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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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.

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 ~~January 31, 2018~~August 1, 2021 was ~~37,921,116.~~

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:

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 ~~factors,~~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.

	December 31,			September 30,
	2017			2017			June 30,			September 30,
	(unaudited)						2021			2020
ASSETS							(unaudited)
Current assets:
Cash and cash equivalents	$	2,027		$	5,630		$	8,415		$	6,050
Accounts receivable, net of allowance for doubtful accounts of $987 ($830 at September 30, 2017)		55,540			49,457
Accounts receivable, net of allowance for doubtful accounts of $154 and $1,033 at June 30, 2021 and September 30, 2020, respectively								52,601			56,487
Inventories, net		9,903			9,376			6,600			6,232
Prepaid expenses and other current assets		8,045			5,783			8,361			9,015
Current assets of discontinued operations								—			4,828
Total current assets		75,515			70,246			75,977			82,612
Property and equipment, net		56,735			54,335			67,236			67,785
Goodwill		56,372			54,964
Operating lease right-of-use assets								30,736			—
Intangible assets, net		46,498			43,179			31,716			35,552
Collateral deposits, less current portion		694			879
Collateral deposits								487			424
Other assets		3,810			4,474			1,450			2,887
Deferred tax asset, net		7,800			11,052
Long-term assets of discontinued operations								—			984
Total assets	$	247,424		$	239,129		$	207,602		$	190,244
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,667		$	15,597		$	14,308		$	16,224
Accrued expenses		13,636			12,661			22,456			19,140
Income taxes payable		—			195			273			9
Deferred revenue and customer deposits		4,312			5,755			5,464			8,583
Current portion of term loan, net of deferred loan costs		8,196			11,848
Current portion of capital lease obligations		3,575			2,571
Current portion of workers’ compensation reserve		989			1,015
Term loans, net of deferred loan costs - current installments								2,675			9,827
Finance lease obligations - current installments								810			2,437
Operating lease obligations - current installments								5,035			—
Current portion of workers' compensation reserve								710			960
Other current liabilities		1,591			64			4,311			60
Current liabilities of discontinued operations								—			3,351
Total current liabilities		47,966			49,706			56,042			60,591
Line of credit, net of deferred loan costs		13,536			5,330			—			13,753
Term loan payable, less current portion, net of deferred loan costs		81,475			76,753
Term loans, less current portion, net of deferred loan costs								94,187			73,482
Deferred revenue, less current portion		2,675			3,111			590			2,358
Workers’ compensation reserve, less current portion		1,719			1,748
Capital lease obligations, less current portion		5,730			4,679
Workers' compensation reserve, less current portion								1,887			1,842
Finance lease obligations, less current installments								540			2,900
Operating lease obligations, less current installments								34,432			—
Deferred tax liabilities, net								1,025			987
Other non-current liabilities		1,923			2,049			7,502			16,669
Long-term liabilities of discontinued operations								—			606
Total liabilities		155,024			143,376			196,205			173,188
Commitments and contingencies (Note 8)
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.01 par value; total authorized – 5,000,000 shares; 1,000,000 shares authorized for Series A; 550,000 shares authorized for Series B; none issued and outstanding as of December 31, 2017 and September 30, 2017		—			—
Common stock, $0.01 par value; authorized – 100,000,000 shares; 37,621,116 and 37,041,308 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively		376			371
Common stock, $0.01 par value; authorized – 100,000 shares; 42,321 and 42,298 issued and outstanding at June 30, 2021 and September 30, 2020, respectively								423			423
Additional paid-in capital		278,438			276,478			288,240			288,193
Accumulated deficit		(186,414	)		(181,096	)		(277,266	)		(271,560	)
Total stockholders’ equity		92,400			95,753			11,397			17,056
Total liabilities and stockholders’ equity	$	247,424		$	239,129		$	207,602		$	190,244

Three Months Ended December 31,

2017

2016

Net revenue

$
94,954

$
77,617

Costs and expenses:

Cost of revenue

74,910

60,181

Selling, general, and administrative expense

19,538

14,383

(Gain) loss on disposal of assets, net

(207
)

8

Total operating expenses

94,241

74,572

Operating income

713

3,045

Other expense:

Interest expense, net

(2,660
)

(2,434
)
Total other expense

(2,660
)

(2,434
)
(Loss) income before income taxes

(1,947
)

611

Provision for income taxes

(3,371
)

(60
)
Net (loss) income

$
(5,318
)

$
551

Basic (loss) earnings per share of common stock

$
(0.14
)

$
0.02

Diluted (loss) earnings per share of common stock

$
(0.14
)

$
0.02

Weighted average shares of common stock outstanding:

Basic

37,577

34,575

Diluted

37,577

35,712

	Three Months Ended June 30,						Nine Months Ended June 30,
	2021			2020			2021			2020
Net revenue	$	103,460		$	86,077		$	329,185		$	252,246
Costs and expenses:
Cost of revenue		82,468			67,656			269,111			205,891
Selling, general, and administrative expense		19,607			18,102			54,461			48,804
Impairment of goodwill		—			—			—			56,492
Gain on disposal of assets, net		(189	)		(301	)		(191	)		(299	)
Total operating expenses		101,886			85,457			323,381			310,888
Operating income (loss)		1,574			620			5,804			(58,642	)
Other (expense) income:
Interest expense, net		(2,623	)		(2,568	)		(7,656	)		(7,976	)
Interest from legal settlement		—			—			—			200
Loss on debt extinguishment		(2,072	)		—			(2,072	)		—
Total other expense, net		(4,695	)		(2,568	)		(9,728	)		(7,776	)
Loss from continuing operations before income taxes		(3,121	)		(1,948	)		(3,924	)		(66,418	)
(Provision for) benefit from income taxes		(383	)		(250	)		(719	)		1,008
Net loss from continuing operations		(3,504	)		(2,198	)		(4,643	)		(65,410	)
Net loss from discontinued operations, net of income taxes		—			(461	)		(1,063	)		(3,324	)
Net loss	$	(3,504	)	$	(2,659	)	$	(5,706	)	$	(68,734	)
Loss per share of common stock–basic and diluted:
Continuing operations	$	(0.08	)	$	(0.05	)	$	(0.11	)	$	(1.55	)
Discontinued operations	$	—		$	(0.01	)	$	(0.03	)	$	(0.08	)
Loss per share ⁽¹⁾	$	(0.08	)	$	(0.06	)	$	(0.13	)	$	(1.63	)
Weighted average shares of common stock outstanding– basic and diluted		42,321			42,173			42,320			42,173

	Nine Months Ended June 30,
	2021			2020
Operating activities
Net loss	$	(5,706	)	$	(68,734	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense		14,912			14,676
Loss on debt extinguishment		2,072			—
Change in fair value of contingent consideration		1,100			900
Interest expense and other bank fees accreted to term loans		1,691			544
Loss on sale of Carpets		761			—
Amortization of deferred loan costs		527			787
Gain on disposal of assets, net		(191	)		(299	)
Stock-based compensation expense		126			312
(Reversal) provision for bad debts and obsolete inventory		(56	)		945
Deferred income taxes		38			(1,448	)
Impairment of goodwill		—			56,492
Fair value of warrants issued in connection with debt modification		—			716
Changes in operating assets and liabilities:
Accounts receivable, net		3,927			(11,723	)
Inventories, net		(353	)		(733	)
Prepaid expenses and other current assets		641			(4,429	)
Income tax receivable		—			895
ROU assets/ROU liabilities		(494	)		—
Other assets and collateral deposits		1,374			(1,147	)
Accounts payable		(1,916	)		3,685
Accrued expenses		2,126			1,577
Income tax payable		264			(215	)
Deferred revenue and customer deposits		(4,887	)		8,112
Other current liabilities and other non-current liabilities		4,043			2,514
Discontinued operations, net		663			3,863
Cash provided by operating activities		20,662			7,290
Investing activities
Capital expenditures		(6,632	)		(5,200	)
Proceeds from sale of Carpets, net of transaction costs		438			—
Proceeds from sales of assets		309			1
Discontinued operations, net		(7	)		(25	)
Cash used for investing activities		(5,892	)		(5,224	)
Financing activities
Proceeds from term loan		95,000			1,500
Payments on term loans		(83,936	)		(3,863	)
(Payments) proceeds from line of credit, net		(14,417	)		5,968
Deferred loan costs		(4,164	)		(766	)
Payments on finance leases		(3,987	)		(2,041	)
Payment of debt extinguishment penalties and other		(901	)		—
Cash (used for) provided by financing activities		(12,405	)		798
Change in cash and cash equivalents		2,365			2,864
Cash and cash equivalents at beginning of the year		6,050			4,529
Cash and cash equivalents at end of the year	$	8,415		$	7,393

Three Months Ended December 31,

2017

2016

Operating activities

Net (loss) income

$
(5,318
)

$
551

Adjustments to reconcile net (loss) income to cash (used for) provided by
operating activities:

Depreciation and amortization - cost of revenue

1,399

1,282

Depreciation and amortization - selling, general and administrative expense

3,434

2,679

Stock-based compensation expense

293

183

Provision for bad debts

156

—

Deferred income taxes

3,252

(226
)
(Gain) loss on disposal of assets, net

(207
)

8

Amortization of deferred loan costs

307

251

Changes in operating assets and liabilities:

Accounts receivable, net

(6,240
)

(3,662
)
Inventories, net

979

1,320

Collateral deposits

184

1,300

Prepaid expenses and other current assets

(2,000
)

77

Other assets

664

(2,244
)
Accounts payable

69

3,759

Accrued expenses

1,064

1,858

Income tax payable

(195
)

184

Deferred revenue and customer deposits

(1,880
)

(166
)
Other current liabilities

501

(587
)
Other liabilities

(154
)

1,742

Cash (used for) provided by operating activities

(3,692
)

8,309

Investing activities

Acquisitions, net of cash acquired

(9,000
)

—

Proceeds from sales of assets

343

97

Capital expenditures

(980
)

(4,042
)
Cash used for investing activities

(9,637
)

(3,945
)
Financing activities

Net proceeds on line of credit

8,162

—

Payments on term loan

(6,427
)

(4,482
)
Proceeds from term loan

7,500

—

Proceeds from issuance of common stock

1,500

—

Debt and common stock issuance costs

(332
)

—

Payments on financed insurance premiums

—

(290
)
Payments on capital leases

(677
)

(436
)
Cash provided by (used for) financing activities

9,726

(5,208
)
Change in cash and cash equivalents

(3,603
)

(844
)
Cash and cash equivalents at beginning of period

5,630

5,279

Cash and cash equivalents at end of period

$
2,027

$
4,435

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Taxes

$
599

$
104

Interest

$
2,205

$
2,149

Non-cash investing and financing activities:

Capital equipment purchases financed with capital leases

$
2,734

$
—

Financed insurance premiums

$
—

$
866

	Three Months Ended June 30,						Nine Months Ended June 30,
	2021			2020			2021			2020
Common stock
Balance, beginning of period	$	423		$	422		$	423		$	422
Issuance of common stock upon cashless exercise of stock options		—			—			—			—
Balance, end of period	$	423		$	422		$	423		$	422
Additional paid in capital
Balance, beginning of period	$	288,225		$	287,985		$	288,193		$	287,101
Issuance of common stock upon cashless exercise of stock options		—			—			—			—
Stock-based compensation expense - options		15			61			47			229
Fair value of warrants issued in connection with term loan modification		—			—			—			716
Balance, end of period	$	288,240		$	288,046		$	288,240		$	288,046
Accumulated deficit
Balance, beginning of period	$	(273,762	)	$	(269,961	)	$	(271,560	)	$	(204,407	)
Net loss		(3,504	)		(2,659	)		(5,706	)		(68,734	)
Cumulative impact of adopting ASC 606 on October 1, 2019		—			—			—			521
Balance, end of period	$	(277,266	)	$	(272,620	)	$	(277,266	)	$	(272,620	)
Total stockholders' equity	$	11,397		$	15,848		$	11,397		$	15,848

ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively ~~in this Report~~herein as ~~“ALJ,” the~~“ALJ” or “Company” ~~or “we”~~) is a holding company. ~~ALJ’s primary assets as of December 31, 2017, were all of~~During the ~~outstanding capital stock~~three and nine months ended June 30, 2021 and June 30, 2020, ALJ consisted of the following ~~companies:~~wholly-owned subsidiaries:

As a result of selling one of the largest floor covering retailers in Las Vegas, Nevada, and a provider of multiple products, including all types of flooring, countertops, cabinets, window coverings and garage/closet organizers, for the commercial, retail and home builder markets. Carpets operates four retail locations, as well as a stone and solid surface fabrication facility. ALJ acquired Carpets effective April 1, 2014.

segments during February 2021, discussed below, ALJ has organized its business and corporate structure ~~along the following~~into two business segments: Faneuil ~~Carpets,~~ and Phoenix. ~~ALJ is reported as corporate overhead.~~

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 (“Purchaser” or “Superior”) and Carpets, pursuant to which the Company 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. 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, the results of operations, assets, liabilities, and cash flows of Carpets were classified as discontinued operations in ALJ’s financial statements for all periods presented. See Note 4 for additional information about the divestiture of Carpets.

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States or(“U.S. GAAP”). The Condensed Consolidated Financial Statements and footnotes thereto are unaudited. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the Company’s interim financial results. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue and expenses that are reported in the Condensed Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. Interim financial results are not necessarily indicative of financial results for ~~interim financial~~a full year. The information ~~and with the instructions to the Securities and Exchange Commission, or SEC,~~included in this Quarterly Report on Form 10-Q ~~and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements~~ should be read in conjunction with ~~ALJ’s audited financial statements and notes thereto~~the Company’s Annual Report on Form 10-K for the ~~years~~fiscal year ended September 30, ~~2017 and 2016,~~2020, filed with the ~~Securities and Exchange Commission~~SEC on December ~~19, 2017.~~ 18, 2020.

In March 2020, the ~~amounts reported in its condensed consolidated financial statements and~~World Health Organization declared the ~~accompanying notes. Significant estimates and assumptions by management are used for, but are not limited to, determining the fair value~~outbreak of assets and liabilities, including intangible assets acquired and allocation of acquisition purchase prices, estimated useful lives, recoverability of long-lived and intangible assets, the recoverability of goodwill, the realizability of deferred tax assets, stock-based compensation, the likelihood of material lossCOVID-19 as a ~~result~~pandemic, which continues to spread throughout the U.S. COVID-19 is having an unprecedented impact on the U.S. economy as federal, state, and local governments react to this public health crisis.

Since the beginning of ~~loss contingencies, customer lives,~~ the ~~allowance for doubtful accounts~~COVID-19 pandemic, all of ALJ’s subsidiaries have been deemed “Essential Services” and ~~inventory reserves, and calculation of insurance reserves. Actual results may differ~~have continued to operate with limited disruption. To date, COVID-19 has not materially ~~from estimates. The interim~~impacted ALJ’s financial ~~information is unaudited but reflects all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly ALJ’s~~position, results of operations ~~and financial position for the interim period. The results of operations for the three months ended December 31, 2017, are not necessarily indicative of the results expected for future quarters~~ or ~~the full year.~~

For a complete summary of ALJ’s significant accounting policies, please refer to Note 2, “Summary of Significant Accounting Policies,” included with ALJ’s audited financial statements and notes thereto for the years ended September 30, 2017 and 2016, filed with the Securities and Exchange Commission on December 19, 2017. There were no material changes to significant accounting policies during the three months ended December 31, 2017.

~~In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory (Topic 330): Simplifying the Measurement of Inventory~~.” The amendments in ASU 2015-11 require an entity to measure inventory at the lower of cost or net realizable value. The amendments do not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 should be applied prospectively. ALJ adopted ASU 2015-11 ~~on October 1, 2017.~~ ~~The standard did not have a significant impact on ALJ’s consolidated financial statements.~~

~~In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers~~,” to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Subsequently, the FASB has issued the following standards to provide additional clarification and implementation guidance for ASU 2014-09 including: (i) ASU 2016-08, “~~Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” (ii) ASU 2016-10, “Identifying Performance Obligations and Licensing,” (iii) ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,”~~ ~~and (iv) ASU~~ ~~2017-10,~~ ~~Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services.~~

ASU 2014-09 will be effective for ALJ on October 1, 2019 as ALJ has determined that it will not adopt ASU 2014-09 early. ASU 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the opening retained earnings balance in the year of adoption. ~~ALJ has not yet determined which method it will adopt.~~

As the new standard will supersede substantially all existing revenue guidance, it could impact the timing of ALJ’s revenue and cost of revenue recognition across all business segments. ALJ has formed a project team and has engaged an outside revenue recognition consultant who has completed a revenue recognition adoption roadmap that includes three phases. Phase I is the identification, documentation, and preliminary analysis of how ALJ currently accounts for revenue transactions compared to the revenue accounting required under the new standard. Phase I is expected to be completed in early 2018. Phase II includes a more detailed analysis, including the development of revenue recognition models, data analysis, analyzing implementation options, and finalizing a transition method. Phase II is expected to be completed in mid-2018. Phase III includes identification of system requirements, changes to internal controls and business processes, and final implementation. Phase III is expected to be completed in mid-2019. Because of the nature of the work that remains, at this time we are unable to reasonably estimate the impact of adoption on our consolidated financial statements. ALJ’s evaluation of the financial impact and related disclosure of the new standard will likely extend over several future reporting periods.

~~In February 2016, the FASB issued ASU 2016-02, “Leases~~.” ASU 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on classification as either a finance or operating lease. ~~ASU 2016-02 also requires certain quantitative and qualitative disclosures. The provisions of~~ ASU 2016-02 should be applied on a modified retrospective basis. ASU 2016-02 will be effective for ALJ on October 1, 2020 as ALJ has determined that it will not adopt ASU 2016-02 early. The adoption of ~~ASU 2016-02 will result in a material increase to the Company’s consolidated balance sheets for lease liabilities and right-of-use assets.~~cash flows. The Company ~~is currently evaluating the~~took immediate actions in March 2020 to enable working-from-home where possible and put in place increased safety precautions, including social distancing, at other ~~effects the adoption of~~ ~~ASU 2016-02 will have~~locations where essential services on ~~its consolidated financial statements and related disclosures.~~

~~On October 2, 2017 (the “Purchase Date”), Phoenix acquired certain assets and assumed certain liabilities from~~ ~~LSC Communications, Inc. (“LSC”) and Moore-Langen Printing Company, Inc. related to its printing and manufacturing services division in Terre Haute, Indiana. Such assets and liabilities~~site are referred to hereinafter as the “Printing Components Business.” Total purchase price was $10.0 million in cash, subject to customary net working capital adjustments. Phoenix withheld $1.0 million from the consideration paid at closing, which ~~will be paid on October 2, 2018.~~

required. The ~~Printing Components Business leverages Phoenix’s existing capabilities and core competencies, strengthens its position in the education markets, and expands revenue into new markets.~~

As part of the Printing Components Business acquisition, Phoenix and LSC entered into a supply agreement (the “Supply Agreement”). Pursuant to the Supply Agreement, LSC agreed to purchase from Phoenix its print requirements to continue servicing certain of its customers, buy minimum amounts of certain components from Phoenix, and provide Phoenix with a right of last refusal to supply certain non-component work.

Phoenix and ALJ financed the acquisition by borrowing $7.5 million under a term loan with Cerberus, selling an aggregate of $1.5 million of ALJ common stock in a private offering to two investors who are unaffiliated with ALJ, and using $1.0 million cash from the exercise of stock options by Jess Ravich, Executive Chairman of ALJ. ALJ amended its financing agreement with Cerberus to facilitate the term loan (Note 7).

~~The following schedule reflects the estimated fair value of assets acquired and liabilities assumed on the Purchase Date and the purchase price details (in thousands~~):

The Company accounted for the Printing Components Business acquisition using the purchase method of accounting. Accordingly, the assets and liabilities were recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and the liabilities assumed was recorded as goodwill. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date, cumulative changes in the estimated fair values of the net assets recorded may change the amount of the purchase price allocable to goodwill. During the measurement period, which expires one year from the acquisition date, changes to any purchase price allocations that are material to the Company's consolidated financial results will be adjusted in the reporting period in which the adjustment amount is determined.

During the three months ended December 31, 2017, the Printing Components Business recorded $4.5 million of net revenue. Because the Printing Components Business was closely aligned with Phoenix’s existing business, including the overlap of customers, its operations were immediately integrated into Phoenix’s operations, and financial metrics other than net revenue were not separately tracked. duration

of these measures is unknown, may be extended and additional measures may be imposed. Although some employees have recently started to return to work, ALJ still has a significant portion of its work force working from home.

Although ALJ has not been materially impacted by COVID-19, ALJ could be impacted by COVID-19 in the near term by lower sales volumes in several parts of ALJ’s business, resulting in lower revenue and profit. While the impact of COVID-19 on the Company’s future financial position, results of operations and cash flows cannot be estimated with certainty, such impact could be significant if the global pandemic continues to adversely impact the U.S. economy for an extended period of time. The extent to which COVID-19 impacts ALJ’s operations will depend on future developments, which are highly uncertain. These include among others, the duration of the outbreak, vaccination rate, emergence of new variants, if portions of the Company’s business segments are recharacterized as non-essential for which closure of some or all of the Company’s operations could be required, information that may emerge concerning the severity of COVID-19 and the actions, especially those taken by governmental authorities, to contain the pandemic or treat its impact. As events are rapidly developing, additional impacts may arise that are not known at this time.

As of June 30, 2021, ALJ’s total available liquidity was $37.6 million, which included $8.4 million of cash and cash equivalents and $29.2 million of unused borrowing capacity under the Company’s revolving credit facility. While the impact that COVID-19 may have on the Company’s financial position, results of operations, and cash flows in the future cannot be estimated with certainty, based on current estimates regarding the magnitude and duration of the global pandemic, ALJ does not anticipate an impact on the Company’s ability to meet its obligations when due for at least the next 12 months. However, the ultimate magnitude and duration of the global pandemic is highly uncertain and, as such, will require ALJ to continually assess the situation for the foreseeable future. Accordingly, the Company’s estimates regarding the magnitude and duration of the global pandemic may change in the future and such changes could be material.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU 2016-02, Leases and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (referred to collectively as “ASC 842”)). ASC 842 requires lessees to recognize a right-of-use (“ROU”) asset and corresponding lease liability for all leases with terms of more than 12 months and provides enhanced disclosure of lease activity. Recognition, measurement, and presentation of expenses depend on classification as either a finance or operating lease.

ALJ adopted ASC 842 as of October 1, 2020, the effective and initial application date, using the modified retrospective approach. Comparative periods presented in the consolidated financial statements prior to October 1, 2020 continue to be presented under Accounting Standards Codification (“ASC”) 840. ALJ elected the package of practical expedients, which allowed the Company to not reassess, as of the adoption date, whether arrangements contain leases, the classification of existing leases, and the capitalization of initial direct costs of the existing leases. The Company also made a policy election to exclude leases with an initial term of 12 months or less from the Consolidated Balance Sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

The Company’s October 1, 2020 adoption of ASC 842 resulted in the recognition of operating lease obligations totaling $42.6 million, based upon the present value of the remaining minimum rental payments using discount rates as of the adoption date, of which $5.2 million was in operating lease obligations - current installments, and $37.4 million was in operating lease liabilities, less current installments. In addition, ALJ recorded corresponding operating lease right-of-use assets totaling $33.4 million. The new standard did not have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. See Note 10 for further discussion of the Company’s leasing arrangements and required ASC 842 disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies certain aspects of the accounting for income taxes as well as clarifies and amends existing guidance to improve consistent application. ALJ early adopted ASU 2019-12 as of January 1, 2021. The impact of ASU 2019-12 on ALJ’s consolidated financial statements and related disclosures was not material.

In August 2018, the FASB issued 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. ASU 2018-15 will be effective for ALJ on October 1, 2021. ALJ does not anticipate the adoption of ASU 2018-15 to significantly impact its consolidated financial statements and related disclosures.

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. ASU 2020-06 will be effective for ALJ on October 1, 2021 and will be applied on a full retrospective basis. ALJ does not anticipate the adoption of ASU 2020-06 to significantly impact its consolidated financial statements and related disclosures.

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 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.

Revenue by contract type was as follows for the three and nine months ended June 30, 2021 and June 30, 2020:

	Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Faneuil:
Healthcare	$	31,318	$	22,119	$	108,020	$	71,474
Transportation		22,614		14,926		64,324		50,422
Utility		13,709		13,509		40,529		40,926
Government		4,148		9,166		26,698		10,796
Other		965		1,803		3,576		5,297
Total Faneuil	$	72,754	$	61,523	$	243,147	$	178,915
Phoenix:
Publisher
MSA	$	24,588	$	20,337	$	67,555	$	52,336
Non-MSA		3,652		1,200		11,522		11,982

During the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2021, the Company ~~incurred approximately $123,000~~capitalized $0.1 million of ~~acquisition-related~~ costs ~~in connection with~~to obtain a contract. During the ~~Printing Components Business acquisition,~~nine months ended June 30, 2021, the Company amortized $0.4 million of these costs, which ~~were expensed to~~was included in selling, general, and administrative expense. The net book value of costs to obtain a contract was $0.3 million as of June 30, 2021, of which $0.2 million was in prepaid expenses and other current assets, and $0.1 million was in other assets.

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 nine months ended June 30, 2021, the Company capitalized $6.0 million of costs to fulfill a contract. The amortization of costs to fulfill contracts, which comprise set-up/transition activities, for the nine months ended June 30, 2021 was $7.6 million. The net book value of the costs to fulfill a contract as of June 30, 2021, was $3.5 million of which $2.9 million was in prepaid expenses and other current assets, and $0.6 million was in other assets.

Capitalized costs to obtain and fulfill a contract are periodically reviewed for impairment. ALJ did 0t incur any impairment losses during the nine months ended June 30, 2021 or June 30, 2020.

On ~~May 26, 2017 (the “CMO Business~~July 31, 2019 (“RDI Purchase Date”), Faneuil acquired ~~certain assets~~Realtime Digital Innovations, LLC (“RDI” and ~~assumed certain liabilities associated~~such acquisition, the “RDI Acquisition”), a provider of workflow automation and business intelligence services. The RDI Acquisition is expected to provide Faneuil with a sustainable competitive advantage in the business process outsourcing space by allowing it to, among others, (i) automate process workflows and business intelligence, (ii) generate labor efficiencies for existing programs, (iii) expand potential new client target entry points, (iv) improve overall customer ~~management outsourcing business (“CMO Business”) of~~ ~~Vertex Business Services LLC.~~ experience, and (v) increase margin profiles through shorter sales cycles and software license sales.

The CMO Business, which was purchased to expand Faneuil’s presence into the utilities market, provides direct customer care call center operations, back-office processes, including billing, collections and business analytics, and installation and cloud-based customer care support exclusivelyaggregate cash consideration for the ~~utilities industry.~~RDI Acquisition paid at closing was $2.5 million, with earn-outs up to $7.5 million to be paid upon the achievement of certain financial metrics over a three-year period, subject to a guaranteed payout of $2.5 million. In March 2021, Faneuil made the first earn-out payment of $2.5 million. The RDI Acquisition was not material to the Company's results of operations, financial position, or cash flows and, therefore, the pro forma impact is not presented.

The following schedule reflects the final fair value of assets acquired and liabilities assumed on the ~~CMO Business~~RDI Purchase Date ~~and the purchase price details~~ (in thousands):

The fair value of the deferred and contingent consideration liabilities is remeasured to fair value at each reporting period using Level 3 inputs such as cash flow forecast, discount rate, and equity risk premium. The change in fair value, including accretion for the passage of time, is recognized in earnings until the deferred and contingent considerations are resolved. ALJ recorded a $1.1 million and a $0.9 million increase to deferred and contingent consideration liabilities during the three months ended June 30, 2021 and June 30, 2020, respectively, which was expensed to selling, general, and administrative expense.

During the nine months ended June 30, 2020, the Company incurred less than $0.1 million of acquisition-related expenses in connection with the RDI Acquisition, which were expensed to selling, general, and administrative expense. There were no acquisition-related expenses incurred during any other periods presented.

As previously discussed in Note 1, ALJ sold Carpets during February 2021. As a result, ALJ recognized a loss on sale of $0.8 million during the nine months ended June 30, 2021, calculated as follows:

The carrying value of the net assets sold, at the time of closing, were as follows:

The following ~~is a summary~~table presents the aggregate carrying amounts of ~~CMO Business revenue~~the classes of assets and ~~earnings included in the Company’s consolidated statement~~liabilities of discontinued operations on September 30, 2020:

The following table presents information regarding certain components of loss from discontinued operations for the three and nine months ended ~~December 31, 2017 (in thousands~~): June 30, 2021 and June 30, 2020:

4.The following table presents significant components of cash flows of discontinued operations for the nine months ended June 30, 2021 and June 30, 2020:

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.

ALJ did not ~~have~~generate net revenue from any one customer ~~with net revenue~~ in excess of 10% of consolidated net revenue. Each of ALJ’s segments had customers that represent more than 10% of their respective net revenue, as described below.

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

~~Faneuil. The percentage of Faneuil net revenue derived~~Accounts receivable from ~~its~~ significant customers ~~was as follows:~~

~~Trade receivables from these customers~~during the three or nine months ended June 30, 2021 totaled ~~$8.2~~$6.6 million on ~~December 31, 2017.~~June 30, 2021. As of ~~December 31, 2017,~~June 30, 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.

Phoenix. The ~~percentage of Carpets net revenue derived from its significant customers was as follows:~~

Trade receivables from these customers totaled $3.1 million on December 31, 2017. As of December 31, 2017, all Carpets 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.

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

	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
	2017			2016			2021			2020			2021			2020
Customer A		18.9	%	**				25.5	%		21.5	%		23.3	%		24.9	%
Customer B		16.1			21.1	%		24.9			24.2			23.0			19.1
Customer C		10.5		**				12.0			10.8			12.2			11.5
Customer D	**				14.5

~~Trade receivables~~Accounts receivable from ~~these~~significant customers during the three or nine months ended June 30, 2021 totaled ~~$6.1~~$3.7 million on ~~December 31, 2017.~~June 30, 2021. As of ~~December 31, 2017,~~June 30, 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.

ALJ ~~did not have any suppliers~~has only 1 segment, Phoenix, that ~~represented more than 10% of consolidated inventory purchases. However, two of ALJ’s segments~~purchases inventory. Phoenix had suppliers that represented more than 10% of ~~their respective~~both Phoenix inventory purchases and consolidated ALJ inventory purchases as ~~described below.~~

~~Carpets. The percentage of Carpets inventory purchases from its significant suppliers was as~~ follows:

	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
	2017			2016			2021			2020			2021			2020
Supplier A		23.5	%		13.0	%		15.7	%		17.6	%		19.2	%		15.5	%
Supplier B	13.9			**				11.4			17.4			12.0			17.7
Supplier C	12.6			**				10.0			10.0		**			**

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

~~Phoenix. The percentage of Phoenix inventory purchases from its significant suppliers was as follows:~~

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.

The following table summarizes accounts receivable at the end of each reporting ~~period (in thousands~~):period:

	December 31,			September 30,			June 30,			September 30,
	2017			2017
(in thousands)							2021			2020
Accounts receivable	$	52,804		$	47,216		$	52,364		$	57,478
Unbilled receivables		3,723			3,071			391			42
Accounts receivable		56,527			50,287			52,755			57,520
Less: Allowance for doubtful accounts		(987	)		(830	)
Less: allowance for doubtful accounts								(154	)		(1,033	)
Accounts receivable, net	$	55,540		$	49,457		$	52,601		$	56,487

The following table summarizes inventories at the end of each reporting ~~period (in thousands~~):period:

	December 31,			September 30,			June 30,			September 30,
	2017			2017
(in thousands)							2021			2020
Raw materials	$	3,781		$	3,127		$	4,794		$	4,260
Semi-finished goods/work in process		3,905			4,064			1,755			1,923
Finished goods		2,510			2,378			83			96
Inventories		10,196			9,569			6,632			6,279
Less: Allowance for obsolete inventory		(293	)		(193	)
Less: allowance for obsolete inventory								(32	)		(47	)
Inventories, net	$	9,903		$	9,376		$	6,600		$	6,232

The following table summarizes property and equipment at the end of each reporting ~~period (in thousands~~):period:

	December 31,			September 30,			June 30,			September 30,
	2017			2017
(in thousands)							2021			2020
Machinery and equipment	$	24,023		$	22,753		$	39,057		$	33,783
Leasehold improvements								30,849			30,843
Computer and office equipment								22,610			19,630
Building and improvements		16,323			15,593			16,874			16,896
Software		15,034			12,276			16,533			16,483
Computer and office equipment		10,511			10,344
Land		9,267			9,167			9,267			9,267
Leasehold improvements		9,175			8,997
Furniture and fixtures		3,599			3,595			7,749			7,749
Construction and equipment in process								1,018			—
Vehicles		235			229			360			356
Construction in process		553			136
Property and equipment		88,720			83,090			144,317			135,007
Less: Accumulated depreciation and amortization		(31,985	)		(28,755	)
Less: accumulated depreciation and amortization								(77,081	)		(67,222	)
Property and equipment, net	$	56,735		$	54,335		$	67,236		$	67,785

Property and equipment depreciation and amortization expense, including amounts related to ~~capitalized~~finance leased assets, was ~~$3,452,000~~$3.7 million and ~~$2,953,000~~$3.5 million for the three months ended ~~December 31, 2017~~June 30, 2021 and ~~2016,~~June 30, 2020, respectively, and $11.1 million and $10.7 million for the nine months ended June 30, 2021 and June 30, 2020, respectively.

~~The following table summarizes goodwill by reportable segment at the end of each reporting period (in thousands~~):

The following ~~table summarizes~~tables summarize identified intangible assets at the end of each reporting ~~period (in thousands~~):period:

	December 31, 2017							September 30, 2017										June 30, 2021
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
(in thousands)															Weighted Average Original Life (Years)	Weighted Average Remaining Life (Years)		Gross		Accumulated Amortization			Net
Customer relationships	$	34,400	$	(8,167	)	$	26,233	$	34,400	$	(7,446	)	$	26,954	12.0		5.7	$	33,590	$	(17,921	)	$	15,669
Trade names		10,760		(1,250	)		9,510		10,760		(1,143	)		9,617	27.6		22.4		10,240		(2,505	)		7,735
Supply agreements/Contract Backlog		10,358		(777	)		9,581		5,658		(420	)		5,238
Supply agreements															10.2		9.1		9,690		(4,996	)		4,694
Technology															8.0		6.1		3,400		(815	)		2,585
Non-compete agreements		3,030		(2,030	)		1,000		3,030		(1,858	)		1,172	6.6		4.3		1,550		(517	)		1,033
Internal software		580		(406	)		174		580		(382	)		198
Totals	$	59,128	$	(12,630	)	$	46,498	$	54,428	$	(11,249	)	$	43,179				$	58,470	$	(26,754	)	$	31,716

~~Intangible asset amortization expense was $1,381,000 and $1,008,000 for the three months ended December 31, 2017 and 2016, respectively.~~

Intangible asset amortization expense was $1.3 million for both the three months ended June 30, 2021 and June 30, 2020, and $3.8 million and $3.9 million for the nine months ended June 30, 2021 and June 30, 2020, respectively.

The following table presents expected future amortization expense for the remainder of ~~fiscal 2018~~Fiscal 2021 and yearly ~~thereafter (in thousands~~):thereafter:

~~The following table summarizes ALJ’s line of credit, and current and noncurrent term loan payables at the end of each reporting period (in thousands~~):NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes accrued expenses at the end of each reporting ~~period (in thousands~~):period:

	December 31,		September 30,		June 30,		September 30,
	2017		2017
(in thousands)					2021		2020
Accrued compensation and related taxes	$	8,524	$	7,370	$	12,290	$	9,660
Rebates payable		2,042		2,014		2,865		3,097
Legal and other		1,092		1,466
Interest payable		799		651
Acquisition contingent consideration						2,400		2,500
Legal						1,600		—
Other						1,410		352
Medical and benefit-related payables		501		431		1,233		1,438
Accrued board of director fees		260		370		522		130
Sales tax payable		217		151
Deferred rent		201		208
Interest payable						136		674
Deferred lease incentives						—		1,289
Total accrued expenses	$	13,636	$	12,661	$	22,456	$	19,140

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.

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

	Three Months Ended June 30,						Nine Months Ended June 30,
(in thousands, except per share amounts)	2021			2020			2021			2020
Net loss from continuing operations	$	(3,504	)	$	(2,198	)	$	(4,643	)	$	(65,410	)
Net loss from discontinued operations, net of income taxes		—			(461	)		(1,063	)		(3,324	)
Net loss	$	(3,504	)	$	(2,659	)	$	(5,706	)	$	(68,734	)
Loss per share of common stock–basic and diluted:
Continuing operations		(0.08	)		(0.05	)		(0.11	)		(1.55	)
Discontinued operations		—			(0.01	)		(0.03	)		(0.08	)
Loss per share ⁽¹⁾		(0.08	)		(0.06	)		(0.13	)		(1.63	)
Weighted average shares of common stock outstanding– basic and diluted		42,321			42,173			42,320			42,173
Anti-dilutive shares excluded from loss per share calculation:
Convertible debt		11,158			10,486			11,158			10,486
Employee stock option grants		1,355			1,804			1,355			1,804
Warrants		2,908			2,908			2,908			2,908
Total		15,421			15,198			15,421			15,198

ALJ computed basic loss per share of common stock using net loss divided by the weighted-average number of shares of common stock outstanding during the period. As a result of recognizing net loss for all periods presented, basic and diluted loss per share are the same.

~~Faneuil. Faneuil is self-insured for workers’ compensation claims up to $500,000 per incident,~~8. DEBT

ALJ’s components of debt and ~~maintains insurance coverage for costs above~~ the ~~specified limit. Faneuil is self-insured for health insurance claims up to $150,000 per incident, and maintains insurance coverage for costs above~~respective interest rate at the ~~specified limit. Reserves have been provided for workers’ compensation and health claims based upon insurance coverages, third-party actuarial analysis, and management’s judgment.~~

~~Carpets. Carpets maintains outside insurance to cover workers’ compensation claims.~~

~~Phoenix.~~ ~~Before the acquisition~~end of Phoenix by ALJ, Phoenix was self-insured for workers’ compensation under their parent company for claims up to $500,000 per incident, and maintains coverage for costs above the specified limit. After the acquisition, Phoenix changed to a fully insured plan.

~~ALJ computed basic and diluted (loss) earnings per common share for~~ each reporting period were as ~~follows (in thousands, except per share amounts~~):follows:

Three Months Ended December 31,

2017

2016

Net (loss) income

$
(5,318
)

$
551

Weighted average shares of common stock outstanding - basic

37,577

34,575

Potentially dilutive effect of options to purchase common stock

—

1,137

Weighted average shares of common stock outstanding – diluted

37,577

35,712

Basic (loss) earnings per share of common stock

$
(0.14
)

$
0.02

Diluted (loss) earnings per share of common stock

$
(0.14
)

$
0.02

	June 30, 2021						September 30, 2020
(in thousands)	Interest Rate			Balance			Interest Rate			Balance
Line of credit:
Amended PNC Revolver		5.25	%	$	—					$	—
Amended PNC Revolver LIBOR		4.00			—						—
Cerberus/PNC Revolver					—			13.25	%		4,417
Cerberus/PNC Revolver LIBOR					—			11.00			10,000
Less: deferred loan costs					—						(664	)
Line of credit, net of deferred loan costs				$	—					$	13,753
Current portion of term loans:
Current portion of Blue Torch Term Loan		8.50		$	3,800					$	—
Current portion of Cerberus Term Loan					—			8.25			8,200
Current portion of equipment financing					—			2.66			1,999
Less: deferred loan costs					(1,125	)					(372	)
Current portion of term loans, net of deferred loan costs				$	2,675					$	9,827
Term loans, less current portion:
Blue Torch Term Loan, less current portion		8.50		$	91,200					$	—
Convertible Promissory Notes		8.25			6,026						—
Cerberus Term Loan, less current portion					—			8.25			62,336
Term B Loan					—			12.25			4,415
Term C Loan					—			8.25			5,782
Equipment financing, less current portion					—			2.66			1,611
Less: deferred loan costs					(3,039	)					(662	)
Term loans, less current portion, net of deferred loan costs				$	94,187					$	73,482

Total line of credit and term loans				$	96,862					$	97,062

~~ALJ computed basic earnings per share of common stock using net (loss) income divided by~~Activity, as described in the weighted average number of shares of common stock outstanding during the period. ALJ computed diluted earnings per share of common stock using net (loss) income divided by the weighted average number of shares of common stock outstanding plus potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares issuable upon exercise of options to purchase common stock were determined by applying the treasury stock method to the assumed exercise of outstanding stock options.

~~Stock options to purchase 1,914,000 shares of common stock were not considered in calculating~~paragraphs below, impacting ALJ’s ~~diluted earnings per common share~~debt for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was as ~~their effect would be anti-dilutive.~~follows:

(in thousands)	Total Line of Credit			Blue Torch Term Loan		Convertible Promissory Notes		Cerberus Term Loan			Term B Loan			Term C Loan			Equipment Financing			Deferred Loan Costs			Total
Balance, September 30, 2020	$	14,417		$	—	$	—	$	70,536		$	4,415		$	5,782		$	3,610		$	(1,698	)	$	97,062
Payments, net		(5,943	)		—		—		(4,100	)		—			—			(1,417	)		—			(11,460	)
Interest expense and other bank fees accreted to term loans		258			—		—		642			422			244			—			—			1,566
New equipment financing																		3,750						3,750
Amortization of deferred loan costs		—			—		—		—			—			—			—			527			527
Balance, June 29, 2021 prior to debt transactions		8,732			—		—		67,078			4,837			6,026			5,943			(1,171	)		91,445
Impacts from June 29, 2021 debt transactions:
Existing debt payoff and other fees		(8,732	)		—		—		(67,078	)		(4,837	)		—			(6,056	)		—			(86,703	)
New debt		—			95,000		—		—			—			—			—			(4,164	)		90,836
Transfer of debt		—			—		6,026		—			—			(6,026	)		—			—			—
Loss on debt extinguishment		—			—		—		—			—			—			113			1,171			1,284
Balance, June 30, 2021	$	—		$	95,000	$	6,026	$	—		$	—		$	—		$	—		$	(4,164	)	$	96,862

~~7. DEBT~~Description of Debt Obligations Entered into During the Three Months Ended June 30, 2021

On June 29, 2021, ALJ replaced its existing term loan and Term B Loan under the Cerberus/PNC Financing Agreement (each as defined below) by entering into a new term loan (“Blue Torch Term Loan”) with Blue Torch Business Finance, LLC for an aggregate under the total principal amount of $95.0 million. ALJ completed the transaction primarily to:

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 of interest per year 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.

The Blue Torch Term Loan is secured by substantially all 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.

The Blue Torch Term Loan has a prepayment penalty of 3%, 2%, and 1% of the outstanding principal balance if ALJ prepays the loan during year one, year two, and year three, respectively.

In connection with the Blue Torch Term Loan, ALJ amended and restated in its entirety the Cerberus/PNC Financing Agreement (as defined below, and as amended and restated, the “Amended PNC Revolver”). The Cerberus/PNC Financing Agreement had two lenders, PNC Bank NA (“PNC”) and Cerberus Business Finance, LLC (“Cerberus”). As part of the Amended PNC Revolver, Cerberus was paid in full (“Cerberus Payoff”) using proceeds from the Blue Torch Term Loan.

The Amended PNC Revolver provides for a total 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 of interest per year 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 as defined 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 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.

The Amended PNC Revolver has a prepayment penalty of 1%, 0.5%, 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.

In connection with the Cerberus Payoff, on June 29, 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 replace and have substantially the same terms as ALJ’s prior Term C Loan (as defined below), except the Convertible Promissory Notes pay interest quarterly and the Term C Loan paid interest at maturity.

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.

The loss on debt extinguishment recorded during the three months ended June 30, 2021 was comprised of the following (in thousands):

The Blue Torch Term Loan and the Amended PNC Revolver include certain financial covenants. As of June 30, 2021, ALJ was in compliance with all financial covenants.

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

Description of Historical Debt Obligations Entered into During Prior Reporting Periods

All of the debt described below was paid off in full on June 29, 2021 (“Payoff Date”). The disclosure is included to provide a historical perspective of ALJ’s debt prior to the Payoff Date.

In August 2015, ALJ entered into a financing agreement (“Cerberus/PNC Financing Agreement”) with Cerberus, ~~Business Finance, LLC (“Cerberus”),~~ to borrow $105.0 million in a term loan (“Cerberus Term Loan”) and have available up to ~~$30.0~~$32.5 million in a revolving loan (“Cerberus/PNC Revolver,” and together with the Cerberus Term Loan, ~~the “Cerberus~~“Cerberus/PNC Debt”). ALJ ~~has~~ subsequently entered into ~~three~~nine amendments to the Cerberus/PNC Financing Agreement, of which four were executed during the period covered by this report and described below. The Cerberus/PNC Debt maturity date was November 28, 2023 (“Cerberus/PNC Debt Maturity Date”).

In December 2019, ALJ entered into the Sixth Amendment (“Sixth Amendment”) to the Cerberus/PNC Financing Agreement. The ~~Financing Agreement~~Sixth Amendment amended certain terms and ~~three amendments are~~covenants in order to support the continued growth of the Company, as summarized ~~below (in thousands~~):below:

Additionally, the Sixth Amendment added a deleveraging fee (“Deleveraging Fee”), of which the first payment was made on March 31, 2020, and the second payment was due on June 30, 2020 unless one or more persons purchased a $2.5 million participating interest in the Cerberus Term Loan prior to June 30, 2020. The first payment was expensed to selling, general, and administrative expense. As a result of the Ninth Amendment (see Ninth Amendment to the Cerberus/PNC Financing Agreement below), the second payment was not required by Cerberus.

In February 2020, ALJ entered into the Seventh Amendment (“Seventh Amendment”) to the Cerberus/PNC Financing Agreement to temporarily increase the Cerberus/PNC Revolver borrowing capacity as follows:

In March 2020, ALJ entered into the Eighth Amendment (“Eighth Amendment”) to the Cerberus/PNC Financing Agreement to amend certain terms and covenants, which included:

As a result of the decline in ALJ’s actual and forecasted results of operations, including the potential effects of COVID-19, ALJ sought an easement of certain debt covenants and the elimination of certain quarterly principal payment obligations under the Cerberus/PNC Financing Agreement.

In May 2020, ALJ entered into the Ninth Amendment (“Ninth Amendment”) to the Cerberus/PNC Financing Agreement. The Ninth Amendment amended certain terms and covenants as summarized below:

In December 2019, in connection with the Sixth Amendment, certain trusts and other entities formed for the benefit of, or otherwise affiliated with Mr. Ravich (“Ravich Entities”), entered into a Junior Participation Agreement with Cerberus (“Junior Participation Agreement”), pursuant to which the Ravich Entities agreed to purchase $4.1 million in junior participation interests in the Term B Loan under the Cerberus/PNC Financing Agreement (“Junior Participation” and such interests, “Junior Participation Interests”). The Junior Participation Interests were junior and subordinate to the Cerberus Term Loan in all respects and had no quarterly payments. Through March 2020, interest accrued under the Junior Participation (i) in cash, accrued at the same rate per year as the Cerberus Term Loan and paid monthly, and (ii) in kind, accrued at 4.00% per year, payable on the Cerberus/PNC Debt Maturity Date. See “Amendment to Junior Participation Agreement -Term B Loan and Warrants Issued” below for interest earned subsequent to March 2020.

In connection with the Junior Participation, the Company issued fully vested warrants to purchase 1.23 million shares of the Company’s common stock (“Junior Participation Agreement Warrants”) to the Ravich Entities, with a five-year term and an exercise price equal to the lesser of the 30-day trailing average closing price of the Company’s common stock as traded on the Nasdaq Stock Market on (i) December 17, 2019 or (ii) six months from December 17, 2019. The 30-day trailing average closing price of the Company’s common stock on December 17, 2019 was $1.20. The 30-day trailing average closing price of the Company’s common stock on June 17, 2020 was $0.54.

The fair value of the Junior Participation Agreement Warrants was calculated using the Black Scholes Model with the following assumptions: contractual life of five years, volatility of 42.3%, dividend yield of 0.00%, and annual risk-free interest rate of 1.7%. The fair value of the Junior Participation Agreement Warrants of $0.6 million was expensed to selling, general, and administrative

In March 2020, in connection with the Eighth Amendment to the Cerberus/PNC Financing Agreement, the Ravich Entities entered into the First Amendment to the Junior Participation Agreement (“First Amendment to Junior Participation Agreement”). The amended terms under the First Amendment to Junior Participation Agreement include:

In connection with the First Amendment to Junior Participation Agreement, the Company issued fully vested warrants to purchase 0.4 million shares of the Company’s common stock (“First Amendment to Junior Participation AgreementWarrants”) to the Ravich Entities, with a five-year term and an exercise price equal to the lesser of the 10-day trailing average closing price of the Company’s common stock as traded on the Nasdaq Stock Market on (i) March 26, 2020 or (ii) six months from March 26, 2020. The 10-day trailing average closing price of the Company’s common stock on the issuance date was $0.72.

The fair value of the First Amendment to Junior Participation AgreementWarrants was calculated using the Black Scholes Model with the following assumptions: contractual life of five years, volatility of 43.8%, dividend yield of 0.00%, and annual risk-free interest rate of 0.5%. The fair value of the First Amendment to Junior Participation Agreement Warrants of $0.1 million was expensed to selling, general, and administrative expense in March 2020.

In May 2020, in connection with, and as a condition to, the Ninth Amendment, certain stockholders of the Company (“Term C Loan Junior Participants”), including Mr. Ravich, entered into, or amended certain Junior Participation Agreements (collectively, “Term C Loan Junior Participation Agreements”) with Cerberus. Pursuant to the Term C Loan Junior Participation Agreements (which was amended and/or restated from time to time), the Term C Loan Junior Participants acquired junior participation interests in the Term C Loan in an aggregate amount of $5.6 million on May 12, 2020 (“Term C Loan”). Mr. Ravich agreed to acquire additional junior participation interests in the Term B Loan in an aggregate amount of (i) $2.5 million on June 30, 2021 and (ii) $2.5 million on September 30, 2021 as long as Term B Loan was outstanding on such date.

The $5.6 million Term C Loan and related accrued interest was convertible, at the option of the Term C Loan Junior Participants, into shares of the Company’s common stock, at a conversion price of $0.54 per share.

The $5.6 million Term C Loan was junior and subordinate to the Cerberus/PNC Debt in all respects and had no quarterly payments. From May 2020 through the Cerberus/PNC Debt Maturity Date, the Term C Loan accrued interest in kind at the same rate per year as the Cerberus Term Loan. Although the Term C Loan was paid off as part of the Cerberus Payoff, the Term C Loan Junior Participants were issued the Convertible Promissory Notes as discussed above, under substantially identical terms as the Term C Loan, except the Convertible Promissory Notes pay interest quarterly and the Term C Loan paid interest at maturity.

The Cerberus/PNC Financing Agreement and amendments thereto are summarized below:

Interest payments ~~are~~were due in arrears on the first day of each month. Quarterly principal payments ~~are~~were due on the last day of each fiscal quarter. Annual principal payments equal to 75% of ALJ’s excess cash flow (“ECF”), as defined in the Cerberus/PNC Financing Agreement, ~~are~~were due annually each December, upon delivery of the annual audited financial statements. ~~During~~The annual ECF calculation, based on results of operations for the ~~three months~~years ended September 30, 2020 and 2019, did not require ALJ to make an annual ECF payment in December ~~31, 2017,~~2020 or 2019.

In certain instances, ALJ was required to make mandatory term loan payments if ALJ receives cash outside the normal course of business. ALJ made ~~an ECF~~one mandatory payment of ~~$4.1 million. A final balloon payment is due at maturity, August 14, 2020. There is a prepayment penalty equal to 1% if the Cerberus Term Loan is repaid prior to August 2018. ALJ may make~~$0.9 million in November 2019. NaN additional mandatory payments ~~of up to $7.0 million against the loan with no penalty.~~were made during any other period covered by this report.

The ~~Cerberus~~Cerberus/PNC Debt iswas secured by substantially all the Company’s assets and ~~imposes~~imposed certain limitations on the Company, including its ability to incur debt, grant liens, initiate certain investments, declare dividends and dispose of assets. The ~~Cerberus~~Cerberus/PNC Debt also ~~requires~~required ALJ to comply with certain debt covenants. ~~As of December 31, 2017,~~

ALJ ~~was in compliance with~~accounted for all Cerberus/PNC Debt amendments as debt ~~covenants and had unused borrowing capacity of $10.8 million.~~modifications pursuant to ASC 470, Debt. ALJ did 0t pay any Cerberus/PNC Debt loan amendment fees during the three or nine months ended June 30, 2021.

During the three and nine months ended ~~December 31, 2017, in connection with the Third Amendment,~~June 30, 2020, ALJ paid $0.2 million and $0.9 million, respectively, of legal and other fees ~~totaling $0.3~~of which $0.1 million ~~which~~and $0.6 million, respectively, were added to deferred loan costs and ~~are being~~ amortized to interest expense ~~over~~through the ~~life~~Cerberus/PNC Debt Maturity Date. The remaining fees of $0.1 million and $0.3 million were expensed to selling, general, and administrative expense during the ~~debt.~~

~~Contingent Loan Costs~~three and nine months ended June 30, 2020, respectively.

In June 2020, Phoenix purchased a Heidelberg Press for $2.6 million with a $1.8 million equipment financing (“June 2020 Equipment Financing”), $0.5 million cash, and a $0.3 million trade-in allowance. The June 2020 Equipment Financing term was 36 months, required monthly principal and interest payments, accrued interest at 2.66% per year, and was secured by the ~~Second Amendment, ALJ~~respective Heidelberg Press.

In March 2021, Phoenix purchased a second Heidelberg Press for $4.5 million with a $3.5 million equipment financing (“March 2021 Equipment Financing” and together with the June 2020 Equipment Financing, the “Equipment Financings”), $0.9 million cash, and a $0.1 million trade-in allowance. The March 2021 Equipment Financing term was 60 months, required monthly principal and interest payments, accrued interest at 4.5% per year, and was secured by the respective Heidelberg Press.

On June 29, 2021, the Equipment Financings were paid ~~Cerberus an amendment fee. Additionally, as part of~~in full using proceeds from the Second Amendment, ALJ is required to pay a fee in each of three consecutive annual periods commencing May 27, 2018 and ending on the termination date, if at any time during each annual period there are any amounts outstanding on the Cerberus/PNC Revolver (“Contingent Payments”). Such Contingent Payments become due and payable on the first day within each annual period there is an outstanding balance on the Cerberus/PNC Revolver. Blue Torch Term Loan.

Faneuil and Phoenix lease equipment under non-cancelable capital leases. As of December 31, 2017, future minimum payments under non-cancelable capital leases with initial or remaining terms of one year or more are as follows (~~in thousands~~):

~~The Company leases real estate, equipment, and vehicles under noncancellable operating leases. As of December 31, 2017, future minimum rental commitments under noncancellable leases were as follows (in thousands~~):

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.~~Directors or the Chief Executive Officer. The agreements also provide for involuntary termination payments, which includes base salary, ~~and~~ performance bonus, medical premiums, stock options, non-competition provisions, and other terms and conditions of employment. ~~As of December 31, 2017,~~On June 30, 2021, contingent termination payments related to base salary and medical premiums totaled ~~$1.3~~$1.1 million.

As part of Faneuil’s normal course of operations, certain customers require surety bonds guaranteeing the performance of a contract. ~~As of December 31, 2017,~~On June 30, 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 ~~$29.1~~$41.5 million. To date, ~~Faneuil’s surety~~Faneuil has not made any non-performance ~~payments.~~payments to any of its sureties.

The Company had letters of credit totaling $3.3 million outstanding on June 30, 2021.

On September 22, 2016, Faneuil filed a complaint against 3M Company ~~on September 22, 2016,~~(“3M”) in the Circuit Court for the City of Richmond, ~~Virginia.~~Virginia (the “Richmond Circuit Court”). The dispute ~~arises~~arose out of a subcontract entered into between 3M and Faneuil in relation to a toll road project in Portsmouth, Virginia. Under the terms of the subcontract, Faneuil provides certain services to 3M as part of 3M’s agreement to provide services to Elizabeth River Crossing (“ERC”). After multiple attempts to resolve a dispute over unpaid invoices failed, Faneuil determined to file suit against 3M to collect on its outstanding receivables. In its complaint, Faneuil ~~seeks~~sought recovery of $5.1 million based on three causes of action: breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment.

On October 14, 2016, 3M filed its answer and counterclaim against Faneuil. In its counterclaim, 3M ~~seeks~~sought recovery in excess of $10.0 million based on three claims: breach of contract/indemnification, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. 3M’s counterclaim ~~alleges~~alleged it incurred approximately $3.2 million in damages ~~payable to ERC~~ as a result of Faneuil’s conduct and ~~seeks~~sought indemnification of an additional $10.0 million in damages incurred as a result of continued ~~performance under its contract with ERC. A five-day~~performance.

The matter was tried in a bench trial ~~is set for April 2018. A pretrial scheduling order has been entered and the parties are engaged in substantive discovery at this time.~~

~~Subsequent to filing suit against 3M, Faneuil entered into an agreement with ERC whereby ERC would become responsible for paying Faneuil directly for all services rendered~~ from April ~~1, 2016,~~30, 2018 through ~~December 31, 2016. That agreement resulted in a payment from ERC~~May 2, 2018. On May 15, 2018, the Richmond Circuit Court issued its opinion, which dismissed both Faneuil’s complaint and 3M’s counterclaim with prejudice. NaN monetary damages were awarded to either Faneuil ~~on December 8, 2016, which resolved a portion of the $5.1 million claim against~~or 3M.

~~During June 2017, ERC transitioned the services that were provided by Faneuil to an internal customer service operation.~~ As a result of ~~this transition,~~the Richmond Circuit Court’s opinion, ALJ recorded a non-cash litigation loss of $2.9 million (the outstanding unreserved receivable from 3M), which was included in selling, general, and administrative expense during the year ended September 30, 2018. The matter was appealed to the Supreme Court of Virginia where Faneuil ~~no longer provides services~~was awarded approximately $1.2 million, plus pre- and post-judgment interest. The matter was remanded to the trial court for calculation of interest and entry of final judgment. Faneuil and 3M ~~or ERC. ERC continues~~settled on the amount of interest to ~~reimburse Faneuil for immaterial transition costs incurred~~be paid. The final judgment plus interest, which totaled $1.5 million, was received and recorded by ~~Faneuil.~~

Faneuil believes the facts support its claims that the disputed services should be paid and that 3M’s counterclaims are without merit. Faneuil intends to vigorously prosecute its claims against 3M and to defend against 3M’s counterclaims. Although litigation is inherently unpredictable, Faneuil remains confident in its ability to collect all of its outstanding receivables from 3M.

~~Tammy McNeil, a former Faneuil call center employee, filed a Fair Labor Standards Act collective action case against~~ Faneuil in ~~federal court in Newport News, Virginia in 2015. The class action asserted various timekeeping~~December 2019. Of the total $1.5 million, $1.3 million was booked as a reduction to selling, general, and ~~overtime violations, which Faneuil denied. On June 6, 2017, the case~~administrative expense, and $0.2 million was ~~settled by the parties as part of a court-ordered mediation, for $0.3 million in damages, plus plaintiff’s attorney fees. Because the parties could not agree~~booked to interest from legal settlement on the ~~dollar amount~~Statement of ~~plaintiff’s attorney fees, both parties agreed to allow~~Operations during the court to determine the amount. On November 8, 2017, Faneuil received the court’s recommendation, which awarded a total of $0.7 million for plaintiff’s attorney fees and court fees. Faneuil has objected to a portion of the recommendation and has requested that the district court judge further reduce the award.nine months ended June 30, 2020.

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 ~~has recently~~ 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.

The ~~case is~~parties are currently engaged in ~~an early stage~~limited discovery. A mediation was held on March 11, 2021 and ~~the parties have not begun substantive discovery at this time.~~discussions are ongoing. Faneuil believes this action is without merit and intends to defend itthis case vigorously.

~~On September 21, 2016, Plaintiffs Clifford Thornton and Tracey Thornton~~Lois Harris, an employee of Faneuil in Georgia, filed a collective action complaint on April 18, 2021 in the ~~Nevada~~United States District Court for ~~Clark County against ALJ, Carpets, Steve Chesin,~~the Northern District of Georgia. Harris alleges, on behalf of herself and ~~Jess Ravich. The complaint includes claims~~other current and former non-exempt Call Center Agent employees who received nondiscretionary bonuses for ~~(1) fraud, (2) bad faith, (3) civil conspiracy, (4) unjust enrichment, (5) wrongful termination, (6) intentional infliction~~periods in which they worked overtime hours, that Faneuil violated the Fair Labor Standards Act by failing to include nondiscretionary bonuses in the regular rate of ~~emotional distress, (7) negligent infliction of emotional distress,~~pay when calculating the overtime rate for Harris and ~~(8) loss of marital consortium. On November 1, 2016, the defendants filed an answer to the complaint generally denying all claims. The parties are~~other similarly-situated persons. Faneuil has engaged in substantive discovery at this time, with the close of discovery scheduled for May 25, 2018 and all substantive dispositive motions due June 25, 2018. ALJ and Carpets believe this action is without merit and intendcounsel to defend it ~~vigorously.~~

~~In connection with its pending litigation matters (including~~in this action. The Company does not believe the ~~matters described above), management has estimated~~resolution of this complaint will have a material adverse effect on the ~~range~~Company’s business, consolidated financial position, results of possible loss, including fees and expenses, to be between $1.6 million and $2.4 million; however, as management has determined that no one estimate within the range is better than another, it has accrued $1.6 million as of December 31, 2017.operations or cash flows.

~~We and our subsidiaries~~ ~~have~~ 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 our ordinary business. Litigation is inherently unpredictable. Any claims against ~~us,~~the Company, whether meritorious or not, could be time-consuming, cause usthe 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. WeThe Company concluded as of ~~December 31, 2017~~June 30, 2021 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on ~~our~~ ~~business,~~the Company’s business, consolidated financial position, results of operations or cash flows.

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.

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.

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:

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

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

Maturities of lease liabilities as of June 30, 2021 are as follows (in thousands):

Common Stock Activity during the ~~Three~~Nine Months Ended ~~December 31, 2017~~June 30, 2021

~~ALJ’s common stock activity for the three months ended December 31, 2017 consisted of the following:~~

Common Stock Activity during the ~~Three~~Nine Months Ended ~~December 31, 2016~~June 30, 2020

ALJ did not have any common stock activity during the ~~three~~nine months ended ~~December 31, 2016.~~June 30, 2020.

ALJ’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.

The following table sets forth the total stock-based compensation expense included in ~~ALJ’s~~selling, general, and administrative expense on the Statements of ~~Operations (in thousands~~):Operations:

	Three Months Ended December 31,				Three Months Ended June 30,				Nine Months Ended June 30,
	2017		2016
(in thousands)					2021		2020		2021		2020
Stock options	$	191	$	98	$	15	$	61	$	47	$	229
Common stock awards		102		85		26		28		79		83
Total stock-based compensation expense	$	293	$	183	$	41	$	89	$	126	$	312

~~At December 31, 2017,~~On June 30, 2021, ALJ had ~~approximately $1.0~~less than $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 ~~2.1~~1.5 years.

ALJ ~~granted an~~did 0t issue any option grants during the three or nine months ended June 30, 2021.

In May 2020, ALJ issued one option grant to purchase ~~10,000~~150,000 shares of ALJ common stock with a total estimated fair value of ~~approximately $15,000 during the three months ended December 31, 2017.~~less than $0.1 million. ALJ estimated the fair value of the option on the grant date using the Black-Scholes valuation model under the following assumptions: weighted average expected option life of ~~6.0~~6.2 years, weighted average expected volatility of ~~48.4%~~47.8%, expected dividend yield of 0%, and ~~weighted average risk free~~weighted-average risk-free interest rate of ~~2.1%~~0.34%.

ALJ had ~~no stock~~110,000 option ~~awards~~forfeitures during the three months ended ~~December 31, 2016.~~ June 30, 2021, and 360,000 option forfeitures during the nine months ended June 30, 2021. ALJ had 0 option forfeitures during the three or nine months ended June 30, 2020.

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) was ~~approximately $1.0~~less than $0.1 million ~~at December 31, 2017.~~on June 30, 2021.

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 ~~$102,000 and $85,000 during~~less than $0.1 million for both the three months ended ~~December 31, 2017~~June 30, 2021 and ~~2016, respectively.~~June 30, 2020, and $0.1 million for both the nine months ended June 30, 2021 and June 30, 2020.

On June 30, 2021, ALJ had 1.4 million stock options with a weighted average exercise price of $3.56 outstanding and warrants exercisable to purchase 2.9 million shares of common stock with a weighted average exercise price of $1.11 outstanding.

On December 22, 2017, the President of the United States signed and enacted into law H.R. 1 (the “Tax Reform Law”). The Tax Reform Law, effective for tax years beginning on or after January 1, 2018, except for certain provisions, resulted in significant changes to existing United States tax law, including various provisions that will impact ALJ. Below is a summary of the provisions of the Tax Reform Law that management believes will be most impactful to ALJ.

~~Federal Corporate Tax Rate Reduction.~~ The Tax Reform Law reduces the federal corporate tax rate from 35% to 21% effective January 1, 2018. Pursuant to Section 15 of the Internal Revenue Code (“IRC”), ALJ will apply a blended corporate tax rate of 28.1%, which is based on the applicable tax rates before and after the Tax Reform Law and the number of days in ALJ’s initial tax year under the Tax Reform Law, which ends June 30, 2018. Subsequent to June 30, 2018, the federal tax rate will be 21%.

~~Interest Expense Limitation.~~ ~~The Tax Reform Law disallows the deduction for interest expense in excess of 30% of “adjusted taxable income” as defined by the IRC.~~

~~Bonus Depreciation~~. The Tax Reform Law allows for the immediate deduction of 100% of eligible property placed in-service after September 27, 2017, and before January 1, 2023. For certain property with longer production periods, the 100% bonus depreciation is extended through December 31, 2023.

~~Pursuant to Accounting Standards Codification (“ASC”) Topic 740-10, “Income Taxes~~,” ALJ recognized the effect of the Tax Reform Law on deferred tax assets and liabilities during the three months ended December 31, 2017. As a result of the enacted reduction in the federal corporate income tax rate, ALJ recorded a ~~one-time, non-cash increase to deferred~~provision for income ~~tax expense~~taxes of ~~$4.1~~$0.4 million ~~to revalue ALJ’s net deferred tax asset. The resulting $4.1~~and $0.3 million decrease to ALJ’s net deferred tax asset was reasonably estimated, and based on the tax rates at which they are expected to reverse in the future. ALJ will continue to analyze the provisions of the Tax Reform Law to assess the impact to ALJ’s consolidated financial statements.

Harland Clarke Holdings Corp. (“Harland Clarke”), a stockholder who owns ALJ shares in excess of five percent, is a counterparty to Faneuil in two contracts. One contract provides call center services to support Harland Clarke’s banking-related products and renews annual every April. The other contract provides dispatch services for managed print operations and concluded September 30, 2017. Faneuil recognized revenue from Harland Clarke totaling $94,000 and $327,000 for the three months ended ~~December 31, 2017~~June 30, 2021 and ~~2016, respectively. The associated cost~~2020, respectively, which was attributable to continuing operations. ALJ recorded a provision for income taxes of ~~revenue was $94,000~~$0.7 million and ~~$308,000~~a benefit from income taxes of $1.0 million for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 and ~~2016, respectively. All revenue from Harland Clarke contained similar terms and conditions~~2020, respectively, which was attributable to continuing operations. ALJ’s effective tax rate for the nine months ended June 30, 2021 was (18.3%), as ~~those found~~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 nine months ended June 30, 2020 was 2.5%, which was also due to generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. The decrease in ~~other transactions of this nature entered into by ALJ and its subsidiaries. Total accounts receivable from Harland Clarke~~ALJ’s effective tax rate was ~~$94,000 and $106,000 at December 31, 2017 and September 30, 2017, respectively.~~attributable to a decrease in forecasted pre-tax losses, as well as changes to the valuation allowance recorded against net deferred tax assets.

ALJ did not record a provision for or benefit from income taxes for discontinued operations during any period presented.

As discussed in Note 1, ALJ has organized its business along ~~three~~2 reportable segments (Faneuil ~~Carpets,~~ 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 ~~Chairman.~~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 income (loss) before ~~interest expense, provision for income taxes,~~ depreciation and amortization expense, interest expense, litigation loss, recovery of litigation loss, restructuring and cost reduction initiatives, loan amendment expenses, fair value of warrants issued in connection with loan amendments, stock-based compensation, ~~expense, restructuring expense,~~ acquisition-related ~~expense, loss (gain)~~expenses, gain on ~~sales~~disposal of assets, net, income taxes, loss on debt extinguishment, and other non-recurring items. Such amounts are detailed in our 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, 2017 and 2016 (in thousands~~):

Three Months Ended December 31, 2017

Faneuil

Carpets

Phoenix

ALJ

Total

Net revenue

$
51,474

$
16,650

$
26,830

$
—

$
94,954

Segment adjusted EBITDA

$
3,711

$
(726
)

$
4,160

$
(555
)

$
6,590

Interest expense

(2,660
)
Provision for income taxes

(3,371
)
Depreciation and amortization

(4,833
)
Stock-based compensation

(293
)
Restructuring expenses

(835
)
Acquisition-related expenses

(123
)
Gain on sales of assets

207

Net loss

$
(5,318
)

Three Months Ended December 31, 2016

Faneuil

Carpets

Phoenix

ALJ

Total

Net revenue

$
38,051

$
15,544

$
24,022

$
—

$
77,617

Segment adjusted EBITDA

$
3,761

$
(47
)

$
4,348

$
(834
)

$
7,228

Interest expense

(2,434
)
Provision for income taxes

(60
)
Depreciation and amortization

(3,961
)
Stock-based compensation

(183
)
Restructuring expenses

(31
)
Loss on sales of assets

(8
)
Net income

$
551

The following tables present ALJ’s segment information for the three and nine months ended June 30, 2021 and June 30, 2020:

	Three Months Ended June 30, 2021
(in thousands)	Faneuil		Phoenix		ALJ			Consolidated
Net revenue	$	72,754	$	30,706	$	—		$	103,460

Segment adjusted EBITDA - continuing operations	$	3,731	$	5,476	$	(1,456	)	$	7,751
Depreciation and amortization									(4,944	)
Interest expense, net									(2,623	)
Loss on debt extinguishment									(2,072	)
Change in fair value of contingent consideration									(1,100	)
Provision for income taxes									(383	)
Bank fees accreted to term loans									(300	)
Stock-based compensation									(41	)
Restructuring and cost reduction initiatives									(27	)
Loan amendment expenses									46
Gain on disposal of assets, net									189
Net loss								$	(3,504	)

	Nine Months Ended June 30, 2021
(in thousands)	Faneuil		Phoenix		ALJ			Consolidated
Net revenue	$	243,147	$	86,038	$	—		$	329,185

Segment adjusted EBITDA - continuing operations	$	12,372	$	14,774	$	(4,076	)	$	23,070
Depreciation and amortization									(14,912	)
Interest expense, net									(7,656	)
Loss on debt extinguishment									(2,072	)
Change in fair value of contingent consideration									(1,100	)
Bank fees accreted to term loans									(900	)
Provision for income taxes									(719	)
Restructuring and cost reduction initiatives									(288	)
Loan amendment expenses									(131	)
Stock-based compensation									(126	)
Gain on disposal of assets, net									191
Net loss from continuing operations								$	(4,643	)
Net loss from discontinued operations, net of income taxes									(1,063	)
Net loss								$	(5,706	)

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.

~~ALJ issued 300,000 shares of common stock upon exercise of employee stock options at a weighted-average exercise price of $0.93 per share.~~

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:

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~~Risk Factors.” Our actual results may differ materially.

ALJ Regional Holdings, Inc. (“ALJ” or “we”) is a holding company that operates Faneuil, Inc.~~, or Faneuil,~~ (“Faneuil”) and Phoenix Color Corp. (“Phoenix”). Additionally, ALJ operated Floors-N-More, LLC, d/b/a Carpets N’ More (“Carpets”) through February 2021.

In January 2021, ALJ 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 ~~Phoenix Color Corp., or Phoenix.~~ 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 all periods presented. See “Part I, Item 1 - Financial Statements – Note 4. Acquisitions and Divestitures – Carpets Divestiture” for additional information about the divestiture of Carpets.

With several members of our senior management and Board of Directors coming from long careers in the professional ~~service~~services industry, ALJ is focused on acquiring and operating exceptional ~~customer service-based~~ businesses.

We continue to see our business evolve as we execute our strategy of buying attractively-valued assets, such as the acquisition of the Printing Components Business by Phoenix on October 2, 2017, the acquisition of the customer management outsourcing business (“CMO Business”) by Faneuil on May 26, 2017, and the acquisition of Color Optics by Phoenix on July 18, 2016.attractively valued assets. 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 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 March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the world. COVID-19 is having an unprecedented impact on the U.S. economy as federal, state, and local governments react to this public health crisis.

Since the beginning of the COVID-19 pandemic, all of ALJ’s subsidiaries have been deemed “Essential Services” and have continued to operate with limited disruption. To date, the impact of COVID-19 has been minimal. The Company took immediate actions to enable work-from-home where possible and put in place increased safety precautions, including social distancing, at other locations where essential services on site are required. The duration of these measures is unknown, may be extended, and additional measures may be imposed.

Although we have not been materially impacted by COVID-19, we could be impacted in the near term by lower volumes in several parts of our business, resulting in lower revenue and profit. While the impact of COVID-19 on our future financial position, results of operations and cash flows cannot be estimated with certainty, such impact could be significantly negative. Although some employees have recently started to return to work, we still have a significant portion of our work force working from home. The extent to which COVID-19 impacts our operations will depend on future developments, which are ~~impacted by~~highly uncertain, including, among others, the ~~timing~~duration of ~~acquisitions, including~~ the ~~CMO Business by Faneuil on May 26, 2017,~~outbreak, vaccination rate, new variants, new information that may emerge concerning the severity of COVID-19 and the ~~Printing Components Business~~actions, especially those taken by ~~Phoenix on October 2, 2017.~~ governmental authorities, to contain the pandemic or treat its impact. As events are rapidly changing, additional impacts may arise that are not known at this time. See “Part II, Item 1A, Risk Factors - 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,” for an additional discussion of risks related to COVID-19.

The following table sets forth certain ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~operations~~Operations data in dollars and as a percentage of net revenue for each period as ~~follows (in thousands, except per share amounts~~):follows:

	Three Months Ended December 31, 2017						Three Months Ended December 31, 2016						Three Months Ended June 30, 2021						Three Months Ended June 30, 2020
				% of						% of						% of						% of
	Dollars			Net Revenue			Dollars			Net Revenue
(in thousands, except per share amounts)													Dollars			Net Revenue			Dollars			Net Revenue
Net revenue⁽¹⁾
Faneuil	$	51,474			54.2	%	$	38,051			49.0	%	$	72,754			70.3	%	$	61,523			71.5	%
Carpets		16,650			17.5			15,544			20.0
Phoenix		26,830			28.3			24,022			31.0			30,706			29.7			24,554			28.5
Consolidated net revenue		94,954			100.0			77,617			100.0			103,460			100.0			86,077			100.0
Cost of revenue ⁽²⁾
Faneuil		40,219			78.1			29,002			76.2			59,209			81.4			48,442			78.7
Carpets		13,803			82.9			13,247			85.2
Phoenix ⁽³⁾		20,888			77.9			17,932			74.6			23,259			75.7			19,214			78.3
Consolidated cost of revenue		74,910			78.9			60,181			77.5			82,468			79.7			67,656			78.6
Selling, general and administrative expense ⁽²⁾
Selling, general, and administrative expense ⁽²⁾
Faneuil		7,544			14.7			5,288			13.9			10,897			15.0			10,211			16.6
Carpets		3,573			21.5			2,343			15.1
Phoenix		4,139			15.4			3,055			12.7			3,308			10.8			2,884			11.7
ALJ		848			—			1,018			—			1,751			—			1,295			—
Consolidated selling, general and administrative expense		16,104			17.0			11,704			15.1
Depreciation and amortization ⁽²⁾
Consolidated selling, general, and administrative expense														15,956			15.4			14,390			16.7
Depreciation and amortization expense ⁽²⁾
Faneuil		2,576			5.0			1,863			4.9			3,116			4.3			3,152			5.1
Carpets		219			1.3			175			1.1
Phoenix⁽⁴⁾		639			2.4			641			2.7			535			1.7			560			2.3
Consolidated depreciation and amortization expense		3,434			3.6			2,679			3.5			3,651			3.5			3,712			4.3
(Gain) loss on disposal of assets, net ⁽²⁾
Phoenix		(207	)		(0.8	)		8			—
Consolidated (gain) loss on disposal of assets, net		(207	)		(0.2	)		8			—
Gain on disposal of assets, net ⁽⁵⁾														(189	)		(0.2	)		(301	)		(0.3	)
Total consolidated operating expenses⁽⁵⁾														101,886			98.5			85,457			99.3
Consolidated operating income		713			0.8			3,045			3.9			1,574			1.5			620			0.7
Interest expense ⁽⁵⁾		(2,660	)		(2.8	)		(2,434	)		(3.1	)
Interest expense, net ⁽⁵⁾														(2,623	)		(2.5	)		(2,568	)		(3.0	)
Loss on debt extinguishment ⁽⁵⁾														(2,072	)		(2.0	)
Provision for income taxes⁽⁵⁾		(3,371	)		(3.6	)		(60	)		(0.1	)		(383	)		(3.7	)		(250	)		(2.9	)
Net (loss) income ⁽⁵⁾	$	(5,318	)		(5.6	)	$	551			0.7
Basic (loss) earnings per share of common stock	$	(0.14	)				$	0.02
Diluted (loss) earnings per share of common stock	$	(0.14	)				$	0.02
Net loss from continuing operations														(3,504	)		(3.4	)		(2,198	)		(2.6	)
Net loss from discontinued operations														—			—			(461	)		(0.5	)
Net loss ⁽⁵⁾													$	(3,504	)		(3.4	)	$	(2,659	)		(3.1	)
Loss per share of common stock–basic and diluted													$	(0.08	)				$	(0.06	)

	Three Months Ended December 31,									Three Months Ended June 30,
(in thousands)	2017		2016		$ Change		% Change			2021		2020		$ Change		% Change
Faneuil	$	51,474	$	38,051	$	13,423		35.3	%	$	72,754	$	61,523	$	11,231		18.3	%
Carpets		16,650		15,544		1,106		7.1
Phoenix		26,830		24,022		2,808		11.7			30,706		24,554		6,152		25.1
Consolidated net revenue	$	94,954	$	77,617	$	17,337		22.3	%	$	103,460	$	86,077	$	17,383		20.2	%

Faneuil net revenue for the three months ended ~~December 31, 2017~~June 30, 2021 was ~~$51.5~~$72.8 million, an increase of ~~$13.4~~$11.2 million, or ~~35.3%~~18.3%, compared to net revenue of ~~$38.1~~$61.5 million for the three months ended ~~December 31, 2016.~~June 30, 2020. The increase was mainly attributable to ~~the CMO Business acquisition, which contributed $8.5 million. The remaining~~a $11.9 million increase ~~was attributable to an~~in new customer contracts and $4.1 million net increase ~~from new and~~in existing customers mostly ~~in the healthcare industry, slightly~~due to increased call center volumes for expanded call center services provided, partially offset by a ~~decrease caused~~$4.8 million reduction driven by the completion of ~~existing~~ customer contracts.

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

	As of December 31,				As of June 30,
	2017		2016
(in millions)					2021		2020
Within one year	$	97.8	$	81.7	$	215.6	$	250.6
Between one year and two years		81.1		54.2		131.8		149.6
Between two years and three years		68.5		44.7		91.0		105.7
Between three years and four years		16.7		41.5		37.8		83.1
Thereafter		10.5		1.5		30.1		53.0
	$	274.6	$	223.6
Total Faneuil backlog					$	506.3	$	642.0

The ~~majority of the increase as of December 31, 2017~~decrease in total Faneuil backlog from June 30, 2021 compared to ~~December 31, 2016~~June 30, 2020 was primarily the result ~~new contracts within the transportation~~of negotiating an early termination of a large unprofitable contract and ~~healthcare markets, and the CMO Business acquisition.~~revenue recognition of contract backlog on June 30, 2020.

Carpets net revenue for the three months ended December 31, 2017 was $16.7 million, an increase of $1.1 million, or 7.1%, compared to net revenue of $15.5 million for the three months ended December 31, 2016. The increase was primarily attributable to higher volumes from sales of cabinet and granite products.

The following table reflects the amount of Carpets’ backlog, which represents multi-year contracts with contractors to build-out communities with typical terms of two to three years, by the fiscal year Carpets expects to recognize such net revenue (~~in millions~~):

~~The decrease at December 31, 2017, compared to December 31, 2016, was a result of the fulfilment of contracts during the year ended December 31, 2017 for contracts in place at December 31, 2016.~~

Phoenix net revenue for the three months ended ~~December 31, 2017~~June 30, 2021 was ~~$26.8~~$30.7 million, an increase of ~~$2.8~~$6.2 million, or ~~11.7%~~25.1%, compared to net revenue of ~~$24.0~~$24.6 million for the three months ended ~~December 31, 2016.~~June 30, 2020. The increase was a result of the acquisition of the Printing Component Business, which contributed net revenue of $4.5 million during the three months ended December 31, 2017. This increase was offset by a decrease in revenue from the remaining business of $1.7 million during the three months ended December 31, 2017 comparedprimarily attributable to ~~the three months ended December 31, 2016, due~~higher component sales primarily related to ~~lower volumes for books and components.~~ trade.

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 ~~fiscal~~ year Phoenix expects to recognize such net ~~revenue (in millions~~):revenue:

	As of December 31,				As of June 30,
	2017		2016
(in millions)					2021		2020
Within one year	$	71.6	$	59.3	$	71.3	$	64.4
Between one year and two years		57.1		49.0		70.7		58.0
Between two years and three years		39.4		28.1		45.7		53.0
Between three years and four years		10.0		18.8		43.3		34.3
Thereafter		10.0		—		63.2		93.1
	$	188.1	$	155.2
Total Phoenix backlog					$	294.2	$	302.8

~~The majority~~For further discussion of the increase as of December 31, 2017 compared to December 31, 2016 was a result of the Printing Components Business acquisition, slightly offset by the fulfillment of orders during the year ended December 31, 2017 for contracts in place at December 31, 2016.

~~See~~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.”

Faneuil cost of revenue for the three months ended June 30, 2021 was $59.2 million, an increase of $10.8 million, or 22.2%, compared to cost of revenue of $48.4 million for the three months ended June 30, 2020. The increase in cost of revenue was a direct result of the increased net revenue. During the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, cost of revenue as a percentage of segment net revenue increased to 81.4% from 78.7%, respectively, as a result of the wind down of certain unemployment contracts during the three months ended June 30, 2021.

Phoenix cost of revenue for the three months ended June 30, 2021 was $23.3 million, an increase of $4.0 million, or 21.1%, compared to cost of revenue of $19.2 million for the three months ended June 30, 2020. During the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, cost of revenue as a percentage of segment net revenue decreased to 75.7% from 78.3%. 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.

Faneuil selling, general, and administrative expense for the three months ended June 30, 2021 was $10.9 million, an increase of $0.7 million, or 6.7%, compared to selling, general, and administrative expense of $10.2 million for the three months ended June 30, 2020. The increase was primarily attributable to higher salaries and the expansion of software solutions to improve Faneuil’s customer experience and support call center efficiencies. During the three months ended June 30, 2021 compared to the three months ended June 30, 2020, selling, general, and administrative expense as a percentage of segment net revenue decreased to 15.0% from 16.6%. 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 for the three months ended June 30, 2021 was $3.3 million, an increase of $0.4 million, or 14.7%, compared to selling, general, and administrative expense of $2.9 million for the three months ended June 30, 2020. Selling, general, and administrative expense as a percentage of segment net revenue decreased to 10.8% for the three months ended June 30, 2021 from 11.7% for the three months ended June 30, 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.

ALJ selling, general, and administrative expense for the three months ended June 30, 2021 was $1.8 million, an increase of $0.5 million, or 35.2%, compared to selling, general, and administrative expense of $1.3 million for the three months ended June 30, 2020. The increase was mainly attributable to a $0.4 million increased bonus accrual. We expect selling, general, and administrative expense to fluctuate in the future as we comply with SEC reporting requirements and regulations and allocate certain expenses to our subsidiaries.

Faneuil depreciation and amortization expense was consistent at $3.1 million and $3.2 million for the three months ended June 30, 2021 and June 30, 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 consists primarily of amortization of acquisition-related intangible assets. Depreciation and amortization expense was consistent at $0.5 million and $0.6 million for the three months ended June 30, 2021 and June 30, 2020, respectively.

Interest expense was consistent at $2.6 million for both the three months ended June 30, 2021 and June 30, 2020. Interest expense was impacted by the weighted-average outstanding balance on our line of credit and principal paydown on our term loans.

We recognized a loss on debt extinguishment of $2.1 million during the three months ended June 30, 2021, which was comprised of $1.2 million for the write off of deferred loan costs and $0.9 million of prepayment penalties.

We recorded a provision for income taxes of $0.4 million for the three months ended June 30, 2021 compared to $0.3 million for the three months ended June 30, 2020. The provision for both the three months ended June 30, 2021 and June 30, 2020 was the result of generating state taxable income and changes to the valuation allowance recorded against net deferred tax assets.

ALJ did not record a provision for or benefit from income taxes for discontinued operations during either the three months ended June 30, 2021 or June 30, 2020.

As a result of the sale of Carpets in February 2021, we had no discontinued operations during the three months ended June 30, 2021, compared to a $0.5 million net loss from discontinued operations during the three months ended June 30, 2020, which was attributable to the operations of Carpets.

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 income (loss) before depreciation and amortization expense, interest expense, litigation loss, recovery of litigation loss, restructuring and cost reduction initiatives, loan amendment expenses, fair value of warrants issued in connection with loan amendments, stock-based compensation, acquisition-related expenses, gain on disposal of assets, net, income taxes, loss on debt extinguishment, and other non-recurring items. The following table summarizes segment adjusted EBITDA.

Faneuil segment adjusted EBITDA was $3.7 million for the three months ended June 30, 2021 compared to $4.3 million for the three months ended June 30, 2020. Segment adjusted EBITDA decreased $0.5 million, or 12.5%, driven by the wind-down of certain state unemployment contracts and continuing losses from one healthcare contract.

Phoenix recognized segment adjusted EBITDA of $5.5 million for the three months ended June 30, 2021 compared to $3.8 million for the three months ended June 30, 2020. Segment adjusted EBITDA increased by $1.7 million, or 45.6%, as a result of higher volumes from components and books.

ALJ segment adjusted EBITDA loss for the three months ended June 30, 2021 was ($1.5) million compared to segment adjusted EBITDA loss of ($0.9) million for the three months ended June 30, 2020. ALJ segment adjusted EBITDA loss for three months ended June 30, 2021 was impacted by an increased bonus accrual.

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

	Nine Months Ended June 30, 2021						Nine Months Ended June 30, 2020
				% of						% of
(in thousands, except per share amounts)	Dollars			Net Revenue			Dollars			Net Revenue
Net revenue⁽¹⁾
Faneuil	$	243,147			73.9	%	$	178,915			70.9	%
Phoenix		86,038			26.1			73,331			29.1
Consolidated net revenue		329,185			100.0			252,246			100.0
Cost of revenue ⁽²⁾
Faneuil		203,247			83.6			148,951			83.3
Phoenix ⁽³⁾		65,864			76.6			56,940			77.6
Consolidated cost of revenue		269,111			81.8			205,891			81.6
Selling, general, and administrative expense ⁽²⁾
Faneuil		28,799			11.8			24,625			13.8
Phoenix		9,373			10.9			9,358			12.8
ALJ		5,232			—			3,466			—
Consolidated selling, general, and administrative expense		43,404			13.2			37,449			14.8
Depreciation and amortization expense ⁽²⁾
Faneuil		9,456			3.9			9,667			5.4
Phoenix⁽⁴⁾		1,601			1.9			1,688			2.3
Consolidated depreciation and amortization expense		11,057			3.4			11,355			4.5
Impairment of goodwill		—			—			56,492			22.4
Gain on disposal of assets, net ⁽⁵⁾		(191	)		(0.1	)		(299	)		—
Total consolidated operating expenses⁽⁵⁾		323,381			98.2			310,888			123.2
Consolidated operating income (loss)		5,804			1.8			(58,642	)		(23.2	)
Interest expense, net ⁽⁵⁾		(7,656	)		(2.3	)		(7,976	)		(3.2	)
Interest from legal settlement ⁽⁵⁾		—			—			200			0.1
Loss on debt extinguishment ⁽⁵⁾		(2,072	)		(0.6	)		—			—
(Provision for) benefit from income taxes⁽⁵⁾		(719	)		(2.2	)		1,008			4.0
Net loss from continuing operations		(4,643	)		(1.4	)		(65,410	)		(25.9	)
Net loss from discontinued operations		(1,063	)		(0.3	)		(3,324	)		(1.3	)
Net loss ⁽⁵⁾	$	(5,706	)		(1.7	)	$	(68,734	)		(27.2	)
Loss per share of common stock–basic and diluted	$	(0.13	)				$	(1.63	)

Faneuil net revenue for the nine months ended June 30, 2021 was $243.1 million, an increase of $64.2 million, or 35.9%, compared to net revenue of $178.9 million for the nine months ended June 30, 2020. The increase was mainly attributable to a $62.1 million increase in new customer contracts and a $16.5 million net increase in existing customers mostly due to open enrollment volumes for healthcare contracts and expanded call center services provided, partially offset by a $14.4 million reduction driven by the completion of customer contracts.

Phoenix net revenue for the nine months ended June 30, 2021 was $86.0 million, an increase of $12.7 million, or 17.3%, compared to net revenue of $73.3 million for the nine months ended June 30, 2020. The increase was primarily attributable to higher component sales primarily related to trade and book sales.

	Three Months Ended December 31,											Nine Months Ended June 30,
(in thousands)	2017			2016			$ Change		% Change			2021			2020			$ Change		% Change
Faneuil	$	40,219		$	29,002		$	11,217		38.7	%	$	203,247		$	148,951		$	54,296		36.5	%
As a percentage of net revenue		78.1	%		76.2	%
Carpets		13,803			13,247			556		4.2
As a percentage of net revenue		82.9	%		85.2	%
As a percentage of segment net revenue													83.6	%		83.3	%
Phoenix		20,888			17,932			2,956		16.5			65,864			56,940			8,924		15.7
As a percentage of net revenue		77.9	%		74.6	%
As a percentage of segment net revenue													76.6	%		77.6	%
Consolidated cost of revenue	$	74,910		$	60,181		$	14,729		24.5	%	$	269,111		$	205,891		$	63,220		30.7	%

Faneuil cost of revenue for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was ~~$40.2~~$203.2 million, an increase of ~~$11.2~~$54.3 million, or ~~38.7%~~36.5%, compared to cost of revenue of ~~$29.0~~$149.0 million for the ~~three~~nine months ended ~~December 31, 2016.~~June 30, 2020. The ~~absolute dollar~~ increase in cost of revenue was a direct result of the increased net revenue. During the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2021, as compared to the ~~three~~nine months ended ~~December 31, 2016,~~June 30, 2020, cost of revenue as a percentage of segment net revenue ~~increased to 78.1% from 76.2% as a result of the integration of the CMO Business.~~was consistent at 83.6% and 83.3%, respectively.

~~Carpets~~Phoenix cost of revenue for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was ~~$13.8~~$65.9 million, an increase of ~~$0.6~~$8.9 million, or ~~4.2%~~15.7%, compared to cost of revenue of ~~$13.2~~$56.9 million for the ~~three~~nine months ended ~~December 31, 2016. The absolute dollar increase in cost of revenue was a direct result of increased net revenue.~~June 30, 2020. During the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2021, as compared to the ~~three~~nine months ended ~~December 31, 2016,~~June 30, 2020, cost of revenue as a percentage of segment net revenue ~~decreased to 82.9% from 85.2% as a result of implementing operating efficiencies.~~

Phoenix cost of revenue for the three months ended December 31, 2017 was $20.9 million, an increase of $3.0 million, or 16.5% compared to cost of revenue of $17.9 million for the three months ended December 31, 2016. The absolute dollar increase in cost of revenue was mainly attributable to increased net revenue associated with the aforementioned Printing Components Business acquisition. During the three months ended December 31, 2017, as compared to the three months ended December 31, 2016, cost of revenue as a percentage of net revenue increased to 77.9% from 74.6% as a result of changes in product mix sold,remained consistent at 76.6% and ~~some duplicate expenses incurred with the Printing Components Business acquisition.~~77.6%, 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.

	Three Months Ended December 31,										Nine Months Ended June 30,
(in thousands)	2017		2016		$ Change			% Change			2021		2020		$ Change		% Change
Faneuil	$	7,544	$	5,288	$	2,256			42.7	%	$	28,799	$	24,625	$	4,174		17.0	%
Carpets		3,573		2,343		1,230			52.5
Phoenix		4,139		3,055		1,084			35.5			9,373		9,358		15		0.2
ALJ		848		1,018		(170	)		(16.7	)		5,232		3,466		1,766		51.0
Consolidated selling, general and administrative expense	$	16,104	$	11,704	$	4,400			37.6	%	$	43,404	$	37,449	$	5,955		15.9	%

Faneuil selling, general, and administrative expense for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was ~~$7.5~~$28.8 million, an increase of ~~$2.3~~$4.2 million, or ~~42.7%~~17.0%, compared to selling, general, and administrative expense of ~~$5.3~~$24.6 million for the ~~three~~nine months ended ~~December 31, 2016.~~June 30, 2020. The increase was ~~primarily~~ attributable to higher compensation expenses, legal expenses, and the ~~CMO Business acquisition, which added $1.5 million,~~expansion of software solutions to improve Faneuil’s customer experience and ~~expenses to~~ support ~~existing customers, mostly in~~call center efficiencies. To a lesser extent, the ~~healthcare industry as a result of open enrollment season, which added $1.6 million. This~~ increase was ~~partially offset by reduced expenses~~attributable to Faneuil’s $1.3 million recovery of ~~$0.8 million to onboard new customers and $0.1 million related to customer contracts that concluded.~~litigation loss during the nine months ended June 30, 2020. During the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 compared to the ~~three~~nine months ended ~~December 31, 2016,~~June 30, 2020, selling, general, and administrative expense as a percentage of segment net revenue ~~increased~~decreased to ~~14.7%~~11.8% from ~~13.9%~~13.8%. 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.

Carpets selling, general and administrative expense was $3.6 million for the three months ended December 31, 2017, an increase of $1.2 million, or 52.5%, compared to selling, general and administrative expense of $2.3 million for the three months ended December 31, 2016. The increase was primarily attributable to increased headcount to support growth in the cabinet and granite divisions, and to a lesser extent, increased legal fees to defend against legal claims. Selling, general and administrative expense as a percentage of net revenue increased to 21.5% for the three months ended December 31, 2017 from 15.1% for the three months ended December 31, 2016 as a result of incurring additional expenses, which do not fluctuate with net revenue.

Phoenix selling, general, and administrative expense was $9.4 million for both the ~~three~~nine months ended ~~December 31, 2017 was $4.1 million, an increase of $1.1 million, or 35.5%, compared to selling, general~~June 30, 2021 and administrative expense of $3.1 million for the three months ended December 31, 2016. The increase was mainly attributable to the Printing Component Business acquisition and restructuring expense incurred to consolidate manufacturing facilities of $0.8 million.June 30, 2020. Selling, general, and administrative expense as a percentage of segment net revenue ~~increased~~decreased to ~~15.4%~~10.9% for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 from ~~12.7%~~12.8% for the ~~three~~nine months ended ~~December 31, 2016.~~June 30, 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.

ALJ selling, general, and administrative expense for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was ~~$0.8~~$5.2 million, ~~a decrease~~an increase of ~~$0.2~~$1.8 million, or ~~16.7%~~51.0%, compared to selling, general, and administrative expense of ~~$1.0~~$3.5 million for the ~~three~~nine months ended ~~December 31, 2016.~~June 30, 2020. The ~~decrease~~increase was ~~primarily~~mainly attributable to ~~allocating certain expenses, including accounting~~a $1.1 million increased bonus accrual and ~~tax preparation,~~increased banking fees to support our subsidiaries to better align expenses with ALJ’s consolidated reporting structure. Such decrease was somewhat offset by an increased compensation expense associated with the appointment of a new chief financial officer and an increase in non-cash stock-based compensation costs for key employees and board of directors.various Financing Agreement amendments. We expect selling, general, and administrative expense to fluctuate in the future as we comply with SEC reporting requirements and regulations and allocate certain expenses to our subsidiaries.

	Three Months Ended December 31,										Nine Months Ended June 30,
(in thousands)	2017		2016		$ Change			% Change			2021		2020		$ Change			% Change
Faneuil	$	2,576	$	1,863	$	713			38.3	%	$	9,456	$	9,667	$	(211	)		(2.2	)%
Carpets		219		175		44			25.1
Phoenix		639		641		(2	)		(0.3	)		1,601		1,688		(87	)		(5.2	)
Consolidated depreciation and amortization expense	$	3,434	$	2,679	$	755			28.2	%	$	11,057	$	11,355	$	(298	)		(2.6	)%

Faneuil depreciation and amortization expense for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was ~~$2.6~~$9.5 million, ~~an increase~~a decrease of ~~$0.7~~$0.2 million, or ~~38.3%~~2.2%, compared to depreciation and amortization expense of ~~$1.9~~$9.7 million for the ~~three~~nine months ended ~~December 31, 2016.~~June 30, 2020. The ~~increase~~decrease was ~~mainly~~ attributable to ~~the CMO Business acquisition, and to a lesser extent~~leasehold improvements for one large call center that were fully amortized. Because certain Faneuil contracts require capital ~~equipment purchased to support new and expanded contracts. Because each Faneuil contract requires unique capital investment and infrastructure such as lease buildouts,~~investments, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Carpets depreciation and amortization expense for both the three months ended December 31, 2017 and 2016 was $0.2 million. The slight increase of less than $0.1 million, or 25.1%, was attributable to the installation of automation machinery to support the new granite and stone facility.

Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets. Depreciation and amortization expense ~~remained relatively unchanged~~was consistent at ~~$0.6~~$1.6 million and $1.7 for ~~both~~ the ~~three~~nine months ended ~~December~~June 30, 2021 and June 30, 2020, respectively.

As a result of the decline in ALJ’s market capitalization, downward economic pressure, declines in actual and forecasted results of operations including the estimated effects of COVID-19, managementdetermined that it was more likely than not that the fair value of goodwill for all reporting units was below each reporting unit’s respective carrying amount. As such, management performed an interim impairment test as of March 31, ~~2017~~2020, based on discounted cash flows, which were derived from internal forecasts and ~~December 31, 2016.~~ more cautious economic expectations for all reporting units.

As a result of the interim test, ALJ recognized a non-cash impairment of goodwill totaling $56.5 million during the nine months ended June 30, 2020.

Interest expense for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was ~~$2.7~~$7.7 million, ~~an increase~~a decrease of ~~$0.2~~$0.3 million, or ~~9.3%~~4.0%, compared to ~~interest expense of $2.4~~$8.0 million for the ~~three~~nine months ended ~~December 31, 2016.~~June 30, 2020. The ~~increase~~decrease was ~~primarily~~mainly attributable to ~~the $8.2 million increase to~~decreased weighted-average outstanding balance on our line of credit as we were able to fund working capital requirements ~~and the $7.5 million increased~~from operations rather than borrowing on our line of credit, and principal paydown on our term ~~loan to acquire~~loans.

During the ~~Printing Components Business, partially offset by reduced interest resulting from quarterly principal payments.~~

~~Our income tax provision was $3.4 million for the three~~nine months ended ~~December 31, 2017 compared~~June 30, 2020, Faneuil received a onetime $1.5 million settlement, of which $0.2 million was attributable to ~~less than $0.1~~interest. See “Part I, Item 1. Financial Statements – Note 9. Commitments and Contingencies.”

We recognized a loss on debt extinguishment of $2.1 million ~~for the three months ended December 31, 2016. The increase~~ during the three months ended ~~December 31, 2017 compared to~~June 30, 2021, which was comprised of $1.2 million for the ~~three~~write off of deferred loan costs and $0.9 million of prepayment penalties.

ALJ recorded a provision for income taxes from continuing operations of $0.7 million and a benefit for income taxes from continuing operations of $1.0 million for the nine months ended ~~December 31, 2016 was due to a one-time revaluation of deferred tax assets, which~~June 30, 2021 and June 30, 2020, respectively. The provision for the nine months ended June 30, 2021 was the result of ~~new~~generating state taxable income. The benefit from income taxes for the nine months ended June 30, 2020 was the result of changes to our valuation allowance recorded against net deferred tax ~~reform legislation enacted on December 22, 2017 (the “Tax Reform Law”). We recorded~~assets.

ALJ did not record a provision for or benefit from income taxes for discontinued operations during the ~~provisional impacts~~nine months ended June 30, 2021 or June 30, 2020.

As a result of the ~~Tax Reform Law as~~sale of ~~December 31, 2017, based on our current knowledge, interpretation, and understanding~~Carpets in February 2021, we recognized a net loss from discontinued operations of $1.1 million during the ~~Tax Reform Law and its impact to our business.~~ ~~While we were able to make reasonable estimates~~nine months ended June 30, 2021, of ~~the impact of certain aspects of the Tax Reform Law, we may be affected by other aspects, including, but not limited~~which $0.8 million was attributable to the ~~state tax effect~~onetime loss on the sale of ~~adjustments made~~Carpets, and $3.3 million during the nine months ended June 30, 2020, which was attributable to ~~federal temporary differences, and~~ the ~~interest expense deduction limitation.~~

~~We will continue to assess the impact~~operations of ~~the Tax Reform Law on our future taxes and our consolidated financial statements. Actual impacts could be materially different from current estimates. See “Part I, Item 1. Financial~~ ~~Statements – Note 10. Income Taxes.”~~Carpets.

~~Segment adjusted EBITDA is a financial measure used by our management and chief operating decision maker (“CODM”) to~~ manage the business, allocate resources, and assesses the performance of each operating segments. ALJ defines segment adjusted EBITDA as segment net income (loss) before interest expense, provision for income taxes, depreciation and amortization expense, stock-based compensation expense, restructuring expense, acquisition-related expense, loss (gain) on sales of assets, and other non-recurring items.

~~The following table summarizes our segment adjusted EBITDA for each period (in thousands):~~

Faneuil segment adjusted EBITDA was $12.4 million for ~~both~~ the ~~three~~nine months ended ~~December 31, 2017 and 2016 was basically flat at $3.7 million. Higher expenses related~~June 30, 2021 compared to ~~new technology, training and call handling~~$7.3 million for the nine months ended June 30, 2020. Segment adjusted EBITDA increased $5.1 million, or 69.8%, driven by the start of new ~~CMO Business~~contracts, operational improvements at existing contracts, reduced costs for medical and workers compensation claims, offset ~~the increased net revenue recognized from the new CMO Business contracts.~~somewhat by continuing losses for one healthcare contract.

~~Carpets~~Phoenix segment adjusted EBITDA for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was ~~$(0.7)~~$14.8 million compared to segment adjusted EBITDA of ~~less than $(0.1)~~$10.8 million for the ~~three~~nine months ended December 31, 2016. The three months ended December 31, 2017 was impacted by higher administrative personnel costs, homebuilder discounts, legal fees, bad debt expense, inventory reserves, and higher expenses associated with the granite business.

~~Phoenix segment~~ adjusted EBITDA ~~was $4.2 million for the three months ended December 31, 2017, a decrease of $0.2~~increased by $4.0 million, or ~~4.3%~~37.1%, ~~compared to segment adjusted EBITDA~~as a result of ~~$4.4 million for the three months ended December 31, 2016. The majority of the decrease was attributable to lower sales~~higher volumes ~~for books~~from trade components and ~~components.~~books.

ALJ segment adjusted EBITDA loss for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was ~~$(0.6)~~($4.1) million compared to segment adjusted EBITDA loss of ~~$(0.8) million. The three~~($2.9) million for the nine months ended ~~December 31, 2017~~June 30, 2020. ALJ segment adjusted EBITDA loss for nine months ended June 30, 2021 was impacted by allocating certain expenses, including accounting and tax preparation, to our subsidiaries to better align expenses with ALJ’s consolidated reporting structure. Such decrease was somewhat offset by an increased ~~compensation expense associated with the appointment of a new chief financial officer.~~

Segment adjusted EBITDA is not considered a non-GAAP measure because we include segment adjusted EBITDA in our segment disclosures in accordance with the Accounting Standards Codification Topic 280 – Segment Reporting. See “Part I, Item 1. Financial Statement ~~– Note 12.~~ ~~Reportable Segments and Geographic Information.” As such, we do not provide a reconciliation from net (loss) income to segment adjusted EBITDA.~~bonus accrual.

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.

Carpets generally experiences seasonality within the home building business as the number of houses sold during the winter months is generally lower than the number of homes sold during other times during the year. Conversely, the number of houses sold and delivered during the remaining portion of the year increases by comparison.

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 ~~components~~ 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 ~~the~~ Phoenix’s weakest quarter. These seasonal factors are not significant.

Historically, our principal sources of liquidity have been cash provided by operations and borrowings under various debt arrangements. ~~At December 31, 2017,~~On June 30, 2021, our principal sources of liquidity included cash and cash equivalents of ~~$2.0~~$8.4 million and an ~~available~~unused borrowing capacity of ~~$10.8~~$29.2 million on our line of credit. Our principal uses of cash have been for acquisitions, capital expenditures to support Faneuil’s customers, and to pay down debt. We anticipate these uses will continue to be our principal uses of liquidity in the future.

Global financial and credit markets have been volatile in recent years and ~~future~~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 (in thousands~~):follows:

	Three Months Ended December 31,						Nine Months Ended June 30,
	2017			2016
Cash (used for) provided by operating activities	$	(3,692	)	$	8,309
(in thousands)							2021			2020
Cash provided by operating activities							$	20,662		$	7,290
Cash used for investing activities		(9,637	)		(3,945	)		(5,892	)		(5,224	)
Cash provided by (used for) financing activities		9,726			(5,208	)
Cash (used for) provided by financing activities								(12,405	)		798
Change in cash and cash equivalents	$	(3,603	)	$	(844	)	$	2,365		$	2,864

For the nine months ended June 30, 2021, we recognized a net loss of ~~$5.3~~$5.7 million, for the three months ended December 31, 2017, used cash of $3.7 million for operating activities and $9.6 million for investing activities, offset by $9.7 million cash provided by financing activities.

~~We recognized net income of $0.6 million for the three months ended December 31, 2016 and~~ generated cash from operating activities of ~~$8.3~~$20.7 million, ~~offset by~~used cash ~~used by~~for investing activities of ~~$3.9~~$5.9 million, and used cash for financing activities of $12.4 million.

For the nine months ended June 30, 2020, we recognized net loss of $68.7 million, which included a non-recurring impairment of goodwill of $56.5 million, generated cash from operating activities of $7.3 million, used cash for investing activities of $5.2 million, and generated cash from financing activities of $0.8 million.

Cash ~~used for operations~~provided by operating activities of ~~$3.7~~$20.7 million during the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2021 was the result of our ~~$5.3~~$5.7 million net loss, ~~$8.6~~$21.0 million addback of net non-cash expenses, and $7.0 million of net cash used by changes in operating assets and liabilities. The most significant components of net non-cash expenses were depreciation and amortization of $4.8 million, stock-based compensation of $0.3 million, amortization of non-cash interest expense of $0.3 million, and deferred income taxes of $3.3 million. The most significant components of changes in operating assets and liabilities included accounts receivable of $6.2 million, prepaid expenses and other current assets of $2.0 million, and deferred revenue and customer deposits of $1.9 million, which used cash, offset by accrued expenses of $1.1 million and inventories of $1.0 million, which provided cash.

~~Cash provided by operations of $8.3 million during the three months ended December 31, 2016 was the result of our $0.6 million net income, $4.1 million addback of net non-cash expenses, and $3.6~~$5.4 million of net cash provided by changes in operating assets and liabilities. The most significant components of net non-cash expenses were depreciation and amortization expense of ~~$4.0~~$14.9 million, ~~stock-based compensation~~loss on debt extinguishment of ~~$0.2~~$2.1 million, interest expense and other bank fees accreted to term loans of $1.7 million, and ~~amortization~~change in fair value of ~~non-cash interest expense~~contingent consideration of ~~$0.2 million, offset by deferred income tax benefit of $0.3~~$1.1 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 ~~inventories~~accounts receivable of ~~$1.3~~$3.9 million and other current liabilities and other non-current liabilities of $4.0 million, which provided cash, partially offset by deferred revenue and customer deposits of $4.9 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 other current liabilities and $4.2 million is recorded in other non-current liabilities on June 30, 2021.

Cash provided by operating activities of $7.3 million during the nine months ended June 30, 2020 was the result of our $68.7 million net loss, $73.6 million addback of net non-cash expenses, and $2.4 million of net cash used for changes in operating assets and liabilities. The most significant components of net non-cash expenses include the impairment of goodwill of $56.5 million, depreciation and amortization expense of $14.7 million, offset by deferred income taxes of $1.4 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 $11.7 million, prepaid expenses and other current assets of $4.4 million, and other assets and collateral deposits of ~~$1.3~~$1.1 million, which used cash, offset by deferred revenue and customer deposits of $8.1 million, discontinued operations, net of $3.9 million, accounts payable of ~~$3.8~~$3.7 million, and accrued expenses of ~~$1.9 million, and other liabilities of $1.8~~$1.6 million, which provided ~~cash, and accounts receivable~~cash. Additionally, the CARES Act allowed us to defer payment for $2.5 million of ~~$3.7 million, and other assets of $2.2 million,~~payroll-related taxes, which ~~used cash. Our~~positively impacted our cash flow from operations. The CARES Act payroll-related liability is recorded in other non-current liabilities on June 30, 2020.

Cash provided by operations for the nine months ended June 30, 2021 compared to cash used for operations for the nine months ended June 30, 2020, was ~~negatively~~ impacted by ~~one large past due account receivable due~~the deferral of payroll-related taxes under the CARES Act. Additionally, Faneuil had fewer new contract implementations during the nine months ended June 30, 2021 as compared to ~~Faneuil. See “Part 2, Item 1 – Legal Proceedings.”~~the nine months ended June 30, 2020, which had a positive impact on working capital.

For the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2021, our investing activities used ~~$9.6~~$5.9 million of cash, of which ~~$9.0~~$2.8 million was used to purchase equipment and software for ~~our Printing Components Business acquisition,~~Faneuil’s new and ~~$1.0~~existing customers, and $3.8 million was used to purchase capital equipment, mostly printing equipment, in the normal course of operations, offset by $0.4 million cash proceeds from the sale of Carpets and $0.3 million cash proceeds from the sale of ~~assets.~~redundant printing equipment.

For the ~~three~~nine months ended ~~December 31, 2016,~~June 30, 2020, our investing activities used ~~$3.9~~$5.2 million of cash, of which ~~$2.9~~$2.2 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and ~~$1.0~~$3.0 million was used to purchase capital equipment in the normal course of operations.

The increase in capital expenditures was a result of Phoenix buying more printer equipment during the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020.

For the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2021, our financing activities used $12.4 million of cash. In June 2021, we replaced our term loan with a new $95.0 million term loan and amended our revolving credit facility to (i) significantly reduce principal payments, (ii) consolidate debt, (iii) update financial covenants, and (iv) extend the maturity date from November 2023 to June 2025. In connection with the transaction, we paid deferred loan costs of $4.2 million. See “Part I, Item 1 - Financial Statements – Note 8. Debt” for additional information.

For the nine months ended June 30, 2020, our financing activities provided ~~$9.7~~$0.8 million of cash. ~~Proceeds~~Net proceeds from our line of credit provided ~~$8.2~~$6.0 million ~~proceeds from our amended term loan provided $7.5 million (see further discussion~~to fund working capital requirements at ~~Contractual Obligations~~ ~~below),~~Faneuil, Phoenix, and ~~the issuance of common stock~~Corporate. Our Ninth Amendment provided $1.5 ~~million. Proceeds from the amended term loan and issuance~~million of ~~common stock were~~cash, which was used to ~~fund~~pay down our ~~Printing Components Business acquisition discussed above.~~line of credit. Financing activities which used cash ~~include $6.4~~included $3.9 million to pay down our term ~~loan, $0.7~~loans, $2.0 million for capital lease payments, and ~~$0.3~~$0.8 million for ~~debt~~deferred loan costs related to the Sixth, Seventh, Eighth, and ~~stock issuance costs.~~ Ninth Amendments to our Financing Agreement. See “Part I, Item 1. Financial Statements – Note 8. Debt.”

Cash used for financing activities for the ~~three~~nine months ended ~~December 31, 2016, our~~June 30, 2021 compared to cash provided by financing activities ~~used $5.2 million~~for the nine months ended June 30, 2020 was impacted by the replacement of ~~cash, of which $4.5 million was used to pay down~~ our term loan ~~$0.4 million was used for payments on capital leases~~ and ~~$0.3 million was used for payments on financed insurance premiums.~~amendment of our revolving credit facility during June 2021.

The following table summarizes our significant contractual obligations ~~at December 31, 2017,~~on June 30, 2021, and the effect such obligations are expected to have on our liquidity and cash flows in future ~~periods (in thousands~~):periods:

Payments due by Period

Less Than

One – Three

Four – Five

More than Five

Total

One Year

Years

Years

Years

Line of credit⁽¹⁾

$
13,662

$
—

$
13,662

$
—

$
—

Term loan payable⁽¹⁾

92,091

9,188

82,903

—

—

Operating lease obligations

20,612

4,722

8,745

7,145

—

Capital lease obligations

9,305

3,575

4,697

1,033

—

Other long-term liabilities⁽²⁾

4,631

989

3,642

—

—

Total contractual cash obligations

$
140,301

$
18,474

$
113,649

$
8,178

$
—

	Payments due by Period
			Less Than		One – Three		Four – Five		More than Five
(in thousands)	Total		One Year		Years		Years		Years
Term loan with quarterly principal payments ⁽¹⁾	$	95,000	$	3,800	$	7,600	$	83,600	$	—
Operating lease obligations ⁽²⁾		39,467		5,035		11,181		10,136		13,115
Other liabilities ⁽³⁾		12,499		3,110		9,389		—		—
Finance lease obligations ⁽¹⁾		1,350		810		540		—		—
Convertible Promissory Notes ⁽¹⁾		6,026		—		6,026		—		—
Total contractual cash obligations ⁽⁴⁾	$	154,342	$	12,755	$	34,736	$	93,736	$	13,115

(1) In August 2015, ALJ entered into a financing agreement (“Financing Agreement”) with Cerberus Business Finance, LLC (“Cerberus”), to borrow $105.0 million in a term loan (“Cerberus Term Loan”) and have available up to $30.0 million in a revolving loan (“Cerberus/PNC Revolver”), collectively (“Cerberus Debt”). ALJ has subsequently entered into three amendments to the Financing Agreement. The Financing Agreement and three amendments are summarized below (~~in thousands~~):

*~~Range of annual interest rates accrued during the three months ended December 31, 2017.~~

~~Interest payments are due in arrears on the first day of each month.~~ Quarterly principal payments are due on the last day of each fiscal quarter. Annual principal payments equal to 75% of ALJ’s excess cash flow (“ECF”), as defined in the Financing Agreement, are due upon delivery of the audited financial statements. During the three months ended December 31, 2017, ALJ made an ECF payment of $4.1 million. A final balloon payment is due at maturity, August 14, 2020. There is a prepayment penalty equal to 1% if the Cerberus Term Loan is repaid prior to August 2018. ALJ may make payments of up to $7.0 million against the loan with no penalty.

The Cerberus Debt is secured by substantially all the Company’s assets and imposes certain limitations on the Company, including its ability to incur debt, grant liens, initiate certain investments, declare dividends and dispose of assets. The Cerberus Debt also requires ALJ to comply with certain debt covenants. As of December 31, 2017, ALJ was in compliance with all debt covenants and had unused borrowing capacity of $10.8 million.

~~(2) Amounts represent future cash payments to satisfy our short- and long-term workers’ compensation reserve and other long-term liabilities recorded on our consolidated balance sheets.~~

~~As of December 31, 2017,~~On June 30, 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. ~~As of December 31, 2017,~~On June 30, 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 ~~$29.1~~$41.5 million.

~~Letter~~Letters of Credit. ~~Faneuil~~ALJ had ~~a letter~~letters of credit ~~for $2.7~~totaling $3.3 million ~~as of December 31, 2017.~~outstanding on June 30, 2021.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or ~~U.S.~~ 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 induring the reporting period. ~~Significant~~We regularly evaluate our estimates and assumptions ~~by management are used for, but are not limited~~related to ~~determining~~ the fair value of assets and liabilities, including intangible assets acquired and allocation of ~~acquisition~~ purchase ~~prices, estimated~~price, useful lives, carrying value and recoverability of long-lived and intangible assets, the recoverability of goodwill, ~~the realizability of deferred tax assets, stock-based compensation, the likelihood of~~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 ~~loss as a result of loss contingencies, customer lives, the allowance for doubtful accounts and inventory reserves, and calculation of insurance reserves.~~impact on our consolidated financial statements. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe ~~to be~~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, 2020, filed with the SEC on December 18, 2020 (“Fiscal 2020 Form 10-K”).

For a complete summary of our significant accounting policies, please refer to ~~Note 2, “Summary~~“Part IV. Exhibits, Financial Statement Schedules –Note 2. Summary of Significant Accounting Policies,” included ~~with~~in our ~~audited financial statements and notes thereto~~Fiscal 2020 Form 10-K. As a result of adopting ASC 842, we revised our accounting policy for ~~the years ended September 30, 2017 and 2016, filed with the Securities and Exchange Commission on December 19, 2017.~~leases. See further discussion at “Part I, Item 1. Financial Statements – Note 2. Recent Accounting Standards.” There were no ~~material~~other changes to ~~significant~~our accounting policies during the ~~three~~nine months ended ~~December 31, 2017.~~ June 30, 2021.

Item 3. Qualitative and ~~Quantitati~~veQuantitative Disclosures about Market Risk

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.

Faneuil filed a complaint against 3M Company on September 22, 2016, in the Circuit Court for the City of Richmond, Virginia. The dispute arises out of a subcontract entered into between 3M and Faneuil in relation to a toll road project in Portsmouth, Virginia. Under the terms of the subcontract, Faneuil provides certain services to 3M as part of 3M’s agreement to provide services to Elizabeth River Crossing (“ERC”). After multiple attempts to resolve a dispute over unpaid invoices failed, Faneuil determined to file suit against 3M to collect on its outstanding receivables. In its complaint, Faneuil seeks recovery of $5.1 million based on three causes of action: breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment.

On October 14, 2016, 3M filed its answer and counterclaim against Faneuil. In its counterclaim, 3M seeks recovery in excess of $10.0 million based on three claims: breach of contract/indemnification, breach of the implied covenant of good faith and fair dealing and unjust enrichment. 3M’s counterclaim alleges it incurred approximately $3.2 million in damages payable to ERC as a result of Faneuil’s conduct and seeks indemnification of an additional $10.0 million in damages incurred as a result of continued performance under its contract with ERC. A five-day bench trial is set for April 2018. A pretrial scheduling order has ~~been entered and the parties are engaged in substantive discovery at this time.~~

Subsequent to filing suit against 3M, Faneuil entered into an agreement with ERC whereby ERC would become responsible for paying Faneuil directly for all services rendered from April 1, 2016, through December 31, 2016. That agreement resulted in a payment from ERC to Faneuil on December 8, 2016, which resolved a portion of the $5.1 million claim against 3M.

During June 2017, ERC transitioned the services that were provided by Faneuil to an internal customer service operation. As a result of this transition, Faneuil no longer provides services to 3M or ERC. ERC continues to reimburse Faneuil for immaterial transition costs incurred by Faneuil.

Tammy McNeil, a former Faneuil call center employee, filed a Fair Labor Standards Act collective action case against Faneuil in federal court in Newport News, Virginia in 2015. The class action asserted various timekeeping and overtime violations, which Faneuil denied. On June 6, 2017, the case was settled by the parties as part of a court-ordered mediation, for $0.3 million in damages, plus plaintiff’s attorney fees. Because the parties could not agree on the dollar amount of plaintiff’s attorney fees, both parties agreed to allow the court to determine the amount. On November 8, 2017, Faneuil received the court’s recommendation, which awarded a total of $0.7 million for plaintiff’s attorney fees and court fees. Faneuil has objected to a portion of the recommendation and has requested that the district court judge further reduce the award.

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 has recently filed a motion to remand the case back to state court. The case is in an early stage and the parties have not begun substantive discovery at this time. Faneuil believes this action is without merit and intends to defend it vigorously.

On September 21, 2016, Plaintiffs Clifford Thornton and Tracey Thornton filed a complaint in the Nevada District Court for Clark County against ALJ, Carpets, Steve Chesin, and Jess Ravich. The complaint includes claims for (1) fraud, (2) bad faith, (3) civil conspiracy, (4) unjust enrichment, (5) wrongful termination, (6) intentional infliction of emotional distress, (7) negligent infliction of emotional distress, and (8) loss of marital consortium. On November 1, 2016, the defendants filed an answer to the complaint generally denying all claims. The parties are engaged in substantive discovery at this time, with the close of discovery scheduled for May 25, 2018 and all substantive dispositive motions due June 25, 2018. ALJ and Carpets believe this action is without merit and intend to defend it vigorously.

In connection with its pending litigation matters (including the matters described above), management has estimated the range of possible loss, including fees and expenses, to be between $1.6 million and $2.4 million; however, as management has determined that no one estimate within the range is better than another, it has accrued $1.6 million as of December 31, 2017.

~~We and our subsidiaries~~ ~~have~~ been named in, and from time to time may become named in, various ~~other~~ 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, ~~is inherently unpredictable. Any claims against us, whether meritorious or not, could be time-consuming, cause us to incur costs~~Claims, 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. We concluded as of December 31, 2017 that the ultimate resolution of these matters will not have a material adverse effect on our ~~business, consolidated financial position, results of operations or cash flows.~~Assessments.”

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.

~~The diversion of resources and management’s attention to the integration of the CMO Business could adversely affect Faneuil’s day-to-day business.~~

The integration of the CMO Business may place a significant burden on Faneuil’s management and internal resources. The diversion of Faneuil management’s attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could adversely affect Faneuil’s financial results.

~~Faneuil may not be able to integrate the CMO Business successfully, and the anticipated benefits of the CMO Business acquisition may not be realized.~~

Faneuil acquired the CMO Business with the expectation that the acquisition would result in various benefits, including, among other things, expansion and diversification of Faneuil’s revenue base into the utilities market while leveraging its existing core competencies. Achieving those anticipated benefits is subject to a number of uncertainties, including whether Faneuil can integrate the operations of the CMO Business in an efficient and effective manner. The integration process could also take longer than Faneuil anticipates and could result in the loss of valuable employees, the disruption of each company’s ongoing businesses, processes and systems or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect Faneuil’s ability to achieve the benefits it anticipates.

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

~~On March 23,~~Since its adoption into law in 2010, ~~President Obama signed~~ the Affordable Care Act ~~(the~~ “~~Affordable Care Act~~”~~) into law, which~~ has ~~affected comprehensive health insurance reform, including~~been challenged before the ~~creation~~U.S. Supreme Court, and several bills have been and continue to be introduced in Congress to delay, defund, or repeal implementation of ~~health insurance exchanges, among other reforms. A portion~~or amend significant provisions of ~~Faneuil~~’s healthcare business relates to providing services to health insurance exchanges in various states, and Faneuil believes that there may be significant opportunities for growth in this area. President Trump has disclosed that a key initiative for his Presidency is to repeal or substantially change the Affordable Care Act. ~~For example,~~In addition, there continues to be ongoing litigation over the interpretation and implementation of certain provisions of the law. New tax reform legislation enacted on December 22, 2017 (“Tax Reform ~~Law repealed~~Law”) includes a provision repealing, effective January 1, 2019, the ~~individual mandate~~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 ~~health care~~healthcare exchanges. ~~It is unclear whether further changes that President Trump has planned to the Affordable Care Act will be enacted, or if enacted changes will affect Faneuil’s business.~~ Further significant changes to, or repeal of, the Affordable Care Act could materially and adversely affect that aspect of Faneuil’s business.

Economic downturns, ~~and~~ 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.~~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’~~s industry~~ as a whole, or key industry segments targeted by Faneuil. In addition, ~~Faneuil~~’sFaneuil’s operations are, in part, dependent upon state government funding. Significant changes in the level of state government funding, ~~could have an unfavorable effect on Faneuil~~’~~s business, financial position, results of operations and cash flows.~~

~~Faneuil’s business involves many program-related and contract-related risks.~~

~~Faneuil~~’s business is subject to a variety of program-related risks, including changes in political and other circumstances, particularly since contracts for major programs are performed over extended periods of time. These risks include changes in personnel at government authorities, the failure of applicable government authorities to take necessary actions, opposition by third parties to particular programs, and the failure by customers to obtain adequate financing for particular programs. Due to these factors, losses on a particular contract or contracts could occur, and Faneuil could experience significant changes in operating results on a quarterly or annual basis.

~~Delays in the government budget process or a government shutdown may adversely affect Faneuil’s cash flows and operating results.~~

~~Faneuil derives a significant portion of its revenue from state government contracts and programs. Any~~any delay in the state government budget process or a state government shutdown ~~may result in Faneuil~~’~~s incurrence of substantial labor or other costs without reimbursement under customer contracts, or the delay or cancellation of key programs in which Faneuil is involved, which~~ could ~~materially adversely affect Faneuil~~’~~s cash flows and operating results.~~

~~Faneuil faces intense competition. If Faneuil does not compete effectively, its business may suffer.~~

~~Faneuil faces intense competition from numerous competitors. Faneuil primarily competes~~have an unfavorable effect on the basis of 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 of these fronts or with all of its competitors. In addition, new competitors may emerge, and service offerings may be threatened by new technologies or market trends that reduce the value of the services Faneuil provides. To remain competitive, Faneuil must respond to new technologies and enhance its existing services, and we anticipate that it may have to adjust the pricing for its services to stay competitive on future responses to proposals. If Faneuil does not compete effectively, itsFaneuil’s business, financial position, results of operations and cash ~~flows~~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 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 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 ~~affected.~~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’s customer concentrations, see “Part I, Item 1. Financial Statements – Note 4.5. Concentration Risks.”We expect ~~that Faneuil~~’sthe largest customers ~~will~~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’s 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’s revenue and cash flows. Additionally, many of Faneuil’s 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.

~~Faneuil’s ability to recover~~The recovery of capital investments in ~~connection with its~~Faneuil contracts is subject to risk.

In order to attract and retain large outsourcing contracts, Faneuil ~~sometimes makes~~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 ~~a portion of Faneuil~~’s intangible assets, could be impaired, and Faneuil’s 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 business could be adversely affected if Faneuil’s clients are not satisfied with its services.~~

~~Faneuil~~’~~s business model depends in large part on its ability to attract new work from its base of existing clients. Faneuil~~’~~s business model also depends on relationships it develops with its clients with respect to understanding its clients~~’ needs and delivering solutions that are tailored to those needs. If a client is not satisfied with the quality of work performed by Faneuil or a subcontractor or with the type of services or solutions delivered, Faneuil could incur additional costs to address the situation, the profitability of that work might be impaired and the client’~~s dissatisfaction with Faneuil~~’~~s services could lead to the termination of that work or damage Faneuil~~’~~s ability to obtain additional work from that client. Also, negative publicity related to Faneuil~~’~~s client relationships, regardless of its accuracy, may further damage Faneuil~~’~~s business by affecting its ability to compete for new contracts with current and prospective clients.~~

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, ~~Faneuil~~’~~s ability to perform~~its performance, according to the terms of ~~its contracts with its customers~~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.

~~Faneuil’s dependence on~~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’s 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’s~~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~~’sFaneuil’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 ~~the~~such program ~~would~~may exceed ~~Faneuil~~’s original estimates, and ~~it could experience~~cause reduced profits, or in some cases a loss for that program.

~~In line with industry practice,~~ 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~~’sFaneuil’s business.

Interruption of ~~Faneuil’s~~Faneuil data centers and customer contact centers could negatively impact Faneuil’s business.

If Faneuil ~~were~~was to experience a temporary or permanent interruption at ~~one or more of Faneuil~~’~~s data or~~a customer contact ~~centers~~center due to natural disaster, casualty, operating malfunction, cyber-attack, sabotage or any other cause, Faneuil might be unable to provide the services it is contractually obligated to deliver. This could result in Faneuil being required to pay contractual damages to some clients or to allow some clients to terminate or renegotiate their contracts. Notwithstanding disaster recovery and business continuity plans and precautions instituted to protect Faneuil’~~s clients~~ and Faneuilclients from events that could interrupt delivery of services, there is no guarantee that such interruptions would not result in a prolonged interruption in ~~Faneuil~~’~~s ability to provide services to its clients~~service, or that such precautions would adequately compensate Faneuil for any losses it may incur as a result of such interruptions.

~~Any business disruptions due to political instability, armed hostilities, and acts of terrorism or natural disasters could adversely affect Faneuil’s financial performance.~~

~~If terrorist activities, armed conflicts, political instability or natural disasters occur in the United States or other locations, such events may negatively affect~~ Faneuil’~~s operations, cause general economic conditions to deteriorate or cause demand for Faneuil~~’~~s services, many of which depend on travel, to decline. A prolonged economic slowdown or recession could reduce the demand for Faneuil~~’~~s services, and consequently, negatively affect Faneuil~~’~~s future sales and profits. Any of these events could have a significant effect on Faneuil~~’~~s business, financial condition or results of operations.~~

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

~~Faneuil~~’sFaneuil’s business is subject to many laws and regulatory requirements in the United States, covering such matters as data privacy, consumer protection, ~~health care~~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~~“non-public personal information.” For instance, the collection of patient data through ~~Faneuil~~’sFaneuil’s contact center services is subject to ~~the Health Insurance Portability and Accountability Act of 1996, commonly known as~~ HIPAA, which protects the privacy of ~~patients~~’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 ~~Faneuil~~’sthe 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 ~~Faneuil~~’s liability for damages, fines, criminal prosecution, unfavorable publicity and restrictions placed on Faneuil’~~s ability to operate. Faneuil~~’s 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~~’sFaneuil’s reputation in the marketplace, which could have a material adverse effect on ~~Faneuil~~’sFaneuil’s business, results of operations and financial condition. In addition, because a substantial portion of Faneuil’s 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~~’sFaneuil’s business, results of operations or financial condition.

~~A failure~~Matters relating to ~~attract~~employment and ~~retain necessary personnel, skilled management,~~labor laws and ~~qualified subcontractors~~prevailing wage standards may ~~have an adverse impact on Faneuil’s business.~~

Because Faneuil operates in intensely competitive markets, its success depends to a significant extent upon its ability to attract, retain and motivate highly skilled and qualified personnel and to subcontract with qualified, competent subcontractors. If Faneuil fails to attract, develop, motivate, retain, and effectively utilize personnel with the desired levels of training or experience, or is unable to contract with qualified, competent subcontractors, Faneuil’s business will be harmed. Experienced and capable personnel remain in high demand, and there is continual competition for their talents. Additionally, regarding the labor-intensive business of Faneuil, quality service depends on Faneuil’s ability to retain employees and control personnel turnover. Any increase in the employee turnover rate could increase recruiting and training costs and could decrease operating effectiveness and productivity. Faneuil may not be able to continue to hire, train and retain a sufficient number of qualified personnel to adequately staff new client projects. Faneuil’~~s business is driven in part by the personal relationships of Faneuil~~’~~s senior management team, and its success depends on the skills, experience, and performance of members of Faneuil~~’~~s senior management team. Despite executing an employment agreement with Faneuil~~’s CEO, she or other members of the management team may discontinue service with Faneuil and Faneuil may not be able to find individuals to replace them at the same cost, or at all. Faneuil has not obtained “~~key person~~” ~~insurance for any member of its senior management team. The loss or interruption of the services of any key employee or the loss of a key subcontractor relationship could hurt Faneuil~~’~~s business, financial condition, cash flow, results of operations and prospects.~~

The floor covering industry is highly dependent on national and regional economic conditions, such as consumer confidence and income, corporate and individual spending, interest rate levels, availability of credit and demand for housing. A decline in residential or commercial construction activity or remodeling and refurbishment in Las Vegas could have a material adverse effect onadversely affect our business.

The ~~floor covering industry~~industries in which Faneuil competes is ~~highly dependent on construction activity, including new construction, which is cyclical in nature~~labor intensive and ~~recently experienced a downturn. The downturn in the U.S.~~governed by various federal and ~~global economies, along~~state labor laws with ~~the residential and commercial markets in such economies, particularly in Las Vegas, negatively impacted the floor covering industry and Carpets~~’ business. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, these activities lagged during the downturn. Although these difficult economic conditions have improved, there may be additional downturns that could cause the industryrespect to ~~deteriorate in the future. A significant or prolonged decline in residential/commercial remodeling or new construction activity could have a material adverse effect on the Company~~’~~s business and results of operations.~~

~~Carpets faces intense competition in the floor covering industry that could decrease demand for its products or force it to lower prices, which could have a material adverse effect on our business.~~

The floor covering industry is highly competitive. Carpets competes with a number of home improvement stores, building materials supply houses and lumber yards, specialty design stores, showrooms, discount stores, local, regional and national hardware stores, mail order firms, warehouse clubs, independent building supply stores and other retailers, as well as with installers. Also, it faces growing competition from online and multichannel retailers as its customers increasingly use computers, tablets, smartphones and other mobile devices to shop online and compare prices and products in real time. Intense competitive pressures from one or more of Carpets’ competitors or its inability to adapt effectively and quickly to a changing competitive landscape could affect its prices, its margins or demand for its products and services. If it is unable to respond timely and appropriately to these competitive pressures, including through maintaining competitive locations of stores, customer service, quality and price of merchandise and services, in-stock levels, and merchandise assortment and presentation, its market share and its financial performance could be adversely affected.

~~Carpets may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect~~ its relationship with ~~customers,~~ its ~~reputation, demand for its products and services and its market share.~~

~~Carpets operates in a market sector where demand is strongly influenced by rapidly changing customer preferences as to product design and features. Carpets~~’ ~~success depends on its~~employees. Faneuil’s ability to anticipate and react to changing consumer demands promptly. All of its products are subject to changing consumer preferences that cannot be predicted with certainty. Also, long lead times for certain of its products may make it hard for it to respond quickly to changes in consumer demands. Consumer preferences could shift rapidly to different types of products or away from the types of products Carpets carries altogether, and its future success depends, in part, on its ability to anticipate and respond to these changes. Failure to anticipate and respond promptly to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels, which could have a material adverse effect on its financial condition.

Carpets relies on third-party suppliers for its products. If it fails to identify and develop relationships with a sufficient number of qualified suppliers, or if its suppliers experience financial or operational difficulties, its ability to timely and efficiently access products that meet its ~~standards could be adversely affected.~~

Carpets sources, stocks and sells products from vendors, and its ability to fulfill their orders reliably and efficiently is critical to its business success. Its ability to continue to identify and develop relationships with qualified suppliers who can satisfy its standards for quality and the need to access products inlabor needs on a ~~timely, efficient and~~ cost-effective ~~manner is a significant challenge. Carpets~~’ ~~ability to access products can also be adversely affected by political instability, the financial instability of suppliers, suppliers~~’ noncompliance with applicable laws, trade restrictions, tariffs, currency exchange rates, supply disruptions, weather conditions, natural disasters, shipping or logistical interruptions or costs and other factors beyond its control. If these vendors fail or are unable to perform as expected and Carpets is unable to replace them quickly, its business could be adversely affected, at least temporarily, until it can do so, and potentially, in some cases, permanently.

Failure to achieve and maintain a high level of product and service quality could damage Carpets’ image with customers and negatively impact its sales, profitability, cashflows, and financial condition.

~~Product and service quality issues could result in a negative impact on customer confidence in Carpets and the Carpets brand image. As a result, Carpets~~’ reputation as a retailer of high-quality products and services could suffer and impact customer loyalty. Additionally, a decline in product and service quality could result in product recalls, product liability and warranty claims. Carpets generally provides a one-year warranty on the installation of any of its products. Warranty work related directly to installation is repaired at the cost to Carpets, and product defects are generally charged back to the manufacturer.

~~If Carpets is unable to manage its installation service business effectively, it could suffer lost sales and be subject to fines, lawsuits, and a damaged reputation.~~

Carpets acts as a general contractor to provide installation services to its customers. As such, it is subject to regulatory requirements and risks applicable to general contractors, which include management of licensing, permitting and the quality of its installers. If Carpets fails to effectively manage these processes or provide proper oversight of these services, it could suffer lost sales, fines and lawsuits, as well as damage to its reputation, which could adversely affect its business.

A portion of Carpets’ business is dependent on estimating fixed price projects correctly and completing the installations within budget. Carpets could suffer losses associated with installations on fixed price projects.

~~A portion of Carpets~~’ business consists of fixed price projects that are bid for and contracted based on estimated costs. The estimating process includes budgeting for the appropriate amount of materials, labor and overhead. At times, this work can be substantial and as a result Carpets’ ability to estimate costs correctly and its ability to complete the project within budget or satisfaction without material defect is essential. If Carpets is unable to estimate a project properly or unable to complete the project within budget or without material defect, it may suffer losses, which could adversely affect its reputation, business, and financial condition.

~~Carpets’ success depends upon its ability to attract, train and retain highly qualified associates while also controlling its labor costs.~~

~~Carpets~~’ customers expect a high level of customer service and product knowledge from its associates. To meet the needs and expectations of its customers, it must attract, train and retain a large number of highly qualified associates while at the same time controlling labor costs. Its ability to control labor costsbasis 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, ~~and~~ health and other insurance costs ~~as well as the impact of legislation~~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 ~~regulations governing labor relations or healthcare benefits. Also, Carpets competes with other retail businesses for many~~inactions of its ~~associates~~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 ~~hourly positions, and it invests significant resources in training and motivating them~~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 ~~maintain a high level~~be aggrieved nor seek recourse until solicited. Due to the inherent uncertainties of ~~job satisfaction. These positions have historically had high turnover rates, which can lead to increased training and retention costs. There is no assurance that Carpets will~~litigation, Faneuil may not be able to ~~attract or retain highly qualified associates in~~accurately determine the ~~future.~~

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

~~A small number~~impact on it of ~~customers have historically accounted for a substantial portion~~any future adverse outcome of Carpets net revenue. We expect that key customers will continue to account for a substantial portion of Carpets net revenue for the foreseeable future. However, Carpets may lose these customers due to pricing, quality or other various issues.such proceedings. The ~~loss or reduction of, or failure to renew or replace, any significant contracts with any~~ultimate resolution of these ~~customers~~matters could have a material adverse ~~effect~~impact on ~~its business or~~Faneuil’s financial condition, results of ~~operations. For additional information regarding customer concentrations, see~~ ~~“Part I, Item 1. Financial Statements – Note 4. Concentration Risks.”~~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.

~~Historically, Carpets has purchased inventory from a small number of vendors. If these vendors became unable to provide materials promptly, Carpets would~~Additionally, in the event prevailing wage rates increase in the local markets in which Faneuil operates, Faneuil may be required to ~~find alternative vendors. Management estimates they could locate~~concurrently increase the wages paid to its employees to maintain the quality of its workforce and ~~qualify new vendors~~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 ~~approximately two weeks. For additional information regarding vendor concentrations, see~~ ~~“Part I, Item 1. Financial Statements – Note 4. Concentration Risks.”~~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 depends on several factors discussed above, including the ability to protect staff during COVID-19. 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.

~~Phoenix faces intense competition in the printing industry that could decrease demand for its products or force it to lower prices.~~

The printing industry is highly competitive. Phoenix competes directly or indirectly with a number of 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.

C~~ompetitive pressures or the inability to adapt effectively and quickly to a changing competitive landscape could affect Phoenix~~’s prices, its margins or demand for its products and services. If Phoenix is unable to respond timely and appropriately to these competitive pressures, from existing or new competitors, its business could be adversely affected.

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

Economic conditions related to Phoenix, Phoenix’s customers, and ~~in particular, conditions in Phoenix~~’~~s customers~~’ ~~and~~Phoenix’s suppliers,’ ~~businesses,~~ could ~~affect its~~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, and other factors which continue to affect the global economy, ~~Phoenix~~’sPhoenix’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’s products and related services, and ~~Phoenix~~’sPhoenix’s suppliers and customers may not be able to fulfill their obligations to it in a timely fashion.

~~Phoenix~~’~~s educational~~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~~’sPhoenix’s allowance for doubtful accounts receivable. Further, ~~Phoenix~~’sPhoenix’s suppliers may experience similar conditions as its customers, which may impact their viability and their ability to fulfill their obligations to ~~it.~~Phoenix. Negative changes in these or related economic factors could materially adversely affect ~~Phoenix~~’sPhoenix’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 4.5. 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 ~~our~~Phoenix’s failure to perform, the impact of economic weakness and challenges to ~~their~~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’s business. Further, if ~~Phoenix~~’~~s major~~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~~’sPhoenix’s significant customers could result in write-offs or the loss of future business and could have a material adverse effect on ~~Phoenix~~’sPhoenix’s business.

Additionally, Phoenix purchases certain limited grades of paper ~~for the production of their~~to produce book and component products. If ~~our~~Phoenix’s suppliers reduce their supplies or discontinue these grades of paper, wePhoenix may be unable to fulfill ~~our~~its contract obligations, which could have a material adverse effect on ~~Phoenix~~’sits business. See “Part I, Item 1. Financial Statements – Note 4.5. 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 offer 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 consumer acceptance 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.

Fluctuations in the cost and availability of raw materials could increase ~~Phoenix’s~~Phoenix cost of sales.

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

Any material increase in the price of key raw materials could adversely impact Phoenix’s 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~~’sPhoenix’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~~’sPhoenix’s business.

~~Any disruption at Phoenix’s production facility could adversely affect its results of operations.~~

Phoenix is dependent on certain key production facilities and certain specialized machines. Any disruption of production capabilities due to unforeseen events, including mechanical failures, labor disturbances, weather or other force majeure events, at any of its principal facilities could adversely affect its business, results of operations, cash flows, and financial condition. Further, if any of the specialized equipment that Phoenix relies upon to make its products becomes inoperable, Phoenix may experience delays in its ability to fulfill customer orders, which could harm its relationships with its customers.

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

~~Phoenix~~’sPhoenix’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 ~~of Phoenix~~’s 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~~’sPhoenix’s business may be materially and adversely affected.

~~The diversion of resources and management’s attention to the integrations of the Printing Components Business and Color Optics could adversely affect Phoenix’s day-to-day business.~~

The integrations of the Printing Components Business and Color Optics may place a significant burden on Phoenix’s management and internal resources. The diversion of Phoenix management’s attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could adversely affect Phoenix’s financial results.

~~Phoenix may not be able to successfully integrate recently acquired businesses, and the anticipated benefits of the recently acquired businesses may not be realized.~~

Phoenix has completed multiple acquisitions with the expectation that such acquisitions would result in various benefits, including, among other things, complementing Phoenix’s current product offerings and allowing Phoenix to expand and diversify its product offerings by leveraging its existing core competencies. Achieving those anticipated benefits is subject to a number of uncertainties, including whether Phoenix can integrate the acquired businesses in an efficient and effective manner. The integration process could also take longer than Phoenix anticipates and could result in the loss of valuable employees, the disruption of each company’s ongoing businesses, processes and systems or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect Phoenix’s ability to achieve the benefits it anticipates.

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

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, the emergence of new variants, 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, ~~Carpets,~~ and Phoenix. Specifically, our loan ~~facilities include~~facilities’ covenants ~~restricting~~restrict ALJ,’s, Faneuil,’~~s, Carpets~~’ and Phoenix’s from:

~~ALJ~~’~~s, Faneuil~~’~~s, Carpets~~’ ~~and Phoenix~~’~~s respective abilities~~ to borrow under our loan arrangements ~~depend upon their respective abilities to comply~~depends on our compliance with certain covenants and borrowing base requirements. ~~Our and~~A significant deterioration in our ~~subsidiaries~~’ ~~abilities~~profitability and/or cash flow, whether caused by our inability to ~~meet these covenants and requirements may be affected~~grow our businesses in a profitable manner, or by events beyond our control, may cause us to fall out of compliance with such covenants and ~~we or they may not meet these obligations.~~borrowing base requirements. The failure ~~of any of us or our subsidiaries~~ 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, ~~in the event that~~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.

WeThe industries in which our subsidiaries operate are ~~subject~~highly competitive, which could decrease demand for our subsidiaries’ products or force them to ~~claims arising~~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 ~~ordinary course~~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. We have not obtained “key person” insurance for any member of our ~~business that~~senior management team. The loss or interruption of the services of any key employee or the loss of a key subcontractor relationship 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 affecthurt our business, financial condition, ~~and~~cash flow, results of ~~operations.~~

~~We, our officers,~~operations 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. Our subsidiaries Carpets and Faneuil have each been named in lawsuits incidental to its ordinary business, and have filed actions against third parties in connection with such lawsuits. We have carefully analyzed our cases with our counsel, and we believe that we are not subject to any material risk of liability. Nevertheless, 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. For additional information, see “Part II. Item 1, Legal Proceedings.”prospects.

As of ~~December 31, 2017, $105.8~~June 30, 2021, $95.0 million of our current borrowings under the ~~Cerberus~~Blue Torch Term Loan, ~~Cerberus/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. IfSuch rates tend to fluctuate based on general economic conditions, general interest rates, ~~do increase, our debt service obligations on our~~Federal Reserve rates and the supply of and demand for credit in the relevant interbanking market. In recent years, the Fed 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 ~~increase even if the amount borrowed remained the same, resulting in a decrease in~~materially adversely impact our ~~net income. For example, if~~interest expense. If interest rates ~~increased~~changed in the future by 100 basis points, based on our current borrowings as of ~~December 31, 2017, we~~June 30, 2021, our interest expense would ~~incur approximately an additional $1.1~~increase or decrease by $1.0 million per ~~annum~~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, 2017, each~~June 30, 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.

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

We 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 a number of 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.~~

Some of our officers ~~do not devote all of their time to us because of~~may have outside business interests, which could impair our ability to implement our business strategies and lead to potential conflicts of interest.

Jess Ravich, our Executive Chairman, is also the Group Managing Director of The TCW Group, an asset management firm. While we believe that Mr. Ravich is able to devote sufficient amounts of time to our business, the fact that Mr. Ravich has outside business interests could lessen his focus on our business, and jeopardize our ability to implement our business strategies.

~~Additionally, some~~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:

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~~”(“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~~”“ownership change” within the meaning of Section 382 of the ~~Code.~~

~~Section 382 of the~~ Code, ~~contains rules that limit the ability of a company that undergoes an~~ “~~ownership change,~~” which is generally any change in ownership of more than 50% of its stock over a three-year ~~period, to utilize its NOLs and certain built-in losses recognized in years after the ownership change.~~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.

If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, including purchases or sales of stock between 5% stockholders, our ability to use our NOLs and to recognize certain built-in losses would be subject to the limitations of Section 382. 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 last fiscal year, September 30, ~~2017,~~2020, we had net operating loss carryforwards for federal income tax purposes of approximately ~~$154.3~~$133.2 million that start expiring in 2022. Approximately ~~$131.3~~$109.9 million of the 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~~”“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.

~~In May 2009, we announced that our Board of Directors adopted a shareholder rights plan (the~~ “~~Rights Plan~~”) designed to preserve stockholder value and the value of certain tax assets primarily associated with NOLs and built-in losses under Section 382 of the Code. We also amended our certificate of incorporation to add certain restrictions on transfers of our stock that may result in an ownership change under Section 382.

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

The Tax Reform Law contains many significant changes to the U.S. federal income tax laws, the full consequences of which have not yet been determined. As a result of the enacted reduction in the federal corporate income tax rate, we recorded a one-time, non-cash increase to deferred income tax expense of $4.1 million to revalue ALJ’s net deferred tax asset. The one-time revaluation was based on our current knowledge, interpretation and understanding of the Tax Reform Law and its impact to our business. Other aspects of the Tax Reform Law, including, but not limited to the state tax effect of adjustments made to federal taxes and the interest expense deduction limitation may have additional material impacts on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future tax expense. The foregoing items could have a material adverse effect on our business, cash flow, results of operations or financial conditions.

Our internal controls and procedures, including the internal controls and procedures of our subsidiaries, may be subject to deficiencies or weaknesses. Remedying and monitoring internal controls and procedures distracts our management from its operations, planning, oversight and performance functions, which could harm our operating results. Additionally, any failure of our internal controls or procedures could harm our operating results or cause us to fail to meet our obligations to maintain adequate public information or to file periodic reports with the SEC, as applicable.

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 ~~own a majority~~owned approximately 57.9% of our outstanding common stock ~~and~~at August 1, 2021. Jess Ravich, our current Chief Executive ~~Chairman owns~~Officer, beneficially owned approximately ~~36.0%~~49.6% of our ~~outstanding~~ common stock as of ~~December 31, 2017.~~August 1, 2021. 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 are an “emerging growth company,” and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.”

We ~~qualify as an~~ “~~emerging growth company,~~” ~~as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the~~ “~~JOBS Act~~”~~). We shall continue~~do not currently plan to ~~be deemed an emerging growth company until the earliest of:~~

~~(a) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more;~~

~~(b) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant~~pay dividends to ~~an effective registration statement;~~

~~(c) the date on which we have issued more than $1 billion in non-convertible debt, during the previous 3-year period, issued; or~~

As an emerging growth company, we will be subject to reduced public company reporting requirements. As an emerging growth company, we are exempt from Section 404(b) of Sarbanes Oxley. Section 404(a) requires issuers to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. Section 404(b) requires that the registered accounting firm shall, in the same report, attest to and report on the assessment of the effectiveness of the internal control structure and procedures for financial reporting.

As an emerging growth company, we are also exempt from Section 14A (a) and (b) of the Securities Exchange Act of 1934 which require the shareholder approval of executive compensation and golden parachutes.

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

~~An active trading market for our common stock may never develop or be sustained.~~

On May 11, 2016, our stock began trading on The NASDAQ Global Market (“NASDAQ”) under the ticker symbol “ALJJ.” We cannot assure you that an active trading market for our common stock will develop on NASDAQ or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you that a liquid trading market will exist, that you will be able to sell your shares of our common stock when you wish, or that you will obtain your desired price for your sharesholders of our common stock.

We ~~cannot assure you~~do not currently anticipate paying cash 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.

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, 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 net operating loss carryforwards, an indefinite net operating loss carryforward and the elimination of the two-year net operating loss carryback, temporary, immediate expensing for certain new investments and the modification or repeal of many business deductions and credits. We continue to ~~trade on NASDAQ.~~

~~Although our stock began trading on NASDAQ, we cannot assure you that we will be able to maintain NASDAQ’s continued listing requirements.~~ ~~Such a listing helps our stockholders by providing a readily available trading market with current quotations. Without that, stockholders~~examine the impact this tax reform legislation may have ~~a difficult time getting a quote for~~on our business. Notwithstanding the ~~sale or purchase~~reduction in the corporate income tax rate, the overall impact of ~~our stock,~~ the ~~sale or purchase of our stock would likely be made more difficult~~Tax Reform Law is uncertain and the trading volume and liquidity of our stock would likely decline. In that regard, listing on a recognized national trading market such as NASDAQ will also affect our ability to benefit from the use of our operations and expansion plans, including the development of strategic relationships and acquisitions, which are critical to our business and ~~strategy. Any failure~~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 ~~maintain NASDAQ’s continued listing requirements would result in negative publicity and would negatively impact our ability to raise capital in~~ the ~~future.~~U.S. Federal tax laws on them.

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

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 II. Item 1, Legal Proceedings.”

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 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. As of ~~December 31, 2017,~~June 30, 2021, a total of ~~1,914,000~~1,355,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of ~~$3.11.~~$3.56, and 2,907,529 shares of our common stock are issuable pursuant to outstanding warrants at a weighted-average exercise price of $1.11. As of June 30, 2021, ALJ had debt that was convertible into approximately 11,158,000 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.~~option or warrant. If the stock options or warrants are exercised, your share ownership will be diluted. Additionally, options to purchase up to ~~1,370,000~~1,445,000 shares of ALJ common stock are available for grant under our existing equity compensation plans as of ~~December 31, 2017.~~ June 30, 2021.

In addition, our ~~board~~Board of ~~directors~~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 doare an “emerging growth company” and 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 ~~currently plan to pay dividends to holders of our common stock.~~“emerging growth companies” or “smaller reporting companies.”

We doqualify as an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We shall continue to be deemed an emerging growth company until the earliest of:

For so long as we remain an emerging growth company, we are subject to reduced public company reporting requirements, including, but not ~~currently anticipate paying cash dividends~~limited to, not being required to comply with the ~~holders~~auditor attestation requirements of Section 404(b) of Sarbanes Oxley and reduced disclosure obligations regarding executive compensation in our ~~common stock. Accordingly, holders~~periodic reports and proxy statements. We are also exempt

from Section 14A (a) and (b) of ~~our common stock must rely on price appreciation~~the Securities Exchange Act of 1934 which require shareholder approval of executive compensation and golden parachutes for so long 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.~~

~~The anti-takeover provisions of our stockholders rights plan may have the effect of delaying or preventing beneficial takeover bids by third parties.~~we remain an emerging growth company.

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, which allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a ~~stockholder rights plan designed~~result of this election, our financial statements may not be comparable to ~~preserve~~companies that comply with public company effective dates.

We are also 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 ~~value~~most recently completed fiscal year and (A) no public float or (B) a public float of ~~certain tax assets primarily~~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.

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 ~~NOLs~~businesses. Access to clean water and ~~built-in losses under Section 382. At~~reliable energy in the ~~end~~communities where we conduct our business is a priority. Any of our ~~last fiscal year, September 30, 2017, we had approximately $154.3 million~~locations may be vulnerable to the adverse effects of ~~NOLs. The use of such losses~~climate change. Climate related events have the potential to ~~offset federal income tax would be limited if we experience an~~ “~~ownership change~~” ~~under Section 382. This would occur if stockholders owning (or deemed under Section 382 to own) 5% or more~~disrupt our business, including the business of our stock by value increase their collective ownership of the aggregate amount of our stock by more than 50 percentage points over a defined period. The Rights Plan was adopted to reduce the likelihood of an “~~ownership change~~” ~~occurring as defined by Section 382.~~

In connection with the Rights Plan, we declared a dividend of one preferred share purchase right for each share of its common stock outstanding as of the close of business on May 21, 2009. Pursuant to the Rights Plan, any stockholder or group that acquires beneficial ownership of 4.9 percent or more of our outstanding stock (an “~~Acquiring Person~~”) without the approval of our Board of Directors would be subjected to significant dilution of its holdings. Any existing stockholder holding 4.9% or more of our stock will not be considered an Acquiring Person unless such stockholder acquires additional stock; provided that existing stockholders actually known tocustomers, and may cause us to ~~hold 4.9% or more of its stock as of April 30, 2009, are permitted~~experience higher attrition, losses and additional costs to purchase up to an additional 5% of our stock without triggering the Rights Plan. In addition, in its discretion, the Board of Directors may exempt certain persons whose acquisition of securities is determined by the Board of Directors not to jeopardize our deferred tax assets and may also exempt certain transactions. The Rights Plan will continue in effect until May 13, 2019, unless it is terminated or the preferred share purchase rights are redeemed earlier by the Board of Directors.resume operations.

~~While the Rights Plan is intended to protect our NOLs and built-in losses under Section 382, it may also have the effect of delaying or preventing beneficial takeover bids by third parties.~~

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

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.

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

		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)	79

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2335

Item 3	Quantitative and Qualitative Disclosures About Market Risk	3349

Item 4	Controls and Procedures	33

	~~PART II – OTHER INFORMATION~~	34

~~Item 1~~	~~Legal Proceedings~~	34

~~Item 1A~~	~~Risk Factors~~	35

~~Item 2~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	47

~~Item 3~~	~~Defaults Upon Senior Securities~~	48

~~Item 4~~	~~Mine Safety Disclosures~~	48

~~Item 5~~	~~Other Information~~	48

~~Item 6~~	~~Exhibits~~	49

	~~Signatures~~PART II – OTHER INFORMATION	50

Item 1	Legal Proceedings	50

Item 1A	Risk Factors	50

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 3	Defaults Upon Senior Securities	61

Item 4	Mine Safety Disclosures	61

Item 5	Other Information	61

Item 6	Exhibits	62

	Signatures	63

	Purchase Price
Balance Sheet Caption	Allocation
Total current assets	$	1,767
Fixed assets		2,273
Identified intangible asset - supply agreement		4,700
Goodwill		1,408
Total assets		10,148
Total current liabilities		(148	)
Purchase price	$	10,000

Break Out of Components of Purchase Price Consideration
Term loan	$	7,500
Common stock issued		1,500
Cash received from exercise of stock option		1,000
Purchase price	$	10,000

(in thousands)	June 30, 2021		September 30, 2020
Contract assets:
Unbilled revenue ⁽¹⁾	$	885	$	527
Total contract assets	$	885	$	527
Contract liabilities:
Deferred revenue	$	6,054	$	10,875
Accrued rebates and material rights ⁽²⁾		2,865		3,097
Total contract liabilities	$	8,919	$	13,972

(in thousands)	Contract Assets			Contract Liabilities
Balance, September 30, 2020	$	527		$	13,972
Additions to contract assets		1,806			—
Transfer from contract assets to accounts receivable		(1,448	)		—
Revenue recognized		—			(13,773	)
Accrued rebates		—			3,747
Payment of rebates		—			(3,979	)
Cash received from customer		—			8,952
Balance, June 30, 2021	$	885		$	8,919

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

Commercial
MSA		—		239		93		1,424
Non-MSA		2,466		2,778		6,868		7,589
Total Phoenix	$	30,706	$	24,554	$	86,038	$	73,331
Total consolidated revenue, net	$	103,460	$	86,077	$	329,185	$	252,246

(in thousands)
Cash proceeds	$	500
Net assets sold		(1,199	)
Transaction costs		(62	)
Impact of income taxes		—
Total loss on sale	$	(761	)

(in thousands)
Current assets	$	4,615
Intangible assets, net		318
Other long-term assets		740
Current liabilities		(4,099	)
Long-term liabilities		(375	)
Net assets sold	$	1,199

	September 30,
	2020
Assets:
Accounts receivable	$	2,874
Inventories, net		1,221
Prepaid expenses and other current assets		733
Property and equipment, net		598
Intangible assets, net		335
Other long-term assets		51
Total assets of discontinued operations	$	5,812
Liabilities:
Accounts payable	$	1,946
Accrued expenses		1,172
Other current liabilities		233
Total long-term liabilities		606
Total liabilities of discontinued operations	$	3,957

Income Statement Caption	Amount
Revenue	$	8,526
Operating loss		(221	)

	Estimated Future Amortization
2018	$	4,101
2019		5,099
2020		4,800
2021		4,485
2022		4,067
Thereafter		23,946
	$	46,498

(in thousands)	Estimated Future Amortization
Fiscal 2021 (remaining)	$	1,105
Fiscal 2022		4,596
Fiscal 2023		4,596
Fiscal 2024		4,457
Fiscal 2025		4,144
Thereafter		12,818
Total	$	31,716

(in thousands)
Deferred loan costs from Cerberus/PNC Financing Agreement	$	1,171
Prepayment penalties from Cerberus/PNC Financing Agreement		716
Prepayment penalties from equipment financing agreements, capital leases, and other		185
Total loss on debt extinguishment	$	2,072

Year Ending June 30,	Blue Torch Term Loan		Convertible Promissory Notes		Total
2022	$	3,800	$	—	$	3,800
2023		3,800		—		3,800
2024		3,800		6,026		9,826
2025*		83,600		—		83,600
Total	$	95,000	$	6,026	$	101,026

Description	Use of Proceeds	Origination Date	Interest Rate *	Quarterly Payments		Balance at December 31, 2017
Term Loan:
Financing Agreement	Phoenix acquisition	August 2015	7.99% to 8.30%	$	1,969	$	76,766
First Amendment	Color Optics acquisition	July 2016	7.99% to 8.30%		187		8,280
Third Amendment	Printing Components Business acquisition	October 2017	7.99% to 8.30%		141		7,045
Totals				$	2,297	$	92,091
Line of Credit:
Cerberus/PNC Revolver	Working Capital	August 2015	10.00% to 10.25%	$	—	$	8,162
Second Amendment	CMO Business acquisition	May 2017	7.99% to 8.30%		—		5,500
Totals				$	—	$	13,662

Year Ending December 31,	Future Minimum Payments
2018	$	9,188
2019		9,188
2020*		87,377
Total	$	105,753

Year Ending December 31,	Estimated Future Payments
2018	$	3,850
2019		2,766
2020		1,716
2021		535
2022		535
Thereafter		569
Total minimum required payments		9,971
Less: current portion of capital lease obligations		(3,575	)
Less: imputed interest		(666	)
Capital lease obligations, less current portion	$	5,730

Year Ending December 31,	Future Minimum Lease Payments
2018	$	4,722
2019		4,098
2020		2,786
2021		1,861
2022		1,015
Thereafter		6,130
Total	$	20,612

(dollars in thousands)	As of June 30, 2021
Finance Leases:
Property and equipment, at cost	$	1,575
Less accumulated amortization		(392	)
Property and equipment, net	$	1,183
Finance lease obligations, current portion	$	810
Finance lease obligations, less current portion		540
Total finance lease liabilities	$	1,350
Operating Leases:
Operating lease right-of-use assets	$	30,736
Operating lease obligations - current installments	$	5,035
Operating lease obligations, less current installments		34,432
Total operating lease obligations	$	39,467
Weighted average remaining lease term (years):
Finance		1.7
Operating		7.0
Weighted average discount rate:
Finance		0.0	%
Operating		10.6	%

(in thousands)	Statement of Operations Location	Three Months Ended June 30, 2021		Nine Months Ended June 30, 2021
Finance Leases:
Amortization of finance lease assets	Selling, general, and administrative expense	$	189	$	696
Amortization of finance lease assets	Cost of revenue		115		343
Interest on finance lease liabilities	Interest expense		74		162
Total finance lease cost			378		1,201
Operating Leases:
Operating lease cost	Selling, general, and administrative expense		1,724		5,207
Operating lease cost	Cost of revenue		319		957
Variable lease cost	Selling, general, and administrative expense		220		719
Short-term lease cost	Selling, general, and administrative expense		10		28
Total operating lease cost			2,273		6,911
Total lease cost		$	2,651	$	8,112

(In thousands)	Nine Months Ended June 30, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for finance leases	$	162
Operating cash flows used for operating leases - continuing operations		3,750
Financing cash flows used for finance leases		3,987
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		576
Finance leases		—

Year Ending June 30,	Finance Leases		Operating Leases
2022	$	810	$	8,875
2023		540		8,136
2024		—		7,399
2025		—		7,071
2026		—		7,012
Thereafter		—		18,221
Total lease payments		1,350		56,714
Less: imputed interest		—		(17,247	)
Total present value of lease payments	$	1,350	$	39,467

Reported as of June 30, 2021:
Current	$	810	$	5,035
Non-current		540		34,432
Total	$	1,350	$	39,467

	Three Months Ended June 30, 2020
(in thousands)	Faneuil		Phoenix		ALJ			Consolidated
Net revenue	$	61,523	$	24,554	$	—		$	86,077

Segment adjusted EBITDA - continuing operations	$	4,263	$	3,761	$	(906	)	$	7,118
Depreciation and amortization									(4,800	)
Interest expense, net									(2,568	)
Change in fair value of contingent consideration									(900	)
Restructuring and cost reduction initiatives									(649	)
Bank fees accreted to term loans									(300	)
Benefit from income taxes									(250	)
Stock-based compensation									(89	)
Loan amendment expenses									(61	)
Gain on disposal of assets, net									301
Net loss from continuing operations									(2,198	)
Net loss from discontinued operations, net of income taxes									(461	)
Net loss								$	(2,659	)

	Nine Months Ended June 30, 2020
(in thousands)	Faneuil		Phoenix		ALJ			Consolidated
Net revenue	$	178,915	$	73,331	$	—		$	252,246

Segment adjusted EBITDA - continuing operations	$	7,288	$	10,779	$	(2,855	)	$	15,212
Impairment of goodwill									(56,492	)
Depreciation and amortization									(14,675	)
Interest expense, net									(7,976	)
Restructuring and cost reduction initiatives									(1,440	)
Change in fair value of contingent consideration									(900	)
Fair value of warrants issued in connection with loan amendments									(716	)
Loan amendment expenses									(475	)
Stock-based compensation									(312	)
Bank fees accreted to term loans									(300	)
Acquisition-related expenses									(99	)
Interest from legal settlement									200
Gain on disposal of assets, net									299
Recovery of litigation loss									1,256
Benefit from income taxes									1,008
Net loss from continuing operations									(65,410	)
Net loss from discontinued operations, net of income taxes									(3,324	)
Net loss								$	(68,734	)

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

~~3.1~~3.2	~~First Amendment to the~~ Restated Certificate of Incorporation of ALJ Regional Holdings, Inc. as filed with the Secretary of State of the State of Delaware on ~~June 1, 2010~~August 17, 2018	Incorporated by reference to Exhibit ~~3.1~~3.5 to Form ~~10-12B~~10-K as filed ~~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 ~~June 16, 2009~~	~~Incorporated by reference to Exhibit 3.2 to Form 10-12B as filed February 2, 2016.~~

~~3.3~~	~~Certificate of Ownership and Merger of YouthStream Media Networks, Inc. as filed with the Secretary of State of the State of Delaware on October 23, 2006~~	~~Incorporated by reference to Exhibit 3.3 to Form 10-12B as filed February 2, 2016.~~

~~3.4~~	~~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 February 2, 2016.~~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)~~"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


ALJ Regional Holdings, Inc.

~~Date: February 14, 2018~~
	Date: August 12, 2021
	/s/Jess Ravich
	Jess Ravich
	Chief Executive ~~Chairman~~Officer
	(Principal Executive Officer)


Date: ~~February 14, 2018~~August 12, 2021
	/s/Brian Hartman
	Brian Hartman
	Chief Financial Officer
	(Principal Financial Officer)