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

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

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

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

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

The number of shares of common stock, $0.01 par value per share, outstanding as of April 30, ~~2018~~2019 was ~~37,921,116.~~38,026,435.

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

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

	March 31,			September 30,			March 31,			September 30,
	2018			2017			2019			2018
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,947		$	5,630		$	7,541		$	2,000
Accounts receivable, net of allowance for doubtful accounts of $801 ($830 at September 30, 2017)		49,152			49,457
Accounts receivable, net of allowance for doubtful accounts of $131 ($208 at September 30, 2018)								38,393			46,383
Inventories, net		8,695			9,376			7,383			7,656
Prepaid expenses and other current assets		5,467			5,783			5,548			5,504
Assets held for sale								—			222
Total current assets		66,261			70,246			58,865			61,765
Property and equipment, net		54,332			54,335			72,540			60,162
Goodwill		56,372			54,964			56,372			56,372
Intangible assets, net		45,123			43,179			39,760			42,400
Collateral deposits, less current portion		695			879			695			695
Deferred tax asset, net								7,643			7,639
Other assets		3,417			4,474			1,828			2,435
Deferred tax asset, net		8,278		��	11,052
Total assets	$	234,478		$	239,129		$	237,703		$	231,468
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,635		$	15,597		$	10,851		$	12,692
Accrued expenses		12,273			12,661			16,607			14,371
Income taxes payable		—			195			72			204
Deferred revenue and customer deposits		4,340			5,755			2,096			3,179
Current portion of term loan, net of deferred loan costs		8,251			11,848
Current portion of term loans, net of deferred loan costs								9,063			8,595
Current portion of capital lease obligations		3,022			2,571			2,510			2,909
Current portion of workers’ compensation reserve		1,130			1,015			930			1,000
Other current liabilities		1,003			64			7			1,003
Total current liabilities		46,654			49,706			42,136			43,953
Line of credit, net of deferred loan costs		4,418			5,330			10,443			8,594
Term loan payable, less current portion, net of deferred loan costs		79,464			76,753
Term loans, less current portion, net of deferred loan costs								78,187			74,795
Deferred revenue, less current portion		2,343			3,111			856			1,374
Workers’ compensation reserve, less current portion		1,636			1,748			1,290			1,508
Capital lease obligations, less current portion		5,613			4,679			3,243			4,427
Other non-current liabilities		1,844			2,049			8,866			5,289
Total liabilities		141,972			143,376			145,021			139,940
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.01 par value; total authorized – 5,000,000 shares; 1,000,000 shares authorized for Series A; 550,000 shares authorized for Series B; none issued and outstanding as of March 31, 2018 and September 30, 2017		—			—
Common stock, $0.01 par value; authorized – 100,000,000 shares; 37,921,116 and 37,041,308 shares issued and outstanding at March 31, 2018 and September 30, 2017, respectively		379			371
Common stock, $0.01 par value; authorized – 100,000 shares; 38,026 and 38,111 shares issued and outstanding at March 31, 2019 and September 30, 2018, respectively								380			381
Additional paid-in capital		278,881			276,478			279,596			279,575
Accumulated deficit		(186,754	)		(181,096	)		(187,294	)		(188,428	)
Total stockholders’ equity		92,506			95,753			92,682			91,528
Total liabilities and stockholders’ equity	$	234,478		$	239,129		$	237,703		$	231,468

	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017			2019			2018			2019			2018
Net revenue	$	95,105		$	79,296		$	190,059		$	156,913		$	87,996		$	95,105		$	181,780		$	190,059
Costs and expenses:
Cost of revenue		74,239			61,007			149,149			121,188			67,739			74,239			140,566			149,149
Selling, general, and administrative expense		18,822			14,914			38,360			29,297
(Gain) loss on disposal of assets, net		(25	)		4			(232	)		12
Selling, general and administrative expense														17,007			18,822			34,473			38,360
Disposal of assets and other gain														—			(25	)		(223	)		(232	)
Total operating expenses		93,036			75,925			187,277			150,497			84,746			93,036			174,816			187,277
Operating income		2,069			3,371			2,782			6,416			3,250			2,069			6,964			2,782
Other expense:
Interest expense, net		(2,793	)		(2,284	)		(5,453	)		(4,718	)		(2,625	)		(2,793	)		(5,340	)		(5,453	)
Total other expense		(2,793	)		(2,284	)		(5,453	)		(4,718	)		(2,625	)		(2,793	)		(5,340	)		(5,453	)
(Loss) income before income taxes		(724	)		1,087			(2,671	)		1,698
Benefit (provision) for income taxes		384			(695	)		(2,987	)		(755	)
Net (loss) income	$	(340	)	$	392		$	(5,658	)	$	943
Basic (loss) earnings per share of common stock	$	(0.01	)	$	0.01		$	(0.15	)	$	0.03
Diluted (loss) earnings per share of common stock	$	(0.01	)	$	0.01		$	(0.15	)	$	0.03
Income (loss) before income taxes														625			(724	)		1,624			(2,671	)
(Provision) benefit for income taxes														(202	)		384			(490	)		(2,987	)
Net income (loss)													$	423		$	(340	)	$	1,134		$	(5,658	)
Basic earnings (loss) per share of common stock													$	0.01		$	(0.01	)	$	0.03		$	(0.15	)
Diluted earnings (loss) per share of common stock													$	0.01		$	(0.01	)	$	0.03		$	(0.15	)
Weighted average shares of common stock outstanding:
Basic		37,911			34,575			37,742			34,575			38,026			37,911			38,037			37,742
Diluted		37,911			35,644			37,742			35,671			38,076			37,911			38,087			37,742

	Six Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2019			2018
Operating activities
Net (loss) income	$	(5,658	)	$	943
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Net income (loss)							$	1,134		$	(5,658	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization - cost of revenue		2,794			2,623			2,224			2,794
Depreciation and amortization - selling, general and administrative expense		6,889			5,391			7,059			6,889
Stock-based compensation expense		563			357			371			563
Provision for bad debts		225			39
Provision for bad debts and obsolete inventory								77			305
Deferred income taxes		2,774			189			(4	)		2,774
(Gain) loss on disposal of assets, net		(232	)		12
Disposal of assets and other gain								(223	)		(232	)
Amortization of deferred loan costs		691			506			398			691
Changes in operating assets and liabilities:
Accounts receivable, net		80			(2,211	)		7,998			80
Inventories, net		2,187			199			188			2,107
Collateral deposits		184			1,300
Prepaid expenses and other current assets		578			(606	)
Prepaid expenses, collateral deposits, and other current assets								(44	)		762
Other assets		1,057			(272	)		607			1,057
Accounts payable		1,038			(63	)		(1,841	)		1,038
Accrued expenses		(403	)		80			722			(403	)
Income tax payable		(195	)		123			(132	)		(195	)
Deferred revenue and customer deposits		(2,183	)		351			(1,601	)		(2,183	)
Other current liabilities		54			(643	)		(66	)		54
Other liabilities		(317	)		1,636			(787	)		(317	)
Cash provided by operating activities		10,126			9,954			16,080			10,126
Investing activities
Acquisitions, net of cash acquired		(9,000	)		—			(1,000	)		(9,000	)
Proceeds from sales of assets		383			148			308			383
Capital expenditures		(2,067	)		(6,005	)		(9,515	)		(2,067	)
Cash used for investing activities		(10,684	)		(5,857	)		(10,207	)		(10,684	)
Financing activities
Net (payments) proceeds on line of credit		(1,000	)		179
Net proceeds (payments) on line of credit								1,761			(1,000	)
Payments on term loan		(8,723	)		(6,638	)		(5,108	)		(8,723	)
Proceeds from term loan		7,500			—			5,000			7,500
Proceeds from issuance of common stock		1,500			—			—			1,500
Proceeds from stock option exercise		278			—			—			278
Debt and common stock issuance costs		(332	)		—			(402	)		(332	)
Payments on financed insurance premiums		—			(678	)
Payments on capital leases		(1,348	)		(1,080	)		(1,583	)		(1,348	)
Cash used for financing activities		(2,125	)		(8,217	)		(332	)		(2,125	)
Change in cash and cash equivalents		(2,683	)		(4,120	)		5,541			(2,683	)
Cash and cash equivalents at beginning of period		5,630			5,279			2,000			5,630
Cash and cash equivalents at end of period	$	2,947		$	1,159		$	7,541		$	2,947
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Taxes	$	714		$	444		$	634		$	714
Interest	$	4,596		$	4,225		$	4,877		$	4,956
Non-cash investing and financing activities:
Capital equipment purchases financed with capital leases	$	2,734		$	2,532		$	—		$	2,734
Financed insurance premiums	$	—		$	866
Capital equipment purchases financed with term loan							$	4,060		$	—
Construction in process funded by landlord tenant improvement allowance							$	4,146		$	—
Construction in process not yet paid for							$	1,311		$	—

	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Common stock
Balance, beginning of period	$	380		$	379		$	381		$	371
Common stock issued		—			—			—			8
Common stock retired		—			—			(1	)		—
Balance, end of period	$	380		$	379		$	380		$	379
Additional paid in capital
Balance, beginning of period	$	279,512		$	278,714		$	279,575		$	276,478
Common stock issued, net of issuance costs		—			—			—			2,045
Stock-based compensation expense - options		84			167			168			358
Common stock retired		—			—			(147	)		—
Balance, end of period	$	279,596		$	278,881		$	279,596		$	278,881
Accumulated deficit
Balance, beginning of period	$	(187,717	)	$	(186,414	)	$	(188,428	)	$	(181,096	)
Net income (loss)		423			(340	)		1,134			(5,658	)
Balance, end of period	$	(187,294	)	$	(186,754	)	$	(187,294	)	$	(186,754	)
Total stockholders' equity	$	92,682		$	92,506		$	92,682		$	92,506

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

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

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, for interim financial information and with the instructions to the Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with ALJ’s audited financial statements and notes thereto for the years ended September 30, 2018 and 2017 ~~and 2016,~~contained in its Annual Report on Form 10-K, filed with the ~~Securities and Exchange Commission~~SEC on December ~~19, 2017.~~17, 2018.

The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes. Significant estimates and assumptions by management are used for, but are not limited to, determining the fair value of assets and liabilities, including intangible assets acquired and allocation of acquisition purchase prices, estimated useful lives, recoverability of long-lived and intangible assets, the recoverability of goodwill, the realizability of deferred tax assets, stock-based compensation, the likelihood of material loss as a result of loss contingencies, customer lives, the allowance for doubtful accounts and inventory reserves, and calculation of insurance reserves. Actual results may differ materially from estimates. The interim financial information is unaudited but reflects all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly ALJ’s results of operations and financial position for the interim period. The results of operations for the three and six months ended March 31, ~~2018,~~2019, are not necessarily indicative of the results expected for future quarters or the full year.

For a complete summary of ALJ’s significant accounting policies, please refer to Note 2, “Summary of Significant Accounting Policies,” included with ALJ’s audited financial statements and notes thereto for the years ended September 30, 2018 and 2017 ~~and 2016,~~contained in its Annual Report on Form 10-K, filed with the ~~Securities and Exchange Commission~~SEC on December ~~19, 2017.~~17, 2018. There were no material changes to ALJ’s significant accounting policies during the six months ended March 31, ~~2018.~~2019.

In ~~July 2015,~~May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2015-11, “Simplifying the Measurement of Inventory (Topic 330): Simplifying the Measurement of Inventory~~.” The amendments in ASU 2015-11 require an entity to measure inventory at the lower of cost or net realizable value. The amendments do not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 should be applied prospectively. ALJ adopted ASU 2015-11 ~~on October 1, 2017.~~ ~~The standard did not have a significant impact on ALJ’s consolidated financial statements.~~

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

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

As the new standard will supersede substantially all existing revenue guidance, it could impact the timing of ALJ’s revenue and cost of revenue recognition across all business segments. In July 2017, ALJ ~~has~~ formed a revenue recognition project team ~~and has engaged~~(“Revenue Team”), which included an outside revenue recognition ~~consultant who has~~consultant. The Revenue Team completed a revenue recognition adoption roadmap that includes three phases. Phase I is the identification, documentation, and preliminary analysis of how ALJ currently accounts for revenue transactions compared to the revenue accounting required under the new standard. Phase I is expected to be completed in mid-2018. Phase II, which overlaps with Phase I and was started in January 2018, includes a more detailed analysis, including the development of revenue recognition models, data analysis, analyzing implementation options, and finalizing a transition method. Phase II is expected to be completed in late-2018. Phase III includes identification of system requirements, changes to internal controls and business processes, and final implementation. Phase III is expected to be completed in mid-2019. phases:

Because of the nature of the work that remains, ~~at this time we are~~ALJ is unable to reasonably estimate the impact of adoption on ~~our~~its consolidated financial statements. However, ALJ anticipates the adoption of ASU 2014-09 will expand its revenue-related disclosures. ALJ’s evaluation of the financial impact and related disclosure of the new standard will likely extend over the next several future reporting periods.

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

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

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

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

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

As part of the Printing Components Business acquisition, Phoenix and LSC entered into a supply agreement (the “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).~~loan. See Note 7.

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

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

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

The Company accounted for the Printing Components Business acquisition using the purchase method of accounting. Accordingly, the assets and liabilities were recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and the liabilities assumed was recorded as goodwill. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date, cumulative changes in the estimated fair values of the net assets recorded may change the amount ofThere were no adjustments to the purchase price ~~allocable to goodwill. During~~allocations during the measurement period, which ~~expires~~expired one year from the acquisition ~~date, changes to any purchase price allocations that are material to the Company's consolidated financial results will be adjusted in the reporting period in which the adjustment amount is determined.~~date.

~~During~~The Printing Components Business recorded $3.9 million and $7.0 million of net revenue during the three and six months ended March 31, ~~2018, the Printing Components Business recorded~~2019, respectively, and $3.6 million and $8.1 million ~~of net revenue,~~during the three and six months ended March 31, 2018, respectively. Because the Printing Components Business was closely aligned with Phoenix’s existing business, including the overlap of customers, its operations were immediately integrated into Phoenix’s operations, and financial metrics other than net revenue were not separately ~~tracked.~~ tracked, and therefore, not disclosed.

During the three and six months ended March 31, 2018, the Company incurred $0 and ~~$123,000, respectively,~~$0.1 million of acquisition-related ~~costs~~expenses in connection with the Printing Components Business acquisition, which were expensed to selling, general and administrative expense.

On May 26, 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.~~

The CMO Business, which was purchased to expand Faneuil’s presence into the utilities market, provides direct customer care call center operations, back-office processes, including billing, collections and business analytics, and installation and cloud-based customer care support exclusively for the utilities industry.

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

During the three and six months ended March 31, 2018, the CMO Business recorded $8.4 and $17.0 million of net revenue, respectively. Because the CMO Business has been integrated into Faneuil’s operations, financial metrics other than net revenue were not separately tracked.

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

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

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

	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017			2019			2018			2019			2018
Customer A		14.8	%		19.3	%		14.5	%		18.8	%		14.6	%		14.8	%		13.7	%		14.5	%
Customer B		12.3			16.4			13.3			16.1			11.0			10.3			10.3		**
Customer C		10.3		**			**			**				10.8			12.3			13.8			13.3
Customer D	**				12.8		**				12.0

Trade receivables from these customers totaled ~~$9.3~~$6.3 million on March 31, ~~2018.~~2019. As of March 31, ~~2018,~~2019, all Faneuil accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

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

	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017			2019			2018			2019			2018
Customer A		29.9	%		26.3	%		28.4	%		27.3	%		31.5	%		29.9	%		30.4	%		28.4	%
Customer B		21.2			33.5			23.0			31.0			25.5			17.3			26.5			20.9
Customer C		17.3			18.6			20.9			17.4			22.9			21.2			21.1			23.0

Trade receivables from these customers totaled ~~$3.5~~$3.0 million on March 31, ~~2018.~~2019. As of March 31, ~~2018,~~2019, all Carpets accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

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

	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017			2019			2018			2019			2018
Customer A		21.1	%		20.0	%		18.7	%		20.5	%		23.0	%		21.1	%		21.1	%		18.7	%
Customer B		15.9		**			17.3			**				20.5			15.9			19.2		17.3
Customer C		11.0			14.2		**			**				10.9		**				11.6			10.1
Customer D	**				12.4		10.1				11.1		**				11.0			10.5		**

Trade receivables from these customers totaled ~~$4.7~~$5.1 million on March 31, ~~2018.~~2019. As of March 31, ~~2018,~~2019, all Phoenix accounts receivable were unsecured. The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

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

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

	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017			2019			2018			2019			2018
Supplier A		23.5	%		28.0	%		22.9	%		27.5	%		21.6	%		16.6	%		22.9	%		18.0	%
Supplier B		16.6		21.9				18.0			20.8		17.2			**			15.6			**
Supplier C	14.0			10.9			13.7			10.9			15.6				23.5			16.0		22.9
Supplier D	**			11.3			**			**			**				14.0		10.5				13.7

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:

	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017			2019			2018			2019			2018
Supplier A		30.7	%		30.6	%		30.1	%		26.4	%		25.6	%		30.7	%		25.9	%		30.1	%
Supplier B	**			**				10.8		**			**			**			**			10.8

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

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

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

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 (in thousands~~):period:

	March 31,			September 30,			March 31,			September 30,
	2018			2017
(in thousands)							2019			2018
Machinery and equipment	$	24,812		$	22,753		$	29,244		$	24,900
Leasehold improvements								22,058			9,334
Building and improvements		16,323			15,593			17,035			16,459
Software		15,199			12,276			16,030			15,749
Computer and office equipment		10,718			10,344			12,067			11,319
Land		9,267			9,167			9,267			9,267
Leasehold improvements		9,341			8,997
Construction and equipment in process								8,110			10,627
Furniture and fixtures		3,607			3,595			6,660			3,834
Vehicles		306			229			375			342
Construction in process		211			136
Property and equipment		89,784			83,090			120,846			101,831
Less: Accumulated depreciation and amortization		(35,452	)		(28,755	)
Less: accumulated depreciation and amortization								(48,306	)		(41,669	)
Property and equipment, net	$	54,332		$	54,335		$	72,540		$	60,162

Property and equipment depreciation and amortization expense, including amounts related to capitalized leased assets, was ~~$3,475,000 and $3,044,000~~$3.5 million for both the three months ended March 31, 2019 and 2018, and ~~2017, respectively,~~$6.6 million and ~~$6,927,000 and $5,997,000~~$6.9 million for the six months ended March 31, ~~2018~~2019 and ~~2017,~~2018, respectively.

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

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

Intangible asset amortization expense was $1,375,000 and $1,009,000 for the three months ended March 31, 2018 and 2017, respectively, and $2,756,000 and $2,017,000 for the six months ended March 31, 2018 and 2017, respectively.

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

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

Intangible asset amortization expense was $1.3 million and $1.4 million for the three months ended March 31, 2019 and 2018, respectively, and $2.6 million and $2.8 million for the six months ended March 31, 2019 and 2018, respectively.

The following table presents expected future amortization expense for the remainder of fiscal ~~2018~~2019 and yearly ~~thereafter (in thousands~~):thereafter:

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

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

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

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

Faneuil. Faneuil is self-insured for workers’ compensation claims up to $500,000 per incident, and maintains insurance coverage for costs above the specified limit. Faneuil is self-insured for health insurance claims up to $150,000 per incident, and maintains insurance coverage for costs above the specified limit. Reserves have been provided for workers’ compensation and health insurance claims based upon insurance coverages, third-party actuarial analysis, and management’s judgment.

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

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

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

Three Months Ended March 31,

Six Months Ended March 31,

2018

2017

2018

2017

Net (loss) income

$
(340
)

$
392

$
(5,658
)

$
943

Weighted average shares of common stock
   outstanding - basic

37,911

34,575

37,742

34,575

Potentially dilutive effect of options to purchase
   common stock

—

1,069

—

1,096

Weighted average shares of common stock
   outstanding – diluted

37,911

35,644

37,742

35,671

Basic (loss) earnings per share of common stock

$
(0.01
)

$
0.01

$
(0.15
)

$
0.03

Diluted (loss) earnings per share of common
   stock

$
(0.01
)

$
0.01

$
(0.15
)

$
0.03

	Three Months Ended March 31,					Six Months Ended March 31,
(in thousands, except per share amounts)	2019		2018			2019		2018
Net income (loss)	$	423	$	(340	)	$	1,134	$	(5,658	)
Weighted average shares of common stock outstanding – basic		38,026		37,911			38,037		37,742
Potentially dilutive effect of options to purchase common stock		50		—			50		—
Weighted average shares of common stock outstanding – diluted		38,076		37,911			38,087		37,742
Basic earnings (loss) per share of common stock	$	0.01	$	(0.01	)	$	0.03	$	(0.15	)
Diluted earnings (loss) per share of common stock	$	0.01	$	(0.01	)	$	0.03	$	(0.15	)

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

~~Stock options to purchase 1,614,000 shares of common stock were not considered in calculating ALJ’s diluted earnings per common share for~~During the three and six months ended March 31, 2019, and the three and six months ended March 31, 2018, stock options to purchase 1.5 million and 1.6 million shares of common stock, respectively, were not included in ALJ’s diluted earnings (loss) per share as their effect would be anti-dilutive.

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

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

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

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

Description	Use of Proceeds	Origination Date	Interest Rate *	Quarterly Payments		Balance at March 31, 2018		Use of Proceeds	Origination Date	Interest Rate *	Quarterly Payments		Balance at March 31, 2019
Term Loan:
Financing Agreement	Phoenix acquisition	August 2015	7.99% to 8.63%	$	1,969	$	74,798	Phoenix acquisition	August 2015	9.00% to 9.28%	$	1,610	$	66,893
First Amendment	Color Optics acquisition	July 2016	7.99% to 8.63%		187		8,093	Color Optics acquisition	July 2016	9.00% to 9.28%		175		7,286
Third Amendment	Printing Components Business acquisition	October 2017	7.99% to 8.63%		141		6,904	Printing Components Business acquisition	October 2017	9.00% to 9.28%		151		6,252
Fourth Amendment								Working capital	November 2018	9.00% to 9.28%		114		4,751
			Totals	$	2,297	$	89,795			Totals	$	2,050	$	85,182
Line of Credit:
Cerberus/PNC Revolver	Working capital	August 2015	10.00% to 10.50%	$	—	$	—
Second Amendment	CMO Business acquisition	May 2017	7.99% to 8.63%		—		4,500
			Totals	$	—	$	4,500
Cerberus/PNC Revolver (includes Second Amendment)								Working capital	August 2015	11.00% to 11.25%	$	—	$	10,500

Interest payments are due in arrears on the first day of each month. Quarterly principal payments are due on the last day of each fiscal quarter. Annual principal payments equal to 75% of ALJ’s excess cash flow (“ECF”), as defined in the Financing Agreement, are due upon delivery of the annual audited financial statements. During December 2018 and December 2017, ALJ made an ECF ~~payment~~payments of $0.3 million and $4.1 ~~million.~~million, respectively. During the six months ended March 31, 2019, ALJ made mandatory payments of $0.4 million as a result of receiving proceeds from sales of assets. A final balloon payment is due ~~at maturity, August 14, 2020.~~on the Amended Maturity Date. There is a prepayment penalty equal to 3%, 2%, and 1% if the Cerberus Term Loan is repaid ~~prior to August 2018.~~within the first, second, and third year anniversary of the Fourth Amendment. ALJ may make payments of up to $7.0 million against the loan with no penalty.

The Cerberus Debt is secured by substantially all the Company’s assets and imposes certain limitations on the Company, including its ability to incur debt, grant liens, initiate certain investments, declare dividends and dispose of assets. The Cerberus Debt also requires ALJ to comply with certain debt covenants. As of March 31, ~~2018,~~2019, ALJ was in compliance with all debt covenants and had unused borrowing capacity of ~~$19.1~~$11.9 million.

On November 28, 2018, in connection with the Fourth Amendment, the Company entered into a Backstop Letter Agreement with Jess Ravich, the Company’s Executive Chairman. Pursuant to the Backstop Letter Agreement, Mr. Ravich will provide a “backstop” that would enable the Company to satisfy the Alternative Financing Requirement by agreeing, if the Company is unable to locate alternative financing on terms, conditions and timing reasonably acceptable to it, and if required by the Collateral Agent. In consideration of Mr. Ravich entering into such backstop arrangement, the Company’s Audit Committee and independent directors reviewed, approved and agreed to a backstop fee package, pursuant to which the Company would (i) pay to Mr. Ravich’s trust a one-time backstop fee of $0.1 million, and (ii) if the purchase of such subordinated debt is required by the Collateral Agent and the Company has failed to secure a financing alternative more advantageous to the Company, issue to Mr. Ravich’s trust a five-year warrant (the “Warrant”) to purchase 1.5 million shares of ALJ common stock at an exercise price equal to the average closing price of the Company’s common stock as reported on The Nasdaq Stock Market for the 30 trading days preceding the warrant issuance date. On February 28, 2019, the Company determined the conditions set forth in the Backstop Letter Agreement requiring the issuance of the Warrant by the Company to Mr. Ravich’s trust were not met and that the Company shall have no further obligations under the Backstop Letter Agreement with regards to the Warrant.

Initially, ALJ recorded the backstop fee and other fees incurred in connection with the Backstop Letter Agreement, which totaled approximately $0.1 million, as a current asset. During the three months ended March 31, 2019, ALJ expensed the backstop and other fees incurred in connection with the Backstop Letter Agreement, which totaled approximately $0.1 million, to selling, general and administrative expense.

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

During the six months ended March 31, 2018, in connection with the Third Amendment to the Financing Agreement, ALJ paid legal and other fees totaling $0.3 million, which were added to deferred loan costs and are being amortized to interest expense ~~over~~through the ~~life of the debt.~~Amended Maturity Date.

~~As part of~~Pursuant to the ~~Second Amendment, ALJ paid Cerberus an~~second amendment ~~fee. Additionally, as part of~~to the ~~Second Amendment,~~Financing Agreement, 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.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~paid the first Contingent Payment, which was added to deferred loan costs and is being amortized to interest expense through April 30, 2019.

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

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

Year Ending March 31,	Future Minimum Payments		Equipment Financing		Cerberus Debt		Total
2019	$	9,187
2020		9,187	$	1,303	$	8,200	$	9,503
2021*		75,921
2021				1,369		8,200		9,569
2022				1,072		8,200		9,272
2023				—		8,200		8,200
2024*				—		62,882		62,882
Total	$	94,295	$	3,744	$	95,682	$	99,426

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

Year Ending March 31,	Estimated Future Payments			Estimated Future Payments
2019	$	3,265
2020		2,514		$	2,679
2021		1,952			1,931
2022		536			536
2023		536			536
Thereafter		435
2024					435
Total minimum required payments		9,238			6,117
Less: current portion of capital lease obligations		(3,022	)		(2,510	)
Less: imputed interest		(603	)		(364	)
Capital lease obligations, less current portion	$	5,613		$	3,243

The Company leases real estate, equipment, and vehicles under ~~noncancellable~~non-cancellable operating leases. As of March 31, ~~2018,~~2019, future minimum rental commitments under ~~noncancellable~~non-cancellable leases were as follows (in thousands):

Year Ending March 31,	Future Minimum Lease Payments		Future Minimum Lease Payments
2019	$	5,035
2020		4,208	$	5,703
2021		3,051		4,909
2022		2,016		3,589
2023		1,452		2,850
2024				2,814
Thereafter		8,845		15,414
Total	$	24,607	$	35,279

ALJ maintains employment agreements with certain key executive officers that provide for a base salary and an annual bonus, with annual bonus amounts to be determined by the Board of Directors. The agreements also provide for termination payments, which includes base salary and performance bonus, stock options, non-competition provisions, and other terms and conditions of employment. As of March 31, ~~2018,~~2019, termination payments related to base salary totaled ~~$1.3~~$1.2 million.

As part of Faneuil’s normal course of operations, certain customers require surety bonds guaranteeing the performance of a contract. As of March 31, ~~2018,~~2019, the face value of such surety bonds, which represents the maximum cash payments that Faneuil’s surety would be obligated to pay under certain circumstances of non-performance, was ~~$29.1~~$26.3 million. To date, ~~Faneuil’s surety~~Faneuil has not made any non-performance ~~payments.~~payments to any of its sureties.

The Company had letters of credit totaling $3.3 million outstanding as of March 31, 2019.

At March 31, 2019, Faneuil had a commitment of $1.5 million to build out one new call center. Faneuil expects to complete the call center within the next 12 months. See related accrued liabilities at Note 5.

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

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

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

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

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. Faneuil has filed an appeal of the Richmond Circuit Court’s judgment. The parties ~~presented findings~~have fully briefed the merits of ~~fact, conclusions~~Faneuil’s appeal and are waiting for the court to set the date for oral argument at this time.

On July 31, 2017, plaintiff Donna Marshall (“Marshall”), filed a proposed class action lawsuit in the Superior Court of the State of California for the County of Sacramento against Faneuil and ALJ. Marshall, a previously terminated Faneuil employee, alleges various California state law employment-related claims against Faneuil. Faneuil has answered the complaint and ~~final arguments~~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, ~~on May 8, 2018. As of the date of~~which has been granted. The case is in early discovery at this ~~filing, the court had not issued a final ruling.~~time. Faneuil believes ~~the facts support its claims that the disputed services should be paid~~this action is without merit and ~~that 3M’s counterclaims are without merit. Although litigation is inherently unpredictable, Faneuil remains confident in its ability~~intends to ~~collect all of its outstanding receivables from 3M.~~ defend it vigorously.

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

On July 31, 2017, plaintiff Donna Marshall (“Marshall”), filed a proposed class action lawsuit in the Superior Court of the State of California for the County of Sacramento against Faneuil and ALJ. Marshall, a previously terminated Faneuil employee, alleges various California state law employment-related claims against Faneuil. Faneuil has answered the complaint and removed the matter to the United States District Court for the Eastern District of California; however, Marshall filed a motion to remand the case back to state court. The motion to remand has been fully briefed and argued and remains pending before the court. The case is in an early stage and the parties have not begun substantive discovery at this time. Faneuil believes this action is without merit and intends to defend it vigorously.

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

On February 23, 2018, plaintiffs Trax and Cilley filed a proposed class action against Faneuil and one of its clients, the Transportation Corridor Agencies, in the United States District Court for the Southern District of California. The plaintiffs allege claims for violations of the Fair Debt Collection Practices Act, the state law corollary and California’s unfair competition law. Plaintiffs’ claims arise out of collections-related activity that Faneuil does not perform under its contract with the Transportation Corridor Agencies. Faneuil therefore believes the case is entirely without merit and intends to defend it vigorously. Faneuil has filed a motion to dismiss which will be heard by the court in June.

In connection with its pending litigation matters (including the matters described above), management has estimated the range of possible loss, including fees and expenses, to be between $1.6 million and $2.4 million; however, as management has determined that no one estimate within the range is better than another, it has accrued $1.6 million as of March 31,30, 2018.

~~We and our subsidiaries~~The Company has ~~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,~~the Company, whether meritorious or not, could be time-consuming, cause usthe Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. WeThe Company concluded as of March 31, ~~2018~~2019 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on ~~our~~ the Company’s b~~business,~~usiness, 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 six months ended March 31, 2019 consisted of the following:

ALJ’s common stock activity for the six months ended March 31, 2018 consisted of the following:

~~ALJ did not have any common stock activity during the six months ended March 31, 2017.~~

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

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

	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2018		2017		2018		2017
(in thousands)									2019		2018		2019		2018
Stock options	$	167	$	89	$	358	$	187	$	84	$	167	$	168	$	358
Common stock awards		103		85		205		170		102		103		203		205
Total stock-based compensation expense	$	270	$	174	$	563	$	357	$	186	$	270	$	371	$	563

At March 31, ~~2018,~~2019, ALJ had approximately ~~$0.8~~$0.5 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 ~~1.9~~1.6 years.

Stock Option Awards. ALJ did not grant any options during the six months ended March 31, 2019. During the six months ended March 31, 2018, ALJ granted an option to purchase 10,000 shares of ALJ common stock with a total estimated fair value of ~~approximately $15,000 during the six months ended March 31, 2018.~~less than $0.1 million. ALJ estimated the fair value of the option on the grant date using the Black-Scholes valuation model under the following assumptions: weighted average expected option life of 6.0 years, weighted average expected volatility of 48.4%, expected dividend yield of 0%, and ~~weighted average risk free~~weighted-average risk-free interest rate of 2.1%. ~~ALJ did not grant any stock option awards during the six months ended March 31, 2017.~~

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)~~vested) was ~~approximately~~less than $0.1 million at March 31, ~~2018.~~2019.

Members of ALJ’s Board of Directors receive a director compensation package that includes an annual common stock award. In connection with such awards, ALJ recorded stock-based compensation expense of $~~103,000~~0.1 million for both the three months ended March 31, 2019 and ~~$85,000 during~~2018, and $0.2 million for both the six months ended March 31, 2019 and 2018.

ALJ recorded a provision for income taxes for both the three and six months ended March 31, 2019 as a result of generating state taxable income. ALJ recorded a benefit for income taxes for the three months ended March 31, 2018 ~~and 2017, respectively, and $205,000 and $170,000 during~~as a result of generating state taxable losses. ALJ’s provision for income taxes for the six months ended March 31, 2018 ~~and 2017, respectively.~~

~~10. INCOME TAX~~was impacted by the United States Tax Reform as discussed below.

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

Federal Corporate Tax Rate Reduction. The Tax Reform Law reduces the federal corporate tax rate from 35% to 21% effective January 1, 2018. Pursuant to Section 15 of the Internal Revenue Code (“IRC”), ALJ will apply a blended corporate tax rate of 28.1%, which is based on the applicable tax rates before and after the Tax Reform Law and the number of days in ALJ’s initial tax year under the Tax Reform Law, which ~~ends June 30,~~ended December 31, 2018. Subsequent to ~~June 30,~~December 31, 2018, the federal corporate tax rate ~~will be~~became 21%.

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

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

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

Pursuant to ~~Accounting Standards Codification (“ASC”)~~ASC Topic 740-10, “Income Taxes,” ALJ recognized the effect of the Tax Reform Law on deferred tax assets and liabilities during its first fiscal quarter of 2018, which ended December 31, 2017. As a result of the enacted reduction in the federal corporate income tax rate, ALJ recorded a one-time, non-cash increase to deferred income tax expense of $4.1 million to revalue ALJ’s net deferred tax asset. The resulting $4.1 million decrease to ALJ’s net deferred tax asset was reasonably estimated and based on the tax rates at which they are expected to reverse in the future. ALJ will continue to analyze the provisions of the Tax Reform Law to assess the impact to ALJ’s consolidated financial statements.

Harland Clarke Holdings Corp. (“Harland Clarke”), a stockholder who owns ALJ shares in excess of five percent, ishad a ~~counterparty~~contract with Faneuil to ~~Faneuil in two contracts. One contract provides~~provide call center services ~~to support~~for Harland Clarke’s banking-related ~~products and renews annually every April.~~products. The ~~other~~ contract ~~provides dispatch services for managed print operations and concluded September 30, 2017.~~completed in March 2019. Faneuil recognized revenue from Harland Clarke totaling ~~$81,000~~$0.1 million for both the three and ~~$175,000~~six months ended March 31, 2019, and $0.1 million and $0.2 million for the three and six months ended March 31, 2018, ~~respectively,~~respectively. The associated cost of revenue was $0.1 million for both the three and ~~$272,000~~six months ended March 31, 2019, and ~~$599,000~~$0.1 million and $0.2 million for the three and six months ended March 31, ~~2017, respectively. The associated cost of revenue was $83,000 and $177,000 for the three and six months ended March 31,~~ 2018, ~~respectively, and $256,000 and $564,000 for the three and six months ended March 31, 2017,~~ respectively. All revenue from Harland Clarke contained similar terms and conditions as those found in other transactions of this nature entered into by ~~ALJ and its subsidiaries.~~Faneuil. Total accounts receivable from Harland Clarke was ~~$55,000 and $106,000~~less than $0.1 million at March 31, ~~2018~~2019 and September 30, ~~2017, respectively.~~2018.

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

The following tables present ALJ’s segment information for the three and six months ended March 31, ~~2018~~2019 and ~~2017 (in thousands~~2018:):

	Three Months Ended March 31, 2018													Three Months Ended March 31, 2019
	Faneuil		Carpets			Phoenix		ALJ			Total
(in thousands)														Faneuil		Carpets		Phoenix		ALJ			Total
Net revenue	$	47,953	$	18,691		$	28,461	$	—		$	95,105		$	46,590	$	12,088	$	29,318	$	—		$	87,996

Segment adjusted EBITDA	$	2,915	$	(240	)	$	5,459	$	(540	)	$	7,594		$	2,793	$	272	$	6,335	$	(659	)	$	8,741
Depreciation and amortization																								(4,837	)
Interest expense												(2,793	)											(2,625	)
Provision for income taxes												384
Depreciation and amortization												(4,850	)
Lease payments in anticipation of facility shutdown																								(188	)
Stock-based compensation												(270	)											(186	)
Restructuring expenses												(430	)											(144	)
Gain on sales of assets												25
Net loss											$	(340	)
Loan amendment fees																								(136	)
Provision for income taxes																								(202	)
Net income																							$	423

	Six Months Ended March 31, 2018													Six Months Ended March 31, 2019
	Faneuil		Carpets			Phoenix		ALJ			Total
(in thousands)														Faneuil		Carpets		Phoenix		ALJ			Total
Net revenue	$	99,427	$	35,341		$	55,291	$	—		$	190,059		$	101,792	$	24,450	$	55,538	$	—		$	181,780

Segment adjusted EBITDA	$	6,625	$	(966	)	$	9,619	$	(1,096	)	$	14,182		$	7,739	$	432	$	10,556	$	(1,380	)	$	17,347
Depreciation and amortization																								(9,283	)
Interest expense												(5,453	)											(5,340	)
Provision for income taxes												(2,987	)
Depreciation and amortization												(9,683	)
Lease payments in anticipation of facility shutdown																								(374	)
Stock-based compensation												(563	)											(371	)
Loan amendment fees																								(337	)
Restructuring expenses												(1,263	)											(229	)
Acquisition-related expenses												(123	)											(12	)
Gain on sales of assets												232
Net loss											$	(5,658	)
Disposal of assets and other gain																								223
Provision for income taxes																								(490	)
Net income																							$	1,134

	Three Months Ended March 31, 2018
(in thousands)	Faneuil		Carpets			Phoenix		ALJ			Total
Net revenue	$	47,953	$	18,691		$	28,461	$	—		$	95,105

Segment adjusted EBITDA	$	2,915	$	(240	)	$	5,459	$	(540	)	$	7,594
Depreciation and amortization												(4,850	)
Interest expense												(2,793	)
Restructuring expenses												(430	)
Stock-based compensation												(270	)
Disposal of assets and other gain												25
Benefit for income taxes												384
Net loss											$	(340	)

	Three Months Ended March 31, 2017												Six Months Ended March 31, 2018
	Faneuil		Carpets		Phoenix		ALJ			Total
(in thousands)													Faneuil		Carpets			Phoenix		ALJ			Total
Net revenue	$	36,722	$	17,905	$	24,669	$	—		$	79,296		$	99,427	$	35,341		$	55,291	$	—		$	190,059

Segment adjusted EBITDA	$	2,929	$	261	$	4,863	$	(390	)	$	7,663		$	6,625	$	(966	)	$	9,619	$	(1,096	)	$	14,182
Depreciation and amortization																								(9,683	)
Interest expense											(2,284	)												(5,453	)
Restructuring expenses																								(1,263	)
Stock-based compensation																								(563	)
Acquisition-related expenses																								(123	)
Disposal of assets and other gain																								232
Provision for income taxes											(695	)												(2,987	)
Depreciation and amortization											(4,053	)
Stock-based compensation											(174	)
Restructuring expenses											(61	)
Loss on sales of assets											(4	)
Net income										$	392
Net loss																							$	(5,658	)

Six Months Ended March 31, 2017

Faneuil

Carpets

Phoenix

ALJ

Total

Net revenue

$
74,773

$
33,449

$
48,691

$
—

$
156,913

Segment adjusted EBITDA

$
6,690

$
215

$
9,211

$
(1,224
)

$
14,892

Interest expense

(4,718
)
Provision for income taxes

(755
)
Depreciation and amortization

(8,014
)
Stock-based compensation

(357
)
Restructuring expenses

(93
)
Loss on sales of assets

(12
)
Net income

$
943

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

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

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

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

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

We continue to see our business evolve as we execute our strategy of buying ~~attractively-valued~~attractively valued assets, such as the acquisition of the Printing Components Business by Phoenix onin October 2, 2017, the acquisition of the CMO Business by Faneuil onin May ~~26,~~ 2017, and the acquisition of Color Optics by Phoenix onin July ~~18,~~ 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.

~~Our results of operations are impacted by the timing of acquisitions, including the CMO Business by Faneuil on May 26, 2017, and the Printing Components Business by Phoenix on October 2, 2017.~~

Three Months Ended March 31, ~~2018~~2019 Compared to Three Months Ended March 31, ~~2017~~2018

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

	Three Months Ended March 31, 2018						Three Months Ended March 31, 2017						Three Months Ended March 31, 2019						Three Months Ended March 31, 2018
				% of						% of						% of						% of
	Dollars			Net Revenue			Dollars			Net Revenue
(in thousands, except per share amounts)													Dollars			Net Revenue			Dollars			Net Revenue
Net revenue⁽¹⁾
Faneuil	$	47,953			50.4	%	$	36,722			46.3	%	$	46,590			52.9	%	$	47,953			50.4	%
Carpets		18,691			19.7			17,905			22.6			12,088			13.7			18,691			19.7
Phoenix		28,461			29.9			24,669			31.1			29,318			33.3			28,461			29.9
Consolidated net revenue		95,105			100.0			79,296			100.0			87,996			100.0			95,105			100.0
Cost of revenue ⁽²⁾
Faneuil		37,351			77.9			28,062			76.4			37,117			79.7			37,351			77.9
Carpets		15,832			84.7			14,792			82.6			9,576			79.2			15,832			84.7
Phoenix ⁽³⁾		21,056			74.0			18,153			73.6			21,046			71.8			21,056			74.0
Consolidated cost of revenue		74,239			78.1			61,007			76.9			67,739			77.0			74,239			78.1
Selling, general and administrative expense ⁽²⁾
Faneuil		7,688			16.0			5,730			15.6			6,817			14.6			7,688			16.0
Carpets		3,099			16.6			2,853			15.9			2,335			19.3			3,099			16.6
Phoenix		3,769			13.2			3,056			12.4			3,238			11.0			3,769			13.2
ALJ		810			—			563			—			845			—			810			—
Consolidated selling, general and administrative expense		15,366			16.2			12,202			15.4			13,235			15.0			15,366			16.2
Depreciation and amortization ⁽²⁾
Faneuil		2,607			5.4			1,889			5.1			2,968			6.4			2,607			5.4
Carpets		219			1.2			179			1.0			237			2.0			219			1.2
Phoenix⁽⁴⁾		630			2.2			644			2.6			567			1.9			630			2.2
Consolidated depreciation and amortization expense		3,456			3.6			2,712			3.4			3,772			4.3			3,456			3.6
(Gain) loss on disposal of assets, net ⁽²⁾
Phoenix		(25	)		(0.1	)		4			—
Consolidated (gain) loss on disposal of assets, net		(25	)		(0.0	)		4			—
Disposal of assets and other gain ⁽⁵⁾														—			—			(25	)		—
Total consolidated operating expenses ⁽⁵⁾														84,746			96.3			93,036			97.8
Consolidated operating income		2,069			2.2			3,371			4.3			3,250			3.7			2,069			2.2
Interest expense ⁽⁵⁾		(2,793	)		(2.9	)		(2,284	)		(2.9	)		(2,625	)		(3.0	)		(2,793	)		(2.9	)
Benefit (provision) for income taxes⁽⁵⁾		384			0.4			(695	)		(0.9	)
Net (loss) income ⁽⁵⁾	$	(340	)		(0.4	)	$	392			0.5
Basic (loss) earnings per share of common stock	$	(0.01	)				$	0.01
Diluted (loss) earnings per share of common stock	$	(0.01	)				$	0.01
(Provision) benefit for income taxes⁽⁵⁾														(202	)		(0.2	)		384			0.4
Net income (loss) ⁽⁵⁾													$	423			0.5		$	(340	)		(0.4	)
Basic earnings (loss) per share of common stock													$	0.01					$	(0.01	)
Diluted earnings (loss) per share of common stock													$	0.01					$	(0.01	)

	Three Months Ended March 31,									Three Months Ended March 31,
(in thousands)	2018		2017		$ Change		% Change			2019		2018		$ Change			% Change
Faneuil	$	47,953	$	36,722	$	11,231		30.6	%	$	46,590	$	47,953	$	(1,363	)		(2.8	)%
Carpets		18,691		17,905		786		4.4			12,088		18,691		(6,603	)		(35.3	)
Phoenix		28,461		24,669		3,792		15.4			29,318		28,461		857			3.0
Consolidated net revenue	$	95,105	$	79,296	$	15,809		19.9	%	$	87,996	$	95,105	$	(7,109	)		(7.5	)%

Faneuil net revenue for the three months ended March 31, ~~2018~~2019 was ~~$48.0~~$46.6 million, ~~an increase~~a decrease of ~~$11.2~~$1.4 million, or ~~30.6%~~2.8%, compared to net revenue of ~~$36.7~~$48.0 million for the three months ended March 31, ~~2017.~~2018. The ~~increase~~decrease was mainly attributable to ~~the CMO Business acquisition, which contributed $8.4 million. The remaining increase was attributable to~~ a ~~$4.4~~$1.6 million ~~increase from new customers, offset by a $1.2 million decrease~~reduction driven by the completion of customer contracts and a ~~$0.4~~$2.1 million decrease in existing ~~customers.~~customers, offset by a $2.3 million increase from new customer contracts.

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

	As of March 31,				As of March 31,
	2018		2017
(in millions)					2019		2018
Within one year	$	98.4	$	92.3	$	167.6	$	98.4
Between one year and two years		78.4		60.6		123.6		78.4
Between two years and three years		56.2		50.8		55.9		56.2
Between three years and four years		14.6		34.4		28.3		14.6
Thereafter		6.8		3.1		28.0		6.8
Total Faneuil backlog	$	254.4	$	241.2	$	403.4	$	254.4

The ~~majority of the~~ increase ~~as of~~in Faneuil backlog at March 31, ~~2018~~2019 compared to March 31, ~~2017~~2018 was primarily driven by the ~~result~~award of ~~new contracts within~~ the ~~transportation~~Metro ExpressLanes Customer Service Center Operations contract by the Los Angeles County Metropolitan Transportation Authority (“LA Metro”), to provide the management and ~~healthcare markets, and~~day-to-day customer service operations for its ExpressLanes program. The contract was awarded during the ~~CMO Business acquisition.~~ three months ended March 31, 2019.

Carpets net revenue for the three months ended March 31, ~~2018~~2019 was ~~$18.7~~$12.1 million, ~~an increase~~a decrease of ~~$0.8~~$6.6 million, or ~~4.4%~~35.3%, compared to net revenue of ~~$17.9~~$18.7 million for the three months ended March 31, ~~2017.~~2018. The ~~increase~~decrease was primarily attributable to ~~higher~~lower sales volumes ~~from commercial sales.~~ in cabinets, flooring, and granite.

~~The following table reflects the amount of Carpets’~~Carpets backlog represents open purchase orders. Carpets total contract backlog, which ~~represents multi-year contracts with contractors~~is expected to ~~build-out communities with typical terms~~be fully realized within the next 12 months, as of ~~two~~March 31, 2019 was $11.4 million compared to ~~three years, by the fiscal year Carpets expects to recognize such net revenue (in millions~~):

$16.8 million as of March 31, 2018. The decrease in Carpets backlog at March 31, ~~2018,~~2019 compared to March 31, ~~2017,~~ 2018, was athe result of ~~the fulfillment of contracts during the year ended March 31, 2018 for contracts in place at March 31, 2017.~~a strategic decision to only accept jobs that yield a targeted profit margin.

Phoenix net revenue for the three months ended March 31, ~~2018~~2019 was ~~$28.5~~$29.3 million, an increase of ~~$3.8~~$0.9 million, or ~~15.4%~~3.0%, compared to net revenue of ~~$24.7~~$28.5 million for the three months ended March 31, ~~2017.~~2018. The increase was a result of ~~the acquisition of the Printing Component Business, which contributed net revenue of $3.6 million during the three months ended March 31, 2018, and~~ higher component sales and ~~books sales~~book volumes, slightly offset by planned lower packaging sales.

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

	As of March 31,				As of March 31,
	2018		2017
(in millions)					2019		2018
Within one year	$	70.2	$	59.7	$	69.5	$	70.2
Between one year and two years		57.4		47.1		44.4		57.4
Between two years and three years		30.6		29.2		22.1		30.6
Between three years and four years		10.0		15.6		10.9		10.0
Thereafter		7.5		—		—		7.5
Total Phoenix backlog	$	175.7	$	151.6	$	146.9	$	175.7

~~The majority~~For further discussion of the increase as of March 31, 2018 compared to March 31, 2017 was a result of the Printing Components Business acquisition, slightly offset by the fulfillment of orders during the year ended March 31, 2018 for contracts in place at March 31, 2017.

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

	Three Months Ended March 31,											Three Months Ended March 31,
(in thousands)	2018			2017			$ Change		% Change			2019			2018			$ Change			% Change
Faneuil	$	37,351		$	28,062		$	9,289		33.1	%	$	37,117		$	37,351		$	(234	)		(0.6	)%
As a percentage of net revenue		77.9	%		76.4	%							79.7	%		77.9	%
Carpets		15,832			14,792			1,040		7.0			9,576			15,832			(6,256	)		(39.5	)
As a percentage of net revenue		84.7	%		82.6	%							79.2	%		84.7	%
Phoenix		21,056			18,153			2,903		16.0			21,046			21,056			(10	)		—
As a percentage of net revenue		74.0	%		73.6	%							71.8	%		74.0	%
Consolidated cost of revenue	$	74,239		$	61,007		$	13,232		21.7	%	$	67,739		$	74,239		$	(6,500	)		(8.8	)%

Faneuil cost of revenue for the three months ended March 31, ~~2018~~2019 was ~~$37.4~~$37.1 million, ~~an increase~~a decrease of ~~$9.3~~$0.2 million, or ~~33.1%~~0.6%, compared to cost of revenue of ~~$28.1~~$37.4 million for the three months ended March 31, ~~2017.~~2018. The slight decrease in absolute dollar ~~increase in~~ cost of revenue was a direct result of the ~~increased~~decreased net revenue. During the three months ended March 31, ~~2018,~~2019, as compared to the three months ended March 31, ~~2017,~~2018, cost of revenue as a percentage of segment net revenue increased to 79.7% from 77.9% ~~from 76.4% as a result~~in the normal course of ~~the integration of the CMO Business.~~business.

Carpets cost of revenue for the three months ended March 31, ~~2018~~2019 was ~~$15.8~~$9.6 million, ~~an increase~~a decrease of ~~$1.0~~$6.3 million, or ~~7.0%~~39.5%, compared to cost of revenue of ~~$14.8~~$15.8 million for the three months ended March 31, ~~2017.~~2018. The absolute dollar ~~increase~~decrease in cost of revenue was ~~a direct result of increased~~mainly attributable to decreased net revenue. During the three months ended March 31, ~~2018,~~2019, as compared to the three months ended March 31, ~~2017,~~2018, cost of revenue as a percentage of segment net revenue ~~increased~~decreased to ~~84.7%~~79.2% from ~~82.6%~~84.7% as a result of ~~higher labor~~the strategic decision to only accept jobs that yield a targeted profit margin, and ~~materials costs.~~process improvements and cost reductions throughout the organization.

Phoenix cost of revenue ~~for the three months ended March 31, 2018~~ was ~~$21.1~~flat at $21.0 million ~~an increase of $2.9 million, or 16.0% compared to cost of revenue of $18.2~~and $21.1 million for the three months ended March 31, ~~2017. The absolute dollar increase in cost of~~

~~revenue was mainly attributable to increased net revenue associated with the aforementioned Printing Components Business acquisition.~~2019 and March 31, 2018, respectively. During the three months ended March 31, ~~2018,~~2019, as compared to the three months ended March 31, ~~2017,~~2018, cost of revenue as a percentage of segment net revenue ~~increased to~~decreased at 71.8% and 74.0% ~~from 73.6%~~, respectively. Phoenix experiences normal fluctuations to cost of revenue as a percentage of net revenue as a result of changes to the mix of products sold.

	Three Months Ended March 31,									Three Months Ended March 31,
(in thousands)	2018		2017		$ Change		% Change			2019		2018		$ Change			% Change
Faneuil	$	7,688	$	5,730	$	1,958		34.2	%	$	6,817	$	7,688	$	(871	)		(11.3	)%
Carpets		3,099		2,853		246		8.6			2,335		3,099		(764	)		(24.7	)
Phoenix		3,769		3,056		713		23.3			3,238		3,769		(531	)		(14.1	)
ALJ		810		563		247		43.9			845		810		35			4.3
Consolidated selling, general and administrative expense	$	15,366	$	12,202	$	3,164		25.9	%	$	13,235	$	15,366	$	(2,131	)		(13.9	)%

Faneuil selling, general and administrative expense for the three months ended March 31, ~~2018~~2019 was ~~$7.7~~$6.8 million, ~~an increase~~a decrease of ~~$2.0~~$0.9 million, or ~~34.2%~~11.3%, compared to selling, general and administrative expense of ~~$5.7~~$7.7 million for the three months ended March 31, ~~2017.~~2018. The ~~increase~~decrease was primarily attributable to ~~the CMO Business acquisition, which added $1.2 million, $0.3 million to support~~reduced legal expenses, reduced expenses from completed contracts and existing customers, ~~and $0.5 million~~slightly offset by an increase to support new customers. During the three months ended March 31, ~~2018~~2019 compared to the three months ended March 31, ~~2017,~~2018, selling, general and administrative expense as a percentage of segment net revenue ~~increased~~decreased to ~~16.0%~~14.6% from ~~15.6%~~16.0%. Certain selling, general and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general and administrative expense as a percentage of segment net revenue to fluctuate.

Carpets selling, general and administrative expense was $2.3 million for the three months ended March 31, 2019, a decrease of $0.8 million, or 24.7%, compared to selling, general and administrative expense of $3.1 million for the three months ended March 31, ~~2018, an increase of $0.2 million, or 8.6%, compared to selling, general and administrative expense of $2.9 million for the three months ended March 31, 2017.~~2018. The ~~increase~~decrease was primarily attributable to ~~higher labor costs~~process improvements and ~~increased insurance premiums, slightly offset by reduced legal fees.~~cost reductions throughout the organization. Selling, general and administrative expense as a percentage of segment net revenue increased to 19.3% for the three months ended March 31, 2019 from 16.6% for the three months ended March 31, ~~2018 from 15.9% for the three months ended March 31, 2017 as a result of incurring additional~~2018. Certain selling, general and administrative expenses ~~which~~ do not fluctuate directly with net revenue. As such, we expect selling, general and administrative expense as a percentage of segment net revenue to fluctuate.

Phoenix selling, general and administrative expense for the three months ended March 31, ~~2018~~2019 was ~~$3.8~~$3.2 million, ~~an increase~~a decrease of ~~$0.7~~$0.5 million, or ~~23.4%~~14.1%, compared to selling, general and administrative expense of ~~$3.1~~$3.8 million for the three months ended March 31, ~~2017.~~2018. The ~~increase~~decrease was mainly attributable to the ~~Printing Component Business acquisition, and relocation and restructuring expense totaling $0.8 million~~completion of the process to consolidate manufacturing facilities. Selling, general and administrative expense as a percentage of segment net revenue ~~increased~~decreased to 11.0% for the three months ended March 31, 2019 from 13.2% for the three months ended March 31, 2018, ~~from 12.4% for the three months ended March 31, 2017,~~ which was mainly attributable to the ~~non-recurring~~ relocation and restructuring expense incurred during the three months ended March 31, 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 both the three months ended March 31, 2019 and March 31, 2018 was unchanged at $0.8 ~~million, an increase of $0.2 million, or 43.9%, compared to~~million. ALJ selling, general and administrative ~~expense of $0.6 million for the three months ended March 31, 2017. The increase was primarily attributable to~~expenses were impacted by the hiring of ~~a new full-time chief financial officer and~~ additional personnel to support ~~the growing complexities of ALJ’s~~our business and ~~an increase in non-cash~~our strategy of acquisitions offset by lower stock-based compensation costs for key employees and board of directors. Such increase was somewhat offset by allocating certain expenses, including accounting and tax preparation, to subsidiaries to better align expenses with ALJ’s consolidated reporting structure.expense. We expect selling, general and administrative expense to fluctuate in the future as we comply with SEC reporting requirements and regulations and allocate certain expenses to our subsidiaries.

	Three Months Ended March 31,										Three Months Ended March 31,
(in thousands)	2018		2017		$ Change			% Change			2019		2018		$ Change			% Change
Faneuil	$	2,607	$	1,889	$	718			38.0	%	$	2,968	$	2,607	$	361			13.8	%
Carpets		219		179		40			22.3			237		219		18			8.2
Phoenix		630		644		(14	)		(2.2	)		567		630		(63	)		(10.0	)
Consolidated depreciation and amortization expense	$	3,456	$	2,712	$	744			27.4	%	$	3,772	$	3,456	$	316			9.1	%

Faneuil depreciation and amortization expense for the three months ended March 31, ~~2018~~2019 was ~~$2.6~~$3.0 million, an increase of ~~$0.7~~$0.4 million, or ~~38.0%~~13.8%, compared to depreciation and amortization expense of ~~$1.9~~$2.6 million for the three months ended March 31, ~~2017.~~2018. The increase was ~~mainly~~ attributable to ~~the CMO Business acquisition, and to a lesser extent~~ capital equipment purchased to support new and expanded contracts. Faneuil expects future depreciation and amortization expense to increase as Faneuil continues to invest in its business, which includes opening new call centers. Because ~~each~~certain Faneuil ~~contract requires unique~~contracts require capital ~~investment and infrastructure~~investments such as lease buildouts, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Carpets depreciation and amortization expense was unchanged at $0.2 million for both the three months ended March 31, ~~2018~~2019 and ~~2017 was $0.2 million. The slight increase of less than $0.1 million, or 22.3%, was attributable to the installation of automation machinery to support the new granite and stone facility.~~ 2018.

Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets. Depreciation and amortization expense ~~remained relatively unchanged~~was consistent at $0.6 million for both the three months ended March 31, ~~2018~~2019 and ~~March 31, 2017.~~2018.

Interest expense for the three months ended March 31, ~~2018~~2019 was ~~$2.8~~$2.6 million, ~~an increase~~a decrease of ~~$0.5~~$0.2 million, or ~~22.3%~~6.0%, compared to ~~interest expense of $2.3~~$2.8 million for the three months ended March 31, ~~2017. The increase~~2018. Interest expense was ~~attributable to the~~impacted by reduced interest expense resulting from quarterly principal payments, partially offset by increased interest rates, increased weighted-average outstanding balance on our line of credit ~~to fund the CMO Business acquisition and working capital requirements, increased interest rates,~~ and the ~~$7.5~~$5.0 million ~~increased borrowing on~~increase to our term loan, which were both used to ~~acquire the Printing Components Business, partially offset by reduced interest resulting from quarterly principal payments.~~fund Faneuil’s call center buildouts and other working capital requirements.

~~We recorded~~Our provision for income taxes was $0.2 million for the three months ended March 31, 2019 compared to a benefit for income taxes of $0.4 million for the three months ended March 31, 2018 as a result of recognizing a loss before income taxes, compared to a provision for income taxes of $0.7 million for the three months ended March 31, 2017 as a result of recognizing income before income taxes. The effective tax rate during the three months ended March 31, 2018 compared to the three months ended March 31, 2017 was impacted by the reduced corporate income tax rates as part of the tax reform legislation enacted on December 22, 2017 (the “Tax Reform Law”).2018.

Segment adjusted EBITDA is a financial measure used by our management and chief operating decision maker (“CODM”) to manage the business, allocate resources, and assess the performance of each operating segment. ALJ defines segment adjusted EBITDA as segment net income (loss) before depreciation and amortization, interest expense, litigation loss, restructuring expenses, lease payments in anticipation of facility shutdown, loan amendment fees, stock-based compensation, acquisition-related expenses, disposal of fixed assets and other gain, provision for income taxes, ~~depreciation and amortization expense, stock-based compensation expense, restructuring expense, acquisition-related expense, loss (gain) on sales of assets,~~ and other non-recurring items.

	Three Months Ended March 31,												Three Months Ended March 31,
(in thousands)	2018			2017			$ Change			% Change			2019			2018			$ Change			% Change
Faneuil	$	2,915		$	2,929		$	(14	)		(0.5	)%	$	2,793		$	2,915		$	(122	)		(4.2	)%
Carpets		(240	)		261			(501	)		(192.0	)		272			(240	)		512			213.3
Phoenix		5,459			4,863			596			12.3			6,335			5,459			876			16.0
ALJ		(540	)		(390	)		(150	)		38.5			(659	)		(540	)		(119	)		(22.0	)
Segment adjusted EBITDA	$	7,594		$	7,663		$	(69	)		(0.9	)%	$	8,741		$	7,594		$	1,147			15.1	%

Faneuil segment adjusted EBITDA for ~~both~~ the three months ended March 31, ~~2018 and 2017~~2019 was ~~basically flat at~~$2.8 million compared to segment adjusted EBITDA of $2.9 ~~million. Higher expenses related to new technology, training and call handling~~million for the ~~new CMO Business offset~~three months ended March 31, 2018. Faneuil segment adjusted EBITDA for the ~~increased~~three months ended March 31, 2019 was impacted by lower net revenue ~~recognized~~and lower expenses resulting from ~~the new CMO Business~~operational efficiencies within certain contracts.

Carpets segment adjusted EBITDA for the three months ended March 31, ~~2018~~2019 was ~~$(0.2)~~$0.3 million compared to segment adjusted EBITDA loss of ~~$0.3~~($0.2) million for the three months ended March 31, ~~2017. The~~2018. Carpets segment adjusted EBITDA for the three months ended March 31, ~~2018~~2019 was positively impacted by ~~higher material, labor,~~process improvements and ~~customer service costs, which exceeded net revenue growth.~~cost reductions.

Phoenix segment adjusted EBITDA for the three months ended March 31, ~~2018~~2019 was ~~$5.5~~$6.3 million compared to segment adjusted EBITDA of ~~$4.9~~$5.5 million for the three months ended March 31, ~~2017. The~~2018. Phoenix segment adjusted EBITDA for the three months ended March 31, 2019 was positively impacted by the increase ~~was a result of~~in net revenue and the ~~Printing Component Business acquisition somewhat offset by reduced net revenues in packaging.~~decrease to selling, general and administrative expenses resulting from consolidating printing facilities.

ALJ segment adjusted EBITDA for the three months ended March 31, ~~2018~~2019 was ~~$(0.5)~~$(0.7) million compared to segment adjusted EBITDA of ~~$(0.4) million. The~~$(0.5) million for the three months ended March 31, ~~2018~~2018. ALJ segment adjusted EBITDA for three months ended March 31, 2019 was impacted by the hiring of a new full-time chief financial officer and other headcount to support the growing complexities of ALJ’s business, and the allocation of certain expenses, including accounting and tax preparation, to subsidiaries to better align expenses with ALJ’s consolidated reporting structure.increased headcount.

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

Six Months Ended March 31, ~~2018~~2019 Compared to Six Months Ended March 31, ~~2017~~2018

	Six Months Ended March 31, 2018						Six Months Ended March 31, 2017						Six Months Ended March 31, 2019						Six Months Ended March 31, 2018
				% of						% of						% of						% of
	Dollars			Net Revenue			Dollars			Net Revenue
(in thousands, except per share amounts)													Dollars			Net Revenue			Dollars			Net Revenue
Net revenue⁽¹⁾
Faneuil	$	99,427			52.3	%	$	74,773			47.7	%	$	101,792			56.0	%	$	99,427			52.3	%
Carpets		35,341			18.6			33,449			21.3			24,450			13.5			35,341			18.6
Phoenix		55,291			29.1			48,691			31.0			55,538			30.6			55,291			29.1
Consolidated net revenue		190,059			100.0			156,913			100.0			181,780			100.0			190,059			100.0
Cost of revenue ⁽²⁾
Faneuil		77,570			78.0			57,064			76.3			79,765			78.4			77,570			78.0
Carpets		29,635			83.9			28,039			83.8			19,392			79.3			29,635			83.9
Phoenix ⁽³⁾		41,944			75.9			36,085			74.1			41,409			74.6			41,944			75.9
Consolidated cost of revenue		149,149			78.5			121,188			77.2			140,566			77.3			149,149			78.5
Selling, general and administrative expense ⁽²⁾
Faneuil		15,232			15.3			11,018			14.7			14,625			14.4			15,233			15.3
Carpets		6,672			18.9			5,196			15.5			4,721			19.3			6,672			18.9
Phoenix		7,909			14.3			6,111			12.6			6,305			11.4			7,908			14.3
ALJ		1,658			—			1,581			—			1,763			—			1,658			—
Consolidated selling, general and administrative expense		31,471			16.6			23,906			15.2			27,414			15.1			31,471			16.6
Depreciation and amortization expense ⁽²⁾
Depreciation and amortization ⁽²⁾
Faneuil		5,183			5.2			3,752			5.0			5,462			5.4			5,182			5.2
Carpets		438			1.2			354			1.1			466			1.9			438			1.2
Phoenix⁽⁴⁾		1,268			2.3			1,285			2.6			1,131			2.0			1,269			2.3
Consolidated depreciation and amortization expense		6,889			3.6			5,391			3.4			7,059			3.9			6,889			3.6
(Gain) loss on disposal of assets, net ⁽²⁾
Phoenix		(232	)		(0.4	)		12			—
Consolidated (gain) loss on disposal of assets, net		(232	)		(0.1	)		12			—
Disposal of assets and other gain ⁽⁵⁾														(223	)		(0.1	)		(232	)		(0.1	)
Total consolidated operating expenses⁽⁵⁾														174,816			96.2			187,277			98.5
Consolidated operating income		2,782			1.5			6,416			4.1			6,964			3.8			2,782			1.5
Interest expense ⁽⁵⁾		(5,453	)		(2.9	)		(4,718	)		(3.0	)		(5,340	)		(2.9	)		(5,453	)		(2.9	)
Provision for income taxes⁽⁵⁾		(2,987	)		(1.6	)		(755	)		(0.5	)		(490	)		(0.3	)		(2,987	)		(1.6	)
Net (loss) income ⁽⁵⁾	$	(5,658	)		(3.0	)	$	943			0.6
Basic (loss) earnings per share of common stock	$	(0.15	)				$	0.03
Diluted (loss) earnings per share of common stock	$	(0.15	)				$	0.03
Net income (loss) ⁽⁵⁾													$	1,134			0.6		$	(5,658	)		(3.0	)
Basic earnings (loss) per share of common stock													$	0.03					$	(0.15	)
Diluted earnings (loss) per share of common stock													$	0.03					$	(0.15	)

	Six Months Ended March 31,									Six Months Ended March 31,
(in thousands)	2018		2017		$ Change		% Change			2019		2018		$ Change			% Change
Faneuil	$	99,427	$	74,773	$	24,654		33.0	%	$	101,792	$	99,427	$	2,365			2.4	%
Carpets		35,341		33,449		1,892		5.7			24,450		35,341		(10,891	)		(30.8	)
Phoenix		55,291		48,691		6,600		13.6			55,538		55,291		247			0.4
Consolidated net revenue	$	190,059	$	156,913	$	33,146		21.1	%	$	181,780	$	190,059	$	(8,279	)		(4.4	)%

Faneuil net revenue for the six months ended March 31, ~~2018~~2019 was ~~$99.4~~$101.8 million, an increase of ~~$24.7~~$2.4 million, or ~~33.0%~~2.4%, compared to net revenue of ~~$74.8~~$99.4 million for the six months ended March 31, ~~2017.~~2018. The increase was mainly attributable to ~~the CMO Business acquisition, which contributed $17.0 million. The remaining increase was attributable to~~ a ~~$9.3~~$6.4 million ~~increase~~ from new ~~customers, and a $2.1 million increase from existing customers,~~customer contracts, offset by a ~~$3.7~~$2.4 million ~~decrease~~reduction driven by the completion of customer ~~contracts.~~contracts and a $1.6 million decrease in existing customers.

Carpets net revenue for the six months ended March 31, ~~2018~~2019 was ~~$35.3~~$24.5 million, ~~an increase~~a decrease of ~~$1.9~~$10.9 million, or ~~5.7%~~30.8%, compared to net revenue of ~~$33.4~~$35.3 million for the six months ended March 31, ~~2017.~~2018. The ~~slight increase~~decrease was primarily attributable to ~~higher~~lower sales volumes ~~from builder~~in cabinets, flooring, and ~~commercial sales.~~ granite.

Phoenix net revenue for the six months ended March 31, ~~2018~~2019 was ~~$55.3~~$55.5 million, an increase of ~~$6.6~~$0.2 million, or ~~13.6%~~0.4%, compared to net revenue of ~~$48.7~~$55.3 million for the six months ended March 31, ~~2017.~~2018. The increase was athe net result of the acquisition of the Printing Component Business, which contributed net revenue of $8.1 million during the six months ended March 31, 2018. This increase was offset by a decrease in revenue from the remaining business of $1.5 million during the six months ended March 31, 2018 compared to the six months ended March 31, 2017, due tohigher component sales, lower book volumes, ~~for books~~ and ~~packaging.~~planned lower packaging sales.

	Six Months Ended March 31,											Six Months Ended March 31,
(in thousands)	2018			2017			$ Change		% Change			2019			2018			$ Change			% Change
Faneuil	$	77,570		$	57,064		$	20,506		35.9	%	$	79,765		$	77,570		$	2,195			2.8	%
As a percentage of net revenue		78.0	%		76.3	%							78.4	%		78.0	%
Carpets		29,635			28,039			1,596		5.7			19,392			29,635			(10,243	)		(34.6	)
As a percentage of net revenue		83.9	%		83.8	%							79.3	%		83.9	%
Phoenix		41,944			36,085			5,859		16.2			41,409			41,944			(535	)		(1.3	)
As a percentage of net revenue		75.9	%		74.1	%							74.6	%		75.9	%
Consolidated cost of revenue	$	149,149		$	121,188		$	27,961		23.1	%	$	140,566		$	149,149		$	(8,583	)		(5.8	)%

Faneuil cost of revenue for the six months ended March 31, ~~2018~~2019 was ~~$77.6~~$79.8 million, an increase of ~~$20.5~~$2.2 million, or ~~35.9%~~2.8%, compared to cost of revenue of ~~$57.1~~$77.6 million for the six months ended March 31, ~~2017.~~2018. The increase in absolute dollar ~~increase in~~ cost of revenue was a direct result of the increased net revenue. During the six months ended March 31, ~~2018,~~2019, as compared to the six months ended March 31, ~~2017,~~2018, cost of revenue as a percentage of segment net revenue ~~increased~~was relatively unchanged at 78.4% compared to 78.0% ~~from 76.3% as a result of the integration of the CMO Business.~~.

Carpets cost of revenue for the six months ended March 31, ~~2018~~2019 was ~~$29.6~~$19.4 million, ~~an increase~~a decrease of ~~$1.6~~$10.2 million, or ~~5.7%~~34.6%, compared to cost of revenue of ~~$28.0~~$29.6 million for the six months ended March 31, ~~2017.~~2018. The absolute dollar ~~increase~~decrease in cost of revenue was ~~a direct result of increased~~mainly attributable to decreased net revenue. During the six months ended March 31, ~~2018,~~2019, as compared to the six months ended March 31, ~~2017,~~2018, cost of revenue as a percentage of segment net revenue ~~remained flat at~~decreased to 79.3% from 83.9% as a result of the aforementioned strategic decision to only accept jobs that yield a targeted profit margin, and ~~83.8%, respectively.~~process improvements and cost reductions throughout the organization.

Phoenix cost of revenue for the six months ended March 31, ~~2018~~2019 was ~~$41.9~~$41.4 million, ~~an increase~~a decrease of ~~$5.9~~$0.5 million, or ~~16.2%~~1.3%, compared to cost of revenue of ~~$36.1~~$41.9 million for the six months ended March 31, ~~2017. The absolute dollar increase in cost of revenue was mainly attributable to increased net revenue associated with the aforementioned Printing Components Business acquisition.~~ 2018. During the six months ended March 31, ~~2018,~~2019, as compared to the six months ended March 31, ~~2017,~~2018, cost of revenue as a percentage of segment net revenue ~~increased~~decreased to 74.6% from 75.9% ~~from 74.1%, respectively.~~as a result of lower depreciation expense. Phoenix experiences normal fluctuations to cost of revenue as a percentage of net revenue as a result of changes to the mix of products sold.

	Six Months Ended March 31,									Six Months Ended March 31,
(in thousands)	2018		2017		$ Change		% Change			2019		2018		$ Change			% Change
Faneuil	$	15,232	$	11,018	$	4,214		38.2	%	$	14,625	$	15,233	$	(608	)		(4.0	)%
Carpets		6,672		5,196		1,476		28.4			4,721		6,672		(1,951	)		(29.2	)
Phoenix		7,909		6,111		1,798		29.4			6,305		7,908		(1,603	)		(20.3	)
ALJ		1,658		1,581		77		4.9			1,763		1,658		105			6.3
Consolidated selling, general and administrative expense	$	31,471	$	23,906	$	7,565		31.6	%	$	27,414	$	31,471	$	(4,057	)		(12.9	)%

Faneuil selling, general and administrative expense for the six months ended March 31, ~~2018~~2019 was ~~$15.2~~$14.6 million, ~~an increase~~a decrease of ~~$4.2~~$0.6 million, or ~~38.2%~~4.0%, compared to selling, general and administrative expense of ~~$11.0~~$15.2 million for the six months ended March 31, ~~2017.~~2018. The ~~increase~~decrease was primarily attributable to ~~the CMO Business acquisition, which added $2.7 million, $1.1 million to support~~reduced legal expenses, reduced expenses from completed contracts and existing customers, ~~and $0.6 million~~slightly offset by an increase to support new customers. ~~This increase was partially offset by reduced expenses of $0.2 million related to customer contracts that concluded.~~ During the six months ended March 31, ~~2018~~2019 compared to the six months ended March 31, ~~2017,~~2018, selling, general and administrative expense as a percentage of segment net revenue ~~increased~~decreased to ~~15.3%~~14.4% from ~~14.7%~~15.3%. Certain selling, general and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general and administrative expense as a percentage of segment net revenue to fluctuate.

Carpets selling, general and administrative expense was $4.7 million for the six months ended March 31, 2019, a decrease of $2.0 million, or 29.2%, compared to selling, general and administrative expense of $6.7 million for the six months ended March 31, ~~2018, an increase of $1.5 million, or 28.4%, compared to selling, general and administrative expense of $5.2 million for the six months ended March 31, 2017.~~2018. The ~~increase~~decrease was primarily attributable to ~~higher labor costs~~process improvements and ~~increased insurance premiums, slightly offset by reduced legal fees.~~cost reductions throughout the organization. Selling, general and administrative expense as a percentage of segment net revenue increased to 19.3% for the six months ended March 31, 2019 from 18.9% for the six months ended March 31, ~~2018 from 15.5% for the six months ended March 31, 2017 as a result of incurring additional~~2018. Certain selling, general and administrative expenses ~~which~~ do not fluctuate directly with net revenue. As such, we expect selling, general and administrative expense as a percentage of segment net revenue to fluctuate.

Phoenix selling, general and administrative expense for the six months ended March 31, ~~2018~~2019 was ~~$7.9~~$6.3 million, ~~an increase~~a decrease of ~~$1.8~~$1.6 million, or ~~29.4%~~20.3%, compared to selling, general and administrative expense of ~~$6.1~~$7.9 million for the six months ended March 31, ~~2017.~~2018. The ~~increase~~decrease was mainly attributable to the ~~Printing Component Business acquisition, and non-recurring relocation and restructuring expense totaling $1.3 million~~completion of the process to consolidate manufacturing facilities. Selling, general and administrative expense as a percentage of segment net revenue ~~increased~~decreased to 11.4% for the six months ended March 31, 2019 from 14.3% for the six months ended March 31, 2018, ~~from 12.6% for the six months ended March 31, 2017,~~ which was mainly attributable to the ~~non-recurring~~ relocation and restructuring expense incurred during the six months ended March 31, 2018. Certain selling, general and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general and administrative expense as a percentage of segment net revenue to fluctuate.

ALJ selling, general and administrative expense for the six months ended March 31, ~~2018~~2019 was ~~$1.7~~$1.8 million, an increase of $0.1 million, or ~~4.9%~~6.3%, compared to selling, general and administrative expense of ~~$1.6~~$1.7 million for the six months ended March 31, ~~2017. The increase was primarily attributable to~~2018. ALJ selling, general and administrative expenses were impacted by the hiring of ~~a new full-time chief financial officer and~~ additional personnel to support ~~the growing complexities of ALJ’s~~our business and ~~an increase in non-cash~~our strategy of acquisitions offset by lower stock-based compensation ~~costs for key employees~~expense. We expect selling, general and ~~board of directors. Such increase was somewhat offset by allocating~~administrative expense to fluctuate in the future as we comply with SEC reporting requirements and regulations and allocate certain expenses ~~including accounting and tax preparation,~~ to ~~subsidiaries to better align expenses with ALJ’s consolidated reporting structure.~~ our subsidiaries.

	Six Months Ended March 31,										Six Months Ended March 31,
(in thousands)	2018		2017		$ Change			% Change			2019		2018		$ Change			% Change
Faneuil	$	5,183	$	3,752	$	1,431			38.1	%	$	5,462	$	5,182	$	280			5.4	%
Carpets		438		354		84			23.7			466		438		28			6.4
Phoenix		1,268		1,285		(17	)		(1.3	)		1,131		1,269		(138	)		(10.9	)
Consolidated depreciation and amortization expense	$	6,889	$	5,391	$	1,498			27.8	%	$	7,059	$	6,889	$	170			2.5	%

Faneuil depreciation and amortization expense for the six months ended March 31, ~~2018~~2019 was ~~$5.2~~$5.5 million, an increase of ~~$1.4~~$0.3 million, or ~~38.1%~~5.4%, compared to depreciation and amortization expense of ~~$3.8~~$5.2 million for the six months ended March 31, ~~2017.~~2018. The increase was ~~mainly~~ attributable to ~~the CMO Business acquisition, and to a lesser extent~~ 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 ~~each~~certain Faneuil ~~contract requires unique~~contracts require capital ~~investment and infrastructure~~investments such as lease buildouts, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.

Carpets depreciation and amortization expense was flat at $0.5 million and $0.4 million for ~~both~~ the six months ended March 31, 2019 and 2018, ~~and 2017 was $0.4 million. The slight increase of less than $0.1 million, or 23.7%, was attributable to the installation of automation machinery to support the new granite and stone facility.~~ respectively.

Phoenix depreciation and amortization expense for the six months ended March 31, 2019 was $1.1 million, a decrease of $0.1 million, or 10.9%, compared to depreciation and amortization expense of $1.3 million for the six months ended March 31, 2018. Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets. ~~Depreciation and amortization expense remained relatively unchanged at $1.3 million for both the six months ended March 31, 2018 and March 31, 2017.~~The decrease was attributable to fully amortized acquisition-related intangible assets.

Interest expense for the six months ended March 31, ~~2018~~2019 was ~~$5.5~~$5.3 million, ~~an increase~~a decrease of ~~$0.7~~$0.1 million, or ~~15.6%~~2.1%, compared to ~~interest expense of $4.7~~$5.5 million for the six months ended March 31, ~~2017. The increase~~2018. Interest expense was ~~attributable to the~~impacted by reduced interest expense resulting from quarterly principal payments, partially offset by increased interest rates, increased weighted-average outstanding balance on our line of credit ~~to fund the CMO Business acquisition and working capital requirements, increased interest rates,~~ and the ~~$7.5~~$5.0 million ~~increased borrowing on~~increase to our term loan, which were both used to ~~acquire the Printing Components Business, partially offset by reduced interest resulting from quarterly principal payments.~~ fund Faneuil’s call center buildouts and other working capital requirements.

~~Income tax~~Our provision for income taxes was $0.5 million for the six months ended March 31, 2019 compared to $3.0 million for the six months ended March 31, ~~2018 compared to $0.8 million for the six months ended March 31, 2017.~~2018. The ~~increase during the~~ six months ended March 31, 2018 ~~compared to the six months ended March 31, 2017~~reflected a one-time revaluation of deferred tax assets, which was the result of ~~the aforementioned Tax~~new tax reform legislation enacted on December 22, 2017 (the “Tax Reform ~~Law.~~ As a result of the enacted reduction in the federal corporate income tax rate, we recorded a one-time, non-cash increase to deferred income tax expense of $4.1 million to revalue ALJ’s net deferred tax asset. ~~We recorded the provisional impacts of the Tax Reform Law, based on our current knowledge, interpretation, and understanding of the Tax Reform Law and its impact to our business.~~ While we were able to make reasonable estimates of the impact of certain aspects of the Tax Reform Law, we may be affected by other aspects, including, but not limited to, the state tax effect of adjustments made to federal temporary differences, and the interest expense deduction limitation.Law”).

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

	Six Months Ended March 31,												Six Months Ended March 31,
(in thousands)	2018			2017			$ Change			% Change			2019			2018			$ Change			% Change
Faneuil	$	6,625		$	6,690		$	(65	)		(1.0	)%	$	7,739		$	6,625		$	1,114			16.8	%
Carpets		(966	)		215			(1,181	)		(549.3	)		432			(966	)		1,398			144.7
Phoenix		9,619			9,211			408			4.4			10,556			9,619			937			9.7
ALJ		(1,096	)		(1,224	)		128			(10.5	)		(1,380	)		(1,096	)		(284	)		(25.9	)
Segment adjusted EBITDA	$	14,182		$	14,892		$	(710	)		(4.8	)%	$	17,347		$	14,182		$	3,165			22.3	%

Faneuil segment adjusted EBITDA for the six months ended March 31, ~~2018~~2019 was ~~$6.6~~$7.7 million compared to segment adjusted EBITDA of ~~$6.7~~$6.6 million for the six months ended March 31, ~~2017. Higher expenses related to new technology, training and call handling~~2018. Faneuil segment adjusted EBITDA for the ~~new CMO Business offset the~~six months ended March 31, 2019 was positively impacted by increased net revenue ~~recognized from the new CMO Business~~and operational efficiencies within certain contracts.

Carpets segment adjusted EBITDA for the six months ended March 31, ~~2018~~2019 was ~~$(1.0)~~$0.4 million compared to segment adjusted EBITDA loss of ~~$0.2~~($1.0) million for the six months ended March 31, ~~2017. The~~2018. Carpets segment adjusted EBITDA for the six months ended March 31, ~~2018~~2019 was positively impacted by ~~higher material, labor,~~process improvements and ~~customer service costs, which exceeded Carpets net revenue growth.~~cost reductions.

Phoenix segment adjusted EBITDA for the six months ended March 31, ~~2018~~2019 was $10.6 million compared to segment adjusted EBITDA of $9.6 million for the six months ended March 31, ~~2018 compared to~~2018. Phoenix segment adjusted EBITDA ~~of $9.2 million~~ for the six months ended March 31, ~~2017. The~~2019 was positively impacted by the increase ~~was a result of the Printing Component Business acquisition somewhat offset by reduced~~in net ~~revenues in books,~~revenue, primarily components, and ~~packaging.~~ the decrease to selling, general and administrative expenses resulting from consolidating printing facilities.

ALJ segment adjusted EBITDA for the six months ended March 31, ~~2018~~2019 was ~~$(1.1)~~($1.4) million compared to segment adjusted EBITDA of ~~$(1.2) million. The~~($1.1) million for the six months ended March 31, ~~2018~~2018. ALJ segment adjusted EBITDA for six months ended March 31, 2019 was impacted by the hiring of a new full-time chief financial officer and other headcount to support the growing complexities of ALJ’s business, and the allocation of certain expenses, including accounting and tax preparation, to subsidiaries to better align expenses with ALJ’s consolidated reporting structure.increased headcount.

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

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

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

Historically, our principal sources of liquidity have been cash provided by operations and borrowings under various debt arrangements. At March 31, ~~2018,~~2019, our principal sources of liquidity included cash and cash equivalents of ~~$2.9~~$7.5 million and an available borrowing capacity of ~~$19.1~~$11.9 million on our line of credit. Our principal uses of cash have been for acquisitions, capital expenditures to support Faneuil’s customers, and to pay down debt. We anticipate these uses will continue to be our principal uses of liquidity in the future.

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

In summary, our cash flows for each period were as ~~follows (in thousands~~follows:):

	Six Months Ended March 31,						Six Months Ended March 31,
	2018			2017
(in thousands)							2019			2018
Cash provided by operating activities	$	10,126		$	9,954		$	16,080		$	10,126
Cash used for investing activities		(10,684	)		(5,857	)		(10,207	)		(10,684	)
Cash used for financing activities		(2,125	)		(8,217	)		(332	)		(2,125	)
Change in cash and cash equivalents	$	(2,683	)	$	(4,120	)	$	5,541		$	(2,683	)

We recognized net income of $1.1 million for the six months ended March 31, 2019 and generated cash from operating activities of $16.1 million, offset by cash used for investing activities of $10.2 million and financing activities of $0.3 million.

We recognized net loss of $5.7 million for the six months ended March 31, 2018, and generated cash from operating activities of $10.1 million, offset by cash used byfor investing activities of $10.7 million and financing activities of $2.1 million.

Cash provided by operating activities of ~~$0.9~~$16.1 million ~~for~~during the six months ended March 31, ~~2017~~2019 was the result of $1.1 million net income, $9.9 million addback of net non-cash expenses, and ~~generated~~$5.1 million of net cash ~~from~~used for changes in operating ~~activities~~assets and liabilities. The most significant components of ~~$10.0~~net non-cash expenses were depreciation and amortization expense of $9.3 million, stock-based compensation of $0.4 million, and amortization of deferred loan costs of $0.4 million, offset by $0.2 million of disposal of assets and other gain. The most significant components of changes in operating assets and liabilities included accounts receivable of $8.0 million, which provided cash, ~~used~~offset by ~~investing activities~~accounts payable of ~~$5.9~~$1.8 million and ~~financing activities~~deferred revenue and customer deposits of ~~$8.2 million.~~

Cash provided by operating activities of $10.1 million during the six months ended March 31, 2018 was the result of $5.7 million net loss, $13.7 million addback of net non-cash expenses, and $2.1 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 expense of $9.7 million, stock-based compensation of $0.6 million, amortization of non-cash interest expense of $0.7 million, and deferred income taxes of $2.8 million. The most significant components of changes in operating assets and liabilities, which were all part of normal operations, included inventories of $2.2 million, other assets of $1.1 million, accounts payable of $1.0 million, which provided cash, offset by deferred revenue and customer deposits of $2.2 million, which used cash.

~~Cash provided by operating activities of $10.0 million during~~For the six months ended March 31, ~~2017~~2019, our investing activities used $10.2 million of cash, of which $1.0 million was the ~~result of~~final payment for our $0.9 million net income and $9.2 million addback of net non-cash expenses, and $0.1 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 expense ofPrinting Components Business acquisition, $8.0 million ~~stock-based compensation~~was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and $1.5 million was used to purchase capital equipment in the normal course of ~~$0.4~~operations, partially offset by $0.3 million ~~and amortization~~proceeds received from the sale of non-cash interest expense of $0.5 million. The most significant components of changes in operating assets and liabilities included collateral deposits of $1.3 million and other liabilities of $1.7 million, which provided cash, and accounts receivable of $2.2 million, which used cash.

For the six months ended March 31, 2018, our investing activities used $10.7 million, of which $9.0 million was for our Printing Components Business acquisition, and $2.1 million was to purchase capital equipment in the normal course of operations, offset by $0.4 million cash proceeds from the sale of assets.

For the six months ended March 31, ~~2017,~~2019, our ~~investing~~financing activities used ~~$5.9~~$0.3 million of cash. Net proceeds from our line of credit and term loan provided $1.8 million and $5.0 million, respectively. Financing activities which used cash ~~of which $4.6~~included $5.1 million ~~was used~~ to ~~purchase equipment, software~~pay down our term loan, $1.6 million for capital lease payments, and ~~leasehold improvements~~$0.4 million for ~~Faneuil’s new and existing customers, and $1.4 million was used to purchase capital equipment in the normal course of operations.~~

For the six months ended March 31, 2018, our financing activities used $2.1 million of cash. Financing activities which used cash included $8.7 million to pay down our term loan, $1.0 million to pay down our line of credit, $1.3 million for capital lease payments, and $0.3 million for debt and stock issuance costs. Proceeds from our amended term loan provided $7.5 ~~million (see further discussion at~~ ~~Contractual Obligations~~ ~~below).~~million. Proceeds from the issuance of common stock and exercise of stock options provided $1.5 million and $0.3 million, respectively. Proceeds from the amended term loan and issuance of common stock were used to fund our Printing Components Business ~~acquisition discussed above.~~acquisition.

For the six months ended March 31, 2017, our financing activities used $8.2 million of cash, of which $6.6 million was used to pay down our term loan, $1.1 million was used for payments on capital leases and $0.7 million was used for payments on financed insurance premiums, offset by net advances on our line of credit of $0.2 million.

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

Payments due by Period

Less Than

One – Three

Four – Five

More than Five

Total

One Year

Years

Years

Years

Line of credit⁽¹⁾

$
4,500

$
—

$
4,500

$
—

$
—

Term loan payable⁽¹⁾

89,795

9,187

80,608

—

—

Operating lease obligations

24,607

5,035

9,275

10,297

—

Capital lease obligations

8,635

3,022

4,701

912

—

Other long-term liabilities⁽²⁾

4,610

1,130

3,480

—

—

Total contractual cash obligations

$
132,147

$
18,374

$
102,564

$
11,209

$
—

	Payments due by Period
			Less Than		One – Three		Four – Five		More than Five
(in thousands)	Total		One Year		Years		Years		Years
Term loan⁽¹⁾	$	85,182	$	8,200	$	24,600	$	52,382	$	—
Operating lease obligations⁽²⁾		35,279		5,703		11,348		18,228		—
Line of credit⁽¹⁾		10,500		—		—		10,500		—
Capital lease obligations⁽¹⁾		5,753		2,510		2,833		410		—
Equipment financing agreement⁽¹⁾		3,744		1,303		2,441		—		—
Leasehold improvement obligations⁽²⁾		1,500		1,500		—		—		—
Other liabilities ⁽³⁾		2,220		930		1,290		—		—
Total contractual cash obligations⁽⁴⁾	$	144,178	$	20,146	$	42,512	$	81,520	$	—

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

*~~Range of annual interest rates accrued during the six months ended March 31, 2018.~~

~~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 December 2017, ALJ made an ECF payment of $4.1 million. A final balloon payment is due at maturity, August 14, 2020. There is a prepayment penalty equal to 1% if the Cerberus Term Loan is repaid prior to August 2018. ALJ may make payments of up to $7.0 million against the loan with no penalty.

The Cerberus Debt is secured by substantially all the Company’s assets and imposes certain limitations on the Company, including its ability to incur debt, grant liens, initiate certain investments, declare dividends and dispose of assets. The Cerberus Debt also requires ALJ to comply with certain debt covenants. As of March 31, 2018, ALJ was in compliance with all debt covenants and had unused borrowing capacity of $19.1 million.

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

As of March 31, ~~2018,~~2019, we had two types of off-balance sheet arrangements.

Surety Bonds. As part of Faneuil’s normal course of operations, certain customers require surety bonds guaranteeing the performance of a contract. As of March 31, ~~2018,~~2019, the face value of such surety bonds, which represents the maximum cash payments that Faneuil would have to make under certain circumstances of non-performance, was approximately ~~$29.1~~$26.3 million.

~~Letter~~Letters of Credit. ~~Faneuil~~ALJ had ~~a letter~~letters of credit ~~for $2.7~~totaling $3.3 million outstanding as of March 31, ~~2018.~~2019.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. Significant estimates and assumptions by management are used for, but are not limited to, determining the fair value of assets and liabilities, including intangible assets acquired and allocation of acquisition purchase prices, estimated useful lives, recoverability of long-lived and intangible assets, the recoverability of goodwill, the realizability of deferred tax assets, stock-based compensation, the likelihood of material loss as a result of loss contingencies, customer lives, the allowance for doubtful accounts and inventory reserves, and calculation of insurance reserves. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

For a complete summary of our significant accounting policies, please refer to Note 2, “Summary of Significant Accounting Policies,” included with our audited financial statements and notes thereto for the years ended September 30, ~~2017~~2018 and ~~2016,~~2017, filed with the Securities and Exchange Commission on December ~~19, 2017.~~17, 2018. There were no material changes to significant accounting policies during the six months ended March 31, ~~2018.~~ 2019.

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

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

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 ~~final arguments~~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, ~~on May 8, 2018. As of the date of~~which has been granted. The case is in early discovery at this ~~filing, the court had not issued a final ruling.~~time. Faneuil believes ~~the facts support its claims that the disputed services should be paid~~this action is without merit and ~~that 3M’s counterclaims are without merit. Although litigation is inherently unpredictable, Faneuil remains confident in its ability~~intends to ~~collect all of its outstanding receivables from 3M.~~defend it vigorously.

On July 31, 2017, plaintiff Donna Marshall (“Marshall”), filed a proposed class action lawsuit in the Superior Court of the State of California for the County of Sacramento against Faneuil and ALJ. Marshall, a previously terminated Faneuil employee, alleges various California state law employment-related claims against Faneuil. Faneuil has answered the complaint and removed the matter to the United States District Court for the Eastern District of California; however, Marshall filed a motion to remand the case back to state court. The motion to remand has been fully briefed and argued and remains pending before the court. The case is in an early stage and the parties have not begun substantive discovery at this time. Faneuil believes this action is without merit and intends to defend it vigorously.All amounts were paid during ALJ’s fiscal year ended September 30, 2018.

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

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

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

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

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

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

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

On March 23, 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~~’sFaneuil’s healthcare business relates to providing services to health insurance exchanges in various states, and Faneuil believes that there may be significant opportunities for growth in this area. President Trump has disclosed that a key initiative for his Presidency is to repeal or substantially change the Affordable Care Act. ~~For example,~~While Congress has not passed repeal legislation, the Tax Reform Law ~~repealed~~includes a provision repealing, effective January 1, 2019, the ~~individual mandate~~tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate,” which could lead to fewer enrollments in health care 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’~~s industry~~ as a whole, or key industry segments targeted by Faneuil. In addition, ~~Faneuil~~’sFaneuil’s operations are, in part, dependent upon state government funding. Significant changes in the level of state government funding could have an unfavorable effect on ~~Faneuil~~’sFaneuil’s business, financial position, results of operations and cash flows.

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

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

Faneuil derives a significant portion of its revenue from state government contracts and programs. Any delay in the state government budget process or a state government shutdown may result in Faneuil’~~s incurrence of~~ 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~~’sFaneuil’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 ~~the basis of~~ quality, performance, innovation, technology, price, applications expertise, system and service flexibility, and established customer service capabilities, as its services relate to toll collection, customer contact centers, and employee staffing. Faneuil may not be able to compete effectively on all of these fronts or with all of its competitors. In addition, new competitors may emerge, and service offerings may be threatened by new technologies or market trends that reduce the value of the services Faneuil provides. To remain competitive, Faneuil must respond to new technologies and enhance its existing services, and we anticipate that it may have to adjust the pricing for its services to stay competitive on future responses to proposals. If Faneuil does not compete effectively, 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’s customer concentrations, see “Part I, Item 1. Financial Statements – Note 4. Concentration Risks.”We expect ~~that Faneuil~~’sthe largest customers ~~will~~of Faneuil to continue to account for a substantial portion of its total net revenue for the foreseeable future. Faneuil has long-standing relationships with many of its significant customers. However, because Faneuil’s customers generally contract for specific projects or programs with a finite duration, Faneuil may lose these customers if funding for their respective programs is discontinued, or if their projects end and the contracts are not renewed or replaced. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could materially reduce Faneuil’s revenue and cash flows. Additionally, many of Faneuil’s customers are government entities, which can unilaterally terminate or modify the existing contracts with Faneuil without cause and penalty to such government entities in many situations. If Faneuil does not replace them with other customers or other programs, the loss of business from any one of such customers could have a material adverse effect on its business or results of operations.

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

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

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

~~Faneuil~~’sFaneuil’s business model largely depends ~~in large part~~ on ~~its~~the ability to attract new work from ~~its base of~~ existing clients. ~~Faneuil~~’sFaneuil’s business model also depends on client relationships, ~~it develops with its clients with respect to~~ understanding ~~its clients~~’client needs, and delivering specific solutions ~~that are tailored~~ to ~~those~~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~~’sFaneuil’s services could lead to the termination of that work or damage ~~Faneuil~~’sFaneuil’s ability to obtain additional work from that client. Also, negative publicity related to ~~Faneuil~~’sFaneuil’s client relationships, regardless of its accuracy, may further damage ~~Faneuil~~’sFaneuil’s business by affecting its ability to compete for new contracts with current and prospective clients.

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

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

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

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

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

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

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

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

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

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

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

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

~~Faneuil~~’sFaneuil’s business is subject to many laws and regulatory requirements in the United States, covering such matters as data privacy, consumer protection, health care 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~~’sFaneuil’s contact center services is subject to the Health Insurance Portability and Accountability Act of 1996, commonly known as HIPAA, which protects the privacy of patients’ data. These laws, regulations, and agreements require Faneuil to develop and implement policies to protect non-public personal information and to disclose these policies to consumers before a customer relationship is established and periodically after that. These laws, regulations, and agreements limit ~~Faneuil~~’sthe ability to use or disclose non-public personal information for purposes other than the ones originally intended. Many of these regulations, including those related to data privacy, are frequently changing and sometimes conflict with existing ones among the various jurisdictions in which Faneuil provides services. Violations of these laws and regulations could result in ~~Faneuil~~’s liability for damages, fines, criminal prosecution, unfavorable publicity and restrictions placed on Faneuil’~~s ability to operate. Faneuil~~’s operations. Faneuil’s failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to ~~Faneuil~~’sFaneuil’s reputation in the marketplace, which could have a material adverse effect on ~~Faneuil~~’sFaneuil’s business, results of operations and financial condition. In addition, because a substantial portion of Faneuil’s operating costs consists of labor costs, changes in governmental regulations relating to wages, healthcare and healthcare reform and other benefits or employment taxes could have a material adverse effect on ~~Faneuil~~’sFaneuil’s business, results of operations or financial condition.

A failure 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~~’sFaneuil’s business will be harmed. Experienced and capable personnel remain in high demand, and there is continual competition for their talents. Additionally, regarding the labor-intensive business of Faneuil, quality service depends on ~~Faneuil~~’sthe 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~~’sFaneuil’s business is driven in part by the personal relationships of ~~Faneuil~~’sFaneuil’s senior management team, and its success depends on the skills, experience, and performance of members of ~~Faneuil~~’sFaneuil’s senior management team. Despite executing an employment agreement with ~~Faneuil~~’sFaneuil’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~~’sFaneuil’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 ~~our~~Carpets business.

The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature and recently experienced a downturn. The downturn in the U.S. and global economies, along with the residential and commercial markets in such economies, particularly in Las Vegas, negatively impacted the floor covering industry and Carpets’ business. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, these activities lagged during the downturn. Although these difficult economic conditions have improved, there may be additional downturns that could cause the industry to deteriorate in the future. Diminished consumer confidence in general, or specifically with respect to purchasing homes, or lack of consumer interest in purchasing a home compared to other housing alternatives due to location preferences, perceived affordability constraints or otherwise, may contribute to such a downturn. Further, changes to monetary policy or other actions by the Federal Reserve resulting in an adverse effect on interest rates (including mortgage interest rates), a downward trend in employment levels and job and wage growth, and increasing prices for available new or existing homes could lead to a decline in housing activity and negatively impact Carpets business. A significant or prolonged decline in residential/commercial remodeling or new construction activity could have a material adverse effect on the ~~Company~~’s business and results of ~~operations.~~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 ~~a number of~~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’ ~~competitors~~ or ~~its~~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’ ~~success~~ depends on its ability to anticipate and react to changing consumer demands promptly. All of its products are subject to changing consumer preferences that cannot be predicted with certainty. Also, long lead times for certain of its products may make it hard for it to respond quickly to changes in consumer demands. Consumer preferences could shift rapidly to different types of products or away from the types of products Carpets carries altogether, and its future success depends, in part, on its ability to anticipate and respond to these changes. Failure to anticipate and respond promptly to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels, which could have a material adverse effect on its financial condition.

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

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

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

~~A portion~~The business of ~~Carpets’ business~~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 and as a result Carpets~~’substantial. The ability to estimate costs correctly and ~~its ability to~~ 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’ success~~Carpets depends upon its ability to attract, train and retain highly qualified associates while also controlling its labor costs.

~~Carpets~~’ ~~customers~~Customers expect a high level of customer service and product knowledge from ~~its associates.~~associates employed by Carpets. To meet the needs and expectations of its customers, itCarpets 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’~~Carpets significant customers or suppliers could adversely affect its business.

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

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

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

The printing industry is highly competitive. Phoenix competes directly or indirectly with ~~a number of~~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 ~~Phoenix~~’s prices, ~~its~~ margins or demand for ~~its~~ products and services. If Phoenix is unable to respond timely and appropriately to these competitive pressures, from existing or new competitors, its business could be adversely affected.

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

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

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

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

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

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

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

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

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

Any material increase in the price of key raw materials could adversely impact Phoenix’s cost of sales or result in the loss of availability of such materials at reasonable prices. When these fluctuations result in significantly higher raw material costs, ~~Phoenix~~’sPhoenix’s operating results are adversely affected to the extent it is unable to pass on these increased costs to its customers or to the extent they

materially affect customer buying habits. Significant fluctuations in prices for paper, ink, and adhesives could, therefore, have a material adverse effect on ~~Phoenix~~’sPhoenix’s business.

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

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

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

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

Phoenix has completed multiple acquisitions with the expectation that such acquisitions would result in various benefits, including, among other things, complementing Phoenix’s current product offerings and allowing Phoenix to expand and diversify its product offerings by leveraging its existing core competencies. Achieving those anticipated benefits is subject to ~~a number of~~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 ~~Phoenix’s ability to achieve~~ the ~~benefits it anticipates.~~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 ~~include~~ covenants ~~restricting~~restrict ALJ,’s, Faneuil,’s, Carpets’ and Phoenix’ from~~s ability to:~~:

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

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

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

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. Our subsidiaries Carpets and Faneuil have each been named in lawsuits incidental to its ordinary business, and have filed actions against third parties in connection with such lawsuits. We have carefully analyzed our cases with our counsel, and we believe that we are not subject to any material risk of liability. Nevertheless, litigationLitigation is inherently unpredictable, time-consuming and distracting to our management team, and the expenses of conducting litigation are not inconsequential. Such distraction and expense may adversely affect the execution of our business plan and our ability to compete effectively in the marketplace. Further, if we do not prevail in litigation in which we may be involved, our results could be adversely affected, in some cases, materially. For additional information, see “Part II. Item 1, Legal Proceedings.”

As of March 31, ~~2018, $94.3~~2019, $95.7 million of our current borrowings under the Cerberus Term Loan, Cerberus/PNC Revolver, and potential future borrowings are, and may continue to be, at variable rates of interest, tied to LIBOR or the Prime Rate of interest, thus exposing us to interest rate risk. Such rates tend to fluctuate based on general economic conditions, general interest rates, Federal Reserve rates and the supply of and demand for credit in the relevant interbanking market. In recent years, the Fed has incrementally raised the target range for the federal funds rate, with additional increases expected to come over the next year. Increases in the interest rate generally, and particularly when coupled with any significant variable rate indebtedness, could materially adversely impact our interest expenses. If interest rates ~~do increase,~~continue increasing, our debt service obligations on ~~our~~the variable rate indebtedness ~~could~~would increase even ifthough the amount borrowed remained the same, ~~resulting in a decrease in~~and our net ~~income.~~income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. For example, if interest rates increased in the future by 100 basis points, based on our current borrowings as of March 31, ~~2018,~~2019, we would incur approximately an additional ~~$0.9~~$1.0 million per ~~annum~~year in interest expense.

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

As of March 31, ~~2018,~~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~~Cyber-attacks designed to gain access to sensitive information are constantly evolving, and ~~high profile~~high-profile electronic security breaches leading to unauthorized releases of sensitive information have occurred recently at ~~a number of~~several major U.S. companies, including several large retailers, despite widespread recognition of the cyber-attack threat and improved data protection methods. Any breach of the systems on which sensitive data and account information are stored or archived and any misuse by our employees, by employees of data archiving services or by other unauthorized users of such data could lead to damage to our reputation, claims against us and other potential increases in costs. If we are unsuccessful in defending any lawsuit involving such data security breaches or misuse, we may be forced to pay damages, which could materially and adversely affect our profitability and financial condition. Also, damage to our reputation stemming from such breaches could adversely affect our prospects. As the regulatory environment relating to companies’ obligations to protect such sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions.

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

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

Additionally, some 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, ~~2017,~~2018, we had net operating loss carryforwards for federal income tax purposes of approximately ~~$154.3~~$144.3 million that start expiring in 2022. Approximately ~~$131.3~~$121.3 million of the carryforward expires in 2022. Our inability to utilize our NOLs would have a negative impact on our financial position and results of operations.

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

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

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

The Tax Reform Law contains many significant changes to the U.S. federal income tax laws, the full consequences of which have not yet been determined. As a result of the enacted reduction in the federal corporate income tax rate, we recorded a one-time, non-cash increase to deferred income tax expense of $4.1 million to revalue ALJ’s net deferred tax ~~asset.~~asset during the year ended September 30, 2018. The one-time revaluation was based on our current knowledge, interpretation and understanding of the Tax Reform Law and its impact to our business. Other aspects of the Tax Reform Law, including, but not limited to the state tax effect of adjustments made to federal taxes and the interest expense deduction limitation may have additional material impacts on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future tax expense. The foregoing items could have a material adverse effect on our business, cash flow, results of operations or financial conditions.

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

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

Our executive officers and directors and their affiliated entities together beneficially own a majority of our outstanding common stock, and our Executive Chairman owns approximately ~~36.7%~~37.7% of our outstanding common stock as of March 31, ~~2018.~~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,”~~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 ~~will be~~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, ~~that~~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.

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

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

~~We cannot assure you that our common stock will continue to trade on NASDAQ.~~

~~Although our stock began trading on NASDAQ, we cannot assure you~~meaning that we ~~will~~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 ~~able~~a “smaller reporting company,” such reduced disclosure in our SEC filings may make it harder for investors to ~~maintain NASDAQ’s continued listing requirements.~~ ~~Such a listing helps~~analyze our stockholders by providing a readily available trading market with current quotations. Without that, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficultoperating results and the trading volume and liquidity of our stock would likely decline. In that regard, listing on a recognized national trading market such as NASDAQ will also affect our ability to benefit from the use of our operations and expansion plans, including the development of strategic relationships and acquisitions, which are critical to our business and strategy. Any failure to maintain NASDAQ’s continued listing requirements would result in negative publicity and would negatively impact our ability to raise capital in the future.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 March 31, ~~2018,~~2019, a total of ~~1,614,000~~1,654,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of ~~$3.52.~~$3.39. It is probable that options to purchase our common stock will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option. If the stock options are exercised, your share ownership will be diluted. Additionally, options to purchase up to ~~1,370,000~~1,280,000 shares of ALJ common stock are available for grant under our existing equity compensation plans as of March 31, ~~2018.~~2019.

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

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

The anti-takeover provisions of our stockholders rights plan may have the effect of delaying or preventing beneficial takeover bids by third parties.

We have a stockholder rights plan (the “Rights Plan”) designed to preserve the value of certain tax assets primarily associated with our NOLs and built-in losses under Section 382. At the end of our last fiscal year, September 30, ~~2017,~~2018, we had approximately ~~$154.3~~$144.3 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 Rights Plan was adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382.

In connection with the Rights Plan, we declared a dividend of one preferred share purchase right for each share of its common stock outstanding as of the close of business on May 21, 2009. Pursuant to the Rights Plan, any stockholder or group that acquires beneficial ownership of 4.9 percent or more of our outstanding stock (an “Acquiring Person”) without the approval of our Board of Directors would be subjected to significant dilution of its holdings. Any existing stockholder holding 4.9% or more of our stock will not be considered an Acquiring Person unless such stockholder acquires additional stock; provided that existing stockholders actually known to us to hold 4.9% or more of its stock as of April 30, 2009, are permitted to purchase up to an additional 5% of our stock without triggering the Rights Plan. In addition, in its discretion, the Board of Directors may exempt certain persons whose acquisition of securities is determined by the

Board of Directors not to jeopardize our deferred tax assets and may also exempt certain transactions. The Rights Plan will continue in effect until May 13, 2019, unless it is terminated or the preferred share purchase rights are redeemed earlier by the Board of Directors.

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

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

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

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

		Page
	PART I – FINANCIAL INFORMATION	4

Item 1	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations (unaudited)	5
	Condensed Consolidated Statements of Cash Flows (unaudited)	6
	Condensed Consolidated Statements of Equity (unaudited)	7
	Notes to Condensed Consolidated Financial Statements	78

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

Item 3	Quantitative and Qualitative Disclosures About Market Risk	3839

Item 4	Controls and Procedures	3839

	PART II – OTHER INFORMATION	3940

Item 1	Legal Proceedings	3940

Item 1A	Risk Factors	4041

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3	Defaults Upon Senior Securities	53

Item 4	Mine Safety Disclosures	53

Item 5	Other Information	53

Item 6	Exhibits	54

	Signatures	55

	Purchase Price
Balance Sheet Caption	Allocation
Total current assets	$	3,947
Fixed assets		553
Identified intangible assets:
Customer relationships		3,790
Supply agreements/contract backlog		5,418
Non-compete agreements		250
Goodwill		1,547
Total assets		15,505
Total current liabilities		(2,760	)
Purchase price	$	12,745

Break Out of Components of Purchase Price Consideration
Line of credit	$	5,500
Common stock issued		4,708
Cash		2,537
Purchase price	$	12,745

	March 31,			September 30,
	2018			2017
Accounts receivable	$	45,835		$	47,216
Unbilled receivables		4,118			3,071
Accounts receivable		49,953			50,287
Less: Allowance for doubtful accounts		(801	)		(830	)
Accounts receivable, net	$	49,152		$	49,457

	March 31,			September 30,
	2018			2017
Raw materials	$	3,745		$	3,127
Semi-finished goods/work in process		2,414			4,064
Finished goods		2,782			2,378
Inventories		8,941			9,569
Less: Allowance for obsolete inventory		(246	)		(193	)
Inventories, net	$	8,695		$	9,376

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

	March 31, 2018							September 30, 2017
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Customer relationships	$	34,400	$	(8,888	)	$	25,512	$	34,400	$	(7,446	)	$	26,954
Trade names		10,760		(1,358	)		9,402		10,760		(1,143	)		9,617
Supply agreements/contract backlog		10,358		(1,128	)		9,230		5,658		(420	)		5,238
Non-compete agreements		3,030		(2,201	)		829		3,030		(1,858	)		1,172
Internal software		580		(430	)		150		580		(382	)		198
Totals	$	59,128	$	(14,005	)	$	45,123	$	54,428	$	(11,249	)	$	43,179

	March 31, 2019							September 30, 2018
(in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Customer relationships	$	34,400	$	(11,770	)	$	22,630	$	34,400	$	(10,329	)	$	24,071
Trade names		10,760		(2,544	)		8,216		10,760		(1,573	)		9,187
Supply agreements/contract backlog		10,358		(1,788	)		8,570		10,358		(1,836	)		8,522
Non-compete agreements		2,330		(2,039	)		291		2,330		(1,811	)		519
Internal software		580		(527	)		53		580		(479	)		101
Totals	$	58,428	$	(18,668	)	$	39,760	$	58,428	$	(16,028	)	$	42,400

	Estimated Future Amortization
Remainder of Fiscal 2018	$	2,723
Fiscal 2019		5,099
Fiscal 2020		4,800
Fiscal 2021		4,485
Fiscal 2022		4,067
Thereafter		23,949
Total	$	45,123

(in thousands)	Estimated Future Amortization
Remainder of Fiscal 2019	$	2,460
Fiscal 2020		4,800
Fiscal 2021		4,485
Fiscal 2022		4,067
Fiscal 2023		4,067
Thereafter		19,881
Total	$	39,760

	Six Months Ended March 31, 2017
	Faneuil		Carpets		Phoenix		ALJ			Total
Net revenue	$	74,773	$	33,449	$	48,691	$	—		$	156,913

Segment adjusted EBITDA	$	6,690	$	215	$	9,211	$	(1,224	)	$	14,892
Interest expense											(4,718	)
Provision for income taxes											(755	)
Depreciation and amortization											(8,014	)
Stock-based compensation											(357	)
Restructuring expenses											(93	)
Loss on sales of assets											(12	)
Net income										$	943

	Payments due by Period
			Less Than		One – Three		Four – Five		More than Five
	Total		One Year		Years		Years		Years
Line of credit⁽¹⁾	$	4,500	$	—	$	4,500	$	—	$	—
Term loan payable⁽¹⁾		89,795		9,187		80,608		—		—
Operating lease obligations		24,607		5,035		9,275		10,297		—
Capital lease obligations		8,635		3,022		4,701		912		—
Other long-term liabilities⁽²⁾		4,610		1,130		3,480		—		—
Total contractual cash obligations	$	132,147	$	18,374	$	102,564	$	11,209	$	—

Exhibit Number	Description of Exhibit	Method of Filing

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

3.2	~~Restated Certificate of Incorporation of ALJ Regional Holdings, Inc. as filed with the Secretary of State of the State of Delaware on June 16, 2009~~	~~Incorporated by reference to Exhibit 3.2 to Form 10-12B as filed February 2, 2016.~~

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

~~3.4~~3.3	Restated Bylaws of ALJ Regional Holdings, Inc., dated as of May 11, 2009	Incorporated by reference to Exhibit 3.4 to Form 10-12B as filed on February 2, ~~2016.~~ 2016

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