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EX-32.1 - EX-32.1 - ALJ REGIONAL HOLDINGS INCaljj-ex321_8.htm
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EX-31.1 - EX-31.1 - ALJ REGIONAL HOLDINGS INCaljj-ex311_6.htm

 

 

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 December 31, 2017

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)

(212) 883-0083

(Registrant’s telephone number, including area code)

 

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

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

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

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 January 31, 2018 was 37,921,116.

 

 

 


 

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 and unexpected natural disasters. Any forward-looking statements included in this Form 10-Q are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statements.

 

 

2


 

ALJ REGIONAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED DECEMBER 31, 2017

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

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2

 

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

 

23

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

Item 4

 

Controls and Procedures

 

33

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

34

 

 

 

 

 

Item 1

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A

 

Risk Factors

 

35

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

 

 

Item 3

 

Defaults Upon Senior Securities

 

48

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

 

48

 

 

 

 

 

Item 5

 

Other Information

 

48

 

 

 

 

 

Item 6

 

Exhibits

 

49

 

 

 

 

 

 

 

Signatures

 

50

 

3


 

PART I.  FINANCIAL INFORMATION

Item 1 - Financial Statements

 

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,027

 

 

$

5,630

 

Accounts receivable, net of allowance for doubtful accounts of $987

   ($830 at September 30, 2017)

 

 

55,540

 

 

 

49,457

 

Inventories, net

 

 

9,903

 

 

 

9,376

 

Prepaid expenses and other current assets

 

 

8,045

 

 

 

5,783

 

Total current assets

 

 

75,515

 

 

 

70,246

 

Property and equipment, net

 

 

56,735

 

 

 

54,335

 

Goodwill

 

 

56,372

 

 

 

54,964

 

Intangible assets, net

 

 

46,498

 

 

 

43,179

 

Collateral deposits, less current portion

 

 

694

 

 

 

879

 

Other assets

 

 

3,810

 

 

 

4,474

 

Deferred tax asset, net

 

 

7,800

 

 

 

11,052

 

Total assets

 

$

247,424

 

 

$

239,129

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,667

 

 

$

15,597

 

Accrued expenses

 

 

13,636

 

 

 

12,661

 

Income taxes payable

 

 

 

 

 

195

 

Deferred revenue and customer deposits

 

 

4,312

 

 

 

5,755

 

Current portion of term loan, net of deferred loan costs

 

 

8,196

 

 

 

11,848

 

Current portion of capital lease obligations

 

 

3,575

 

 

 

2,571

 

Current portion of workers’ compensation reserve

 

 

989

 

 

 

1,015

 

Other current liabilities

 

 

1,591

 

 

 

64

 

Total current liabilities

 

 

47,966

 

 

 

49,706

 

Line of credit, net of deferred loan costs

 

 

13,536

 

 

 

5,330

 

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

 

 

81,475

 

 

 

76,753

 

Deferred revenue, less current portion

 

 

2,675

 

 

 

3,111

 

Workers’ compensation reserve, less current portion

 

 

1,719

 

 

 

1,748

 

Capital lease obligations, less current portion

 

 

5,730

 

 

 

4,679

 

Other non-current liabilities

 

 

1,923

 

 

 

2,049

 

Total liabilities

 

 

155,024

 

 

 

143,376

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; total authorized – 5,000,000 shares; 1,000,000 shares

   authorized for Series A; 550,000 shares authorized for Series B; none issued and

   outstanding as of December 31, 2017 and September 30, 2017

 

 

 

 

 

 

Common stock, $0.01 par value; authorized – 100,000,000 shares; 37,621,116 and

   37,041,308 shares issued and outstanding at December 31, 2017 and

   September 30, 2017, respectively

 

 

376

 

 

 

371

 

Additional paid-in capital

 

 

278,438

 

 

 

276,478

 

Accumulated deficit

 

 

(186,414

)

 

 

(181,096

)

Total stockholders’ equity

 

 

92,400

 

 

 

95,753

 

Total liabilities and stockholders’ equity

 

$

247,424

 

 

$

239,129

 

 

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 December 31,

 

 

 

2017

 

 

2016

 

Net revenue

 

$

94,954

 

 

$

77,617

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenue

 

 

74,910

 

 

 

60,181

 

Selling, general, and administrative expense

 

 

19,538

 

 

 

14,383

 

(Gain) loss on disposal of assets, net

 

 

(207

)

 

 

8

 

Total operating expenses

 

 

94,241

 

 

 

74,572

 

Operating income

 

 

713

 

 

 

3,045

 

Other expense:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,660

)

 

 

(2,434

)

Total other expense

 

 

(2,660

)

 

 

(2,434

)

(Loss) income before income taxes

 

 

(1,947

)

 

 

611

 

Provision for income taxes

 

 

(3,371

)

 

 

(60

)

Net (loss) income

 

$

(5,318

)

 

$

551

 

Basic (loss) earnings per share of common stock

 

$

(0.14

)

 

$

0.02

 

Diluted (loss) earnings per share of common stock

 

$

(0.14

)

 

$

0.02

 

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

37,577

 

 

 

34,575

 

Diluted

 

 

37,577

 

 

 

35,712

 

 

See accompanying notes

 

 

5


 

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(5,318

)

 

$

551

 

Adjustments to reconcile net (loss) income to cash (used for) provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization - cost of revenue

 

 

1,399

 

 

 

1,282

 

Depreciation and amortization - selling, general and administrative expense

 

 

3,434

 

 

 

2,679

 

Stock-based compensation expense

 

 

293

 

 

 

183

 

Provision for bad debts

 

 

156

 

 

 

 

Deferred income taxes

 

 

3,252

 

 

 

(226

)

(Gain) loss on disposal of assets, net

 

 

(207

)

 

 

8

 

Amortization of deferred loan costs

 

 

307

 

 

 

251

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(6,240

)

 

 

(3,662

)

Inventories, net

 

 

979

 

 

 

1,320

 

Collateral deposits

 

 

184

 

 

 

1,300

 

Prepaid expenses and other current assets

 

 

(2,000

)

 

 

77

 

Other assets

 

 

664

 

 

 

(2,244

)

Accounts payable

 

 

69

 

 

 

3,759

 

Accrued expenses

 

 

1,064

 

 

 

1,858

 

Income tax payable

 

 

(195

)

 

 

184

 

Deferred revenue and customer deposits

 

 

(1,880

)

 

 

(166

)

Other current liabilities

 

 

501

 

 

 

(587

)

Other liabilities

 

 

(154

)

 

 

1,742

 

Cash (used for) provided by operating activities

 

 

(3,692

)

 

 

8,309

 

Investing activities

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(9,000

)

 

 

 

Proceeds from sales of assets

 

 

343

 

 

 

97

 

Capital expenditures

 

 

(980

)

 

 

(4,042

)

Cash used for investing activities

 

 

(9,637

)

 

 

(3,945

)

Financing activities

 

 

 

 

 

 

 

 

Net proceeds on line of credit

 

 

8,162

 

 

 

 

Payments on term loan

 

 

(6,427

)

 

 

(4,482

)

Proceeds from term loan

 

 

7,500

 

 

 

 

Proceeds from issuance of common stock

 

 

1,500

 

 

 

 

Debt and common stock issuance costs

 

 

(332

)

 

 

 

Payments on financed insurance premiums

 

 

 

 

 

(290

)

Payments on capital leases

 

 

(677

)

 

 

(436

)

Cash provided by (used for) financing activities

 

 

9,726

 

 

 

(5,208

)

Change in cash and cash equivalents

 

 

(3,603

)

 

 

(844

)

Cash and cash equivalents at beginning of period

 

 

5,630

 

 

 

5,279

 

Cash and cash equivalents at end of period

 

$

2,027

 

 

$

4,435

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Taxes

 

$

599

 

 

$

104

 

Interest

 

$

2,205

 

 

$

2,149

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Capital equipment purchases financed with capital leases

 

$

2,734

 

 

$

 

Financed insurance premiums

 

$

 

 

$

866

 

 

See accompanying notes

 

 

6


 

 

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 December 31, 2017, 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.  ALJ acquired Faneuil effective October 19, 2013.

 

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 four retail locations, as well as a stone and solid surface fabrication facility.  ALJ acquired Carpets effective April 1, 2014.

 

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 acquired Phoenix effective August 9, 2015.

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, 2017 and 2016, filed with the Securities and Exchange Commission on December 19, 2017.  

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 months ended December 31, 2017, 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, 2017 and 2016, filed with the Securities and Exchange Commission on December 19, 2017.  There were no material changes to significant accounting policies during the three months ended December 31, 2017.  

 

 

7


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

2. RECENT ACCOUNTING STANDARDS

Accounting Standards Adopted  

 

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

Accounting Standards Not Yet Adopted

 

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

 

ASU 2014-09 will be effective for ALJ on October 1, 2019 as ALJ has determined that it will not adopt ASU 2014-09 early. 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. ALJ has formed a project team and has engaged an outside revenue recognition consultant who has completed a revenue recognition adoption roadmap that includes three phases.  Phase I is the identification, documentation, and preliminary analysis of how ALJ currently accounts for revenue transactions compared to the revenue accounting required under the new standard.  Phase I is expected to be completed in early 2018.  Phase II includes a more detailed analysis, including the development of revenue recognition models, data analysis, analyzing implementation options, and finalizing a transition method.  Phase II is expected to be completed in mid-2018.  Phase III includes identification of system requirements, changes to internal controls and business processes, and final implementation.  Phase III is expected to be completed in mid-2019.  Because of the nature of the work that remains, at this time we are unable to reasonably estimate the impact of adoption on our consolidated financial statements.  ALJ’s evaluation of the financial impact and related disclosure of the new standard will likely extend over several future reporting periods.

  

In February 2016, the FASB issued ASU 2016-02, “Leases.”  ASU 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on classification as either a finance or operating lease. ASU 2016-02 also requires certain quantitative and qualitative disclosures. The provisions of ASU 2016-02 should be applied on a modified retrospective basis.   ASU 2016-02 will be effective for ALJ on October 1, 2020 as ALJ has determined that it will not adopt ASU 2016-02 early.  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.

 

 

8


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

3. ACQUISITIONS  

 

Printing Components Business

 

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

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

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

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

The following schedule reflects the estimated fair value of assets acquired and liabilities assumed on the 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

 

$

7,500

 

Common stock issued

 

 

1,500

 

Cash received from exercise of stock option

 

 

1,000

 

Purchase price

 

$

10,000

 

 

The Company accounted for the Printing Components Business acquisition using the purchase method of accounting. Accordingly, the assets and liabilities were recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and the liabilities assumed was recorded as goodwill. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date, cumulative changes in the estimated fair values of the net assets recorded may change the amount of the purchase price allocable to goodwill. During the measurement period, which expires one year from the acquisition date, changes to any purchase price allocations that are material to the Company's consolidated financial results will be adjusted in the reporting period in which the adjustment amount is determined.

During the three months ended December 31, 2017, the Printing Components Business recorded $4.5 million of net revenue.  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.    

9


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

During the three months ended December 31, 2017, the Company incurred approximately $123,000 of acquisition-related costs in connection with the Printing Components Business acquisition, which were expensed to selling, general and administrative expense.

Customer Management Outsourcing Business

On May 26, 2017 (the “CMO Business Purchase Date”), Faneuil acquired certain assets and assumed certain liabilities associated with the customer management outsourcing business (“CMO Business”) of Vertex Business Services LLC.  

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

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

 

 

 

Purchase Price

 

Balance Sheet Caption

 

Allocation

 

Total current assets

 

$

3,947

 

Fixed assets

 

 

553

 

Identified intangible assets:

 

 

 

 

Customer relationships

 

 

3,790

 

Supply agreements/contract backlog

 

 

5,418

 

Non-compete agreements

 

 

250

 

Goodwill

 

 

1,547

 

Total assets

 

 

15,505

 

Total current liabilities

 

 

(2,760

)

Purchase price

 

$

12,745

 

 

 

 

 

 

Break Out of Components of Purchase Price Consideration

 

 

 

 

Line of credit

 

$

5,500

 

Common stock issued

 

 

4,708

 

Cash

 

 

2,537

 

Purchase price

 

$

12,745

 

 

The following is a summary of CMO Business revenue and earnings included in the Company’s consolidated statement of operations for the three months ended December 31, 2017 (in thousands):  

 

Income Statement Caption

 

Amount

 

Revenue

 

$

8,526

 

Operating loss

 

 

(221

)

 

 

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.  

10


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

Customer A

 

 

14.1

%

 

 

18.3

%

Customer B

 

 

14.1

 

 

 

15.9

 

Customer C

 

**

 

 

 

11.3

 

 

**

Less than 10% of Faneuil net revenue.

 

Trade receivables from these customers totaled $8.2 million on December 31, 2017.  As of December 31, 2017, 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 December 31,

 

 

 

2017

 

 

2016

 

Customer A

 

 

26.8

%

 

 

29.4

%

Customer B

 

 

25.1

 

 

 

29.0

 

Customer C

 

 

24.9

 

 

 

16.6

 

 

Trade receivables from these customers totaled $3.1 million on December 31, 2017.  As of December 31, 2017, all Carpets accounts receivable were unsecured.  The risk with respect to accounts receivable is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers.

 

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

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

Customer A

 

 

18.9

%

 

**

 

Customer B

 

 

16.1

 

 

 

21.1

%

Customer C

 

 

10.5

 

 

**

 

Customer D

 

**

 

 

 

14.5

 

 

**

Less than 10% of Phoenix net revenue.

Trade receivables from these customers totaled $6.1 million on December 31, 2017.  As of December 31, 2017, 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.

 

11


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

Supplier A

 

 

23.5

%

 

 

13.0

%

Supplier B

 

13.9

 

 

**

 

Supplier C

 

12.6

 

 

**

 

 

**

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 December 31,

 

 

 

2017

 

 

2016

 

Supplier A

 

 

29.4

%

 

 

21.9

%

Supplier B

 

 

12.9

 

 

 

11.2

 

 

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.

 

 

5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Accounts Receivable, Net

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

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Accounts receivable

 

$

52,804

 

 

$

47,216

 

Unbilled receivables

 

 

3,723

 

 

 

3,071

 

  Accounts receivable

 

 

56,527

 

 

 

50,287

 

Less: Allowance for doubtful accounts

 

 

(987

)

 

 

(830

)

  Accounts receivable, net

 

$

55,540

 

 

$

49,457

 

 

Inventories, Net

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

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Raw materials

 

$

3,781

 

 

$

3,127

 

Semi-finished goods/work in process

 

 

3,905

 

 

 

4,064

 

Finished goods

 

 

2,510

 

 

 

2,378

 

   Inventories

 

 

10,196

 

 

 

9,569

 

Less:  Allowance for obsolete inventory

 

 

(293

)

 

 

(193

)

  Inventories, net

 

$

9,903

 

 

$

9,376

 

 

12


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Property and Equipment

The following table summarizes property and equipment at the end of each reporting period (in thousands):

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Machinery and equipment

 

$

24,023

 

 

$

22,753

 

Building and improvements

 

 

16,323

 

 

 

15,593

 

Software

 

 

15,034

 

 

 

12,276

 

Computer and office equipment

 

 

10,511

 

 

 

10,344

 

Land

 

 

9,267

 

 

 

9,167

 

Leasehold improvements

 

 

9,175

 

 

 

8,997

 

Furniture and fixtures

 

 

3,599

 

 

 

3,595

 

Vehicles

 

 

235

 

 

 

229

 

Construction in process

 

 

553

 

 

 

136

 

  Property and equipment

 

 

88,720

 

 

 

83,090

 

Less: Accumulated depreciation and amortization

 

 

(31,985

)

 

 

(28,755

)

   Property and equipment, net

 

$

56,735

 

 

$

54,335

 

 

Property and equipment depreciation and amortization expense, including amounts related to capitalized leased assets, was $3,452,000 and $2,953,000 for the three months ended December 31, 2017 and 2016, respectively.

Goodwill

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

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Faneuil

 

$

21,276

 

 

$

21,276

 

Carpets

 

 

2,555

 

 

 

2,555

 

Phoenix

 

 

32,541

 

 

 

31,133

 

   Goodwill

 

$

56,372

 

 

$

54,964

 

 

Intangible Assets

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

 

 

 

December 31, 2017

 

 

September 30, 2017

 

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Customer relationships

 

$

34,400

 

 

$

(8,167

)

 

$

26,233

 

 

$

34,400

 

 

$

(7,446

)

 

$

26,954

 

Trade names

 

 

10,760

 

 

 

(1,250

)

 

 

9,510

 

 

 

10,760

 

 

 

(1,143

)

 

 

9,617

 

Supply agreements/Contract Backlog

 

 

10,358

 

 

 

(777

)

 

 

9,581

 

 

 

5,658

 

 

 

(420

)

 

 

5,238

 

Non-compete agreements

 

 

3,030

 

 

 

(2,030

)

 

 

1,000

 

 

 

3,030

 

 

 

(1,858

)

 

 

1,172

 

Internal software

 

 

580

 

 

 

(406

)

 

 

174

 

 

 

580

 

 

 

(382

)

 

 

198

 

   Totals

 

$

59,128

 

 

$

(12,630

)

 

$

46,498

 

 

$

54,428

 

 

$

(11,249

)

 

$

43,179

 

 

Intangible asset amortization expense was $1,381,000 and $1,008,000 for the three months ended December 31, 2017 and 2016, respectively.

13


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

 

 

Estimated

Future

Amortization

 

2018

 

$

4,101

 

2019

 

 

5,099

 

2020

 

 

4,800

 

2021

 

 

4,485

 

2022

 

 

4,067

 

Thereafter

 

 

23,946

 

 

 

$

46,498

 

 

Debt

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

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Line of credit:

 

 

 

 

 

 

 

 

Line of credit

 

$

13,662

 

 

$

5,500

 

Less: deferred loan costs

 

 

(126

)

 

 

(170

)

Line of credit, net of deferred loan costs

 

 

13,536

 

 

 

5,330

 

Current portion of term loan:

 

 

 

 

 

 

 

 

Current portion of term loan

 

$

9,188

 

 

$

12,764

 

Less: deferred loan costs

 

 

(992

)

 

 

(916

)

Current portion of term loan, net of deferred loan costs

 

 

8,196

 

 

 

11,848

 

Term loan payable, less current portion:

 

 

 

 

 

 

 

 

Term loan payable, less current portion

 

 

82,903

 

 

 

78,254

 

Less: deferred loan costs

 

 

(1,428

)

 

 

(1,501

)

Term loan payable, less current portion, net of deferred

   loan costs

 

$

81,475

 

 

$

76,753

 

 

Accrued Expenses

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

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2017

 

Accrued compensation and related taxes

 

$

8,524

 

 

$

7,370

 

Rebates payable

 

 

2,042

 

 

 

2,014

 

Legal and other

 

 

1,092

 

 

 

1,466

 

Interest payable

 

 

799

 

 

 

651

 

Medical and benefit-related payables

 

 

501

 

 

 

431

 

Accrued board of director fees

 

 

260

 

 

 

370

 

Sales tax payable

 

 

217

 

 

 

151

 

Deferred rent

 

 

201

 

 

 

208

 

Total accrued expenses

 

$

13,636

 

 

$

12,661

 

 

14


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 claims based upon insurance coverages, third-party actuarial analysis, and management’s judgment.  

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

Phoenix. Before the acquisition of Phoenix by ALJ, Phoenix was self-insured for workers’ compensation under their parent company for claims up to $500,000 per incident, and maintains coverage for costs above the specified limit.  After the acquisition, Phoenix changed to a fully insured plan.  

 

 

6. (LOSS) EARNINGS PER SHARE

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

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

Net (loss) income

 

$

(5,318

)

 

$

551

 

Weighted average shares of common stock outstanding - basic

 

 

37,577

 

 

 

34,575

 

Potentially dilutive effect of options to purchase common stock

 

 

 

 

 

1,137

 

Weighted average shares of common stock outstanding – diluted

 

 

37,577

 

 

 

35,712

 

  Basic (loss) earnings per share of common stock

 

$

(0.14

)

 

$

0.02

 

  Diluted (loss) earnings per share of common stock

 

$

(0.14

)

 

$

0.02

 

 

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

Stock options to purchase 1,914,000 shares of common stock were not considered in calculating ALJ’s diluted earnings per common share for the three months ended December 31, 2017 as their effect would be anti-dilutive.

 

 

15


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 three amendments to the Financing Agreement.  The Financing Agreement and three amendments are summarized below (in thousands):

 

Description

 

Use of Proceeds

 

Origination Date

 

Interest Rate *

 

Quarterly

Payments

 

 

Balance at

December 31, 2017

 

Term Loan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Agreement

 

Phoenix acquisition

 

August 2015

 

7.99% to 8.30%

 

$

1,969

 

 

$

76,766

 

First Amendment

 

Color Optics acquisition

 

July 2016

 

7.99% to 8.30%

 

 

187

 

 

 

8,280

 

Third Amendment

 

Printing Components Business acquisition

 

October 2017

 

7.99% to 8.30%

 

 

141

 

 

 

7,045

 

Totals  

 

 

 

 

 

 

 

$

2,297

 

 

$

92,091

 

Line of Credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cerberus/PNC Revolver

 

Working Capital

 

August 2015

 

10.00% to 10.25%

 

$

 

 

$

8,162

 

Second Amendment

 

CMO Business acquisition

 

May 2017

 

7.99% to 8.30%

 

 

 

 

 

5,500

 

Totals

 

 

 

 

 

 

 

$

 

 

$

13,662

 

 

*

Range of annual interest rates accrued during the three months ended December 31, 2017.  

Interest payments are due in arrears on the first day of each month.  Quarterly principal payments are due on the last day of each fiscal quarter.  Annual principal payments equal to 75% of ALJ’s excess cash flow (“ECF”), as defined in the Financing Agreement, are due upon delivery of the audited financial statements.  During the three months ended December 31, 2017, ALJ made an ECF payment of $4.1 million.  A final balloon payment is due at maturity, August 14, 2020.  There is a prepayment penalty equal to 1% if the Cerberus Term Loan is repaid prior to August 2018.  ALJ may make payments of up to $7.0 million against the loan with no penalty.

The Cerberus Debt is secured by substantially all the Company’s assets and imposes certain limitations on the Company, including its ability to incur debt, grant liens, initiate certain investments, declare dividends and dispose of assets.  The Cerberus Debt also requires ALJ to comply with certain debt covenants.  As of December 31, 2017, ALJ was in compliance with all debt covenants and had unused borrowing capacity of $10.8 million.

Deferred Loan Costs

During the three months ended December 31, 2017, in connection with the Third Amendment, ALJ paid legal and other fees totaling $0.3 million, which were deferred and are being amortized to interest expense over the life of the debt.

Contingent Loan Costs

 

As part of the Second Amendment, ALJ paid Cerberus an amendment fee. Additionally, as part of the Second Amendment, ALJ is required to pay a fee in each of three consecutive annual periods commencing May 27, 2018 and ending on the termination date, if at any time during each annual period there are any amounts outstanding on the Cerberus/PNC Revolver (“Contingent Payments”).   Such Contingent Payments become due and payable on the first day within each annual period there is an outstanding balance on the Cerberus/PNC Revolver.  

16


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Cerberus Debt Estimated Future Minimum Payments

Estimated future minimum payments are as follows (in thousands): 

 

Year Ending December 31,

 

Future

Minimum

Payments

 

2018

 

$

9,188

 

2019

 

 

9,188

 

2020*

 

 

87,377

 

Total

 

$

105,753

 

 

*

The majority of this amount is the final balloon payment due at maturity, August 14, 2020.

Capital Lease Obligations

Faneuil and Phoenix lease equipment under non-cancelable capital leases. As of December 31, 2017, 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 December 31,

 

Estimated

Future

Payments

 

2018

 

$

3,850

 

2019

 

 

2,766

 

2020

 

 

1,716

 

2021

 

 

535

 

2022

 

 

535

 

Thereafter

 

 

569

 

Total minimum required payments

 

 

9,971

 

Less: current portion of capital lease obligations

 

 

(3,575

)

Less: imputed interest

 

 

(666

)

Capital lease obligations, less current portion

 

$

5,730

 

 

 

8. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases real estate, equipment, and vehicles under noncancellable operating leases. As of December 31, 2017, future minimum rental commitments under noncancellable leases were as follows (in thousands):

 

Year Ending December 31,

 

Future

Minimum

Lease

Payments

 

2018

 

$

4,722

 

2019

 

 

4,098

 

2020

 

 

2,786

 

2021

 

 

1,861

 

2022

 

 

1,015

 

Thereafter

 

 

6,130

 

Total

 

$

20,612

 

 

17


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Employment Agreements

ALJ maintains employment agreements with certain key executive officers that provide for a base salary and annual bonus to be determined by the Board of Directors.  The agreements also provide for termination payments, which includes base salary and performance bonus, stock options, non-competition provisions, and other terms and conditions of employment.  As of December 31, 2017, termination payments related to base salary totaled $1.3 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 December 31, 2017, the face value of such surety bonds, which represents the maximum cash payments that Faneuil’s surety would be obligated to pay under certain circumstances of non-performance, was $29.1 million.  To date, Faneuil’s surety has not made any non-performance payments.

 

Litigation, Claims, and Assessments

Faneuil, Inc. v. 3M Company

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

On October 14, 2016, 3M filed its answer and counterclaim against Faneuil.  In its counterclaim, 3M seeks recovery in excess of $10.0 million based on three claims:  breach of contract/indemnification, breach of the implied covenant of good faith and fair dealing and unjust enrichment.  3M’s counterclaim alleges it incurred approximately $3.2 million in damages payable to ERC as a result of Faneuil’s conduct and seeks indemnification of an additional $10.0 million in damages incurred as a result of continued performance under its contract with ERC. A five-day bench trial is set for April 2018. A pretrial scheduling order has been entered and the parties are engaged in substantive discovery at this time.  

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

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

Faneuil believes the facts support its claims that the disputed services should be paid and that 3M’s counterclaims are without merit.  Faneuil intends to vigorously prosecute its claims against 3M and to defend against 3M’s counterclaims.  Although litigation is inherently unpredictable, Faneuil remains confident in its ability to collect all of its outstanding receivables from 3M. 

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.  On November 8, 2017, Faneuil received the court’s recommendation, which awarded a total of $0.7 million for plaintiff’s attorney fees and court fees.  Faneuil has objected to a portion of the recommendation and has requested that the district court judge further reduce the award.

18


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 has recently filed a motion to remand the case back to state court. The case is in an early stage and the parties have not begun substantive discovery at this time. Faneuil believes this action is without merit and intends to defend it vigorously.

 

Thornton v. ALJ Regional Holdings, Inc., et al.

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

In connection with its pending litigation matters (including the matters described above), management has estimated the range of possible loss, including fees and expenses, to be between $1.6 million and $2.4 million; however, as management has determined that no one estimate within the range is better than another, it has accrued $1.6 million as of December 31, 2017.

Other Litigation

We and our subsidiaries have been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time-consuming, cause us to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. We concluded as of December 31, 2017 that the ultimate resolution of these matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

 

 

9. EQUITY

Common Stock Activity during the Three Months Ended December 31, 2017

ALJ’s common stock activity for the three months ended December 31, 2017 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 Moore-Langen acquisition (Note 3); and

 

Issued 102,102 shares of common stock to members of ALJ’s Board of Directors as compensation for the period from July 1, 2016 to June 30, 2017.  See “Common Stock Awards” below for further discussion.

Common Stock Activity during the Three Months Ended December 31, 2016

ALJ did not have any common stock activity during the three months ended December 31, 2016.

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.

19


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Stock-Based Compensation.  

The following table sets forth the total stock-based compensation expense included in ALJ’s Statements of Operations (in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2017

 

 

2016

 

Stock options

 

$

191

 

 

$

98

 

Common stock awards

 

 

102

 

 

 

85

 

  Total stock-based compensation expense

 

$

293

 

 

$

183

 

 

At December 31, 2017, ALJ had approximately $1.0 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 2.1 years.

Stock Option Awards.   ALJ granted an option to purchase 10,000 shares of ALJ common stock with a total estimated fair value of approximately $15,000 during the three months ended December 31, 2017.  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%.  ALJ had no stock option awards during the three months ended December 31, 2016.  

The “intrinsic value” of options is the excess of the value of ALJ stock over the exercise price of such options.  The total intrinsic value of options outstanding (of which all are vested or expected to vest) was approximately $1.0 million at December 31, 2017.

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 $102,000 and $85,000 during the three months ended December 31, 2017 and 2016, respectively.

 

 

10. INCOME TAX

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, except for certain provisions, resulted in significant changes to existing United States tax law, including various provisions that will impact ALJ.  Below is a summary of the provisions of the Tax Reform Law that management believes will be most impactful to ALJ.

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

Interest Expense Limitation.  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.      

Pursuant to Accounting Standards Codification (“ASC”) Topic 740-10, “Income Taxes,” ALJ recognized the effect of the Tax Reform Law on deferred tax assets and liabilities during the three months 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.  

20


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

11. RELATED-PARTY TRANSACTIONS

Harland Clarke Holdings Corp. (“Harland Clarke”), a stockholder who owns ALJ shares in excess of five percent, is a counterparty to Faneuil in two contracts.  One contract provides call center services to support Harland Clarke’s banking-related products and renews annual every April. The other contract provides dispatch services for managed print operations and concluded September 30, 2017. Faneuil recognized revenue from Harland Clarke totaling $94,000 and $327,000 for the three months ended December 31, 2017 and 2016, respectively. The associated cost of revenue was $94,000 and $308,000 for the three months ended December 31, 2017 and 2016, respectively. All revenue from Harland Clarke contained similar terms and conditions as those found in other transactions of this nature entered into by ALJ and its subsidiaries.  Total accounts receivable from Harland Clarke was $94,000 and $106,000 at December 31, 2017 and September 30, 2017, respectively.

 

 

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 interest expense, provision for income taxes, depreciation and amortization expense, stock-based compensation expense, restructuring expense, acquisition-related expense, loss (gain) on sales of assets, and other non-recurring items.  Such amounts are detailed in our segment reconciliation below. The accounting policies for segment reporting are the same as for ALJ as a whole.

 

The following tables present ALJ’s segment information for the three months ended December 31, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended December 31, 2017

 

 

 

Faneuil

 

 

Carpets

 

 

Phoenix

 

 

ALJ

 

 

Total

 

Net revenue

 

$

51,474

 

 

$

16,650

 

 

$

26,830

 

 

$

 

 

$

94,954

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment adjusted EBITDA

 

$

3,711

 

 

$

(726

)

 

$

4,160

 

 

$

(555

)

 

$

6,590

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,660

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,371

)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,833

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(293

)

Restructuring expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(835

)

Acquisition-related expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(123

)

Gain on sales of assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

207

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(5,318

)

 

 

 

Three Months Ended December 31, 2016

 

 

 

Faneuil

 

 

Carpets

 

 

Phoenix

 

 

ALJ

 

 

Total

 

Net revenue

 

$

38,051

 

 

$

15,544

 

 

$

24,022

 

 

$

 

 

$

77,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment adjusted EBITDA

 

$

3,761

 

 

$

(47

)

 

$

4,348

 

 

$

(834

)

 

$

7,228

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,434

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(60

)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,961

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(183

)

Restructuring expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31

)

Loss on sales of assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

551

 

21


ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.

 

 

13. SUBSEQUENT EVENT

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

 

 

 

22


 

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 of our financial results comparing the three months ended December 31, 2017 to the three months ended December 31, 2016.

 

Liquidity and Capital Resources. An analysis of changes in our cash flows and discussion of our financial condition and liquidity.

 

Contractual Obligations.  Discussion of our contractual obligations as of December 31, 2017.

 

Off-Balance Sheet Arrangements.  Discussion of our off-balance sheet arrangements as of December 31, 2017.

 

Critical Accounting Policies and Estimates.  This section provides a 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 customer service-based 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 on October 2, 2017, the acquisition of the customer management outsourcing business (“CMO Business”) by Faneuil on May 26, 2017, and the acquisition of Color Optics by Phoenix on July 18, 2016.  In analyzing the financial impact of any potential acquisition, we focus on earnings, operating margin, cash flow and return on invested capital targets. We hire successful and experienced management teams to run each of our operating companies and incentivize them to drive higher profits. We are focused on increasing our net revenue at each of our operating subsidiaries by investing in sales and marketing, expanding into new products and markets, and evaluating and executing on tuck-in acquisitions, while continually examining our cost structures to drive higher profits.

Results of Operations  

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

23


 

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

 

 

 

Three Months Ended December 31, 2017

 

 

Three Months Ended December 31, 2016

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

 

 

Dollars

 

 

Net Revenue

 

 

Dollars

 

 

Net Revenue

 

Net revenue (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

$

51,474

 

 

 

54.2

%

 

$

38,051

 

 

 

49.0

%

Carpets

 

 

16,650

 

 

 

17.5

 

 

 

15,544

 

 

 

20.0

 

Phoenix

 

 

26,830

 

 

 

28.3

 

 

 

24,022

 

 

 

31.0

 

Consolidated net revenue

 

 

94,954

 

 

 

100.0

 

 

 

77,617

 

 

 

100.0

 

Cost of revenue (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

40,219

 

 

 

78.1

 

 

 

29,002

 

 

 

76.2

 

Carpets

 

 

13,803

 

 

 

82.9

 

 

 

13,247

 

 

 

85.2

 

Phoenix (3)

 

 

20,888

 

 

 

77.9

 

 

 

17,932

 

 

 

74.6

 

Consolidated cost of revenue

 

 

74,910

 

 

 

78.9

 

 

 

60,181

 

 

 

77.5

 

Selling, general and administrative expense (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

7,544

 

 

 

14.7

 

 

 

5,288

 

 

 

13.9

 

Carpets

 

 

3,573

 

 

 

21.5

 

 

 

2,343

 

 

 

15.1

 

Phoenix

 

 

4,139

 

 

 

15.4

 

 

 

3,055

 

 

 

12.7

 

ALJ

 

 

848

 

 

 

 

 

 

1,018

 

 

 

 

Consolidated selling, general and administrative expense

 

 

16,104

 

 

 

17.0

 

 

 

11,704

 

 

 

15.1

 

Depreciation and amortization (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Faneuil

 

 

2,576

 

 

 

5.0

 

 

 

1,863

 

 

 

4.9

 

Carpets

 

 

219

 

 

 

1.3

 

 

 

175

 

 

 

1.1

 

Phoenix (4)

 

 

639

 

 

 

2.4

 

 

 

641

 

 

 

2.7

 

Consolidated depreciation and amortization expense

 

 

3,434

 

 

 

3.6

 

 

 

2,679

 

 

 

3.5

 

(Gain) loss on disposal of assets, net (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Phoenix

 

 

(207

)

 

 

(0.8

)

 

 

8

 

 

 

 

Consolidated (gain) loss on disposal of assets, net

 

 

(207

)

 

 

(0.2

)

 

 

8

 

 

 

 

Consolidated operating income

 

 

713

 

 

 

0.8

 

 

 

3,045

 

 

 

3.9

 

Interest expense (5)

 

 

(2,660

)

 

 

(2.8

)

 

 

(2,434

)

 

 

(3.1

)

Provision for income taxes (5)

 

 

(3,371

)

 

 

(3.6

)

 

 

(60

)

 

 

(0.1

)

Net (loss) income (5)

 

$

(5,318

)

 

 

(5.6

)

 

$

551

 

 

 

0.7

 

Basic (loss) earnings per share of common stock

 

$

(0.14

)

 

 

 

 

 

$

0.02

 

 

 

 

 

Diluted (loss) earnings per share of common stock

 

$

(0.14

)

 

 

 

 

 

$

0.02

 

 

 

 

 

 

(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 $1,399,000 and $1,282,000 for the three months ended December 31, 2017 and 2016, respectively.

(4)

Primarily amortization of intangible assets.  Total depreciation and amortization for Phoenix including depreciation expense captured in cost of revenue was $2,038,000 and $1,923,000 for the three months ended December 31, 2017 and 2016, respectively.

(5)

Percentage is calculated as a percentage of consolidated net revenue.


24


 

Net Revenue

 

 

 

Three Months Ended December 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

51,474

 

 

$

38,051

 

 

$

13,423

 

 

 

35.3

%

Carpets

 

 

16,650

 

 

 

15,544

 

 

 

1,106

 

 

 

7.1

 

Phoenix

 

 

26,830

 

 

 

24,022

 

 

 

2,808

 

 

 

11.7

 

Consolidated net revenue

 

$

94,954

 

 

$

77,617

 

 

$

17,337

 

 

 

22.3

%

 

Faneuil Net Revenue

Faneuil net revenue for the three months ended December 31, 2017 was $51.5 million, an increase of $13.4 million, or 35.3%, compared to net revenue of $38.1 million for the three months ended December 31, 2016.  The increase was mainly attributable to the CMO Business acquisition, which contributed $8.5 million.  The remaining increase was attributable to an increase from new and existing customers mostly in the healthcare industry, slightly offset by a decrease caused by the completion of existing customer contracts.  

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

 

 

 

As of  December 31,

 

 

 

2017

 

 

2016

 

Within one year

 

$

97.8

 

 

$

81.7

 

Between one year and two years

 

 

81.1

 

 

 

54.2

 

Between two years and three years

 

 

68.5

 

 

 

44.7

 

Between three years and four years

 

 

16.7

 

 

 

41.5

 

Thereafter

 

 

10.5

 

 

 

1.5

 

 

 

$

274.6

 

 

$

223.6

 

 

The majority of the increase as of December 31, 2017 compared to December 31, 2016 was the result new contracts within the transportation and healthcare markets, and the CMO Business acquisition.  

Carpets Net Revenue

Carpets net revenue for the three months ended December 31, 2017 was $16.7 million, an increase of $1.1 million, or 7.1%, compared to net revenue of $15.5 million for the three months ended December 31, 2016.  The increase was primarily attributable to higher volumes from sales of cabinet and granite products.  

The following table reflects the amount of Carpets’ backlog, which represents multi-year contracts with contractors to build-out communities with typical terms of two to three years, by the fiscal year Carpets expects to recognize such net revenue (in millions):

 

 

 

As of  December 31,

 

 

 

2017

 

 

2016

 

Within one year

 

$

17.9

 

 

$

37.2

 

Between one year and two years

 

 

25.1

 

 

 

30.1

 

Between two years and three years

 

 

7.8

 

 

 

12.1

 

Between three years and four years

 

 

1.5

 

 

 

2.8

 

 

 

$

52.3

 

 

$

82.2

 

 

The decrease at December 31, 2017, compared to December 31, 2016, was a result of the fulfilment of contracts during the year ended December 31, 2017 for contracts in place at December 31, 2016.

25


 

Phoenix Net Revenue

Phoenix net revenue for the three months ended December 31, 2017 was $26.8 million, an increase of $2.8 million, or 11.7%, compared to net revenue of $24.0 million for the three months ended December 31, 2016.  The increase was a result of the acquisition of the Printing Component Business, which contributed net revenue of $4.5 million during the three months ended December 31, 2017.  This increase was offset by a decrease in revenue from the remaining business of $1.7 million during the three months ended December 31, 2017 compared to the three months ended December 31, 2016, due to lower volumes for books and components.  

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

 

 

 

As of  December 31,

 

 

 

2017

 

 

2016

 

Within one year

 

$

71.6

 

 

$

59.3

 

Between one year and two years

 

 

57.1

 

 

 

49.0

 

Between two years and three years

 

 

39.4

 

 

 

28.1

 

Between three years and four years

 

 

10.0

 

 

 

18.8

 

Thereafter

 

 

10.0

 

 

 

 

 

 

$

188.1

 

 

$

155.2

 

 

The majority of the increase as of December 31, 2017 compared to December 31, 2016 was a result of the Printing Components Business acquisition, slightly offset by the fulfillment of orders during the year ended December 31, 2017 for contracts in place at December 31, 2016.

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 December 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

40,219

 

 

$

29,002

 

 

$

11,217

 

 

 

38.7

%

As a percentage of net revenue

 

 

78.1

%

 

 

76.2

%

 

 

 

 

 

 

 

 

Carpets

 

 

13,803

 

 

 

13,247

 

 

 

556

 

 

 

4.2

 

As a percentage of net revenue

 

 

82.9

%

 

 

85.2

%

 

 

 

 

 

 

 

 

Phoenix

 

 

20,888

 

 

 

17,932

 

 

 

2,956

 

 

 

16.5

 

As a percentage of net revenue

 

 

77.9

%

 

 

74.6

%

 

 

 

 

 

 

 

 

Consolidated cost of revenue

 

$

74,910

 

 

$

60,181

 

 

$

14,729

 

 

 

24.5

%

 

Faneuil Cost of Revenue

Faneuil cost of revenue for the three months ended December 31, 2017 was $40.2 million, an increase of $11.2 million, or 38.7%, compared to cost of revenue of $29.0 million for the three months ended December 31, 2016.  The absolute dollar increase in cost of revenue was a direct result of the increased net revenue.  During the three months ended December 31, 2017, as compared to the three months ended December 31, 2016, cost of revenue as a percentage of net revenue increased to 78.1% from 76.2% as a result of the integration of the CMO Business.     

Carpets Cost of Revenue

Carpets cost of revenue for the three months ended December 31, 2017 was $13.8 million, an increase of $0.6 million, or 4.2%, compared to cost of revenue of $13.2 million for the three months ended December 31, 2016.  The absolute dollar increase in cost of revenue was a direct result of increased net revenue.  During the three months ended December 31, 2017, as compared to the three months ended December 31, 2016, cost of revenue as a percentage of net revenue decreased to 82.9% from 85.2% as a result of implementing operating efficiencies.      

26


 

Phoenix Cost of Revenue

Phoenix cost of revenue for the three months ended December 31, 2017 was $20.9 million, an increase of $3.0 million, or 16.5% compared to cost of revenue of $17.9 million for the three months ended December 31, 2016.  The absolute dollar increase in cost of revenue was mainly attributable to increased net revenue associated with the aforementioned Printing Components Business acquisition.  During the three months ended December 31, 2017, as compared to the three months ended December 31, 2016, cost of revenue as a percentage of net revenue increased to 77.9% from 74.6% as a result of changes in product mix sold, and some duplicate expenses incurred with the Printing Components Business acquisition.  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.  

Selling, General and Administrative Expense

 

 

 

Three Months Ended December 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

7,544

 

 

$

5,288

 

 

$

2,256

 

 

 

42.7

%

Carpets

 

 

3,573

 

 

 

2,343

 

 

 

1,230

 

 

 

52.5

 

Phoenix

 

 

4,139

 

 

 

3,055

 

 

 

1,084

 

 

 

35.5

 

ALJ

 

 

848

 

 

 

1,018

 

 

 

(170

)

 

 

(16.7

)

Consolidated selling, general and administrative expense

 

$

16,104

 

 

$

11,704

 

 

$

4,400

 

 

 

37.6

%

 

Faneuil Selling, General and Administrative Expense

Faneuil selling, general and administrative expense for the three months ended December 31, 2017 was $7.5 million, an increase of $2.3 million, or 42.7%, compared to selling, general and administrative expense of $5.3 million for the three months ended December 31, 2016.  The increase was primarily attributable to the CMO Business acquisition, which added $1.5 million, and expenses to support existing customers, mostly in the healthcare industry as a result of open enrollment season, which added $1.6 million.  This increase was partially offset by reduced expenses of $0.8 million to onboard new customers and $0.1 million related to customer contracts that concluded.  During the three months ended December 31, 2017 compared to the three months ended December 31, 2016, selling, general and administrative expense as a percentage of net revenue increased to 14.7% from 13.9%.  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 net revenue to fluctuate.

Carpets Selling, General and Administrative Expense

Carpets selling, general and administrative expense was $3.6 million for the three months ended December 31, 2017, an increase of $1.2 million, or 52.5%, compared to selling, general and administrative expense of $2.3 million for the three months ended December 31, 2016.  The increase was primarily attributable to increased headcount to support growth in the cabinet and granite divisions, and to a lesser extent, increased legal fees to defend against legal claims.  Selling, general and administrative expense as a percentage of net revenue increased to 21.5% for the three months ended December 31, 2017 from 15.1% for the three months ended December 31, 2016 as a result of incurring additional expenses, which do not fluctuate with net revenue.

Phoenix Selling, General and Administrative Expense

Phoenix selling, general and administrative expense for the three months ended December 31, 2017 was $4.1 million, an increase of $1.1 million, or 35.5%, compared to selling, general and administrative expense of $3.1 million for the three months ended December 31, 2016.  The increase was mainly attributable to the Printing Component Business acquisition and restructuring expense incurred to consolidate manufacturing facilities of $0.8 million.  Selling, general and administrative expense as a percentage of net revenue increased to 15.4% for the three months ended December 31, 2017 from 12.7% for the three months ended December 31, 2016.  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 net revenue to fluctuate.

ALJ Selling, General and Administrative Expense

ALJ selling, general and administrative expense for the three months ended December 31, 2017 was $0.8 million, a decrease of $0.2 million, or 16.7%, compared to selling, general and administrative expense of $1.0 million for the three months ended December 31, 2016. The decrease was primarily attributable to allocating certain expenses, including accounting and tax preparation, to our subsidiaries to better align expenses with ALJ’s consolidated reporting structure.  Such decrease was somewhat offset by an increased compensation expense associated with the appointment of a new chief financial officer and an increase in non-cash stock-based compensation costs for key employees and board of directors.  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.

27


 

Depreciation and Amortization

 

 

 

Three Months Ended December 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

2,576

 

 

$

1,863

 

 

$

713

 

 

 

38.3

%

Carpets

 

 

219

 

 

 

175

 

 

 

44

 

 

 

25.1

 

Phoenix

 

 

639

 

 

 

641

 

 

 

(2

)

 

 

(0.3

)

Consolidated depreciation and amortization expense

 

$

3,434

 

 

$

2,679

 

 

$

755

 

 

 

28.2

%

Faneuil Depreciation and Amortization

Faneuil depreciation and amortization expense for the three months ended December 31, 2017 was $2.6 million, an increase of $0.7 million, or 38.3%, compared to depreciation and amortization expense of $1.9 million for the three months ended December 31, 2016.  The increase was mainly attributable to the CMO Business acquisition, and to a lesser extent capital equipment purchased to support new and expanded contracts.  Because each Faneuil contract requires unique capital investment and infrastructure 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

Carpets depreciation and amortization expense for both the three months ended December 31, 2017 and 2016 was $0.2 million.  The slight increase of less than $0.1 million, or 25.1%, was attributable to the installation of automation machinery to support the new granite and stone facility.  

Phoenix Depreciation and Amortization

Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets.  Depreciation and amortization expense remained relatively unchanged at $0.6 million for both the three months ended December 31, 2017 and December 31, 2016.      

Interest Expense

Interest expense for the three months ended December 31, 2017 was $2.7 million, an increase of $0.2 million, or 9.3%, compared to interest expense of $2.4 million for the three months ended December 31, 2016.  The increase was primarily attributable to the $8.2 million increase to our line of credit to fund working capital requirements, and the $7.5 million increased borrowing on our term loan to acquire the Printing Components Business, partially offset by reduced interest resulting from quarterly principal payments.  

Income Taxes

Our income tax provision was $3.4 million for the three months ended December 31, 2017 compared to less than $0.1 million for the three months ended December 31, 2016.  The increase during the three months ended December 31, 2017 compared to the three months ended December 31, 2016 was due to 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”).  We recorded the provisional impacts of the Tax Reform Law as of December 31, 2017, based on our current knowledge, interpretation, and understanding of the Tax Reform Law and its impact to our business.  While we were able to make reasonable estimates of the impact of certain aspects of the Tax Reform Law, we may be affected by other aspects, including, but not limited to, the state tax effect of adjustments made to federal temporary differences, and the interest expense deduction limitation.

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

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 assesses the performance of each operating segments.  ALJ defines segment adjusted EBITDA as segment net income (loss) before interest expense, provision for income taxes, depreciation and amortization expense, stock-based compensation expense, restructuring expense, acquisition-related expense, loss (gain) on sales of assets, and other non-recurring items.

28


 

The following table summarizes our segment adjusted EBITDA for each period (in thousands):

 

 

 

Three Months Ended December 31,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Faneuil

 

$

3,711

 

 

$

3,761

 

 

$

(50

)

 

 

(1.3

)%

Carpets

 

 

(726

)

 

 

(47

)

 

 

(679

)

 

NM

 

Phoenix

 

 

4,160

 

 

 

4,348

 

 

 

(188

)

 

 

(4.3

)

ALJ

 

 

(555

)

 

 

(834

)

 

 

279

 

 

 

(33.5

)

Segment adjusted EBITDA

 

$

6,590

 

 

$

7,228

 

 

$

(638

)

 

 

(8.8

)%

NM – Not Meaningful

Faneuil Segment Adjusted EBITDA

Faneuil segment adjusted EBITDA for both the three months ended December 31, 2017 and 2016 was basically flat at $3.7 million.  Higher expenses related to new technology, training and call handling for the new CMO Business offset the increased net revenue recognized from the new CMO Business contracts.  

Carpets Segment Adjusted EBITDA

Carpets segment adjusted EBITDA for the three months ended December 31, 2017 was $(0.7) million compared to segment adjusted EBITDA of less than $(0.1) million for the three months ended December 31, 2016.   The three months ended December 31, 2017 was impacted by higher administrative personnel costs, homebuilder discounts, legal fees, bad debt expense, inventory reserves, and higher expenses associated with the granite business.

Phoenix Segment Adjusted EBITDA

Phoenix segment adjusted EBITDA was $4.2 million for the three months ended December 31, 2017, a decrease of $0.2 million, or 4.3%, compared to segment adjusted EBITDA of $4.4 million for the three months ended December 31, 2016.  The majority of the decrease was attributable to lower sales volumes for books and components.

ALJ Segment Adjusted EBITDA

ALJ segment adjusted EBITDA for the three months ended December 31, 2017 was $(0.6) million compared to segment adjusted EBITDA of $(0.8) million.   The three months ended December 31, 2017 was impacted by allocating certain expenses, including accounting and tax preparation, to our subsidiaries to better align expenses with ALJ’s consolidated reporting structure.  Such decrease was somewhat offset by an increased compensation expense associated with the appointment of a new chief financial officer.  

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 (loss) income to segment adjusted EBITDA.

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.

29


 

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 the 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 December 31, 2017, our principal sources of liquidity included cash and cash equivalents of $2.0 million and an available borrowing capacity of $10.8 million on our line of credit.  Our principal uses of cash have been for acquisitions and to pay down debt.  We anticipate these uses will continue to be our principal uses of liquidity in the future.  

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

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

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

Cash (used for) provided by operating activities

 

$

(3,692

)

 

$

8,309

 

Cash used for investing activities

 

 

(9,637

)

 

 

(3,945

)

Cash provided by (used for) financing activities

 

 

9,726

 

 

 

(5,208

)

Change in cash and cash equivalents

 

$

(3,603

)

 

$

(844

)

 

We recognized net loss of $5.3 million for the three months ended December 31, 2017, used cash of $3.7 million for operating activities and $9.6 million for investing activities, offset by $9.7 million cash provided by financing activities.    

We recognized net income of $0.6 million for the three months ended December 31, 2016 and generated cash from operating activities of $8.3 million, offset by cash used by investing activities of $3.9 million and financing activities of $5.2 million.  

Operating Activities

Cash used for operations of $3.7 million during the three months ended December 31, 2017 was the result of our $5.3 million net loss, $8.6 million addback of net non-cash expenses, and $7.0 million of net cash used by changes in operating assets and liabilities.  The most significant components of net non-cash expenses were depreciation and amortization of $4.8 million, stock-based compensation of $0.3 million, amortization of non-cash interest expense of $0.3 million, and deferred income taxes of $3.3 million.  The most significant components of changes in operating assets and liabilities included accounts receivable of $6.2 million, prepaid expenses and other current assets of $2.0 million, and deferred revenue and customer deposits of $1.9 million, which used cash, offset by accrued expenses of $1.1 million and inventories of $1.0 million, which provided cash.

Cash provided by operations of $8.3 million during the three months ended December 31, 2016 was the result of our $0.6 million net income, $4.1 million addback of net non-cash expenses, and $3.6 million of net cash provided by changes in operating assets and liabilities.  The most significant components of net non-cash expenses were depreciation and amortization of $4.0 million, stock-based compensation of $0.2 million, and amortization of non-cash interest expense of $0.2 million, offset by deferred income tax benefit of $0.3 million.  The most significant components of changes in operating assets and liabilities included inventories of $1.3 million, collateral deposits of $1.3 million, accounts payable of $3.8 million, accrued expenses of $1.9 million, and other liabilities of $1.8 million which provided cash, and accounts receivable of $3.7 million, and other assets of $2.2 million, which used cash.  Our cash flow from operations was negatively impacted by one large past due account receivable due to Faneuil.  See “Part 2, Item 1 – Legal Proceedings.”  

Investing Activities

For the three months ended December 31, 2017, our investing activities used $9.6 million, of which $9.0 million was for our Printing Components Business acquisition, and $1.0 million was to purchase capital equipment in the normal course of operations, offset by $0.3 million cash proceeds from the sale of assets.

30


 

For the three months ended December 31, 2016, our investing activities used $3.9 million of cash, of which $2.9 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and $1.0 million was used to purchase capital equipment in the normal course of operations.  

Financing Activities

For the three months ended December 31, 2017, our financing activities provided $9.7 million of cash.  Proceeds from our line of credit provided $8.2 million, proceeds from our amended term loan provided $7.5 million (see further discussion at Contractual Obligations below), and the issuance of common stock provided $1.5 million. Proceeds from the amended term loan and issuance of common stock were used to fund our Printing Components Business acquisition discussed above.  Financing activities which used cash include $6.4 million to pay down our term loan, $0.7 million for capital lease payments, and $0.3 million for debt and stock issuance costs.  

For the three months ended December 31, 2016, our financing activities used $5.2 million of cash, of which $4.5 million was used to pay down our  term loan, $0.4 million was used for payments on capital leases and $0.3 million was used for payments on financed insurance premiums.

Contractual Obligations

The following table summarizes our significant contractual obligations at December 31, 2017, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

 

 

Payments due by Period

 

 

 

 

 

 

 

Less Than

 

 

One – Three

 

 

Four – Five

 

 

More than Five

 

 

 

Total

 

 

One Year

 

 

Years

 

 

Years

 

 

Years

 

Line of credit(1)

 

$

13,662

 

 

$

 

 

$

13,662

 

 

$

 

 

$

 

Term loan payable(1)

 

 

92,091

 

 

 

9,188

 

 

 

82,903

 

 

 

 

 

 

 

Operating lease obligations

 

 

20,612

 

 

 

4,722

 

 

 

8,745

 

 

 

7,145

 

 

 

 

Capital lease obligations

 

 

9,305

 

 

 

3,575

 

 

 

4,697

 

 

 

1,033

 

 

 

 

Other long-term liabilities(2)

 

 

4,631

 

 

 

989

 

 

 

3,642

 

 

 

 

 

 

 

Total contractual cash obligations

 

$

140,301

 

 

$

18,474

 

 

$

113,649

 

 

$

8,178

 

 

$

 

 

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

 

Description

 

Use of Proceeds

 

Origination Date

 

Interest Rate *

 

Quarterly

Payments

 

 

Balance at

December 31, 2017

 

Term Loan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Agreement

 

Phoenix acquisition

 

August 2015

 

7.99% to 8.30%

 

$

1,969

 

 

$

76,766

 

First Amendment

 

Color Optics acquisition

 

July 2016

 

7.99% to 8.30%

 

 

187

 

 

 

8,280

 

Third Amendment

 

Printing Components Business acquisition

 

October 2017

 

7.99% to 8.30%

 

 

141

 

 

 

7,045

 

 

 

 

 

 

 

 

 

$

2,297

 

 

$

92,091

 

Line of Credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cerberus/PNC Revolver

 

Working Capital

 

August 2015

 

10.00% to 10.25%

 

$

 

 

$

8,162

 

Second Amendment

 

CMO Business acquisition

 

May 2017

 

7.99% to 8.30%

 

 

 

 

 

5,500

 

 

 

 

 

 

 

 

 

$

 

 

$

13,662

 

*Range of annual interest rates accrued during the three months ended December 31, 2017.  

Interest payments are due in arrears on the first day of each month.  Quarterly principal payments are due on the last day of each fiscal quarter.  Annual principal payments equal to 75% of ALJ’s excess cash flow (“ECF”), as defined in the Financing Agreement, are due upon delivery of the audited financial statements.  During the three months ended December 31, 2017, ALJ made an ECF payment of $4.1 million.  A final balloon payment is due at maturity, August 14, 2020.  There is a prepayment penalty equal to 1% if the Cerberus Term Loan is repaid prior to August 2018.  ALJ may make payments of up to $7.0 million against the loan with no penalty.

31


 

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 December 31, 2017, ALJ was in compliance with all debt covenants and had unused borrowing capacity of $10.8 million.

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

Off-Balance Sheet Arrangements

As of December 31, 2017, 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 December 31, 2017, the face value of such surety bonds, which represents the maximum cash payments that Faneuil would have to make under certain circumstances of non-performance, was approximately $29.1 million.

Letter of Credit.  Faneuil had a letter of credit for $2.7 million as of December 31, 2017.

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.

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

32


 

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.

 

 

33


 

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

Litigation, Claims, and Assessments

Faneuil, Inc. v. 3M Company

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

On October 14, 2016, 3M filed its answer and counterclaim against Faneuil.  In its counterclaim, 3M seeks recovery in excess of $10.0 million based on three claims:  breach of contract/indemnification, breach of the implied covenant of good faith and fair dealing and unjust enrichment.  3M’s counterclaim alleges it incurred approximately $3.2 million in damages payable to ERC as a result of Faneuil’s conduct and seeks indemnification of an additional $10.0 million in damages incurred as a result of continued performance under its contract with ERC. A five-day bench trial is set for April 2018. A pretrial scheduling order has been entered and the parties are engaged in substantive discovery at this time.  

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

 

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

Faneuil believes the facts support its claims that the disputed services should be paid and that 3M’s counterclaims are without merit.  Faneuil intends to vigorously prosecute its claims against 3M and to defend against 3M’s counterclaims.  Although litigation is inherently unpredictable, Faneuil remains confident in its ability to collect all of its outstanding receivables from 3M. 

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.  On November 8, 2017, Faneuil received the court’s recommendation, which awarded a total of $0.7 million for plaintiff’s attorney fees and court fees.  Faneuil has objected to a portion of the recommendation and has requested that the district court judge further reduce the award.

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 has recently filed a motion to remand the case back to state court. The case is in an early stage and the parties have not begun substantive discovery at this time. Faneuil believes this action is without merit and intends to defend it vigorously.

 

Thornton v. ALJ Regional Holdings, Inc., et al.

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

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In connection with its pending litigation matters (including the matters described above), management has estimated the range of possible loss, including fees and expenses, to be between $1.6 million and $2.4 million; however, as management has determined that no one estimate within the range is better than another, it has accrued $1.6 million as of December 31, 2017.

Other Litigation

We and our subsidiaries have been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to our ordinary business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time-consuming, cause us to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. We concluded as of December 31, 2017 that the ultimate resolution of these matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

 

 

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

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

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

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

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

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

On March 23, 2010, President Obama signed the Affordable Care Act (the Affordable Care Act) into law, which has affected comprehensive health insurance reform, including the creation of health insurance exchanges, among other reforms. A portion of Faneuils healthcare business relates to providing services to health insurance exchanges in various states, and Faneuil believes that there may be significant opportunities for growth in this area.  President Trump has disclosed that a key initiative for his Presidency is to repeal or substantially change the Affordable Care Act. For example, the Tax Reform Law repealed the individual mandate imposed by the Affordable Care Act, 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 Faneuils industry as a whole, or key industry segments targeted by Faneuil. In addition, Faneuils operations are, in part, dependent upon state government funding. Significant changes in the level of state government funding could have an unfavorable effect on Faneuils business, financial position, results of operations and cash flows.

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

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

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

Faneuil derives a substantial portion of its revenue from a relatively small number of customers. For additional information regarding Faneuils customer concentrations, see “Part I, Item 1. Financial Statements – Note 4. Concentration Risks.”  We expect that Faneuils largest customers will 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 Faneuils 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 Faneuils revenue and cash flows. Additionally, many of Faneuils customers are government entities, which can unilaterally terminate or modify the existing contracts with Faneuil without cause and penalty to such government entities in many situations. If Faneuil does not replace them with other customers or other programs, the loss of business from any one of such customers could have a material adverse effect on its business or results of operations.

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

In order to attract and retain large outsourcing contracts, Faneuil sometimes makes significant capital investments to perform its services under the contract, such as purchases of information technology equipment and costs incurred to develop and implement software. The net book value of such assets, including a portion of Faneuils intangible assets, could be impaired, and Faneuils 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.

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

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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, Faneuils ability to perform according to the terms of its contracts with its customers may be impaired. If the amount Faneuil is required to pay for subcontracted services or equipment exceeds the amount Faneuil has estimated in bidding for fixed prices or fixed unit price contracts, it could experience reduced profit or losses in the performance of these contracts with its customers. Also, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, Faneuil may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the expected profit or result in a loss of a customer contract for which the services, equipment or materials were needed.

Faneuil’s dependence on 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 Faneuils profit or cause losses in the performance of the contract.   In certain instances, the subcontract agreement includes a “Pay When Paid” provision, which allows the primary contractor to hold back payments to a subcontractor until they are paid by the customer, which has negatively impacted Faneuil’s cashflow.      

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

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

Adequate bonding is necessary for Faneuil to win new contracts.

In line with industry practice, Faneuil is often required, primarily in its toll and transportation programs, to provide performance and surety bonds to customers in conjunction with its contracts. These bonds indemnify the customer should Faneuil fail to perform its obligations under the contracts. If a bond is required for a particular program and Faneuil is unable to obtain an appropriate bond, Faneuil cannot pursue that program. The issuance of a bond is at the 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 Faneuils business.

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

If Faneuil were to experience a temporary or permanent interruption at one or more of Faneuils data or customer contact centers 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 Faneuils clients and Faneuil from events that could interrupt delivery of services, there is no guarantee that such interruptions would not result in a prolonged interruption in Faneuils ability to provide services to its clients or that such precautions would adequately compensate Faneuil for any losses it may incur as a result of such interruptions.

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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 occur in the United States or other locations, such events may negatively affect Faneuils operations, cause general economic conditions to deteriorate or cause demand for Faneuils services, many of which depend on travel, to decline. A prolonged economic slowdown or recession could reduce the demand for Faneuils services, and consequently, negatively affect Faneuils future sales and profits. Any of these events could have a significant effect on Faneuils 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.

Faneuils 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 Faneuils 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 Faneuils 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 Faneuils liability for damages, fines, criminal prosecution, unfavorable publicity and restrictions on Faneuils ability to operate. Faneuils 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 Faneuils reputation in the marketplace, which could have a material adverse effect on Faneuils business, results of operations and financial condition. In addition, because a substantial portion of Faneuils 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 Faneuils business, results of operations or financial condition.

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

Because Faneuil operates in intensely competitive markets, its success depends to a significant extent upon its ability to attract, retain and motivate highly skilled and qualified personnel and to subcontract with qualified, competent subcontractors. If Faneuil fails to attract, develop, motivate, retain, and effectively utilize personnel with the desired levels of training or experience, or is unable to contract with qualified, competent subcontractors, Faneuils 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 Faneuils 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. Faneuils business is driven in part by the personal relationships of Faneuils senior management team, and its success depends on the skills, experience, and performance of members of Faneuils senior management team. Despite executing an employment agreement with Faneuils 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 Faneuils 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 our 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. A significant or prolonged decline in residential/commercial remodeling or new construction activity could have a material adverse effect on the Companys business and results of operations.

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

The floor covering industry is highly competitive. Carpets competes with a number of 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 of Carpets competitors or its inability to adapt effectively and quickly to a changing competitive landscape could affect its prices, its margins or demand for its products and services. If it is unable to respond timely and appropriately to these competitive pressures, including through maintaining competitive locations of stores, customer service, quality and price of merchandise and services, in-stock levels, and merchandise assortment and presentation, its market share and its financial performance could be adversely affected.

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

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

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

Carpets sources, stocks and sells products from vendors, and its ability to fulfill their orders reliably and efficiently is critical to its business success. Its ability to continue to identify and develop relationships with qualified suppliers who can satisfy its standards for quality and the need to access products in a timely, efficient and cost-effective manner is a significant challenge. Carpets 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, shipping or logistical interruptions or costs and other factors beyond its control. If these vendors fail or are unable to perform as expected and Carpets is unable to replace them quickly, its business could be adversely affected, at least temporarily, until it can do so, and potentially, in some cases, permanently.

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

Product and service quality issues could result in a negative impact on customer confidence in Carpets and the Carpets brand image. As a result, Carpets 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.

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A portion of Carpets’ business is dependent on estimating fixed price projects correctly and completing the installations within budget. Carpets could suffer losses associated with installations on fixed price projects.

A portion of Carpets business consists of fixed price projects that are bid for and contracted based on estimated costs. The estimating process includes budgeting for the appropriate amount of materials, labor and overhead. At times, this work can be substantial and as a result Carpets ability to estimate costs correctly and its ability to complete the project within budget or satisfaction without material defect is essential. If Carpets is unable to estimate a project properly or unable to complete the project within budget or without material defect, it may suffer losses, which could adversely affect its reputation, business, and financial condition.

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

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

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

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

Historically, Carpets has purchased inventory from a small number of vendors. If these vendors became unable to provide materials promptly, Carpets would be required to find alternative vendors. Management estimates they could locate and qualify new vendors in approximately two weeks. 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 a number of 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 to adapt effectively and quickly to a changing competitive landscape could affect Phoenixs prices, its margins or demand for its products and services. If Phoenix is unable to respond timely and appropriately to these competitive pressures, from existing or new competitors, its business could be adversely affected.

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

Economic conditions and, in particular, conditions in Phoenixs customers and suppliers businesses, could affect its 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 and other factors which continue to affect the global economy, Phoenixs 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 Phoenixs products and related services, and Phoenixs suppliers and customers may not be able to fulfill their obligations to it in a timely fashion.

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Phoenixs 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 Phoenixs allowance for doubtful accounts receivable. Further, Phoenixs suppliers may experience similar conditions as its customers, which may impact their viability and their ability to fulfill their obligations to it. Negative changes in these or related economic factors could materially adversely affect Phoenixs business.

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

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

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

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

Phoenix is dependent upon the availability of raw materials to produce its products. Phoenix primarily uses paper, ink, and adhesives, and the price and availability of these raw materials are affected by numerous factors beyond Phoenixs 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 Phoenixs 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, Phoenixs 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 Phoenixs business.

Any disruption at Phoenix’s 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.

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

Phoenixs operations are subject to a variety of federal, state, local and foreign laws and regulations governing emissions to air, discharge to water, the generation, handling, storage, transportation, treatment and disposal of hazardous substances and other materials, and employee health and safety matters. As an owner and operator of real property and a generator of hazardous substances, Phoenix may be subject to environmental cleanup liability, regardless of fault, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act or analogous state laws, as well as to claims for harm to health or property or for natural resource damages arising out of contamination or exposure to hazardous substances. Some of Phoenixs 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, Phoenixs business may be materially and adversely affected.

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

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

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

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

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 include covenants restricting ALJs, Faneuils, Carpets and Phoenixs ability to:

 

incur additional debt;

 

make certain capital expenditures;

 

incur or permit liens to exist;

 

enter into transactions with affiliates;

 

guarantee the debt of other entities, including joint ventures;

 

merge or consolidate or otherwise combine with another company; or

 

transfer or sale of our assets.

ALJs, Faneuils, Carpets and Phoenixs respective abilities to borrow under our loan arrangements depend upon their respective abilities to comply with certain covenants and borrowing base requirements. Our and our subsidiaries abilities 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.

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

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

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

We, our officers, and our subsidiaries, are currently involved in, and from time to time may become involved in, legal proceedings or be subject to claims arising in the ordinary course of our business. Our subsidiaries Carpets and Faneuil have each been named in lawsuits incidental to its ordinary business, and have filed actions against third parties in connection with such lawsuits.  We have carefully analyzed our cases with our counsel, and we believe that we are not subject to any material risk of liability.  Nevertheless, 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.  For additional information, see “Part II. Item 1, Legal Proceedings.”

Changes in interest rates may increase our interest expense.

 

As of December 31, 2017, $105.8 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.  If interest rates do increase, our debt service obligations on our variable rate indebtedness could increase even if the amount borrowed remained the same, resulting in a decrease in our net income. For example, if interest rates increased in the future by 100 basis points, based on our current borrowings as of December 31, 2017, we would incur approximately an additional $1.1 million per annum 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 December 31, 2017, 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 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 a number of 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

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data could lead to damage to our reputation, claims against us and other potential increases in costs. If we are unsuccessful in defending any lawsuit involving such data security breaches or misuse, we may be forced to pay damages, which could materially and adversely affect our profitability and financial condition. Also, damage to our reputation stemming from such breaches could adversely affect our prospects. As the regulatory environment relating to companies obligations to protect such sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions.

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

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

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

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

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

 

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.

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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 Code and tax credit carryforwards to offset our future taxable income and/or to recover previously paid taxes would be limited if we were to undergo an ownership change within the meaning of Section 382 of the Code.

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

If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, including purchases or sales of stock between 5% stockholders, our ability to use our NOLs and to recognize certain built-in losses would be subject to the limitations of Section 382. Depending on the resulting limitation, a significant portion of our NOLs could expire before we would be able to use them.  At the end of our last fiscal year, September 30, 2017, we had net operating loss carryforwards for federal income tax purposes of approximately $154.3 million that start expiring in 2022. Approximately $131.3 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.  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 distracts our management from its operations, planning, oversight and performance functions, which could harm our operating results. Additionally, any failure of our internal controls or procedures could harm our operating results or cause us to fail to meet our obligations to maintain adequate public information or to file periodic reports with the SEC, as applicable.

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

Our executive officers and directors and their affiliated entities together beneficially own a majority of our outstanding common stock, and our Executive Chairman owns approximately 36.0% of our outstanding common stock as of December 31, 2017. 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.

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We are an “emerging growth 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.”

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;

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

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

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

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

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

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

Although our stock began trading on NASDAQ, we cannot assure you that we will be able to maintain NASDAQ’s continued listing requirements.  Such a listing helps our stockholders by providing a readily available trading market with current quotations. Without that, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficult and the trading volume and liquidity of our stock would likely decline. In that regard, listing on a recognized national trading market such as NASDAQ will also affect our ability to benefit from the use of our operations and expansion plans, including the development of strategic relationships and acquisitions, which are critical to our business and strategy. Any failure to maintain NASDAQ’s continued listing requirements would result in negative publicity and would negatively impact our ability to raise capital in the future.

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.

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

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 December 31, 2017, a total of 1,914,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of $3.11. It is probable that options to purchase our common stock will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option. If the stock options are exercised, your share ownership will be diluted.  Additionally, options to purchase up to 1,370,000 shares of ALJ common stock are available for grant under our existing equity compensation plans as of December 31, 2017.  

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

We do not currently 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 designed to preserve the value of certain tax assets primarily associated with our NOLs and built-in losses under Section 382. At the end of our last fiscal year, September 30, 2017, we had approximately $154.3 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.

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

None.

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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

 

First Amendment to the Restated Certificate of Incorporation of ALJ Regional Holdings, Inc. as filed with the Secretary of State of the State of Delaware on June 1, 2010

 

Incorporated by reference to Exhibit 3.1 to Form 10-12B as filed February 2, 2016.  

 

 

 

 

 

3.2

 

Restated Certificate of Incorporation of ALJ Regional Holdings, Inc. as filed with the Secretary of State of the State of Delaware on June 16, 2009

 

Incorporated by reference to Exhibit 3.2 to Form 10-12B as filed February 2, 2016.  

 

 

 

 

 

3.3

 

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

 

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

 

 

 

 

 

3.4

 

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 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

 

 

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SIGNATURES

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

 

ALJ Regional Holdings, Inc.

 

Date: February 14, 2018

/s/ Jess Ravich

Jess Ravich

Executive Chairman

(Principal Executive Officer)

 

Date: February 14, 2018

/s/ Brian Hartman

Brian Hartman

Chief Financial Officer

(Principal Financial Officer)

 

 

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