The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements and the related notes thereto, which appear elsewhere
herein. Except for the historical financial information, many of the matters
discussed in this Item 2 may be considered "forward-looking" statements that
reflect our plans, estimates and beliefs. Actual results could differ materially
from those discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in the section below entitled "Cautionary Statement Regarding
Forward-Looking Statements," in the section below entitled "Item 1A. Risk
Factors," and in other filings made with the Securities and Exchange Commission
("SEC"), including our Annual Report on Form 10-K for the year ended June 30,
2019.
References herein to "CCUR Holdings," the "Company," "we," "us," or "our" refer
to CCUR Holdings, Inc. and its subsidiaries, unless the context specifically
indicates otherwise.
Overview
As of December 31, 2019, the Company had two existing operating segments: (i)
merchant cash advance ("MCA") 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.
The Company holds an 80% interest in LMCS, with the remaining 20% held by
LuxeMark Capital, LLC ("Old LuxeMark"). Through LMCS, we manage a connected
network of MCA originators and syndicate participants who provide those
originators with capital by purchasing participation interests or co-funding MCA
transactions. In addition, we provide loans to MCA originators, the proceeds of
which are used by the MCA originators to fund MCAs themselves. LMCS' daily
operations are led by the three principals of Old LuxeMark. CCUR provides
accounting and legal support to LMCS.
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.
In addition to our real estate and MCA operating segments, we actively evaluate
acquisitions of additional businesses or operating assets, either as part of an
expansion of our current operating segments or establishment of a new operating
segment, in an effort to reinvest the proceeds of our calendar year 2017
business dispositions and maximize use of other assets such as our net operating
loss ("NOL") carryforwards. We may also seek additional capital and financing to
support the purchase of additional businesses and/or to provide additional
working capital to further develop our operating segments. We believe that these
activities will enable us to identify, acquire, and grow businesses and assets
that will maximize value for all our stockholders. On December 10, 2019, the
Board announced that it has initiated further review of capital allocation
alternatives to maximize stockholder value, including a potential limited return
of capital to stockholders through a special distribution. The timing of such
distribution, if any, is uncertain and the Company does not currently intend to
provide announcements or updates except as required by applicable law.
Critical Accounting Policies and Estimates
The SEC defines "critical accounting estimates" as those that require
application of management's most difficult, subjective, or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods. Our critical
accounting policies and estimates are disclosed under the section "Application
of Critical Accounting Policies" in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2019.
Results of Operations
We recognize revenue in accordance with the appropriate accounting guidance as
described in our critical accounting policies. See the section titled
"Application of Critical Accounting Policies" in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in our Annual Report on Form 10-K for the year ended June 30, 2019. MCA
revenue includes income from the discount at which we provide advances on future
merchant receivables, as well as fees earned for sourcing both syndication
capital and merchant leads for MCA originators. We generate revenue from
interest on loans by entering into commercial loan agreements to fund third
party originators in the MCA industry and real estate industry.
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Sales and marketing expenses consist primarily of commissions, travel, employee
salaries, benefits, and consulting fees.
General and administrative expenses consist primarily of salaries, benefits,
overhead, management travel, administrative personnel, rent, information
systems, insurance, accounting, legal services, board of director fees and
expenses, and other professional services.
Other interest income is earned on cash overnight sweep accounts and money
market deposits as well as investments in debt securities. Interest income also
includes accretion of discounts related to transactions in which we purchased
debt securities at discounts. Such discounts are amortized over the terms of
each debt security to the commitment values that will be due on each maturity
date, as well as early repayment. Additionally, we earn payment-in-kind ("PIK")
interest from one of our debt securities whereby interest is paid in the form of
an increase in the commitment value due from the debt security issuer on the
maturity date.
Three Months Ended December 31, 2019 in Comparison to the Three Months Ended
December 31, 2018
Consolidated Revenues and Income. During the three months ended December 31,
2019, we generated $1.8 million of total revenue, compared to $0.4 million in
the three months ended December 31, 2018, driven largely by our increasing
participation in the MCA industry. Our net income for the second quarter of
fiscal year 2020 increased to $3.0 million, compared to a loss of $1.5 million
in the second quarter of fiscal year 2019. This increase was attributable
largely to an increase in our income before income tax driven by our MCA
operations and returns from our investments in certain debt and equity
securities.
MCA Operations Segment Revenues. In December 2018, we began participating in the
MCA industry by purchasing participation interests in advances to merchants
through third-party originators. For the three months ended December 31, 2019,
we maintained a larger weighted average outstanding balance of funded MCAs
compared to the prior year, and consequently earned higher MCA revenue during
the current period relative to the three months ended December 31, 2018. After
closing the acquisition of the assets of Old LuxeMark (the "LuxeMark
Acquisition") in the third quarter of our fiscal year 2019, we began generating
additional revenue in the MCA sector by earning fees on sourcing syndication
capital for MCA originators, earning interest on loans to MCA originators, and
generating leads for MCA originators in exchange for a fee. Additionally, as
part of our MCA business, we originated term loans to an MCA originator so that
it may fund additional MCAs. These loans generated $0.2 million of interest
income during the period. Our quarterly MCA operations revenues are as follows:
Three Months Ended
December 31,
2019 2018
(Amounts in thousands)
MCA revenue $ 990 $ 185
Syndication fee revenue 388 -
Fee income on leads generation 62 -
MCA fees and other revenue 1,440 185
Interest on loans to MCA originators 235 -
Total MCA operations segment revenue $ 1,675 $ 185MCA revenue from interest on loans to MCA originators is categorized as MCA
operations revenue for purposes of segment reporting but reported within the
line item Interest on mortgage and commercial loans within our consolidated
statements of operations.
Real Estate Operations Segment Revenues. We generated $0.1 million of revenue
from interest on commercial mortgage loans during the three months ended
December 31, 2019, compared to $0.2 million during the three months ended
December 31, 2018. The decrease in revenue resulted from the decrease in
interest on commercial mortgage loans due to borrower payoffs outpacing
originations.
24
Sales and Marketing Expenses. During the third quarter of our fiscal year 2019,
we began incurring sales and marketing expenses attributable to new business
development resources that are focused on augmenting our current businesses and
identifying potential new businesses. We incurred $0.1 million of these business
development costs during the three months ended December 31, 2019, which are
reported as part of our corporate operating expenses. Additionally, the
principals of Old LuxeMark, who now lead the LMCS daily operations following
closing of the LuxeMark Acquisition, are predominantly focused on generating
incremental syndication income and other MCA income for our MCA operations
segment. As a result, our MCA operations segment incurred $0.2 million of sales
and marketing expenses during the three months ended December 31, 2019.
General and Administrative Expenses. General and administrative expenses were
$1.0 million for the three months ended December 31, 2019, a $0.2 million, or
26%, increase from the three months ended December 31, 2018. Legal, accounting,
compensation and other administrative expenses attributable to our MCA
operations accounted for $0.1 million of the increase, as we did not have MCA
operations in the prior year period. The remaining $0.1 million increase was due
to corporate salaries from additional headcount and financial performance
bonuses accrued during the three months ended December 31, 2019.
Change in Fair Value of Contingent Consideration. During the three months ended
December 31, 2019, we recorded a $0.4 million reversal of previously recorded
expense for change in the fair value of contingent consideration due to Old
LuxeMark. The decrease in estimated contingent consideration payments associated
with the LuxeMark acquisition resulted from LMCS not meeting the minimum
performance levels to earn calendar year 2019 contingent consideration.
Amortization of Purchased Intangibles. Our amortization of purchased intangibles
includes amortization over the respective useful lives of the trade name,
non-competition agreements, and investor/originator relationships attributable
to the LuxeMark Acquisition. Our intangible assets are evaluated for impairment
whenever events or changes in circumstances indicate that the carrying value of
the assets may not be fully recoverable. We acquired these intangibles as part
of the LuxeMark Acquisition on February 13, 2019 and no impairments of these
intangible assets were identified as of December 31, 2019. Additionally, we
completed our annual impairment test of goodwill as of December 31, 2019 and
concluded that goodwill was not impaired.
Provision for Credit Losses on Advances. During the three months ended December
31, 2019, we recorded a $0.2 million provision for credit losses on MCAs, a $0.3
million, or 64%, decrease from the provision expense for the three months ended
December 31, 2018. The period over period decrease in provision expense resulted
from a lower amount of MCAs funded in the current period versus the prior
period, and lower expected default rates for the current period originators
compared to the originators with whom we funded MCAs in the prior year period.
25
Other Interest Income. Other interest income includes interest earned on
investments in debt securities and cash and money market balances. The
components of our interest income for the three months ended December 31, 2019
and 2018 are as follows:
Three Months Ended
December 31,
2019 2018
(Amounts in thousands)
Interest from cash deposits and debt securities $ 716 $ 416
Accretion of discounts on purchased debt securities 1,190 265
Payment-in-kind interest 239 209
Other interest income $ 2,145 $ 890Other interest income for the three months ended December 31, 2019 increased by
$1.3 million, or 141%, compared to the three months ended December 31, 2018, due
to higher yields on incremental investments in debt securities since December
31, 2019 and accretion of any discounts on these securities.
Realized Gain on Investments, Net. During the three months ended December 31,
2019, we sold investments in certain equity securities for which we recognized
$0.8 million of net realized gains, as compared to $0 of realized gains on the
sale of certain equity and debt securities during the same period in the prior
year.
Unrealized Loss on Equity Securities, Net. During the three months ended
December 31, 2019, we reported unrealized loss on equity securities, net, of
$0.6 million, compared to unrealized loss of $1.5 million during the three
months ended December 31, 2018. Our unrealized losses on equity securities each
period are a function of changes in the fair value of the equity securities that
we hold as of the current reporting period balance sheet date relative to the
preceding balance sheet date. Our unrealized losses during the current period
were primarily attributable to sale of equity securities during the period for
which we had previously recognized unrealized gains, and upon sale in the
current period, resulted in a transfer of the gain from unrealized to realized,
while the unrealized loss in the comparative prior period is primarily
attributable to declines in the market values of securities.
Income Tax (Benefit) Provision. We reported $17 thousand of income tax benefit
for the three months ended December 31, 2019, due to updated estimates of our
estimated state income taxes during the period. Our available federal NOLs
offset any federal taxable income for our fiscal year 2019.
Six Months Ended December 31, 2019 in Comparison to the Six Months Ended
December 31, 2018
Consolidated Revenues and Income. During the six months ended December 31, 2019,
we generated $3.5 million of total revenue, compared to $0.5 million in the six
months ended December 31, 2018, driven largely by the growth in our
participation in the MCA industry. Our net income for the first six months of
fiscal year 2020 increased to $6.6 million, compared to a loss of $1.5 million
in the first six months of fiscal year 2019. This increase was attributable
largely to an increase in our income before income tax driven by our MCA
operations and our investments in certain debt and equity securities.
MCA Operations Segment Revenues. In December 2018, we began participating in the
MCA industry by purchasing participation interests in funds advanced to
merchants through third-party originators. We generated $3.3 million of revenue
from MCA operations during the six months ended December 31, 2019, compared to
$0.3 million during the six months ended December 31, 2018. For the six months
ended December 31, 2019, we maintained a larger weighted average outstanding
balance of funded MCAs compared to the prior year, and consequently earned
higher MCA revenue during the current period relative to the six months ended
December 31, 2018. Additionally, as part of our MCA business, we originated term
loans to an MCA originator so that it may fund additional MCAs. These loans
generated $0.4 million of interest income during the period. Our MCA operations
revenues for the six months are as follows:
26
Six Months Ended
December 31,
2019 2018
(Amounts in thousands)
MCA revenue $ 1,795 $ 316
Syndication fee revenue 938 -
Fee income on MCA leads generation 155 -
MCA fees and other revenue 2,888 316
Interest on loans to MCA originators 439 -
Total MCA operations segment revenue $ 3,327 $ 316MCA revenue from interest on loans to MCA originators is categorized as MCA
operations revenue for purposes of segment reporting but reported within the
line item Interest on mortgage and commercial loans within our consolidated
statements of operations.
Real Estate Operations Segment Revenues. We generated $0.2 million of revenue
from real estate operations during both the six months ended December 31, 2019
and December 31, 2018.
Sales and Marketing Expenses. During the third quarter of our fiscal year 2019,
we began incurring sales and marketing expenses attributable to new business
development resources that are focused on augmenting our current businesses and
identifying potential new businesses. We incurred $0.2 million of these business
development costs during the six months ended December 31, 2019, which are
reported as part of our corporate operating expenses. Additionally, the
principals of Old LuxeMark, who now lead the LMCS daily operations following
closing of the LuxeMark Acquisition, are predominantly focused on generating
incremental syndication income and other MCA income for our MCA operations
segment. As a result, our MCA operations segment incurred $0.4 million of sales
and marketing expenses during the six months ended December 31, 2019.
General and Administrative Expenses. General and administrative expenses were
$2.0 million for the six months ended December 31, 2019, a $0.4 million, or 25%,
increase from the six months ended December 31, 2018. Legal, accounting,
compensation and other administrative expenses attributable to our MCA
operations accounted for $0.3 million of the increase, as we did not have MCA
operations in the prior year period. The remaining $0.1 million increase was due
to corporate salaries from additional headcount and financial performance
bonuses accrued during the six months ended December 31, 2019.
Change in Fair Value of Contingent Consideration. During the six months ended
December 31, 2019, we recorded a $0.4 million reduction of previously recorded
expense for change in the fair value of contingent consideration due to Old
LuxeMark. The decrease in estimated contingent consideration payments associated
with the LuxeMark Acquisition resulted from LMCS not meeting the minimum
performance levels to earn calendar year 2019 contingent consideration.
27
Amortization of Purchased Intangibles. Our amortization of purchased intangibles
includes amortization over the respective useful lives of the trade name,
non-competition agreements, and investor/originator relationships attributable
to the LuxeMark Acquisition. Our intangible assets are evaluated for impairment
whenever events or changes in circumstances indicate that the carrying value of
the assets may not be fully recoverable. We acquired these intangibles as part
of the LuxeMark Acquisition on February 13, 2019 and no impairments of these
intangible assets were identified as of December 31, 2019. Additionally, we
completed our annual impairment test of goodwill as of December 31, 2019 and
concluded that goodwill was not impaired.
Provision for Credit Losses on Advances. During the six months ended December
31, 2019, we recorded a $0.4 million provision for credit losses on MCAs, a $0.1
million, or 20%, decrease from the six months ended December 31, 2018. The
period over period decrease in provision expense resulted from a lower amount of
MCAs funded in the current period versus the prior period, and lower expected
default rates for the current period originators compared to the originators
with whom we funded MCAs in the prior year period.
Other Interest Income. Other interest income includes interest earned on
investments in debt securities and cash and money market balances. The
components of our interest income for the six months ended December 31, 2019 and
2018 are as follows:
Six Months Ended
December 31,
2019 2018
(Amounts in thousands)
Interest from cash deposits and debt securities $ 1,433 $ 794
Accretion of discounts on purchased debt securities 2,366 517
Payment-in-kind interest 483 412
Other - 12
Other interest income $ 4,282 $ 1,735
Other interest income for the six months ended December 31, 2019 increased by
$2.5 million, or 147%, compared to the six months ended December 31, 2018, due
to higher yields on incremental investments in debt securities since December
31, 2019 and accretion of any discounts on these securities.
Realized Gain on Investments, Net. During the six months ended December 31,
2019, we sold investments in certain equity securities for which we recognized
$1.9 million of net realized gains, as compared to $0.2 million of realized
gains on the sale of certain equity and debt securities during the same period
in the prior year.
Unrealized Loss on Equity Securities, Net. During the six months ended December
31, 2019, we reported unrealized losses on equity securities, net, of $0.2
million, compared to an unrealized loss of $2.0 million during the six months
ended December 31, 2018. Our unrealized gains and losses on equity securities
each period are a function of changes in the fair value of the equity securities
that we hold as of the current reporting period balance sheet date relative to
the preceding balance sheet date. Our unrealized losses during the current
period were primarily attributable to sale of equity securities during the
period for which we had previously recognized unrealized gains, and upon sale in
the current period, resulted in a transfer of the gain from unrealized to
realized, while the unrealized loss in the comparative prior period is primarily
attributable to declines in the market values of securities.
Income Tax Provision (Benefit). We reported $0.2 million of income tax expense
for the six months ended December 31, 2019, primarily due to taxes owed on
income earned in states where we do not have NOLs available to offset such
taxable income.
Liquidity and Capital Resources
Our future liquidity will be affected by, among other things:
· our future access to capital;
· our exploration and evaluation of strategic alternatives and development of new
operating assets;
· our ability to collect on our commercial loans and advances receivable;
· the liquidity and fair value of our debt and equity securities;
· our ongoing operating expenses; and
· potential liquidation of the Company pursuant to an organized plan of
liquidation.
28
Uses and Sources of Cash
Cash Flows from Operating Activities
We generated $2.1 million and used $0.1 million of cash for operating activities
during the six months ended December 31, 2019 and 2018, respectively. Operating
cash generated during the six months ended December 31, 2019 was primarily
attributable to income from operations, adjusted for non-cash items, partially
offset by the timing of collection of interest income. Operating cash usage
during the six months ended December 31, 2018 was primarily attributable to
operating costs during the period exceeding cash generating income, as
approximately $1.0 million of our income for the period was from non-cash
accretion and PIK interest.
Cash Flows from Investing Activities
During the six months ended December 31, 2019 we generated $1.9 million of cash,
net, from investing activities. Our net cash inflows were primarily driven by
liquidations of $2.4 million more in debt and equity securities than investments
during the six months ended December 31, 2019. Partially offsetting the net cash
inflows from debt and equity securities, we funded $0.2 million more in mortgage
and commercial loans than we collected during the period, due to new loans that
we made to originators in the MCA industry. Remaining investing cash outflows
during the six months ended December 31, 2019 resulted from our purchase of land
parcels for development and resale.
During the six months ended December 31, 2018 we used $11.3 million of cash,
net, in investing activities. During the prior year period, we originated $4.5
million of short-term mortgage loans and collected $2.0 million in repayments of
loans through Recur. Additionally, we provided $7.9 million in MCA funding
through our MCA originators, and received $0.9 million in repayments through
LMCS. Our remaining investing activities consisted of $8.0 million in purchases
and $6.2 million in maturities or sales of debt and equity securities for the
purpose of funding our operating expenses as we continued to evolve our real
estate and MCA operating businesses and actively search for additional operating
businesses to acquire.
Cash Flows from Financing Activities
On March 5, 2018, we announced that our Board of Directors authorized the
repurchase of up to one million shares of the Company's common stock. In January
2019, we completed the purchase of the authorized one million 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. Purchases are made through private
transactions or open market purchases, which 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").
We did not repurchase any shares during the six months ended December 31, 2019,
compared to 156,423 shares of the Company's common stock totaling $0.6 million
during the six months ended December 31, 2018. All repurchased stock was
retired. We may purchase up to 381,119 additional shares pursuant to our
previously announced repurchase plan.
Liquidity
We had working capital (current assets less current liabilities) of $50.2
million at December 31, 2019, compared to working capital of $48.8 million at
June 30, 2019. At December 31, 2019, we had no material commitments for capital
expenditures.
As of December 31, 2019, less than 0.1% of our cash was in foreign accounts, and
there is no expectation that any foreign cash would need to be transferred from
these foreign accounts to cover U.S. operations in the next 12 months. Based
upon our existing cash balances, equity securities, and available-for-sale
investments, historical cash usage, and anticipated operating cash flow in the
current fiscal year, we believe that existing U.S. cash balances will be
sufficient to meet our anticipated working capital requirements for at least the
next 12 months from the issuance date of this report.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of December 31, 2019.
29
Recent Accounting Guidance
See "Note 2. Recent Accounting Guidance," to the accompanying consolidated
financial statements for a full description of recent accounting standards,
including the respective expected dates of adoption and the expected effects on
our consolidated results of operations and financial condition.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements made or incorporated by reference in this Quarterly Report on
Form 10-Q may constitute "forward-looking statements" within the meaning of the
federal securities laws. When used or incorporated by reference in this report,
the words "believes," "expects," "estimates," "anticipates," and similar
expressions, are intended to identify forward-looking statements. Statements
regarding future events and developments, our future performance, payment of
dividends, ability to utilize our net deferred tax assets and availability of
earnings and profits with respect to dividend income, as well as our
expectations, beliefs, plans, estimates or projections relating to the future
and current assessments of business opportunities, are forward-looking
statements within the meaning of these laws. Examples of our forward-looking
statements in this report include, but are not limited to, the ability of the
Board of Directors and Asset Management Committee to identify suitable business
opportunities and acquisition targets and the Company's ability to consummate
transactions with such acquisition targets; our ability to successfully develop
our real estate and MCA operations, the impact of any strategic initiatives we
may undertake; the impact of the current reestablishment of and potential for
future release of our tax valuation allowances on future income tax provisions
and income taxes paid; expected level of capital additions; our expected cash
position; the impact of interest rate changes and fluctuation in currency
exchange rates; our sufficiency of cash; and the impact of litigation and the
payment of any declared dividends. These statements are based on beliefs and
assumptions of our management, which are based on currently available
information. All forward-looking statements are subject to certain risks and
uncertainties that could cause actual events to differ materially from those
projected. The risks and uncertainties which could affect our financial
condition or results of operations include, without limitation: the process of
evaluating strategic alternatives; the Company's ability to compete with
experienced investors in the acquisition of one or more additional businesses,
our ability to utilize our net operating losses to offset cash taxes, in
general, and in the event of an ownership change as defined by the Internal
Revenue Service; changes in and related uncertainties caused by changes in
applicable tax laws, the current macroeconomic environment generally and with
respect to acquisitions and the financing thereof; continuing unevenness of the
global economic recovery; the availability of debt or equity financing to
support any liquidity needs; global terrorism; and earthquakes, tsunamis, floods
and other natural disasters.
Our forward-looking statements are based on current expectations and speak only
as of the date of such statements. We undertake no obligation to publicly update
or revise any forward-looking statement, whether as a result of future events,
new information or otherwise, except as may be required by federal securities
law.
Other important risk factors that could cause actual results to differ from any
forward-looking statements made in this report are discussed in "Item 1A. Risk
Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30,
2019 and in "Item 1A. Risk Factors" in this report or elsewhere herein.
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