EDGAR 10-K Filing

Company CIK: 1438731
Filing Year: 2021
Filename: 1438731_10-K_2021_0001564590-21-060735.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS.
Overview and Business Organization
ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively in this report as “ALJ,” the “Company” or “we”) is a holding company. During the year ended September 30, 2021, ALJ consisted of the following wholly-owned subsidiaries:
•
Faneuil, Inc. (including its subsidiaries, “Faneuil”). Faneuil is a leading provider of call center services, back-office operations, staffing services, and toll collection services to government and regulated commercial clients across the United States, focusing on the healthcare, utility, transportation, and toll revenue collection industries. Faneuil is headquartered in Hampton, Virginia. ALJ acquired Faneuil in October 2013.
•
Phoenix Color Corp. (including its subsidiaries, “Phoenix”). Phoenix is a leading manufacturer of book components, educational materials and related products producing value-added components, heavily illustrated books and commercial specialty products using a broad spectrum of materials and decorative technologies. Phoenix is headquartered in Hagerstown, Maryland. ALJ acquired Phoenix in August 2015.
•
Floors-N-More, LLC, d/b/a, Carpets N’ More (“Carpets”). Carpets was a floor covering retailer in Las Vegas, Nevada, and a provider of multiple products for the commercial, retail and home builder markets including all types of flooring, countertops, cabinets, window coverings and garage/closet organizers. ALJ acquired and disposed of Carpets in April 2014 and February 2021, respectively.
With several members of senior management and our board of directors (“Board of Directors”) coming from long careers in the professional service industry, ALJ is focused on acquiring and operating exceptional businesses.
As a result of the sale of one of its segments, Carpets, during February 2021, discussed below, ALJ has organized its business and corporate structure into two business segments: Faneuil and Phoenix. ALJ is reported as corporate overhead. For results of operations by business segment, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Faneuil
Background
Faneuil is a Delaware corporation with headquarters in Hampton, VA. We acquired Faneuil from Harland Clarke Holdings Corp., a wholly-owned subsidiary of MacAndrews & Forbes Holdings Inc., for aggregate consideration of $53.0 million.
Faneuil is a nationally recognized leader in technology-enabled in-person and automated service delivery, particularly in regulated, highly complex environments.
Acquisition of Realtime Digital Innovations, LLC
On July 31, 2019 (“RDI Purchase Date”), Faneuil acquired Realtime Digital Innovations, LLC (“RDI” and such acquisition, the “RDI Acquisition”), a provider of workflow automation and business intelligence services. The RDI Acquisition is expected to provide Faneuil with a sustainable competitive advantage in the business process outsourcing space by allowing it to, among others, (i) automate process workflows and business intelligence, (ii) generate labor efficiencies for existing programs, (iii) expand potential new client target entry points, (iv) improve overall customer experience, and (v) increase margin profiles through shorter sales cycles and software license sales.
Services
Faneuil provides business processing solutions for an extensive client portfolio that includes both commercial and government entities across several verticals, including transportation, utilities, healthcare, consumer goods, and government/municipal services. Utilizing advanced applications and a dedicated team of service professionals, Faneuil delivers broad outsourcing support, ranging from customer contact centers, fulfillment operations, and information technology services, to manual and electronic toll collection and violation processing, with the goal of building its clients’ brands by providing exemplary customer service.
Faneuil’s core competencies include:
•
High-volume, multi-channel customer contact centers;
•
Customer relationship management;
•
Billing, payment, and claims processing;
•
Data entry;
•
Document management;
•
Operational expertise;
•
Workforce and support analytics;
•
Quality assurance;
•
Back office and fulfillment operations;
•
System support and maintenance; and
•
Staffing services.
Faneuil employees who have contact with customers undergo intensive training and development, followed by structured monitoring and assessments before they are certified to process customer contacts. Faneuil’s customer contact employees provide service delivery through multiple communication channels, including telephone, fax, email, web chat and face-to-face interaction. Additionally, Faneuil provides multi-lingual representatives to accommodate the communication needs of non-English-speaking customers, as well as the hearing-impaired.
Human Capital Management
Faneuil is committed to fostering a work environment that values diversity and inclusion. This commitment includes providing equal access to and participation in, equal employment opportunities, programs, and services without regard to race, religion, color, origin, disability, sex, sexual orientation, gender identity, veteran status, age, or stereotypes based thereon. Faneuil welcomes team members' differences, experiences, and beliefs, and is investing in a more productive, engaged, diverse and inclusive workforce.
Faneuil monitors human capital metrics and diversity. On September 30, 2021, Faneuil had 6,541 full-time employees (down from 7,743 employees on September 30, 2020). No Faneuil employees are represented by a labor union, or subject to any collective bargaining agreements. Faneuil considers its employee relations good.
Faneuil continues to focus on workplace safety by providing training and bringing awareness to workplace best practices in a continuous effort to reduce workplace injuries and accidents. Faneuil acted quickly to respond to safety protocols as a result of the COVID-19 pandemic to protect the health and safety of team members. To support team members, Faneuil offered remote work options where possible, purchased additional sanitation supplies and increased personal protective materials provided to staff.
Customers
Faneuil’s client portfolio includes both government and commercial entities nationwide, including several toll authorities, state agencies, municipalities, publicly-owned utilities, health benefit exchanges, one government agency that operates the major airports serving the Washington, D.C. area, and several other public and private entities.
The percentages of Faneuil net revenue derived from its significant customers for the years ended September 30, 2021 and 2020 were as follows:
Year Ended
September 30,
Customer A
10.1
%
10.6
%
Customer B
10.0
**
** Less than 10% of Faneuil net revenue.
Many Faneuil customers are government agencies subject to contractual budgetary ceilings. State and local funding for these agencies is approved by the respective state legislature(s) each year. Depending on budgetary constraints, the contract values may be subject to change based upon ongoing legislative approval.
Competition
Primary competitors to Faneuil are other large providers of toll services, such as Conduent, AEComm, and TransCore, Inc., as well as contact center operators such as Maximus and Automated Health Services. In many cases, Faneuil is smaller and has less financial and personnel resources than its competitors. If Faneuil cannot compete effectively to win new business and retain existing clients, its operating results will be negatively affected. To remain competitive, Faneuil must continuously implement new technologies and expand its portfolio of outsourced services and may have to make occasional strategic adjustments to its pricing for its services.
Properties
Faneuil leases all of its properties in various locations throughout the United States for customer contact centers, walk-in retail, and administration. Faneuil’s corporate headquarters are located in Hampton, VA. Faneuil’s leased facilities comprise an aggregate of approximately 487,000 square feet with leases that expire at various dates through June 2030. Faneuil believes that its existing leased facilities are adequate for current requirements.
Backlog
Faneuil backlog represents executed contracts for future services. Most contracts are long-term and obligate Faneuil to provide services over multiple years. Faneuil backlog may not represent firm commitments as some contracts, especially with government entities, allow for cancellation under certain instances. Faneuil adjusts backlog to reflect contract cancellations, deferrals, and revisions known at the reporting date. However, Faneuil could experience additional contract modifications or cancellations, which may increase or decrease backlog.
The following table reflects the amount of Faneuil backlog by the fiscal year we expect to recognize revenue:
As of September 30,
(in millions)
Within one year
$
196.4
$
245.6
Between one year and two years
125.4
145.4
Between two years and three years
77.7
101.4
Between three years and four years
30.0
83.4
Thereafter
21.3
38.1
Total Faneuil backlog
$
450.8
$
613.9
The decrease in total Faneuil backlog from September 30, 2021 compared to September 30, 2020 was primarily the result of negotiating an early termination of a large unprofitable contract, and services provided in the normal course of business for long-term contracts outstanding on September 30, 2020.
For further information regarding Faneuil backlog, see “Part I, Item 1A. Risk Factors - Risks Related to our Business Generally and our Common Stock - We may not receive the full amounts estimated under the contracts in our backlog, which could reduce our revenue in future periods below the levels anticipated. This makes backlog an uncertain indicator of future operating results.”
Seasonality
Faneuil experiences seasonality within its various lines of business. For example, during the end of the calendar year through the end of the first calendar quarter, Faneuil generally experiences higher revenue attributable to its healthcare customers as the customer contact centers increase operations during the open enrollment periods of the healthcare exchanges. Faneuil revenue from its healthcare customers generally decreases during the remaining portion of the year after the open enrollment period. Seasonality is less pronounced with Faneuil customers in the transportation industry, though there is typically some volume increase during the summer months.
Governmental Regulation
Faneuil’s business is subject to many legal and regulatory requirements in the United States, covering such matters as data privacy, consumer protection, healthcare requirements, labor relations, taxation, internal and disclosure control obligations, governmental affairs and immigration. For example, Faneuil is subject to state and federal laws and regulations regarding the protection of consumer information commonly referred to as “non-public personal information,” including the collection of patient data through Faneuil’s contact center services and medical device tracking services, which is subject to the Health Insurance Portability and Accountability Act of 1996, commonly known as HIPAA, which protects the privacy of patient data. These laws, regulations, and agreements require Faneuil to develop and implement policies to protect non-public personal information and to disclose these policies to consumers before a customer relationship is established and periodically thereafter. These laws, regulations, and agreements limit the ability to use or disclose non-public personal information for purposes other than the purposes originally intended. Many of these regulations, including those related to data privacy, frequently change and sometimes conflict with existing regulations amongst the various jurisdictions in which Faneuil provides services. Violations of these laws and regulations could result in liability for damages, fines, criminal prosecution, unfavorable publicity and restrictions on Faneuil’s operations. Failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to Faneuil’s reputation in the marketplace, which could have a material adverse effect on Faneuil’s business, results of operations and financial condition. Also, because a substantial portion of Faneuil operating costs consists of labor costs, changes in governmental regulations relating to wages, healthcare and healthcare reform and other benefits or employment taxes could have a material adverse effect on Faneuil’s business, results of operations or financial condition.
Management
Faneuil is led by ALJ board member Anna Van Buren, who has served as President and Chief Executive Officer since 2009 and previously served in executive roles at Faneuil since 2004. For additional information regarding Ms. Van Buren, see “Part III, Item 10. Directors, Executive Officers and Corporate Governance.”
Phoenix Color Corp.
Background
Phoenix is a Delaware corporation headquartered in Hagerstown, Maryland. We acquired Phoenix from Visant Corporation for aggregate consideration of $88.3 million.
Phoenix is a premier full-service, full-color printer with over 40 years of superior printing experience. Drawing on a broad spectrum of materials and decorative technologies, Phoenix produces memorable, value-added components, heavily illustrated books, and specialty commercial products. Book publishers generally design book components to enhance the sales appeal of their books. The production of book components requires specialized equipment, materials, and finishes and often demands high-quality, intricate work. As a result, many leading publishers rely on specialty printers such as Phoenix to supply high-quality book components. This same philosophy applies to labels, packaging, and specialty commercial products, where Phoenix customers require the knowledge and expertise of a printer that can enhance their products for sale into the commercial marketplace. Phoenix has been servicing the publishing industry within the United States since 1979 and has formed lasting relationships with many of the biggest names in book publishing.
As a domestic manufacturer, Phoenix offers extensive, in-house digital pre-press capabilities and its technologically advanced UV printing platform supports an array of printing and finishing options. Phoenix innovative special effects include foil stamping, UV embellishments, and laminations, as well as its trademarked products LithoFoil®, MetalTone™, Look of Leather™, and VibraColor™.
Products and Services
Books and Components
Phoenix offers several products for books and components, which represents more than 90% of Phoenix net revenue.
Phoenix is a leader in providing distinctive cover components and high-quality, heavily illustrated and multi-colored books for all markets. With its technologically advanced pre-press and press operations as well as an array of finishing applications and innovative special effects, Phoenix is committed to producing memorable, value-added products.
Labels and Packaging
In recent years, Phoenix has expanded into the label and packaging markets to leverage its unique printing and finishing capabilities as well as its trademarked special effects and extensive offerings of finishes and coatings.
Human Capital Management
Phoenix continually invests in and supports its employees and has an employee-focused, values-driven culture, which management believes is an advantage over its competitors.
Phoenix relies on highly qualified, skilled, and knowledgeable talent to support its strategic priorities. As such, Phoenix invests in (i) efforts to attract, develop, and retain employees, and (ii) tools, technologies, processes, and education to increase employee engagement, productivity, and efficiency.
Phoenix is committed to fostering a work environment that values diversity, equity, and inclusion to create an equal, safe, and fair work environment for all employees. On September 30, 2021, Phoenix had 417 full-time employees (up from 413 employees on September 30, 2020). No Phoenix employees are represented by a labor union, or subject to any collective bargaining agreements. Phoenix considers its employee relations good.
Customers
Phoenix sells to many of the leading publishing companies. A small number of customers have historically accounted for a substantial portion of Phoenix net revenue. The percentages of Phoenix net revenue derived from its significant customers for the years ended September 30, 2021 and 2020 were as follows:
Year Ended
September 30,
Customer A
24.3
%
24.4
%
Customer B
22.6
18.9
Customer C
12.2
13.0
Suppliers
Phoenix has historically purchased raw materials from a small number of suppliers primarily to control the quality of the product and to capitalize on volume discounts. If these suppliers were unable to provide materials on a timely basis, Phoenix management believes alternative suppliers could provide the required materials with minimal disruption to the business. Historically, Phoenix has not experienced any significant delay or shortage in the supply of materials.
The percentages of Phoenix inventory purchases from its significant suppliers for the years ended September 30, 2021 and 2020 were as follows:
Year Ended
September 30,
Supplier A
19.6
%
14.1
%
Supplier B
13.2
17.3
Supplier C
**
10.6
** Less than 10% of Phoenix inventory purchases.
Backlog
Phoenix backlog represents executed master service agreements (“MSA”) that contain minimum volume commitments over multiple years for future product deliveries. Phoenix includes only the estimated minimum commitments in the MSAs as backlog. As Phoenix executed MSAs mostly provide for minimum volume commitments rather than minimum aggregate dollar spend, the actual revenue from such agreements may differ from our backlog estimates as to the total order volume and the timing of such volume. Phoenix adjusts backlog to reflect estimated order volumes delivered by its customers based on historical experience known at the reporting date; however, future variations in order volumes by Phoenix customers may increase or decrease backlog and future revenue.
The following table reflects the amount of Phoenix backlog by the fiscal year we expect to recognize revenue:
As of September 30,
(in millions)
Within one year
$
69.8
$
65.0
Between one year and two years
64.7
63.5
Between two years and three years
44.5
57.3
Between three years and four years
43.3
43.3
Thereafter
52.4
95.6
Total Phoenix backlog
$
274.7
$
324.7
The decrease in Phoenix backlog on September 30, 2021 compared to September 30, 2020 was primarily driven by product delivery in the normal course of business for purchase orders outstanding on September 30, 2020.
For further information regarding the Phoenix backlog, see “Part I, Item 1A. Risk Factors - Risks Related to our Business Generally - 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.”
Seasonality
There is seasonality to the Phoenix business. Education book component sales (school and college) traditionally peak in the first and second quarters of the calendar year. Other book components sales traditionally peak in the third quarter of the calendar year. Book sales also traditionally peak in the third quarter of the calendar year. The fourth quarter of the calendar year traditionally has been the weakest quarter. These seasonal factors are not significant.
Competition
The printing industry in general and the printing and manufacturing of books, in particular, is extremely competitive. Over the past several years, there has been significant consolidation in the publishing industry, such that fewer publishers control a greater share of the market. Although there are still many small, independent publishers, they do not wield the leverage held by major publishing houses. Additionally, the printing industry has experienced a reduction in demand for trade books due to the impact of the e-book market and a reduction in textbooks due to lower state government funding, alternative product formats and digital distribution of content.
Primary competitors in the printing and manufacturing of books and book components include, but are not limited to Coral Graphics, Quad Graphics, and Worzalla. There is no reliable industry data available to determine Phoenix’s market share and position versus that of its competitors. With respect to book components, a portion of the products is produced by the book manufacturers and a portion by component printers. The dollar value of book components manufactured by the book manufacturers or by other component printers is unknown. Phoenix and Coral Graphics are the two primary trade book component manufacturers used by major publishers in the U.S. market. Most high-quality, heavily-illustrated and multi-colored books sold in the U.S. are produced outside of the U.S. Phoenix competes with Worzalla and several domestic book manufacturers for that portion that is produced domestically.
Environmental Matters
Phoenix is committed to creating quality products, while providing a safe and healthy workplace and acting as an environmentally responsible neighbor. Phoenix believes in preserving the environment and is committed to safeguarding natural resources and the environment as part of its daily operations.
Phoenix continues to seek solutions to reduce its environmental impact by identifying areas for improvement, continually seeking alternatives to improve efficiency of conventional energy usage and implementing new innovations to reduce its impacts on the environment.
Properties
Phoenix owns its principal properties for corporate offices and production located in Hagerstown, MD, which totals approximately 276,000 square feet. Phoenix also owns two buildings totaling approximately 45,000 square feet in Terre Haute, IN. Additionally, Phoenix rents approximately 5,000 square feet in Rockaway, NJ under a month-to-month lease. Phoenix believes its facilities will be adequate for at least the next 12 months.
Management
Phoenix is led by Marc Reisch, who currently serves as its Chairman and previously served as its Chief Executive Officer from 2008 to 2015. Mr. Reisch served as a director on ALJ’s Board of Directors from August 2015 until October 2019. For additional information regarding Mr. Reisch, see “Part III, Item 10. Directors, Executive Officers and Corporate Governance.”
Carpets N’ More
Background
In January 2021, ALJ entered into a Purchase and Sale Agreement (“PSA”), by and among the Company, Superior Interior Finishes, LLC, a Nevada limited liability company (“Superior”) and Carpets, pursuant to which the Company agreed to sell 100% of the membership interests of Carpets to Superior for an aggregate purchase price of $0.5 million (the “Purchase Price”) in cash (the “Transaction”). At the time of the PSA, Superior was 100% owned by Steve Chesin, the Chief Executive Officer of Carpets. The Company entered into the PSA because its Carpets business segment had been deemed a non-core holding and had underperformed over the past several years. The Transaction, which was approved by a committee of the Board comprised solely of certain independent directors of the Company, closed in February 2021. As such, the results of operations, assets, liabilities, and cash flows of Carpets were classified as discontinued operations in ALJ’s financial statements for all periods presented. See “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 4. Acquisitions and Divestitures - Carpets Divestiture.”
Additional Information About ALJ and its Subsidiaries
ALJ was originally incorporated in the State of Delaware under the name Nuparent, Inc. on June 22, 1999. The Company’s name was changed to YouthStream Media Networks, Inc. on June 24, 1999, and that name was used through October 23, 2006. The Company’s name was changed to ALJ Regional Holdings, Inc. on October 23, 2006.
As of September 30, 2021, ALJ corporate had five employees, consisting of its Chief Executive Officer, Chief Financial Officer, and three support staff, performing services dedicated primarily to general corporate and administrative matters. No employee is represented by a labor union.
Intellectual Property
We rely on copyright, trademark, and trade secret laws as well as contractual restrictions to protect our proprietary information and intellectual property rights. We control access to our proprietary information and intellectual property, in part, by entering into confidentiality and invention assignment agreements with our employees, contractors, and business partners. We also control the use of our proprietary information and intellectual property through provisions in our client agreements and distribution partner agreements.
We have a limited number of registered trademarks and registered copyrights in the United States as well as a number of common law trademarks and trade names. We rely substantially on unpatented proprietary technology. We do not consider the success of our business, as a whole to be dependent on our intellectual property.
Available Information
We make available free of charge our annual, quarterly, and current reports, proxy statements and other information, in electronic format, upon request. To request such materials, please contact our Chief Financial Officer at 244 Madison Avenue, PMB #358, New York, NY 10016 or call 212-883-0083.
Additionally, many reports and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.aljregionalholdings.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Information on our website and other information that can be accessed through our website are not part of this report.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS.
The following risk factors and other information included in this Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be significantly harmed.
Risks Related to Faneuil
Faneuil is subject to uncertainties regarding healthcare reform that could materially and adversely affect that aspect of our business.
Since its adoption into law in 2010, the Affordable Care Act has been challenged before the U.S. Supreme Court, and several bills have been and continue to be introduced in Congress to delay, defund, or repeal implementation of or amend significant provisions of the Affordable Care Act. In addition, there continues to be ongoing litigation over the interpretation and implementation of certain provisions of the law. New tax reform legislation enacted on December 22, 2017 (“Tax Reform Law”) includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate,” which could lead to fewer enrollments in healthcare exchanges. Further significant changes to, or repeal of, the Affordable Care Act could materially and adversely affect that aspect of Faneuil’s business.
Economic downturns, reductions in government funding and other program-related and contract-related risks could have a negative effect on Faneuil’s business.
Demand for the services offered by Faneuil has been, and is expected to continue to be, subject to significant fluctuations due to a variety of factors beyond its control, including economic conditions, particularly since contracts for major programs are performed over extended periods of time. During economic downturns, the ability of both private and governmental entities to make expenditures may decline significantly. We cannot be certain that economic or political conditions will be generally favorable or that there will not be significant fluctuations adversely affecting Faneuil as a whole, or key industry segments targeted by Faneuil. In addition, Faneuil’s operations are, in part, dependent upon state government funding. Significant changes in the level of state government funding, changes in personnel at government authorities, the failure of applicable government authorities to take necessary actions, opposition by third parties to particular programs, any delay in the state government budget process or a state government shutdown could have an unfavorable effect on Faneuil’s business, financial position, results of operations and cash flows.
Faneuil’s profitability is dependent in part on Faneuil’s ability to estimate correctly, obtain adequate pricing, and control its cost structure related to fixed “price per call” contracts.
A significant portion of Faneuil’s revenues are derived from commercial and government contracts awarded through competitive bidding processes. Many of these contracts are extremely complex and require the investment of significant resources in order to prepare accurate bids and pricing based on both current and future conditions, such as the cost of labor, that could impact profitability of such contracts. Our success depends on Faneuil’s ability to (i) accurately estimate the resources and costs that will be required to implement and service any contracts we are awarded, sometimes in advance of the final determination of such contracts’ full scope and design, and (ii) negotiate adequate pricing for call center services that provide a reasonable return to our shareholders based on such estimates. Additionally, in order to attract and retain certain contracts, we are sometimes required to make significant capital and other investments to enable us to perform our services under those contracts, such as facility leases, information technology equipment purchases, labor resources, and costs incurred to develop and implement software. If Faneuil is unable to accurately estimate its costs to provide call center services, obtain adequate pricing, or control costs for fixed “price per call” contracts, it could materially adversely affect our results of operations and financial condition.
Faneuil’s dependence on a small number of customers could adversely affect its business or results of operations.
Faneuil derives a substantial portion of its revenue from a relatively small number of customers. For additional information regarding Faneuil customer concentrations, see “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 5. Concentration Risks.” We expect the largest customers of Faneuil to continue to account for a substantial portion of its total net revenue for the foreseeable future. Faneuil has long-standing relationships with many of its significant customers. However, because Faneuil customers generally contract for specific projects or programs with a finite duration, Faneuil may lose these customers if funding for their respective programs is discontinued, or if their projects end and the contracts are not renewed or replaced. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could materially reduce Faneuil revenue and cash flows. Additionally, many Faneuil customers are government entities, which can unilaterally terminate or modify the existing contracts with Faneuil without cause and penalty to such government entities in many situations. If Faneuil does not replace them with other customers or other programs, the loss of business from any one of such customers could have a material adverse effect on its business or results of operations.
The recovery of capital investments in Faneuil contracts is subject to risk.
In order to attract and retain large outsourcing contracts, Faneuil may be required to make significant capital investments to perform its services under the contract, such as purchases of information technology equipment and costs incurred to develop and implement software. The net book value of such assets, including intangible assets, could be impaired, and Faneuil earnings and cash flow could be materially adversely affected in the event of the early termination of all or a part of such a contract, reduction in volumes and services thereunder for reasons including, but not limited to, a client’s merger or acquisition, divestiture of assets or businesses, business failure or deterioration, or a client’s exercise of contract termination rights.
Faneuil’s dependence on subcontractors and equipment manufacturers could adversely affect it.
In some cases, Faneuil relies on and partners with third-party subcontractors as well as third-party equipment manufacturers to provide services under its contracts. To the extent that Faneuil cannot engage subcontractors or acquire equipment or materials, its performance, according to the terms of the customer contract, may be impaired. If the amount Faneuil is required to pay for subcontracted services or equipment exceeds the amount Faneuil has estimated in bidding for fixed prices or fixed unit price contracts, it could experience reduced profit or losses in the performance of these contracts with its customers. Also, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, Faneuil may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the expected profit or result in a loss of a customer contract for which the services, equipment or materials were needed.
Partnerships entered into by Faneuil as a subcontractor with third parties who are primary contractors could adversely affect its ability to secure new projects and derive a profit from its existing projects.
In some cases, Faneuil partners as a subcontractor with third parties who are the primary contractors. In these cases, Faneuil is largely dependent on the judgments of the primary contractors in bidding for new projects and negotiating the primary contracts, including establishing the scope of services and service levels to be provided. Furthermore, even if projects are secured, if a primary contractor is unable to deliver its services according to the negotiated terms of the primary contract for any reason, including the deterioration of its financial condition, the customer may terminate or modify the primary contract, which may reduce Faneuil profit or cause losses in the performance of the contract. In certain instances, the subcontract agreement includes a “Pay When Paid” provision, which allows the primary contractor to hold back payments to a subcontractor until they are paid by the customer, which has negatively impacted Faneuil cashflow.
If Faneuil or a primary contractor guarantees to a customer the timely implementation or performance standards of a program, Faneuil could incur additional costs to meet its guaranteed obligations or liquidated damages if it fails to perform as agreed.
In certain instances, Faneuil or its primary contractor guarantees a customer that it will implement a program by a scheduled date. At times, they also provide that the program will achieve or adhere to certain performance standards or key performance indicators. Although Faneuil generally provides input to its primary contractors regarding the scope of services and service levels to be provided, it is possible that a primary contractor may make commitments without Faneuil’s input or approval. If Faneuil or the primary contractor subsequently fails to implement the program as scheduled, or if the program subsequently fails to meet the guaranteed performance standards, Faneuil may be held responsible for costs to the client resulting from any delay in implementation, or the costs incurred by the program to achieve the performance standards. In most cases where Faneuil or the primary contractor fails to meet contractually defined performance standards, Faneuil may be subject to agreed-upon liquidated damages. To the extent that these events occur, the total costs for such program may exceed original estimates, and cause reduced profits, or in some cases a loss for that program.
Adequate bonding is necessary for Faneuil to win new contracts.
Faneuil is often required, primarily in its toll and transportation programs, to provide performance and surety bonds to customers in conjunction with its contracts. These bonds indemnify the customer should Faneuil fail to perform its obligations under the contracts. If a bond is required for a particular program and Faneuil is unable to obtain an appropriate bond, Faneuil cannot pursue that program. The issuance of a bond is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional costs. There can be no assurance that bonds will continue to be available on reasonable terms, or at all. Any inability to obtain adequate bonding and, as a result, to bid on new work could harm Faneuil’s business.
Data security and integrity are critically important to our business, and cybersecurity incidents, including cyberattacks, cyber-fraud, breaches of security, unauthorized access to or disclosure of confidential information, business disruption, or the perception that confidential information is not secure, could result in a material loss of business, regulatory enforcement, substantial legal liability and/or significant harm to our reputation.
Our business involves the use, storage, and transmission of information about our clients, their customers, and our employees. While we take reasonable measures to protect the security of and unauthorized access to our systems and the privacy of personal and proprietary information that we access and store, our security controls over our systems may not be adequate to prevent the improper access to or disclosure of this information. Such unauthorized access or disclosure could subject Faneuil to significant liability under relevant law or our contracts and could harm our reputation, resulting in impacts on our results of operations, loss of future revenue and business opportunities. These risks may further increase as our business model includes a high percentage of work from home delivery in addition to our delivery through customer experience centers.
We operate in an environment of significant risk of cybersecurity incidents resulting from unintentional events or deliberate attacks by third parties or insiders, which may involve exploiting highly obscure security vulnerabilities or sophisticated attack methods. These cyberattacks can take many forms, but they typically have one or more of the following objectives, among others:
•
obtain unauthorized access to confidential consumer information;
•
manipulate or destroy data; or
•
disrupt, sabotage or degrade service on our systems.
In recent years, there have been an increasing number of high-profile security breaches at companies and government agencies, and security experts have warned about the growing risks of hackers, cybercriminals and state actors launching a broad range of attacks targeting information technology systems. Information security breaches, computer viruses, interruption or loss of business data, DDoS (distributed denial of service) attacks, ransomware and other cyberattacks on any of these systems could disrupt our normal operations of customer engagement centers and remote service delivery, our cloud platform offerings, and our enterprise services, impeding our ability to provide critical services to our clients. For example, on August 18, 2021, we detected a ransomware attack (the “Security Event”) that accessed and encrypted certain files on certain servers utilized by us in the provision of our call center services. Although we quickly and actively managed the Security Event, such event caused disruption to parts of our business, including certain aspects of our provision of call center services. Although we actively communicated with customers and worked to minimize disruption, we cannot guarantee that customer relationships were not harmed as a result of the Security Event.
We are experiencing an increase in frequency of cyber-fraud attempts, such as so-called “social engineering” attacks and phishing scams, which typically seek unauthorized money transfers or information disclosure. We actively train our employees to recognize these attacks and have implemented proactive risk mitigation measures to identify and to attempt to prevent these attacks. There are no assurances, however, that these attacks, which are growing in sophistication, may not deceive our employees, resulting in a material loss.
While we have taken reasonable measures to protect our systems and processes from unauthorized intrusions and cyber-fraud, we cannot be certain that advances in cyber-criminal capabilities, discovery of new system vulnerabilities, and attempts to exploit such vulnerabilities will not compromise or breach the technology protecting our systems and the information that we manage and control, which could result in damage to our systems, our business, our reputation, and our profitability.
We cannot assure you that our systems, databases and services will not be compromised or disrupted in the future, whether as a result of deliberate attacks by malicious actors, breaches due to employee error or malfeasance, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. We work to monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact.
The preventive actions we take to address cybersecurity risk, including protection of our systems and networks, may be insufficient to repel or mitigate the effects of cyberattacks in the future as it may not always be possible to anticipate, detect or recognize threats to our systems, or to implement effective preventive measures against all cybersecurity risks. This is because, among other things:
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the techniques used in cyberattacks change frequently and may not be recognized until after the attacks have succeeded;
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cyberattacks can originate from a wide variety of sources, including sophisticated threat actors involved in organized crime, sponsored by nation-states, or linked to terrorist or hacktivist organizations; and
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third parties may seek to gain access to our systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users.
Unauthorized disclosure, loss or corruption of our data or inability of our clients and their customers to access our systems could disrupt our operations, subject us to substantial regulatory and legal proceedings and potential liability, result in a material loss of business and/or significantly harm our reputation.
We may not be able to immediately address the consequences of a cybersecurity incident because a successful breach of our computer systems, software, networks or other technology assets could occur and persist for an extended period of time before being detected due to, among other things:
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the breadth and complexity of our operations;
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the large number of clients, counterparties and third-party service providers with which we do business;
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the proliferation and increasing sophistication of cyberattacks;
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the possibility that a malicious third party compromises the software, hardware or services that we procure from a service provider unbeknownst to both the provider and to the Company; and
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the possibility that a third party, after establishing a foothold on an internal network without being detected, might obtain access to other networks and systems.
The extent of a particular cybersecurity incident and the steps that we may need to take to investigate it may not be immediately clear, and it may take a significant amount of time before such an investigation can be completed and full and reliable information about the incident is known. While such an investigation is ongoing, we may not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, any or all of which could further increase the costs and consequences of a cybersecurity incident.
Due to concerns about data security and integrity, a growing number of legislative and regulatory bodies have adopted consumer notification and other requirements in the event that consumer information is accessed by unauthorized persons and additional regulations regarding the use, access, accuracy and security of such data are possible. In the United States, we are subject to federal and state laws that provide for disparate notification regimes. In the event of unauthorized access, our failure to comply with the complexities of these various regulations could subject us to regulatory scrutiny and additional liability.
If our cloud platforms and third-party software and systems experience disruptions due to technology failures or cyberattacks and if we fail to correct such impacts promptly, our business will be materially impacted.
Our cloud platforms and third-party software and systems that we use to serve our clients are complex and may, from time to time have service interruptions, contain design defects, configuration or coding errors, and other vulnerabilities that may be difficult to detect or correct, and which may be outside of our control. We may not have sufficient redundant operations to cover a loss or failure of our systems in a timely manner. Any significant interruption could severely harm our business and reputation and result in a loss of revenue and clients. Although our commercial agreements limit our exposure from such occurrences, they may not always effectively protect us against claims in all jurisdictions and against third-party claims. If our clients’ business is damaged, our reputation could suffer, we could be subject to contract termination and payments for damages, adversely affecting our business, our reputation, our results of operations and financial condition.
If we fail to maintain and improve our systems, demand for our services could be adversely affected.
In our markets, there are continuous improvements in computer hardware, network operating systems and technologies. These improvements, as well as changes in client preferences or regulatory requirements, may require changes in the technology used to gather and process our data and deliver our services. Our future success will depend, in part, upon our ability to:
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internally develop and implement new and competitive technologies;
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use leading third-party technologies effectively;
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respond to changing client needs and regulatory requirements; and
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transition client and their customer data and data sources successfully to new interfaces or other technologies.
We cannot provide assurance that we will successfully implement new technologies, cause our cloud platforms and third-party software and systems providers to implement compatible technologies or adapt our technology to evolving customer, regulatory and competitive requirements. If we fail to respond or fail to cause our cloud platforms and third-party software and systems providers to respond, to changes in technology, regulatory requirements or client preferences, the demand for our services, the delivery of our services or our market reputation could be adversely affected. Additionally, our failure to implement important updates could affect our ability to successfully meet the timeline for us to generate cost savings resulting from our investments in improved technology. Failure to achieve any of these objectives would impede our ability to deliver strong financial results.
Faneuil’s business is subject to many regulatory requirements, and current or future regulation could significantly increase Faneuil’s cost of doing business.
Faneuil’s business is subject to many laws and regulatory requirements in the United States, covering such matters as data privacy, consumer protection, healthcare requirements, labor relations, taxation, internal and disclosure control obligations, governmental affairs and immigration. For example, Faneuil is subject to state and federal laws and regulations regarding the protection of consumer information commonly referred to as “non-public personal information.” For instance, the collection of patient data through Faneuil’s contact center services is subject to HIPAA, which protects the privacy of patients’ data. These laws, regulations, and agreements require Faneuil to develop and implement policies to protect non-public personal information and to disclose these policies to consumers before a customer relationship is established and periodically after that. These laws, regulations, and agreements limit the ability to use or disclose non-public personal information for purposes other than the ones originally intended. Many of these regulations, including those related to data privacy, are frequently changing and sometimes conflict with existing ones among the various jurisdictions in which Faneuil provides services. Violations of these laws and regulations could result in liability for damages, fines, criminal prosecution, unfavorable publicity, and restrictions placed on Faneuil operations. Faneuil’s failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to Faneuil’s reputation in the marketplace, which could have a material adverse effect on Faneuil’s business, results of operations and financial condition. In addition, because a substantial portion of Faneuil operating costs consists of labor costs, changes in governmental regulations relating to wages, healthcare and healthcare reform and other benefits or employment taxes could have a material adverse effect on Faneuil’s business, results of operations or financial condition.
Matters relating to employment and labor laws and prevailing wage standards may adversely affect our business.
The industries in which Faneuil competes is labor intensive and governed by various federal and state labor laws with respect to its relationship with its employees. Faneuil’s ability to meet its labor needs on a cost-effective basis is subject to numerous external factors, including the availability of qualified personnel in the workforce in the local markets in which it operates, unemployment levels within those markets, prevailing wage rates, health and other insurance costs and changes in employment and labor laws. Such laws related to employee hours, wages, job classification and benefits could significantly increase Faneuil’s operating costs. Faneuil is also subject to employee claims against it based on such laws and other actions or inactions of its employees. Some or all of these claims may give rise to litigation, including class action litigation under the Fair Labor Standards Act and state wage and hour lawsuits. Such class action lawsuits are typically brought by specialized plaintiff law firms who often seek large settlements based entirely on the number of potential plaintiffs in a class, whether or not there is any basis for the claims that they make on behalf of their clients, most of whom do not believe themselves to be aggrieved nor seek recourse until solicited. Due to the inherent uncertainties of litigation, Faneuil may not be able to accurately determine the impact on it of any future adverse outcome of such proceedings. The ultimate resolution of these matters could have a material adverse impact on Faneuil’s financial condition, results of operations, and liquidity. In addition, regardless of the outcome, these proceedings could result in substantial cost to Faneuil and may require Faneuil to devote substantial resources to defend itself.
Additionally, in the event prevailing wage rates increase in the local markets in which Faneuil operates, Faneuil may be required to concurrently increase the wages paid to its employees to maintain the quality of its workforce and customer service. To the extent such increases are not covered by our customers, Faneuil’s profit margins may decrease as a result. If Faneuil is unable to hire and retain employees capable of meeting its business needs and expectations, its business and brand image may be impaired. Any failure to meet Faneuil’s staffing needs or any material increase in turnover rates of its employees may adversely affect its business, results of operations and financial condition.
Further, Faneuil relies on the ability to attract and retain labor on a cost-effective basis. The availability of labor in the local markets in which Faneuil operates has declined in recent years and competition for such labor has increased, especially under the economic crises experienced throughout the COVID-19 pandemic. Faneuil’s ability to attract and retain a sufficient workforce on a cost-effective basis depends on several factors discussed above, including the ability to protect staff during the COVID-19 pandemic. Faneuil may not be able to attract and retain a sufficient workforce on a cost-effective basis in the future. In the event of increased costs of attracting and retaining a workforce, Faneuil’s profit margins may decline as a result.
Risks Related to Phoenix
Economic weakness and uncertainty, as well as the effects of these conditions on Phoenix’s customers and suppliers, could reduce demand for or the ability of Phoenix to provide its products and services.
Economic conditions related to Phoenix, Phoenix’s customers, and Phoenix’s suppliers, could negatively impact Phoenix’s business and results of operations. Phoenix has experienced, and may continue to experience, reduced demand for certain of its products and services. As a result of uncertainty about global economic conditions, including factors such as unemployment, bankruptcies, financial market volatility, sovereign debt issues, government budget deficits, tariffs, and other factors which continue to affect the global economy, Phoenix’s customers and suppliers may experience further deterioration of their businesses, suffer cash flow shortages or file for bankruptcy. In turn, existing or potential customers may delay or decline to purchase Phoenix products and related services, and Phoenix’s suppliers and customers may not be able to fulfill their obligations to it in a timely fashion.
Educational textbook cover and component sales depend on continued government funding for educational spending, which impacts demand by its customers, and may be affected by changes in or continued restrictions on local, state and/or federal funding and school budgets. As a result, a reduction in consumer discretionary spending or disposable income and/or adverse trends in the general economy (and consumer perceptions of those trends) may affect Phoenix more significantly than other businesses in other industries.
In addition, customer difficulties could result in increases in bad debt write-offs and increases to Phoenix’s allowance for doubtful accounts receivable. Further, Phoenix’s suppliers may experience similar conditions as its customers, which may impact their viability and their ability to fulfill their obligations to Phoenix. Negative changes in these or related economic factors could materially adversely affect Phoenix’s business.
A substantial decrease or interruption in business from Phoenix’s significant customers or suppliers could adversely affect its business.
Phoenix has significant customer and supplier concentration. For additional information regarding customer and supplier concentrations, see “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 5. Concentration Risks.” Any significant cancellation, deferral or reduction in the quantity or type of products sold to these principal customers or a significant number of smaller customers, including as a result of Phoenix’s failure to perform, the impact of economic weakness and challenges to customer businesses, a change in buying habits, further industry consolidation or the impact of the shift to alternative methods of content delivery, including digital distribution and printing, to customers, could have a material adverse effect on Phoenix business. Further, if Phoenix’s significant customers, in turn, are not able to secure large orders, they will not be able to place orders with Phoenix. A substantial decrease or interruption in business from Phoenix’s significant customers could result in write-offs or the loss of future business and could have a material adverse effect on Phoenix’s business.
Additionally, Phoenix purchases certain limited grades of paper to produce book and component products. If Phoenix’s suppliers reduce their supplies or discontinue these grades of paper, Phoenix may be unable to fulfill its contract obligations, which could have a material adverse effect on its business. See “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 5. Concentration Risks.”
The impact of digital media and similar technological changes, including the substitution of printed products with digital content, may continue to adversely affect the results of Phoenix’s operations.
The industry in which Phoenix operates is experiencing rapid change due to the impact of digital media and content on printed products. Electronic delivery of information offers alternatives to traditional delivery in the form of print materials provided by Phoenix. Further improvements in the accessibility and quality of digital media, mobile technologies, e-reader technologies, digital retailing and the digital distribution of documents and data has resulted and may continue to result in increased consumer substitution away from Phoenix’s printed products. Continued acceptance by consumers and educational institutions of such digital media, as an alternative to print materials, is uncertain and difficult to predict and may decrease the demand for the Phoenix’s printed products, result in reduced pricing for its printing services and additional excess capacity in the printing industry, and could materially adversely affect Phoenix’s business.
Fluctuations in the cost and availability of raw materials could increase Phoenix cost of sales.
To produce its products, Phoenix is dependent upon the availability of raw materials, including paper, ink, and adhesives, the price and availability of which are affected by numerous factors beyond its control. These factors include:
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the level of consumer demand for these materials and downstream products containing or using these materials;
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the supply of these materials and the impact of industry consolidation;
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government regulation and taxes;
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market uncertainty;
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volatility in the capital and credit markets;
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environmental conditions and regulations; and
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political and global economic conditions.
Any material increase in the price of key raw materials could adversely impact Phoenix cost of sales or result in the loss of availability of such materials at reasonable prices. When these fluctuations result in significantly higher raw material costs, Phoenix’s operating results are adversely affected to the extent it is unable to pass on these increased costs to its customers or to the extent they materially affect customer buying habits. Significant fluctuations in prices for paper, ink, and adhesives could, therefore, have a material adverse effect on Phoenix’s business.
Phoenix is subject to environmental obligations and liabilities that could impose substantial costs upon Phoenix.
Phoenix’s operations are subject to a variety of federal, state, local and foreign laws and regulations governing emissions to air, discharge to water, the generation, handling, storage, transportation, treatment and disposal of hazardous substances and other materials, and employee health and safety matters. As an owner and operator of real property and a generator of hazardous substances, Phoenix may be subject to environmental cleanup liability, regardless of fault, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act or analogous state laws, as well as to claims for harm to health or property or for natural resource damages arising out of contamination or exposure to hazardous substances. Some current or past operations have involved metalworking and plating, printing and other activities that have resulted in or could result in environmental conditions giving rise to liabilities. If Phoenix incurs significant expenses related to environmental cleanup or damages stemming from harm or alleged harm to health, property or natural resources arising from contamination or exposure to hazardous substances, Phoenix’s business may be materially and adversely affected.
Risks Related to our Businesses Generally
A widespread health crisis, such as the COVID-19 pandemic, may adversely affect our business, results of operations and financial condition.
A widespread health crisis, including the COVID-19 pandemic, and related governmental responses may adversely affect our business, results of operations and financial condition. These effects could include disruptions to our workforce due to illness or “shelter-in-place” restrictions, temporary closures of our facilities, the interruption of our supply chains and distribution channels, and similar effects on our customers or suppliers that may impact their ability to perform under their contracts with us or cause them to curtail their business with us. In addition, we have taken and will continue to take temporary precautionary measures intended to help minimize the risk of COVID-19 to our employees, including requiring certain employees to work remotely and suspending non-essential travel and in-person meetings, which could negatively affect our business. Further, COVID-19 has and is expected to continue to adversely affect the economies and financial markets of many countries and most areas of the United States, which may affect demand for our products and services and our ability to obtain additional financing for our business. Further impacts specific to our subsidiaries’ businesses may include:
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Prolonged interruption of Faneuil’s physical customer contact centers due to illness or stay-at-home regulations and costs related to transitioning to work from home arrangements;
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Reduced demand for Faneuil’s toll services as travel declines;
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Disruption of Phoenix’s production facilities due to illness or stay-at-home regulations; and
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Similar impacts that negatively affect Phoenix’s significant customer or suppliers.
Any of these events could materially and adversely affect our business and our financial results. To the extent that the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in our credit agreement.
The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted with certainty. Such developments may include the ongoing spread of the virus, the vaccination rates against the virus, the emergence of new variants of the virus, the severity of the disease, the duration of the outbreak and the type and duration of actions that may be taken by various governmental authorities in response to the outbreak and the impact
on the economy. As a result, at the time of this filing, it is not possible to predict the overall impact of COVID-19 on our business, liquidity, and financial results.
We previously received a notice of failure to satisfy a continued listing rule from the Nasdaq.
On April 9, 2020, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(a)(1). Pursuant to the initial Nasdaq notice and Rule 5810(c)(3)(A) of the Nasdaq Listing Rules, we originally had 180 calendar days from the date of the notice, or until October 6, 2020, to regain compliance with the minimum bid price requirement in Rule 5550(a)(2) by achieving a closing bid price for our common stock of at least $1.00 per share over a minimum of 10 consecutive business days. However, on April 17, 2020, we received a second letter from the Nasdaq indicating that, given the extraordinary market conditions, effective as of April 16, 2020, the Nasdaq has determined to toll the compliance periods for the minimum bid price requirement through June 30, 2020, such that we had until December 21, 2020, to regain compliance. On November 5, 2020, we received a notice from NASDAQ that we had regained compliance with Listing Rule 5450(a)(1). Despite Nasdaq now considering this matter closed, there can be no assurance that we will be able to remain in compliance with the minimum bid price requirement or with other Nasdaq listing requirements in the future. If we are unable to remain in compliance with the minimum bid price requirement or with any of the other continued listing requirements, the Nasdaq may take steps to delist our common stock, which could have adverse results, including, but not limited to, a decrease in the liquidity and market price of our common stock, loss of confidence by our employees and investors, loss of business opportunities, and limitations in potential financing options.
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, and Phoenix. Specifically, our loan facilities’ covenants restrict ALJ, Faneuil, and Phoenix from:
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incurring additional debt;
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making certain capital expenditures;
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allowing liens to exist;
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entering transactions with affiliates;
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guaranteeing the debt of other entities, including joint ventures;
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merging, consolidating, or otherwise combining with another company; or
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transferring or selling our assets.
Our ability to borrow under our loan arrangements depends on our compliance with certain covenants and borrowing base requirements. A significant deterioration in our profitability and/or cash flow, whether caused by our inability to grow our businesses in a profitable manner, or by events beyond our control, may cause us to fall out of compliance with such covenants and borrowing base requirements. The failure to comply with these covenants and requirements could result in an event of default under our loan arrangements that, if not cured or waived, could terminate such party’s ability to borrow further, permit acceleration of the relevant debt (and other indebtedness based on cross-default provisions) and permit foreclosure on any collateral granted as security under the loan arrangements, which includes substantially all of our assets. Accordingly, any default under our loan facilities could also result in a material adverse effect on us that may result in our lenders seeking to recover from us or against our assets. There can also be no assurance that the lenders will grant waivers on covenant violations if they occur. Any such event of default would have a material adverse effect on us.
We have substantial indebtedness and our ability to generate cash to service our indebtedness depends on factors that are beyond our control.
We currently have, and will likely continue to have, a substantial amount of indebtedness, some of which require us to make a lump-sum or “balloon” payment at maturity. Our indebtedness could, among other things, make it more difficult for us to satisfy our debt obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions and place us at a competitive disadvantage. We expect to obtain the money to pay our expenses and pay the principal and interest on our indebtedness from cash flow from our operations and potentially from debt or equity offerings. However, if we do not have sufficient funds to repay the debt at maturity of these loans, we will need to refinance this debt. If the credit environment is constrained at the time the balloon payment is due or our indebtedness otherwise matures, we may not be able to refinance our existing indebtedness on acceptable terms and may be forced to choose from a
number of unfavorable options. These options include agreeing to otherwise unfavorable financing terms, selling assets on disadvantageous terms or defaulting on the loan and permitting the lender to foreclose. Accordingly, our ability to meet our obligations depends on our future performance and capital raising activities, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If our cash flow and capital resources prove inadequate to allow us to pay the principal and interest on our debt and meet our other obligations, our ability to execute our business plan and effectively compete in the marketplace may be materially adversely affected.
The industries in which our subsidiaries operate are highly competitive, which could decrease demand for our subsidiaries’ products or force them to lower their prices, which could have a material adverse effect on their business and our financial results.
Faneuil primarily competes based on quality, performance, innovation, technology, price, applications expertise, system and service flexibility, and established customer service capabilities, as its services relate to toll collection, customer contact centers, and employee staffing. Faneuil may not be able to compete effectively on all these fronts or with all of its competitors.
Phoenix competes directly or indirectly with several established book and book component manufacturers. New distribution channels such as digital formats, the internet and online retailers and growing delivery platforms (e.g., tablets and e-readers), combined with the concentration of retailer power, pose threats and provide opportunities to traditional consumer publishing models, potentially impacting both sales volumes and pricing.
Competitive pressures or the inability by our subsidiaries to adapt effectively and quickly to a changing competitive landscape could affect prices, margins or demand for products and services. If our subsidiaries are unable to respond timely and appropriately to these competitive pressures, from existing or new competitors, their business, market share and financial performance could be adversely affected.
A failure to attract and retain necessary personnel, skilled management, and qualified subcontractors may have an adverse impact on the business of our subsidiaries.
Because each of our subsidiaries operates in intensely competitive markets, its success depends to a significant extent upon each subsidiary’s ability to attract, retain and motivate highly skilled and qualified personnel and to subcontract with qualified, competent subcontractors. If our subsidiaries fail to attract, develop, motivate, retain, and effectively utilize personnel with the desired levels of training or experience, or, as applicable, are unable to contract with qualified, competent subcontractors, their business will be harmed. Experienced and capable personnel remain in high demand, and there is continual competition for their talents. Quality service depends on the ability to retain employees and control personnel turnover, as any increase in the employee turnover rate could increase recruiting and training costs and could decrease operating effectiveness and productivity. Additionally, our subsidiaries’ businesses are driven in part by the personal relationships, skills, experience and performance of each subsidiary’s senior management team. Despite executing employment agreements with members of each subsidiary’s senior management team, such members may discontinue service with our subsidiaries and we may not be able to find individuals to replace them at the same cost, or at all. The loss or interruption of the services of any key employee or the loss of a key subcontractor relationship could hurt our business, financial condition, cash flow, results of operations and prospects.
Changes in interest rates may increase our interest expense.
As of September 30, 2021, $99.5 million of our current borrowings under the Blue Torch Term Loan, Amended PNC Revolver, and potential future borrowings are, and may continue to be, at variable rates of interest, tied to LIBOR or the Prime Rate of interest, thus exposing us to interest rate risk. Such rates tend to fluctuate based on general economic conditions, general interest rates, Federal Reserve rates and the supply of and demand for credit in the relevant interbanking market. In recent years, the Fed has incrementally changed the target range for the federal funds rate. Changes in the interest rate generally, and particularly when coupled with any significant variable rate indebtedness, could materially adversely impact our interest expense. If interest rates changed in the future by 100 basis points, based on our current borrowings as of September 30, 2021, our interest expense would increase or decrease by $1.0 million per year.
Further, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or compelling banks to submit rates for the calculation of LIBOR rates after 2021 (the “FCA Announcement”). The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate; however, we are not able to predict whether LIBOR will cease to be available after 2021 or whether SOFR will become a widely accepted benchmark in place of LIBOR. Although it is not possible to predict the effect the FCA Announcement, any discontinuation, modification or other reforms to LIBOR or the establishment of
alternative reference rates such as SOFR may have on LIBOR, we do not expect the effect to have a material impact on our interest expense.
We may not receive the full amounts estimated under the contracts in our backlog, which could reduce our revenue in future periods below the levels anticipated. This makes backlog an uncertain indicator of future operating results.
As of September 30, 2021, both 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.
Some of our officers may have outside business interests, which could impair our ability to implement our business strategies and lead to potential conflicts of interest.
Some of our officers, in the course of their other business activities, may become aware of investments, business or other information which may be appropriate for presentation to us as well as to other entities to which they owe a fiduciary duty. They may also in the future become affiliated with entities that are engaged in business or other activities similar to those we intend to conduct. As a result, they may have conflicts of interest in determining to which entity particular opportunities or information should be presented. If, as a result of such conflict, we are deprived of investments, business or information, the execution of our business plan and our ability to effectively compete in the marketplace may be adversely affected.
We may not be able to consummate additional acquisitions and dispositions on acceptable terms or at all. Furthermore, we and our subsidiaries may not be able to integrate acquisitions successfully and achieve anticipated synergies, or the acquisitions and dispositions we and our subsidiaries pursue could disrupt our business and harm our financial condition and operating results.
As part of our business strategy, we intend to continue to pursue acquisitions and dispositions. Acquisitions and dispositions could involve a number of risks and present financial, managerial and operational challenges, including:
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adverse developments with respect to our results of operations as a result of an acquisition which may require us to incur charges and/or substantial debt or liabilities;
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disruption of our ongoing business and diversion of resources and management attention from existing businesses and strategic matters;
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difficulty with assimilation and integration of operations, technologies, products, personnel or financial or other systems;
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increased expenses, including compensation expenses resulting from newly hired employees and/or workforce integration and restructuring;
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disruption of relationships with current and new personnel, customers, and suppliers;
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integration challenges related to implementing or improving internal controls, procedures and/or policies at a business that prior to the acquisition lacked the same level of controls, procedures and/or policies;
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assumption of certain known and unknown liabilities of the acquired business;
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regulatory challenges or resulting delays; and
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potential disputes (including with respect to indemnification claims) with the buyers of disposed businesses or with the sellers of acquired businesses, technologies, services, or products.
We may not be able to consummate acquisitions or dispositions on favorable terms or at all. Our ability to consummate acquisitions will be limited by our ability to identify appropriate acquisition candidates, to negotiate acceptable terms for purchase and our access to financial resources, including available cash and borrowing capacity. In addition, we could experience financial or other setbacks if we are unable to realize, or are delayed in realizing, the anticipated benefits resulting from an acquisition, if we incur greater than expected costs in achieving the anticipated benefits or if any business that we acquire or invest in encounters problems or liabilities which we were not aware of or were more extensive than believed.
Our net operating loss carryforwards could be substantially limited if we experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code.
Our ability to utilize net operating losses (“NOLs”) and built-in losses under Section 382 of the Internal Revenue Code (the “Code”) and tax credit carryforwards to offset our future taxable income and/or to recover previously paid taxes would be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the Code, which is generally any change in ownership of more than 50% of its stock over a three-year period. 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. 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 most recent fiscal year, September 30, 2021, we had net operating loss carryforwards for federal income tax purposes of approximately $135.1 million that start expiring in 2022. Approximately $109.1 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.
In August 2018, our shareholders approved the amendment of certain provisions in our Restated Certificate of Incorporation, updating certain restrictions on transfers of our stock that may result in an “ownership change” within the meaning of Section 382 in order to preserve stockholder value and the value of certain tax assets primarily associated with NOLs and built-in losses under Section 382. 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.
The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.
Our executive officers and directors and their affiliated entities together beneficially owned approximately 56.0% of our outstanding common stock at November 30, 2021. Jess Ravich, our current Chief Executive Officer, beneficially owned approximately 47.4% of our common stock as of November 30, 2021. As a result, these stockholders, if they act together or in a block, could have significant influence over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions, even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
We do not currently plan to pay dividends to holders of our common stock.
We do not currently anticipate paying cash dividends to the holders of our common stock. Accordingly, holders of our common stock must rely on price appreciation as the sole method to realize a gain on their investment. There can be no assurances that the price of our common stock will ever appreciate in value.
Certain provisions in our Restated Certificate of Incorporation contain transfer restrictions that may have the effect of delaying or preventing beneficial takeover bids by third parties.
Our Restated Certificate of Incorporation imposes certain restrictions on transfer of stock designed to preserve the value of certain tax assets primarily associated with our NOLs and built-in losses under Section 382. These restrictions prohibit certain transfers that would result in a person or a group of persons acquiring 5% of more of ALJ’s outstanding stock, unless otherwise approved by our Board of Directors or a committee thereof. While such transfer restrictions are intended to protect our NOLs and built-in losses under Section 382, they may also have the effect of delaying or preventing beneficial takeover bids by third parties.
Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations or financial conditions
On December 22, 2017, then President Trump signed into law the final version of the Tax Reform Law. The Tax Reform Law significantly reforms the Internal Revenue Code of 1986, as amended, with many of its provisions effective for tax years beginning on or after January 1, 2018. The Tax Reform Law, among other things, contains significant changes to corporate taxation, including a permanent reduction of the corporate income tax rate, a partial limitation on the deductibility of business interest expense, a limitation of the deduction for net operating loss carryforwards, an indefinite net operating loss carryforward and the elimination of the two-year net operating loss carryback, temporary, immediate expensing for certain new investments and the modification or repeal of many business deductions and credits. We continue to examine the impact this tax reform legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Reform Law is uncertain and our business and financial condition could be adversely affected. The impact of this reform on our stockholders is uncertain. Stockholders should consult with their tax advisors regarding the effect of the Tax Reform Law and other potential changes to the U.S. Federal tax laws on them.
The 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;
•
relatively low trading volumes;
•
announcements by our competitors of significant acquisitions; and
•
the occurrence of various risks described in these Risk Factors.
Also, the stock market has experienced extreme price and volume fluctuations recently. This volatility has had a significant impact on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.
We are subject to claims arising in the ordinary course of our business that could be time-consuming, result in costly litigation and settlements or judgments, require significant amounts of management attention and result in the diversion of significant operational resources, which could adversely affect our business, financial condition, and results of operations.
We, our officers, and our subsidiaries, are currently involved in, and from time to time may become involved in, legal proceedings or be subject to claims arising in the ordinary course of our business. Litigation is inherently unpredictable, time-consuming and distracting to our management team, and the expenses of conducting litigation are not inconsequential. Such distraction and expense may adversely affect the execution of our business plan and our ability to compete effectively in the marketplace. Further, if we do not prevail in litigation in which we may be involved, our results could be adversely affected, in some cases, materially. For additional information, see “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 9. Commitments and Contingencies - Litigation, Claims, and Assessments.”
Any business disruptions due to political instability, armed hostilities, acts of terrorism, natural disasters or other unforeseen events could adversely affect our financial performance.
If terrorist activities, armed conflicts, political instability, or natural disasters, including climate change related events, occur in the United States, such events may negatively affect the operations of our subsidiaries, cause general economic conditions to deteriorate or cause demand for our subsidiaries’ services to decline. A prolonged economic slowdown or recession could reduce the demand for our subsidiaries’ services, and consequently, negatively affect our subsidiaries’ future sales and profits. Additionally, certain of our subsidiaries are dependent on key production facilities and certain specialized machines. Any disruption of production capabilities due to unforeseen events at any of our subsidiaries’ principal facilities could adversely affect our business, results of operations, cash flows, and financial condition.
Account data breaches involving stored data, or the misuse of such data could adversely affect our reputation, performance, and financial condition.
We and each of our subsidiaries provide services that involve the storage of non-public information. Cyber-attacks designed to gain access to sensitive information are constantly evolving, and high-profile electronic security breaches leading to unauthorized releases of sensitive information have occurred recently at several major U.S. companies, including several large retailers, despite widespread recognition of the cyber-attack threat and improved data protection methods. Any breach of the systems on which sensitive data and account information are stored or archived and any misuse by our employees, by employees of data archiving services or by other unauthorized users of such data could lead to damage to our reputation, claims against us and other potential increases in costs. If we are unsuccessful in defending any lawsuit involving such data security breaches or misuse, we may be forced to pay damages, which could materially and adversely affect our profitability and financial condition. Also, damage to our reputation stemming from such breaches could adversely affect our prospects. As the regulatory environment relating to companies’ obligations to protect such sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions.
Your share ownership may be diluted by the issuance of additional shares of our common or preferred stock in the future.
Your share ownership may be diluted by the issuance of additional shares of our common or preferred stock or securities convertible into common or preferred stock in the future. As of September 30, 2021, a total of 1,425,000 shares of our common stock are issuable pursuant to outstanding options issued by us at a weighted-average exercise price of $3.45, and 1,610,538 shares of our common stock are issuable pursuant to outstanding warrants at a weighted-average exercise price of $0.56. As of September 30, 2021, ALJ had debt that was convertible into 11,158,357 shares of common stock at the discretion of the debt holder. It is probable that options or warrants to purchase our common stock, or debt that is convertible into common stock, will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option or warrant. If the stock options or warrants are exercised, your share ownership will be diluted. Additionally, options to purchase up to 1,375,000 shares of ALJ common stock are available for grant under our existing equity compensation plans as of September 30, 2021.
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 are a “smaller reporting company” and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “smaller reporting companies.”
We qualify as a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a “smaller reporting company,” and have either: (i) a public float of less than $250 million or (ii) annual revenues of less than $100 million during the most recently completed fiscal year and (A) no public float or (B) a public float of less than $700 million. As a “smaller reporting company,” we are subject to reduced disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Until such time as we cease to be a “smaller reporting company,” such reduced disclosure in our SEC filings may make it harder for investors to analyze our operating results and financial prospects.
Climate change related events may have a long-term impact on our business.
While we seek to mitigate our business risks associated with climate change, we recognize that there are inherent climate related risks regardless of where we conduct our businesses. Access to clean water and reliable energy in the communities where we conduct our business is a priority. Any of our locations may be vulnerable to the adverse effects of climate change. Climate related events have the potential to disrupt our business, including the business of our customers, and may cause us to experience higher attrition, losses and additional costs to resume operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES.
ALJ’s corporate mailing address is 244 Madison Avenue, PMB #358, New York, NY 10016. For additional information about the properties of each of ALJ’s operating subsidiaries, see “Part I, Item 1. Business.”

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS.
The Company has been named in, and from time to time may become named in, various other lawsuits or threatened actions that are incidental to our ordinary business. For additional information regarding such matters, see “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 9. Commitments and Contingencies - Litigation, Claims, and Assessments.”

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURE.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
On May 11, 2016, our stock began trading on NASDAQ under the ticker symbol “ALJJ.” Prior to May 11, 2016, our stock traded on the OTC Bulletin Board. Although a market for our common stock exists, it is relatively illiquid.
Record Holders
As of November 30, 2021, there were 118 registered holders of ALJ’s common stock. In addition, there are a significant number of holders of ALJ common stock that are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
Dividends
We have not declared or paid dividends on our common stock to date. We intend to retain any earnings for use in the business for the foreseeable future.
Equity Compensation Plan Information
On July 11, 2016, ALJ shareholders approved ALJ’s Omnibus Equity Incentive Plan (the “2016 Plan”), which allows ALJ and its subsidiaries to grant securities of ALJ to officers, employees, directors or consultants. ALJ believes that equity-based compensation is fundamental to attracting, motivating and retaining highly-qualified dedicated employees who have the skills and experience required to achieve business goals. Further, ALJ believes the 2016 Plan aligns the compensation of directors, officers, and employees with shareholder interest.
The 2016 Plan is administered by ALJ’s Compensation, Nominating and Corporate Governance Committee (the “Compensation, Nominating, and Corporate Governance Committee”) of the Board. The maximum aggregate number of common stock shares that may be granted under the 2016 Plan is 2,000,000. The 2016 Plan generally provides for the grant of qualified or nonqualified stock options, restricted stock and restricted stock units, unrestricted stock, stock appreciation rights, performance awards and other awards. The Compensation, Nominating, and Corporate Governance Committee has full discretion to set the vesting criteria. The exercise price of a stock option may not be less than 100% of the fair market value of ALJ’s common stock on the date of grant. The 2016 Plan prohibits the repricing of outstanding stock options without prior shareholder approval. The term of stock options granted under the 2016 Plan may not exceed ten years. Awards are subject to accelerated vesting upon a change in control in the event the acquiring company does not assume the awards.
The Board may amend, alter, or discontinue the 2016 Plan, but shall obtain shareholder approval of any amendment as required by applicable law or stock exchange listing requirements.
The following table sets forth certain information concerning shares of common stock authorized for issuance under the Company’s existing equity compensation plans as of September 30, 2021:
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
(c)
Equity compensation plans approved by
security holders
625,000
$
2.61
1,375,000
Equity compensation plans not approved by
security holders
800,000
4.12
-
Total
1,425,000
$
3.45
1,375,000
Recent Sales of Unregistered Securities
None, other than as previously disclosed by the Company.
Issuer Purchases of Equity Securities
None.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Our MD&A is organized as follows:
•
Overview. Discussion of our business and overall analysis of financial and other highlights affecting us to provide context for the remainder of MD&A.
•
Results of Operations. An analysis comparing our financial results for the year ended September 30, 2021 (“Fiscal 2021”) to the year ended September 30, 2020 (“Fiscal 2020”).
•
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 September 30, 2021.
•
Off-Balance Sheet Arrangements. Discussion of our off-balance sheet arrangements as of September 30, 2021.
•
Critical Accounting Policies and Estimates. This section provides a discussion of the significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues 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 IV, Item 15. Exhibits, Financial Statement Schedules.” The following discussion contains a number of forward-looking statements that involve a number of risks and uncertainties. Words such as "anticipates," "expects," "intends," "goals," "plans," "believes," "seeks," "estimates," "continues," "may," "will," "should," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements are based on our current expectations and could be affected by the risk and uncertainties described in “Part I, Item 1A. Risk Factors.” Our actual results may differ materially.
Overview
ALJ Regional Holdings, Inc. (“ALJ” or “we”) is a holding company that operates Faneuil, Inc. (“Faneuil”) and Phoenix Color Corp. (“Phoenix”). Additionally, ALJ operated Floors-N-More, LLC, d/b/a Carpets N’ More (“Carpets”) through February 2021.
In January 2021, ALJ entered into a Purchase and Sale Agreement (“PSA”), by and among ALJ, Superior Interior Finishes, LLC, a Nevada limited liability company (“Superior”) and Carpets, pursuant to which ALJ agreed to sell 100% of the membership interests of Carpets to Superior for an aggregate purchase price of $0.5 million (the “Purchase Price”) in cash (the “Transaction”). At the time of the PSA, Superior was 100% owned by Steve Chesin, the Chief Executive Officer of Carpets. ALJ entered into the PSA because its Carpets business segment had been deemed a non-core holding and had underperformed over the past several years. The Transaction, which was approved by a committee of the Board comprised solely of certain independent directors of the Company, closed in February 2021. As such, the results of operations, assets, liabilities, and cashflows of Carpets were classified as discontinued operations in ALJ’s financial statements for all periods presented. See “Part IV, Item 15 - Exhibits, Financial Statement Schedules - Note 4. Acquisitions and Divestitures - Carpets Divestiture” for additional information about the divestiture of Carpets.
With several members of our senior management and Board of Directors coming from long careers in the professional services industry, ALJ is focused on acquiring and operating exceptional businesses.
We continue to see our business evolve as we execute our strategy of buying attractively valued assets. 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.
In June 2021, we replaced the Cerberus Term Loan with the Blue Torch Term Loan and amended the Cerberus/PNC Financing Agreement (referred to collectively as “Debt Refinance”) to (i) significantly reduce principal payments, (ii) consolidate debt, (iii) update financial covenants, and (iv) extend the maturity dates under both the Blue Torch Term Loan and the Amended PNC Revolver from November 2023 to June 2025. See “Part IV, Item 15 - Exhibits, Financial Statement Schedules - Note 8. Debt” for additional information.
Impact of Coronavirus Pandemic - Update
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the world. COVID-19 is having an unprecedented impact on the U.S. economy as federal, state, and local governments react to this public health crisis.
Since the beginning of the COVID-19 pandemic, all of ALJ’s subsidiaries have been deemed “Essential Services” and have continued to operate with limited disruption. To date, the impact of COVID-19 has been minimal. The Company took immediate actions to enable work-from-home where possible and put in place increased safety precautions, including social distancing, at other locations where essential services on site are required. The duration of these measures is unknown, may be extended, and additional measures may be imposed.
Although we have not been materially impacted by COVID-19, we could be impacted in the near term by lower volumes in several parts of our business, resulting in lower revenue and profit. While the impact of COVID-19 on our future financial position, results of operations and cash flows cannot be estimated with certainty, such impact could be significantly negative. Although some employees have recently started to return to work, we still have a significant portion of our work force working from home. The extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain, including, among others, the duration of the outbreak, vaccination rate against the virus, new variants of the virus, new information that may emerge concerning the severity of COVID-19 and the actions, especially those taken by governmental authorities, to contain the pandemic or treat its impact. As events are rapidly changing, additional impacts may arise that are not known at this time. See “Part I, Item 1A, Risk Factors - Risks Related to our Businesses Generally - A widespread health crisis, such as the COVID-19 pandemic, may adversely affect our business, results of operations and financial condition,” for an additional discussion of risks related to COVID-19.
Results of Operations
The following table sets forth certain Consolidated Statements of Operations data as a percentage of net revenue, unless specifically footnoted, for each period as follows:
Year Ended
September 30, 2021
Year Ended
September 30, 2020
% of
% of
(in thousands, except per share amounts)
Dollars
Net Revenue
Dollars
Net Revenue
Net revenue (1)
Faneuil
$
325,226
73.8
%
$
247,032
70.6
%
Phoenix
115,627
26.2
103,021
29.4
Consolidated net revenue
440,853
100.0
350,053
100.0
Cost of revenue (2)
Faneuil
267,342
82.2
203,409
82.3
Phoenix (3)
87,903
76.0
79,079
76.8
Consolidated cost of revenue
355,245
80.6
282,488
80.7
Selling, general, and administrative expense (2)
Faneuil
40,130
12.3
34,577
14.0
Phoenix
12,981
11.2
12,651
12.3
ALJ
7,368
-
4,856
-
Consolidated selling, general, and administrative expense
60,479
13.7
52,084
14.9
Depreciation and amortization expense (2)
Faneuil
14,074
4.3
12,978
5.3
Phoenix (4)
2,135
1.8
2,222
2.2
Consolidated depreciation and amortization expense
16,209
3.7
15,200
4.3
Impairment of goodwill
-
-
56,492
16.1
Gain on disposal of assets and other gain, net
(191
)
-
(324
)
(0.1
)
Total consolidated operating expenses
431,742
97.9
405,940
116.0
Consolidated operating income (loss)
9,111
2.1
(55,887
)
(16.0
)
Interest expense
(10,190
)
(2.3
)
(10,528
)
(3.0
)
Interest from legal settlement
-
-
0.1
Loss on debt extinguishment
(2,072
)
(0.5
)
-
-
(Provision for) benefit from income taxes
(429
)
(1.0
)
2,043
5.8
Net loss from continuing operations
(3,580
)
(0.8
)
(64,172
)
(18.3
)
Net loss from discontinued operations
(1,063
)
(0.2
)
(3,502
)
(1.0
)
Net loss
$
(4,643
)
(1.1
)
$
(67,674
)
(19.3
)
Loss per share of common stock-basic and diluted
$
(0.11
)
$
(1.60
)
(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 $5.4 million and $4.6 million during Fiscal 2021 and Fiscal 2020, respectively.
(4)
Primarily amortization of intangible assets. Total depreciation and amortization for Phoenix, including depreciation expense captured in cost of revenue, was $7.5 million and $6.8 million during Fiscal 2021 and Fiscal 2020, respectively.
Net Revenue
Year Ended
September 30,
(in thousands)
$ Change
% Change
Faneuil
$
325,226
$
247,032
$
78,194
31.7
%
Phoenix
115,627
103,021
12,606
12.2
Consolidated net revenue
$
440,853
$
350,053
$
90,800
25.9
%
Faneuil Net Revenue
Faneuil net revenue for Fiscal 2021 was $325.2 million, an increase of $78.2 million, or 31.7%, compared to net revenue of $247.0 million for Fiscal 2020. The increase was attributable to a $77.8 million and $17.9 million increase in revenues from new and existing customers, respectively, partly offset by a $17.5 million decrease driven by the completion of customer contracts.
Phoenix Net Revenue
Phoenix net revenue for Fiscal 2021 was $115.6 million, an increase of $12.6 million, or 12.2%, compared to net revenue of $103.0 million during Fiscal 2020. The increase was primarily attributable to higher component sales primarily related to trade sales.
Cost of Revenue
Year Ended
September 30,
(in thousands)
$ Change
% Change
Faneuil
$
267,342
$
203,409
$
63,933
31.4
%
As a percentage of segment net revenue
82.2
%
82.3
%
Phoenix
87,903
79,079
8,824
11.2
As a percentage of segment net revenue
76.0
%
76.8
%
Consolidated cost of revenue
$
355,245
$
282,488
$
72,757
25.8
%
Faneuil Cost of Revenue
Faneuil cost of revenue for Fiscal 2021 was $267.3 million, an increase of $63.9 million, or 31.4%, compared to cost of revenue of $203.4 million for Fiscal 2020. The absolute dollar increase in cost of revenue was a direct result of the increased net revenue. During Fiscal 2021, as compared to Fiscal 2020, Faneuil cost of revenue as a percentage of segment net revenue remained consistent at 82.2% and 82.3%, respectively.
Phoenix Cost of Revenue
Phoenix cost of revenue for Fiscal 2021 was $87.9 million, an increase of $8.8 million, or 11.2% compared to cost of revenue of $79.1 million for Fiscal 2020. The absolute dollar increase in cost of revenue was a direct result of increased net revenue and to a lesser extent an increase in depreciation expense for new press equipment. During Fiscal 2021, as compared to Fiscal 2020, Phoenix cost of revenue as a percentage of segment net revenue decreased slightly to 76.0% from 76.8%, respectively. Phoenix experiences normal fluctuations to cost of revenue as a percentage of segment net revenue as a result of changes to the mix of products sold. Additionally, certain costs do not fluctuate directly with net revenue.
Selling, General, and Administrative Expense
Year Ended
September 30,
(in thousands)
$ Change
% Change
Faneuil
$
40,130
$
34,577
$
5,553
16.1
%
Phoenix
12,981
12,651
2.6
ALJ
7,368
4,856
2,512
51.7
Consolidated selling, general and administrative
expense
$
60,479
$
52,084
$
8,395
16.1
%
Faneuil Selling, General, and Administrative Expense
Faneuil selling, general, and administrative expense for Fiscal 2021 was $40.1 million, an increase of $5.6 million, or 16.1%, compared to selling, general, and administrative expense of $34.6 million for Fiscal 2020. The increase was mainly attributable to higher legal fees, performance-related bonus expense, and other administrative expenses to support the overall growth in Faneuil’s business. During Fiscal 2021, as compared to Fiscal 2020, Faneuil selling, general, and administrative expense as a percentage of segment net revenue decreased to 12.3% from 14.0%. Certain selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.
Phoenix Selling, General, and Administrative Expense
Phoenix selling, general, and administrative expense for Fiscal 2021 was $13.0 million, an increase of $0.3 million, or approximately 2.6%, compared to $12.7 million for Fiscal 2020. The increase was mainly attributable to higher performance-related bonus expense offset by lower compensation and travel expenses as a result of COVID-19. Phoenix selling, general, and administrative expense as a percentage of segment net revenue decreased to 11.2% for Fiscal 2021 from 12.3% for Fiscal 2020, which was mainly attributable to the increase to Phoenix net revenue. Certain Phoenix selling, general, and administrative expenses do not fluctuate directly with net revenue. As such, we expect Phoenix selling, general, and administrative expense as a percentage of segment net revenue to fluctuate.
ALJ Selling, General, and Administrative Expense
ALJ selling, general, and administrative expense for Fiscal 2021 was $7.4 million, an increase of $2.5 million, or 51.7%, compared to selling, general, and administrative expense of $4.9 million for Fiscal 2020. The increase was mainly attributable to a $2.0 million increased bonus accrual and increased banking fees to support our various Financing Agreement amendments. We expect selling, general, and administrative expense to fluctuate in the future as we comply with SEC reporting requirements and regulations and allocate certain expenses to our subsidiaries.
Depreciation and Amortization
Year Ended
September 30,
(in thousands)
$ Change
% Change
Faneuil
$
14,074
$
12,978
$
1,096
8.4
%
Phoenix
2,135
2,222
(87
)
(3.9
)
Consolidated depreciation and amortization
expense
$
16,209
$
15,200
$
1,009
6.6
%
Faneuil Depreciation and Amortization
Faneuil depreciation and amortization expense for Fiscal 2021 was $14.1 million, an increase of $1.1 million, or 8.4%, compared to $13.0 million for Fiscal 2020. The increase was attributable to capital equipment purchased to support new and expanded contracts, somewhat offset by fully depreciated and amortized assets. Because certain Faneuil contracts require capital investments such as lease buildouts, Faneuil depreciation and amortization expense is impacted by the timing of new contracts and the completion of existing contracts.
Phoenix Depreciation and Amortization
Phoenix depreciation and amortization expense consists primarily of amortization of acquisition-related intangible assets. Depreciation and amortization expense was consistent at $2.1 million and $2.2 million for Fiscal 2021 and Fiscal 2020, respectively.
Impairment of Goodwill
As a result of the decline in ALJ’s market capitalization, downward economic pressure, declines in actual and forecasted results of operations, including the estimated effects of COVID-19, management determined that it was more likely than not that the fair value of goodwill for all three reporting units was below each reporting unit’s respective carrying amount. As such, management performed an impairment test as of March 31, 2020, based on discounted cash flows, which were derived from internal forecasts and more cautious economic expectations for all three reporting units.
As a result of the test, ALJ recognized a non-cash impairment of goodwill totaling $56.5 million during Fiscal 2020. ALJ did not recognize any goodwill impairment during Fiscal 2021.
Interest Expense
Interest expense was $10.2 million and $10.5 million for Fiscal 2021 and Fiscal 2020, respectively. Interest expense was impacted by our Debt Refinance in June 2021.
Interest from Legal Settlement
During Fiscal 2020, Faneuil received a onetime $1.5 million settlement, of which $0.2 million was attributable to interest. See “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 9. Commitments and Contingencies - Litigation, Claims, and Assessments” for additional information.
Loss on Debt Extinguishment
We recognized a loss on debt extinguishment of $2.1 million during Fiscal 2021, which was comprised of $1.2 million for the write off of deferred loan costs and $0.9 million of prepayment penalties. See “Part IV, Item 15 - Exhibits, Financial Statement Schedules - Note 8. Debt” for additional information.
Income Taxes
ALJ recorded a provision for income taxes from continuing operations of $0.4 million and a benefit for income taxes from continuing operations of $2.0 million for Fiscal 2021 and Fiscal 2020, respectively. The provision for Fiscal 2021 was the result of generating state taxable income. The benefit from income taxes for Fiscal 2020 was the result of changes to our valuation allowance recorded against net deferred tax assets.
ALJ did not record a provision for or benefit from income taxes for discontinued operations during Fiscal 2021. ALJ recorded a provision for income taxes for discontinued operations of less than $0.1 million during Fiscal 2020.
Net Loss from Discontinued Operations
As a result of the sale of Carpets in February 2021, we recognized a net loss from discontinued operations of $1.1 million during Fiscal 2021, of which $0.8 million was attributable to the one-time loss on the sale of Carpets, and $3.5 million during Fiscal 2020, which was attributable to the operations of Carpets.
Segment Adjusted EBITDA
Year Ended
September 30,
(in thousands)
$ Change
% Change
Faneuil
$
19,332
$
11,197
$
8,135
72.7
%
Phoenix
20,331
16,723
3,608
21.6
ALJ
(5,999
)
(3,875
)
(2,124
)
(54.8
)
Segment adjusted EBITDA
$
33,664
$
24,045
$
9,619
40.0
%
Faneuil Segment Adjusted EBITDA
Faneuil segment adjusted EBITDA for Fiscal 2021 was $19.3 million compared to segment adjusted EBITDA of $11.2 million for Fiscal 2020. Faneuil segment adjusted EBITDA increase for Fiscal 2021 was driven by the start of new contracts, operational improvements at existing contracts, reduced costs for medical and workers’ compensation claims, offset somewhat by continuing losses for one healthcare contract.
Phoenix Segment Adjusted EBITDA
Phoenix segment adjusted EBITDA for Fiscal 2021 was $20.3 million compared to segment adjusted EBITDA of $16.7 million for Fiscal 2020. The increase was primarily attributable to higher component sales primarily related to trade sales.
ALJ Segment Adjusted EBITDA
ALJ segment adjusted EBITDA loss for Fiscal 2021 was ($6.0) million compared to segment adjusted EBITDA loss of ($3.9) million for Fiscal 2020. ALJ segment adjusted EBITDA loss for Fiscal 2021 was impacted by an increased bonus expense.
Segment adjusted EBITDA is not considered a non-GAAP measure because we include segment adjusted EBITDA in our segment disclosures in accordance with the Accounting Standards Codification Topic 280 - Segment Reporting. See “Part IV, Item 15. Exhibits, Financial Statements Schedules - Note 13. Reportable Segments and Geographic Information.”
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 attributable to its healthcare customers as the customer contact centers increase operations during the open enrollment periods of the healthcare exchanges. Faneuil revenue from its healthcare customers generally decreases during the remaining portion of the year after the open enrollment period. Seasonality is less pronounced with Faneuil customers in the transportation industry, though there is typically some volume increase during the summer months.
Phoenix
There is seasonality to the Phoenix business. Education book component sales (school and college) traditionally peak in the first and second quarters of the calendar year. Other book components sales traditionally peak in the third quarter of the calendar year. Book sales also traditionally peak in the third quarter of the calendar year. The fourth quarter of the calendar year has traditionally been the weakest quarter. These seasonal factors are not significant.
Climate Change
Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
Liquidity and Capital Resources
Our principal sources of liquidity have been cash provided by operations and borrowings under various debt arrangements. On September 30, 2021, our principal sources of liquidity included cash and cash equivalents of $2.3 million and an available borrowing capacity of $23.5 million on our line of credit. Our principal uses of cash have been for acquisitions and to pay down debt. We anticipate that our principal uses of cash will continue to be to acquire businesses and pay down our debt.
Global financial and credit markets have been volatile in recent years and has been further exacerbated by COVID-19 since March 2020. 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:
Year Ended
September 30,
(in thousands)
Cash provided by operating activities
$
12,450
$
12,903
Cash used for investing activities
(8,136
)
(9,549
)
Cash used for financing activities
(8,088
)
(1,833
)
Change in cash and cash equivalents
$
(3,774
)
$
1,521
We recognized a net loss of $4.6 million for Fiscal 2021, and generated cash from operating activities of $12.5 million, offset by cash used for both investing and financing activities of $8.1 million.
We recognized a net loss of $67.7 million for Fiscal 2020, and generated cash from operating activities of $12.9 million, offset by cash used for investing and financing activities of $9.5 million and $1.8 million, respectively.
Operating Activities
During Fiscal 2021, our operating activities provided $12.5 million, which was the result of our $4.6 million net loss, $28.0 million addback of net non-cash expenses, and $10.9 million of net cash used for changes in operating assets and liabilities. The most significant components of net non-cash expenses include depreciation and amortization expense of $21.6 million, loss on debt extinguishment of $2.1 million, $1.7 million interest expense and other bank fees accreted to term loans, and $1.2 million change in fair value of contingent consideration. The most significant components of changes in operating assets and liabilities were mostly attributable to the timing of Faneuil’s significant new customer implementations and included accounts receivable of $12.1 million, and deferred revenue and customer deposits of $6.5 million, which used cash, and accrued expenses of $5.9 million and other current liabilities and other non-current liabilities of $4.6 million, which provided cash.
During Fiscal 2020, our operating activities provided $12.9 million, which was the result of our $67.7 million net loss, $80.6 million addback of net non-cash expenses, and less than $0.1 million of net cash used for changes in operating assets and liabilities. The most significant components of net non-cash expenses include the impairment of goodwill of $56.5 million and depreciation and amortization expense of $19.8 million. The most significant components of changes in operating assets and liabilities were mostly attributable to the timing of Faneuil’s significant new customer implementations and included accounts receivable of $19.3 million, which used cash, offset by deferred revenue and customer deposits of $9.1 million, other current liabilities and other non-current liabilities of $4.9 million, and accrued expenses of $4.1 million, which provided cash. Additionally, the CARES Act allowed us to defer payment for $5.3 million of payroll-related taxes, which positively impacted our cash flow from operations. The CARES Act payroll liability is recorded in other non-current liabilities on September 30, 2020.
Cash provided by operations for Fiscal 2021 compared to cash provided by operations for Fiscal 2020, was impacted by higher cash earnings, increased accounts receivable due to the timing of Faneuil’s new customer implementations, managing vendor payments to preserve cashflow, and deferring payment of certain payroll-related taxes pursuant to the CARES Act.
Investing Activities
During Fiscal 2021, our investing activities used $8.1 million of cash, of which $3.8 million was used to purchase equipment and software for Faneuil’s new and existing customers, and $5.0 million was used to purchase capital equipment, mostly printing equipment for Phoenix, in the normal course of operations, offset by $0.4 million cash proceeds from the sale of Carpets and $0.3 million cash proceeds from the sale of redundant printing equipment.
During Fiscal 2020, our investing activities used $9.5 million of cash, of which $5.8 million was used to purchase equipment, software and leasehold improvements for Faneuil’s new and existing customers, and $3.7 million was used to purchase capital equipment in the normal course of operations.
Cash used for investing activities for Fiscal 2021 compared to Fiscal 2020 declined slightly due to Faneuil purchasing less equipment and software to support customers during Fiscal 2021 compared to Fiscal 2020, somewhat offset by Phoenix purchasing more printer equipment during Fiscal 2021 compared to Fiscal 2020.
Financing Activities
During Fiscal 2021, our financing activities used $8.1 million of cash. In June 2021, we replaced our term loan with a new $95.0 million term loan and amended our revolving credit facility to (i) significantly reduce principal payments, (ii) consolidate debt, (iii) update financial covenants, and (iv) extend the maturity date from November 2023 to June 2025. In connection with the transaction, we paid deferred loan costs of $4.2 million. See “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 8. Debt.” for additional information.
During Fiscal, 2020, our financing activities used $1.8 million of cash. Net proceeds from our line of credit provided $4.6 million to fund working capital requirements at Faneuil, Phoenix, and Corporate. Our Ninth Amendment provided $1.5 million of cash, which was used to pay down our line of credit. Financing activities which used cash included $4.3 million to pay down our term loans, $2.8 million for capital lease payments, and $0.8 million for deferred loan costs related to the Sixth, Seventh, Eighth, and Ninth Amendments to our Financing Agreement.
Cash used for financing activities for Fiscal 2021 compared to Fiscal 2020 was impacted by the replacement of our term loan and amendment of our revolving credit facility during June 2021.
Contractual Obligations
The following table summarizes our significant contractual obligations on September 30, 2021, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:
Payments due by Period
Less Than
One - Three
Four - Five
More than Five
(in thousands)
Total
One Year
Years
Years
Years
Term loan with quarterly principal payments (1)
$
94,050
$
3,800
$
7,600
$
82,650
$
-
Operating lease obligations (2)
37,489
4,722
10,735
9,964
12,067
Other liabilities (3)
13,065
3,210
9,855
-
-
Convertible Promissory Notes (1)
6,026
-
6,026
-
-
Line of credit (1)
5,490
-
-
5,490
-
Finance lease obligations (1)
1,097
-
-
Total contractual cash obligations (4)
$
157,217
$
12,497
$
34,548
$
98,104
$
12,067
(1)
Refer to “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 8. Debt.”
(2)
Refer to “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 10. Leases.”
(3)
Amounts represent future cash payments to satisfy our short- and long-term workers’ compensation reserve, short- and long-term acquisition-related deferred and contingent liabilities, and other long-term liabilities recorded on our consolidated balance sheets. It excludes deferred revenue and non-cash items. Short- and long-term acquisition-related deferred and contingent payments are included in the table at total fair value, as defined by generally accepted accounting principles, of $4.7 million. On September 30, 2021, the total maximum amount of acquisition-related deferred and contingent cash payments was $5.0 million.
(4)
Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the short-term portions of our term loans, short-term portion of acquisition-related deferred and contingent payments, and workers’ compensation reserve.
Off-Balance Sheet Arrangements
On September 30, 2021, we had two types of off-balance sheet arrangements.
Surety Bonds. In the normal course of operations, certain Faneuil customers require surety bonds guaranteeing the performance of a contract. On September 30, 2021, 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 $41.9 million.
Letters of Credit. ALJ had letters of credit totaling $3.5 million outstanding on September 30, 2021, in connection with workers’ compensation insurance requirements.
Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period. We regularly evaluate our estimates and assumptions related to the fair value of assets and liabilities, including intangible assets acquired and allocation of purchase price, useful lives, carrying value and recoverability of long-lived and intangible assets, the recoverability of goodwill, and revenue recognition. Certain accounting policies, as described below, are considered "critical accounting policies" because they are particularly dependent on estimates made by us about matters that are inherently uncertain and could have a material impact on our consolidated financial statements. We base our estimates and assumptions on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. A summary of all of our significant accounting policies is included in “Part IV, Item 15. Exhibits, Financial Statement Schedules - Note 2. Summary of Significant Accounting Policies.”
We believe the following are critical accounting policies that require us to make significant estimates, assumptions, or judgments:
•
Valuation and allocation of assets acquired and liabilities assumed in connection with business acquisitions;
•
Impairment of identified intangible assets and goodwill; and
•
Revenue recognition.
Business Acquisitions
Accounting for acquisitions requires our management to estimate the fair value of the assets acquired and liabilities assumed, which involves a number of judgments, assumptions, and estimates that could materially affect the timing or amounts recognized in our financial statements. The items involving the most significant assumptions, estimates, and judgments include determining the fair value of the following:
-
Intangible assets, including valuation methodology, estimations of future cash flows, and discount rates, as well as the estimated useful life of the intangible assets;
-
Deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances, which are initially estimated as of the acquisition date;
-
Inventory; property, plant, and equipment; pre-existing liabilities or legal claims; deferred revenue; and contingent consideration, each as may be applicable; and
-
Goodwill, as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.
The goodwill and intangible assets acquired in business acquisitions are pushed down to the reporting unit that benefits from the business combination.
We use an independent valuation firm to assist with our valuation, and our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year following the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.
Long-Lived Asset Impairments
Identified Intangibles
We make judgments about the recoverability of purchased finite-lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of finite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate.
The assumptions and estimates used to determine future values, such as expected future net cash flows, and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by internal factors such as changes in our business strategy or external factors such as industry and economic trends.
Goodwill
The application of the goodwill impairment test is considered a critical accounting estimate. We perform an annual impairment assessment of goodwill as of September 30 each year, or more frequently if indicators of potential impairment exist, which includes evaluating qualitative and quantitative factors to assess the likelihood of an impairment of goodwill. Each of our reporting units has goodwill assigned, which is assessed independently.
Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting units. Additionally, as part of this assessment, we may perform a quantitative analysis to supplement and support the qualitative factors.
Our goodwill impairment test considers both the income method and the market method to estimate fair value. For both Faneuil and Phoenix, the goodwill impairment test is weighted 50% on the income method and 50% on the market method. For Carpets, the
goodwill impairment test is weighted 100% on the income method. The income method is based on a discounted future cash flow approach that uses the following major assumptions and inputs: revenue, based on assumed market segment growth rates and assumed market segment share, estimated costs, and weighted average cost of capital (“WACC”). WACC was estimated using guideline companies adjusted for a company-specific risk premium. Estimates of market segment growth, market segment share, and costs are based on historical data, various internal estimates, and a variety of external sources. The same estimates are also used in the Company’s business planning and forecasting process. The data is tested for reasonableness of the inputs and outcomes of our discounted cash flow analysis against available comparable market data. The market method used at Faneuil and Phoenix in estimating fair value is based on financial multiples and transaction prices of comparable companies. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.
During the year ended September 30, 2020, we wrote off 100% of our goodwill and recognized a non-cash impairment of goodwill totaling $56.5 million. The Company did not have any impairment of goodwill during the year ended September 30, 2021.
Revenue Recognition
We must make subjective estimates as to when our revenue is earned, the impact of pricing adjustments, and the collectability of our accounts receivable.
When upfront fees do not relate directly to the satisfaction or partial satisfaction of a performance obligation, the payments are deemed to be advance payments for future services. In such, instances, the fees are allocated to performance obligations and recognized when or as the performance obligations, typically call center services, are satisfied over the contract term, as defined under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). If a contract contains termination provisions, and such termination provisions are not substantive, the upfront nonrefundable fees may be fully recognized prior to the expiration of the stated term of the contract.
We record reductions to revenue for pricing adjustments, such as rebates, in the same period that the related revenue is recorded. Phoenix often has contracts with its customers that include prospective and retrospective volume rebates, credits, discounts, and other similar items that generally decrease the amount a customer pays Phoenix. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity during the contract term, or making payments within a specified number of days. Under ASC 606, with the exception of prospective volume rebates, these adjustments are classified as variable consideration, which is estimated at contract inception and included as part of the transaction price. Under ASC 606, prospective volume rebates are not part of the transaction price but are instead accounted for as a material right and separate performance obligation.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item are included in “Part IV, Item 15. Exhibits, Financial Statement Schedules.”

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Based on management’s evaluation (with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in U.S. Securities and Exchange Commission (“SEC”) rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth fiscal quarter for the year ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).
Management assessed our internal control over financial reporting as of September 30, 2021, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Based on this assessment, management has concluded that our internal controls over financial reporting were effective as of September 30, 2021 and provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this report.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION.
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following table sets forth the names, ages, and principal offices and positions of our current directors and executive officers as of November 30, 2021.
Name
Age
Position
Jess M. Ravich
Director, Chairman of the Board, and Chief Executive Officer
Brian Hartman
Chief Financial Officer
Anna Van Buren
Director, President and CEO of Faneuil
John Scheel
Director, Vice Chairman of the Board, and Chairman of Audit Committee
Michael Borofsky
Director, and Chairman of Compensation, Nominating and Corporate
Governance Committee
Hal G. Byer
Director
Julie Cavanna-Jerbic
Director
Robert Scott Fritz
Director
Rae Ravich
Director
The following is a brief summary of the backgrounds of the Company’s directors and executive officers.
Jess M. Ravich. Mr. Ravich has served as a director since June 2006 and Chairman of the Board of Directors since August 2006. He served as the Executive Chairman and senior executive officer of the Company from December 2012 through July 2019, at which time he became the Company’s fulltime Chief Executive Officer. Mr. Ravich was a Group Managing Director at The TCW Group from December 2012 until July 2019. From 2009 to 2012, Mr. Ravich was Managing Director at Houlihan Lokey. In 1991 Mr. Ravich founded Libra Securities, LLC (“Libra Securities”), a Los Angeles-based investment banking firm that focused on capital raising and financial advisory services for middle-market corporate clients and the sales and trading of debt and equity securities for institutional investors, and served as its Chairman and Chief Executive Officer from 1991 until 2009. Prior to founding Libra Securities, Mr. Ravich was an Executive Vice President at Jefferies & Co., Inc. and a Senior Vice President at Drexel Burnham Lambert.
Mr. Ravich was a member of the board of directors of Apex Global Brands (Nasdaq: APEX), formerly known as Cherokee Inc. (Nasdaq: CHKE) from 1995 until 2020, and served as its Chairman of the Board from 2011 until 2017. Mr. Ravich has also served on the board of directors of A-Mark International since 2014. In addition to his professional responsibilities, Mr. Ravich has also served on the Undergraduate Executive Board of the Wharton School and the Board of Trustees of the Archer School for Girls. Mr. Ravich earned both a B.S and M.S. from the Wharton School and a J.D. from Harvard University. Mr. Ravich is the father of Rae Ravich, a director of the Company.
Brian Hartman. Mr. Hartman has served as Chief Financial Officer since August 2017. Previously, Mr. Hartman was the Senior Vice President, Chief Financial Officer of Arcade Beauty, a manufacturer of sampling solutions for the beauty, fragrance and skincare segments, having served in such role since March 2012. From April 2005 to March 2012, Mr. Hartman was the Vice President, Corporate Controller of Visant Corporation, a specialty printing and marketing services enterprise. From January 1996 to April 2005, Mr. Hartman was the Controller for Metallurg Inc, a producer and distributor of specialty metals. Prior to this, Mr. Hartman held various accounting and auditing positions at Witco Chemical Corp., a manufacturer of specialty chemicals, and Deloitte & Touche LLP. Mr. Hartman is a certified public accountant and received a Bachelor of Business Administration degree in public accounting and a Master of Business Administration in financial management from Pace University.
Anna Van Buren. Ms. Van Buren has served as a director since November 2013. Ms. Van Buren was appointed President and Chief Executive Officer of Faneuil in April 2009, after previously serving as President and Chief Operating Officer from 2007 to 2009, as Vice President and Managing Director of Faneuil’s Government Services Division from 2005 to 2007, and as Vice President of Business Development from 2004 to 2005. Prior to her association with Faneuil, Ms. Van Buren founded Capital Initiatives, a consulting service for clients seeking visibility among federal lawmakers with the objective of encouraging legislative action and operated numerous government services and marketing companies. Anna’s experience also includes executive roles at The Daily Press, Inc. in Virginia where she played an integral role in multi-site operations and growth strategy. Ms. Van Buren has served in leadership roles for many civic and business organizations including her current role as Chairman of Lead Virginia, chairmanship of the United Way of the Virginia Peninsula, the Peninsula Chamber of Commerce, and the NASA Aeronautics Support Team. She is the recipient of numerous awards including the Women in Business Achievement Award by Inside Business Magazine, the Presidential Citizenship Award from Hampton University and the NCCJ Humanitarian Award. Ms. Van Buren holds a degree in biology from Hollins University and the University of Virginia Executive School.
.
John Scheel. Mr. Scheel has served as a director since September 2006 and our Vice Chairman since December 2016. From August 2006 to February 2013, Mr. Scheel was the President and Chief Executive Officer of the Company. He served as the plant manager for the Company’s former subsidiary Kentucky Electric Steel’s (“KES”) steel mini-mill in Ashland, Kentucky (the “Mill”) and managed the operations of KES on our behalf from January 2004 until its sale in February 2013 to Optima Specialty Steel (“Optima”). Following such sale, Mr. Scheel not only continued to manage the Mill for Optima as its general manager, but also managed the melt shop and caster for Warren Steel Holdings EAF in Warren, Ohio, which was also managed by Optima. He is now the Senior Vice President of Manufacturing and Supply Chain at Easy Gardener, Inc, a fertilizer and landscape fabric supplier. Prior to managing KES, Mr. Scheel held various positions of increased responsibility at AK Steel, Nucor Corporation, and Birmingham Steel Management. Mr. Scheel holds both B.S. and M.S. degrees in Metallurgical Engineering from Purdue University and a Master of Business Administration in Finance and International Business from Xavier University.
Michael Borofsky. Mr. Borofsky has served as a director since September 2013. Mr. Borofsky is currently managing director and general counsel for Gryphon Investors. From 2019 to mid-2020, Mr. Borofsky was the Chief Operating and Strategy Officer for The Pohland Company. Prior to that, Mr. Borofsky was a Senior Vice President of MacAndrews & Forbes Holdings Inc. Mr. Borofsky earned a B.A. from Yale University and a J.D. from Columbia University School of Law.
Hal G. Byer. Mr. Byer has served as a director since January 2003. Mr. Byer joined Houlihan Lokey as a Senior Vice President in its Financial Sponsors Coverage Group in December 2009. He was a director for Houlihan Lokey from 2011 to 2017 and a senior advisor during 2017 until his retirement in November 2017. From May 2001 to November 2009, Mr. Byer was a Senior Vice President of Libra Securities, a broker-dealer registered with the SEC and an NASD member. From 1995 to 2003, Mr. Byer was Chief Executive Officer of Byer Distributing Co., a snack food distribution company. From 2000 to 2003, Mr. Byer was also the Chief Operating Officer of eGreatcause.com, an internet start-up involved in fundraising for charitable and non-profit organizations that is no longer active.
Julie Cavanna-Jerbic. Ms. Cavanna-Jerbic has served as a director since July 2020. Ms. Cavanna-Jerbic is currently the principal and founder of Iron Butterfly LLC, a consulting firm providing business advisory services, which she founded in 2012. Since November 2012, Ms. Cavanna-Jerbic has been a member of the Supervisory (Audit) Committee of First Tech Federal Credit Union, and since August 2012, Ms. Cavanna-Jerbic has given back to her community as a member of the Board of Trustees, Morrissey Compton Educational Center, helping children with learning differences regardless of their ability to pay. Prior to this, Ms. Cavanna-Jerbic held various positions at Hewlett Packard during a 28-year career, including as the Chief Financial Officer & Vice President of Global Information Technology and the Chief Information Officer & Vice President of Information Technology and Integrations. Ms. Cavanna-Jerbic earned a B.A. from University of California at Berkeley and a Master of Business Administration from the University of Southern California.
Robert Scott Fritz. Mr. Fritz has served as a director since January 2003. Since May 1982, Mr. Fritz has served as the President of Robert L. Fritz and Sons Sales Company, a New Jersey-based food broker and paper distributor that he owns. Mr. Fritz earned a B.S. in Business from Fairleigh Dickinson University.
Rae Ravich. Ms. Ravich has served as a director since June 2014. Ms. Ravich is currently the founder of a startup engaged in the health and wellness space, which she founded in July 2016. From July 2013 until June 2016, Ms. Ravich was an Associate in the direct lending group at TCW Financial Planning LLC. Previously, Ms. Ravich was a Financial Analyst at Houlihan Lokey, which she joined in July 2013. Ms. Ravich has dual B.S. degrees from the Wharton School and the Nursing School at the University of Pennsylvania. Ms. Ravich is the daughter of Jess Ravich, ALJ’s CEO and Chairman of the Board.
Key Employees
Marc Reisch. Mr. Reisch was appointed Chairman of Phoenix in August 2015 and served as a director of the Company from that time until his resignation as director effective October 24, 2019. Mr. Reisch served as Chairman of the Board, Chief Executive Officer and President of Visant and Visant Holding Corp. from October 2004 to November 2015. Prior to joining Visant, he served as Senior Advisor to Kohlberg Kravis Roberts & Co. and has over 35 years of experience in the printing and publishing industries. Mr. Reisch holds a Bachelor of Science degree and a Master of Business Administration degree from Cornell University.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or officers has had a determination during the past ten years in any legal proceedings listed in Item 401(f) of Regulation S-K that may bear on his or her ability or integrity to serve as a director or officer of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in beneficial ownership. Directors, executive officers, and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of copies of Section 16(a) reports and representations received by us from reporting persons, and without conducting any independent investigation of our own, we believe all Forms 3, 4 and 5 were timely filed with the SEC by such reporting persons during the year ended September 30, 2021.
Code of Business Conduct and Ethics
Our Board of Directors adopted a Code of Business Conduct and Ethics (“Ethics Code”), which is applicable to all employees of ALJ, ALJ subsidiaries, and members of our Board of Directors.
The Ethics Code addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws and regulations, policies related to disclosure requirements under federal securities laws, confidentiality, trading on insider information, and reporting violations of the Ethics Code. Any amendment to our Ethics Code, or waiver thereof, applicable to our principal executive officer, principal financial officer, directors, or persons performing similar functions will be disclosed on our website within five days of the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of the person to whom the waiver was granted, and the date of the waiver will also be disclosed.
Our Ethics Code can be found in the Investor Relations section of the Company’s website, www.aljregionalholdings.com, and is filed as Exhibit 14.1 to this Form 10-K. In addition, a printed copy of our Ethics Code can be requested by writing our Chief Financial Officer at 244 Madison Avenue, PMB #358, New York, NY 10016.
Committees of the Board of Directors
The Board of Directors has a standing audit committee (“Audit Committee”) and compensation, nominating, and corporate governance committee (“Compensation, Nominating, and Corporate Governance Committee”). The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by the Board of Directors.
The Board of Directors has determined that all members of both committees are independent under the applicable rules and regulations of NASDAQ and the SEC as currently in effect. The Audit Committee and the Compensation, Nominating, and Corporate Governance Committee each operate under a written charter approved by the Board of Directors. Each committee will review and reassess the adequacy of its charter periodically. The charters of both committees are available in the Investor Relations section of the Company’s website, www.aljregionalholdings.com.
The following chart details the current membership of each committee:
Name of Director
Audit Committee
Compensation, Nominating and
Corporate Governance Committee
Michael Borofsky
Member
Chair
Hal G. Byer
Member
Julie Cavanna-Jerbic
Member
Member
Robert Scott Fritz
Member
John Scheel
Chair
Audit Committee
Our Audit Committee consists of Ms. Cavanna-Jerbic, and Messrs. Scheel, Borofsky and Fritz, with Mr. Scheel chairing this committee. All members of our Audit Committee are independent directors and meet the requirements for financial literacy as defined by SEC guidelines. Our Board of Directors has determined that both Mr. Scheel and Ms. Cavanna-Jerbic are “audit committee financial experts” as defined by SEC guidelines.
The Audit Committee’s responsibilities include, among other responsibilities:
•
appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;
•
pre-approving audit and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;
•
reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;
•
coordinating the oversight and reviewing the adequacy of our internal control over financial reporting;
•
establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns; and
•
preparing the audit committee report required by SEC rules to be included in our annual proxy statement.
Compensation, Nominating, and Corporate Governance Committee
Our Compensation, Nominating, and Corporate Governance Committee consists of Ms. Cavanna-Jerbic, and Messrs. Borofsky and Byer, with Mr. Borofsky chairing this committee. All members of this committee meet the requirements for independence under the applicable rules and regulations of the SEC, NASDAQ, and the Code, as amended, including the application of such rules and regulations to members of a listed company’s compensation committee.
The Compensation, Nominating, and Corporate Governance Committee’s responsibilities include:
•
reviewing and approving corporate goals and objectives relevant to compensation of our executive chairman;
•
evaluating the performance of our executive chairman in light of such corporate goals and objectives and determining the compensation of our chief executive officer;
•
determining the compensation of all our other officers and reviewing the aggregate amount of compensation payable to such officers periodically;
•
developing and making recommendations to the Board of Directors with respect to succession plans for our executive chairman and other key officers;
•
overseeing and making recommendations to the Board of Directors with respect to our incentive-based compensation and equity plans;
•
reviewing and making recommendations to the Board of Directors with respect to director compensation;
•
developing and recommending to the Board of Directors the criteria for selecting board and committee membership;
•
establishing procedures for identifying and evaluating director candidates including nominees recommended by stockholders;
•
identifying individuals qualified to become board members;
•
recommending to the Board of Directors the persons to be nominated for election as directors and to each of the Board’s committees;
•
overseeing the evaluation of the Board of Directors, its committees, and management;
•
reviewing and accessing the adequacy of our policies and practices in corporate governance, and recommending any proposed changes to the Board of Directors for approval; and
•
reviewing and accessing the adequacy of our code of ethics for selected executives and other internal policies and guidelines, and monitor that the principles described therein are incorporated into our culture and business practices.
There have been no material changes to the procedures by which shareholders may nominate nominees to our Board of Directors during the year ended September 30, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation
Our executive compensation program, consisting of a three-part compensation strategy that includes base salary, annual discretionary cash bonuses, and equity incentive compensation, is designed to (i) pay for performance to encourage both Company and individual achievement; (ii) encourage efficient use of shareholder resources; and (iii) provide market competitive compensation to attract and retain highly qualified individuals who are capable of making significant contributions to the long-term success of the Company.
We do not adopt express formulae for weighting different elements of compensation or for allocating between long-term and short-term compensation but strive to develop comprehensive packages that are competitive with those offered by other companies with which we compete to attract and retain talented executives. Under our compensation practices, cash compensation consists of an annual base salary and discretionary bonuses. Equity-based compensation is primarily stock options.
The following table sets forth, for the years indicated, all compensation awarded to, paid to or earned by each of our named executive officers and certain key employees.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Fiscal
Year
Salary
Bonus
Option
Awards (1)
Non-equity
Incentive Plan
Compensation
All Other
Compensation
Total
Named Executive Officers:
Jess M. Ravich
$
225,000
$
-
$
-
$
1,672,500
(2)
$
287,532
(3)
$
2,185,032
Chief Executive Officer
225,000
-
-
-
81,096
(3)
306,096
Anna Van Buren
520,000
-
-
1,145,847
(4)
31,153
(5)
1,697,000
President and CEO, Faneuil
520,000
-
-
352,202
(4)
42,351
(5)
914,553
Brian Hartman
375,000
350,000
(6)
25,915
-
-
750,915
Chief Financial Officer
375,000
234,375
(6)
-
-
-
609,375
Key Employees:
Marc Reisch
200,000
-
-
1,025,000
(7)
-
1,225,000
Chairman, Phoenix
200,000
-
-
87,958
(7)
-
287,958
(1)
This column represents the aggregate fair value of common stock awards calculated in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation - Stock Compensation” (“ASC Topic 718”). Fair value is the closing price of the common stock as listed on the NASDAQ Global Market on the issuance date.
(2)
Represents an annual bonus equal to 10% of ALJ EBITDA minus actual cash interest paid, in excess of a bonus threshold of $7.5 million.
(3)
Out-of-policy business expenses, which were allowed up to $300,000 for Fiscal Year 2021 and $192,000 from July 29, 2019 through September 30, 2020 under the terms of Mr. Ravich’s employment agreement.
(4)
Represents an annual bonus amount equal to 10% of Faneuil EBITDA, before any bonus amount owed to Ms. Van Buren, in excess of $7.5 million. Ms. Van Buren’s bonus is based on a calendar year. The amounts included in the table above are estimates based on ALJ fiscal year and are subject to adjustments.
(5)
Represents health care insurance premiums. Additionally, Fiscal Year 2020 included a $10,000 cash payment in lieu of paid time off.
(6)
Represents performance bonus according to the terms of Mr. Hartman’s employment agreement.
(7)
Represents an annual bonus amount equal to 10% of Phoenix pre-bonus EBITDA, in excess of $20.0 million, with a step down to 5% in excess of $27.0 million. Mr. Reisch’s bonus is based on a calendar year. The amounts included in the table above are estimates based on ALJ’s fiscal year and are subject to adjustments.
Employment Arrangements with Named Executive Officers and Key Employees
Named Executive Officers
Jess Ravich. On July 29, 2019, the Company entered into an employment agreement (the “Ravich Employment Agreement”) with Jess Ravich. Prior to entering into the Employment Agreement, Mr. Ravich served as the Company’s Executive Chairman. Pursuant to the Ravich Employment Agreement, Mr. Ravich assumed full-time responsibilities as the Company’s Chief Executive Officer until September 30, 2020 (the “Initial Term”), subject to subsequent automatic two-year renewals.
Additional material terms of the Ravich Employment Agreement include:
(i)
Base salary is $225,000 per year, of which up to $150,000 per year may be paid at the Company’s discretion through the issuance of the Company’s stock;
(ii)
A stipend of $117,000 during the Initial Term for Mr. Ravich’s use in connection with out of policy business expenses;
(iii)
Incentive bonus structure includes (a) an annual bonus in the amount of 10% of the difference between (1) the Company’s pre-bonus consolidated EBITDA less actual cash interest paid during the trailing twelve month measurement period and (2) a bonus threshold of $22,000,000, subject to adjustment from time to time, and (b) a one-time realization bonus for any sale of a business of the Company in an amount equal to: (1) for a sale of Faneuil, 2.5% of the first $25,000,000 of profit from such sale, less growth capital expenditures (“Profit”), and 5% of any Profit in excess of $25,000,000; and (2) for a sale of any other subsidiary, 5% of the Profit;
(iv)
A standstill provision, pursuant to which (a) Mr. Ravich, without the approval of a majority of the independent directors of the Board, shall not acquire additional shares that will result in more than 45% of the outstanding stock of the Company to be held by Mr. Ravich and his affiliates, and (b) any stock held by Mr. Ravich or any of his affiliates in excess of 40% of the outstanding stock of the Company shall be subject to a voting agreement to be entered into, pursuant to which such shares will be automatically voted with the majority of all other outstanding stock of the Company; and
(v)
A clawback provision in the event of (a) a material restatement, revision or change to the Company’s financial statements requiring a recalculation of EBITDA for any particular fiscal year of the Company or (b) a breach by Mr. Ravich of his fiduciary obligation owed to the Company or commission by Mr. Ravich of an act of fraud, embezzlement, disloyalty or defalcation, or usurpation of a Company opportunity.
On June 21, 2020, the Company entered into an amended and restated employment agreement with Jess Ravich (the “A&R Ravich Employment Agreement”). The A&R Ravich Employment Agreement amended and restated Ravich Employment Agreement, which term was to expire on September 30, 2020. Pursuant to the A&R Ravich Employment Agreement, effective July 1, 2020 (the “Effective Date”), Mr. Ravich will continue to serve as the Company’s Chief Executive Officer until September 30, 2022 (the “A&R Initial Term”), subject to subsequent automatic two-year renewals.
Additional material terms amended by the A&R Ravich Employment Agreement include:
(i)
No annual bonus for the fiscal year ending September 30, 2020;
(ii)
An increase in the out of policy business expense stipend from $100,000 to $300,000 during the A&R Initial Term, prorated for the period commencing on the Effective Date and ending on September 30, 2020; and
(iii)
An amendment to the incentive bonus structure to include (a) an annual bonus in the amount of 10% of the difference between (1) the Company’s pre-bonus consolidated EBITDA less actual cash interest paid during the trailing twelve month measurement period (“Company Adjusted EBITDA”) and (2) a bonus threshold of $7,500,000, subject to adjustment from time to time; provided, that if Company Adjusted EBITDA is in excess of $37,500,000, the annual bonus shall equal the sum of $3,000,000 and 5% of such excess amount; provided further, that such thresholds shall be subject to future adjustments as negotiated in good faith by the Company and Mr. Ravich prior to the end of the Initial Term.
As of September 30, 2021, if Mr. Ravich’s employment is terminated by ALJ without cause, or by Mr. Ravich for good reason, Mr. Ravich is entitled to receive as severance: (i) the lesser of one-year base salary or pro-rated base salary for the remaining term; (ii) continuation of group health plan benefits, with the cost of the regular premium for such benefits paid in full by Faneuil; and (iii) annual bonus prorated for the period of Mr. Ravich’s service during the year of termination and calculated based on actual EBITDA (as defined in the Ravich Employment Agreement) for the year of termination equal to full annual bonus for the year of termination if otherwise entitled to receive the bonus.
Anna Van Buren. In October 2013, concurrent with ALJ’s acquisition of Faneuil, Faneuil entered into an employment agreement with Ms. Van Buren through December 2018. In August 2017, Faneuil and Ms. Van Buren entered into an amended employment agreement (the “Van Buren Amended Employment Agreement”), which extended the term to December 2021. Pursuant to the Van Buren Amended Employment Agreement, Ms. Van Buren receives an annual base salary of $520,000 and is eligible to earn an incentive bonus equal to 10% of Faneuil EBITDA, as defined in the Van Buren Amended Employment Agreement, before any bonus amount owed to Ms. Van Buren, in excess of $6,250,000 for calendar year 2017 and $7,500,000 thereafter, subject to further
adjustment by ALJ Compensation, Nominating and Corporate Governance Committee from time to time in its discretion, with a step down to 5% of pre-bonus Faneuil EBITDA at $2,000,000 total compensation.
As of September 30, 2021, if Ms. Van Buren’s employment is terminated by Faneuil without cause, or by Ms. Van Buren for good reason, Ms. Van Buren is entitled to receive: (i) the lesser of one-year base salary or pro-rated base salary for the remaining term; (ii) continuation of group health plan benefits, with the cost of the regular premium for such benefits paid in full by Faneuil; (iii) full annual bonus for the year of termination if otherwise entitled to receive the bonus; and (iv) the annual bonus for the previous year if such bonus has been earned but not yet paid at time of termination.
On October 20, 2021, Faneuil entered into an amended and restated employment agreement with Ms. Van Buren, which extended the term to December 2022. Ms. Van Buren’s compensation and bonus structure remained materially unchanged.
Brian Hartman. In connection with ALJ’s appointment of Brian Hartman to serve as its Chief Financial Officer in August 2017, ALJ entered into an employment agreement with Mr. Hartman through August 2018. Pursuant to the employment agreement, Mr. Hartman received an annual base salary of $300,000, a one-time sign-on bonus of $75,000, a cash bonus of $100,000 for the calendar year 2017, and an individual bonus target of 50% of annual base salary effective January 2018.
In August 2018, ALJ entered into the First Amended and Restated Employment Agreement (the “First A&R Employment Agreement”) with Mr. Hartman, which extended the term until August 8, 2019. Additional material terms changed by the First A&R Employment Agreement included: (i) an increase in base salary from $300,000 to $350,000 and (ii) Mr. Hartman’s incentive bonus structure, which was amended to include a bonus target of up to 25% of his annual base salary based on his achievement of performance goals set by the Company’s Compensation, Nominating and Corporate Governance Committee.
In August 2019, ALJ entered into the Second Amended and Restated Employment Agreement (the “Second A&R Employment Agreement”) with Mr. Hartman, which extended the term until September 30, 2021. Additional material terms changed by the A&R Employment Agreement included: (i) an increase in base salary from $350,000 to $375,000 and (ii) Mr. Hartman’s incentive bonus structure, which was amended to include an annual bonus target of (a) up to 50% of his annual base salary based on the general quality and success of his efforts during the immediately preceding fiscal year and (b) up to 25% of his annual base salary based on certain goals agreed between the CEO and Mr. Hartman for the applicable fiscal year. In addition, Mr. Hartman will be granted six months of his annual base salary and one additional month of his annual base salary for every year of service completed, with a maximum of twelve months, as severance pay in the event of termination by the Company without cause or by Mr. Hartman for good reason.
In August 2021, ALJ entered into the Third Amended and Restated Employment Agreement (the “Third A&R Employment Agreement”) with Mr. Hartman, which extended the term until September 30, 2023, subject to further one-year or two-year renewals, as determined by ALJ’s CEO. In connection with the Third A&R Employment Agreement, Mr. Hartman’s base salary increased from $375,000 to $400,000. Other terms remained materially unchanged.
As of September 30, 2021, if Mr. Hartman’s employment is terminated by ALJ without cause, or by Mr. Hartman for good reason, Mr. Hartman is entitled to receive: (i) ten months of base salary; (ii) continuation of group health plan benefits with the cost of the regular premium for such benefits shared in the same relative proportion by ALJ and Mr. Hartman as in effect on the date of termination; (iii) full annual bonus for the year of termination if otherwise entitled to receive the bonus; and (iv) the annual bonus for the previous year if such bonus has been earned but not yet paid at time of termination.
Key Employees
Marc Reisch. In August 2015, concurrent with ALJ’s acquisition of Phoenix, Phoenix entered into an employment agreement with Mr. Reisch through December 2018. In August 2018, Phoenix entered into a new employment agreement with Mr. Reisch, which superseded and terminated the August 2015 employment agreement, and extended the term to December 2021. In November 2020, Phoenix entered into a new employment agreement (the “2020 Employment Agreement”) with Mr. Reisch. In connection with the entry into the 2020 Employment Agreement, the previous employment agreement, entered into in August 2018 (the “2018 Employment Agreement”) was superseded and terminated. Pursuant to the 2020 Employment Agreement, Mr. Reisch’s term was extended to September 2023. Additional material terms changed by the 2020 Employment Agreement as compared to the 2018 Employment Agreement include:
(i)
a one-time payment of $300,000 paid in December 2020, in full satisfaction of any amounts owed under the 2018 Employment Agreement;
(ii)
commencing with the fiscal year ending September 30, 2021, a base bonus of $200,000 per annum (the “Base Bonus”);
(iii)
Mr. Reisch’s incentive bonus structure was modified to 10% of pre-bonus Phoenix EBITDA in excess of $17,500,000, with a step down to 5% of pre-bonus Phoenix EBITDA in excess of $27,000,000 (the “Annual Bonus”);
(iv)
in the event of an acquisition, merger, or sale of Phoenix (each, a “Phoenix Sale”) during the term (or within six months following the term if such Phoenix Sale is commenced during the Term), a sale bonus equal to the sum of (1) 5% of the net sale price less $85,000,000 and (2) 22.5% of the trailing twelve-month Phoenix EBITDA (the “22.5% Bonus”), subject to certain exceptions;
(v)
in the event a Phoenix Sale does not occur during the term, an exit bonus equal to the 22.5% Bonus less $500,000 (the “Exit Bonus”);
(vi)
Mr. Reisch’s severance payments in an amount equal to (1) any base salary and Annual Bonus (for the prior fiscal year) earned but not paid, (2) an Exit Bonus, subject to certain adjustments, (3) if terminated in the fiscal fourth quarter, an Annual Bonus for the current fiscal year, and (4) the Consulting Fee (as defined below), in the event of his death, disability, termination by the Company without cause, or termination by Mr. Reisch for good reason; and
(vii)
if a Phoenix Sale has not occurred and the New Reisch Agreement has not otherwise been terminated, an agreement by the Company and Mr. Reisch following the term to enter into a transitional consulting agreement from October 1, 2023 through March 31, 2024 for total compensation of $500,000 (the “Consulting Fee”).
On December 17, 2021, Phoenix entered into a new employment agreement (“2021 Employment Agreement”) and terminated the 2020 Employment Agreement. Material terms changed by the 2021 Employment Agreement as compared to the 2020 Employment Agreement include:
(i)
Removed the 22.5% Bonus, the Exit Bonus, and the Consulting Fee;
(ii)
Added a $5.0 million retention bonus (the “Retention Bonus”) provided that Mr. Reisch remains continuously employed by Phoenix on the payment date, payable as follows: 20% on December 15, 2021, 40% on September 15, 2022, and 40% on September 15, 2023;
(iii)
Added a bonus equal to 5% of the difference of the net sale price less $85,000,000 in the event of a Phoenix Sale during the Term (the “Sale Bonus”), to be paid to Mr. Reisch in a lump sum on the first payroll period following the closing of the Phoenix Sale;
(iv)
Provided that in the event of a Phoenix Sale, a pro-rated portion of the Base Bonus and the Annual Bonus for the year in which such Phoenix Sale occurs shall be paid to Mr. Reisch at the same time and in the same manner as the Sale Bonus; and
(v)
Modified Mr. Reisch’s severance payments in the event of his death, disability, termination by the Company without cause, or termination by Mr. Reisch for good reason to an amount equal to (1) any base salary earned but not paid, (2) any unpaid portion of the Retention Bonus (including any unvested portions), (3) a Base Bonus and Annual Bonus (for the prior fiscal year) if earned and not yet paid, and (4) a pro-rated portion of the Base Bonus and Annual Bonus that Mr. Reisch would have earned had he remained employed through the end of the fiscal year.
All other terms in the 2021 Employment Agreement remain materially unchanged from the terms in the 2020 Employment Agreement.
Outstanding Equity Awards at Fiscal Year End
The following table sets forth certain information regarding outstanding equity awards on September 30, 2021, by the named executive officers and key employee.
OUTSTANDING EQUITY AWARDS TABLE
Option Awards
Name
Option
Grant
Date
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Equity
Incentive
Plan
Awards:
Total
Number of
Securities
Underlying
Unexercised
Options (#)
Option
Exercise
Price ($)
Option
Expiration
Date
Named Executive Officers:
Jess M. Ravich, Executive Chairman
8/3/2015
350,000
-
350,000
4.00
8/3/2022
Anna Van Buren, President and CEO, Faneuil
8/11/2017
150,000
-
150,000
3.33
8/9/2027
Brian Hartman, Chief Financial Officer
8/8/2017
150,000
-
150,000
3.26
8/8/2027
8/9/2018
150,000
-
150,000
2.10
8/9/2028
8/20/2021
-
40,000
(1
)
40,000
1.24
8/20/2031
Key Employees:
Marc Reisch, Chairman, Phoenix
8/14/2015
250,000
-
250,000
4.27
8/13/2025
(1)
Vests in three equal installments on August 20, 2022, August 20, 2023, and August 20, 2024.
Director Compensation
The following table sets forth the total compensation paid or accrued by ALJ to the named directors for services rendered during the year ended September 30, 2021:
DIRECTOR COMPENSATION TABLE (1)
Name
Fees Earned
or Paid in
Cash
Stock
Awards
Option
Awards
Non-Equity
Incentive
Compensation
Nonqualified
Deferred
Compensation
on Earnings
All Other
Compensation
Total
Hal G. Byer
$
84,000
$
-
$
-
$
-
$
-
$
-
$
84,000
Robert Scott Fritz
85,000
-
-
-
-
-
85,000
Rae Ravich
80,000
-
-
-
-
-
80,000
John Scheel
52,500
40,000
-
-
-
-
92,500
Michael Borofsky
55,000
40,000
-
-
-
-
95,000
Julie Cavanna-Jerbic
61,074
(2)
25,000
-
-
-
-
86,074
________________
(1)
Each outside director received an annual compensation package comprised of (i) an annual retainer of $80,000, (ii) an additional $12,500 for the chair and $5,000 for each other member of the Audit Committee, and (iii) an additional $10,000 for the chair and $4,000 for each other member of the Compensation, Nominating, and Corporate Governance Committee. Each outside director has the discretion of how to allocate the payment between cash and common stock. Director who are employees do not receive any additional compensation for their service on the Board of Directors.
(2)
Does not include $20,000 paid for ad hoc IT-related services.
Report on Repricing of Stock Options
We did not re-price any stock options during the year ended September 30, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of November 30, 2021, information regarding the beneficial ownership of our common stock based upon the most recent information available to us for: (i) each person known by us to own beneficially more than five (5%) percent of our outstanding common stock; (ii) each of our named executive officers, directors, and key employee; and (iii) all of our named executive officers, directors, and key employee. Unless otherwise indicated, each stockholder listed below has sole voting and investment power with respect to the shares beneficially owned by them and has the following address: c/o ALJ Regional Holdings, Inc., 244 Madison Avenue, PMB #358, New York, NY 10016. As of November 30, 2021, there were 42,405,725 shares of our common stock outstanding, which was the only class of voting securities outstanding.
Name and Address of Beneficial Owner
Number of
Common
Shares
Beneficially
Owned (1)
Percentage
of Common
Shares
Beneficially
Owned
Named Executive Officers and Directors:
Jess Ravich, Chief Executive Officer and Chairman of the
Board
24,777,254
(2)
47.4
%
Anna Van Buren, Director
1,720,576
(3)
4.0
%
c/o Faneuil, Inc.
2 Eaton Street, Suite 1002
Hampton, VA 23669
John Scheel, Director and Vice Chairman of the Board
962,840
2.3
%
Robert Scott Fritz, Director
953,780
(4)
2.2
%
Hal G. Byer, Director
53,940
(5)
*
Rae G. Ravich, Director
185,419
(6)
*
Brian Hartman, Chief Financial Officer
300,000
(7)
*
Michael C. Borofsky, Director
119,369
*
Julie Cavanna-Jerbic, Director
20,161
*
Key Employee:
Marc Reisch, Chairman, Phoenix
750,000
(8)
1.8
%
c/o Phoenix Color Corp.
18249 Phoenix Drive
Hagerstown, MD 21742
All Directors and Executive Officers as a Group
29,843,339
(9)
56.0
%
5% Stockholders:
Vericast Corp.
3,000,000
7.1
%
15955 La Cantera Parkway
San Antonio, Texas 78256
*
Less than 1%.
(1)
Consistent with SEC regulations, shares of common stock issuable upon exercise of derivative securities by their terms exercisable within 60 days of November 30, 2021, are deemed outstanding for purposes of computing the percentage ownership of the person holding such securities but are not deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated below, to the knowledge of the Company, the persons and entities named in this table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
(2)
Includes 4,853,804 shares held by the Exemption Trust under the Ravich Revocable Trust of 1989, 350,000 shares of common stock issuable upon exercise of currently vested options, 1,315,927 shares of common stock issuable upon exercise of currently vested warrants, and 8,170,116 shares of common stock issuable upon the conversion of Convertible Promissory Note.
(3)
Includes 150,000 shares of common stock issuable upon exercise of currently vested options.
(4)
Includes 431,088 shares and 294,611 shares of common stock issuable upon exercise of currently vested warrants held by The Ravich Children Permanent Trust, for which Mr. Fritz is the sole trustee. Mr. Fritz disclaims all economic ownership of such shares.
(5)
Includes 10,014 restricted shares held by the Hal Byer and Marihelene Byer Revocable Trust.
(6)
Includes 100,000 shares of common stock issuable upon exercise of currently vested options.
(7)
Includes 300,000 shares of common stock issuable upon exercise of currently vested options.
(8)
Includes 250,000 shares of common stock issuable upon exercise of currently vested options.
(9)
Includes 8,170,116 shares of common stock issuable upon the conversion of Convertible Promissory Note, 1,610,538 shares of common stock issuable upon exercise of currently vested warrants, and 1,150,000 shares of common stock issuable upon the exercise of options that are either vested or will vest within 60 days from the date hereof.
Securities Authorized for Issuance under Equity Compensation Plans
For information regarding securities authorized for issuance under Equity Compensation Plans and the equity compensation plan information table see “Part II, Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
Changes in Control
We are not aware of any arrangements that may result in a change in control of the Company.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
During the years ended September 30, 2021 and 2020, we entered into the following transactions required to be reported under Item 404 of Regulation S-K (“Item 404”):
Fiscal 2021 Debt
Issuance of Convertible Promissory Notes
On June 29, 2021, ALJ issued convertible promissory notes in an aggregate principal amount of $6.0 million (the “Convertible Promissory Notes”) to two investors, including ALJ’s Chief Executive Officer and Chairman of the Board, Jess Ravich. The Convertible Promissory Notes replace and have substantially the same terms as ALJ’s prior Term C Loan (as defined below), except the Convertible Promissory Notes pay interest quarterly and the Term C Loan paid interest at maturity.
The Convertible Promissory Notes accrue interest at the rate of 8.25% per year, compounded monthly with interest payable in cash quarterly in arrears on the last day of each calendar quarter on the outstanding principal balance until such principal amount is paid in full or until conversion. The principal and accrued interest owed under the Convertible Promissory Notes are convertible, at the option of the holders, into shares of the Company’s common stock, at any time prior to November 28, 2023, at a conversion price equal to the quotient of all amounts due under each Convertible Promissory Note divided by the conversion rate of $0.54 per common share.
The Convertible Promissory Notes are (i) subordinate to the Blue Torch Term Loan and the Amended PNC Revolver, (ii) unsecured, and (iii) have a maturity date of November 28, 2023, subject to extension under certain circumstances.
Fiscal 2020 Debt
Junior Participation Agreement - Term B Loan and Warrants Issued
In December 2019, in connection with the Sixth Amendment, certain trusts and other entities formed for the benefit of, or otherwise affiliated with Mr. Ravich (“Ravich Entities”), entered into a Junior Participation Agreement with Cerberus (“Junior Participation Agreement”), pursuant to which the Ravich Entities agreed to purchase $4.1 million in junior participation interests in the Term B Loan under the Cerberus/PNC Financing Agreement (“Junior Participation” and such interests, “Junior Participation Interests”). The Junior Participation Interests were junior and subordinate to the Cerberus Term Loan in all respects and had no quarterly payments. Through March 2020, interest accrued under the Junior Participation (i) in cash, accrued at the same rate per year as the Cerberus Term Loan and paid monthly, and (ii) in kind, accrued at 4.00% per year, payable on the Cerberus/PNC Debt Maturity Date. See “Amendment to Junior Participation Agreement -Term B Loan and Warrants Issued” below for interest earned subsequent to March 2020.
In connection with the Junior Participation, the Company issued fully vested warrants to purchase 1.23 million shares of the Company’s common stock (“Junior Participation Agreement Warrants”) to the Ravich Entities, with a five-year term and an exercise price of $0.54.
Amendment to Junior Participation Agreement - Term B Loan and Warrants Issued
In March 2020, in connection with the Eighth Amendment to the Cerberus/PNC Financing Agreement, the Ravich Entities entered into the First Amendment to the Junior Participation Agreement (“First Amendment to Junior Participation Agreement”). Under the First Amendment to Junior Participation Agreement, interest was paid in kind, instead of a mixture of cash and in kind.
In connection with the First Amendment to Junior Participation Agreement, the Company issued fully vested warrants to purchase 0.4 million shares of the Company’s common stock (“First Amendment to Junior Participation Agreement Warrants”) to the Ravich Entities, with a five-year term and an exercise price of $0.62.
Amendment to the Junior Participation Agreements - Term C Loan
In May 2020, in connection with, and as a condition to, the Ninth Amendment, certain stockholders of the Company (“Term C Loan Junior Participants”), including Mr. Ravich, entered into, or amended certain Junior Participation Agreements (collectively, “Term C Loan Junior Participation Agreements”) with Cerberus. Pursuant to the Term C Loan Junior Participation Agreements (which was amended and/or restated from time to time), the Term C Loan Junior Participants acquired junior participation interests in the Term C Loan in an aggregate amount of $5.6 million on May 12, 2020 (“Term C Loan”). Mr. Ravich agreed to acquire additional junior participation interests in the Term B Loan in an aggregate amount of (i) $2.5 million on June 30, 2021 and (ii) $2.5 million on September 30, 2021 as long as Term B Loan was outstanding on such date.
The $5.6 million Term C Loan and related accrued interest was convertible, at the option of the Term C Loan Junior Participants, into shares of the Company’s common stock, at a conversion price of $0.54 per share.
The $5.6 million Term C Loan was junior and subordinate to the Cerberus/PNC Debt in all respects and had no quarterly payments. From May 2020 through the Cerberus/PNC Debt Maturity Date, the Term C Loan accrued interest in kind at the same rate per year as the Cerberus Term Loan. Although the Term C Loan was paid off as part of the Cerberus Payoff, the Term C Loan Junior Participants were issued the Convertible Promissory Notes as discussed above, under substantially identical terms as the Term C Loan, except the Convertible Promissory Notes pay interest quarterly and the Term C Loan paid interest at maturity.
Director Independence
The following directors qualify as “independent” in accordance with the rules and regulations of the SEC and NASDAQ, as applicable:
•
Hal G. Byer
•
Robert Scott Fritz
•
John Scheel
•
Michael Borofsky
•
Julie Cavanna-Jerbic

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The Audit Committee of ALJ’s Board of Directors has engaged Deloitte & Touche LLP (“Deloitte”) as the independent registered public accounting firm for the Company and its subsidiaries for the fiscal year ended September 30, 2021. The Audit Committee regularly reviews and determines whether any non-audit services provided by Deloitte potentially affects its independence with respect to the Company. The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by Deloitte. Pre-approval is generally provided by the Audit Committee for up to one year, is detailed as to the particular service or category of services to be rendered and is generally subject to a specific budget. The Audit Committee may also pre-approve additional services or specific engagements on a case-by-case basis. Management provides annual updates to the Audit Committee regarding the extent of any services provided in accordance with this pre-approval. To date, all services performed by Deloitte have been pre-approved by the Audit Committee in accordance with this policy.
The following table sets forth the aggregate fees billed, or expected to be billed, by Deloitte with respect to audit and non-audit services for the Company during the fiscal years ended September 30, 2021 and 2020:
Year Ended
September 30,
Fee Category
Audit fees (1)
$
936,837
$
789,344
Audit-related fees (2)
91,999
160,000
Tax fees (3)
74,590
124,548
All other fees (4)
1,895
1,895
Total
$
1,105,321
$
1,075,787
(1)
Audit Fees. Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of our interim consolidated financial statements included in quarterly reports and services that are normally provided in connection with statutory and regulatory filings or engagements, including post-effective amendments to previously filed registration statements.
(2)
Audit-Related Fees. Includes services that are reasonably related to the performance of the audit or review of the financial statements, including audit and attestation services related to financial reporting that are not required by statute or regulation.
(3)
Tax Fees. Tax fees generally consist of tax compliance and return preparation, and tax planning and advice. Tax compliance and return preparation services consist of preparing original and amended tax returns and claims for refunds. Tax planning and advice services consist of support during income tax audits or inquiries.
(4)
All Other Fees. All other fees consist of permitted services other than those that meet the criteria above. For the years ended September 30, 2021 and 2020 such fees were for technical subscriptions.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements
The financial statements required by this Item are included beginning at page.
Financial Statement Schedules
The financial statement schedules required by this Item are included on page S-1.
Exhibits
The following documents are filed as exhibits hereto:
Exhibit Number
Description of Exhibit
Method of Filing
2.1
Asset Purchase Agreement, dated as of June 21, 2016, by and among Phoenix Color Corp., AKI, Inc. and Bioplan USA, Inc.
Incorporated by reference to Exhibit 2.1 to Form 8-K as filed on June 22, 2016
3.1
Restated Bylaws of ALJ Regional Holdings, Inc., dated as of May 11, 2009
Incorporated by reference to Exhibit 3.4 to Form 10-12B as filed on February 2, 2016
3.2
Restated Certificate of Incorporation of ALJ Regional Holdings, Inc. as filed with the Secretary of State of the State of Delaware on August 17, 2018
Incorporated by reference to Exhibit 3.5 to Form 10-K as filed on December 17, 2018
10.01
Form of Indemnification Agreement for Directors and Officers
Incorporated by reference to Exhibit 10.2 to Form 10-12B as filed on February 2, 2016
10.02
Employment Agreement, dated July 29, 2019, by and between the Company and Jess Ravich
Incorporated by reference to Exhibit 10.2 to Form 8-K as filed on August 1, 2019
10.03
First Amended and Restated Employment Agreement, dated June 21, 2020, by and between the Company and Jess Ravich
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on June 23, 2020
10.04
Employment Agreement, dated October 18, 2013, by and between Faneuil, Inc. and Anna Van Buren
Incorporated by reference to Exhibit 10.3 to Form 10-12B as filed on February 2, 2016
10.05
First Amendment to Employment Agreement, dated August 11, 2017, by and between Faneuil, Inc. and Anna Van Buren
Incorporated by reference to Exhibit 10.2 to Form 8-K as filed on August 14, 2017
10.06
Amended and Restated Employment Agreement, dated October 20, 2021, by and between Faneuil, Inc. and Anna Van Buren
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on October 25, 2021
10.07
Employment Agreement, dated August 8, 2017, by and between ALJ Regional Holdings, Inc. and Brian Hartman
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 14, 2017
10.08
First Amendment to Employment Agreement, dated August 2, 2018, by and between ALJ Regional Holdings, Inc. and Brian Hartman
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 3, 2018
10.09
Second Amended and Restated Employment Agreement, dated August 20, 2019, by and between ALJ Regional Holdings, Inc. and Brian Hartman
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 22, 2019
10.10
Third Amended and Restated Employment Agreement, dated August 20, 2021, by and between ALJ Regional Holdings, Inc. and Brian Hartman
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 20, 2021
10.11
Employment Agreement, dated as of March 12, 2018, by and between ALJ Regional Holdings, Inc. and Marc Reisch
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on March 13, 2018
10.12
Employment Agreement, dated November 6, 2020, by and between Phoenix Color Corp. and Marc Reisch
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on November 9, 2020
10.13
Employment Agreement, dated December 17, 2021, by and between Phoenix Color Corp. and Marc Reisch
Filed herewith
10.14
ALJ Regional Holdings, Inc. 2016 Omnibus Equity Plan
Incorporated by reference to Exhibit 10.1 to Form S-8 as filed on August 23, 2016
10.15
Financing Agreement, dated as of August 14, 2015, by and among ALJ Regional Holdings, Inc., Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of ALJ Regional Holdings, Inc. listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders.
Incorporated by reference to Exhibit 10.1 to Form 10-12B as filed on February 2, 2016
10.16
First Amendment to Financing Agreement, dated as of July 18, 2016, by and among the Company, Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on July 20, 2016
10.17
Second Amendment to Financing Agreement, dated as of May 26, 2017, by and among the Company, Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on May 30, 2017
10.18
Third Amendment to Financing Agreement, dated as of October 2, 2017, by and among the Company, Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on October 2, 2017
10.19
Fourth Amendment to Financing Agreement, dated as of November 28, 2018, by and among the Company, Faneuil, Inc., Floors-N-More, LLC, Phoenix Color Corp., each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent for the lenders, and PNC Bank, National Association, as administrative agent for the lenders
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on November 30, 2018
10.20
Fifth Amendment to Financing Agreement, dated as of July 31, 2019, by and among the Company, Faneuil, Carpets, Phoenix, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, the Collateral Agent, and the Administrative Agent
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on August 1, 2019
10.21
Sixth Amendment to Financing Agreement, dated as of December 17, 2019, by and among the Company, Faneuil, Carpets, Phoenix, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, the Collateral Agent, and the Administrative Agent
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on December 23, 2019
10.22
Seventh Amendment to Financing Agreement, dated as of February 13, 2020, by and among the Company, Faneuil, Carpets, Phoenix, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, the Collateral Agent, and the Administrative Agent
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on February 14, 2020
10.23
Eighth Amendment to Financing Agreement, dated as of March 26, 2020, by and among the Company, Faneuil, Carpets, Phoenix, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, the Collateral Agent, and the Administrative Agent
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on March 27, 2020
10.24
Ninth Amendment to Financing Agreement, dated as of May 12, 2020, by and among the Company, Faneuil, Carpets, Phoenix, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto, the lenders from time to time party thereto, the Collateral Agent, and the Administrative Agent
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on May 13, 2020
10.25
Financing Agreement, dated as of June 29, 2021 among ALJ Regional Holdings, Inc., Faneuil Inc., and Phoenix Color Corp., as Borrowers, each subsidiary of ALJ Regional Holdings, Inc. listed as a guarantor on the signature pages, as Guarantors, the lenders from time to time, as Lenders, and Blue Torch Finance, LLC, as Collateral Agent and Administrative Agent.
Incorporated by reference to Exhibit 10.1 to Form 8-K as filed on July 1, 2021
10.26
Amended and Restated Financing Agreement, dated as of June 29, 2021, among ALJ Regional Holdings, Inc., Faneuil Inc., and Phoenix Color Corp., as Borrowers, each subsidiary of ALJ Regional Holdings, Inc. listed as a guarantor on the signature pages, as Guarantors, the lenders from time to time, as Lenders, and PNC Bank, National Association, as Collateral Agent and Administrative Agent.
Incorporated by reference to Exhibit 10.2 to Form 8-K as filed on July 1, 2021
10.27
Collateral Agent and Term Loan Lender Exit Agreement, dated as of June 29, 2021, among ALJ Regional Holdings, Inc., Faneuil Inc., and Phoenix Color Corp., as Borrowers, each subsidiary of ALJ Regional Holdings, Inc. listed as a guarantor on the signature pages, as Guarantors, the lenders from time to time, as Lenders, Cerberus Business Finance, LLC, as Collateral Agent and PNC Bank, National Association, as Administrative Agent.
Incorporated by reference to Exhibit 10.3 to Form 8-K as filed on July 1, 2021
10.28
Convertible Promissory Note issued by the Company to Jess Ravich, dated June 29, 2021.
Incorporated by reference to Exhibit 10.4 to Form 8-K as filed on July 1, 2021
10.29
Convertible Promissory Note issued by the Company to Elizabeth Glazer 2012 Trust, dated June 29, 2021.
Incorporated by reference to Exhibit 10.5 to Form 8-K as filed on July 1, 2021
10.30
Voting Agreement, dated as of September 6, 2019, between ALJ Regional Holdings, Inc. and Jess Ravich.
Incorporated by reference to Exhibit 99.1 to Form SC 13D as filed on September 10, 2019
14.1
Code of Business Conduct and Ethics
Incorporated by reference to Exhibit 14.1 to Form 10-K as filed on December 23, 2016
21.1
List of Subsidiaries
Filed herewith
23.1
Consent of Independent Registered Public Accounting Firm - Deloitte & Touche, LLP
Filed herewith
Power of Attorney (see signature page)
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
Filed herewith
31.2
Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act
Filed herewith
32.1
Certification of the Chief Executive Officer and the Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Filed herewith
101.SCH
Inline XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
Filed herewith
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS)
Filed herewith