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.

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 reported as discontinued operations in the accompanying consolidated financial statements. 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.

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.

Smaller Reporting Company

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.

Principles of Consolidation

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 loss, assets, liabilities, stockholders’ deficit, or net operating, investing, or financing cash flows.

Use of Estimates

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.

Discontinued Operations

We record discontinued operations when the disposal of a separately identified business unit constitutes a “strategic shift” in our operations, as defined in Accounting Standards Codification (“ASC”) Topic 205‑20, Discontinued Operations (“ASC Topic 205‑20”).

Business Combinations

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.

Foreign Currency

The functional currency of all our foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using average rates of exchange prevailing during the fiscal year. Adjustments resulting from the translation of foreign currency financial statements are accumulated in a separate component of stockholders’ equity. Gains or losses resulting from foreign currency transactions are included in the consolidated statements of operations, except for those relating to intercompany transactions of a long-term investment nature, which are accumulated in a separate component of stockholders’ equity. Subsequent to the sale of our Content Delivery business in December 2017, we began the dissolution of certain of our foreign wholly owned subsidiaries. As part of this process, we settled intercompany loan balances with certain of our foreign wholly owned subsidiaries, which resulted in significant realized foreign exchange losses during our fiscal year ended June 30, 2018.

A net loss on foreign currency transactions of $1,921,000 for the fiscal year ended June 30, 2018 is included in the consolidated statements of operations.

Cash and Cash Equivalents

Cash balances and short-term investments with original maturities of 90 days or less at the date of purchase are considered cash equivalents. Cash equivalents are stated at fair value, and represent cash and cash invested in money market funds and commercial paper.

Concentration of Credit Risk

Financial instruments that subject the Company to a concentration of credit risk include cash and cash equivalents on deposit that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. Concentration of credit risk consists of cash and cash equivalents maintained in financial institutions that are, in part, in excess of the FDIC limits. At times, the Company may hold cash balances in excess of the FDIC insurance limits.

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 its 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.

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 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.

Investments in Debt and Equity Securities

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 have retrospectively adjusted our fiscal year 2018 consolidated financial statements to reclassify investments in equity securities from available-for-sale, fair value to equity securities, fair value, to conform with the current year presentation.

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 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 if it is more likely than not that the Company 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.

In some cases, our debt investments may provide for a portion of the interest payable to be payment-in-kind (“PIK”) interest. To the extent interest is PIK, it is payable through the increase of the principal amount of the loan by the amount of the interest due on the then-outstanding principal amount of the loan.

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 June 30, 2019, we have not recorded any charge-offs, and believe that an allowance for loan losses is not required.

Advances Receivable

In December 2018, we began purchasing participation interests in MCAs from third parties whose principal activity is originating MCAs to small businesses. In a typical MCA, a merchant sells an amount of its future receivables, expected to be generated from future sales, to an MCA originator (also referred to as a “funder”) at a discount, in exchange for a lump sum payment from the funder. The merchant then remits a portion of its sales receipts, or an amount equal to this portion, often daily via ACH transfer, until the funder has received the full amount of the future receipts it has purchased. MCA funders often offer a streamlined application and approval process in connection with the provision of MCAs making them a widely-used alternative financing source for small businesses. MCAs are not structured as loans or sales of securities; instead, they are structured as sales and purchases of assets, specifically future receivables, and the assignment of related ownership interests. Small businesses typically seek these advances for working capital purposes to finance their purchase of inventory or equipment, or to address other immediate business needs.

Allowance for MCA credit losses

We establish an allowance for credit losses for MCAs at the time of funding through a provision for losses charged to our consolidated statement of operations. The provision amount is based on an analysis of our charge-off history and 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. We review our MCA receivables on a regular basis and charge off any MCA receivables for which the merchant has not made a payment in 90 days or more. Subsequent recoveries, if any, are credited to the provision for credit losses on advances. 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. In addition, 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.

Revenue Recognition - Syndication Fee Income

We recognize revenue when our performance obligations with our customers have been satisfied. Our performance obligation is to facilitate funding for MCA originators through the Old LuxeMark syndication network. The performance obligation is satisfied at a point in time when the syndicate participants provide MCA originators with capital by purchasing participation interests in funded MCAs.

We determine the transaction price based on the fixed consideration in our contractual agreements, which do not contain any variable consideration. As we have identified only one distinct performance obligation, the transaction price is allocated entirely to this service. In determining the transaction price, a significant financing component does not exist, since the timing from when we perform this service to when the syndicate participants fund the MCA is less than one year, and we are not paid in advance for the performance of our services.

During the fiscal year ended June 30, 2019, we recognized $693,000 of syndication fee income, which is included in MCA fees and other revenue on the accompanying consolidated statement of operations.

Revenue Recognition - Advance Income

We earn MCA income based on the amount advanced multiplied by the factor rate, net of any commissions or fees related to the participation. The factor rate is stipulated in the funding agreement, which is an agreement between the funder and the merchant. As repayments on the advances are received from the merchants, we apply a portion of the cash payment against the advanced amount, and the remaining portion of the cash payment is recognized as MCA income. We will cease recognizing MCA income when, in our opinion, the advanced amount is not probable of being collected.

Revenue Recognition - Interest Income

Interest income is earned on commercial mortgages and other loans based on the contractual terms of the loan. We evaluate loans for non-accrual status each reporting period. A loan is placed on a non-accrual status at the earlier of the date when the loan payment deficiencies exceed 90 days or when, in our opinion, the collection of interest in full becomes doubtful. Interest income recognition for non-accrual loans is generally resumed when the non-accrual loan is making current contractual interest payments. We have retrospectively adjusted our 2018 financial statements to reclassify all income on commercial loans to revenue (from other interest income) to conform with current year presentation.

Loan origination fees are deferred and amortized to interest income, using the effective interest method, over the contractual life of the loan, in accordance with FASB ASC 310, Receivables.

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 June 30, 2019, all land held by the Company is considered to be held for use and development.

Defined-Benefit Pension Plan

We maintain defined-benefit pension plans (the “Pension Plans”) for a number of former employees (“participants”) of our German subsidiary. In 1998, the Pension Plans were closed to new employees, and no existing employees are eligible to participate; therefore, all eligible participants are no longer employed by us. The Pension Plans provide benefits to be paid to all participants at retirement based primarily on years of service with the Company. Our policy is to fund benefits attributed to participants’ service to date. The determination of our Pension Plans’ benefit obligations and expenses is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the weighted average discount rate and the weighted average expected rate of return on plan assets. To the extent that these assumptions change, our future benefit obligation and net periodic pension expense may be positively or negatively impacted.

Basic and Diluted Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing income (loss) by the weighted-average number of common shares outstanding during each fiscal 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 10,004 and 167,218 for the fiscal years ended June 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:


	Fiscal Year Ended June 30,
	2019	2018

Basic weighted average number of shares outstanding	8,941,413	9,469,331
Effect of dilutive securities:
Restricted stock	17,049	—
Diluted weighted average number of shares outstanding	8,958,462	9,469,331

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, 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. 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 used Level 3 inputs to determine the fair value of our contingent consideration and common stock purchase warrants related to the LuxeMark Acquisition (see Note 13– 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. As of June 30, 2019, we used Level 3 inputs to remeasure the fair value of our contingent consideration related to the LuxeMark Acquisition (see Note 13 – Acquisitions). The Company again used a Monte Carlo simulation technique to remeasure the value of the performance-based contingent consideration. The remeasured 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 June 30, 2019 and 2018 are as follows:


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

Cash	$	5,223	$	5,223	$	—	$	—
Money market funds and repos		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
Mutual funds		—		—		—		—
Equity investments	$	7,405	$	4,522	$	—	$	2,883

Corporate debt	$	20,393	$	—	$	20,393	$	—
Available-for-sale investments	$	20,393	$	—	$	20,393	$	—
Contingent consideration	$	2,890	$	—	$	—	$	2,890
Contingent warrants		200		—		—		200
Liabilities	$	3,090	$	—	$	—	$	3,090


			Quoted
	As of		Prices in		Observable		Unobservable
	June 30, 2018		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Amounts in thousands)

Cash	$	3,777	$	3,777	$	—	$	—
Money market funds and repos		28,215		28,215		—		—
Commercial paper		1,000		—		1,000		—
Cash and cash equivalents	$	32,992	$	31,992	$	1,000	$	—

Common stock warrants	$	283	$	283	$	—	$	—
Common stock		5,537		5,537		—		—
Mutual funds		809		809		—		—
Equity investments	$	6,629	$	6,629	$	—	$	—

Commercial paper	$	3,294	$	—	$	3,294	$	—
Corporate debt		10,087		—		10,087		—
Available-for-sale investments	$	13,381	$	—	$	13,381	$	—

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, 2018	$	—	$	—
Purchase of preferred stock		2,883		—
Contingent consideration issued for the purchase of Old LuxeMark		—		2,360
Fair value adjustment to contingent consideration		—		730
Balance at June 30, 2019	$	2,883	$	3,090

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring basis:


				Unobservable	Range of
	Fair Value		Valuation Methodology	Inputs	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	12.00	%
				expected volatility	25.00	%
				drift rate	1.70	%
				credit spread	8.00	%

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	%

Income Taxes

The Company and its domestic subsidiaries file a consolidated federal income tax return. All foreign subsidiaries file individual or consolidated tax returns pursuant to local tax laws. We follow the asset and liability method of accounting for income taxes. Under the asset and liability method, a deferred tax asset or liability is recognized for temporary differences between financial reporting and income tax basis of assets and liabilities, tax credit carryforwards and operating loss carryforwards. A valuation allowance is established to reduce deferred tax assets if it is more-likely-than-not that such deferred tax assets will not be realized.

Stock-Based Compensation

We account for stock-based compensation in accordance with ASC Topic 718‑10, Stock Compensation (“ASC 718‑10”), which requires the recognition of the fair value of stock compensation in the statement of operations. We recognize stock compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. All our stock compensation is accounted for as equity instruments. Refer to Note 10 to the consolidated financial statements for assumptions used in calculation of fair value.

Comprehensive Income

Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Comprehensive income is defined as a change in equity during the financial reporting period of a business enterprise resulting from non-owner sources. Components of accumulated other comprehensive income are disclosed in the consolidated statements of comprehensive income.