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.

During the first quarter of our fiscal year 2019 we created Recur Holdings LLC (“Recur”), a Delaware limited liability company wholly owned by the Company. Through Recur we conduct, hold and manage our existing and future real estate 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 (“Old LuxeMark”) (the “LuxeMark Acquisition”). 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 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 Old LuxeMark. LMCS does business as “LuxeMark Capital” with daily operations led by the three principals of Old LuxeMark. Through LMCS, we (i) continue to operate the Old 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.

With the formation of LMCS and the acquisition of the Old LuxeMark operating assets, we now have two operating segments: (i) “MCA Operations”, conducted through LMCS, and (ii) “Real Estate Operations”, conducted by Recur. In addition to our operating segments, we derive a significant amount of our net income from our investments in debt and equity securities. See “Note 3. Investments” to the accompanying consolidated financial statements for more information.

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 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 and may not include all disclosures required by U.S. GAAP. The results of operations for the three months ended September 30, 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, 2019 filed with the SEC on August 28, 2019.

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.

Commercial and Mortgage Loans and Loan Losses

We have potential exposure to transaction losses as a result of uncollectability 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, 2019, 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, 2019, 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 year. Diluted earnings (loss) per share is computed by dividing net 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 9,757 and 31,665 for the three months ended September 30, 2019 and 2018, 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,
	2019	2018

Basic weighted average number of shares outstanding	8,756,156	9,105,527
Effect of dilutive securities:
Restricted stock	53,416	—
Diluted weighted average number of shares outstanding	8,809,572	9,105,527

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.

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 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.

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 also use Level 3 inputs to determine the fair value of our contingent consideration and common stock purchase warrants related to 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 September 30, 2019 and June 30, 2019 are as follows:


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

Cash	$	3,697	$	3,697	$	—	$	—
Money market funds		5,070		5,070		—		—
Cash and cash equivalents	$	8,767	$	8,767	$	—	$	—

Common stock	$	4,108	$	4,108	$	—	$	—
Preferred stock		2,883		—		—		2,883
Equity investments	$	6,991	$	4,108	$	—	$	2,883

Corporate debt		22,785		—		22,785		—
Available-for-sale investments	$	22,785	$	—	$	22,785	$	—

Contingent consideration - cash earn-out	$	2,990	$	—	$	—	$	2,990
Contingent consideration - warrants		110		—		—		110
Liabilities	$	3,100	$	—	$	—	$	3,100


	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		—		10
Balance at September 30, 2019	$	2,883	$	3,100

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 September 30, 2019:


	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs
	(Amounts in thousands)

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

Contingent consideration
Contingent cash payments	$	2,990	Monte Carlo simulations	discount rate	12.0	%
				expected volatility	25.0	%
				drift rate	1.6	%
				credit spread	8.0	%

Contingent warrants	$	110	Black-Scholes, Monte Carlo simulations	expected term	5.62	years
				expected volatility	25.0	%
				risk free rate	1.6	%
				dividend yield	—	%

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:


	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs
	(Amounts in thousands)

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	—	%