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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2022

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

For the transition period from to

Commission File Number: 001-37689

ALJ REGIONAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


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

244 Madison Avenue, PMB #358

New York, NY 10016

(Address of principal executive offices, Zip code)

(888) 486-7775

(Registrant’s telephone number, including area code)

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

Ticker Symbol
ALJJ

Name of exchange on which registered
NASDAQ

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

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

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


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

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

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

The number of shares of common stock, $0.01 par value per share, outstanding as of August 1, 2022, was 38,660,330.

FORWARD-LOOKING STATEMENTS

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

•

any statements regarding our expectations for future performance;

•

our ability to identify, consummate, and integrate business acquisitions;

•

our ability to compete effectively;

•

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

•

our ability to meet customer needs;

•

regulatory compliance costs;

•

the potential adverse impact of the novel coronavirus disease (“COVID-19”) pandemic on our business, operations and the markets and communities in which we and our customers, vendors and employees operate;

•

our ability to manage ongoing supply chain disruptions and constraints due primarily to the restriction of employee movements, key material and labor shortages, and transportation constraints;

•

our ability to improve margins and profitability on contracts we enter into; and

•

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

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

Table of Contents

ALJ REGIONAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED JUNE 30, 2022

INDEX


		Page

	PART I – FINANCIAL INFORMATION	4

Item 1	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations (unaudited)	5
	Condensed Consolidated Statements of Cash Flows (unaudited)	6
	Condensed Consolidated Statements of Equity (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4	Controls and Procedures	40

	PART II – OTHER INFORMATION	41

Item 1	Legal Proceedings	41

Item 1A	Risk Factors	41

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3	Defaults Upon Senior Securities	51

Item 4	Mine Safety Disclosures	51

Item 5	Other Information	51

Item 6	Exhibits	52

	Signatures	53

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1 - Financial Statements

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)


	June 30, 2022			September 30, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	27,944		$	2,276
Short-term investments		99,679			—
Accounts receivable, net of allowance for doubtful accounts of $1,300 and $– on June 30, 2022 and September 30, 2021		37,679			57,660
Prepaid expenses and other current assets		4,861			8,852
Current assets of discontinued operations		—			20,608
Total current assets		170,163			89,396
Property and equipment, net		10,756			22,864
Operating lease right-of-use assets		17,647			29,048
Intangible assets, net		9,980			11,906
Collateral deposits		4,123			487
Other assets		5,636			792
Long-term assets of discontinued operations		—			60,160
Total assets	$	218,305		$	214,653
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,990		$	11,255
Accrued expenses		17,437			20,815
Income taxes payable		3,846			38
Deferred revenue and customer deposits		—			4,053
Term loans, net of deferred loan costs - current installments		—			2,692
Finance lease obligations - current installments		528			765
Operating lease obligations - current installments		3,200			4,722
Current portion of workers' compensation reserve		900			710
Other current liabilities		3,679			3,686
Current liabilities of discontinued operations		—			10,192
Total current liabilities		35,580			58,928
Line of credit, net of deferred loan costs		—			5,490
Term loans, less current portion, net of deferred loan costs		6,026			93,484
Deferred revenue, less current portion		—			369
Workers' compensation reserve, less current portion		1,902			1,749
Finance lease obligations, less current installments		—			332
Operating lease obligations, less current installments		20,167			32,767
Deferred tax liabilities, net		17			852
Other non-current liabilities		440			6,265
Long-term liabilities of discontinued operations		—			1,841
Total liabilities		64,132			202,077
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.01 par value; authorized – 100,000 shares; 42,409 and 42,406 issued and outstanding on June 30, 2022 and September 30, 2021, respectively		424			424
Additional paid-in capital		288,430			288,355
Accumulated deficit		(134,681	)		(276,203	)
Total stockholders’ equity		154,173			12,576
Total liabilities and stockholders’ equity	$	218,305		$	214,653

See accompanying notes

Table of Contents

ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2022			2021
Revenue:
Revenue	$	25,110		$	72,754		$	168,403		$	243,147
Other revenue		32,511			—			32,511			—
Total revenue and other revenue		57,621			72,754			200,914			243,147
Costs, expenses, and other:
Cost of revenue		52,352			59,209			178,071			203,247
Selling, general, and administrative expense		7,443			15,764			38,042			43,487
Lease impairment		—			—			2,158			—
Gain on sale of assets and other		(118,014	)		—			(117,988	)		—
Total operating costs, expenses, and other, net		(58,219	)		74,973			100,283			246,734
Operating income (loss)		115,840			(2,219	)		100,631			(3,587	)
Other (expense) income, net:
Interest income		127			—			127			—
Interest expense		(151	)		(2,623	)		(5,449	)		(7,656	)
Loss on debt extinguishment		(3,884	)		(1,914	)		(3,884	)		(1,914	)
Total other expense, net		(3,908	)		(4,537	)		(9,206	)		(9,570	)
Income (loss) from continuing operations before income taxes		111,932			(6,756	)		91,425			(13,157	)
Provision for income taxes		(6,065	)		(70	)		(6,010	)		(244	)
Net income (loss) from continuing operations		105,867			(6,826	)		85,415			(13,401	)
Net income from discontinued operations, net of income taxes		47,963			3,322			56,107			7,695
Net income (loss)	$	153,830		$	(3,504	)	$	141,522		$	(5,706	)
Income (loss) per share of common stock–basic:
Continuing operations	$	2.50		$	(0.16	)	$	2.01		$	(0.32	)
Discontinued operations	$	1.13		$	0.08		$	1.32		$	0.18
Net income (loss) per share (1)	$	3.63		$	(0.08	)	$	3.34		$	(0.13	)
Income (loss) per share of common stock–diluted:
Continuing operations	$	1.93		$	(0.16	)	$	1.56		$	(0.32	)
Discontinued operations	$	0.87		$	0.06		$	1.03		$	0.14
Net income (loss) per share (1)	$	2.81		$	(0.08	)	$	2.59		$	(0.13	)
Weighted average shares of common stock outstanding:
Basic		42,409			42,321			42,408			42,320
Diluted		54,818			54,503			54,735			54,416

(1) Amounts may not add due to rounding.

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine Months Ended June 30,
	2022			2021
Operating activities:
Net income (loss)	$	141,522		$	(5,706	)
Adjustments to reconcile net income (loss) to cash (used for) provided by operating activities:
Depreciation and amortization expense		8,630			9,455
Loss on debt extinguishment		3,884			1,914
Lease impairment		2,158			—
Amortization of discount of short-term investments		(83	)		—
Interest expense and other bank fees accreted to term loans		—			1,691
Change in fair value of contingent consideration		300			1,100
Amortization of deferred loan costs		627			527
Stock-based compensation expense		154			126
Provision (reversal) for bad debts		1,300			(17	)
Gain on sale of assets and other, excluding cash transaction costs paid		(124,301	)		—
(Gain) loss on sale of subsidiaries, excluding cash transaction costs paid		(66,221	)		761
Deferred income taxes		(835	)		38
Changes in operating assets and liabilities:
Accounts receivable, net		18,681			1,298
Prepaid expenses, collateral deposits, and other current assets		3,991			(392	)
ROU assets/ROU liabilities		(1,160	)		(494	)
Other assets		(3,480	)		960
Accounts payable		(5,227	)		(3,157	)
Accrued expenses		(4,393	)		2,797
Income tax payable		3,808			5
Deferred revenue		(4,422	)		(4,820	)
Other current liabilities and other non-current liabilities		(5,489	)		2,914
Discontinued operations, net		1,331			11,662
Cash (used for) provided by operating activities		(29,225	)		20,662
Investing activities:
Capital expenditures		(820	)		(3,001	)
Proceeds from the sale of subsidiaries		135,928			438
Proceeds from the sale of assets		127,442			—
Purchase of investments		(104,596	)		—
Discontinued operations, net		(2,303	)		(3,329	)
Cash provided by (used for) investing activities		155,651			(5,892	)
Financing activities:
Proceeds from term loans		—			95,000
Payments on term loans		(94,050	)		(76,398	)
Payments on line of credit, net		(5,490	)		(14,417	)
Deferred loan costs		(283	)		(4,164	)
Payments on finance leases		(607	)		(2,350	)
Payment of debt extinguishment penalties and other		(328	)		(743	)
Discontinued operations, net		—			(9,333	)
Cash used for financing activities		(100,758	)		(12,405	)
Change in cash and cash equivalents		25,668			2,365
Cash and cash equivalents at beginning of the year		2,276			6,050
Cash and cash equivalents at end of the year	$	27,944		$	8,415

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine Months Ended June 30,
	2022		2021
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	4,933	$	6,878
Taxes	$	16,251	$	89
Non-cash investing and financing activities:
Capital equipment purchases financed with term loans	$	—	$	4,000

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(in thousands)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2022			2021
Common stock:
Balance, beginning of period	$	424		$	423		$	424		$	423
Issuance of common stock upon cashless exercise of stock options		—			—			—			—
Balance, end of period	$	424		$	423		$	424		$	423
Additional paid in capital:
Balance, beginning of period	$	288,415		$	288,225		$	288,355		$	288,193
Stock-based compensation expense - options		15			15			75			47
Balance, end of period	$	288,430		$	288,240		$	288,430		$	288,240
Accumulated deficit:
Balance, beginning of period	$	(288,511	)	$	(273,762	)	$	(276,203	)	$	(271,560	)
Net income (loss)		153,830			(3,504	)		141,522			(5,706	)
Balance, end of period	$	(134,681	)	$	(277,266	)	$	(134,681	)	$	(277,266	)
Total stockholders' equity	$	154,173		$	11,397		$	154,173		$	11,397

See accompanying notes

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ALJ REGIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively herein as “ALJ” or “Company”) is a holding company. During the three and nine months ended June 30, 2022, 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. On April 1, 2022, ALJ completed the sale of Faneuil’s tolling and transportation and health benefit exchange vertical. See Basis of Presentation below.

•

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. On April 13, 2022, ALJ completed its sale of Phoenix. See Basis of Presentation below.

ALJ owned a third segment, 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. See Basis of Presentation below.

As a result of the Phoenix Sale, ALJ had one operating segment for all periods presented.

Basis of Presentation

Overall

The accompanying condensed consolidated financial statements include the accounts of ALJ and its subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information. All intercompany transactions and balances have been eliminated in consolidation. The financial information included herein is unaudited, and reflects all adjustments which are, in the opinion of management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. Interim financial results are not necessarily indicative of financial results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with ALJ’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the SEC on December 20, 2021.

Discontinued Operations – Carpets

In February 2021, ALJ completed the sale of Carpets (the “Carpets Sale”). The Company determined that the Carpets Sale qualified as discontinued operations as defined by Accounting Standards Codification (“ASC”) 205-20-45, Presentation of Financial Statements — Discontinued Operations — Other Presentation Matters (“ASC 205”) because the Carpets Sale represented a strategic shift with a major effect on the Company's operations and financial results. Pursuant to ASC 205, Carpets results of operations and cash flows were classified as discontinued operations for the nine months ended June 30, 2021. See Note 4 for additional financial information about Carpets’ discontinued operations.

Discontinued Operations – Phoenix

In February 2022, ALJ entered into a stock purchase agreement (the “Stock Purchase Agreement”) to sell all of the outstanding shares of common stock of Phoenix (the “Phoenix Sale”) for cash consideration, including post-closing working capital adjustments, totaling approximately $135.9 million. The Phoenix Sale closed on April 13, 2022. The Company recorded a gain on sale of discontinued operations, net of related income taxes, of $46.8 million during the three months ended June 30, 2022.

The Company determined that the Phoenix Sale qualified as discontinued operations as defined by ASC 205 because the Phoenix Sale represented a strategic shift with a major effect on the Company's operations and financial results. Pursuant to ASC 205, Phoenix assets, liabilities, results of operations, and cash flows were classified as discontinued operations for all periods presented. See Note 4 for additional financial information about Phoenix’s discontinued operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Asset Sale - Faneuil

In December 2021, ALJ entered into an agreement to sell certain net assets of Faneuil’s tolling and transportation vertical and health benefit exchange vertical (the “Faneuil Asset Sale”). The Faneuil Asset Sale closed on April 1, 2022, for cash consideration of $142.3 million less an indemnification escrow amount of approximately $15.0 million. Faneuil is also eligible to receive additional earn-out payments based upon the performance of certain customer agreements in an aggregate amount of up to $25.0 million. The Company recorded a gain on sale of assets, net of related income taxes, of $112.0 million during the three and nine months ended June 30, 2022. See Note 4 for additional financial information about Faneuil's gain on sale of assets.

In connection with the Faneuil Asset Sale, Faneuil entered into a Transition Services Agreement ("TSA"), which is designed to ensure and facilitate an orderly transfer of the tolling and transportation vertical and health benefit exchange vertical. The services provided under the TSA will terminate at various times between 30 days and 365 days from the closing date of the Faneuil Asset Sale and can be renewed, in whole or in part, in 30-day increments, for a maximum of 180 days. Revenue earned from the TSA was disclosed as other revenue on the consolidated statements of operations during the three and nine months ended June 30, 2022. TSA-related expenses were recorded in their natural expense classification.

The Company determined that the Faneuil Asset Sale did not qualify as discontinued operations as defined by ASC 205 because the Faneuil Asset Sale does not represent a strategic shift with a major effect on the Company's operations and financial results. As such, Faneuil assets, liabilities, results of operations, and cash flows were included with continuing operations for all periods presented.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Although actual results could differ materially from those estimates, such estimates are based on the best information available to management and management’s best judgments at the time. Significant estimates and assumptions by management are used for, but are not limited to, determining the fair value of assets and liabilities, including intangible assets acquired and allocation of acquisition purchase prices, estimated useful lives of certain assets, recoverability of long-lived and intangible assets, the recoverability of goodwill, the realizability of deferred tax assets, stock-based compensation, the likelihood of material loss as a result of loss contingencies, customer lives used for revenue recognition, the allowance for doubtful accounts and inventory reserves, and calculation of insurance reserves. The inputs into certain of these estimates and assumptions include the consideration of the economic impact of the COVID-19 pandemic. Actual results may differ materially from estimates. As the impact of the COVID-19 pandemic continues to develop, many of these estimates could require increased judgment and carry a higher degree of variability and volatility, and may change materially in future periods.

2. RECENT ACCOUNTING STANDARDS

Recent Accounting Pronouncements Adopted

Internal-Use Software

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

Debt with Conversion and Other Options

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ALJ adopted ASU 2020-06 on October 1, 2021 using the full retrospective basis. The impact of ASU 2020-06 on ALJ’s consolidated financial statements and related disclosures was not material.

Accounting Standards Not Yet Adopted

Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. ASU 2021-04 will be effective for ALJ on October 1, 2022. ALJ does not anticipate the adoption of ASU 2021-04 to significantly impact its consolidated financial statements and related disclosures.

Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, as if it had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. ASU 2021-08 will be effective for ALJ on October 1, 2023. The adoption impact of the new standard will depend on the magnitude of future acquisitions. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date.

3. REVENUE RECOGNITION

Disaggregation of Revenue

As a result of the Phoenix Sale described in Note 1, all revenue reported was attributable to Faneuil for all periods presented.

Revenue by contract type was as follows for the three and nine months ended June 30, 2022 and 2021:


	Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Faneuil:
Utility	$	14,295	$	13,709	$	40,854	$	40,529
Healthcare		9,147		31,318		70,141		108,020
Other		1,327		965		2,791		3,576
Government		341		4,148		2,633		26,698
Transportation		—		22,614		51,984		64,324
Total revenue		25,110		72,754		168,403		243,147
Other revenue		32,511		—		32,511		—
Total revenue and other revenue	$	57,621	$	72,754	$	200,914	$	243,147

Substantially all of Faneuil revenue is recognized over time.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other Revenue

As discussed in Note 1, other revenue was attributable to Faneuil's TSA. The TSA has a single performance obligation, as the promises to provide the identified services are not distinct within the context of the TSA. The single performance obligation constitutes a series of distinct services as the customer benefits as services are provided. Service revenue is recognized over time using the input method. The input method provides a faithful depiction of the performance toward complete satisfaction of the performance obligation and can be tied to the direct cost incurred.

Contract Assets and Liabilities

The following table provides information about consolidated contract assets and contract liabilities at the end of each reporting period:


	June 30,		September 30,
(in thousands)	2022		2021
Contract assets:
Unbilled revenue (1)	$	—	$	69
Total contract assets	$	—	$	69
Contract liabilities:
Deferred revenue	$	—	$	4,422
Total contract liabilities	$	—	$	4,422

(1) Included in prepaid expenses and other current assets on the consolidated balance sheets. Unbilled revenue represents rights to consideration for services provided when the right is conditioned on something other than passage of time (for example, meeting a milestone for the right to bill under the cost-to-cost measure of progress). Unbilled revenue is transferred to accounts receivable when the rights become unconditional.

The following table provides changes in consolidated contract assets and contract liabilities from September 30, 2021 to June 30, 2022:


(in thousands)	Contract Assets			Contract Liabilities
Balance, September 30, 2021	$	69		$	4,422
Additions to contract assets		26			—
Revenue recognized		—			(8,403	)
Cash received from customer and other		(95	)		3,981
Balance, June 30, 2022	$	—		$	—

Deferred Revenue and Remaining Performance Obligations

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from call center services, including non-refundable payments made prior to operations. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. Customers are typically invoiced for these agreements in regular installments and revenue is recognized ratably over the contractual service period. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter. Deferred revenue does not represent the total contract value of annual or multi-year non-cancellable agreements.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, not to receive financing from customers. Any potential financing fees are considered de minimis.

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue. Transaction price allocated to the remaining performance obligation is influenced by several factors, including the timing of renewals and average contract terms. The Company applied practical expedients to exclude amounts related to

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

performance obligations that are billed and recognized as they are delivered, optional purchases that do not represent material rights, and any estimated amounts of variable consideration that are subject to constraint.

The Company has elected to apply the optional exemption for the disclosure of remaining performance obligations for contracts that have an original expected duration of one year or less, are billed and recognized as services are delivered and/or variable consideration allocated entirely to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. This primarily consists of call center services that are billed monthly based on the services performed each month.

Costs to Obtain a Contract

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The costs to obtain a contract capitalized are primarily sales commissions paid to our sales force personnel. Capitalized costs may also include portions of fringe benefits and payroll taxes associated with compensation for incremental costs to acquire customer contracts and incentive payments to partners. These costs are amortized over the term of the contract or the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. The Company expenses sales commissions when incurred if the amortization period of the sales commission is one year or less. The accounting for incremental costs of obtaining a contract with a customer is consistent with the accounting under previous guidance.

The following table provides changes in costs to obtain a contract for the three and nine months ended June 30, 2022 and 2021:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2022			2021

Balance, beginning of period	$	143		$	412		$	239		$	593
Additions		285			—			363			99
Amortization, included in selling, general, and administrative expense		(113	)		(111	)		(287	)		(391	)
Balance, end of period	$	315		$	301		$	315		$	301

Reported as of end of period
Current - prepaid expenses and other current assets		283			213
Noncurrent - other assets		32			88
Total	$	315		$	301

Costs to Fulfill a Contract

The Company also capitalizes costs incurred to fulfill its contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to cost of revenue as the Company satisfies its performance obligations by transferring the service to the customer. These costs are amortized on a systematic basis over the expected period of benefit.

The following table provides changes in costs to fulfill a contract for the three and nine months ended June 30, 2022 and 2021:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2022			2021

Balance, beginning of period	$	678		$	4,363		$	2,884		$	5,118
Additions		—			55			2,756			6,047
Amortization, included in selling, general, and administrative expense		(127	)		(877	)		(5,089	)		(7,624	)
Balance, end of period	$	551		$	3,541		$	551		$	3,541

Reported as of end of period
Current - prepaid expenses and other current assets		252			2,946
Noncurrent - other assets		299			595
Total	$	551		$	3,541

Capitalized costs to obtain and fulfill a contract are periodically reviewed for impairment. ALJ did not incur any impairment losses during the three and nine months ended June 30, 2022 or 2021.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4. DIVESTITURES AND DISCONTINUED OPERATIONS

Carpets Sale

As previously discussed in Note 1, ALJ sold Carpets during February 2021. As a result, ALJ recognized a loss on sale of $0.8 million

during the nine months ended June 30, 2021 calculated as follows:


(in thousands)	Amount
Cash proceeds	$	500
Net assets sold		(1,199	)
Transaction costs		(62	)
Impact of income taxes		—
Total loss on sale	$	(761	)

The carrying values of the net assets sold, at the time of closing, were as follows:


(in thousands)	Amount
Current assets	$	4,615
Intangible assets, net		318
Other long-term assets		740
Current liabilities		(4,099	)
Long-term liabilities		(375	)
Net assets sold	$	1,199

The following table presents information regarding certain components of loss from discontinued operations, net of income taxes, attributable to Carpets, for the nine months ended June 30, 2021:


	Nine Months Ended
(in thousands)	June 30, 2021
Revenue	$	13,799
Operating loss		(302	)
Loss on sale		(761	)
Loss before income taxes		(1,063	)
Income tax expense		—
Loss from discontinued operations, net of income taxes		(1,063	)

The following table presents significant components of cash flows of discontinued operations, attributable to Carpets, for the nine months ended June 30, 2021:


	Nine Months Ended
(in thousands)	June 30, 2021
Operating activities
Depreciation and amortization expense	$	199
Provision for bad debts and obsolete inventory		27
Changes in operating assets and liabilities:
Accounts receivable, net		399
Inventories, net		(12	)
Prepaid expenses, collateral deposits, and other current assets		24
Other assets and liabilities, net		26
Investing activities
Capital expenditures		(7	)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Faneuil Asset Sale

As previously discussed in Note 1, ALJ sold certain net assets of Faneuil on April 1, 2022. As a result, the Company recorded a gain on sale of assets, net of related income taxes, of $112.0 million during the three and nine months ended June 30, 2022 calculated as follows:


(in thousands)	Amount
Cash proceeds	$	127,442
Net assets sold		(3,114	)
Transaction costs		(6,314	)
Gain on sale of assets before income taxes	$	118,014
Impact of income taxes (1)		(5,992	)
Total gain on sale, net of income taxes	$	112,022

(1) Included in the provision for income taxes on the consolidated statement of operations.

The carrying values of the net assets sold, at the time of closing, were as follows:


(in thousands)	Amount
Current assets	$	215
Property and equipment, net		6,198
Operating lease right-of-use assets		7,572
Current liabilities		(1,376	)
Long-term liabilities		(9,495	)
Net assets sold	$	3,114

Phoenix Sale

As previously discussed in Note 1, ALJ sold Phoenix on April 13, 2022. As a result, ALJ recognized a gain on sale, net of income taxes, of $46.8 million during the three months ended June 30, 2022, calculated as follows:


(in thousands)	Amount
Cash proceeds	$	135,928
Net assets sold		(69,707	)
Transaction costs		(6,441	)
Impact of income taxes		(12,950	)
Total gain on sale	$	46,830

The carrying values of the net assets sold, at the time of closing, were as follows:


(in thousands)	Amount
Current assets	$	22,270
Property and equipment, net		40,329
Other long-term assets		18,171
Current liabilities		(10,705	)
Long-term liabilities		(358	)
Net assets sold	$	69,707

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the carrying amount of major classes of assets and liabilities, attributable to Phoenix, classified as held for sale included in discontinued operations on September 30, 2021:


	September 30,
(in thousands)	2021
Assets:
Accounts receivable	$	10,912
Inventories, net		7,654
Prepaid expenses and other current assets		2,042
Property and equipment, net		41,066
Operating lease right-of-use assets		—
Intangible assets, net		18,705
Other long-term assets		389
Total assets of discontinued operations	$	80,768
Liabilities:
Accounts payable	$	3,986
Accrued expenses		5,396
Other current liabilities		810
Total long-term liabilities		1,841
Total liabilities of discontinued operations	$	12,033

The following table presents certain components of results of operations reported as discontinued operations, attributable to Phoenix, for the three and nine months ended June 30, 2022 and 2021:


	Three Months Ended June 30,				Nine Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Revenue	$	4,275	$	30,706	$	65,040	$	86,038
Operating income		1,133		3,793		9,277		9,391
Gain on sale, net of income taxes		46,830		—		46,830		—
Net income from discontinued operations, net of income taxes		47,963		3,322		56,107		8,758

The following table presents certain components of cash flows reported as discontinued operations, attributable to Phoenix, for the nine months ended June 30, 2022 and 2021:


	Nine Months Ended June 30,
(in thousands)	2022			2021
Operating activities
Depreciation and amortization expense	$	4,092		$	5,457
Provision for bad debts and obsolete inventory and other		(11	)		(72	)
Changes in operating assets and liabilities:
Accounts receivable, net		(549	)		2,629
Inventories, net		(487	)		(353	)
Prepaid expenses, collateral deposits, and other current assets		1,026			1,033
Other assets and liabilities, net		(2,740	)		2,305
Investing activities
Capital expenditures		(2,309	)		(3,631	)
Proceeds from sales of assets		6			309
Financing activities

ALJ REGIONAL HOLDINGS INC 10-Q