Overview of the Business and Basis of Presentation (Policies)

3 Months Ended

Sep. 30, 2020

Overview of the Business and Basis of Presentation

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. Following the disposition of our legacy operating businesses in calendar year 2017, we began identifying business alternatives to redeploy the proceeds of such divestitures. As of September 30, 2020, we had two existing operating segments: (i) merchant cash advances (“MCA”) and other financial services 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.

As of September 30, 2020, we hold a 51% interest in LMCS, with the remaining 49% held by AZOKKB, LLC (formerly named LuxeMark Capital, LLC and herein referenced as “Old LuxeMark”). Through LMCS, we manage a network of MCA funders ("Funders") and syndicate participants who provide those Funders with capital by purchasing participation interests in or co-funding MCA transactions. In addition, we provide loans to Funders, the proceeds of which are used by the Funders to fund MCAs. LMCS’ daily operations are led by the three principals of Old LuxeMark. CCUR provides operational, accounting, and legal support to LMCS. On July 17, 2020, LMCS entered into a series of transactions resulting in its recapitalization. The transactions included an amendment to LMCS’ operating agreement that reduced our ownership from 80% to 51% of LMCS and the grant by us to LMCS’ non-controlling member of a right to purchase our remaining equity interests in LMCS upon the occurrence of certain conditions, including, without limitation, the repayment of an intercompany note from us to LMCS. The transactions also included (i) the waiver of LMCS’ obligations to pay contingent consideration to the non-controlling member, (ii) the termination of certain warrants to purchase our capital stock held by certain affiliates of the non-controlling member, (iii) the assignment of certain contractual rights of LMCS to the non-controlling member, and (iv) the amendment of an intercompany note from us to LMCS. All conditions required for the non-controlling member to have the right to repurchase LMCS have been met as of the filing date of this report, with the exception of the repayment of the intercompany note. We are reviewing our strategic options with respect to continued participation in the MCA industry.

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.

The global outbreak of the novel coronavirus ("COVID-19") was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020 and has negatively impacted the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to "shelter-in-place," and created significant disruption of the financial markets. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted.

The unaudited consolidated financial statements included herein have been prepared by the Company in conformity with the instructions to Form 10-Q and Article 8 of Regulation S-X and the related 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, 2020 was derived from our audited consolidated financial statements. The results of operations for the three months ended September 30, 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, 2020 filed with the SEC on September 15, 2020.

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, 2020, except for those as described below.

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 September 30, 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 September 30, 2020, all land held by the Company is considered to be held for use and development.

Basic and Diluted Earnings per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during each fiscal period. Diluted earnings per share is computed by dividing net income 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 11,680 and 9,757 for the three months ended September 30, 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 per share for the periods indicated:


	Three Months Ended
	September 30,
	2020	2019

Basic weighted-average number of shares outstanding	8,797,671	8,756,156
Effect of dilutive securities:
Restricted stock	59,020	53,416
Diluted weighted-average number of shares outstanding	8,856,691	8,809,572

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 transactions would occur and we consider assumptions that market participants would use when pricing the asset or liability.

Accounting Standards Update ("ASU") 2018-13, Fair Value Measurement (Accounting Standards Codification ("ASC") 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement, requires certain disclosures regarding 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. The 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, commercial mortgage loans, and corporate debt. All highly liquid investments with original maturities 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 when purchased are classified as available-for-sale, trading, or held-to-maturity investments. Our marketable securities, other than equity securities, are classified as available ‑for‑ sale, and are reported at fair value, with unrealized gains and losses, net of tax, reported in the accompanying consolidated balance sheets in stockholders’ equity as a component of accumulated other comprehensive income or loss. Interest on securities is reported in the accompanying consolidated statements of operations in interest income. Dividends paid by securities are reported in the accompanying consolidated statements of operations in other income. Realized gains or losses are reported in the accompanying consolidated statements of operations in net realized gain on investments.

We used 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 provide fair value measurement disclosures of our available-for-sale 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 September 30, 2020 and June 30, 2020 are as follows:


	As of		Quoted
	September 30,		Prices in		Observable		Unobservable
	2020		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Amounts in thousands)

Cash	$	14,234	$	14,234	$	—	$	—
Money market funds		4,051		4,051		—		—
Cash and cash equivalents	$	18,285	$	18,285	$	—	$	—

Common stock and common stock options	$	4,871	$	4,871	$	—	$	—
Preferred stock		2,883		—		—		2,883
Equity investments	$	7,754	$	4,871	$	—	$	2,883

Corporate debt	$	14,784	$	—	$	14,784	$	—
Available-for-sale investments	$	14,784	$	—	$	14,784	$	—


	As of		Quoted
	June 30,		Prices in		Observable		Unobservable
	2020		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Amounts in thousands)

Cash	$	4,473	$	4,473	$	—	$	—
Money market funds		4,863		4,863		—		—
Cash and cash equivalents	$	9,336	$	9,336	$	—	$	—

Common stock and common stock options	$	4,489	$	4,489	$	—	$	—
Preferred stock		2,883		—		—		2,883
Equity investments	$	7,372	$	4,489	$	—	$	2,883

Corporate debt	$	21,429	$	—	$	21,429	$	—
Available-for-sale investments	$	21,429	$	—	$	21,429	$	—

The carrying amounts of certain financial instruments, including cash equivalents, MCAs, and other advances, approximate their fair values due to their short-term nature. Included in available-for-sale securities is a loan which we purchased from the syndicated loan market. Quotations are available for this security on the syndicated loan market. The fair value of our syndicated portion of this loan is $3,780,000 and $3,240,000 as of September 30, 2020 and June 30, 2020, respectively. The Company’s assets and obligations measured at fair value using Level 3 inputs were valued at $2,883,000 as of September 30, 2020 and June 30, 2020.

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 both September 30, 2020 and June 30, 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