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 statements of historical facts, many of the matters discussed
in this Item 2 are 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, 2020.
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 September 30, 2020, we operate with two business segments: (i) merchant
cash advances ("MCA") and other financial services, conducted primarily through
our subsidiary LM Capital Solutions, LLC (d/b/a "LuxeMark Capital") ("LMCS"),
and (ii) real estate, conducted through our subsidiary Recur Holdings LLC
("Recur") and its subsidiaries.
As of September 30, 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 (the
"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, we entered into a series of agreements with Old LuxeMark
pursuant to which our interest in LMCS was reduced from 80% to 51%. After the
repayment of the outstanding balance of a master promissory note issued by LMCS
to us, Old LuxeMark has the right to purchase the remaining 51% equity interest
in LMCS for nominal consideration. 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.
In addition to our real estate and MCA and other financial services 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.
Recent Events
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.
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Our MCA and other financial services segment experienced a decline in revenues
during the three months ended September 30, 2020, which management believes is
predominantly due to the economic uncertainties caused by the pandemic, and we
anticipate our MCA revenues will continue to be adversely affected while major
parts of the U.S. economy are restricted by mandatory business shut-downs and/or
stay-at-home orders, as well as other effects of the pandemic. We and our
finance partners decreased our volume of new funding arrangements while
evaluating the effect of the current economic uncertainties on the MCA business
and its customers during the three months ended September 30, 2020. During the
fourth quarter of our fiscal year 2020, management concluded that it would not
resume funding MCAs with Funders and would focus our MCA efforts exclusively on
MCA syndication fee income generated by our LMCS business unit. Our reduced
participation in MCA funding through Funders reduces our syndication fee income
and revenue from direct funding of MCAs. We anticipate continued lower funding
of new MCAs and reduced collection volume on outstanding MCAs until the economic
situation caused by the pandemic stabilizes and a greater level of economic
activity returns. Additionally, while Funders modified their underwriting
criteria during the fourth quarter of our fiscal year ended June 30, 2020 and
focused new funding on businesses that have been deemed "essential services"
during the pandemic, it remains to be seen whether essential businesses will
pursue MCAs at levels sufficient to offset the declines in MCA collections for
the foregoing reasons.
On July 17, 2020, LMCS entered into a series of transactions resulting in its
recapitalization. The transactions included an amendment to the operating
agreement of LMCS 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
transaction 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.
Our real estate-related revenues have continued to remain stable during the
three months ended September 30, 2020 and we believe that our real estate
borrowers will continue to be able to service their real estate loans. We
continue to develop real estate for future sale. While we do not believe that
any of these projects warrant impairment charges or other reserves at this
point, we do expect that the economic impact of the pandemic will result in a
delay in the eventual sale of this real estate.
In August 2020, we established CCUR Aviation Finance, LLC, a wholly owned
subsidiary through which we operate our aviation funding business. Since
August 2018, we have periodically funded aviation deposit purchases for a fee,
and we expect this business to continue and grow. We have reported income from
this business within our MCA and other financial services segment.
Through most of the three months ended September 30, 2020, we have continued to
actively evaluate and engage with potential acquisition target candidates;
however, the pandemic has delayed our due diligence process by impeding our
ability to participate in in-person visits and physical tours and complicating
our ability to place valuations on targets given the uncertainty in the global
markets. We expect this uncertainty to continue over the next few months. Thus,
while we have not experienced a significant slowing of merger and acquisition
activity, any acquisitions that we decide to pursue may take longer to
consummate.
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, 2020.
Results of Operations
MCA and other financial services 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 Funders. We
generate revenue from interest on loans by entering into commercial loan
agreements to Funders and third-party originators in the real estate industry.
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Selling, general, and administrative expenses consist primarily of salaries,
benefits, rent, administrative personnel, 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 on the secondary markets at a discount. 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 September 30, 2020 in Comparison to the Three Months Ended
September 30, 2019
Consolidated Revenues and Income. During the three months ended September 30,
2020, we generated $910,000 of total revenue, compared to $1,731,000 in the
three months ended September 30, 2019, driven largely by our decreasing
participation in the MCA industry. Our net income for the three months ended
September 30, 2020 decreased to $389,000, compared to net income of $3,406,000
for the three months ended September 30, 2019. This decrease was primarily
attributable to a reduction of our revenue, other interest income, realized gain
on investments, and unrealized income on investments. This was offset by a
decrease in operating expenses and an increase in other income, net.
MCA and Other Financial Services Segment Revenues. We generated $816,000 of
revenue from MCA and other financial services operations during the three months
ended September 30, 2020, compared to $1,652,000 during the three months ended
September 30, 2019. During the year ended June 30, 2020, management concluded
that it would not resume funding MCAs with Funders . This resulted in a decrease
of MCA revenue during the current period. Our MCA and other financial services
operations revenues for the three months ended September 30, 2020 and 2019 are
as follows:
Three Months Ended
September 30,
2020 2019
(Amounts in thousands)
MCA and other financial services revenue $ 539 $ 805
Syndication fee revenue 129 550
Fee income on MCA leads generation - 93
MCA fees and other revenue 668 1,448
Interest on loans to MCA originators 148 204
Total MCA and other financial services operations segment
revenue $ 816 $ 1,652MCA revenue from interest on loans to Funders is categorized as MCA and other
financial services operations revenue for segment reporting purposes but
reported within the line item interest on mortgage and commercial loans within
our consolidated statements of operations.
Revenues from each of the revenue sources within our MCA segment decreased with
the onset of the COVID-19 pandemic. We experienced declines of MCA revenues
during the three months ended September 30, 2020. This occurred as (i) fewer
merchants are meeting MCA underwriting criteria, which reduces our syndication
fee income and ability to generate revenue by funding MCAs, (ii) underwriters
are less interested in purchasing leads, and (iii) a portion of our merchants,
in coordination with the Funders, have reduced or paused payments to better
weather the current economic downturn, which reduces our MCA revenues.
Furthermore, we reduced our volume of MCA funding during the three months ended
September 30, 2020, primarily as a result of our efforts to better evaluate the
impact of the pandemic on MCA assets before funding additional assets. We
anticipate continued lower funding and collection volume over the next few
months and are uncertain as to the long-term impact of the pandemic at this
point. On July 17, 2020, we entered into a series of agreements with Old
LuxeMark pursuant to which our interest in LMCS was reduced from 80% to 51%.
After the repayment of the outstanding balance of the Master Promissory Note
issued by LMCS to us, Old LuxeMark has the right to purchase the remaining 51%
equity interest in LMCS for nominal consideration. We are reviewing our
strategic options with respect to our continued participation in the MCA
industry.
26
Real Estate Operations Segment Revenues. We generated $94,000 of revenue from
interest on commercial mortgage loans during the three months ended September
30, 2020, compared to $79,000 during the three months ended September 30, 2019.
The increase in revenue resulted from originations outpacing borrower
repayments.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses were $1,085,000 for the three months ended September 30,
2020, a $249,000, or 18.7%, decrease from the $1,334,000 for the three months
ended September 30, 2019. Decreases in salaries and benefits, offset by
increases in stock appreciation rights ("SARs") expense, accounting fees, and
legal fees compared to the prior period caused the period-over-period decrease.
Selling, general, and administrative expenses for our MCA and other financial
services segment were $192,000 for the three months ended September 30, 2020, a
$162,000, or 45.8%, decrease from the $354,000 for the three months ended
September 30, 2019. This decrease was caused by decreases in commissions and
fees related to the decrease in MCA revenue during the period. There were no
selling, general, and administrative expenses for our real estate segment in
either the three months ended September 30, 2020 or the three months ended
September 30, 2019.
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 our acquisition of the assets of Old LuxeMark (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 or circumstances requiring a testing of
impairment of these intangible assets were identified as of or during the three
months ended September 30, 2020.
Provision for Credit Losses on Advances. During the three months ended September
30, 2020, we recorded a $52,000 provision for credit losses on MCAs, a $164,000,
or 75.9%, decrease from the $216,000 for the three months ended September 30,
2019. The period-over-period decrease in provision expense resulted from
decreases in the MCAs funded in the current period versus the prior period. MCA
funding activity decreased during the period primarily as a result of our
efforts to better evaluate the impact of the pandemic on MCA assets before
funding additional assets.
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 September 30, 2020
and 2019 are as follows:
Three Months Ended
September 30,
2020 2019
(Amounts in thousands)
Interest from cash deposits and debt securities $ 500 $ 717
Accretion of discounts on purchased debt securities
604 1,176
Payment-in-kind interest 256 244
Other interest income $ 1,360 $ 2,137Other interest income for the three months ended September 30, 2020 decreased by
$777,000, or 36.4%, compared to the three months ended September 30, 2019,
primarily due to lower yields on incremental investments in debt securities
since September 30, 2019 and accretion of the discounts on these securities.
Realized Gain on Investments, Net. During the three months ended September 30,
2020, we sold investments in certain debt and equity securities for which we
recognized $532,000 of net realized gains, as compared to $1,076,000 of realized
gains on the sale of certain equity and debt securities during the same period
in the prior year.
Unrealized (Loss) Gain on Equity Securities, Net. During the three months ended
September 30, 2020, we reported unrealized loss on equity securities, net, of
$1,045,000, compared to unrealized gain of $469,000 during the three months
ended September 30, 2019. 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 attributable to a decline in the fair value of equity securities during the
period.
27
Income Tax (Benefit) Provision. We reported $231,000 of income tax provision for
the three months ended September 30, 2020. The effective tax rate ("ETR") each
period is impacted by a number of factors, including the relative mix of
domestic and international earnings, adjustments to the valuation allowances,
and other items. The currently forecasted ETR may vary from the actual year-end
ETR due to the changes in these factors. The Company's global ETR for the three
months ended September 30, 2020 and 2019 was 39% and 5%, respectively. The
difference between the ETR's for the three months ended September 30, 2020 and
2019 was primarily driven by the release of a substantial portion of our
valuation allowance during our fiscal year 2020. We maintained a full valuation
allowance as of September 30, 2019, resulting in the comparably lower ETR. Other
factors include differences in the magnitude of taxable gains in the periods and
lower levels of forecasted pre-tax book income for fiscal year 2021 as compared
to fiscal year 2020, which can yield large fluctuations in the ETR on a
period-over-period basis.
Liquidity and Capital Resources
We do not currently expect the COVID-19 pandemic to significantly affect our
liquidity and currently have access to sufficient liquidity and capital
resources to continue funding our operations and sustain currently expected
levels of capital expenditures over the next twelve months. While we maintain
significant amounts of cash and cash equivalents and marketable securities which
we may use to fund our operations and make investments, the COVID-19 pandemic
has had a significant impact on credit markets, which may adversely affect our
ability to access third-party financing. Given our substantial cash balances, we
do not anticipate that our future liquidity will be materially impacted by any
funding obligations related to our affiliates. 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; and
· our ongoing operating expenses.
Uses and Sources of Cash
Cash Flows from Operating Activities
We generated $516,000 and $537,000 of cash from operating activities during the
three months ended September 30, 2020 and 2019, respectively. Operating cash
generated during the three months ended September 30, 2020 was primarily
attributable to income from operations, adjusted for non-cash items, partially
offset by realized gains on investments and by the timing of collection of
interest income. Operating cash generated during the three months ended
September 30, 2019 was primarily attributable to cash income generated by our
operations and investments exceeding our operating costs.
Cash Flows from Investing Activities
During the three months ended September 30, 2020, we generated $8,470,000 of
cash, net, from investing activities. Our net cash inflows were primarily driven
by liquidations of $5,659,000 more in debt and equity securities than
investments during the three months ended September 30, 2020. We also collected
$1,833,000 more in MCAs and other advances than we funded during the three
months ended September 30, 2020. Additionally, we collected $1,214,000 more in
mortgage and commercial loans receivable than we funded during the three months
ended September 30, 2020. Remaining investing cash outflows during the three
months ended September 30, 2020 resulted from our purchase of a small minority
interest in an operating business, and from our continued investment in land
parcels for development and resale.
During the three months ended September 30, 2019, we generated $137,000 of cash,
net, from investing activities. Our net cash inflows were primarily driven by
collecting more merchant payments and other advances than we redeployed to fund
MCAs and other advances, resulting in $1,567,000 of net cash inflows from MCAs
during the period. Additionally, we generated net cash from debt and equity
securities as we liquidated $817,000 more in debt and equity securities than we
invested during the three months ended September 30, 2019. Partially offsetting
the net cash inflows from MCAs and other advances and debt and equity
securities, we funded $1,981,000 more in mortgage and commercial loans than we
collected during the period, primarily attributable to new loans that we made to
Funders. Remaining investing cash outflows during the three months ended
September 30, 2019 resulted from our purchase of land parcels for development
and resale.
Cash Flows from Financing Activities
During the three months ended September 30, 2020, we used $15,000 of cash for
financing activities for distributions to the non-controlling interest.
During the three months ended September 30, 2019, there were no cash flows from
financing activities.
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Liquidity
We had working capital (current assets less current liabilities) of $52.2
million at September 30, 2020, compared to working capital of $51.0 million at
June 30, 2020. At September 30, 2020, we had no material commitments for capital
expenditures.
As of September 30, 2020, 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 September 30, 2020.
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 duration and
impact of the illness caused by the COVID-19 pandemic on the Company's business
plans and expected operating results, the ability of the Board of Directors and
the Asset Management Committee of the Board of Directors (the "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 operations; the
future of our MCA and other financial services 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; our 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; 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 NOLs to offset cash taxes, in
general, and in the event of an ownership change as defined by the Internal
Revenue Service (the "IRS"); 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, pandemics, 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 applicable law.
29
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,
2020 and in "Item 1A. Risk Factors" in this report or elsewhere herein.
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