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

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

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

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~~July 31, 2019 was ~~38,026,435.~~41,921,299.

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, the Company’s ability to retain and attract key employees, acts of war or global terrorism, cyber-attacks and unexpected natural disasters, including climate change related events. 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,			June 30,			September 30,
	2018			2018			2019			2018
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,168		$	2,000		$	2,971		$	2,000
Accounts receivable, net of allowance for doubtful accounts of $232 ($208 at September 30, 2018)		54,275			46,383
Accounts receivable, net of allowance for doubtful accounts of $132 ($208 at September 30, 2018)								43,727			46,383
Inventories, net		7,593			7,656			7,488			7,656
Prepaid expenses and other current assets		6,725			5,504			5,684			5,504
Assets held for sale		—			222			—			222
Total current assets		70,761			61,765			59,870			61,765
Property and equipment, net		72,168			60,162			72,604			60,162
Goodwill		56,372			56,372			56,372			56,372
Intangible assets, net		41,080			42,400			38,530			42,400
Collateral deposits, less current portion		695			695			695			695
Deferred tax asset, net		7,590			7,639			4,013			7,639
Other assets		2,152			2,435			1,652			2,435
Total assets	$	250,818		$	231,468		$	233,736		$	231,468
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	13,922		$	12,692		$	12,306		$	12,692
Accrued expenses		18,665			14,371			15,612			14,371
Income taxes payable		176			204			370			204
Deferred revenue and customer deposits		2,386			3,179			2,716			3,179
Current portion of term loans, net of deferred loan costs		8,926			8,595			9,091			8,595
Current portion of capital lease obligations		2,729			2,909			2,472			2,909
Current portion of workers’ compensation reserve		891			1,000			923			1,000
Other current liabilities		3			1,003			69			1,003
Total current liabilities		47,698			43,953			43,559			43,953
Line of credit, net of deferred loan costs		15,506			8,594			13,163			8,594
Term loans, less current portion, net of deferred loan costs		80,573			74,795			75,904			74,795
Deferred revenue, less current portion		1,113			1,374			2,228			1,374
Workers’ compensation reserve, less current portion		1,285			1,508			1,290			1,508
Capital lease obligations, less current portion		3,796			4,427			2,908			4,427
Other non-current liabilities		8,672			5,289			9,125			5,289
Total liabilities		158,643			139,940			148,177			139,940
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.01 par value; authorized – 100,000 shares; 38,026 and 38,111 shares issued and outstanding at December 31, 2018 and September 30, 2018, respectively		380			381
Common stock, $0.01 par value; authorized – 100,000 shares; 38,026 and 38,111 shares issued and outstanding at June 30, 2019 and September 30, 2018, respectively								380			381
Additional paid-in capital		279,512			279,575			279,680			279,575
Accumulated deficit		(187,717	)		(188,428	)		(194,501	)		(188,428	)
Total stockholders’ equity		92,175			91,528			85,559			91,528
Total liabilities and stockholders’ equity	$	250,818		$	231,468		$	233,736		$	231,468

	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
	2018			2017			2019			2018			2019			2018
Net revenue	$	93,784		$	94,954		$	84,225		$	89,660		$	266,005		$	279,719
Costs and expenses:
Cost of revenue		72,827			74,910			67,030			67,778			207,596			216,927
Selling, general and administrative expense		17,466			19,538			18,037			21,058			52,510			59,418
Disposal of assets and other gain		(223	)		(207	)		2			59			(221	)		(173	)
Total operating expenses		90,070			94,241			85,069			88,895			259,885			276,172
Operating income		3,714			713
Operating (loss) income								(844	)		765			6,120			3,547
Other expense:
Interest expense, net		(2,715	)		(2,660	)		(2,701	)		(2,526	)		(8,041	)		(7,979	)
Total other expense		(2,715	)		(2,660	)		(2,701	)		(2,526	)		(8,041	)		(7,979	)
Income (loss) before income taxes		999			(1,947	)
Loss before income taxes								(3,545	)		(1,761	)		(1,921	)		(4,432	)
Provision for income taxes		(288	)		(3,371	)		(3,662	)		(1,135	)		(4,152	)		(4,122	)
Net income (loss)	$	711		$	(5,318	)
Basic earnings (loss) per share of common stock	$	0.02		$	(0.14	)
Diluted earnings (loss) per share of common stock	$	0.02		$	(0.14	)
Weighted average shares of common stock outstanding:
Basic		38,047			37,577
Diluted		38,097			37,577
Net loss							$	(7,207	)	$	(2,896	)	$	(6,073	)	$	(8,554	)
Loss per share of common stock–basic and diluted							$	(0.19	)	$	(0.08	)	$	(0.16	)	$	(0.23	)
Weighted average shares of common stock outstanding– basic and diluted								38,026			37,921			38,034			37,801

	December 31,						Nine Months Ended June 30,
	2018			2017			2019			2018
Operating activities
Net income (loss)	$	711		$	(5,318	)
Adjustments to reconcile net income (loss) to cash used for operating activities:
Net loss							$	(6,073	)	$	(8,554	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization - cost of revenue		1,159			1,399			3,493			4,168
Depreciation and amortization - selling, general and administrative expense		3,287			3,434			11,388			10,233
Stock-based compensation expense		185			293			556			812
Provision for bad debts		26			156
Provision for obsolete inventory		42			105
Provision for bad debts and obsolete inventory								68			232
Deferred income taxes		49			3,252			3,626			3,883
Litigation loss								—			2,910
Disposal of assets and other gain		(223	)		(207	)		(221	)		(173	)
Amortization of deferred loan costs		238			307			555			978
Changes in operating assets and liabilities:
Accounts receivable, net		(7,918	)		(6,240	)		2,685			3,936
Inventories, net		21			874			71			2,612
Prepaid expenses, collateral deposits, and other current assets		(1,221	)		(1,816	)		(180	)		474
Other assets		283			664			783			1,393
Accounts payable		1,230			69			(386	)		(619	)
Accrued expenses		1,493			1,064			1,539			(205	)
Income tax payable		(28	)		(195	)		166			(195	)
Deferred revenue and customer deposits		(1,054	)		(1,880	)		391			(3,291	)
Other current liabilities		(109	)		501			(11	)		(137	)
Other liabilities		(340	)		(154	)		(954	)		(535	)
Cash used for operating activities		(2,169	)		(3,692	)
Cash provided by operating activities								17,496			17,922
Investing activities
Acquisitions, net of cash acquired		(1,000	)		(9,000	)		(1,000	)		(9,000	)
Proceeds from sales of assets		308			343			317			408
Capital expenditures		(4,883	)		(980	)		(15,096	)		(3,100	)
Cash used for investing activities		(5,575	)		(9,637	)		(15,779	)		(11,692	)
Financing activities
Net proceeds on line of credit		6,868			8,162
Payments on term loan		(2,743	)		(6,427	)
Net proceeds (payments) on line of credit								4,588			(2,500	)
Payments on term loans								(7,477	)		(11,152	)
Proceeds from term loan		5,000			7,500			5,000			7,500
Proceeds from issuance of common stock		—			1,500			—			1,500
Proceeds from stock option exercise								—			278
Debt and common stock issuance costs		(402	)		(332	)		(552	)		(482	)
Payments on capital leases		(811	)		(677	)		(2,305	)		(2,025	)
Cash provided by financing activities		7,912			9,726
Cash used for financing activities								(746	)		(6,881	)
Change in cash and cash equivalents		168			(3,603	)		971			(651	)
Cash and cash equivalents at beginning of period		2,000			5,630			2,000			5,630
Cash and cash equivalents at end of period	$	2,168		$	2,027		$	2,971		$	4,979
Supplemental Disclosures of Cash Flow Information:
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Taxes	$	372		$	599		$	841		$	883
Interest	$	2,359		$	2,205		$	7,399		$	6,894
Non-cash investing and financing activities:
Capital equipment purchases financed with capital leases	$	—		$	2,734		$	349		$	2,914
Capital equipment purchases financed with term loan	$	4,060		$	—		$	4,060		$	—
Construction in process funded by landlord tenant improvement allowance	$	3,500		$	—		$	4,572		$	—
Construction in process not yet paid for	$	2,700		$	—

	Three Months Ended June 30,						Nine Months Ended June 30,
	2019			2018			2019			2018
Common stock
Balance, beginning of period	$	380		$	379		$	381		$	371
Common stock issued		—			—			—			8
Common stock retired		—			—			(1	)		—
Balance, end of period	$	380		$	379		$	380		$	379
Additional paid in capital
Balance, beginning of period	$	279,596		$	278,881		$	279,575		$	276,478
Common stock issued, net of issuance costs		—			5			—			2,050
Stock-based compensation expense - options		84			142			252			500
Common stock retired		—			—			(147	)		—
Balance, end of period	$	279,680		$	279,028		$	279,680		$	279,028
Accumulated deficit
Balance, beginning of period	$	(187,294	)	$	(186,754	)	$	(188,428	)	$	(181,096	)
Net loss		(7,207	)		(2,896	)		(6,073	)		(8,554	)
Balance, end of period	$	(194,501	)	$	(189,650	)	$	(194,501	)	$	(189,650	)
Total stockholders' equity	$	85,559		$	89,757		$	85,559		$	89,757

ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively in this Report as “ALJ,” the “Company” or “we”) is a holding company. ALJ’s primary assets as of ~~December 31, 2018~~June 30, 2019 were all of the outstanding capital stock of the following companies:

ALJ has organized its business and corporate structure along the following business segments: Faneuil, Carpets, and Phoenix. ALJ is reported as corporate overhead.

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, for interim financial information and with the instructions to the Securities and Exchange Commission, or SEC, 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 for the years ended September 30, 2018 and 2017 contained in its Annual Report on Form 10-K, filed with the SEC on December 17, 2018.

The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes. Significant estimates and assumptions by management are used for, but are not limited to, revenue recognition, including estimated customer lives, determining the fair value 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 loss as a result of loss contingencies, ~~customer lives,~~ the allowance for doubtful accounts and inventory reserves, and calculation of insurance reserves. Actual results may differ materially from estimates. The interim 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 results of operations and financial position for the interim period. The results of operations for the three and nine months ended ~~December 31, 2018,~~June 30, 2019, 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, 2018 and 2017 contained in its Annual Report on Form 10-K, filed with the SEC on December 17, 2018. There were no material changes to ALJ’s significant accounting policies during the ~~three~~nine months ended ~~December 31, 2018.~~June 30, 2019.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” to supersede nearly all existing revenue recognition guidance under 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 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: (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. 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. In July 2017, ALJ formed a revenue recognition project team (“Revenue Team”), which included an outside revenue recognition consultant. The Revenue Team completed a revenue recognition adoption roadmap that includes three phases:

Because of the nature of the work that remains, ALJ is unable to reasonably estimate the impact of adoption on its consolidated financial statements. However, ALJ anticipates the adoption of ASU 2014-09 will expand its revenue-related disclosures. ~~ALJ’s evaluation of the financial impact and related disclosure of the new standard will likely extend over the next 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. 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. The Company is currently evaluating the other effects the adoption of ASU 2016-02 will have on its consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This amendment expands the scope of the FASB’s Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 will be effective for ALJ on October 1, 2019. ALJ does not anticipate the adoption of ASU 2018-07 to significantly impact its consolidated financial statements.

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 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.

On October 2, 2017 (the “Printing Components Business 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 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, of which $1.0 million was withheld from the consideration paid at closing and paid in October 2018.

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~~(as amended from time to time, 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. See Note 7.

The following schedule reflects the estimated fair value of assets acquired and liabilities assumed on the Printing Components Business Purchase Date and the purchase price details:

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. There were no adjustments to the purchase price allocations during the measurement period, which expired one year from the acquisition date.

~~During the three months ended December 31, 2018 and 2017, the~~The Printing Components Business recorded ~~$3.1~~$3.2 million and ~~$4.5~~$10.2 million of net revenue during the three and nine months ended June 30, 2019, respectively, and $3.1 million and $11.2 million during the three and nine months ended June 30, 2018, respectively. 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, and therefore, not disclosed.

During the three and nine months ended ~~December 31, 2017,~~June 30, 2018, the Company incurred $0 and $0.1 million of acquisition-related expenses in connection with the Printing Components Business acquisition, which were expensed to selling, general and administrative expense.

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 any 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 percentage of Faneuil net revenue derived from its significant customers was as follows:

	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
	2018			2017			2019			2018			2019			2018
Customer A		16.2	%		14.1	%		14.6	%		16.4	%		14.0	%		15.1	%
Customer B		13.0			14.1			11.3			11.8			10.6			10.5
Customer C							**			**				11.8			11.8

Trade receivables from these customers totaled ~~$11.4~~$5.9 million on ~~December 31, 2018.~~June 30, 2019. As of ~~December 31, 2018,~~June 30, 2019, 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.

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

	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
	2018			2017			2019			2018			2019			2018
Customer A		29.3	%		26.8	%		33.6	%		19.9	%		28.9	%		20.5	%
Customer B		27.4			24.9			24.5			27.9			28.4			28.3
Customer C		19.4			25.1			21.7			19.3			21.3			21.8

Trade receivables from these customers totaled ~~$2.4~~$2.3 million on ~~December 31, 2018.~~June 30, 2019. As of ~~December 31, 2018,~~June 30, 2019, 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 of Phoenix net revenue derived from its significant customers was as follows:

	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
	2018			2017			2019			2018			2019			2018
Customer A		19.0	%		16.1	%		22.1	%		16.8	%		20.1	%		17.1	%
Customer B		17.8			18.9			17.2			16.7			19.8			18.0
Customer C		12.3			10.5			13.4			11.4			11.4		**
Customer D		12.2		**				13.0			10.9			12.1		10.4

Trade receivables from these customers totaled ~~$8.5~~$6.4 million on ~~December 31, 2018.~~June 30, 2019. As of ~~December 31, 2018,~~June 30, 2019, 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 customers.

ALJ did not have any suppliers that represented more than 10% of consolidated inventory purchases. However, two of ALJ’s segments had suppliers that represented more than 10% of their respective 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,
	2018			2017			2019			2018		2019			2018
Supplier A		24.3	%		23.5	%		20.9	%	**			17.5	%	**
Supplier B	13.8			**			16.7				21.9	20.7				19.2
Supplier C	11.4			12.6			11.9				22.2	14.6				22.7
Supplier D	10.7			**			**				14.4	**				13.9
Supplier E	**			13.9

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~~one significant ~~suppliers~~supplier was ~~as follows:~~19.6% and 23.8% for the three and nine months ended June 30, 2019, respectively, and 22.9% and 27.5% for the three and nine months ended June 30, 2018, respectively.

If ~~these suppliers were~~this supplier was 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:

	December 31,			September 30,			June 30,			September 30,
(in thousands)	2018			2018			2019			2018
Accounts receivable	$	53,088		$	42,815		$	42,199		$	42,815
Unbilled receivables		1,419			3,776			1,660			3,776
Accounts receivable		54,507			46,591			43,859			46,591
Less: allowance for doubtful accounts		(232	)		(208	)		(132	)		(208	)
Accounts receivable, net	$	54,275		$	46,383		$	43,727		$	46,383

	December 31,			September 30,			June 30,			September 30,
(in thousands)	2018			2018			2019			2018
Raw materials	$	4,502		$	4,017		$	4,008		$	4,017
Semi-finished goods/work in process		2,012			2,298			2,401			2,298
Finished goods		1,340			1,566			1,402			1,566
Inventories		7,854			7,881			7,811			7,881
Less: allowance for obsolete inventory		(261	)		(225	)		(323	)		(225	)
Inventories, net	$	7,593		$	7,656		$	7,488		$	7,656

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

	December 31,			September 30,			June 30,			September 30,
(in thousands)	2018			2018			2019			2018
Leasehold improvements							$	31,371		$	9,334
Machinery and equipment	$	24,937		$	24,900			29,918			24,900
Construction and equipment in process		21,599			10,627
Building and improvements		17,035			16,459			17,035			16,459
Software		16,017			15,749			16,039			15,749
Computer and office equipment		11,776			11,319			12,700			11,319
Leasehold improvements		9,466			9,334
Land		9,267			9,267			9,267			9,267
Furniture and fixtures		6,518			3,834			7,302			3,834
Construction and equipment in process								1,249			10,627
Vehicles		342			342			375			342
Property and equipment		116,957			101,831			125,256			101,831
Less: accumulated depreciation and amortization		(44,789	)		(41,669	)		(52,652	)		(41,669	)
Property and equipment, net	$	72,168		$	60,162		$	72,604		$	60,162

Property and equipment depreciation and amortization expense, including amounts related to capitalized leased assets, was ~~$3.1~~$4.4 million and ~~$3.5~~$3.3 million for the three months ended ~~December 31,~~June 30, 2019 and 2018, respectively, and ~~2017,~~$11.0 million and $10.3 million for the nine months ended June 30, 2019 and 2018, respectively.

The following table summarizes goodwill by reportable segment at the end of each reporting period:

	December 31,		September 30,		June 30,		September 30,
(in thousands)	2018		2018		2019		2018
Faneuil	$	21,276	$	21,276	$	21,276	$	21,276
Carpets		2,555		2,555		2,555		2,555
Phoenix		32,541		32,541		32,541		32,541
Goodwill	$	56,372	$	56,372	$	56,372	$	56,372

The following table summarizes identified intangible assets at the end of each reporting period:

	December 31, 2018							September 30, 2018							June 30, 2019							September 30, 2018
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Customer relationships	$	34,400	$	(11,050	)	$	23,350	$	34,400	$	(10,329	)	$	24,071	$	34,400	$	(12,491	)	$	21,909	$	34,400	$	(10,329	)	$	24,071
Trade names		10,760		(1,681	)		9,079		10,760		(1,573	)		9,187		10,760		(1,896	)		8,864		10,760		(1,573	)		9,187
Supply agreements/contract backlog		10,358		(2,190	)		8,168		10,358		(1,836	)		8,522		10,358		(2,898	)		7,460		10,358		(1,836	)		8,522
Internal software																580		(551	)		29		580		(479	)		101
Non-compete agreements		2,330		(1,924	)		406		2,330		(1,811	)		519		520		(252	)		268		2,330		(1,811	)		519
Internal software		580		(503	)		77		580		(479	)		101
Totals	$	58,428	$	(17,348	)	$	41,080	$	58,428	$	(16,028	)	$	42,400	$	56,618	$	(18,088	)	$	38,530	$	58,428	$	(16,028	)	$	42,400

Intangible asset amortization expense was $1.3 million and $1.4 million for the three months ended ~~December 31,~~June 30, 2019 and 2018, respectively, and ~~2017,~~$3.9 million and $4.1 million for the nine months ended June 30, 2019 and 2018, respectively.

The following table presents expected future amortization expense for the remainder of fiscal 2019 and yearly thereafter:

(in thousands)	Estimated Future Amortization		Estimated Future Amortization
Remainder of Fiscal 2019	$	3,780	$	1,230
Fiscal 2020		4,800		4,800
Fiscal 2021		4,485		4,485
Fiscal 2022		4,067		4,067
Fiscal 2023		4,067		4,067
Thereafter		19,881		19,881
Total	$	41,080	$	38,530

The following table summarizes ALJ’s line of credit, term loan, and equipment financing at the end of each reporting period:

~~The following table summarizes ALJ’s line of credit, term loan, and equipment financing agreement at the end of each reporting period:~~

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

	December 31,		September 30,		June 30,		September 30,
(in thousands)	2018		2018
(in thousands)					2019		2018
Accrued compensation and related taxes	$	8,345	$	7,275	$	7,138	$	7,275
Call center buildouts**		5,400		2,700
Professional fees and other						2,642		1,123
Call center buildout						2,099		2,700
Rebates payable		2,004		1,491		1,485		1,491
Legal and other		927		1,123
Interest payable		797		676		763		676
Medical and benefit-related payables		687		609		730		609
Accrued board of director fees		260		130		521		130
Deferred rent		156		174		120		174
Sales tax payable		89		193		114		193
Total accrued expenses	$	18,665	$	14,371	$	15,612	$	14,371

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

Carpets. Effective October 1, 2018, Carpets changed from a fully insured plan for workers’ compensation to a self-insured plan for claims up to $200,000 per incident and maintains insurance coverage for costs above the specified limit.

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

~~ALJ computed~~The following table summarizes basic and diluted ~~earnings (loss)~~loss per share of common stock for each period ~~as follows:~~presented:

ALJ computed basic ~~earnings (loss)~~loss per share of common stock using net ~~income (loss)~~loss divided by the weighted average number of shares of common stock outstanding during the period. ALJ computed diluted ~~earnings (loss)~~loss per share of common stock using net ~~income (loss)~~loss 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 ~~1.5~~less than 1.7 million and ~~1.9~~1.6 million shares of common stock were not ~~included~~considered in calculating ALJ’s diluted ~~earnings~~loss per common share ~~calculation~~ for the three and nine months ended ~~December 31,~~June 30, 2019, and the three and nine months ended June 30, 2018, ~~and 2017,~~ respectively, as their effect would be anti-dilutive.

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,” and together with the Cerberus Term Loan, the “Cerberus Debt”). ALJ has subsequently entered into four amendments to the Financing Agreement.

On November 28, 2018, ALJ entered into the Fourth Amendment (the “Fourth Amendment”) to the Financing Agreement. The Fourth Amendment added a $5.0 million term loan, reduced the maximum availability of the Cerberus/PNC Revolver by $5.0 million to $25.0 million from $30.0 million, extended the maturity date to December 1, 2023 (“Amended Maturity Date”), and effective December 31, 2018, reduced quarterly term loan amortization payments from $2.3 million to $2.1 million. The Fourth Amendment amends certain terms and covenants to support the continued growth of the Company and the associated cash required to ~~buildout~~build out three new customer call centers to position Faneuil for anticipated increased contract awards, as summarized below:

In addition, the Fourth Amendment requires the Company, under certain circumstances, to secure not less than $5.0 million of equity or subordinated debt financing, ~~on or before February 28, 2019,~~ which will be used to pay down the Cerberus Term Loan (the “Alternative Financing Requirement”). See Backstop Letter Agreement below.

The Financing Agreement and amendments thereto are summarized below (in thousands):

Description	Use of Proceeds	Origination Date	Interest Rate *	Quarterly Payments		Balance at December 31, 2018		Use of Proceeds	Origination Date	Interest Rate *	Quarterly Payments		Balance at June 30, 2019
Term Loan:
Financing Agreement	Phoenix acquisition	August 2015	9.00% to 9.28%	$	1,610	$	68,502	Phoenix acquisition	August 2015	9.00% to 9.28%	$	1,610	$	65,283
First Amendment	Color Optics acquisition	July 2016	9.00% to 9.28%		175		7,461	Color Optics acquisition	July 2016	9.00% to 9.28%		175		7,111
Third Amendment	Printing Components Business acquisition	October 2017	9.00% to 9.28%		151		6,403	Printing Components Business acquisition	October 2017	9.00% to 9.28%		151		6,102
Fourth Amendment	Working capital	November 2018	9.00% to 9.28%		114		4,865	Working capital	November 2018	9.00% to 9.28%		114		4,637
			Totals	$	2,050	$	87,231			Totals	$	2,050	$	83,133
Line of Credit:
Cerberus/PNC Revolver (includes Second Amendment)	Working capital	August 2015	11.00% to 11.25%	$	—	$	15,607	Working capital	August 2015	11.00% to 11.25%	$	—	$	13,327

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 annual audited financial statements. During December 2018 and December 2017, ALJ made ECF payments of $0.3 million and $4.1 million, respectively. During the ~~three~~nine months ended ~~December 31, 2018,~~June 30, 2019, ALJ made mandatory payments of $0.4 million as a result of receiving proceeds from sales of assets. A final balloon payment is due on the Amended Maturity Date. There is a prepayment penalty equal to 3%, 2%, and 1% if the Cerberus Term Loan is repaid within the first, second, and third year anniversary of the Fourth Amendment. 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, 2018,~~June 30, 2019, ALJ was in compliance with all debt covenants and had unused borrowing capacity of ~~$6.4~~$8.5 million.

On November 28, 2018, in connection with the Fourth Amendment, the Company entered into a Backstop Letter Agreement with Jess Ravich, the Company’s Executive Chairman. Pursuant to the Backstop Letter Agreement, Mr. Ravich will provide a “backstop” that would enable the Company to satisfy the Alternative Financing Requirement by agreeing, if the Company is unable to locate alternative financing on terms, conditions and timing reasonably acceptable to it, and if required by the Collateral Agent. In consideration of Mr. Ravich entering into such backstop arrangement, the Company’s Audit Committee and independent directors reviewed, approved and agreed to a backstop fee package, pursuant to which the Company would (i) pay to Mr. Ravich’s trust a one-time backstop fee of $0.1 million, and (ii) if the purchase of such subordinated debt is required by the Collateral Agent and the Company has failed to secure a financing alternative more advantageous to the Company, issue to Mr. Ravich’s trust a five-year warrant (the “Warrant”) to purchase 1.5 million shares of ALJ common stock at an exercise price equal to the average closing price of the Company’s common stock as reported on The Nasdaq Stock Market for the 30 trading days preceding the warrant issuance date. In February 2019, the Company determined that the possibility of the conditions set forth in the Backstop Letter Agreement requiring the issuance of the Warrant by the Company to Mr. Ravich’s trust were remote.

Initially, ALJ recorded the backstop fee and other fees incurred in connection with the Backstop Letter Agreement, which totaled approximately $0.1 million, as a current ~~asset until~~asset. ALJ expensed the ~~Company satisfies~~associated fees, which totaled approximately $0.1 million, to selling, general and administrative expense during the ~~Alternative Financing Requirement.~~nine months ended June 30, 2019 as the likelihood that ALJ would be required to issue the Warrant was deemed remote.

ALJ accounted for the Fourth Amendment as a debt modification pursuant to ASC 470, Debt. During the ~~three~~nine months ended ~~December 31, 2018~~June 30, 2019, ALJ paid $0.6 million of legal and other fees, of which $0.4 million were added to deferred loan costs and are being amortized to interest expense through the Amended Maturity Date. The remaining $0.2 million were expensed to selling, general and administrative expense.

During the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2018, in connection with the Third Amendment to the Financing Agreement, ALJ paid legal and other fees totaling $0.3 million, which were added to deferred loan costs and are being amortized to interest expense through the Amended Maturity Date.

Pursuant to the ~~second amendment~~Second Amendment to the Financing Agreement, ALJ is required to pay a fee (a “Contingent Payment”) in each of three consecutive annual periods ~~commencing~~which began on May 27, 2018, if at any time during each annual period there are any amounts outstanding on the Cerberus/PNC ~~Revolver (“Contingent Payments”).~~Revolver. 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. During May 2018, ALJ paid the first Contingent Payment, which was added to deferred loan costs and was amortized to interest expense through April 30, 2019. During May 2019, ALJ paid the second Contingent Payment, which was added to deferred loan costs and is being amortized to interest expense through April 30, ~~2019.~~2020.

In July 2019, ALJ entered into the Fifth Amendment to the Financing Agreement. See Note 13.

In December 2018, Phoenix purchased a Heidelberg Press for $4.1 million pursuant to an equipment financing agreement ~~(“Equipment~~(the “Equipment Financing”). The ~~EFA~~Equipment Financing term is 36 months, requires monthly principal and interest payments, accrues interest at 4.94% per year, and is secured by the Heidelberg Press.

Estimated future minimum principal payments for the Cerberus Debt and Equipment Financing are as follows (in thousands):

Year Ending December 31,	Equipment Financing		Cerberus Debt			Total
2019	$	1,177	$	8,200		$	9,377
Year Ending June 30,								Equipment Financing		Cerberus Debt		Total
2020		1,352		8,200			9,552	$	1,319	$	8,200	$	9,519
2021		1,531		8,200			9,731		1,386		8,200		9,586
2022		—		8,200			8,200		719		8,200		8,919
2023		—		70,038	*		70,038		—		8,200		8,200
2024*									—		63,660		63,660
Total	$	4,060	$	102,838		$	106,898	$	3,424	$	96,460	$	99,884

Faneuil and Phoenix lease equipment under non-cancelable capital leases. As of ~~December 31, 2018,~~June 30, 2019, future minimum payments under non-cancelable capital leases with initial or remaining terms of one year or more are as follows (in thousands):

Year Ending December 31,	Estimated Future Payments
2019	$	2,918
Year Ending June 30,				Estimated Future Payments
2020		2,193		$	2,650
2021		728			1,610
2022		535			647
2023		498			535
Thereafter		71
2024					301
Total minimum required payments		6,943			5,743
Less: current portion of capital lease obligations		(2,729	)		(2,472	)
Less: imputed interest		(418	)		(363	)
Capital lease obligations, less current portion	$	3,796		$	2,908

The Company leases real estate, equipment, and vehicles under non-cancellable operating leases. As of June 30, 2019, future minimum rental commitments and sublease income under non-cancellable leases were as follows (in thousands):

The Company leases real estate, equipment, and vehicles under non-cancellable operating leases. As of December 31, 2018, future minimum rental commitments under non-cancellable 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. The agreements also provide for 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, 2018,~~June 30, 2019, termination payments related to base salary and medical premiums totaled $1.2 million. In July 2019, ALJ entered into a new employment agreement. See Note 13.

As part of Faneuil’s normal course of operations, certain customers require surety bonds guaranteeing the performance of a contract. As of ~~December 31, 2018,~~June 30, 2019, 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 ~~$29.3~~$25.8 million. To date, Faneuil has not made any non-performance payments to any of its sureties.

The Company had letters of credit totaling ~~$3.0~~$3.6 million outstanding as of ~~December 31, 2018.~~

At December 31, 2018 Faneuil had commitments that totaled $2.5 million to buildout three new call centers. Faneuil expects to complete all three call centers within the next 12 months. See related accrued liabilities at Note 5.June 30, 2019.

On September 22, 2016, Faneuil filed a complaint against 3M Company (“3M”) in the Circuit Court for the City of Richmond, ~~Virginia.~~Virginia (the “Richmond Circuit Court”). The dispute arose out of a subcontract entered into between 3M and Faneuil in relation to a toll road project in Portsmouth, Virginia. In its complaint, Faneuil 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 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 alleged it incurred approximately $3.2 million in damages payable to ERC as a result of Faneuil’s conduct and sought indemnification of an additional $10.0 million in damages incurred as a result of continued performance under its contract with ERC.

The matter was tried in a bench trial from April 30, 2018 through May 2, 2018. On May 15, 2018, the Richmond Circuit Court ~~for the City of Richmond, Virginia (the “Richmond Circuit Court”)~~ issued its opinion, which dismissed both Faneuil’s complaint and 3M’s counterclaim with prejudice. No monetary damages were awarded to either Faneuil or 3M. As a result of 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 with selling, general and administrative expense during the year ended September 30, 2018. Faneuil has filed an appeal of the Richmond Circuit Court’s ~~judgment and the~~judgment. The parties ~~are briefing~~have fully briefed the merits of Faneuil’s appeal and are waiting for the court to set the date for oral argument at this time.

On July 31, 2017, plaintiff Donna Marshall (“Marshall”), filed a proposed class action lawsuit in the Superior Court of the State of California for the County of Sacramento against Faneuil and ALJ. Marshall, a previously terminated Faneuil employee, alleges various California state law employment-related claims against Faneuil. Faneuil has answered the complaint and removed the matter to the United States District Court for the Eastern District of California; however, Marshall filed a motion to remand the case back to state ~~court. The motion to remand~~court, which has been ~~fully briefed and argued and remains pending before~~granted. In connection with the ~~court.~~above, an amended complaint was filed by certain plaintiffs to add a claim for penalties under the California Private Attorneys General Act. The case is in early discovery at this time. Faneuil believes this action is without merit and intends to defend it vigorously.

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. The court awarded $0.7 million in attorney’s fees and overruled Faneuil’s objections to the recommendation of the magistrate judge relating to that amount. Neither party appealed the decision. All amounts were paid during ALJ’s fiscal year ended September 30, 2018.

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 the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company concluded as of ~~December 31, 2018~~June 30, 2019 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

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.

Common Stock Activity during the ~~Three~~Nine Months ~~Ended December 31, 2018~~ended June 30, 2019

ALJ’s common stock activity for the nine months ended June 30, 2019 consisted of the following:

Common Stock Activity during the ~~Three~~Nine Months ~~Ended December 31, 2017~~ended June 30, 2018

ALJ’s common stock activity for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2018 consisted of the following:

At ~~December 31, 2018,~~June 30, 2019, ALJ had approximately ~~$0.6~~$0.4 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 ~~1.8~~1.3 years.

Stock Option Awards. ALJ did not grant any options during the ~~three~~nine months ended ~~December 31, 2018.~~June 30, 2019. During the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2018, ALJ granted an option to purchase 10,000 shares of ALJ common stock with a total estimated fair value of 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 years, weighted average expected volatility of 48.4%, expected dividend yield of 0%, and weighted-average risk-free interest rate of 2.1%.

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) was less than $0.1 million at ~~December 31, 2018.~~June 30, 2019.

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 $0.1 million for both the three months ended ~~December 31,~~June 30, 2019 and 2018, and ~~2017.~~$0.3 million for both the nine months ended June 30, 2019 and 2018.

ALJ recorded a non-cash deferred income tax expense of $3.6 million during the three and nine months ended June 30, 2019, the majority of which was to increase its deferred tax asset valuation allowance as a result of reduced taxable income projections. The remaining provision for income taxes ~~for both~~during the three and nine months ended June 30, 2019, and the three months ended ~~December 31,~~June 30, 2018 ~~and 2017 as~~was a result of generating state taxable income. ~~Additionally,~~ ALJ’s provision for income taxes for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2018 was impacted by the United States Tax Reform as discussed below.

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, 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~~ended December 31, 2018. Subsequent to December 31, 2018, the federal corporate tax rate ~~will be~~became 21%.

Interest Expense Limitation. Effective January 1, 2018, 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.

Alternative Minimum Tax. Effective January 1, 2018, the Tax Reform Law eliminates the corporate alternative minimum tax (“AMT”) and provides for refunds of all remaining AMT credits. The Company has evaluated its AMT carryover refund and continues to classify such refund as a deferred tax asset in the balance sheet at ~~December 31, 2018.~~June 30, 2019.

Pursuant to ASC Topic 740-10, “Income Taxes,” ALJ recognized the effect of the Tax Reform Law on deferred tax assets and liabilities during its first fiscal quarter of 2018, which 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 income tax expense of $4.1 million to revalue ALJ’s net deferred tax asset. The resulting $4.1 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, ~~has~~had a contract with Faneuil to provide call center services for Harland Clarke’s banking-related products. The contract ~~renews annually every April.~~completed in March 2019. Faneuil recognized revenue from Harland Clarke totaling $0 and $0.1 million for ~~both~~ the three and nine months ended ~~December 31,~~June 30, 2019, and $0.1 million and $0.2 million for the three and nine months ended June 30, 2018, ~~and 2017.~~respectively. The associated cost of revenue was $0 and $0.1 million for the ~~both~~three and nine months ended June 30, 2019, and $0.1 million and $0.3 million for the three and nine months ended ~~December 31,~~June 30, 2018, ~~and 2017.~~respectively. All revenue from Harland Clarke contained similar terms and conditions as those found in other transactions of this nature entered into by Faneuil. Total accounts receivable from Harland Clarke was ~~less than~~$0 and $0.1 million at ~~both December 31, 2018~~June 30, 2019 and September 30, ~~2018.~~2018, respectively.

As discussed in Note 1, ALJ has organized its business along three 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 Executive Chairman. 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 depreciation and amortization, interest expense, litigation loss, restructuring expenses, lease payments in anticipation of facility shutdown, loan amendment fees, stock-based compensation, acquisition-related expenses, disposal of fixed assets and other gain, provision for income taxes, 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.

21The following tables present ALJ’s segment information for the three and nine months ended June 30, 2019 and 2018:

	Three Months Ended June 30, 2019
(in thousands)	Faneuil		Carpets		Phoenix		ALJ			Total
Net revenue	$	44,773	$	12,763	$	26,689	$	—		$	84,225

Segment adjusted EBITDA	$	518	$	478	$	4,881	$	(712	)	$	5,165
Depreciation and amortization											(5,598	)
Interest expense											(2,701	)
Lease payments in anticipation of facility shutdown											(73	)
Stock-based compensation											(185	)
Restructuring expenses											(66	)
Acquisition-related expenses											(85	)
Disposal of assets and other gain											(2	)
Provision for income taxes											(3,662	)
Net loss										$	(7,207	)

~~The following tables present ALJ’s segment information for the three months ended December 31, 2018 and 2017:~~

	Three Months Ended December 31, 2018												Nine Months Ended June 30, 2019
(in thousands)	Faneuil		Carpets		Phoenix		ALJ			Total
(in thousands)													Faneuil		Carpets		Phoenix		ALJ			Total
Net revenue	$	55,202	$	12,362	$	26,220	$	—		$	93,784		$	146,565	$	37,213	$	82,227	$	—		$	266,005

Segment adjusted EBITDA	$	4,946	$	160	$	4,221	$	(721	)	$	8,606		$	8,257	$	910	$	15,437	$	(2,092	)	$	22,512
Depreciation and amortization											(4,446	)											(14,881	)
Interest expense											(2,715	)											(8,041	)
Loan amendment fees											(201	)
Lease payments in anticipation of facility shutdown											(186	)											(517	)
Stock-based compensation											(185	)											(556	)
Loan amendment fees																							(337	)
Restructuring expenses											(85	)											(225	)
Acquisition-related expenses											(12	)											(97	)
Disposal of assets and other gain											223												221
Provision for income taxes											(288	)											(4,152	)
Net income										$	711
Net loss																						$	(6,073	)

	Three Months Ended December 31, 2017													Three Months Ended June 30, 2018
(in thousands)	Faneuil		Carpets			Phoenix		ALJ			Total			Faneuil		Carpets		Phoenix		ALJ			Total
Net revenue	$	51,474	$	16,650		$	26,830	$	—		$	94,954		$	43,893	$	18,013	$	27,754	$	—		$	89,660

Segment adjusted EBITDA	$	3,711	$	(726	)	$	4,160	$	(555	)	$	6,590		$	3,604	$	582	$	6,021	$	(621	)	$	9,586
Depreciation and amortization												(4,833	)											(4,718	)
Interest expense												(2,660	)											(2,526	)
Litigation loss																								(2,910	)
Restructuring expenses												(835	)											(779	)
Stock-based compensation												(293	)											(249	)
Acquisition-related expenses												(123	)											(106	)
Disposal of assets and other gain												207												(59	)
Provision for income taxes												(3,371	)											(1,135	)
Net loss											$	(5,318	)										$	(2,896	)

	Nine Months Ended June 30, 2018
(in thousands)	Faneuil			Carpets			Phoenix		ALJ			Total
Net revenue	$	143,320		$	53,354		$	83,045	$	—		$	279,719

Segment adjusted EBITDA	$	10,229		$	(384	)	$	15,640	$	(1,717	)	$	23,768
Depreciation and amortization													(14,401	)
Interest expense													(7,979	)
Litigation loss													(2,910	)
Restructuring expenses													(2,042	)
Stock-based compensation													(812	)
Acquisition-related expenses													(229	)
Disposal of assets and other gain													173
Provision for income taxes													(4,122	)
Net loss			��									$	(8,554	)

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.

On July 31, 2019, ALJ acquired Realtime Digital Innovations, LLC (the “RDI Acquisition”), an exclusive partner of Faneuil for the past 18 months providing 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 other things, (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 experience, and (v) increase margin profiles through shorter sales cycles and software license sales.

The aggregate cash consideration for the 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. Faneuil plans to consolidate the RDI business under Faneuil’s corporate umbrella.

On July 31, 2019, ALJ entered into the Fifth Amendment (the “Fifth Amendment”) to the Financing Agreement to support the continued growth of the Company and the associated increase in cash capital expenditures for Faneuil’s buildout of three new customer call centers, which will support anticipated growth.

ALJ sold 3.9 million shares of common stock at $1.80 per share in connection with financing the RDI acquisition discussed above for total cash proceeds of $7.0 million. Of the common shares sold, 2.2 million shares were to unaffiliated investors, 1.6 million shares were to ALJ’s Chief Executive Officer, and 0.1 million were to Faneuil’s President and Chief Executive Officer. Each investor received 33% warrant coverage with a two-year term to purchase ALJ common stock at $1.80 per share.

On July 29, 2019, the Company entered into an Employment Agreement (the “Employment Agreement”) with Jess Ravich. Prior to entering into the Employment Agreement, Mr. Ravich served as the Company’s Executive Chairman. Pursuant to the Employment Agreement, Mr. Ravich will assume full-time responsibilities as the Company’s Chief Executive Officer until September 30, 2020 (the “Initial Term”), subject to subsequent automatic two-year renewals. Mr. Ravich will continue to serve as the Company’s Chairman of the Board. Mr. Ravich’s compensation includes (i) base salary of $0.2 million per year, of which a portion may be paid at the Company’s discretion through the issuance of the Company’s stock, (ii) annual incentive bonus based on consolidated adjusted EBITDA, and (iii) incentive bonus for any sale of a business of the Company as defined in the Employment Agreement.

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

ALJ Regional Holdings, Inc. (“ALJ” or “we”) is a holding company that operates Faneuil, Inc., or Faneuil, Floors-N-More, LLC, d/b/a Carpets N’ More, or Carpets, and Phoenix Color Corp., or Phoenix. With several members of our senior management and Board of Directors coming from long careers in the professional service 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 in October 2017, the acquisition of the CMO Business by Faneuil in May 2017, and the acquisition of Color Optics by Phoenix in July 2016. 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.

Three Months Ended ~~December 31, 2018~~June 30, 2019 Compared to Three Months Ended ~~December 31, 2017~~June 30, 2018

The following table sets forth certain condensed consolidated statements of operations data as a percentage of net revenue for each period as follows:

	Three Months Ended December 31, 2018						Three Months Ended December 31, 2017						Three Months Ended June 30, 2019						Three Months Ended June 30, 2018
				% of						% of						% of						% of
(in thousands, except per share amounts)	Dollars			Net Revenue			Dollars			Net Revenue			Dollars			Net Revenue			Dollars			Net Revenue
Net revenue⁽¹⁾
Faneuil	$	55,202			58.9	%	$	51,474			54.2	%	$	44,773			53.2	%	$	43,893			49.0	%
Carpets		12,362			13.2			16,650			17.5			12,763			15.1			18,013			20.0
Phoenix		26,220			27.9			26,830			28.3			26,689			31.7			27,754			31.0
Consolidated net revenue		93,784			100.0			94,954			100.0			84,225			100.0			89,660			100.0
Cost of revenue ⁽²⁾
Faneuil		42,648			77.3			40,219			78.1			36,898			82.4			33,092			75.4
Carpets		9,816			79.4			13,803			82.9			9,935			77.8			14,745			81.9
Phoenix ⁽³⁾		20,363			77.7			20,888			77.9			20,197			75.7			19,941			71.8
Consolidated cost of revenue		72,827			77.7			74,910			78.9			67,030			79.6			67,778			75.6
Selling, general and administrative expense ⁽²⁾
Faneuil		7,808			14.1			7,544			14.7			7,442			16.6			10,107			23.0
Carpets		2,386			19.3			3,573			21.5			2,350			18.4			2,700			15.0
Phoenix		3,067			11.7			4,139			15.4			3,017			11.3			3,931			14.2
ALJ		918			—			848			—			899			—			977			—
Consolidated selling, general and administrative expense		14,179			15.1			16,104			17.0			13,708			16.3			17,715			19.8
Depreciation and amortization ⁽²⁾
Faneuil		2,494			4.5			2,576			5.0			3,611			8.1			2,517			5.7
Carpets		229			1.9			219			1.3			150			1.2			203			1.1
Phoenix⁽⁴⁾		564			2.2			639			2.4			568			2.1			623			2.2
Consolidated depreciation and amortization expense		3,287			3.5			3,434			3.6			4,329			5.1			3,343			3.7
Disposal of assets and other gain ⁽⁵⁾		(223	)		(0.2	)		(207	)		(0.2	)		2			—			59			—
Total consolidated operating expenses ⁽⁵⁾		90,070			96.0			94,241			99.2			85,069			101.0			88,895			99.1
Consolidated operating income		3,714			4.0			713			0.8
Consolidated operating (loss) income														(844	)		(1.0	)		765			0.9
Interest expense ⁽⁵⁾		(2,715	)		(2.9	)		(2,660	)		(2.8	)		(2,701	)		(3.2	)		(2,526	)		(2.8	)
Provision for income taxes⁽⁵⁾		(288	)		(0.3	)		(3,371	)		(3.6	)		(3,662	)		(4.3	)		(1,135	)		(1.3	)
Net income (loss) ⁽⁵⁾	$	711			0.8		$	(5,318	)		(5.6	)
Basic earnings (loss) per share of common stock	$	0.02					$	(0.14	)
Diluted earnings (loss) per share of common stock	$	0.02					$	(0.14	)
Net loss ⁽⁵⁾													$	(7,207	)		(8.6	)	$	(2,896	)		(3.2	)
Loss per share of common stock–basic and diluted													$	(0.19	)				$	(0.08	)

	Three Months Ended December 31,										Three Months Ended June 30,
(in thousands)	2018		2017		$ Change			% Change			2019		2018		$ Change			% Change
Faneuil	$	55,202	$	51,474	$	3,728			7.2	%	$	44,773	$	43,893	$	880			2.0	%
Carpets		12,362		16,650		(4,288	)		(25.8	)		12,763		18,013		(5,250	)		(29.1	)
Phoenix		26,220		26,830		(610	)		(2.3	)		26,689		27,754		(1,065	)		(3.8	)
Consolidated net revenue	$	93,784	$	94,954	$	(1,170	)		(1.2	)%	$	84,225	$	89,660	$	(5,435	)		(6.1	)%

Faneuil net revenue for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$55.2~~$44.8 million, an increase of ~~$3.7~~$0.9 million, or ~~7.2%~~2.0%, compared to net revenue of ~~$51.5~~$43.9 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The increase was mainly attributable to a ~~$4.0~~$2.3 million increase ~~from~~in new ~~customers~~customer contracts and ~~a $0.2~~$0.3 million increase in existing customers, offset by a ~~$0.5~~$1.7 million ~~decrease~~reduction driven by the completion of customer contracts.

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

	As of December 31,				As of June 30,
(in millions)	2018		2017		2019		2018
Within one year	$	158.1	$	97.8	$	202.3	$	107.3
Between one year and two years		101.3		81.1		143.9		92.0
Between two years and three years		25.7		68.5		72.8		41.9
Between three years and four years		15.0		16.7		24.9		14.0
Thereafter		1.3		10.5		51.1		3.8
Total Faneuil backlog	$	301.4	$	274.6	$	495.0	$	259.0

The increase in Faneuil backlog at June 30, 2019 compared to June 30, 2018 was primarily driven by new healthcare customer contract awards, and the Metro ExpressLanes Customer Service Center Operations contract by the Los Angeles County Metropolitan Transportation Authority (“LA Metro”), awarded in February 2019, to provide the management and day-to-day customer service operations for its ExpressLanes program.

Carpets net revenue for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$12.4~~$12.8 million, a decrease of ~~$4.3~~$5.3 million, or ~~25.8%~~29.1%, compared to net revenue of ~~$16.7~~$18.0 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The decrease was primarily attributable to lower sales volumes in cabinets, flooring, and granite.

Carpets backlog represents open purchase orders. Carpets total contract backlog, which is expected to be fully realized within the next 12 months, as of ~~December 31, 2018~~June 30, 2019 was ~~$11.6~~$11.0 million compared to ~~$17.3~~$15.2 million as of ~~December 31, 2017.~~June 30, 2018. The decrease in Carpets backlog at ~~December 31, 2018,~~June 30, 2019 compared to ~~December 31, 2017,~~June 30, 2018, was the result of a strategic decision to only accept jobs that yield a targeted profit margin.

Phoenix net revenue for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$26.2~~$26.7 million, a decrease of ~~$0.6~~$1.1 million, or ~~2.3%~~3.8%, compared to net revenue of ~~$26.8~~$27.8 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The decrease was a result of ~~lower book volumes and~~ planned lower packaging sales and lower book sales, somewhat offset by higher component sales.

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

	As of December 31,				As of June 30,
(in millions)	2018		2017		2019		2018
Within one year	$	70.8	$	71.6	$	71.4	$	66.6
Between one year and two years		55.7		57.1		51.6		56.1
Between two years and three years		24.5		39.4		38.3		19.6
Between three years and four years		14.6		10.0		26.0		10.0
Thereafter		–		10.0		—		5.0
Total Phoenix backlog	$	165.6	$	188.1	$	187.3	$	157.3

The increase in Phoenix backlog at June 30, 2019 compared to June 30, 2018 was primarily driven by the three-year extension of a contract with an existing customer.

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

	Three Months Ended December 31,												Three Months Ended June 30,
(in thousands)	2018			2017			$ Change			% Change			2019			2018			$ Change			% Change
Faneuil	$	42,648		$	40,219		$	2,429			6.0	%	$	36,898		$	33,092		$	3,806			11.5	%
As a percentage of net revenue		77.3	%		78.1	%								82.4	%		75.4	%
Carpets		9,816			13,803			(3,987	)		(28.9	)		9,935			14,745			(4,810	)		(32.6	)
As a percentage of net revenue		79.4	%		82.9	%								77.8	%		81.9	%
Phoenix		20,363			20,888			(525	)		(2.5	)		20,197			19,941			256			1.3
As a percentage of net revenue		77.7	%		77.9	%								75.7	%		71.8	%
Consolidated cost of revenue	$	72,827		$	74,910		$	(2,083	)		(2.8	)%	$	67,030		$	67,778		$	(748	)		(1.1	)%

Faneuil cost of revenue for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$42.6~~$36.9 million, an increase of ~~$2.4~~$3.8 million, or ~~6.0%~~11.5%, compared to cost of revenue of ~~$40.2~~$33.1 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The increase in absolute dollar ~~increase in~~ cost of revenue was a direct result of the increased net ~~revenue.~~revenue, inefficiencies related to the startup of new contracts, and operational challenges related to the expansion of certain ongoing contracts. During the three months ended ~~December 31, 2018,~~June 30, 2019, as compared to the three months ended ~~December 31, 2017,~~June 30, 2018, cost of revenue as a percentage of segment net revenue ~~decreased slightly~~increased to ~~77.3%~~82.4% from ~~78.1% in~~75.4% as a result of inefficiencies related to the ~~normal course~~startup of ~~business.~~ new contracts.

Carpets cost of revenue for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$9.8~~$9.9 million, a decrease of ~~$4.0~~$4.8 million, or ~~28.9%~~32.6%, compared to cost of revenue of ~~$13.8~~$14.7 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The absolute dollar decrease in cost of revenue was mainly attributable to decreased net revenue. During the three months ended ~~December 31, 2018,~~June 30, 2019, as compared to the three months ended ~~December 31, 2017,~~June 30, 2018, cost of revenue as a percentage of segment net revenue decreased to ~~79.4%~~77.8% from ~~82.9%~~81.9% as a result of the ~~aforementioned~~ strategic decision to only accept jobs that yield a targeted profit margin, and process improvements and cost reductions throughout the organization.

Phoenix cost of revenue for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$20.4~~$20.2 million, ~~a decrease~~an increase of ~~$0.5~~$0.3 million, or ~~2.5%~~1.3%, compared to cost of revenue of ~~$20.9~~$19.9 million for the three months ended ~~December 31, 2017. The absolute dollar decrease in cost of revenue was mainly attributable to decreased net revenue.~~June 30, 2018. During the three months ended ~~December 31, 2018,~~June 30, 2019, as compared to the three months ended ~~December 31, 2017,~~June 30, 2018, cost of revenue as a percentage of segment net revenue ~~decreased slightly at 77.7% and 77.9%, respectively.~~increased to 75.7% from 71.8%. 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.

	Three Months Ended December 31,										Three Months Ended June 30,
(in thousands)	2018		2017		$ Change			% Change			2019		2018		$ Change			% Change
Faneuil	$	7,808	$	7,544	$	264			3.5	%	$	7,442	$	10,107	$	(2,665	)		(26.4	)%
Carpets		2,386		3,573		(1,187	)		(33.2	)		2,350		2,700		(350	)		(13.0	)
Phoenix		3,067		4,139		(1,072	)		(25.9	)		3,017		3,931		(914	)		(23.3	)
ALJ		918		848		70			8.3			899		977		(78	)		(8.0	)
Consolidated selling, general and administrative expense	$	14,179	$	16,104	$	(1,925	)		(12.0	)%	$	13,708	$	17,715	$	(4,007	)		(22.6	)%

Faneuil selling, general and administrative expense for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$7.8~~$7.4 million, ~~an increase~~a decrease of ~~$0.3~~$2.7 million, or ~~3.5%~~26.4%, compared to selling, general and administrative expense of ~~$7.5~~$10.1 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The ~~increase~~decrease was primarily attributable to ~~legal fees associated with increased debt~~a $2.9 million non-cash litigation loss recorded during the three months ended June 30, 2018, slightly offset by an increase of $0.4 million to ~~fund customer call center buildouts.~~support new customers. During the three months ended ~~December 31, 2018~~June 30, 2019 compared to the three months ended ~~December 31, 2017,~~June 30, 2018, selling, general and administrative expense as a percentage of segment net revenue decreased to ~~14.1%~~16.6% from ~~14.7%.~~23.0% principally as a result of the aforementioned non-cash litigation loss. 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 $2.4 million for the three months ended ~~December 31, 2018,~~June 30, 2019, a decrease of ~~$1.2~~$0.4 million, or ~~33.2%~~13.0%, compared to selling, general and administrative expense of ~~$3.6~~$2.7 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The decrease was primarily attributable to process improvements and cost reductions throughout the organization. Selling, general and administrative expense as a percentage of segment net revenue ~~decreased~~increased to ~~19.3%~~18.4% for the three months ended ~~December 31, 2018~~June 30, 2019 from ~~21.5%~~15.0% for the three months ended ~~December 31, 2017, which was also attributable to process improvements and cost reductions offset by the reduction to net revenues.~~June 30, 2018. 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 ~~December 31, 2018~~June 30, 2019 was ~~$3.1~~$3.0 million, a decrease of ~~$1.1~~$0.9 million, or ~~25.9%~~23.3%, compared to selling, general and administrative expense of ~~$4.1~~$3.9 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The decrease was mainly attributable to the completion of the process to consolidate manufacturing facilities ~~during the three months ended December 31, 2018. Additionally, the three months ended December 31, 2017 included non-recurring acquisition-related legal expenses~~ and ~~restructuring expenses related to the Printing Components Business acquisition.~~cost reduction initiatives. Selling, general and administrative expense as a percentage of segment net revenue decreased to ~~11.7%~~11.3% for the three months ended ~~December 31, 2018~~June 30, 2019 from ~~15.4%~~14.2% for the three months ended ~~December 31, 2017,~~June 30, 2018, which was mainly attributable to the relocation and restructuring expense incurred during the three months ended ~~December 31, 2017.~~June 30, 2018. Certain selling, general and administrative expenses do not fluctuate directly ~~correlate~~ with ~~fluctuations in Phoenix~~ 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 ~~December 31, 2018~~June 30, 2019 was $0.9 million, ~~an increase~~a decrease of $0.1 million, or ~~8.3%~~8.0%, compared to selling, general and administrative expense of ~~$0.8~~$1.0 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The ~~increase~~decrease was ~~primarily~~mainly attributable to the acquisition-related legal expenses incurred during the three months ended June 30, 2018 to support our strategy of acquiring attractively valued assets and lower stock-based compensation expense, offset by the hiring of additional ~~personnel to support our business and our strategy of acquisitions.~~personnel. 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,										Three Months Ended June 30,
(in thousands)	2018		2017		$ Change			% Change			2019		2018		$ Change			% Change
Faneuil	$	2,494	$	2,576	$	(82	)		(3.2	)%	$	3,611	$	2,517	$	1,094			43.5	%
Carpets		229		219		10			4.6			150		203		(53	)		(26.1	)
Phoenix		564		639		(75	)		(11.7	)		568		623		(55	)		(8.8	)
Consolidated depreciation and amortization expense	$	3,287	$	3,434	$	(147	)		(4.3	)%	$	4,329	$	3,343	$	986			29.5	%

Faneuil depreciation and amortization expense for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$2.5~~$3.6 million, ~~a decrease~~an increase of ~~$0.1~~$1.1 million, or ~~3.2%~~43.5%, compared to depreciation and amortization expense of ~~$2.6~~$2.5 million for the three months ended ~~December 31, 2017. Although Faneuil has three~~June 30, 2018. The increase was attributable to leasehold improvements for new ~~customer~~ call center buildouts, ~~in process, Faneuil will not start depreciating the related assets until the customer call centers are completed.~~and capital equipment purchased to support new and expanded contracts. Faneuil expects future depreciation and amortization expense to increase as ~~the~~Faneuil continues to invest in its business, which includes opening new call ~~center buildouts are completed and depreciation begins.~~centers. Because certain Faneuil contracts require ~~unique~~ capital investments such as lease buildouts, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Carpets depreciation and amortization expense was ~~flat~~consistent at $0.2 million for both the three months ended ~~December 31, 2018~~June 30, 2019 and ~~2017.~~2018.

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 million for both the three months ended ~~December 31, 2018~~June 30, 2019 and ~~2017.~~2018.

Interest expense for ~~both~~ the three months ended ~~December 31, 2018 and 2017~~June 30, 2019 was $2.7 ~~million.~~million, a decrease of $0.2 million, or 6.9%, compared to $2.5 million for the three months ended June 30, 2018. Interest expense was impacted by reduced interest expense resulting from quarterly principal payments, partially offset by increased interest rates, increased weighted-average outstanding balance on our line of credit and the $5.0 million increase to our term loan, which were both used to fund Faneuil’s call center buildouts and other working capital ~~requirements, partially offset by reduced interest resulting from quarterly principal payments.~~requirements.

Our provision for income taxes was ~~$0.3~~$3.7 million for the three months ended ~~December 31, 2018~~June 30, 2019 compared to ~~$3.4~~$1.1 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The three months ended ~~December 31, 2017~~June 30, 2019 reflected a ~~one-time revaluation~~non-cash deferred income tax expense of ~~deferred tax assets,~~$3.6 million, the majority of which was to reduce the net value of our net operating loss (“NOL”) carryforward. The remaining provision for income taxes during the three months ended June 30, 2019 was a result of ~~new tax reform legislation enacted on December 22, 2017 (the “Tax Reform Law”).~~generating state taxable income. Our provision for income taxes during the three months ended June 30, 2018 was a result of generating state taxable income.

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, interest expense, litigation loss, restructuring expenses, lease payments in anticipation of facility shutdown, loan amendment fees, stock-based compensation, acquisition-related expenses, disposal of fixed assets and other gain, provision for income taxes, and other non-recurring items. The following table summarizes segment adjusted EBITDA.

	Three Months Ended December 31,												Three Months Ended June 30,
(in thousands)	2018			2017			$ Change			% Change			2019			2018			$ Change			% Change
Faneuil	$	4,946		$	3,711		$	1,235			33.3	%	$	518		$	3,604		$	(3,086	)		(85.6	)%
Carpets		160			(726	)		886			122.0			478			582			(104	)		(17.9	)
Phoenix		4,221			4,160			61			1.5			4,881			6,021			(1,140	)		(18.9	)
ALJ		(721	)		(555	)		(166	)		(29.9	)		(712	)		(621	)		(91	)		(14.7	)
Segment adjusted EBITDA	$	8,606		$	6,590		$	2,016			30.6	%	$	5,165		$	9,586		$	(4,421	)		(46.1	)%

Faneuil segment adjusted EBITDA for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$4.9~~$0.5 million compared to segment adjusted EBITDA of ~~$3.7~~$3.6 million for the three months ended ~~December 31, 2017.~~June 30, 2018. Faneuil segment adjusted EBITDA for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~positively~~ impacted by ~~new contract awards~~the wind-down of customer contracts, timing delays related to the startup of recently awarded contracts, operational challenges related to the expansion of certain ongoing contracts, and increased ~~volume from existing customers.~~expenses in certain healthcare-related contracts.

Carpets segment adjusted EBITDA for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$0.2~~$0.5 million compared to segment adjusted EBITDA ~~loss~~ of ~~($0.7)~~$0.6 million for the three months ended ~~December 31, 2017.~~June 30, 2018. The positive impact realized from Carpets ~~segment adjusted EBITDA for the three months ended December 31, 2018 was positively impacted by~~ process improvements and cost ~~reductions.~~reductions was more than offset by Carpets reduction to net revenues.

Phoenix segment adjusted EBITDA for the ~~both~~three months ended June 30, 2019 was $4.9 million compared to segment adjusted EBITDA of $6.0 million for the three months ended ~~December 31, 2018 and 2017 was $4.2 million.~~June 30, 2018. Phoenix segment adjusted EBITDA for the three months ended ~~December 31, 2018~~June 30, 2019 was impacted by the decrease in net revenue and shifts in product mix, somewhat offset by the decrease to selling, general and administrative expenses resulting from consolidating printing facilities.

ALJ segment adjusted EBITDA for the three months ended ~~December 31, 2018~~June 30, 2019 was ~~$(0.7)~~($0.7) million compared to segment adjusted EBITDA of ~~$(0.6)~~($0.6) million for the three months ended ~~December 31, 2017.~~June 30, 2018. ALJ segment adjusted EBITDA for three months ended ~~December 31, 2018~~June 30, 2019 was impacted by increased headcount.

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 income (loss) to segment adjusted EBITDA.

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, 2019						Nine Months Ended June 30, 2018
				% of						% of
(in thousands, except per share amounts)	Dollars			Net Revenue			Dollars			Net Revenue
Net revenue⁽¹⁾
Faneuil	$	146,565			55.1	%	$	143,320			51.2	%
Carpets		37,213			14.0			53,354			19.1
Phoenix		82,227			30.9			83,045			29.7
Consolidated net revenue		266,005			100.0			279,719			100.0
Cost of revenue ⁽²⁾
Faneuil		116,663			79.6			110,662			77.2
Carpets		29,327			78.8			44,380			83.2
Phoenix ⁽³⁾		61,606			74.9			61,885			74.5
Consolidated cost of revenue		207,596			78.0			216,927			77.6
Selling, general and administrative expense ⁽²⁾
Faneuil		22,067			15.1			25,339			17.7
Carpets		7,071			19.0			9,372			17.6
Phoenix		9,324			11.3			11,839			14.3
ALJ		2,660			—			2,635			—
Consolidated selling, general and administrative expense		41,122			15.5			49,185			17.6
Depreciation and amortization ⁽²⁾
Faneuil		9,073			6.2			7,700			5.4
Carpets		616			1.7			641			1.2
Phoenix⁽⁴⁾		1,699			2.1			1,892			2.3
Consolidated depreciation and amortization expense		11,388			4.3			10,233			3.7
Disposal of assets and other gain ⁽⁵⁾		(221	)		(0.1	)		(173	)		(0.1	)
Total consolidated operating expenses⁽⁵⁾		259,885			97.7			276,172			98.7
Consolidated operating income		6,120			2.3			3,547			1.3
Interest expense ⁽⁵⁾		(8,041	)		(3.0	)		(7,979	)		(2.9	)
Provision for income taxes⁽⁵⁾		(4,152	)		(1.6	)		(4,122	)		(1.5	)
Net loss ⁽⁵⁾	$	(6,073	)		(2.3	)	$	(8,554	)		(3.1	)
Loss per share of common stock–basic and diluted	$	(0.16	)				$	(0.23	)

Faneuil net revenue for the nine months ended June 30, 2019 was $146.6 million, an increase of $3.2 million, or 2.3%, compared to net revenue of $143.3 million for the nine months ended June 30, 2018. The increase was mainly attributable to a $3.9 million increase in new customer contracts and a $4.3 million increase in existing customers, somewhat offset by a $4.9 million reduction driven by the completion of customer contracts.

Carpets net revenue for the nine months ended June 30, 2019 was $37.2 million, a decrease of $16.1 million, or 30.3%, compared to net revenue of $53.4 million for the nine months ended June 30, 2018. The decrease was primarily attributable to lower sales volumes in cabinets, flooring, and granite.

Phoenix net revenue for the nine months ended June 30, 2019 was $82.2 million, a decrease of $0.8 million, or 1.0%, compared to net revenue of $83.0 million for the nine months ended June 30, 2018. The decrease was a result of planned lower packaging sales and lower book sales, somewhat offset by higher component sales.

Faneuil cost of revenue for the nine months ended June 30, 2019 was $116.7 million, an increase of $6.0 million, or 5.4%, compared to cost of revenue of $110.7 million for the nine months ended June 30, 2018. The increase in absolute dollar cost of revenue was a direct result of the increased net revenue, inefficiencies related to the startup of new contracts, and operational challenges related to the expansion of certain ongoing contracts. During the nine months ended June 30, 2019, as compared to the nine months ended June 30, 2018, cost of revenue as a percentage of segment net revenue was 79.6% compared to 77.2%.

Carpets cost of revenue for the nine months ended June 30, 2019 was $29.3 million, a decrease of $15.1 million, or 33.9%, compared to cost of revenue of $44.4 million for the nine months ended June 30, 2018. The absolute dollar decrease in cost of revenue was mainly attributable to decreased net revenue. During the nine months ended June 30, 2019, as compared to the nine months ended June 30, 2018, cost of revenue as a percentage of segment net revenue decreased to 78.8% from 83.2% as a result of the aforementioned strategic decision to only accept jobs that yield a targeted profit margin, and process improvements and cost reductions throughout the organization.

Phoenix cost of revenue for the nine months ended June 30, 2019 was $61.6 million, a decrease of $0.3 million, or 0.5%, compared to cost of revenue of $61.9 million for the nine months ended June 30, 2018. During the nine months ended June 30, 2019, as compared to the nine months ended June 30, 2018, cost of revenue as a percentage of segment net revenue increased to 74.9% from 74.5%. 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.

Faneuil selling, general and administrative expense for the nine months ended June 30, 2019 was $22.1 million, a decrease of $3.3 million, or 12.9%, compared to selling, general and administrative expense of $25.3 million for the nine months ended June 30, 2018. The decrease was primarily attributable to a $2.9 million non-cash litigation loss recorded during the nine months ended June 30, 2018 and a reduction to expenses of $0.1 million from concluded customer contracts. During the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018, selling, general and administrative expense as a percentage of segment net revenue decreased to 15.1% from 17.7%. 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 $7.1 million for the nine months ended June 30, 2019, a decrease of $2.3 million, or 24.6%, compared to selling, general and administrative expense of $9.4 million for the nine months ended June 30, 2018. The decrease was primarily attributable to process improvements and cost reductions throughout the organization. Selling, general and administrative expense as a percentage of segment net revenue increased to 19.0% for the nine months ended June 30, 2019 from 17.6% for the nine months ended June 30, 2018. 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 nine months ended June 30, 2019 was $9.3 million, a decrease of $2.5 million, or 21.2%, compared to selling, general and administrative expense of $11.8 million for the nine months ended June 30, 2018. The decrease was mainly attributable to the completion of the process to consolidate manufacturing facilities. Selling, general and administrative expense as a percentage of segment net revenue decreased to 11.3% for the nine months ended June 30, 2019 from 14.3% for the nine months ended June 30, 2018, which was mainly attributable to the relocation and restructuring expense incurred during the nine months ended June 30, 2018. 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 nine months ended June 30, 2019 was $2.7 million, an increase of less than $0.1 million and less than 1.0%, compared to selling, general and administrative expense of $2.6 million for the nine months ended June 30, 2018. ALJ selling, general and administrative expenses were impacted by the hiring of additional personnel to support our business and our strategy of acquisitions offset by lower stock-based compensation expense. 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 for the nine months ended June 30, 2019 was $9.1 million, an increase of $1.4 million, or 17.8%, compared to depreciation and amortization expense of $7.7 million for the nine months ended June 30, 2018. The increase was attributable to leasehold improvements for new call center buildouts, and capital equipment purchased to support new and expanded contracts. Faneuil expects future depreciation and amortization expense to increase as Faneuil continues to invest in its customers, which includes opening new call centers. Because certain Faneuil contracts require capital investments such as lease buildouts, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Carpets depreciation and amortization expense was flat at $0.6 million for both the nine months ended June 30, 2019 and 2018.

Phoenix depreciation and amortization expense for the nine months ended June 30, 2019 was $1.7 million, a decrease of $0.2 million, or 10.2%, compared to depreciation and amortization expense of $1.9 million for the nine months ended June 30, 2018. Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets. The decrease was attributable to fully amortized acquisition-related intangible assets.

Interest expense for both the nine months ended June 30, 2019 and 2018 was $8.0 million. Interest expense was impacted by reduced interest expense resulting from quarterly principal payments, partially offset by increased interest rates, increased weighted-average outstanding balance on our line of credit and the $5.0 million increase to our term loan, which were both used to fund Faneuil’s call center buildouts and other working capital requirements.

Our provision for income taxes was $4.2 million for the nine months ended June 30, 2019 compared to $4.1 million for the nine months ended June 30, 2018. The nine months ended June 30, 2019 reflected a non-cash deferred income tax expense of $3.6 million, the majority of which was to reduce the net value of our NOL carryforward. The remaining provision for income taxes during the nine months ended June 30, 2019 was a result of generating state taxable income. The nine months ended June 30, 2018 reflected a $4.1 million one-time revaluation of deferred tax assets, which was the result of new tax reform legislation enacted on December 22, 2017 (the “Tax Reform Law”).

Faneuil segment adjusted EBITDA for the nine months ended June 30, 2019 was $8.3 million compared to segment adjusted EBITDA of $10.2 million for the nine months ended June 30, 2018. Faneuil segment adjusted EBITDA for the nine months ended June 30, 2019 was impacted by the wind-down of customer contracts, operational challenges related to the expansion of certain ongoing contracts, and timing delays related to the startup of recently awarded contracts.

Carpets segment adjusted EBITDA for the nine months ended June 30, 2019 was $0.9 million compared to segment adjusted EBITDA loss of ($0.4) million for the nine months ended June 30, 2018. Carpets segment adjusted EBITDA for the nine months ended June 30, 2019 was positively impacted by process improvements and cost reductions.

Phoenix segment adjusted EBITDA for the nine months ended June 30, 2019 was $15.4 million compared to segment adjusted EBITDA of $15.6 million for the nine months ended June 30, 2018. Phoenix segment adjusted EBITDA for the nine months ended June 30, 2019 was negatively impacted by product mix and positively impacted by the decrease to selling, general and administrative expenses, which resulted from consolidating printing facilities.

ALJ segment adjusted EBITDA for the nine months ended June 30, 2019 was ($2.1) million compared to segment adjusted EBITDA of ($1.7) million for the nine months ended June 30, 2018. ALJ segment adjusted EBITDA for nine months ended June 30, 2019 was impacted by increased headcount.

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 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, 2018,~~June 30, 2019, our principal sources of liquidity included cash and cash equivalents of ~~$2.2~~$3.0 million and an available borrowing capacity of ~~$6.4~~$8.5 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 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.

	Three Months Ended December 31,						Nine Months Ended June 30,
(in thousands)	2018			2017			2019			2018
Cash used for operating activities	$	(2,169	)	$	(3,692	)
Cash provided by operating activities							$	17,496		$	17,922
Cash used for investing activities		(5,575	)		(9,637	)		(15,779	)		(11,692	)
Cash provided by financing activities		7,912			9,726
Cash used for financing activities								(746	)		(6,881	)
Change in cash and cash equivalents	$	168		$	(3,603	)	$	971		$	(651	)

We recognized net income of $0.7 million for the three months ended December 31, 2018 and used cash of $2.2 million for operating activities and $5.6 million for investing activities, offset by $7.9 million cash provided by financing activities.

We recognized net loss of ~~$5.3~~$6.1 million for the ~~three~~nine months ended ~~December 31, 2017, used~~June 30, 2019, and generated cash ~~of $3.7 million for~~from operating activities ~~and $9.6~~of $17.5 million, offset by cash used for investing activities of $15.8 million and financing activities of $0.7 million.

We recognized net loss of $8.6 million for the nine months ended June 30, 2018, and generated cash from operating activities of $17.9 million, offset by ~~$9.7~~cash used by investing activities of $11.7 million ~~cash provided~~and by financing ~~activities.~~activities of $6.9 million.

Cash ~~used~~provided by operating activities of ~~$2.2~~$17.5 million during the ~~three~~nine months ended ~~December 31, 2018~~June 30, 2019 was the result of ~~$0.7~~$6.1 million net ~~income, $4.7~~loss, $19.5 million addback of net non-cash expenses, and ~~$7.6~~$4.1 million of net cash ~~used for~~provided by changes in operating assets and liabilities. The most significant components of net non-cash expenses were depreciation and amortization expense of ~~$4.4~~$14.9 million, deferred income taxes of $3.6 million, stock-based compensation of ~~$0.2~~$0.6 million, and amortization of deferred loan costs of ~~$0.2~~$0.6 million, offset by $0.2 million of disposal of assets and other ~~gain (loss), net.~~gain. The most significant components of changes in operating assets and liabilities included accounts receivable of $7.9 million, prepaid expenses, collateral deposits, and other current assets of $1.2 million, and deferred revenue and customer deposits of $1.1 million, which used cash, offset by accounts payable of $1.2$2.7 million and accrued expenses of $1.5 million, which provided cash, offset by other liabilities of $1.0 million, which used cash.

Cash ~~used for operations~~provided by operating activities of ~~$3.7~~$17.9 million during the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2018 was the result of ~~our $5.3~~$8.6 million net loss, ~~$8.6~~$23.1 million addback of net non-cash expenses, and ~~$7.0~~$3.4 million of net cash ~~used~~provided by changes in operating assets and liabilities. The most significant components of net non-cash expenses were depreciation and amortization expense of ~~$4.8~~$14.4 million, stock-based compensation of ~~$0.3~~$0.8 million, ~~amortization~~litigation loss of ~~non-cash interest expense of $0.3~~$2.9 million, ~~and~~ deferred income taxes of ~~$3.3~~$3.9 million, and amortization of deferred loan costs of $1.0 million. The most significant components of changes in operating assets and liabilities included accounts receivable of ~~$6.2~~$3.9 million, ~~prepaid expenses~~inventories of $2.6 million, and other ~~current~~ assets of ~~$2.0~~$1.4 million, ~~and~~which provided cash, offset by deferred revenue and customer deposits of ~~$1.9~~$3.3 million, which used ~~cash, offset by accrued expenses of $1.1 million and inventories of $1.0 million, which provided~~ cash.

For the ~~three~~nine months ended ~~December 31, 2018,~~June 30, 2019, our investing activities used ~~$5.6~~$15.8 million of cash, of which $1.0 million was the final payment for our Printing Components Business acquisition, ~~$3.9~~$13.0 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and ~~$1.0~~$2.1 million was used to purchase capital equipment in the normal course of operations, partially offset by $0.3 million proceeds received from the sale of equipment.

For the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2018, our investing activities used ~~$9.6~~$11.7 million of cash, of which $9.0 million was for our Printing Components Business acquisition, ~~and $1.0~~$1.3 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and $1.8 million was used to purchase capital equipment in the normal course of operations, partially offset by ~~$0.3~~$0.4 million ~~cash~~ proceeds received from the sale of ~~assets.~~equipment.

For the ~~three~~nine months ended ~~December 31, 2018,~~June 30, 2019, our financing activities ~~provided $7.9~~used $0.8 million of cash. ~~Proceeds~~Net proceeds from our line of

credit and term loan provided ~~$6.9~~$4.6 million and $5.0 million, respectively. Financing activities which used cash included ~~$2.7~~$7.5 million to pay down our term loan, ~~$0.8~~$2.3 million for capital lease payments, and ~~$0.4~~$0.6 million for debt issuance costs.

For the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2018, our financing activities ~~provided $9.7~~used $6.9 million of cash. Financing activities which used cash included $11.2 million to pay down our term loan, $2.5 million to pay down our line of credit, $2.0 million for capital lease payments, and $0.5 million for debt and stock issuance costs. Proceeds from our ~~line of~~

~~credit provided $8.2 million, proceeds from our~~amended term loan provided $7.5 ~~million, and~~million. Proceeds from the issuance of common stock and exercise of stock options provided $1.5 ~~million.~~million and $0.3 million, respectively. Proceeds from the amended term loan and issuance of common stock were used to fund our Printing Components Business acquisition discussed above. ~~Financing activities which used cash include $6.4 million to pay down our term loan, $0.7 million for capital lease payments, and $0.3 million for debt and stock issuance costs.~~

The following table summarizes our significant contractual obligations at ~~December 31, 2018,~~June 30, 2019, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

	Payments due by Period										Payments due by Period
			Less Than		One – Three		Four – Five		More than Five				Less Than		One – Three		Four – Five		More than Five
(in thousands)	Total		One Year		Years		Years		Years		Total		One Year		Years		Years		Years
Term loan⁽¹⁾	$	87,231	$	8,200	$	24,600	$	54,431	$	—	$	83,133	$	8,200	$	24,600	$	50,333	$	—
Operating lease obligations⁽²⁾		35,137		5,535		11,254		18,348		—		44,921		6,190		10,306		8,781		19,644
Line of credit⁽¹⁾		15,607		—		—		15,607		—		13,327		—		—		13,327		—
Capital lease obligations⁽¹⁾		6,525		2,729		3,259		537		—		5,380		2,472		2,625		283		—
Equipment financing agreement⁽¹⁾		4,060		1,177		2,883		—		—		3,424		1,319		2,105		—		—
Leasehold improvement obligations⁽²⁾		2,500		2,500		—		—		—
Other liabilities ⁽³⁾		2,176		891		1,285		—		—		2,213		923		1,290		—		—
Total contractual cash obligations⁽⁴⁾	$	153,236	$	21,032	$	43,281	$	88,923	$	—	$	152,398	$	19,104	$	40,926	$	72,724	$	19,644

short-term portions of our term loan, equipment financing agreement, and workers’ compensation reserve.

As of ~~December 31, 2018,~~June 30, 2019, 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, 2018,~~June 30, 2019, 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 ~~$29.3~~$25.8 million.

Letters of Credit. ALJ had letters of credit totaling ~~$3.0~~$3.6 million outstanding as of ~~December 31, 2018.~~June 30, 2019.

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 in the reporting period. Significant estimates and assumptions by management are used for, but are not limited to, revenue recognition, including estimated customer lives, determining the fair value 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 loss as a result of loss contingencies, ~~customer lives,~~ the allowance for doubtful accounts and inventory reserves, and calculation of insurance reserves. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be 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 significant accounting policies, please refer to Note 2, “Summary of Significant Accounting Policies,” included with our audited financial statements and notes thereto for the years ended September 30, 2018 and 2017, filed with the Securities and Exchange Commission on December 17, 2018. There were no material changes to significant accounting policies during the ~~three~~nine months ended ~~December 31, 2018.~~ June 30, 2019.

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.

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.

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

On March 23, 2010, President Obama signed the Affordable Care Act (the “Affordable Care Act”) into law, which has affected comprehensive health insurance reform, including the creation of health insurance exchanges, among other reforms. A portion 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. While Congress has not passed repeal legislation, the Tax Reform Law includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate,” which could lead to fewer enrollments in health care 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 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. During economic downturns, the ability of both private and governmental entities to make expenditures may decline significantly. We cannot be certain that economic or political conditions will be generally favorable or that there will not be significant fluctuations adversely affecting Faneuil as a whole, or key industry segments targeted by Faneuil. In addition, Faneuil’s operations are, in part, dependent upon state government funding. Significant changes in the level of state government funding could have an unfavorable effect on Faneuil’s business, financial position, results of operations and cash flows.

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.

The diversion of resources and management’s attention to the integrations of the RDI Acquisition could adversely affect Faneuil’s day-to-day business.

The integrations of the RDI Acquisition may place a significant burden on Faneuil 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.

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 delay in the state government budget process or a state government shutdown may result in Faneuil incurring 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 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. 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, its business, financial position, results of operations and cash flows could be materially adversely affected.

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

Faneuil derives a substantial portion of its revenue from a relatively small number of customers. For additional information regarding Faneuil customer concentrations, see “Part I, Item 1. Financial Statements – Note 4. Concentration Risks.” We expect the largest customers of Faneuil to continue to account for a substantial portion of its total net revenue for the foreseeable future. Faneuil has long-standing relationships with many of its significant customers. However, because Faneuil customers generally contract for specific projects or programs with a finite duration, Faneuil may lose these customers if funding for their respective programs is discontinued, or if their projects end and the contracts are not renewed or replaced. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could materially reduce Faneuil revenue and cash flows. Additionally, many Faneuil customers are government entities, which can unilaterally terminate or modify the existing contracts with Faneuil without cause and penalty to such government entities in many situations. If Faneuil does not replace them with other customers or other programs, the loss of business from any one of such customers could have a material adverse effect on its business or results of operations.

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

Faneuil’s business could be adversely affected if Faneuil’s clients are not satisfied with its services.

Faneuil’s business model largely depends on the ability to attract new work from existing clients. Faneuil’s business model also depends on client relationships, understanding client needs, and delivering specific solutions to meet such 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, its performance, according to the terms of the customer contract, may be impaired. If the amount Faneuil is required to pay for subcontracted services or equipment exceeds the amount Faneuil has estimated in bidding for fixed prices or fixed unit price contracts, it could experience reduced profit or losses in the performance of these contracts with its customers. Also, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, Faneuil may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the expected profit or result in a loss of a customer contract for which the services, equipment or materials were needed.

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

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

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

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

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

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

If Faneuil was to experience a temporary or permanent interruption at a customer contact 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 and Faneuil clients from events that could interrupt delivery of services, there is no guarantee that such interruptions would not result in a prolonged interruption in 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, including climate change related events, occur in the United States or other locations, such events may negatively affect Faneuil operations, cause general economic conditions to deteriorate or cause demand for Faneuil services, many of which depend on travel, to decline. A prolonged economic slowdown or recession could reduce the demand for Faneuil 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 business is subject to many regulatory requirements, and current or future regulation could significantly increase Faneuil’s cost of doing business.

Faneuil’s business is subject to many laws and regulatory requirements in the United States, covering such matters as data privacy, consumer protection, health care requirements, labor relations, taxation, internal and disclosure control obligations, governmental affairs and immigration. For example, Faneuil is subject to state and federal laws and regulations regarding the protection of consumer information commonly referred to as “non-public personal information.” For instance, the collection of patient data through Faneuil’s contact center services is subject to the Health Insurance Portability and Accountability Act of 1996, commonly known as HIPAA, which protects the privacy of patients’ data. These laws, regulations, and agreements require Faneuil to develop and implement policies to protect non-public personal information and to disclose these policies to consumers before a customer relationship is established and periodically after that. These laws, regulations, and agreements limit the ability to use or disclose non-public personal information for purposes other than the ones originally intended. Many of these regulations, including those related to data privacy, are frequently changing and sometimes conflict with existing ones among the various jurisdictions in which Faneuil provides services. Violations of these laws and regulations could result in liability for damages, fines, criminal prosecution, unfavorable publicity and restrictions placed on Faneuil operations. Faneuil’s failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to Faneuil’s

reputation in the marketplace, which could have a material adverse effect on ~~Faneuil~~’sFaneuil’s business, results of operations and financial condition. In addition, because a substantial portion of Faneuil operating costs consists of labor costs, changes in governmental regulations relating to wages, healthcare and healthcare reform and other benefits or employment taxes could have a material adverse effect on ~~Faneuil~~’sFaneuil’s business, results of operations or financial condition.

A failure to attract and retain necessary personnel, skilled management, and qualified subcontractors 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 the 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 on Carpets business.

The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature and recently experienced a downturn. The downturn in the U.S. and global economies, along 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 industry to deteriorate in the future. Diminished consumer confidence in general, or specifically with respect to purchasing homes, or lack of consumer interest in purchasing a home compared to other housing alternatives due to location preferences, perceived affordability constraints or otherwise, may contribute to such a downturn. Further, changes to monetary policy or other actions by the Federal Reserve resulting in an adverse effect on interest rates (including mortgage interest rates), a downward trend in employment levels and job and wage growth, and increasing prices for available new or existing homes could lead to a decline in housing activity and negatively impact Carpets business. A significant or prolonged decline in residential/commercial remodeling or new construction activity could have a material adverse effect on the business and results of operations of Carpets.

Because all of Carpets operations are concentrated in the Las Vegas area, it is especially subject to certain risks, including economic and competitive risks, associated with the conditions in that area and in the areas from which it draws customers.

Carpets currently operates solely in the Las Vegas area. Due to this geographic concentration, its results of operations and financial conditions are subject to greater risks from changes in local and regional conditions, such as changes in local or regional economic conditions and unemployment rates; changes in local and state laws and regulations; a decline in the number of residents in the Las Vegas area; and changes in the local or regional competitive environment. As a result of the geographic concentration of is business, Carpets faces a greater risk of a negative impact on its business, financial condition, results of operations and prospects if any of the geographic areas in which it operates is more severely impacted by any such adverse condition, as compared to other areas in the United States.

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 several 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 competitors of Carpets or the inability by Carpets 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. The success of Carpets depends on its 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 in a timely, efficient and cost-effective manner is a significant challenge. The 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, including climate change related events, 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.

If Carpets fails to achieve and maintain a high level of product and service quality, its reputation, sales, profitability, cashflows, and financial condition could be negatively impacted.

Product and service quality issues could result in a negative impact on customer confidence in Carpets and the Carpets brand image. As a result, its 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.

The business of Carpets is dependent in part 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. The ability to estimate costs correctly and complete the project within budget or satisfaction without material defect is essential. In particular, there may be additional tariffs or taxes related to any inputs and finished goods imported by Carpets. Compliance with changes in taxes, tariffs and other regulations may require Carpets to alter its sourcing and make the process of estimating fixed price projects more difficult. 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 depends upon its ability to attract, train and retain highly qualified associates while also controlling its labor costs.

Customers expect a high level of customer service and product knowledge from associates employed by Carpets. To meet the needs and expectations of its customers, Carpets 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 costs is subject to numerous external factors, including prevailing wage rates and health and other insurance costs, as well as the impact of legislation or regulations governing labor relations or healthcare benefits. Also, Carpets competes with other retail businesses for many of its associates in hourly positions, and it invests significant resources in training and motivating them to maintain a high level 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 be able to attract or retain highly qualified associates in the future.

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

A small number of customers have historically accounted for a substantial portion 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. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could have a material adverse effect on its business or results of operations. For additional information regarding customer concentrations, see “Part I, Item 1. Financial Statements – Note 4. Concentration Risks.”

Historically, Carpets has purchased inventory from a small number of vendors. If these vendors became unable to provide materials promptly, Carpets would be required to find alternative vendors. Management estimates they could locate and qualify new vendors in a short period of time. For additional information regarding vendor concentrations, see “Part I, Item 1. Financial Statements – Note 4. Concentration Risks.”

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 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 Phoenix to adapt effectively and quickly to a changing competitive landscape could affect prices, margins or demand for 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 the ability of Phoenix to provide its products and services.

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

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

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

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

Phoenix has significant customer and supplier concentration. For additional information regarding customer and supplier concentrations, see “Part I, Item 1. Financial Statements – Note 4. Concentration Risks.” Any significant cancellation, deferral or reduction in the quantity or type of products sold to these principal customers or a significant number of smaller customers, including as a result of Phoenix’s failure to perform, the impact of economic weakness and challenges to customer businesses, a change in buying habits, further industry consolidation or the impact of the shift to alternative methods of content delivery, including digital distribution and printing, to customers, could have a material adverse effect on Phoenix business. Further, if Phoenix’s significant customers, in turn, are not able to secure large orders, they will not be able to place orders with Phoenix. A substantial decrease or interruption in business from Phoenix’s significant customers could result in write-offs or the loss of future business and could have a material adverse effect on Phoenix’s business.

Additionally, Phoenix purchases certain limited grades of paper to produce book and component products. If Phoenix’s suppliers reduce their supplies or discontinue these grades of paper, Phoenix may be unable to fulfill its contract obligations, which could have a material adverse effect on its business. See “Part I, Item 1. Financial Statements – Note 4. Concentration Risks.”

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

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

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

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

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 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 several 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 the achievement of anticipated benefits.

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 covenants restrict ALJ, Faneuil, Carpets and Phoenix from:

The ability of ALJ, Faneuil, Carpets, and Phoenix to borrow under our loan arrangements depends upon their respective abilities to comply with certain covenants and borrowing base requirements. The ability to meet these covenants and requirements may be affected by events beyond our control, and we or they may not meet these obligations. 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, 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.

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.”

As of ~~December 31, 2018, $102.8~~June 30, 2019, $96.5 million of our current borrowings under the Cerberus 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. Such rates tend to fluctuate based on general economic conditions, general interest rates, Federal Reserve rates and the supply of and demand for credit in the relevant interbanking market. In recent years, the Fed has incrementally raised the target range for the federal funds ~~rate, with additional increases expected to come over the next year.~~rate. Increases in the interest rate generally, and particularly when coupled with any significant variable rate indebtedness, could materially adversely impact our interest expenses. If interest rates ~~continue increasing,~~increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. For example, if interest rates increased in the future by 100 basis points, based on our current borrowings as of ~~December 31, 2018,~~June 30, 2019, we would incur approximately an additional $1.0 million per year in 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, 2018,~~June 30, 2019, each 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 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.

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 may not be able to integrate acquisitions successfully and achieve anticipated synergies, or the acquisitions and dispositions we 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~~“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. 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, 2018, we had net operating loss carryforwards for federal income tax purposes of approximately $144.3 million that start expiring in 2022. Approximately $121.3 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.

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~~August 2018, our shareholders approved the amendment of certain provisions of our certificate of incorporation to update certain restrictions on transfers of our stock that ~~our Board of Directors adopted a shareholder rights plan (the~~ “~~Rights Plan~~”~~) designed~~may result in an ownership change under 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 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 during the year ended September 30, 2018. 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 distract 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 of our outstanding common stock, and Jess Ravich, our current Chief Executive ~~Chairman owns~~Officer, beneficially owned approximately ~~37.2%~~38.2% of our ~~outstanding~~ common stock as of ~~December 31, 2018.~~June 30, 2019. 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 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 “emerging growth companies” or “smaller reporting 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 to be deemed an emerging growth company until the earliest of:

As an emerging growth company, we are 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, 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 result of this election, our financial statements may not be comparable to 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 most recently completed fiscal year and (A) no public float or (B) a public float of less than $700 million. As a “smaller reporting company,” we are subject to reduced disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Until such time as we cease to be a “smaller reporting company,” such reduced disclosure in our SEC filings may make it harder for investors to analyze our operating results and financial prospects.

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.

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, 2018,~~June 30, 2019, a total of 1,654,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of $3.39. It is probable that options to purchase our 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. If the stock options are exercised, your share ownership will be diluted. Additionally, options to purchase up to 1,280,000 shares of ALJ common stock are available for grant under our existing equity compensation plans as of ~~December 31, 2018.~~June 30, 2019.

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

We 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.

~~The anti-takeover~~Certain provisions of our ~~stockholders rights plan~~Restated Certificate of Incorporation contain transfer restrictions that may have the effect of delaying or preventing beneficial takeover bids by third parties.

~~We have a stockholder rights plan (the “Rights Plan”)~~Our Restated Certificate of Incorporation imposes certain restrictions on transfer designed to preserve the value of certain tax assets primarily associated with our NOLs and built-in losses under Section 382. These restrictions prohibits certain transfers that would lead to a person or a group of persons from acquiring 5% of more of ALJ’s outstanding stock, unless otherwise approved by our Board of Directors or a committee thereof. At the end of our last fiscal year, September 30, 2018, we had approximately $144.3 million of NOLs. The use of such losses to offset federal income tax would be limited if we experience an “~~ownership change~~”“ownership change” under Section 382. This would occur if stockholders owning (or deemed under Section 382 to own) 5% or more 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~~transfer restrictions in our Restated Certificate of Incorporation were adopted to reduce the likelihood of an “~~ownership change~~”“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 While such ~~stockholder acquires additional stock; provided that existing stockholders actually known to us to hold 4.9% or more of its stock as of April 30, 2009,~~transfer restrictions are permitted 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.

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

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

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
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)	7
	Notes to Condensed Consolidated Financial Statements	78

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2325

Item 3	Quantitative and Qualitative Disclosures About Market Risk	3239

Item 4	Controls and Procedures	3239

	PART II – OTHER INFORMATION	3340

Item 1	Legal Proceedings	3340

Item 1A	Risk Factors	3441

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	4754

Item 3	Defaults Upon Senior Securities	4754

Item 4	Mine Safety Disclosures	4754

Item 5	Other Information	4754

Item 6	Exhibits	4855

	Signatures	4956

(in thousands)	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 (note 7)	$	7,500
Common stock issued (note 9)		1,500
Cash received from exercise of stock option		1,000
Purchase price	$	10,000

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

Year Ending June 30,	Future Minimum Lease Payments		Lease Income			Net
2020	$	6,689	$	(499	)	$	6,190
2021		5,658		—			5,658
2022		4,648		—			4,648
2023		4,375		—			4,375
2024		4,406		—			4,406
Thereafter		19,644		—			19,644
Total	$	45,420	$	(499	)	$	44,921

	Three Months Ended December 31,				Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands)	2018		2017		2019		2018		2019		2018
Stock options	$	84	$	191	$	84	$	142	$	252	$	500
Common stock awards		101		102		101		107		304		312
Total stock-based compensation expense	$	185	$	293	$	185	$	249	$	556	$	812

Exhibit Number	Description of Exhibit	Method of Filing

3.1	Restated Certificate of Incorporation of ALJ Regional Holdings, Inc. as filed with the Secretary of State of the State of Delaware on August 17, 2018	Incorporated by reference to Exhibit ~~3.5~~3.1 to Form 10-K as filed on December 17, 2018

3.2	~~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 on February 2, 2016~~

~~3.3~~	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

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

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

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

101.INS	XBRL Instance Document	Filed herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith