the foreseeable future. Faneuil has long-standing relationships with many of its significant customers. However, because Faneuil customers generally contract for specific projects or programs with a finite duration, Faneuil may lose these customers if funding for their respective programs is discontinued, or if their projects end and the contracts are not renewed or replaced. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could materially reduce Faneuil revenue and cash flows. Additionally, many Faneuil customers are government entities, which can unilaterally terminate or modify the existing contracts with Faneuil without cause and penalty to such government entities in many situations. If Faneuil does not replace them with other customers or other programs, the loss of business from any one of such customers could have a material adverse effect on its business or results of operations.

The recovery of capital investments in Faneuil contracts is subject to risk.

In order to attract and retain large outsourcing contracts, Faneuil may be required to make significant capital investments to perform its services under the contract, such as purchases of information technology equipment and costs incurred to develop and implement software. The net book value of such assets, including intangible assets, could be impaired, and Faneuil earnings and cash flow could be materially adversely affected in the event of the early termination of all or a part of such a contract, reduction in volumes and services thereunder for reasons including, but not limited to, a client’s merger or acquisition, divestiture of assets or businesses, business failure or deterioration, or a client’s exercise of contract termination rights.

Faneuil’s dependence on subcontractors and equipment manufacturers could adversely affect it.

In some cases, Faneuil relies on and partners with third-party subcontractors as well as third-party equipment manufacturers to provide services under its contracts. To the extent that Faneuil cannot engage subcontractors or acquire equipment or materials, its

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performance, according to the terms of the customer contract, may be impaired. If the amount Faneuil is required to pay for subcontracted services or equipment exceeds the amount Faneuil has estimated in bidding for fixed prices or fixed unit price contracts, it could experience reduced profit or losses in the performance of these contracts with its customers. Also, if a subcontractor or a manufacturer is unable to deliver its services, equipment, or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, Faneuil may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the expected profit or result in a loss of a customer contract for which the services, equipment or materials were needed.

Partnerships entered into by Faneuil as a subcontractor with third parties who are primary contractors could adversely affect its ability to secure new projects and derive a profit from its existing projects.

In some cases, Faneuil partners as a subcontractor with third parties who are the primary contractors. In these cases, Faneuil is largely dependent on the judgments of the primary contractors in bidding for new projects and negotiating the primary contracts, including establishing the scope of services and service levels to be provided. Furthermore, even if projects are secured, if a primary contractor is unable to deliver its services according to the negotiated terms of the primary contract for any reason, including the deterioration of its financial condition, the customer may terminate or modify the primary contract, which may reduce Faneuil profit or cause losses in the performance of the contract. In certain instances, the subcontract agreement includes a “Pay When Paid” provision, which allows the primary contractor to hold back payments to a subcontractor until they are paid by the customer, which has negatively impacted Faneuil cashflow.

If Faneuil or a primary contractor guarantees to a customer the timely implementation or performance standards of a program, Faneuil could incur additional costs to meet its guaranteed obligations or liquidated damages if it fails to perform as agreed.

In certain instances, Faneuil or its primary contractor guarantees a customer that it will implement a program by a scheduled date. At times, they also provide that the program will achieve or adhere to certain performance standards or key performance indicators. Although Faneuil generally provides input to its primary contractors regarding the scope of services and service levels to be provided, it is possible that a primary contractor may make commitments without Faneuil’s input or approval. If Faneuil or the primary contractor subsequently fails to implement the program as scheduled, or if the program subsequently fails to meet the guaranteed performance standards, Faneuil may be held responsible for costs to the client resulting from any delay in implementation, or the costs incurred by the program to achieve the performance standards. In most cases where Faneuil or the primary contractor fails to meet contractually defined performance standards, Faneuil may be subject to agreed-upon liquidated damages. To the extent that these events occur, the total costs for such program may exceed original estimates, and cause reduced profits, or in some cases a loss for that program.

Adequate bonding is necessary for Faneuil to win new contracts.

Faneuil is often required, primarily in its toll and transportation programs, to provide performance and surety bonds to customers in conjunction with its contracts. These bonds indemnify the customer should Faneuil fail to perform its obligations under the contracts. If a bond is required for a particular program and Faneuil is unable to obtain an appropriate bond, Faneuil cannot pursue that program. The issuance of a bond is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional costs. There can be no assurance that bonds will continue to be available on reasonable terms, or at all. Any inability to obtain adequate bonding and, as a result, to bid on new work could harm Faneuil’s business.

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Data security and integrity are critically important to our business, and cybersecurity incidents, including cyberattacks, cyber-fraud, breaches of security, unauthorized access to or disclosure of confidential information, business disruption, or the perception that confidential information is not secure, could result in a material loss of business, regulatory enforcement, substantial legal liability and/or significant harm to our reputation.

Our business involves the use, storage, and transmission of information about our clients, their customers, and our employees. While we take reasonable measures to protect the security of and unauthorized access to our systems and the privacy of personal and proprietary information that we access and store, our security controls over our systems may not be adequate to prevent the improper access to or disclosure of this information. Such unauthorized access or disclosure could subject Faneuil to significant liability under relevant law or our contracts and could harm our reputation, resulting in impacts on our results of operations, loss of future revenue and business opportunities. These risks may further increase as our business model includes a high percentage of work from home delivery in addition to our delivery through customer experience centers.

We operate in an environment of significant risk of cybersecurity incidents resulting from unintentional events or deliberate attacks by third parties or insiders, which may involve exploiting highly obscure security vulnerabilities or sophisticated attack methods. These cyberattacks can take many forms, but they typically have one or more of the following objectives, among others:

•

obtain unauthorized access to confidential consumer information;

•

manipulate or destroy data; or

•

disrupt, sabotage or degrade service on our systems.

In recent years, there have been an increasing number of high-profile security breaches at companies and government agencies, and security experts have warned about the growing risks of hackers, cybercriminals and state actors launching a broad range of attacks targeting information technology systems. Information security breaches, computer viruses, interruption or loss of business data, DDoS (distributed denial of service) attacks, ransomware and other cyberattacks on any of these systems could disrupt our normal operations of customer engagement centers and remote service delivery, our cloud platform offerings, and our enterprise services, impeding our ability to provide critical services to our clients. For example, on August 18, 2021, we detected a ransomware attack (the “Security Event”) that accessed and encrypted certain files on certain servers utilized by us in the provision of our call center services. Although we quickly and actively managed the Security Event, such event caused disruption to parts of our business, including certain aspects of our provision of call center services. Although we actively communicated with customers and worked to minimize disruption, we cannot guarantee that customer relationships were not harmed as a result of the Security Event.

We are experiencing an increase in frequency of cyber-fraud attempts, such as so-called “social engineering” attacks and phishing scams, which typically seek unauthorized money transfers or information disclosure. We actively train our employees to recognize these attacks and have implemented proactive risk mitigation measures to identify and to attempt to prevent these attacks. There are no assurances, however, that these attacks, which are growing in sophistication, may not deceive our employees, resulting in a material loss.

While we have taken reasonable measures to protect our systems and processes from unauthorized intrusions and cyber-fraud, we cannot be certain that advances in cyber-criminal capabilities, discovery of new system vulnerabilities, and attempts to exploit such vulnerabilities will not compromise or breach the technology protecting our systems and the information that we manage and control, which could result in damage to our systems, our business, our reputation, and our profitability.

We cannot assure you that our systems, databases and services will not be compromised or disrupted in the future, whether as a result of deliberate attacks by malicious actors, breaches due to employee error or malfeasance, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. We work to monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact.

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The preventive actions we take to address cybersecurity risk, including protection of our systems and networks, may be insufficient to repel or mitigate the effects of cyberattacks in the future as it may not always be possible to anticipate, detect or recognize threats to our systems, or to implement effective preventive measures against all cybersecurity risks. This is because, among other things:

•

the techniques used in cyberattacks change frequently and may not be recognized until after the attacks have succeeded;

•

cyberattacks can originate from a wide variety of sources, including sophisticated threat actors involved in organized crime, sponsored by nation-states, or linked to terrorist or hacktivist organizations; and

•

third parties may seek to gain access to our systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users.

Unauthorized disclosure, loss or corruption of our data or inability of our clients and their customers to access our systems could disrupt our operations, subject us to substantial regulatory and legal proceedings and potential liability, result in a material loss of business and/or significantly harm our reputation.

We may not be able to immediately address the consequences of a cybersecurity incident because a successful breach of our computer systems, software, networks or other technology assets could occur and persist for an extended period of time before being detected due to, among other things:

•

the breadth and complexity of our operations;

•

the large number of clients, counterparties and third-party service providers with which we do business;

•

the proliferation and increasing sophistication of cyberattacks;

•

the possibility that a malicious third party compromises the software, hardware or services that we procure from a service provider unbeknownst to both the provider and to the Company; and

•

the possibility that a third party, after establishing a foothold on an internal network without being detected, might obtain access to other networks and systems.

The extent of a particular cybersecurity incident and the steps that we may need to take to investigate it may not be immediately clear, and it may take a significant amount of time before such an investigation can be completed and full and reliable information about the incident is known. While such an investigation is ongoing, we may not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, any or all of which could further increase the costs and consequences of a cybersecurity incident.

Due to concerns about data security and integrity, a growing number of legislative and regulatory bodies have adopted consumer notification and other requirements in the event that consumer information is accessed by unauthorized persons and additional regulations regarding the use, access, accuracy and security of such data are possible. In the United States, we are subject to federal and state laws that provide for disparate notification regimes. In the event of unauthorized access, our failure to comply with the complexities of these various regulations could subject us to regulatory scrutiny and additional liability.

If our cloud platforms and third-party software and systems experience disruptions due to technology failures or cyberattacks and if we fail to correct such impacts promptly, our business will be materially impacted.

Our cloud platforms and third-party software and systems that we use to serve our clients are complex and may, from time to time have service interruptions, contain design defects, configuration or coding errors, and other vulnerabilities that may be difficult to detect or correct, and which may be outside of our control. We may not have sufficient redundant operations to cover a loss or failure of our systems in a timely manner. Any significant interruption could severely harm our business and reputation and result in a loss of revenue and clients. Although our commercial agreements limit our exposure from such occurrences, they may not always effectively protect us against claims in all jurisdictions and against third-party claims. If our clients’ business is damaged, our reputation could suffer, we could be subject to contract termination and payments for damages, adversely affecting our business, our reputation, our results of operations and financial condition.

If we fail to maintain and improve our systems, demand for our services could be adversely affected.

In our markets, there are continuous improvements in computer hardware, network operating systems and technologies. These improvements, as well as changes in client preferences or regulatory requirements, may require changes in the technology used to gather and process our data and deliver our services. Our future success will depend, in part, upon our ability to:

•

internally develop and implement new and competitive technologies;

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•

use leading third-party technologies effectively;

•

respond to changing client needs and regulatory requirements; and

•

transition client and their customer data and data sources successfully to new interfaces or other technologies.

We cannot provide assurance that we will successfully implement new technologies, cause our cloud platforms and third-party software and systems providers to implement compatible technologies or adapt our technology to evolving customer, regulatory and competitive requirements. If we fail to respond or fail to cause our cloud platforms and third-party software and systems providers to respond, to changes in technology, regulatory requirements or client preferences, the demand for our services, the delivery of our services or our market reputation could be adversely affected. Additionally, our failure to implement important updates could affect our ability to successfully meet the timeline for us to generate cost savings resulting from our investments in improved technology. Failure to achieve any of these objectives would impede our ability to deliver strong financial results.

Faneuil’s business is subject to many regulatory requirements, and current or future regulation could significantly increase Faneuil’s cost of doing business.

Faneuil’s business is subject to many laws and regulatory requirements in the United States, covering such matters as data privacy, consumer protection, healthcare requirements, labor relations, taxation, internal and disclosure control obligations, governmental affairs and immigration. For example, Faneuil is subject to state and federal laws and regulations regarding the protection of consumer information commonly referred to as “non-public personal information.” For instance, the collection of patient data through Faneuil’s contact center services is subject to HIPAA, which protects the privacy of patients’ data. These laws, regulations, and agreements require Faneuil to develop and implement policies to protect non-public personal information and to disclose these policies to consumers before a customer relationship is established and periodically after that. These laws, regulations, and agreements limit the ability to use or disclose non-public personal information for purposes other than the ones originally intended. Many of these regulations, including those related to data privacy, are frequently changing and sometimes conflict with existing ones among the various jurisdictions in which Faneuil provides services. Violations of these laws and regulations could result in liability for damages, fines, criminal prosecution, unfavorable publicity, and restrictions placed on Faneuil operations. Faneuil’s failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to Faneuil’s reputation in the marketplace, which could have a material adverse effect on Faneuil’s business, results of operations and financial condition. In addition, because a substantial portion of Faneuil operating costs consists of labor costs, changes in governmental regulations relating to wages, healthcare and healthcare reform and other benefits or employment taxes could have a material adverse effect on Faneuil’s business, results of operations, or financial condition.

Matters relating to employment and labor laws and prevailing wage standards may adversely affect our business.

The industries in which Faneuil competes is labor intensive and governed by various federal and state labor laws with respect to its relationship with its employees. Faneuil’s ability to meet its labor needs on a cost-effective basis is subject to numerous external factors, including the availability of qualified personnel in the workforce in the local markets in which it operates, unemployment levels within those markets, prevailing wage rates, health and other insurance costs and changes in employment and labor laws. Such laws related to employee hours, wages, job classification and benefits could significantly increase Faneuil’s operating costs. Faneuil is also subject to employee claims against it based on such laws and other actions or inactions of its employees. Some or all of these claims may give rise to litigation, including class action litigation under the Fair Labor Standards Act and state wage and hour lawsuits. Such class action lawsuits are typically brought by specialized plaintiff law firms who often seek large settlements based entirely on the number of potential plaintiffs in a class, whether or not there is any basis for the claims that they make on behalf of their clients, most of whom do not believe themselves to be aggrieved nor seek recourse until solicited. Due to the inherent uncertainties of litigation, Faneuil may not be able to accurately determine the impact on it of any future adverse outcome of such proceedings. The ultimate resolution of these matters could have a material adverse impact on Faneuil’s financial condition, results of operations, and liquidity. In addition, regardless of the outcome, these proceedings could result in substantial cost to Faneuil and may require Faneuil to devote substantial resources to defend itself.

Additionally, in the event prevailing wage rates increase in the local markets in which Faneuil operates, Faneuil may be required to concurrently increase the wages paid to its employees to maintain the quality of its workforce and customer service. To the extent such increases are not covered by our customers, Faneuil’s profit margins may decrease as a result. If Faneuil is unable to hire and retain employees capable of meeting its business needs and expectations, its business and brand image may be impaired. Any failure to meet Faneuil’s staffing needs or any material increase in turnover rates of its employees may adversely affect its business, results of operations and financial condition.

Further, Faneuil relies on the ability to attract and retain labor on a cost-effective basis. The availability of labor in the local markets in which Faneuil operates has declined in recent years and competition for such labor has increased, especially under the economic crises experienced throughout the COVID-19 pandemic. Faneuil’s ability to attract and retain a sufficient workforce on a cost-effective basis

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depends on several factors discussed above, including the ability to protect staff during the COVID-19 pandemic. Faneuil may not be able to attract and retain a sufficient workforce on a cost-effective basis in the future. In the event of increased costs of attracting and retaining a workforce, Faneuil’s profit margins may decline as a result.

Risks Related to Phoenix

Economic weakness and uncertainty, as well as the effects of these conditions on Phoenix’s customers and suppliers, could reduce demand for or the ability of Phoenix to provide its products and services.

Economic conditions related to Phoenix, Phoenix’s customers, and Phoenix’s suppliers, could negatively impact Phoenix’s business and results of operations. Phoenix has experienced, and may continue to experience, reduced demand for certain of its products and services. As a result of uncertainty about global economic conditions, including factors such as unemployment, bankruptcies, financial market volatility, sovereign debt issues, government budget deficits, tariffs, global supply chain disruptions, and other factors which continue to affect the global economy, Phoenix’s customers and suppliers may experience further deterioration of their businesses, suffer cash flow shortages or file for bankruptcy. In turn, existing or potential customers may delay or decline to purchase Phoenix products and related services, and Phoenix’s suppliers and customers may not be able to fulfill their obligations to it in a timely fashion.

Educational textbook cover and component sales depend on continued government funding for educational spending, which impacts demand by its customers, and may be affected by changes in or continued restrictions on local, state and/or federal funding and school budgets. As a result, a reduction in consumer discretionary spending or disposable income and/or adverse trends in the general economy (and consumer perceptions of those trends) may affect Phoenix more significantly than other businesses in other industries.

In addition, customer difficulties could result in increases in bad debt write-offs and increases to Phoenix’s allowance for doubtful accounts receivable. Further, Phoenix’s suppliers may experience similar conditions as its customers, which may impact their viability and their ability to fulfill their obligations to Phoenix. Negative changes in these or related economic factors could materially adversely affect Phoenix’s business.

A substantial decrease or interruption in business from Phoenix’s significant customers or suppliers could adversely affect its business.

Phoenix has significant customer and supplier concentration. For additional information regarding customer and supplier concentrations, see “Part I, Item 1. Financial Statements – Note 5. Concentration Risks.” Any significant cancellation, deferral or reduction in the quantity or type of products sold to these principal customers or a significant number of smaller customers, including as a result of Phoenix’s failure to perform, the impact of economic weakness and challenges to customer businesses, a change in buying habits, further industry consolidation or the impact of the shift to alternative methods of content delivery, including digital distribution and printing, to customers, could have a material adverse effect on Phoenix business. Further, if Phoenix’s significant customers, in turn, are not able to secure large orders, they will not be able to place orders with Phoenix. A substantial decrease or interruption in business from Phoenix’s significant customers could result in write-offs or the loss of future business and could have a material adverse effect on Phoenix’s business.

Additionally, Phoenix purchases certain limited grades of paper to produce book and component products. If Phoenix’s suppliers reduce their supplies or discontinue these grades of paper, Phoenix may be unable to fulfill its contract obligations, which could have a material adverse effect on its business. See “Part I, Item 1. Financial Statements – Note 5. Concentration Risks.”

The impact of digital media and similar technological changes, including the substitution of printed products with digital content, may continue to adversely affect the results of Phoenix’s operations.

The industry in which Phoenix operates is experiencing rapid change due to the impact of digital media and content on printed products. Electronic delivery of information offers alternatives to traditional delivery in the form of print materials provided by Phoenix. Further improvements in the accessibility and quality of digital media, mobile technologies, e-reader technologies, digital retailing and the digital distribution of documents and data has resulted and may continue to result in increased consumer substitution away from Phoenix’s printed products. Continued acceptance by consumers and educational institutions of such digital media, as an alternative to print materials, is uncertain and difficult to predict and may decrease the demand for the Phoenix’s printed products, result in reduced pricing for its printing services and additional excess capacity in the printing industry, and could materially adversely affect Phoenix’s business.

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Disruptions in manufacturing and supply arrangements and fluctuations in the cost and availability of raw materials could increase Phoenix cost of sales.

To produce its products, Phoenix is dependent upon the availability of raw materials, including paper, ink, and adhesives, the price and availability of which are affected by numerous factors beyond its control. These factors include:

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the level of consumer demand for these materials and downstream products containing or using these materials;

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the supply of these materials and the impact of industry consolidation;

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government regulation and taxes;

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market uncertainty;

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volatility in the capital and credit markets;

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environmental conditions and regulations;

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disruption of manufacturing and supply arrangements; and

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political and global economic conditions.

Any material increase in the price of key raw materials could adversely impact Phoenix cost of sales or result in the loss of availability of such materials at reasonable prices. When these fluctuations result in significantly higher raw material costs, Phoenix’s operating results are adversely affected to the extent it is unable to pass on these increased costs to its customers or to the extent they materially affect customer buying habits. Significant fluctuations in prices for paper, ink, and adhesives could, therefore, have a material adverse effect on Phoenix’s business.

Phoenix’s ability to meet its customers’ needs and achieve cost targets depends on its ability to maintain key manufacturing and

supply arrangements. The loss or disruption of such manufacturing and supply arrangements, including for issues such as labor

disputes or controversies, loss or impairment of key manufacturing sites, discontinuity or disruptions in internal information and data

systems, inability to procure sufficient input materials, significant changes in trade policy, natural disasters, increasing severity or

frequency of extreme weather events due to climate change or otherwise, acts of war or terrorism, disease outbreaks or other external

factors over which it has no control, has at times interrupted and could, in the future, interrupt product supply and, if not effectively managed and remedied, could have an adverse impact on its business, financial condition, results of operations or cash flows.

Phoenix is subject to environmental obligations and liabilities that could impose substantial costs upon Phoenix.

Phoenix’s operations are subject to a variety of federal, state, local and foreign laws and regulations governing emissions to air, discharge to water, the generation, handling, storage, transportation, treatment and disposal of hazardous substances and other materials, and employee health and safety matters. As an owner and operator of real property and a generator of hazardous substances, Phoenix may be subject to environmental cleanup liability, regardless of fault, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act or analogous state laws, as well as to claims for harm to health or property or for natural resource damages arising out of contamination or exposure to hazardous substances. Some current or past operations have involved metalworking and plating, printing and other activities that have resulted in or could result in environmental conditions giving rise to liabilities. If Phoenix incurs significant expenses related to environmental cleanup or damages stemming from harm or alleged harm to health, property or natural resources arising from contamination or exposure to hazardous substances, Phoenix’s business may be materially and adversely affected.

Risks Related to our Businesses Generally

A widespread health crisis, such as the COVID-19 pandemic, may adversely affect our business, results of operations and financial condition.

A widespread health crisis, including the COVID-19 pandemic, and related governmental responses may adversely affect our business, results of operations and financial condition. These effects could include disruptions to our workforce due to illness or “shelter-in-place” restrictions, temporary closures of our facilities, the interruption of our supply chains and distribution channels, and similar effects on our customers or suppliers that may impact their ability to perform under their contracts with us or cause them to curtail their business with us. In addition, we have taken and will continue to take temporary precautionary measures intended to help minimize the risk of COVID-19 to our employees, including requiring certain employees to work remotely and suspending non-essential travel and in-person meetings, which could negatively affect our business. Further, COVID-19 has and is expected to continue to adversely affect the economies and financial markets of many countries and most areas of the United States, which may

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affect demand for our products and services and our ability to obtain additional financing for our business. Further impacts specific to our subsidiaries’ businesses may include:

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Prolonged interruption of Faneuil’s physical customer contact centers due to illness or stay-at-home regulations and costs related to transitioning to work from home arrangements;

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Reduced demand for Faneuil’s toll services as travel declines;

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Disruption of Phoenix’s production facilities due to illness or stay-at-home regulations; and

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Similar impacts that negatively affect Phoenix’s significant customer or suppliers.

Any of these events could materially and adversely affect our business and our financial results. To the extent that the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in our credit agreement.

The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted with certainty. Such developments may include the ongoing spread of the virus, the vaccination rates against the virus, the emergence of new variants of the virus, the severity of the disease, the duration of the outbreak and the type and duration of actions that may be taken by various governmental authorities in response to the outbreak and the impact on the economy. As a result, at the time of this filing, it is not possible to predict the overall impact of COVID-19 on our business, liquidity, and financial results.

We previously received a notice of failure to satisfy a continued listing rule from the Nasdaq.

On April 9, 2020, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(a)(1). Pursuant to the initial Nasdaq notice and Rule 5810(c)(3)(A) of the Nasdaq Listing Rules, we originally had 180 calendar days from the date of the notice, or until October 6, 2020, to regain compliance with the minimum bid price requirement in Rule 5550(a)(2) by achieving a closing bid price for our common stock of at least $1.00 per share over a minimum of 10 consecutive business days. However, on April 17, 2020, we received a second letter from the Nasdaq indicating that, given the extraordinary market conditions, effective as of April 16, 2020, the Nasdaq has determined to toll the compliance periods for the minimum bid price requirement through June 30, 2020, such that we had until December 21, 2020, to regain compliance. On November 5, 2020, we received a notice from NASDAQ that we had regained compliance with Listing Rule 5450(a)(1). Despite Nasdaq now considering this matter closed, there can be no assurance that we will be able to remain in compliance with the minimum bid price requirement or with other Nasdaq listing requirements in the future. If we are unable to remain in compliance with the minimum bid price requirement or with any of the other continued listing requirements, the Nasdaq may take steps to delist our common stock, which could have adverse results, including, but not limited to, a decrease in the liquidity and market price of our common stock, loss of confidence by our employees and investors, loss of business opportunities, and limitations in potential financing options.

Our ability to engage in some business transactions may be limited by the terms of our debt.

Our financing documents contain affirmative and negative financial covenants restricting ALJ, Faneuil, and Phoenix. Specifically, our loan facilities’ covenants restrict ALJ, Faneuil, and Phoenix from:

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incurring additional debt;

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making certain capital expenditures;

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allowing liens to exist;

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entering transactions with affiliates;

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guaranteeing the debt of other entities, including joint ventures;

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merging, consolidating, or otherwise combining with another company; or

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transferring or selling our assets.

Our ability to borrow under our loan arrangements depends on our compliance with certain covenants and borrowing base requirements. A significant deterioration in our profitability and/or cash flow, whether caused by our inability to grow our businesses

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in a profitable manner, or by events beyond our control, may cause us to fall out of compliance with such covenants and borrowing base requirements. The failure to comply with these covenants and requirements could result in an event of default under our loan arrangements that, if not cured or waived, could terminate such party’s ability to borrow further, permit acceleration of the relevant debt (and other indebtedness based on cross-default provisions) and permit foreclosure on any collateral granted as security under the loan arrangements, which includes substantially all of our assets. Accordingly, any default under our loan facilities could also result in a material adverse effect on us that may result in our lenders seeking to recover from us or against our assets. There can also be no assurance that the lenders will grant waivers on covenant violations if they occur. Any such event of default would have a material adverse effect on us.

We have substantial indebtedness and our ability to generate cash to service our indebtedness depends on factors that are beyond our control.

We currently have, and will likely continue to have, a substantial amount of indebtedness, some of which require us to make a lump-sum or “balloon” payment at maturity. Our indebtedness could, among other things, make it more difficult for us to satisfy our debt obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions and place us at a competitive disadvantage. We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations and potentially from debt or equity offerings. However, if we do not have sufficient funds to repay the debt at maturity of these loans, we will need to refinance this debt. If the credit environment is constrained at the time the balloon payment is due or our indebtedness otherwise matures, we may not be able to refinance our existing indebtedness on acceptable terms and may be forced to choose from a number of unfavorable options. These options include agreeing to otherwise unfavorable financing terms, selling assets on disadvantageous terms or defaulting on the loan and permitting the lender to foreclose. Accordingly, our ability to meet our obligations depends on our future performance and capital raising activities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate to allow us to pay the principal and interest on our debt and meet our other obligations, our ability to execute our business plan and effectively compete in the marketplace may be materially adversely affected.

The industries in which our subsidiaries operate are highly competitive, which could decrease demand for our subsidiaries’ products or force them to lower their prices, which could have a material adverse effect on their business and our financial results.

Faneuil primarily competes based on quality, performance, innovation, technology, price, applications expertise, system and service flexibility, and established customer service capabilities, as its services relate to toll collection, customer contact centers, and employee staffing. Faneuil may not be able to compete effectively on all these fronts or with all of its competitors.

Phoenix competes directly or indirectly with several established book and book component manufacturers. New distribution channels such as digital formats, the internet and online retailers and growing delivery platforms (e.g., tablets and e-readers), combined with the concentration of retailer power, pose threats and provide opportunities to traditional consumer publishing models, potentially impacting both sales volumes and pricing.

Competitive pressures or the inability by our subsidiaries to adapt effectively and quickly to a changing competitive landscape could affect prices, margins or demand for products and services. If our subsidiaries are unable to respond timely and appropriately to these competitive pressures, from existing or new competitors, their business, market share and financial performance could be adversely affected.

A failure to attract and retain necessary personnel, skilled management, and qualified subcontractors may have an adverse impact on the business of our subsidiaries.

Because each of our subsidiaries operates in intensely competitive markets, its success depends to a significant extent upon each subsidiary’s ability to attract, retain and motivate highly skilled and qualified personnel and to subcontract with qualified, competent subcontractors. If our subsidiaries fail to attract, develop, motivate, retain, and effectively utilize personnel with the desired levels of training or experience, or, as applicable, are unable to contract with qualified, competent subcontractors, their business will be harmed. Experienced and capable personnel remain in high demand, and there is continual competition for their talents. Quality service depends on the ability to retain employees and control personnel turnover, as any increase in the employee turnover rate could increase recruiting and training costs and could decrease operating effectiveness and productivity. Additionally, our subsidiaries’ businesses are driven in part by the personal relationships, skills, experience and performance of each subsidiary’s senior management team. Despite executing employment agreements with members of each subsidiary’s senior management team, such members may discontinue service with our subsidiaries and we may not be able to find individuals to replace them at the same cost, or at all. The

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loss or interruption of the services of any key employee or the loss of a key subcontractor relationship could hurt our business, financial condition, cash flow, results of operations and prospects.

Changes in interest rates may increase our interest expense.

As of December 31, 2021, $104.6 million of our current borrowings under the Blue Torch Term Loan, Amended PNC Revolver, and potential future borrowings are, and may continue to be, at variable rates of interest, tied to LIBOR or the Prime Rate of interest, thus exposing us to interest rate risk. Such rates tend to fluctuate based on general economic conditions, general interest rates, Federal Reserve rates and the supply of and demand for credit in the relevant interbanking market. In recent years, the Federal Reserve Board has incrementally changed the target range for the federal funds rate. Changes in the interest rate generally, and particularly when coupled with any significant variable rate indebtedness, could materially adversely impact our interest expense. If interest rates changed in the future by 100 basis points, based on our current borrowings as of December 31, 2021, our interest expense would increase or decrease by $1.0 million per year.

Further, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or compelling banks to submit rates for the calculation of LIBOR rates after 2021 (the “FCA Announcement”). The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate; however, we are not able to predict whether LIBOR will cease to be available after 2021 or whether SOFR will become a widely accepted benchmark in place of LIBOR. Although it is not possible to predict the effect the FCA Announcement, any discontinuation, modification or other reforms to LIBOR or the establishment of alternative reference rates such as SOFR may have on LIBOR, we do not expect the effect to have a material impact on our interest expense.

We may not receive the full amounts estimated under the contracts in our backlog, which could reduce our revenue in future periods below the levels anticipated. This makes backlog an uncertain indicator of future operating results.

As of December 31, 2021, both of our subsidiaries had a significant backlog. Our backlog is typically subject to large variations from quarter to quarter and comparisons of backlog from period to period are not necessarily indicative of future revenue. The contracts comprising our backlog may not result in actual revenue in any particular period or at all, and the actual revenue from such contracts may differ from our backlog estimates. The timing of receipt of revenue, if any, for projects included in backlog could change because many factors affect the scheduling of projects. In certain instances, customers may have the right to cancel, reduce or defer amounts that we have in our backlog, which could negatively affect our future revenue. The failure to realize all amounts in our backlog could adversely affect our revenue and gross margins. As a result, our subsidiaries’ backlog as of any particular date may not be an accurate indicator of our future revenue or earnings.

Some of our officers may have outside business interests, which could impair our ability to implement our business strategies and lead to potential conflicts of interest.

Some of our officers, in the course of their other business activities, may become aware of investments, business or other information which may be appropriate for presentation to us as well as to other entities to which they owe a fiduciary duty. They may also in the future become affiliated with entities that are engaged in business or other activities similar to those we intend to conduct. As a result, they may have conflicts of interest in determining to which entity particular opportunities or information should be presented. If, as a result of such conflict, we are deprived of investments, business or information, the execution of our business plan and our ability to effectively compete in the marketplace may be adversely affected.

We may not be able to consummate additional acquisitions and dispositions on acceptable terms or at all. Furthermore, we and our subsidiaries may not be able to integrate acquisitions successfully and achieve anticipated synergies, or the acquisitions and dispositions we and our subsidiaries pursue could disrupt our business and harm our financial condition and operating results.

As part of our business strategy, we intend to continue to pursue acquisitions and dispositions. Acquisitions and dispositions could involve a number of risks and present financial, managerial and operational challenges, including:

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adverse developments with respect to our results of operations as a result of an acquisition which may require us to incur charges and/or substantial debt or liabilities;

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disruption of our ongoing business and diversion of resources and management attention from existing businesses and strategic matters;

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difficulty with assimilation and integration of operations, technologies, products, personnel or financial or other systems;

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increased expenses, including compensation expenses resulting from newly hired employees and/or workforce integration and restructuring;

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disruption of relationships with current and new personnel, customers, and suppliers;

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integration challenges related to implementing or improving internal controls, procedures and/or policies at a business that prior to the acquisition lacked the same level of controls, procedures and/or policies;

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assumption of certain known and unknown liabilities of the acquired business;

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regulatory challenges or resulting delays; and

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potential disputes (including with respect to indemnification claims) with the buyers of disposed businesses or with the sellers of acquired businesses, technologies, services, or products.

We may not be able to consummate acquisitions or dispositions on favorable terms or at all. Our ability to consummate acquisitions will be limited by our ability to identify appropriate acquisition candidates, to negotiate acceptable terms for purchase and our access to financial resources, including available cash and borrowing capacity. In addition, we could experience financial or other setbacks if we are unable to realize, or are delayed in realizing, the anticipated benefits resulting from an acquisition, if we incur greater than expected costs in achieving the anticipated benefits or if any business that we acquire or invest in encounters problems or liabilities which we were not aware of or were more extensive than believed.

Our net operating loss carryforwards could be substantially limited if we experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code.

Our ability to utilize net operating losses (“NOLs”) and built-in losses under Section 382 of the Internal Revenue Code (the “Code”) and tax credit carryforwards to offset our future taxable income and/or to recover previously paid taxes would be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the Code, which is generally any change in ownership of more than 50% of its stock over a three-year period. These rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Depending on the resulting limitation, a significant portion of our NOLs could expire before we would be able to use them. At the end of our most recent fiscal year, September 30, 2021, we had NOL carryforwards for federal income tax purposes of approximately $135.1 million that start expiring in 2022. Approximately $109.1 million of the NOL carryforward expires in 2022. Our inability to utilize our NOLs would have a negative impact on our financial position and results of operations.

In August 2018, our shareholders approved the amendment of certain provisions in our Restated Certificate of Incorporation, updating certain restrictions on transfers of our stock that may result in an “ownership change” within the meaning of Section 382 in order to preserve stockholder value and the value of certain tax assets primarily associated with NOLs and built-in losses under Section 382. We do not believe we have experienced an “ownership change” as defined by Section 382 in the last three years. However, whether a change in ownership occurs in the future is largely outside of our control, and there can be no assurance that such a change will not occur.

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

Our executive officers and directors and their affiliated entities together beneficially owned approximately 55.6% of our outstanding common stock on February 1, 2022. Jess Ravich, our current Chief Executive Officer, beneficially owned approximately 47.1% of our common stock on February 1, 2022. As a result, these stockholders, if they act together or in a block, could have significant influence over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions, even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

We do not currently plan to pay dividends to holders of our common stock.

We do not currently anticipate paying dividends to the holders of our common stock. Accordingly, holders of our common stock must rely on price appreciation as the sole method to realize a gain on their investment. There can be no assurances that the price of our common stock will ever appreciate in value.

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Certain provisions in our Restated Certificate of Incorporation contain transfer restrictions that may have the effect of delaying or preventing beneficial takeover bids by third parties.

Our Restated Certificate of Incorporation imposes certain restrictions on transfer of stock designed to preserve the value of certain tax assets primarily associated with our NOLs and built-in losses under Section 382. These restrictions prohibit certain transfers that would result in a person or a group of persons acquiring 5% of more of ALJ’s outstanding stock, unless otherwise approved by our Board of Directors or a committee thereof. While such transfer restrictions are intended to protect our NOLs and built-in losses under Section 382, they may also have the effect of delaying or preventing beneficial takeover bids by third parties.

Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations or financial conditions

On December 22, 2017, then President Trump signed into law the final version of the Tax Reform Law. The Tax Reform Law significantly reforms the Internal Revenue Code of 1986, as amended, with many of its provisions effective for tax years beginning on or after January 1, 2018. The Tax Reform Law, among other things, contains significant changes to corporate taxation, including a permanent reduction of the corporate income tax rate, a partial limitation on the deductibility of business interest expense, a limitation of the deduction for NOL carryforwards, an indefinite NOL carryforward, and the elimination of the two-year NOL carryback, temporary, immediate expensing for certain new investments and the modification or repeal of many business deductions and credits. We continue to examine the impact this tax reform legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Reform Law is uncertain and our business and financial condition could be adversely affected. The impact of this reform on our stockholders is uncertain. Stockholders should consult with their tax advisors regarding the effect of the Tax Reform Law and other potential changes to the U.S. Federal tax laws on them.

The market price of our common stock is volatile.

The market price of our common stock could fluctuate substantially in the future in response to a number of factors, including the following:

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our quarterly operating results or the operating results of other companies in our industry;

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changes in general conditions in the economy, the financial markets or our industry;

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relatively low trading volumes;

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announcements by our competitors of significant acquisitions; and

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the occurrence of various risks described in these Risk Factors.

Also, the stock market has experienced extreme price and volume fluctuations recently. This volatility has had a significant impact on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.

We are subject to claims arising in the ordinary course of our business that could be time-consuming, result in costly litigation and settlements or judgments, require significant amounts of management attention and result in the diversion of significant operational resources, which could adversely affect our business, financial condition, and results of operations.

We, our officers, and our subsidiaries, are currently involved in, and from time to time may become involved in, legal proceedings or be subject to claims arising in the ordinary course of our business. Litigation is inherently unpredictable, time-consuming and distracting to our management team, and the expenses of conducting litigation are not inconsequential. Such distraction and expense may adversely affect the execution of our business plan and our ability to compete effectively in the marketplace. Further, if we do not prevail in litigation in which we may be involved, our results could be adversely affected, in some cases, materially. For additional information, see “Part I, Item 1. Financial Statements – Note 9. Commitments and Contingencies - Litigation, Claims, and Assessments.”

Any business disruptions due to political instability, armed hostilities, acts of terrorism, natural disasters or other unforeseen events could adversely affect our financial performance.

If terrorist activities, armed conflicts, political instability, or natural disasters, including climate change related events, occur in the United States, such events may negatively affect the operations of our subsidiaries, cause general economic conditions to deteriorate or cause demand for our subsidiaries’ services to decline. A prolonged economic slowdown or recession could reduce the demand for

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our subsidiaries’ services, and consequently, negatively affect our subsidiaries’ future sales and profits. Additionally, certain of our subsidiaries are dependent on key production facilities and certain specialized machines. Any disruption of production capabilities due to unforeseen events at any of our subsidiaries’ principal facilities could adversely affect our business, results of operations, cash flows, and financial condition.

Account data breaches involving stored data, or the misuse of such data could adversely affect our reputation, performance, and financial condition.

We and each of our subsidiaries provide services that involve the storage of non-public information. Cyber-attacks designed to gain access to sensitive information are constantly evolving, and high-profile electronic security breaches leading to unauthorized releases of sensitive information have occurred recently at several major U.S. companies, including several large retailers, despite widespread recognition of the cyber-attack threat and improved data protection methods. Any breach of the systems on which sensitive data and account information are stored or archived and any misuse by our employees, by employees of data archiving services or by other unauthorized users of such data could lead to damage to our reputation, claims against us and other potential increases in costs. If we are unsuccessful in defending any lawsuit involving such data security breaches or misuse, we may be forced to pay damages, which could materially and adversely affect our profitability and financial condition. Also, damage to our reputation stemming from such breaches could adversely affect our prospects. As the regulatory environment relating to companies’ obligations to protect such sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions.

Your share ownership may be diluted by the issuance of additional shares of our common or preferred stock in the future.

Your share ownership may be diluted by the issuance of additional shares of our common or preferred stock or securities convertible into common or preferred stock in the future. On December 31, 2021, a total of 1,410,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of $3.48, and 1,610,538 shares of our common stock are issuable pursuant to outstanding warrants at a weighted-average exercise price of $0.56. On December 31, 2021, ALJ had debt that was convertible into 11,158,357 shares of common stock at the discretion of the debt holder. It is probable that options or warrants to purchase our common stock, or debt that is convertible into common stock, will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option or warrant. If the stock options or warrants are exercised, your share ownership will be diluted. Additionally, options to purchase up to 1,375,000 shares of ALJ common stock are available for grant under our existing equity compensation plans on December 31, 2021.

In addition, our Board of Directors may determine from time to time that we need to raise additional capital by issuing additional shares of our common stock or other securities. We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common or preferred stock. The issuance of any additional shares of common stock or preferred stock or securities convertible into, exchangeable for or that represent the right to receive common or preferred stock, or the exercise of such securities could be substantially dilutive to shareholders of our common stock. New investors also may have rights, preferences, and privileges that are senior to, and that adversely affect, our then current shareholders. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series. The market price of our common stock could decline as a result of sales of shares of our common stock made after this offering or the perception that such sales could occur. We cannot predict or estimate the amount, timing, or nature of our future offerings. Thus, our shareholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings.

We are a “smaller reporting company” and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “smaller reporting companies.”

We qualify as a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a “smaller reporting company,” and have either: (i) a public float of less than $250 million or (ii) annual revenues of less than $100 million during the most recently completed fiscal year and (A) no public float or (B) a public float of less than $700 million. As a “smaller reporting company,” we are subject to reduced disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Until such time as we cease to be a “smaller reporting company,” such reduced disclosure in our SEC filings may make it harder for investors to analyze our operating results and financial prospects.

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Climate change related events may have a long-term impact on our business.

While we seek to mitigate our business risks associated with climate change, we recognize that there are inherent climate related risks regardless of where we conduct our businesses. Access to clean water and reliable energy in the communities where we conduct our business is a priority. Any of our locations may be vulnerable to the adverse effects of climate change. Climate related events have the potential to disrupt our business, including the business of our customers, and may cause us to experience higher attrition, losses and additional costs to resume operations.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

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Item 6 – Exhibits

Exhibit Number	Description of Exhibit	Method of Filing
3.1	Restated Bylaws of ALJ Regional Holdings, Inc., dated as of May 11, 2009	Incorporated by reference to Exhibit 3.4 to Form 10-12B as filed on February 2, 2016

3.2	Restated Certificate of Incorporation of ALJ Regional Holdings, Inc. as filed with the Secretary of State of the State of Delaware on August 17, 2018	Incorporated by reference to Exhibit 3.5 to Form 10-K as filed on December 17, 2018

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")	Filed herewith

31.2	Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act	Filed herewith

32.1	Certification of the Chief Executive Officer and the Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

101.INS	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document	Filed herewith

101.SCH	Inline XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS)	Filed herewith

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SIGNATURES

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

	ALJ Regional Holdings, Inc.

	Date: February 11, 2022
	/s/ Jess Ravich
	Jess Ravich
	Chief Executive Officer
	(Principal Executive Officer)

	Date: February 11, 2022
	/s/ Brian Hartman
	Brian Hartman
	Chief Financial Officer
	(Principal Financial Officer)