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 December 31, 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 December 31, 2020, we hold a 51% interest in LMCS, with the remaining 49%
held by AZOKKB, LLC (formerly named LuxeMark Capital, LLC and herein referenced
as "Old LuxeMark"). Through LMCS, we manage a network of MCA funders (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.
27
Our MCA and other financial services segment experienced a decline in revenues
during the three and six months ended December 31, 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 shutdowns 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 and six months ended
December 31, 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 and six months ended December 31, 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 been providing fully refundable deposits into the aircraft finance
market, which are used during the initial due diligence period for aircraft
("aviation deposits"). We have financed 12 transactions, each of which has
utilized the services of Wright Brothers, based in Oklahoma City, Oklahoma, as
the escrow agent. Prior to January 12, 2021, each aviation deposit we provided
had been returned on time and without incident.
On January 12, 2021, we were due the return of $8,500,000 in aviation deposits.
Upon inquiry to Wright Brothers and following repeated unsuccessful attempts to
contact it or its principal, Debbie Mercer-Erwin, we learned that on or about
December 17, 2020, Ms. Mercer-Erwin had been arrested by law enforcement and
that all assets of Wright Brothers had been frozen.
In addition to the deposit funds mentioned above, we were also due the return of
a further $5,500,000 in aviation deposits on January 25, 2021.
We are currently fully cooperating with authorities to expedite the return of
all aviation deposits that were due. We have been told by authorities that we
are not the subject of any investigations related to Ms. Mercer-Erwin or Wright
Brothers. Based on an examination of all information currently available to us,
we have determined that it is probable a loss has occurred related to our
aviation deposits. Due to the limited information available and uncertainty
related to the specific sources of recovery and their timing, we are unable to
make the determination that any amount of recovery is probable. As a result, our
Board of Directors and management determined on February 6, 2021 that the
appropriate action is a full write-down of our aviation deposits during the
three and six months ended December 31, 2020. The write-down is reported as part
of provision for credit losses on advances on the consolidated statements of
operations.
We expect to aggressively pursue all remedies for recovery, including those
related to insurance and actions against all parties that may have contributed
to the loss of the aviation deposits. Since the loss of our aviation deposits
held by Wright Brothers, we are re-evaluating our aviation funding business.
Through most of the three and six months ended December 31, 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, except for those as described below.
Equity Method Investments
Investments in unconsolidated entities over which we have significant influence
are accounted for under the equity method of accounting. Under the equity method
of accounting, the Company does not consolidate the investment's financial
statements within its consolidated financial statements. Equity method
investments are initially recorded at cost, then our proportional share of the
underlying net income or loss is recorded as equity in net income or loss from
equity method investments in our statement of operations, with a corresponding
increase or decrease to the carrying value of the investment. Distributions
received from the investee reduce our carrying value of the investment and are
recorded in the consolidated statements of cash flows using the cumulative
earnings approach. These investments are evaluated for impairment if events or
circumstances arise that indicate that the carrying amount of such assets may
not be recoverable. There were no indicators of impairment related to our equity
method investments for the three and six months ended December 31, 2020.
28
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.
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 December 31, 2020 in Comparison to the Three Months Ended
December 31, 2019
Consolidated Revenues and Income. During the three months ended December 31,
2020, we generated $1,197,000 of total revenue, compared to $1,787,000 in the
three months ended December 31, 2019, with the decline driven largely by our
decreasing participation in the MCA industry. Our net loss for the three months
ended December 31, 2020 was $8,333,000, compared to net income of $2,737,000 for
the three months ended December 31, 2019. This decrease was primarily
attributable to aviation advance loss provisions, reductions of revenue and
other interest income, and an increase in operating expenses due primarily to
increased management and performance fees. Additionally, the three months ended
December 31, 2019 included an adjustment for the decrease in fair value of
contingent consideration for which the agreement was terminated during the
fourth quarter of the fiscal year ended June 30, 2020. This was offset by
increases in realized gains on sales of securities and unrealized gains on
equity securities.
MCA and Other Financial Services Segment Revenues. We generated $1,151,000 of
revenue from MCA and other financial services operations during the three months
ended December 31, 2020, compared to $1,675,000 during the three months ended
December 31, 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 December 31, 2020 and 2019 are as
follows:
Three Months Ended
December 31,
2020 2019
(Amounts in thousands)
MCA and other financial services revenue $ 927 $ 990
Syndication fee revenue 85 388
Fee income on MCA leads generation 34 62
MCA fees and other revenue 1,046 1,440
Interest on loans to MCA originators 105 235
Total MCA and other financial services operations segment
revenue $ 1,151 $ 1,675MCA revenue from interest on loans to Funders is categorized as MCA and other
financial services operations revenue for segment reporting purposes but
reported as 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 December 31, 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
December 31, 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.
29
Real Estate Operations Segment Revenues. We generated $46,000 of revenue from
interest on commercial mortgage loans during the three months ended December 31,
2020, compared to $112,000 during the three months ended December 31, 2019. The
decrease in revenue resulted from originations outpacing borrower repayments.
Selling, General, and Administrative Expenses. Corporate selling, general, and
administrative expenses were $1,161,000 for the three months ended December 31,
2020, a $164,000, or 16.4%, increase from the $997,000 for the three months
ended December 31, 2019. Decreases in salaries and benefits, real property lease
costs, and travel and entertainment, offset by increases in 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 $41,000 for the three months ended December 31, 2020, a
$328,000, or 88.9%, decrease from the $369,000 for the three months ended
December 31, 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 December 31, 2020 or 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 December 31, 2020.
Provision for Credit Losses on Advances. During the three months ended December
31, 2020, we recorded a $13,775,000 provision for credit losses on aviation
advances and MCAs, a $13,595,000 increase from the $180,000 for the three months
ended December 31, 2019. The period-over-period increase in provision expense
resulted primarily from the loss provision recorded against the aviation
advances in the current period versus the prior period (see Note 16).
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, 2020
and 2019 are as follows:
Three Months Ended
December 31,
2020 2019
(Amounts in thousands)
Interest from cash deposits and debt securities $ 359 $ 716
Accretion of discounts on purchased debt securities
311 1,190
Payment-in-kind interest 9 239
Other interest income $ 679 $ 2,145Other interest income for the three months ended December 31, 2020 decreased by
$1,466,000, or 68.3%, compared to the three months ended December 31, 2019,
primarily due to lower yields on incremental investments in debt securities
since December 31, 2019 and accretion of the discounts on these securities.
Realized Gain on Investments, Net.During the three months ended December 31,
2020, we sold investments in certain debt and equity securities for which we
recognized $876,000 of net realized gains, as compared to $843,000 of realized
gains on the sale of certain equity and debt securities during the same period
in the prior year.
30
Unrealized (Loss) Gain on Equity Securities, Net. During the three months ended
December 31, 2020, we reported unrealized gains on equity securities, net, of
$2,285,000, compared to unrealized losses of $627,000 during the three months
ended December 31, 2019. 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 gains during the current period
were attributable to increases in the fair value of our equity securities
holdings during the period.
Equity in Net Loss from Equity Method Investment. During the three months ended
December 31, 2020, we recorded net loss from equity method investment of
$53,000. There was no net income or loss from equity method investment during
the same period in the prior year.
Income Tax (Benefit) Provision. We reported $1,725,000 of income tax benefit for
the three months ended December 31, 2020, primarily due to the tax effects of
the aviation advance loss. 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 deferred tax 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 December 31, 2020 and 2019 was 17% and -1%, respectively. The
difference between the ETR's for the three months ended December 31, 2020 and
2019 was driven by differences in the magnitude of taxable gains in the periods,
as well as by the release of the bulk of the deferred tax valuation allowance
during the fiscal year ended June 30, 2020, offset by the tax effects of the
aviation advance loss provision recorded during the current period.
Six Months Ended December 31, 2020 in Comparison to the Six Months Ended
December 31, 2019
Consolidated Revenues and Income. During the six months ended December 31, 2020,
we generated $2,107,000 of total revenue, compared to $3,518,000 in the six
months ended December 31, 2019, with the decline driven largely by our
decreasing participation in the MCA industry. Our net loss for the six months
ended December 31, 2020 was $7,944,000, compared to net income of $6,143,000 for
the six months ended December 31, 2019. This decrease was primarily attributable
to aviation advance loss provisions, reductions of revenue and other interest
income, and an increase in operating expenses due primarily to increased
management and performance fees. Additionally, the six months ended December 31,
2019 included an adjustment for the decrease in fair value of contingent
consideration for which the agreement was terminated during the fourth quarter
of the fiscal year ended June 30, 2020. This was offset by an increase in
realized gains on sales of securities and unrealized gains on equity securities.
MCA and Other Financial Services Segment Revenues. We generated $1,967,000 of
revenue from MCA and other financial services operations during the six months
ended December 31, 2020, compared to $3,327,000 during the six months ended
December 31, 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 six months ended December 31, 2020 and 2019 are as
follows:
Six Months Ended
December 31,
2020 2019
(Amounts in thousands)
MCA and other financial services revenue $ 1,466 $ 1,795
Syndication fee revenue 214 938
Fee income on MCA leads generation 34 155
MCA fees and other revenue 1,714 2,888
Interest on loans to MCA originators 253 439
Total MCA and other financial services operations segment
revenue $ 1,967 $ 3,327MCA revenue from interest on loans to Funders is categorized as MCA and other
financial services operations revenue for segment reporting purposes but
reported as interest on mortgage and commercial loans within our consolidated
statements of operations.
31
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 six months ended December 31, 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 six months ended
December 31, 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.
Real Estate Operations Segment Revenues. We generated $140,000 of revenue from
interest on commercial mortgage loans during the six months ended December 31,
2020, compared to $191,000 during the six months ended December 31, 2019. The
decrease in revenue resulted from originations outpacing borrower repayments.
Selling, General, and Administrative Expenses. Corporate selling, general, and
administrative expenses were $2,054,000 for the six months ended December 31,
2020, a $166,000, or 8.8%, increase from the $1,888,000 for the six months ended
December 31, 2019. Increases in accounting fees and legal fees, offset by
decreases in salaries and benefits compared to the prior period, caused the
period-over-period increase.
Selling, general, and administrative expenses for our MCA and other financial
services segment were $233,000 for the six months ended December 31, 2020, a
$490,000, or 67.8%, decrease from the $723,000 for the six months ended
December 31, 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
six months ended December 31, 2020 or 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 six
months ended December 31, 2020.
Provision for Credit Losses on Advances. During the six months ended December
31, 2020, we recorded a $13,827,000 provision for credit losses on aviation
advances and MCAs, a $13,431,000 increase from the $396,000 for the six months
ended December 31, 2019. The period-over-period increase in provision expense
resulted from the loss provision recorded against the aviation advances in the
current period versus the prior period (see Note 16).
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, 2020 and
2019 are as follows:
Six Months Ended
December 31,
2020 2019
(Amounts in thousands)
Interest from cash deposits and debt securities $ 858 $ 1,433
Accretion of discounts on purchased debt securities
916 2,366
Payment-in-kind interest 265 483
Other interest income $ 2,039 $ 4,282
32
Other interest income for the six months ended December 31, 2020 decreased by
$2,243,000, or 52.4%, compared to the six months ended December 31, 2019,
primarily due to lower yields on incremental investments in debt securities
since December 31, 2019 and accretion of the discounts on these securities.
Realized Gain on Investments, Net.During the six months ended December 31, 2020,
we sold investments in certain debt and equity securities for which we
recognized $1,408,000 of net realized gains, as compared to $1,919,000 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 six months ended
December 31, 2020, we reported unrealized gains on equity securities, net, of
$1,240,000, compared to unrealized losses of $158,000 during the six months
ended December 31, 2019. 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 gains during the current period
were attributable to an increase in the fair value of equity securities during
the period.
Equity in Net Loss from Equity Method Investment. During the six months ended
December 31, 2020, we recorded net loss from equity method investment of
$53,000. There was no net income or loss from equity method investment during
the same period in the prior year.
Income Tax Provision. We reported $1,494,000 of income tax benefit for the six
months ended December 31, 2020, primarily due to the tax effects of the aviation
advance loss provision. The 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 six months ended December 31, 2020 and 2019 was 16%
and 2%, respectively. The difference between the ETR's for the six months ended
December 31, 2020 and 2019 was driven by differences in the magnitude of taxable
gains in the periods, as well as by the release of the bulk of the deferred tax
valuation allowance during the fiscal year ended June 30, 2020, offset by the
tax effects of the aviation advance loss provision recorded during the current
period.
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. Due to the impairment in our
aviation deposits held by Wright Brothers, the Company will cease recognizing
any related revenue in future periods. Still, the Company does not believe this
will affect its overall future liquidity. 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 used $96,000 and generated $2,080,000 of cash from operating activities
during the six months ended December 31, 2020 and 2019, respectively. Operating
cash used during the six months ended December 31, 2020 was primarily
attributable to income from operations, adjusted for advance loss provisions,
realized and unrealized gains on investments, and the timing of collection of
interest income. Operating cash generated during the six months ended December
31, 2019 was primarily attributable to cash income generated by our operations
and investments exceeding our operating costs.
33
Cash Flows from Investing Activities
During the six months ended December 31, 2020, we generated $7,072,000 of cash,
net, from investing activities. Our net cash inflows were primarily driven by
liquidations of $10,625,000 more in debt and equity securities than investments
during the six months ended December 31, 2020. We also collected $1,850,000 more
in mortgage and commercial loans receivable than we funded during the six months
ended December 31, 2020. We funded $1,277,000 more in aviation advances and MCAs
than we collected during the six months ended December 31, 2020. Additionally,
we invested $3,850,000 in an equity method subsidiary during the six months
ended December 31, 2020. Remaining investing cash outflows during the six months
ended December 31, 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 six months ended December 31, 2019, we generated $1,893,000 of cash,
net, from investing activities. Our net cash inflows were primarily driven by
liquidations of $2,384,000 more in debt and equity securities than investments
during the period. Partially offsetting the net cash inflows from debt and
equity securities, we funded $196,000 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 six months ended
December 31, 2019 resulted from our purchase of land parcels for development and
resale.
Cash Flows from Financing Activities
During the six months ended December 31, 2020, we used $59,000 of cash for
financing activities for distributions to the non-controlling interest and used
$2,000 in cash for financing activities for payment of accrued dividends related
to restricted stock releases.
During the six months ended December 31, 2019, we used $1,000 of cash for
financing activities for payment of accrued dividends related to restricted
stock releases.
Liquidity
We had working capital (current assets less current liabilities) of $43.1
million as of December 31, 2020, compared to working capital of $51.0 million as
of June 30, 2020. While the loss of the Company's aviation deposits had a
significant impact on working capital during the quarter, the Company's working
capital remains strong and sufficient to execute on its stated business plans.
As of December 31, 2020, we had no material commitments for capital
expenditures.
As of December 31, 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 December 31, 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.
34
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.
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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