CCUR CCUR Holdings Inc (CE)

The accompanying notes are an integral part of the consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

ccur holdings, inc.

Consolidated STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

(Amounts in thousands)

The accompanying notes are an integral part of the consolidated financial statements

ccur holdings, inc.

Consolidated STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(Amounts in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements.

ccur holdings, inc.

Consolidated STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(Amounts in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements.

ccur holdings, inc.

The accompanying notes are an integral part of the consolidated financial statements.

CCUR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 December 31, 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 December 31, 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 and six months ended December 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, 2020 filed with the SEC on September 15, 2020.

CCUR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Principles of Consolidation and Reclassifications

The consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts were reclassified to conform to the current period presentation. These reclassifications did not affect total revenues, costs and expenses, net income, assets, liabilities, stockholders’ deficit, or net operating, investing, or financing cash flows.

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 December 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 December 31, 2020, all land held by the Company is considered to be held for use and development.

Equity Method Investments

Investments in unconsolidated entities over which we have significant influence are accounted for under the equity method of accounting. Under the equity method of accounting, the Company does not consolidate the investment’s financial statements within its consolidated financial statements. Equity method investments are initially recorded at cost, then our proportional share of the underlying net income or loss is recorded as equity in net loss from equity method investments in our statement of operations, with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce our carrying value of the investment and are recorded in the consolidated statements of cash flows using the cumulative earnings approach. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. There were no indicators of impairment related to our equity method investments for the three and six months ended December 31, 2020.

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 8,179 and 7,598 for the three months ended December 31, 2020 and 2019, respectively, and 10,021 and 8,644 for the six months ended December 31, 2020 and 2019, respectively, were excluded from the calculation, as their effect would have been anti-dilutive.

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:

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 December 31, 2020 and June 30, 2020 are as follows:

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. During the three months ended December 31, 2020, this loan was exchanged for a preferred stock investment. The fair value of our syndicated portion of this loan was $0 and $3,240,000 as of December 31, 2020 and June 30, 2020, respectively. The Company’s assets and obligations measured at fair value using Level 3 inputs were valued at $2,686,000 as of December 31, 2020 and $2,883,000 as of 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 December 31, 2020 ($ amounts in thousands):

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, 2020 ($ amounts in thousands):

Recently Issued and Adopted Accounting Guidance

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is part of the disclosure framework project and eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. The new guidance was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted. We adopted the new guidance effective July 1, 2020, with no impact on our consolidated financial statements or disclosures.

Recent Accounting Guidance Not Yet Adopted

In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs (“ASU 2020-08”), and ASU No. 2020-10, Codification Improvements (“ASU 2020-10”). ASU 2020-08 and ASU 2020-10 provide changes to clarify or improve existing guidance. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is not permitted. We are currently evaluating the impact that ASU 2020-08 and ASU 2020-10 will have on our consolidated financial statements and disclosures.

During the three months ended December 31, 2020, we reported unrealized gains on equity securities, net, of $2,285,000 within our consolidated statements of operations. During the three months ended December 31, 2019, we reported unrealized losses on equity securities, net, of $627,000 within our consolidated statements of operations. During the three months ended December 31, 2020 and 2019, we reported $876,000 and $843,000 realized gains on the sale of debt and equity securities within our consolidated statements of operations, respectively.

During the six months ended December 31, 2020, we reported unrealized gains on equity securities, net, of $1,240,000 within our consolidated statements of operations. During the six months ended December 31, 2019, we reported unrealized losses on equity securities, net, of $158,000 within our consolidated statements of operations. During the six months ended December 31, 2020 and 2019, we reported $1,408,000 and $1,919,000 realized gains on the sale of debt and equity securities within our consolidated statements of operations, respectively.

Maturities of Fixed-Maturity Securities Available-for-Sale

The amortized cost and fair values of fixed-maturity securities available for sale as of December 31, 2020 are shown by contractual maturity in the table below. Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

We had $3,738,000 of loan assets as of December 31, 2020, of which $1,958,000 were mortgage loans secured by real property in certain markets throughout the United States, and the remaining balance was comprised of loans to Funders. Summaries of mortgage loan activity for the six months ended December 31, 2020 and 2019 are as follows:

Summaries of loan activity to Funders for the six months ended December 31, 2020 and 2019 are as follows (amounts in thousands):

Loans reported under “Other Loans Receivable” have two-year, interest-only terms, bearing interest at 17.0% per annum, and are to a single Funder. The borrower may pay down principal without incurring a prepayment penalty and paid down $2,098,000 of principal during the six months ended December 31, 2020. See Note 16 for further discussion.

Total advances receivable, net, as of December 31, 2020, consisted of the following:

Total advances receivable, net, as of June 30, 2020, consisted of the following:

As of December 31, 2020, 100% of MCAs in which we hold a participation interest were funded through a single Funder. As of June 30, 2020, 100% of MCAs in which we held a participation interest were funded through three Funders.

During the six months ended December 31, 2020 and 2019, we provided $9,000,000 and $8,000,000 of gross advances, respectively, to fund aircraft purchasers’ deposits to purchase aircraft in exchange for paying us a fee and a guaranty of the full repayment obligation from the principal of a third-party business. These deposits are typically outstanding for less than six months. The prepaid fees are netted against the principal balance, earned over the advance period, and reported as part of MCA and other financial services income within the accompanying consolidated statements of operations. During the six months ended December 31, 2020 and 2019, we collected $5,000,000 and $3,000,000, respectively, of these advances. See Note 16 for further discussion.

Our investment in Spartacus Sponsor LLC (the “Sponsor”) of $3,850,000 is accounted for under the equity method and is included within equity method investment in our consolidated balance sheet as of December 31, 2020. Our ownership percentage in the Sponsor, which is recorded under the equity method investment, is 38.5%. The Company could potentially increase its investment through grants of additional units up to 44.5% subject to certain return hurdles for the Sponsor. As of December 31, 2020, the Sponsor controls all of the founders’ shares of Spartacus Acquisition Corporation (“Spartacus”). During the three and six months ended December 31, 2020, we recorded $53,000 of losses from this investment as equity in net loss from equity method investment within our consolidated statements of operations.

On October 19, 2020, Spartacus completed its initial public offering (“IPO”). In connection with the IPO, the Sponsor, of which the Company is a Managing Member and holds 50% voting control, purchased 8,104,244 warrants at a price of $1.00 per warrant. Each warrant is exercisable into one share of Spartacus’ Class A common stock at a price of $11.50 per share. Spartacus is a newly organized special-purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses, which is referred to as an initial business combination.

Summarized financial information relating to our equity method investment is as follows (amounts in thousands):

Accounts payable and accrued expenses as of December 31, 2020 and June 30, 2020 consisted of the following:

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. With a few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before 2000.

The components of the provision for income taxes are as follows (amounts in thousands):

Net Operating Losses (“NOLs”)

As of June 30, 2020, we had U.S. federal NOL carryforwards of approximately $51,438,000 for income tax purposes, of which none expired in our fiscal year 2020, and the remainder expire at various dates through our fiscal year 2037; however, with the enactment of the Tax Cuts and Jobs Act on December 22, 2017, federal NOLs generated in taxable years beginning after December 31, 2017 now have no expiration date. We recently completed an evaluation of the potential effect of Section 382 of the Internal Revenue Code (the “IRC”) on our ability to utilize these NOLs. The study concluded that we have not had an ownership change for the period from July 22, 1993 to June 30, 2020; therefore, the NOLs will not be subject to limitation under Section 382. If we experience an ownership change as defined in Section 382 of the IRC, our ability to use these NOLs will be substantially limited, which could therefore significantly impair the value of that asset.

As of June 30, 2020, we had state NOL carryforwards of $22,856,000 and foreign NOL carryforwards of $8,258,000. The state NOL carryforwards expire according to the rules of each state, and expiration will occur at various dates through our fiscal year 2037. The foreign NOL carryforwards expire according to the rules of each country. As of June 30, 2020, the foreign NOLs can be carried forward indefinitely in each country, although some countries do restrict the amount of NOL that can be used in a given tax year.

Deferred Tax Assets and Related Valuation Allowances

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining whether or not a valuation allowance for tax assets is needed, we evaluate all available evidence, both positive and negative, including: trends in operating income or losses; currently available information about future years; future reversals of existing taxable temporary differences; future taxable income exclusive of reversing temporary differences and carryforwards; taxable income in prior carryback years if carryback is permitted under the tax law; and tax planning strategies that would accelerate taxable amounts to utilize expiring carryforwards, change the character of taxable and deductible amounts from ordinary income or loss to capital gain or loss, or switch from tax-exempt to taxable investments. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of June 30, 2020, we have released the valuation allowance on our U. S. deferred tax assets, with the exception of certain federal and state NOLs and credits expected to expire before usage. We continue to maintain a full valuation allowance on our German deferred tax asset.

CCUR HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unrecognized Tax Benefits

We have evaluated our unrecognized tax benefits and determined that there has not been a material change in the amount of such benefits for the three months ended December 31, 2020.

We have a stock incentive plan providing for the grant of stock-based awards to employees and directors. The Compensation Committee of the Board of Directors (“Compensation Committee”) administers the Amended and Restated 2011 Stock Incentive Plan (the “Stock Plan”). Under the Stock Plan, the Compensation Committee may award stock options and shares of common stock on a restricted basis. The Stock Plan also specifically provides for stock appreciation rights (“SARs”) and authorizes the Compensation Committee to provide, either at the time of the grant of an award under the Stock Plan or otherwise, that such award may be cashed out upon terms and conditions to be determined by the Compensation Committee or the Board of Directors.

Option awards are granted with an exercise price equal to the market price of our stock at the date of grant. We recognize stock compensation expense in accordance with ASU 2018-07, Compensation – Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting, over the requisite service period of the individual grantees, which generally equals the vesting period. All of our stock compensation is accounted for as equity instruments. As of December 31, 2020, there were 733,706 shares available for future grant under the Stock Plan.

During the three months ended December 31, 2020, we recorded a reduction of $6,000 of stock-based compensation expense to selling, general, and administrative expense due to forfeitures exceeding expenses. During the three months ended December 31, 2019, we recorded $96,000 of stock-based compensation expense to selling, general, and administrative expense. During the six months ended December 31, 2020 and 2019, we recorded $53,000 and $195,000, respectively, of stock-based compensation expense. Our stock-based compensation expense results from the issuance of stock options and restricted stock to employees and board members during the current and prior years, for which expense is recognized over the respective vesting periods of the granted stock and options.

Total remaining compensation cost of restricted stock awards issued but not yet vested as of December 31, 2020 was $219,000, which is expected to be recognized over the weighted-average recognition period of 2.31 years.

Stock Options

During the three and six months ended December 31, 2020, 5,000 unvested stock options were forfeited, and 10,000 vested stock options expired. During the three and six months ended December 31, 2020 and 2019, there were no grants or exercises of stock options. During the three and six months ended December 31, 2019, there were no forfeitures of stock options. As of December 31, 2020, there were no stock options outstanding.

CCUR HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On March 5, 2018, the Company announced its Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company’s common stock. In February 2019 we completed the purchase of the authorized 1,000,000 shares, and the Board of Directors authorized the repurchase of an additional 500,000 shares of the Company’s common stock under a new repurchase program that replaces and supersedes the prior repurchase program. Repurchases may be made at the discretion of management through open market or privately negotiated transactions or any combination of the same. Open market purchases may be made pursuant to trading plans subject to the restrictions and protections of Rule 10b5-1 and/or Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The repurchase program does not have an expiration date. No purchases were made under this program during the three or six months ended December 31, 2020. As of December 31, 2020, there were 364,298 shares available for repurchase under the program.

The following table summarizes the changes in accumulated other comprehensive loss by component, net of taxes, for the six months ended December 31, 2020:

We operate in two segments: (i) “MCA and Other Financial Services Operations,” conducted primarily through LMCS, and (ii) “Real Estate Operations,” conducted primarily through Recur.

Our President and Chief Operating Officer (“COO”) is our chief operating decision maker (the “CODM”). Our CODM uses revenue and operating income to evaluate the profitability of our operating segments; all other financial information is reviewed by the CODM on a consolidated basis. Segment operating contribution reflects segment revenue, less operating expenses that are directly attributable to the operating segment, not including corporate and unallocated expenses. All of our principal operations and assets are located in the United States.

Segment operating results are as follows (amounts in thousands):