ALJ REGIONAL HOLDINGS, INC.
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is provided in addition to the accompanying condensed
consolidated financial statements and notes to assist readers in understanding
our results of operations, financial condition and cash flows. MD&A is organized
as follows:
• Overview. Discussion of our business and overall analysis of financial and
other highlights affecting us to provide context for the remainder of
MD&A.
• Results of Operations. An analysis comparing our financial results for the
three and six months ended
ended
• Liquidity and Capital Resources. An analysis comparing our cash flows for
the six months ended
2021, and discussion of our financial condition and liquidity.
• Contractual Obligations. Discussion of contractual obligations on March
31, 2022.
• Off-Balance Sheet Arrangements. Discussion of off-balance sheet
arrangements on March 31, 2022 .
• Critical Accounting Policies and Estimates. Discussion of the significant
estimates and judgments that affect the reported amounts of assets,
liabilities, net revenue and expenses, and related disclosure of
contingent assets and liabilities.
The following discussion should be read in conjunction with our condensed
consolidated financial statements and accompanying notes included in "Part I,
Item 1 - Financial Statements." The following discussion contains a number of
forward-looking statements that involve risks and uncertainties. Words such as
"anticipates," "expects," "intends," "goals," "plans," "believes," "seeks,"
"estimates," "continues," "may," "will," "should," and variations of such words
and similar expressions are intended to identify such forward-looking
statements. Such statements are based on our current expectations and could be
affected by the risk and uncertainties described in "Part II, Item 1A - Risk
Factors." Our actual results may differ materially.
Overview
ALJ Regional Holdings, Inc. (including subsidiaries, referred to collectively herein as "ALJ" or "Company") is a holding company. During the three and six months endedMarch 31, 2022 , ALJ consisted of the following wholly-owned subsidiaries:
•
leading provider of call center services, back-office operations, staffing
services, and toll collection services to government and regulated
commercial clients across
utility, transportation, and toll revenue collection industries. Faneuil
is headquartered in
tolling and transportation and health benefit exchange vertical. See Asset
Sale - Faneuil below.
•
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.
ALJ acquired
sale of
ALJ owned a third segment,Floors-N-More, LLC , d/b/a, Carpets N' More ("Carpets"). Carpets was a floor covering retailer inLas 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 inApril 2014 andFebruary 2021 , respectively. See Discontinued Operations - Carpets below. 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 and selling existing assets when advantageous. 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. 30
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Table of Contents Recent Developments
Discontinued Operations - Carpets
InFebruary 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 three and six months endedMarch 31, 2021 .
Discontinued Operations -
InFebruary 2022 , ALJ entered into a stock purchase agreement (the "Stock Purchase Agreement") to sell all of the outstanding shares of common stock ofPhoenix (the "Phoenix Sale") for cash consideration totaling approximately$136.4 million , subject to post-closing working capital adjustments. ThePhoenix Sale closed onApril 13, 2022 . The Company expects to recognize a gain on sale of discontinued operations, before related income taxes, of approximately$45.0 million to$60.0 million during the three months endedJune 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. Interest expense previously allocated toPhoenix does not qualify for classification within discontinued operations and has been reallocated to continuing operations.
Asset Sale - Faneuil
InDecember 2021 , ALJ entered into an agreement to sell certain assets of Faneuil's tolling and transportation vertical and health benefit exchange vertical (the "Faneuil Asset Sale"). The Faneuil Asset Sale closed onApril 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 expects to recognize a gain on sale of assets, before related income taxes, of approximately$110.0 million to$125.0 million during the three months endedJune 30, 2022 . 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 theTSA 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. Except for customary post-closing adjustments and transition services, Faneuil will have no continuing involvement in the disposed verticals subsequent to the completion of the sale. The Company determined that the Faneuil Asset Sale does 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. The associated assets and liabilities met the held-for-sale criteria as defined by ASC 360-10-45-9, Long-Lived Assets Classified as Held for Sale ("ASC 360"). As such, the associated assets and liabilities were classified as held for sale onMarch 31, 2022 , and were valued at the lower of cost or fair value less cost to sell.
Termination of Debt
Termination of Blue Torch Term Loan
OnApril 1, 2022 , in connection with the Faneuil Asset Sale, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under that certain Financing Agreement, datedJune 29, 2021 (the "Blue Torch Term Loan"). ALJ's payment to Blue Torch was approximately$92.2 million , which satisfied all of the Company's debt obligations under the Blue Torch Term Loan ("Blue Torch Payoff"). The Company was not required to pay any prepayment premiums as a result of the repayment of indebtedness under the Blue Torch Term Loan, which provided that the mandatory prepayment made in connection with the proceeds from the Faneuil Asset Sale were exempt from such pre-payment premiums. In connection with the repayment of outstanding 31
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indebtedness by the Company, the lenders automatically and permanently released all security interests, mortgages, liens and encumbrances under the Blue Torch Term Loan. Termination of PNC Revolver In connection with the Phoenix Sale onApril 13, 2022 , the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under that Amended and Restated Financing Agreement, dated as ofJune 29, 2021 (as amended, the "PNC Revolver"). The Company was required to pay a pre-payment premium of$0.3 million as a result of the repayment of indebtedness under the PNC Revolver. In connection with the repayment of outstanding indebtedness by the Company, the lenders automatically and permanently released all security interests, mortgages, liens and encumbrances under the PNC Revolver.
Three Months Ended
The following table sets forth certain Condensed Consolidated Statements of
Operations data in dollars and as a percentage of net revenue for each period as
follows:
Three Months Ended Three Months Ended
March 31, 2022 March 31, 2021
% of % of(in thousands, except per share amounts) Dollars Net Revenue
Dollars Net Revenue
Net revenue
Faneuil $ 68,514 100.0 % $ 84,424 100.0 %
Consolidated net revenue 68,514 100.0 84,424 100.0
Cost of revenue
Faneuil 58,194 84.9 70,160 83.1
Consolidated cost of revenue 58,194 84.9 70,160 83.1
Selling, general, and administrative
expense
Faneuil 7,561 11.0 9,424 11.2
ALJ 3,689 - 1,804 -
Consolidated selling, general, and
administrative expense 11,250 16.4 11,228 13.3
Depreciation and amortization expense
Faneuil 2,754 4.0 3,125 3.7
Consolidated depreciation and
amortization expense 2,754 4.0 3,125 3.7
Lease impairment 2,158 3.1 - 0.0
Total consolidated operating expenses 74,356 108.5 84,513 100.1
Consolidated operating loss (5,842 ) (8.5 ) (89 ) (0.1 )
Interest expense (2,593 ) (3.8 ) (2,451 ) (2.9 )
Provision for income taxes (46 ) (0.7 ) (50 ) (0.6 )
Net loss from continuing operations (8,481 ) (12.4 ) (2,590 ) (3.1 )
Net income from discontinued operations,
net of income taxes 5,565 8.1 2,475 2.9
Net loss $ (2,916 ) (4.3 ) $ (115 ) (0.1 )
(Loss) income per share of common
stock-basic:
Continuing operations $ (0.20 ) $ (0.06 )
Discontinued operations $ 0.13 $ 0.06
Net loss per share (1) $ (0.07 ) $ -
(Loss) income per share of common
stock-diluted
Continuing operations $ (0.20 ) $ (0.06 )
Discontinued operations $ 0.10 $ 0.05
Net loss per share (1) $ (0.07 ) $ -
Weighted average shares of common stock
outstanding:
Basic 42,409 42,321
Diluted 54,691 54,458
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