Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2022

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

For the transition period from to

Commission File Number: 001-37689

ALJ REGIONAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

244 Madison Avenue, PMB #358

New York, NY 10016

(Address of principal executive offices, Zip code)

(888) 486-7775

(Registrant’s telephone number, including area code)

Title of class of registered securities

Common Stock, par value $0.01 per share

Ticker Symbol

ALJJ

Name of exchange on which registered

NASDAQ

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

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

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

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

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

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

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

Table of Contents

FORWARD-LOOKING STATEMENTS

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

•

any statements regarding our expectations for future performance;

•

our ability to integrate business acquisitions;

•

our ability to compete effectively;

•

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

•

our ability to meet customer needs;

•

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

•

regulatory compliance costs;

•

our ability to manage cost cutting activities;

•

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

•

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

•

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

•

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

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

Table of Contents

ALJ REGIONAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2022

INDEX

		Page

	PART I – FINANCIAL INFORMATION	4

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

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4	Controls and Procedures	43

	PART II – OTHER INFORMATION	44

Item 1	Legal Proceedings	44

Item 1A	Risk Factors	44

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3	Defaults Upon Senior Securities	54

Item 4	Mine Safety Disclosures	54

Item 5	Other Information	54

Item 6	Exhibits	55

	Signatures	56

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1 - Financial Statements

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	March 31,			September 30,
	2022			2021
ASSETS
Current assets:
Cash and cash equivalents	$	2,638		$	2,276
Accounts receivable, net of allowance for doubtful accounts of $680 and $– on March 31, 2022 and September 30, 2021		42,383			57,660
Prepaid expenses and other current assets		6,901			8,852
Assets held for sale		13,891			—
Current assets of discontinued operations		20,620			20,608
Total current assets		86,433			89,396
Property and equipment, net		12,530			22,864
Operating lease right-of-use assets		17,327			29,048
Intangible assets, net		10,622			11,906
Collateral deposits		487			487
Other assets		715			792
Long-term assets of discontinued operations		58,488			60,160
Total assets	$	186,602		$	214,653
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,073		$	11,255
Accrued expenses		14,008			20,815
Liabilities related to assets held for sale		12,053			—
Income taxes payable		—			38
Deferred revenue and customer deposits		348			4,053
Term loans, net of deferred loan costs - current installments		2,637			2,692
Finance lease obligations - current installments		720			765
Operating lease obligations - current installments		3,044			4,722
Current portion of workers' compensation reserve		900			710
Other current liabilities		3,679			3,686
Current liabilities of discontinued operations		10,385			10,192
Total current liabilities		56,847			58,928
Line of credit, net of deferred loan costs		11,588			5,490
Term loans, less current portion, net of deferred loan costs		91,983			93,484
Deferred revenue, less current portion		—			369
Workers' compensation reserve, less current portion		1,902			1,749
Finance lease obligations, less current installments		—			332
Operating lease obligations, less current installments		20,187			32,767
Deferred tax liabilities, net		768			852
Other non-current liabilities		2,640			6,265
Long-term liabilities of discontinued operations		359			1,841
Total liabilities		186,274			202,077
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.01 par value; authorized – 100,000 shares; 42,409 and 42,406 issued and outstanding on March 31, 2022 and September 30, 2021, respectively		424			424
Additional paid-in capital		288,415			288,355
Accumulated deficit		(288,511	)		(276,203	)
Total stockholders’ equity		328			12,576
Total liabilities and stockholders’ equity	$	186,602		$	214,653

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

	Three Months Ended March 31,						Six Months Ended March 31,
	2022			2021			2022			2021
Net revenue	$	68,514		$	84,424		$	143,293		$	170,393
Costs and expenses:
Cost of revenue		58,194			70,160			125,719			144,038
Selling, general, and administrative expense		14,004			14,353			30,599			27,723
Lease impairment		2,158			—			2,158			—
Loss on disposal of assets, net		—			—			26			—
Total operating expenses		74,356			84,513			158,502			171,761
Operating loss		(5,842	)		(89	)		(15,209	)		(1,368	)
Other expense, net:
Interest expense, net		(2,593	)		(2,451	)		(5,298	)		(5,033	)
Total other expense, net		(2,593	)		(2,451	)		(5,298	)		(5,033	)
Loss from continuing operations before income taxes		(8,435	)		(2,540	)		(20,507	)		(6,401	)
(Provision for) benefit from income taxes		(46	)		(50	)		55			(174	)
Net loss from continuing operations		(8,481	)		(2,590	)		(20,452	)		(6,575	)
Net income from discontinued operations, net of income taxes		5,565			2,475			8,144			4,373
Net loss	$	(2,916	)	$	(115	)	$	(12,308	)	$	(2,202	)
(Loss) income per share of common stock–basic:
Continuing operations	$	(0.20	)	$	(0.06	)	$	(0.48	)	$	(0.16	)
Discontinued operations	$	0.13		$	0.06		$	0.19		$	0.10
Net loss per share ⁽¹⁾	$	(0.07	)	$	—		$	(0.29	)	$	(0.05	)
(Loss) income per share of common stock–diluted
Continuing operations	$	(0.20	)	$	(0.06	)	$	(0.48	)	$	(0.16	)
Discontinued operations	$	0.10		$	0.05		$	0.15		$	0.08
Net loss per share ⁽¹⁾	$	(0.07	)	$	—		$	(0.29	)	$	(0.05	)
Weighted average shares of common stock outstanding:
Basic		42,409			42,321			42,406			42,319
Diluted		54,691			54,458			54,681			54,363

⁽¹⁾	Amounts may not add due to rounding.

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Six Months Ended March 31,
	2022			2021
Operating activities
Net loss	$	(12,308	)	$	(2,202	)
Adjustments to reconcile net loss to cash (used for) provided by operating activities:
Depreciation and amortization expense		6,139			6,339
Lease impairment		2,158
Interest expense and other bank fees accreted to term loans		—			1,121
Amortization of deferred loan costs		627			364
Stock-based compensation expense		113			85
Provision (reversal) for bad debts		680			(179	)
Loss on disposal of assets, net		26			—
Loss on sale of Carpets		—			761
Deferred income taxes		(84	)		21
Changes in operating assets and liabilities:
Accounts receivable, net		14,597			304
Prepaid expenses, collateral deposits, and other current assets		1,830			1,023
ROU assets/ROU liabilities		(760	)		(298	)
Other assets		77			(1,236	)
Accounts payable		(2,154	)		(4,395	)
Accrued expenses		(6,314	)		1,589
Income tax payable		(38	)		5
Deferred revenue and customer deposits		(4,074	)		(2,819	)
Other current liabilities and other non-current liabilities		(3,289	)		2,913
Discontinued operations, net		2,674			7,726
Cash (used for) provided by operating activities		(100	)		11,122
Investing activities
Capital expenditures		(745	)		(2,655	)
Proceeds from sale of Carpets, net of transaction costs		—			438
Discontinued operations, net		(2,303	)		(1,487	)
Cash used for investing activities		(3,048	)		(3,704	)
Financing activities
Payments on term loans		(1,900	)		(4,101	)
Proceeds from (payments on) line of credit, net		6,098			(2,320	)
Deferred loan costs		(283	)		—
Payments on finance leases		(405	)		(1,194	)
Discontinued operations, net		—			(1,287	)
Cash provided by (used for) financing activities		3,510			(8,902	)
Change in cash and cash equivalents		362			(1,484	)
Cash and cash equivalents at beginning of the year		2,276			6,050
Cash and cash equivalents at end of the year	$	2,638		$	4,566

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Six Months Ended March 31,
	2022		2021
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	4,622	$	4,153
Taxes	$	504	$	35

Non-cash investing and financing activities:
Capital equipment purchases financed with term loans	$	—	$	1,850

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(in thousands)

	Three Months Ended March 31,						Six Months Ended March 31,
	2022			2021			2022			2021
Common stock
Balance, beginning of period	$	424		$	423		$	424		$	423
Issuance of common stock upon cashless exercise of stock options		—			—			—			—
Balance, end of period	$	424		$	423		$	424		$	423
Additional paid in capital
Balance, beginning of period	$	288,399		$	288,210		$	288,355		$	288,193
Stock-based compensation expense - options		16			15			60			32
Balance, end of period	$	288,415		$	288,225		$	288,415		$	288,225
Accumulated deficit
Balance, beginning of period	$	(285,595	)	$	(273,647	)	$	(276,203	)	$	(271,560	)
Net loss		(2,916	)		(115	)		(12,308	)		(2,202	)
Balance, end of period	$	(288,511	)	$	(273,762	)	$	(288,511	)	$	(273,762	)
Total stockholders' equity	$	328		$	14,886		$	328		$	14,886

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively herein as “ALJ” or “Company”) is a holding company. During the three and six months ended March 31, 2022, ALJ consisted of the following wholly-owned subsidiaries:

•

Faneuil, Inc. (including its subsidiaries, “Faneuil”). Faneuil is a leading provider of call center services, back-office operations, staffing services, and toll collection services to government and regulated commercial clients across the United States, focusing on the healthcare, utility, transportation, and toll revenue collection industries. Faneuil is headquartered in Hampton, Virginia. ALJ acquired Faneuil in October 2013. On April 1, 2022, ALJ completed the sale of Faneuil’s tolling and transportation and health benefit exchange vertical. See Basis of Presentation below.

•

Phoenix Color Corp. (including its subsidiaries, “Phoenix”). Phoenix is a leading manufacturer of book components, educational materials and related products producing value-added components, heavily illustrated books and commercial specialty products using a broad spectrum of materials and decorative technologies. Phoenix is headquartered in Hagerstown, Maryland. ALJ acquired Phoenix in August 2015. On April 13, 2022, ALJ completed its sale of Phoenix. See Basis of Presentation below.

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

Basis of Presentation

Overall

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

Discontinued Operations – Carpets

In February 2021, ALJ completed the sale of Carpets (the “Carpets Sale”). The Company determined that the Carpets Sale qualified as discontinued operations as defined by Accounting Standards Codification (“ASC”) 205-20-45, Presentation of Financial Statements — Discontinued Operations — Other Presentation Matters (“ASC 205”) because the Carpets Sale represented a strategic shift with a major effect on the Company's operations and financial results. Pursuant to ASC 205, Carpets results of operations and cash flows were classified as discontinued operations for the three and six months ended March 31, 2021. See Note 4 for additional financial information about Carpets’ discontinued operations.

Discontinued Operations – Phoenix

In February 2022, ALJ entered into a stock purchase agreement (the “Stock Purchase Agreement”) to sell all of the outstanding shares of common stock of Phoenix (the “Phoenix Sale”) for cash consideration totaling approximately $136.4 million, subject to post-closing working capital adjustments. The Phoenix Sale closed on April 13, 2022. The Company expects to recognize a gain on sale of discontinued operations, before related income taxes, of approximately $45.0 million to $60.0 million during the three months ended June 30, 2022.

The Company determined that the Phoenix Sale qualified as discontinued operations as defined by ASC 205 because the Phoenix Sale represented a strategic shift with a major effect on the Company's operations and financial results. Pursuant to ASC 205, Phoenix assets, liabilities, results of operations, and cash flows were classified as discontinued operations for all periods presented. Interest

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

expense previously allocated to Phoenix does not qualify for classification within discontinued operations and has been reallocated to continuing operations. See Note 4 for additional financial information about Phoenix’s discontinued operations.

Asset Sale - Faneuil

In December 2021, ALJ entered into an agreement to sell certain assets of Faneuil’s tolling and transportation vertical and health benefit exchange vertical (the “Faneuil Asset Sale”). The Faneuil Asset Sale closed on April 1, 2022, for cash consideration of $142.3 million less an indemnification escrow amount of approximately $15.0 million. Faneuil is also eligible to receive additional earn-out payments based upon the performance of certain customer agreements in an aggregate amount of up to $25.0 million. The Company expects to recognize a gain on sale of assets, before related income taxes, of approximately $110.0 million to $125.0 million during the three months ended June 30, 2022.

Faneuil entered into a Transition Services Agreement ("TSA"), which is designed to ensure and facilitate an orderly transfer of the tolling and transportation vertical and health benefit exchange vertical. The services provided under the TSA will terminate at various times between 30 days and 365 days from the closing date of the Faneuil Asset Sale and can be renewed, in whole or in part, in 30-day increments, for a maximum of 180 days. Except for customary post-closing adjustments and transition services, Faneuil will have no continuing involvement in the disposed verticals subsequent to the completion of the sale.

The Company determined that the Faneuil Asset Sale does not qualify as discontinued operations as defined by ASC 205 because the Faneuil Asset Sale does not represent a strategic shift with a major effect on the Company's operations and financial results. The associated assets and liabilities met the held-for-sale criteria as defined by ASC 360-10-45-9, Long-Lived Assets Classified as Held for Sale (“ASC 360”). As such, the associated assets and liabilities were classified as held for sale on March 31, 2022, and were valued at the lower of cost or fair value less cost to sell.

Use of Estimates

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

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Pronouncements Adopted

Internal-Use Software

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

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Debt with Conversion and Other Options

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

Accounting Standards Not Yet Adopted

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

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. ASU 2021-04 will be effective for ALJ on October 1, 2022. ALJ does not anticipate the adoption of ASU 2021-04 to significantly impact its consolidated financial statements and related disclosures.

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

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

3. REVENUE RECOGNITION

Disaggregation of Revenue

As a result of the Phoenix Sale described in Note 1, all revenue reported was attributable to Faneuil for all periods presented.

Revenue by contract type was as follows for the three and six months ended March 31, 2022 and 2021:

	Three Months Ended March 31,				Six Months Ended March 31,
(in thousands)	2022		2021		2022		2021
Faneuil:
Healthcare	$	27,493	$	37,859	$	60,994	$	76,702
Transportation		26,702		21,615		51,984		41,710
Utility		13,398		13,756		26,559		26,820
Government		368		10,021		2,292		22,550
Other		553		1,173		1,464		2,611
Total Faneuil	$	68,514	$	84,424	$	143,293	$	170,393
Total consolidated revenue, net	$	68,514	$	84,424	$	143,293	$	170,393

Substantially all of Faneuil revenue is recognized over time.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Contract Assets and Liabilities

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

	March 31,		September 30,
(in thousands)	2022		2021
Contract assets:
Unbilled revenue ⁽¹⁾	$	95	$	69
Total contract assets	$	95	$	69
Contract liabilities:
Deferred revenue	$	348	$	4,422
Total contract liabilities	$	348	$	4,422

⁽¹⁾

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

The following table provides changes in consolidated contract assets and contract liabilities from September 30, 2021 to March 31, 2022:

(in thousands)	Contract Assets		Contract Liabilities
Balance, September 30, 2021	$	69	$	4,422
Additions to contract assets		26		—
Revenue recognized		—		(8,054	)
Cash received from customer		—		3,980
Balance, March 31, 2022	$	95	$	348

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Deferred Revenue and Remaining Performance Obligations

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

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

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

The Company has elected to apply the optional exemption for the disclosure of remaining performance obligations for contracts that have an original expected duration of one year or less, are billed and recognized as services are delivered and/or variable consideration allocated entirely to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. This primarily consists of call center services that are billed monthly based on the services performed each month.

Costs to Obtain a Contract

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

The following table provides changes in costs to obtain a contract for the three and six months ended March 31, 2022 and 2021:

	Three Months Ended March 31,						Six Months Ended March 31,
	2022			2021			2022			2021

Balance, beginning of period	$	177		$	553		$	239		$	593
Additions		78			—			78			99
Amortization, included in selling, general, and administrative expense		(112	)		(141	)		(174	)		(280	)
Balance, end of period	$	143		$	412		$	143		$	412

Reported as of end of period
Current - prepaid expenses and other current assets		103			293
Noncurrent - other assets		40			119
Total	$	143		$	412

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Costs to Fulfill a Contract

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

The following table provides changes in costs to fulfill a contract for the three and six months ended March 31, 2022 and 2021:

	Three Months Ended March 31,						Six Months Ended March 31,
	2022			2021			2022			2021

Balance, beginning of period	$	1,803		$	6,664		$	2,884		$	5,118
Additions		586			—			2,756			5,992
Amortization, included in selling, general, and administrative expense		(1,711	)		(2,301	)		(4,962	)		(6,747	)
Balance, end of period	$	678		$	4,363		$	678		$	4,363

Reported as of end of period
Current - prepaid expenses and other current assets		292			1,604
Noncurrent - other assets		386			2,759
Total	$	678		$	4,363

Capitalized costs to obtain and fulfill a contract are periodically reviewed for impairment. ALJ did not incur any impairment losses during the three and six months ended March 31, 2022 or 2021.

4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

Carpets Sale

As previously discussed in Note 1, ALJ sold Carpets during February 2021. As a result, ALJ recognized a loss on sale of $0.8 million

during the three months ended March 31, 2021 calculated as follows:

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

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

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

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents information regarding certain components of loss from discontinued operations, net of income taxes, attributable to Carpets, for the three and six months ended March 31, 2021:

	Three Months Ended			Six Months Ended
(in thousands)	March 31, 2021			March 31, 2021
Net revenue	$	5,106		$	13,799
Operating loss		(99	)		(302	)
Loss on sale		(761	)		(761	)
Loss before income taxes		(860	)		(1,063	)
Income tax expense		—			—
Loss from discontinued operations, net of income taxes		(860	)		(1,063	)

The following table presents significant components of cash flows of discontinued operations, attributable to Carpets, for the six months ended March 31, 2021:

	Six Months Ended
(in thousands)	March 31, 2021
Operating activities
Depreciation and amortization expense	$	199
Provision for bad debts and obsolete inventory		27
Changes in operating assets and liabilities:
Accounts receivable, net		399
Inventories, net		(12	)
Prepaid expenses, collateral deposits, and other current assets		24
Other assets and liabilities, net		26
Investing activities
Capital expenditures		(7	)

Faneuil Asset Sale

As previously discussed in Note 1, ALJ sold certain assets of Faneuil on April 1, 2022.

The following table presents the carrying amount of major classes of assets and liabilities classified as held for sale on March 31, 2022:

	March 31,
(in thousands)	2022
Assets:
Prepaid expenses and other current assets	$	120
Property and equipment, net		6,198
Operating lease right-of-use assets		7,573
Assets held for sale	$	13,891
Liabilities:
Accrued expenses	$	546
Operating lease obligations		11,507
Liabilities related to assets held for sale	$	12,053

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Phoenix Sale

As previously discussed in Note 1, ALJ sold Phoenix on April 13, 2022.

The following table presents the carrying amount of major classes of assets and liabilities, attributable to Phoenix, classified as held for sale included in discontinued operations on March 31, 2022 and September 30, 2021:

	March 31,		September 30,
(in thousands)	2022		2021
Assets:
Accounts receivable	$	11,462	$	10,912
Inventories, net		8,142		7,654
Prepaid expenses and other current assets		1,016		2,042
Property and equipment, net		40,300		41,066
Operating lease right-of-use assets		301		—
Intangible assets, net		17,691		18,705
Other long-term assets		196		389
Total assets of discontinued operations	$	79,108	$	80,768
Liabilities:
Accounts payable	$	3,569	$	3,986
Accrued expenses		6,062		5,396
Other current liabilities		754		810
Total long-term liabilities		359		1,841
Total liabilities of discontinued operations	$	10,744	$	12,033

The following table presents results of operations reported as discontinued operations, attributable to Phoenix, for the three and six months ended March 31, 2022 and 2021:

	Three Months Ended March 31,					Six Months Ended March 31,
(in thousands)	2022			2021		2022			2021
Net revenue	$	32,462		$	30,164	$	60,766		$	55,332
Costs and expenses:
Cost of revenue		23,080			23,324		44,721			42,605
Selling, general, and administrative expense		4,085			3,447		7,673			7,131
Loss (gain) on disposal of assets, net		(9	)		64		(9	)		(2	)
Total operating expenses		27,156			26,835		52,385			49,734
Operating income		5,306			3,329		8,381			5,598
Benefit from (provision for) income taxes		259			6		(237	)		(162	)
Net income from discontinued operations, net of income taxes	$	5,565		$	3,335	$	8,144		$	5,436

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The following table presents certain components of cash flows reported as discontinued operations, attributable to Phoenix, for the six months ended March 31, 2022:

	Six Months Ended March 31,
(in thousands)	2022			2021
Operating activities
Depreciation and amortization expense	$	4,092		$	3,629
Provision for bad debts and obsolete inventory and other		(11	)		(41	)
Changes in operating assets and liabilities:
Accounts receivable, net		(549	)		1,622
Inventories, net		(487	)		107
Prepaid expenses, collateral deposits, and other current assets		1,026			571
Other assets and liabilities, net		(1,397	)		1,175
Investing activities
Capital expenditures		(2,309	)		(1,508	)
Proceeds from sales of assets		6			28
Financing activities
Payments on term loans		—			(1,287	)

5. CONCENTRATION RISKS

Cash

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

Major Customers and Accounts Receivable

As a result of the Phoenix Sale described in Note 1, all revenue reported was attributable to Faneuil for all periods presented. The percentages of ALJ consolidated net revenue derived from its significant customers were as follows:

	Three Months Ended March 31,						Six Months Ended March 31,
	2022			2021			2022			2021
Customer A		20.4	%	**				18.0	%	**
Customer B		11.3		**				11.2		**
Customer C	**				13.1	%		10.9			13.1	%

**	Less than 10% of consolidated net revenue.

Accounts receivable from significant customers during either the three or six months ended March 31, 2022, totaled $13.4 million on March 31, 2022. As of March 31, 2022, all Faneuil accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

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6. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Accounts Receivable, Net

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

	March 31,			September 30,
(in thousands)	2022			2021
Accounts receivable	$	37,438		$	57,455
Unbilled receivables		5,625			205
Accounts receivable		43,063			57,660
Less: allowance for doubtful accounts		(680	)		—
Accounts receivable, net	$	42,383		$	57,660

Property and Equipment

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

	March 31,			September 30,
(in thousands)	2022			2021
Leasehold improvements	$	16,457		$	30,849
Computer and office equipment		12,395			22,387
Software		9,509			16,532
Furniture and fixtures		3,086			7,600
Machinery and equipment		987			1,190
Vehicles		154			155
Property and equipment		42,588			78,713
Less: accumulated depreciation and amortization		(30,058	)		(55,849	)
Property and equipment, net	$	12,530		$	22,864

Property and equipment depreciation and amortization expense, including amounts related to finance leased assets, was $2.7 million

and $2.4 million for the three months ended March 31, 2022 and 2021, respectively, and $4.9 million and $4.8 million for the six

months ended March 31, 2022 and 2021, respectively.

Intangible Assets

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

				March 31, 2022
(in thousands)	Weighted Average Original Life (Years)	Weighted Average Remaining Life (Years)		Gross		Accumulated Amortization			Net
Customer relationships	12.0		5.2	$	16,550	$	(10,602	)	$	5,948
Trade names	27.6		21.9		1,500		(845	)		655
Supply agreements	11.9		8.8		2,910		(2,009	)		901
Technology	8.0		5.6		3,400		(1,133	)		2,267
Non-compete agreements	6.6		3.9		1,550		(699	)		851
Totals				$	25,910	$	(15,288	)	$	10,622

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				September 30, 2021
(in thousands)	Weighted Average Original Life (Years)	Weighted Average Remaining Life (Years)		Gross		Accumulated Amortization			Net
Customer relationships	12.0		4.8	$	16,550	$	(9,908	)	$	6,642
Trade names	15.0		7.0		1,500		(795	)		705
Supply agreements	7.0		2.7		2,910		(1,802	)		1,108
Technology	8.0		5.8		3,400		(921	)		2,479
Non-compete agreements	6.6		4.1		1,550		(578	)		972
Totals				$	25,910	$	(14,004	)	$	11,906

Intangible asset amortization expense was $0.6 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively, and $1.3 million and $1.5 million for the six months ended March 31, 2022 and 2021, respectively.

The following table presents expected future amortization expense as of March 31, 2022:

(in thousands)	Estimated Future Amortization
Fiscal 2022 (remaining)	$	1,284
Fiscal 2023		2,567
Fiscal 2024		2,429
Fiscal 2025		2,116
Fiscal 2026		1,447
Thereafter		779
Total	$	10,622

Accrued Expenses

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

	March 31,		September 30,
(in thousands)	2022		2021
Accrued compensation and related taxes	$	5,380	$	12,320
Acquisition contingent consideration		2,500		2,500
Legal		2,000		2,000
Medical and benefit-related payables		1,384		1,172
Other		1,122		1,216
Bank overdraft		1,095		1,366
Accrued board of director fees		394		131
Interest payable		133		110
Total accrued expenses	$	14,008	$	20,815

Workers’ Compensation Reserve

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

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

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7. LOSS PER SHARE

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

	Three Months Ended March 31,						Six Months Ended March 31,
(in thousands, except per share amounts)	2022			2021			2022			2021
Net loss from continuing operations	$	(8,481	)	$	(2,590	)	$	(20,452	)	$	(6,575	)
Net income from discontinued operations, net of income taxes		5,565			2,475			8,144			4,373
Net loss	$	(2,916	)	$	(115	)	$	(12,308	)	$	(2,202	)
(Loss) income per share of common stock–basic:
Continuing operations	$	(0.20	)	$	(0.06	)	$	(0.48	)	$	(0.16	)
Discontinued operations	$	0.13		$	0.06		$	0.19		$	0.10
Net loss per share ⁽¹⁾	$	(0.07	)	$	—		$	(0.29	)	$	(0.05	)
(Loss) income per share of common stock–diluted
Continuing operations	$	(0.20	)	$	(0.06	)	$	(0.48	)	$	(0.16	)
Discontinued operations	$	0.10		$	0.05		$	0.15		$	0.08
Net loss per share ⁽¹⁾	$	(0.07	)	$	—		$	(0.29	)	$	(0.05	)
Weighted average shares of common stock outstanding:
Basic		42,409			42,321			42,406			42,319
Convertible debt		11,158			11,158			11,158			11,158
Warrants		1,095			962			1,089			873
Employee stock option grants		29			17			28			13
Diluted		54,691			54,458			54,681			54,363
Anti-dilutive shares excluded from diluted net income (loss) per share calculation:
Employee stock option grants		1,310			1,420			1,310			1,420
Warrants		-			1,297			-			1,297
Total		1,310			2,717			1,310			2,717

⁽¹⁾	Amounts may not add due to rounding.

8. DEBT

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

	March 31, 2022						September 30, 2021
(in thousands)	Interest Rate			Balance			Interest Rate			Balance
Line of credit:
PNC Revolver		5.25	%	$	11,588			5.25	%	$	5,490
PNC Revolver LIBOR		4.00			—			4.00			—
Line of credit, net of deferred loan costs				$	11,588					$	5,490
Current portion of term loans:
Current portion of Blue Torch Term Loan		8.50		$	3,800			8.50		$	3,800
Less: deferred loan costs					(1,163	)					(1,108	)
Current portion of term loans, net of deferred loan costs				$	2,637					$	2,692
Term loans, less current portion:
Blue Torch Term Loan, less current portion		8.50		$	88,350			8.50		$	90,250
Convertible Promissory Notes		8.25			6,026			8.25			6,026
Less: deferred loan costs					(2,393	)					(2,792	)
Term loans, less current portion, net of deferred loan costs				$	91,983					$	93,484

Total line of credit and term loans				$	106,208					$	101,666

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Termination of Debt

Termination of Blue Torch Term Loan

On April 1, 2022, in connection with the Faneuil Asset Sale (see Note 1), the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under that certain Financing Agreement, dated June 29, 2021 (the “Blue Torch Term Loan”). ALJ’s payment to Blue Torch was approximately $92.2 million, which satisfied all of the Company’s debt obligations under the Blue Torch Term Loan (“Blue Torch Payoff”). The Company was not required to pay any prepayment premiums as a result of the repayment of indebtedness under the Blue Torch Term Loan, which provided that the mandatory prepayment made in connection with the proceeds from the Faneuil Asset Sale were exempt from such pre-payment premiums. In connection with the repayment of outstanding indebtedness by the Company, the lenders automatically and permanently released all security interests, mortgages, liens and encumbrances under the Blue Torch Term Loan.

Termination of PNC Revolver

In connection with the Phoenix Sale on April 13, 2022, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under that Amended and Restated Financing Agreement, dated as of June 29, 2021 (as amended, the “PNC Revolver”). The Company was required to pay a pre-payment premium of $0.3 million as a result of the repayment of indebtedness under the PNC Revolver. In connection with the repayment of outstanding indebtedness by the Company, the lenders automatically and permanently released all security interests, mortgages, liens and encumbrances under the PNC Revolver.

Loss on Debt Extinguishment

During the fiscal quarter ending June 30, 2022, ALJ expects to book a loss on debt extinguishment in the range of $3.0 million to $5.0 million, mostly attributable to the write-off of deferred loan costs.

The Blue Torch Payoff and termination of the PNC Revolver do not impact the financial statement presentation, footnotes, and related disclosure of ALJ as of and for the three months ended March 31, 2022.

Convertible Promissory Notes

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

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

The Convertible Promissory Notes (i) were subordinate to the Blue Torch Term Loan and the PNC Revolver until the Blue Torch Payoff and the termination of the PNC Revolver, (ii) are unsecured, and (iii) mature on November 28, 2023, subject to extension under certain circumstances.

Financial Covenant Compliance

As a result of the Blue Torch Payoff and PNC Revolver termination, ALJ is no longer subject to financial covenant requirements.

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Estimated Future Minimum Principal Payments

Estimated future minimum principal payments, subsequent to the Blue Torch Payoff and termination of the PNC Revolver, are as follows (in thousands):

Year Ending March 31,	Convertible Promissory Notes
2023	$	—
2024		6,026
Total	$	6,026

9. COMMITMENTS AND CONTINGENCIES

Employment Agreements

ALJ maintains employment agreements with certain key executive officers that provide for a base salary and an annual bonus, with annual bonus amounts to be determined by the Board of Directors, or committee thereof, or the Chief Executive Officer. The agreements also provide for involuntary termination payments, which include base salary, performance bonus, medical premiums, stock options, non-competition provisions, and other terms and conditions of employment. On March 31, 2022, contingent termination payments related to base salary and medical premiums totaled $1.1 million. On April 1, 2022, contingent termination payments related to base salary and medical premiums were reduced to $0.5 million as a result of the Faneuil Asset Sale.

Surety Bonds

As part of Faneuil’s normal course of operations, certain customers require surety bonds guaranteeing the performance of a contract. Subsequent to the Faneuil Asset Sale, 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 $0.5 million, a decrease from $41.8 million on March 31, 2022. To date, Faneuil has not made any non-performance payments to any of its sureties.

Letters of Credit

The Company had letters of credit totaling $3.5 million outstanding on March 31, 2022, which were collateralized by a borrowing sublimit on the PNC Revolver. Subsequent to the termination of the PNC Revolver, the letters of credit were collateralized by restricted cash.

Litigation, Claims, and Assessments

Marshall v. Faneuil

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

A mediation was held on March 11, 2021 and the parties are negotiating a settlement. The parties are negotiating a settlement agreement for approval by the court.

Harris v. Faneuil

Lois Harris, an employee of Faneuil in Georgia, filed a collective action complaint on April 18, 2021 in the United States District Court for the Northern District of Georgia. Harris alleges, on behalf of herself and other current and former non-exempt Call Center Agent employees who received nondiscretionary bonuses for periods in which they worked overtime hours, that Faneuil violated the Fair Labor Standards Act by failing to include nondiscretionary bonuses in the regular rate of pay when calculating the overtime rate for Harris and other similarly-situated persons. Faneuil has engaged counsel to defend it in this action. The Company does not believe

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the resolution of this complaint will have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

Jesse James Pagan et. al. v. Faneuil

On April 26, 2022, a putative class action complaint was filed against Faneuil in the United States District Court for the Eastern District of Virginia. The complaint asserts claims against Faneuil for negligence, breach of an implied contract, and unjust enrichment in connection with an alleged data breach. The proposed class includes certain former employees of Faneuil who contend their personal identifiable information was compromised in the data breach. The complaint seeks damages in excess of $5.0 million on behalf of the putative class. Faneuil has engaged counsel to defend it in this action.

Other Litigation

The Company has been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company concluded as of March 31, 2022, 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.

10. LEASES

General

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

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

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

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

Lease Impairment

The Company tests right-of-use (“ROU”) assets when impairment indicators are present. During the three months ended March 31, 2022, the Company entered into an agreement to sublease excess office space, which triggered impairment testing for the underlying ROU asset. The Company performed a discounted cash flow analysis on the ROU asset and determined that the net carrying value exceeded the estimated discounted future cash flows. As a result, ALJ recorded a $2.2 million lease impairment during the three months ended March 31, 2022.

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ROU Assets and ROU Liabilities

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

(dollars in thousands)	March 31, 2022			September 30, 2021
Finance Leases:
Property and equipment, at cost	$	1,575		$	1,575
Less accumulated amortization		(1,237	)		(977	)
Property and equipment, net	$	338		$	598
Finance lease obligations, current portion	$	720		$	765
Finance lease obligations, less current portion		—			332
Total finance lease liabilities	$	720		$	1,097
Operating Leases:
Operating lease right-of-use assets	$	17,327		$	29,048
Operating lease obligations - current installments	$	3,044		$	4,722
Operating lease obligations, less current installments		20,187			32,767
Total operating lease obligations	$	23,231		$	37,489
Weighted average remaining lease term (years):
Finance		0.9			1.4
Operating		6.5			6.8
Weighted average discount rate:
Finance		6.0	%		6.0	%
Operating		10.7	%		10.7	%

Components of Lease Costs, Net

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

		Three Months Ended March 31,				Six Months Ended March 31,
(in thousands)	Statement of Operations Location	2022		2021		2022		2021
Finance Leases:
Amortization of finance lease assets	Selling, general, and administrative expense	$	39	$	195	$	260	$	507
Interest on finance lease liabilities	Interest expense		13		18		28		51
Total finance lease cost			52		213		288		558
Operating Leases:
Operating lease cost	Selling, general, and administrative expense		1,510		1,726		3,168		3,483
Operating lease cost	Cost of revenue		255		319		510		638
Variable lease cost	Selling, general, and administrative expense		25		277		380		499
Short-term lease cost	Selling, general, and administrative expense		—		9		—		19
Total operating lease cost			1,790		2,331		4,058		4,639
Sublease income	Selling, general, and administrative expense
Lease impairment	Lease impairment		2,158		—		2,158		—
Total lease cost, net		$	4,000	$	2,544	$	6,504	$	5,197

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Supplemental Cash Flow Information

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

(In thousands)	Six Months Ended March 31,
	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for finance leases	$	28	$	51
Operating cash flows used for operating leases - continuing operations		2,408		2,543
Financing cash flows used for finance leases		405		1,194
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		464		560

Lease Maturities

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

Year Ending March 31,	Finance Leases			Operating Leases			Sublease Cash Receipts
2023	$	742		$	5,137		$	771
2024		—			4,924			771
2025		—			4,896			771
2026		—			4,844			771
2027		—			4,507			514
Thereafter		—			7,194
Total lease payments		742			31,502			3,598
Less: imputed interest		(22	)		(8,271	)		—
Total present value of lease payments	$	720		$	23,231		$	3,598

Reported as of March 31, 2022
Current	$	720		$	3,044
Non-current		-			20,187
Total	$	720		$	23,231

11. EQUITY

Common Stock

ALJ issued less than 0.1 million shares of common stock upon the cashless exercise of stock options during both the six months ended March 31, 2022 and 2021.

Preferred Stock

In August 2018, ALJ shareholders approved the amendment and restatement of ALJ’s Restated Certificate of Incorporation to eliminate the preferred stock and authorize the issuance of 5.0 million shares of blank check preferred stock. ALJ had no preferred stock outstanding on March 31, 2022 or September 30, 2021.

Equity Incentive Plans

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

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The 2016 Plan is administered by ALJ’s Compensation, Nominating and Corporate Governance Committee (“Committee”) of the Board. The maximum aggregate number of common stock shares that may be granted under the 2016 Plan is 2.0 million. The 2016 Plan generally provides for the grant of qualified or nonqualified stock options, restricted stock and restricted stock units, unrestricted stock, stock appreciation rights, performance awards and other awards. The Committee has full discretion to set the vesting criteria. The exercise price of a stock option may not be less than 100% of the fair market value of ALJ’s common stock on the date of grant. The 2016 Plan prohibits the repricing of outstanding stock options without prior shareholder approval. The term of stock options granted under the 2016 Plan may not exceed ten years. Awards are subject to accelerated vesting upon a change in control in the event the acquiring company does not assume the awards. The Board may amend, alter, or discontinue the 2016 Plan, but shall obtain shareholder approval of any amendment as required by applicable law or stock exchange listing requirements. As of March 31, 2022, there were 1.4 million options available for future grant under the 2016 Plan.

Stock-Based Compensation.

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

	Three Months Ended March 31,				Six Months Ended March 31,
(in thousands)	2022		2021		2022		2021
Stock options	$	16	$	15	$	60	$	32
Common stock awards		26		22		53		53
Total stock-based compensation expense	$	42	$	37	$	113	$	85

On March 31, 2022, ALJ had $0.1 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 2.5 years.

Stock Option Awards.

ALJ issued 200,000 options during the six months ended March 31, 2022. The fair value of the options was $0.1 million using the following assumptions: expected option life of 6.2 years, volatility of 56.46%, dividend yield of 0.00%, and annual risk-free interest rate of 1.18%.

ALJ had no option grants during the six months ended March 31, 2021.

Common Stock Awards. Members of ALJ’s Board of Directors receive a director compensation package that includes an annual common stock award. In connection with such awards, ALJ recorded stock-based compensation expense of less than $0.1 million for both the three months ended March 31, 2022 and 2021, and $0.1 million for both the six months ended March 31, 2022 and 2021.

Common Stock Options and Warrants Outstanding on March 31, 2022

On March 31, 2022, ALJ had 1.4 million stock options with a weighted average exercise price of $3.48 outstanding and warrants exercisable to purchase 1.6 million shares of common stock with a weighted average exercise price of $0.56 outstanding.

The “intrinsic value” of options is the excess of the value of ALJ stock over the exercise price of such options. The total intrinsic value of options outstanding (of which all are vested or expected to vest) and the total intrinsic value of options exercisable was $0.2 million on March 31, 2022.

12. INCOME TAX

ALJ recorded a benefit from income taxes for continuing operations of $0.1 million and a provision for income taxes of $0.2 million for the six months ended March 31, 2022 and 2021, respectively. ALJ’s effective tax rate from continuing operations for the six months ended March 31, 2022 was 0.3%, as a result of generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. ALJ’s effective tax rate for the six months ended March 31, 2021 was (3.0%), which was also due to generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. The

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

increase in ALJ’s effective tax rate was attributable to an increase in forecasted operating losses, as well as changes to the valuation allowance recorded against net deferred tax assets.

ALJ recorded a provision for income taxes for discontinued operations of $0.2 million for both the six months ended March 31, 2022 and 2021.

13. RANSOMWARE INCIDENT

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

Promptly upon detection of the Security Event, Faneuil launched an investigation, engaged legal counsel and other incident response professionals, and notified law enforcement. Faneuil immediately implemented a series of containment and remediation measures to address this situation and reinforce the security of its information technology systems. Faneuil worked with industry-leading cybersecurity professionals to immediately respond to the threat, defend its information technology systems, and conduct remediation.

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

Faneuil did not incur any expenses as a result of the Security Event during the three months ended March 31, 2022. Faneuil incurred approximately $0.2 million of Security Event related expenses, recorded in selling, general, and administrative expense during the six months ended March 31, 2022. As of March 31, 2022, Faneuil’s insurance recovery receivable was approximately $1.2 million, included with other current assets on the Consolidated Balance Sheet, for amounts that are considered probable for recovery. The insurance proceeds are expected to be received before July 31, 2022.

Should Faneuil expect to receive additional insurance recoveries, above the $1.2 million insurance recovery receivable on March 31, 2022, they will be recorded when considered probable for recovery.

14. REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION

Reportable Segments

As discussed in Note 1, ALJ has organized its business along two reportable segments (Faneuil and Phoenix) and a corporate group for certain support services. ALJ’s operating segments are aligned on the basis of products, services, and industry. As a result of the Phoenix Sale on April 1, 2022, Phoenix results of operations were reported as discontinued operations for all periods presented. The Chief Operating Decision Maker (“CODM”) is ALJ’s Chief Executive Officer. The CODM manages the business, allocates resources to, and assesses the performance of each operating segment using information about its net revenue and segment adjusted EBITDA. ALJ defines segment adjusted EBITDA as segment net loss before depreciation and amortization, interest expense, net, acquisition/disposition-related expenses, lease impairment, restructuring and cost reduction initiatives, Security Event expenses, stock-based compensation, gain on disposal of assets, net, bank fees accreted to term loans, loan amendment expenses, and provision for income taxes. Such amounts are detailed in ALJ’s segment reconciliation below. The accounting policies for segment reporting are the same as for ALJ as a whole.

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following tables present ALJ’s segment information for the three and six months ended March 31, 2022 and 2021:

	Three Months Ended March 31, 2022
(in thousands)	Faneuil		ALJ Corporate			Consolidated
Net revenue	$	68,514	$	—		$	68,514
Segment adjusted EBITDA - continuing operations	$	2,759	$	(1,366	)	$	1,393
Depreciation and amortization							(2,754	)
Interest expense, net							(2,593	)
Acquisition/disposition-related expenses							(2,281	)
Lease impairment							(2,158	)
Provision for income taxes							(46	)
Stock-based compensation							(42	)
Net loss from continuing operations							(8,481	)
Net income from discontinued operations, net of income taxes							5,565
Net loss						$	(2,916	)

	Six Months Ended March 31, 2022
(in thousands)	Faneuil		ALJ Corporate			Consolidated
Net revenue	$	143,293	$	—		$	143,293

Segment adjusted EBITDA - continuing operations	$	943	$	(2,803	)	$	(1,860	)
Depreciation and amortization							(6,139	)
Interest expense, net							(5,298	)
Lease impairment							(2,158	)
Acquisition/disposition-related expenses							(4,670	)
Security Event expenses							(168	)
Stock-based compensation							(113	)
Restructuring and cost reduction initiatives							(75	)
Loss on disposal of assets, net							(26	)
Benefit from income taxes							55
Net loss from continuing operations							(20,452	)
Net income from discontinued operations, net of income taxes							8,144
Net loss						$	(12,308	)

	Three Months Ended March 31, 2021
(in thousands)	Faneuil		ALJ Corporate			Consolidated
Net revenue	$	84,424	$	—		$	84,424
Segment adjusted EBITDA - continuing operations	$	5,004	$	(1,378	)	$	3,626
Depreciation and amortization							(3,125	)
Interest expense, net							(2,451	)
Bank fees accreted to term loans							(300	)
Restructuring and cost reduction initiatives							(164	)
Loan amendment expenses							(89	)
Provision for income taxes							(50	)
Stock-based compensation							(37	)
Net loss from continuing operations							(2,590	)
Net income from discontinued operations, net of income taxes							2,475
Net loss						$	(115	)

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Six Months Ended March 31, 2021
(in thousands)	Faneuil		ALJ Corporate			Consolidated
Net revenue	$	170,393	$	—		$	170,393

Segment adjusted EBITDA - continuing operations	$	8,641	$	(2,620	)	$	6,021
Depreciation and amortization							(6,339	)
Interest expense, net							(5,033	)
Bank fees accreted to term loans							(600	)
Restructuring and cost reduction initiatives							(188	)
Loan amendment expenses							(177	)
Provision for income taxes							(174	)
Stock-based compensation							(85	)
Net loss from continuing operations							(6,575	)
Net income from discontinued operations, net of income taxes							4,373
Net loss						$	(2,202	)

Geographic Information

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

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

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

•

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

•

Results of Operations. An analysis comparing our financial results for the three and six months ended March 31, 2022 to the three and six months ended March 31, 2021.

•

Liquidity and Capital Resources. An analysis comparing our cash flows for the six months ended March 31, 2022 to the three months ended March 31, 2021, and discussion of our financial condition and liquidity.

•

Contractual Obligations. Discussion of contractual obligations on March 31, 2022.

•

Off-Balance Sheet Arrangements. Discussion of off-balance sheet arrangements on March 31, 2022.

•

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

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

Overview

•

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

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

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Recent Developments

Discontinued Operations – Carpets

Discontinued Operations – Phoenix

Asset Sale - Faneuil

Termination of Debt

Termination of Blue Torch Term Loan

On April 1, 2022, in connection with the Faneuil Asset Sale, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under that certain Financing Agreement, dated June 29, 2021 (the “Blue Torch Term Loan”). ALJ’s payment to Blue Torch was approximately $92.2 million, which satisfied all of the Company’s debt obligations under the Blue Torch Term Loan (“Blue Torch Payoff”). The Company was not required to pay any prepayment premiums as a result of the repayment of indebtedness under the Blue Torch Term Loan, which provided that the mandatory prepayment made in connection with the proceeds from the Faneuil Asset Sale were exempt from such pre-payment premiums. In connection with the repayment of outstanding

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indebtedness by the Company, the lenders automatically and permanently released all security interests, mortgages, liens and encumbrances under the Blue Torch Term Loan.

Termination of PNC Revolver

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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

	Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
				% of						% of
(in thousands, except per share amounts)	Dollars			Net Revenue			Dollars			Net Revenue
Net revenue
Faneuil	$	68,514			100.0	%	$	84,424			100.0	%
Consolidated net revenue		68,514			100.0			84,424			100.0
Cost of revenue
Faneuil		58,194			84.9			70,160			83.1
Consolidated cost of revenue		58,194			84.9			70,160			83.1
Selling, general, and administrative expense
Faneuil		7,561			11.0			9,424			11.2
ALJ		3,689			—			1,804			—
Consolidated selling, general, and administrative expense		11,250			16.4			11,228			13.3
Depreciation and amortization expense
Faneuil		2,754			4.0			3,125			3.7
Consolidated depreciation and amortization expense		2,754			4.0			3,125			3.7
Lease impairment		2,158			3.1			—			0.0
Total consolidated operating expenses		74,356			108.5			84,513			100.1
Consolidated operating loss		(5,842	)		(8.5	)		(89	)		(0.1	)
Interest expense		(2,593	)		(3.8	)		(2,451	)		(2.9	)
Provision for income taxes		(46	)		(0.7	)		(50	)		(0.6	)
Net loss from continuing operations		(8,481	)		(12.4	)		(2,590	)		(3.1	)
Net income from discontinued operations, net of income taxes		5,565			8.1			2,475			2.9
Net loss	$	(2,916	)		(4.3	)	$	(115	)		(0.1	)
(Loss) income per share of common stock–basic:
Continuing operations	$	(0.20	)				$	(0.06	)
Discontinued operations	$	0.13					$	0.06
Net loss per share ⁽¹⁾	$	(0.07	)				$	—
(Loss) income per share of common stock–diluted
Continuing operations	$	(0.20	)				$	(0.06	)
Discontinued operations	$	0.10					$	0.05
Net loss per share ⁽¹⁾	$	(0.07	)				$	—
Weighted average shares of common stock outstanding:
Basic		42,409						42,321
Diluted		54,691						54,458

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Net Revenue

	Three Months Ended March 31,
(in thousands)	2022		2021		$ Change			% Change
Faneuil	$	68,514	$	84,424	$	(15,910	)		(18.8	)%
Consolidated net revenue	$	68,514	$	84,424	$	(15,910	)		(18.8	)%

Faneuil Net Revenue

Faneuil net revenue for the three months ended March 31, 2022 was $68.5 million, a decrease of $15.9 million, or 18.8%, compared to net revenue of $84.4 million for the three months ended March 31, 2021. The decrease was mainly attributable to a $19.5 million reduction driven by the completion of customer contracts, somewhat offset by a $2.9 million net increase in existing customer call volumes.

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

	As of March 31,
(in millions)	2022		2021
Within one year	$	60.6	$	119.4
Between one year and two years		24.8		54.2
Between two years and three years		11.9		28.6
Between three years and four years		3.2		11.6
Thereafter		4.8		6.3
Total Faneuil backlog	$	105.3	$	220.1

The decrease in total Faneuil backlog from March 31, 2022 compared to March 31, 2021 was primarily the result of negotiating an early termination of a large unprofitable contract and revenue recognition of contract backlog on March 31, 2021.

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.”

Cost of Revenue

	Three Months Ended March 31,
(in thousands)	2022			2021			$ Change			% Change
Faneuil	$	58,194		$	70,160		$	(11,966	)		(17.1	)%
As a percentage of segment net revenue		84.9	%		83.1	%
Consolidated cost of revenue	$	58,194		$	70,160		$	(11,966	)		(17.1	)%

Faneuil Cost of Revenue

Faneuil cost of revenue for the three months ended March 31, 2022 was $58.2 million, a decrease of $12.0 million, or 17.1%, compared to cost of revenue of $70.2 million for the three months ended March 31, 2021. The decrease in cost of revenue was a direct result of the decreased net revenue. During the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, cost of revenue as a percentage of segment net revenue increased to 84.9% from 83.1%, respectively, as a result of supplementing Faneuil’s call center workforce with more costly subcontract labor during the three months ended March 31, 2022.

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Selling, General, and Administrative Expense

	Three Months Ended March 31,
(in thousands)	2022		2021		$ Change			% Change
Faneuil	$	7,561	$	9,424	$	(1,863	)		(19.8	)%
ALJ		3,689		1,804		1,885			104.5
Consolidated selling, general and administrative expense	$	11,250	$	11,228	$	22			0.2	%

Faneuil Selling, General, and Administrative Expense

Faneuil selling, general, and administrative expense for the three months ended March 31, 2022 was $7.6 million, a decrease of $1.9 million, or 19.8%, compared to selling, general, and administrative expense of $9.4 million for the three months ended March 31, 2021. The decrease was primarily attributable to lower performance-based bonuses for selling, general, and administrative personnel and reduced legal fees as a result of settling legal claims, slightly offset by higher bad debt expense driven by one terminated contract. During the three months ended March 31, 2022 compared to the three months ended March 31, 2021, selling, general, and administrative expense as a percentage of segment net revenue was fairly constant at 11.0% and 11.2%, respectively. 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

ALJ selling, general, and administrative expense for the three months ended March 31, 2022 was $3.7 million, an increase of $1.9 million, or 104.5%, compared to selling, general, and administrative expense of $1.8 million for the three months ended March 31, 2021. The increase was mainly attributable to acquisition/disposition-related legal fees.

Depreciation and Amortization Expense

	Three Months Ended March 31,
(in thousands)	2022		2021		$ Change			% Change
Faneuil	$	2,754	$	3,125	$	(371	)		(11.9	)%
Consolidated depreciation and amortization expense	$	2,754	$	3,125	$	(371	)		(11.9	)%

Faneuil Depreciation and Amortization Expense

Faneuil depreciation and amortization expense was $2.8 million and $3.1 million for the three months ended March 31, 2022 and March 31, 2021, respectively. Because certain Faneuil contracts require capital investments, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Interest Expense

Interest expense was consistent at $2.6 million and $2.5 million for the three months ended March 31, 2022 and March 31, 2021, respectively. Interest expense was impacted by lower interest rates offset by higher amortization of deferred loan costs, which were both attributable to our debt refinance in June 2021.

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Provision for Income Taxes

We recorded a provision for income taxes from continuing operations of less than $0.1 million for both the three months ended March 31, 2022 and 2021. Our effective tax rate from continuing operations for the three months ended March 31, 2022 was (0.6)%, as a result of generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. Our effective tax rate from continuing operations for the three months ended March 31, 2021 was (2.0%), which was also due to generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. The increase in our effective tax rate was attributable to an increase in forecasted operating losses, as well as changes to the valuation allowance recorded against net deferred tax assets.

We recorded a provision for income taxes for discontinued operations of $0.3 million and less than $0.1 million for the three months ended March 31, 2022 and 2021, respectively.

Net Income from Discontinued Operations, Net of Income Taxes

	Three Months Ended March 31,
(in thousands)	2022		2021			$ Change		% Change
Phoenix – discontinued operations	$	5,565	$	3,335		$	2,230		66.9	%
Carpets – discontinued operations		—		(99	)		99	NM
Carpets – loss on sale		—		(761	)		761	NM
Net income from discontinued operations, net of income taxes	$	5,565	$	2,475		$	3,090		124.8	%

NM – Not meaningful.

As a result of the Phoenix Sale, Phoenix results of operations were classified as discontinued operations for the three months ended March 31, 2022 and 2021. Both the three months ended March 31, 2022 and 2021 were attributable to the operations of Phoenix. We expect to report a gain on the sale of Phoenix during the three months ended June 30, 2022.

As a result of the sale of Carpets in February 2021, Carpets had no discontinued operations during the three months ended March 31, 2022.

Segment Adjusted EBITDA

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

	Three Months Ended March 31,
(in thousands)	2022			2021			$ Change			% Change
Faneuil	$	2,759		$	5,004		$	(2,245	)		(44.9	)%
ALJ		(1,366	)		(1,378	)		12			0.9
Segment adjusted EBITDA	$	1,393		$	3,626		$	(2,233	)		(61.6	)%

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Faneuil Segment Adjusted EBITDA

Faneuil segment adjusted EBITDA was $2.8 million for the three months ended March 31, 2022 compared to segment adjusted EBITDA of $5.0 million for the three months ended March 31, 2021. Segment adjusted EBITDA decreased $2.2 million, or 44.9%, driven by the completion of certain contracts.

ALJ Segment Adjusted EBITDA

ALJ segment adjusted EBITDA loss for the three months ended March 31, 2022 was ($1.4) million for both the three months ended March 31, 2022 and 2021.

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Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021

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

	Six Months Ended March 31, 2022						Six Months Ended March 31, 2021
				% of						% of
(in thousands, except per share amounts)	Dollars			Net Revenue			Dollars			Net Revenue
Net revenue
Faneuil	$	143,293			100.0	%	$	170,393			100.0	%
Consolidated net revenue		143,293			100.0			170,393			100.0
Cost of revenue
Faneuil		125,719			87.7			144,038			84.5
Consolidated cost of revenue		125,719			87.7			144,038			84.5
Selling, general, and administrative expense
Faneuil		16,874			11.8			17,902			10.5
ALJ		7,586			—			3,481			—
Consolidated selling, general, and administrative expense		24,460			17.1			21,383			12.5
Depreciation and amortization expense
Faneuil		6,139			4.3			6,340			3.7
Consolidated depreciation and amortization expense		6,139			4.3			6,340			3.7
Lease impairment		2,158			1.5			—			—
Loss on disposal of assets, net		26			—			—			—
Total consolidated operating expenses		158,502			110.6			171,761			100.8
Consolidated operating loss		(15,209	)		(10.6	)		(1,368	)		(0.8	)
Interest expense		(5,298	)		(3.7	)		(5,033	)		(3.0	)
Benefit from (provision for) income taxes		55			0.4			(174	)		(1.0	)
Net loss from continuing operations		(20,452	)		(14.3	)		(6,575	)		(3.9	)
Net income from discontinued operations, net of taxes		8,144			5.7			4,373			2.6
Net loss	$	(12,308	)		(8.6	)	$	(2,202	)		(1.3	)
(Loss) income per share of common stock–basic:
Continuing operations	$	(0.48	)				$	(0.16	)
Discontinued operations	$	0.19					$	0.10
Net loss per share ⁽¹⁾	$	(0.29	)				$	(0.05	)
(Loss) income per share of common stock–diluted	$	—					$	—
Continuing operations	$	(0.48	)				$	(0.16	)
Discontinued operations	$	0.15					$	0.08
Net loss per share ⁽¹⁾	$	(0.29	)				$	(0.05	)
Weighted average shares of common stock outstanding:
Basic		42,406						42,319
Diluted		54,681						54,363

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Net Revenue

	Six Months Ended March 31,
(in thousands)	2022		2021		$ Change			% Change
Faneuil	$	143,293	$	170,393	$	(27,100	)		(15.9	)%
Consolidated net revenue	$	143,293	$	170,393	$	(27,100	)		(15.9	)%

Faneuil Net Revenue

Faneuil net revenue for the six months ended March 31, 2022 was $143.3 million, a decrease of $27.1 million, or 15.9%, compared to net revenue of $170.4 million for the six months ended March 31, 2021. The decrease was mainly attributable to a $38.8 million reduction driven by the completion of customer contracts, somewhat offset by an $11.0 million net increase in existing customer call volumes.

Cost of Revenue

	Six Months Ended March 31,
(in thousands)	2022			2021			$ Change			% Change
Faneuil	$	125,719		$	144,038		$	(18,319	)		(12.7	)%
As a percentage of segment net revenue		87.7	%		84.5	%
Consolidated cost of revenue	$	125,719		$	144,038		$	(18,319	)		(12.7	)%

Faneuil Cost of Revenue

Faneuil cost of revenue for the six months ended March 31, 2022 was $125.7 million, a decrease of $18.3 million, or 12.7%, compared to cost of revenue of $144.0 million for the six months ended March 31, 2021. The decrease in cost of revenue was a direct result of the decreased net revenue. During the six months ended March 31, 2022, as compared to the six months ended March 31, 2021, cost of revenue as a percentage of segment net revenue increased to 87.7% from 84.5%, respectively, as a result of supplementing Faneuil’s call center workforce with more costly subcontract labor during the six months ended March 31, 2022.

Selling, General, and Administrative Expense

	Six Months Ended March 31,
(in thousands)	2022		2021		$ Change			% Change
Faneuil	$	16,874	$	17,902	$	(1,028	)		(5.7	)%
ALJ		7,586		3,481		4,105			117.9
Consolidated selling, general and administrative expense	$	24,460	$	21,383	$	3,077			14.4	%

Faneuil Selling, General, and Administrative Expense

Faneuil selling, general, and administrative expense for the six months ended March 31, 2022 was $16.9 million, a decrease of $1.0 million, or 5.7%, compared to selling, general, and administrative expense of $17.9 million for the six months ended March 31, 2021. The decrease was primarily attributable to lower performance-based bonuses for selling, general, and administrative personnel and reduced legal fees as a result of settling legal claims, slightly offset by higher bad debt expense driven by one terminated contract and higher medical insurance claims under Faneuil’s self-insurance medical plan. During the six months ended March 31, 2022 compared to the six months ended March 31, 2021, selling, general, and administrative expense as a percentage of segment net revenue increased to 11.8% from 10.5% mostly due to the decrease in net revenue. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.

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ALJ Selling, General, and Administrative Expense

ALJ selling, general, and administrative expense for the six months ended March 31, 2022 was $7.6 million, an increase of $4.1 million, or 117.9%, compared to selling, general, and administrative expense of $3.5 million for the six months ended December 31, 2020. The increase was mainly attributable to acquisition/disposition-related legal fees.

Depreciation and Amortization Expense

	Six Months Ended March 31,
(in thousands)	2022		2021		$ Change			% Change
Faneuil	$	6,139	$	6,340	$	(201	)		(3.2	)%
Consolidated depreciation and amortization expense	$	6,139	$	6,340	$	(201	)		(3.2	)%

Faneuil Depreciation and Amortization Expense

Faneuil depreciation and amortization expense was consistent at $6.1 million and $6.3 million for the six months ended March 31, 2022 and March 31, 2021, respectively. Because certain Faneuil contracts require capital investments, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Interest Expense

Interest expense was consistent at $5.3 million and $5.0 million for the six months ended March 31, 2022 and March 31, 2021, respectively. Interest expense was impacted by lower interest rates offset by higher amortization of deferred loan costs, which were both attributable to our debt refinance in June 2021.

Provision for Income Taxes

ALJ recorded a benefit from income taxes for continuing operations of $0.1 million and a provision for income taxes of $0.2 million for the six months ended March 31, 2022 and 2021, respectively. Our effective tax rate from continuing operations for the six months ended March 31, 2022 was 0.3%, as a result of generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. Our effective tax rate from continuing operations for the six months ended March 31, 2021 was (3.0%), which was also due to generating state taxable income, offset by changes to the valuation allowance recorded against net deferred tax assets. The increase in our effective tax rate was attributable to an increase in forecasted operating losses, as well as changes to the valuation allowance recorded against net deferred tax assets.

We recorded a provision for income taxes for discontinued operations of $0.2 million for the six months ended March 31, 2022 and 2021.

Net Income from Discontinued Operations, Net of Income Taxes

	Six Months Ended March 31,
(in thousands)	2022		2021			$ Change		% Change
Phoenix – discontinued operations	$	8,144	$	5,436		$	2,708		49.8	%
Carpets – discontinued operations		—		(302	)		302	NM
Carpets – loss on sale		—		(761	)		761	NM
Net income from discontinued operations, net of income taxes	$	8,144	$	4,373		$	3,771		86.2	%

NM – Not meaningful.

As a result of the Phoenix Sale, Phoenix results of operations were classified as discontinued operations for the six months ended March 31, 2022 and 2021. Both the six months ended March 31, 2022 and 2021 were attributable to the operations of Phoenix.

As a result of the sale of Carpets in February 2021, Carpets had no discontinued operations during the six months ended March 31, 2022.

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Segment Adjusted EBITDA

	Six Months Ended March 31,
(in thousands)	2022			2021			$ Change			% Change
Faneuil	$	943		$	8,641		$	(7,698	)		(89.1	)%
ALJ		(2,803	)		(2,620	)		(183	)		(7.0	)
Segment adjusted EBITDA	$	(1,860	)	$	6,021		$	(7,881	)		(130.9	)%

Faneuil Segment Adjusted EBITDA

Faneuil segment adjusted EBITDA was $0.9 million for the six months ended March 31, 2022 compared to segment adjusted EBITDA of $8.6 million for the six months ended March 31, 2021. Segment adjusted EBITDA decreased $7.7 million, or 89.1%, driven by the wind-down of certain contracts, higher medical insurance claims under Faneuil’s self-insurance medical plan, and the usage of more costly subcontract labor to supplement the call center workforce.

ALJ Segment Adjusted EBITDA

ALJ segment adjusted EBITDA loss for the six months ended March 31, 2022 was ($2.8) million compared to segment adjusted EBITDA loss of ($2.6) million for the six months ended March 31, 2021. ALJ segment adjusted EBITDA loss for six months ended March 31, 2022 was impacted by additional headcount and compensation-related expenses.

Seasonality

Faneuil

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

Liquidity and Capital Resources

Historically, our principal sources of liquidity have been cash provided by operations and borrowings under various debt arrangements. During April 2022, the following transactions had, and will continue to have, a significant impact on our liquidity and capital resources:

•

Faneuil Asset Sale

•

Phoenix Sale

•

Blue Torch Payoff

•

Termination of PNC Revolver

See Recent Developments in the MD&A introduction above for a further discussion of these transactions.

The following table summarizes the impact that the above transactions had, or are expected to have, on our liquidity. The amounts are management’s best estimates at the time this report was filed and are subject to change.

(in millions)	Amount
Cash Inflows:
Proceeds from Faneuil Asset Sale⁽¹⁾	$	127.3
Proceeds from Phoenix Sale⁽²⁾		136.4
Cash Outflows:
Blue Torch Payoff		(92.2	)
PNC Revolver Payoff		(11.6	)
Transaction-related expenses (including income taxes)⁽³⁾		(27.3	)
Estimated net increase to ALJ liquidity	$	132.6

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⁽¹⁾

Includes $2.1 million proceeds, which are expected to be received during our fiscal third quarter, upon the customer’s final approval. Does not include approximately $15.0 million held in an indemnification escrow account or the potential earn-out payments based upon the performance of certain customer agreements in an aggregate amount of up to $25.0 million.

⁽²⁾

Subject to post-closing working capital adjustments.

⁽³⁾

Estimated transaction-related expenses that will be recorded and paid after March 31, 2022. Does not include $4.7 million of expenses recorded prior to March 31, 2022.

Summary of Cash Flows

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

	Six Months Ended March 31,
(in thousands)	2022			2021
Cash (used for) provided by operating activities	$	(100	)	$	11,122
Cash used for investing activities		(3,048	)		(3,704	)
Cash provided by (used for) financing activities		3,510			(8,902	)
Change in cash and cash equivalents	$	362		$	(1,484	)

For the six months ended March 31, 2022, we recognized a net loss of $12.3 million, used cash for operating activities of $0.1 million, used cash for investing activities of $3.0 million, and generated cash from financing activities of $3.5 million.

For the six months ended March 31, 2021, we recognized a net loss of $2.2 million, generated cash from operating activities of $11.1 million, used cash for investing activities of $3.7 million, and used cash for financing activities of $8.9 million.

Operating Activities

Cash used for operating activities of $0.1 million during the six months ended March 31, 2022 was the result of our $12.3 million net loss, $9.7 million addback of net non-cash expenses, and $2.5 million of net cash provided by changes in operating assets and liabilities. The most significant component of net non-cash expenses was depreciation and amortization expense of $6.1 million and lease impairment of $2.2, which was driven by subleasing excess real estate. The most significant components of changes in operating assets and liabilities were mostly attributable to the timing of cash receipts from Faneuil’s customers and repayment of 50%, or $3.6 million, of payroll-related taxes, which were deferred in previous reporting periods under the CARES Act.

Cash provided by operating activities of $11.1 million during the six months ended March 31, 2021 was the result of our $2.2 million

net loss, $8.5 million addback of net non-cash expenses, and $4.8 million of net cash provided by changes in operating assets and

liabilities. The most significant component of net non-cash expenses was depreciation and amortization expense of $6.3 million. The

most significant components of changes in operating assets and liabilities were mostly attributable to the timing of Faneuil’s significant new customer implementations and included accounts payable of $4.4 million, and deferred revenue and customer deposits of $2.8 million, which used cash. Additionally, the CARES Act allowed us to defer payment for $7.2 million of payroll-related taxes, of which $3.6 million was recorded in accrued expenses and $3.6 million was recorded in other non-current liabilities on March 31, 2021. Our discontinued operations provided $7.7 million of cash in the normal course of operations.

Cash used for operations for the six months ended March 31, 2022, compared to cash provided by operations for the six months ended March 31, 2021, was impacted by the timing of the repayment and deferral of payroll-related taxes under the CARES Act.

Investing Activities

For the six months ended March 31, 2022, our investing activities used $3.0 million of cash, of which $2.3 million was used by our discontinued operations to upgrade printer equipment, and $0.7 million was used to purchase computer equipment and software to support Faneuil’s new and existing customers.

For the six months ended March 31, 2021, our investing activities used $3.7 million of cash, of which $2.6 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, offset by $0.4 million cash proceeds from the sale of Carpets. Additionally, our discontinued operations used $1.5 million of cash to purchase equipment in the normal course of operations.

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Our investing activities during the six months ended March 31, 2022, compared to the six months ended March 31, 2021, were consistent and a result of normal business operations.

Financing Activities

For the six months ended March 31, 2022, our financing activities provided $3.5 million of cash as a result of drawing down on our line of credit of $6.1 million to pay short-term liabilities, including annual bonuses and the repayment of the CARES Act payroll-related taxes discussed above, partially offset by quarterly principal payments, totaling $1.9 million, on our term loan.

For the six months ended March 31, 2021, our financing activities used $8.9 million of cash. We used $2.3 million to pay down our line of credit, $1.4 million for finance lease payments, and $4.1 million to pay down our term loans. Additionally, our discontinued operations used $1.1 million of cash to pay down term loans and finance lease payments.

Cash used for financing activities for the six months ended March 31, 2022 compared to cash provided by financing activities for the six months ended March 31, 2021 was impacted by the payment of short-term liabilities, which required us to draw on our line of credit facility. Our quarterly principal payments on our term loan were reduced as a result of our debt refinance in June 2021.

Contractual Obligations

The Faneuil Asset Sale and the Phoenix Sale, which resulted in the Blue Torch Loan Payoff and PNC Revolver termination, had a material impact to our contractual obligations. As such, the following table summarizes pro forma contractual obligations on March 31, 2022 adjusted for the Blue Torch Loan Payoff and PNC Revolver termination, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:

	Payments due by Period
			Less Than		One – Three		Four – Five		More than Five
(in thousands)	Total		One Year		Years		Years		Years
Operating lease obligations ⁽¹⁾	$	23,231	$	3,044	$	7,519	$	7,160	$	5,508
Other liabilities ⁽²⁾		7,942		3,400		4,542		—		—
Convertible Promissory Notes ⁽³⁾		6,026		—		6,026		—		—
Finance lease obligations ⁽¹⁾		720		720		—		—		—
Total contractual cash obligations ⁽⁴⁾	$	37,919	$	7,164	$	18,087	$	7,160	$	5,508

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

⁽²⁾

Amounts represent future cash payments to satisfy our short- and long-term workers’ compensation reserve, short- and long-term acquisition-related deferred and contingent liabilities, and other long-term liabilities recorded on our consolidated balance sheets. It excludes deferred revenue and non-cash items. Short- and long-term acquisition-related deferred and contingent payments are included in the table at total fair value, as defined by generally accepted accounting principles, of $4.7 million. As of March 31, 2022, the total maximum amount of acquisition-related deferred and contingent cash payments was $5.0 million.

⁽³⁾	Refer to “Part I, Item 1. Financial Statements – Note 8. Debt.”

⁽⁴⁾

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

Off-Balance Sheet Arrangements

On March 31, 2022, 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. Subsequent to the Faneuil Asset Sale, 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 $0.5 million, a decrease from $41.8 million on March 31, 2022. To date, Faneuil has not made any non-performance payments to any of its sureties.

Letters of Credit. ALJ had letters of credit totaling $3.5 million outstanding on March 31, 2022, which were collateralized by a borrowing sublimit on the PNC Revolver. Subsequent to the termination of the PNC Revolver, the letters of credit were collateralized by restricted cash.

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Critical Accounting Policies and Estimates

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

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

For a complete summary of our significant accounting policies, please refer to “Part IV. Exhibits, Financial Statement Schedules –Note 2. Summary of Significant Accounting Policies,” included in our Fiscal 2021 Form 10-K. There have been no changes to our accounting policies during the three months ended March 31, 2022.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

Risks Related to Faneuil

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

Since its adoption into law in 2010, the Affordable Care Act has been challenged before the U.S. Supreme Court, and several bills have been and continue to be introduced in Congress to delay, defund, or repeal implementation of or amend significant provisions of the Affordable Care Act. In addition, there continues to be ongoing litigation over the interpretation and implementation of certain provisions of the law. New tax reform legislation enacted on December 22, 2017 (“Tax Reform Law”) includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate,” which could lead to fewer enrollments in healthcare exchanges. Further significant changes to, or repeal of, the Affordable Care Act could materially and adversely affect that aspect of Faneuil’s business.

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

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

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

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

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

Faneuil derives a substantial portion of its revenue from a relatively small number of customers. For additional information regarding Faneuil customer concentrations, see “Part I, Item 1. Financial Statements – Note 5. Concentration Risks.” We expect the largest

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

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

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

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

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

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

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

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

•

obtain unauthorized access to confidential consumer information;

•

manipulate or destroy data; or

•

disrupt, sabotage or degrade service on our systems.

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

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

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

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

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

•

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

•

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

•

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

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

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

•

the breadth and complexity of our operations;

•

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

•

the proliferation and increasing sophistication of cyberattacks;

•

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

•

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

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

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

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

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

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

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

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internally develop and implement new and competitive technologies;

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•

use leading third-party technologies effectively;

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respond to changing client needs and regulatory requirements; and

•

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

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

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

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

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

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

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

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

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

The industries in which Faneuil operates are highly competitive, which could decrease demand for Faneuil’s products or force Faneuil to lower its prices, which could have a material adverse effect on Faneuil’s business and our financial results.

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

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

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.

On March 31, 2022, Faneuil 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. 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, Faneuil’s backlog as of any particular date may not be an accurate indicator of our future revenue or earnings.

Risks Related to the Company Generally

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

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

•

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

•

Similar impacts that negatively affect Faneuil’s significant customers.

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

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

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

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

We have in the past, and may in the future, incur indebtedness that could adversely affect our financial flexibility and expose us to risks that could materially adversely affect our liquidity and financial condition.

As of April 13, 2022, after giving effect to the application of the net proceeds of the Phoenix Sale and the termination of the PNC Revolver, we have no outstanding indebtedness other than certain convertible promissory notes outstanding. We may incur additional indebtedness in the future, which could have significant effects on our business, including:

•

limiting our ability to borrow additional amounts to fund capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;

•

limiting our ability to make investments, including acquisitions, loans and advances, and to sell, transfer or otherwise dispose of assets;

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requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our borrowings, which would reduce availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;

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increasing our vulnerability to adverse changes in general economic, industry and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing conditions;

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placing us at a competitive disadvantage compared with our competitors that have less debt; and

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exposing us to risks inherent in interest rate fluctuations if our future borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

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In addition, we may not be able to generate sufficient cash flow from our operations to repay our future indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our borrowings under future indebtedness as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our future debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our business, financial condition and results of operations. In addition, we may be subject to prepayment penalties depending on when we repay our future indebtedness, which amounts could be material.

If we are unable to retain key members of our management team or attract, integrate and retain additional executives and other skilled personnel we need to support our operations and growth, we may be unable to achieve our goals and our business will suffer.

Our future success depends upon our ability to continue to attract, train, integrate and retain highly skilled employees, particularly those on our management team, including Jess Ravich, our Chief Executive Officer and Brian Hartman, our Chief Financial Officer, whose services are essential to the execution of our corporate strategy and ensuring the continued operations and integrity of financial reporting within our company. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their relationship with us at any time. The loss of any member of our senior management team could significantly delay or prevent us from achieving our business and/or development objectives and could materially harm our business.

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:

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

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

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

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

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

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

•

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

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regulatory challenges or resulting delays; and

•

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

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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.

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

Our executive officers and directors and their affiliated entities together beneficially owned approximately 55.7% of our outstanding common stock on May 1, 2022. Jess Ravich, our current Chief Executive Officer, beneficially owned approximately 47.1% of our common stock on May 1, 2022. As a result, these stockholders, if they act together or in a block, could have significant influence over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions, even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

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

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

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

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

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

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

The market price of our common stock is volatile.

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

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

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

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relatively low trading volumes;

•

announcements by our competitors of significant acquisitions; and

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the occurrence of various risks described in these Risk Factors.

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

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

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

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

If terrorist activities, armed conflicts (including Russia’s invasion of Ukraine), political instability, or natural disasters, including climate change related events, such events may negatively affect our operations, cause general economic conditions to deteriorate or cause demand for our services to decline. A prolonged economic slowdown or recession could reduce the demand for our services, and consequently, negatively affect our future sales and profits. Any disruption of operations due to unforeseen events at any of our principal facilities could adversely affect our business, results of operations, cash flows, and financial condition.

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

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

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

Your share ownership may be diluted by the issuance of additional shares of our common or preferred stock or securities convertible into common or preferred stock in the future. On March 31, 2022, a total of 1,410,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of $3.48, and 1,610,538 shares of our common stock are issuable pursuant to outstanding warrants at a weighted-average exercise price of $0.56. On March 31, 2022, ALJ had debt that was convertible into 11,158,357 shares of common stock at the discretion of the debt holder. It is probable that options or warrants to purchase our common stock, or debt that is convertible into common stock, will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option or warrant. If the stock options or warrants are exercised, your share ownership will be diluted. Additionally, options to purchase up to 1,375,000 shares of ALJ common stock are available for grant under our existing equity compensation plans on March 31, 2022.

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

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to purchase their pro rata share of any offering of shares of any class or series. The market price of our common stock could decline as a result of sales of shares of our common stock made after this offering or the perception that such sales could occur. We cannot predict or estimate the amount, timing, or nature of our future offerings. Thus, our shareholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings.

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

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

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

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

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Item 6 – Exhibits

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

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

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

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

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

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

101.SCH	Inline XBRL Taxonomy Extension Schema Document	Filed herewith

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

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

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

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

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

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SIGNATURES

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

	ALJ Regional Holdings, Inc.

	Date: May 16, 2022
	/s/ Jess Ravich
	Jess Ravich
	Chief Executive Officer
	(Principal Executive Officer)

	Date: May 16, 2022
	/s/ Brian Hartman
	Brian Hartman
	Chief Financial Officer
	(Principal Financial Officer)

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