SEC Info - Alj Regional Holdings Inc - ‘10-K’ for 9/30/19

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		Alternative Formats (Word, et al.) Business Certain Relationships and Related Transactions, and Director Independence Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Consolidated Balance Sheets September 30, 2019 and 2018 Consolidated Statements of Cash Flows September 30, 2019 and 2018 Consolidated Statements of Operations September 30, 2019 and 2018 Consolidated Statements of Stockholders' Equity September 30, 2019 and 2018 Controls and Procedures Deloitte & Touche, LLP Directors, Executive Officers and Corporate Governance Executive Compensation Exhibits, Financial Statement Schedules Financial Statements and Supplementary Data Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Mayer Hoffman McCann P.C Mine Safety Disclosures Notes to Consolidated Financial Statements September 30, 2019 and 2018 Other Information Part I Part Ii Part Iii Part Iv Power of Attorney Principal Accounting Fees and Services Properties Quantitative and Qualitative Disclosures About Market Risk Report of Independent Registered Public Accounting Firm -- Deloitte & Touche, LLP Report of Independent Registered Public Accounting Firm -- Mayer Hoffman McCann P.C Risk Factors Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Selected Financial Data Unresolved Staff Comments
1	1st Page – Filing Submission
"	Part I
"	Business
"	Risk Factors
"	Unresolved Staff Comments
"	Properties
"	Legal Proceedings
"	Mine Safety Disclosures
"	Part Ii
"	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
"	Selected Financial Data
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Quantitative and Qualitative Disclosures About Market Risk
"	Financial Statements and Supplementary Data
"	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"	Controls and Procedures
"	Other Information
"	Part Iii
"	Directors, Executive Officers and Corporate Governance
"	Executive Compensation
"	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"	Certain Relationships and Related Transactions, and Director Independence
"	Principal Accounting Fees and Services
"	Part Iv
"	Exhibits, Financial Statement Schedules
"	Power of Attorney
"	Report of Independent Registered Public Accounting Firm -- Deloitte & Touche, LLP
"	Report of Independent Registered Public Accounting Firm -- Mayer Hoffman McCann P.C
"	Consolidated Balance Sheets September 30, 2019 and 2018
"	Consolidated Statements of Operations September 30, 2019 and 2018
"	Consolidated Statements of Stockholders' Equity September 30, 2019 and 2018
"	Consolidated Statements of Cash Flows September 30, 2019 and 2018
"	Notes to Consolidated Financial Statements September 30, 2019 and 2018

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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

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

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

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

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates was approximately $26,919,056, based on the closing price of $1.60 for such common equity on March 31, 2019.

The number of shares of common stock, $0.01 par value per share, outstanding as of November 30, 2019, was 42,172,791.

The statements included in this Form 10-K 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-K include, among other things, statements about the following:

The Company is also subject to general business risks, including results of tax audits, adverse state, federal or foreign legislation and regulation, changes in general economic 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-K 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.

ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively in this report as “ALJ,” the “Company” or “we”) is a holding company. As of September 30, 2019, ALJ consisted of the following wholly-owned subsidiaries:

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

ALJ has organized its business and corporate structure along the following business segments: Faneuil, Carpets, and Phoenix. ALJ is reported as corporate overhead. For results of operations by business segment, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Faneuil is a Delaware corporation with headquarters in Hampton, VA. We acquired Faneuil from Harland Clarke Holdings Corp., a wholly-owned subsidiary of MacAndrews & Forbes Holdings Inc., for aggregate consideration of $53.0 million.

Faneuil is a nationally recognized leader in technology-enabled in-person and automated service delivery, particularly in regulated, highly complex environments.

In July 2019, Faneuil acquired Realtime Digital Innovations, LLC (the “RDI Acquisition”), an exclusive partner of Faneuil for the past 18 months providing workflow automation and business intelligence services. The RDI Acquisition is expected to provide Faneuil with a sustainable competitive advantage in the business process outsourcing space by allowing it to, among other things, (i) automate process workflows and business intelligence, (ii) generate labor efficiencies for existing programs, (iii) expand potential new client target entry points, (iv) improve overall customer experience, and (v) increase margin profiles through shorter sales cycles and software license sales. Faneuil plans to consolidate the RDI business under Faneuil’s corporate umbrella.

In May 2017 (the “CMO Business Purchase Date”), Faneuil acquired certain assets and assumed certain liabilities associated with the customer management outsourcing business (“CMO Business”) of Vertex Business Services LLC.

Faneuil purchased the CMO Business to expand into the utilities market by providing direct customer care call center operations, back-office processes, including billing, collections and business analytics, and installation and cloud-based customer care support for the utilities industry.

Faneuil provides business processing solutions for an extensive client portfolio that includes both commercial and government entities across several verticals, including transportation, utilities, healthcare, consumer goods, and government/municipal services. Utilizing advanced applications and a dedicated team of service professionals, Faneuil delivers broad outsourcing support, ranging from customer contact centers, fulfillment operations, and information technology services, to manual and electronic toll collection and violation processing, with the goal of building its clients’ brands by providing exemplary customer service.

Faneuil employees who have contact with customers undergo intensive training and development, followed by structured monitoring and assessments before they are certified to process customer contacts. Faneuil’s customer contact employees provide service delivery through multiple communication channels, including telephone, fax, email, web chat and face-to-face interaction. Additionally, Faneuil provides multi-lingual representatives to accommodate the communication needs of non-English-speaking customers, as well as the hearing-impaired.

Faneuil had 5,499 employees as of September 30, 2019 (up from 5,042 employees as of September 30, 2018), all of whom are located in the U.S. No employees are subject to any collective bargaining agreements. Faneuil considers its employee relations good.

Faneuil’s client portfolio includes both government and commercial entities nationwide, including several toll authorities, state agencies, municipalities, publicly-owned utilities, health benefit exchanges, one government agency that operates the major airports serving the Washington, D.C. area, and several other public and private entities.

The percentages of Faneuil net revenue derived from its significant customers for the years ended September 30, 2019 and 2018 were as follows:

Many Faneuil customers are government agencies subject to contractual budgetary ceilings. State and local funding for these agencies is approved by the respective state legislature(s) each year. Depending on budgetary constraints, the contract values may be subject to change based upon ongoing legislative approval.

Primary competitors to Faneuil are other large providers of toll services, such as Conduent, AEComm, and TransCore, Inc., as well as contact center operators such as Maximus and Automated Health Services. In many cases, Faneuil is smaller and has less financial and personnel resources than its competitors. If Faneuil cannot compete effectively to win new business and retain existing clients, its operating results will be negatively affected. To remain competitive, Faneuil must continuously implement new technologies and expand its portfolio of outsourced services and may have to make occasional strategic adjustments to its pricing for its services.

Faneuil leases all its properties in various locations throughout the United States for customer contact centers, walk-in retail, and administration. Corporate headquarters are located in Hampton, VA. Faneuil’s leased facilities comprise an aggregate of approximately 400,000 square feet with leases that expire at various dates through April 2029 . Faneuil believes that its existing leased facilities are adequate for current requirements. However, Faneuil intends to expand call center capacity by adding new facilities in certain tax beneficial and economically favorable locations to meet its growing business needs.

Faneuil backlog represents executed contracts for future services. Most contracts are long-term and obligate Faneuil to provide services over multiple years. Faneuil backlog may not represent firm commitments as some contracts, especially with government entities, allow for cancellation under certain instances. Faneuil adjusts backlog to reflect contract cancellations, deferrals, and revisions known at the reporting date. However, Faneuil could experience additional contract modifications or cancellations, which may increase or decrease backlog.

The following table reflects the amount of Faneuil backlog by the fiscal year we expect to recognize revenue:

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

For further information regarding Faneuil backlog, see “Part I, 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 revenue in future periods below the levels anticipated. This makes backlog an uncertain indicator of future operating results.”

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 attributable to its healthcare customers as the customer contact centers increase operations during the open enrollment periods of the healthcare exchanges. Faneuil revenue from its healthcare customers generally decreases during the remaining portion of the year after the open enrollment period. Seasonality is less pronounced with Faneuil customers in the transportation industry, though there is typically some volume increase during the summer months.

Faneuil’s business is subject to many legal 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,” including the collection of patient data through Faneuil’s contact center services and medical device tracking services, which is subject to the Health Insurance Portability and Accountability Act of 1996, commonly known as HIPAA, which protects the privacy of patient 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 thereafter. These laws, regulations, and agreements limit the ability to use or disclose non-public personal information for purposes other than the purposes originally intended. Many of these regulations, including those related to data privacy, frequently change and sometimes conflict with existing regulations amongst 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 on Faneuil’s operations. 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. Also, 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.

Faneuil is led by ALJ board member Anna Van Buren, who has served as President and Chief Executive Officer since 2009 and previously served in executive roles at Faneuil since 2004. For additional information regarding Ms. Van Buren, see “Part III, Item 10. Directors, Executive Officers and Corporate Governance.”

Carpets is a Nevada limited liability company headquartered in Las Vegas, Nevada. We acquired Carpets from Levine Leichtman for aggregate consideration of $5.3 million.

Carpets is one of the largest floor covering retailers in Las Vegas, Nevada, and a provider of multiple products for the commercial, retail and home builder markets, including flooring, countertops, cabinets, window coverings, and garage/closet organizers. In addition to a stone and solid surface fabrication facility, Carpets has two retail locations in the Las Vegas area.

Floor Coverings. Carpets provides various floor coverings to home builders, commercial and retail customers including carpet, hardwood, laminate, tile, ceramic, porcelain, natural stone, vinyl plank, vinyl tile, area rugs, and specialty flooring including bamboo, leather, cork and large format tile.

Countertops and Surrounds. Carpets provides countertop and surrounds, primarily for bathrooms and kitchens, including natural stone, granite, ceramic, porcelain, solid surface, quartz, and piedrafina.

Cabinets and Other Products. Carpets provides kitchen, bathroom, and garage cabinets, closet and closet organizers; and window coverings including blinds, shutters, and shades.

Carpets sells to a variety of customers, including home builders, commercial, and retail customers. Home building customers of Carpets include some of the largest home builders in the United States, along with local builders in and around Las Vegas, Nevada. Commercial customers of Carpets include general contractors, real estate investment firms/funds, and other commercial entities such as casinos and other companies looking to improve their office space. Retail customers of Carpets include the general public interested in making home improvements.

Carpets bids directly with home builders on residential developments and is awarded flooring, countertops and surrounds, and/or cabinet contracts. These contracts involve installing the base level products in each of the residential homes within the awarded development and, when requested, providing upgraded materials and services to the base level products. Carpets also bids on commercial work and is awarded contracts generally on a fixed price basis. These projects generally involve high-rise condos, office buildings, tenant improvements, and off-strip casinos. Carpets also engages in marketing activities, including Internet search engine optimization, banner advertising, car wraps, affiliate websites, radio and television advertising, and referrals targeted toward retail customers.

A small number of customers have historically accounted for a substantial portion of Carpets net revenue. The percentages of Carpets net revenue derived from its significant customers for the years ended September 30, 2019 and 2018 were as follows:

Carpets has historically purchased materials from a small number of suppliers primarily to control the quality of the product and to capitalize on volume discounts. If these suppliers were unable to provide materials on a timely basis, Carpets management believes alternative suppliers could provide the required materials with minimal disruption to the business. Historically, Carpets has never experienced any significant delay or shortage in the supply of materials.

The percentages of Carpets inventory purchases from its significant suppliers for the years ended September 30, 2019 and 2018 were as follows:

Carpets backlog represents open purchase orders. As of September 30, 2019, Carpets total backlog, which is expected to be fully realized within the next 12 months, was $11.0 million compared to $12.5 million as of September 30, 2018. The decrease in Carpets backlog at September 30, 2019, compared to September 30, 2018, was the result of a strategic decision to only accept jobs that yield a targeted profit margin.

For further information regarding Carpets backlog, see “Part I, 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 revenue in future periods below the levels anticipated. This makes backlog an uncertain indicator of future operating results.”

Primary competitors to Carpets include other flooring, countertop and surround, and cabinet providers in the Las Vegas area, such as Interior Specialist Inc. and Classic Flooring, as well as large box stores such as Lowe’s, Home Depot, and RC Willey. Carpets believes that its competitive advantages include a comprehensive and high-end quality solution for home builders for flooring, surrounds, and cabinets, which provides them with a single point of accountability. Carpets also competes with discounted flooring companies such as Cloud Carpet and Carpets Galore.

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

Carpets had 386 employees, including part-time installers, as of September 30, 2019 (up from 361 employees at September 30, 2018), all of whom are located in the U.S. No employees are subject to any collective bargaining agreements. Carpets considers its employee relations good.

Carpets leases its corporate office, two retail locations, solid surface fabrication facility, and flooring and cabinet warehouses, which are all located in or around Las Vegas, NV. Leased facilities total approximately 95,000 square feet with leases that expire at various dates through March 2022. Carpets believes its leased facilities will be adequate for at least the next 12 months.

Carpets is led by Steve Chesin, who has served as its Chief Executive Officer since 2007. For additional information about Mr. Chesin, see “Part III, Item 10. Directors, Executive Officers and Corporate Governance.”

Phoenix is a Delaware corporation headquartered in Hagerstown, Maryland. We acquired Phoenix from Visant Corporation for aggregate consideration of $88.3 million.

Phoenix is a premier full-service, full-color printer with over 40 years of superior printing experience. Drawing on a broad spectrum of materials and decorative technologies, Phoenix produces memorable, value-added components, heavily illustrated books, and specialty commercial products. Book publishers generally design book components to enhance the sales appeal of their books. The production of book components requires specialized equipment, materials, and finishes and often demands high-quality, intricate work. As a result, many leading publishers rely on specialty printers such as Phoenix to supply high-quality book components. This same philosophy applies to labels, packaging, and specialty commercial products, where Phoenix customers require the knowledge and expertise of a printer that can enhance their products for sale into the commercial marketplace. Phoenix has been servicing the publishing industry within the United States since 1979 and has formed lasting relationships with many of the biggest names in book publishing.

As a domestic manufacturer, Phoenix offers extensive, in-house digital pre-press capabilities and its technologically advanced UV printing platform supports an array of printing and finishing options. Phoenix innovative special effects include foil stamping, UV embellishments, and laminations, as well as its trademarked products LithoFoil^®, MetalTone™, Look of Leather™, and VibraColor™.

On October 2, 2017, Phoenix acquired certain assets and assumed certain liabilities from LSC Communications, Inc. (“LSC”) and Moore-Langen Printing Company, Inc. related to LSC’s printing and manufacturing services division in Terre Haute, Indiana (“Printing Components Business”). Total purchase price was $10.0 million.

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

In July 2016, Phoenix acquired certain assets and assumed certain liabilities from AKI, Inc. (“AKI”) in respect of AKI’s Color Optics division (“Color Optics”) for an adjusted purchase price of $6.6 million.

Color Optics is a leading printing and packaging solutions business servicing the beauty, fragrance, cosmetic, and consumer-packaged goods markets. The purchase of Color Optics complements Phoenix product offerings and has allowed Phoenix to expand and diversify its product offerings by leveraging its existing core competencies.

Phoenix offers several products for books and components, which represents approximately 90% of Phoenix net revenue.

Phoenix is a leader in providing distinctive cover components and high-quality, heavily illustrated and multi-colored books for all markets. With its technologically advanced pre-press and press operations as well as an array of finishing applications and innovative special effects, Phoenix is committed to producing memorable, value-added products.

In recent years, Phoenix has expanded into the label and packaging markets to leverage its unique printing and finishing capabilities as well as its trademarked special effects and extensive offerings of finishes and coatings. In 2014, Phoenix acquired the Brady Palmer Company, establishing its presence in the cut and stack label market. With the subsequent purchase of Color Optics, Phoenix strengthened its presence in the label and packaging markets.

Phoenix had 433 employees as of September 30, 2019 (down from 444 employees as of September 30, 2018), all of whom are located in the U.S. Phoenix considers its employee relations good.

Phoenix sells to many of the leading publishing companies. A small number of customers have historically accounted for a substantial portion of Phoenix net revenue. The percentages of Phoenix net revenue derived from its significant customers for the years ended September 30, 2019 and 2018 were as follows:

Phoenix has historically purchased raw materials from a small number of suppliers primarily to control the quality of the product and to capitalize on volume discounts. If these suppliers were unable to provide materials on a timely basis, Phoenix management believes alternative suppliers could provide the required materials with minimal disruption to the business. Historically, Phoenix has never experienced any significant delay or shortage in the supply of materials.

The percentages of Phoenix inventory purchases from its significant suppliers for the years ended September 30, 2019 and 2018 were as follows:

Phoenix backlog represents executed master service agreements (“MSA”) that contain minimum volume commitments over multiple years for future product deliveries. Phoenix includes only the estimated minimum commitments in the MSA as backlog. As Phoenix executed MSAs mostly provide for minimum volume commitments rather than minimum aggregate dollar spend, the actual revenue from such agreements may differ from our backlog estimates as to the total order volume and the timing of such volume. Phoenix adjusts backlog to reflect estimated order volumes delivered by its customers based on historical experience known at the reporting date; however, future variations in order volumes by Phoenix customers may increase or decrease backlog and future revenue.

The following table reflects the amount of Phoenix backlog by the fiscal year we expect to recognize revenue:

For further information regarding Phoenix backlog, see “Part I, 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 revenue in future periods below the levels anticipated. This makes backlog an uncertain indicator of future operating results.”

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

The printing industry in general and the printing and manufacturing of books, in particular, is extremely competitive. Over the past several years, there has been significant consolidation in the publishing industry, such that fewer publishers control a greater share of the market. Although there are still many small, independent publishers, they do not wield the leverage held by major publishing houses. Additionally, the printing industry has experienced a reduction in demand for trade books due to the impact of the e-book market and a reduction in textbooks due to lower state government funding, alternative product formats and digital distribution of content.

Primary competitors in the printing and manufacturing of books and book components include, but are not limited to, LSC, Coral Graphics, Quad Graphics, and Worzalla. There is no reliable industry data available to determine Phoenix’s market share and position versus that of its competitors. With respect to book components, a portion of the products is produced by the book manufacturers and a portion by component printers. The dollar value of book components manufactured by the book manufacturers or by other component printers is unknown. Phoenix and Coral Graphics are the two primary trade book component manufacturers used by major publishers in the U.S. market. Most high-quality, heavily-illustrated and multi-colored books sold in the U.S. are produced outside of the U.S. Phoenix competes with Worzalla and several domestic book manufacturers for that portion that is produced domestically.

Phoenix owns its principal properties for corporate offices and production located in Hagerstown, MD, which totals approximately 276,000 square feet. Additionally, Phoenix owns two buildings totaling approximately 45,000 square feet in Terre Haute, IN, which were acquired as part of the Printing Components Business. As part of the purchase of Color Optics, Phoenix acquired a lease of a print facility with approximately 84,000 square feet in Rockaway, NJ. During the year ended September 30, 2018, Phoenix relocated equipment and printing from its Rockaway facility to its Hagerstown facility. Relocation efforts were completed in November 2018. In April 2019, Phoenix entered a sublease agreement for the entire Rockaway facility. The lease and sublease of the Rockaway facility both expire in May 2020. Phoenix believes its facilities will be adequate for at least the next 12 months.

Phoenix is led by Marc Reisch, who currently serves as its Chairman and previously served as its Chief Executive Officer from 2008 to 2015. Mr. Reisch served as a director on ALJ’s Board of Directors from August 2015 until October 2019. For additional information regarding Mr. Reisch, see “Part III, Item 10. Directors, Executive Officers and Corporate Governance.”

ALJ was originally incorporated in the State of Delaware under the name Nuparent, Inc. on June 22, 1999. The Company’s name was changed to YouthStream Media Networks, Inc. on June 24, 1999, and that name was used through October 23, 2006. The Company’s name was changed to ALJ Regional Holdings, Inc. on October 23, 2006.

As of September 30, 2019, ALJ had four employees, its Chief Executive Officer, Chief Financial Officer, and two support staff, performing services dedicated primarily to general corporate and administrative matters. No employee is represented by a labor union.

We rely on copyright, trademark, and trade secret laws as well as contractual restrictions to protect our proprietary information and intellectual property rights. We control access to our proprietary information and intellectual property, in part, by entering into confidentiality and invention assignment agreements with our employees, contractors, and business partners. We also control the use of our proprietary information and intellectual property through provisions in our client agreements and distribution partner agreements.

We have a limited number of registered trademarks and registered copyrights in the United States as well as a number of common law trademarks and trade names. We rely substantially on unpatented proprietary technology. We do not consider the success of our business, as a whole to be dependent on our intellectual property.

We make available free of charge our annual, quarterly and current reports, proxy statements and other information, in electronic format, upon request. To request such materials, please contact our Chief Financial Officer at 244 Madison Avenue, PMB #358, New York, NY 10016 or call 212-883-0083.

Additionally, many reports and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.aljregionalholdings.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Information on our website and other information that can be accessed through our website are not part of this report.

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

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

On March 23, 2010, President Obama signed the Affordable Care Act (the “Affordable Care Act”) into law, which has affected comprehensive health insurance reform, including the creation of health insurance exchanges, among other reforms. A portion of Faneuil’s healthcare business relates to providing services to health insurance exchanges in various states, and Faneuil believes that there may be significant opportunities for growth in this area. President Trump has disclosed that a key initiative for his Presidency is to repeal or substantially change the Affordable Care Act. While Congress has not passed repeal legislation, 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. It is unclear whether further changes that President Trump has planned to the Affordable Care Act will be enacted, or if enacted changes will affect Faneuil’s business. Further significant changes to, or repeal of, the Affordable Care Act could materially and adversely affect that aspect of Faneuil’s business.

Economic downturns and reductions in government funding could have a negative effect on Faneuil’s business.

Demand for the services offered by Faneuil has been, and is expected to continue to be, subject to significant fluctuations due to a variety of factors beyond its control, including economic conditions. During economic downturns, the ability of both private and governmental entities to make expenditures may decline significantly. We cannot be certain that economic or political conditions will be generally favorable or that there will not be significant fluctuations adversely affecting Faneuil as a whole, or key industry segments targeted by Faneuil. In addition, Faneuil’s operations are, in part, dependent upon state government funding. Significant changes in the level of state government funding could have an unfavorable effect on Faneuil’s business, financial position, results of operations and cash flows.

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

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

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

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

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

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

Faneuil faces intense competition from numerous competitors. Faneuil primarily competes based on quality, performance, innovation, technology, price, applications expertise, system and service flexibility, and established customer service capabilities, as its services relate to toll collection, customer contact centers, and employee staffing. Faneuil may not be able to compete effectively on all these fronts or with all of its competitors. In addition, new competitors may emerge, and service offerings may be threatened by new technologies or market trends that reduce the value of the services Faneuil provides. To remain competitive, Faneuil must respond to new technologies and enhance its existing services, and we anticipate that it may have to adjust the pricing for its services to stay competitive on future responses to proposals. If Faneuil does not compete effectively, its business, financial position, results of operations and cash flows could be materially adversely affected.

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

Faneuil derives a substantial portion of its revenue from a relatively small number of customers. For additional information regarding Faneuil customer concentrations, see “Part IV, Item 15. Exhibits, Financial Statement Schedules – Note 4. Concentration Risks.” We expect the largest customers of Faneuil to continue to account for a substantial portion of its total net revenue for the foreseeable future. Faneuil has long-standing relationships with many of its significant customers. However, because Faneuil customers generally contract for specific projects or programs with a finite duration, Faneuil may lose these customers if funding for their respective programs is discontinued, or if their projects end and the contracts are not renewed or replaced. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could materially reduce Faneuil revenue and cash flows. Additionally, many Faneuil customers are government entities, which can unilaterally terminate or modify the existing contracts with Faneuil without cause and penalty to such government entities in many situations. If Faneuil does not replace them with other customers or other programs, the loss of business from any one of such customers could have a material adverse effect on its business or results of operations.

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

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

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

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

In some cases, Faneuil relies on and partners with third-party subcontractors as well as third-party equipment manufacturers to provide services under its contracts. To the extent that Faneuil cannot engage subcontractors or acquire equipment or materials, its performance, according to the terms of the customer contract, may be impaired. If the amount Faneuil is required to pay for subcontracted services or equipment exceeds the amount Faneuil has estimated in bidding for fixed prices or fixed unit price contracts, it could experience reduced profit or losses in the performance of these contracts with its customers. Also, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, Faneuil may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the expected profit or result in a loss of a customer contract for which the services, equipment or materials were needed.

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

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

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

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

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

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

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

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

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

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

Faneuil’s business is subject to many laws and regulatory requirements in the United States, covering such matters as data privacy, consumer protection, 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.

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

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

A failure to attract and retain necessary personnel, skilled management, and qualified subcontractors may have an adverse impact on Faneuil’s business.

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

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

The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature. Historically, downturns in the U.S. and global economies, along with the residential and commercial markets in such economies, particularly in Las Vegas, have negatively impacted the floor covering industry and Carpets business. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, these activities

lagged during the recent downturns. Diminished consumer confidence in general, or specifically with respect to purchasing homes, or lack of consumer interest in purchasing a home compared to other housing alternatives due to location preferences, perceived affordability constraints or otherwise, may contribute to such a downturn. Further, changes to monetary policy or other actions by the Federal Reserve resulting in an adverse effect on interest rates (including mortgage interest rates), a downward trend in employment levels and job and wage growth, and increasing prices for available new or existing homes could lead to a decline in housing activity and negatively impact Carpets business. A significant or prolonged decline in residential/commercial remodeling or new construction activity could have a material adverse effect on the business and results of operations of Carpets.

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

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

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

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

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

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

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

Carpets sources, stocks and sells products from vendors, and the vendors’ ability to fulfill Carpets orders reliably and efficiently is critical to its business success. Its ability to continue to identify and develop relationships with qualified suppliers who can satisfy its standards for quality and the need to access products in a timely, efficient and cost-effective manner is a significant challenge. The ability to access products can also be adversely affected by political instability, the financial instability of suppliers, suppliers’ noncompliance with applicable laws, trade restrictions, tariffs, currency exchange rates, supply disruptions, weather conditions, natural disasters, including climate change related events, shipping or logistical interruptions or costs and other factors beyond its control. If these vendors fail or are unable to perform as expected and Carpets is unable to replace them quickly, its business could suffer material adverse short- and long-term effects.

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

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

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

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

The business of Carpets is dependent in part on estimating fixed price projects correctly and completing the installations within budget. Carpets could suffer losses associated with installations on fixed price projects.

A portion of Carpets business consists of fixed price projects that are bid for and contracted based on estimated costs. The estimating process includes budgeting for the appropriate amount of materials, labor, and overhead. At times, this work can be substantial. The ability to estimate costs correctly and complete the project within budget or satisfaction without material defect is essential. In particular, there may be additional tariffs or taxes related to any inputs and finished goods imported by Carpets. Compliance with changes in taxes, tariffs and other regulations may require Carpets to alter its sourcing and make the process of estimating fixed price projects more difficult. If Carpets is unable to estimate a project properly or unable to complete the project within budget or without material defect, it may suffer losses, which could adversely affect its reputation, business, and financial condition.

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

Customers expect a high level of customer service and product knowledge from associates employed by Carpets. To meet the needs and expectations of its customers, Carpets must attract, train and retain a large number of highly qualified associates while at the same time controlling labor costs. Its ability to control labor costs is subject to numerous external factors, including prevailing wage rates and health and other insurance costs, as well as the impact of legislation or regulations governing labor relations or healthcare benefits. Also, Carpets competes with other retail businesses for many of its associates in hourly positions, and it invests significant resources in training and motivating them to maintain a high level of job satisfaction. These positions have historically had high turnover rates, which can lead to increased training and retention costs. There is no assurance that Carpets will be able to attract or retain highly qualified associates in the future.

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

A small number of customers have historically accounted for a substantial portion of Carpets net revenue. We expect that key customers will continue to account for a substantial portion of Carpets net revenue for the foreseeable future. However, Carpets may lose these customers due to pricing, quality or other various issues. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could have a material adverse effect on its business or results of operations. For additional information regarding customer concentrations, see “Part IV, Item 15. Exhibits, Financial Statement Schedules – Note 4. Concentration Risks.”

Historically, Carpets has purchased inventory from a small number of vendors. If these vendors became unable to provide materials promptly, Carpets would be required to find alternative vendors. Management estimates they could locate and qualify new vendors in a short period of time. For additional information regarding vendor concentrations, see “Part IV, Item 15. Exhibits, Financial Statement Schedules – Note 4. Concentration Risks.”

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

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

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

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

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

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

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

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

Phoenix has significant customer and supplier concentration. For additional information regarding customer and supplier concentrations, see “Part IV, Item 15. Exhibits, Financial Statement Schedules – Note 4. Concentration Risks.” Any significant cancellation, deferral or reduction in the quantity or type of products sold to these principal customers or a significant number of smaller customers, including as a result of Phoenix’s failure to perform, the impact of economic weakness and challenges to customer businesses, a change in buying habits, further industry consolidation or the impact of the shift to alternative methods of content delivery, including digital distribution and printing, to customers, could have a material adverse effect on Phoenix business. Further, if Phoenix’s significant customers, in turn, are not able to secure large orders, they will not be able to place orders with Phoenix. A substantial decrease or interruption in business from Phoenix’s significant customers could result in write-offs or the loss of future business and could have a material adverse effect on Phoenix’s business.

Additionally, Phoenix purchases certain limited grades of paper to produce book and component products. If Phoenix’s suppliers reduce their supplies or discontinue these grades of paper, Phoenix may be unable to fulfill its contract obligations, which could have a material adverse effect on its business. See “Part IV, Item 15. Exhibits, Financial Statement Schedules – Note 4. Concentration Risks.”

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

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

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

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

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

Any disruption at a Phoenix production facility could adversely affect its results of operations.

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

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

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

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

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

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

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

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

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

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

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

We, our officers, and our subsidiaries, are currently involved in, and from time to time may become involved in, legal proceedings or be subject to claims arising in the ordinary course of our business. Litigation is inherently unpredictable, time-consuming and distracting to our management team, and the expenses of conducting litigation are not inconsequential. Such distraction and expense may adversely affect the execution of our business plan and our ability to compete effectively in the marketplace. Further, if we do not prevail in litigation in which we may be involved, our results could be adversely affected, in some cases, materially. For additional information, see “Part I. Item 3, Legal Proceedings.”

As of September 30, 2019, $90.9 million of our current borrowings under the Cerberus Term Loan, Cerberus/PNC Revolver, and potential future borrowings are, and may continue to be, at variable rates of interest, tied to LIBOR or the Prime Rate of interest, thus exposing us to interest rate risk. Such rates tend to fluctuate based on general economic conditions, general interest rates, Federal Reserve rates and the supply of and demand for credit in the relevant interbanking market. In recent years, the Fed has incrementally changed the target range for the federal funds rate. Changes in the interest rate generally, and particularly when coupled with any significant variable rate indebtedness, could materially adversely impact our interest expense. If interest rates changed in the future by 100 basis points, based on our current borrowings as of September 30, 2019, our interest expense would increase or decrease by $0.9 million per year.

Further, the United Kingdom’s Financial Conduct Authority, which regulates LI BOR, has announced that it intends to stop encouraging or compelling banks to submit rates for the calculation of LIBOR rates after 2021 (“FCA Announcement”). The FCA Announcement indicates that the continuation of LIBOR on the current basis is not guarant eed after 2021 and, based on the foregoing, it appears likely that LIBOR will be discontinued or modified by 2021. Although it is no t possible to predict the effect the FCA Announcement, any discontinuation, modification or other reforms to LIBOR or the e stablishment of alternative reference rates may have on LIBOR, we do not expect the effect to have a material impact on our interest expense.

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

As of September 30, 2019, each of our subsidiaries had a significant backlog. Our backlog is typically subject to large variations from quarter to quarter and comparisons of backlog from period to period are not necessarily indicative of future revenue. The contracts comprising our backlog may not result in actual revenue in any particular period or at all, and the actual revenue from such contracts may differ from our backlog estimates. The timing of receipt of revenue, if any, for projects included in backlog could change because many factors affect the scheduling of projects. In certain instances, customers may have the right to cancel, reduce or defer amounts that we have in our backlog, which could negatively affect our future revenue. The failure to realize all amounts in our backlog could adversely affect our revenue and gross margins. As a result, our subsidiaries’ backlog as of any particular date may not be an accurate indicator of our future revenue or earnings.

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

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

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

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

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

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

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

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

Our ability to utilize net operating losses (“NOLs”) and built-in losses under Section 382 of the Internal Revenue Code (the “Code”) and tax credit carryforwards to offset our future taxable income and/or to recover previously paid taxes would be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the Code.

Section 382 of the Code contains rules that limit the ability of a company that undergoes an “ownership change,” which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its NOLs and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company.

If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, including purchases or sales of stock between 5% stockholders, our ability to use our NOLs and to recognize certain built-in losses would be subject to the limitations of Section 382. Depending on the resulting limitation, a significant portion of our NOLs could expire before we would be able to use them. At the end of our last fiscal year, September 30, 2019, we had net operating loss carryforwards for federal income tax purposes of approximately $138.1 million that start expiring in 2022. Approximately $115.3 million of the carryforward expires in 2022. Our inability to utilize our NOLs would have a negative impact on our financial position and results of operations.

We do not believe we have experienced an “ownership change” as defined by Section 382 in the last three years. However, whether a change in ownership occurs in the future is largely outside of our control, and there can be no assurance that such a change will not occur.

In August 2018, our shareholders approved the amendment of certain provisions in our Restated Certificate of Incorporation, updating certain restrictions on transfers of our stock that may result in an “ownership change” within the meaning of Section 382 in order to preserve stockholder value and the value of certain tax assets primarily associated with NOLs and built-in losses under Section 382.

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

On December 22, 2017, President Trump signed into law the final version of the Tax Reform Law. The Tax Reform Law significantly reforms the Internal Revenue Code of 1986, as amended, with many of its provisions effective for tax years beginning on or after January 1, 2018. The Tax Reform Law, among other things, contains significant changes to corporate taxation, including a permanent reduction of the corporate income tax rate, a partial limitation on the deductibility of business interest expense, a limitation of the deduction for net operating loss carryforwards, an indefinite net operating loss carryforward and the elimination of the two-year net operating loss carryback, temporary, immediate expensing for certain new investments and the modification or repeal of many business deductions and credits. We continue to 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 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 49.3% of our outstanding common stock at November 30, 2019. Jess Ravich, our current Chief Executive Officer, beneficially owned approximately 39.2% of our common stock as of November 30, 2019. As a result, these stockholders, if they act together or in a block, could have significant influence over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions, even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

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

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

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

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

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

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

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

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

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

Your share ownership may be diluted by the issuance of additional shares of our common or preferred stock or securities convertible into common or preferred stock in the future. As of September 30, 2019, a total of 1,654,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of $3.39, and 1,296,991 shares of our common stock are issuable pursuant to outstanding warrants at a weighted-average exercise price of $1.80. It is probable that options or warrants to purchase our common stock will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option or warrant. If the stock options or warrants are exercised, your share ownership will be diluted. Additionally, options to purchase up to 1,280,000 shares of ALJ common stock are available for grant under our existing equity compensation plans as of September 30, 2019.

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

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

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. As of September 30, 2019, we had approximately $138.1

million of NOLs. The use of such losses to offset federal income tax would be limited if we experience an “ownership change” under Section 382. This would occur if stockholders owning (or deemed under Section 382 to own) 5% or more of our stock by value increase their collective ownership of the aggregate amount of our stock by more than 50 percentage points over a defined period. The transfer restrictions in our Restated Certificate of Incorporation were adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382. While such transfer restrictions are intended to protect our NOLs and built-in losses under Section 382, they may also have the effect of delaying or preventing beneficial takeover bids by third parties.

While we seek to mitigate our business risks associated with climate change, we recognize that there are inherent climate related risks 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.

ALJ’s corporate mailing address is 244 Madison Avenue, PMB 358, New York, NY 10016. ALJ does not maintain any physical corporate offices. For additional information about the properties of each of ALJ’s operating subsidiaries, see “Item 1. Business.”

On September 22, 2016, Faneuil filed a complaint against 3M Company (“3M”) in the Circuit Court for the City of Richmond, Virginia (the “Richmond Circuit Court”). The dispute arose out of a subcontract entered into between 3M and Faneuil in relation to a toll road project in Portsmouth, Virginia. In its complaint, Faneuil sought recovery of $5.1 million based on three causes of action: breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment.

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

The matter was tried in a bench trial from April 30, 2018 through May 2, 2018. On May 15, 2018, the Richmond Circuit Court issued its opinion, which dismissed both Faneuil’s complaint and 3M’s counterclaim with prejudice. No monetary damages were awarded to either Faneuil or 3M. As a result of the Richmond Circuit Court’s opinion, ALJ recorded a non-cash litigation loss of $2.9 million (the outstanding unreserved receivable from 3M), which was included with selling, general, and administrative expense during the year ended September 30, 2018. The matter was appealed to the Supreme Court of Virginia where Faneuil was awarded approximately $1.2 million, plus pre- and post-judgment interest. The matter was remanded to the trial court for calculation of interest and entry of final judgment. Faneuil and 3M settled on the amount of interest to be paid. The full amount of the award plus interest, which totaled $1.5 million, was received by Faneuil on December 5, 2019.

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

We and our subsidiaries have been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time-consuming, cause us 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. We concluded as of September 30, 2019 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

On May 11, 2016, our stock began trading on NASDAQ under the ticker symbol “ALJJ.” Prior to May 11, 2016, our stock traded on the OTC Bulletin Board. Although a market for our common stock exists, it is relatively illiquid.

As of November 30, 2019, there were 127 registered holders of ALJ’s common stock. In addition, there are a significant number of holders of ALJ common stock that are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.

We have not declared or paid dividends on our common stock to date. We intend to retain any earnings for use in the business for the foreseeable future.

On July 11, 2016, ALJ shareholders approved ALJ’s Omnibus Equity Incentive Plan (the “2016 Plan”), which allows ALJ and its subsidiaries to grant securities of ALJ to officers, employees, directors or consultants. ALJ believes that equity-based compensation is fundamental to attracting, motivating and retaining highly-qualified dedicated employees who have the skills and experience required to achieve business goals. Further, ALJ believes the 2016 Plan aligns the compensation of directors, officers, and employees with shareholder interest.

The 2016 Plan is administered by ALJ’s Compensation, Nominating and Corporate Governance Committee (the “Compensation, Nominating, and Corporate Governance Committee”) of the Board. The maximum aggregate number of common stock shares that may be granted under the 2016 Plan is 2,000,000. 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 Compensation, Nominating, and Corporate Governance 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.

The following table sets forth certain information concerning shares of common stock authorized for issuance under the Company’s existing equity compensation plans as of September 30, 2019:

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included in “Part IV, Item 15. Exhibits, Financial Statement Schedules.” The following discussion contains a number of forward-looking statements that involve a number of 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 I, Item 1A. Risk Factors.” Our actual results may differ materially.

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

We continue to see our business evolve as we execute our strategy of buying attractively valued assets, such as the acquisition of the Printing Components Business by Phoenix in October 2017, the acquisition of the CMO Business by Faneuil in May 2017, and the acquisition of Color Optics by Phoenix in July 2016. In analyzing the financial impact of any potential acquisition, we focus on earnings, operating margin, cash flow and return on invested capital targets. We hire successful and experienced management teams to run each of our operating companies and incentivize them to drive higher profits. We are focused on increasing our net revenue at each of our operating subsidiaries by investing in sales and marketing, expanding into new products and markets, and evaluating and executing on tuck-in acquisitions, while continually examining our cost structures to drive higher profits.

On July 31, 2019, we acquired Realtime Digital Innovations, LLC (the “RDI Acquisition”), an exclusive partner of Faneuil for the past 18 months providing workflow automation and business intelligence services. The RDI Acquisition is expected to provide Faneuil with a sustainable competitive advantage in the business process outsourcing space by allowing it to, among other things, (i) automate process workflows and business intelligence, (ii) generate labor efficiencies for existing programs, (iii) expand potential new client target entry points, (iv) improve overall customer experience, and (v) increase margin profiles through shorter sales cycles and software license sales.

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

	Year Ended September 30, 2019						Year Ended September 30, 2018
				% of						% of
(in thousands, except per share amounts)	Dollars			Net Revenue			Dollars			Net Revenue
Net revenue⁽¹⁾
Faneuil	$	196,802			55.4	%	$	188,233			50.9	%
Carpets		48,978			13.8			68,404			18.5
Phoenix		109,217			30.8			113,139			30.6
Consolidated net revenue		354,997			100.0			369,776			100.0
Cost of revenue ⁽²⁾
Faneuil		157,481			80.0			146,004			77.6
Carpets		38,184			78.0			56,161			82.1
Phoenix ⁽³⁾		81,789			74.9			83,707			74.0
Consolidated cost of revenue		277,454			78.2			285,872			77.3
Selling, general and administrative expense ⁽²⁾
Faneuil		30,980			15.7			32,047			17.0
Carpets		9,333			19.1			11,803			17.3
Phoenix		12,385			11.3			15,419			13.6
ALJ		3,917			—			3,761			—
Consolidated selling, general and administrative expense		56,615			15.9			63,030			17.0
Depreciation and amortization expense ⁽²⁾
Faneuil		12,733			6.5			10,286			5.5
Carpets		763			1.6			861			1.3
Phoenix⁽⁴⁾		2,264			2.1			2,479			2.2
Consolidated depreciation and amortization expense		15,760			4.4			13,626			3.7
Impairment of intangible assets⁽⁵⁾		746			0.2			—			—
Disposal of assets and other gain, net ⁽⁵⁾		(216	)		(0.1	)		(277	)		(0.1	)
Total consolidated operating expenses⁽⁵⁾		350,359			98.7			362,251			98.0
Interest expense ⁽⁵⁾		(10,611	)		(3.0	)		(10,558	)		(2.9	)
Provision for income taxes⁽⁵⁾		(10,006	)		(2.8	)		(4,299	)		(1.2	)
Net loss ⁽⁵⁾	$	(15,979	)		(4.5	)%	$	(7,332	)		(2.0	)%
Loss per share of common stock–basic and diluted	$	(0.41	)				$	(0.19	)

Faneuil net revenue for Fiscal 2019 was $196.8 million, an increase of $8.6 million, or 4.6%, compared to net revenue of $188.2 million for Fiscal 2018. The increase was attributable to a $7.5 million increase in revenues from new customers and a $7.6 million increase in revenues from existing customers, partly offset by a $6.5 million decrease driven by the completion of customer contracts.

Carpets net revenue for Fiscal 2019 was $49.0 million, a decrease of $19.4 million, or 28.4%, compared to net revenue of $68.4 million for Fiscal 2018. The decrease was primarily attributable to lower sales volumes in cabinets, flooring, and granite, slightly offset by higher volumes in window coverings, and the strategic decision to only accept jobs that yield a targeted profit margin.

Phoenix net revenue for Fiscal 2019 was $109.2 million, a decrease of $3.9 million, or 3.5%, compared to $113.1 million during Fiscal 2018. The decrease was a result of lower volumes in packaging, slightly offset by higher volumes in components. The industry in which Phoenix operates is experiencing rapid change due to the impact of digital media and content on printed products. Continued consumer acceptance of such digital media, as an alternative to print materials, could put downward pressure on Phoenix net revenue.

	Year Ended September 30,
(in thousands)	2019			2018			$ Change			% Change
Faneuil	$	157,481		$	146,004		$	11,477			7.9	%
As a percentage of net revenue		80.0	%		77.6	%
Carpets		38,184			56,161			(17,977	)		(32.0	)
As a percentage of net revenue		78.0	%		82.1	%
Phoenix		81,789			83,707			(1,918	)		(2.3	)
As a percentage of net revenue		74.9	%		74.0	%
Consolidated cost of revenue	$	277,454		$	285,872		$	(8,418	)		(2.9	)%

Faneuil cost of revenue for Fiscal 2019 was $157.5 million, an increase of $11.5 million, or 7.9%, compared to $146.0 million for Fiscal 2018. The absolute dollar increase in cost of revenue was a direct result of the increased net revenue. During Fiscal 2019, as compared to Fiscal 2018, Faneuil cost of revenue as a percentage of segment net revenue increased to 80.0% from 77.6% as a result of the mix of customer contracts, incurred losses on certain contracts, and the ramp up of costs related to new contracts.

Carpets cost of revenue for Fiscal 2019 was $38.2 million, a decrease of $18.0 million, or 32.0%, compared to cost of revenue of $56.2 million for Fiscal 2018. The absolute dollar decrease in cost of revenue was a direct result of decreased net revenue. During Fiscal 2019 as compared to Fiscal 2018, cost of revenue as a percentage of segment net revenue decreased to 78.0% from 82.1% as a result of the strategic decision to only accept jobs that yield a targeted profit margin, and process improvements and cost reductions throughout the organization.

Phoenix cost of revenue for Fiscal 2019 was $81.8 million, a decrease of $1.9 million, or 2.3% compared to cost of revenue of $83.7 million for Fiscal 2018. The absolute dollar decrease in cost of revenue was a direct result of decreased net revenue. During Fiscal 2019, as compared to Fiscal 2018, Phoenix cost of revenue as a percentage of segment net revenue was consistent at 74.9% and 74.0%, respectively. Phoenix experiences normal fluctuations to cost of revenue as a percentage of segment net revenue as a result of changes to the mix of products sold.

	Year Ended September 30,
(in thousands)	2019		2018		$ Change			% Change
Faneuil	$	30,980	$	32,047	$	(1,067	)		(3.3	)%
Carpets		9,333		11,803		(2,470	)		(20.9	)
Phoenix		12,385		15,419		(3,034	)		(19.7	)
ALJ		3,917		3,761		156			4.1
Consolidated selling, general, and administrative expense	$	56,615	$	63,030	$	(6,415	)		(10.2	)%

Faneuil selling, general and administrative expense for Fiscal 2019 was $31.0 million, a decrease of $1.1 million, or 3.3%, compared to selling, general and administrative expense of $32.0 million for Fiscal 2018. The decrease was primarily attributable to the non-recurring $2.9 million non-cash litigation loss, a $0.7 million decrease in legal expenses associated with the litigation loss in Fiscal 2018, and a $0.2 million decrease due to concluded contracts. These decreases were somewhat offset by a $1.3 million increase to support new customers, a $1.4 million increase to support existing customers, and a $0.4 million increase due to the RDI Acquisition in July 2019. During Fiscal 2019, as compared to Fiscal 2018, Faneuil selling, general and administrative expense as a percentage of segment net revenue decreased to 15.7% from 17.0% principally as a result of the aforementioned non-cash litigation loss.

Carpets selling, general, and administrative expense was $9.3 million for Fiscal 2019, a decrease of $2.5 million, or 20.9%, compared to selling, general, and administrative expense of $11.8 million for Fiscal 2018. The decrease was primarily attributable to process improvements and cost reductions throughout the organization. Carpets selling, general, and administrative expense as a percentage of segment net revenue increased to 19.1% for Fiscal 2019 from 17.3% for Fiscal 2018. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.

Phoenix selling, general, and administrative expense for Fiscal 2019 was $12.4 million, a decrease of $3.0 million, or approximately 19.7%, compared to $15.4 million for Fiscal 2018. Expenses to consolidate manufacturing facilities and the related restructuring expense decreased $1.4 million in Fiscal 2019 compared to Fiscal 2018. As a result of the consolidation and restructuring, headcount-related expenses decreased $0.8 million in Fiscal 2019 compared to Fiscal 2018. Selling, general, and administrative expense as a percentage of segment net revenue decreased to 11.3% for Fiscal 2019 from 13.6% for Fiscal 2018, which was mainly attributable to the consolidation of the manufacturing facility and restructuring expense incurred during Fiscal 2018. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.

ALJ selling, general, and administrative expense for Fiscal 2019 was $3.9 million, an increase of $0.2 million, or 4.1%, compared to selling, general, and administrative expense of $3.8 million for Fiscal 2018. ALJ selling, general, and administrative expenses were impacted by the hiring of additional personnel, which added $0.3 million, and increased legal fees, which added $0.3 million, to support our business and our strategy of acquisitions, partially offset by lower stock-based compensation expense of $0.4 million as a result of fully amortized stock option awards. We expect selling, general, and administrative expense to fluctuate in the future as we comply with SEC reporting requirements and regulations and allocate certain expenses to our subsidiaries.

Faneuil depreciation and amortization expense for Fiscal 2019 was $12.7 million, an increase of $2.4 million, or 23.8%, compared to $10.3 million for Fiscal 2018. The increase was attributable to leasehold improvements for new call center buildouts and capital equipment purchased to support new and expanded contracts. Faneuil expects future depreciation and amortization expense to increase as Faneuil continues to invest in its customers, which includes opening new call centers. Because certain Faneuil contracts require capital investments such as lease buildouts, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Carpets depreciation and amortization expense for Fiscal 2019 was $0.8 million, a decrease of $0.1 million, or 11.4%, compared to $0.9 million for Fiscal 2018. The decrease was a result of certain intangible assets being fully amortized during Fiscal 2019.

Phoenix depreciation and amortization expense for Fiscal 2019 was $2.3 million, a decrease of $0.2 million, or 8.7%, compared to $2.5 million for Fiscal 2018. Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets. The decrease was attributable to fully amortized acquisition-related intangible assets.

During Fiscal 2019, Faneuil recorded an impairment of intangible assets of $0.7 million to write off the remaining carrying value of certain intangible assets related to the CMO Business acquisition in May 2017. During the fourth quarter of Fiscal 2019, certain conditions came to light, largely regarding the lack of profitability related to one customer contract, which indicated that the carrying value of the asset may not be fully recoverable. As such, management performed an impairment test based on a comparison of the undiscounted cash flows expected to be generated by the asset, to the recorded value of the asset and concluded that the associated cash flows did not support any of the carrying value of the intangible asset and Faneuil recorded a full impairment charge.

Interest expense for both Fiscal 2019 and Fiscal 2018 was $10.6 million. Interest expense was impacted by reduced interest expense resulting from quarterly principal payments, partially offset by increased interest rates, and increased weighted-average outstanding balance on our line of credit and the $5.0 million increase to our term loan, which were both used to fund Faneuil’s call center buildouts and other working capital requirements.

Our provision for income taxes was $10.0 million for Fiscal 2019 compared to $4.3 million for Fiscal 2018. Fiscal 2019 reflected a non-cash deferred income tax expense of $9.7 million, the majority of which was to reduce the net value of our NOL carryforward deferred tax assets. The remaining provision for income taxes during Fiscal 2019 was a result of generating state taxable income. Fiscal 2018 reflected a $4.1 million one-time revaluation of deferred tax assets, which was the result of the Tax Reform Law.

	Year Ended September 30,
(in thousands)	2019			2018			$ Change			% Change
Faneuil	$	8,833		$	13,127		$	(4,294	)		(32.7	)%
Carpets		1,557			453			1,104			243.7
Phoenix		20,533			22,077			(1,544	)		(7.0	)
ALJ		(3,225	)		(2,553	)		(672	)		(26.3	)
Segment adjusted EBITDA	$	27,698		$	33,104		$	(5,406	)		(16.3	)%

Faneuil segment adjusted EBITDA for Fiscal 2019 was $8.8 million compared to segment adjusted EBITDA of $13.1 million for Fiscal 2018. Faneuil segment adjusted EBITDA for Fiscal 2019 was impacted by the operational challenges in the normal course of business related to certain ongoing and new contracts, and timing delays related to the startup of recently awarded contracts.

Carpets segment adjusted EBITDA for Fiscal 2019 was $1.6 million compared to segment adjusted EBITDA of $0.5 million for Fiscal 2018. Fiscal 2019 was positively impacted by process improvements and cost reductions.

Phoenix segment adjusted EBITDA for Fiscal 2019 was $20.5 million compared to segment adjusted EBITDA of $22.1 million for Fiscal 2018. Phoenix segment adjusted EBITDA for Fiscal 2019 was negatively impacted by product mix offset somewhat by decreased selling, general, and administrative expenses, which resulted from consolidating printing facilities.

ALJ segment adjusted EBITDA for Fiscal 2019 was ($3.2) million compared to segment adjusted EBITDA of ($2.6) million for Fiscal 2018. ALJ segment adjusted EBITDA for Fiscal 2019 was impacted by increased headcount.

Segment adjusted EBITDA is not considered a non-GAAP measure because we include segment adjusted EBITDA in our segment disclosures in accordance with the Accounting Standards Codification Topic 280 – Segment Reporting. See “Part IV, Item 15. Exhibits, Financial Statements Schedules – Note 12. Reportable Segments and Geographic Information.”

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

Our principal sources of liquidity have been cash provided by operations and borrowings under various debt arrangements. At September 30, 2019, our principal sources of liquidity included cash and cash equivalents of $4.5 million and an available borrowing capacity of $12.1 million on our line of credit. Our principal uses of cash have been for acquisitions and to pay down debt. We anticipate that our principal uses of cash will continue to be to acquire businesses and pay down our debt.

Global financial and credit markets have been volatile in recent years, and future adverse conditions of these markets could negatively affect our ability to secure funds or raise capital at a reasonable cost or at all. For additional discussion of our various debt arrangements see Contractual Obligations below.

We recognized a net loss of $16.0 million for Fiscal 2019, and generated cash from operating activities of $24.6 million, offset by cash used for investing and financing activities of $21.4 million and $0.6 million, respectively.

We recognized a net loss of $7.3 million for Fiscal 2018, and generated cash from operating activities of $17.8 million, offset by cash used for investing and financing activities of $17.1 million and $4.3 million, respectively.

Cash provided by operations of $24.6 million during Fiscal 2019 was the result of our $16.0 million net loss, $32.4 million addback of net non-cash expenses, and $8.2 million of net cash provided by changes in operating assets and liabilities. The most significant components of net non-cash expenses were depreciation and amortization of $20.6 million, deferred income taxes of $9.5 million, as a result of increasing our NOL carryforwards valuation allowance, impairment of intangible assets of $0.7 million, amortization of deferred loan costs of $0.7 million, and stock-based compensation of $0.7 million. The most significant components of changes in operating assets and liabilities that provided cash include accounts receivable of $4.6 million as a result of lower fourth quarter sales at Phoenix and Carpets, accounts payable of $2.4 million due to timing of payments in the normal course of business, accrued expenses of $1.3 million, and other assets of $1.4 million. The most significant component of changes in operating assets and liabilities that provided cash was deferred revenue and customer deposits of $2.2 million as a result of Faneuil recognizing revenue for amounts deferred at September 30, 2018.

Cash provided by operations of $17.8 million during Fiscal 2018 was the result of our $7.3 million net loss, $27.8 million addback of net non-cash expenses, and $2.7 million of net cash used by changes in operating assets and liabilities. The most significant components of net non-cash expenses were depreciation and amortization of $19.0 million, deferred income taxes of $3.4 million, litigation loss of $2.9 million, amortization of deferred loan costs of $1.3 million, and stock-based compensation of $1.1 million. The most significant components of changes in operating assets and liabilities included inventories of $3.1 million and other assets of $2.0 million, which provided cash, and deferred revenue and customer deposits of $4.3 million, and accounts payable of $2.9 million, which used cash.

During Fiscal 2019, our investing activities used $21.4 million of cash, of which $14.5 million was for the buildout of Faneuil’s three new call centers, $2.5 million was for Faneuil’s RDI Acquisition, $1.0 million was for payment of the holdback related to Phoenix’s Printing Components Business acquisition, $2.9 million was used to purchase capital equipment in the normal course of operations, and $0.9 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, partially offset by $0.3 million proceeds received from the sale of equipment.

During Fiscal 2018, our investing activities used $17.1 million of cash, of which $9.0 million was for our Printing Components Business acquisition, $5.9 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and $2.7 million was used to purchase capital equipment in the normal course of operations, partially offset by $0.5 million proceeds received from the sale of equipment.

During Fiscal 2019, our financing activities used $0.6 million of cash. Financing activities which used cash included $9.9 million to pay down our term loan, $3.0 million of capital lease payments, and $0.9 million for debt and stock issuance costs. Proceeds from our line of credit and our amended term loan provided $1.1 million and $5.0 million, respectively (see further discussion at Contractual Obligations below). Proceeds from the issuance of common stock provided $7.0 million, which was used to fund Faneuil’s RDI Acquisition.

During Fiscal 2018, our financing activities used $4.3 million of cash. Financing activities which used cash included $13.5 million to pay down our term loan, $2.8 million of capital lease payments, and $0.5 million for debt and stock issuance costs. Proceeds from our line of credit and our amended term loan provided $3.2 million and $7.5 million, respectively (see further discussion at Contractual Obligations below). Proceeds from the issuance of common stock and exercise of stock options provided $1.5 million and $0.3 million, respectively. Proceeds from the amended term loan and issuance of common stock were used to fund Phoenix’s Printing Components Business acquisition.

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

	Payments due by Period
			Less Than		One – Three		Four – Five		More than Five
(in thousands)	Total		One Year		Years		Years		Years
Term loan ⁽¹⁾	$	81,082	$	8,200	$	8,200	$	64,682	$	—
Operating lease obligations ⁽²⁾		54,806		7,883		17,436		5,608		23,879
Other liabilities ⁽³⁾		14,088		1,043		13,045		—		—
Line of credit ⁽¹⁾		9,823		—		—		9,823		—
Capital lease obligations ⁽¹⁾		5,158		2,535		2,457		166		—
Equipment financing agreement ⁽¹⁾		3,101		1,336		1,403		362
Total contractual cash obligations ⁽⁴⁾	$	168,058	$	20,997	$	42,541	$	80,641	$	23,879

Surety Bonds. In the normal course of operations, certain Faneuil customers require surety bonds guaranteeing the performance of a contract. As of September 30, 2019, the face value of such surety bonds, which represents the maximum cash payments that Faneuil would have to make under certain circumstances of non-performance, was approximately $26.1 million.

Letters of Credit. ALJ had letters of credit totaling $3.9 million outstanding as of September 30, 2019, in connection with workers’ compensation insurance requirements.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“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, the recoverability of goodwill, and revenue recognition. Certain accounting policies, as described below, 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. A summary of all of our significant accounting policies is included in “Part IV, Item 15. Exhibits, Financial Statement Schedules – Note 2. Summary of Significant Accounting Policies.”

We believe the following are critical accounting policies that require us to make significant estimates, assumptions or judgments:

Accounting for acquisitions requires our management to estimate the fair value of the assets acquired and liabilities assumed, which involves a number of judgments, assumptions, and estimates that could materially affect the timing or amounts recognized in our financial statements. The items involving the most significant assumptions, estimates, and judgments include determining the fair value of the following:

The goodwill and intangible assets acquired in business acquisitions are pushed down to the reporting unit that benefits from the business combination.

We use an independent valuation firm to assist with our valuation, and our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year following the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

We make judgments about the recoverability of purchased finite-lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of finite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate.

The assumptions and estimates used to determine future values, such as expected future net cash flows, and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by internal factors such as changes in our business strategy or external factors such as industry and economic trends.

The application of the goodwill impairment test is considered a critical accounting estimate. We perform an annual impairment assessment of goodwill as of September 30 each year, or more frequently if indicators of potential impairment exist, which includes evaluating qualitative and quantitative factors to assess the likelihood of an impairment of goodwill. Each of our reporting units has goodwill assigned, which is assessed independently.

Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting units. Additionally, as part of this assessment, we may perform a quantitative analysis to supplement and support the qualitative factors. Although there were no specific qualitative indicators of impairment for our reporting units, we elected to perform a quantitative impairment test as of September 30, 2019.

Our goodwill impairment test considers both the income method and the market method to estimate fair value. For both Faneuil and Phoenix, the goodwill impairment test is weighted 50% on the income method and 50% on the market method. For Carpets, the goodwill impairment test is weighted 100% on the income method. The income method is based on a discounted future cash flow approach that uses the following major assumptions and inputs: revenue, based on assumed market segment growth rates and assumed market segment share, estimated costs, and weighted average cost of capital (“WACC”). WACC was estimated using guideline companies adjusted for a company-specific risk premium. Estimates of market segment growth, market segment share, and costs are based on historical data, various internal estimates, and a variety of external sources. The same estimates are also used in the Company’s business planning and forecasting process. The data is tested for reasonableness of the inputs and outcomes of our discounted cash flow analysis against available comparable market data. The market method used at Faneuil and Phoenix in estimating fair value is based on financial multiples and transaction prices of comparable companies. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.

Each of our reporting units were deemed to have fair values that exceeded their carrying value.

We must make subjective estimates as to when our revenue is earned, the impact of pricing adjustments, and the collectability of our accounts receivable.

We recognize revenue from non-refundable up-front payments attributable to contract implementation, with no specific deliverables, over the longer of the initial term of the contract or the expected customer life, which is estimated at the time the initial contract is executed.

We record reductions to revenue for pricing adjustments, such as rebates, in the same period that the related revenue is recorded. We accrue 100% of potential rebates at the time of sale. We reverse the accrual of unclaimed rebate amounts as specific rebate programs contractually end and when we believe unclaimed rebates are no longer subject to payment and will not be paid. Thus the reversal of unclaimed rebates may have a positive impact on our net revenue and net income in subsequent periods. Additional reductions to revenue will result if actual pricing adjustments exceed our estimates.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

The financial statements and supplementary data required by this item are included in “Part IV, Item 15. Exhibits, Financial Statement Schedules.”

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

As previously disclosed, on July 23, 2019, the Audit Committee of ALJ’s Board of Directors determined, pending execution of an engagement letter in form and substance satisfactory to the Company (the “Engagement Letter”), to appoint Deloitte & Touche, LLP (“Deloitte”) and dismiss Mayer Hoffman McCann P.C. (“MHM”). On August 21, 2019, the Company executed the Engagement Letter, and Deloitte was formally appointed by the Audit Committee, and MHM was formally dismissed, as the Company’s independent registered public accounting firm.

During the fiscal year ended September 30, 2018 and through August 21, 2019 (the date of the change in auditors), ALJ did not have any disagreements with MHM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to MHM’s satisfaction, would have caused MHM to make reference thereto in its reports on our financial statements for the relevant periods. During the fiscal year ended September 30, 2018 and through August 21, 2019, there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.

Based on management’s evaluation (with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in U.S. Securities and Exchange Commission (“SEC”) rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth fiscal quarter for the year ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).

Management assessed our internal control over financial reporting as of September 30, 2019, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.

Based on this assessment, management has concluded that our internal controls over financial reporting were effective as of September 30, 2019, and provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this report.

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

The following table sets forth the names, ages, and principal offices and positions of our current directors and executive officers as of November 30, 2019.

The following is a brief summary of the backgrounds of the Company’s directors and executive officers.

Jess M. Ravich. Mr. Ravich has served as a director since June 2006 and Chairman of the Board of Directors since August 2006. He served as the Executive Chairman and senior executive officer of the Company from December 2012 through July 2019, at which time he became the Company’s fulltime Chief Executive Officer. Mr. Ravich was a Group Managing Director at The TCW Group from December 2012 until July 2019. From 2009 to 2012, Mr. Ravich was Managing Director at Houlihan Lokey. In 1991 Mr. Ravich founded Libra Securities, LLC (“Libra Securities”), a Los Angeles-based investment banking firm that focused on capital raising and financial advisory services for middle-market corporate clients and the sales and trading of debt and equity securities for institutional investors, and served as its Chairman and Chief Executive Officer from 1991 until 2009. Prior to founding Libra Securities, Mr. Ravich was an Executive Vice President at Jefferies & Co., Inc. and a Senior Vice President at Drexel Burnham Lambert.

Mr. Ravich has been a member of the board of directors of Apex Global Brands (Nasdaq: APEX), formerly known as Cherokee Inc. (Nasdaq CHKE) since May 1995 and served as its Chairman of the Board from 2011 until 2017. Mr. Ravich has also served on the Board of Directors of A-Mark International since 2014. In addition to his professional responsibilities, Mr. Ravich has also served on the Undergraduate Executive Board of the Wharton School and the Board of Trustees of the Archer School for Girls. Mr. Ravich earned both a B.S and M.S. from the Wharton School and a J.D. from Harvard University. Mr. Ravich is the father of Rae Ravich, a director of the Company.

Brian Hartman. Mr. Hartman has served as Chief Financial Officer since August 2017. Previously, Mr. Hartman was the Senior Vice President, Chief Financial Officer of Arcade Beauty, a manufacturer of sampling solutions for the beauty, fragrance and skincare segments, having served in such role since March 2012. From April 2005 to March 2012, Mr. Hartman was the Vice President, Corporate Controller of Visant Corporation, a specialty printing and marketing services enterprise. From January 1996 to April 2005, Mr. Hartman was the Controller for Metallurg Inc, a producer and distributor of specialty metals. Prior to this, Mr. Hartman held various accounting and auditing positions at Witco Chemical Corp., a manufacturer of specialty chemicals, and Deloitte & Touche LLP. Mr. Hartman is a certified public accountant and received a Bachelor of Business Administration degree in public accounting and a Master of Business Administration in financial management from Pace University.

Hal G. Byer. Mr. Byer has served as a director since January 2003. Mr. Byer joined Houlihan Lokey as a Senior Vice President in its Financial Sponsors Coverage Group in December 2009. He was a director for Houlihan Lokey from 2011 to 2017 and a senior advisor during 2017 until his retirement in November 2017. From May 2001 to November 2009, Mr. Byer was a Senior Vice President of Libra Securities, a broker-dealer registered with the SEC and an NASD member. From 1995 to 2003, Mr. Byer was Chief Executive Officer of Byer Distributing Co., a snack food distribution company. From 2000 to 2003, Mr. Byer was also the Chief Operating Officer of eGreatcause.com, an internet start-up involved in fundraising for charitable and non-profit organizations that is no longer active.

Robert Scott Fritz. Mr. Fritz has served as a director since January 2003. Since May 1982, Mr. Fritz has served as the President of Robert Fritz and Sons Sales Company, a New Jersey-based food broker and paper distributor that he owns. Mr. Fritz earned a B.S. in Business from Fairleigh Dickinson University.

Rae Ravich. Ms. Ravich has served as a director since June 2014. Ms. Ravich is currently the founder of a startup engaged in the health and wellness space, which she founded in July 2016. From July 2013 until June 2016, Ms. Ravich was an Associate in the direct lending group at TCW Financial Planning LLC. Previously, Ms. Ravich was a Financial Analyst at Houlihan Lokey, which she joined in July 2013. Ms. Ravich has dual B.S. degrees from the Wharton School and the Nursing School at the University of Pennsylvania. Ms. Ravich is the daughter of Jess Ravich, ALJ’s Executive Chairman.

John Scheel. Mr. Scheel has served as a director since September 2006 and our Vice Chairman since December 2016. From August 2006 to February 2013, Mr. Scheel was the President and Chief Executive Officer of the Company. Mr. Scheel is a principal of, and also currently serves as the Chief Operating Officer, of Pinnacle Steel. He served as the plant manager for the Company’s former subsidiary Kentucky Electric Steel’s (“KES”) steel mini-mill in Ashland, Kentucky (the “Mill”) and managed the operations of KES on our behalf from January 2004 until its sale in February 2013 to Optima Specialty Steel (“Optima”). Following such sale, Mr. Scheel not only continued to manage the Mill for Optima as its general manager, but also managed the melt shop and caster for Warren Steel Holdings EAF in Warren, Ohio, which was also managed by Optima. Prior to joining Pinnacle Steel, Mr. Scheel held various positions of increased responsibility at AK Steel, Nucor Corporation, and Birmingham Steel Management. Mr. Scheel holds both B.S. and M.S. degrees in Metallurgical Engineering from Purdue University and a Master of Business Administration in Finance and International Business from Xavier University.

Anna Van Buren. Ms. Van Buren has served as a director since November 2013. Ms. Van Buren was appointed President and Chief Executive Officer of Faneuil in April 2009, after previously serving as President and Chief Operating Officer from 2007 to 2009, as Vice President and Managing Director of Faneuil’s Government Services Division from 2005 to 2007, and as Vice President of Business Development from 2004 to 2005. Prior to her association with Faneuil, Ms. Van Buren founded Capital Initiatives, a consulting service for clients seeking visibility among federal lawmakers with the objective of encouraging legislative action, and operated numerous government services and marketing companies. Ms. Van Buren has served in leadership roles for many civic and business organizations including chairmanship of the United Way of the Virginia Peninsula, the Peninsula Chamber of Commerce and the NASA Aeronautics Support Team. She is the recipient of numerous awards including the Women in Business Achievement Award by Inside Business Magazine, the Presidential Citizenship Award from Hampton University and the NCCJ Humanitarian Award. Ms. Van Buren holds a degree in biology from Hollins University and the University of Virginia Executive School.

Michael Borofsky. Mr. Borofsky has served as a director since September 2013. Mr. Borofsky was formerly Senior Vice President of MacAndrews & Forbes. Prior to that, Mr. Borofsky worked for Skadden, Arps, Slate, Meagher & Flom LLP, where he specialized in mergers & acquisitions, and was an analyst at Goldman Sachs. Mr. Borofsky earned a B.A. from Yale University and a J.D. from Columbia University School of Law.

Marc Reisch. Mr. Reisch was appointed Chairman of Phoenix in August 2015 and served as a director of the Company from that time until his resignation as director effective October 24, 2019. Mr. Reisch served as Chairman of the Board, Chief Executive Officer and President of Visant and Visant Holding Corp. from October 2004 to November 2015. Prior to joining Visant, he served as Senior Advisor to Kohlberg Kravis Roberts & Co. and has over 35 years of experience in the printing and publishing industries. Mr. Reisch holds a Bachelor of Science degree and a Master of Business Administration degree from Cornell University.

Steve Chesin. Mr. Chesin has served as the Chief Executive Officer of Carpets since August 2007. From 2002 to 2007, Mr. Chesin served as the Executive Vice President of Carpets. From 1995 to 2001, Mr. Chesin served as the Senior Vice President and the Chief Operating Officer of Carpet Barn Inc., a subsidiary of Nations Flooring Inc. Mr. Chesin attended University of Nevada, Las Vegas.

To the best of our knowledge, none of our directors or officers has had a determination during the past ten years in any legal proceedings listed in Item 401(f) of Regulation S-K that may bear on his or her ability or integrity to serve as a director or officer of the Company.

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in beneficial ownership. Directors, executive officers, and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of copies of Section 16(a) reports and representations received by us from reporting persons, and without conducting any independent investigation of our own, we believe all Forms 3, 4 and 5 were timely filed with the SEC by such reporting persons during the year ended September 30, 2019.

Our Board of Directors adopted a Code of Business Conduct and Ethics (“Ethics Code”), which is applicable to all employees of ALJ, ALJ subsidiaries, and members of our Board of Directors.

The Ethics Code addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws and regulations, policies related to disclosure requirements under federal securities laws, confidentiality, trading on insider information, and reporting violations of the Ethics Code. Any amendment to our Ethics Code, or waiver thereof, applicable to our principal executive officer, principal financial officer, directors, or persons performing similar functions will be disclosed on our website within five days of the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver will also be disclosed.

Our Ethics Code can be found in the Investor Relations section of the Company’s website, www.aljregionalholdings.com, and is filed as Exhibit 14.1 to this Form 10-K. In addition, a printed copy of our Ethics Code can be requested by writing our Chief Financial Officer at 244 Madison Avenue, PMB #358, New York, NY 10016.

The Board of Directors has a standing audit committee (“Audit Committee”) and compensation, nominating, and corporate governance committee (“Compensation, Nominating, and Corporate Governance Committee”). The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by the Board of Directors.

The Board of Directors has determined that all members of both committees are independent under the applicable rules and regulations of NASDAQ and the SEC as currently in effect. The Audit Committee and the Compensation, Nominating, and Corporate Governance Committee each operate under a written charter approved by the Board of Directors. Each committee will review and reassess the adequacy of its charter periodically. The charters of both committees are available in the Investor Relations section of the Company’s website, www.aljregionalholdings.com.

Our Audit Committee consists of Messrs. Scheel, Borofsky and Fritz, with Mr. Scheel chairing this committee. All members of our Audit Committee are independent directors and meet the requirements for financial literacy as defined by SEC guidelines. Our Board of Directors has determined that Mr. Scheel is an “audit committee financial expert” as defined by SEC guidelines.

Our Compensation, Nominating, and Corporate Governance Committee consists of Messrs. Borofsky and Byer, with Mr. Borofsky chairing this committee. All members of this committee meet the requirements for independence under the applicable rules and regulations of the SEC, NASDAQ, and the Code, as amended, including the application of such rules and regulations to members of a listed company’s compensation committee.

The Compensation, Nominating, and Corporate Governance Committee’s responsibilities include:

There have been no material changes to the procedures by which shareholders may nominate nominees to our Board of Directors during the year ended September 30, 2019.

Our executive compensation program, consisting of a three-part compensation strategy that includes base salary, annual discretionary cash bonuses, and equity incentive compensation, is designed to (i) pay for performance to encourage both Company and individual achievement; (ii) encourage efficient use of shareholder resources; and (iii) provide market competitive compensation to attract and retain highly qualified individuals who are capable of making significant contributions to the long-term success of the Company.

We do not adopt express formulae for weighting different elements of compensation or for allocating between long-term and short-term compensation but strive to develop comprehensive packages that are competitive with those offered by other companies with which we compete to attract and retain talented executives. Under our compensation practices, cash compensation consists of an annual base salary and discretionary bonuses. Equity-based compensation is primarily stock options.

The following table sets forth, for the years indicated, all compensation awarded to, paid to or earned by each of our named executive officers and certain other key employees.

Name and Principal Position	Year	Salary			Bonus			Stock Awards ⁽¹⁾			Option Awards ⁽²⁾			Non-equity Incentive Plan Compensation			All Other Compensation			Total
Named Executive Officers:
Jess M. Ravich	2019	$	37,500	⁽³⁾	$	—		$	187,500	⁽³⁾	$	—		$	—		$	11,136	⁽⁴⁾	$	236,136
Chief Executive Officer	2018		—			—			225,000	⁽³⁾		—			—			—			225,000

Anna Van Buren	2019		520,000			250,000	⁽⁵⁾		—			—			341,275	⁽⁶⁾		31,153	⁽⁷⁾		1,142,428
President and CEO, Faneuil	2018		520,000			—			—			—			330,380	⁽⁶⁾		31,147	⁽⁷⁾		881,527

Brian Hartman	2019		350,000			276,000	⁽⁸⁾		—			—			—			—			626,000
Chief Financial Officer	2018		307,222			191,000	⁽⁸⁾		—			161,659	⁽⁹⁾		—			—			659,881

Other Key Employees:
Marc Reisch	2019		200,000			—			—			—			80,000	⁽¹⁰⁾		—			280,000
Chairman, Phoenix	2018		200,000			—			—			—			294,442	⁽¹⁰⁾		—			494,442

Steve Chesin	2019		300,000			—			—			—			21,131	⁽¹¹⁾		12,907	⁽¹²⁾		334,038
President and CEO, Carpets	2018		300,000			—			—			—			—			46,582	⁽¹³⁾		346,582

Jess Ravich. On July 29, 2019, the Company entered into an employment agreement (the “Ravich Employment Agreement”) with Jess Ravich. Prior to entering into the Employment Agreement, Mr. Ravich served as the Company’s Executive Chairman. Pursuant to the Ravich Employment Agreement, Mr. Ravich assumed full-time responsibilities as the Company’s Chief Executive Officer until September 30, 2020 (the “Initial Term”), subject to subsequent automatic two-year renewals. Mr. Ravich will continue to serve as the Company’s Chairman of the Board.

As of September 30, 2019, if Mr. Ravich’s employment is terminated by ALJ without cause, or by Mr. Ravich for good reason, Mr. Ravich is entitled to receive as severance: (i) the lesser of one-year base salary or pro-rated base salary for the remaining term; (ii) continuation of group health plan benefits, with the cost of the regular premium for such benefits paid in full by Faneuil; and (iii) annual bonus prorated for the period of Mr. Ravich’s service during the year of termination and calculated based on actual EBITDA (as defined in the Ravich Employment Agreement) for the year of termination equal to full annual bonus for the year of termination if otherwise entitled to receive the bonus.

Anna Van Buren. In October 2013, concurrent with ALJ’s acquisition of Faneuil, Faneuil entered into an employment agreement with Ms. Van Buren through December 2018. In August 2017, Faneuil and Ms. Van Buren entered into an amended employment agreement (the “Van Buren Amended Employment Agreement”), which extended the term to December 2021. Pursuant to the Van Buren Amended Employment Agreement, Ms. Van Buren receives an annual base salary of $520,000 and is eligible to earn an incentive bonus equal to 10% of Faneuil EBITDA, as defined in the Van Buren Amended Employment Agreement, before any bonus amount owed to Ms. Van Buren, in excess of $6,250,000 for calendar year 2017 and $7,500,000 thereafter, subject to further adjustment by ALJ Compensation, Nominating and Corporate Governance Committee from time to time in its discretion, with a step down to 5% of pre-bonus Faneuil EBITDA at $2,000,000 total compensation.

As of September 30, 2019, if Ms. Van Buren’s employment is terminated by Faneuil without cause, or by Ms. Van Buren for good reason, Ms. Van Buren is entitled to receive: (i) the lesser of one-year base salary or pro-rated base salary for the remaining term; (ii) continuation of group health plan benefits, with the cost of the regular premium for such benefits paid in full by Faneuil; (iii) full annual bonus for the year of termination if otherwise entitled to receive the bonus; and (iv) the annual bonus for the previous year if such bonus has been earned but not yet paid at time of termination.

Brian Hartman. In connection with ALJ’s appointment of Brian Hartman to serve as its Chief Financial Officer in August 2017, ALJ entered into an employment agreement with Mr. Hartman through August 2018, subject to one-year renewals. Pursuant to the employment agreement, Mr. Hartman received an annual base salary of $300,000, a one-time sign-on bonus of $75,000, a cash bonus of $100,000 for the calendar year 2017, and an individual bonus target of 50% of annual base salary effective January 2018. In August 2019, the Company entered into the Second Amended and Restated Employment Agreement (the “A&R Employment Agreement”) with Mr. Hartman, its Chief Financial Officer. The A&R Employment Agreement amended and restated the Employment Agreement, dated August 8, 2017, as amended by the First Amended and Restated Employment Agreement dated August 2, 2018, between Mr. Hartman and the Company, which term expired in August 2019. Pursuant to the A&R Employment Agreement Mr. Hartman will serve as the Company’s Chief Financial Officer until September 30, 2021, subject to further one-year or two-year renewals, as determined by the Chief Executive Officer of the Company. Additional material terms changed by the A&R Employment Agreement include: (i) an increase in base salary from $350,000 to $375,000 effective October 2019, and (ii) Mr. Hartman’s incentive bonus structure, which was amended to include an annual bonus target of (a) up to 50% of his annual base salary based on the general quality and success of his efforts during the immediately preceding fiscal year and (b) up to 25% of his annual base salary based on certain goals agreed between the Chief Executive Officer and Mr. Hartman for the applicable fiscal year.

As of September 30, 2019, if Mr. Hartman’s employment is terminated by ALJ without cause, or by Mr. Hartman for good reason, Mr. Hartman is entitled to receive: (i) eight months of base salary; (ii) continuation of group health plan benefits with the cost of the regular premium for such benefits shared in the same relative proportion by ALJ and Mr. Hartman as in effect on the date of termination; (iii) full annual bonus for the year of termination if otherwise entitled to receive the bonus; and (iv) the annual bonus for the previous year if such bonus has been earned but not yet paid at time of termination.

Marc Reisch. In August 2015, concurrent with ALJ’s acquisition of Phoenix, Phoenix entered into an employment agreement with Mr. Reisch through December 2018. In March 2018, Phoenix entered into a new employment agreement with Mr. Reisch (the “New Reisch Employment Agreement”), which superseded and terminated the August 2015 employment agreement, and extended the term to December 2021. Under the New Reisch Employment Agreement, Mr. Reisch receives an annual base salary of $200,000 and is eligible to earn an annual bonus equal to 10% of any pre-bonus EBITDA of Phoenix in excess of $20,000,000, with a step down to 5% of any pre-bonus EBITDA of Phoenix in excess of $27,000,000, in each case before any bonus amount owed to Mr. Reisch and the Chief Operating Officer of Phoenix. In the event of a material restatement, revision, or change to Phoenix’s financial statements requiring a recalculation of EBITDA for any particular fiscal year, the Compensation, Nominating and Corporate Governance Committee of ALJ may require reimbursement from Mr. Reisch of any excess bonus paid to Mr. Reisch as a result of the recalculated EBITDA for such particular fiscal year.

As of September 30, 2019, if Mr. Reisch’s employment is terminated by Phoenix without cause, or by Mr. Reisch for good reason, Mr. Reisch is entitled to receive, for each calendar year remaining during the employment term, an annual bonus calculated and paid in the same manner as if Mr. Reisch’s employment had continued.

Steve Chesin. During April 2014, concurrent with ALJ’s acquisition of Carpets, Carpets entered into an employment agreement with Mr. Chesin through December 2017. In December 2017, Carpets and Mr. Chesin entered into the first amended employment agreement. Effective January 2019, Carpets and Mr. Chesin entered into the second amended employment agreement (the “New Chesin Employment Agreement”), which extended the term to December 2020. Under the New Chesin Employment Agreement, Mr. Chesin receives an annual base salary of $300,000 and is eligible to earn an annual bonus equal to 5% of any pre-bonus EBITDA of Carpets in excess of $1,000,000.

As of September 30, 2019, if Mr. Chesin’s employment is terminated by Carpets without cause, or by Mr. Chesin for good reason, Mr. Chesin is entitled to receive: (i) one year of base salary; (ii) continuation of group health plan benefits, with the cost of the regular premium for such benefits paid in full by Carpets; (iii) full annual bonus for the year of termination if otherwise entitled to receive the bonus; and (iv) the annual bonus for the previous year if such bonus has been earned but not yet paid at time of termination.

The following table sets forth certain information regarding outstanding equity awards at September 30, 2019, by the named executive officers and other key employees.

	Option Awards
Name	Option Grant Date	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable			Equity Incentive Plan Awards: Total Number of Securities Underlying Unexercised Options (#)		Option Exercise Price ($)		Option Expiration Date
Named Executive Officers:
Jess M. Ravich, Executive Chairman	8/3/2015		350,000		—			350,000		4.00	8/3/2022
Anna Van Buren, President and CEO, Faneuil	8/11/2017		100,000		50,000	⁽¹⁾		150,000		3.33	8/9/2027
Brian Hartman, Chief Financial Officer	8/8/2017		100,000		50,000	⁽²⁾		150,000		3.26	8/8/2027
	8/9/2018		50,000		100,000	⁽³⁾		150,000		2.10	8/9/2028

Other Key Employees:
Marc Reisch, Chairman, Phoenix	8/14/2015		250,000		—			250,000		4.27	8/13/2025
Steve Chesin, President and CEO, Carpets	12/7/2017		3,333		6,667	⁽⁴⁾		10,000		3.21	12/7/2027

The following table sets forth the total compensation paid or accrued by ALJ to the named directors for services rendered during the year ended September 30, 2019:

Name	Fees Earned or Paid in Cash		Stock Awards		Option Awards		Non-Equity Incentive Compensation		Nonqualified Deferred Compensation on Earnings		All Other Compensation		Total
Hal G. Byer	$	84,000	$	—	$	—	$	—	$	—	$	—	$	84,000
Robert Scott Fritz		70,000		15,000		—		—		—		—		85,000
Rae Ravich		42,500		37,500		—		—		—		—		80,000
John Scheel		52,500		40,000		—		—		—		—		92,500
Michael Borofsky		55,000		40,000		—		—		—		—		95,000
Margarita Paláu Hernández⁽¹⁾		33,000		30,000		—		—		—		—		63,000

In December 2015, the Board of Directors approved an outside director compensation package comprised of (i) an annual retainer of $40,000 in cash, (ii) an annual grant of common stock with a value of $40,000, (iii) an additional $12,500 for the chair and $5,000 for each other member of the Audit Committee, and (iv) an additional $10,000 for the chair and $4,000 for each other member of the Compensation, Nominating, and Corporate Governance Committee. Effective July 1, 2017, each outside director was given the option of how to allocate the payment between cash and common stock. Director who are employees do not receive any additional compensation for their service on the Board of Directors.

ITEM 12. SECU RITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth, as of November 30, 2019, information regarding the beneficial ownership of our common stock based upon the most recent information available to us for: (i) each person known by us to own beneficially more than five (5%) percent of our outstanding common stock; (ii) each of our named executive officers, directors, and other key employees; and (iii) all of our named executive officers, directors, and other key employees as a group. Unless otherwise indicated, each stockholder listed below has sole voting and investment power with respect to the shares beneficially owned by them and has the following address: c/o ALJ Regional Holdings, Inc., 244 Madison Avenue, PMB #358, New York, NY 10016. As of November 30, 2019, there were 42,172,791 shares of our common stock outstanding, which was the only class of voting securities outstanding.

Name and Address of Beneficial Owner	Number of Common Shares Beneficially Owned ⁽¹⁾			Percentage of Common Shares Beneficially Owned
Named Executive Officers and Directors:
Jess Ravich, Chief Executive Officer and Chairman of the Board		16,858,637	⁽²⁾		39.2	%
Anna Van Buren, Director		1,689,076	⁽³⁾		4.0	%
c/o Faneuil, Inc.
2 Eaton Street, Suite 1002
Hampton, VA 23669
John Scheel, Director and Vice Chairman of the Board		885,127			2.1	%
Robert Scott Fritz, Director		659,169	⁽⁴⁾		1.6	%
Hal G. Byer, Director		164,684	⁽⁵⁾	*
Rae G. Ravich, Director		164,206	⁽⁶⁾	*
Brian Hartman, Chief Financial Officer		150,000	⁽⁷⁾	*
Michael C. Borofsky, Director		73,914		*
Other Key Employees:
Marc Reisch, Director and Chairman, Phoenix		750,000	⁽⁸⁾		1.8	%
c/o Phoenix Color Corp.
16^th Floor, 350 7^th Ave
New York, NY 10001
Steve Chesin, Chief Executive Officer, Carpets		156,667	⁽⁹⁾	*
c/o Carpets N’ More
4580 West Teco Avenue
Las Vegas, NV 89118
All Directors and Executive Officers as a Group		21,551,480	⁽¹⁰⁾		49.2	%
5% Stockholders:
Harland Clarke Holdings Corp.		3,000,000			7.1	%
10931 Laureate Drive
San Antonio, Texas 78249

For information regarding securities authorized for issuance under Equity Compensation Plans and the equity compensation plan information table see “Part II, Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

We are not aware of any arrangements that may result in a change in control of the Company.

During the years ended September 30, 2019 and 2018, we entered into the following transactions required to be reported under Item 404 of Regulation S-K (“Item 404”):

Harland Clarke Holdings Corp. (“Harland Clarke”), a stockholder who owns ALJ shares in excess of five percent, was a counterparty to Faneuil in two contracts. One contract provides call center services to support Harland Clarke’s banking-related products and completed in March 2019. The other contract provided managed print services and concluded in September 2018. Faneuil recognized revenue from Harland Clarke totaling $0.1 million and $0.3 million for the years ended September 30, 2019 and 2018, respectively. The associated cost of revenue was $0.1 million and $0.3 million for the years ended September 30, 2019 and 2018, respectively. All revenue from Harland Clarke contained similar terms and conditions as for other transactions of this nature entered into by ALJ. Total accounts receivable from Harland Clarke was $0 and less than $0.1 million at September 30, 2019 and 2018, respectively.

In July 2019, ALJ sold 3.9 million shares of common stock at $1.80 per share for total cash proceeds of $7.0 million. Of the common shares sold, 2.2 million shares were to unaffiliated investors, 1.6 million shares were to ALJ’s Chief Executive Officer, and 0.1 million were to Faneuil’s President and Chief Executive Officer. In connection with such purchase and sale, each investor thereto, including ALJ’s CEO and Faneuil’s President and CEO, received 33% warrant coverage with a two-year term to purchase ALJ common stock at $1.80 per share.

In November 2018, in connection with the Fourth Amendment, the Company entered into a Backstop Letter Agreement with Jess Ravich, the Company’s Chairman and Chief Executive Officer. Pursuant to the Backstop Letter Agreement, Mr. Ravich will provide a “backstop” that would enable the Company to satisfy the Alternative Financing Requirement by agreeing, if the Company is unable to locate alternative financing on terms, conditions and timing reasonably acceptable to it, and if required by Cerberus. In consideration of Mr. Ravich entering into such backstop arrangement, the Company’s Audit Committee and independent directors reviewed, approved and agreed to a backstop fee package, pursuant to which the Company would (i) pay to Mr. Ravich’s trust a one-time backstop fee of $0.1 million, and (ii) if the purchase of such subordinated debt is required by Cerberus and the Company has failed to secure a financing alternative more advantageous to the Company, to issue to Mr. Ravich’s trust a five-year warrant (the “Warrant”) to purchase 1,500,000 shares of ALJ common stock at an exercise price equal to the average closing price of the Company’s common stock as reported on The Nasdaq Stock Market for the 30 trading days preceding the warrant issuance date.

The following directors qualify as “independent” in accordance with the rules and regulations of the SEC and NASDAQ, as applicable:

The Audit Committee of ALJ’s Board of Directors has engaged Deloitte & Touche LLP (“Deloitte”) as the independent registered public accounting firm for the Company and its subsidiaries for the fiscal year ended September 30, 2019. The Audit Committee regularly reviews and determines whether any non-audit services provided by Deloitte potentially affects its independence with respect to the Company. The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by Deloitte. Pre-approval is generally provided by the Audit Committee for up to one year, is detailed as to the particular service or category of services to be rendered and is generally subject to a specific budget. The Audit Committee may also pre-approve additional services or specific engagements on a case-by-case basis. Management provides annual updates to the Audit Committee regarding the extent of any services provided in accordance with this pre-approval. To date, all services performed by Deloitte have been pre-approved by the Audit Committee in accordance with this policy.

Prior to August 21, 2019, the Audit Committee had engaged Mayer Hoffman McCann P.C. (“MHM”) as the independent registered public accounting firm for the Company. As previously disclosed, on July 23, 2019, the Audit Committee of ALJ’s Board of Directors determined, pending execution of an engagement letter in form and substance satisfactory to the Company (the “Engagement Letter”), to appoint Deloitte and dismiss MHM. On August 21, 2019, the Company executed the Engagement Letter, and Deloitte was formally appointed by the Audit Committee, and MHM was formally dismissed, as the Company’s independent registered public accounting firm.

The reports of MHM on the consolidated financial statements of the Company and subsidiaries as of and for the fiscal year ended September 30, 2018 and the subsequent interim period through August 21, 2019 did not contain any adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal year ended September 30, 2018 and the subsequent interim period through August 21, 2019, there were (i) no disagreements within the meaning of Item 304(a)(1)(iv) of Regulation S-K between the Company and MHM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which, if not resolved to MHM’s satisfaction, would have caused MHM to make reference thereto in their reports, and (ii) no “reportable events” within the meaning of Item 304(a)(1)(v) of Regulation S-K.

The following table sets forth the aggregate fees billed, or expected to be billed, by Deloitte with respect to audit and non-audit services for the Company during the fiscal year ended September 30, 2019, and the aggregate fees billed by MHM with respect to audit and non-audit services for the Company during the fiscal year ended September 30, 2018, and the subsequent interim periods in 2019 before the change in auditors became effective:

The financial statements required by this Item are included beginning at page F-1.

The financial statement schedules required by this Item are included on page S-1.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jess Ravich and Brian Hartman, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for her or him and in her or his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as she or he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Name	Title	Date

/s/ *Jess Ravich*	Chairman of the Board, and Chief Executive Officer	December 23, 2019
Jess Ravich	(Principal Executive Officer)

/s/ *Brian Hartman*	Chief Financial Officer (Principal Financial Officer and Principal	December 23, 2019
Brian Hartman	Accounting Officer)

/s/ *Hal G. Byer*	Director	December 23, 2019
Hal G. Byer

/s/ *Robert Scott Fritz*	Director	December 23, 2019
Robert Scott Fritz

/s/ *Rae Ravich*	Director	December 23, 2019
Rae Ravich

/s/ *John Scheel*	Director	December 23, 2019
John Scheel

/s/ *Anna Van Buren*	Director	December 23, 2019
Anna Van Buren

/s/ *Michael Borofsky*	Director	December 23, 2019
Michael Borofsky

We have audited the accompanying consolidated balance sheet of ALJ Regional Holdings, Inc. and subsidiaries (the "Company") as of September 30, 2019, the related statements of consolidated operations, stockholders' equity and cash flows for the year ended September 30, 2019, and the related notes and the consolidated financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019, and the results of its operations and its cash flows for the year ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

We have audited the accompanying consolidated balance sheet of ALJ Regional Holdings, Inc. and Subsidiaries (the “Company”) as of September 30, 2018, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended September 30, 2018, and the related notes and schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018, and the results of its operations and its cash flows for the year ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

	September 30,			September 30,
	2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	4,529		$	2,000
Accounts receivable, net of allowance for doubtful accounts of $126 ($208 in 2018)		41,707			46,383
Inventories, net		6,777			7,656
Prepaid expenses and other current assets		5,515			5,504
Income tax receivable		897			—
Assets held for sale		—			222
Total current assets		59,425			61,765
Property and equipment, net		69,870			60,162
Goodwill		59,047			56,372
Intangible assets, net		41,148			42,400
Collateral deposits		695			695
Deferred tax assets, net		—			7,639
Other assets		992			2,435
Total assets	$	231,177		$	231,468
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,070		$	12,692
Accrued expenses		16,092			14,371
Income taxes payable		367			204
Deferred revenue and customer deposits		1,965			3,179
Current portion of term loans, net of deferred loan costs		9,119			8,595
Current portion of capital lease obligations		2,535			2,909
Current portion of workers’ compensation reserve		1,043			1,000
Other current liabilities		72			1,003
Total current liabilities		46,263			43,953
Line of credit, net of deferred loan costs		9,372			8,594
Term loans, less current portion, net of deferred loan costs		73,614			74,795
Deferred revenue, less current portion		349			1,374
Workers’ compensation reserve, less current portion		1,312			1,508
Capital lease obligations, less current portion		2,623			4,427
Deferred tax liabilities, net		2,795			—
Other non-current liabilities		11,733			5,289
Total liabilities		148,061			139,940
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.01 par value; authorized – 100,000 shares; 42,173 and 38,111 issued and outstanding at September 30, 2019 and 2018, respectively		422			381
Additional paid-in capital		287,101			279,575
Accumulated deficit		(204,407	)		(188,428	)
Total stockholders’ equity		83,116			91,528
Total liabilities and stockholders’ equity	$	231,177		$	231,468

	Year Ended September 30,
	2019			2018
Net revenue	$	354,997		$	369,776
Costs and expenses:
Cost of revenue		277,454			285,872
Selling, general, and administrative expense		72,375			76,656
Impairment of intangible assets		746			—
Disposal of assets and other gain, net		(216	)		(277	)
Total operating expenses		350,359			362,251
Operating income		4,638			7,525
Other (expense) income:
Interest expense, net		(10,611	)		(10,558	)
Total other expense, net		(10,611	)		(10,558	)
Loss before income taxes		(5,973	)		(3,033	)
Provision for income taxes		(10,006	)		(4,299	)
Net loss	$	(15,979	)	$	(7,332	)
Loss per share of common stock–basic and diluted	$	(0.41	)	$	(0.19	)
Weighted-average shares of common stock outstanding– basic and diluted		38,710			37,856

							Additional
	Common Stock						Paid-in			Accumulated
	Shares			Amount			Capital			Deficit			Total
Balances at September 30, 2017		37,042		$	371		$	276,478		$	(181,096	)	$	95,753
Issuance of common stock upon exercise of stock options		300			3			275			—			278
Issuance of common stock, net of stock-issuance costs		478			4			1,431			—			1,435
Issuance of common stock to members of ALJ's board of directors		291			3			752			—			755
Stock-based compensation expense - options		—			—			639			—			639
Net loss		—			—			—			(7,332	)		(7,332	)
Balances at September 30, 2018		38,111			381			279,575			(188,428	)		91,528
Common stock retired		(84	)		(1	)		(147	)		—			(148	)
Issuance of common stock, net of stock-issuance costs		3,895			39			6,934			—			6,973
Issuance of common stock to members of ALJ's board of directors		251			3			402			—			405
Stock-based compensation expense - options		—			—			337			—			337
Net loss		—			—			—			(15,979	)		(15,979	)
Balances at September 30, 2019		42,173		$	422		$	287,101		$	(204,407	)	$	83,116

	Year Ended September 30,
	2019			2018
Operating activities
Net loss	$	(15,979	)	$	(7,332	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		20,553			19,048
Impairment of intangible assets		746			—
Stock-based compensation expense		667			1,054
Provision for bad debts		56			272
Other non-cash expense		205			—
Litigation loss		—			2,910
Provision for obsolete inventory		176			151
Deferred income taxes		9,537			3,413
Disposal of assets and other gain, net		(216	)		(277	)
Amortization of deferred loan costs		724			1,275
Changes in operating assets and liabilities:
Accounts receivable, net		4,620			(108	)
Inventories, net		703			3,075
Prepaid expenses and other current assets		8			724
Other assets		1,443			2,039
Accounts payable		2,378			(2,905	)
Accrued expenses		1,317			(797	)
Income taxes payable		163			9
Deferred revenue and customer deposits		(2,249	)		(4,313	)
Workers’ compensation reserve		(153	)		(255	)
Other current liabilities		69			(61	)
Other non-current liabilities		(151	)		(160	)
Cash provided by operating activities		24,617			17,762
Investing activities
Acquisitions, net of cash acquired		(3,466	)		(9,000	)
Proceeds from sales of assets		318			544
Capital expenditures		(18,295	)		(8,598	)
Cash used for investing activities		(21,443	)		(17,054	)
Financing activities
Proceeds from term loan		5,000			7,500
Payments on term loans		(9,851	)		(13,544	)
Net proceeds from line of credit		1,084			3,239
Debt and common stock-issuance costs		(934	)		(482	)
Proceeds from issuance of common stock		7,011			1,500
Proceeds from stock option exercise		—			278
Payments on capital lease obligations		(2,955	)		(2,829	)
Cash used for financing activities		(645	)		(4,338	)
Change in cash and cash equivalents		2,529			(3,630	)
Cash and cash equivalents at the beginning of the year		2,000			5,630
Cash and cash equivalents at the end of the year	$	4,529		$	2,000

	Year Ended September 30,
	2019		2018
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	9,840	$	9,257
Taxes	$	913	$	1,022

Non-cash investing and financing activities:
Capital equipment purchases financed with capital leases	$	4,837	$	2,914
Fair value of deferred and contingent consideration related to acquisition	$	4,900	$	—
Capital equipment purchases financed with term loan	$	4,060	$	—
Leasehold improvements funded by landlord tenant improvement allowance	$	2,145	$	3,400
Leasehold improvements not yet paid for	$	—	$	2,700

ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively herein as “ALJ” or “Company”) is a holding company. As of September 30, 2109, ALJ consisted of the following wholly-owned subsidiaries:

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

The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of ALJ and its subsidiaries. All intercompany items and transactions have been eliminated in consolidation.

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. Actual results may differ materially from estimates.

The Company accounts for business combinations under the acquisition method of accounting in accordance with the Financial Accounting Standards Board (“FASB”) ASC 805, Business Combinations (“ASC 805”). The Company recognizes the fair value of the assets acquired and liabilities assumed, immediately expenses transaction costs and accounts for restructuring plans separately from the business combination. The excess of the cost of the acquisition over the fair value of the net tangible and identifiable intangible assets acquired is recorded as goodwill. Results of operations of the acquired business are included in the consolidated statements of operations from the effective date of acquisition.

ALJ uses its best estimates and assumptions to accurately value assets acquired, and liabilities assumed at the acquisition date. The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but does not exceed 12 months. Adjustments to purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

Cash and equivalents include all cash, demand deposits, and money market accounts with original maturities of three months or less.

ALJ presents accounts receivable, net of allowances for doubtful accounts and returns. Allowances, when required, are calculated based on a detailed review of certain individual customer accounts and an estimation of the overall economic conditions affecting ALJ’s customer base. ALJ reviews a customer’s credit history before extending credit. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

Carpets. Inventory, which consists of carpet, wood, vinyl, granite and other related hard surfaces, cabinets and window treatments, is stated at the lower of cost or net realizable value. Cost is computed on a first-in, first-out basis (“FIFO”). Carpets reserves for slow-moving and obsolete inventory based on historical and/or projected usage of the product.

Phoenix. Inventory, which consists primarily of paper, laminating film and inks, is stated at lower of cost or net realizable value. Cost is determined using FIFO and includes direct materials, direct labor, and applicable overhead. Phoenix reserves for slow-moving and obsolete inventory based on historical and/or projected usage of the product.

Assets that ALJ intends to sell and are not used in current operations are disclosed separately on the consolidated balance sheets and valued at fair value less estimated costs to sell. Assets held for sale at September 30, 2018 consisted of printing and manufacturing equipment.

Property and equipment are initially recorded at cost and are depreciated over the estimated useful lives of the assets using the straight-line method. Estimated useful lives are as follows:

Property and equipment acquired in a business acquisition are recorded at fair value on the date of acquisition. Subsequent purchases are recorded at historical cost. Significant improvements and betterments are capitalized. Routine repairs and maintenance are expensed when incurred. Gains and losses on disposal of fixed assets are recognized in the consolidated statements of operations based on the net disposal proceeds less the carrying amount of the assets.

ALJ records goodwill when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired. ALJ assigns the goodwill to its reporting units consistent with the future economic benefits and synergies expected to be achieved. ALJ performs an annual impairment assessment annually as of September 30, or more frequently if indicators of potential impairment exist, which includes evaluating qualitative and quantitative factors to assess the likelihood of an impairment of a segment’s goodwill. To date, ALJ has not recorded any goodwill impairment.

As of September 30, 2019 and 2018, all intangible assets were acquisition-related, recorded at fair value on the dates acquired, and subject to amortization. ALJ amortizes intangible assets over their estimated useful life based on expected economic benefit using the straight-line method. In the quarter following the period in which the intangible asset becomes fully amortized, ALJ removes the fully-amortized balances from the gross asset and accumulated amortization amounts.

The estimated useful life ranges for all identified intangible assets were as follows:

Deferred loan costs related to ALJ’s term loans are amortized to interest expense using the effective yield method over the contractual life of the debt. Additional amortization is recorded in periods where optional prepayments on debt are made. Deferred loan costs related to ALJ’s line of credit are amortized to interest expense using the straight-line method over the life of the debt.

Deferred implementation costs represent direct costs (e.g. training call center representatives) incurred prior to providing call center services. The Company capitalizes such costs, which are then amortized to cost of revenue over the life of the contract, once call center services commence. Implementation costs which are expected to be amortized during the next year are included in prepaid expenses and other current assets; the remaining balance of the implementation costs are included in other assets on the Company’s consolidated balance sheets.

Deferred revenue represents amounts billed to the customer in excess of amounts earned. Customer deposits represent payments received before all of the relevant criteria for revenue recognition are met. In certain instances, the Company requires a deposit when the customer order is placed. Customer deposits are recognized as revenue when the contract deliverables are complete, and revenue recognition criteria have been met, which is typically less than one year.

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

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

Phoenix. Phoenix maintains outside insurance to cover workers’ compensation claims.

ALJ accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1 - inputs are based upon unadjusted quoted prices for identical instruments in active markets. ALJ had no Level 1 assets or liabilities.

Level 2 - inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g., the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. ALJ had no Level 2 assets or liabilities.

Level 3 - inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. ALJ had no Level 3 assets. ALJ’s only Level 3 liabilities are acquisition-related deferred and contingent consideration. The fair values were determined using a variation of the income approach, known as the real options method, where certain revenue was simulated in a risk-neutral framework using Geometric Brownian Motion, a well-accepted model of stock price behavior that is used in option pricing models such as the Black-Scholes option pricing model. See Note 3.

ALJ’s other fair value instruments consist of accounts receivable, accounts payable, accrued expenses, line of credit, and term-loans. As of September 30, 2019 and 2018, carrying values of accounts receivable, accounts payable and accrued expenses approximate fair values due to the short-term nature of the instrument. Additionally, ALJ’s line of credit and term loans both carry a variable interest rate set at current market rates, and as such, the carrying value approximates fair value.

Overall. The Company recognizes revenue when the earnings process is complete as evidenced by (1) an agreement with the respective customer, (2) delivery and acceptance has occurred, or services have been provided, (3) collectability is probable, and (4) pricing is fixed or determinable. Shipping charges billed to customers are included in net revenue, and the related shipping costs are included in the cost of revenue in the period of shipment. Revenue is recorded net of any applicable sales tax.

Additional revenue recognition policies specific to each business segment are discussed below.

Faneuil. Revenue associated with outsourcing services is generally recognized during the period in which the services are rendered. Revenue for call center contracts is recognized at the time calls are received based on the contracted rate per call. Revenue is generally based on staff hours, call time, call volume, number of transactions processed, or number of accounts, and is presented net of any allowance or discounts.

Revenue from non-refundable up-front payments attributable to contract implementation, not tied to achieving a specific performance milestone, is recognized over the longer of the initial term of the contract or the expected customer life.

Carpets. Revenue related to long-term commercial contracts is recognized using the percentage-of-completion method. In using the percentage-of-completion method, Carpets generally applies the cost-to-cost method of accounting where revenue and profit is recorded based on the ratio of costs incurred to estimated total costs at completion. When adjustments in contract value or estimated costs are determined, any changes from prior estimates are reflected in earnings in the current period. Anticipated losses on contracts or programs in progress are charged to earnings during the period the loss is initially identified.

Phoenix. Phoenix records reductions of revenue for estimated rebates in the same period the related revenue is recorded. The amounts are based on historical information, specific criteria included in rebate agreements, and other factors known at the time. Phoenix accrues rebates each month based on customers actual revenue and estimated future revenue as outlined in the customer contract. By the end of the contract, 100% of the rebate earned is recorded. Rebates are paid to the customers based on their contractual agreements.

In certain instances, Phoenix will provide a customer with an incentive sign-on bonus at contract commencement in exchange for the customer committing to certain purchase volumes. Phoenix capitalizes the sign-on bonus when paid, and amortizes the balance as a reduction of revenue systematically as the volume commitment is attained. The portion of the sign-on bonus expected to be earned within one year is calculated based on estimates of customer orders for the year and recorded as prepaid expenses and other current assets, with the remaining sign-on bonus recorded as other assets.

Prompt pay discounts are recorded as a reduction to revenue in the period the prompt pay discount is taken by the customer.

The Company assesses the recoverability of goodwill on an annual basis in accordance with ASC 350 Intangibles - Goodwill and Other. The measurement date is September 30, or more frequently, if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying value. The Company can elect to perform a quantitative or qualitative test of impairment. For the years ended September 30, 2019 and 2018, the Company performed a quantitative impairment assessment for goodwill. The Company calculated the fair value of its three reporting units using both the income method and the market method to estimate fair value. For both Faneuil and Phoenix, the goodwill impairment test is weighted 50% on the income method and 50% on the market method. For Carpets, the goodwill impairment test is weighted 100% on the income method. The income method is based on a discounted future cash flow approach that uses the following major assumptions and inputs: revenue, based on assumed market segment growth rates and assumed market segment share, estimated costs, and weighted average cost of capital (“WACC”). WACC was estimated using guideline companies. Estimates of market segment growth, market segment share, and costs are based on historical data, various internal estimates, and a variety of external sources. The same estimates are also used in the Company’s business planning and forecasting process. The data is tested for reasonableness of the inputs and outcomes of our discounted cash flow analysis against available comparable market data. The market method is based on financial multiples and transaction prices of comparable companies.

The goodwill for each of ALJ’s three reporting units was deemed to have a fair value that exceeded carrying value.

Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds the estimated fair value of the asset or asset group. Long-lived assets to be disposed of by sale are reported at the lower of their carrying amounts or their estimated fair values, less costs to sell, and are not depreciated.

During the year ended September 30, 2019, ALJ wrote off certain intangible assets totaling $0.8 million that were deemed impaired. The Company did not have any impairments during the year ended September 30, 2018.

The Company uses the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by the valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company’s judgments relative to the current provision for income taxes take into account current tax laws, the interpretation of current tax laws and possible outcomes of current and future audits conducted by tax authorities. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions, and is subject to U.S. federal tax and state tax examinations. The Company’s judgments relative to the value of deferred tax assets and liabilities take into account estimates of the amount of future taxable income. Actual operating results and the underlying amount of income in future years could render current estimates of recoverable net deferred taxes inaccurate. Any of the judgments mentioned above could cause actual income tax obligations to differ from estimates, thus materially impacting the Company’s financial position and results of operations.

If the Company takes a recognized tax position or has taken a recognized tax position on a tax return that more likely than not would be sustained upon examination by tax authorities, then the Company will recognize the potential asset or liability in the financial statements. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Management believes that the Company has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accrual for tax liabilities is adequate for all open years based on its assessment of many factors, including past experience and interpretation of tax law applied to the facts of each matter.

ALJ recognizes compensation expense for its equity awards on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest and applies estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. ALJ uses the quoted closing market price of its common stock on the grant date to measure the fair value of common stock awards and the Black-Scholes option pricing model to measure the fair value of stock option awards. The expected volatility is based on historical volatilities of ALJ’s common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is equal to the midpoint between the vesting date and the end of the contractual term of the award. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. ALJ has never paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero.

ALJ did not issue any options during the year ended September 30, 2019. During the year ended September 30, 2018, ALJ used the following weighted-average assumptions: expected option life of 6 years, volatility of 50.9%, dividend yield of 0.00%, and annual risk-free interest rate of 2.8%. The weighted-average fair value of the options granted during the year ended September 30, 2018 was $1.11.

The Company leases most of its facilities under operating leases. Some of these lease agreements contain tenant improvement allowances funded by landlord incentives, rent holidays, and rent escalation clauses. The authoritative guidance for leases requires rent expense to be recognized on a straight-line basis over the lease term. The difference between the rent due under the stated periods of the lease compared to that of the straight-line basis is recorded as deferred rent within other accrued expenses and other non-current liabilities. For tenant improvement allowances funded by landlord incentives and rent holidays, the Company records a deferred lease incentive liability in accrued expenses and other non-current liabilities and amortizes the deferred liability as a reduction to rent expense on the consolidated statements of operations over the term of the lease.

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

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, with several clarifying updates issued during 2016 and 2017, referred to collectively hereafter as “ASC 606.” This new standard supersedes all current revenue recognition standards and guidance. Revenue recognition will occur when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled to in exchange for those goods or services. The mandatory adoption will require new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. Management determined that the impact of the adoption of ASC 606 does not have a material impact on a consolidated basis or at the subsidiary level.

The standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will be adopting the standard using the modified retrospective method effective October 1, 2019. We have substantially completed our evaluation of the impact of adopting the standard on our financial position, results of operations, and cash flows and continue to evaluate the impact on disclosures and internal controls. In addition to the impact discussed below, we expect significant expanded disclosures in our consolidated financial statements as a result of adopting this new standard.

Carpets’ assessment resulted in immaterial impacts on timing and method of revenue recognition. Based on Carpets’ evaluation, ASC 606 generally supports the recognition of revenue over time using the input method for the majority of its contracts, and we expect the pattern of revenue recognition to not differ materially from Carpets’ current revenue recognition methodology.

Carpets does not expect the new standard to materially affect the timing and amount of total revenue that can be recognized over the life of a construction project; however, the revenue recognized on a quarterly basis during the construction period may change. Carpets determined that ASC 606 is likely to be more impactful to certain of its lump sum projects as a result of the following required changes from its current practices:

Upon adoption of ASC 606, Carpets is required to adjust revenue and estimated losses based on the revenue associated with each separate performance obligation within a contract against its accumulated deficit within total equity. Based upon the balances that existed as of September 30, 2019, Carpets will record an increase to accumulated deficit of less than $0.1 million as of October 1, 2019.

Carpets does not expect ASC 606 to have a material impact on ALJ’s consolidated financial statements.

Carpets completed an analysis of historical periods, assuming the guidance under ASC 606 was applied to those historical periods for the items discussed above. The analysis yielded an immaterial difference in the timing and amount of revenue recognized under current guidance and that under ASC 606 guidance. Therefore, Carpets anticipates that the adoption of ASC 606 will not have a material impact to Carpets in future periods with respect to the categories mentioned above; however, Carpets is not able to predict whether such historical patterns, timing and level of activity will continue into future periods. Regardless, the adoption of ASC 606 will not impact the timing of cash flows as the billing terms with its customers remain unchanged.

Faneuil focused its assessment on: (1) determination of the contract term; (2) identification of the performance obligations in its open contracts; (3) treatment of costs incurred during the implementation phase; (4) the timing of revenue recognition associated with fixed and variable fees for certain contracts and; (5) revenue associated with various pass through costs and third party expenses.

The performance obligations in each contract have been identified, and vary depending on the nature of the contract, but may include provision of call center services and certain implementation activities.

Based on the assessment of the costs incurred during the implementation phase, the costs incurred as part of implementation relate to either a partially satisfied performance obligation, fulfillment costs, or administrative costs. Under current guidance, Faneuil capitalizes these costs and amortizes them over the stated contractual term on a straight-line basis. Under ASC 606, the only costs that are capitalizable are fulfillment costs, which have been determined to be immaterial.

Based on analysis of specific terms associated with current customer contracts, customers may be required to make nonrefundable fixed payments to Faneuil prior to the commencement of call center services. The timing of such payments may be based on the achievement of specified implementation milestones. Additionally, customers may be required to make certain nonrefundable variable payments (e.g. training of personnel) prior to the commencement of operations. Under current guidance, depending on the nature of the variable fees, the fees may be recognized as services are provided, or, in cases where no such services are provided, deferred and amortized over the stated contractual term on a straight-line basis.

Under ASC 606, fees are estimated and allocated to each performance obligation and recognized when or as the performance obligation is satisfied. When payments do not relate directly to the satisfaction or partial satisfaction of a performance obligation, the payments are deemed to be advance payments for future services. In such, instances, the fees are allocated to future performance obligations and recognized when or as the performance obligations are satisfied. Based on the allocation of such advance payments to performance obligations under ASC 606, these advance payments may be fully recognized prior to the expiration of the stated term of the contract.

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

Upon adoption of ASC 606, Faneuil is required to eliminate deferred costs incurred during the implementation phase and to reduce deferred revenues resulting in a decrease in the opening balance of accumulated deficit as of October 1, 2019 of approximately $0.7 million to $0.8 million.

Faneuil completed an analysis of historical periods, assuming the guidance under ASC 606 was applied to those historical periods for the categories mentioned above. The analysis yielded an immaterial difference in the timing and amount of revenue recognized under current guidance and that under ASC 606 guidance. Therefore, Faneuil anticipates that the adoption of ASC 606 will not have a material impact to Faneuil in future periods with respect to the categories mentioned above; however, Faneuil is not able to predict whether such historical patterns, timing and level of activity will continue into future periods. Regardless, the adoption of ASC 606 will not impact the timing of cash flows as the billing terms with its customers remain unchanged.

Phoenix focused its assessment on (1) customized products, (2) certain items in inventory, and (3) variable consideration which are areas where the new revenue standard could have a material impact on the consolidated financial statements.

Phoenix completed the evaluation of whether the accounting for revenue of customized products should be over time or at a point in time under the new standard. Based on analysis of specific terms associated with current customer contracts, Phoenix has concluded that revenue should be recognized at a point in time for substantially all customized products. This treatment is consistent with revenue recognition under the current guidance, where revenue is recognized when the products are completed and shipped to the customer (dependent upon specific shipping terms). As revenue recognition is dependent upon individual contractual terms, Phoenix will continue its evaluation of any new or amended contracts entered into, including contracts that Phoenix might assume as a result of acquisition activity. Any contracts whereby revenue for customized products should be recognized over time, as opposed to a point in time, are expected to be immaterial due to the de minimis nature of any particular order under such contracts in production at any given point in time.

With respect to certain items in inventory, Phoenix has determined the following situations will be impacted by ASC 606:

Additionally, when evaluating the transaction price, Phoenix analyzes on a contract by contract basis all applicable variable considerations and performs a constraint analysis. The nature of Phoenix's contracts give rise to variable consideration, including, volume rebates, credits, discounts, and other similar items that generally decrease the transaction price. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, when contracts are signed, or making payments within specific terms. In adopting ASC 606, the amount and timing of recognition changed for certain variable consideration.

Upon adoption of ASC 606, Phoenix is required to eliminate inventory associated with the above categories, as well as adjust the timing of recognition of certain variable consideration resulting in an increase in the opening balance of accumulated deficit as of October 1, 2019 amounting to less than $0.1 million.

Phoenix completed an analysis of historical periods, assuming the guidance under ASC 606 was applied to those historical periods for the categories mentioned above. The analysis yielded an immaterial difference in the timing and amount of revenue and gross margin recognized under current guidance and that under ASC 606 guidance. Therefore, Phoenix anticipates that the adoption of ASC 606 will not have a material impact to Phoenix in future periods with respect to the categories mentioned above; however, Phoenix is not able to predict whether such historical patterns, timing and level of activity will continue into future periods. Regardless, the adoption of ASC 606 will not impact the timing of cash flows as the billing terms with its customers remain unchanged.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on classification as either a finance or operating lease. ASU 2016-02 also requires certain quantitative and qualitative disclosures. The provisions of ASU 2016-02 should be applied on a modified retrospective basis. ASU 2016-02 will be effective for ALJ on October 1, 2020. The adoption of ASU 2016-02 will result in a material increase to the Company’s consolidated balance sheets for lease liabilities and right-of-use assets. The Company is currently evaluating the other effects the adoption of ASU 2016-02 will have on its consolidated financial statements and related disclosures.

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

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

On July 31, 2019 (“RDI Purchase Date”), Faneuil acquired 100% of Realtime Digital Innovations, LLC (the “RDI Acquisition”), an exclusive partner of Faneuil for the past 18 months, that provides workflow automation and business intelligence services. The RDI Acquisition is expected to provide Faneuil with a sustainable competitive advantage in the business process outsourcing space by allowing it to, among other things, (i) automate process workflows and business intelligence, (ii) generate labor efficiencies for existing programs, (iii) expand potential new client target entry points, (iv) improve overall customer experience, and (v) increase margin profiles through shorter sales cycles and software license sales.

The aggregate cash consideration for the RDI Acquisition paid at closing was $2.5 million, with earn-outs up to $7.5 million to be paid upon the achievement of certain financial metrics over a three-year period, subject to a guaranteed payout of $2.5 million. Faneuil plans to consolidate the RDI business under Faneuil’s corporate umbrella.

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

The Company accounted for the RDI Acquisition using the purchase method of accounting. Accordingly, the assets and liabilities were recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the tangible and intangible assets acquired, liabilities assumed, and deferred and contingent consideration, was recorded as goodwill. During the measurement period, if updated or final information is obtained about facts and circumstances that existed as of the acquisition date, cumulative changes in the estimated fair values of the net assets recorded may change the amount of the purchase price allocable to goodwill. During the measurement period, which expires one year from the acquisition date, changes to any purchase price allocations will be adjusted in the reporting period in which the adjustment amount is determined.

From the RDI Purchase Date through September 30, 2019, RDI did not record any revenue to outside parties. RDI’s revenue was attributable to Faneuil and was eliminated in consolidation.

As previously discussed in Note 3, Faneuil purchased RDI for an aggregate consideration $2.5 million cash paid at closing, with earn-outs, or contingent consideration, in an amount up to $7.5 million to be paid upon the achievement of certain financial metrics over a three-year period, subject to a guaranteed payout, or deferred consideration, of $2.5 million. As of September 30, 2019, the fair value and the maximum deferred and contingent considerations payments were as follows (in thousands):

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

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

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

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

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

The Company accounted for the Printing Components Business acquisition using the acquisition method of accounting. Accordingly, the assets and liabilities were recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and the liabilities assumed was recorded as goodwill. The allocation of purchase price was finalized as of October 2, 2018.

The Printing Components Business was immaterial to ALJ results of operations during the years ended September 30, 2019 and 2018. During the years ended September 30, 2019 and 2018, the Printing Components Business recorded net revenue of $13.2 million and $15.7 million, respectively. Because the Printing Components Business was closely aligned with Phoenix’s existing business, including the overlap of customers, its operations were immediately integrated into operations, and financial metrics other than net revenue were not separately tracked, and therefore, not disclosed.

During the years ended September 30, 2019 and September 30, 2018, the Company incurred approximately $0.2 million and $0.1 million of acquisition-related costs in connection with the RDI Acquisition and the Printing Components Business, which were expensed to selling, general, and administrative expense as incurred.

These acquisitions, individually or in aggregate, were not material to the Company's results of operations, financial position, or cash flows and, therefore, the pro forma impact of these acquisitions is not presented.

The Company maintains its cash balances in accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes there is little or no exposure to any significant credit risk.

ALJ did not have any customer with net revenue in excess of 10% of consolidated net revenue during the years ended September 30, 2019 and 2018. Each of ALJ’s segments had customers that represented more than 10% of their respective net revenue, as described below.

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

Trade receivables from these customers totaled $7.6 million at September 30, 2019. As of September 30, 2019, all Faneuil accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

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

Trade receivables from these customers totaled $1.9 million at September 30, 2019. As of September 30, 2019, all Carpets accounts receivable were unsecured. The risk with respect to accounts receivables is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

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

Trade receivables from these customers totaled $5.2 million at September 30, 2019. As of September 30, 2019, all Phoenix accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

ALJ did not have any suppliers that represented more than 10% of consolidated inventory purchases. However, two of ALJ’s segments had suppliers that represented more than 10% of their respective inventory purchases as described below.

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

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

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

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

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

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

	September 30,
(in thousands)	2019			2018
Leasehold improvements	$	31,370		$	9,334
Machinery and equipment		30,805			24,900
Building and improvements		17,403			16,459
Software		16,139			15,749
Computer and office equipment		13,273			11,319
Land		9,267			9,267
Furniture and fixtures		7,796			3,834
Vehicles		386			342
Construction and equipment in process		206			10,627
Property and equipment		126,645			101,831
Less: accumulated depreciation and amortization		(56,775	)		(41,669	)
Property and equipment, net	$	69,870		$	60,162

Property and equipment depreciation and amortization expense, including amounts related to capitalized leased assets, was $15.3 million and $13.6 million for the years ended September 30, 2019 and 2018, respectively.

The following table presents changes in the carrying values of goodwill by segment for the years ended September 30, 2019 and 2018:

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

	September 30, 2019							September 30, 2018
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Customer relationships	$	33,660	$	(13,039	)	$	20,621	$	34,400	$	(10,329	)	$	24,071
Trade names		10,760		(2,004	)		8,756		10,760		(1,573	)		9,187
Supply agreements		9,930		(3,002	)		6,928		10,358		(1,836	)		8,522
Technology		3,400		(71	)		3,329		—		—			—
Non-compete agreements		1,820		(311	)		1,509		2,330		(1,811	)		519
Internal-use software		580		(575	)		5		580		(479	)		101
Totals	$	60,150	$	(19,002	)	$	41,148	$	58,428	$	(16,028	)	$	42,400

Intangible asset amortization expense was $5.2 million and $5.5 million for the years ended September 30, 2019 and 2018, respectively.

The following table presents expected annual amortization expense as of September 30, 2019 (in thousands):

The following table presents changes in the carrying values of intangible assets by category for the years ended September 30, 2019 and 2018:

(in thousands)	Customer Relationships			Trade Names		Supply Agreements			Technology		Non- Compete Agreements			Internal Use Software		Accumulated Amortization			Total, Net
Balance, September 30, 2017	$	34,400		$	10,760	$	5,658		$	—	$	3,030		$	580	$	(11,249	)	$	43,179
Printing Components Business Acquisition		—			—		4,700			—		—			—					4,700
Write off fully amortized intangible assets		—			—		—			—		(700	)		—		700			—
Amortization expense		—			—		—			—		—			—		(5,479	)		(5,479	)
Balance, September 30, 2018	$	34,400		$	10,760	$	10,358		$	—	$	2,330		$	580	$	(16,028	)	$	42,400
RDI Acquisition		—			—		—			3,400		1,300			—					4,700
Impairment of intangible assets**		(740	)		—		(428	)		—		—			—		422			(746	)
Write off fully amortized intangible assets		—			—		—			—		(1,810	)		—		1,810			—
Amortization expense		—			—		—			—		—			—		(5,206	)		(5,206	)
Balance, September 30, 2019	$	33,660		$	10,760	$	9,930		$	3,400	$	1,820		$	580	$	(19,002	)	$	41,148

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

	September 30,
(in thousands)	2019		2018
Accrued compensation and related taxes	$	8,041	$	7,275
Rebates payable		2,157		1,491
Acquisition contingent consideration		2,100		—
Deferred lease incentives		1,159		389
Medical and benefit-related payables		964		609
Interest payable		723		676
Other		342		734
Call center buildouts**		274		2,700
Deferred rent		112		174
Sales tax payable		111		193
Accrued board of director fees		109		130
Total accrued expenses	$	16,092	$	14,371

ALJ computed basic and diluted loss per common share for each period as follows:

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

Common stock equivalents of 3.0 million and 1.7 million were not considered in calculating ALJ’s diluted loss per common share for the years ended September 30, 2019 and 2018, respectively, as their effect would be anti-dilutive.

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

	September 30,
(in thousands)	2019			2018
Line of credit:
Line of credit	$	9,823		$	8,739
Less: deferred loan costs		(451	)		(145	)
Line of credit, net of deferred loan costs	$	9,372		$	8,594
Current portion of term loans:
Current portion of term loan	$	8,200		$	9,470
Current portion of equipment financing		1,336			—
Less: deferred loan costs		(417	)		(875	)
Current portion of term loans, net of deferred loan costs	$	9,119		$	8,595
Term loans, less current portion:
Term loan, less current portion	$	72,882		$	75,504
Equipment financing, less current portion		1,765			—
Less: deferred loan costs		(1,033	)		(709	)
Term loans, less current portion, net of deferred loan costs	$	73,614		$	74,795

In August 2015, ALJ entered into a financing agreement (“Financing Agreement”) with Cerberus Business Finance, LLC (“Cerberus”) to borrow $105.0 million in a term loan (“Cerberus Term Loan”) and have available up to $30.0 million in a revolving loan (“Cerberus/PNC Revolver,” and together with the Cerberus Term Loan, the “Cerberus Debt”). ALJ has subsequently entered into five amendments to the Financing Agreement, two of which were entered into during the year ended September 30, 2019 and are described below.

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

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

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

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

Description

Use of Proceeds

Origination Date

Interest Rate *

Quarterly

Payments

Balance at

September 30, 2019

Term Loan:

Financing Agreement

Phoenix acquisition

August 2015

8.87% to 9.28%

1,610

63,672

First Amendment

Color Optics acquisition

July 2016

8.87% to 9.28%

175

6,936

Third Amendment

Printing Components Business acquisition

October 2017

8.87% to 9.28%

151

5,951

Fourth Amendment

Working capital

November 2018

8.87% to 9.28%

114

4,523

Totals

2,050

81,082

Line of Credit:

Cerberus/PNC Revolver

(includes Second and Fifth

Amendments)

Working capital

August 2015

11.00% to 11.25%

—

9,823

Interest payments are due in arrears on the first day of each month. Quarterly principal payments are due on the last day of each fiscal quarter. Annual principal payments equal to 75% of ALJ’s excess cash flow (“ECF”), as defined in the Financing Agreement, are due upon delivery of the audited financial statements. During the year ended September 30, 2019, ALJ made an ECF payment of $0.3 million. During the year ended September 30, 2018, ALJ made an ECF payment of $4.1 million, and mandatory payments totaling $0.2 million as a result of receiving proceeds from sales of assets. A final balloon payment is due at maturity, December 1, 2023.

The Cerberus Debt is secured by substantially all the Company’s assets and imposes certain limitations on the Company, including its ability to incur debt, grant liens, initiate certain investments, declare dividends and dispose of assets. The Cerberus Debt also requires ALJ to comply with certain debt covenants. As of September 30, 2019, ALJ was in compliance with all debt covenants and had unused borrowing capacity of $12.1 million.

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

ALJ expensed the backstop fee and other fees incurred in connection with the Backstop Letter Agreement, which totaled approximately $0.1 million, to selling, general, and administrative expense during the year ended September 30, 2019.

As part of the Second Amendment, ALJ is required to pay a fee in each of three consecutive annual periods commencing May 27, 2018 and ending on the termination date, if at any time during each annual period there are any amounts outstanding on the Cerberus/PNC Revolver (“Contingent Payments”). Such Contingent Payments become due and payable on the first day within each annual period there is an outstanding balance on the Cerberus/PNC Revolver. ALJ made the first Contingent Payment during the year ended September 30, 2018. ALJ made the second Contingent Payment during the year ended September 30, 2019. Both Contingent Payments were added to deferred loan costs and amortized to interest expense for one year following the respective Contingent Payment. As of September 30, 2019, one Contingent Payment remained outstanding.

During the years ended September 30, 2019 and 2018, ALJ paid legal fees, other fees, and Contingent Payments, totaling $0.9 million and $0.4 million, respectively, which were deferred and are being amortized to interest expense over the life of the debt.

In December 2019, ALJ entered into the sixth amendment to the Financing Agreement. See Note 13.

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

As of September 30, 2019, estimated future minimum principal payments for the Cerberus Debt and Equipment Financing are as follows (in thousands):

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

The Company leases real estate, equipment, and vehicles under noncancellable operating leases. As of September 30, 2019, future minimum rental commitments under noncancellable leases were as follows (in thousands):

During the years ended September 30, 2019 and 2018 rental expense under operating leases was $7.1 million and $6.9 million, respectively, and was included with selling, general, and administrative expense.

ALJ maintains employment agreements with certain key executive officers that provide for a base salary and annual bonus to be determined by the Board of Directors. The agreements also provide for termination payments, which includes base salary and performance bonus, stock options, non-competition provisions, and other terms and conditions of employment. As of September 30, 2019, contingent termination payments related to base salary totaled $1.4 million.

In the normal course of operations, certain Faneuil customers require surety bonds guaranteeing the performance of a contract. As of September 30, 2019, the face value of such surety bonds, which represents the maximum cash payments that Faneuil would have to make under certain circumstances of non-performance, was $26.1 million. To date, Faneuil has not made any non-performance payments.

ALJ had letters of credit totaling for $3.9 million as of September 30, 2019, in connection with workers’ compensation insurance requirements.

The matter was tried in a bench trial from April 30, 2018 through May 2, 2018. On May 15, 2018, the Richmond Circuit Court issued its opinion, which dismissed both Faneuil’s complaint and 3M’s counterclaim with prejudice. No monetary damages were awarded to either Faneuil or 3M. As a result of the Richmond Circuit Court’s opinion, ALJ recorded a non-cash litigation loss of $2.9 million (the outstanding unreserved receivable from 3M), which was included with selling, general, and administrative expense during the year ended September 30, 2018. The matter was appealed to the Supreme Court of Virginia where Faneuil was awarded approximately $1.2 million, plus pre- and post-judgment interest. The matter was remanded to the trial court for calculation of interest and entry of final judgment. Faneuil and 3M settled on the amount of interest to be paid. The final judgment was not recorded in the Company’s financial statements as of and for the year ended September 30, 2019. The final judgment plus interest, which totaled $1.5 million, was received by Faneuil on December 5, 2019.

The parties are currently engaged in limited discovery. A court-ordered mediation is scheduled between the parties for May 2020. Faneuil believes this action is without merit and intends to defend this case vigorously. The Company has not accrued any amounts related to the Marshall claim as of September 30, 2019.

Tammy McNeil, a former Faneuil call center employee, filed a Fair Labor Standards Act collective action case against Faneuil in federal court in Newport News, Virginia in 2015. The class action asserted various timekeeping and overtime violations, which Faneuil denied. On June 6, 2017, the case was settled by the parties as part of a court-ordered mediation, for $0.3 million in damages, plus plaintiff’s attorney fees. Because the parties could not agree on the dollar amount of plaintiff’s attorney fees, both parties agreed to allow the court to determine the amount. The court awarded $0.7 million in attorney’s fees and overruled Faneuil’s objections to the recommendation of the magistrate judge relating to that amount. Neither party appealed the decision. As of September 30, 2018, all amounts were paid.

The Company has been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. The Company concluded as of September 30, 2019 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

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

ALJ’s common stock activity for the year ended September 30, 2019 consisted of the following:

ALJ’s common stock activity for the year ended September 30, 2018 consisted of the following:

As part of the 2019 Private Placement discussed above, ALJ issued fully vested warrants (“Warrants”) to purchase 1.3 million shares of ALJ common stock at $1.80 per share. The Warrants, which expire in July 2021, were classified as equity. As a result, the entire $7.0 million received from the 2019 Private Placement was recorded to equity. No Warrants were exercised from the date of issuance through September 30, 2019.

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 at September 30, 2019.

On July 11, 2016, ALJ shareholders approved ALJ’s Omnibus Equity Incentive Plan (“2016 Plan”), which allows ALJ and its subsidiaries to grant securities of ALJ to officers, employees, directors or consultants. ALJ believes that equity-based compensation is fundamental to attracting, motivating and retaining highly-qualified dedicated employees who have the skills and experience required to achieve business goals. Further, ALJ believes the 2016 Plan aligns the compensation of directors, officers, and employees with shareholder interest.

The 2016 Plan is administered by ALJ’s Compensation, Nominating and Corporate Governance Committee (“Committee”) of the Board. The maximum aggregate number of common stock shares that may be granted under the 2016 Plan is 2.0 million. The 2016 Plan generally provides for the grant of qualified or nonqualified stock options, restricted stock and restricted stock units, unrestricted stock, stock appreciation rights, performance awards and other awards. The Committee has full discretion to set the vesting criteria. The exercise price of a stock option may not be less than 100% of the fair market value of ALJ’s common stock on the date of grant. The 2016 Plan prohibits the repricing of outstanding stock options without prior shareholder approval. The term of stock options granted under the 2016 Plan may not exceed ten years. Awards are subject to accelerated vesting upon a change in control in the event the acquiring company does not assume the awards. The Board may amend, alter, or discontinue the 2016 Plan, but shall obtain shareholder approval of any amendment as required by applicable law or stock exchange listing requirements. As of September 30, 2019, there were 1.3 million options available for future grant under the 2016 Plan.

Prior to the approval of the 2016 Plan, ALJ issued stock options that were approved by ALJ’s board of directors on a case-by-case basis.

The following table sets forth the total stock-based compensation expense included in ALJ’s consolidated statements of operations:

At September 30, 2019, ALJ had approximately $0.3 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.1 years.

The following table summarizes stock option activity during the years ended September 30, 2019 and 2018:

The following table summarizes all options outstanding and exercisable by price range as of September 30, 2019:

			Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Exercise Price
$1.00		134,000		0.90	$	1.00		134,000	$	1.00
$2.10 - $3.33		720,000		7.99		3.02		426,667		3.12
$4.00 - $4.27		800,000		4.17		4.12		800,000		4.12
		1,654,000		5.57		3.39		1,360,667		3.50

The “intrinsic value” of options is the excess of the value of ALJ stock over the exercise price of such options. The total intrinsic value of options outstanding (of which all are vested or expected to vest) was approximately $0.1 million at both September 30, 2019 and 2018 . The total intrinsic value for exercisable options was $0.1 million at both September 30, 2019 and 2018, respectively. There were no options exercised during the year ended September 30, 2019. The total intrinsic value of options exercised during the year ended September 30, 2018 was $0.7 million.

ALJ’s board of directors receive a director compensation package that includes an annual common stock award. In connection with such awards, ALJ recorded stock-based compensation expense of $0.3 million and $0.4 million during the years ended September 30, 2019 and 2018, respectively.

Loss before income taxes and the provision for income taxes for the years ended September 30, 2019 and 2018 consisted of the following:

	Year Ended September 30,
(in thousands)	2019			2018
Loss before income taxes	$	(5,973	)	$	(3,033	)
Provision for income taxes:
Current:
Federal		—			—
State		(469	)		(886	)
Total current (provision for) income taxes		(469	)		(886	)
Deferred:
Federal		(9,748	)		(3,437	)
State		211			24
Total (provision for) benefit from deferred income taxes		(9,537	)		(3,413	)
Total (provision for) benefit from income taxes	$	(10,006	)	$	(4,299	)
Effective tax rate		(167.5	)%		(141.7	)%

The difference between the statutory federal income tax rate and the effective tax rate for the years ended September 30, 2019 and 2018 was as follows:

Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2019 and 2018 were as follows:

	Year Ended September 30,
(in thousands)	2019			2018
Deferred tax assets:
Net operating loss carryforward	$	29,010		$	30,301
Accrued expenses and other		1,783			1,720
Other (work opportunity and alternative minimum tax credit carryforwards)		1,300			1,881
Interest expense carryover		802			—
Deferred revenue		328			771
Allowance for doubtful accounts		29			48
Gross deferred tax assets		33,252			34,721
Less: valuation allowance		(28,793	)		(17,718	)
Net deferred tax assets		4,459			17,003

Deferred tax liabilities:
Intangible assets		(5,278	)		(6,108	)
Land and depreciable assets		(1,705	)		(2,927	)
Prepaid expenses		(271	)		(329	)
Total deferred tax liabilities		(7,254	)		(9,364	)
Net deferred tax (liabilities) assets	$	(2,795	)	$	7,639

The net deferred tax (liabilities) assets are recorded as non-current liabilities at September 30, 2019 and non-current assets at September 30, 2018.

The Company files income tax returns in the U.S. federal jurisdiction and various states. The years still open to audit under the applicable statutes of limitations are June 30, 2017 through June 30, 2019 for federal tax purposes and June 30, 2016 through June 30, 2019 for state tax purposes. Tax years ending June 30, 2002 through June 30, 2009 generated a federal net operating loss carryforward and remain subject to examination. The amount of any tax assessments and penalties may be material and may negatively impact the Company’s operations. Given the uncertainty in the amount and the difficulty in estimating the probability of the assessments arising from future tax examinations, the Company has not made any accruals for such tax contingencies. The Company recently completed an IRS audit with respect to its June 30, 2017 federal tax return. The impact was less than a $0.1 million increase to the Company’s federal NOL carryforwards. No tax returns are currently under examination by any tax authorities.

As of September 30, 2019, the Company’s deferred tax assets were primarily the result of U.S. net operating losses (“NOL”) carryforwards. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s assessment with regard to future realization of deferred tax assets. Based on the assessment, management believes it is more likely than not that certain deferred tax assets will not be fully realized. As a result, management established a valuation allowance against such deferred tax assets for the amount that will likely not be realized.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. At September 30, 2019 and 2018, the Company does not have a liability for uncertain tax positions. Additionally, the Company does not anticipate that there will be a material change of unrecognized tax benefits within the next 12 months.

At September 30, 2019, the Company has NOL carryforwards for federal income tax purposes of approximately $138.1 million that begin expiring in 2022. In addition, the use of this NOL in future years may be restricted under Section 382 of the IRC due to a potential change of ownership.

On December 22, 2017, the President of the United States signed and enacted into law H.R. 1 (the “Tax Reform Law”). The Tax Reform Law, effective for tax years beginning on or after January 1, 2018, except for certain provisions, resulted in significant changes to existing United States tax law, including various provisions that will impact ALJ. ALJ completed its assessment of the impact of the Tax Reform Law. Any changes as a result are reflected in this Annual Report on Form 10-K. Below is a summary of the provisions of the Tax Reform Law that management believes are most impactful to ALJ.

Federal Corporate Tax Rate Reduction. The Tax Reform Law reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018. Pursuant to Section 15 of the Internal Revenue Code (“IRC”), ALJ applied a blended corporate tax rate of 28.1%, based on the applicable tax rates before and after the Tax Reform Law and the number of days in ALJ’s initial tax year under the Tax Reform Law, which ended June 30, 2018. Subsequent to June 30, 2018, ALJ applied the newly enacted rate of 21%. As a result of the enacted reduction in the federal corporate income tax rate, ALJ recorded a one-time, non-cash increase to deferred income tax expense of $4.1 million to revalue ALJ’s net deferred tax asset during the first fiscal quarter of 2018.

Alternative Minimum Tax Refund. As of September 30, 2019, ALJ had an income tax receivable of $0.9 million, which related to an alternative minimum tax refund and was received in November 2019.

Interest Expense Limitation. Effective January 1, 2018, the Tax Reform Law disallows the deduction for interest expense in excess of 30% of “adjusted taxable income” as defined by the IRC.

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

Harland Clarke Holdings Corp. (“Harland Clarke”), a stockholder who owns ALJ shares in excess of five percent, was a counterparty to Faneuil in two contracts. One contract provides call center services to support Harland Clarke’s banking-related products and concluded in March 2019. The other contract provided managed print services and concluded in September 2018. Faneuil recognized revenue from Harland Clarke totaling $0.1 million and $0.3 million for the years ended September 30, 2019 and 2018, respectively. The associated cost of revenue was $0.1 million and $0.3 million for the years ended September 30, 2019 and 2018, respectively. All revenue from Harland Clarke contained similar terms and conditions as for other transactions of this nature entered into by ALJ. Total accounts receivable from Harland Clarke was $0 and less than $0.1 million at September 30, 2019 and 2018, respectively.

As discussed in Note 1, ALJ has organized its business along three reportable segments (Faneuil, Carpets, and Phoenix) together with a corporate group for certain support services. ALJ’s operating segments are aligned on the basis of products, services, and industry. The Chief Operating Decision Maker (“CODM”) is ALJ’s 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 income (loss) before depreciation and amortization, interest expense, litigation loss, restructuring expenses, lease payments in anticipation of facility shutdown, loan amendment fees, stock-based compensation, acquisition-related expenses, disposal of fixed assets, net and other gain, provision for income taxes, and other non-recurring items. Such amounts are detailed in our segment reconciliation below. The accounting policies for segment reporting are the same as for ALJ as a whole.

The following tables present ALJ’s segment information as of or for the years ended September 30, 2019 and 2018:

	As of or for the Year Ended September 30, 2019
(in thousands)	Faneuil		Carpets		Phoenix		ALJ			Consolidated
Total assets	$	106,659	$	10,353	$	112,181	$	1,984		$	231,177

Net revenue	$	196,802	$	48,978	$	109,217	$	—		$	354,997

Segment adjusted EBITDA	$	8,832	$	1,557	$	20,533	$	(3,224	)	$	27,698
Depreciation and amortization											(20,553	)
Interest expense											(10,611	)
Provision for income taxes											(10,006	)
Impairment of intangible assets											(746	)
Stock-based compensation											(667	)
Lease payments in anticipation of facility shutdown											(556	)
Loan amendment fees											(337	)
Restructuring expenses											(239	)
Acquisition-related expenses											(178	)
Disposal of assets and other gain, net											216
Net loss										$	(15,979	)

	As of or for the Year Ended September 30, 2018
(in thousands)	Faneuil		Carpets		Phoenix		ALJ			Consolidated
Total assets	$	93,999	$	12,447	$	117,190	$	7,832		$	231,468

Net revenue	$	188,233	$	68,404	$	113,139	$	—		$	369,776

Segment adjusted EBITDA	$	13,127	$	453	$	22,077	$	(2,553	)	$	33,104
Depreciation and amortization											(19,048	)
Interest expense											(10,558	)
Provision from income taxes											(4,299	)
Litigation loss (note 8)											(2,910	)
Restructuring expenses											(2,314	)
Stock-based compensation											(1,054	)
Acquisition-related expenses											(280	)
Lease payments in anticipation of facility shutdown											(250	)
Disposal of assets and other gain, net											277
Net loss										$	(7,332	)

All assets were located in the United States. All revenue was earned in the United States.

On December 17, 2019, ALJ entered into the Sixth Amendment (“Sixth Amendment”) to the Financing Agreement. See Note 7. The Sixth Amendment amends certain terms and covenants in order to support the continued growth of the Company, as summarized below:

In connection with the Sixth Amendment, certain trusts and other entities formed for the benefit of, or otherwise affiliated with, Jess Ravich, the Company’s Chief Executive Officer and Chairman of the Board, and his children (the “Ravich Entities”), entered into a Junior Participation Agreement with Cerberus (the “Junior Participation Agreement”), pursuant to which the Ravich Entities agreed to purchase $4.1 million in junior participation interests in the Term B Loan under the Financing Agreement (the “Junior Participation” and such interests, the “Junior Participation Interests”). The Junior Participation Interests are junior and subordinate to Cerberus Term Loan in all respects, and accrue interest under the financing agreement (i) in cash, accrued at the same APR as the Cerberus Term Loan and paid monthly, and (ii) in kind, accrued at 4.00% APR, payable on the maturity date of December 1, 2023. In addition, on December 17, 2019 (the “Issuance Date”), in consideration of the Ravich Entities agreeing to enter into the Junior Participation, the Company agreed to issue the Ravich Entities fully vested warrants to purchase 1.23 million shares of the Company’s common stock (the “Warrants”), with a five-year term and an exercise price equal to the lesser of the 30 day trailing average closing price of the Company’s common stock as traded on the NASDAQ Stock Market on (i) the Issuance Date, or (ii) the six month anniversary of the Issuance Date. The 30 day trailing average closing price of the Company’s common stock on the Issuance Date was $1.21.

The above transactions do not impact the presentation of the Cerberus Term Loan at September 30, 2019.

	Balance at the Beginning of the Year		Charged to Costs and Expenses		Deductions			Balance at the End of the Year
Year Ended September 30, 2019:
Allowance for doubtful accounts	$	208	$	56	$	(138	)		126
Allowance for obsolete inventory		225		176		—			401
Rebates payable		1,763		3,271		(2,421	)		2,613
Workers’ compensation reserve		2,508		523		(676	)		2,355

Year Ended September 30, 2018:
Allowance for doubtful accounts	$	830	$	272	$	(894	)	$	208
Allowance for obsolete inventory		193		151		(119	)		225
Rebates payable		2,014		2,249		(2,500	)		1,763
Workers’ compensation reserve		2,763		2,248		(2,503	)		2,508

Title of each class	Name of exchange on which registered
Common Stock, $0.01 par value	The Nasdaq Stock Market LLC

	As of September 30,
(in millions)	2019		2018
Within one year	$	210.0	$	106.6
Between one year and two years		133.5		86.5
Between two years and three years		62.3		27.6
Between three years and four years		29.2		12.9
Thereafter		58.6		1.3
	$	493.6	$	234.9

	Year Ended September 30,
	2019			2018
Customer A		29.4	%		21.3	%
Customer B		27.3			27.7
Customer C		21.1			22.7

	Year Ended September 30,
	2019			2018
Supplier A		20.1	%		20.8	%
Supplier B		17.7		**
Supplier C		10.2			14.0
Supplier D	**				11.8

	As of September 30,
(in millions)	2019		2018
Within one year	$	68.1	$	62.8
Between one year and two years		51.5		49.3
Between two years and three years		37.8		12.6
Between three years and four years		18.2		10.0
Thereafter		—		2.5
	$	175.6	$	137.2

Alj Regional Holdings Inc – ‘10-K’ for 9/30/19

On: Monday, 12/23/19, at 4:07pm ET · For: 9/30/19 · Accession #: 1564590-19-46710 · File #: 1-37689

Previous ‘10-K’: ‘10-K’ on 12/17/18 for 9/30/18 · Next: ‘10-K’ on 12/18/20 for 9/30/20 · Latest: ‘10-K’ on 12/20/21 for 9/30/21

Annual Report — Form 10-K — Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

‘10-K’ — Annual Report
Document Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Mine Safety Disclosures	24

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
Item 6.	Selected Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37
Item 9B.	Other Information	38

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	39
Item 11.	Executive Compensation	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47
Item 13.	Certain Relationships and Related Transactions, and Director Independence	48
Item 14.	Principal Accounting Fees and Services	49

PART IV
Item 15.	Exhibits, Financial Statement Schedules	50

	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		720,000	$	3.02		1,280,000
Equity compensation plans not approved by security holders		934,000		3.67		—
Total		1,654,000	$	3.39		1,280,000

Name	Age	Position
Jess M. Ravich	62	Director, Chairman of the Board, and Chief Executive Officer
Brian Hartman	49	Chief Financial Officer
Hal G. Byer	62	Director
Robert Scott Fritz	63	Director
Rae Ravich	28	Director
John Scheel	65	Director, Vice Chairman, and Chairman of Audit Committee
Anna Van Buren	61	Director, President and CEO of Faneuil
Michael Borofsky	47	Director, and Chairman of Compensation, Nominating and Corporate Governance Committee

Name of Director	Audit Committee	Compensation, Nominating and Corporate Governance Committee
Michael Borofsky	Member	Chair
Hal G. Byer		Member
Robert Scott Fritz	Member
John Scheel	Chair

	Year Ended September 30,
Fee Category	2019				2018
	Deloitte		MHM		MHM
Audit fees ⁽¹⁾	$	500,000	$	262,565	$	711,000
Audit-related fees ⁽²⁾		50,000		22,078		—
Tax fees		—		—		—
All other fees ⁽³⁾		—		120,000		—
Total	$	550,000	$	404,643	$	711,000

Exhibit Number	Description of Exhibit	Method of Filing
2.1	Asset Purchase Agreement, dated as of June 21, 2016, by and among Phoenix Color Corp., AKI, Inc. and Bioplan USA, Inc.	Incorporated by reference to Exhibit 2.1 to Form 8-K as filed on June 22, 2016

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

10.1	Form of Indemnification Agreement for Directors and Officers	Incorporated by reference to Exhibit 10.2 to Form 10-12B as filed on February 2, 2016

10.2	Employment Agreement, dated July 29, 2019, by and between the Company and Jess Ravich	Incorporated by reference to Exhibit 10.2 to Form 8-K as filed on August 1, 2019

10.3	Employment Agreement, dated as of October 18, 2013, by and between Faneuil, Inc. and Anna Van Buren	Incorporated by reference to Exhibit 10.3 to Form 10-12B as filed on February 2, 2016

10.4	First Amendment to Employment Agreement, dated August 11, 2017, by and between Faneuil, Inc. and Anna Van Buren	Incorporated by reference to Exhibit 10.2 to Form 8-K as filed on August 14, 2017

10.5	Employment Agreement, dated August 8, 2017, by and between ALJ Regional Holdings, Inc. and Brian Hartman	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 14, 2017

10.6	First Amendment to Employment Agreement, dated August 8, 2018, by and between ALJ Regional Holdings, Inc. and Brian Hartman	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 3, 2018

10.7	Second Amended and Restated Employment Agreement, dated August 20, 2019, by and between ALJ Regional Holdings, Inc. and Brian Hartman	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 22, 2019

10.8	Employment Agreement, dated as of March 12, 2018, by and between ALJ Regional Holdings, Inc. and Marc Reisch	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on March 13, 2018

10.9	Employment Agreement, dated April 14, 2014, by and between Floors-N-More, LLC and Steven Chesin	Incorporated by reference to Exhibit 10.2 to Form 8-K as filed on March 13, 2018

10.10	First Amendment to Employment Agreement, dated December 27, 2017, by and between Floors-N-More, LLC and Steven Chesin	Incorporated by reference to Exhibit 10.3 to Form 8-K as filed on March 13, 2018

10.11	ALJ Regional Holdings, Inc. 2016 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.1 to Form S-8 as filed on August 23, 2016

10.12		Financing Agreement, dated as of August 14, 2015, by and among ALJ Regional Holdings, Inc., Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of ALJ Regional Holdings, Inc. listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders.	Incorporated by reference to Exhibit 10.1 to Form 10-12B as filed on February 2, 2016

10.13		First Amendment to Financing Agreement, dated as of July 18, 2016, by and among the Company, Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on July 20, 2016

	10.14	Second Amendment to Financing Agreement, dated as of May 26, 2017, by and among the Company, Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on May 30, 2017

	10.15	Third Amendment to Financing Agreement, dated as of October 2, 2017, by and among the Company, Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on October 2, 2017

	10.16	Fourth Amendment to Financing Agreement, dated as of November 28, 2018, by and among the Company, Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on November 30, 2018

	10.17	Fifth Amendment to Financing Agreement, dated as of July 31, 2019, by and among the Company, Faneuil, Carpets, Phoenix, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, the Collateral Agent, and the Administrative Agent	Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 1, 2019

	10.18	Backstop Letter Agreement, dated as of November 28, 2018, between the Company and Jess Ravich	Incorporated by reference to Exhibit 10.2 to Form 8-K as filed on November 30, 2018

14.1		Code of Business Conduct and Ethics	Incorporated by reference to Exhibit 14.1 to Form 10-K as filed on December 23, 2016


21.1	List of Subsidiaries	Filed herewith

23.1	Consent of Independent Registered Public Accounting Firm - Deloitte & Touche, LLP	Filed herewith

23.2	Consent of Independent Registered Public Accounting Firm - Mayer Hoffman McCann P.C.	Filed herewith

24	Power of Attorney	Filed herewith

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

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

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

101.INS	XBRL Instance Document	Filed herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

	ALJ REGIONAL HOLDINGS, INC.

Date: December 23, 2019	By:	/s/ *Jess Ravich*
		Jess Ravich
		Chief Executive Officer (Principal Executive Officer)

	Page Number
Report of Independent Registered Public Accounting Firm – Deloitte & Touche, LLP	F-2

Report of Independent Registered Public Accounting Firm – Mayer Hoffman McCann P.C.	F-3

Consolidated Balance Sheets September 30, 2019 and 2018	F-4

Consolidated Statements of Operations September 30, 2019 and 2018	F-5

Consolidated Statements of Stockholders’ Equity September 30, 2019 and 2018	F-6

Consolidated Statements of Cash Flows September 30, 2019 and 2018	F-7

Notes to Consolidated Financial Statements September 30, 2019 and 2018	F-9

Computer and office equipment		3–7 years
Computer software		3–6 years
Furniture and fixtures		7–10 years
Leasehold improvements		Shorter of useful life or lease term
Equipment under capital leases		Shorter of useful life or lease term
Equipment		5–12 years
Vehicles and commercial trucks		5 years
Buildings		7–40 years
Land		indefinite

		Estimated
Description		Useful Life (Yrs.)
Non-compete agreements		2-6
Supply agreements		4-15
Technology		8
Internal-use software		6
Customer relationships		12-15
Trade names		15-30

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

Payment Date	Fair Value		Maximum Payment
March 2021	$	2,100	$	2,500	⁽¹⁾
March 2022		1,847		2,500	⁽¹⁾
March 2023		953		2,500	⁽²⁾
Total deferred and contingent consideration	$	4,900	$	7,500

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

Break Out of Components of Purchase Price Consideration
Term loan (Note 7)	$	7,500
Common stock issued (Note 9)		1,500
Cash received from exercise of stock option		1,000
Purchase price	$	10,000

Year Ended September 30,	Estimated Future Amortization
2020	$	5,261
2021		4,982
2022		4,635
2023		4,635
2024		4,496
Thereafter		17,139
Total	$	41,148

Year Ended September 30,	Equipment Financing		Cerberus Debt		Total
2020	$	1,336	$	8,200	$	9,536
2021		1,403		8,200		9,603
2022		362		8,200		8,562
2023		—		8,200		8,200
2024*		—		58,105		58,105
Total	$	3,101	$	90,905	$	94,006

Year Ended September 30,	Estimated Future Payments
2020	$	2,714
2021		1,349
2022		740
2023		526
2024		177
Total minimum required payments		5,506
Less: current portion of capital lease obligations		(2,535	)
Less: imputed interest		(348	)
Capital lease obligations, less current portion	$	2,623

Year Ended September 30,	Future Minimum Lease Payments
2020	$	7,883
2021		6,424
2022		5,558
2023		5,454
2024		5,608
Thereafter		23,879
Total	$	54,806

	Number of Options			Weighted- Average Exercise Price
Outstanding at September 30, 2017		1,904,000		$	3.11
Exercised		(300,000	)		0.93
Granted		160,000			2.17
Forfeited or expired		(90,000	)		3.61
Outstanding at September 30, 2018		1,674,000			3.38
Forfeited or expired		(20,000	)		3.13
Outstanding at September 30, 2019		1,654,000			3.39
Vested or Expected to Vest at September 30, 2019		1,654,000		$	3.39

Alj Regional Holdings Inc – ‘10-K’ for 9/30/19

On: Monday, 12/23/19, at 4:07pm ET · For: 9/30/19 · Accession #: 1564590-19-46710 · File #: 1-37689

Previous ‘10-K’: ‘10-K’ on 12/17/18 for 9/30/18 · Next: ‘10-K’ on 12/18/20 for 9/30/20 · Latest: ‘10-K’ on 12/20/21 for 9/30/21

Annual Report — Form 10-K — Sect. 13 / 15(d) – SEA’34Filing Table of Contents

‘10-K’ — Annual ReportDocument Table of Contents

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Dates Referenced Herein and Documents Incorporated by Reference

Annual Report — Form 10-K — Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

‘10-K’ — Annual Report
Document Table of Contents

Year Ended September 30,	Amount of Expiring NOL
2022	$	115,199
2023		7,762
2024		9,256
2025		2,803
Thereafter		3,122
Total	$	138,142

This ‘10-K’ Filing	Date	Other Filings

	12/31/23
	12/1/23
	1/1/23
	3/31/22
	12/31/21
	10/1/21
	9/30/21
	8/9/21
	8/8/21
	6/30/21
	3/31/21
	12/31/20
	12/7/20
	10/1/20
	9/30/20
	8/11/20
	8/9/20
	8/8/20
	6/30/20	10-Q
	3/31/20	10-Q
	12/31/19	10-Q
Filed on:	12/23/19	8-K
	12/17/19	4, 8-K
	12/7/19
	12/5/19
	11/30/19
	10/24/19	8-K
	10/3/19	8-K
	10/1/19
For Period end:	9/30/19	5
	8/22/19	8-K
	8/21/19	8-K
	8/8/19
	8/1/19	4, 8-K, SC 13D/A
	7/31/19	8-K
	7/29/19	8-K
	7/23/19	DEF 14A, DEFA14A
	6/30/19	10-Q
	3/31/19	10-Q
	1/1/19
	12/31/18	10-Q
	12/17/18	10-K, 8-K, 8-K/A
	11/30/18	8-K
	11/28/18	8-K
	10/2/18
	10/1/18
	9/30/18	10-K
	8/3/18	8-K, DEFA14A
	8/2/18	8-K
	6/30/18	10-Q
	5/27/18
	5/15/18	8-K
	5/2/18
	4/30/18
	3/13/18
	1/1/18
	12/22/17
	10/2/17	8-K
	9/30/17	10-K
	9/27/17
	8/14/17	10-Q, 8-K
	8/8/17
	7/31/17	EFFECT
	7/1/17
	6/30/17	10-Q
	6/6/17
	5/30/17	8-K
	12/23/16	10-K, 4
	10/14/16	4
	9/22/16
	8/23/16	S-8
	7/20/16	8-K
	7/11/16	8-K, DEF 14A
	6/30/16	10-Q
	6/22/16	8-K
	5/11/16	3, CT ORDER
	2/2/16	10-12B
	3/23/10
	6/30/09
	10/23/06
	6/30/02
	6/24/99
	6/22/99
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