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Alj Regional (ALJJ)

Filed: 13 May 19, 4:06pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

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

For the Quarterly Period Ended March 31, 2019

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

For the transition period from           to           

Commission File Number: 001-37689

 

ALJ REGIONAL HOLDINGS, INC.  

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

13-4082185

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

244 Madison Avenue, PMB #358

New York, NY 10016

(Address of principal executive offices, Zip code)

(888) 486-7775

(Registrant’s telephone number, including area code)

 

 

Title of class of registered securities Common Stock, par value $0.01 per share

 

 

Ticker Symbol

ALJJ

Name of exchange on which registered

NASDAQ

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller Reporting Company

Emerging growth company

 

 

 

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

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

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

 

 


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

 

any statements regarding our expectations for future performance;

 

our ability to integrate business acquisitions;

 

our ability to compete effectively;

 

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

 

our expectations that interest expense will increase;

 

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

 

our expectation that we will be in compliance with the required covenants pursuant to our loan agreements;

 

regulatory compliance costs; and

 

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

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

 

 

2


 

ALJ REGIONAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2019

INDEX

 

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

4

 

 

 

 

 

Item 1

 

Financial Statements

 

4

 

 

Condensed Consolidated Balance Sheets

 

4

 

 

Condensed Consolidated Statements of Operations (unaudited)

 

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

 

6

 

 

Condensed Consolidated Statements of Equity (unaudited)

 

7

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

 

Item 4

 

Controls and Procedures

 

39

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

40

 

 

 

 

 

Item 1

 

Legal Proceedings

 

40

 

 

 

 

 

Item 1A

 

Risk Factors

 

41

 

 

 

 

 

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

 

3


 

PART I.  FINANCIAL INFORMATION

Item 1 - Financial Statements

 

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

 

March 31,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,541

 

 

$

2,000

 

Accounts receivable, net of allowance for doubtful accounts of $131

   ($208 at September 30, 2018)

 

 

38,393

 

 

 

46,383

 

Inventories, net

 

 

7,383

 

 

 

7,656

 

Prepaid expenses and other current assets

 

 

5,548

 

 

 

5,504

 

Assets held for sale

 

 

 

 

 

222

 

Total current assets

 

 

58,865

 

 

 

61,765

 

Property and equipment, net

 

 

72,540

 

 

 

60,162

 

Goodwill

 

 

56,372

 

 

 

56,372

 

Intangible assets, net

 

 

39,760

 

 

 

42,400

 

Collateral deposits, less current portion

 

 

695

 

 

 

695

 

Deferred tax asset, net

 

 

7,643

 

 

 

7,639

 

Other assets

 

 

1,828

 

 

 

2,435

 

Total assets

 

$

237,703

 

 

$

231,468

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,851

 

 

$

12,692

 

Accrued expenses

 

 

16,607

 

 

 

14,371

 

Income taxes payable

 

 

72

 

 

 

204

 

Deferred revenue and customer deposits

 

 

2,096

 

 

 

3,179

 

Current portion of term loans, net of deferred loan costs

 

 

9,063

 

 

 

8,595

 

Current portion of capital lease obligations

 

 

2,510

 

 

 

2,909

 

Current portion of workers’ compensation reserve

 

 

930

 

 

 

1,000

 

Other current liabilities

 

 

7

 

 

 

1,003

 

Total current liabilities

 

 

42,136

 

 

 

43,953

 

Line of credit, net of deferred loan costs

 

 

10,443

 

 

 

8,594

 

Term loans, less current portion, net of deferred loan costs

 

 

78,187

 

 

 

74,795

 

Deferred revenue, less current portion

 

 

856

 

 

 

1,374

 

Workers’ compensation reserve, less current portion

 

 

1,290

 

 

 

1,508

 

Capital lease obligations, less current portion

 

 

3,243

 

 

 

4,427

 

Other non-current liabilities

 

 

8,866

 

 

 

5,289

 

Total liabilities

 

 

145,021

 

 

 

139,940

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

   Common stock, $0.01 par value; authorized – 100,000 shares; 38,026 and

     38,111 shares issued and outstanding at March 31, 2019 and

      September 30, 2018, respectively

 

 

380

 

 

 

381

 

   Additional paid-in capital

 

 

279,596

 

 

 

279,575

 

   Accumulated deficit

 

 

(187,294

)

 

 

(188,428

)

Total stockholders’ equity

 

 

92,682

 

 

 

91,528

 

Total liabilities and stockholders’ equity

 

$

237,703

 

 

$

231,468

 

 

See accompanying notes

4


 

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended

March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net revenue

 

$

87,996

 

 

$

95,105

 

 

$

181,780

 

 

$

190,059

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

67,739

 

 

 

74,239

 

 

 

140,566

 

 

 

149,149

 

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

 

 

84,746

 

 

 

93,036

 

 

 

174,816

 

 

 

187,277

 

Operating income

 

 

3,250

 

 

 

2,069

 

 

 

6,964

 

 

 

2,782

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,625

)

 

 

(2,793

)

 

 

(5,340

)

 

 

(5,453

)

Total other expense

 

 

(2,625

)

 

 

(2,793

)

 

 

(5,340

)

 

 

(5,453

)

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

 

 

38,026

 

 

 

37,911

 

 

 

38,037

 

 

 

37,742

 

Diluted

 

 

38,076

 

 

 

37,911

 

 

 

38,087

 

 

 

37,742

 

 

See accompanying notes

5


 

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands) 

 

 

 

Six Months Ended March 31,

 

 

 

2019

 

 

2018

 

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

 

 

2,224

 

 

 

2,794

 

Depreciation and amortization - selling, general and administrative expense

 

 

7,059

 

 

 

6,889

 

Stock-based compensation expense

 

 

371

 

 

 

563

 

Provision for bad debts and obsolete inventory

 

 

77

 

 

 

305

 

Deferred income taxes

 

 

(4

)

 

 

2,774

 

Disposal of assets and other gain

 

 

(223

)

 

 

(232

)

Amortization of deferred loan costs

 

 

398

 

 

 

691

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

7,998

 

 

 

80

 

Inventories, net

 

 

188

 

 

 

2,107

 

Prepaid expenses, collateral deposits, and other current assets

 

 

(44

)

 

 

762

 

Other assets

 

 

607

 

 

 

1,057

 

Accounts payable

 

 

(1,841

)

 

 

1,038

 

Accrued expenses

 

 

722

 

 

 

(403

)

Income tax payable

 

 

(132

)

 

 

(195

)

Deferred revenue and customer deposits

 

 

(1,601

)

 

 

(2,183

)

Other current liabilities

 

 

(66

)

 

 

54

 

Other liabilities

 

 

(787

)

 

 

(317

)

Cash provided by operating activities

 

 

16,080

 

 

 

10,126

 

Investing activities

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(1,000

)

 

 

(9,000

)

Proceeds from sales of assets

 

 

308

 

 

 

383

 

Capital expenditures

 

 

(9,515

)

 

 

(2,067

)

Cash used for investing activities

 

 

(10,207

)

 

 

(10,684

)

Financing activities

 

 

 

 

 

 

 

 

Net proceeds (payments) on line of credit

 

 

1,761

 

 

 

(1,000

)

Payments on term loan

 

 

(5,108

)

 

 

(8,723

)

Proceeds from term loan

 

 

5,000

 

 

 

7,500

 

Proceeds from issuance of common stock

 

 

 

 

 

1,500

 

Proceeds from stock option exercise

 

 

 

 

 

278

 

Debt and common stock issuance costs

 

 

(402

)

 

 

(332

)

Payments on capital leases

 

 

(1,583

)

 

 

(1,348

)

Cash used for financing activities

 

 

(332

)

 

 

(2,125

)

Change in cash and cash equivalents

 

 

5,541

 

 

 

(2,683

)

Cash and cash equivalents at beginning of period

 

 

2,000

 

 

 

5,630

 

Cash and cash equivalents at end of period

 

$

7,541

 

 

$

2,947

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Taxes

 

$

634

 

 

$

714

 

Interest

 

$

4,877

 

 

$

4,956

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Capital equipment purchases financed with capital leases

 

$

 

 

$

2,734

 

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

 

 

$

 

 

See accompanying notes

6


 

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(in thousands) 

 

 

 

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

 

 

See accompanying notes

 

7


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

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, 2019 were all of the outstanding capital stock of the following companies:

 

Faneuil, Inc. (including its subsidiaries, “Faneuil”).  Faneuil is a leading provider of call center services, back office operations, staffing services, and toll collection services to government and regulated commercial clients across the United States, focusing on the healthcare, utility, toll and transportation industries. Faneuil is headquartered in Hampton, Virginia.  

 

Floors-N-More, LLC, dba, Carpets N’ More (“Carpets”).  Carpets is one of the largest floor covering retailers in Las Vegas, Nevada, and a provider of multiple products, including all types of flooring, countertops, cabinets, window coverings and garage/closet organizers, for the commercial, retail and home builder markets. Carpets operates two retail locations, as well as a stone and solid surface fabrication facility.  

 

Phoenix Color Corp. (including its subsidiaries, “Phoenix”).  Phoenix is a leading manufacturer of book components, educational materials and related products producing value-added components, heavily illustrated books and specialty commercial products using a broad spectrum of materials and decorative technologies. Phoenix is headquartered in Hagerstown, Maryland.

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

Basis of Presentation

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

The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes.  Significant estimates and assumptions by management are used for, but are not limited to, 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, 2019, are not necessarily indicative of the results expected for future quarters or the full year.  

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

 

 

8


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. RECENT ACCOUNTING STANDARDS   

 

Accounting Standards Not Yet Adopted

 

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

 

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

 

As the new standard will supersede substantially all existing revenue guidance, it could impact the timing of ALJ’s revenue and cost of revenue recognition across all business segments. In July 2017, ALJ formed a revenue recognition project team (“Revenue Team”), which included an outside revenue recognition consultant.  The Revenue Team completed a revenue recognition adoption roadmap that includes three phases:

 

 

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

 

Phase II, 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 analysis for certain revenue streams was completed by December 31, 2018, with the remaining revenue streams expected to be completed by mid 2019.  

 

Phase III includes identification of system requirements, changes to internal controls and business processes, and final implementation.  Phase III is on target and expected to be completed by the original target timeframe of mid 2019. 

 

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

 

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

 

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

9


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

 

3. ACQUISITIONS  

 

Printing Components Business

 

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

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

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

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

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

 

(in thousands)

 

Purchase

Price

 

Balance Sheet Caption

 

Allocation

 

Total current assets

 

$

1,767

 

Fixed assets

 

 

2,273

 

Identified intangible asset - supply agreement

 

 

4,700

 

Goodwill

 

 

1,408

 

Total assets

 

 

10,148

 

Total current liabilities

 

 

(148

)

Purchase price

 

$

10,000

 

 

 

 

 

 

Break Out of Components of Purchase Price Consideration

 

 

 

 

Term loan (note 7)

 

$

7,500

 

Common stock issued (note 9)

 

 

1,500

 

Cash received from exercise of stock option

 

 

1,000

 

Purchase price

 

$

10,000

 

 

10


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company accounted for the Printing Components Business acquisition using the purchase method of accounting. Accordingly, the assets and liabilities were recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and the liabilities assumed was recorded as goodwill. There were no adjustments to the purchase price allocations during the measurement period, which expired one year from the acquisition date.

The Printing Components Business recorded $3.9 million and $7.0 million of net revenue during the three and six months ended March 31, 2019, respectively, and $3.6 million and $8.1 million 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, and therefore, not disclosed.    

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

 

4. CONCENTRATION RISKS

Cash

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

Major Customers and Accounts Receivable

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Customer A

 

 

14.6

%

 

 

14.8

%

 

 

13.7

%

 

 

14.5

%

Customer B

 

 

11.0

 

 

 

10.3

 

 

 

10.3

 

 

**

 

Customer C

 

 

10.8

 

 

 

12.3

 

 

 

13.8

 

 

 

13.3

 

 

**

Less than 10% of Faneuil net revenue.

 

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

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

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Customer A

 

 

31.5

%

 

 

29.9

%

 

 

30.4

%

 

 

28.4

%

Customer B

 

 

25.5

 

 

 

17.3

 

 

 

26.5

 

 

 

20.9

 

Customer C

 

 

22.9

 

 

 

21.2

 

 

 

21.1

 

 

 

23.0

 

 

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

 

11


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Customer A

 

 

23.0

%

 

 

21.1

%

 

 

21.1

%

 

 

18.7

%

Customer B

 

 

20.5

 

 

 

15.9

 

 

 

19.2

 

 

17.3

 

Customer C

 

 

10.9

 

 

**

 

 

 

11.6

 

 

 

10.1

 

Customer D

 

**

 

 

 

11.0

 

 

 

10.5

 

 

**

 

 

**

Less than 10% of Phoenix net revenue.

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

Supplier Risk

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Supplier A

 

 

21.6

%

 

 

16.6

%

 

 

22.9

%

 

 

18.0

%

Supplier B

 

17.2

 

 

**

 

 

15.6

 

 

**

 

Supplier C

 

15.6

 

 

 

23.5

 

 

 

16.0

 

 

22.9

 

Supplier D

 

**

 

 

 

14.0

 

 

10.5

 

 

 

13.7

 

 

**

Less than 10% of Carpets inventory purchases.

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Supplier A

 

 

25.6

%

 

 

30.7

%

 

 

25.9

%

 

 

30.1

%

Supplier B

 

**

 

 

**

 

 

**

 

 

10.8

 

 

**

Less than 10% of Phoenix inventory purchases.

 

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.

 

 

12


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Accounts Receivable, Net

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

 

 

 

March 31,

 

 

September 30,

 

(in thousands)

 

2019

 

 

2018

 

Accounts receivable

 

$

35,402

 

 

$

42,815

 

Unbilled receivables

 

 

3,122

 

 

 

3,776

 

Accounts receivable

 

 

38,524

 

 

 

46,591

 

Less: allowance for doubtful accounts

 

 

(131

)

 

 

(208

)

Accounts receivable, net

 

$

38,393

 

 

$

46,383

 

 

Inventories, Net

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

 

 

 

March 31,

 

 

September 30,

 

(in thousands)

 

2019

 

 

2018

 

Raw materials

 

$

4,101

 

 

$

4,017

 

Semi-finished goods/work in process

 

 

2,180

 

 

 

2,298

 

Finished goods

 

 

1,392

 

 

 

1,566

 

Inventories

 

 

7,673

 

 

 

7,881

 

Less:  allowance for obsolete inventory

 

 

(290

)

 

 

(225

)

Inventories, net

 

$

7,383

 

 

$

7,656

 

 

Property and Equipment

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

 

 

 

March 31,

 

 

September 30,

 

(in thousands)

 

2019

 

 

2018

 

Machinery and equipment

 

$

29,244

 

 

$

24,900

 

Leasehold improvements

 

 

22,058

 

 

 

9,334

 

Building and improvements

 

 

17,035

 

 

 

16,459

 

Software

 

 

16,030

 

 

 

15,749

 

Computer and office equipment

 

 

12,067

 

 

 

11,319

 

Land

 

 

9,267

 

 

 

9,267

 

Construction and equipment in process

 

 

8,110

 

 

 

10,627

 

Furniture and fixtures

 

 

6,660

 

 

 

3,834

 

Vehicles

 

 

375

 

 

 

342

 

Property and equipment

 

 

120,846

 

 

 

101,831

 

Less: accumulated depreciation and amortization

 

 

(48,306

)

 

 

(41,669

)

Property and equipment, net

 

$

72,540

 

 

$

60,162

 

 

Property and equipment depreciation and amortization expense, including amounts related to capitalized leased assets, was $3.5 million for both the three months ended March 31, 2019 and 2018, and $6.6 million and $6.9 million for the six months ended March 31, 2019 and 2018, respectively.

 

13


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Goodwill

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

 

 

 

March 31,

 

 

September 30,

 

(in thousands)

 

2019

 

 

2018

 

Faneuil

 

$

21,276

 

 

$

21,276

 

Carpets

 

 

2,555

 

 

 

2,555

 

Phoenix

 

 

32,541

 

 

 

32,541

 

Goodwill

 

$

56,372

 

 

$

56,372

 

 

Intangible Assets

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

 

 

 

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

 

 

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 2019 and yearly thereafter:

 

(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

 

 

14


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Debt

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

 

 

 

March 31,

 

 

September 30,

 

(in thousands)

 

2019

 

 

2018

 

Line of credit:

 

 

 

 

 

 

 

 

Line of credit

 

$

10,500

 

 

$

8,739

 

Less: deferred loan costs

 

 

(57

)

 

 

(145

)

Line of credit, net of deferred loan costs

 

$

10,443

 

 

$

8,594

 

Current portion of term loans:

 

 

 

 

 

 

 

 

Current portion of term loan

 

$

8,200

 

 

$

9,470

 

Current portion of equipment financing

 

 

1,303

 

 

 

 

Less: deferred loan costs

 

 

(440

)

 

 

(875

)

Current portion of term loans, net of deferred loan costs

 

$

9,063

 

 

$

8,595

 

Term loans, less current portion:

 

 

 

 

 

 

 

 

Term loans, less current portion

 

$

76,982

 

 

$

75,504

 

Equipment financing, less current portion

 

 

2,441

 

 

 

 

Less: deferred loan costs

 

 

(1,236

)

 

 

(709

)

Term loans, less current portion, net of deferred

   loan costs

 

$

78,187

 

 

$

74,795

 

 

Accrued Expenses

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

 

 

 

March 31,

 

 

September 30,

 

(in thousands)

 

2019

 

 

2018

 

Accrued compensation and related taxes

 

$

8,260

 

 

$

7,275

 

Call center buildout**

 

 

3,791

 

 

 

2,700

 

Rebates payable

 

 

1,192

 

 

 

1,491

 

Legal and other

 

 

1,242

 

 

 

1,123

 

Interest payable

 

 

742

 

 

 

676

 

Medical and benefit-related payables

 

 

729

 

 

 

609

 

Accrued board of director fees

 

 

390

 

 

 

130

 

Deferred rent

 

 

138

 

 

 

174

 

Sales tax payable

 

 

123

 

 

 

193

 

Total accrued expenses

 

$

16,607

 

 

$

14,371

 

 

**

At March 31, 2019, Faneuil had total liabilities and commitments of $6.8 million to build out one new call center. $3.8 million was recorded to accrued liabilities, $1.5 million was recorded to other non-current liabilities, and $1.5 million was disclosed as a commitment. See Note 8.

Workers’ Compensation Reserve

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

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

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

 

 

15


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. EARNINGS (LOSS) PER SHARE

ALJ computed basic and diluted earnings (loss) per share of common stock for each period as follows:

 

 

 

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) 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) 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.

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.

 

7. DEBT

Term Loan and Line of Credit

 

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

 

Fourth Amendment to 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:

 

 

an easing of the fixed charge coverage ratio financial covenant from 1.25:1.00 to (a) 1.05:1.00 for each quarter beginning with the quarter ended December 31, 2018 through the quarter ending September 30, 2020 and (b) 1.10:1.00 for the quarter beginning with the quarter ending December 31, 2020 and for each quarter thereafter; and

 

 

a stepdown in the leverage ratio financial covenant from (a) 3.50:1.00 for each quarter beginning with the quarter ended December 31, 2018 through the quarter ending September 30, 2020, to (b) 3.25:1.00 for each  quarter beginning with the quarter ending December 31, 2020 through the quarter ending September 30, 2021, (c) 3.00:1.00 for each quarter beginning with the quarter ending December 31, 2021 through the quarter ending September 30, 2022 and (d) 2.75:1.00 for each  quarter beginning with the quarter ending December 31, 2022 and for each quarter thereafter.

 

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.

 

16


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Description

 

Use of Proceeds

 

Origination Date

 

Interest Rate *

 

Quarterly

Payments

 

 

Balance at

March 31, 2019

 

Term Loan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Agreement

 

Phoenix acquisition

 

August 2015

 

9.00% to 9.28%

 

$

1,610

 

 

$

66,893

 

First Amendment

 

Color Optics acquisition

 

July 2016

 

9.00% to 9.28%

 

 

175

 

 

 

7,286

 

Third Amendment

 

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

 

$

2,050

 

 

$

85,182

 

Line of Credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cerberus/PNC Revolver

(includes Second Amendment)

 

Working capital

 

August 2015

 

11.00% to 11.25%

 

$

 

 

$

10,500

 

 

*

Range of annual interest rates accrued during the six months ended March 31, 2019.  

Interest payments are due in arrears on the first day of each month.  Quarterly principal payments are due on the last day of each fiscal quarter.  Annual principal payments equal to 75% of ALJ’s excess cash flow (“ECF”), as defined in the Financing Agreement, are due upon delivery of the annual audited financial statements.  During December 2018 and December 2017, ALJ made ECF payments of $0.3 million and $4.1 million, respectively.  During the 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 on the Amended Maturity Date.  There is a prepayment penalty equal to 3%, 2%, and 1% if the Cerberus Term Loan is repaid within the first, second, and third year anniversary of the Fourth Amendment.  ALJ may make payments of up to $7.0 million against the loan with no penalty.

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

 

Backstop Letter Agreement

 

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.

 

Loan Amendment Fees

 

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.

17


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 through the Amended Maturity Date.

Contingent Loan Costs

 

Pursuant to the second amendment to the Financing Agreement, ALJ is required to pay a fee in each of three consecutive annual periods commencing May 27, 2018, 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.  During May 2018, ALJ paid the first Contingent Payment, which was added to deferred loan costs and is being amortized to interest expense through April 30, 2019.

 

Equipment Financing

 

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

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

 

Year Ending March 31,

 

Equipment Financing

 

 

Cerberus Debt

 

 

Total

 

2020

 

$

1,303

 

 

$

8,200

 

 

$

9,503

 

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

 

$

3,744

 

 

$

95,682

 

 

$

99,426

 

 

*

The majority of this amount is the final balloon payment due on the Amended Maturity Date.

Capital Lease Obligations

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

 

Year Ending March 31,

 

Estimated

Future

Payments

 

2020

 

$

2,679

 

2021

 

 

1,931

 

2022

 

 

536

 

2023

 

 

536

 

2024

 

 

435

 

Total minimum required payments

 

 

6,117

 

Less: current portion of capital lease obligations

 

 

(2,510

)

Less: imputed interest

 

 

(364

)

Capital lease obligations, less current portion

 

$

3,243

 

 

 

18


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. COMMITMENTS AND CONTINGENCIES

Operating Leases

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

 

Year Ending March 31,

 

Future

Minimum

Lease

Payments

 

2020

 

$

5,703

 

2021

 

 

4,909

 

2022

 

 

3,589

 

2023

 

 

2,850

 

2024

 

 

2,814

 

Thereafter

 

 

15,414

 

Total

 

$

35,279

 

 

Employment Agreements

ALJ maintains employment agreements with certain key executive officers that provide for a base salary and an annual bonus, with annual bonus amounts to be determined by the Board of Directors.  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, 2019, termination payments related to base salary totaled $1.2 million.

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, 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 $26.3 million.  To date, Faneuil has not made any non-performance payments to any of its sureties.

Letters of Credit

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

Leasehold Improvements

 

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.

Litigation, Claims, and Assessments

Faneuil, Inc. v. 3M Company

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

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

 

19


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 have fully briefed the merits of Faneuil’s appeal and are waiting for the court to set the date for oral argument at this time.

Marshall v. Faneuil, Inc.

On July 31, 2017, plaintiff Donna Marshall (“Marshall”), filed a proposed class action lawsuit in the Superior Court of the State of California for the County of Sacramento against Faneuil and ALJ. Marshall, a previously terminated Faneuil employee, alleges various California state law employment-related claims against Faneuil.  Faneuil has answered the complaint and removed the matter to the United States District Court for the Eastern District of California; however, Marshall filed a motion to remand the case back to state court, which has been granted.  The case is in early discovery at this time. Faneuil believes this action is without merit and intends to defend it vigorously.

McNeil, et al. v. Faneuil, Inc.

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

Other Litigation

The Company has been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty.  The Company concluded as of March 31, 2019 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

Environmental Matters

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.

 

 

9. EQUITY

Common Stock Activity during the Six Months Ended March 31, 2019

ALJ’s common stock activity for the six months ended March 31, 2019 consisted of the following:

 

Retired 84,000 shares of common stock, which were received by ALJ as part of a settlement agreement related to Faneuil’s acquisition of certain customer management outsourcing business assets and liabilities (the “CMO Business”) in May 2017.  In connection with the settlement, ALJ recognized a $0.1 million gain during the six months ended March 31, 2019, which was included with disposal of assets and other gain on the statement of operations.

Common Stock Activity during the Six Months Ended March 31, 2018

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

 

Sold 477,706 shares of common stock, at $3.14 per share, to two unaffiliated shareholders in connection with financing the Printing Components Business acquisition.  See Note 3.

20


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Issued 102,102 shares of common stock to members of ALJ’s Board of Directors as compensation.  See “Common Stock Awards” below for further discussion.

 

Issued 300,000 shares of common stock upon exercise of options at a weighted-average exercise price of $0.93 per share.

Equity Incentive Plans

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

Stock-Based Compensation.  

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

 

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

(in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Stock options

 

$

84

 

 

$

167

 

 

$

168

 

 

$

358

 

Common stock awards

 

 

102

 

 

 

103

 

 

 

203

 

 

 

205

 

Total stock-based compensation expense

 

$

186

 

 

$

270

 

 

$

371

 

 

$

563

 

 

At March 31, 2019, ALJ had approximately $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 1.6 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 less than $0.1 million.  ALJ estimated the fair value of the option on the grant date using the Black-Scholes valuation model under the following assumptions:  weighted average expected option life of 6.0 years, weighted average expected volatility of 48.4%, expected dividend yield of 0%, and weighted-average risk-free interest rate of 2.1%.

The “intrinsic value” of options is the excess of the value of ALJ stock over the exercise price of such options.  The total intrinsic value of options outstanding (of which all are vested) was less than $0.1 million at March 31, 2019.

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

 

10. INCOME TAX

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 as a result of generating state taxable losses.  ALJ’s provision for income taxes for the six months ended March 31, 2018 was impacted by the United States Tax Reform as discussed below.

United States Tax Reform

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

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

21


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 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.  

 

 

11. RELATED-PARTY TRANSACTIONS

Harland Clarke Holdings Corp. (“Harland Clarke”), a stockholder who owns ALJ shares in excess of five percent, had a contract with Faneuil to provide call center services for Harland Clarke’s banking-related products.  The contract completed in March 2019.  Faneuil recognized revenue from Harland Clarke totaling $0.1 million for both the three and 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. The associated cost of revenue was $0.1 million for both the three and 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.  All revenue from Harland Clarke contained similar terms and conditions as those found in other transactions of this nature entered into by Faneuil.  Total accounts receivable from Harland Clarke was less than $0.1 million at March 31, 2019 and September 30, 2018.

 

 

12. REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION

Reportable Segments

 

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

 

22


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Three Months Ended March 31, 2019

 

(in thousands)

 

Faneuil

 

 

Carpets

 

 

Phoenix

 

 

ALJ

 

 

Total

 

Net revenue

 

$

46,590

 

 

$

12,088

 

 

$

29,318

 

 

$

 

 

$

87,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment adjusted EBITDA

 

$

2,793

 

 

$

272

 

 

$

6,335

 

 

$

(659

)

 

$

8,741

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,837

)

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,625

)

Lease payments in anticipation

   of facility shutdown

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(188

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(186

)

Restructuring expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(144

)

Loan amendment fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(136

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(202

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

423

 

 

 

 

Six Months Ended March 31, 2019

 

(in thousands)

 

Faneuil

 

 

Carpets

 

 

Phoenix

 

 

ALJ

 

 

Total

 

Net revenue

 

$

101,792

 

 

$

24,450

 

 

$

55,538

 

 

$

 

 

$

181,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment adjusted EBITDA

 

$

7,739

 

 

$

432

 

 

$

10,556

 

 

$

(1,380

)

 

$

17,347

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,283

)

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,340

)

Lease payments in anticipation

   of facility shutdown

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(374

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(371

)

Loan amendment fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(337

)

Restructuring expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(229

)

Acquisition-related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

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

)

23


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

Six Months Ended March 31, 2018

 

(in thousands)

 

Faneuil

 

 

Carpets

 

 

Phoenix

 

 

ALJ

 

 

Total

 

Net revenue

 

$

99,427

 

 

$

35,341

 

 

$

55,291

 

 

$

 

 

$

190,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment adjusted EBITDA

 

$

6,625

 

 

$

(966

)

 

$

9,619

 

 

$

(1,096

)

 

$

14,182

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,683

)

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,987

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(5,658

)

 

 

Geographic Information

 

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

 

 

 

24


 

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:

 

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

 

Results of Operations. An analysis comparing our financial results for the three and six months ended March 31, 2019 to the three and six months ended March 31, 2018.

 

Liquidity and Capital Resources. An analysis comparing our cash flows for the six months ended March 31, 2019 to the six months ended March 31, 2018, and discussion of our financial condition and liquidity.

 

Contractual Obligations.  Discussion of contractual obligations as of March 31, 2019.

 

Off-Balance Sheet Arrangements.  Discussion of off-balance sheet arrangements as of March 31, 2019.

 

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

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

Overview

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

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

25


 

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

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

 

 

 

Three Months Ended

March 31, 2019

 

 

Three Months Ended

March 31, 2018

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

(in thousands, except per share amounts)

 

Dollars

 

 

Net Revenue

 

 

Dollars

 

 

Net Revenue

 

Net revenue (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

$

46,590

 

 

 

52.9

%

 

$

47,953

 

 

 

50.4

%

Carpets

 

 

12,088

 

 

 

13.7

 

 

 

18,691

 

 

 

19.7

 

Phoenix

 

 

29,318

 

 

 

33.3

 

 

 

28,461

 

 

 

29.9

 

Consolidated net revenue

 

 

87,996

 

 

 

100.0

 

 

 

95,105

 

 

 

100.0

 

Cost of revenue (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

37,117

 

 

 

79.7

 

 

 

37,351

 

 

 

77.9

 

Carpets

 

 

9,576

 

 

 

79.2

 

 

 

15,832

 

 

 

84.7

 

Phoenix (3)

 

 

21,046

 

 

 

71.8

 

 

 

21,056

 

 

 

74.0

 

Consolidated cost of revenue

 

 

67,739

 

 

 

77.0

 

 

 

74,239

 

 

 

78.1

 

Selling, general and administrative expense (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

6,817

 

 

 

14.6

 

 

 

7,688

 

 

 

16.0

 

Carpets

 

 

2,335

 

 

 

19.3

 

 

 

3,099

 

 

 

16.6

 

Phoenix

 

 

3,238

 

 

 

11.0

 

 

 

3,769

 

 

 

13.2

 

ALJ

 

 

845

 

 

 

 

 

 

810

 

 

 

 

Consolidated selling, general and administrative expense

 

 

13,235

 

 

 

15.0

 

 

 

15,366

 

 

 

16.2

 

Depreciation and amortization (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

2,968

 

 

 

6.4

 

 

 

2,607

 

 

 

5.4

 

Carpets

 

 

237

 

 

 

2.0

 

 

 

219

 

 

 

1.2

 

Phoenix (4)

 

 

567

 

 

 

1.9

 

 

 

630

 

 

 

2.2

 

Consolidated depreciation and amortization expense

 

 

3,772

 

 

 

4.3

 

 

 

3,456

 

 

 

3.6

 

Disposal of assets and other gain (5)

 

 

 

 

 

 

 

 

(25

)

 

 

 

Total consolidated operating expenses (5)

 

 

84,746

 

 

 

96.3

 

 

 

93,036

 

 

 

97.8

 

Consolidated operating income

 

 

3,250

 

 

 

3.7

 

 

 

2,069

 

 

 

2.2

 

Interest expense (5)

 

 

(2,625

)

 

 

(3.0

)

 

 

(2,793

)

 

 

(2.9

)

(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

)

 

 

 

 

 

(1)

Percentage is calculated as segment net revenue divided by consolidated net revenue.

(2)

Percentage is calculated as a percentage of the respective segment net revenue.

(3)

Includes depreciation expense of $1.1 million and $1.4 million for the three months ended March 31, 2019 and 2018, respectively.

(4)

Primarily amortization of intangible assets.  Total depreciation and amortization expense for Phoenix, including depreciation expense captured in cost of revenue, was $1.6 million and $2.0 million for the three months ended March 31, 2019 and 2018, respectively.

(5)

Percentage is calculated as a percentage of consolidated net revenue.


26


 

Net Revenue

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

46,590

 

 

$

47,953

 

 

$

(1,363

)

 

 

(2.8

)%

Carpets

 

 

12,088

 

 

 

18,691

 

 

 

(6,603

)

 

 

(35.3

)

Phoenix

 

 

29,318

 

 

 

28,461

 

 

 

857

 

 

 

3.0

 

Consolidated net revenue

 

$

87,996

 

 

$

95,105

 

 

$

(7,109

)

 

 

(7.5

)%

 

Faneuil Net Revenue

Faneuil net revenue for the three months ended March 31, 2019 was $46.6 million, a decrease of $1.4 million, or 2.8%, compared to net revenue of $48.0 million for the three months ended March 31, 2018.  The decrease was mainly attributable to a $1.6 million reduction driven by the completion of customer contracts and a $2.1 million decrease in existing 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 year Faneuil expects to recognize such net revenue:

 

 

 

As of  March 31,

 

(in millions)

 

2019

 

 

2018

 

Within one year

 

$

167.6

 

 

$

98.4

 

Between one year and two years

 

 

123.6

 

 

 

78.4

 

Between two years and three years

 

 

55.9

 

 

 

56.2

 

Between three years and four years

 

 

28.3

 

 

 

14.6

 

Thereafter

 

 

28.0

 

 

 

6.8

 

Total Faneuil backlog

 

$

403.4

 

 

$

254.4

 

 

The increase in Faneuil backlog at March 31, 2019 compared to March 31, 2018 was primarily driven by the award of the Metro ExpressLanes Customer Service Center Operations contract by the Los Angeles County Metropolitan Transportation Authority (“LA Metro”), to provide the management and day-to-day customer service operations for its ExpressLanes program.  The contract was awarded during the three months ended March 31, 2019.

Carpets Net Revenue

Carpets net revenue for the three months ended March 31, 2019 was $12.1 million, a decrease of $6.6 million, or 35.3%, compared to net revenue of $18.7 million for the three months ended March 31, 2018.  The decrease was primarily attributable to lower sales volumes in cabinets, flooring, and granite.

Carpets backlog represents open purchase orders.  Carpets total contract backlog, which is expected to be fully realized within the next 12 months, as of March 31, 2019 was $11.4 million compared to $16.8 million as of March 31, 2018.  The decrease in Carpets backlog at March 31, 2019 compared to March 31, 2018, was the result of a strategic decision to only accept jobs that yield a targeted profit margin.

Phoenix Net Revenue

Phoenix net revenue for the three months ended March 31, 2019 was $29.3 million, an increase of $0.9 million, or 3.0%, compared to net revenue of $28.5 million for the three months ended March 31, 2018.  The increase was a result of higher component sales and book volumes, slightly offset by planned lower packaging sales.

27


 

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

 

 

 

As of  March 31,

 

(in millions)

 

2019

 

 

2018

 

Within one year

 

$

69.5

 

 

$

70.2

 

Between one year and two years

 

 

44.4

 

 

 

57.4

 

Between two years and three years

 

 

22.1

 

 

 

30.6

 

Between three years and four years

 

 

10.9

 

 

 

10.0

 

Thereafter

 

 

 

 

 

7.5

 

Total Phoenix backlog

 

$

146.9

 

 

$

175.7

 

 

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

Cost of Revenue

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

37,117

 

 

$

37,351

 

 

$

(234

)

 

 

(0.6

)%

As a percentage of net revenue

 

 

79.7

%

 

 

77.9

%

 

 

 

 

 

 

 

 

Carpets

 

 

9,576

 

 

 

15,832

 

 

 

(6,256

)

 

 

(39.5

)

As a percentage of net revenue

 

 

79.2

%

 

 

84.7

%

 

 

 

 

 

 

 

 

Phoenix

 

 

21,046

 

 

 

21,056

 

 

 

(10

)

 

 

 

As a percentage of net revenue

 

 

71.8

%

 

 

74.0

%

 

 

 

 

 

 

 

 

Consolidated cost of revenue

 

$

67,739

 

 

$

74,239

 

 

$

(6,500

)

 

 

(8.8

)%

 

Faneuil Cost of Revenue

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

Carpets Cost of Revenue

 

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

Phoenix Cost of Revenue

Phoenix cost of revenue was flat at $21.0 million and $21.1 million for the three months ended March 31, 2019 and March 31, 2018, respectively.  During the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, cost of revenue as a percentage of segment net revenue decreased at 71.8% and 74.0%, 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.  

28


 

Selling, General and Administrative Expense

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

6,817

 

 

$

7,688

 

 

$

(871

)

 

 

(11.3

)%

Carpets

 

 

2,335

 

 

 

3,099

 

 

 

(764

)

 

 

(24.7

)

Phoenix

 

 

3,238

 

 

 

3,769

 

 

 

(531

)

 

 

(14.1

)

ALJ

 

 

845

 

 

 

810

 

 

 

35

 

 

 

4.3

 

Consolidated selling, general and administrative

   expense

 

$

13,235

 

 

$

15,366

 

 

$

(2,131

)

 

 

(13.9

)%

 

Faneuil Selling, General and Administrative Expense

Faneuil selling, general and administrative expense for the three months ended March 31, 2019 was $6.8 million, a decrease of $0.9 million, or 11.3%, compared to selling, general and administrative expense of $7.7 million for the three months ended March 31, 2018.  The decrease was primarily attributable to reduced legal expenses, reduced expenses from completed contracts and existing customers, slightly offset by an increase to support new customers.  During the three months ended March 31, 2019 compared to the three months ended March 31, 2018, selling, general and administrative expense as a percentage of segment net revenue decreased to 14.6% from 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

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.  The decrease was primarily attributable to process improvements and cost reductions throughout the organization.  Selling, general and administrative expense as a percentage of segment net revenue increased to 19.3% for the three months ended March 31, 2019 from 16.6% for 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.  

Phoenix Selling, General and Administrative Expense

Phoenix selling, general and administrative expense for the three months ended March 31, 2019 was $3.2 million, a decrease of $0.5 million, or 14.1%, compared to selling, general and administrative expense of $3.8 million for the three months ended March 31, 2018.  The decrease was mainly attributable to the completion of the process to consolidate manufacturing facilities.  Selling, general and administrative expense as a percentage of segment net revenue decreased to 11.0% for the three months ended March 31, 2019 from 13.2% for the three months ended March 31, 2018, which was mainly attributable to the 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

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.  ALJ selling, general and administrative expenses were impacted by the hiring of additional personnel to support our business and our strategy of acquisitions offset by lower stock-based compensation expense.  We expect selling, general and administrative expense to fluctuate in the future as we comply with SEC reporting requirements and regulations and allocate certain expenses to our subsidiaries.

Depreciation and Amortization Expense

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

2,968

 

 

$

2,607

 

 

$

361

 

 

 

13.8

%

Carpets

 

 

237

 

 

 

219

 

 

 

18

 

 

 

8.2

 

Phoenix

 

 

567

 

 

 

630

 

 

 

(63

)

 

 

(10.0

)

Consolidated depreciation and amortization

   expense

 

$

3,772

 

 

$

3,456

 

 

$

316

 

 

 

9.1

%

29


 

 

Faneuil Depreciation and Amortization Expense

Faneuil depreciation and amortization expense for the three months ended March 31, 2019 was $3.0 million, an increase of $0.4 million, or 13.8%, compared to depreciation and amortization expense of $2.6 million for the three months ended March 31, 2018.   The increase was attributable to capital equipment purchased to support new and expanded contracts. Faneuil expects future depreciation and amortization expense to increase as Faneuil continues to invest in its business, which includes opening new call centers.  Because certain Faneuil contracts require capital investments such as lease buildouts, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.  

Carpets Depreciation and Amortization Expense

Carpets depreciation and amortization expense was unchanged at $0.2 million for both the three months ended March 31, 2019 and 2018.

Phoenix Depreciation and Amortization Expense

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

Interest Expense

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

Provision for Income Taxes

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.  

Segment Adjusted EBITDA

 

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

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

2,793

 

 

$

2,915

 

 

$

(122

)

 

 

(4.2

)%

Carpets

 

 

272

 

 

 

(240

)

 

 

512

 

 

 

213.3

 

Phoenix

 

 

6,335

 

 

 

5,459

 

 

 

876

 

 

 

16.0

 

ALJ

 

 

(659

)

 

 

(540

)

 

 

(119

)

 

 

(22.0

)

Segment adjusted EBITDA

 

$

8,741

 

 

$

7,594

 

 

$

1,147

 

 

 

15.1

%

 

Faneuil Segment Adjusted EBITDA

Faneuil segment adjusted EBITDA for the three months ended March 31, 2019 was $2.8 million compared to segment adjusted EBITDA of $2.9 million for the three months ended March 31, 2018.  Faneuil segment adjusted EBITDA for the three months ended March 31, 2019 was impacted by lower net revenue and lower expenses resulting from operational efficiencies within certain contracts.        

30


 

Carpets Segment Adjusted EBITDA

Carpets segment adjusted EBITDA for the three months ended March 31, 2019 was $0.3 million compared to segment adjusted EBITDA loss of ($0.2) million for the three months ended March 31, 2018.   Carpets segment adjusted EBITDA for the three months ended March 31, 2019 was positively impacted by process improvements and cost reductions.  

Phoenix Segment Adjusted EBITDA

Phoenix segment adjusted EBITDA for the three months ended March 31, 2019 was $6.3 million compared to segment adjusted EBITDA of $5.5 million for the three months ended March 31, 2018.  Phoenix segment adjusted EBITDA for the three months ended March 31, 2019 was positively impacted by the increase in net revenue and the decrease to selling, general and administrative expenses resulting from consolidating printing facilities.   

ALJ Segment Adjusted EBITDA

ALJ segment adjusted EBITDA for the three months ended March 31, 2019 was $(0.7) million compared to segment adjusted EBITDA of $(0.5) million for the three months ended March 31, 2018.  ALJ segment adjusted EBITDA for three months ended March 31, 2019 was impacted by increased headcount.    

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

31


 

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

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

 

 

 

Six Months Ended

March 31, 2019

 

 

Six Months Ended

March 31, 2018

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

(in thousands, except per share amounts)

 

Dollars

 

 

Net Revenue

 

 

Dollars

 

 

Net Revenue

 

Net revenue (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

$

101,792

 

 

 

56.0

%

 

$

99,427

 

 

 

52.3

%

Carpets

 

 

24,450

 

 

 

13.5

 

 

 

35,341

 

 

 

18.6

 

Phoenix

 

 

55,538

 

 

 

30.6

 

 

 

55,291

 

 

 

29.1

 

Consolidated net revenue

 

 

181,780

 

 

 

100.0

 

 

 

190,059

 

 

 

100.0

 

Cost of revenue (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

79,765

 

 

 

78.4

 

 

 

77,570

 

 

 

78.0

 

Carpets

 

 

19,392

 

 

 

79.3

 

 

 

29,635

 

 

 

83.9

 

Phoenix (3)

 

 

41,409

 

 

 

74.6

 

 

 

41,944

 

 

 

75.9

 

Consolidated cost of revenue

 

 

140,566

 

 

 

77.3

 

 

 

149,149

 

 

 

78.5

 

Selling, general and administrative expense (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

14,625

 

 

 

14.4

 

 

 

15,233

 

 

 

15.3

 

Carpets

 

 

4,721

 

 

 

19.3

 

 

 

6,672

 

 

 

18.9

 

Phoenix

 

 

6,305

 

 

 

11.4

 

 

 

7,908

 

 

 

14.3

 

ALJ

 

 

1,763

 

 

 

 

 

 

1,658

 

 

 

 

Consolidated selling, general and administrative expense

 

 

27,414

 

 

 

15.1

 

 

 

31,471

 

 

 

16.6

 

Depreciation and amortization (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

5,462

 

 

 

5.4

 

 

 

5,182

 

 

 

5.2

 

Carpets

 

 

466

 

 

 

1.9

 

 

 

438

 

 

 

1.2

 

Phoenix (4)

 

 

1,131

 

 

 

2.0

 

 

 

1,269

 

 

 

2.3

 

Consolidated depreciation and amortization expense

 

 

7,059

 

 

 

3.9

 

 

 

6,889

 

 

 

3.6

 

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

 

 

6,964

 

 

 

3.8

 

 

 

2,782

 

 

 

1.5

 

Interest expense (5)

 

 

(5,340

)

 

 

(2.9

)

 

 

(5,453

)

 

 

(2.9

)

Provision for income taxes (5)

 

 

(490

)

 

 

(0.3

)

 

 

(2,987

)

 

 

(1.6

)

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

)

 

 

 

 

 

(1)

Percentage is calculated as segment net revenue divided by consolidated net revenue.

(2)

Percentage is calculated as a percentage of the respective segment net revenue.

(3)

Includes depreciation expense of $2.2 million and $2.8 million for the six months ended March 31, 2019 and 2018, respectively.

(4)

Primarily amortization of intangible assets.  Total depreciation and amortization expense for Phoenix, including depreciation expense captured in cost of revenue, was $3.4 million and $4.1 million for the six months ended March 31, 2019 and 2018, respectively.

(5)

Percentage is calculated as a percentage of consolidated net revenue.

Net Revenue

 

 

 

Six Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

101,792

 

 

$

99,427

 

 

$

2,365

 

 

 

2.4

%

Carpets

 

 

24,450

 

 

 

35,341

 

 

 

(10,891

)

 

 

(30.8

)

Phoenix

 

 

55,538

 

 

 

55,291

 

 

 

247

 

 

 

0.4

 

Consolidated net revenue

 

$

181,780

 

 

$

190,059

 

 

$

(8,279

)

 

 

(4.4

)%

32


 

 

Faneuil Net Revenue

Faneuil net revenue for the six months ended March 31, 2019 was $101.8 million, an increase of $2.4 million, or 2.4%, compared to net revenue of $99.4 million for the six months ended March 31, 2018.  The increase was mainly attributable to a $6.4 million from new customer contracts, offset by a $2.4 million reduction driven by the completion of customer contracts and a $1.6 million decrease in existing customers.

Carpets Net Revenue

Carpets net revenue for the six months ended March 31, 2019 was $24.5 million, a decrease of $10.9 million, or 30.8%, compared to net revenue of $35.3 million for the six months ended March 31, 2018.  The decrease was primarily attributable to lower sales volumes in cabinets, flooring, and granite.

Phoenix Net Revenue

Phoenix net revenue for the six months ended March 31, 2019 was $55.5 million, an increase of $0.2 million, or 0.4%, compared to net revenue of $55.3 million for the six months ended March 31, 2018.  The increase was the net result of higher component sales, lower book volumes, and planned lower packaging sales.

Cost of Revenue

 

 

 

Six Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

79,765

 

 

$

77,570

 

 

$

2,195

 

 

 

2.8

%

As a percentage of net revenue

 

 

78.4

%

 

 

78.0

%

 

 

 

 

 

 

 

 

Carpets

 

 

19,392

 

 

 

29,635

 

 

 

(10,243

)

 

 

(34.6

)

As a percentage of net revenue

 

 

79.3

%

 

 

83.9

%

 

 

 

 

 

 

 

 

Phoenix

 

 

41,409

 

 

 

41,944

 

 

 

(535

)

 

 

(1.3

)

As a percentage of net revenue

 

 

74.6

%

 

 

75.9

%

 

 

 

 

 

 

 

 

Consolidated cost of revenue

 

$

140,566

 

 

$

149,149

 

 

$

(8,583

)

 

 

(5.8

)%

 

Faneuil Cost of Revenue

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

Carpets Cost of Revenue

 

Carpets cost of revenue for the six months ended March 31, 2019 was $19.4 million, a decrease of $10.2 million, or 34.6%, compared to cost of revenue of $29.6 million for the six months ended March 31, 2018.  The absolute dollar decrease in cost of revenue was mainly attributable to decreased net revenue.  During the six months ended March 31, 2019, as compared to the six months ended March 31, 2018, cost of revenue as a percentage of segment net revenue 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 process improvements and cost reductions throughout the organization.  

Phoenix Cost of Revenue

Phoenix cost of revenue for the six months ended March 31, 2019 was $41.4 million, a decrease of $0.5 million, or 1.3%, compared to cost of revenue of $41.9 million for the six months ended March 31, 2018.  During the six months ended March 31, 2019, as compared to the six months ended March 31, 2018, cost of revenue as a percentage of segment net revenue decreased to 74.6% from 75.9% 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.  

33


 

Selling, General and Administrative Expense

 

 

 

Six Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

14,625

 

 

$

15,233

 

 

$

(608

)

 

 

(4.0

)%

Carpets

 

 

4,721

 

 

 

6,672

 

 

 

(1,951

)

 

 

(29.2

)

Phoenix

 

 

6,305

 

 

 

7,908

 

 

 

(1,603

)

 

 

(20.3

)

ALJ

 

 

1,763

 

 

 

1,658

 

 

 

105

 

 

 

6.3

 

Consolidated selling, general and administrative

   expense

 

$

27,414

 

 

$

31,471

 

 

$

(4,057

)

 

 

(12.9

)%

 

Faneuil Selling, General and Administrative Expense

Faneuil selling, general and administrative expense for the six months ended March 31, 2019 was $14.6 million, a decrease of $0.6 million, or 4.0%, compared to selling, general and administrative expense of $15.2 million for the six months ended March 31, 2018.  The decrease was primarily attributable to reduced legal expenses, reduced expenses from completed contracts and existing customers, slightly offset by an increase to support new customers.  During the six months ended March 31, 2019 compared to the six months ended March 31, 2018, selling, general and administrative expense as a percentage of segment net revenue decreased to 14.4% from 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

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.  The decrease was primarily attributable to process improvements and cost reductions throughout the organization.  Selling, general and administrative expense as a percentage of segment net revenue increased to 19.3% for the six months ended March 31, 2019 from 18.9% for 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.  

Phoenix Selling, General and Administrative Expense

Phoenix selling, general and administrative expense for the six months ended March 31, 2019 was $6.3 million, a decrease of $1.6 million, or 20.3%, compared to selling, general and administrative expense of $7.9 million for the six months ended March 31, 2018.  The decrease was mainly attributable to the completion of the process to consolidate manufacturing facilities.  Selling, general and administrative expense as a percentage of segment net revenue decreased to 11.4% for the six months ended March 31, 2019 from 14.3% for the six months ended March 31, 2018, which was mainly attributable to the 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

ALJ selling, general and administrative expense for the six months ended March 31, 2019 was $1.8 million, an increase of $0.1 million, or 6.3%, compared to selling, general and administrative expense of $1.7 million for the six months ended March 31, 2018.  ALJ selling, general and administrative expenses were impacted by the hiring of additional personnel to support our business and our strategy of acquisitions offset by lower stock-based compensation expense. We expect selling, general and administrative expense to fluctuate in the future as we comply with SEC reporting requirements and regulations and allocate certain expenses to our subsidiaries.

Depreciation and Amortization Expense

 

 

 

Six Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

5,462

 

 

$

5,182

 

 

$

280

 

 

 

5.4

%

Carpets

 

 

466

 

 

 

438

 

 

 

28

 

 

 

6.4

 

Phoenix

 

 

1,131

 

 

 

1,269

 

 

 

(138

)

 

 

(10.9

)

Consolidated depreciation and amortization

   expense

 

$

7,059

 

 

$

6,889

 

 

$

170

 

 

 

2.5

%

34


 

 

Faneuil Depreciation and Amortization Expense

Faneuil depreciation and amortization expense for the six months ended March 31, 2019 was $5.5 million, an increase of $0.3 million, or 5.4%, compared to depreciation and amortization expense of $5.2 million for the six months ended March 31, 2018.   The increase was attributable to capital equipment purchased to support new and expanded contracts. Faneuil expects future depreciation and amortization expense to increase as Faneuil continues to invest in its customers, which includes opening new call centers.  Because certain Faneuil contracts require capital investments such as lease buildouts, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.  

Carpets Depreciation and Amortization Expense

Carpets depreciation and amortization expense was flat at $0.5 million and $0.4 million for the six months ended March 31, 2019 and 2018, respectively.

Phoenix Depreciation and Amortization Expense

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.  The decrease was attributable to fully amortized acquisition-related intangible assets.        

Interest Expense

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

Provision for Income Taxes

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.  The six months ended March 31, 2018 reflected a one-time revaluation of deferred tax assets, which was the result of new tax reform legislation enacted on December 22, 2017 (the “Tax Reform Law”).

Segment Adjusted EBITDA

 

The following table summarizes segment adjusted EBITDA.

 

 

 

Six Months Ended

March 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

7,739

 

 

$

6,625

 

 

$

1,114

 

 

 

16.8

%

Carpets

 

 

432

 

 

 

(966

)

 

 

1,398

 

 

 

144.7

 

Phoenix

 

 

10,556

 

 

 

9,619

 

 

 

937

 

 

 

9.7

 

ALJ

 

 

(1,380

)

 

 

(1,096

)

 

 

(284

)

 

 

(25.9

)

Segment adjusted EBITDA

 

$

17,347

 

 

$

14,182

 

 

$

3,165

 

 

 

22.3

%

 

Faneuil Segment Adjusted EBITDA

Faneuil segment adjusted EBITDA for the six months ended March 31, 2019 was $7.7 million compared to segment adjusted EBITDA of $6.6 million for the six months ended March 31, 2018.  Faneuil segment adjusted EBITDA for the six months ended March 31, 2019 was positively impacted by increased net revenue and operational efficiencies within certain contracts.    

35


 

Carpets Segment Adjusted EBITDA

Carpets segment adjusted EBITDA for the six months ended March 31, 2019 was $0.4 million compared to segment adjusted EBITDA loss of ($1.0) million for the six months ended March 31, 2018.   Carpets segment adjusted EBITDA for the six months ended March 31, 2019 was positively impacted by process improvements and cost reductions.  

Phoenix Segment Adjusted EBITDA

Phoenix segment adjusted EBITDA for the six months ended March 31, 2019 was $10.6 million compared to segment adjusted EBITDA of $9.6 million for the six months ended March 31, 2018.  Phoenix segment adjusted EBITDA for the six months ended March 31, 2019 was  positively impacted by the increase in net revenue, primarily components, and the decrease to selling, general and administrative expenses resulting from consolidating printing facilities.

ALJ Segment Adjusted EBITDA

ALJ segment adjusted EBITDA for the six months ended March 31, 2019 was ($1.4) million compared to segment adjusted EBITDA of ($1.1) million for the six months ended March 31, 2018.  ALJ segment adjusted EBITDA for six months ended March 31, 2019 was impacted by increased headcount.    

Seasonality

Faneuil

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

Carpets

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.

Phoenix

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.  

Liquidity and Capital Resources

Historically, our principal sources of liquidity have been cash provided by operations and borrowings under various debt arrangements.  At March 31, 2019, our principal sources of liquidity included cash and cash equivalents of $7.5 million and an available borrowing capacity of $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.  

36


 

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

 

 

 

Six Months Ended

March 31,

 

(in thousands)

 

2019

 

 

2018

 

Cash provided by operating activities

 

$

16,080

 

 

$

10,126

 

Cash used for investing activities

 

 

(10,207

)

 

 

(10,684

)

Cash used for financing activities

 

 

(332

)

 

 

(2,125

)

Change in cash and cash equivalents

 

$

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 for investing activities of $10.7 million and financing activities of $2.1 million.  

 

Operating Activities

Cash provided by operating activities of $16.1 million during the six months ended March 31, 2019 was the result of $1.1 million net income, $9.9 million addback of net non-cash expenses, and $5.1 million of net cash used for changes in operating assets and liabilities.  The most significant components of 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, offset by accounts payable of $1.8 million and deferred revenue and customer deposits of $1.6 million, which used cash.

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.

Investing Activities

For the six months ended March 31, 2019, our investing activities used $10.2 million of cash, of which $1.0 million was the final payment for our Printing Components Business acquisition, $8.0 million 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 operations, partially offset by $0.3 million proceeds received from the sale of equipment.

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.

Financing Activities

For the six months ended March 31, 2019, our financing activities used $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 included $5.1 million to pay down our term loan, $1.6 million for capital lease payments, and $0.4 million for debt issuance costs.

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.  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.

37


 

Contractual Obligations  

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

 

 

 

Payments due by Period

 

 

 

 

 

 

 

Less Than

 

 

One –

Three

 

 

Four – Five

 

 

More than Five

 

(in thousands)

 

Total

 

 

One Year

 

 

Years

 

 

Years

 

 

Years

 

Term loan(1)

 

$

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)

Refer to “Part I, Item 1. Financial Statements – Note 7. Debt.”

(2)

Refer to “Part I, Item 1. Financial Statements – Note 8. Commitments and Contingencies.”

(3)

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.  It excludes deferred revenue and non-cash items.

(4)

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

Off-Balance Sheet Arrangements

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

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

Letters of Credit.  ALJ had letters of credit totaling $3.3 million outstanding as of March 31, 2019.

Critical Accounting Policies and Estimates

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.

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

Item 3. Qualitative and Quantitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

 

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PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

Litigation, Claims, and Assessments

Faneuil, Inc. v. 3M Company

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

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

 

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 have fully briefed the merits of Faneuil’s appeal and are waiting for the court to set the date for oral argument at this time.

 

Marshall v. Faneuil, Inc.

 

On July 31, 2017, plaintiff Donna Marshall (“Marshall”) filed a proposed class action lawsuit in the Superior Court of the State of California for the County of Sacramento against Faneuil and ALJ. Marshall, a previously terminated Faneuil employee, alleges various California state law employment-related claims against Faneuil.  Faneuil has answered the complaint and removed the matter to the United States District Court for the Eastern District of California; however, Marshall filed a motion to remand the case back to state court, which has been granted.  The case is in early discovery at this time. Faneuil believes this action is without merit and intends to defend it vigorously.

 

McNeil, et al. v. Faneuil, Inc.

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

 

 

Other Litigation

The Company has been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty.  The Company concluded as of March 31, 2019 that the ultimate resolution of these matters (including the matters described above) will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

Environmental Matters

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.

 

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Item 1A. Risk Factors

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

 

Risks Related to Faneuil

 

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

On March 23, 2010, President Obama signed the Affordable Care Act (the Affordable Care Act) into law, which has affected comprehensive health insurance reform, including the creation of health insurance exchanges, among other reforms. A portion of Faneuil’s healthcare business relates to providing services to health insurance exchanges in various states, and Faneuil believes that there may be significant opportunities for growth in this area.  President Trump has disclosed that a key initiative for his Presidency is to repeal or substantially change the Affordable Care Act. While Congress has not passed repeal legislation, the Tax Reform Law includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate,” which could lead to fewer enrollments in health care exchanges. It is unclear whether further changes that President Trump has planned to the Affordable Care Act will be enacted, or if enacted changes will affect Faneuil’s business.  Further significant changes to, or repeal of, the Affordable Care Act could materially and adversely affect that aspect of Faneuil’s business.

 

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

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

Faneuil’s business involves many program-related and contract-related risks.

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

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

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

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

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

41


 

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

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

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

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

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

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

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

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

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

 

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

42


 

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

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

Adequate bonding is necessary for Faneuil to win new contracts.

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 suretys sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional costs. There can be no assurance that bonds will continue to be available on reasonable terms, or at all. Any inability to obtain adequate bonding and, as a result, to bid on new work could harm Faneuil’s business.

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

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

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

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

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

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

43


 

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

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

Risks Related to Carpets

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Phoenix

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

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

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

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

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

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

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

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

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

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

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

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

 

the level of consumer demand for these materials and downstream products containing or using these materials;

 

the supply of these materials and the impact of industry consolidation;

 

government regulation and taxes;

 

market uncertainty;

 

volatility in the capital and credit markets;

 

environmental conditions and regulations; and

 

political and global economic conditions.

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

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

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

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

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

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

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

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

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

Risks Related to our Businesses Generally and our Common Stock

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

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

 

incurring additional debt;

 

making certain capital expenditures;

 

allowing liens to exist;

 

entering transactions with affiliates;

 

guaranteeing the debt of other entities, including joint ventures;

 

merging, consolidating, or otherwise combining with another company; or

 

transferring or selling our assets.

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

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

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

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

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

Changes in interest rates may increase our interest expense.

 

As of March 31, 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 continue increasing, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. For example, if interest rates increased in the future by 100 basis points, based on our current borrowings as of March 31, 2019, we would incur approximately an additional $1.0 million per year in interest expense.

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

 

As of March 31, 2019, each of our subsidiaries had a significant backlog.  Our backlog is typically subject to large variations from quarter to quarter and comparisons of backlog from period to period are not necessarily indicative of future revenue. The contracts comprising our backlog may not result in actual revenue in any particular period or at all, and the actual revenue from such contracts may differ from our backlog estimates. The timing of receipt of revenue, if any, for projects included in backlog could change because many factors affect the scheduling of projects. In certain instances, customers may have the right to cancel, reduce or defer amounts that we have in our backlog, which could negatively affect our future revenue.  The failure to realize all amounts in our backlog could adversely affect our revenue and gross margins. As a result, our subsidiaries’ backlog as of any particular date may not be an accurate indicator of our future revenue or earnings.

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

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

Some of our officers 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.

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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:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

regulatory challenges or resulting delays; and

 

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

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.

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If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, including purchases or sales of stock between 5% stockholders, our ability to use our NOLs and to recognize certain built-in losses would be subject to the limitations of Section 382. Depending on the resulting limitation, a significant portion of our NOLs could expire before we would be able to use them.  At the end of our last fiscal year, September 30, 2018, we had net operating loss carryforwards for federal income tax purposes of approximately $144.3 million that start expiring in 2022. Approximately $121.3 million of the carryforward expires in 2022. Our inability to utilize our NOLs would have a negative impact on our financial position and results of operations.

We do not believe we have experienced an ownership change 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 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 may be deficient.

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

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

Our executive officers and directors and their affiliated entities together beneficially own a majority of our outstanding common stock, and our Executive Chairman owns approximately 37.7% of our outstanding common stock as of March 31, 2019. As a result, these stockholders, if they act together or in a block, could have significant influence over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions, even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

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

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

 

(a)

the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more;

 

(b)

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

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(c)

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

 

(d)

the date on which we are deemed to be a large accelerated filer.

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

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

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

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

The market price of our common stock is volatile.

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

 

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

 

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

 

announcements by our competitors of significant acquisitions; and

 

the occurrence of various risks described in these Risk Factors.

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, 2019, a total of 1,654,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of $3.39.  It is probable that options to purchase our common stock will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option. If the stock options are exercised, your share ownership will be diluted.  Additionally, options to purchase up to 1,280,000 shares of ALJ common stock are available for grant under our existing equity compensation plans as of March 31, 2019.  

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

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

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, 2018, we had approximately $144.3 million of NOLs. The use of such losses to offset federal income tax would be limited if we experience an ownership change 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.

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

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

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Item 6 – Exhibits

 

Exhibit Number

 

Description of Exhibit

 

Method of Filing

 

 

 

 

 

3.1

 

Restated Certificate of Incorporation of ALJ Regional Holdings, Inc. as filed with the Secretary of State of the State of Delaware on August 17, 2018

 

Incorporated by reference to Exhibit 3.5 to Form 10-K as filed on December 17, 2018

 

 

 

 

 

3.2

 

Certificate of Ownership and Merger of YouthStream Media Networks, Inc. as filed with the Secretary of State of the State of Delaware on October 23, 2006

 

Incorporated by reference to Exhibit 3.3 to Form 10-12B as filed on February 2, 2016

 

 

 

 

 

3.3

 

Restated Bylaws of ALJ Regional Holdings, Inc., dated as of May 11, 2009

 

Incorporated by reference to Exhibit 3.4 to Form 10-12B as filed on February 2, 2016

 

 

 

 

 

31.1

 

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

 

Filed herewith

 

 

 

 

 

31.2

 

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

 

Filed herewith

 

 

 

 

 

32.1

 

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

 

Filed herewith

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

Filed herewith

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

Filed herewith

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

Filed herewith

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

Filed herewith

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

Filed herewith

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

Filed herewith

 

54


 

SIGNATURES

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

 

ALJ Regional Holdings, Inc.

 

Date: May 13, 2019

/s/ Jess Ravich

Jess Ravich

Executive Chairman

(Principal Executive Officer)

 

Date: May 13, 2019

/s/ Brian Hartman

Brian Hartman

Chief Financial Officer

(Principal Financial Officer)

 

 

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