HCS relies significantly on its ability to attract, develop and retain healthcare professionals who possess the skills, experience and, as required, licensure necessary to meet the specified requirements of our healthcare clients. The ability to recruit healthcare professionals generally and the competition for their services may limit our ability to increase the number of healthcare professionals that we successfully recruit, decreasing our ability to grow our business.

We are subject to litigation in the ordinary course of business, which could result in substantial judgment or settlement costs; significant legal actions could subject us to substantial uninsured liabilities.

HCS is a party to various litigation claims and legal proceedings in its normal course of business. We evaluate these litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. ~~We may not have sufficient insurance to cover these risks.~~ Actual outcomes or losses may differ materially from those estimated by our current assessments which would impact our profitability. Adverse developments in existing litigation claims or legal proceedings involving HCS or new claims could require us to establish litigation reserves, enter into unfavorable settlements or satisfy judgments for monetary damages for amounts in excess of current reserves, which could adversely affect our financial results. We may not have sufficient insurance to cover these risks. Litigation losses would impact our profitability.

Our collection, use, and retention of personal information and personal health information create risks that may harm our business.

As part of its business model, HCS collects, transmits and retains personal information of our employees and contract professionals and their dependents, including, without limitation, full names, social security numbers, addresses, birth dates, and payroll-related information. Employees or third parties may be able to circumvent security measures in place and acquire or misuse such information, resulting in breaches of privacy, and errors in the storage, use or transmission of such information may result in breaches of privacy. We may be required to incur significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards, or contractual obligations if a privacy breach were to occur.

Cyber security risks and cyber incidents could adversely affect our business and disrupt operations.

Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting customer or investor confidence. Security measures in place may not provide absolute security, and systems may be vulnerable to cyber-security breaches such as viruses, hacking, and similar disruptions from unauthorized intrusions. In addition, third party service providers perform certain services, such as payroll and tax services. Any failure of HCS or third party systems may compromise sensitive information and/or personally identifiable information of employees.

~~The healthcare industry is highly regulated.~~

The healthcare industry is subject to extensive and complex federal, state and local laws and regulations related to, among other things, conduct of operations, and costs and payment for services. While HCS is not directly regulated as a healthcare provider, the customers of HCS are highly regulated. Therefore, HCS must comply with many of the regulations prescribed for its customers. If HCS does not comply with applicable laws and regulations, it could incur civil and/or criminal penalties as well as litigation or be subject to equitable remedies. HCS may lose customers if it cannot adequately adhere to the regulations.

HCS provides services to hospitals and health systems that pay HCS directly. Accordingly, Medicare, Medicaid and insurance reimbursement policy changes generally do not directly impact HCS. However, HCS’s business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation and general economic conditions affect the purchasing practices, operations and the financial health of HCS’s customers.

Reimbursement changes in government programs, particularly Medicare and Medicaid, can and do indirectly affect the demand and the prices paid for HCS’s services. For example, HCS clients could receive reduced or no reimbursements because of a change in the rates or conditions set by the government, which would negatively affect the demand and the prices for HCS’s services.

~~The business of HCS is concentrated in the State of Georgia and to a relatively few number of customers.~~

HCS derives all of its revenues from clients in the State of Georgia. As a result, HCS is subject to risks associated with conditions in the State of Georgia, including but not limited to economic and regulatory risks, than healthcare staffing and other companies that are more geographically diversified.

HCS derives the majority of its businesses from CSBs. There are 24 CSBs in Georgia and HCS conductions business with 14 of them. Matters that adversely impact Georgia CSBs, including regulatory changes may negatively affect our business.

Risks Related to our Company

We have a history of operating losses and we may not generate sufficient revenue to support our operations.

During 2019, we had a net loss of $10.2 million. We also generated negative operating cash flow of $5.2 million. As of December 31, 2019, we had an overall shareholders deficit of $72.1 million. As of December 31, 2019, we had an aggregate of $2.0 million in cash and cash equivalents and total liabilities of $91.5 million. Of the $2.0 million in cash, $0.7 million was held by our subsidiary NMLLC, which has filed a Chapter 11 plan of reorganization that was confirmed by the court on April 11, 2018 and under such plan is prohibited from using its assets for anything other than payment of its obligations. The Company also has a significant ongoing obligation to pay interest under its senior note agreement.

After engaging major investment firms to evaluate the marketplace for its mortgage securities, the Company executed trades to sell all of its mortgage securities during 2018. These sales generated $13.0 million in cash proceeds for the Company. However, the Company will no longer have any future cash flows from these securities since they were sold.

From January 2019 through August 2019, the Company had a significant on-going obligation to pay interest under its senior note agreements at LIBOR plus 3.5% per annum, payable quarterly in arrears until maturity on March 30, 2033. The Company was successful in amending the senior note agreements to lower the interest rate and receive future credit for cash interest payments made in 2019 in exchange for the issuance of common stock and warrants. Based on the terms of the amendment, the Company is not required to make cash interest payments on the senior notes from August 2019 through March 2022. There is no cash interest payment due within one year from the date of the consolidated financial statements.

Management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers and targeting new customers that have not previously been served by HCS. In addition, management is exploring cost cutting initiatives that will reduce overall corporate overhead and operating costs.

Our historical operating results and poor cash flow suggest substantial doubt exists related to the Company’s ability to continue as a going concern.

In addition, based on the recent global developments regarding the coronavirus (COVID-19) situation, there is significant uncertainty regarding the potential impact to our business. Based on these uncertainties, there is no guarantee the Company's cash position will cover current obligations. As a result, we have not been able to alleviate the substantial doubt about the Company's ability to continue as a going concern for at least one year after the date that these consolidated financial statements are issued.

We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term. Additionally, we cannot be certain that we will be successful at raising capital in the future. Such failures would have a material adverse effect on our business, including the possible cessation of operations.

We found material weaknesses in our disclosure controls and procedures and internal control over financial reporting and concluded that they were not effective as ofDecember 31, 2019.

As disclosed in Part II, Item 9. Controls and Procedures of this Form 10-K, our chief executive officer and chief financial officer, with the participation of the Company’s management, concluded that our disclosure controls and procedures and internal controls over financial reporting were not effective as of December 31, 2019 due to the lack of adequate processes, procedures and controls at HCS. Our failure to successfully remediate these material weaknesses could cause us to fail to meet our reporting obligations and to produce timely and reliable financial information. Additionally, such failure could cause investors to lose confidence in our public disclosures, which could have a negative impact on our stock price. For a discussion of these material weaknesses and our remediation efforts, see Part II, Item 9. Controls and Procedures of this Form 10-K.

Table of Contents

Our ability to use our net operating loss carryforwards and net unrealized built-in losses could be severely ~~limited in the event of certain transfers of our voting securities.~~

limited.

As of December 31, ~~2016,~~2019, we had a federal net operating ~~loss~~losses ("NOLs") of ~~approximately $685.5~~approximately $727.2 million, including ~~$307.3~~$250.3 million in losses on mortgage securities that have not been recognized for income tax purposes. Our ability to use NOLs to offset future taxable income will depend on the amount of taxable income we generate in future periods and whether we become subject to annual limitations on the amount of taxable income that may be offset by our NOLs.

Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes an annual limitation on the amount of taxable income that may be offset by a corporation’s NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when the corporation’s “5-percent shareholders” (as defined in Section 382 of the Code) collectively increase their ownership in the corporation by more than 50 percentage points (by value) over a rolling three-year period. Additionally, various states have similar limitations on the use of state NOLs following an ownership change.

Our charter includes provisions designed to protect the tax benefits of our NOLs by generally restricting any direct or indirect transfers of our common stock that increase the direct or indirect ownership of our common stock by any person from less than 4.99% to 4.99% or more, or increase the percentage of our common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of our common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions will be void as of the date of the prohibited transfer as to the purported transferee. These transfer restrictions expire on August 1, 2020. Additionally, we have adopted and our shareholders have approved a Rights Agreement (the “NOL Rights Plan”) that generally is designed to deter any person from acquiring shares of our common stock if the acquisition would result in such person beneficially owning 4.99% or more of our common stock without the approval of our Board of Directors (the “Board”).

Shareholders voted to extend the NOL Rights Plan through July 20, 2021 at the Company's 2018 annual meeting of shareholders.

Although these measures are intended to reduce the likelihood of an ownership change, we cannot assure you that they will prevent all transfers of our common stock that could result in such an ownership change. Further, these measures could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, the Company or a large block of our common stock, which may adversely affect the marketability, and depress the market price, of our common stock. In addition, these provisions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our shareholders.

Covenant restrictions under our indebtedness may limit our ability to operate our business.

The ~~Note Purchase Agreement~~agreement governing the 2017 Notes contains, among other things, covenants that may restrict our and our subsidiaries' ability to finance future operations, capital needs or to engage in other business activities. The Note Purchase Agreement and the 2017 Notes limit our ability and the ability of our subsidiaries to take certain actions without the consent of the ~~noteholders,~~Noteholders, including but not limited to the following:

incur indebtedness;

create certain liens;

make payments to our shareholders;

acquire our outstanding shares, or the shares of our subsidiaries;

make payments on debt securities junior to the 2017 Notes; and

merge, consolidate, transfer and/or sell substantially all of our assets.

There can be no assurance that we will be able to receive the consent of the ~~noteholders~~Noteholders should we have a need to take one of the restricted actions, which ~~such~~ limitation may hinder our ability to operate or grow our business in the future.

Loss of key members of our management could disrupt our business.

The loss of ~~certain~~ key members of management could have a material adverse effect on our business, financial condition and results of operations. We may not be able to retain our existing senior management, fill new positions or vacancies created by expansion or turnover or attract additional qualified senior management personnel.

Differences in our actual experience compared to the assumptions that we use to determine the value of our residual mortgage securities and to estimate fair values could further adversely affect our financial position.

The Company uses significant unobservable inputs (Level 3 inputs) to estimate the fair value of its residual mortgage securities. Material differences between actual experience and the assumptions used to determine the fair value of these securities may negatively impact our financial condition and results of operations. For example, one significant unobservable input used to determine the fair value of the Company's residual mortgage securities is the prepayment rate for the underlying mortgage loan collateral. If prepayment rates are faster (higher) than our estimates, the value of the securities may decline significantly.

~~The cash flows from, and value of, our mortgage securities will further decline as the underlying mortgage loan collateral declines.~~

There are many factors that affect the cash flows from, and value of, our mortgage securities, many of which are beyond our control. In general, the nature of mortgage securities is that as the underlying mortgage loan collateral is repaid or defaults, the cash flows from, and value of, our securities will decline.

We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could further harm our liquidity.

When we sold mortgage loans, whether as whole loans or pursuant to a securitization, we made customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower, broker, or employee fraud. Likewise, we are required to repurchase or substitute mortgage loans if we breach a representation or warranty in connection with our securitizations. We have received various repurchase demands as performance of subprime mortgage loans has deteriorated. A majority of repurchase requests have been denied, otherwise a negotiated purchase price adjustment was agreed upon with the purchaser. Enforcement of repurchase obligations against us would further harm our liquidity.

Risks Related to our Capital Stock

There can be no assurance that our common stock will continue to be traded in an active market.

Our common stock currently trades on ~~the~~ OTC ~~Pink marketplace of the OTC Markets Group, Inc.~~Pink. Trading of securities on this quotation service is generally limited and is effected on a less regular basis than on exchanges, such as the NYSE, and accordingly investors who own or purchase our stock will find that the liquidity or transferability of the stock may be limited. Additionally, a shareholder may find it more difficult to dispose of, or obtain accurate quotations as to the market value of, our stock. If an active public trading market cannot be sustained, the trading price of our common stock could be adversely affected and the ability of an investor to transfer their shares of our common stock may be limited.

Table of Contents

The market price and trading volume of our common stock may be volatile, which could result in substantial losses for our shareholders.

The market price of our capital stock can be highly volatile and subject to wide fluctuations. In addition, the trading volume in our capital stock may fluctuate and cause significant price variations to occur. Investors may experience volatile returns and material losses. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our capital stock include:

actual or anticipated changes in our earnings and cash flow;

general market and economic conditions, including the operations and stock performance of other industry participants;

the impact of new state or federal legislation or adverse court decisions;

~~actual or anticipated changes in the delinquency and default rates on mortgage loans, in general, and specifically on the loans we invest in through our mortgage securities;~~

~~actual or anticipated changes in financial estimates by securities analysts;~~

sales, or the perception that sales could occur, of a substantial number of shares of our common stock by insiders;

additions or departures of senior management and key personnel; and

actions by institutional shareholders.

Some provisions of our charter, bylaws, Maryland law and our NOL Rights Plan may deter takeover attempts, which may limit the opportunity of our shareholders to sell their common stock at favorable prices.

Certain provisions of our charter, bylaws, Maryland law, and our NOL Rights Plan could discourage, delay or prevent transactions that involve an actual or threatened change in control, and may make it more difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders. Under our charter, generally a director may only be removed for cause and only by the affirmative vote of the holders of at least a majority of all classes of shares entitled to vote in the election for directors together as a single class. Maryland law provides protection for Maryland corporations against unsolicited takeover situations. Further, our charter includes provisions designed to protect the tax benefits of our NOLs by generally restricting any direct or indirect transfers of our common stock that increase the direct or indirect ownership of our common stock by any person from less than 4.99% to 4.99% or more, or increase the percentage of our common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of our common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions will be void as of the date of the prohibited transfer as to the purported transferee. These transfer restrictions expire on August 1, 2020. Additionally, we have adopted an NOL Rights Plan that generally is designed to deter any person from acquiring shares of our common stock if the acquisition would result in such person beneficially owning 4.99% or more of our common stock without the approval of our Board.

Shareholders voted to extend the NOL Rights Plan through July 20, 2021 at the Company's 2018 annual meeting of shareholders.

Item

~~Item~~ 1B. Unresolved Staff Comments

None.

Item

~~Item~~ 2. Properties

The executive and administrative offices for the Company are located in Kansas City, Missouri, and consist of approximately ~~2,300~~1,400 square feet of leased office space. The Company is also a party to an operating lease for 12,000 square feet of office space in Kansas City and 30,000 square feet of office space in Tampa, Florida. The Company abandoned these operating leases during the fourth quarter of 2016 and 2014, respectively.

HCS leases office space in a number of locations in the state of Georgia. The executive and administrative offices for HCS are located in College Park, Georgia, and consist of approximately 4,700 square feet of leased office space.

Item

~~Item~~ 3. Legal Proceedings

The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and routine nature.

On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included ~~NovaStar Mortgage Funding Corporation (“NMFC”)~~NMFC and NovaStar Mortgage, Inc. ("NMI"), wholly-owned subsidiaries of the Company, and NMFC's individual directors, several securitization trusts sponsored by the Company (“affiliated defendants”) and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. The plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933, as amended, by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by the plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff's claims, which the court granted on March 31, 2011, with leave to amend. The plaintiff filed a second amended complaint on May 16, 2011, and the Company again filed a motion to dismiss. On March 29, 2012, the court dismissed the plaintiff's second amended complaint with prejudice and without leave to replead. The plaintiff filed an appeal. On March 1, 2013, the appellate court reversed the judgment of the lower court, which had dismissed the case. Also, the appellate court vacated the judgment of the lower court which had held that the plaintiff lacked standing, even as a class representative, to sue on behalf of investors in securities in which plaintiff had not invested, and the appellate court remanded the case back to the lower court for further proceedings. On April 23, 2013 the plaintiff filed its memorandum with the lower court seeking a reconsideration of the earlier dismissal of plaintiff's claims as to five offerings in which plaintiff was not invested, and on February 5, 2015 the lower court granted plaintiff's motion for reconsideration and vacated its earlier dismissal. On March 8, 2017, the affiliated defendants and all other parties executed an agreement to settle the action, with the contribution of the affiliated defendants to the settlement fund being paid by their insurance carriers. The court certified a settlement class and granted preliminary approval to the settlement on May 10, 2017. One member of the settlement class objected to the settlement and sought a stay of the final settlement approval hearing on the ground that it did not receive notice of the settlement and had no opportunity to timely opt out of the class. After the court rejected the motion for a stay, the objector filed an appeal and requested a stay of the district court proceedings pending disposition of the appeal. The court of appeals ~~has granted a~~denied the temporary stay of the district court proceedings ~~pending a decision~~and on October 19, 2018 dismissed the appeal as moot. Following the court of appeals’ denial of the objector’s ~~request~~petition for rehearing, the district court on March 7, 2019 held a ~~stay. Given~~fairness hearing. On March 8, 2019, the ~~stage~~district court issued a memorandum and order approving the settlement as fair, reasonable and adequate, and dismissing the action with prejudice. Following entry of judgment, the ~~litigation,~~objector filed a notice of appeal on March 26, 2019 and their opening brief was filed on June 28, 2019. The defendants answered on September 27, 2019, and the objector replied on October 18, 2019. Oral argument was held on February 19, 2020. Assuming the settlement approval becomes final, which is expected, the Company ~~cannot provide an estimate of the range of any~~will incur no loss. The Company believes that the ~~affiliated defendants~~Affiliated Defendants have meritorious defenses to the case and, if the settlement approval does not become final, expects them to defend the case vigorously.

Table of Contents

misleading registration statements, prospectuses, and/or prospectus supplements. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. NMFC filed a motion to dismiss the amended complaint which was denied on September 12, 2013. The defendants had claimed that the case should be dismissed based upon a statute of limitations and sought an appeal of the court's denial of this defense. An interlocutory appeal of this issue was allowed, and on August 27, 2013, the Tenth Circuit affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the appellate court held that the Extender Statute, 12 U.S.C. §1787(b)(14) applied to plaintiff’s claims. On June 16, 2014, the United States Supreme Court granted a petition of NMFC and its co-defendants for certiorari, vacated the ruling of the Tenth Circuit, and remanded the case back to that court for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). On August 19, 2014, the Tenth Circuit reaffirmed its prior decision, and on October 2, 2014 the defendants filed a petition for writ of certiorari with the Supreme Court, which was denied. On March 22, 2016, NMFC filed motions for summary judgment, and plaintiff filed a motion for partial summary judgment. Those motions remain pending. Given that plaintiff did not file a timely proof of claim in NMFC’s bankruptcy case, the Company believes it is likely that the case will be dismissed. The Company believes that NMFC has meritorious defenses to the case and expects it to defend the case vigorously in the event it proceeds.

On February 28, 2013, the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and purportedly on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series 2007-1 (the “Trust”), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, ~~County of~~ New York County against the Company and ~~NMI, a wholly-owned subsidiary of the Company.~~NMI. The notice provides that this is a breach of contract action with respect to certain, unspecified mortgage loans and ~~defendant's~~defendants’ failure to repurchase such loans under the applicable agreements. Plaintiff alleges that defendants, from the closing date of the transaction that created the Trust, were aware of the breach of the representations and warranties made and failed to give notice of and cure such breaches, and due to the failure of defendants to cure any breach, notice to defendants would have been futile. The summons with notice was not served until June 28, 2013. By letter dated June 24, 2013, the Trustee of the Trust forwarded a notice from Freddie Mac alleging breaches of representations and warranties with respect to 43 loans, as more fully set forth in included documentation. The 43 loans had an aggregate, original principal balance of about $6.5 million. On August 19, 2013, Deutsche Bank National Trust Company, as Trustee, filed a complaint identifying alleged breaches of representations and warranties with respect to seven loans that were included in the earlier list of 43 loans. Plaintiff also generally alleged a trust-wide breach of representations and warranties by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, ~~recessionary~~rescissory and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; ~~and~~ indemnification (indemnification against NMI only). and damages for breach of the implied covenant of good faith and fair dealing. On October 9, 2013, the Company and NMI filed a motion to dismiss plaintiff’s complaint. This motion to dismiss was withdrawn after plaintiff filed an amended complaint on January 28, 2014, and on March 4, 2014, the Company and NMI filed a motion to dismiss the amended complaint. ~~Given~~By a Decision/Order dated November 30, 2017, the ~~stage~~court granted in part and denied in part the motion to dismiss the amended complaint. The court dismissed all claims except for plaintiff’s claim for damages for breach of contract, to the extent that claim is based on the Company’s and NMI’s alleged failure to notify plaintiff of allegedly defective loans, and plaintiff’s claim for indemnification. The court denied the motion to dismiss these claims without prejudice to the Company’s and NMI’s right to file a new motion to dismiss in conformity with procedures to be established in coordinated proceedings before the court addressing similar claims against numerous defendants. Briefing of the ~~litigation,~~indemnification issue was completed.

The parties have reached a settlement of this matter. On October 25, 2018, the bankruptcy court overseeing the Company's bankruptcy case entered an order approving the settlement, and on November 19, 2018, the New York State Court “so ordered” a Stipulation of Voluntary Discontinuance terminating the case. Pursuant to the terms of the settlement agreement, the required upfront payment of $0.3 million was made on March 1, 2019. The settlement also requires equal quarterly installments over a three years period, which total an additional $0.3 million. Based on the probability of all contingencies associated with the settlement being satisfied, the Company ~~cannot provide~~has recorded an ~~estimate~~expense in the second quarter of 2018 in the Reorganization Items, net expense line item of the ~~range of any loss. The Company believes that it has meritorious defenses to~~income statement and the ~~case~~short and ~~expects to defend~~long-term liability totals in the ~~case vigorously.~~

applicable Accrued Settlement Claims lines per the balance sheet.

See "Reorganization" in Part I, Item 1. Business of the Form 10-K and Note 2 to the consolidated financial statements for a description of the Chapter 11 ~~Cases.~~

cases of Novation and the other Debtors.

Item

~~Item~~ 4. Mine Safety Disclosures

None.

~~None.~~

Table of Contents

PART II

Item

~~Item~~ 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company's common stock currently trades on ~~the~~ OTC Pink ~~marketplace of the OTC Markets Group, Inc.~~ under the symbol “NOVC”. Prior to the commencement of the Company's Chapter 11 ~~Cases,~~case, the Company's common stock traded on the OTCQB market of the OTC Markets Group, Inc. under the symbol "NOVC." There is no established public trading market for teh Company's common stock. The following table sets forth the high and low bid prices as reported by these quotation services, for the periods indicated.

High Low
2016
First Quarter $ 0.14
$ 0.05
Second Quarter 0.10
0.06
Third Quarter 0.08
0.03
Fourth Quarter 0.06
0.03

2015
First Quarter $ 0.35
$ 0.24
Second Quarter 0.42
0.22
Third Quarter 0.32
0.22
Fourth Quarter 0.31
0.12

The quotations represent inter-dealer prices without adjustment for retail markups, markdowns or commissions, and may not necessarily represent actual transactions.


	High		Low
2019
First Quarter	$	0.08	$	0.02
Second Quarter		0.07		0.02
Third Quarter		0.07		0.02
Fourth Quarter		0.06		0.02

2018
First Quarter	$	0.10	$	0.03
Second Quarter		0.08		0.03
Third Quarter		0.05		0.02
Fourth Quarter		0.05		0.02

As of ~~October 24, 2017,~~March 17, 2020, we had approximately ~~709~~713 shareholders of record of the Company's common ~~stock.~~stock. This figure does not represent the actual number of beneficial owners of our common stock because such stock is frequently held in "street name" by securities dealers and others for the benefit of individual owners who may vote the shares.

No dividends were declared during ~~2016~~2019 or ~~2015,~~2018 nor do we expect to declare any stock dividend distributions in the near future. The Note Purchase Agreement governing the ~~2017 Notes~~Company's senior notes contains restrictive covenants which prohibit the Company and its subsidiaries, from among other things, making any cash dividend or distribution to Novation shareholders. Should the restrictions be relieved, any future determination to pay dividends will be made at the discretion of our Board and will depend on earnings, financial condition, cost of equity, investment opportunities and other factors as our Board may deem relevant.

Item

~~Item~~ 6. Selected Financial Data

Not applicable.

Table of Contents

~~Not applicable.~~

Item

~~Item~~ 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our financial condition and results of operations for the years ended December 31, ~~2016~~2019 and ~~2015.~~2018. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and Notes to the Consolidated Financial Statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

~~Executive~~

Corporate Overview

Through our wholly-owned subsidiary HCS, acquired on July 27, 2017, we provide outsourced health care staffing and related services in the State of Georgia. The ~~Management's~~Company also owned a portfolio of mortgage securities which generated earnings to support on-going financial obligations. These securities were sold during 2018 for $13.0 million. See Note 5 to the consolidated financial statements for additional information regarding the sale of these securities. Our common stock, par value $0.01 per share, is traded on OTC Pink under the symbol “NOVC”.

See Part I, Item 1 of this Form 10-K for a discussion of our emergence from bankruptcy and note refinancing, which both occurred in the third quarter of 2017, and the note amendment, which occurred in the third quarter of 2019.

Financial Highlights and Key Performance Metrics. The following key performance metrics (in thousands, except per share amounts) are derived from our consolidated financial statements for the periods presented and should be read in conjunction with the more detailed information therein and with the disclosure included in this report under the heading “Management's Discussion and Analysis of Financial Condition and ~~Operating~~ Results ~~(“MD&A”) includes the following sections:~~

~~Corporate Overview~~ – ~~a brief overview~~ of ~~our business and current strategy, and summary of financial highlights as of December 31, 2016.~~

Operations.”

	December 31,
	2019			2018
Cash and cash equivalents	$	2,032		$	9,249
Service fee income	$	63,474		$	55,126
General and administrative expenses	$	8,345		$	8,089
Net income (loss) available to common shareholders, per basic share	$	(0.10	)	$	0.07

Consolidated Results of Operations–

Year Ended December 31, 2019 as Compared to the Year Ended December 31, 2018

Service Fee Income and Cost of Services

HCS delivers outsourced full-time and part-time employees primarily to Community Service Boards (“CSBs”), quasi state organizations that provide behavioral health services at facilities across Georgia including mental health services, developmental disabilities programs and substance abuse treatments. The State of Georgia has a total of 25 CSBs. Each CSB has a number of facilities, including crisis centers, outpatient centers and 24-hour group homes that require a broad range of employees, such as registered nurses, social workers, house parents and supervisors. The CSB market in Georgia is large and growing steadily, as the demand for the services provided by the CSBs continues to grow. In addition to providing outsourced employees to CSBs, HCS also provides healthcare outsourcing and staffing services to hospitals, schools and a variety of privately owned businesses. The services and positions provided to non-CSB clients are similar to the ones provided to CSB clients. The service fee income and costs of services in the consolidated statement of operations and comprehensive income (loss) are from the operations of HCS.

Future service fee income will be driven by the number of customers and the volume of associates employed by the CSB and outsourced to HCS. Customer contracts typically establish a fixed markup on the pay rate for the associates; therefore the cost of services will generally fluctuate consistently with fee income. HCS offers a health and welfare benefit plan to its associates. The cost of this benefit is passed through to customers plus a small markup to cover the cost of administration.

HCS acquired two significant customers that started in September 2018 and January 2019, respectively. However, during the fourth quarter of 2019, HCS was notified by a significant customer of its intent to terminate its contract services as of January 29, 2020.

General and Administrative Expenses

General and administrative expenses consist of salaries, office costs, legal and professional expenses and other customary costs of corporate administration. During 2019 and 2018, an$6.2 and $5.8 million, respectively, of the total general and administrative expenses were incurred by HCS. Corporate-level general and administrative expenses during 2019 and 2018 were $2.1 million and $2.3 million, respectively. The future amount of corporate-level general and administrative expenses will depend largely on corporate activities and staffing needs based on the evolving business strategy. For HCS, the amount of these expenses will depend on business growth. Increased advertising expense for recruiting, addition of new management staff, and insurance related fees are the primary reasons for the increase in general and administrative expenses incurred by HCS.

Goodwill Impairment Charge

Management completed its annual goodwill impairment assessment as of April 30, 2019, which determined that the carrying value of the HCS goodwill exceeded its fair value by $2.6 million. A goodwill impairment charge in this amount was recorded during the second quarter of 2019. In addition, during the fourth quarter of 2019, HCS was notified by a significant customer of its intent to terminate its contract services as of January 29, 2020. As a result, confirmation of the loss of the customer represented a triggering event for analysis of impairment of our intangible asset and goodwill balances as of September 30, 2019. It was determined that the carrying value of the HCS goodwill exceeded the fair value by $1.7 million and this adjustment was recorded during the third quarter of 2019.

Interest Income – Mortgage Securities

All of our mortgage securities were sold in December 2018, and therefore the Company will have no future interest income or cash flow from these securities. For the year ended December 31, 2018, interest income on our mortgage securities was approximately $1.1 million.

Table of Contents

Impairment on Mortgage Securities

To the extent that the cost basis of mortgage securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The impairment of $0.3 million on the 2002-3 AIO security recorded in 2018 was primarily driven by the deteriorating credit quality of the loans underlying the security.

Other Income

Fluctuations in the income received from the Company's mortgage securities results from the timing of ~~operations~~purchases/sales and amounts of dividends and interest paid. Subsequent to the HCS Acquisition, the Company had significantly less available funds to invest. In 2018, other income consisted primarily of the gains on sale of the Company's mortgage securities.

	For the Years Ended December 31,
	2019			2018
Interest income	$	1		$	10
Gain (loss) on sales of investments		(1	)		12,881
Other income		39			401
Total	$	39		$	13,292

Reorganization items, net

The Company incurred approximately $0.06 million and $1.9 million in reorganization related expenses for the years ended December 31, ~~2016~~2019 and ~~2015~~2018, respectively. During 2019, these costs related to professional fees paid and during 2018 this expense was comprised of $0.4 million in professional fees and $1.5 in settlement claims. These costs have decreased significantly as ~~presented in our Consolidated Financial Statements.~~

~~Liquidity and Capital Resources~~ – ~~an analysis~~a result of ~~our cash flows and financial commitments.~~

~~Critical Accounting Estimates~~ – ~~a discussion of our critical accounting estimates, which involve a high degree of judgment or complexity. This section also includes the impact of new accounting standards.~~

~~Corporate Overview~~

~~Emergence from Bankruptcy~~. On the Bankruptcy Petition Date, Novation and three of its subsidiaries (referred to as the Debtors), filed the Bankruptcy Petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases were being jointly administered under the case Novation Companies, Inc., et al, No. 16-19745-DER. The Company and one of its subsidiaries subsequently filed with the Bankruptcy Court and amended a plan of reorganization (referred to as the Plan) and a related disclosure statement. The Bankruptcy Court entered the Confirmation Order confirming the Plan solely with respect to the Company, which provided that the effective date of the Plan will occur when all conditions precedent to effectiveness, as set forth in the Plan, have been satisfied or waived. Two of the conditions to the effectiveness of the Plan were (i) the closing of the HCS Acquisition and (ii) the closing of the Note Refinancing. The HCS Acquisition and the Note Refinancing were completed on July 27, 2017. On July 27, 2017, upon the completion of the ~~HCS Acquisition and~~Company's reorganization. See Note 2 to the ~~Note Refinancing, and the satisfaction or waiver of all other conditions precedent to effectiveness, the effective date of the Plan occurred and~~consolidated financial statements.

Interest Expense

Interest expense decreased period over period, with the Company ~~filed a Notice of Occurrence of Effective Date of the Plan with the Bankruptcy Court. Under the Plan, holders of existing equity interests~~incurring $4.5 million in ~~the Company (i.e., the common stock) retain their interests.~~

~~Acquisition of Healthcare Staffing, Inc.~~ ~~On July 27, 2017, the Company~~2019 and ~~NHI completed the HCS Acquisition pursuant~~$5.3 million in 2018. See "Liquidity and Capital Resources" below and Note 8 to the ~~terms~~consolidated financial statements for a discussion of the HCS Purchase Agreement, as a result of which HCS became a wholly-owned subsidiary of NHI. HCS owns and operates a healthcare staffing solutions business based in the State of Georgia. Consideration for the HCS Acquisition consisted of $24 million in cash, subject to adjustment as provided in the HCS Purchase Agreement.

~~Note Refinancing.~~ ~~On July 27, 2017, the Company entered into~~ the Note Purchase Agreement ~~with NHI~~ and HCS as guarantors (together with the Company, referred to as the Credit Parties), the Noteholders and Wilmington Savings Fund Society, FSB, as collateral agent for the benefit of the Noteholders, to refinance $85,937,500 of principal indebtedness of the Company under the 2011 Notes. Pursuant to the Note Purchase Agreement, the Noteholders exchanged their 2011 Notes for 2017 Notes on the terms and conditions set forth therein. The unpaid principal amounts of the 2017 Notes, ~~bear~~which were amended on August 9, 2019. This Amendment, among other things, significantly reduced the interest atrate applicable from January 2019 through the third quarter of 2028 and allows the Company to apply certain surplus interest payments against future quarterly interest payments.

Income Tax Expense

Because of the Company's significant net operating losses and full valuation allowance, income tax expense was not material for any period presented and is not expected to be material for the foreseeable future.

Liquidity and Capital Resources

During 2019, the Company had net loss of $10.2 million and generated negative operating cash flow of $5.2 million. As of December 31, 2019, the Company had an overall shareholders deficit of $72.1 million. As of December 31, 2019, the Company had an aggregate of $2.0 million in cash and cash equivalents and total liabilities of $91.5 million. Of the $2.0 million in cash, $0.7 million is held by the Company's subsidiary NMLLC, which has filed a ~~variable rate equal~~Chapter 11 plan of reorganization that was confirmed by the court on April 11, 2018. Under this plan, this cash is only available to pay general creditors and expenses of NMLLC.

From January 2019 through August 2019, the Company had a significant on-going obligation to pay interest under its senior note agreements at LIBOR plus 3.5% per annum, payable quarterly in arrears until maturity on March 30, 2033. ~~The 2017 Notes generally rank~~As disclosed in Note 8 to the consolidated financial statements, the Company was
successful in amending the senior note agreements to lower the interest rate and receive future credit for cash interest payments made in ~~right~~2019 in exchange for the issuance of ~~payment to any existing or future subordinated indebtedness~~common stock and warrants. Based on the terms of the ~~Credit Parties. The~~amendment, the Company ~~may at any time upon 30 days’ notice~~is not required to make cash interest payments on the ~~Noteholders redeem all or part~~senior notes from August 2019 through March 2022. There is no cash interest payment due within one year from the date of the ~~2017 Notes at a redemption price equal~~consolidated financial statements.

After engaging major investment firms to ~~101%~~evaluate the marketplace for its mortgage securities, the Company executed trades to sell all of its mortgage securities during 2018. These sales generated $13.0 million in cash proceeds for the ~~principal amount redeemed plus~~Company. However, the Company will no longer have any ~~accrued~~future cash flows from these securities since they were sold.

Management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers and ~~unpaid interest thereon. Pursuant~~targeting new customers that have not previously been served by HCS.

As discussed, the Amendment to the Note Purchase Agreement ~~in connection with~~and waiver of interest payments through April 2022, has significantly improved our forecasted cash position over the ~~Note Refinancing,~~next year. However, our historical operating results and poor cash flow suggest substantial doubt exists related to the ~~Company paid all overdue and unpaid accrued interest~~Company's ability to continue as a going concern. In addition, based on the ~~2011 Notes in~~recent global developments regarding the ~~agreed, reduced aggregate amount of $5,775,779, and paid $500,000 in fees and expenses incurred by~~coronavirus (COVID-19) situation, there is significant uncertainty regarding the ~~Noteholders.~~

~~Following~~potential impact to our business. Based on these uncertainties, there is ~~a summary of financial highlights (in thousands; except per share amounts).~~

December 31,
2016 2015
Cash and cash equivalents $ 4,805
$ 2,826
Marketable securities $ 36,488
$ 18,897
Net income (loss) available to common shareholders, per diluted share $ 0.06
$ (0.32 )

~~Consolidated Results of Operations~~

~~Year ended~~ ~~December 31, 2016~~ ~~as Compared to the Year Ended~~ ~~December 31, 2015~~

~~Interest Income – Mortgage Securities~~

Interest income on mortgage securities decreased to approximately $5.1 million in 2016 from $6.1 million in 2015. Fluctuations in the interest income received from our mortgage portfolio are typically due to factors beyondno guarantee the Company's ~~control, such as the~~

~~performance of the underlying loan collateral, prepayment speeds, interest rates, etc. The Company expects interest income~~

~~and~~ cash ~~flow from these securities to decline as the principal on the underlying loan collateral is paid, written down, or written~~

off. However, the Company owns overcollateralization ("OC") mortgage securities that are expected to generate significant cash flow. These securities represent the excess of securitized mortgage loan collateral over mortgage bonds sold to third parties. When the third party bonds are fully repaid, the mortgage loan principal and interest paymentsposition will ~~be paid to the Company as the owner of the OC bonds. The timing of receipt of these payments is unknown and depends on the timing of the mortgage loan principal and interest payments.~~

~~General and Administrative~~

General and administrative expenses decreased to approximately $4.4 million in 2016 compared to $5.7 million in 2015. The decrease in general and administrative expenses is due to the elimination of a significant portion of employees subsequent to 2015 and as a result of its divestiture of Corvisa. The Company is continuing to take steps to reduce other operating and overhead costs, including the reduction in leased office space. The anticipated cost savings cannot be quantified at this time, but the Company expects further reductions in operating costs in 2017.

~~Other (Expense) Income~~

The Company invests in liquid marketable securities, including equities, corporate bonds and traditional mortgage-backed securities in order to supplement earnings. During 2016, these investments generated additional income during the period where the Company had no other operating income. During 2016, other income includes realized gains of $3.7 million and interest and dividends of $1.7 million from this investing activity. The Company realized approximately $0.2 million in losses from the write-down of leasehold improvements when it abandoned its Kansas City office lease and recognized other income of approximately $0.3 million during 2016. During 2015, other expense includes $20 thousand of interest income and $47 thousand of miscellaneous expenses.

~~Reorganization items, net~~

The Company has incurred significant costs associated with our reorganization and the Chapter 11 proceedings. These costs are being expensed as incurred. In addition, a non-cash charge to write-off the unamortized debt issuance costs related to our 2011 Notes is included in “Reorganization items, net” as these debt instruments are expected to be impacted by the bankruptcy reorganization process. For the year ended December 31, 2016 reorganization items include (in thousands):

Adjustments to deferred debt issuance costs and senior debt premium $ 2,399
Professional fees (1,252 )
Adjustments to other liabilities for claims made or rejected contracts (449 )
Other (31 )
Reorganization items, net $ 667

While these costs will significantly affect our results of operations for the first and second quarters of 2017, we expect these costs to decline significantly beginning in the third quarter following the resolution of our Chapter 11 proceedings. For the six months ended June 30, 2017, the Company incurred $3.1 million in reorganization items, net, primarily professional fees.

~~Interest Expense~~

Interest expense is comprised primarily of interest on the 2011 Notes, which is variable based on 3-month LIBOR. Interest expense increased to $3.6 million in 2016 from $3.2 million in 2015. The increase in interest expense is a result of an increase in LIBOR.

~~Liquidity and Capital Resources~~

As of December 31, 2016, the Company had approximately $4.8 million in unrestricted cash and cash equivalents. In addition, the Company held approximately $26.5 million in liquid marketable securities, which consist of traditional agency mortgage-backed securities. In addition, the Company owns various residual interest and overcollateralization mortgage securities that are generating monthly cash. The Company's marketable securities are classified as available-for-sale and are included in thecover current ~~and non-current marketable securities line items on the consolidated balance sheet. For additional information regarding the Company's marketable securities, see~~ ~~Note 5~~ ~~to the consolidated financial statements.~~

As of December 31, 2016, the 2011 Notes had an aggregate principal balance of $85.9 million. The 2011 Notes were created through an exchange of the Company's previously outstanding junior subordinated notes that occurred prior to 2015. This exchange was considered a modification of a debt instrument for accounting purposes. Through the Bankruptcy Petition Date, the Company used the effective interest method to accrete from the principal balance as of the modification date to the carrying balance as of any reporting date. Under the effective interest method, significant changes in the rate at which a debt instrument accrues interest over its term can result in a recorded balance in excess of the aggregate principal balance of the debt instrument. As of the Bankruptcy Petition Date, the Company charged off the entire difference between the contractual principal amount of the 2011 Notes and their carrying value as these notes are expected to be impacted by the Company's bankruptcy reorganization process.

The 2011 Notes accrued interest at a rate of 1.0% per annum until January 1, 2016 and then accrued interest at a rate of three-month LIBOR plus 3.5% per annum. Interest on the 2011 Notes is payable on a quarterly basis and no principal payments were due until maturity on March 30, 2033. The Company did not make the quarterly interest payments due on March 30, 2016 totaling $0.9 million. These interest payments were not made within 30 days after they became due and payable, and remain unpaid, such non-payments constituting events of default under the Indentures.obligations. As a result, we have not been able to alleviate the 2011 Notes were classified as current liabilities. On May 9, 2016, the Company received a notice of acceleration with respect to the Series 1 Notes and the Series 2 Notes, declaring all principal and unpaid interest immediately due and payable. A similar acceleration notice was received on June 6, 2016 with respect to the Series 3 Notes.

On the Bankruptcy Petition Date, the aggregate outstanding principal under the 2011 Notes was $85.9 million and the aggregate recorded interest liability was $2.0 million. As of December 31, 2016, the principal and recorded unpaid interest ($3.7 million) are classified as liabilities subject to compromise insubstantial doubt about the Company's ability to continue as a going concern for at least one year after the date that these consolidated ~~balance sheet.~~financial statements are issued.

~~Pursuant to the Note Purchase Agreement, in connection with the Note Refinancing, the Company paid all overdue and unpaid accrued interest on the 2011 Notes in the agreed, reduced aggregate amount~~

Table of ~~$5,775,779, and paid $500,000 in fees and expenses incurred by the Noteholders, and the Noteholders exchanged their 2011 Notes for the 2017 Notes on the terms and conditions set forth therein.~~Contents

The unpaid principal amounts of the 2017 Notes bear interest at a variable rate equal to LIBOR plus 3.5% per annum, payable quarterly in arrears until maturity on March 30, 2033. The 2017 Notes generally rank senior in right of payment to any existing or future subordinated indebtedness of the Credit Parties. The Company may at any time upon 30 days’ notice to the Noteholders redeem all or part of the 2017 Notes at a redemption price equal to 101% of the principal amount redeemed plus any accrued and unpaid interest thereon.

The Note Purchase Agreement contains customary affirmative and negative covenants, including but not limited to certain financial covenants. The Note Purchase Agreement also contains customary events of default, including but not limited to payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Noteholders may, among other remedies, accelerate the payment of all obligations under the Note Purchase Agreement and the 2017 Notes.

In connection with the Note Purchase Agreement, on July 27, 2017, the Credit Parties entered into a Pledge and Security Agreement, dated as of the same date, pursuant to which each of the Credit Parties granted a first priority lien generally covering all of its assets, other than accounts receivable and inventory, for the benefit of the Noteholders, to secure the obligations under the Note Purchase Agreement and the 2017 Notes.

Overview of Cash Flow for the Year Ended December 31, ~~2016~~

2019

The following table provides a summary of our operating, investing and financing cash flows as taken from our consolidated statements of cash flows for ~~2016~~2019 and ~~2015~~2018 (in thousands).

For the Year Ended
December 31,
2016 2015
Consolidated Statements of Cash Flows:
Cash flows (used in) provided by operating activities of continuing operations $ 1,922
$ (1,742 )
Cash flows provided by investing activities of continuing operations 1,980
26,993
Cash flows used in financing activities of continuing operations (205 ) (25,660 )

	For the Years Ended December 31,
	2019			2018
Cash flows used in operating activities	$	(5,168	)	$	(5,056	)
Cash flows (used in) provided by investing activities		(70	)		13,031
Cash flows used in financing activities		(1,979	)		(1,466	)

Operating Activities

The increase in net cash flows ~~from~~used in operating activities to approximately ~~$1.9~~$5.2 million ~~provided by operating activities~~ during ~~2016~~2019 from ~~approximately $1.7 million~~cash used in operating activities of $5.1 millionduring ~~2015~~2018 was ~~driven primarily by the reduction in interest payments and other operating expenses, demonstrated~~immaterial.

Investing Activities

The decrease in the ~~change in accounts payable and accrued expenses.~~

~~Investing Activities~~

~~Cash~~net cash flows provided by (used in) investing activities ~~includes primarily proceeds from and maturities of marketable securities. Significant funds were required in 2015~~is mainly due to ~~finance the operations of Corvisa in 2015. Significantly less net proceeds sales were necessary in 2016 given~~ the sale of ~~Corvisa~~the Company's marketable securities in ~~January.~~

2018, compared to no sales of securities in 2019.

Financing Activities

The ~~net~~increase in cash ~~flows~~ used in financing activities ~~results from contributions~~is mainly due to the payoff of ~~capital to discontinued operations~~HCS’s line of credit in 2019 and ~~decreased substantially after~~additional fees associated with the ~~sale of Corvisa in January of 2016.~~

payoff.

Critical Accounting Estimates

We prepare our consolidated financial statements in conformity with GAAP and, therefore, are required to make estimates regarding the values of our assets and liabilities and in recording income and expenses. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. These estimates affect reported amounts of assets, liabilities and accumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income during the periods presented. The following summarizes the components of our consolidated financial statements where understanding accounting policies is critical to understanding and evaluating our reported financial results, especially given the significant estimates used in applying the policies. The discussion is intended to demonstrate the significance of estimates to our consolidated financial statements and the related accounting policies. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board and the Audit Committee has reviewed our disclosure.

~~Marketable Securities~~

~~Our marketable securities include corporate equity~~

Impairment of Goodwill and ~~debt instruments~~Indefinite-Lived Intangible Assets

The values of goodwill and ~~other traditional liquid investments, such as agency mortgage-backed securities.~~trademarks are assessed annually to determine whether their carrying value exceeds their fair value. In addition, they ~~include beneficial interests~~are tested on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce their fair value below carrying value. If we determine the fair value of goodwill or trademarks is less than their carrying value, an impairment loss is recognized. Impairment losses, if any, are reflected in operating income or loss in the ~~mortgage securitizations we executed prior to 2008. These beneficial interests include interest-only mortgage securities, residual interests~~period incurred. The Company performs its annual tests of goodwill and ~~over-collateralization bonds, collectively "retained mortgage securities."~~

trademarks during the second quarter of each fiscal year.

Impairment of Long-Lived Assets with Finite Lives

The ~~accounting estimates used~~value of purchased intangible assets is assessed for impairment whenever an event or change in ~~valuing~~circumstances indicates that the retained mortgage securities and determining their income recognition rate are “critical accounting estimates” because they can materially affect net income and shareholders’ equity. In order to determinecarrying value ~~we must forecast interest rates, mortgage principal payments, prepayments and loan default assumptions and when, or if,~~of the ~~servicer for the underlying mortgage loans will exercise optional redemption rights (the "call date"). Making these assumptions requires a large degree~~asset may not be fully recoverable. Recoverability is determined based on an estimate of ~~judgment. The rate used to discount the projected~~undiscounted future cash flows resulting from the use of an asset and its eventual disposition. An impairment loss is ~~also critical in~~measured by comparing the valuation of our residual securities. Management’s best estimate of key assumptions, including credit losses, prepayment speeds, expected call dates, market discount rates and forward yield curves commensurate with the risks involved, are used in estimating future cash flows.

We use historical collateral performance data, market economic data and published forward yield curves when modeling future expected cash flows and establishing the rate of income recognized on our retained mortgage securities. At each reporting date, future expected cash flows to be received is forecasted based on the assumptions made. The fair value of the ~~retained mortgage securities is estimated by discounting these cash flows. We have relied heavily on historical performance of non-prime mortgage loans, in general,~~asset to its carrying value. If we determine assumptions. However, market trends for housing prices, labor statistics and other economic factors have consistently improved for several years. Sufficient time has passed to suggest that these trends are sustainable. Therefore, we are now relying more heavily on the specific performance of these loans in forecasting cash flow from our retained mortgage securities. To date, these specific loans have performed significantly better than non-prime loans in general. Better performance by the underlying mortgage securities generally results in more cash flow and higher values for our retained mortgage securities.

~~We believe the~~fair value of an asset is less than the carrying value, an impairment loss is incurred. Impairment losses, if any, are reflected in operating income or loss in our ~~residual securities is appropriate, but can provide no assurance that future changes in interest rates, prepayment and loss experience or changes in~~consolidated statements of operations during the ~~market discount rate will not require material adjustments to the retained mortgage securities. See~~ ~~Note 8~~ ~~to the consolidated financial statements for additional information on the estimates used in the valuation of our retained mortgage securities.~~

~~Liabilities Subject to Compromise~~

~~Beginning with the quarterly~~ period ended September 30, 2016, the Company accounts for the bankruptcy in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, “Reorganizations.” The consolidated financial statements include amounts classified as “liabilities subject to compromise.” This amount represents estimates of known or potential pre-petition claims that were expected to be resolved in connection with our Chapter 11 Cases. Differences between amounts we are reporting as liabilities subject to compromise in this Annual Report on Form 10-K and the amounts attributable to such matters claimed by our creditors or approved by the Bankruptcy Court may be material. We

~~continued to evaluate our liabilities throughout the Chapter 11 process and may make adjustments in future periods as necessary and appropriate.~~

incurred.

Income Taxes

In determining the amount of deferred tax assets to recognize in the consolidated financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. The income ~~taxes~~tax guidance requires the recognition of a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Income tax guidance indicates the more likely than not threshold is a level of likelihood that is more than 50%.

Under the income tax guidance, companies are required to identify and consider all available evidence, both positive and negative, in determining whether it is more likely than not that all or some portion of its deferred tax assets will not be realized. Positive evidence includes, but is not limited to the following: cumulative earnings in recent years, earnings expected in future years, excess appreciated asset value over the tax basis and positive industry trends. Negative evidence includes, but is not limited to the following: cumulative losses in recent years, losses expected in future years, a history of operating losses or tax credit carryforwards expiring, and adverse industry trends.

Table of Contents

The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is required ~~to counter~~ to support a conclusion that a valuation allowance is not needed for all or some of the deferred tax assets. Cumulative losses in recent years are significant negative evidence that is difficult to overcome when determining the need for a valuation allowance. Similarly, cumulative earnings in recent years represent significant positive objective evidence. If the weight of the positive evidence is sufficient to support a conclusion that it is more likely than not that a deferred tax asset will be realized, a valuation allowance should not be recorded.

The Company examines and weighs all available evidence (both positive and negative and both historical and forecasted) in the process of determining whether it is more likely than not that a deferred tax asset will be realized. The Company considers the relevance of historical and forecasted evidence when there has been a significant change in circumstances. Additionally, the Company evaluates the realization of its recorded deferred tax assets on an interim and annual basis. The Company does not record a full valuation allowance if the weight of the positive evidence exceeds the negative evidence and is sufficient to support a conclusion that it is more likely than not that its deferred tax asset will be realized.

If a valuation allowance is necessary, the Company considers all sources of taxable income in determining the amount of valuation allowance to be recorded. Sources of taxable income identified in the income tax guidance include the following: 1) taxable income in prior carryback year, 2) future reversals of existing taxable temporary differences, 3) future taxable income exclusive of reversing temporary differences and carryforwards, and 4) tax planning strategies.

The Company currently evaluates estimates of uncertainty in income taxes based upon a framework established in the income tax accounting guidance. The guidance prescribes a recognition threshold and measurement standard for the recognition and measurement of tax positions taken or expected to be taken in a tax return. In accordance with the guidance, the Company evaluates whether a tax position will more likely than not be sustained upon examination by the appropriate taxing authority. The Company measures the amount to recognize in its consolidated financial statements as the largest amount that is greater than 50% likely of being realized upon ultimate settlement. The recognition and measurement of tax benefits is often judgmental, and determinations regarding the tax benefit can change as additional developments occur relative to the issue.

~~The amounts of income taxes, deferred tax assets and the related valuation allowance are discussed in~~ ~~Note 10~~ ~~to the Company's consolidated financial statements.~~

Impact of Recently Issued Accounting Pronouncements

Information regarding the impact of recently issued accounting pronouncements is included in Note 3 to the consolidated financial statements.

Item

~~Item~~ 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Table of Contents

Item

~~Item~~ 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

NOVATION COMPANIES, INC. AND SUBSIDIARIES




Report of Independent Registered Public Accounting Firm	1617
Consolidated Balance Sheets	18
Consolidated Statements of Operations and Comprehensive Income (Loss)	19
Consolidated Statements of Shareholders' Deficit	20
Consolidated Statements of Cash Flow	21
Notes to Consolidated Financial Statements	2223

Table of Contents

REPORT

~~REPORT~~ OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Novation Companies, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance ~~sheet~~sheets of Novation Companies, Inc. (the Company) as of December 31, ~~2016,~~2019 and 2018, and the related consolidated statements of operations and comprehensive income (loss), ~~shareholders’~~shareholders' deficit, and cash flows for each of the years in the two year period ended December 31, ~~2016. Management~~2019, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company ~~is responsible~~as of December 31, 2019 and 2018, and the results of its operations and its cash flows for ~~these~~each of the years in the two year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt About the Company's Ability to Continue as a Going Concern

The accompanying consolidated financial ~~statements.~~statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred net operating losses and has had negative operating cash flow, combined with the potential impact of COVID-19, this has led to substantial doubt related to the Company to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding those matters also are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of FASB Accounting Standards Codification (Topic 842), Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on ~~these~~the Company’s consolidated financial statements based on our ~~audit.~~

audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our ~~audit~~audits in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material ~~misstatement.~~misstatement, whether due to error or fraud. The Company is not ~~reuqred~~required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. ~~Our audit included consideration~~As part of our audits, we are required to obtain an understanding of internal control over financial reporting, ~~as a basis for designing audit procedures that are appropriate in the circumstances,~~ but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. ~~An audit also includes~~

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence ~~supporting~~regarding the amounts and disclosures in the consolidated financial ~~statements, assessing~~statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial ~~statement presentation.~~statements. We believe that our ~~audit~~audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Novation Companies, Inc. as of December 31, 2016 and the results of its operations and its cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

/s/ BOULAY PLLP

~~October 25, 2017~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~Board of Directors and Shareholders~~

~~Novation Companies, Inc.~~

We have ~~audited~~served as the ~~accompanying consolidated balance sheet~~Company's auditor since 2016.

Minneapolis, Minnesota

March 23, 2020

Table of Novation Companies, Inc. a Maryland corporation, and subsidiaries (the “Company”) as of December 31, 2015, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.Contents

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Novation Companies, Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 in the previously filed 2015 consolidated financial statements, which is not presented herein, the Company has changed its method of accounting for the presentation of deferred income taxes in 2015 due to the adoption of FASB Accounting Standards Update No. 2015-17 - ~~Balance Sheet Classification of Deferred Taxes~~.

~~/s/ GRANT THORNTON LLP~~

~~Kansas City, Missouri~~

~~February 16, 2016~~

NOVATION

~~NOVATION~~ COMPANIES, INC.

~~DEBTORS-IN-POSSESSION~~

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	December 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	2,032		$	9,249
Accounts and unbilled receivables		6,583			6,122
Prepaid expenses		647			350
Other		21			131
Total current assets		9,283			15,852
Non-current assets:
Goodwill		3,905			8,205
Intangible assets, net		5,784			6,978
Property and equipment, net		125			91
Operating lease right-of-use asset		316			—
Other		4			4
Total non-current assets		10,134			15,278
Total assets	$	19,417		$	31,130

Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable and current maturities of long-term debt	$	524		$	670
Accrued compensation and benefits payable		2,717			2,731
Health and wellness program liability		492			—
Borrowings under revolving line of credit		—			1,948
Operating lease liability		205			—
Accrued interest payable		—			1,295
Accrued claim settlements		246			459
Other		36			35
Total current liabilities		4,220			7,138

Non-current liabilities:
Long-term debt, including debt premium		86,824			85,969
Accrued claim settlements		307			553
Operating lease liability		125			—
Other		—			426
Total non-current liabilities		87,256			86,948
Total liabilities		91,476			94,086

Shareholders' deficit:
Common stock, $.01 par value per share, 780,000,000 shares authorized:
112,355,893 and 99,137,893 shares issued and outstanding as of December 31, 2019 and 2018, respectively		1,123			991
Additional paid-in capital		746,112			745,104
Accumulated deficit		(819,294	)		(809,050	)
Accumulated other comprehensive income (loss)		—			(1	)
Total shareholders' deficit		(72,059	)		(62,956	)
Total liabilities and shareholders' deficit	$	19,417		$	31,130

December 31,
2016 2015
Assets
Current Assets
Cash and cash equivalents $ 4,805
$ 2,826
Marketable securities, current 9,943
17,500
Other current assets 644
1,119
Current assets of discontinued operations 447
1,843
Total current assets 15,839
23,288
Non-Current Assets
Marketable securities, non-current 26,545
1,397
Other assets 246
839
Non-current assets of discontinued operations —
6,415
Total non-current assets 26,791
8,651
Total assets $ 42,630
$ 31,939

Liabilities and Shareholders' Deficit
Liabilities:
Current Liabilities
Accounts payable and accrued expenses $ 792
$ 1,453
Current liabilities of discontinued operations —
2,470
Total current liabilities 792
3,923
Non-Current Liabilities
Senior notes —
88,385
Other liabilities 71
391
Non-current liabilities of discontinued operations —
1,833
Total non-current liabilities 71
90,609
Total liabilities not subject to compromise 863
94,532
Liabilities subject to compromise 90,966
—
Total liabilities 91,829
94,532

Commitments and contingencies (Note 7)

Shareholders' deficit:
Capital stock, $0.01 par value per share, 120,000,000 shares authorized:
Common stock, 92,844,907 and 92,748,753 shares issued and outstanding as of December 31, 2016 and 2015, respectively 928
928
Additional paid-in capital 744,873
744,575
Accumulated deficit (804,319 ) (809,532 )
Accumulated other comprehensive income 9,319
1,436
Total shareholders' deficit (49,199 ) (62,593 )
Total liabilities and shareholders' deficit $ 42,630
$ 31,939

See notes to consolidated financial statements.

Table of Contents

NOVATION COMPANIES, INC.

~~DEBTORS-IN-POSSESSION~~

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except share and per share amounts)

	For the Years Ended December 31,
	2019			2018
Service fee income	$	63,474		$	55,126
Cost and expenses:
Cost of services		56,483			48,149
General and administrative expenses		8,345			8,089
Goodwill impairment charge		4,300			—
Operating loss		(5,654	)		(1,112	)

Interest income - mortgage securities		—			1,133
Impairment on mortgage securities		—			(325	)
Gains on sales of investments		—			12,881
Other income		39			411
Interest expense		(4,522	)		(5,279	)
Reorganization items, net		(63	)		(1,864	)

Income (loss) before income taxes		(10,200	)		5,845
Income tax expense (benefit)		25			(289	)
Net income (loss)		(10,225	)		6,134

Other comprehensive loss:
Reclassification gain on marketable securities included in net income		—			(12,881	)
Unrealized gains on marketable securities		1			1,486
Total other comprehensive income (loss)		1			(11,395	)
Total comprehensive loss	$	(10,224	)	$	(5,261	)

Earnings (loss) per share:
Basic	$	(0.10	)	$	0.07
Diluted	$	(0.10	)	$	0.06
Weighted average common shares outstanding:
Basic		100,472,515			93,961,799
Diluted		100,472,515			94,470,057

See notes to consolidated financial statements.

Table of Contents

For the Year Ended
December 31,
2016 2015
Income:
Interest income – mortgage securities $ 5,060
$ 6,131
Total 5,060
6,131

Operating Expenses:
General and administrative 4,367
5,704
Total 4,367
5,704

Other income (expense) 5,472
(27 )
Reorganization items, net 667
—
Interest expense (3,606 ) (3,193 )

Income (loss) from continuing operations before income taxes 3,226
(2,793 )
Income tax benefit (21 ) (28 )
Net income (loss) from continuing operations 3,247
(2,765 )
Income (loss) from discontinued operations, net of income taxes 1,966
(25,964 )
Net income (loss) 5,213
(28,729 )

Other comprehensive income (loss):
Less reclassification gain included in net income

(3,672 ) —
Change in unrealized gain on marketable securities 11,555
(1,183 )
Other comprehensive income (loss) 7,883
(1,183 )
Net comprehensive income (loss) $ 13,096
$ (29,912 )

Earnings (loss) per common share:
Basic $ 0.06
$ (0.32 )
Diluted $ 0.06
$ (0.32 )
Weighted average basic common shares outstanding 91,905,941
91,138,068
Weighted average diluted common shares outstanding 91,905,941
91,138,068

NOVATION

~~NOVATION~~ COMPANIES, INC.

~~DEBTORS-IN-POSSESSION~~

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(in thousands)

	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders�� Deficit
Balance, December 31, 2018	$	991	$	745,104		$	(809,050	)	$	(1	)	$	(62,956	)
Issuances and cancellations of nonvested stock		42		(42	)		—			—			—
Common stock granted in debt restructure		90		(90	)		—			—			—
Common stock and common stock warrants granted in debt restructure		—		916			—			—			916
Compensation recognized under stock compensation plans		—		224			—			—			224
Net loss		—		—			(10,225	)		—			(10,225	)
Adjustment to retained earnings for adoption of accounting standard		—		—			(19	)		—			(19	)
Other comprehensive income		—		—			—			1			1
Balance, December 31, 2019	$	1,123	$	746,112		$	(819,294	)	$	—		$	(72,059	)


Balance, December 31, 2017	$	971	$	744,937		$	(815,184	)	$	11,394		$	(57,882	)
Issuances and cancellations of nonvested stock		20		(20	)		—			—			—
Compensation recognized under stock compensation plans		—		187			—			—			187
Net income		—		—			6,134			—			6,134
Other comprehensive loss		—		—			—			(11,395	)		(11,395	)
Balance, December 31, 2018	$	991	$	745,104		$	(809,050	)	$	(1	)	$	(62,956	)

See notes to consolidated financial statements.

Table of Contents

Common
Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income

Total
Shareholders’
Deficit
Balance, December 31, 2015 $ 928
$ 744,575
$ (809,532 ) $ 1,436
$ (62,593 )
Issuance of nonvested shares —
—
—
—
—
Compensation recognized under stock compensation plans —
298
—
—
298
Net income —
—
5,213
—
5,213
Other comprehensive income —
—
—
7,883
7,883
Balance, December 31, 2016 $ 928
$ 744,873
$ (804,319 ) $ 9,319
$ (49,199 )

Balance, December 31, 2014 $ 915
$ 743,919
$ (780,803 ) $ 2,619
$ (33,350 )
Issuance of nonvested shares 13
(13 ) —
—
—
Compensation recognized under stock compensation plans —
669
—
—
669
Net loss —
—
(28,729 ) —
(28,729 )
Other comprehensive loss —
—
—
(1,183 ) (1,183 )
Balance, December 31, 2015 $ 928
$ 744,575
$ (809,532 ) $ 1,436
$ (62,593 )

See notes to consolidated financial statements.

NOVATION

~~NOVATION~~ COMPANIES, INC.

~~DEBTORS-IN-POSSESSION~~

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the Years Ended December 31,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(10,225	)	$	6,134
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Accretion of marketable securities, net		—			(76	)
Impairment on mortgage securities		—			325
Amortization of intangible assets		1,194			1,194
Amortization of debt discount		1,262			—
Realized gain on marketable securities		—			(12,881	)
Settlement claims		—			1,012
Depreciation expense		27			334
Loss on disposal of fixed assets		9			—
Lease expense		(5	)		—
Goodwill impairment		4,300			—
Compensation recognized under stock compensation plans		224			187
Changes in operating assets and liabilities:
Accounts and unbilled receivables		(461	)		1,800
Accounts payable and accrued expenses		(146	)		(2,012	)
Accrued compensation and benefits payable		(14	)		(1,482	)
Accrued health and wellness program payable		492			—
Accrued interest payable		(754	)		245
Accrued claim settlements		(459	)		—
Other current assets and liabilities, net		(186	)		128
Other noncurrent assets and liabilities, net		(426	)		36
Net cash used in operating activities		(5,168	)		(5,056	)

Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities		—			13,031
Purchase of property and equipment		(96	)		—
Proceeds from sale of property and equipment		26			—
Net cash provided by (used in) investing activities		(70	)		13,031

Cash flows from financing activities:
Borrowings under revolving line of credit		8,685			55,537
Repayments of borrowings under revolving line of credit		(10,633	)		(56,922	)
Paydowns of long-term debt		(31	)		(81	)
Net cash used in financing activities		(1,979	)		(1,466	)

Net increase (decrease) in cash and cash equivalents		(7,217	)		6,509
Cash and cash equivalents, beginning of period		9,249			2,740
Cash and cash equivalents, end of period	$	2,032		$	9,249


Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,030		$	5,034
Cash paid for reorganization items	$	94		$	1,175
Cash paid for income taxes, net	$	30		$	75

Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock in restructure of debt (Note 8)	$	311		$	—
Issuance of common stock warrants in restructure of debt (Note 8)	$	605		$	—

See notes to consolidated financial statements.

Table of Contents

For the Year Ended
December 31,
2016 2015
Cash flows from operating activities:
Net income (loss) $ 5,213
$ (28,729 )
Income (loss) from discontinued operations, net of income taxes 1,966
(25,964 )
Net income (loss) from continuing operations 3,247
(2,765 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gains on sales of marketable securities, net (3,672 ) —
Non-cash reorganization items, net (2,447 ) —
Accretion of marketable securities, net 16
(235 )
Amortization of deferred debt issuance costs and senior debt discount —
2,448
Other non-cash losses, net —
203
Compensation recognized under stock compensation plans 274
669
Changes in:
Due from discontinued operations (26 ) 89
Other current assets and liabilities, net 183
(1,346 )
Other noncurrent assets and liabilities, net 225
57
Accounts payable and accrued expenses 4,122
(862 )
Net cash provided by (used in) operating activities of continuing operations 1,922
(1,742 )
Net cash used in operating activities of discontinued operations (1,921 ) (23,005 )
Net cash provided by (used in) operating activities 1
(24,747 )

Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities 33,468
26,995
Proceeds from other investing activities, net —
(2 )
Proceeds from paydowns of notes receivable 21
—
Proceeds from sale of subsidiary 7,643
—
Purchases of marketable securities (39,520 ) —
Release of restricted cash 368
—
Net cash provided by investing activities of continuing operations 1,980
26,993
Net cash used in investing activities of discontinued operations (159 ) (4,490 )
Net cash provided by investing activities 1,821
22,503

Cash flows from financing activities:
Cash payments for contributions of capital to discontinued operations (205 ) (25,660 )
Net cash used in financing activities of continuing operations (205 ) (25,660 )
Net cash provided by financing activities of discontinued operations 205
25,428
Net cash used in financing activities —
(232 )

Net increase (decrease) in cash and cash equivalents, including discontinued operations 1,822
(2,476 )
Cash and cash equivalents, beginning of period including cash in assets held for sale 3,178
5,654
Cash and cash equivalents, end of period including cash in assets held for sale $ 5,000
$ 3,178

Supplemental disclosure of cash flow information:
Cash paid for reorganization items $ 902
$ —
Cash paid for interest —
871
Cash income taxes paid, net (17 ) (708 )
Cash received on mortgage securities - available-for-sale with no cost basis 4,666
5,603

See notes to consolidated financial statements.

NOVATION COMPANIES, INC.

~~NOVATION COMPANIES, INC.~~

~~DEBTORS-IN-POSSESSION~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation, Business Plan and Liquidity

Description of Operations – Novation Companies, Inc. and its subsidiaries (the ~~“Company” or “Novation” or “we”~~“Company,” “Novation,” “we,” or “us”) has been implementing its strategy to acquire operating businesses or making other investments that generate taxable earnings. See Note 2 for a description of the Company's bankruptcy reorganization and see Note 11 for a description of the, through Healthcare Staffing, Inc. ("HCS") ~~Acquisition (as defined below)~~, our wholly-owned subsidiary acquired on July 27, 2017, provides outsourced health care staffing and related services in the ~~Note Refinancing (as defined below), which were completed after~~State of Georgia. Our common stock, par value $0.01 per share, is traded on the ~~end of fiscal year 2016.~~

Prior to 2016, Novation owned 100% of Corvisa LLC ("Corvisa"). On December 21, 2015, the Company entered into a Membership Interest Purchase Agreement (the "Corvisa Purchase Agreement") with Corvisa Services LLC ("Corvisa Services"), a wholly owned subsidiaryOTC Pink marketplace of the ~~Company, and ShoreTel,~~OTC Markets Group, Inc. ~~("ShoreTel"). Subject to the terms and conditions~~ under the ~~Corvisa Purchase Agreement, ShoreTel agreed to purchase all of the membership interests of Corvisa (the "Corvisa Sale")~~symbol “NOVC”. The Corvisa Sale closed on January 6, 2016. The operations of Corvisa have been classified as discontinued operations for all periods presented. Prior to 2015, the Company sold a portion of the assets and conducted an orderly wind-down of Advent Financial Services LLC ("Advent"), a financial settlement services provider for professional tax preparers nationwide. See ~~Note 4~~ ~~to the consolidated financial statements for additional information regarding the Company's divestiture activity.~~

Prior to 2008, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. As a result of those activities, the Company holds mortgage securities that continue to be a source of its earnings and cash flow. See ~~Note 5~~ ~~and~~ ~~Note 8~~ to the consolidated financial statements for additional information regarding these securities and the valuation thereof. Also as a result of those activities, the Company may, from time to time, receive indemnification and loan repurchase demands related to past sales of loans to securitization trusts and other third parties. See ~~Note 7~~ ~~to the consolidated financial statements for additional information regarding these demands.~~

Liquidity and Going Concern – During 2019, the Company incurred a net loss of $10.2 million and generated negative operating cash flow of $5.2 million. As of December 31, ~~2016,~~2019, the Company has an overall shareholders deficit of $72.1 million, an aggregate of $2.0 million in cash and cash equivalents and total liabilities of $91.5 million. Of the $2.0 million in cash, $0.7 million is held by the Company's subsidiary NovaStar Mortgage LLC ("NMLLC"). This cash is available only to pay only general creditors and expenses of NMLLC.

From January 2019 through August 2019, the Company had ~~approximately $4.8 million~~a significant on-going obligation to pay interest under its senior note agreements at LIBOR plus 3.5% per annum, payable quarterly in ~~unrestricted~~arrears until maturity on March 30, 2033, leading to a significant annual cash ~~and cash equivalents.~~outflow. In addition, ~~the Company held approximately $36.5 million~~HCS has experienced lower than anticipated cash flows due to increased costs and changes in marketable securities, which consist of primarily agency mortgage-backed securities. The Company's marketable securities are classified as available-for-sale as of December 31, 2016 and are included in the current and non-current marketable securities linecustomers. These items ~~on the consolidated balance sheet as of December 31, 2016. For additional information regarding~~have led to substantial doubt about the Company's ~~marketable securities, see the consolidated statements of cash flow and~~ ~~Note 5~~ability to ~~the consolidated financial statements.~~

~~As discussed in~~ ~~Note 6, the Company did not make the quarterly interest payments due in 2016, totaling $3.6 million,~~continue as ~~required under the Company's three series of 2011 Notes and three related Indentures (each as defined in~~ ~~Note 6~~). These interest payments were not made within 30 days after they became due and payable, and remain unpaid, such non-payment constituting events of default under the Indentures. The trustee under any Indenture or the holders of not less than 25% of the aggregate principal amount of the outstanding 2011 Notes issued pursuanta going concern.

Management continues to ~~such Indenture,~~work toward expanding HCS’s customer base by ~~notice in writing~~increasing revenue from existing customers, looking at methods to the Company (and to the trustee if given by the holders), was able to declare the principal amount of all of the 2011 Notes issued under such Indenture to be due and payable immediately. On May 9, 2016, the Company received a notice of acceleration with respect to the Series 1 2011 Notesreduce overall operating costs, both at HCS and the ~~Series 2 2011 Notes declaring all principal~~corporate level, and ~~unpaid interest immediately due and payable. A similar acceleration notice was received on June 6, 2016 with respect to the Series 3 2011 Notes. Because the 2011 Notes were expected to be impacted~~targeting new customers that have not previously been served by ~~the bankruptcy reorganization process, the Company discontinued accrued interest on the 2011 Notes after the date of the Bankruptcy Petitions (as defined below).~~HCS. As ~~of December 31, 2016 the aggregate outstanding principal under the 2011 Notes was $85.9 million, and the recorded aggregate interest liability was $3.7 million.~~

~~As discussed~~disclosed in Note 28 to the consolidated financial statements, the Company was successful in amending the senior note agreements to lower the interest rate and ~~three~~receive future credit for cash interest payments made in 2019 in exchange for the issuance of ~~its subsidiaries filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11~~common stock and warrants. Based on the terms of the ~~Bankruptcy Code in~~amendment, the ~~United States Bankruptcy Court~~Company is not required to make cash interest payments on the senior notes from August 2019 through March 2022, leading to significant cash savings for the ~~District~~Company.

As discussed, the Amendment to the Note Purchase Agreement and waiver of ~~Maryland (the “Bankruptcy Court”). These factors raise~~interest payments through April 2022, has significantly improved our forecasted cash position over the next year. However, our historical operating results and poor cash flow suggest substantial doubt ~~about~~exists related to the ~~Company’s~~Company's ability to continue as a going concern.

We In addition, based on the recent global developments regarding the coronavirus (COVID-19) situation, there is significant uncertainty regarding the potential impact to our business. Based on these uncertainties, there is no guarantee the Company's cash position will cover current obligations. As a result, we have ~~taken action~~not been able to alleviate the substantial doubt raised by our historical operating results and to satisfy expected liquidity needs that will arise with the 12 months from the issuance of these consolidated financial statements. These actions included completing our plan of reorganization, refinancing the terms of our 2011 Notes and acquiring an operating business, which is anticipated to be cash flow positive, each effective July 27, 2017. The terms of the refinanced 2011 Notes allow the Company to obtain additional financing based on the accounts receivable and inventory of operating subsidiaries. The Company is aggressively pursuing such financing. Other actions the Company has taken include significantly reducing corporate overhead costs. Excluding the cost of reorganization, the Company has reduced compensation and other general and administrative expense by reducing staff, eliminating office space and paring back other administrative costs.

~~The Company acknowledges that it continues to face significant liquidity challenges. The cost of the bankruptcy proceedings have placed demands on~~about the Company's ~~liquidity resources. While no principal is due for many years on the Company's 2011~~

~~Notes, the on-going interest costs are significant and the rate is variable. If HCS and the Company's other investments do not perform as expected and/or we are unable~~ability to ~~obtain other funding sources, we may not be able to meet financial obligations.~~

~~The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will~~ continue as a going concern ~~and contemplates~~for at least one year after the ~~continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.~~

date that these consolidated financial statements are issued.

Financial Statement Presentation. The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expense during the period. The Company uses estimates and judgments in ~~establishing~~assessing the ~~fair value~~recoverability of ~~its mortgage securities, liabilities subject to compromise~~goodwill and other intangible assets and accounting for income taxes, including the determination of the timing of the establishment or release of the valuation allowance related to the deferred tax asset balances and reserves for uncertain tax positions. While the consolidated financial statements and footnotes reflect the best estimates and judgments of management at the time, actual results could differ significantly from those estimates.

The consolidated financial statements of the Company include the accounts of all wholly-owned and majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Note 2. Reorganization

On July 20, 2016, ~~(the "Bankruptcy Petition Date"),~~ Novation and three of its subsidiaries, ~~NovaStar Mortgage LLC,~~NMLLC, NovaStar Mortgage Funding Corporation ("NMFC") and 2114 Central LLC, ~~(collectively, the “Debtors”),~~ filed ~~the Bankruptcy Petitions~~voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy ~~Court. The Debtors’ Chapter 11 cases~~Court for the District of Maryland (the ~~“Chapter 11 Cases”~~"Bankruptcy Court") ~~were being jointly administered under the case Novation Companies, Inc., et al, No. 16-19745-DER.~~

. The Company and one of its subsidiaries subsequently filed with the Bankruptcy Court, and amended, a plan of reorganization for the resolution of the outstanding claims against and interests pursuant to Section 1121(a) of the Bankruptcy Code (as amended ~~and~~as supplemented, the “Plan”) and a related disclosure statement. The Bankruptcy Court entered an order on June 12, 2017, confirming the Plan (the “Confirmation Order”) solely with respect to the Company, which provided that the effective date of the Plan will occur when all conditions precedent to effectiveness, as set forth in the Plan, have been satisfied or waived.

Two of the conditions to the effectiveness of the Plan were (i) the closing of the Company’s acquisition (the “HCS Acquisition”) of all of the capital stock of HCS ~~as discussed in Note 11 to the consolidated financial statements~~ and (ii) the restructuring ~~(the “Note Refinancing”)~~ of the Company’s then outstanding Series 1 Notes, Series 2 Notes and Series 3 Notes (collectively, the “2011 Notes”), held by Taberna Preferred Funding I, Ltd. (“Taberna I”), Taberna Preferred Funding II, Ltd. (“Taberna II”) and Kodiak CDO I, Ltd. (“Kodiak” and, together with Taberna I and Taberna II, the “Noteholders”), issued pursuant to three Indentures, each dated as of March 22, 2011, between the Company and The Bank of New York Mellon Trust Company, National Association.senior notes. The HCS Acquisition and the ~~Note Refinancing~~note restructuring were completed on July 27, 2017 ~~and are discussed in Note 11 to the consolidated financial statements.~~

On July 27, 2017, upon the completion of the HCS Acquisition and the Note Refinancing, and the satisfaction or waiver of all other conditions precedent to effectiveness, the effective date of the Plan occurred and the Company filed a Notice of Occurrence of Effective Date of the Plan with the Bankruptcy Court. Under the Plan, holders of existing equity interests in the Company (i.e., the common stock) ~~retain~~retained their interests.

~~Beginning with the quarterly period ended~~

On September ~~30, 2016, the Company accounts for~~25, 2017, the bankruptcy in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, “Reorganizations.” The consolidated financial statements presented here include amounts classified as “liabilities subject to compromise.” This amount represents estimatescase of known or potential pre-petition claims that were expected to be resolved in connection with our Chapter 11 Cases. Additional amounts may be included in liabilities subject to compromise in future periods related to an election to reject executory contracts and unexpired leases as part of our Chapter 11 Cases. Due to the uncertain nature of many2114 Central, LLC was dismissed by order of the ~~potential claims, the magnitude of potential claims is not reasonably estimable at this time. Potential claims not currently included~~Bankruptcy Court. Thereafter, on December 22, 2017, NMLLC filed with liabilities subject to compromise in our consolidated balance sheets may be material. Differences between amounts we are reporting as liabilities subject to compromise in this Annual Report on Form 10-K and the amounts attributable to such matters claimed by our creditors or approved by the Bankruptcy Court ~~may be material. We continued to evaluate our liabilities throughout the~~a Chapter 11 ~~process~~plan of reorganization, and ~~may make adjustments in future periods~~on December 26, 2017 filed a related disclosure statement. The Bankruptcy Court entered an order on February 16, 2018 approving the disclosure statement, as ~~necessary and appropriate. These adjustments may be material.~~

~~Under~~revised. On April 11, 2018, the Bankruptcy ~~Code, except with respect~~Court confirmed NMLLC’s plan of reorganization. This plan allows NMLLC to exit bankruptcy but prohibits the ~~Company, which is bound~~use of NMLLC assets for anything other than for the payment of NMLLC obligations. On April 19, 2019, the Bankruptcy Court approved the Motion for Final Decrees for Novation and NMLLC. On July 16, 2019, the bankruptcy case of NMFC was dismissed by ~~the Plan, we may assume, assign, or reject executory contracts and unexpired leases, subject to the approval~~order of the Bankruptcy ~~Court~~Court.

Reorganization and ~~other conditions. If we reject a contract or lease, such rejection generally is treated as a pre-petition breach of~~bankruptcy-related expenses for the contract or lease, subject to exceptions, relieves the Debtors of performing their future obligations under such contract or lease and entitles the counterparty thereto to a pre-petition general unsecured claim for damages caused by the breach. If we assume an executory contract or unexpired lease, we are generally required to cure any existing monetary defaults under the contract or lease and

provide adequate assurance of future performance to the counterparty. Accordingly, any description of an executory contract or unexpired lease in this Annual Report on Form 10-K, including any quantification of our obligations under any such contract or lease, is wholly qualified by the rejection rights we have under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and we expressly preserve all of our rights with respect thereto. As of twelve months ended December 31, ~~2016, liabilities subject to compromise include (in thousands):~~

Obligations under the 2011 Notes (see Note 6), including accrued interest through the petition date $ 89,626
Claims and other liabilities related to operating leases 715
Income tax liabilities 309
Liabilities associated with the discontinued operations of Advent 195
Other 121
Liabilities subject to compromise $ 90,966

To the best of our knowledge, we notified all of our known current or potential creditors that the Debtors have filed Chapter 11 Cases. In addition, on August 23, 2016, each of the Debtors filed the Schedules2019 and Statements with the Bankruptcy Court. These documents set forth, among other things, the assets and liabilities of each of the Debtors, including executory contracts to which each of the Debtors is a party. The Schedules and Statements are subject to the qualifications and assumptions included therein, and were subject to amendment or modification as our Chapter 11 Cases proceed. Many of the claims identified in the Schedules and Statements are listed as disputed, contingent or unliquidated. In addition, there may be differences between the amounts for certain claims listed in the Schedules and Statements and the amounts claimed by our creditors. These differences were investigated and resolved as part of our claims resolution process in our Chapter 11 Cases.

We have incurred significant costs associated with our reorganization and the Chapter 11 proceedings. These costs, which are being expensed as incurred, will significantly affect our results of operations. In addition, a non-cash charge to write-off the unamortized debt issuance costs related to our 2011 Notes is included in “Reorganization items, net” as these debt instruments are expected to be impacted by the bankruptcy reorganization process. For the year ended December 31, ~~2016 reorganization items include (in thousands):~~2018 were $0.06 million and $1.9 million, respectively.

Table of Contents

Note 3. Summary of Significant Accounting and Reporting Policies

Cash and Cash Equivalents. Cash equivalents consist of liquid investments with an original maturity of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Company maintains cash balances at ~~one~~four major financial institutions in the United States. Accounts are secured by the Federal Deposit Insurance Corporation up to $250,000. ~~At December 31, 2016, 49%~~The uninsured balances of the Company’s cash and cash equivalents ~~were with one institution. The uninsured balances of the Company’s unrestricted cash and cash equivalents~~ accounts aggregated ~~$4.3~~$1.4 million as of December 31, ~~2016.~~2019

~~Marketable Securities – Available-for-Sale.~~ ~~Marketable securities~~.

Accounts and Unbilled Receivables. Accounts receivable are uncollateralized customer obligations due under normal trade terms. Customer account balances that are not paid within contract terms are considered delinquent. Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company maintains an allowance for potential losses primarily based upon management's analysis of delinquent accounts, routine assessment of its customers' financial condition, and any other known factors impacting collectability, including disputed amounts. When management has exhausted all collection efforts, amounts deemed uncollectible are written off. Recoveries of previously written off accounts receivable are recognized in the period in which they are received. The ultimate amount of accounts receivable that becomes uncollectible could differ from management's estimate.

Goodwill and Indefinite-Lived Intangible Assets. Goodwill and trademarks are assessed annually to determine whether their carrying value exceeds their fair value. In addition, they are tested on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce their fair value ~~in accordance with the relevant accounting guidance. The Company determines~~below carrying value. If we determine the fair value of goodwill or trademarks is less than their carrying value, an impairment loss is recognized. Impairment losses, if any, are reflected in operating income or loss in the period incurred. The Company performs its ~~marketable securities~~annual tests of goodwill and trademarks during the second quarter of each fiscal year.

Impairment of Long-Lived Intangible Assets with Finite Lives. Long-lived intangible assets held and used by us which have finite lives are assessed for impairment whenever an event or change in circumstances indicates that the carrying value of the asset may not be fully recoverable. Recoverability is determined based on ~~pricing~~an estimate of undiscounted future cash flows resulting from ~~our third party service provider~~the use of an asset and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates,its eventual disposition. An impairment loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. To the extent observable inputs are not available, as is the case with the Company's mortgage securities – available-for-sale, the Company estimates fair value using significant unobservable inputs (Level 3 inputs). The methods and processes used to estimatemeasured by comparing the fair value of the ~~Company's mortgage securities are discussed further below.~~

Mortgage securities – available-for-sale represent beneficial interests the Company retains in securitization transactions which consist of residual interests (the “residual securities”) in certain components of the cash flows of the underlying mortgage loansasset to the securitization trusts. As payments are received on the residual securities, the payments are applied to the cost basis of the related mortgage securities. Each period, the accretable yield for each mortgage security is evaluated and, to the extent there has been a change in the estimated cash flows, it is adjusted and applied prospectively. The accretable yield is recorded as interest income with a corresponding increase to theits carrying ~~basis of the mortgage security. The Company estimates~~value. If we determine the fair value of ~~its residual securities retained based on~~an asset is less than the ~~present~~carrying value, of future expected cash flows to be received. Management’s best estimate of key assumptions, including credit losses, prepayment speeds, market discount rates and forward yield curves commensurate with the risks involved, are used in estimating future cash flows.

All of the Company's available-for-sale securities are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent the cost basis of these securities exceeds the estimated fair value and the unrealizedan impairment loss is ~~considered to be other than temporary, an impairment charge is recognized and the amount recorded~~incurred. Impairment losses, if any, are reflected in ~~accumulated other comprehensive~~operating income or loss ~~is reclassified to earnings as a realized loss.~~ in the period incurred.

Revenue and Cost Recognition - The Company ~~uses~~recognizes revenue when control of the ~~specific identification method~~promised services is transferred to customers and for the amount that reflects the consideration we are entitled to receive in ~~computing realized gains~~exchange for those services. Furthermore, revenue is recognized over time based on a fixed amount for each hour of staffing service provided as our customers benefit from our services and as we provide them.A performance obligation is a promise in a contract to transfer a distinct good or ~~losses.~~

~~Earnings Per Share (“EPS”).~~ ~~Basic EPS excludes dilution~~service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s customer contracts have a single performance obligation to transfer the individual goods or services, and it is not separately identifiable from other promises in the contracts and is, ~~computed by dividing net income available to common shareholders by~~therefore, not distinct. Performance obligations are satisfied at the ~~weighted-average number~~point in time the HCS employees work on behalf of ~~common shares outstanding~~the customer. Contract costs include compensation, benefits and overhead when appropriate. Because of the nature of the contracts and the fact that revenue is earned at the time the employee works for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is calculated assuming all options, nonvested shares and performance-based awards of the Company's common stock have been exercised, unless the exercise would be antidilutive. See ~~Note 9~~ ~~to the consolidated financial statements for additional details on earnings per share calculation.~~

customer, no contract estimates are necessary.

Income Taxes. The Company had a gross deferred tax asset of ~~$295.9~~$166.5 million and ~~$282.1~~$164.0 million as of December 31, ~~2016~~2019 and ~~2015~~2018, respectively. In determining the amount of deferred tax assets to recognize in the consolidated financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. The income tax guidance requires the recognition of a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Income tax guidance indicates the more likely than not threshold is a level of likelihood that is more than 50%.

Under the income tax guidance, companies are required to identify and consider all available evidence, both positive and negative, in determining whether it is more likely than not that all or some portion of its deferred tax assets will not be realized. Positive evidence includes but is not limited to the following: cumulative earnings in recent years, earnings expected in future years, excess appreciated asset value over the tax basis and positive industry trends. Negative evidence includes but is not limited to the following: cumulative losses in recent years, losses expected in future years, a history of operating losses or tax credit carryforwards expiring, and adverse industry trends.

Table of Contents

~~New Accounting Pronouncements~~

~~In August 2014,~~

Earnings (Loss) Per Share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income (loss) available to common shareholders by the ~~FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation~~weighted-average number of ~~Financial Statements - Going Concern (Subtopic 205-40): Disclosure~~common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of ~~Uncertainties About an Entity’s Ability to Continue as a Going Concern, which amended Going Concern (Topic 205)~~common stock that then shared in the earnings of the ~~Accounting Standards Codification. This amendment provided guidance in generally accepted accounting principles about management’s responsibility to evaluate whether there~~entity. Diluted EPS is ~~substantial doubt about an entity’s ability to continue as a going concern~~calculated assuming all options, nonvested shares and ~~to provide related disclosures. The Company has adopted this standard as~~performance-based awards of ~~January 1, 2016. See~~ the Company's ~~evaluation in~~common stock have been exercised, unless the exercise would be antidilutive. See Note 1.

In November 2016, the FASB issued ASU 2016-18, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. Key requirements of the ASU are as follows:

~~Cash and cash-equivalent balances in the statement of cash flows should include those amounts that are deemed to be restricted cash and restricted cash equivalents.~~

~~Under some circumstances, a reconciliation between the statement of financial position and the statement of cash flows must be disclosed.~~

Changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows.

~~Information regarding the nature of restrictions on cash and cash equivalents must be disclosed.~~

This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods therein. The impact of this guidance will be determined based on the amounts of cash and restricted cash upon implementation, but is not expected to be material.

In August 2016, the FASB issued ASU 2016-15, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s amendments add or clarify guidance on eight cash flow issues:

~~Debt prepayment or debt extinguishment costs.~~

~~Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation~~12 to the ~~effective interest rate of the borrowing.~~

~~Contingent consideration payments made after a business combination.~~

~~Proceeds from the settlement of insurance claims.~~

~~Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies.~~

~~Distributions received from equity method investees.~~

~~Beneficial interests in securitization transactions.~~

~~Separately identifiable cash flows and application of the predominance principle.~~

For the Company, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Management has not determined if this guidance will have a significant impact on its consolidated financial ~~statements.~~

statements for additional details on earnings per share calculation.

Recently Adopted Accounting Principles

In February 2016, the ~~FASB issued~~Financial Accounting Standards Board (FASB) established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU ~~2016-02 Leases, a~~No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard ~~on accounting for leases. ASU 2016-02 introduces~~establishes a right-of-use (ROU) model that requires a lessee ~~model that brings most leases~~to recognize a ROU asset and lease liability on the balance ~~sheet.~~sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement. The ~~new standard also aligns many~~Company adopted ASU No. 2016-02 effective January 1, 2019 using the modified retrospective method. See Note 7 to the consolidated financial statements for further details.

Note 4. Revenue; Accounts and Unbilled Receivables

Staffing services include the augmentation of customers' workforce with our contingent employees performing services under the customers' supervision, which provides our customers with a source of flexible labor at a competitive cost. Customer contracts are typically annual contracts but may be terminated upon 60 days' notice for any reason.

The Company recognizes revenue when control of the ~~underlying principles~~promised services is transferred to customers and for the amount that reflects the consideration we are entitled to receive in exchange for those services. Furthermore, revenue is recognized over time based on a fixed amount for each hour of staffing service provided as our customers benefit from our services and as we provide them.

Performance Obligations — A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company's customer contracts have a single performance obligation to transfer the individual goods or services, and it is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Performance obligations are satisfied at the point in time the HCS employees work on behalf of the ~~new lessor model with those in ASC 606,~~customer. Contract costs include compensation, benefits and overhead when appropriate. Because of the ~~FASB’s new~~nature of the contracts and the fact that revenue is earned at the time the employee works for the customer, no contract estimates are necessary.

Contract Balances — The timing of revenue recognition, ~~standard (e.g., those related to evaluating when profit can be recognized)~~billings and cash collections results in accounts receivable and unbilled receivables (the "contract assets"). ~~Furthermore, this ASU addresses~~The Company bills customers generally every other ~~concerns related to~~week based on the current leases model. For example, this ASU eliminates the requirement in current GAAP for an entity to use bright-line tests in determining lease classification. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The new model represents a wholesale change to lease accounting. As a result, entities will face significant implementation challengeswork performed during the ~~transition~~two-week period ~~and beyond, such as those related to:~~

~~Applying judgment and estimating.~~

~~Managing~~ended the ~~complexities of data collection, storage, and maintenance.~~

~~Enhancing information technology systems~~week prior to ~~ensure their ability to perform the calculations necessary for compliance with reporting requirements.~~

~~Refining internal controls and other business processes related to leases.~~

~~Determining whether debt covenants are likely to be affected and, if so, working with lenders to avoid violations; and~~

~~Addressing any income tax implications.~~

~~For the Company, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning~~billing. Generally, billing occurs after ~~December 15, 2018. Management has not yet determined if this guidance will have a significant impact on its consolidated financial statements.~~

~~In January 2016, the FASB issued ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance~~revenue recognition, resulting in GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. This ASU also amends certain disclosure requirements associated with the fair value of financial instruments. For Novation, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Management has not yet determined if this guidance will have a significant impact on its consolidated financial statements.

~~Note 4. Divestitures~~

On December 21, 2015, the Company entered into the Corvisa Purchase Agreement with Corvisa Services and ShoreTel. Subject to the terms and conditions of the Corvisa Purchase Agreement, ShoreTel agreed to purchase 100% of the membership interests of Corvisa. The Corvisa Sale closed on January 6, 2016. The aggregate consideration for the transaction included approximately $8.4 million in cash, subject to a potential post-closing working capital adjustment, of which amount approximately $7.0 million was paid at the closing and the following was deposited in escrow: (i) approximately $1.0 million for a period of twelve months to secure certain indemnification obligations of the Company; and (ii) $0.35 million to secure certain obligations of the Company in connection with the post-closing working capital adjustment.

In connection with the Corvisa Sale, the Company and ShoreTel also agreed to enter into a Transition Services Agreement pursuant to which each of the Company and ShoreTel would provide the other with specified services for a transition period following the closing.contract assets. The Company does not ~~expect~~receive advances or deposits from its customers.

Disaggregation of Revenue — All revenue is generated from customers that provide healthcare services in Georgia. The following is a disaggregation of the Company’s revenue, in thousands, into categories that best depict how the nature, amount, timing, and uncertainty of revenues and cash flows ~~associated with these services to be significant to Corvisa,~~are affected by economic factors.

	For the Year Ended December 31, 2019				For the Year Ended December 31, 2018
Type of Customer
CSB	$	61,620	97.1	%	$	52,491	95.2	%
Other		1,854	2.9	%		2,635	4.8	%
Total	$	63,474	100.0	%	$	55,126	100.0	%

Accounts and ~~the Company will have no significant continuing involvement with Corvisa beyond these services.~~

~~During 2015, the Company incurred approximately $0.8 million~~unbilled receivables are summarized as follows, in ~~severance and related one-time termination benefits associated with this transaction. Approximately $0.1 million~~thousands:

	December 31, 2019		December 31, 2018
Accounts receivable	$	4,083	$	3,952
Unbilled receivables (Contract Assets)		2,500		2,170
Total accounts and unbilled receivables	$	6,583	$	6,122

As of ~~this expense was included in current liabilities of discontinued operations as of~~ December 31, ~~2015. Also during 2015, the Company incurred approximately $0.5 million of legal~~2019 and ~~audit fees related to this transaction. These costs are included in the loss from discontinued operations line item in the consolidated statement of operations.~~

The Company recognized a gain on the transaction of $1.4 million during 2016, which is reflected in the income (loss) from discontinued operations. Also included in discontinued operations during 2016 are transaction-related costs that were contingent upon the closing of the sale. These costs include approximately $0.3 million of earned bonus payments to a Corvisa executive, $1.0 million of advisory fees and $0.1 million of other transaction-related costs.

At ShoreTel’s request, the Company disposed of Corvisa’s third-party software implementation consulting business in December 2015. The Company sold the assets related exclusively to this business, including but not limited to customer contracts, computer hardware and marketing materials, to Canpango LLC (“Canpango”), which agreed to hire certain employees of the business, to assume Corvisa’s obligations under the customer contracts, and to pay to the Company a portion of the business’s existing accounts receivable collected in the next nine months, less associated collection costs. Canpango is led by a former employee of Corvisa, and certain current and former employees of Corvisa have financial interests in Canpango. The sales price, assets and operations related exclusively to this business were not material to the Company’s consolidated financial statements when taken as a whole.

Prior to 2015, Advent sold certain intellectual property, software, and customer data to an unrelated entity and conducted an orderly winding-down of Advent’s remaining business and operations. As the run-off operations are substantially complete, and as the Company will not have any significant continuing involvement in Advent, the operations of Advent have been classified as discontinued operations for all periods presented.

~~Results of Discontinued Operations~~

During 2016, net income from discontinued operations consists of the net operating income and losses of the disposed entities and any necessary eliminations through the date of sale or disposal, the gain on the Corvisa Sale and any transaction-related expenses, along with any income tax impact. During 2015, net income from discontinued operations consists of the net operating income and losses of the disposed entities and any necessary eliminations and income tax expense.

~~The results of the Company's discontinued operations are summarized below (dollars in thousands):~~

For the Year Ended
December 31,
2016 2015

Service fee income $ —
$ 3,254

Income from discontinued operations before income taxes $ 1,966
$ (25,964 )
Income tax expense —
—
Income from discontinued operations, net of income taxes $ 1,966
$ (25,964 )

~~The assets and liabilities of discontinued operations as of~~ December 31, ~~2016, shown below in thousands, include those~~2018, management has determined no allowance for doubtful accounts is necessary. For the years ended December 31, 2019 and December 31, 2018, 63.1% and 44.6% of ~~Advent.~~service fee income was generated from four and two customers, respectively. As of December ~~2015, the assets~~31, 2019, 61.6% of accounts and ~~liabilities~~unbilled receivables was due from four customers and 96.6% was due from 14 CSB customers. As of ~~discontinued operations include those~~December 31, 2018, 60.9% of ~~Advent~~accounts and ~~Corvisa.~~unbilled receivables was due from four customers and 95.3% was due from 14 CSB customers.

December 31,
2016 2015
Assets
Current Assets
Cash and cash equivalents $ 195
$ 352
Service fee receivable, net —
282
Other current assets 252
1,209
Total current assets 447
1,843
Non-Current Assets
Property and equipment, net of accumulated depreciation —
5,708
Other assets —
707
Total non-current assets —
6,415
Total assets $ 447
$ 8,258

Liabilities
Current liabilities $ —
$ 2,470
Non-current liabilities —
1,833
Liabilities subject to compromise 195
—
Total liabilities $ 195
$ 4,303

Table of Contents

Note 5. Marketable Securities

~~The following table presents certain information on the Company's portfolio of available-for-sale securities (dollars in thousands):~~

As of December 31, 2016
Amortized Cost Gross Unrealized Estimated Fair Value
Description of Securities Gains Losses
Marketable securities, current
Mortgage securities $ 450
$ 9,341
$ —
$ 9,791
Equity securities 112
47
(7 ) 152
Total $ 562
$ 9,388
$ (7 ) $ 9,943

Marketable securities, non-current
Agency mortgage-backed securities $ 26,607
$ —
$ (62 ) $ 26,545

As of December 31, 2015
Amortized Cost Gross Unrealized Estimated Fair Value
Description of Securities Gains Losses
Marketable securities, current
Corporate notes and bonds $ 15,517
$ —
$ (28 ) $ 15,489
Mortgage securities 525
1,486
—
2,011
Total $ 16,042
$ 1,486
$ (28 ) $ 17,500

Marketable securities, non-current
Corporate notes and bonds $ 1,419
$ —
$ (22 ) $ 1,397

Prior to ~~2015,~~2018, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. As a result of those activities, ~~we acquired~~the Company held mortgage securities that ~~continue to be~~were a source of ~~our~~its earnings and cash flow. ~~As of December 31, 2016 and 2015, the~~These mortgage securities ~~classified as current~~ consisted entirely of the Company's investment in the ~~residual securities~~interest-only and overcollateralization bonds issued by securitization trusts sponsored by the Company. ~~Residual~~Maturities of these retained mortgage securities ~~consist~~depend on repayment characteristics, performance and other experience of ~~interest-only~~the underlying financial instruments. During 2018, the Company sold all but 33 non-performing mortgage securities. These sales generated proceeds of $13.0 million and ~~overcollateralization bonds.~~

realized gains of $12.9 million recognized, included in other income in the Company's consolidated statements of operations and comprehensive income (loss). Of the 33 mortgage securities retained, the Company determined that these securities have no fair value. There were no other-than-temporary impairments relating to available-for-sale securities in 2018 of $0.3 million.

As part of the mortgage securitization process, the Company owned the mortgage servicing rights on the mortgage loans in each securitization deal. These servicing rights were sold to a third party on October 12, 2007 as documented in the Servicing Rights Transfer Agreement by and between Saxon Mortgage Services as purchaser and NovaStar Mortgage, Inc. as seller, which was discussed in the Company's third quarter 2007 report on Form 10-Q. As part of this transaction, the Company retained the clean-up call rights for ~~2016~~most of the securitization deals. The Company attempted to sell those clean-up call rights with the securities sold in 2018. However, no bids were received for the clean-up call rights and ~~2015.~~the Company determined that such clean-up call rights have no fair value.

Note 6. Goodwill and Intangible Assets

	December 31, 2019						December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Indefinite-lived assets (in thousands):
Goodwill	$	3,905	$	—	$	3,905	$	8,205	$	—	$	8,205
Tradenames		1,147		—		1,147		1,147		—		1,147
	$	5,052	$	—	$	5,052	$	9,352	$	—	$	9,352

Finite-lived assets (in thousands):
Customer relationships	$	6,895	$	2,380	$	4,515	$	6,895	$	1,395	$	5,500
Non-compete agreement		627		505		122		627		296		331
	$	7,522	$	2,885	$	4,637	$	7,522	$	1,691	$	5,831

	Years Ended December 31,
	2019			2018
Goodwill activity (in thousands):
Beginning balance	$	8,205		$	8,205
Impairment charge		(4,300	)		—
Ending balance	$	3,905		$	8,205

Management completed its annual goodwill impairment assessment as of April 30, 2019. Increased cost of services and administrative expenses at HCS have resulted in declining cash flow for the business. Based on the likelihood of these expenses remaining higher than initially forecast, management determined that the carrying value of the HCS goodwill exceeded its fair value by $2.6 million. A goodwill impairment charge in this amount was recorded during the second quarter of 2019. Management assessed the other indefinite and definite lived intangible assets and determined no impairment was necessary.

During the fourth quarter of 2019, HCS was notified by a significant customer of its intent to terminate its contract services as of January 29, 2020. As a result, confirmation of the loss of the customer represented a triggering event for analysis of impairment of our intangible asset and goodwill balances as of September 30, 2019. It was determined that the carrying value of the HCS goodwill exceeded the fair value by $1.7 million, and this adjustment was recorded during the third quarter of 2019.

Amortization expense (in thousands):
2018	$	1,194
2019		1,194
Estimated future amortization expense (in thousands):
2020	$	1,107
2021		985
2022		985
2023		985
Thereafter		575
Total estimated amortization expense	$	4,637

Table of Contents

Note 7. Leases

We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The ~~average remaining maturities~~modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. The Company elected to adopt the ‘package of practical expedients’, which permitted the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs, the practical expedients pertaining to land easements, the use-of hindsight, the short-term lease recognition exemption for all leases that qualified, and the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate.

Adoption of the new standard resulted in the recording of an additional net operating lease right-of-use asset and operating lease liability of approximately $0.2 million each, as of January 1, 2019. The difference between the additional lease assets and lease liabilities was recorded as an adjustment to accumulated deficit. The standard did not materially impact our consolidated net loss and had no impact on cash flows. The Company does not have any finance leases.

Our leases consist primarily of office space. Leases with an initial term of 12 months or less, and leases which are on a month-to-month basis, are not recorded on the balance sheet. For these leases we recognize lease expense on a straight-line basis over the lease term.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to three years or more. The exercise of lease renewal options is at our discretion. Our lease agreements do not contain any variable lease payments, residual value guarantees or restrictive covenants. The components of lease expense for the twelve months ended December 31, 2019 were immaterial. As our leases do not provide an implicit interest rate, we use our incremental current borrowing rate in determining the present value of lease payments.

Maturities of lease liabilities were as follows (in thousands):

	December 31, 2019
2020	$	220
2021		110
2022		20
Thereafter		-
Total	$	350
Less interest		20
Present value of lease liabilities	$	330

Other information related to the Company's operating leases was as follows (in thousands):

	December 31, 2019
Supplemental Cash Flow Information
Operating cash flows from leases	$	(5	)
Lease Term and Discount Rate
Weighted average remaining lease term (years)		1.67
Weighted average discount rate		6.75	%

Note 8. Borrowings

Note Refinancing and 2017 Notes — On August 9, 2019, the Company and Taberna Preferred Funding I, Ltd. (“Taberna I”), Taberna Preferred Funding II, Ltd. (“Taberna II”) and Kodiak CDO I, Ltd. (“Kodiak” and, together with Taberna I and Taberna II, the “Noteholders”) executed a First Amendment to Senior Secured Note Purchase Agreement (the “Amendment”) amending the terms of the Note Purchase Agreement (as defined below) and the 2017 Notes (as defined below) to, among other things, significantly reduce the interest rate applicable from January 2019 through the third quarter of 2028 and allow the Company to apply certain surplus interest payments against future quarterly interest payments. As of December 31, 2019, the Company had $85.9 million in aggregate borrowings outstanding under three senior secured promissory notes (the “2017 Notes”). The unpaid principal amounts of the 2017 Notes bear interest at the following rates until the maturity date on March 30, 2033, with interest payable quarterly in arrears as follows: 1% per annum from April 1, 2019 through December 31, 2023; 2% per annum from January 1, 2024 through December 31, 2028; and 10% per annum from January 1, 2029 through the maturity date. Commencing with the delivery to the Noteholders of the financial statements for the fiscal year ending December 31, 2019, the Company is required to remit 50% of excess cash flow each year to the Noteholders to be applied as a principal reduction to the outstanding balance of the debt. The 2017 Notes generally rank senior in right of payment to any existing or future subordinated indebtedness of the Credit Parties (as defined below). The Company may at any time upon 30 days’ notice to the Noteholders redeem all or part of the 2017 Notes at a redemption price equal to 101% of the principal amount redeemed plus any accrued and unpaid interest thereon. The 2017 Notes were entered into on July 27, 2017 as a result of a refinancing of the Company’s ~~short-term and long-term available-for-sale investments~~then outstanding senior notes with the same aggregate principal amount through the execution of the Senior Secured Note Purchase Agreement, dated as of the same date (as amended, the “Note Purchase Agreement”), with NHI and HCS as guarantors (together with the Company, collectively, the “Credit Parties”).

Table of Contents

On April 1, 2019 and on July 1, 2019, the Company made payments under the 2017 Notes totaling $2.6 million. The actual aggregate amounts due for those dates totaled $0.4 million. Under the terms of the Amendment, the Company is permitted to apply the payment surplus of $2.2 million against future quarterly interest
payments. Therefore, the Company will not have another quarterly interest payment due until April 1, 2022.

The Note Purchase Agreement contains customary affirmative and negative covenants, including but not limited to certain financial covenants. Under the terms of the Amendment, the financial covenants have been waived until the quarter ending December 31, ~~2016 were approximately six~~2021. The Note Purchase Agreement also contains customary events of default, including but not limited to payment defaults, cross defaults with certain other indebtedness, breaches of covenants and ~~21 months, respectively. Maturities~~bankruptcy events. In the case of ~~mortgage securities owned by~~an event of default, the Noteholders may, among other remedies, accelerate the payment of all obligations under the Note Purchase Agreement and the 2017 Notes. The Credit Parties entered into a Pledge and Security Agreement, dated as of the same date, pursuant to which each of the Credit Parties granted a first priority lien generally covering all of its assets, other than accounts receivable and inventory, for the benefit of the Noteholders, to secure the obligations under the Note Purchase Agreement and the 2017 Notes.

Under the terms of the Amendment, the Company ~~depend on repayment characteristics and experience~~issued to the Noteholders 9,000,000 shares of common stock of the ~~underlying financial instruments.~~Company and ten-year warrants allowing the Noteholders to purchase up to 22,250,000 shares of the Company’s common stock at an exercise price of $0.01 per share. These warrants can be exercised at any time prior to expiration. See the Company’s discussion in Note 810 to the consolidated financial statements for ~~details on~~additional information regarding the ~~Company's fair value methodology.~~

~~The following table relates to the securitizations where the Company retained an interest in the assets issued by the securitization trust (dollars in thousands):~~

Size/Principal Outstanding (A) Assets on Balance Sheet (B) Liabilities on Balance Sheet Maximum Exposure to Loss(C) Year to Date Loss on Sale Year to Date Cash Flows
December 31, 2016 $ 3,185,270
9,943
$ —
$ 9,943
$ —
$ 5,135
December 31, 2015 $ 3,601,468
$ 2,011
$ —
$ 2,011
$ —
$ 6,287


~~(A)~~	~~Size/Principal Outstanding reflects the estimated principal of the underlying assets held by the securitization trust.~~


~~(B)~~	~~Assets on balance sheet are securities issued by the entity and are recorded in the current marketable securities line item of the consolidated balance sheets.~~


~~(C)~~	~~The maximum exposure to loss includes the assets held by the Company. The maximum exposure to loss assumes a total loss on the referenced assets held by the securitization trust.~~

The Company invests in liquid marketable securities, including equities, corporate bonds and traditional mortgage-backed securities in order to supplement earnings. During 2016, other income includes realized gains of $3.7 million and interest and dividends of $1.7 million from this investing activity. During 2015, other expense includes $20 thousand of interest income.

~~Note 6. Borrowings - 2011 Notes~~

Amendment.

Revolving Credit Agreement — As of December 31, ~~2016,~~2018, HCS had $1.9 million outstanding under a Revolving Credit and Security Agreement (the “White Oak Credit Agreement”) between HCS and White Oak Global Advisors, LLC ("White Oak'), which provided HCS with a line of credit of up to $5,000,000. Availability under the ~~Company had outstanding three series of unsecured senior notes (collectively,~~White Oak Credit Agreement was based on a formula tied to HCS’s eligible accounts receivable. Borrowings bore interest at the ~~"2011 Notes") pursuant to three separate indentures (collectively, the “Indentures”) with an aggregate principal balance of $85.9 million.~~prime rate plus 1.25%. The ~~2011 Notes were created through an exchange~~initial term of the ~~Company's previously outstanding junior subordinated notes that occurred prior to 2015. This exchange~~White Oak Credit Agreement expired on November 17, 2018 but was ~~considered~~renewed automatically for a ~~modification of a debt instrument for accounting purposes. Through~~consecutive one-year term per the ~~Bankruptcy Petition Date, the Company used the effective interest method to accrete from the principal balance as~~provisions of the ~~modification date to~~White Oak Credit Agreement. The obligations of HCS under the ~~carrying balance as~~White Oak Credit Agreement were secured by HCS’s inventory and accounts receivable. In the case of any reporting date. As of the Bankruptcy Petition Date, the Company charged off the entire difference between the contractual principal amount of the 2011 Notes and their carrying value as these notes were impacted by the bankruptcy reorganization process.

The 2011 Notes accrued interest at a rate of 1.0% per annum until January 1, 2016 and then accrued interest at a rate of three-month LIBOR plus 3.5% per annum (the “Full Rate”). Interest on the 2011 Notes was payable on a quarterly basis and no principal payments were due until maturity on March 30, 2033. The Company did not make the quarterly interest payments due on March 30, 2016 totaling $0.9 million. These interest payments were not made within 30 days after they became due and payable, and remain unpaid, such non-payments constituting eventsan event of default, under the Indentures. As a result, the 2011 Notes were classified as current liabilities. The trustee under any Indenture or the holders of not less than 25% of the aggregate principal amount of the outstanding 2011 Notes issued pursuant to such Indenture, by notice in writing to the Company (and to the trustee if given by the holders),White Oak was able to, ~~declare the principal amount~~among other remedies, have accelerated payment of all obligations under the ~~2011 Notes issued under such Indenture to be due and payable immediately. On May 9, 2016,~~White Oak Credit Agreement. In connection with the White Oak Credit Agreement, the Company ~~received~~executed a ~~notice~~guaranty in favor of ~~acceleration with respect to~~White Oak guaranteeing all of HCS’s obligations under the ~~Series 1 2011 Notes~~White Oak Credit Agreement. HCS terminated the White Oak Credit Agreement in February 2019 and the ~~Series 2 2011 Notes, declaring all principal and unpaid interest immediately due and payable. A similar acceleration notice was received on June 6, 2016 with respect to~~Company fully repaid the ~~Series 3 2011 Notes.~~

~~The aggregate~~ outstanding principal under the 2011 Notes was $85.9 million and the aggregate recorded interest liability is $3.7 million. The principal and recorded unpaid interest are classified as liabilities subject to compromise in the Company's consolidated balance sheet.

~~As discussed in Note 11 to the consolidated financial statements, on July 27, 2017 the 2011 Notes were exchanged for the 2017 Notes (as defined in Note 11).~~obligations at that time.

Note 7.9. Commitments and Contingencies

Contingencies. Prior to ~~2008,~~2016, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. The Company has received indemnification and loan repurchase demands with respect to alleged violations of representations and warranties (“defects”) and with respect to other alleged misrepresentations and contractual commitments made in loan sale and securitization agreements. These demands have been received substantially beginning in 2006 and have continued into recent years. Prior to the Company ceasing the origination of loans in its mortgage lending business, it sold loans to securitization trusts and other third parties and agreed to repurchase loans with material defects and to otherwise indemnify parties to these transactions. Beginning in 1997 and ending in 2007, affiliates of the Company sold loans to securitization trusts and third parties with the potential of such obligations. The aggregate original principal balance of these loans was ~~$43.1~~$43.1 billion at the time of sale or securitization. The remaining principal balance of these loans is not available as these loans are serviced by third parties and may have been refinanced, sold or liquidated. Claims to repurchase loans or to indemnify under securitization documents have not been acknowledged as valid by the Company. In some cases, claims were made against affiliates of the Company that have ceased operations and have no or limited assets. The Company has not repurchased any loans or made any such indemnification payments since 2010.

Historically, repurchases of loans or indemnification of losses where a loan defect has been alleged have been insignificant and any future losses for alleged loan defects have not been deemed to be probable or reasonably estimable; therefore, the Company has recorded no reserves related to these claims. The Company does not use internal groupings for purposes of determining the status of these loans. The Company is unable to develop an estimate of the maximum potential amount of future payments related to repurchase demands because the Company does not have access to information relating to loans sold and securitized and the number or amount of claims deemed probable of assertion is not known nor is it reasonably estimated. Further, the validity of claims received remains questionable. Also, considering that the Company completed its last sale or securitization of loans during 2007, the Company believes that it will be difficult for a claimant to successfully validate any additional repurchase demands. Management does not expect that the potential impact of claims will be material to the Company's consolidated financial statements.

Pending Litigation. The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and routine nature. Any legal fees associated with these proceedings are expensed as incurred.

Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than the active

proceedings described in detail below, proceedings and actions against the Company should not, individually, or in the aggregate, have a material effect on the Company's financial condition, operations and liquidity. Furthermore, due to the uncertainty of any potential loss as a result of pending litigation and due to the Company's belief that an adverse ruling is not probable, the Company has not accrued a loss contingency related to the following matters in its consolidated financial statements. However, a material outcome in one or more of the active proceedings described below could have a material impact on the results of operations in a particular quarter or fiscal year. See Note 2 to the consolidated financial statements for a description of the impact of the Company's Chapter 11 ~~Cases~~case on these proceedings.

Table of Contents

On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included ~~NovaStar Mortgage Funding Corporation (“NMFC”)~~NMFC and NovaStar Mortgage, Inc. ("NMI"), wholly-owned subsidiaries of the Company, and NMFC's individual directors, several securitization trusts sponsored by the Company (“affiliated defendants”) and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. The plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933, as amended, by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by the plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff's claims, which the court granted on March 31, 2011, with leave to amend. The plaintiff filed a second amended complaint on May 16, 2011, and the Company again filed a motion to dismiss. On March 29, 2012, the court dismissed the plaintiff's second amended complaint with prejudice and without leave to replead. The plaintiff filed an appeal. On March 1, 2013, the appellate court reversed the judgment of the lower court, which had dismissed the case. Also, the appellate court vacated the judgment of the lower court which had held that the plaintiff lacked standing, even as a class representative, to sue on behalf of investors in securities in which plaintiff had not invested, and the appellate court remanded the case back to the lower court for further proceedings. On April 23, 2013 the plaintiff filed its memorandum with the lower court seeking a reconsideration of the earlier dismissal of plaintiff's claims as to five offerings in which plaintiff was not invested, and on February 5, 2015 the lower court granted plaintiff's motion for reconsideration and vacated its earlier dismissal. On March 8, 2017, the affiliated defendants and all other parties executed an agreement to settle the action, with the contribution of the affiliated defendants to the settlement fund being paid by their insurance carriers. The court certified a settlement class and granted preliminary approval to the settlement on May 10, 2017. One member of the settlement class objected to the settlement and sought a stay of the final settlement approval hearing on the ground that it did not receive notice of the settlement and had no opportunity to timely opt out of the class. After the court rejected the motion for a stay, the objector filed an appeal and requested a stay of the district court proceedings pending disposition of the appeal. The court of appeals denied the temporary stay of the district court proceedings and on October 19, 2018 dismissed the appeal as moot. Following the court of appeals’ denial of the objector’s petition for rehearing, the district court on March 7, 2019 held a fairness hearing. On March 8, 2019, the district court issued a memorandum and order approving the settlement as fair, reasonable and adequate, and dismissing the action with prejudice. Following entry of judgment, the objector filed a notice of appeal on March 26, 2019 and their opening brief was filed on June 28, 2019. The defendants answered on September 27, 2019, and the ~~way for~~ objector replied on October 18, 2019. Oral argument was held on February 19, 2020. Assuming the ~~District Court to conduct the final~~ settlement approval ~~hearing. Assuming the settlement is approved and completed,~~becomes final, which is expected, the Company will incur no loss. ~~If the settlement is not approved, the~~The Company believes that the ~~affiliated defendants~~Affiliated Defendants have meritorious defenses to the case and, if the settlement approval does not become final, expects them to defend the case vigorously.

On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. NMFC filed a motion to dismiss the amended complaint which was denied on September 12, 2013. The defendants had claimed that the case should be dismissed based upon a statute of limitations and sought an appeal of the court's denial of this defense. An interlocutory appeal of this issue was allowed, and on August 27, 2013, the Tenth Circuit affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the appellate court held that the Extender Statute, 12 U.S.C. §1787(b)(14) applied to plaintiff’s claims. On June 16, 2014, the United States Supreme Court granted a petition of NMFC and its co-defendants for certiorari, vacated the ruling of the Tenth Circuit, and remanded the case back to that court for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). On August 19, 2014, the Tenth Circuit reaffirmed its prior decision, and on October 2, 2014 the defendants filed a petition for writ of certiorari with the Supreme Court, which was denied. On March 22, 2016, NMFC filed motions for summary judgment, and plaintiff filed a motion for partial summary judgment. Those motions remain pending. Given that plaintiff did not file a timely proof of claim in NMFC’s bankruptcy case, the Company believes it is likely that the case will be dismissed. The Company ~~believes that~~and NMFC ~~has~~have meritorious defenses to the case and expects it to defend the case vigorously in the event it proceeds.

complaint identifying alleged breaches of representations and warranties with respect to seven loans that were included in the earlier list of 43 loans. Plaintiff also generally alleged a trust-wide breach of representations and warranties by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, ~~recessionary~~rescissory and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; ~~and~~ indemnification (indemnification against NMI only). and damages for breach of the implied covenant of good faith and fair dealing. On October 9, 2013, the Company and NMI filed a motion to dismiss plaintiff’s complaint. This motion to dismiss was withdrawn after plaintiff filed an amended complaint on January 28, 2014, and on March 4, 2014, the Company and NMI filed a motion to dismiss the amended complaint. ~~Given~~By a Decision/Order dated November 30, 2017, the ~~stage~~court granted in part and denied in part the motion to dismiss the amended complaint. The court dismissed all claims except for plaintiff’s claim for damages for breach of contract, to the extent that claim is based on the Company’s and NMI’s alleged failure to notify plaintiff of allegedly defective loans, and plaintiff’s claim for indemnification. The court denied the motion to dismiss these claims without prejudice to the Company’s and NMI’s right to file a new motion to dismiss in conformity with procedures to be established in coordinated proceedings before the court addressing similar claims against numerous defendants. Briefing of the ~~litigation,~~indemnification issue was completed.

The parties have reached a settlement of this matter. On October 25, 2018, the bankruptcy court overseeing the Company's bankruptcy case entered an order approving the settlement, and on November 19, 2018, the New York State Court "so ordered" a Stipulation of Voluntary Discontinuance terminating the case. Pursuant to the terms of the settlement agreement, the required upfront payment of $0.3 million was made on March 1, 2019. The settlement also requires equal quarterly installments over a three years period, which total an additional $0.3 million. Based on the probability of all contingencies associated with the settlement being satisfied, the Company ~~cannot provide~~recorded an ~~estimate~~expense in the second quarter of 2018 in the Reorganization Items, net expense line item of the ~~range~~income statement and the short and long-term liability totals in the applicable Accrued Settlement Claims lines per the consolidated balance sheet.

Table of ~~any loss.~~Contents

DB Structured Products, Inc., Deutsche Bank AG, Deutsche Bank National Trust Company, Deutsche Bank Securities Inc., Greenwich Capital Derivatives, Inc., RBS Acceptance Inc., RBS Financial Products Inc., RBS Securities Inc., The Royal Bank of Scotland PLC, Wachovia Investment Holdings, LLC, Wells Fargo & Company, Wells Fargo Advisors, LLC, Wells Fargo Bank, N.A. and Wells Fargo Securities, LLC (collectively, the “Indemnity Claimants”) filed proofs of claim in the Company’s bankruptcy case asserting the right to be indemnified by the Company for, and/or to receive contribution from the company in respect of, certain liabilities incurred as a result of their roles in the issuance of residential mortgage-backed securities sponsored by the Company. The Company ~~believes that it~~filed an objection in the bankruptcy case seeking to disallow and expunge the Indemnity Claimants’ proofs of claim. The Indemnity Claimants’ claims were not discharged by the confirmation of the Company’s plan of reorganization, and the bankruptcy court has ~~meritorious defenses~~not ruled on the Company’s objection to those claims.

The parties have reached a settlement in this matter, which was approved by the court on November 29, 2018. This settlement includes an upfront payment of $0.5 million, which was paid on December 21, 2018. In addition, the settlement provides for equal quarterly installments over a three years period, which total an additional $0.4 million. Based on the probability of this settlement receiving court approval, the Company recorded an expense during the second quarter of 2018 in the Reorganization Items, net expense line item of the income statement and the short and long-term liability totals in the applicable Accrued Settlement Claims lines per the balance sheet.

Note 10. Troubled Debt Restructuring

The Company evaluated whether the terms of the Amendment, as discussed in Note 8 to the ~~case~~consolidated financial statements, qualified as a troubled debt restructuring under applicable accounting standards. The Company determined that this transaction did qualify. Under the terms of the Amendment, there were no transfers of other assets and ~~expects~~there was no gain or loss recorded on this transaction.

The outstanding balance on the 2017 Notes as of December 31, 2019 and 2018 was $86.8 and $85.9, respectively. At the time of the troubled debt restructuring, the carrying value of the debt was decreased by the fair value of the common stock and warrants issued by the Company under the terms of the Amendment of $0.3 and $0.6 million, respectively, less the total accrued interest from July 1, 2019 through August 8, 2019 of $0.5 million at the original variable rate equal to ~~defend~~LIBOR plus 3.5% per annum. Future interest expense is computed using the ~~case vigorously.~~effective interest method.

The carrying value of long-term debt is as follows (in thousands):

	December 31, 2019		December 31, 2018
Principal balance, 2017 Notes	$	85,938	$	85,938
Unamortized debt premium, 2017 Notes		886		-
Other long-term debt		-		31
Total long-term debt	$	86,824	$	85,969

Note 8.11. Fair Value Accounting

Fair Value Measurements

The Company's valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:

~~Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities.~~

~~Level 2 – Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates.~~

~~Level 3 – Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.~~

~~The following tables present for each of the fair value hierarchy levels, the Company's assets and liabilities which are measured at fair value on a recurring basis(in thousands):~~

December 31, 2016
Fair Value Measurements at Reporting Date Using
Description Fair Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)
Assets:
Marketable securities, current $ 9,943
$ 152
$ —
$ 9,791
Marketable securities, non-current 26,545
26,545
—
—
Total $ 36,488
$ 26,697
$ —
$ 9,791

December 31, 2015
Fair Value Measurements at Reporting Date Using
Description Fair Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)
Assets:
Marketable securities, current:
Corporate notes and bonds $ 15,489
$ —
$ 15,489
$ —
Mortgage securities 2,011
—
—
2,011
Marketable securities, non-current:
Corporate notes and bonds 1,397
—
1,397
—
Total $ 18,897
$ —
$ 16,886
$ 2,011

~~Valuation Methods and Processes~~

When available, the Company determines the fair value of its marketable securities using market prices from industry-standard independent data providers. Market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.

To the extent observable inputs are not available, as is the case with the Company's retained mortgage securities, the Company estimates fair value using present value techniques and generally does not have the option to choose other valuation methods for these securities. The methods and processes used to estimate the fair value of the Company's retained mortgage securities are discussed further below. There have been no significant changes to the Company's valuation techniques. Accordingly, there have been no material changes to the consolidated financial statements resulting from changes to our valuation techniques.

The Company's marketable securities are classified as available-for-sale and are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of the Company's marketable securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses.

~~Mortgage securities - available-for-sale~~. ~~The Company's mortgage securities include traditional agency mortgage-backed securities, with valuations based on quoted prices in active markets for identical assets (Level 1).~~

Additionally, mortgage securities include investments that were retained during the Company's lending and securitization process, conducted prior to 2015. For these securities, the Company maintains the right to receive excess interest and other cash flow generated through the mortgage loan securitization vehicle. The Company receives the difference between the interest on the mortgage loans and the interest paid to the securitization bondholders. The Company also owns overcollateralization ("OC") classes of various securitization trusts. These OC bonds represent the difference in the principal of the underlying mortgage loans compared to the bonds sold to third parties. This extra collateral serves as a cushion for losses that have and may occur in the underlying mortgage pool. The OC bonds may receive cash if and when it is determined that actual losses are less than expectations. As of December 31, 2016, the aggregate overcollateralization was $27.0 million. The timing and amount of cash to be generated by the OC bonds is contingent upon the performance of the underlying mortgage loan collateral.

The independent loan servicer controls and manages the individual mortgage loans and therefore the Company has no control over the loan performance. Collectively, these mortgage securities are identified by the Company as "retained mortgage securities," in order to distinguish them from the Company's traditional agency mortgage-backed securities.

Retained mortgage-backed securities are valued at each reporting date using significant unobservable inputs (Level 3) by discounting the expected cash flows. An independent valuation specialist has been engaged to assist management in estimating cash flows and values for the Company's mortgage securities. It is the Company's responsibility for the overall resulting valuation.

The critical assumptions used in estimating the value of the mortgage securities include market interest rates, rate and severity of default, prepayment speeds and how long the security will continue to provide cash flow. To determine the assumptions, the Company and its independent valuation specialist rely primarily on historical mortgage loan performance and appropriate general economic indicators. The Company continuously reviews the assumptions used and monitors the efforts of the independent valuation specialist used to value the retained mortgage securities. As a result of this review during 2016, the Company and its independent valuation specialist revised key assumptions, leading to an increase in the expected cash flow and estimated value of these securities. The significant assumptions used in preparing the fair value estimates are:

As of December 31,
2016 (A) 2015
Weighted average:
Loss severity 49.6 % 121.6 %
Default rate 2.1 % 1.3 % (B)
Prepayment speed 9.8 % 9.8 %
Servicer's optional redemption date None 2 years from valuation date

(A) For the 2016 assessment, rates are for actual historical performance of these individual loans based on most recent 24 months. The model also considers 12 and 36 month history and predicts performance using this information combined with other fundamental economic information.

~~(B) Prior to 2016, the model assumed a graduated default rate to a maximum. Rate is the initial month's default rate.~~

Management and its valuation specialist previously relied heavily on historical general industry average performance of non-prime mortgage loans in developing loan-specific assumptions. Management and the valuation specialist believed that the overall performance of non-prime loans was a predictor for how the loans underlying the Company's retained mortgage securities would perform. However, market trends for housing prices, labor statistics and other economic factors have consistently improved for several years. The performance of the specific loans underlying the Company's retained mortgage securities is substantially better than that of non-prime loans in general. Sufficient time has passed to suggest that these trends are sustainable. Therefore, the revised assumptions used in 2016 rely more heavily on the specific performance of the loans underlying the Company's retained mortgage securities. Better performance by the underlying mortgage loans generally results

in more estimated cash flow and higher values for our retained mortgage securities. Furthermore, while management and its valuation specialist previously assumed that a reasonable servicer would exercise its optional redemption, this has not occurred and there is no indication it will occur. Therefore, in 2016 we have revised the assumption regarding the time at which the servicer will exercise its option. This serves to extend the term over which the Company expects to receive cash from the excess interest securities, which also results in higher estimated fair values.

The improving loan performance and therefore the changes in our assumptions during 2016 resulted in a change in estimate of the value of retained mortgage securities, resulting in an increase the estimated fair value of marketable securities, current and other comprehensive income and a decrease in the total stockholders’ deficit by $8.2 million. Adjustments to assets and liabilities measured at fair value on a recurring and nonrecurring basis did not have a material impact on the earnings of continuing operations for any period presented.

•	Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities.
•	Level 2 – Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates for substantially the full term of the asset or liability.
•	Level 3 – Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.

The following table provides a reconciliation of the beginning and ending balances for the Company's mortgage securities – available-for-sale which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (dollars in thousands):

For the Year Ended
December 31,
2016 2015
Balance, beginning of period $ 2,011
$ 3,381
Increases (decreases) to mortgage securities – available-for-sale:
Accretion of income (A) 394
528
Proceeds from paydowns of securities (A) (469 ) (685 )
Mark-to-market value adjustment 7,855
(1,213 )
Net increases (decreases) to mortgage securities – available-for-sale 7,780
(1,370 )
Balance, end of period $ 9,791
$ 2,011


~~(A)~~	~~Cash received on mortgage securities with no cost basis was $4.7 million and $5.6 million during 2016 and 2015, respectively.~~

~~The following disclosure of~~ the estimated fair value of financial instruments and presents amounts that have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies could have a material impact on the estimated fair value amounts. The fair value of short-term financial assets and liabilities, such as service fees receivable, notes receivable, and accounts payable and accrued expenses are not included in the following table as their ~~fair~~carrying value approximates their ~~carrying~~fair value.

The estimated fair values of the Company's financial instruments are as follows as of December 31, ~~2016~~2019 and ~~2015 (dollars~~2018 (in thousands):

	As of December 31,
	2019				2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Equity securities (Level 1)	$	-	$	-	$	1	$	1
Financial liabilities:
Senior notes (Level 3)	$	86,824	$	21,289	$	85,938	$	24,659

Table of Contents

Valuation Methods and Processes

The equity securities are valued based on quoted market prices and are included in ~~thousands):~~

As of December 31,
2016 2015
Carrying Value Fair Value Carrying Value Fair Value
Financial assets:
Marketable securities $ 36,488
$ 36,488
$ 18,897
$ 18,897
Financial liabilities:
2011 notes $ 85,937
$ 23,349
$ 88,385
$ 18,331

~~For~~other current assets on the ~~items~~consolidated balance sheets. All equity securities held by the Company were sold during the third quarter of 2019. The senior notes in the table above are not measured at fair value in the ~~statement of financial position~~consolidated balance sheets but ~~for which the~~are required to be disclosed at fair value. The fair value ~~is disclosed,~~of the ~~fair value~~senior notes has been estimated using Level 3 methodologies, based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow calculations based on internal cash flow forecasts. No assets or liabilities have been transferred between levels during any period presented.

~~2011 notes.~~

Senior Notes — The fair value is estimated by discounting future projected cash flows using a discount rate commensurate with the risks involved. The interest rate used in calculating the fair value ofon the 2011 Notes was calculated assuming that the Company would be required to pay interest at a rate of 1.0% per annum until January 2016, at which time the Company would be required to start paying the Full Rate ofsenior notes is three-month LIBOR plus 3.5% per annum until maturity in March 2033. The three-month LIBOR used in the analysis was projected using a

forward interest rate curve. ~~The increase~~

Goodwill — See Note 6 to the consolidated financial statements for more information on the goodwill impairment assessments performed in 2019.

Financial assets reported at fair value on a nonrecurring basis include the following (in thousands):

	December 31, 2019
	Fair Value (Level 3)		Gains and (Losses)
Goodwill	$	3,905	$	(4,300	)

Activity during 2019for Goodwill, the ~~senior notes when comparing December 31, 2016 to December 31, 2015 relates to the increase~~Company's only Level 3 asset, measured on a nonrecurring basis is included in the ~~forward LIBOR, which is market driven.~~following table (in thousands):

Goodwill Activity:
Balance, December 31, 2018	$	8,205
Impairment charge		(4,300	)
Balance, December 31, 2019	$	3,905

~~Note 9. Earnings Per Share~~

Note 12. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the effect of conversions of stock options and nonvested shares. The computations of basic and diluted earnings per share for ~~2016~~2019 and ~~2015~~2018 (dollars in thousands, except share and per share amounts) are as follows:

	For the Years Ended December 31,
	2019			2018
Numerator, in thousands:
Net income (loss) available to common shareholders	$	(10,225	)	$	6,134

Denominator:
Weighted average common shares outstanding – basic		100,472,515			93,961,799

Weighted average common shares outstanding – dilutive:
Weighted average common shares outstanding – basic		100,472,515			93,961,799
Stock options		—			—
Common stock warrants		—			—
Nonvested shares		—			508,258
Weighted average common shares outstanding – dilutive		100,472,515			94,470,057

Basic earnings (loss) per share:
Net income (loss) available to common shareholders	$	(0.10	)	$	0.07

Diluted earnings (loss) per share:
Net income (loss) available to common shareholders	$	(0.10	)	$	0.06

For the Year Ended
December 31,
2016 2015
Numerator:
Net income (loss) from continuing operations $ 3,247
$ (2,765 )
Income (loss) from discontinued operations 1,966
(25,964 )
Net income (loss) $ 5,213
$ (28,729 )

Denominator:
Weighted average common shares outstanding – basic 91,905,941
91,138,068

Weighted average common shares outstanding – diluted:
Weighted average common shares outstanding – basic 91,905,941
91,138,068
Stock options —
—
Nonvested shares —
—
Weighted average common shares outstanding – diluted 91,905,941
91,138,068

Basic earnings per share:
Net income (loss) from continuing operations $ 0.04
$ (0.03 )
Income (loss) from discontinued operations 0.02
(0.29 )
Net income (loss) $ 0.06
$ (0.32 )

Diluted earnings per share:
Net income (loss) from continuing operations $ 0.04
$ (0.03 )
Income (loss) from discontinued operations 0.02
(0.29 )
Net income (loss) $ 0.06
$ (0.32 )

Table of Contents

~~The following weighted-average stock options~~

Options and warrants to purchase shares of common stock were outstanding during each period as presented below (in thousands, except exercise price), but were not included in the computation of diluted earnings (loss) per share because the number of shares assumed to be repurchased ~~as calculated~~ was greater than the number of shares to be obtained upon exercise, therefore, the effect would be ~~antidilutive (in thousands, except exercise prices):~~anti-dilutive.

	For the Years Ended December 31,
	2019		2018
Number of stock options (in thousands)		24		72
Weighted average exercise price of stock options	$	1.00	$	1.17

For the Year Ended
December 31,
2016 2015
Number of stock options 4,719
10,549
Weighted average exercise price of stock options $ 0.68
$ 0.62

There have been no options granted during 2018 or 2019. During ~~2016~~2018, the Company granted ~~0.1~~3.3 million ~~nonvested~~ shares to ~~a director~~the Board, and all of these shares vested in ~~2016.~~2019. During ~~2015~~2019, the Company granted ~~1.4~~4.5 million ~~options~~shares to ~~purchase~~the directors, officers and other members of management, of which 2.4 million of these shares vested during the year. The remaining 2.1 million shares will vest equally in 2020 and 2021, assuming the grantees are still directors at the vest date. As of ~~common stock at a weighted average exercise price of $0.51.~~December 31, 2019 and 2018, respectively, the Company had approximately 2.2 million and 4.2 million non-vested shares outstanding. The weighted average impact of ~~0.7~~0.1million and 0.8 million non-vested shares and common stock warrants of ~~the options~~22.3 million granted ~~during 2015 is included~~ in the table above for 2015. The Company granted 1.3 million nonvested shares to its directors in 2015. These shares vested during 2016. The weighted average impact of 0.5 million of the nonvested shares granted during 2015debt restructure were not included in the calculation of earnings per share for ~~2015, because they were anti-dilutive.~~

~~As of December 31, 2016~~2019 and 2015, respectively, the Company had approximately 0.1 million and 1.4 million nonvested shares outstanding. The nonvested shares granted during 2015 vested during the current year. The remaining restricted shares outstanding as of December 31, 2016 are schedule to vest in 2017. The weighted average impact of 0.9 million and 0.8 million nonvested shares were not included in the calculation of earnings per share for 2016 and 2015,2018, respectively, because they were anti-dilutive.

~~Note 10. Income Taxes~~

Note 13. Income Taxes

The components of income tax ~~benefit~~expense (benefit) from continuing operations are (in thousands):

	For the Years Ended December 31,
	2019			2018
Current:
Federal	$	(11	)	$	(113	)
State and local		36			(176	)
Total current	$	25		$	(289	)

For the Year Ended
December 31,
2016 2015
Current:

Federal $ (14 ) $ (13 )
State and local (7 ) (15 )
Total current $ (21 ) $ (28 )

Below is a reconciliation of the expected federal income tax expense (benefit) using the federal statutory tax rate of ~~35%~~21% to the Company’s actual income tax benefit and resulting effective tax rate (in thousands).

	For the Years Ended December 31,
	2019			2018

Income tax expense (benefit) at statutory rate	$	(2,949	)	$	984

State income taxes, net of federal tax benefit		36			36
Valuation allowance		2,528			(688	)
Change in federal tax rate		—			—
Change in state tax rate		—			—
Bankruptcy reorganization		9			17
Uncertain tax positions		—			(371	)
Other		401			(267	)
Total income tax expense (benefit)	$	25		$	(289	)

For the Year Ended
December 31,
2016 2015
Income tax (benefit) at statutory rate $ 1,129
$ (977 )

State income taxes, net of federal tax benefit 211
(96 )
Valuation allowance 14,595
2,519
Change in state tax rate (16,475 ) —
State tax credits —
488
Adjustment to deferred tax asset —
(1,965 )
Bankruptcy reorganization 437
—
Uncertain tax positions (35 ) (87 )
Other 117
90
Total income tax benefit $ (21 ) $ (28 )

Prior to ~~2015,~~2018, the Company concluded that it was no longer more likely than not that it would realize a portion of its deferred tax assets. As such, the Company maintained a full valuation allowance against its net deferred tax assets as of both December 31, ~~2016~~2019 and ~~2015.~~

2018.

The Company's determination of the realizable deferred tax assets requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. The Company will continue to assess the need for a valuation allowance in future periods. As of December 31, ~~2016~~2019 and ~~2015,~~2018, the Company maintained a valuation allowance of ~~$292.2~~$166.5 million and ~~$281.5~~$164.0 million, respectively, for its deferred tax assets.

~~In 2016, due to the sale~~Table of Corvisa, the Company reassessed their state apportionment rates. Based on available information, the Company changed the apportionment factors, specifically the apportionment factor used for allocation of income to the State of Missouri. In this reassessment, the Company determined that as of December 31, 2016, the federal taxable net operating loss would also be the state net operating loss allocated to Missouri based on its state tax apportionment. Based on Missouri tax code, the Company is able to utilize the full amount of federal net operating losses to reduce Missouri taxable income, subject to certain adjustments outlined in Missouri tax code. As a result of this reassessment, the Company recalculated the deferred tax assets and recognized an additional deferred tax asset related to state net operating losses totaling approximately $16.5 million in the current year. This was offset by an increase in the valuation allowance of approximately $16.5 million. In 2015, the Company had apportioned 22.57% of the total federal net operating loss to Missouri in accordance with Missouri tax code.Contents

Significant components of the Company’s deferred tax assets and liabilities as of December 31, ~~2016~~2019 and ~~2015~~2018 are (in thousands):

	December 31,
	2019			2018
Deferred tax assets:
Federal NOL carryforwards	$	152,705		$	153,139
State NOL carryforwards		9,003			9,016
Goodwill impairment, HCS		1,084			—
Business interest expense limitation		1,877			—
Other		1,876			1,866
Gross deferred tax asset		166,545			164,021
Valuation allowance		(166,545	)		(163,992	)
Deferred tax asset		—			29
Deferred tax liabilities:
Other		—			29
Deferred tax liability		—			29
Net deferred tax asset	$	—		$	—

December 31,
2016 2015
Deferred tax assets:
Basis difference – investments $ 17,261
$ 18,043
Federal net operating loss carryforwards 239,942
239,003
State net operating loss carryforwards 35,896
20,168
Other 2,816
4,882
Gross deferred tax asset 295,915
282,096
Valuation allowance (292,214 ) (281,548 )
Deferred tax asset 3,701
548
Deferred tax liabilities:
Other 3,701
548
Deferred tax liability 3,701
548
Net deferred tax asset $ —
$ —

The other deferred tax assets consist of differences in various accrued expenses, debt restructuring expenses, goodwill and intangible asset book to tax differences, and various other book to tax differences.

As of December 31, ~~2016,~~2019, the Company had a federal ~~net operating loss~~NOL of approximately ~~$685.5~~ $727.2million, including ~~$307.3~~$250.3 million in losses on mortgage securities that have not been recognized for income tax purposes. The federal ~~net operating loss~~NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code (the "Code"). If not used, ~~this net operating loss~~these NOLs will expire in years 2025 through ~~2036. The~~2037. Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely; the portion of NOLs that will not expire is $92.6 million. The Company has state ~~net operating loss carryovers~~NOL carryforwards arising from both combined and separate filings from as early as 2004. The state ~~net operating loss carryovers~~NOL carryforwards may expire as early as ~~2017~~2018 and as late as ~~2036.~~

2037.

The activity in the accrued liability for unrecognized tax benefits for the years ended December 31, ~~2016~~2019 and ~~2015~~2018 was (in thousands):

	For the Years Ended December 31,
	2019			2018
Beginning balance	$	11		$	328
Gross increases – tax positions in current period		—			1
Lapse of statute of limitations		(11	)		(318	)
Ending balance	$	—		$	11

For the Year Ended
December 31,
2016 2015
Beginning balance $ 368
$ 475
Gross increases – tax positions in current period 2
19
Lapse of statute of limitations (39 ) (126 )
Ending balance $ 331
$ 368

Accounting for income taxes, including uncertain tax positions, represents management's best estimate of various events and transactions, and requires significant judgment. As of December 31, ~~2016~~2019, there were no unrecognized tax benefits, and ~~2015,~~as of December 31, 2018, the total gross amount of unrecognized tax benefits was ~~$0.3~~$0.01 million, ~~and $0.4 million, respectively,~~ which also represents the total amount of unrecognized tax benefits that would impact the effective tax rate. The ~~Company anticipates a reduction of~~change in unrecognized tax benefits of ~~less than $0.1~~$0.01 million was due the lapse of statute of limitations in ~~the next twelve months.~~2019. The Company does not expect any other significant change in the liability for unrecognized tax benefits in the next twelve months. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. The benefit for interest and penalties recorded in income tax expense was not significant for ~~2016~~2019 and ~~2015.~~2018. There were accrued interest and penalties of less than $0.1 million as of both December 31, ~~2016~~2019 and ~~2015.~~2018. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions. Tax years ~~2012~~2016 to ~~2016~~2019 remain open to examination for both U.S. federal income tax and major state tax jurisdictions.

~~Note 11. Subsequent Events~~

~~Acquisition~~Table of ~~Healthcare Staffing, Inc.~~On February 1, 2017, the Company entered into a Stock Purchase Agreement (the “HCS Purchase Agreement”) with Novation Holding, Inc., a wholly-owned subsidiary of the Company (“NHI”), HCS, and Butler America, LLC, the owner of HCS (“Butler” and, together with HCS, the “Seller Parties”). Pursuant to the HCS Purchase Agreement, NHI agreed to purchase from Butler all of the outstanding capital stock of HCS for $24.0 million in cash (the “HCS Acquisition”), subject to terms and conditions as provided therein, including but not limited to the Company’s receipt of bankruptcy court approval for the HCS Acquisition in its chapter 11 case. The purchase price is subject to a potential working capital adjustment, based on HCS having $5.0 million of working capital at closing.

On July 27, 2017, in connection with the anticipated closing of the HCS Acquisition, the Company, NHI, HCS and Butler entered into a Closing Agreement, dated as of the same date (the “Closing Agreement”), relating to certain closing matters and the terms of the HCS Purchase Agreement. The Closing Agreement provided for the following: (i) eliminate the $240,000 indemnification escrow under the HCS Purchase Agreement; (ii) provide for NHI’s reimbursement to Butler of $100,000 in costs and expenses incurred by Butler in consideration for the delay in closing the HCS Acquisition; (iii) clarify the treatment of certain of HCS’s outstanding tax obligations; (iv) provide that an adjustment to the purchase price under the HCS Purchase Agreement will be made in connection with the calculation of final closing date net working capital of HCS only if there is a difference between such amount and the pre-closing estimate of greater than three percent; and (v) make certain other changes to the HCS Purchase Agreement.

On July 27, 2017, the Company and NHI completed the HCS Acquisition pursuant to the terms of the HCS Purchase Agreement and the Closing Agreement, as a result of which HCS became a wholly-owned subsidiary of NHI.

~~The net purchase price was allocated as shown below (in thousands).~~

Contents

Cash $ 1,013
Accounts receivable 6,929
Property and equipment 568
Other assets 45
Intangible assets:
Customer relationships 6,041
Trademarks 906
Non-compete agreement 583
Goodwill 11,472
Liabilities assumed - accrued payroll and related liabilities (3,411 )
Net assets acquired $ 24,146

The purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed at their estimated fair values as of the acquisition date. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 in the valuation hierarchy. The allocation of the purchase price above to the assets and liabilities are based on our preliminary assessment and is subject to further review pending the completion of an appraisal of the assets and liabilities acquired.

The gross contractual amount of accounts receivable is $6.9 million, which was determined to approximate fair value. Goodwill and trademarks are considered indefinite-lived assets and are not subject to future amortization, but will be tested for impairment at least annually. Goodwill is comprised primarily of processes for services and knowhow, assembled workforces and other intangible assets that do not qualify for separate recognition. The full amount of goodwill is expected to be deductible for tax purposes. ~~The amortization period for the intangibles for customer relationships and the non-compete agreement are seven and three years, respectively.~~

~~Note Refinancing~~ On July 27, 2017, the Company entered into a Senior Secured Note Purchase Agreement, dated as of the same date (the “Note Purchase Agreement”), with NHI and HCS as guarantors (together with the Company, collectively, the “Credit Parties”), the Noteholders and Wilmington Savings Fund Society, FSB, as collateral agent for the benefit of the Noteholders, to refinance $85,937,500 of principal indebtedness of the Company under the 2011 Notes. Pursuant to the Note Purchase Agreement, the Noteholders exchanged their 2011 Notes for new notes from the Company in the same aggregate principal amount (collectively, the “2017 Notes”) on the terms and conditions set forth therein.

~~redeem all or part of the 2017 Notes at a redemption price equal to 101% of the principal amount redeemed plus any accrued and unpaid interest thereon.~~

Pursuant to the Note Purchase Agreement, in connection with the Note Refinancing, the Company paid all overdue and unpaid accrued interest on the 2011 Notes in the agreed, reduced aggregate amount of $5,775,779, and paid $500,000 in fees and expenses incurred by the Noteholders.

Item

~~Item~~ 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item

~~Item~~ 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~The Company maintains a system~~

As of the end of the period covered by this report, our chief executive officer and our chief financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation of our disclosure controls and procedures, our chief executive officer and chief financial officer, with the participation of the Company’s management, concluded that ~~are designed~~our disclosure controls and procedures were not effective as of December 31, 2019, to ensure that information required to be disclosed by the Company in the reports that ~~it files~~we file or ~~submits~~submit under the ~~federal securities laws, including this report,~~Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the ~~applicable~~SEC’s rules and forms and ~~that it is~~(b) accumulated and communicated to ~~our~~ management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(d)) as of the end of the period covered by this report and, based on such evaluation, concluded that the Company's disclosure controls and procedures were effective as of such date.

~~Internal Control over Financial Reporting~~

Management’s Annual Report on Internal Control over Financial Reporting

The ~~Company's~~Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. ~~This~~Our internal control ~~system has been~~over financial reporting is designed to provide reasonable assurance ~~to the Company’s management and Board~~ regarding the reliability of our financial reporting and the preparation ~~and fair presentation~~ of ~~the Company’s published~~consolidated financial ~~statements.~~

~~All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance~~statements for external purposes in accordance with ~~respect to financial statement preparation and presentation.~~

GAAP. Under the supervision and with the participation of management, including the ~~Company's~~Company’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, ~~2016~~2019 based on the framework set forth in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation and its assessment,, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, ~~2016.~~

2019.

Description of Material Weakness

As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations above, in July 2017, we acquired HCS, which now is our primary business activity. Prior to the HCS Acquisition, HCS was a privately-owned business with limited administrative and accounting resources, accounting software inappropriate for the size of the business and generally weak accounting processes, procedures and controls. Specifically, material weaknesses existed in HCS's processes, procedures and controls with respect to revenue, receivables, payment of payroll taxes and estimating various accrued expenses.

Remediation of Material Weakness

We are working to improve the processes, procedures and controls at HCS and remediate this material weakness. Since the HCS Acquisition in July 2017, we have implemented improvements in processes, procedures and controls and we will continue to do so. We are evaluating the accounting professionals at the Company and HCS and will determine if additional resources with relevant experience are needed. We will disclose in future periods the progress we have made in efforts to remediate this material weakness.

Changes in Internal Control ~~over~~Over Financial Reporting

~~There were~~

We are working to remediate the material weakness discussed above. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In designing and operating a control system, one must consider the potential benefits of controls relative to their costs and the reality of limited resources available to allocate to control activities, particularly in smaller companies. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and there can be no ~~changes~~assurance that any control will meet its objectives under all potential future conditions. Because of such inherent limitations in ~~our internal~~any control ~~over financial reporting during the quarter ended December 31, 2016~~system, there can be no absolute assurance that ~~have materially affected,~~ control issues, misstatements, and/or ~~are reasonably likely to materially affect, our internal control over financial reporting.~~

fraud will be prevented or detected.

Item

~~Item~~ 9B. Other Information

None.

~~None.~~

Table of Contents

PART III

Item

~~Item~~ 10. Directors, Executive Officers and Corporate Governance

DIRECTORS AND EXECUTIVE OFFICERS

Howard M. Amster, age ~~69,~~72, has been a member of the Board since 2009. Mr. Amster currently is an owner and operator of

multiple real estate investments. Since March 1998, Mr. Amster has served as President of Pleasant Lake Apts. Corp., the

corporate general partner of Pleasant Lake Apts. Limited Partnership. Mr. Amster also serves as a director of Maple Leaf

Financial, Inc., the holding company for Geauga Savings ~~Bank, and newAX, Inc. (formerly Astrex, Inc.).~~Bank. Since June 2015, Mr. Amster also has served as a Financial Advisor at McDonald Partners, LLC, a securities brokerage firm. From 2000 to May 2015, Mr. Amster served as a Principal with Ramat Securities Ltd., a securities brokerage firm. From 1992 to 2000, Mr. Amster was an investment consultant with First Union Securities (formerly EVEREN Securities and formerly Kemper Securities). The Board believes Mr. Amster’s qualifications to serve on the Board include his investment experience and his service as a director of public companies.

~~Jeffrey E. Eberwein~~

Howard Timothy Eriksen, age ~~47,~~51, has been a member of the Board since April ~~2015 and~~2018. Mr. Eriksen has been the Chief Executive ~~Chairman~~

Officer and Interim Chief Financial Officer of Solitron Devices, Inc. (“Solitron”), a manufacturer of solid-state semiconductor components, since ~~August 2017.~~July 2016. Mr. ~~Eberwein is~~Eriksen also serves as the ~~founder and chief executive officer~~Managing Member of ~~Lone Star Value~~Eriksen Capital Management LLC (“ECM”), a ~~registered~~

Lynden, Washington based investment ~~firm. Prior to founding Lone Star Value Management, LLC~~advisory firm that he founded in ~~January 2013,~~2005. Previously, Mr. ~~Eberwein was a Portfolio Manager~~

~~at Soros Fund Management from January 2009 to December 2011 and Viking Global Investors from March 2005 to September~~

~~2008. Mr. Eberwein is Chairman of the Board of AMERI Holdings,~~Eriksen worked for Walker’s Manual, Inc., ~~ATRM Holdings, Inc., Digirad Corporation~~a publisher of books and ~~Hudson Global, Inc. Previously~~newsletters on micro-cap stocks, unlisted stocks and community banks, from 2004 to 2005, and prior to that for Kiewit Pacific Co, a subsidiary of Peter Kiewit Sons, a construction and mining services company, as an administrative engineer on the Benicia Martinez Bridge project. Mr. ~~Eberwein served as~~Eriksen has been a ~~director and Chairman~~member of ~~the Board of Crossroads Systems, Inc., from April 2013 to May 2016. Mr. Eberwein also served on~~ the board of directors of ~~The Goldfield Corporation from May 2012 to May 2013, On Track Innovations Ltd. from December 2012 to March 2014, and NTS, Inc. from December 2012 until its sale to~~Solitron since August 2015. Mr. Eriksen received a ~~private equity firm was completed in June 2014. Mr. Eberwein served on the Board~~Bachelor of ~~Hope for New York, a 501(c)(3) organization dedicated to serving the poor in New York City from 2011 until 2014, where he was Treasurer and on the Executive Committee. Mr. Eberwein earned an MBA~~Arts from The ~~Wharton School,~~Master’s University ~~of Pennsylvania~~ and a ~~BBA with High Honors~~Master of Business Administration from ~~The University of~~ Texas ~~at Austin.~~A&M University. The Board believes that Mr. ~~Eberwein’s~~Eriksen’s qualifications to serve on the Board include his financial expertise ~~in finance~~ and operating experience ~~in the investment community and serving as a director of public~~at other small-cap companies.

~~Charles M. Gillman~~, age 47, has been a member of the Board since January 2016. Mr. Gillman is the head of the IDWR Multi-Family Office (the “IDWR”), a position he has held since 2013. The IDWR employs a team of analysts with expertise in finding publicly traded companies that require operational enhancement and an improvement in corporate capital allocation. From 2001 to 2013, Mr. Gillman was a portfolio manager of certain family office investment portfolios at Nadel and Gussman, LLC. Prior to his employment at Nadel and Gussman, Mr. Gillman worked in the investment industry and as a strategic management consultant at McKinsey & Company, where he gained experience designing operational turnarounds of U.S. and international companies. Mr. Gillman currently serves on the board of directors of Points International, Digrad and Solitron. Mr. Gillman is a Summa Cum Laude graduate of the Wharton School and a Director of the Penn Club of New York which serves as the Manhattan home of the Wharton and Penn alumni community. The Board believes that Mr. Gillman’s qualifications to serve on the Board include his significant experience as a successful portfolio manager, M&A experience and divestiture experience.

Barry A. Igdaloff, age ~~62,~~65, has been a member of the Board since 2009. Mr. Igdaloff served as the sole proprietor of Rose Capital, a registered investment advisor in Columbus, Ohio, since 1995. Mr. Igdaloff has been a director of Dynex Capital, Inc. since 2000. Previously, Mr. Igdaloff was a director of Guest Supply, Inc. prior to its acquisition by Sysco Foods in 2001. Prior to entering the investment business, Mr. Igdaloff was an employee of Ernst & Whinney’s international tax department. Mr. Igdaloff is a non-practicing CPA and a non-practicing attorney. The Board believes Mr. Igdaloff’s qualifications to serve on the Board include his financial expertise, his years of experience as an investment advisor, attorney, and CPA and his service as a director of public companies.

~~Robert G. Pearse~~

Lee D. Keddie, age ~~57,~~51, has been a member of the Board since April 2018. Mr. Keddie has been President and Chief Executive Officer of CompuMed Inc. (OTC:CMPD) (“CompuMed”), an enterprise telemedicine solutions company, since November 2015. In addition, he has been President and Chief Executive Officer of Value Creation Management Group LLC, a company that invests in and provides consulting to companies that need operational improvement, since September 2014. Previously, Mr. Pearse currently serves as a Managing Partner at Yucatan Rock Ventures, where he specializes in technology investments and consulting, and has served in that position since August 2012. Mr. Pearse also serves as a director for Aviat Networks, Inc., Ameri Holdings, Inc., and Crossroads Systems, Inc. From 2005 to 2012, Mr. Pearse served as vice president of Strategy and Market Development at NetApp,Keddie spent 13 years with HKX, Inc., a ~~computer storage~~developer of control systems for excavators, as a Co-Owner, President & General Manager, from January 1999 to September 2013. Prior to his business leadership roles, Mr. Keddie spent over eight years in both the commercial and ~~data management company. From 1987~~military sectors of the aircraft industry. He has been a member of the board of directors of CompuMed since November 2014 and of Stephan Co. (OTC:SPCO), a manufacturer of hair care products, since March 2015. Mr. Keddie was a board member of Essex Rental Corp. (NASDAQ:ESSX), a company that rents and distributes construction lifting equipment, from June 2015 to ~~2004,~~February 2017. Mr. ~~Pearse held leadership positions at Hewlett-Packard, most recently as the vice president of Strategy~~Keddie is a professional engineer, and Corporate Development from 2001 to 2004 focusing on business strategy, business development and acquisitions. Mr. Pearse’s professional experience also includes positions at PricewaterhouseCoopers LLP, Eastman Chemical Company, and General Motors Company. Mr. Pearse earned a Master of Business Administration degreereceived an Honors Co-op Mechanical Engineering Degree from the ~~Stanford Graduate School~~University of ~~Business~~Waterloo, and spent two additional years at the University of Toronto in ~~1986, and a Bachelor of Science degree in Mechanical Engineering from the Georgia Institute of Technology in 1982.~~Aerospace Studies. The Board believes Mr. ~~Pearse’s~~Keddie’s qualifications to serve on the Board include his extensive ~~business development~~operating expertise and experience as a director of public companies.

David W. Pointer, age 50, has been our Chief Executive Officer and Chairman of the Board since March 27, 2018. He has served as the Managing Partner of V.I. Capital Management, LLC, a registered investment advisory firm that he founded, since January 2008. Prior to that, Mr. Pointer was a Senior Portfolio Manager and Senior Vice President at ICM Asset Management, an employee owned investment manager, from September 2003 to September 2007, as well as Portfolio Manager at AIM/INVESCO Investments, an investment management firm, from July 1999 to August 2003. Mr. Pointer has served on the Board of Directors of CompuMed an enterprise telemedicine solutions company, since December 2013 and as Chairman since October 2014, and as Co-Chief Executive Officer from November 2015 to January 2016. He also has served on the Board of Directors of Solitron Devices, Inc., a manufacturer of solid-state semiconductor components, since August 2015 and as Chairman since July 2016. Previously, Mr. Pointer served on the Board of Directors of ALCO Stores, Inc., a retailer, from September 2014 to June 2015. Mr. Pointer has taught Corporate Finance as an adjunct faculty in Whitworth University’s MBA program as well as Gonzaga University’s MBA program and is an expert in financial analysis and financial ~~expertise.~~

markets. Mr. Pointer holds a Bachelor of Science in Business Administration from Central Washington University and a Master of Business Administration from the Wharton School of Business at the University of Pennsylvania. Mr. Pointer is a member of the CFA Institute and a Chartered Financial Analyst.

Carolyn K. Campbell, age ~~46,~~49, has served as our Chief Financial Officer since August 2017. She previously worked as an independent contractor in internal audit and tax roles for various businesses from July 2016 to August 2017. From 2007 to March 2016, Ms. Campbell served as the Company’s Internal Audit Manager and was responsible for overseeing corporate audit processes and developing and implementing risk-based audit plans and internal controls over financial recordkeeping and reporting. From 2001 to 2004, Ms. Campbell was an internal auditor with Butler Manufacturing Company, a construction engineering company. From 1995 to 2001, Ms. Campbell was employed by Houlihan’s Restaurant Group, a developer of restaurant concepts, most recently as a tax analyst. Ms. Campbell holds a Bachelor of Science in Business Administration from the University of Central Missouri.

CORPORATE GOVERNANCE AND RELATED MATTERS

Board Leadership Structure

The Board is led by Mr. ~~Eberwein,~~Pointer, the Company's Chief Executive Officer and Chairman ~~who also serves as~~of the ~~Company's principal executive officer,~~Board, and by Mr. Igdaloff, who ~~services~~serves as the Company's Lead Independent Director having such responsibilities set forth in the Company's' Corporate Governance Guidelines. The Board has determined that this leadership structure is in the best interests of the Company’s shareholders at this time.

Table of Contents

Board and Committee Meetings

During ~~2016,~~2019, there were 6 meetings of the Board, 4 meetings of the Audit Committee, ~~1 meeting~~2 meetings of the Compensation Committee and ~~1 meeting~~no meetings of the Nominating and Corporate Governance Committee, ~~in addition to~~not including actions taken outside of a meeting by unanimous written consent. Each director participated in at least 75% of the meetings of the Board and the committees on which he served during the periods for which he has been a director or committee member. ~~Mr. Igdaloff attended our 2016 annual meeting of shareholders.~~ We have no written policy regarding director attendance at our annual meetings of shareholders.

Board Committees

The Board has a standing Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The Board has determined that all directors serving on the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are independent with the meaning of SEC and NASDAQ rules. Descriptions of the responsibilities of such committees are provided below. These descriptions are qualified in their entirety by the full text of the written committee charters that may be found on the Company’s website at www.novationcompanies.com.

Audit Committee. The responsibilities of the Audit Committee are set forth in its charter and include assisting the Board in fulfilling its oversight responsibility relating to: (i) the integrity of the Company’s consolidated financial statements and financial reporting process and its system of internal accounting and financial controls; (ii) the performance of the internal audit function; (iii) the performance of the independent auditors, which would include an evaluation of the independent auditor’s qualifications and independence; (iv) the Company’s compliance with legal and regulatory requirements, including disclosure controls and procedures; and (v) the preparation of an Audit Committee report to be included in the Company’s annual proxy statement. The Audit Committee consists of Barry A. Igdaloff, Howard M. Amster, and ~~Robert G. Pearse,~~Howard Timothy Eriksen, with Mr. Igdaloff serving as the chairman. The Board has determined that Barry A. Igdaloff and ~~Robert G. Pearse~~Howard Timothy Eriksen qualify as “audit committee financial experts” under SEC rules and that each Audit Committee member has sufficient knowledge in reading and understanding the Company’s consolidated financial statements to serve on the Audit Committee.

Nominating and Corporate Governance Committee. The responsibilities of the Nominating and Corporate Governance Committee are set forth in its charter and include the following: (i) identify individuals qualified to become Board members consistent with the criteria established by the Board; (ii) recommend to the Board the director nominees for the next annual meeting of shareholders; (iii) lead the Board in the annual review of the Board’s performance and the review of management’s performance; and (iv) shape the corporate governance policies and practices including developing a set of corporate governance principles applicable to the Company and recommending them to the Board. The Nominating and Corporate Governance Committee consists of ~~Barry A. Igdaloff,~~Lee D. Keddie, Howard M. Amster and ~~Robert G. Pearse,~~Barry A. Igdaloff, with Mr. ~~Igdaloff~~Keddie serving as the chairman.

Compensation Committee. The responsibilities of the Compensation Committee are set forth in its charter and include the following: (i) review and approve the goals, objectives and compensation structure for our Chief Executive Officer, Chief Financial Officer and senior management; (ii) review, approve and recommend to the Board any new incentive-compensation and equity-based plans that are subject to Board approval; and (iii) approve any required disclosure on executive officer compensation for inclusion in the Company’s annual proxy statement and Annual Report on Form 10-K. The Compensation Committee consists of ~~Robert G. Pearse,~~Barry A. Igdaloff, Howard M. Amster and ~~Charles M. Gillman,~~Lee D. Keddie, with Mr. ~~Pearse~~Igdaloff serving as the chairman.

Compensation Committee Process and Advisors

The Compensation Committee is responsible for discharging the responsibilities of the Board with respect to the compensation of our executive officers. The Compensation Committee recommends overall compensation of our executive officers to the

Board. The Board approves all compensation of our executive officers. The Compensation Committee may form and delegate authority to subcommittees, comprised of one or more members of the Compensation Committee, as necessary or appropriate, and each such subcommittee shall have the full power and authority of the Compensation Committee.

The charter of the Compensation Committee permits the Compensation Committee to engage outside consultants. In ~~2016,~~2019, the Compensation Committee did not retain a compensation consultant.

Corporate Governance Documents

The Company’s Corporate Governance Guidelines, Code of Conduct, and the charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available at the ~~corporate governance~~Investors-Corporate Governance section of our website, www.novationcompanies.com. The Company will also provide copies of these documents free of charge to any shareholder who sends a written request to: Novation Companies, Inc., Investor Relations, ~~500 Grand Boulevard,~~9229 Ward Parkway, Suite ~~201B,~~340, Kansas City, MO ~~64106.~~

64114.

Code of Ethics

The Company has adopted a Code of Conduct that applies to our directors, principal executive officer, principal financial officer, principal accounting officer, and other employees. The Code of Conduct is available at the ~~corporate governance~~Investors-Corporate Governance section of our website, www.novationcompanies.com. We intend to satisfy the disclosure requirements regarding any amendment to, or waiver from, a provision of our Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions by disclosing such matters on our website within four business days.

Our investor relations contact information follows:

Investor Relations

~~500 Grand Boulevard,~~

9229 Ward Parkway, Suite ~~201B~~

340

Kansas City, Missouri ~~64106~~

64114

816.237.7000

Email: ir@novationcompanies.com

Table of Contents

Shareholder Communications with the Board

Shareholders may communicate directly with any member of the Board or any individual chairman of a Board committee by writing directly to those individuals at the following address: Novation Companies, Inc., ~~500 Grand Boulevard,~~9229 Ward Parkway, Suite ~~201B,~~340, Kansas City, MO ~~64106.~~64114. Communications that are intended for the non-management, independent directors generally should be marked to the attention of the chairman of the Nominating and Corporate Governance Committee. The Company’s general policy is to forward, and not to intentionally screen, any substantive mail received at the Company’s corporate office that is sent directly to a director; however, (i) routine advertisements and business solicitations and (ii) communications deemed to be a security risk or principally for harassment purposes, may not be forwarded in the discretion of the Corporate Secretary, provided that in the latter case the Chairman of the Board is notified thereof.

Risk Oversight

The Board oversees an enterprise-wide approach to risk management, designed to support the achievement of Company objectives, improve long-term Company performance and create shareholder value. A fundamental part of risk management is understanding the risks the Company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The involvement of the full Board in setting the Company’s business strategy and objectives is integral to the Board’s assessment of the Company’s risk and also a determination of what constitutes an appropriate level of risk for the Company. The full Board conducts an annual risk assessment of the Company’s financial risk, legal/compliance risk and operational/strategic risk and addresses individual risk issues throughout the year as necessary.

While the Board has the ultimate oversight responsibility for the risk management process, the Board delegates responsibility for certain aspects of risk management to the Audit Committee. Per its charter, the Audit Committee focuses on key financial risks and related controls and processes and discusses with management the Company’s major financial reporting exposures and the steps management has taken to monitor and control such exposures.

The Board believes its leadership structure enhances overall risk oversight. While the Board requires risk assessments from management, the combination of Board member experience, diversity of perspectives, continuing education and independence of governance processes provide an effective basis for testing, overseeing and supplementing management assessments.

Identifying and Evaluating Nominees for Directors

The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. The Nominating and Corporate Governance Committee regularly assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee considers various potential candidates for director. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current members of the Board, professional search firms, shareholders or other persons. These candidates are evaluated at regular or special meetings of the Nominating and Corporate Governance Committee, and may be considered at any point during the year. Shareholder nominations should be addressed to: Novation Companies, Inc., ~~500 Grand Boulevard,~~9229 Ward Parkway, Suite ~~201B,~~340, Kansas City, MO ~~64106,~~64114, attention Corporate Secretary. The Nominating and Corporate Governance Committee will consider properly submitted shareholder nominations for candidates for the Board, following verification of the shareholder status of persons proposing candidates. If any materials are provided by a shareholder in connection with the nominating of a director candidate, such material will be forwarded to the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee will also review materials provided by professional search firms or other parties.

The Nominating and Corporate Governance Committee considers candidates for the Board based upon several criteria set forth in the Company’s Corporate Governance Guidelines, including their broad-based business and professional skills and experience, education, accounting and financial expertise, age, reputation, civic and community relationships, concern for the long-term interest of shareholders, personal integrity and judgment, knowledge and experience in the Company’s industry (such as operations, finance, accounting and marketing experience and education) and diversity. The Nominating and Corporate Governance Committee considers diversity in the broadest sense, thus including factors such as age, ~~sex,~~gender, race, ethnicity and geographic location, as well as a variety of experience and educational backgrounds when seeking nominees to the Board. The Nominating and Corporate Governance Committee does not have a formal diversity policy in place.

The Nominating and Corporate Governance Committee does not assign specific weights to the criteria and no particular criterion is necessarily applicable to all prospective nominees. When evaluating nominees, the composition of the entire Board is also taken into account, including the need for a majority of independent directors. In addition, the assessment of a candidate includes consideration of the number of public boards on which he or she serves because of the time requirements for duties and responsibilities associated with serving on the Board. The Nominating and Corporate Governance Committee believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. The Nominating and Corporate Governance Committee assesses the effectiveness of the Corporate Governance Guidelines, including with respect to director nominations and qualifications and achievement of having directors with a broad range of experience and backgrounds, through completion of the annual self-evaluation process.

Involvement in Certain Legal Proceedings

~~Lone Star Value~~

V.I. Capital Management, LLC (“V.I. Capital”) and ~~Company directors Jeffrey E. Eberwein~~Chief Executive Officer and ~~Charles M. Gillman~~Chairman of the Board David W. Pointer are ~~each~~ subject to a ~~SEC administrative~~consent order (the “Consent Order”) from the State of Washington Department of Financial Institutions, Securities Division, dated ~~February 14, 2017 (Securities Exchange Act Release No. 80038)~~March 12, 2018 (Order Number S-16-2093-17-CO01), relating to alleged ~~violations~~breaches of ~~Section 13(d)~~their fiduciary duty as investment advisors to their clients, including (i) failure to disclose certain conflict of interest stemming from Mr. Pointer’s service on the ~~Exchange Act~~Boards of Directors of CompuMed and ~~the rules promulgated thereunder, including~~Solitron Devices, Inc., (ii) pledging V.I. Capital investment fund assets as collateral for a line of credit for CompuMed, Inc. and failing to disclose ~~the members of~~such pledge to V.I. Capital’s year-end auditor, and (iii) failure to timely distribute audited financial statements and a ~~stockholder group, and further allegations that Messrs. Eberwein and Gillman violated Section 16(a)~~final fund audit to investors. As conditions of the ~~Exchange Act~~Consent Order, V.I. Capital and ~~the rules promulgated thereunder, including failing~~Mr. Pointer agreed to ~~timely file initial statements of beneficial ownership on Form 3 and changes thereto on Form 4. Without admitting or denying any violations,~~ (i) ~~Lone Star Value Management agreed to~~ cease and desist from ~~committing~~violating the Securities Act of 1933, (ii) pay a fine of $10,000 and (iii) pay costs of $2,500. Mr. Pointer also agreed that he will not be a principal, officer or ~~causing any violations~~owner of ~~Section 13(d)~~an investment adviser or broker-dealer for 10 years following the entry of the ~~Exchange Act and Rules 13d-1 and 13d-2 promulgated thereunder, and paid~~Consent Order, but he may apply for a ~~civil penalty~~securities salesperson or investment adviser representative registration with an acceptable plan of ~~$120,000 to the SEC and (ii) each~~supervision.

Table of ~~Messrs. Eberwein and Gillman agreed to cease and desist from committing or causing any violations of (x) Section 13(d)~~Contents

Item 11. Executive Compensation

DIRECTOR COMPENSATION

The following table presents a summary of the ~~Exchange Act and Rules 13d-1 and 13d-2 promulgated thereunder and (y) Section 16(a) of~~compensation earned by each director who served on the ~~Exchange Act and Rules 16a-2 and 16a-3 promulgated thereunder, and paid civil penalties to~~Board during the ~~SEC~~fiscal year ended December 31, 2019, other than our Chief Executive Officer Mr. Pointer, whose compensation is described in the ~~amounts of $90,000 and $30,000, respectively.~~

~~SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE~~

Section 16(a) of the Exchange Act requires our directors and executive officers, and holders of more than 10% of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of the forms furnished to us and written representations made by our directors and officers, we believe that our directors, officers and holders of more than 10% of our common stock complied with all applicable filing requirements during fiscal year 2016.

~~Item 11.~~ Executive Compensation

~~DIRECTOR COMPENSATION~~

The Board approves compensation for non-employee directors for the periods between our annual meetings of shareholders. For the period between our 2015 and 2016 annual meetings of shareholders, our non-employee directors received a retainer of $50,000, and the chairmen of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and the Lead Independent Director received retainers of $10,000, $5,000, $5,000 and

~~$10,000, respectively. These amounts were paid in restricted stock through awards made on August 10, 2015, which shares vested on August 10, 2016.~~ section below:

Name	Fees earned or paid in cash		Stock Awards (1) (2)		Total
Barry A. Igdaloff	$	60,875	$	23,400	$	84,275
Howard M. Amster	$	27,750	$	19,500	$	47,250
Howard Timothy Eriksen	$	27,750	$	19,500	$	47,250
Lee D. Keddie	$	32,750	$	19,500	$	52,250

(1)	Represents the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718.

(2)

Represents the grant date fair value of 500,000 shares of restricted stock granted to each of the non-employee directors, except Mr. Igdaloff received 600,000 shares, on October 1, 2019, pursuant to the terms and conditions of the 2015 Incentive Plan and each director’s respective award agreement. These shares vest 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date.

On January 6, 2016, the Board appointed Charles M. Gillman as a director of the Company. In connection with Mr. Gillman’s appointment, we awarded him 96,154 shares of restricted stock under the Company’s 2015 Incentive Stock Plan (the “2015 Incentive Plan”) as a pro-rated portion of his annual retainer for service as a director. These shares vested on August 10, 2016. There was no other compensation paid to the directors during 2016.

Name and Principal Position Fees earned or paid in cash ($)
Stock
Awards ($) ⁽¹⁾

Total ($)
Barry A. Igdaloff $ —
$ —
$ —
Howard M. Amster —
—
—
Jeffrey E. Eberwein —
—
—
Charles M. Gillman —
12,019
12,019
Robert G. Pearse —
—
—
Art N. Burtscher ⁽²⁾
—
—
—

~~(1) Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.~~

~~(2) Mr. Burtscher resigned from the Board effective at the Company’s 2016 annual meeting of shareholders.~~

~~On August 23, 2017,~~September 20, 2019, the Board approved base compensation for each of the Company’s non-employee directors, Barry A. Igdaloff, Howard M. Amster, ~~Charles M. Gillman~~Howard Timothy Eriksen and ~~Robert G. Pearse,~~Lee D. Keddie, in an amount of ~~$50,000~~$36,000 per annum, ~~including (i) $25,000~~payable in ~~restricted stock awards, vesting on the first anniversary of the grant date, and (ii) $25,000 in~~ cash ~~payable~~ on a quarterly ~~basis.~~basis and 500,000 shares of restricted stock. The Board approved additional compensation for the chairmen of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee ~~and the Lead Independent Director~~ in the amounts of ~~$10,000, $7,500,~~$15,000, $5,000, and ~~$20,000,~~$5,000 per annum, respectively, payable in cash ~~payable~~ on a quarterly basis. In ~~order to satisfy~~addition, the ~~foregoing~~Board approved additional compensation for the Lead Director of 100,000 shares of restricted stock.

In payment of the equity component of the directors' base compensation as discussed above, on ~~the same date, the Compensation Committee granted to~~October 1, 2019, each of the non-employee directors ~~a $25,000~~received 500,000 shares of restricted stock, ~~award, which vests on the first anniversary of the grant date,~~except Mr. Igdaloff received 600,000 shares, pursuant to the terms and conditions of the 2015 Incentive Plan and each director’s respective award ~~agreement, as a component~~agreement. These shares vest at 50% on the first anniversary of ~~such director’s base compensation.~~

the grant date and 50% on the second anniversary of the grant date.

EXECUTIVE COMPENSATION

Our named executive officers ~~for 2016~~during 2019 (each a “Named Executive Officer”) ~~were (i) Rodney E. Schwatken,~~were(i) David W. Pointer, our ~~former~~ Chief Executive Officer and Chairman of the Board, (ii) Carolyn K. Campbell, our Chief Financial Officer and ~~Treasurer and (ii) Brett A. Monger, our former Vice~~(iii) Richard M. Rector, formerly President ~~Controller and Chief Accounting Officer.~~

of HCS.

Summary Compensation Table

The following table sets forth the compensation of our Named Executive Officers for the periods indicated.

Name and Principal Position Year Salary Bonus
Option
Award⁽¹⁾
All Other Compensation Total
Rodney E. Schwatken ⁽²⁾
2016 $ 300,000
$ —
$ —
$ —
$ 300,000
Former Chief Executive Officer and Chief Financial Officer 2015 250,962
—
62,765
—
313,727
Brett A. Monger ⁽³⁾
2016 43,846
—
—
100,000
143,846
Former Vice President, Controller and Chief Accounting Officer 2015 118,196
25,000
—
—
143,196

~~(1) Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.~~

~~(2) Mr. Schwatken resigned from his position as the Company's Chief Executive Officer effective October 1, 2017.~~

~~(3) Mr. Monger was terminated from his positions with the Company effective April 1, 2016. Other Compensation includes a severance payment made to Mr. Monger in connection with his termination.~~

Name and Principal Position	Year	Salary		Bonus		Stock Awards (1)		All Other Compensation		Total
David W. Pointer (2) (3)	2019	$	131,154	$	150,000	$	100,000	$	90	$	381,244
Chief Executive Officer and Chairman	2018	$	72,693	$	60,000	$	—	$	66	$	132,758
Carolyn K. Campbell (4)	2019	$	150,000	$	46,750	$	12,500	$	340	$	209,590
Chief Financial Officer	2018	$	144,904	$	42,500	$	—	$	356	$	187,760
Richard M. Rector (5)	2019	$	80,524	$	—	$	—	$	112,500	$	193,025
Former President, Healthcare Staffing, Inc.	2018	$	225,000	$	52,000	$	—	$	64,095	$	341,095

(1)	Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.

(2)	Mr. Pointer serves as the Chief Executive Officer of both Novation and HCS.

(3)	Represents the grant date fair value of 2,000,000 shares of restricted stock granted to Mr. Pointer on January 22, 2019. 100% of these shares vested on October 1, 2019.

(4)	Represents the grant date fair value of 250,000 shares of restricted stock granted to Ms. Campbell on January 22, 2019. 100% of these shares vested on October 1, 2019.

(5)

Mr. Rector resigned from his positions with HCS effective April 2019. Other compensation for 2019 includes severance paid to Mr. Rector under the terms of his employment agreement. Other compensation for 2018 includes a payment to Mr. Rector for his buyout of accrued paid time off pursuant to the HCS paid time off policy and certain tax waivers per the HCS Purchase Agreement.

Outstanding Equity Awards at Fiscal Year-End ~~2016~~

~~The following table sets forth the~~2019

There were no outstanding ~~stock options of~~equity incentive plan awards for our Named Executive Officers as of December 31, ~~2016.~~

2019.

Table of Contents

Name Number of Securities Underlying Unexercised Options Exercisable Number of Securities Underlying Unexercised Options Unexercisable Options Exercise Price Option Expiration Date
Rodney E. Schwatken 1,446,730
—
$ 0.97
11/10/2019
87,500
262,500
0.51
8/18/2025
Brett A. Monger —
—
—
—

~~(1) Options vest in equal installment of 87,500 shares on August 18 of each year through 2019.~~

Employment Agreements and Arrangements with Named Executive Officers

~~Rodney E. Schwatken~~

David W. Pointer

Mr. ~~Schwatken resigned from his position as the Company’s Chief Executive Officer effective October 1, 2017. In connection~~

~~with his resignation, to assist with our transition to a new Chief Executive Officer, Mr. Schwatken~~Pointer entered ~~into an agreement (the~~

~~“Schwatken Transition Agreement”) with the Company providing for his continued employment as an Executive Advisor on an~~

~~“at-will” basis from October 2, 2017 to December 31, 2017 (subject to an extension of up to three months at the Company’s~~

~~discretion) in exchange for (i) a base salary of $18,750 per month from October 2, 2017 through December 1, 2017 and~~

~~$12,500 per month thereafter, (ii) an award of 400,000 restricted shares of the Company’s common stock pursuant to the terms~~

~~and conditions of the 2015 Incentive Plan and an award agreement, such shares vesting in full on January 1, 2018, and (iii)~~

~~certain other benefits. The Schwatken Transition Agreement also provides for the termination of all of Mr. Schwatken’s~~

~~outstanding options (vested and unvested) to purchase shares of the Company common stock.~~

~~Mr. Schwatken entered into~~ an employment agreement with the Company on ~~January 7, 2008~~October 1, 2019 (the ~~“Schwatken~~“Pointer Employment

Agreement”). Mr. ~~Schwatken’s~~Pointer's base salary ~~was increased from $225,000~~is $250,000, and he is eligible to ~~$300,000, effective as~~earn an annual bonus, based on performance benchmarks, and to participate in any equity programs of ~~August 18, 2015, in~~

~~connection with his appointment as our Chief Executive Officer.~~the Company, at the Company's discretion. The ~~Schwatken~~Pointer Employment Agreement ~~had~~has an indefinite

term and provided that Mr. ~~Schwatken was an employee “at-will,” and his employment may be terminated at any time by~~

~~either party, with or without cause, for any reason or no reason. If Mr. Schwatken’s employment~~Pointer is ~~terminated by the Company~~

~~other than for “cause” or by Mr. Schwatken for “good reason” (each as defined in the Schwatken Employment Agreement),~~

~~Mr. Schwatken will receive, over a period of 12 months following termination, compensation at an annual rate equal to his~~

~~then-existing annual base salary, in exchange for consulting services outlined in the Schwatken Employment Agreement. If~~

termination by the Company without cause or by Mr. Schwatken for good reason occurs following a “change of control” (as defined in the Schwatken Employment Agreement) then, in addition to the foregoing, Mr. Schwatken will receive a lump-sum severance amount equal to the greater of $200,000 or the sum of his then-existing annual base salary and actual incentive pay for the prior fiscal year, and all outstanding equity awards will immediately vest upon the date of such termination. Mr. Schwatken continues to be bound by certain non-competition, non-solicitation, confidentiality and similar obligations under, and as more particularly described in, the Schwatken Employment Agreement.

~~Brett A. Monger~~

Mr. Monger was terminated from his positions with the Company effective April 1, 2016. In connection with his termination, Mr. Monger entered into a Severance Agreement and General Release with the Company (the “Monger Severance Agreement”) that upon its effectiveness provides for certain releases by Mr. Monger of, and certain other commitments to, the Company, and for a lump sum payment to Mr. Monger equal to 10 months of his annual base salary, or $100,000. Mr. Monger was provided with severance in exchange for, among other things, his releases and in recognition of his long service to the Company and his efforts in connection with the sale of Corvisa and providing transitional support to the buyer.

Mr. Monger entered into an employment agreement with the Company on March 1, 2012 (the “Monger Employment Agreement”). The Monger Employment Agreement provided for an initial term of three years, renewing automatically for successive one year periods unless either party provided prior written notice, and provided that Mr. Monger was an employee “at-will,” and his employment may be terminated at any time by either party, with or without cause, for any reason or no reason. ~~The Monger Employment Agreement also provided that upon his termination~~If Mr. Pointer’s employment is terminated by the Company other than for “cause”, or by Mr. ~~Monger~~Pointer for “good reason” ~~or upon the occurrence of a “change of control”~~ (each as defined in the ~~Monger~~Pointer Employment Agreement), Mr. ~~Monger~~Pointer will receive, over a period of 6 months following termination, compensation at an annual rate equal to his then-existing annual base salary.

Carolyn K. Campbell

Ms. Campbell entered an employment agreement with the Company on August 9, 2017 (the “Campbell Employment Agreement”). Ms. Campbell's base salary is $150,000, and she is eligible to participate in any equity programs of the Company, at the Company's' discretion. The Campbell Employment Agreement has an indefinite term and provided that Ms. Campbell is an employee “at-will,” and her employment may be terminated at any time by either party, with or without cause, for any reason or no reason. If Ms. Campbell’s employment is terminated by the Company other than for “cause” or by Ms. Campbell for “good reason” (each as defined in the Campbell Employment Agreement), Ms. Campbell will receive, over a period of 3 months following termination, compensation at an annual rate equal to her then-existing annual base salary.

Richard M. Rector

Richard M. Rector, formerly President of HCS,resigned from his positions with HCS effective April 2019. Mr. Rector entered an employment agreement with the Company and HCS on July 27, 2017 (the “Rector Employment Agreement”). Mr. Rector’s base salary was $225,000, and he was eligible to earn a quarterly bonus, based on the Company’s EBITA achievement, and to participate in the Company’s 2015 Incentive Stock Plan. The Rector Employment Agreement also provided for a grant of 1,000,000 restricted shares of the Company’s common stock pursuant to the terms of the Rector Employment Agreement and the Company’s 2015 Incentive Stock Plan. The Rector Employment Agreement had an indefinite term and provided that Mr. Rector was an employee “at-will,” and his employment could be terminated at any time by either party, with or without cause, for any reason or no reason. If Mr. Rector’s employment was terminated by the Company other than for “cause” or by Mr. Rector for “good reason” (each as defined in the Rector Employment Agreement), Mr. Rector would receive, ~~severance~~over a period of 6 months following termination, compensation at an annual rate equal to ~~six months of~~ his then-existing annual base salary ~~in equal installments over six months. Under~~and immediate vesting of any Novation restricted shares that were scheduled to vest within one year after the ~~terms~~date of ~~the Monger Severance Agreement, upon its effectiveness the Company is released from all payment obligations under the Monger Employment Agreement.~~termination of employment, if any, pursuant to Novation’s 2015 Incentive Stock Plan.

Table of Contents

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth sets forth certain information with respect to beneficial ownership of the Company’s common stock as of ~~October 24, 2017~~March 23, 2020 by: (i) each person, or group of affiliated persons, known to us to beneficially own more than 5% of our outstanding common stock, (ii) each of our directors and named executive officers, and (iii) all of our current directors and executive officers as a group. The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. The information relating to 5%

beneficial owners is based on information we received from such holders. Except as otherwise set forth below, the address of the persons listed below is c/o Novation Companies, Inc., ~~500 Grand Boulevard,~~9229 Ward Parkway, Suite ~~201B,~~340, Kansas City, ~~Missouri 64106.~~

MO 64114.

	Beneficial Ownership of Common Stock
Name of Beneficial Owner	Shares		Percent of Class (1)
*Directors and Named Executive Officers*
Howard M. Amster (2)		3,538,623		3.1	%
Howard Timothy Eriksen (3)		1,333,333		1.2	%
Barry A. Igdaloff (4)		10,170,376		9.1	%
Lee D. Keddie (5)		1,333,333		1.2	%
Carolyn K. Campbell (6)		565,000		*
David W. Pointer (7)		4,000,000		3.6	%
Richard M. Rector (8)		—		—
All current directors and executive officers as a group (6 persons) (9)		20,940,665		18.6	%

*5% Beneficial Owners*
Massachusetts Mutual Life Insurance Company (10)		19,258,775		17.1	%

	*	Less than 1%
	(1)	Based on 114,655,893shares of common stock outstanding as of March 17, 2020. Shares of common stock issuable upon exercise of options, warrants or other rights or the conversion of other convertible securities beneficially owned that are exercisable or convertible within 60 days are deemed outstanding for the purpose of computing the percentage ownership of the person holding such securities and rights and all directors and executive officers as a group.
	(2)	Consists of 3,026,567 shares of common stock, 500,000 shares of unvested restricted stock and 12,056 shares of common stock issuable upon exercise of options held directly.
	(3)	Consists of 833,333 shares of common stock and 500,000 shares unvested restricted stock.
	(4)	Consists of 6,101,306 shares of common stock, 600,000 shares of unvested restricted stock and 12,056 shares of common stock issuable upon exercise of options held directly; and 3,457,014 shares of common stock controlled by Mr. Igdaloff as a registered investment advisor.
	(5)	Consists of 833,333 shares of common stock and 500,000 shares unvested restricted stock.
	(6)	Consists of 400,000 shares of common stock and 165,000 shares of unvested restricted stock.
	(7)	Consists of 2,000,000 shares of common stock and 2,000,000 shares of unvested restricted stock.
	(8)	Mr. Rector resigned from his positions with the Company and its subsidiaries effective April 2019.
	(9)	Consists of 16,651,553 shares of common stock; 4,265,000 shares of unvested restricted stock; and 24,112 shares of common stock issuable upon exercise of options. Excludes shares beneficially owned by Mr. Rector who is no longer an executive officer of the Company.
	(10)	Based on a Form 3 filed on December 14, 2011, Massachusetts Mutual Life Insurance Company (“MassMutual”) may be deemed to own beneficially and indirectly 19,258,775 shares of common stock held in one or more advisory accounts and private investment funds. Babson Capital Management LLC acts as investment adviser to these advisory accounts and private investment funds, and in such capacities may also be deemed to be the beneficial owner of such shares. The address of MassMutual is 1295 State Street, Springfield, MA 01111.

Table of Contents

Beneficial Ownership of Common Stock
Name of Beneficial Owner Shares
Percent of
Class ⁽¹⁾
Directors and Named Executive Officers
Howard M. Amster ⁽²⁾
4,267,331
4.5 %
Jeffrey E. Eberwein ⁽³⁾
3,293,273
3.4 %
Charles M. Gillman ⁽⁴⁾
304,487
*
Barry A. Igdaloff ⁽⁵⁾
8,116,566
8.5%
Robert G. Pearse ⁽⁶⁾
419,872
*
Rodney E. Schwatken ⁽⁷⁾
461,543
*
Brett A. Monger 100
*
All current directors and executive officers as a group (6 persons) ⁽⁸⁾
16,551,529
17.3 %

5% Beneficial Owners
Massachusetts Mutual Life Insurance Company ⁽⁹⁾
19,258,775
20.1 %
* Less than 1%
(1) Based on 95,590,178 shares of common stock outstanding as of October 18, 2017.  Shares of common stock issuable upon exercise of options, warrants or other rights or the conversion of other convertible securities beneficially owned that are exercisable or convertible within 60 days are deemed outstanding for the purpose of computing the percentage ownership of the person holding such securities and rights and all directors and executive officers as a group.
(2) Consists of 3,248,558 shares of common stock; 208,333 shares of unvested restricted stock and 36,168 shares of common stock issuable upon exercise of options held directly; and 774,272 shares of common stock held in two trusts of which Mr. Amster is the trustee.
(3) Consists of 192,308 shares of common stock and 2,852,963 shares of common stock held by Lone Star Value Investors, LP; and 248,002 shares of common stock held by an account separately managed by Lone Star Value Management, LLC.  Mr. Eberwein is the manager of Lone Star Value Investors GP, LLC, the general partner of Lone Star Value Investors, LP, and Mr. Eberwein is also the sole member of Lone Star Value Management, LLC, the investment manager of Lone Star Value Investors, LP, which exercises voting and investment control over securities held by Lone Star Investors, LP.  Mr. Eberwein disclaims beneficial ownership of the shares held by Lone Star Value Investors, LP except to the extent of his pecuniary interest therein.
(4) Consists of 96,154 shares of common stock and 208,333 shares of unvested restricted stock.
(5) Consists of 4,702,497 shares of common stock; 208,333 shares of unvested restricted stock and 36,168 shares of common stock issuable upon exercise of options held directly; and 3,169,568 shares of common stock controlled by Mr. Igdaloff as a registered investment advisor.
(6) Consists of 211,539 shares of common stock and 208,333 shares of unvested restricted stock.
(7) Consists of 1,276 shares of common stock and 400,000 shares of unvested restricted stock held directly and 60,267 shares of stock owned by the Rodney E. Schwatken Trust.
(8) Consists of 15,495,861 shares of common stock; 983,332 shares of unvested restricted stock; and 72,336 shares of common stock issuable upon exercise of options. Includes 150,000 shares beneficially owned by Carolyn K. Campbell , who is a current executive officer, but was not a named executive officer for 2016. Excludes shares beneficially owned by Messrs. Schwatken and Monger, who are no longer executive officers of the Company.
(9) Based on a Form 3 filed on December 14, 2011, Massachusetts Mutual Life Insurance Company (“MassMutual”) may be deemed to own beneficially and indirectly 19,258,775 shares of common stock held in one or more advisory accounts and private investment funds. Babson Capital Management LLC acts as investment adviser to these advisory accounts and private investment funds, and in such capacities may also be deemed to be the beneficial owner of such shares.  The address of MassMutual is 1295 State Street, Springfield, MA 01111.

Equity Compensation Plan Information

The following table sets forth information as of December 31, ~~2016~~2019 with respect to compensation plans under which the Company’s common stock may be issued.

Plan Category
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
Number of
Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Shares
Reflected in the First
Column)
Equity compensation plans approved by stockholders ⁽¹⁾
9,160,297
$0.65 3,667,586
Equity compensation plans not approved by stockholder —
—
—
Total 9,160,267
0.65
3,667,586

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in the First Column)
Equity compensation plans approved by stockholders ⁽¹⁾		24,112	$	1.00		6,274,211
Equity compensation plans not approved by stockholder		—		—		—
Total		24,112	$	1.00		6,274,211


(1)
~~(1)~~	Represents shares that may be issued pursuant to outstanding options awarded under the ~~2004 Incentive Plan and the~~ 2015 Incentive Plan. ~~The 2015 Incentive Plan replaced the 2004 Incentive Plan upon its approval by shareholders. Shares remaining available for future issuance are solely under the 2015 Incentive Plan.~~

Item

~~Item~~ 13. Certain Relationships and Related Transactions, and Director Independence

Related Party Transactions

The Company has adopted a written policy that addresses the review, approval or ratification of any transaction, arrangement, or relationship or series of similar transactions, arrangements or relationships, including any indebtedness or guarantee of indebtedness, between the Company and any related party, in which the aggregate amount involved exceeds the lesser of $120,000 or 1% of the average of the Company’s total assets at year-end for the last two completed fiscal years. Under the policy, a related party of the Company includes:

•

Any executive officer, or any director or nominee for election as a director;

•

Any person who owns more than 5% of the Company’s voting securities;

•

Any immediate family member of any of the foregoing; or

•

Any entity in which any of the foregoing persons is employed or is a partner or principal or in a similar position or in which such person has a 10% beneficial ownership interest.

Under the policy, the Board reviews the material facts of any related party transaction and approves it prior to its occurrence. If advance approval is not feasible, then the Board will either ratify the transaction at its next regularly scheduled meeting or the transaction will be rescinded. In making its determination to approve or ratify any related party transaction, the Board may consider such factors as (i) the extent of the related party’s interest in the transaction, (ii) if applicable, the availability of other sources of comparable products or services, (iii) whether the terms of the transaction are no less favorable than terms generally available to Company in unaffiliated transactions under like circumstances, (iv) the benefit to the Company, and (v) the aggregate value of the transaction.

No director may engage in any Board discussion or approval of any related party transaction in which he or she is a related party, but that director is required to provide the Board with all material information reasonably requested concerning the transaction.

Director Independence

The Board has determined that all of our non-employee directors ~~(including Art Burtscher who resigned from the Board effective at the Company's 2016 annual meeting of shareholders)~~ are independent within the meaning of SEC and NASDAQ rules. The Board has also determined that all directors serving on the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are independent within the meaning of SEC and NASDAQ rules. Although the Company’s securities are not listed on NASDAQ, the Company uses the independence standards provided in NASDAQ rules in determining whether or not our directors are independent.

Table of Contents

Item 14. Principal Accountant Fees and Services

Audit Fees

~~We engaged Boulay PLLP as our new independent registered public accounting firm on May 18, 2016, following our dismissal of Grant Thornton LLP on the same date.~~

The following table presents aggregate fees billed for professional services rendered by Boulay ~~PLLP for calendar year 2016 and Grant Thornton LLP for calendar year 2015.~~PLLP. There were no other professional services rendered or fees billed by Boulay ~~PLLP or Grant Thornton LLP.~~

For the Fiscal Year Ended December 31,
2016 2015
Audit fees ⁽¹⁾
74,381
$ 379,284
Audit-related ⁽²⁾
75,632
175,590

Total $ 150,013
$ 554,874

~~(1)~~Audit fees consist principally of fees for the annual and quarterly reviews of our consolidated financial statements and assistance with and review of documents filed with the SEC. For both 2016 and 2015, these fees represent additional services, consultations, etc. related to the Company’s various discontinued operations.

~~(2)~~For 2015, these fees consist principally of fees for the audit of the financial statements of Corvisa in connection with the Corvisa Sale. For 2016, these fees consist of payments for services related to due diligence for the HCS Acquisition and the Company's bankruptcy filings.

PLLP.

	For the Fiscal Years Ended December 31,
	2019		2018
Audit fees (1)	$	122,000	$	118,449
Tax (2)		11,000		60,249
Total	$	133,000	$	178,698

(1)	Annual audit and quarterly reviews of our consolidated financial statements, assistance with and review of documents filed with the SEC.

(2)	Preparation and filing of annual state and federal income taxes.

Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy with respect to the pre-approval of all audit and non-audit services provided by our independent registered public accounting firm. All fees paid to our independent registered public accounting firm for fiscal years ~~2016~~2019 and ~~2015~~2018 were pre-approved in accordance with these policies. Generally, the policy requires that the Audit Committee annually approve fees exceeding $50,000 for audit services, audit-related and tax services. Fees expected to exceed $10,000 for all other services must be approved prior to engagement for those services.

PART IV

Item

~~Item~~ 15. Exhibits and Financial Statements Schedules

Financial Statements and Schedules


(1)	The financial statements as set forth under Item 8 of this ~~Annual Report on~~ Form 10-K are included herein.


(2)	The required financial statement schedules are omitted because the information is disclosed elsewhere herein.

Exhibits

We describe the exhibits filed as part of, or incorporated by reference into, this ~~Annual Report on~~ Form 10-K in the ~~attached~~ Exhibit ~~Index.~~

~~EXHIBIT INDEX~~

Index below.

Item 16. Form 10-K Summary

None.

Table of Contents

EXHIBIT INDEX



Exhibit No.		Description of Document
2.1		Membership Interest Purchase Agreement, dated as of December 21, 2015, by and among Novation Companies, Inc., Corvisa Services LLC and ShoreTel, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on December 21, 2015).
~~3.1~~ 2.2		Stock Purchase Agreement, dated as of February 1, 2017, by and among Novation Companies, Inc., Novation Holding, Inc., Healthcare Staffing, Inc. and Butler America, LLC (incorporated by reference to Exhibit 2.1 on the Current Report on Form 8-K filed on February 3, 2017).**
2.3		Closing Agreement, dated as of July 27, 2017, by and among Novation Companies, Inc., Novation Holding, Inc., Healthcare Staffing, Inc. and Butler America, LLC (incorporated by reference to Exhibit 2.1 on the Quarterly Report on Form 10-Q filed on February 26, 2018).
3.1		Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on August 2, 2017).
3.2		~~Second Amended~~Articles of Amendment to Articles of Amendment and ~~Restated Bylaws~~Restatement (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on December 14, 2018).
3.3		Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on August 2, 2017).
4.1		Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Quarterly Report Form 10-Q filed on August 5, 2005).
4.2		Rights Agreement, dated as of September 15, 2011, by and between NovaStar Financial, Inc. and Computershare Trust Company, N.A., as rights agent (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on September 21, 2011).
4.3		First Amendment to Rights Agreement, dated June 20, 2014, by and between the Company and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.2 to Form 8-A/A filed on June 20, 2014).
4.4		Second Amendment to Rights Agreement, dated August 24, 2015, by and between the Company and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.3 to the Form 8-A12G filed on August 28, 2015).
~~10.1~~4.5		~~Form~~Third Amendment to Rights Agreement, dated as of ~~Indemnification Agreement for Officers and Directors of NovaStar Financial,~~July 20, 2018, between Novation Companies, Inc. and ~~its Subsidiaries~~Computershare Trust Company, N.A. (incorporated by reference to Exhibit ~~10.1 to~~4.1 on the Current Report on Form 8-K filed on ~~November 16, 2005)~~July 25, 2018).*
~~10.2~~4.6		Description of the Company's Securities
10.1		Novation Companies, Inc. 2015 Incentive Stock Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on August 7, 2015).*
~~10.3~~ 10.2		Form of Restricted Stock Award Agreement for Non-Employee Directors under the Novation Companies, Inc. 2015 Incentive Stock ~~Plan.~~Plan (incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K filed on October 26, 2017).*
~~10.4~~ 10.3		Form of Restricted Stock Award Agreement for Employees under the Novation Companies, Inc. 2015 Incentive Stock ~~Plan.~~
~~10.5~~		~~2011 Compensation~~ Plan ~~for Independent Directors~~ (incorporated by reference to Exhibit ~~10.1~~10.4 to the ~~Current~~Annual Report on Form ~~8-K~~10-K filed on ~~August 15, 2011)~~October 26, 2017).*
~~10.6~~ 10.4		Amended and Restated 2004 Incentive Stock Plan (as amended May 29, 2014) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 30, 2014).*
~~10.7~~ 10.5		First Amendment to the Company's Amended and Restated 2004 Incentive Stock Plan (incorporated by reference to Appendix A to Form DEF 14A filed on April 25, 2014).*
~~10.8~~ 10.6		Form of Stock Option Agreement under NovaStar Financial, Inc. 2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.25.1 to the Current Report on Form 8-K filed on February 4, 2005).*
~~10.9~~ 10.7		Form of Restricted Stock Award Agreement under NovaStar Financial, Inc. 2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.25.2 to the Current Report on Form 8-K filed on February 4, 2005).*
~~10.10~~ 10.8		Form of Employee Non-Qualified Stock Option Agreement under the Company's Amended and Restated 2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-Q filed on August 7, 2014).*
~~10.11~~ 10.9		Employment Agreement, dated as of ~~January 7, 2008,~~October 1, 2019, by and between ~~NovaStar Financial,~~Novation Companies, Inc. and Rodney E. Schwatken (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K/A filed on January 10, 2008).*
~~10.12~~		~~Employee Non-Qualified Stock Option Agreement, between the Company and Rodney Schwatken, dated August 18, 2015~~David W. Pointer (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on ~~August 20, 2015)~~September 25, 2019).*

Table of Contents

~~10.13~~

10.10

~~Amended and Restated Employee Non-Qualified Stock Option~~Employment Agreement, dated as of ~~March 2, 2015,~~August 9, 2017, by and between Novation Companies, Inc. and ~~Rodney E. Schwatken~~Carolyn Campbell (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on March 5, 2015).*



~~10.14~~		Second Amended and Restated Stock Option Agreement, dated August 14, 2015, between the Company and W. Lance Anderson (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 14, 2015).*
~~10.15~~		Employment Agreement, dated as of March 2, 2012, by and between NovaStar Financial, Inc. and Matthew Lautz (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on March 9, 2012).*
~~10.16~~		Second Amended and Restated Employee Non-Qualified Stock Option Agreement, by and between Novation Companies, Inc. and Matthew Lautz (incorporated by reference to Exhibit 10.15 to the Form 10-K/A filed on April 30, 2015).*
~~10.17~~		Employee Non-Qualified Stock Option Agreement, between the Company and Matthew Lautz, dated August 18, 2015 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on August 20, 2015).*
~~10.18~~		~~Transaction Bonus and Release Agreement, dated December 20, 2015, by and between the Company and Matthew Lautz (incorporated by reference to Exhibit 10.26~~10.11 to the Annual Report on Form 10-K filed on ~~February 16, 2016)~~April 10, 2018).*
~~10.19~~ 10.11		~~Employment~~Senior Secured Note Purchase Agreement, dated as of March 1, 2012, by and between NovaStar Financial, Inc. and Brett Monger (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on March 9, 2012).*
~~10.20~~		Employee Non-Qualified Stock Option Agreement, dated March 8, 2012, by and between NovaStar Financial, Inc. and Brett Monger (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on March 9, 2012).*
~~10.21~~		~~Agreement, by and~~July 27, 2017, among Novation Companies, Inc. ~~a Maryland corporation, Lone Star Value Investors, LP, Lone Star Value Investors GP, LLC, Lone Star Value Management, LLC~~, Novation Holding, Inc., Healthcare Staffing, Inc., Taberna Preferred Funding I, Ltd., Taberna Preferred Funding II, Ltd., Kodiak CDO I, Ltd., and ~~Jeffrey E. Eberwein, dated April 22, 2015~~Wilmington Savings Fund Society, FSB (incorporated by reference to Exhibit 10.1 toon the ~~Current~~Quarterly Report on Form ~~8-K~~10-Q filed on ~~April 27, 2015)~~February 26, 2018).
~~21.1~~ 10.12		First Amendment to Senior Secured Note Purchase Agreement (incorporated by reference to Exhibit 10.1 on the Quarterly Report on Form 10-Q filed on August 12, 2019).
21.1		Subsidiaries of the Registrant.
23.1		Consent of Boulay PLLP.
~~23.2~~ 31.1		~~Consent of Grant Thornton LLP.~~
~~31.1~~		Principal Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Principal Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Principal Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Principal Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following financial information from Novation Companies, Inc.'s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Balance Sheets as of December 31, ~~2016~~2019 and December 31, ~~2015,~~2018, (ii) Consolidated Statements of Operations for the years ended December 31, ~~2016~~2019 and ~~2015,~~2018, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, ~~2016~~2019 and ~~2015,~~2018, (iv) Consolidated Statements of Shareholders' Deficit for the years ended December 31, ~~2016~~2019 and ~~2015,~~2018, (v) Consolidated Statements of Cash Flows for the years ended December 31, ~~2016~~2019 and ~~2015,~~2018, and (vi) the Notes to Consolidated Financial Statements.

* Management contract or compensatory plan or arrangement.
** The registrant has omitted certain schedules and exhibits to this agreement in accordance with Item 601(b)(2) of Regulation S-K, and will supplementally furnish a copy of any omitted schedule and/or exhibit to the Securities and Exchange Commission upon request.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



			NOVATION COMPANIES, INC.

DATE:	March 23, 2020		/s/ DAVID W. POINTER
			David W. Pointer, Chief Executive Officer and Chairman

DATE:	~~October 25, 2017~~March 23, 2020	~~/s/ JEFFREY E. EBERWEIN~~
		~~Jeffrey E. Eberwein, Executive Chairman~~

~~DATE:~~	~~October 25, 2017~~	/s/ CAROLYN K. CAMPBELL
		Carolyn K. Campbell, Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and dates indicated.

DATE:	March 23, 2020	/s/ DAVID W. POINTER
		David W. Pointer, Chief Executive Officer and Chairman
~~DATE:~~	~~October 25, 2017~~	~~/s/ JEFFREY E. EBERWEIN~~
		~~Jeffrey E. Eberwein, Executive Chairman~~
		(Principal Executive Officer)

DATE:	~~October 25, 2017~~ March 23, 2020	/s/ CAROLYN K. CAMPBELL
		Carolyn K. Campbell, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

DATE:	~~October 25, 2017~~ March 23, 2020	/s/ HOWARD M. AMSTER
		Howard M. Amster, Director

DATE:	~~October 25, 2017~~ March 23, 2020	/s/ ~~CHARLES M. GILLMAN~~HOWARD TIMOTHY ERIKSEN
		~~Charles M. Gillman,~~ Howard T. Eriksen, Director

DATE:	~~October 25, 2017~~ March 23, 2020	/s/ BARRY A. IGDALOFF
		Barry A. Igdaloff, Director

DATE:	~~October 25, 2017~~ March 23, 2020	/s/ ~~ROBERT G. PEARSE~~LEE D. KEDDIE
		~~Robert G. Pearse,~~ Lee D. Keddie, Director


☒
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2019


~~For the Year Ended December 31, 2016~~
☐
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________to __________

Maryland	74-2830661

~~Maryland~~	~~74-2830661~~
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

~~500 Grand Boulevard,~~ 9229 Ward Parkway, Suite ~~201B,~~340, Kansas City, MO	~~64106~~ 64114
(Address of Principal Executive Office)	(Zip Code)

Business	1
Item 1A.	Risk Factors	3

~~TABLE OF CONTENTS~~

~~PART I~~

~~Item 1.~~	~~Business~~	1
~~Item 1A.~~	~~Risk Factors~~	3
Item 1B.	Unresolved Staff Comments	76
Item 2.	Properties	76
Item 3.	Legal Proceedings	76
Item 4.	Mine Safety Disclosures	87

PART II

Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	98
Item 6.	Selected Financial Data	98
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	109
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	1412
Item 8.	Financial Statements and Supplementary Data	1513
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	3930
Item 9A.	Controls and Procedures	3930
Item 9B.	Other Information	3930

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	4031
Item 11.	Executive Compensation	4334
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	4536
Item 13.	Certain Relationships and Related Transactions, and Director Independence	4737
Item 14.	Principal Accountant Fees and Services	4738

PART IV

Item 15.	Exhibits and Financial Statement Schedules	4938
Item 16.	Form 10-K Summary	38
	Exhibit Index	4939
	Signatures	5141




	High		Low
2016
First Quarter	$	0.14	$	0.05
Second Quarter	0.10		0.06
Third Quarter	0.08		0.03
Fourth Quarter	0.06		0.03

2015
First Quarter	$	0.35	$	0.24
Second Quarter	0.42		0.22
Third Quarter	0.32		0.22
Fourth Quarter	0.31		0.12



Adjustments to deferred debt issuance costs and senior debt premium	$	2,399
Professional fees	(1,252		)
Adjustments to other liabilities for claims made or rejected contracts	(449		)
Other	(31		)
Reorganization items, net	$	667



	For the Year Ended December 31,
	2016			2015
Consolidated Statements of Cash Flows:
Cash flows (used in) provided by operating activities of continuing operations	$	1,922		$	(1,742	)
Cash flows provided by investing activities of continuing operations	1,980			26,993
Cash flows used in financing activities of continuing operations	(205		)	(25,660		)



	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total Shareholders’ Deficit
Balance, December 31, 2015	$	928	$	744,575	$	(809,532	)	$	1,436	$	(62,593	)
Issuance of nonvested shares	—		—		—			—		—
Compensation recognized under stock compensation plans	—		298		—			—		298
Net income	—		—		5,213			—		5,213
Other comprehensive income	—		—		—			7,883		7,883
Balance, December 31, 2016	$	928	$	744,873	$	(804,319	)	$	9,319	$	(49,199	)



Balance, December 31, 2014	$	915	$	743,919		$	(780,803	)	$	2,619		$	(33,350	)
Issuance of nonvested shares	13		(13		)	—			—			—
Compensation recognized under stock compensation plans	—		669			—			—			669
Net loss	—		—			(28,729		)	—			(28,729		)
Other comprehensive loss	—		—			—			(1,183		)	(1,183		)
Balance, December 31, 2015	$	928	$	744,575		$	(809,532	)	$	1,436		$	(62,593	)

See notes to consolidated financial statements.



Obligations under the 2011 Notes (see Note 6), including accrued interest through the petition date	$	89,626
Claims and other liabilities related to operating leases	715
Income tax liabilities	309
Liabilities associated with the discontinued operations of Advent	195
Other	121
Liabilities subject to compromise	$	90,966



As of December 31, 2016
	Amortized Cost		Gross Unrealized					Estimated Fair Value
Description of Securities	Amortized Cost		Gains		Losses			Estimated Fair Value
Marketable securities, current
Mortgage securities	$	450	$	9,341	$	—		$	9,791
Equity securities	112		47		(7		)	152
Total	$	562	$	9,388	$	(7	)	$	9,943

Marketable securities, non-current
Agency mortgage-backed securities	$	26,607	$	—	$	(62	)	$	26,545

As of December 31, 2015
	Amortized Cost		Gross Unrealized					Estimated Fair Value
Description of Securities	Amortized Cost		Gains		Losses			Estimated Fair Value
Marketable securities, current
Corporate notes and bonds	$	15,517	$	—	$	(28	)	$	15,489
Mortgage securities	525		1,486		—			2,011
Total	$	16,042	$	1,486	$	(28	)	$	17,500

Marketable securities, non-current
Corporate notes and bonds	$	1,419	$	—	$	(22	)	$	1,397



	Size/Principal Outstanding (A)		Assets on Balance Sheet (B)		Liabilities on Balance Sheet		Maximum Exposure to Loss(C)		Year to Date Loss on Sale		Year to Date Cash Flows
December 31, 2016	$	3,185,270	9,943		$	—	$	9,943	$	—	$	5,135
December 31, 2015	$	3,601,468	$	2,011	$	—	$	2,011	$	—	$	6,287



December 31, 2016
			Fair Value Measurements at Reporting Date Using
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Marketable securities, current	$	9,943	$	152	$	—	$	9,791
Marketable securities, non-current	26,545		26,545		—		—
Total	$	36,488	$	26,697	$	—	$	9,791



	As of December 31,
	2016 (A)		2015
Weighted average:
Loss severity	49.6	%	121.6	%
Default rate	2.1	%	1.3	%	(B)
Prepayment speed	9.8	%	9.8	%
Servicer's optional redemption date	None		2 years from valuation date



Cash	$	1,013
Accounts receivable	6,929
Property and equipment	568
Other assets	45
Intangible assets:
Customer relationships	6,041
Trademarks	906
Non-compete agreement	583
Goodwill	11,472
Liabilities assumed - accrued payroll and related liabilities	(3,411		)
Net assets acquired	$	24,146



Name and Principal Position	Fees earned or paid in cash ($)		Stock Awards ($) ⁽¹⁾		Total ($)
Barry A. Igdaloff	$	—	$	—	$	—
Howard M. Amster	—		—		—
Jeffrey E. Eberwein	—		—		—
Charles M. Gillman	—		12,019		12,019
Robert G. Pearse	—		—		—
Art N. Burtscher ⁽²⁾	—		—		—



Name	Number of Securities Underlying Unexercised Options Exercisable	Number of Securities Underlying Unexercised Options Unexercisable	Options Exercise Price		Option Expiration Date
Rodney E. Schwatken	1,446,730	—	$	0.97	11/10/2019
	87,500	262,500	0.51		8/18/2025
Brett A. Monger	—	—	—		—



		Beneficial Ownership of Common Stock
Name of Beneficial Owner		Shares	Percent of Class ⁽¹⁾
Directors and Named Executive Officers
Howard M. Amster ⁽²⁾		4,267,331	4.5	%
Jeffrey E. Eberwein ⁽³⁾		3,293,273	3.4	%
Charles M. Gillman ⁽⁴⁾		304,487	*
Barry A. Igdaloff ⁽⁵⁾		8,116,566	8.5%
Robert G. Pearse ⁽⁶⁾		419,872	*
Rodney E. Schwatken ⁽⁷⁾		461,543	*
Brett A. Monger		100	*
All current directors and executive officers as a group (6 persons) ⁽⁸⁾		16,551,529	17.3	%

5% Beneficial Owners
Massachusetts Mutual Life Insurance Company ⁽⁹⁾		19,258,775	20.1	%
*	Less than 1%
(1)	Based on 95,590,178 shares of common stock outstanding as of October 18, 2017. Shares of common stock issuable upon exercise of options, warrants or other rights or the conversion of other convertible securities beneficially owned that are exercisable or convertible within 60 days are deemed outstanding for the purpose of computing the percentage ownership of the person holding such securities and rights and all directors and executive officers as a group.
(2)	Consists of 3,248,558 shares of common stock; 208,333 shares of unvested restricted stock and 36,168 shares of common stock issuable upon exercise of options held directly; and 774,272 shares of common stock held in two trusts of which Mr. Amster is the trustee.
(3)	Consists of 192,308 shares of common stock and 2,852,963 shares of common stock held by Lone Star Value Investors, LP; and 248,002 shares of common stock held by an account separately managed by Lone Star Value Management, LLC. Mr. Eberwein is the manager of Lone Star Value Investors GP, LLC, the general partner of Lone Star Value Investors, LP, and Mr. Eberwein is also the sole member of Lone Star Value Management, LLC, the investment manager of Lone Star Value Investors, LP, which exercises voting and investment control over securities held by Lone Star Investors, LP. Mr. Eberwein disclaims beneficial ownership of the shares held by Lone Star Value Investors, LP except to the extent of his pecuniary interest therein.
(4)	Consists of 96,154 shares of common stock and 208,333 shares of unvested restricted stock.
(5)	Consists of 4,702,497 shares of common stock; 208,333 shares of unvested restricted stock and 36,168 shares of common stock issuable upon exercise of options held directly; and 3,169,568 shares of common stock controlled by Mr. Igdaloff as a registered investment advisor.
(6)	Consists of 211,539 shares of common stock and 208,333 shares of unvested restricted stock.
(7)	Consists of 1,276 shares of common stock and 400,000 shares of unvested restricted stock held directly and 60,267 shares of stock owned by the Rodney E. Schwatken Trust.
(8)	Consists of 15,495,861 shares of common stock; 983,332 shares of unvested restricted stock; and 72,336 shares of common stock issuable upon exercise of options. Includes 150,000 shares beneficially owned by Carolyn K. Campbell , who is a current executive officer, but was not a named executive officer for 2016. Excludes shares beneficially owned by Messrs. Schwatken and Monger, who are no longer executive officers of the Company.
(9)	Based on a Form 3 filed on December 14, 2011, Massachusetts Mutual Life Insurance Company (“MassMutual”) may be deemed to own beneficially and indirectly 19,258,775 shares of common stock held in one or more advisory accounts and private investment funds. Babson Capital Management LLC acts as investment adviser to these advisory accounts and private investment funds, and in such capacities may also be deemed to be the beneficial owner of such shares. The address of MassMutual is 1295 State Street, Springfield, MA 01111.



Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in the First Column)
Equity compensation plans approved by stockholders ⁽¹⁾	9,160,297	$0.65	3,667,586
Equity compensation plans not approved by stockholder	—	—	—
Total	9,160,267	0.65	3,667,586



	For the Fiscal Year Ended December 31,
	2016		2015
Audit fees ⁽¹⁾	74,381		$	379,284
Audit-related ⁽²⁾	75,632		175,590

Total	$	150,013	$	554,874