1. Overview of the Business and Basis of Presentation

References herein to “CCUR Holdings,” the “Company,” “we,” “us,” or “our” refer to CCUR Holdings, Inc. and its subsidiaries on a consolidated basis, unless the context specifically indicates otherwise.

We are a holding company owning and seeking to own subsidiaries engaged in a variety of business operations. As of March 31, 2020, we had two existing operating segments: (i) merchant cash advance (“MCA”) operations, conducted primarily through our subsidiary LM Capital Solutions, LLC (d/b/a “LuxeMark Capital”) (“LMCS”), and (ii) real estate operations, conducted through our subsidiary Recur Holdings LLC (“Recur”) and its subsidiaries.

The Company holds an 80% interest in LMCS, with the remaining 20% held by AZOKKB, LLC (formerly named LuxeMark Capital, LLC and herein referenced as “Old LuxeMark”). Through LMCS, we manage a connected network of MCA originators and syndicate participants who provide those originators with capital by purchasing participation interests in or co-funding MCA transactions. In addition, we provide loans to MCA originators, the proceeds of which are used by the MCA originators to fund MCAs themselves. LMCS’ daily operations are led by the three principals of Old LuxeMark. CCUR provides operational, accounting and legal support to LMCS.

Recur provides commercial loans to local, regional, and national builders, developers, and commercial landowners and also acquires, owns, and manages a portfolio of real property for development. Recur does not provide consumer mortgages.

In addition to our MCA and real estate operating segments, we actively evaluate acquisitions of additional businesses or operating assets, either as part of an expansion of our current operating segments or establishment of a new operating segment, in an effort to reinvest the proceeds of our calendar year 2017 business dispositions and maximize use of other assets such as our net operating loss (“NOL”) carryforwards. We may also seek additional capital and financing to support the purchase of additional businesses and/or to provide additional working capital to further develop our operating segments. We believe that these activities will enable us to identify, acquire, and grow businesses and assets that will maximize value for all our stockholders.

During the fiscal quarter ended March 31, 2020, the onset of the illness caused by a novel coronavirus (“COVID-19”) began to have an unprecedented economic impact on the global economy, global financial markets, and transactional activity (including merger and acquisition activity). The Company’s business has not been immune to these effects, and management is actively responding to these developments and modifying business activity in response to rapidly changing circumstances. Management and the Board of Directors have taken steps during the quarter to reduce ongoing operating costs and to reduce risk to the Company’s long-term value for stockholders.

During the third quarter of our fiscal year 2020, the Company declared and paid a one-time dividend of $0.50 per share, which resulted in $4.4 million of cash dividends paid during the quarter. Another $0.1 million of dividends declared during the quarter relate to restricted stock and will remain as dividends payable until the restricted stock vests.

The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments of a normal recurring nature which were considered necessary for a fair presentation have been included. The year-end consolidated balance sheet data as of June 30, 2019 was derived from our audited consolidated financial statements. The results of operations for the three months and nine months ended March 31, 2020 are not necessarily indicative of the results to be expected for the entire year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 filed with the SEC on August 28, 2019.

We meet the SEC’s definition of a “Smaller Reporting Company,” and therefore qualify for the SEC’s reduced disclosure requirements for smaller reporting companies. The significant accounting policies used in preparing these consolidated financial statements are consistent with the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, except for those as described below.

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. We review goodwill at least annually for impairment. In our evaluation of goodwill impairment, we perform a qualitative assessment that requires management judgment and the use of estimates to determine if it is more likely than not that the fair value of a reporting unit is less than the reporting unit’s carrying amount. An entity has an unconditional option to bypass the qualitative assessment for any reporting unit and proceed directly to performing the quantitative goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. We perform our annual impairment tests as of December 31 of each year, unless circumstances indicate the need to accelerate the timing of the tests. We completed our annual impairment test of goodwill as of December 31, 2019 and concluded that there was no impairment. Subsequent to completion of our annual goodwill impairment analysis, the COVID-19 virus developed into a pandemic that significantly impacted the global economy. We have evaluated the impact of this pandemic on our customers, supply chain, workforce limitations, and projected profitability, among other things. Our current expectations are that the COVID-19 pandemic will impact our revenues and profitability over the next quarter. At this time, we do not believe a triggering event for an interim goodwill impairment test has occurred because we do not expect the pandemic will materially adversely impact our applicable reporting unit over the long term. We will continue to monitor the COVID-19 pandemic’s impact on the reporting unit to which our goodwill is attributed, and should we determine in the future that its impact is more severe or persists for a longer period of time than we currently anticipate, we may determine that interim testing of goodwill for impairment is required.

Intangible assets include trade name, non-competition agreements, and syndicate participant/originator relationships, are subject to amortization over their respective useful lives, and are classified in definite-lived intangibles, net, in the accompanying consolidated balance sheets. These intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. If facts and circumstances indicate that the carrying value might not be recoverable, projected undiscounted net cash flows associated with the related assets or groups of assets over their estimated remaining useful lives is compared against their respective carrying amounts. If an asset is found to be impaired, the impairment charge will be measured as the amount by which the carrying amount of an asset exceeds its fair value. Our current expectations are that the COVID-19 pandemic will impact our revenues and profitability over the next quarter. At this time we do not believe a triggering event for an impairment test of our intangibles has occurred because we do not expect the COVID-19 pandemic will materially adversely impact our applicable reporting unit over the long term. We will continue to monitor the COVID-19 pandemic’s impact on the reporting unit to which our intangible assets are attributed, and should we determine in the future that its impact is more severe or persists for a longer period of time than we currently anticipate, we may determine that an impairment test of our intangible assets is required.

Commercial and Mortgage Loans and Loan Losses

We have potential exposure to transaction losses as a result of uncollectibility of commercial mortgage and other loans. We base our reserve estimates on prior charge-off history and currently available information that is indicative of a transaction loss. We reflect additions to the reserve in current operating results, while we make charges to the reserve when we incur losses. We reflect recoveries in the reserve for transaction losses as collected.

We have the intent and ability to hold these loans to maturity or payoff, and as such, have classified these loans as held-for-investment. These loans are reported on the balance sheet at the outstanding principal balance adjusted for any charge-offs, allowance for loan losses, and deferred fees or costs. As of March 31, 2020, we have not recorded any charge-offs, and believe that an allowance for loan losses is not required.

Land Investment

Land investment assets are stated at acquired cost. Pre-acquisition and development costs are capitalized. Gains and losses resulting from the disposition of real estate are included in operations. As of March 31, 2020, all land held by the Company is considered to be held for use and development.

Basic and Diluted Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during each fiscal period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during each fiscal period including dilutive common share equivalents. Under the treasury stock method, incremental shares representing the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued are included in the computation. Weighted-average common share equivalents of 5,209 and 11,195 for the three months ended March 31, 2020 and 2019, respectively, were excluded from the calculation, as their effect would have been anti-dilutive. Weighted-average common share equivalents of 7,490 and 19,398 for the nine months ended March 31, 2020 and 2019, respectively, were excluded from the calculation, as their effect would have been anti-dilutive.

The following table presents a reconciliation of the numerators and denominators of basic and diluted net income (loss) per share for the periods indicated:


	Three Months Ended		Nine Months Ended
	March 31,		March 31,
	2020	2019	2020	2019

Basic weighted average number of shares outstanding	8,779,681	8,853,451	8,764,795	8,998,935
Effect of dilutive securities:
Restricted stock	78,816	10,620	68,951	—
Diluted weighted average number of shares outstanding	8,858,497	8,864,071	8,833,746	8,998,935

Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, we consider the most advantageous market in which it would transact and assumptions that market participants would use when pricing the asset or liability.

Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures requires certain disclosures around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and

Level 3 Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which include the use of management estimates.

Our investment portfolio consists of money market funds, equity securities, and corporate debt. All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost less any unamortized premium or discount, which approximates fair value. All investments with original maturities of more than three months are classified as available-for-sale, trading or held-to-maturity investments. Our marketable securities, other than warrants and equity securities, are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of tax, reported in stockholders’ equity as a component of accumulated other comprehensive income or loss. Warrants to purchase stock are held as trading securities and are reported at fair value with gains and losses reported within the accompanying consolidated statements of operations. Interest on securities is recorded in interest income. Dividends paid by securities are recorded in other income. Any realized gains or losses are reported in the accompanying consolidated statements of operations. Equity securities are reported at fair value, with unrealized gains and losses resulting from adjustments to fair value reported within our consolidated statements of operations.

We use Level 3 inputs to determine the fair value of our preferred stock investments. The Company has elected the measurement alternative and will record the investments at cost adjusted for observable price changes for an identical or similar investment of the same issuer. Observable price changes and impairment indicators will be assessed each reporting period.

We also use Level 3 inputs to determine the fair value of our contingent consideration and common stock purchase warrants related to our acquisition of the assets of Old LuxeMark (the “LuxeMark Acquisition”). The Company uses a Monte Carlo simulation technique to value the performance-based contingent consideration and common stock purchase warrants. This technique is a probabilistic model which relies on repeated random sampling to obtain numerical results. The concluded values represent the means of those results.

We provide fair value measurement disclosures of our securities in accordance with one of the three levels of fair value measurement. Our financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2020 and June 30, 2019 are as follows:


	As of		Quoted
	March 31,		Prices in		Observable		Unobservable
	2020		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Amounts in thousands)

Cash	$	13,574	$	13,574	$	—	$	—
Money market funds		3,189		3,189		—		—
Cash and cash equivalents	$	16,763	$	16,763	$	—	$	—

Common stock and common stock options	$	4,491	$	4,491	$	—	$	—
Preferred stock		2,883		—		—		2,883
Equity investments	$	7,374	$	4,491	$	—	$	2,883

Corporate debt	$	10,952	$	—	$	10,952	$	—
Available-for-sale investments	$	10,952	$	—	$	10,952	$	—

Contingent consideration - cash earn-out	$	1,960	$	—	$	—	$	1,960
Contingent consideration - warrants		50		—		—		50
Liabilities	$	2,010	$	—	$	—	$	2,010


	As of		Quoted
	June 30,		Prices in		Observable		Unobservable
	2019		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Amounts in thousands)

Cash	$	5,223	$	5,223	$	—	$	—
Money market funds		2,860		2,860		—		—
Cash and cash equivalents	$	8,083	$	8,083	$	—	$	—

Common stock warrants	$	1	$	1	$	—	$	—
Common stock		4,521		4,521		—		—
Preferred stock		2,883		—		—		2,883
Equity investments	$	7,405	$	4,522	$	—	$	2,883

Corporate debt	$	20,393	$	—	$	20,393	$	—
Available-for-sale investments	$	20,393	$	—	$	20,393	$	—

Contingent consideration - cash earn-out	$	2,890	$	—	$	—	$	2,890
Contingent consideration - warrants		200		—		—		200
Liabilities	$	3,090	$	—	$	—	$	3,090

The carrying amounts of certain financial instruments, including cash equivalents and MCAs, approximate their fair values due to their short-term nature. The following table provides a reconciliation of the beginning and ending balances for the Company’s assets and obligations measured at fair value using Level 3 inputs:


	Assets		Obligations
	Preferred		Contingent
	Stock		Consideration
	(Amounts in thousands)

Balance at June 30, 2019	$	2,883	$	3,090
Fair value adjustment to contingent consideration		—		(1,080)
Balance at March 31, 2020	$	2,883	$	2,010

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 ($ amounts in thousands):


	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs


Equity securities, fair value
Preferred stock	$	2,883	cost, or observable price changes	not applicable	not applicable

Contingent consideration
Contingent cash payments	$	1,960	Monte Carlo simulations	discount rate	11.0	%
				expected volatility	25.0	%
				drift rate	0.3	%
				credit spread	8.0	%

Contingent warrants	$	50	Black-Scholes, Monte Carlo simulations	expected term	5.12	years
				expected volatility	25.0	%
				risk free rate	0.4	%
				dividend yield	0.0	%

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 ($ amounts in thousands):


	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs


Equity securities, fair value
Preferred stock	$	2,883	cost, or observable price changes	not applicable	not applicable

Contingent consideration
Contingent cash payments	$	2,890	Monte Carlo simulations	discount rate	12.0	%
				expected volatility	25.0	%
				drift rate	1.7	%
				credit spread	8.0	%

Contingent warrants	$	200	Black-Scholes, Monte Carlo simulations	expected term	6.25	years
				expected volatility	30.0	%
				risk free rate	2.6	%
				dividend yield	0.0	%