On December 31, 2017, we completed the sale of our content delivery and storage business (the “Content Delivery business”) and other related assets to Vecima Networks, Inc. (“Vecima”) pursuant to an Asset Purchase Agreement, dated as of October 13, 2017, between the Company and Vecima. Substantially all liabilities associated with the Content Delivery business were assigned to Vecima as part of the transaction. The Content Delivery business provided advanced applications focused on storing, protecting, transforming, and delivering high value media.

Results of the Content Delivery business are retrospectively reported as discontinued operations in the accompanying consolidated financial statements for all periods presented. Prior year information has been adjusted to conform to the current year presentation. Unless otherwise stated, the information disclosed in the footnotes accompanying the consolidated financial statements refers to continuing operations. See Note 3 for more information regarding results from discontinued operations.

On February 13, 2019, through our newly formed subsidiary, LM Capital Solutions, LLC (“LMCS”), we closed on a purchase agreement (the “Purchase Agreement”) to acquire the operating assets of LuxeMark Capital, LLC (“LuxeMark”). LMCS operates through its syndication network to facilitate merchant cash advance (“MCA”) funding by connecting a network of MCA originators (sometimes referred to herein as “funders”) with syndicate participants who provide those originators with additional capital by purchasing participation interests in funded MCAs. In addition, LMCS provides reporting and other administrative services to its syndication network. The Company holds an 80% interest in LMCS, with the remaining 20% held by LuxeMark. LMCS will do business as “LuxeMark Capital” with daily operations led by the three LuxeMark principals. Through LMCS, we (i) continue to operate the LuxeMark syndication network by sourcing syndication funding for MCA originators and providing reporting and other administrative services in exchange for a syndication fee, (ii) directly purchase participation interests from MCA originators for LMCS’ own MCA portfolio and (iii) provide loans to MCA originators to fund the MCAs themselves, which generates interest income and syndication fee income from servicing those MCAs.

The accompanying 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 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, 2018 was derived from our audited consolidated financial statements and may not include all disclosures required by U.S. GAAP. Certain prior period income amounts have been reclassified to conform with current period presentation. The results of operations for the three months and nine months ended March 31, 2019 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 consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 filed with the SEC on September 7, 2018.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company accounts for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. The Company allocates the purchase price of the acquisition to the tangible assets acquired, liabilities assumed, and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred. During the measurement period, the Company records adjustments to provisional amounts recorded for assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, which could be up to one year after the transaction date, subsequent adjustments are recorded to the Company’s consolidated statements of operations. The Company recognizes the fair value of contingent consideration as of the acquisition date as part of the consideration transferred in exchange for an acquired business. The fair value of the contingent consideration is recorded as a liability and remeasured each accounting period, with any resulting change being recorded as an operating income or loss item within the statement of operations.

Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. On an annual basis, the Company makes a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that the fair value of the reporting unit is less than its carrying amount, it will perform a quantitative analysis; otherwise, no further evaluation is necessary. For the quantitative impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company will recognize a loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. Impairments, if any, are charged directly to earnings. Goodwill is attributable to our MCA business unit. We recorded our goodwill during the third quarter of our fiscal year 2019 and will complete our annual impairment test within one year of recording the goodwill, unless facts and circumstances require an earlier impairment test. No impairment charges have been incurred to date.

Intangible assets include trade name, non-competition agreements, and investor/funder 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 asset or group 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.

We determine the appropriate classification of investments in debt securities at the time of purchase and reevaluate such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded as either short term or long term in the consolidated balance sheet based on contractual maturity date and are stated at amortized cost. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt securities not classified as held-to-maturity or as trading are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in stockholders’ equity.

We adopted Accounting Standards Update (“ASU”) No. 2016-01,

Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities

(“ASU No. 2016-01”), as amended by ASU No. 2018-03,

Financial Instruments-Overall: Technical Corrections and Improvements

, on July 1, 2018 (see Note 2). Upon adoption of ASU No. 2016-01 on July 1, 2018, we are no longer required to determine the classification of our equity securities and there will no longer be a requirement to assess equity securities for impairment since such securities will be measured at fair value through net income.

Premiums and discounts on fixed maturity securities are amortized using the effective interest method. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations. Dividends on equity securities are recognized when declared. When the Company sells a security, the difference between the sale proceeds and amortized cost (determined based on specific identification) is reported as a realized investment gain or loss. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheet date, a provision for impairment is charged to earnings (included in realized gains (losses) on investments) and the cost basis of that investment is reduced. If the Company can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then the other-than-temporary impairment is separated into two components: (i) the amount related to credit losses (recorded in earnings) and (ii) the amount related to all other factors (recorded in accumulated other comprehensive income, or “AOCI”). The credit-related portion of an “other-than-temporary” impairment is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge. If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment charge to earnings is recorded to reduce the amortized cost of that security to fair value.

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 chargeback 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, 2019, we have not recorded any charge-offs, and believe that an allowance for loan losses is not required.

In December 2018, we began purchasing participation interests in MCAs from a third party whose principal activity is originating MCAs to small businesses. MCAs are contracts formed through a future receivables purchase and sale agreement, which stipulates the purchase price, or the amount advanced, and the specified amount, or the advance amount plus the factored receivable balance that will be repaid, on the face of the contract. Generally, a specified amount will be withdrawn from the merchant’s bank account via daily or weekly ACH transactions in order to pay down the merchant’s advance. These are not consumer loan contracts, nor are they installment loan contracts to businesses for business use only. In addition, there is no monthly minimum payment, nor is there a specific repayment schedule.

The allowance for credit losses for MCAs is established at the time of funding through a provision for losses charged to our consolidated statement of operations based on historical performance experienced by an industry peer group. Losses are charged against the allowance when management believes that the future collection in full of purchased receivables is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The establishment of appropriate reserves is an inherently uncertain process, and ultimate losses may vary from the current estimates. We regularly update our reserve estimates as new facts become known and events occur that may affect the settlement or recovery of losses. For the nine months ended March 31, 2019, we have experienced no losses on advances; however, new facts and circumstances may adversely affect our MCA portfolio resulting in increased delinquencies and losses and could require additional provisions for credit losses, which could impact future periods. Based on industry peer group historical performance, we recorded a $838 loss reserve as of March 31, 2019. Changes in the allowance for MCA credit losses are as follows:

We generate revenue primarily from interest earned on commercial mortgage and other loans that yield interest, and also from fees earned from our MCA activities. Loan origination fees are deferred and recognized over the expected term of the loan. The revenue generated from MCAs is primarily factor income. The factor income represents the amount of the purchased receivables in excess of the funded contract amount advanced to the merchant in accordance with the merchant agreement, net of amounts related to participations. Factor income on merchant advance receivables is earned and recognized ratably as receivables are collected, at factor rates stipulated in the client funding agreement from the date of purchase through the date the receivables are collected, or ceases accruing factor revenue when the receivable is identified as uncollectible.

Basic earnings (loss) per share is computed by dividing income (loss) by the weighted-average number of common shares outstanding during each year. Diluted earnings (loss) per share is computed by dividing income (loss) by the weighted-average number of common shares outstanding 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 11,195 and 9,614 for the three months ended March 31, 2019 and 2018, respectively, and weighted-average common share equivalents of 19,398 and 216,791 for the nine months ended March 31, 2019 and 2018, respectively, were excluded from the calculation, as their effect would have been anti-dilutive.

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.

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:

Our investment portfolio consists of money market funds, repurchase agreements (“repos”), domestic and international commercial paper, 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. Interest on securities is recorded in interest income. Dividends paid by securities are recorded in dividend 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.

As of March 31, 2019, 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 investment 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 continually assessed each reporting period.

As of February 13, 2019, we used Level 3 inputs to determine the fair value of our contingent consideration and common stock purchase warrants related to the purchase of LuxeMark (see Note 12 - Acquisitions). The Company used 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.