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 ~~July~~January 31, ~~2019~~2020 was ~~41,921,299.~~42,172,791.

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

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

	June 30,			September 30,			December 31,			September 30,
	2019			2018			2019			2019
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,971		$	2,000		$	2,554		$	4,529
Accounts receivable, net of allowance for doubtful accounts of $132 ($208 at September 30, 2018)		43,727			46,383
Accounts receivable, net of allowance for doubtful accounts of $126 at December 31, 2019 and September 30, 2019								50,106			41,707
Inventories, net		7,488			7,656			6,864			6,777
Prepaid expenses and other current assets		5,684			5,504			10,356			5,515
Assets held for sale		—			222
Income tax receivable								—			897
Total current assets		59,870			61,765			69,880			59,425
Property and equipment, net		72,604			60,162			66,176			69,870
Goodwill		56,372			56,372			59,047			59,047
Intangible assets, net		38,530			42,400			39,803			41,148
Collateral deposits, less current portion		695			695
Deferred tax asset, net		4,013			7,639
Collateral deposits								695			695
Other assets		1,652			2,435			1,281			992
Total assets	$	233,736		$	231,468		$	236,882		$	231,177
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,306		$	12,692		$	15,578		$	15,070
Accrued expenses		15,612			14,371			15,563			16,092
Income taxes payable		370			204			619			367
Deferred revenue and customer deposits		2,716			3,179			5,505			1,965
Current portion of term loans, net of deferred loan costs		9,091			8,595			9,106			9,119
Current portion of capital lease obligations		2,472			2,909			2,173			2,535
Current portion of workers’ compensation reserve		923			1,000			1,026			1,043
Other current liabilities		69			1,003			78			72
Total current liabilities		43,559			43,953			49,648			46,263
Line of credit, net of deferred loan costs		13,163			8,594			19,662			9,372
Term loans, less current portion, net of deferred loan costs		75,904			74,795			70,527			73,614
Deferred revenue, less current portion		2,228			1,374			281			349
Workers’ compensation reserve, less current portion		1,290			1,508			1,312			1,312
Capital lease obligations, less current portion		2,908			4,427			2,184			2,623
Deferred tax liabilities, net								1,748			2,795
Other non-current liabilities		9,125			5,289			11,482			11,733
Total liabilities		148,177			139,940			156,844			148,061
Commitments and contingencies (Note 8)
Commitments and contingencies (Note 9)
Stockholders’ equity:
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
Common stock, $0.01 par value; authorized – 100,000 shares; 42,173 shares issued and outstanding at December 31, 2019 and September 30, 2019								422			422
Additional paid-in capital		279,680			279,575			287,779			287,101
Accumulated deficit		(194,501	)		(188,428	)		(208,163	)		(204,407	)
Total stockholders’ equity		85,559			91,528			80,038			83,116
Total liabilities and stockholders’ equity	$	233,736		$	231,468		$	236,882		$	231,177

	Nine Months Ended June 30,						December 31,
	2019			2018			2019			2018
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		3,493			4,168
Depreciation and amortization - selling, general and administrative expense		11,388			10,233
Net (loss) income							$	(4,277	)	$	711
Adjustments to reconcile net (loss) income to cash used for operating activities:
Depreciation and amortization								5,242			4,446
Stock-based compensation expense		556			812			112			185
Fair value of warrants issued in connection with debt modification								594			—
Provision for bad debts and obsolete inventory		68			232			104			68
Deferred income taxes		3,626			3,883			(1,047	)		49
Litigation loss		—			2,910
Disposal of assets and other gain		(221	)		(173	)
Loss (gain) on disposal of assets and other gain, net								2			(223	)
Interest expense accreted to term loan								6			—
Amortization of deferred loan costs		555			978			173			238
Changes in operating assets and liabilities:
Accounts receivable, net		2,685			3,936			(8,096	)		(7,918	)
Inventories, net		71			2,612			(389	)		21
Prepaid expenses, collateral deposits, and other current assets		(180	)		474			(4,217	)		(1,221	)
Income tax receivable								897			—
Other assets		783			1,393			(289	)		283
Accounts payable		(386	)		(619	)		508			1,230
Accrued expenses		1,539			(205	)		(365	)		1,493
Income tax payable		166			(195	)		252			(28	)
Deferred revenue and customer deposits		391			(3,291	)		3,300			(1,054	)
Other current liabilities		(11	)		(137	)		(11	)		(109	)
Other liabilities		(954	)		(535	)		(251	)		(340	)
Cash provided by operating activities		17,496			17,922
Cash used for operating activities								(7,752	)		(2,169	)
Investing activities
Acquisitions, net of cash acquired		(1,000	)		(9,000	)		—			(1,000	)
Proceeds from sales of assets		317			408			1			308
Capital expenditures		(15,096	)		(3,100	)		(675	)		(4,883	)
Cash used for investing activities		(15,779	)		(11,692	)		(674	)		(5,575	)
Financing activities
Net proceeds (payments) on line of credit		4,588			(2,500	)
Net proceeds from line of credit								10,490			6,868
Payments on term loans		(7,477	)		(11,152	)		(3,215	)		(2,743	)
Proceeds from term loan		5,000			7,500			—			5,000
Proceeds from issuance of common stock		—			1,500
Proceeds from stock option exercise		—			278
Debt and common stock issuance costs		(552	)		(482	)
Deferred loan costs								(264	)		(402	)
Payments on capital leases		(2,305	)		(2,025	)		(560	)		(811	)
Cash used for financing activities		(746	)		(6,881	)
Cash provided by financing activities								6,451			7,912
Change in cash and cash equivalents		971			(651	)		(1,975	)		168
Cash and cash equivalents at beginning of period		2,000			5,630			4,529			2,000
Cash and cash equivalents at end of period	$	2,971		$	4,979		$	2,554		$	2,168
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Taxes	$	841		$	883		$	517		$	372
Interest	$	7,399		$	6,894		$	2,344		$	2,359
Non-cash investing and financing activities:
Capital equipment purchases financed with capital leases	$	349		$	2,914		$	110		$	—
Capital equipment purchases financed with term loan	$	4,060		$	—		$	—		$	4,060
Construction in process funded by landlord tenant improvement allowance	$	4,572		$	—		$	—		$	3,500
Construction in process not yet paid for							$	—		$	2,700

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

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”). The Condensed Consolidated Financial Statements and footnotes thereto are unaudited. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the Company’s interim financial results. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue and expenses that are reported in the Condensed Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. Interim financial results are not necessarily indicative of financial results for ~~interim financial~~a full year. The information ~~and with the instructions to the Securities and Exchange Commission, or SEC,~~included in this Quarterly Report on Form 10-Q ~~and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements~~ should be read in conjunction with ~~ALJ’s audited financial statements and notes thereto for~~ the ~~years ended September 30, 2018 and 2017 contained in its~~Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019, filed with the SEC on December ~~17, 2018.~~23, 2019.

The Company has ~~made estimates~~historically classified expenses incurred by the Faneuil reportable segment as either cost of revenue or selling, general, and ~~judgments affecting~~administrative expense based on whether such expenses represented salaries and wages or an expense other than salary and wages. Faneuil is a labor intensive business with labor representing the ~~amounts reported in its condensed consolidated financial statements~~majority of the cost of revenue. Management determined that certain costs classified as cost of revenue should be classified as selling, general, and administrative expense, while other costs classified as selling, general, and administrative expense should be classified as cost of revenue. Accordingly, 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~~Condensed Consolidated Statement 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, 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 operationsOperations for the three ~~and nine~~ months ended ~~June 30, 2019, are~~December 31, 2018 has been revised to correct the amounts previously reported as cost of revenue and selling, general, and administrative expense as applicable.

In accordance with Accounting Standards Codification ASC 250 (Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin 99, Assessing Materiality), the Company concluded that the reclassifications between cost of revenue and selling, general, and administrative expense were not ~~necessarily indicative~~material to any of its previously issued annual or interim financial statements.

The following tables presents the ~~results expected for future quarters or~~impact of Faneuil’s reclassification on the ~~full year.~~

~~For a complete summary~~Condensed Consolidated Statement 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~~Operations for the ~~years~~three months ended December 31, 2018 and the year ended September 30, ~~2018 and 2017 contained in its Annual Report~~2019:

The correction of these previously reported amounts had no impact on ~~Form 10-K, filed with~~ the ~~SEC on December 17, 2018. There were~~Company’s consolidated income (loss) before income taxes, net income (loss), financial position, or cash flows. In addition, corresponding revisions had no ~~material changes~~impact to ~~ALJ’s significant accounting policies during the nine months ended June 30, 2019.~~ Reportable Segments or Geographic disclosures.

In ~~May 2014,~~June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This amendment expands the scope of the FASB’s ASC Topic 718, Compensation—Stock Compensation (which currently 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 was effective for ALJ on October 1, 2019. The adoption of ASU 2018-07 did not significantly impact ALJ’s consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers, with several clarifying updates issued during 2016 and 2017, referred to collectively hereafter as “ASC 606.” ~~to supersede nearly~~This new standard supersedes all ~~existing~~current revenue recognition ~~guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenue~~standards and guidance. Revenue recognition will occur when promised goods or services are transferred to customers in ~~an amount~~amounts that ~~reflects~~reflect the consideration ~~that is expected~~to which the Company expects to be ~~received~~entitled to in exchange for those goods or services. ~~ASU 2014-09 defines a five-step process~~

On October 1, 2019 ALJ adopted ASC 606 using the modified retrospective transition method. The Company applied the new revenue standard to ~~achieve this core principle~~contracts not completed as of the date of initial application. As part of the adoption of ASC 606, the Company assessed all aspects of ASC 606 and the potential impact on each entity. The adoption impacted each entity as follows:

Faneuil.The performance obligations in contracts vary depending on the nature of the contract. Contracts generally include the provision of call center services and in ~~doing so, it is possible more judgment~~certain contracts the provision of various implementation services.

The costs incurred as part of implementation relate to either a partially satisfied performance obligation, fulfillment costs, or administrative costs. Under current guidance, Faneuil capitalizes these costs and ~~estimates~~amortizes them over the stated contractual term on a straight-line basis. Under ASC 606, the only costs that are capitalizable are fulfillment costs.

Certain contracts require that a customer make nonrefundable payments to Faneuil prior to the commencement of call center services. The timing of fixed payments may be based on the achievement of specified implementation milestones. Additionally, customers may be required ~~within~~to make certain nonrefundable variable payments (e.g., training of personnel) prior to the ~~revenue recognition process~~commencement of operations.

Under ASC 606, when upfront fees do not relate directly to the satisfaction or partial satisfaction of a performance obligation, the payments are deemed to be advance payments for future services. In such, instances, the fees are allocated to performance obligations and recognized when or as the performance obligations are satisfied over the contract term. As a result of termination provisions, the contract term under ASC 606 may be shorter than ~~required under existing GAAP including identifying performance~~the contractually stated contract term, resulting in the upfront nonrefundable fees being fully recognized prior to the expiration of the stated term of the contract.

Under previous guidance, depending on the nature of the upfront fees, the fees may be recognized as implementation services are provided or, in cases where implementation services are not provided, deferred and amortized over the stated contractual term on a straight-line basis.

Faneuil concluded that, in most cases, pass through and reimbursed costs are accounted for on a gross basis as Faneuil incurs these costs as part of performing the call center services. Additionally, in certain arrangements, Faneuil utilizes third-party service providers in performing the obligations in the ~~contract, estimating~~contract. Faneuil has concluded that it acts as the principal for all arrangements in which a third-party is utilized as part of the implementation or operation of a call center. This accounting is consistent with the accounting under previous guidance.

Upon adoption of ASC 606, Faneuil eliminated deferred costs incurred during the implementation phase relating to partially satisfied performance obligations and reduced deferred revenue as a result of contracts with termination provisions that accelerated the period over which deferred revenue was recognized.

Carpets. Under ASC 606 revenue is recognized over time using the input method for the majority of its contracts. This pattern of revenue recognition under ASC 606 does not differ materially from the method of recognizing revenue under previous guidance.

Although Carpets determined that the timing and amount of ~~variable consideration~~total revenue recognized over the life of a construction project is not materially impacted, the revenue recognized on a quarterly basis during the construction period may change. Carpets determined that ASC 606 is more impactful to ~~include in~~certain of its lump sum projects as a result of the ~~transaction price and allocating the transaction price~~following required changes from its current practices:

Performance obligations. ASC 606 requires a review of contracts to ~~each~~determine whether there are multiple performance obligations. 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~~obligation must 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~~accounted separately, which ~~method it will adopt.~~

~~As the new standard will supersede substantially all existing revenue guidance, it could~~can impact the timing of ~~ALJ’s~~ revenue ~~and cost of~~recognition. In connection with its evaluation, Carpets identified certain contracts that had more than one performance obligation, which can impact the 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 roadmappattern and methodology for that ~~includes three phases:~~contract.

–

~~Phase I~~ is the identification, documentation, and preliminary analysis of how ALJ currently accounts for revenue transactions compared to the revenue accounting required under the new standard. Phase I was substantially completed by mid 2018.

–•

~~Phase II~~Variable consideration,. In accordance with ASC 606, variable consideration, including potential liquidated damages, adjusts the transaction price of a contract. Under previous revenue recognition guidance, Carpets generally assessed the impact of liquidated damages as an estimated cost of the project. In connection with its evaluation, Carpets did not identify any uncompleted contract in which ~~overlaps with Phase I and was started in January 2018, includes a more detailed analysis, including~~consideration of liquidated damages under ASC 606 affected the ~~development~~amount of revenue recognition models, data analysis, analyzing implementation options, and finalizing a transition method. Phase II analysis for certain revenue streams was completed by December 31, 2018, with the remaining revenue streams expected to be ~~completed by September 30, 2019.~~

~~��~~

~~Phase III~~ ~~includes identification of system requirements, changes~~recorded relating to ~~internal controls and business processes, and final implementation. Phase III is on target and expected to be completed by September 30, 2019.~~ liquidated damages.

Upon adoption of ASC 606, Carpets adjusted the following:

Revenue associated with open contracts to the amount determined by applying the input method of recognizing revenue to the transaction price for each separate performance obligation within a contract; and

Estimated losses when estimated contract costs exceeded the transaction price.

Phoenix. Based on analysis of specific terms associated with customer contracts uncompleted at the date of adoption, Phoenix concluded that revenue is recognized at a point in time for substantially all products. This treatment is consistent with how revenue was recognized under the previous guidance, which was when the products were completed and shipped to the customer (dependent upon specific shipping terms). Contracts requiring revenue to be recognized over time, as opposed to a point in time, are expected to be immaterial due to the de minimis nature of any particular order under such contracts in production at any given point in time.

~~Because~~

Phoenix determined that ASC 606 impacts the timing of revenue recognition under the following circumstances:

Completed production held in inventory. With certain customer contracts, Phoenix is required to complete a pre-defined quantity of customized products and hold these products in inventory until the customer requests shipment (which generally is required to be delivered in the same year as production). For these items, Phoenix has the contractual right to receive payment once production of the ~~nature~~products is complete, regardless of the ~~work~~ultimate delivery date. Under previous guidance, Phoenix held the customized products in inventory and recognized revenue upon shipment to the customer. Following the guidance of ASC 606, in these circumstances, Phoenix recognizes revenue when production of the customized products is complete.

Safety stock. In limited situations, Phoenix is required to produce and hold in inventory a pre-defined quantity of customized products for a customer as safety stock. Similar to completed production held in inventory, Phoenix has the contractual right to receive payment from the customer for the pre-defined quantity of safety stock once production is complete, regardless of the ultimate delivery date. Under previous guidance, Phoenix held the safety stock in inventory and recognized revenue upon shipment to the customer. Following the guidance of ASC 606, in these circumstances, Phoenix recognizes revenue when production of the safety stock is complete.

Lastly, the contracts that ~~remains, ALJ~~Phoenix has with its customers often include prospective and retrospective volume rebates, credits, discounts, and other similar items that generally decrease the amount a customer pays Phoenix. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, when contracts are signed, or making payments within payment specific terms. Under ASC 606, with the exception of prospective volume rebates, these adjustments are classified as variable consideration, which is ~~unable~~estimated at contract inception, and included as part of the transaction price, subject to ~~reasonably estimate~~constraints. Under ASC 606, prospective volume rebates are not part of the ~~impact of adoption on its consolidated financial statements. However, ALJ anticipates the~~transaction price, but are instead accounted for as a material right and separate performance obligation.

Upon adoption of ~~ASU 2014-09 will expand its revenue-related disclosures.~~ ASC 606, Phoenix recognized revenue associated with certain completed inventory and safety stock held in inventory as discussed above, adjusted revenue for prospective volume rebates treated as material rights and adjusted the timing of revenue recognition relating to variable consideration.

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Based upon the balances that existed as of September 30, 2019, the Company recorded adjustments to the following accounts as of October 1, 2019:

				Adjustments for the Adoption of ASC 606
(in thousands)	As Reported September 30, 2019			Faneuil		Carpets			Phoenix			Total Adjustment			Adjusted October 1, 2019
Assets
Prepaid expenses and other current assets	$	5,515		$	777	$	(61	)	$	161		$	877		$	6,392
Inventories, net		6,777			—		19			(217	)		(198	)		6,579
Liabilities
Accrued expenses		16,092			—		(12	)		(2	)		(14	)		16,078
Deferred revenue and customer deposits		1,965			172		—			—			172			2,137
Stockholders’ equity
Accumulated deficit		(204,407	)		605		(30	)		(54	)		521			(203,886	)

As a result of the above adjustments, total assets increased by $0.7 million, total liabilities increased by $0.2 million, and total stockholders’ equity increased by $0.5 million.

The following table summarize the impacts of adopting the new revenue accounting guidance on ALJ’s Consolidated Balance Sheet as of December 31, 2019:

	As of December 31, 2019
				Adjustments for the Adoption of ASC 606
(in thousands)	As Reported			Faneuil			Carpets			Phoenix			Total Adjustment			As if Previous Standard was in Effect
Assets
Prepaid expenses and other current assets	$	10,356		$	(1,207	)	$	(8	)	$	(669	)	$	(1,884	)	$	8,472
Inventories, net		6,864			—			6			528			534			7,398
Liabilities
Accrued expenses		15,563			(10	)		7			2			(1	)		15,562
Deferred revenue and customer deposits		5,505			(541	)		—			—			(541	)		4,964
Stockholders’ equity
Accumulated deficit		(208,163	)		(656	)		(9	)		(143	)		(808	)		(208,971	)

The difference between the reported balances and the amounts that would have been recorded had the previous guidance been in effect is primarily due to the following:

Inventory in the amounts that would have been recorded had the previous guidance been in effect associated with completed production held in inventory and safety stock.

Receivables and other assets in the amounts that would have been recorded had the previous guidance been in effect include receivables for a contract based on milestone billings and therefore do not include unbilled receivables relating over time recognition in accordance with ASC 606.

Deferred revenue in the amounts that would have been recorded had the previous guidance been in effect do not include certain upfront variable payments relating to training.

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarize the impacts of adopting the new revenue accounting guidance on ALJ’s Statement of Operation for the three months ended December 31, 2019:

	Three Months Ended December 31, 2019
				Adjustments for the Adoption of ASC 606
(in thousands, except per share amounts)	As Reported			Faneuil			Carpets		Phoenix			Total Adjustment			As if Previous Standard was in Effect
Net revenue	$	90,465		$	(354	)	$	53	$	(834	)	$	(1,135	)	$	89,330
Cost of revenue		75,726			907			32		(745	)		194			75,920
Net loss		(4,277	)		(1,261	)		21		(89	)		(1,329	)		(5,606	)
Loss per share of common stock–basic and diluted		(0.10	)		(0.03	)		0.00		(0.00	)		(0.03	)		(0.13	)

The differences between the reported balances and the amounts that would have been recorded had the previous guidance been in effect are due to the following impacts:

Reduction in the revenue and cost of revenue in the amounts that would have been recorded had the previous guidance been in effect associated with completed production held in inventory.

Reduction in revenue and cost of revenue in the amounts that would have been recorded had the previous guidance been in effect to recognize revenue for a contract under the milestone billings in accordance with ASC 605.

Increase in revenue and cost of revenue in the amounts that would have been recorded had the previous guidance been in effect to recognize revenue and related expenses relating to certain upfront variable payments as incurred.

The consolidated statement of cash flows for the three months ended December 31, 2019 takes into consideration the effect of adopting ASC 606. Adoption of the new accounting guidance had no impact to net cash provided by (used for) operating, financing or investing activities on our condensed consolidated statement of cash flows for the three months ended December 31, 2019.

Accounting Standards Not Yet Adopted

Leases

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.~~Internal-Use Software

~~ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED 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,Intangibles–Goodwill and Other, to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in such a CCA. ASU 2018-15 will be effective for ALJ on October 1, 2021. ALJ does not anticipate the adoption of ASU 2018-15 to significantly impact its consolidated financial statements.

3. ~~ACQUISITIONS~~REVENUE RECOGNITION

~~Printing Components Business~~Accounting Policy Update

OnAs a result of adopting ASC 606, ALJ updated its revenue recognition accounting policy effective October ~~2, 2017 (the “Printing Components Business Purchase Date”), Phoenix acquired~~1, 2019. The Company recognized revenue when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Faneuil. Faneuil contracts with its customers are typically in the form of a written contract executed between the Faneuil its customers that may include a Statement of Work, Request for Proposal, Responses to the Request for Proposal, and other correspondence. The contracts often provide the customer with renewal and/or termination options that impact the contract term under ASC 606.

Faneuil contracts often include promises to transfer multiple products and services to its customers. Determining whether products and services are considered distinct performance obligations that should be accounted for separately, versus together, requires significant judgment. Typically, Faneuil contracts include performance obligation(s) to stand-ready on a daily or monthly basis to provide services to its customers. Under a stand-ready obligation, the evaluation of the nature of the performance obligation is focused on each time increment rather than the underlying activities. Accordingly, the promise to stand-ready is accounted for as a single-series performance obligation.

Faneuil provides implementation activities prior to commencing services under the stand-ready obligation. The determination of whether the implementation activities are classified as fulfillment activities or promised goods and services and the determination of whether the implementation promised goods and services are distinct performance requirements requires significant judgment.

Once Faneuil determines the performance obligations, Faneuil estimates the amount of variable consideration to be included in determining the transaction price. Typical forms of variable consideration include variable pricing based on the number of transactions processed or usage-based pricing arrangements. Variable consideration is also present in the form of tiered and declining pricing, penalties for service level agreements, performance bonuses, and credits. In circumstances where Faneuil meets certain ~~assets~~requirements to allocate variable consideration to a distinct service within a series of related services, Faneuil allocates variable consideration to each distinct period of service within the series. If Faneuil does not meet those requirements, Faneuil includes an estimate of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty is resolved. For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. Faneuil generally determines stand-alone selling prices based on the prices charged to customers or by using expected cost plus a margin.

Faneuil typically satisfies its performance obligations over time as the services are provided. A time-elapsed output method is used to measure progress because the nature of Faneuil’s promise is a stand-ready service and ~~assumed~~efforts are expended evenly throughout the period. Faneuil uses a cost-to-cost based input method to measure progress on its implementation services. Faneuil has determined that the above methods provide a faithful depiction of the transfer of services to the customer.

Revenue expected to be recognized in future periods exclude unexercised customer options to purchase additional services that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for when the customer exercises its option to purchase additional goods or services.

When more than one party is involved in providing services to a customer, Faneuil evaluates whether it is the principal, and reports revenue on a gross basis, or as an agent, and reports revenue on a net basis. In this assessment, Faneuil considers the following: if it obtains control of the specified services before they are transferred to the customer; if it is primarily responsible for fulfillment; and whether it has discretion in establishing price. Based on its evaluation, in most circumstances, Faneuil determined that it acts as the principal.

Faneuil's payment terms vary by type of services offered. Generally, the time between provision of services during the operational phase, invoicing, and when payment is due is not significant. However, Faneuil sometimes receives advances or deposits from its customers before revenue is recognized, resulting in deferred revenue, which is recorded as a contract liability. The timing of when Faneuil bills its customers during the implementation phase is generally dependent upon agreed-upon contractual terms, milestone billings based on the completion of certain ~~liabilities~~phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue recognition, resulting in unbilled revenue, which is recorded as a contract asset.

From time to time, Faneuil contracts are modified to account for additions or changes to existing performance obligations. Each modification is evaluated under the guidance of ASC 606 and accounted for based on the specific modifications. When a contract modification relates to a stand-ready performance obligation, the impact of the modification is generally accounted for prospectively.

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Carpets.The majority of Carpets revenue is from ~~LSC Communications, Inc.~~ the installation of flooring, cabinets, and countertops for new homes. The contracts for these products are with homebuilders in the form of a purchase order issued in connection with a Master Service Agreement (“~~LSC”~~MSA”) and ~~Moore-Langen Printing Company, Inc. related~~Work Agreement. Carpets also enters into contracts with retail customers to install these same products in the form of a purchase order. The majority of the work performed under each purchase order is completed in less than two-weeks. Carpets also enters into construction contracts with its ~~printing~~commercial customers. The work performed under a construction contract ranges from a couple of weeks up to a year. Carpets contracts are fixed-price contracts.

Carpets evaluates whether two or more contracts should be combined and ~~manufacturing services division in Terre Haute, Indiana. Such assets~~accounted for as one single performance obligation and ~~liabilities are referred to hereinafter~~whether a single contract should be accounted for as more than one performance obligation. The majority of Carpets contracts have a single performance obligation, as the ~~“Printing Components Business.” Total purchase~~promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and, therefore, is not distinct. However, occasionally Carpets may have contracts with multiple performance obligations.

For contracts with multiple performance obligations, Carpets allocates the contracts transaction price ~~was $10.0 million~~to each performance obligation using the observable stand-alone selling price, if available, or alternatively Carpets best estimate of the stand-alone selling price of each distinct performance obligation in ~~cash, subject~~the contract. The primary method used to ~~customary net working capital adjustments, of which $1.0 million was withheld from~~estimate stand-alone selling price is the ~~consideration paid at closing and~~ ~~paid in October 2018.~~ expected cost plus a margin approach for each performance obligation.

The ~~Printing Components Business leverages Phoenix’s existing capabilities~~nature of Carpets contracts give rise to several types of variable consideration, including contract modifications (change orders and ~~core competencies, strengthens its position~~claims), liquidated damages, and other terms that can either increase or decrease the transaction price. Carpets estimates variable consideration as the most likely amount to which Carpets expects to be entitled. Carpets includes estimated amounts in the ~~education markets,~~transaction price to the extent Carpets believes it has an enforceable right and ~~expands~~it is probable that a significant reversal of cumulative revenue recognized will not occur. Carpets estimates variable consideration and the determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available at this time.

The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. This evaluation may require significant judgment and the decision to combine a group of contracts or separate a contract into ~~new markets.~~multiple performance obligations could change the amount of revenue and profit recorded in a given period.

Revenue is recognized over time as work is completed because of the continuous transfer of control to the customer (typically using an input measure such as costs incurred to date relative to total estimated costs at completion to measure progress). Carpets uses a cost-to-cost based input method using labor costs to measure progress on its services. Carpets has determined that using labor costs to measure its progress is the method that most faithfully depicts its performance in transferring control of the performance obligation (installed products) to the builder.

As a significant change in one or more of these estimates could affect the profitability of Carpets contracts, Carpets reviews and updates its contract-related estimates regularly. Carpets recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the cumulative impact of the profit adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. Such adjustments have not been material due to the shorter term of the majority of Carpets contracts. If at any time the estimate of contract profitability indicates an anticipated loss on a contract, the projected loss is recognized in full, including any previously recognized profit, in the period it is identified and recognized as an accrued contract losses (contract liability). For contract revenue recognized over time, the accrued contract losses is adjusted so that the gross profit for the contract remains zero in future periods.

Contract modifications result from changes in contract specifications or requirements. Carpets considers unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. Carpets considers claims to be contract modifications for which Carpets seeks, or will seek, to collect from customers, or others, for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays. Costs associated with contract modifications are included in the estimated costs to complete the contracts and are treated as project costs when incurred. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the ~~Printing Components Business acquisition,~~existing contract. The effect of a contract modification on the transaction price, and Carpets’ measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. In some cases, settlement of contract modifications may not occur until after completion of work under the contract.

The timing of when Carpets bills its customers is generally dependent upon agreed-upon contractual terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

recognition, resulting in unbilled revenue, which is a contract asset. However, Carpets sometimes receive advances or deposits from its customers before revenue is recognized, resulting in deferred revenue, which is a contract liability.

Carpets estimates the collectability of contract amounts at the same time that Carpets estimates project costs. If Carpets anticipates that there may be issues associated with the collectability of the full amount calculated as the transaction price, Carpets may reduce the amount recognized as revenue to reflect the uncertainty associated with realization of the eventual cash collection.

Carpets provides a warranty relating to the products installed and the installation of the products. Since the warranty covers instances when products installed are defective and/or are not installed properly, the warranty is classified as an assurance warranty. Carpets accrues for expected warranty work as revenue is recognized.

Phoenix.Phoenix contracts with its customers are typically in the form of a purchase order issued to the Company by its customers and, in the form of a purchase order issued in connection with a formal MSA executed with a customer.

The majority of Phoenix revenue is derived from purchases under which Phoenix provides a specific product or service and, as a result, each product or service is one performance obligation. Additionally, Phoenix concluded that prospective volume rebates provided to certain customers are material rights, which is a separate performance obligation.

Revenue is measured as the amount of consideration Phoenix expects to receive in exchange for transferring goods or providing services, which is based on transaction prices set forth in contracts with customers and an estimate of variable consideration, as applicable.

Variable consideration resulting from volume rebates, fixed rebates, and sales discounts that are offered within contracts between Phoenix and ~~LSC entered into a supply agreement (as amended from time to time,~~its customers is recognized in the ~~“Supply Agreement”). Pursuant~~period the related revenue is recognized. Estimates of variable consideration are based on stated contract terms and an analysis of historical experience. The amount of variable consideration is included in the net sales price only to the ~~Supply Agreement, LSC agreed~~extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

The contract transaction price is allocated to ~~purchase from~~ each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For contracts with multiple performance obligations, such as when a contract contains a material right, the transaction price allocated to each performance obligation is based on the price stated in the customer contract, which represents Phoenix’s best estimate of the stand-alone selling price of each distinct good or service in the contract and the expected value of a prospective volume rebate.

Phoenix ~~its print requirements~~recognizes revenue at a point in time for substantially all products. The point in time when revenue is recognized is when the performance obligation has been completed and the customer obtains control of the products, which is generally upon shipment to ~~continue servicing~~the customer (dependent upon specific shipping terms).

Under agreements with certain customers, custom products may be stored by the Company for future delivery. Based upon contractual terms, Phoenix is typically able to recognize revenue once the performance obligation is satisfied and the customer obtains control of ~~its~~the completed product, usually when it completes production (depending on the specific facts and circumstances). In these situations, Phoenix may also receive a logistics or warehouse management fee for the services it provides, which Phoenix recognizes over time as the services are provided.

With certain customer contracts, Phoenix is permitted to complete a pre-defined quantity of custom products and holds such inventory until the customer requests shipment (which generally is required to be delivered in the same year as production). For these items, Phoenix has the contractual right to receive payment once the production is completed, regardless of the ultimate delivery date. Based upon contractual terms, Phoenix recognizes revenue once the performance obligation has been satisfied and the customer obtains control of the completed products, usually when production is completed.

In limited situations, Phoenix is permitted to produce and hold in inventory a pre-defined quantity of custom products as safety stock. Similar to completed production held in inventory, for these items, Phoenix has the contractual right to receive payment for the pre-defined quantity once the production is completed, regardless of the ultimate delivery date. Based upon Phoenix’s evaluation of the contractual terms, Phoenix recognizes revenue once the performance obligation has been satisfied and the customer obtains control of the completed product, usually when production is completed.

Billings for shipping and handling costs are recorded in revenue on a gross basis. Phoenix made an accounting policy election under ASC 606 to account for shipping and handling after the customer obtains control of the good as fulfillment activities rather than as a

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

separate service to the customer. As a result, when Phoenix is responsible for shipment, Phoenix accrues the costs of the shipping and handling if revenue is recognized for the related good before the fulfillment activities occur.

Many of Phoenix’s operations process materials, primarily paper, that may be supplied directly by customers ~~buy minimum amounts of certain components from~~or may be purchased by Phoenix and ~~provide~~sold to customers as part of the end product. No revenue is recognized for customer-supplied paper, but revenue for Phoenix-supplied paper is recognized on a gross basis.

In limited circumstances, Phoenix collects taxes from its customers. When taxes are collected, Phoenix records the taxes collected from customers and remitted to governmental authorities on a net basis.

Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 120 days, based on a credit assessment of individual customers, as well as industry expectations.

The timing of revenue recognition, billings, and cash collections results in accounts receivable and unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. Revenue recognition generally coincides with aPhoenix’s contractual right to consideration and the issuance of ~~last refusal~~invoices to ~~supply certain non-component work.~~customers. Depending on the nature of the performance obligation and arrangements with customers, the timing of the issuance of invoices may result in contract assets or contract liabilities. Contract assets related to unbilled receivables are recognized for satisfied performance obligations for which Phoenix cannot yet issue an invoice. Contract liabilities result from advances or deposits from customers on performance obligations not yet satisfied.

Phoenix provides a warranty that the products conform to the customer specifications and ~~ALJ financed~~are free of defects. The warranty is classified as an assurance warranty. Phoenix generally obtains customer approval prior to commencing production to minimize warranty issues. As a result, warranty claims are generally not significant. However, Phoenix accrues for the ~~acquisition by borrowing $7.5 million under a term loan with Cerberus, selling an aggregate~~estimated warranty work when revenue is recognized, if material.

Because the majority of ~~$1.5 million~~Phoenix products are customized, product returns are not significant. However, Phoenix accrues for the estimated amount of ~~ALJ common stock in a private offering to two investors who are unaffiliated with ALJ,~~customer returns at the time of sale, if deemed material.

Contract Assets 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.~~Liabilities

The following ~~schedule reflects~~table provides information about consolidated contract assets and contract liabilities at December 31, 2019 and October 1, 2019:

(in thousands)	December 31, 2019		October 1, 2019
Contract assets:
Unbilled revenue ⁽¹⁾	$	2,255	$	825
Total contract assets	$	2,255	$	825
Contract liabilities
Deferred revenue	$	5,238	$	1,838
Accrued rebates and material rights ⁽²⁾		3,281		2,612
Accrued contract losses ⁽³⁾		12		15
Total contract liabilities	$	8,531	$	4,465

⁽¹⁾

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

⁽²⁾	Of the total balance, $0.4 million is included in other non-current liabilities and $2.9 million is included in accrued expenses on the Consolidated Balance Sheet.

⁽³⁾	Included in accrued expenses on the Consolidated Balance Sheet.

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides changes in consolidated contract assets and contract liabilities during the three months ended December 31, 2019:

(in thousands)	Contract Assets		Contract Liabilities
Balance, beginning of period (October 1, 2019)	$	825	$	4,465
Additions to unbilled revenue, net		1,430		—
Revenue recognized		—		(1,956	)
Change in loss accrual		—		(3	)
Accrued rebates		—		669
Cash received from customer		—		5,356
Balance, end of period	$	2,255	$	8,531

Deferred Revenue and Remaining Performance Obligations

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

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

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

Estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially satisfied at December 31, 2019, was de minimis. This balance does not include revenue related to performance obligations that are part of a contract whose original expected duration is one year or less, including contracts with a penalty-free termination for convenience clause. In addition, this disclosure does not include (i) expected consideration related to performance obligations for which the Company elects to recognize revenue in the amount it has a right to invoice (e.g., usage-based pricing terms), and (ii) any variable consideration which is allocated entirely to future performance obligations including variable transaction fees or fees tied directly to costs incurred.

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Disaggregation of Revenue

Revenue by contract type was as follows for the three months ended December 31, 2019:

(in thousands)	Three Months Ended December 31, 2019
Faneuil:
Transportation	$	17,128
Utility		13,927
Healthcare		25,367
Government		1,049
Other		1,096
Total Faneuil	$	58,567
Carpets
Builder	$	6,959
Commercial		1,628
Retail		1,187
Total Carpets	$	9,774
Phoenix:
Publisher
MSA	$	12,430
Non-MSA		6,560
Commercial
MSA		805
Non-MSA		2,329
Total Phoenix	$	22,124
Total consolidated revenue, net	$	90,465

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

Costs to Obtain a Contract

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

During the three months ended December 31, 2019, the Company recognized $0.1 million of amortization of these costs, which is included in selling, general, and administrative expense in our Consolidated Statement of Operations. The net book value of these costs was $0.6 million as of December 31, 2019, of which $0.3 million was in prepaid expenses and other current assets, ~~acquired~~ and ~~liabilities assumed on the Printing Components Business Purchase Date and the purchase price details:~~$0.3 million was in other assets.

Costs to Fulfill a Contract

(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

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

1019

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The amortization of costs incurred to fulfill contracts, which comprise set-up/transition activities, for the three months ended December 31, 2019 was approximately $1.5 million. The net book value of the costs as of December 31, 2019, was $2.1 million as of December 31, 2019, of which $1.7 million was in prepaid expenses and other current assets, and $0.4 million was in other assets.

Capitalized costs to obtain and fulfill a contract are periodically reviewed for impairment. We did not incur any impairment losses during the three months ended December 31, 2019.

4. ACQUISITIONS

RDI Acquisition

On July 31, 2019 (“RDI Purchase Date”), Faneuil acquired Realtime Digital Innovations, LLC (“RDI” and such acquisition, the “RDI Acquisition”), a provider of workflow automation and business intelligence services. The RDI Acquisition is expected to provide Faneuil with a sustainable competitive advantage in the business process outsourcing space by allowing it to, among 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.

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

	Purchase Price
Balance Sheet Caption	Allocation
Total current assets	$	53
Fixed assets		11
Identified intangible assets:
Technology		3,400
Non-compete agreements		1,300
Goodwill		2,675
Total assets		7,439
Accrued expenses		(39	)
Fair value of deferred and contingent consideration – current ⁽¹⁾		(2,100	)
Fair value of deferred and contingent consideration – non-current ⁽²⁾		(2,800	)
Cash paid at closing	$	2,500

⁽¹⁾	Included in accrued expenses on the Consolidated Balance Sheet at December 31, 2019. There was no change in the fair value from the RDI Purchase Date to December 31, 2019.

⁽²⁾	Included in other non-current liabilities on the Consolidated Balance Sheet at December 31, 2019. There was no change in the fair value from the RDI Purchase Date to December 31, 2019.

The Company accounted for the ~~Printing Components Business acquisition~~RDI Acquisition using the purchase method of accounting. Accordingly, the assets and liabilities were recorded at their fair values at the ~~date of acquisition.~~RDI Purchase Date. The excess of the purchase price over the fair value of the tangible and intangible assets acquired, ~~and the~~ liabilities assumed, and deferred and contingent consideration, 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.~~

~~The Printing Components Business recorded~~ $3.2 million and $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 ~~June 30, 2018,~~December 31, 2019, the Company incurred ~~$0 and~~less than $0.1 million of acquisition-related expenses in connection with the ~~Printing Components Business~~RDI acquisition, which were expensed to selling, general, and administrative expense.

4.5. CONCENTRATION RISKS

Cash

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

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Major Customers and Accounts Receivable

During the three months ended December 31, 2019, ALJ generated 10.2% of consolidated net revenue from one customer. During the three months ended December 31, 2018, ALJ did not have any ~~customer~~customers 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 June 30,

Nine Months Ended June 30,

2019

2018

2019

2018

Customer A

14.6
%

16.4
%

14.0
%

15.1
%
Customer B

11.3

11.8

10.6

10.5

Customer C

**

**

11.8

11.8

**	~~Less than 10% of Faneuil net revenue.~~

	Three Months Ended December 31,
	2019			2018
Customer A		15.7	%		16.2	%
Customer B		11.6			13.0

~~Trade~~

Accounts receivables from these customers totaled ~~$5.9~~$8.2 million on ~~June 30,~~December 31, 2019. As of ~~June 30,~~December 31, 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 June 30,						Nine Months Ended June 30,						Three Months Ended December 31,
	2019			2018			2019			2018			2019			2018
Customer A		33.6	%		19.9	%		28.9	%		20.5	%		26.8	%		29.3	%
Customer B		24.5			27.9			28.4			28.3			23.6			27.4
Customer C		21.7			19.3			21.3			21.8			16.0			19.4

~~Trade~~Accounts receivables from these customers totaled ~~$2.3~~$1.5 million on ~~June 30,~~December 31, 2019. As of ~~June 30,~~December 31, 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:

~~Trade~~Accounts receivables from these customers totaled ~~$6.4~~$6.1 million on ~~June 30,~~December 31, 2019. As of ~~June 30,~~December 31, 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 most customers.

~~ALJ did not have any suppliers that represented more than 10% of consolidated inventory purchases. However, two~~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:

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 ~~one~~its significant ~~supplier~~suppliers was ~~19.6% and 23.8%~~as follows:

⁽¹⁾Represents 11.6% of consolidated inventory purchases for the three ~~and nine~~ months ended ~~June 30, 2019, respectively,~~December 31, 2019.

⁽²⁾Represents 11.0% and ~~22.9% and 27.5%~~17.5% of consolidated inventory purchases for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018, respectively.

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

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

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

Property and equipment depreciation and amortization expense, including amounts related to capitalized leased assets, was ~~$4.4~~$3.9 million and ~~$3.3~~$3.1 million for the three months ended ~~June 30, 2019 and 2018, respectively, and $11.0 million and $10.3 million for the nine months ended June 30,~~December 31, 2019 and 2018, respectively.

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

13Intangible asset amortization expense was $1.3 million for both the three months ended December 31, 2019 and 2018.

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

Intangible asset amortization expense was $1.3 million and $1.4 million for the three months ended June 30, 2019 and 2018, respectively, and $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~~2020 and yearly thereafter:

~~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 accrued expenses at the end of each reporting period:

The Company is self-insured for certain workers’ compensation claims as discussed below.

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

Carpets. Carpets maintains ~~insurance coverage~~a self-insured plan for ~~costs above the specified limit. Faneuil is self-insured for health insurance~~workers’ compensation claims up to ~~$150,000~~$200,000 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.

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

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

Stock options and warrants to purchase ~~less than 1.7~~4.2 million and ~~1.6~~1.5 million shares of common stock were not considered in calculating ALJ’s diluted loss per common share for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and ~~the three and nine months ended June 30,~~ 2018, respectively, as their effect would be anti-dilutive.

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

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~~$32.5 million in a revolving loan (“Cerberus/PNC Revolver,” and together with the Cerberus Term Loan, the “Cerberus Debt”). ALJ has subsequently entered into ~~four~~six amendments to the Financing Agreement. The most recent amendment is described below. The Cerberus Debt matures on November 28, 2023 (“Maturity Date”).

On ~~November 28, 2018,~~December 17, 2019, ALJ entered into the ~~Fourth~~Sixth Amendment ~~(the “Fourth~~(“Sixth 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 FourthSixth Amendment amends certain terms and covenants in order to support the continued growth of the Company, ~~and the associated cash required to build out three new customer call centers to position Faneuil for anticipated increased contract awards,~~ as summarized below:

In ~~addition,~~connection with the ~~Fourth~~Sixth Amendment, ~~requires~~certain trusts and other entities formed for the ~~Company,~~benefit of, or otherwise affiliated with, Jess Ravich, the Company’s Chief Executive Officer and Chairman of the Board (the “Ravich Entities”), entered into a Junior Participation Agreement with Cerberus (the “Junior Participation Agreement”), pursuant to which the Ravich Entities agreed to purchase $4.1 million in junior participation interests in the Term B loan under ~~certain circumstances,~~the Financing Agreement (the “Junior Participation” and such interests, the “Junior Participation Interests”). The Junior Participation Interests are junior and subordinate to ~~secure not less than $5.0 million of equity or subordinated debt financing, which will be used to pay down~~ the Cerberus Term Loan in all respects, have no quarterly payments, and accrue interest under the financing agreement (i) in cash, accrued at the same rate per annum as the Cerberus Term Loan and paid monthly, and (ii) in kind, accrued at 4.00% per annum, payable on the Maturity Date. In addition, on December 17, 2019 (the ~~“Alternative Financing Requirement”~~“Issuance Date”), in consideration of the Ravich Entities agreeing to enter into the Junior Participation, the Company agreed to issue the Ravich Entities fully vested warrants to purchase 1.23 million shares of the Company’s common stock (the “Warrants”), with a five-year term and an exercise price equal to the lesser of the 30 day trailing average closing price of the Company’s common stock as traded on the NASDAQ Stock Market on (i) the Issuance Date, or (ii) the six month anniversary of the Issuance Date. The 30 day trailing average closing price of the Company’s common stock on the Issuance Date was $1.20.

The fair value of the warrants was calculated using the Black Scholes Model with the following assumptions: contractual life of five years, volatility of 42.3%, dividend yield of 0.00%, and annual risk-free interest rate of 1.7%. ~~See~~ ~~Backstop Letter Agreement~~ ~~below.~~The total fair value of the warrants, $0.6 million, was expensed to selling, general, and administrative expense during the three months ended December 31, 2019.

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

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 annually each December, upon delivery of the annual audited financial statements. The annual ECF calculation, based on results of operations for the year ended September 30, 2019, did not require ALJ to make an annual ECF payment in December 2019. During December 2018, ~~and December 2017,~~ ALJ made an ECF ~~payments~~payment of $0.3 ~~million and $4.1 million, respectively. During~~million.

In certain instances, ALJ is required to make mandatory term loan payments if ALJ receives cash outside the ~~nine~~normal course of business. As a result, during the three months ended ~~June 30,~~December 31, 2019 and 2018, ALJ made mandatory payments of $0.9 million and $0.4 million, ~~as a result~~respectively.

As of ~~receiving proceeds from sales of assets. A final balloon payment is due on the Amended Maturity Date. There is~~December 31, 2019, ALJ will be assessed a prepayment penalty equal to ~~3%,~~ 2%, and 1% of the outstanding Cerberus Debt plus any unused available credit on the PNC Revolver if the Cerberus Term Loan is repaid ~~within the first, second,~~before November 28, 2020 and ~~third year anniversary of the Fourth Amendment.~~November 28, 2021, respectively. ALJ may make payments of up to $7.0 million against the loan with no penalty. A final balloon payment is due on the Maturity Date.

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 ~~June 30,~~December 31, 2019, ALJ was in compliance with all debt covenants and had unused borrowing capacity of ~~$8.5~~$8.9 million.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~Backstop Letter Agreement

OnIn November ~~28,~~ 2018, in connection with the Fourth Amendment to the Financing Agreement (“Fourth Amendment”), the Company entered into a Backstop Letter Agreement with Jess ~~Ravich, the Company’s Executive Chairman.~~Ravich. Pursuant to the Backstop Letter Agreement, Mr. Ravich ~~will~~agreed to provide a “backstop” that ~~would enable~~enabled the Company to satisfy an alternative financing requirement as required by the ~~Alternative Financing Requirement by agreeing,~~Fourth Amendment. Mr. Ravich agreed that, if the Company is unable to locate alternative financing on terms, conditions and timing reasonably acceptable to it, and if required by Cerberus, he would satisfy the ~~Collateral Agent.~~alternative financing requirement. 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~~Cerberus 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,~~As of December 31, 2019, Cerberus had not required ALJ ~~recorded~~to satisfy the backstop fee and other fees incurred in connection with the Backstop Letter Agreement, which totaled approximately $0.1 million, as a current asset. ALJ expensed the associated fees, which totaled approximately $0.1 million, to ~~selling, general and administrative expense during the nine months ended June 30, 2019 as the likelihood that ALJ would be required to issue the Warrant was deemed remote.~~alternative financing requirement.

ALJ has accounted for ~~the Fourth Amendment~~all amendments as a debt ~~modification~~modifications pursuant to ASC 470, Debt. During the ~~nine~~three months ended ~~June 30,~~December 31, 2019, ALJ paid ~~$0.6~~$0.4 million of legal and other fees, of which $0.3 million were added to deferred loan costs and are being amortized to interest expense through the maturity date. The remaining $0.1 million were expensed to selling, general, and administrative expense.

During the three months ended December 31, 2018, ALJ paid legal and other fees totaling $0.6 million, of which $0.4 million were added to deferred loan costs and are being amortized to interest expense through the ~~Amended Maturity Date.~~maturity date. The remaining $0.2 million were expensed to selling, general, and administrative expense.

During the nine months ended 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~~ to the Financing Agreement, ALJ is required to pay a fee (a “Contingent Payment”) in each of three consecutive annual periods which began on May 27, 2018, if at any time during each annual period there are any amounts outstanding on the Cerberus/PNC 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~~made the first Contingent Payment ~~which was~~during May 2018. ALJ made the second Contingent Payment during May 2019. Both Contingent Payments were added to deferred loan costs and ~~was~~ amortized to interest expense ~~through April 30, 2019. During May~~for one year following the respective Contingent Payment. As of December 31, 2019, ~~ALJ paid the second~~one Contingent Payment ~~which was added to deferred loan costs and is being amortized to interest expense through April 30, 2020.~~

In ~~July 2019,~~February 2020, ALJ entered into the ~~Fifth Amendment~~seventh 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 (the “Equipment Financing”). The 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):

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

The Company leases real estate, equipment, and vehicles under non-cancellable operating leases. As of ~~June 30,~~December 31, 2019, future minimum rental commitments, ~~and~~net of sublease income, 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.~~Directors or the Chief Executive Officer. The agreements also provide for involuntary termination payments, which includes base salary, performance bonus, medical premiums, stock options, non-competition provisions, and other terms and conditions of employment. As of ~~June 30,~~December 31, 2019, contingent termination payments related to base salary and medical premiums totaled ~~$1.2~~$1.3 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 ~~June 30,~~December 31, 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 ~~$25.8~~$30.0 million. To date, Faneuil has not made any non-performance payments to any of its sureties.

The Company had letters of credit totaling ~~$3.6~~$2.7 million outstanding as of ~~June 30,~~December 31, 2019.

On September 22, 2016, Faneuil filed a complaint against 3M Company (“3M”) in the Circuit Court for the City of Richmond, 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.~~performance.

The matter was tried in a bench trial from April 30, 2018 through May 2, 2018. On May 15, 2018, the Richmond Circuit Court issued its opinion, which dismissed both Faneuil’s complaint and 3M’s counterclaim with prejudice. 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~~in selling, general, and administrative expense during the year ended September 30, 2018. The matter was appealed to the Supreme Court of Virginia where Faneuil ~~has filed an appeal~~was awarded approximately $1.2 million, plus pre- and post-judgment interest. The matter was remanded to the trial court for calculation of interest and entry of final judgment. Faneuil and 3M settled on the ~~Richmond Circuit Court’s judgment.~~amount of interest to be paid. The ~~parties have fully briefed~~final judgment plus interest, which totaled $1.5 million, was received and recorded by Faneuil in December 2019. Of the ~~merits~~total $1.5 million, $1.3 million was booked as a reduction to selling, general, and administrative expense, and $0.2 million was booked to interest from legal settlement on the statement of ~~Faneuil’s appeal and are waiting for~~operations during the ~~court to set the date for oral argument at this time.~~three months ended December 31, 2019.

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

The parties are currently engaged in limited discovery. A court-ordered mediation is scheduled between the parties for May 2020. Faneuil believes this action is without merit and intends to defend this case vigorously. The Company has not accrued any amounts related to the Marshall claim as of December 31, 2019.

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 ~~June 30,~~December 31, 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 ~~Nine~~Three Months ended ~~June 30,~~December 31, 2019

~~ALJ’s~~ALJ did not have any common stock activity ~~for~~during the ~~nine~~three months ended ~~June 30, 2019 consisted of~~December 31, 2019.

Common Stock Activity during the ~~following:~~Three Months ended December 31, 2018

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

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

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

At ~~June 30,~~December 31, 2019, ALJ had approximately ~~$0.4~~$0.2 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 ~~1.3 years.~~one year.

Stock Option Awards. ALJ ~~did not grant any~~had no option grants or exercises during the three months ended December 31, 2019 or 2018. ALJ had no option forfeitures during the three months ended December 31, 2019 and had forfeitures of 20,000 options during the ~~nine~~three months ended June 30, 2019. During the nine months ended 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%.December 31, 2018.

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 ~~June 30,~~December 31, 2019.

Common Stock Awards. Members of ALJ’s Board of Directors receive a director compensation package that includes an annual common stock award. In connection with such awards, ALJ recorded stock-based compensation expense of less than $0.1 million and $0.1 million for ~~both~~ the three months ended ~~June 30,~~December 31, 2019 and 2018, ~~and $0.3 million for both the nine months ended June 30, 2019 and 2018.~~ respectively.

As of December 31, 2019, ALJ had 1.7 million stock options with a weighted average exercise price of $3.39 outstanding, and warrants exercisable to purchase 2.5 million shares of common stock with a weighted average exercise price of $1.51 outstanding.

~~ALJ recorded a non-cash deferred income~~ALJ’s effective 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 provisionrate for ~~income taxes during the three and nine months ended June 30, 2019, and~~ the three months ended June 30, 2018 was a result of generating state taxable income. ALJ’s provision for income taxes for the nine months ended 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. Below31, 2019 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”~~(1.0%)~~, ALJ will apply a blended corporate tax rate of 28.1%~~, which is ~~based on~~due to current state income tax, offset by changes to the ~~applicable~~valuation allowance recorded against net deferred tax ~~rates before and after~~assets. ALJ’s effective tax rate for the ~~Tax Reform Law and the number of days in ALJ’s initial tax year under the Tax Reform Law, which~~three months ended December 31, ~~2018. Subsequent~~2018 was 29.0%, which was due to ~~December 31, 2018,~~current state income tax. The decrease in the ~~federal corporate~~effective tax rate ~~became 21%.~~

~~Interest Expense Limitation.~~ ~~Effective January 1, 2018, the Tax Reform Law disallows the deduction for interest expense~~was attributable to a decrease in ~~excess of 30% of “adjusted~~forecasted taxable ~~income”~~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 refundwell as a ~~deferred tax asset in~~decrease to the ~~balance sheet at 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, ALJvaluation allowance recorded ~~a one-time, non-cash increase to deferred income tax expense of $4.1 million to revalue ALJ’s~~against 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. assets.

Harland Clarke Holdings Corp. (“Harland Clarke”), a stockholder who owns ALJ shares in excess of five percent, had a contract with Faneuil to provide call center services for Harland Clarke’s banking-related products. The contract completed in March 2019. Faneuil did not recognize revenue or cost of revenue subsequent to such completion date. Faneuil recognized revenue from Harland Clarke totaling ~~$0 and~~ $0.1 million for the three ~~and nine~~ months ended ~~June 30, 2019, and $0.1 million and $0.2 million for the three and nine months ended June 30, 2018, respectively.~~December 31, 2018. The associated cost of revenue was ~~$0 and~~ $0.1 million for the three ~~and nine~~ months ended ~~June 30, 2019, and $0.1 million and $0.3 million for the three and nine months ended June 30, 2018, respectively.~~December 31, 2018. 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 $0~~did not owe Faneuil any amounts at December 31, 2019 and owed Faneuil less than $0.1 million at ~~June 30, 2019 and September 30, 2018, respectively.~~December 31, 2018.

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 Chief Executive ~~Chairman.~~Officer. The CODM manages the business, allocates resources to, and assesses the performance of each operating segment using information about its net revenue and segment adjusted EBITDA. ALJ defines segment adjusted EBITDA as segment net income (loss) before depreciation and amortization, interest expense, litigation loss, recovery of litigation loss, restructuring ~~expenses,~~and cost reduction initiatives, lease payments in anticipation of facility shutdown, loan amendment ~~fees,~~expenses, stock-based compensation, acquisition-related expenses, (loss) gain on disposal of ~~fixed~~ assets and other gain, net, 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.

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

The following tables present ALJ’s segment information for the three months ended December 31, 2019 and 2018:

	Nine Months Ended June 30, 2019												Three Months Ended December 31, 2019
(in thousands)	Faneuil		Carpets		Phoenix		ALJ			Total			Faneuil		Carpets			Phoenix		ALJ			Total
Net revenue	$	146,565	$	37,213	$	82,227	$	—		$	266,005		$	58,567	$	9,774		$	22,124	$	—		$	90,465

Segment adjusted EBITDA	$	8,257	$	910	$	15,437	$	(2,092	)	$	22,512		$	1,653	$	(78	)	$	2,840	$	(1,055	)	$	3,360
Depreciation and amortization											(14,881	)												(5,242	)
Interest expense											(8,041	)												(2,564	)
Loan amendment expenses																								(769	)
Restructuring and cost reduction initiatives																								(277	)
Stock-based compensation																								(112	)
Acquisition-related expenses																								(49	)
Provision for income taxes																								(40	)
Lease payments in anticipation of facility shutdown											(517	)												(38	)
Stock-based compensation											(556	)
Loan amendment fees											(337	)
Restructuring expenses											(225	)
Acquisition-related expenses											(97	)
Disposal of assets and other gain											221
Provision for income taxes											(4,152	)
(Loss) gain on disposal of assets and other gain, net																								(2	)
Interest from legal settlement																								200
Recovery of litigation loss																								1,256
Net loss										$	(6,073	)											$	(4,277	)

	Nine Months Ended June 30, 2018														Three Months Ended December 31, 2018
(in thousands)	Faneuil			Carpets			Phoenix		ALJ			Total			Faneuil		Carpets		Phoenix		ALJ			Total
Net revenue	$	143,320		$	53,354		$	83,045	$	—		$	279,719		$	55,202	$	12,362	$	26,220	$	—		$	93,784

Segment adjusted EBITDA	$	10,229		$	(384	)	$	15,640	$	(1,717	)	$	23,768		$	4,946	$	160	$	4,221	$	(721	)	$	8,606
Depreciation and amortization													(14,401	)											(4,446	)
Interest expense													(7,979	)											(2,715	)
Litigation loss													(2,910	)
Restructuring expenses													(2,042	)
Provision for income taxes																									(288	)
Loan amendment expenses																									(201	)
Lease payments in anticipation of facility shutdown																									(186	)
Stock-based compensation													(812	)											(185	)
Restructuring and cost reduction initiatives																									(85	)
Acquisition-related expenses													(229	)											(12	)
Disposal of assets and other gain													173
Provision for income taxes													(4,122	)
Net loss			��									$	(8,554	)
Gain (loss) on disposal of assets and other gain, net																									223
Net income																								$	711

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.

On ~~July 31, 2019,~~February 13, 2020, ALJ entered into the ~~Fifth~~Seventh Amendment ~~(the “Fifth~~(“Seventh Amendment”) to the Financing ~~Agreement~~Agreement. See Note 8. The Seventh Amendment amends certain terms and covenants in order 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.~~as summarized below:

~~ALJ sold 3.9 million shares~~Amendment 7 does not impact Maturity Date, quarterly payments, or interest rates. Additionally, Amendment 7 does not impact the presentation and related disclosure of ~~common stock~~the Cerberus Term Loan 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.December 31, 2019.

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. (“Faneuil”), ~~or Faneuil,~~ Floors-N-More, LLC, d/b/a Carpets N’ More ~~or Carpets,~~(“Carpets”), and Phoenix Color Corp.~~, or Phoenix.~~ (“Phoenix”). With several members of our senior management and Board of Directors coming from long careers in the professional ~~service~~services industry, ALJ is focused on acquiring and operating exceptional 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~~a printing and manufacturing services division in Terre Haute, Indiana by Phoenix in October 2017 (the “Printing Components Business”), 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.

On July 31, 2019, ALJ acquired Realtime Digital Innovations, LLC (the “RDI Acquisition”), an exclusive partner of Faneuil for the past 1821 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.

During the three months ended December 31, 2019, we identified and reclassified certain expenses between cost of revenue and selling, general, and administrative expenses. For additional details, see “Part I, Item 1. Financial Statements – Note 1. Organization and Basis of Presentation.” Accordingly, we have revised previously issued financial statements contained in this Quarterly Report on Form 10-Q to reflect the revisions in the corresponding periods. Management’s discussion and analysis included herein is based on the revised financial results for the three months ended December 31, 2018.

Three Months Ended ~~June 30,~~December 31, 2019 Compared to Three Months Ended ~~June 30,~~December 31, 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 June 30, 2019						Three Months Ended June 30, 2018						Three Months Ended December 31, 2019						Three Months Ended December 31, 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	$	44,773			53.2	%	$	43,893			49.0	%	$	58,567			64.7	%	$	55,202			58.9	%
Carpets		12,763			15.1			18,013			20.0			9,774			10.8			12,362			13.2
Phoenix		26,689			31.7			27,754			31.0			22,124			24.5			26,220			27.9
Consolidated net revenue		84,225			100.0			89,660			100.0			90,465			100.0			93,784			100.0
Cost of revenue ⁽²⁾
Faneuil		36,898			82.4			33,092			75.4			50,172			85.7			44,467			80.6
Carpets		9,935			77.8			14,745			81.9			7,791			79.7			9,816			79.4
Phoenix ⁽³⁾		20,197			75.7			19,941			71.8			17,763			80.3			20,363			77.7
Consolidated cost of revenue		67,030			79.6			67,778			75.6			75,726			83.7			74,646			79.6
Selling, general and administrative expense ⁽²⁾
Selling, general, and administrative expense ⁽²⁾
Faneuil		7,442			16.6			10,107			23.0			6,450			11.0			5,989			10.8
Carpets		2,350			18.4			2,700			15.0			2,061			21.1			2,386			19.3
Phoenix		3,017			11.3			3,931			14.2			2,826			12.8			3,067			11.7
ALJ		899			—			977			—			1,164			—			918			—
Consolidated selling, general and administrative expense		13,708			16.3			17,715			19.8
Consolidated selling, general, and administrative expense														12,501			13.8			12,360			13.2
Depreciation and amortization ⁽²⁾
Faneuil		3,611			8.1			2,517			5.7			3,398			5.8			2,494			4.5
Carpets		150			1.2			203			1.1			143			1.5			229			1.9
Phoenix⁽⁴⁾		568			2.1			623			2.2			568			2.6			564			2.2
Consolidated depreciation and amortization expense		4,329			5.1			3,343			3.7			4,109			4.5			3,287			3.5
Disposal of assets and other gain ⁽⁵⁾		2			—			59			—
Loss (gain) on disposal of assets and other gain, net ⁽⁵⁾														2			—			(223	)		—
Total consolidated operating expenses ⁽⁵⁾		85,069			101.0			88,895			99.1			92,338			102.1			90,070			96.0
Consolidated operating (loss) income		(844	)		(1.0	)		765			0.9			(1,873	)		(2.1	)		3,714			4.0
Interest expense ⁽⁵⁾		(2,701	)		(3.2	)		(2,526	)		(2.8	)		(2,564	)		(2.8	)		(2,715	)		(2.9	)
Interest from legal settlement ⁽⁵⁾														200			0.2			—			—
Provision for income taxes⁽⁵⁾		(3,662	)		(4.3	)		(1,135	)		(1.3	)		(40	)		(0.0	)		(288	)		(0.3	)
Net loss ⁽⁵⁾	$	(7,207	)		(8.6	)	$	(2,896	)		(3.2	)
Loss per share of common stock–basic and diluted	$	(0.19	)				$	(0.08	)
Net (loss) income ⁽⁵⁾													$	(4,277	)		(4.7	)	$	711			0.8
(Loss) earnings per share of common stock–basic and diluted													$	(0.10	)				$	0.02

Faneuil net revenue for the three months ended ~~June 30,~~December 31, 2019 was ~~$44.8~~$58.6 million, an increase of ~~$0.9~~$3.4 million, or ~~2.0%~~6.1%, compared to net revenue of ~~$43.9~~$55.2 million for the three months ended ~~June 30,~~December 31, 2018. The increase was mainly attributable to a ~~$2.3~~$7.6 million increase in new customer contracts, ~~and $0.3~~offset by a $2.4 million ~~increase~~net decrease in existing customers ~~offset by~~mostly due to lower call volumes, and a ~~$1.7~~$1.8 million 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:

The increase in Faneuil backlog at ~~June 30,~~December 31, 2019 compared to ~~June 30,~~December 31, 2018 was primarily driven by new healthcare customer contract awards, and several transportation contract awards including 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 ~~June 30,~~December 31, 2019 was ~~$12.8~~$9.8 million, a decrease of ~~$5.3~~$2.6 million, or ~~29.1%~~20.9%, compared to net revenue of ~~$18.0~~$12.4 million for the three months ended ~~June 30,~~December 31, 2018. The decrease was primarily attributable to lower sales volumes in flooring, 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 ~~June 30,~~December 31, 2019 was ~~$11.0~~$9.4 million compared to ~~$15.2~~$11.6 million as of ~~June 30,~~December 31, 2018. The decrease in Carpets backlog at ~~June 30,~~December 31, 2019 compared to ~~June 30,~~December 31, 2018, was the result of a ~~strategic decision to only accept jobs that yield a targeted profit margin.~~lower sales pipeline.

Phoenix net revenue for the three months ended ~~June 30,~~December 31, 2019 was ~~$26.7~~$22.1 million, a decrease of ~~$1.1~~$4.1 million, or ~~3.8%~~15.6%, compared to net revenue of ~~$27.8~~$26.2 million for the three months ended ~~June 30,~~December 31, 2018. The decrease was a result of ~~planned lower packaging sales~~several large orders during the three months ended December 31, 2018, that did not reoccur during the three months ended December 31, 2019, and lower ~~book~~component sales ~~somewhat offset by higher component sales.~~related to education.

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

~~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.”

Faneuil cost of revenue for the three months ended ~~June 30,~~December 31, 2019 was ~~$36.9~~$50.2 million, an increase of ~~$3.8~~$5.7 million, or ~~11.5%~~12.8%, compared to cost of revenue of ~~$33.1~~$44.5 million for the three months ended ~~June 30,~~December 31, 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.~~contracts, higher rent expense, and costs to implement the new revenue recognition standard. During the three months ended ~~June 30,~~December 31, 2019, as compared to the three months ended ~~June 30,~~December 31, 2018, cost of revenue as a percentage of segment net revenue increased to ~~82.4%~~85.7% from ~~75.4%~~80.6% as a result of ~~inefficiencies related to~~ the ~~startup of new contracts.~~above mentioned items other than the increased net revenue.

Carpets cost of revenue for the three months ended ~~June 30,~~December 31, 2019 was ~~$9.9~~$7.8 million, a decrease of ~~$4.8~~$2.0 million, or ~~32.6%~~20.6%, compared to cost of revenue of ~~$14.7~~$9.8 million for the three months ended ~~June 30,~~December 31, 2018. The absolute dollar decrease in cost of revenue was mainly attributable to decreased net revenue. During the three months ended ~~June 30,~~December 31, 2019, as compared to the three months ended ~~June 30,~~December 31, 2018, cost of revenue as a percentage of segment net revenue ~~decreased~~increased slightly to ~~77.8%~~79.7% from ~~81.9% as a result~~79.4% in the normal course of ~~the strategic decision to only accept jobs that yield a targeted profit margin, and process improvements and cost reductions throughout the organization.~~business.

Phoenix cost of revenue for the three months ended ~~June 30,~~December 31, 2019 was ~~$20.2~~$17.8 million, ~~an increase~~a decrease of ~~$0.3~~$2.6 million, or ~~1.3%~~12.8%, compared to cost of revenue of ~~$19.9~~$20.4 million for the three months ended ~~June 30,~~December 31, 2018. During the three months ended ~~June 30,~~December 31, 2019, as compared to the three months ended ~~June 30,~~December 31, 2018, cost of revenue as a percentage of segment net revenue increased to ~~75.7%~~80.3% from ~~71.8%~~77.7%. 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 three months ended ~~June 30,~~December 31, 2019 was ~~$7.4~~$6.5 million, ~~a decrease~~an increase of ~~$2.7~~$0.5 million, or ~~26.4%~~7.7%, compared to selling, general, and administrative expense of ~~$10.1~~$6.0 million for the three months ended ~~June 30,~~December 31, 2018. The ~~decrease~~increase was primarily attributable to ~~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~~$1.1 million to support new ~~customers.~~customers, a non-cash expense of $0.6 million for the fair value of warrants issued in connection with debt modification, increased expenses to comply with new revenue recognition standards, and severance payments as part of Faneuil’s cost reduction initiative, offset by a $1.2 million recovery of litigation loss. See “Part II. Other Information, Item 1. Legal Proceedings.” During the three months ended ~~June 30,~~December 31, 2019 compared to the three months ended ~~June 30,~~December 31, 2018, selling, general, and administrative expense as a percentage of segment net revenue ~~decreased~~increased slightly to ~~16.6%~~11.0% from ~~23.0% principally as a result of the aforementioned non-cash litigation loss.~~10.8%. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.

Carpets selling, general, and administrative expense was ~~$2.4~~$2.1 million for the three months ended ~~June 30,~~December 31, 2019, a decrease of ~~$0.4~~$0.3 million, or ~~13.0%~~13.6%, compared to selling, general, and administrative expense of ~~$2.7~~$2.4 million for the three months ended ~~June 30,~~December 31, 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 ~~18.4%~~21.1% for the three months ended ~~June 30,~~December 31, 2019 from ~~15.0%~~19.3% for the three months ended ~~June 30, 2018.~~December 31, 2018, which was mainly attributable to the reduction in net revenue. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.

Phoenix selling, general, and administrative expense for the three months ended ~~June 30,~~December 31, 2019 was ~~$3.0~~$2.8 million, a decrease of ~~$0.9~~$0.2 million, or ~~23.3%~~7.9%, compared to selling, general, and administrative expense of ~~$3.9~~$3.1 million for the three months ended ~~June 30,~~December 31, 2018. The decrease was mainly attributable to the completion of the process to consolidate manufacturing facilities and cost reduction initiatives. Selling, general, and administrative expense as a percentage of segment net revenue ~~decreased~~increased to ~~11.3%~~12.8% for the three months ended ~~June 30,~~December 31, 2019 from ~~14.2%~~11.7% for the three months ended ~~June 30,~~December 31, 2018, which was mainly attributable to the ~~relocation and restructuring expense incurred during the three months ended June 30, 2018.~~reduction in net revenue. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.

ALJ selling, general, and administrative expense for the three months ended ~~June 30,~~December 31, 2019 was ~~$0.9~~$1.2 million, ~~a decrease~~an increase of ~~$0.1~~$0.2 million, or ~~8.0%~~26.8%, compared to selling, general, and administrative expense of ~~$1.0~~$0.9 million for the three months ended ~~June 30,~~December 31, 2018. The ~~decrease~~increase was mainly ~~attributable to~~personnel related, including the ~~acquisition-related legal expenses incurred during the three months ended June 30, 2018~~hiring of headcount to support our business and our strategy of ~~acquiring attractively valued assets and lower stock-based compensation expense, offset by the hiring of additional personnel.~~acquisitions. 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 three months ended ~~June 30,~~December 31, 2019 was ~~$3.6~~$3.4 million, an increase of ~~$1.1~~$0.9 million, or ~~43.5%~~36.2%, compared to depreciation and amortization expense of $2.5 million for the three months ended ~~June 30,~~December 31, 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 business, 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 consistent at $0.2 million~~ for ~~both~~ the three months ended ~~June 30,~~December 31, 2019 was $0.1 million, a decrease of $0.1 million, or 37.6%, compared to depreciation and amortization expense of $0.2 million for the three months ended December 31, 2018. The decrease was attributable to fully amortized intangible assets.

Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets. Depreciation and amortization expense was consistent at $0.6 million for both the three months ended ~~June 30,~~December 31, 2019 and 2018.

Interest expense for the three months ended ~~June 30,~~December 31, 2019 was ~~$2.7~~$2.6 million, a decrease of $0.2 million, or ~~6.9%~~5.6%, compared to ~~$2.5~~$2.7 million for the three months ended ~~June 30,~~December 31, 2018. Interest expense was impacted by reduced interest expense resulting from quarterly principal payments ~~partially~~on our term loan 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.

During the three months ended December 31, 2019, Faneuil received a onetime $1.5 million settlement, of which $0.2 million was attributable to interest. See “Part II. Other Information, Item 1. Legal Proceedings.”

Our provision for income taxes was ~~$3.7~~less than $0.1 million for the three months ended ~~June 30,~~December 31, 2019 compared to ~~$1.1~~$0.3 million for the three months ended ~~June 30,~~December 31, 2018. The three 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 net operating loss (“NOL”) carryforward. The remainingOur provision for income taxes ~~during~~for the three months ended ~~June 30,~~December 31, 2019 was athe result of generating state taxable ~~income.~~income, offset by changes to the valuation allowance recorded against net deferred tax assets. Our provision for income taxes ~~during~~for the three months ended ~~June 30,~~December 31, 2018 was athe 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, recovery of litigation loss, restructuring ~~expenses,~~and cost reduction initiatives, lease payments in anticipation of facility shutdown, loan amendment ~~fees,~~expenses, stock-based compensation, acquisition-related expenses, loss (gain) on disposal of ~~fixed~~ assets and other gain, net, provision for income taxes, and other non-recurring items. The following table summarizes segment adjusted EBITDA.

Faneuil segment adjusted EBITDA for the three months ended ~~June 30,~~December 31, 2019 was ~~$0.5~~$1.7 million compared to segment adjusted EBITDA of ~~$3.6~~$4.9 million for the three months ended ~~June 30,~~December 31, 2018. Faneuil segment adjusted EBITDA for the three months ended ~~June 30,~~December 31, 2019 was impacted by operational inefficiencies from the ~~wind-down~~start up of ~~customer~~new contracts, ~~timing delays related~~increased medical claims, higher rent expense, and the cost to ~~the startup of recently awarded contracts, operational challenges related to the expansion of certain ongoing contracts, and increased expenses in certain healthcare-related contracts.~~implement new revenue recognitions standards.

Carpets segment adjusted EBITDA loss for the three months ended ~~June 30,~~December 31, 2019 was ~~$0.5~~($0.1) million compared to segment adjusted EBITDA of ~~$0.6~~$0.2 million for the three months ended ~~June 30,~~December 31, 2018. ~~The positive impact realized~~Carpets segment adjusted EBITDA was impacted by lower volumes from ~~Carpets process improvements~~builders and ~~cost reductions was more than offset~~fewer upgrading to higher margin products by ~~Carpets reduction to net revenues.~~retail customers.

Phoenix segment adjusted EBITDA for the three months ended ~~June 30,~~December 31, 2019 was ~~$4.9~~$2.8 million compared to segment adjusted EBITDA of ~~$6.0~~$4.2 million for the three months ended ~~June 30,~~December 31, 2018. Phoenix segment adjusted EBITDA for the three months ended ~~June 30,~~December 31, 2019 was impacted by the decrease in ~~net revenue~~volumes from components and ~~shifts in product mix,~~books, somewhat offset by the decrease to selling, general, and administrative expenses resulting from consolidating printing facilities.

ALJ segment adjusted EBITDA loss for the three months ended ~~June 30,~~December 31, 2019 was ($~~0.7)~~1.1) million compared to segment adjusted EBITDA of ($~~0.6)~~0.7) million for the three months ended ~~June 30,~~December 31, 2018. ALJ segment adjusted EBITDA for three months ended ~~June 30,~~December 31, 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~~ASC Topic 280 – Segment Reporting. See “Part I, Item 1. Financial Statement – Note ~~12.~~13. 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 ~~June 30,~~December 31, 2019, our principal sources of liquidity included cash and cash equivalents of ~~$3.0~~$2.6 million and an available borrowing capacity of ~~$8.5~~$8.9 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.

We recognized net loss of ~~$6.1~~$4.3 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019, ~~and generated~~used cash ~~from~~for operating activities of ~~$17.5~~$7.8 million and investing activities of $0.7 million, offset by cash used ~~for investing activities of $15.8 million and~~provided by financing activities of ~~$0.7~~$6.4 million.

We recognized net ~~loss~~income of ~~$8.6~~$0.7 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2018 and ~~generated~~used cash ~~from~~of $2.2 million for operating activities ~~of $17.9~~and $5.6 million for investing activities, offset by $7.9 million cash ~~used by investing activities of $11.7 million and~~provided by financing ~~activities of $6.9 million.~~ activities.

Cash ~~provided~~used by operating activities of ~~$17.5~~$7.8 million during the ~~nine~~three months ended ~~June 30,~~December 31, 2019 was the result of ~~$6.1~~$4.3 million net loss, ~~$19.5~~$5.2 million addback of net non-cash expenses, and ~~$4.1~~$8.7 million of net cash ~~provided by~~used for changes in operating assets and liabilities. The most significant components of net non-cash expenses were depreciation and amortization expense of ~~$14.9~~$5.2 million, $0.6 million fair value of warrants issued in connection with debt modification, offset by $1.0 million deferred ~~income taxes of $3.6 million, stock-based compensation of $0.6 million, and amortization of deferred loan costs of $0.6 million, offset by $0.2 million of disposal of assets and other gain.~~tax benefit. The most significant components of changes in operating assets and liabilities included accounts receivable of ~~$2.7~~$8.1 million, prepaid expenses, collateral deposits, and ~~accrued expenses~~other current assets of ~~$1.5~~$4.2 million, which used cash, offset by deferred revenue and customer deposits of $3.3 million, which provided ~~cash, offset by other liabilities of $1.0 million, which used~~ cash.

Cash ~~provided~~used by operating activities of ~~$17.9~~$2.2 million during the ~~nine~~three months ended ~~June 30,~~December 31, 2018 was the result of ~~$8.6~~$0.7 million net ~~loss, $23.1~~income, $4.7 million addback of net non-cash expenses, and ~~$3.4~~$7.6 million of net cash ~~provided by~~used for changes in operating assets and liabilities. The most significant components of net non-cash expenses were depreciation and amortization expense of ~~$14.4~~$4.4 million, stock-based compensation of ~~$0.8 million, litigation loss of $2.9 million, deferred income taxes of $3.9~~$0.2 million, and amortization of deferred loan costs of ~~$1.0 million.~~$0.2 million, offset by $0.2 million of (loss) gain on disposal of assets and other gain, net. The most significant components of changes in operating assets and liabilities included accounts receivable of ~~$3.9~~$7.9 million, ~~inventories of $2.6 million,~~prepaid expenses, collateral deposits, and other current assets of ~~$1.4~~$1.2 million, ~~which provided cash, offset by~~and deferred revenue and customer deposits of ~~$3.3~~$1.1 million, which used cash, offset by accounts payable of $1.2 million and accrued expenses of $1.5 million, which provided cash.

Cash used by operations for the three months ended December 31, 2019 compared to the three months ended December 31, 2018, was impacted by lower cash earnings from operations, offset by higher depreciation and amortization attributable to Faneuil’s customer call center buildouts and RDI Acquisition-related assets, and several new Faneuil contracts with deferred implementation revenue.

For the ~~nine~~three months ended ~~June 30,~~December 31, 2019, our investing activities used ~~$15.8~~$0.7 million of cash, of which $0.6 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and $0.1 million was used to purchase capital equipment in the normal course of operations. During the three months ended December 31, 2019 as compared to the three months ended December 31, 2018, Faneuil’s capital equipment purchases dropped sharply due to the completion of Faneuil’s three new customer call center buildouts.

For the three months ended December 31, 2018, our investing activities used $5.6 million of cash, of which $1.0 million was the final payment for our Printing Components Business acquisition, ~~$13.0~~$3.9 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and ~~$2.1~~$1.0 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 nine months ended June 30, 2018, our investing activities used $11.7 million of cash, of which $9.0 million was for our Printing Components Business acquisition, $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 $0.4 million proceeds received from the sale of equipment.

For the ~~nine~~three months ended ~~June 30,~~December 31, 2019, our financing activities ~~used $0.8~~provided $6.5 million of cash. ~~Net proceeds~~Proceeds from our line of credit provided $10.5 million to fund working capital requirements at Faneuil and Phoenix. Financing activities which used cash included $3.2 million to pay down our term loan, $0.6 million for capital lease payments, and $0.3 million for deferred loan costs related to the Sixth Amendment.

For the three months ended December 31, 2018, our financing activities provided $7.9 million of cash. Proceeds from our line of credit and term loan provided ~~$4.6~~$6.9 million and $5.0 million, respectively. Financing activities which used cash included ~~$7.5~~$2.7 million to pay down our term loan, ~~$2.3~~$0.8 million for capital lease payments, and ~~$0.6~~$0.4 million for ~~debt issuance costs.~~

~~For~~deferred loan costs related to the nine months ended June 30, 2018, our financing activities 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 amended term loan provided $7.5 million. Proceeds from the issuance of common stock and exercise of stock options provided $1.5 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.Fourth Amendment.

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

As of ~~June 30,~~December 31, 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 ~~June 30,~~December 31, 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 ~~$25.8~~$30.0 million.

Letters of Credit. ALJ had letters of credit totaling ~~$3.6~~$2.7 million outstanding as of ~~June 30,~~December 31, 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 induring the reporting period. ~~Significant~~We regularly evaluate our estimates and assumptions ~~by management are used for, but are not limited~~related 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~~price, useful lives, carrying value and recoverability of long-lived and intangible assets, the recoverability of goodwill, ~~the realizability of deferred tax assets, stock-based compensation, the likelihood of~~and revenue recognition. Certain accounting policies are considered "critical accounting policies" because they are particularly dependent on estimates made by us about matters that are inherently uncertain and could have a material ~~loss as a result of loss contingencies, the allowance for doubtful accounts and inventory reserves, and calculation of insurance reserves.~~impact on our consolidated financial statements. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe ~~to be~~are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

For a complete summary of our ~~significant~~critical accounting policies, please refer to ~~Note 2, “Summary~~“Part II, Item 7. Management’s Discussion and Analysis of ~~Significant Accounting Policies,”~~Financial Condition and Results of Operations” included ~~with~~in our ~~audited financial statements and notes thereto~~Form 10-K for the ~~years~~fiscal year ended September 30, ~~2018 and 2017,~~2019, filed with the Securities and Exchange Commission (“SEC”) on December ~~17, 2018.~~23, 2019 (“Fiscal 2019 Form 10-K”).

For a complete summary of our significant accounting policies, please refer to “Part IV. Exhibits, Financial Statement Schedules –Note 2. Summary of Significant Accounting Policies,” included in our Fiscal 2019 Form 10-K. As a result of adopting ASC 606, we revised our revenue recognition accounting policy. See further discussion at “Part I, Item 1. Financial Statements – Note 2. Recent Accounting Standards.” There were no ~~material~~other changes to ~~significant~~our accounting policies during the ~~nine~~three months ended ~~June 30,~~December 31, 2019.

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 matter was tried in a bench trial from April 30, 2018 through May 2, 2018. On May 15, 2018, the Richmond Circuit Court issued its opinion, which dismissed both Faneuil’s complaint and 3M’s counterclaim with prejudice. 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~~in selling, general, and administrative expense during the year ended September 30, 2018. The matter was appealed to the Supreme Court of Virginia where Faneuil ~~has filed an appeal~~was awarded approximately $1.2 million, plus pre- and post-judgment interest. The matter was remanded to the trial court for calculation of interest and entry of final judgment. Faneuil and 3M settled on the ~~Richmond Circuit Court’s judgment.~~amount of interest to be paid. The ~~parties 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.~~

final judgment plus interest, which totaled $1.5 million, was received by Faneuil in December 2019.

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

The ~~case~~parties are currently engaged in limited discovery. A court-ordered mediation is ~~in early discovery at this time.~~scheduled between the parties for May 2020. Faneuil believes this action is without merit and intends to defend itthis case 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 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~~ new tax reform legislation enacted on December 22, 2017 (“Tax Reform ~~Law~~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~~healthcare exchanges. It is unclear whether further changes that President Trump has planned to the Affordable Care Act will be enacted, or if enacted changes will affect Faneuil’s business. Further significant changes to, or repeal of, the Affordable Care Act could materially and adversely affect that aspect of Faneuil’s business.

Economic downturns and reductions in government funding 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.

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

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

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

The ~~integrations~~integration 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 4.5. Concentration Risks.” We expect the largest customers of Faneuil to continue to account for a substantial portion of its total net revenue for the foreseeable future. Faneuil has long-standing relationships with many of its significant customers. However, because Faneuil customers generally contract for specific projects or programs with a finite duration, Faneuil may lose these customers if funding for their respective programs is discontinued, or if their projects end and the contracts are not renewed or replaced. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could materially reduce Faneuil revenue and cash flows. Additionally, many Faneuil customers are government entities, which can unilaterally terminate or modify the existing contracts with Faneuil without cause and penalty to such government entities in many situations. If Faneuil does not replace them with other customers or other programs, the loss of business from any one of such customers could have a material adverse effect on its business or results of operations.

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~~healthcare requirements, labor relations, taxation, internal and disclosure control obligations, governmental affairs and immigration. For example, Faneuil is subject to state and federal laws and regulations regarding the protection of consumer information commonly referred to as “non-public personal information.” For instance, the collection of patient data through Faneuil’s contact center services is subject to ~~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’s business, results of operations and financial condition. In addition, because a substantial portion of Faneuil operating costs consists of labor costs, changes in governmental regulations relating to wages, healthcare and healthcare reform and other benefits or employment taxes could have a material adverse effect on Faneuil’s business, results of operations or financial condition.

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~~nature. Historically, downturns in the U.S. and global economies, along with the residential and commercial markets in such economies, particularly in Las Vegas, have 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.~~recent downturns. 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~~Carpets 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~~the vendors’ ability to fulfill ~~their~~Carpets 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,~~suffer material adverse short- and ~~potentially, in some cases, permanently.~~long-term effects.

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 4.5. 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 4.5. 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 4.5. Concentration Risks.”Any significant cancellation, deferral or reduction in the quantity or type of products sold to these principal customers or a significant number of smaller customers, including as a result of Phoenix’s failure to perform, the impact of economic weakness and challenges to customer businesses, a change in buying habits, further industry consolidation or the impact of the shift to alternative methods of content delivery, including digital distribution and printing, to customers, could have a material adverse effect on Phoenix business. Further, if Phoenix’s significant customers, in turn, are not able to secure large orders, they will not be able to place orders with Phoenix. A substantial decrease or interruption in business from Phoenix’s significant customers could result in write-offs or the loss of future business and could have a material adverse effect on Phoenix’s business.

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

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

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

Fluctuations in the cost and availability of raw materials could increase Phoenix 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~~Our ability ~~of ALJ, Faneuil, Carpets, and Phoenix~~ to borrow under our loan arrangements depends ~~upon their respective abilities to comply~~on our compliance with certain covenants and borrowing base requirements. ~~The ability~~A significant deterioration in our profitability and/or cash flow, whether caused by our inability to ~~meet these covenants and requirements may be affected~~grow our businesses in a profitable manner, or by events beyond our control, may cause us to fall out of compliance with such covenants and ~~we or they may not meet these obligations.~~borrowing base requirements. The failure ~~of any of us or our subsidiaries~~ to comply with these covenants and requirements could result in an event of default under our loan arrangements that, if not cured or waived, could terminate such party’s ability to borrow further, permit acceleration of the relevant debt (and other indebtedness based on cross-default provisions) and permit foreclosure on any collateral granted as security under the loan arrangements, which includes substantially all of our assets. Accordingly, any default under our loan facilities could also result in a material adverse effect on us that may result in our lenders seeking to recover from us or against our assets. There can also be no assurance that the lenders will grant waivers on covenant violations if they occur. Any such event of default would have a material adverse effect on us.

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

We currently have, and will likely continue to have, a substantial amount of indebtedness, some of which require us to make a lump-sum or “balloon” payment at maturity. Our indebtedness could, among other things, make it more difficult for us to satisfy our debt obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions and place us at a competitive disadvantage. We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations and potentially from debt or equity offerings. However, 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 ~~June 30,~~December 31, 2019, ~~$96.5~~$98.5 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~~changed the target range for the federal funds rate. ~~Increases~~Changes in the interest rate generally, and particularly when coupled with any significant variable rate indebtedness, could materially adversely impact our interest ~~expenses.~~expense. If interest rates 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 increasedchanged in the future by 100 basis points, based on our current borrowings as of ~~June 30,~~December 31, 2019, weour interest expense would ~~incur approximately an additional~~increase or decrease by $1.0 million per ~~year~~year.

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

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

As of ~~June 30,~~December 31, 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 may have outside business interests, which could impair our ability to implement our business strategies and lead to potential conflicts of interest.

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

We may not be able to consummate additional acquisitions and dispositions on acceptable terms or at all. Furthermore, we 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”) and built-in losses under Section 382 of the Internal Revenue Code (the “Code”) and tax credit carryforwards to offset our future taxable income and/or to recover previously paid taxes would be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the Code.

Section 382 of the Code contains rules that limit the ability of a company that undergoes an “ownership change,” which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its NOLs and certain built-in losses recognized in years after the ownership change. 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,~~2019, we had net operating loss carryforwards for federal income tax purposes of approximately ~~$144.3~~$138.1 million that start expiring in 2022. Approximately ~~$121.3~~$115.3 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” 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 August 2018, our shareholders approved the amendment of certain provisions in our Restated Certificate of ~~our certificate of incorporation to update~~Incorporation, updating certain restrictions on transfers of our stock that may result in an ~~ownership change under~~“ownership change” within the meaning of Section 382 in order to preserve stockholder value and the value of certain tax assets primarily associated with NOLs and built-in losses under Section ~~382 of the Code.~~382.

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

On December 22, 2017, President Trump signed into law the final version of the Tax Reform Law. The Tax Reform Law significantly reforms the Internal Revenue Code of 1986, as amended, with many of its provisions effective for tax years beginning on or after January 1, 2018. The Tax Reform Law, among other things, contains ~~many~~ significant changes to ~~the U.S. federal income tax laws, the full consequences~~corporate taxation, including a permanent reduction 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~~partial limitation on the deductibility of business interest expense, a limitation of the deduction for net operating loss carryforwards, an indefinite net operating loss carryforward and the elimination of the two-year net operating loss carryback, temporary, immediate expensing for certain new investments and the modification or repeal of many business deductions and credits. We continue to ~~deferred~~examine the impact this tax reform legislation may have on our business. Notwithstanding the reduction in the corporate income tax ~~expense~~rate, the overall impact of ~~$4.1 million to revalue ALJ’s net deferred tax asset during~~ the ~~year ended September 30, 2018.~~Tax Reform Law is uncertain and our business and financial condition could be adversely affected. The ~~one-time revaluation was based~~impact of this reform on our ~~current knowledge, interpretation and understanding~~stockholders is uncertain. Stockholders should consult with their tax advisors regarding the effect of the Tax Reform Law and ~~its impact to our business. Other aspects of the Tax Reform Law, including, but not limited~~other potential changes to the ~~state~~U.S. Federal tax ~~effect of adjustments made to federal taxes and the interest expense deduction limitation may have additional material impacts~~laws 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.them.

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

Our executive officers and directors and their affiliated entities together beneficially ~~own a majority~~owned approximately 50.6% of our outstanding common stock ~~and~~at January 31, 2020. Jess Ravich, our current Chief Executive Officer, beneficially owned approximately ~~38.2%~~40.9% of our common stock as of ~~June 30, 2019.~~January 31, 2020. 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(a) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more;

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

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

For so long as we remain an emerging growth company, we are subject to reduced public company reporting ~~requirements. As an emerging growth company, we are exempt from~~requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes ~~Oxley. Section 404(a) requires issuers to publish information~~Oxley and reduced disclosure obligations regarding executive compensation in ~~their annual~~our periodic 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~~proxy statements. 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.~~parachutes for so long as we remain an emerging growth company.

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, which allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a 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 ~~June 30,~~December 31, 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.~~$3.39, and 2,526,991 shares of our common stock are issuable pursuant to outstanding warrants at a weighted-average exercise price of $1.51. It is probable that options or warrants 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.~~option or warrant. If the stock options or warrants 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 ~~June 30,~~December 31, 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.

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

Our Restated Certificate of Incorporation imposes certain restrictions on transfer of stock designed to preserve the value of certain tax assets primarily associated with our NOLs and built-in losses under Section 382. These restrictions ~~prohibits~~prohibit certain transfers that would ~~lead to~~result in 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,~~2019, we had approximately ~~$144.3~~$138.1 million of NOLs. The use of such losses to offset federal income tax would be limited if we experience an “ownership change” under Section 382. This would occur if stockholders owning (or deemed under Section 382 to own) 5% or more 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 transfer restrictions in our Restated Certificate of Incorporation were adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382. While such transfer restrictions are intended to protect our NOLs and built-in losses under Section 382, they may also have the effect of delaying or preventing beneficial takeover bids by third parties.

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

~~None.~~None other than as previously disclosed in our current reports on Form 8-K filed with the SEC.

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	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2534

Item 3	Quantitative and Qualitative Disclosures About Market Risk	3943

Item 4	Controls and Procedures	3943

	PART II – OTHER INFORMATION	4044

Item 1	Legal Proceedings	4044

Item 1A	Risk Factors	4145

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	5458

Item 3	Defaults Upon Senior Securities	5458

Item 4	Mine Safety Disclosures	5458

Item 5	Other Information	5458

Item 6	Exhibits	5559

	Signatures	5660

	Year Ended September 30, 2019
(in thousands, except per share amounts)	As Previously Reported			Revisions			As Revised
Net revenue	$	354,997		$	—		$	354,997
Costs and expenses:
Cost of revenue		277,454			6,422			283,876
Selling, general, and administrative expense		72,375			(6,422	)		65,953
Impairment of intangible assets		746			—			746
(Gain) loss on disposal of assets and other gain, net		(216	)		—			(216	)
Total operating expenses		350,359			—			350,359
Operating income		4,638			—			4,638
Other (expense) income:
Interest expense, net		(10,611	)		—			(10,611	)
Total other expense, net		(10,611	)		—			(10,611	)
Loss before income taxes		(5,973	)		—			(5,973	)
Provision for income taxes		(10,006	)		—			(10,006	)
Net loss	$	(15,979	)	$	—		$	(15,979	)
Loss per share of common stock–basic and diluted	$	(0.41	)	$	—		$	(0.41	)
Weighted-average shares of common stock outstanding– basic and diluted		38,710			—			38,710

	June 30,			September 30,			December 31,			September 30,
(in thousands)	2019			2018			2019			2019
Raw materials	$	4,008		$	4,017		$	3,956		$	3,837
Semi-finished goods/work in process		2,401			2,298			1,641			2,111
Finished goods		1,402			1,566			1,771			1,230
Inventories		7,811			7,881			7,368			7,178
Less: allowance for obsolete inventory		(323	)		(225	)		(504	)		(401	)
Inventories, net	$	7,488		$	7,656		$	6,864		$	6,777

	June 30,			September 30,			December 31,			September 30,
(in thousands)	2019			2018			2019			2019
Leasehold improvements	$	31,371		$	9,334		$	31,478		$	31,370
Machinery and equipment		29,918			24,900			30,915			30,805
Building and improvements		17,035			16,459			17,403			17,403
Software		16,039			15,749			15,094			16,139
Computer and office equipment		12,700			11,319			13,629			13,273
Land		9,267			9,267			9,267			9,267
Furniture and fixtures		7,302			3,834			7,822			7,796
Vehicles								386			386
Construction and equipment in process		1,249			10,627			128			206
Vehicles		375			342
Property and equipment		125,256			101,831			126,122			126,645
Less: accumulated depreciation and amortization		(52,652	)		(41,669	)		(59,946	)		(56,775	)
Property and equipment, net	$	72,604		$	60,162		$	66,176		$	69,870

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

	Three Months Ended June 30,						Nine Months Ended June 30,
	2019			2018			2019			2018
Net revenue	$	84,225		$	89,660		$	266,005		$	279,719
Costs and expenses:
Cost of revenue		67,030			67,778			207,596			216,927
Selling, general and administrative expense		18,037			21,058			52,510			59,418
Disposal of assets and other gain		2			59			(221	)		(173	)
Total operating expenses		85,069			88,895			259,885			276,172
Operating (loss) income		(844	)		765			6,120			3,547
Other expense:
Interest expense, net		(2,701	)		(2,526	)		(8,041	)		(7,979	)
Total other expense		(2,701	)		(2,526	)		(8,041	)		(7,979	)
Loss before income taxes		(3,545	)		(1,761	)		(1,921	)		(4,432	)
Provision for income taxes		(3,662	)		(1,135	)		(4,152	)		(4,122	)
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

	Three Months Ended December 31,
	2019			2018
Net revenue	$	90,465		$	93,784
Costs and expenses:
Cost of revenue		75,726			74,646
Selling, general, and administrative expense		16,610			15,647
Loss (gain) on disposal of assets and other gain, net		2			(223	)
Total operating expenses		92,338			90,070
Operating (loss) income		(1,873	)		3,714
Other (expense) income:
Interest expense, net		(2,564	)		(2,715	)
Interest from legal settlement		200			—
Total other expense, net		(2,364	)		(2,715	)
(Loss) income before income taxes		(4,237	)		999
Provision for income taxes		(40	)		(288	)
Net (loss) income	$	(4,277	)	$	711
Basic (loss) earnings per share of common stock	$	(0.10	)	$	0.02
Diluted (loss) earnings per share of common stock	$	(0.10	)	$	0.02
Weighted average shares of common stock outstanding:
Basic		42,173			38,047
Diluted		42,173			38,097

(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

	December 31, 2019							September 30, 2019
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Customer relationships	$	33,660	$	(13,761	)	$	19,899	$	33,660	$	(13,039	)	$	20,621
Trade names		10,760		(2,111	)		8,649		10,760		(2,004	)		8,756
Supply agreements		9,930		(3,330	)		6,600		9,930		(3,002	)		6,928
Technology		3,400		(177	)		3,223		3,400		(71	)		3,329
Non-compete agreements		1,820		(388	)		1,432		1,820		(311	)		1,509
Internal-use software		580		(580	)		—		580		(575	)		5
Totals	$	60,150	$	(20,347	)	$	39,803	$	60,150	$	(19,002	)	$	41,148

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

(in thousands)	Estimated Future Amortization		Estimated Future Amortization
Remainder of Fiscal 2019	$	1,230
Fiscal 2020		4,800
Remainder of Fiscal 2020			$	3,916
Fiscal 2021		4,485		4,982
Fiscal 2022		4,067		4,635
Fiscal 2023		4,067		4,635
Fiscal 2024				4,496
Thereafter		19,881		17,139
Total	$	38,530	$	39,803

Description	Use of Proceeds	Origination Date	Interest Rate *	Quarterly Payments		Balance at June 30, 2019		Use of Proceeds	Origination Date	Interest Rate *	Quarterly Payments		Balance at December 31, 2019
Term Loan:
Financing Agreement	Phoenix acquisition	August 2015	9.00% to 9.28%	$	1,610	$	65,283	Phoenix acquisition	August 2015	8.46% to 8.80%	$	1,610	$	58,139
First Amendment	Color Optics acquisition	July 2016	9.00% to 9.28%		175		7,111	Color Optics acquisition	July 2016	8.46% to 8.80%		175		6,333
Third Amendment	Printing Components Business acquisition	October 2017	9.00% to 9.28%		151		6,102	Printing Components Business acquisition	October 2017	8.46% to 8.80%		151		5,434
Fourth Amendment	Working capital	November 2018	9.00% to 9.28%		114		4,637	Working capital	November 2018	8.46% to 8.80%		114		4,130
Sixth Amendment (Term B loan)								N/A	December 2019	12.46% to 12.80%		—		4,106
			Totals	$	2,050	$	83,133			Totals	$	2,050	$	78,142
Line of Credit:
Cerberus/PNC Revolver (includes Second Amendment)	Working capital	August 2015	11.00% to 11.25%	$	—	$	13,327
Cerberus/PNC Revolver (includes Second and Fifth Amendments)								Working capital	August 2015	10.50% to 10.75%	$	—	$	20,313

Year Ending June 30,	Equipment Financing		Cerberus Debt		Total
Year Ending December 31,							Equipment Financing		Cerberus Debt		Total
2020	$	1,319	$	8,200	$	9,519	$	1,311	$	8,200	$	9,511
2021		1,386		8,200		9,586		1,400		8,200		9,600
2022		719		8,200		8,919		121		8,200		8,321
2023		—		8,200		8,200		—		8,200		8,200
2024*		—		63,660		63,660		—		65,649		65,649
Total	$	3,424	$	96,460	$	99,884	$	2,832	$	98,449	$	101,281

Year Ending June 30,	Estimated Future Payments
Year Ending December 31,				Estimated Future Payments
2020	$	2,650		$	2,337
2021		1,610			1,058
2022		647			703
2023		535			498
2024		301			71
Total minimum required payments		5,743			4,667
Less: current portion of capital lease obligations		(2,472	)		(2,173	)
Less: imputed interest		(363	)		(310	)
Capital lease obligations, less current portion	$	2,908		$	2,184

Year Ending June 30,	Future Minimum Lease Payments		Lease Income			Net
Year Ending December 31,								Future Minimum Lease Payments
2020	$	6,689	$	(499	)	$	6,190	$	8,245
2021		5,658		—			5,658		7,230
2022		4,648		—			4,648		6,426
2023		4,375		—			4,375		6,399
2024		4,406		—			4,406		6,699
Thereafter		19,644		—			19,644		27,582
Total	$	45,420	$	(499	)	$	44,921	$	62,581

	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended December 31,
(in thousands)	2019		2018		2019		2018		2019		2018
Stock options	$	84	$	142	$	252	$	500	$	84	$	84
Common stock awards		101		107		304		312		28		101
Total stock-based compensation expense	$	185	$	249	$	556	$	812	$	112	$	185

	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	)

	Three Months Ended June 30, 2018
(in thousands)	Faneuil		Carpets		Phoenix		ALJ			Total
Net revenue	$	43,893	$	18,013	$	27,754	$	—		$	89,660

Segment adjusted EBITDA	$	3,604	$	582	$	6,021	$	(621	)	$	9,586
Depreciation and amortization											(4,718	)
Interest expense											(2,526	)
Litigation loss											(2,910	)
Restructuring expenses											(779	)
Stock-based compensation											(249	)
Acquisition-related expenses											(106	)
Disposal of assets and other gain											(59	)
Provision for income taxes											(1,135	)
Net loss										$	(2,896	)

	As of June 30,				As of December 31,
(in millions)	2019		2018		2019		2018
Within one year	$	202.3	$	107.3	$	223.1	$	158.1
Between one year and two years		143.9		92.0		145.3		101.3
Between two years and three years		72.8		41.9		99.4		25.7
Between three years and four years		24.9		14.0		63.9		15.0
Thereafter		51.1		3.8		82.6		1.3
Total Faneuil backlog	$	495.0	$	259.0	$	614.3	$	301.4

	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	)

	Payments due by Period
			Less Than		One – Three		Four – Five		More than Five
(in thousands)	Total		One Year		Years		Years		Years
Term loan⁽¹⁾	$	83,133	$	8,200	$	24,600	$	50,333	$	—
Operating lease obligations⁽²⁾		44,921		6,190		10,306		8,781		19,644
Line of credit⁽¹⁾		13,327		—		—		13,327		—
Capital lease obligations⁽¹⁾		5,380		2,472		2,625		283		—
Equipment financing agreement⁽¹⁾		3,424		1,319		2,105		—		—
Other liabilities ⁽³⁾		2,213		923		1,290		—		—
Total contractual cash obligations⁽⁴⁾	$	152,398	$	19,104	$	40,926	$	72,724	$	19,644

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 3.1 to Form 10-K as filed on December 17, 2018

3.2	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