SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ | |||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the Fiscal Year Ended December 31, 2020 | |||
☐ | |||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the Transition Period From __________to __________ | |||
Commission File Number 000-22897
NOVATION COMPANIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland | 74-2830661 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
9229 Ward Parkway, Suite | 64114 |
(Address of Principal Executive Office) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (816) 237-7000
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of June 30, 20162020 was approximately $4,869,000, $1,574,911, based upon the closing sales price of the registrant’s common stock on that date ($0.063).02).
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
The number of shares of the registrant's common stock outstanding on October 24, 2017February 25, 2021 was 95,590,178.116,655,893.
FORM 10-K For the Fiscal Year ended December 31, Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Removed and Reserved Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Item 16. Form 10-K Summary Exhibit Index Signatures2016TABLE OF CONTENTSPART IItem 1.BusinessItem 1A.Risk FactorsSelected Financial Data
Unless the context otherwise requires, references in this Annual Report on Form 10-K (this "Form 10-K") to “Novation,” the “Company,” “NOVC,” “we,” “us” and “our,” refer to Novation Companies, Inc. and its consolidated subsidiaries and their respective predecessors. Forward-Looking Statements Statements in this report regarding Novation and its business that are not historical facts are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are those that predict or describe future events, do not relate solely to historical matters and include statements regarding management's beliefs, estimates, projections, and assumptions with respect to, among other things, our future operations, business plans and strategies, as well as industry and market conditions, all of which are subject to change at any time without notice. Words such as "believe," "expect," "anticipate," "promise," "plan,"“believe,” “expect,” “anticipate,” “promise,” “plan,” and other expressions or words of similar meanings, as well as future or conditional auxiliary verbs such as "would," "should," "could,"“would,” “should,” “could,” or "may"“may” are generally intended to identify forward-looking statements. Actual resultsRisks, uncertainties, contingencies, and operations for any future period may vary materially fromdevelopments, including those discussed herein. Some important factors thatin “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report could cause actualour future operating results to differ materially from those anticipated include: decreasesset forth in cash flows from our mortgage securities; our abilityany forward-looking statement. Given these uncertainties, readers are cautioned not to remain in compliance with the agreements governing our indebtedness; the outcome of litigation actions pending against us or other legal contingencies; our compliance with applicable local, state and federal laws and regulations; compliance with new accounting pronouncements; the impact of general economic conditions; and the risks that are from time to time included in our filings with the Securities and Exchange Commission (“SEC”), including this report. Other factors not presently identified may also cause actual results to differ. This report speaks only as of its date and we expresslyplace undue reliance on such forward-looking statements. We disclaim any dutyobligation to update any such factors or to publicly announce the informationresults of any revisions to any of the forward-looking statements contained herein except as required by federal securities laws.
Overview
Novation Companies, Inc. and its subsidiaries (the "Company," "Novation," "we," "us," or "our") through Healthcare Staffing, Inc. ("HCS"), our wholly-owned subsidiary which was acquired on July 27, 2017, we provide outsourced health care staffing and related services in the State of Georgia. Services are performed by expert staff on-site at client facilities. We also own a portfolio of mortgage securities which generate earnings to support on-going financial obligations. Our common stock, par value $0.01 per share, is traded on the OTC Pink marketplace of the OTC Markets Group, Inc. under the symbol “NOVC”.
Recent Developments
Note Refinancing and to “Novation Companies, Inc.” effective May 23, 2012. Our corporate executive offices are located at 500 Grand Boulevard, Suite 201B, Kansas City, MO 64106 and our telephone number is (816) 237-7000. Our website address is www.novationcompanies.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available, free of charge, on our website as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. Reports and other information we file with the SEC may also be viewed at the SEC’s website at www.sec.gov or viewed or obtained at the SEC Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Our website is not intended to be a part of, nor are we incorporating it by reference into, this Annual Report on Form 10-K.
On April 1, 2019 and on July 1, 2019, the Company paidmade 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, 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 bankruptcy events. In the case of an event of default, the Noteholders may, among other remedies, accelerate the payment of 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.
Under the terms of the Amendment, the Company issued to the Noteholders 9,000,000 shares of common stock of the 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 116 to the consolidated financial statements.
Business
Established in 1995, HCS is the largest outsourced healthcare services provider in the State of Georgia. HCS delivers outsourced full-time and part-time employees primarily to Community Service Boards (“CSBs”CSB”). HCS has long-term relationships with many of its customers and has been providing services to several clients for more than 15 years. A CSB is a quasi-state organization providing 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 of 25CSBs. 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 CSBsCSB continues to grow. The Georgia Association for CSBs estimates that CSBs in Georgia provided services to over 173,000 people in 2010, a figure that grew to over 188,000 people in 2015. In addition to providing outsourced employees to CSBs, HCS also provides healthcare outsourcing and staffing services to hospitals, schools, crisis units, clinics, doctors offices, prisons and a variety of privately owned businesses.
Strategy
The strategy of HCS is to continue expanding its market share in providing healthcare staffing services in Georgia and in particular serving Georgia CSBs. HCS is the dominant player in providing services to Georgia CSBs and has earned aplans to increase its market share of 55% of the CSB business. HCS will also continue to expand business to additional hospitals, private group homes, clinics, rest homes, prisons and retirement centers. Furthermore, the HCS strategy includes expanding clerical staff within existing customers, as well as gaining new clients. The longer-term strategy includes expansion beyond the Georgia market and may include acquisitions of staffing companies outside of Georgia, particularly in states that have public health infrastructure similar to that of Georgia.
Competition
HCS competes with numerous national staffing and recruiting businesses that specialize in the medical and healthcare industry, such as Nursefinders, Lighthouse Recruiting, Action Med and Brightstar. Other national staffing businesses have divisions that compete with HCS in Georgia, including ATC Healthcare, Kelly Services, Interim, Randstad and Maxim. Numerous Georgia non-national and smaller staffing providers also compete with HCS.
Regulation
The healthcare industry is subject to extensive and complex federal, state and local laws and regulations related to, among
HCS provides services directly to its clients on a contract basis and receives payment directly from them. However, many clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide.
Additional Information
The Company is a Maryland corporation formed on September 13, 1996 as “CapStar Financial, Inc.” The Company’s name was changed to “NovaStar Financial, Inc.” effective October 11, 1996, and to “Novation Companies, Inc.” effective May 23, 2012. Our corporate executive offices are located at 9229 Ward Parkway, Suite 340, Kansas City, MO 64114 and our telephone number is (816) 237-7000. Our website address is www.novationcompanies.com. Our website is not intended to be a part of, nor are we incorporating it by reference into, this Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, on our website as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. Reports and other information we file with the SEC may also be viewed at the SEC’s website at www.sec.gov.
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and notes thereto, before deciding whether to invest in our common stock. Any of these risks, as well as additional risks and uncertainties that we are unaware of, could negatively affect our results of operations, financial condition, liquidity and business prospects, and cause the trading price of our common stock to decline, and cause you to lose all or part of your investment.
Risks Related to our Business and Industry
Our operations and financial results have been negatively affected by the ongoing COVID-19 pandemic and could continue to be negatively impacted, perhaps materially, by the COVID-19 pandemic.
The COVID-19 pandemic has harmed our ability to staff employees and has negatively impacted the Company’s revenue. HCS relies on staffing healthcare professionals to generate income, primarily to CSBs, which are ultimately funded by the State of Georgia. The spread of COVID-19 has reduced our ability to provide these services based on customer driven lay-offs or reduction in hours of the staff provided by HCS. In addition, some CSB sponsored programs have been shut down as a result of COVID-19.
While HCS employees provide services throughout the State of Georgia at multiple facilities, the Company’s operations are limited to this region. If Georgia experiences a second severe outbreak of COVID-19, it could have a larger impact on the Company and its business than on businesses which operate in multiple states.
The COVID-19 pandemic, and any other outbreak or other public health crises, may also impact our ability to attract and retain employees or healthcare professionals due to illness, risk of illness, quarantines, or other factors. Some of our healthcare professionals have been exposed, diagnosed and or quarantined as a result of COVID-19. As such, there is a risk that our employees may not want, or be able to provide services, which could negatively impact our supply and ability to provide staffing services to our customers. In addition, HCS may be charged higher insurance premiums for workers compensation and other corporate insurance coverage as a result of the COVID-19 pandemic. HCS may also be subject to claims regarding the health and safety of our staffed healthcare associates and our colleagues.
As HCS generates most of its revenue from customers which rely on the State of Georgia to provide them funding, the state may decrease the budgets for these services. As such, our CSB customers may need to scale back their programs and therefore reduce the employees we staff for them.
The foregoing and other potential disruptions to our business as a result of the COVID-19 pandemic could materially adversely affect our business and operating results, financial condition, and cash flow. The extent of such impact will depend on future developments, including the duration and spread of COVID-19, the speed at which the vaccine is distributed, the number of individuals in general who agree to receive the vaccine along with the number of our employees receiving the vaccine. In addition, the recent COVID-19 strain mutations may also hamper the vaccine's effectiveness.
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 25 CSBs in Georgia and HCS conducts business with 12 of them. Matters that adversely impact Georgia CSBs, including regulatory changes, may negatively affect our business.
Our clients may terminate or not renew their contracts with us.
Our arrangements with CSBs and other customers generally are terminable upon 60 days’ notice for any reason. The loss of one or more of our large customers could materially affect our profitability.
We may be unable to recruit enough healthcare professionals to meet our clients’ demands.
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.
Risks Related to our Company
We have a history of operating losses and we may not generate sufficient revenue to support our operations.
During 2020, we had a net loss of $9.2 million. We also generated negative operating cash flow of $0.7 million. As of December 31, 2020, we had an overall shareholders deficit of $81.1 million. As of December 31, 2020, we had an aggregate of $1.3 million in cash and cash equivalents and total liabilities of $93.3 million. Of the $1.3 million in cash, $0.3 million was held by our subsidiary NMLLC. This cash is available only 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 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 continues to explore cost cutting initiatives that will reduce overall overhead and operating costs, both at HCS and at the corporate level.
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.
As of December 31, 2016,2020, we had a federal net operating losslosses ("NOLs") of approximately $685.5approximately $730.1 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”).
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 Agreementagreement 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 noteholdersNoteholders 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.
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.
Prior to its acquisition of HCS, the Company originated, purchased, securitized, sold, invested in, and serviced residential nonconforming mortgage loans and mortgage securities. When we sold these 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.
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 effectedaffected 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.
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;
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 expired 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.
None.
The executive and administrative offices for the Company are located in Kansas City, Missouri, and consist of approximately 2,3001,400 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.
The Company is a party to various legal proceedings. Except as set forth below, theseThese proceedings are of an ordinary and routine nature.
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.""NOVC". There is no established public trading market for the 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 | ||||||
High | Low | |||||||
2020 | ||||||||
First Quarter | $ | 0.06 | $ | 0.03 | ||||
Second Quarter | 0.04 | 0.02 | ||||||
Third Quarter | 0.07 | 0.02 | ||||||
Fourth Quarter | 0.06 | 0.02 | ||||||
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 | ||||||
As of October 24, 2017,February 25, 2021, we had approximately 709696 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 20162020 or 2015, 2019,nor do we expect to declare any stock dividend distributions in the near future. The Note Purchase Agreement governing the 2017 NotesCompany'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.
The following is a discussion and analysis of our financial condition and results of operations for the years ended December 31, 20162020 and 2015.2019. 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.
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. We also previously owned a portfolio of mortgage securities which generated earnings to support on-going financial obligations through the end of 2018. The Management'smortgage securities were sold during 2018 for a total of $13.0 million. 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 note refinancing, which 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:
December 31, | ||||||||
2020 | 2019 | |||||||
Cash and cash equivalents | $ | 1,340 | $ | 2,032 | ||||
Service fee income | $ | 51,354 | $ | 63,474 | ||||
General and administrative expenses | $ | 7,503 | $ | 8,345 | ||||
Net loss available to common shareholders, per basic share | $ | (0.08 | ) | $ | (0.10 | ) | ||
Consolidated Results of Operations
Year Ended December 31, 2016 and 2015 as presented in our Consolidated Financial Statements.
| 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 | ) | |||
Service Fee Income – Mortgage Securities
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 on mortgage securities decreased to approximately $5.1 million in 2016 from $6.1 million in 2015. Fluctuationsand costs of services in the interestconsolidated statement of operations and comprehensive income received(loss) are from our mortgage portfolio arethe 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 CSB customers plus a small markup to cover the cost of administration.
A significant CSB customer terminated its contract services with HCS as of January 29, 2020. In addition, due to factors beyond the Company's control, such asrecent developments of COVID-19, and the
General and Administrative
General and administrative expenses decreased to approximately $4.4consist of salaries, office costs, legal and professional expenses and other customary costs of corporate administration. During 2020 and 2019, $5.5 and $6.2 million, respectively, of the total general and administrative expenses were incurred by HCS. Corporate-level general and administrative expenses during 2020 and 2019 were $2.0 million and $2.1 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. Decreased marketing, advertising, and travel advertising expense along with reductions in 2016 compared to $5.7 million in 2015. Thecorporate-level staffing are the primary reasons for the decrease in general and administrative expenses is due toincurred by HCS.
Goodwill Impairment Charge
Management completed its annual goodwill impairment assessment as of April 30, 2020. Increased cost of services and administrative expenses at HCS and the eliminationloss 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.
| 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 | |
Interest Expense
Interest expense decreased period over period, with the Company incurring $3.3 million in 2020 and $4.5 million in 2019. See "Liquidity and Capital Resources" below and Note 5
Income Tax Expense
Because of the same date, pursuantCompany's significant net operating losses and full valuation allowance, income tax expense was not material for any period presented and is not expected to which eachbe material for the foreseeable future.
Liquidity and Capital Resources
During 2020, the Company had net loss of $9.2 million and generated negative operating cash flow of $0.7 million. As of December 31, 2020, the Company had an overall shareholders deficit of $81.1 million. As of December 31, 2020, the Company had an aggregate of $1.3 million in cash and cash equivalents and total liabilities of $93.3 million. Of the $1.3 million in cash, $0.3 million is held by the Company's subsidiary NMLLC. This cash is only available to pay general creditors and expenses of NMLLC.
Management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers, looking at methods to reduce overall operating costs, both at HCS and the corporate level, and targeting new customers that have not previously been served by HCS. As disclosed in Note 6 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 2019 in exchange for the issuance of common stock and warrants. Based on the terms of the Credit Parties granted a first priority lien generally covering all of its assets, other than accounts receivable and inventory,amendment, the 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 benefit of the Noteholders,Company. This amendment to secure the obligations under the Note Purchase Agreement and waiver of interest payments through April 2022 has significantly improved our forecasted cash position over the 2017 Notes.
In late March 2020, HCS started experiencing a reduction in Georgia CSB customer needs related to COVID-19. This resulted in the layoff of approximately 8% of the Company’s employees. As HCS relies on providing healthcare staffing services to generate income, this has decreased our service fee income, and direct cost of services, accordingly. While the majority of these employees were rehired when customer demand returned, there have been some permanent loss of staffing opportunities based on changes to programs and services offered by CSBs. In addition, there is still concern at the Company about the ongoing effects of COVID-19 on our services for the foreseeable future. As of December 31, 2020, based on our operating losses and negative cash flow, substantial doubt exists related to the Company’s ability to continue as a going concern.
Overview of Cash Flow for the Year Ended December 31, 2016
The following table provides a summary of our operating, investing and financing cash flows as taken from our consolidated statements of cash flows for 2016the years ended December 31, 2020 and 20152019 (in thousands).
For the Years Ended December 31, | ||||||||
2020 | 2019 | |||||||
Cash flows used in operating activities | $ | (677 | ) | $ | (5,168 | ) | ||
Cash flows (used in) provided by investing activities | (15 | ) | (70 | ) | ||||
Cash flows used in financing activities | — | (1,979 | ) | |||||
| 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 | ) | |||
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.
Impairment of Indefinite-Lived Intangible Assets and debt instruments and other traditional liquid investments,Long-Lived Assets with Finite Lives
The values of indefinite-lived assets such as agency mortgage-backed securities.goodwill and trademarks are assessed annually to determine whether their carrying value exceeds their fair value. The Company performs its annual tests of goodwill and trademarks during the second quarter of each fiscal year. In addition, they include beneficial interests inindefinite-lived assets are tested on an interim basis if an event occurs or circumstances change that would more likely than not reduce their fair value below carrying value and for long-lived purchased intangible assets this occurs whenever an event or circumstances indicate the mortgage securitizationscarrying value of the asset may not be fully recoverable. If we executed prior to 2008. These beneficial interests include interest-only mortgage securities, residual interests and over-collateralization bonds, collectively "retained mortgage securities."
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 taxestax 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.
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.
Impact of Recently Issued Accounting Pronouncements
No new accounting pronouncements is includedstandards were adopted in Note 3 to the consolidated financial statements.
Not applicable.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NOVATION COMPANIES, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets | |
Consolidated Statements of Operations and Comprehensive | |
Consolidated Statements of Shareholders' Deficit | |
Consolidated Statements of Cash Flow | |
Notes to Consolidated Financial Statements | |
To the Board of Directors and Stockholders of Novation Companies, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance Substantial Doubt About the Company's Ability to Continue as a Going Concern The accompanying consolidated financial Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on We conducted our 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 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements Valuation of Intangible Assets and Goodwill Description of the Matter: As disclosed in Auditing the How We Addressed the Matter in Our Audit: We obtained an understanding and evaluated the design of the controls related to the intangible asset and goodwill impairment assessment process, including controls over management's identification of indicators of impairment. We performed audit procedures surrounding the impairment evaluation that included, among others, assessing methodologies and testing the significant assumptions and the completeness and accuracy of the underlying data used by the Company in its analysis. We reviewed management's discounted future cash flow analysis and the assessment of the assumptions used in this evaluation. We compared these assumptions prepared by management to current industry and economic trends, the Company's historical results, and other relevant factors. /s/ We have served as the Company's auditor since 2016. Minneapolis, Minnesota CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents Accounts and unbilled receivables Prepaid expenses Other Total current assets Non-current assets: Goodwill Intangible assets, net Property and equipment, net Operating lease right-of-use asset Other Total non-current assets Total assets Liabilities and Shareholders' Deficit Current liabilities: Accounts payable and accrued expenses Accrued compensation and benefits payable Health and wellness program liability Operating lease liability Accrued claim settlements Other Total current liabilities Non-current liabilities: Senior notes, net of unamortized debt premium of $4.2 million and $0.9 million as of December 31, 2020 and 2019, respectively Accrued claim settlements Operating lease liability Total non-current liabilities Total liabilities Shareholders' deficit: Common stock, $.01 par value per share, 780,000,000 shares authorized: 114,655,893 and 112,355,893 shares issued and outstanding as of December 31, 2020 and 2019, respectively Additional paid-in capital Accumulated deficit Total shareholders' deficit Total liabilities and shareholders' deficit See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (in thousands, except share and per share amounts) For the Years Ended December 31, 2020 2019 Service fee income Cost and expenses: Cost of services General and administrative expenses Goodwill impairment charge Operating loss Other income Interest expense Reorganization items, net Loss before income taxes Income tax expense Net loss Other comprehensive income: Unrealized gains on marketable securities Total other comprehensive income Total comprehensive loss Loss per share: Basic Diluted Weighted average common shares outstanding: Basic Diluted See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT (in thousands) Common Additional Accumulated Accumulated Total Balance, December 31, 2019 Issuances of nonvested stock Compensation recognized under stock compensation plans Net loss Balance, December 31, 2020 Common Additional Accumulated Accumulated Total Balance, December 31, 2018 Issuances and cancellations of nonvested stock, net Common stock granted in debt restructure Common stock and common stock warrants granted in debt restructure Compensation recognized under stock compensation plans Net loss Adjustment to retained earnings for adoption of accounting standard Other comprehensive income Balance, December 31, 2019 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2020 2019 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Amortization of intangible assets Amortization of debt premium and prepaid interest into interest expense Depreciation expense (Gain) loss on disposal of fixed assets Lease expense Goodwill impairment Compensation recognized under stock compensation plans Changes in operating assets and liabilities: Accounts and unbilled receivables Accounts payable and accrued expenses Accrued compensation and benefits payable Accrued health and wellness program payable Accrued interest payable Accrued claim settlements Other current assets and liabilities, net Other noncurrent assets and liabilities, net Net cash used in operating activities Cash flows from investing activities: Purchases of property and equipment Proceeds from sale of property and equipment Net cash used in investing activities Cash flows from financing activities: Borrowings under revolving line of credit Repayments of borrowings under revolving line of credit Paydowns of long-term debt Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental disclosure of cash flow information: Cash paid for interest Cash paid for income taxes, net Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock in restructure of debt (Note 6) Issuance of common stock warrants in restructure of debt (Note 6) See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation, Business Plan and Liquidity Description of Operations – Liquidity and Going Concern – Prior to executing the Amendment with the Noteholders in August 2019 (Note 6), the Company had Management continues to In late March 2020, HCS started experiencing a reduction in CSB customer needs related to the COVID-19 pandemic. This resulted in the Our historical operating results and negative cash flow suggest substantial doubt Financial Statement Presentation. 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 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 Revenue and Cost Recognition - The Company Income 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. 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 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. Earnings (Loss) Per Share (“EPS”) - Basic EPS excludes dilution and is computed by dividing net income (loss) available to common shareholders by the Segments - The Company has Note 3. 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 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 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 Contract Balances — The timing of revenue recognition, billings and cash 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 are affected by economic factors. For the Year Ended December 31, 2020 For the Year Ended December 31, 2019 Type of Customer CSB Other Total Accounts and December 31, 2020 December 31, 2019 Accounts receivable Unbilled receivables (Contract Assets) Total accounts and unbilled receivables As of December 31, 2020 and December 31, 2019, management has determined no allowance for doubtful accounts is necessary. For the years ended December 31, 2020 and December 31, 2019, 63.3% and 63.1% of service fee income was generated from four customers. As of December 31, 2020, 64.0% of accounts and unbilled receivables was due from four customers and 88.8% was due from 12 CSB customers. As of December 31, 2019, 61.6% of accounts and unbilled receivables was due from four customers and 96.6% was due from 14 CSB customers. Note 4. Goodwill and Intangible Assets December 31, 2020 December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Indefinite-lived assets (in thousands): Goodwill Tradenames Finite-lived assets (in thousands): Customer relationships Non-compete agreement Amortization expense (in thousands): 2019 2020 Estimated future amortization expense (in thousands): 2021 2022 2023 Thereafter Total estimated amortization expense Years Ended December 31, 2020 2019 Goodwill activity (in thousands): Beginning balance Impairment charge Ending balance Management completed its annual goodwill impairment assessment as of April 30, 2020. Increased cost of services and administrative expenses at HCS and the loss of a significant customer during the first quarter of 2020 have resulted in declining cash Note 5. Leases Our leases consist primarily of 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 Maturities of lease liabilities were as follows (in thousands): December 31, 2020 2021 2022 2023 Thereafter Total Less interest Present value of lease liabilities Other information related to the December31, 2020 Lease Term and Discount Rate: Weighted average remaining lease term (years) Weighted average discount rate Note 6. Borrowings Note Refinancing and 2017 Notes — On August 9, 2019, the 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 The carrying value December 31, 2020 December 31, 2019 Principal balance Unamortized debt premium Total, 2017 Notes Note Contingencies 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 Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than the active 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 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. 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, DB Structured Products, Inc., Deutsche Bank AG, Deutsche Bank National Trust Company, Note 8. 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 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 The estimated fair values of the Company's financial instruments are as follows as of December 31, December 31, 2020 December 31, 2019 Carrying Value Fair Value Carrying Value Fair Value Financial liabilities: 2017 Notes (Level 3) The 2017 Notes in the table above are not measured at fair value in the Assets reported at fair value on a nonrecurring basis include the December 31, 2020 Fair Value (Level 3) Gains and (Losses) Goodwill Activity during 2020 for Goodwill Activity: Balance, December 31, 2019 Impairment charge Balance, December 31, 2020 The determination of the goodwill impairment was based on a discounted cash flow approach utilizing forecasted revenue ranging from $57 million to $69 million, historical operating income percentages, and a cost of capital of approximately 15%. Prior to the Company's acquisition of HCS in 2017, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. The Company Note 9. Income Taxes The components of income tax For the Years Ended December 31, 2020 2019 Current: Federal State and local Total current Below is a reconciliation of the expected federal income tax expense (benefit) using the federal statutory tax rate of For the Years Ended December 31, 2020 2019 Income tax benefit at statutory rate State income taxes, net of federal tax benefit Valuation allowance Bankruptcy reorganization Other Total income tax expense Prior to 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, Significant components of the Company’s deferred tax assets and liabilities as of December 31, December 31, 2020 2019 Deferred tax assets: Federal NOL carryforwards State NOL carryforwards Goodwill impairment, HCS Business interest expense limitation Other Gross deferred tax asset Valuation allowance Deferred tax asset Deferred tax liabilities: Other Deferred tax liability 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, The activity in the accrued liability for unrecognized tax benefits for the years ended December 31, For the Years Ended December 31, 2020 2019 Beginning balance Gross increases – tax positions in current period Lapse of statute of limitations Ending balance 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, None. Evaluation of Disclosure Controls and Procedures 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 Management’s Annual Report on Internal Control over Financial Reporting The Description of Material Weakness of Disclosure Controls 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 As a result of the HCS acquisition and the generally weak controls at HCS discussed above, we determined that we have a material weakness in our It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the DIRECTORS AND EXECUTIVE OFFICERS Howard M. Amster Howard Timothy Eriksen, age Barry A. Igdaloff, age Lee D. Keddie, age David W. Pointer, age 51, has been our Chief Executive Officer 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 Carolyn K. Campbell CORPORATE GOVERNANCE AND RELATED MATTERS Board Leadership Structure The Board is led by Mr. During 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. Nominating and Corporate Governance Committee. Compensation Committee 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 The charter of the Compensation Committee permits the Compensation Committee to engage outside consultants. In 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 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 Our investor relations contact information follows: Investor Relations 9229 Ward Parkway, Suite Kansas City, Missouri 816.237.7000 Email: ir@novationcompanies.com 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., 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., 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, 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 V.I. Capital Management, LLC (“V.I. Capital”) and DIRECTOR COMPENSATION The Name Fees earned or paid in cash Stock Awards Total Barry A. Igdaloff Howard M. Amster Howard Timothy Eriksen Lee D. Keddie (1) (2) On In payment of the EXECUTIVE COMPENSATION Our named executive officers 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 Stock Awards (1) All Other Compensation Total David W. Pointer (2) (3) (4) 2020 Chief Executive Officer 2019 Carolyn K. Campbell (5) (6) (7) 2020 Chief Financial Officer 2019 (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. (4) (6) Outstanding Equity Awards at Fiscal Year-End There were no outstanding Employment Agreements and Arrangements with Named Executive Officers David W. Pointer Mr. 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 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 Beneficial Ownership of Common Stock Name of Beneficial Owner Shares Percent of Class (1) Directors and Named Executive Officers Howard M. Amster (2) 500,000 * Howard Timothy Eriksen (3) 1,333,333 1.1% Barry A. Igdaloff (4) 6,953,390 6.2% Lee D. Keddie (5) 1,333,333 1.1% Carolyn K. Campbell (6) 565,000 * David W. Pointer (7) 5,000,000 4.3% All current directors and executive officers as a group (6 persons) (8) 15,685,056 13.7% 5% Beneficial Owners Massachusetts Mutual Life Insurance Company (9) 19,258,775 16.5% * Less than 1% (1) Based on 116,655,893shares of common stock outstanding as of February 25, 2021. 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 250,000 shares of common stock, 250,000 shares of unvested restricted stock. (3) Consists of 1,083,333 shares of common stock and 250,000 shares unvested restricted stock. (4) Consists of 3,529,707 shares of common stock, 300,000 shares of unvested restricted stock and 3,123,683 shares of common stock controlled by Mr. Igdaloff as a registered investment advisor. (5) (6) Consists of 565,000 shares of common stock. (7) Consists of 3,000,000 shares of common stock and 2,000,000 shares of unvested restricted stock. (8) Consists of 9,511,373 shares of common stock; 3,050,000 shares of unvested restricted stock. (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, 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) Equity compensation plans not approved by stockholder Total (1) Represents shares that may be issued pursuant to outstanding options awarded under the 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 Audit Fees The following table presents aggregate fees billed for professional services rendered by Boulay For the Fiscal Years Ended December 31, 2020 2019 Audit Fees (1) Tax Fees (2) Total Fees (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 Financial Statements and Schedules (1) The financial statements as set forth under Item 8 of this (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 None. Exhibit No. Description of Document 2.1 2.2 2.3 3.1 3.3 4.1 4.2 4.3 4.4 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 21.1 23.1 31.1 31.2 32.1 32.2 101 The following financial information from Novation Companies, Inc.'s Annual Report on Form 10-K for the year ended December 31, * 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. 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: /s/ DAVID W. POINTER David W. Pointer, Chief Executive Officer DATE: /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: /s/ DAVID W. POINTER David W. Pointer, Chief Executive Officer (Principal Executive Officer) DATE: /s/ CAROLYN K. CAMPBELL Carolyn K. Campbell, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) DATE: /s/ HOWARD M. AMSTER Howard M. Amster, Director DATE: /s/ Howard T. Eriksen, Director DATE: /s/ BARRY A. IGDALOFF Barry A. Igdaloff, Director and Chairman DATE: /s/ Lee D. Keddie, Directorsheetsheets of Novation Companies, Inc. (the Company) as of December 31, 2016,2020 and 2019, 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. Management2020, 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 responsibleas of December 31, 2020 and 2019, and the results of its operations and its cash flows for theseeach of the years in the two year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.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 impacts 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 matterthesethe Company’s consolidated financial statements based on our audit.auditaudits 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 reuqredrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs 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 includessupportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. 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 auditaudits provide a reasonable basis for our opinion.In our opinion,referredthat were communicated or required 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 PLLPOctober 25, 2017REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersNovation Companies, Inc.We have audited the accompanying consolidated balance sheet 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 isbe communicated to express an opinion on these financial statements based on our audit.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 committee and that: (1) relate 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 proceduresaccounts or disclosures 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,material to the consolidated financial statements referredand (2) involve especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to above present fairly,which they relate.all material respects,Notes 2 and 4 to the consolidated financial position of Novation Companies, Inc. and subsidiaries as ofstatements, the Company's intangible assets totaled $4.7 million at December 31, 2015,2020 and goodwill was impaired by $3.9 million to its fair value of $0 during the resultssecond quarter 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.discusseddisclosed in Note 2 into the previously filed 2015 consolidated financial statements, which isindefinite-lived intangible assets and goodwill are tested at least annually during the second quarter of each year. Finite-lived intangible assets are assessed for impairment whenever an event or change in circumstances indicates that the carrying value of the asset may not presented herein,be recoverable. The Company determined that the Company has changedonset of the COVID-19 pandemic and its methodnegative effect on its service fee income was a triggering event that required an assessment of accountingimpairment for its finite-lived intangible assets.presentationvaluation of deferred income taxes in 2015the Company's intangible assets and goodwill was highly judgmental due to the adoptionsignificant estimation required to determine the fair value of FASB Accounting Standards Update No. 2015-17 - Balance Sheet Classificationthese assets as a result of Deferred Taxes.GRANT THORNTON LLPBOULAY PLLPFebruary 16, 2016DEBTORS-IN-POSSESSION $ 1,340 $ 2,032 5,008 6,583 663 647 53 21 7,064 9,283 — 3,905 4,677 5,784 92 125 339 316 4 4 5,112 10,134 $ 12,176 $ 19,417 $ 315 $ 524 2,176 2,717 — 492 195 205 246 246 4 36 2,936 4,220 90,115 86,824 62 307 153 125 90,330 87,256 93,266 91,476 1,146 1,123 746,227 746,112 (828,463 ) (819,294 ) (81,090 ) (72,059 ) $ 12,176 $ 19,417 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 DEBTORS-IN-POSSESSIONINCOME (LOSS) $ 51,354 $ 63,474 45,819 56,483 7,503 8,345 3,905 4,300 (5,873 ) (5,654 ) 43 39 (3,311 ) (4,522 ) — (63 ) (9,141 ) (10,200 ) 28 25 (9,169 ) (10,225 ) — 1 — 1 $ (9,169 ) $ (10,224 ) $ (0.08 ) $ (0.10 ) $ (0.08 ) $ (0.10 ) 111,045,292 100,472,515 111,045,292 100,472,515 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): (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 DEBTORS-IN-POSSESSION
Stock
Paid-in
Capital
Deficit
Other
Comprehensive
Income
Shareholders’
Deficit $ 1,123 $ 746,112 $ (819,294 ) $ — $ (72,059 ) 23 (23 ) — — — — 138 — — 138 — — (9,169 ) — (9,169 ) $ 1,146 $ 746,227 $ (828,463 ) $ — $ (81,090 )
Stock
Paid-in
Capital
Deficit
Other
Comprehensive
Income
Shareholders’
Deficit $ 991 $ 745,104 $ (809,050 ) $ (1 ) $ (62,956 ) 42 (42 ) — — — 90 (90 ) — — — — 916 — — 916 — 224 — — 224 — — (10,225 ) — (10,225 ) — — (19 ) — (19 ) — — — 1 1 $ 1,123 $ 746,112 $ (819,294 ) $ — $ (72,059 ) 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. DEBTORS-IN-POSSESSION $ (9,169 ) $ (10,225 ) 1,107 1,194 3,291 1,262 48 27 — 9 (5 ) (5 ) 3,905 4,300 138 224 1,575 (461 ) (209 ) (146 ) (541 ) (14 ) (492 ) 492 — (754 ) (245 ) (459 ) (80 ) (186 ) — (426 ) (677 ) (5,168 ) (15 ) (96 ) — 26 (15 ) (70 ) — 8,685 — (10,633 ) — (31 ) — (1,979 ) (692 ) (7,217 ) 2,032 9,249 $ 1,340 $ 2,032 $ 21 $ 4,030 $ 45 $ 30 $ — $ 311 $ — $ 605 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. DEBTORS-IN-POSSESSION“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 afterState 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.2016,2020, the Company has an overall shareholders deficit of $81.1 million, an aggregate of $1.3 million in cash and cash equivalents and total liabilities of $93.3 million. Of the $1.3 million in cash, $0.3 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.approximately $4.8 milliona significant on-going obligation to pay interest under its senior note agreements at LIBOR plus 3.5% per annum, payable quarterly in unrestrictedarrears until maturity on March 30, 2033, leading to a significant annual cash outflow. HCS has also experienced lower than anticipated cash flows in general due to increased costs and cash equivalents. In addition, the Company held approximately $36.5 milliona decrease 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 linebusiness from certain customers. These items on the consolidated balance sheet as of December 31, 2016. For additional information regardinginitially led to substantial doubt about the Company's marketable securities, see the consolidated statements of cash flow and Note 5ability 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.such Indenture,work toward expanding HCS’s customer base by notice in writingincreasing 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 principalcorporate 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 impactedtargeting 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 discusseddisclosed in Note 26 to the consolidated financial statements, the Company was successful in amending the senior note agreements to lower the interest rate and threereceive 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 11common stock and warrants. Based on the terms of the Bankruptcy CodeAmendment, the 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 Company. This Amendment to the Note Purchase Agreement and waiver of interest payments through April 2022 has significantly improved our forecasted cash position over the next year.United States Bankruptcy Courtlayoff of approximately 8% of the Company’s employees. As HCS relies on providing healthcare staffing services to generate income, this has decreased our service fee income, and direct cost of services, accordingly. While the majority of these employees were rehired when customer demand returned, there have been some permanent loss of staffing opportunities based on changes to programs and services offered by CSBs. In addition, there is still concern at the Company about the ongoing effects of COVID-19 on our services for the District of Maryland (the “Bankruptcy Court”). These factors raiseforeseeable future.aboutexists related to the Company’sCompany's ability to continue as a going concern.We Furthermore, there is still significant uncertainty regarding the future impact that COVID-19 will have taken actionon 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 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 onabout the Company's liquidity resources. While no principal is due for many years on the Company's 2011Notes, 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 unableability 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 contemplatesfor 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.establishingassessing the fair valuerecoverability of its mortgage securities, liabilities subject to compromiselong-lived assets, impairments 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. ReorganizationOn July 20, 2016, (the "Bankruptcy Petition Date"), Novation and three of its subsidiaries, NovaStar Mortgage LLC, NovaStar Mortgage Funding Corporation and 2114 Central LLC (collectively, the “Debtors”), filed the Bankruptcy Petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors’ Chapter 11 cases (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 for the resolution of the outstanding claims against and interests pursuant to Section 1121(a) of the Bankruptcy Code (as amended and 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 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. The HCS Acquisition and the Note Refinancing 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 their interests.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 presented here 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. 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 many of the potential claims, the magnitude of potential claims is not reasonably estimable at this time. Potential claims not currently included 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 maycould be material. We continued to evaluate our liabilities throughout the Chapter 11 process and may make adjustments in future periods as necessary and appropriate. These adjustments may be material.Under the Bankruptcy Code, except with respect to the Company, which is bound by the Plan, we may assume, assign, or reject executory contracts and unexpired leases, subject to the approval of the Bankruptcy Court and other conditions. If we reject a contract or lease, such rejection generally is treated as a pre-petition breach of 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 andprovide 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 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 Schedules 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):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 3.2. Summary of Significant Accounting and Reporting PoliciesEquivalents.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 onefour 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$0.8 million as of December 31, 2016.2020.Marketable Securities – Available-for-Sale. Marketable securitiesAccounts 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.in accordance with the relevant accounting guidance. The Company determinesbelow 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 securitiesannual tests of goodwill and trademarks during the second quarter of each fiscal year.pricingan estimate of undiscounted future cash flows resulting from our third party service providerthe 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 estimatesvalue. If we determine the fair value of its residual securities retained based onan asset is less than the presentcarrying 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 recordedincurred. Impairment losses, if any, are reflected in accumulated other comprehensiveoperating income or loss is reclassified to earnings as a realized loss. in the period incurred.usesrecognizes revenue when control of the specific identification methodpromised services is transferred to customers and for the amount that reflects the consideration we are entitled to receive in computing realized gainsexchange for those services. Furthermore, revenue is recognized at a point in 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 dilutionservice 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 services, and it is not separately identifiable from other promises in the contracts and is, computed by dividing net income available to common shareholders bytherefore, not distinct. Performance obligations are satisfied at the weighted-average numberpoint in time the HCS employees work on behalf of common shares outstandingthe 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.Taxes.$295.9$168.8 million and $282.1$166.5 million as of December 31, 20162020 and 20152019, 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%. 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.New Accounting PronouncementsIn August 2014,FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentationweighted-average number of Financial Statements - Going Concern (Subtopic 205-40): Disclosurecommon 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 thereentity. Diluted EPS is substantial doubt about an entity’s ability to continue as a going concerncalculated assuming all options, nonvested shares and to provide related disclosures. performance-based awards of the Company's common stock have been exercised, unless the exercise would be antidilutive.adopted this standardevaluated it’s operations and determined it has one reportable segment.of January 1, 2016. Seeour customers benefit from our services and as we provide them.evaluation in Note 1.In November 2016,customer contracts have a single performance obligation to transfer the FASB issued ASU 2016-18, which amends ASC 230 to addindividual goods or clarify guidance on the classificationservices, and presentation of restricted cashit is not separately identifiable from other promises in the statement of cash flows. Key requirementscontracts and is, therefore, not distinct. Performance obligations are satisfied at the point in time the HCS employees work on behalf of the ASU are as follows:Cashcustomer. Contract costs include compensation, benefits and cash-equivalent balances in the statementoverhead when appropriate. Because 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 cashthe contracts and the fact that revenue is earned at the time the employee works for the customer, no contract estimates are necessary.equivalents must be disclosed.This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods therein.collections results in accounts receivable and unbilled receivables (the "contract assets"). The impact of this guidance will be determinedCompany bills customers generally every other week based on the amountswork performed during the two-week period ended the week prior to billing. Generally, billing occurs after revenue recognition, resulting in contract assets. The Company does not receive advances or deposits from its customers. $ 50,054 97.5 % $ 61,620 97.1 % 1,300 2.5 % 1,854 2.9 % $ 51,354 100.0 % $ 63,474 100.0 % restrictedunbilled receivables are summarized as follows, in thousands: $ 2,705 $ 4,083 2,303 2,500 $ 5,008 $ 6,583 $ — $ — $ — $ 3,905 $ — $ 3,905 1,147 — 1,147 1,147 — 1,147 Total indefinite-lived assets $ 1,147 $ — $ 1,147 $ 5,052 $ — $ 5,052 $ 6,895 $ 3,365 $ 3,530 $ 6,895 $ 2,380 $ 4,515 627 627 — 627 505 122 Total finite-lived assets $ 7,522 $ 3,992 $ 3,530 $ 7,522 $ 2,885 $ 4,637 $ 1,194 1,107 $ 985 985 985 575 $ 3,530 $ 3,905 $ 8,205 (3,905 ) (4,300 ) $ — $ 3,905 upon implementation, but is not expectedflow for the business. In addition, COVID-19 concerns were attributable to be material.In August 2016,a lay-off of staffed employees starting in the FASB issued ASU 2016-15, which amendssecond quarter of 2020. Based on these factors, management determined that the guidance in ASC 230carrying value of the HCS goodwill exceeded its fair value by the full amount recorded on the classificationconsolidated balance sheets of certain cash receipts$3.9 million. A goodwill impairment charge in this amount was recorded during the second quarter of 2020. Management assessed the other indefinite and payments in the statementdefinite lived intangible assets and determined no impairment was necessary.the ASU is to reduce the diversity in practice that has resulted from the lackoffice space. Leases with an initial term of consistent principles12 months or less, and leases which are 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 thata month-to-month basis, are insignificant in relation 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.In February 2016, the FASB issued ASU 2016-02 Leases, a new standard on accounting for leases. ASU 2016-02 introduces a lessee model that brings most leasesrecorded on the balance sheet. For these leases we recognize lease expense on a straight-line basis over the lease term. The new standard also aligns manyCompany does not have any finance leases.underlying principlestwelve months ended December 31, 2020 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 the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, this ASU addresses other concernslease payments. $ 212 88 57 19 $ 376 28 $ 348 currentCompany's operating leases model. For example, this ASU eliminateswas as follows (in thousands):2.20 6.75 % requirementCompany 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. This amendment qualified as a troubled debt restructuring. As of December 31, 2020, the Company had $85.9 million in current GAAPaggregate 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 an entitythe fiscal year ending December 31, 2019, the Company is required to use bright-line testsremit 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 determining lease classification.right of payment to any existing or future subordinated indebtedness of the Credit Parties (as defined below). The standard also requires lessorsCompany may at any time upon 30 days’ notice to increase the transparencyNoteholders redeem all or part of their exposurethe 2017 Notes at a redemption price equal to changes in value101% of their residual assetsthe principal amount redeemed plus any accrued and how they manage that exposure.unpaid interest thereon. The new model represents a wholesale change to lease accounting. As2017 Notes were entered into on July 27, 2017 as a result entities will face significant implementation challenges duringof a refinancing of the transition period and beyond, such as those related to:Applying judgment and estimating.Managing the complexities of data collection, storage, and maintenance.Enhancing information technology systems 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; andAddressing any income tax implications.For the Company, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning 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 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 associatedCompany’s then outstanding senior notes with the fair valuesame aggregate principal amount through the execution 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. 4. DivestituresOn December 21, 2015, the Company entered into the Corvisa Purchase Agreement, with Corvisa Services and ShoreTel. Subject to the terms and conditionsdated as of the Corvisasame date (as amended, the “Note 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 toAgreement”), with Novation Holding, Inc., 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 obligationswholly-owned subsidiary of the Company in connection("NHI") and HCS as guarantors (together with the post-closing working capital adjustment.In connection withCompany, collectively, the Corvisa Sale,“Credit Parties”).ShoreTelnegative 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, 2021. The Note Purchase Agreement also agreedcontains customary events of default, including but not limited to enterpayment 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. The Credit Parties entered into a Transition ServicesPledge and Security Agreement, dated as of the same date, pursuant to which each of the CompanyCredit Parties granted a first priority lien generally covering all of its assets, other than accounts receivable and ShoreTel would provideinventory, for the other with specified services for a transition period following the closing. The Company does not expect the cash flows associated with these services to be significant to Corvisa, and the Company will have no significant continuing involvement with Corvisa beyond these services.During 2015, the Company incurred approximately $0.8 million in severance and related one-time termination benefits associated with this transaction. Approximately $0.1 million 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 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 closingbenefit of the sale. These costs include approximately $0.3 million of earned bonus paymentsNoteholders, to a Corvisa executive, $1.0 million of advisory fees and $0.1 million of other transaction-related costs.At ShoreTel’s request,secure 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,Note Purchase Agreement and to paythe 2017 Notes.
Under the terms of the Amendment, the Company issued to the Company a portionNoteholders 9,000,000 shares of common stock of the business’s existing accounts receivable collected inCompany and ten-year warrants allowing 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 exclusivelyNoteholders to this business were not materialpurchase up 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 OperationsDuring 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 of Advent. As of December 2015, the assets and liabilities of discontinued operations include those of Advent and Corvisa. 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 Note 5. Marketable SecuritiesThe 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, 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 mortgage securities that continue to be a source of our earnings and cash flow. As of December 31, 2016 and 2015, the mortgage securities classified as current consisted entirely of the Company's investment in the residual securities issued by securitization trusts sponsored by the Company. Residual securities consist of interest-only and overcollateralization bonds.There were no other-than-temporary impairments relating to available-for-sale securities for 2016 and 2015. The average remaining maturities22,250,000 shares of the Company’s short-termcommon stock at an exercise price of $0.01 per share. These warrants can be exercised at any time prior to expiration. At the time of the Amendment, the outstanding principal balance of the notes were reduced by the fair value of the common stock and long-term available-for-sale investments as of December 31, 2016 were approximately six and 21 months, respectively. Maturities of mortgage securities ownedwarrants issued by the Company, depend on repayment characteristicsresulting in debt premium of $0.9 million, offset by accrued interest of $0.5 million. The Company will amortize the debt premium and experienceprepaid interest over the amended term of the underlying financial instruments. See Note 8 toPurchase Agreement using the consolidated financial statements for details oneffective interest method. Under the Company's fair value methodology.The following table relates to the securitizations where the Company retained aneffective interest method, significant changes in the assets issued by the securitization trust (dollarsrate at which a debt instrument accrues interest over its term can result 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 principala recorded balance in excess 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 NotesAs of December 31, 2016, the Company had outstanding three series of unsecured senior notes (collectively, the "2011 Notes") pursuant to three separate indentures (collectively, the “Indentures”) with 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. As of the Bankruptcy Petition Date, the Company charged off the entire difference between the contractual principal amount of the 2011 Notes and theirinstrument.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 events 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), was able to declare the principal amount of all 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 Notes 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 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).is as follows (in thousands): $ 85,938 $ 85,938 4,177 886 $ 90,115 $ 86,824 7.7. Commitments and Contingencies2008,2016, 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. See Note 2 to the consolidated financial statements for a descriptionNovaStar 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, theThe Company believes that the affiliated defendantsAffiliated Defendants have meritorious defenses to the case and, if the settlement approval does not become final, expects them to defend the case vigorously.Those motions remain pending. Given that plaintiff did not fileThe case was stayed after NMFC filed a timely proofbankruptcy case. On September 2, 2020, the parties filed a stipulation of claim in NMFC’s bankruptcy case, the Company believes it is likely thatdismissal with prejudice and the case will be dismissed. The Company believes that NMFC has meritorious defenses towas terminated by the case and expects it to defend the case vigorously in the event it proceeds.County of New York County against the Company and NMI. The notice provides that this is a breach of contract action with respect to certain, unspecified mortgage loans and defendant'sdefendants’ 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,Eventually, the Trusteeparties reached a settlement of the Trust forwarded a notice from Freddie Mac alleging breachesthis matter, which required an upfront payment of representations$0.3 million and warranties with respect to 43 loans, as more fully set forth in included documentation. The 43 loans hadequal quarterly installments over three years totaling an aggregate, original principal balance of about $6.5additional $0.3 million. On August 19, 2013,as Trustee,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 acomplaint identifying alleged breachesproofs of representations and warranties with respect to seven loans that were includedclaim in the earlier list of 43 loans. Plaintiff also generally alleged a trust-wide breach of representations and warrantiesCompany’s bankruptcy case asserting the right to be indemnified by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, recessionary and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; and indemnification (indemnification against NMI only). On October 9, 2013, 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. Eventually, the parties reached a settlement in this matter, which required an upfront payment of $0.5 million and NMI filed a motion to dismiss plaintiff’s complaint. This motion to dismiss was withdrawn after plaintiff filedequal quarterly installments over three years totaling 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 the stageadditional $0.4 million.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 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 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 ProcessesWhen 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 resultsin 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. 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 faircarrying value approximates their carryingfair value.20162020 and 2015 (dollars in2019 (in thousands): $ 90,115 $ 11,365 $ 86,824 $ 21,289 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 the itemsstatement of financial positionconsolidated balance sheets but for which theare required to be disclosed at fair value. The fair value is disclosed,of the fair value2017 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. The fair value is estimated by discounting future projected cash flows using a discount rate commensurate with the risks involved. The value of 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 of three-month LIBOR plus 3.5% until maturity in March 2033. The three-month LIBOR used in the analysis was projected using aforward interest rate curve. The increase in fair value foron the senior notes when comparingis 1% per annum from April 1, 2019 through December 31, 2016 to2023; 2% per annum from January 1, 2024 through December 31, 2015 relates2028; and 10% per annum from January 1, 2029 through the maturity date in March 2033.
Goodwill — See Note 4 to the increaseconsolidated financial statements for more information on the goodwill impairment assessments performed in the forward LIBOR, which is market driven.Note 9. Earnings Per ShareBasic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share2020.effect of conversions of stock options and nonvested shares. The computations of basic and diluted earnings per sharefollowing (in thousands): $ — $ (3,905 ) 2016 and 2015 (dollars in thousands, except share and per share amounts) are as follows: 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 ) The following weighted-average stock options to purchase shares of common stock were outstanding during each period presented, but were not included inGoodwill, 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): 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 During 2016 the Company granted 0.1 million nonvested shares toCompany's only Level 3 asset, measured on a director and these shares vested in 2016. During 2015 the Company granted 1.4 million options to purchase shares of common stock at a weighted average exercise price of $0.51. The weighted average impact of 0.7 million of the options granted during 2015nonrecurring basis is included in the following table above for 2015.(in thousands): $ 3,905 (3,905 ) $ — 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 2015 were not included in the calculation of earnings per share for 2015, because they were anti-dilutive.As of December 31, 2016retains clean-up call rights associated with prior servicing activities 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 outstandinghas determined these clean-up call rights have no fair value as of December 31, 2016 are schedule to vest in 2017. The weighted average impact2020 and 2019.benefitexpense (benefit) from continuing operations are (in thousands): $ — $ (11 ) 28 36 $ 28 $ 25 2016 2015 Current: Federal $ (14 ) $ (13 ) State and local (7 ) (15 ) Total current $ (21 ) $ (28 ) 35%21% to the Company’s actual income tax benefitexpense (benefit) and resulting effective tax rate (in thousands). $ (1,926 ) $ (2,949 ) (71 ) 36 2,278 2,528 — 9 (253 ) 401 $ 28 $ 25 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 ) 2015,2019, 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, 20162020 and 2015.20162020 and 2015,2019, the Company maintained a valuation allowance of $292.2$168.8 million and $281.5$166.5 million, respectively, for its deferred tax assets.In 2016, due to the sale 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.20162020 and 20152019 are (in thousands): $ 153,320 $ 152,705 9,044 9,003 2,069 1,084 2,578 1,877 1,812 1,876 168,823 166,545 (168,823 ) (166,545 ) — — — — — — $ — $ — 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 $ — $ — 2016,2020, the Company had a federal net operating lossNOL of approximately $685.5 $730.1million, including $307.3$250.3 million in losses on mortgage securities that have not been recognized for income tax purposes. The federal net operating lossNOL 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 lossthese NOLs will expire in years 2025 through 2036. The2037. Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely; the portion of NOLs that will not expire is $94.9 million. The Company has state net operating loss carryoversNOL carryforwards arising from both combined and separate filings from as early as 2004. The state net operating loss carryoversNOL carryforwards may expire as early as 20172019 and as late as 2036.2037.20162020 and 20152019 was (in thousands): $ — $ 11 — — — (11 ) $ — $ — 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 20162020 and 2015, the total gross amount of2019. there were no unrecognized tax benefits was $0.3 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 unrecognized tax benefits of less than $0.1 million due the lapse of statute of limitations in the next twelve months.benefits. 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 20162020 and 2015.2019. There were accrued interest and penalties of less than $0.1 million as of both December 31, 20162020 and 2015.2019. 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 20122017 to 20162020 remain open to examination for both U.S. federal income tax and major state tax jurisdictions.Note 11. Subsequent EventsAcquisitionTable 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).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.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 Noteholdersredeem 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.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.The Company maintains a systemare designedour disclosure controls and procedures were not effective as of December 31, 2020, to ensure that information required to be disclosed by the Company in the reports that it fileswe file or submitssubmit under the federal securities laws, including this report,Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the applicableSEC’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 ReportingCompany'sCompany’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. ThisOur internal control system has beenover 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 publishedconsolidated 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 assurancestatements for external purposes in accordance with respect to financial statement preparation and presentation.Company'sCompany’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, 20162020 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.overOver Financial ReportingThere were no changesinternaldisclosure controls and procedures. We are working to remediate this material weakness as discussed above, but have not completed the process to document and test the new control over financial reporting duringprocesses.quarter ended December 31, 2016objectives 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 assurance that have materially affected, any control will meet its objectives under all potential future conditions. Because of such inherent limitations in any control system, there can be no absolute assurance that control issues, misstatements, and/or are reasonably likely to materially affect, our internal control over financial reporting.69,73, has been a member of the Board since 2009. Mr. Amster currently is an owner and operator ofalso serveshas served as a director of Phenixfin Corp since August 2020. Mr. Amster served as a director of Maple Leafand newAX, Inc. (formerly Astrex, Inc.). Since June 2015,until it was acquired by Farmers Banc Corp in 2020. Mr. Amster also has served as a Financial Advisor at McDonald Partners, LLC, a securities brokerage firm.firm from 2015 to 2020. 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. Eberwein47,52, has been a member of the Board since April 2015 and2018. Mr. Eriksen has been the Chief Executive ChairmanAugust 2017.July 2016. Mr. Eberwein isEriksen also serves as the founder and chief executive officerManaging Member of Lone Star ValueEriksen Capital Management LLC (“ECM”), a registeredfirm. Prior to founding Lone Star Value Management, LLCadvisory firm that he founded in January 2013,2005. Previously, Mr. Eberwein was a Portfolio Managerat Soros Fund Management from January 2009 to December 2011 and Viking Global Investors from March 2005 to September2008. Mr. Eberwein is Chairman of the Board of AMERI Holdings,Eriksen worked for Walker’s Manual, Inc., ATRM Holdings, Inc., Digirad Corporationa publisher of books and Hudson Global, Inc. Previouslynewsletters 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 asEriksen has been a director and Chairmanmember 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. fromSolitron since August 2015. Mr. Eriksen has been a member of the board of directors of TSR Inc. since October 2019, and since December 2012 to March 2014,2019 Lead Independent Director, Chairman of the Audit and NTS, Inc. from December 2012 until its sale toNominating Committees, and a private equity firm was completed in June 2014.member of the Compensation and Special Committees. Mr. Eberwein served on the BoardEriksen received a 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 MBAArts from The Wharton School,Master’s University of Pennsylvania and a BBA with High HonorsMaster of Business Administration from The University of Texas at Austin.A&M University. The Board believes that Mr. Eberwein’sEriksen’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 publicat other small-cap companies.Charles M. Gillman47,66, 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 enhancement2009 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, has been a memberChairman of the Board since 2009.August 2020. Mr. Igdaloff served as the sole proprietor of Rose Capital, a registered investment advisor in Columbus, Ohio, since 1995. Mr. Igdaloff has beenwas a director of Dynex Capital, Inc. since 2000.from 2000 through 2020. 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. Pearse57,52, 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 storagedeveloper 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 1987military 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 StrategyKeddie 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 SchoolUniversity of BusinessWaterloo. He 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’sKeddie’s qualifications to serve on the Board include his extensive business developmentoperating expertise and experience as a director of public companies.expertise.46,50, 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.Eberwein, the Company's Executive ChairmanIgdaloff, who also serves as the Company's principal executive officer, and by Mr. Igdaloff, who services asChairman of the Company's Lead Independent DirectorBoard 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.2016,2020, there were 65 meetings of the Board, 4 meetings of the Audit Committee, 1 meeting2 meetings of the Compensation Committee and 1 meeting2 meetings of the Nominating and Corporate Governance Committee, in addition tonot 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.Robert G. Pearse,Howard Timothy Eriksen, with Mr. Igdaloff serving as the chairman. The Board has determined that Barry A. Igdaloff and Robert G. PearseHoward 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.Barry A. Igdaloff,Lee D. Keddie, Howard M. Amster and Robert G. Pearse,Barry A. Igdaloff, with Mr. IgdaloffKeddie serving as the chairman.Robert G. Pearse,Barry A. Igdaloff, Howard M. Amster and Charles M. Gillman,Lee D. Keddie, with Mr. PearseIgdaloff serving as the chairman.2016,2020, the Compensation Committee did not retain a compensation consultant.corporate governanceInvestors-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.corporate governanceInvestors-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.500 Grand Boulevard,201B64106500 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.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.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.Lone Star ValueCompany directors Jeffrey E. Eberwein and Charles M. GillmanChief Executive Officer David W. Pointer are each subject to a SEC administrativeconsent 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 violationsbreaches 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 ActBoards of Directors of CompuMed and the rules promulgated thereunder, includingSolitron 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 ofsuch 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 ActConsent Order, V.I. Capital and the rules promulgated thereunder, including failingMr. 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 committingviolating 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 violationsowner 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 paidConsent Order, but he may apply for a civil penaltysecurities salesperson or investment adviser representative registration with an acceptable plan of $120,000 to the SEC and (ii) eachsupervision.SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCESection 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.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 receivedfollowing table presents a retainer of $50,000, and the chairmensummary 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$10,000, respectively. These amounts were paid in restricted stock through awards madecompensation earned by each director who served on August 10, 2015, which shares vested on August 10, 2016. On January 6, 2016, the Board appointed Charles M. Gillman as a director ofduring the Company. In connection withfiscal year ended December 31, 2020, other than our Chief Executive Officer Mr. Gillman’s appointment, we awarded him 96,154 shares of restricted stock underPointer, whose compensation is described in the Company’s 2015 Incentive Stock Plan (the “2015 Incentive Plan”) as a pro-rated portion of his annual retainer for service as a director. These shares vested on August 10, 2016. There was no other compensation paid to the directors during 2016.Name and Principal Position Fees earned or paid in cash ($) Barry A. Igdaloff $ — $ — $ — Howard M. Amster — — — Jeffrey E. Eberwein — — — Charles M. Gillman — 12,019 12,019 Robert G. Pearse — — — — — — (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.
(1) (2) $ 68,500 — $ 68,500 $ 36,000 — $ 36,000 $ 36,000 — $ 36,000 $ 41,000 — $ 41,000 Represents the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. There were no stock awards granted to the Board in 2020. 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. GillmanHoward Timothy Eriksen and Robert G. Pearse,Lee D. Keddie, in an amount of $50,000$36,000 per annum, including (i) $25,000payable 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 satisfyaddition, the foregoingBoard approved additional compensation for the Lead Independent Director of 100,000 shares of restricted stock. This base compensation was applicable for non-employee directors for the year ended December 31, 2020. On August 13, 2020, the Board appointed Barry A. Igdaloff as Chairman of the Board and approved additional compensation in the amount of $25,000 per annum, payable in cash on a quarterly basis.same date,equity component of the Compensation Committee granted todirectors' base compensation as discussed above, on October 1, 2019, each of the non-employee directors a $25,000received 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 componentagreement. These shares vested at 50% on the first anniversary of such director’s base compensation.for 2016during 2020 (each a “Named Executive Officer”) were (i) Rodney E. Schwatken,were(i) David W. Pointer, our former Chief Executive Officer, and (ii) Carolyn K. Campbell, our Chief Financial Officer and Treasurer and (ii) Brett A. Monger, our former Vice President, Controller and Chief Accounting Officer.Name and Principal Position Year Salary Bonus All Other Compensation Total 2016 $ 300,000 $ — $ — $ — $ 300,000 Former Chief Executive Officer and Chief Financial Officer 2015 250,962 — 62,765 — 313,727 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. $ 250,000 $ 18,000 $ 80,000 $ 109 $ 348,109 $ 131,154 $ 150,000 $ 100,000 $ 90 $ 381,244 $ 150,000 $ 50,000 $ 8,250 $ 368 $ 208,618 $ 150,000 $ 46,750 $ 12,500 $ 340 $ 209,590 (3) Represents the grant date fair value of 2,000,000 shares of restricted stock granted to Mr. Pointer on February 4, 2020. 100% of these shares vested on October 1, 2020. 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. (5) Ms. Campbell serves as the Chief Financial Officer of both Novation and HCS. Represents the grant date fair value of 165,000 shares of restricted stock granted to Ms. Campbell on February 4, 2020. 100% of these shares vested on October 1, 2020. (7) 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. 2016The following table sets forth the2020stock options ofequity incentive plan awards for our Named Executive Officers as of December 31, 2016.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 installmentRodney E. SchwatkenSchwatken resigned from his position as the Company’s Chief Executive Officer effective October 1, 2017. In connectionwith his resignation, to assist with our transition to a new Chief Executive Officer, Mr. SchwatkenPointer 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’sdiscretion) 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 termsand 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’soutstanding 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, 2008October 1, 2019 (the “Schwatken“Pointer EmploymentSchwatken’sPointer's base salary was increased from $225,000is $250,000, and he is eligible to $300,000, effective asearn an annual bonus, based on performance benchmarks, and to participate in any equity programs of August 18, 2015, inconnection with his appointment as our Chief Executive Officer.the Company, at the Company's discretion. The SchwatkenPointer Employment Agreement hadhas an indefiniteSchwatken was an employee “at-will,” and his employment may be terminated at any time byeither party, with or without cause, for any reason or no reason. If Mr. Schwatken’s employmentPointer is terminated by the Companyother 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 histhen-existing annual base salary, in exchange for consulting services outlined in the Schwatken Employment Agreement. Iftermination 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. MongerMr. 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 terminationIf Mr. Pointer’s employment is terminated by the Company other than for “cause”, or by Mr. MongerPointer for “good reason” or upon the occurrence of a “change of control” (each as defined in the MongerPointer Employment Agreement), Mr. Monger wouldPointer will receive, severanceover a period of 6 months following termination, compensation at an annual rate equal to six months of his then-existing annual base salary.equal installments over six months. Under the termsany equity programs of the Monger SeveranceCompany, at the Company's' discretion. The Campbell Employment Agreement upon its effectivenesshas 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 is released from all payment obligations underother than for “cause” or by Ms. Campbell for “good reason” (each as defined in the MongerCampbell Employment Agreement.October 24, 2017March 4, 2021 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%500 Grand Boulevard,9229 Ward Parkway, Suite 201B,340, Kansas City, Missouri 64106. Consists of 1,083,333 shares of common stock and 250,000 shares unvested restricted stock. Beneficial Ownership of Common Stock Name of Beneficial Owner Shares Directors and Named Executive Officers 4,267,331 4.5 % 3,293,273 3.4 % 304,487 * 8,116,566 8.5% 419,872 * 461,543 * Brett A. Monger 100 * 16,551,529 17.3 % 5% Beneficial Owners 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. 20162020 with respect to compensation plans under which the Company’s common stock may be issued.Plan Category 9,160,297 $0.65 3,667,586 Equity compensation plans not approved by stockholder — — — Total 9,160,267 0.65 3,667,586 — — 3,974,211 (1)— — — — — 3,974,211 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.•••• (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.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. 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 74,381 $ 379,284 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. $ 95,400 $ 122,000 7,020 11,000 $ 102,420 $ 133,000 20162020 and 20152019 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.Annual Report on Form 10-K are included herein.Annual Report on Form 10-K in the attached Exhibit Index.Index below.3.13.2 10.14.5 10.24.6 Novation Companies, Inc. Amended 2015 Incentive Stock Plan (incorporated by reference to Exhibit 10.14.1 to the Quarterly ReportRegistration Statement on Form 10-QS-8 filed on August 7, 2015)September 21, 2020).*10.310.410.510.610.710.810.910.1010.1110.1210.1310.1410.1510.1610.1710.1810.1910.2010.2121.123.231.12016,2020, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Balance Sheets as of December 31, 20162020 and December 31, 2015,2019, (ii) Consolidated Statements of Operations for the years ended December 31, 20162020 and 2015,2019, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 20162020 and 2015,2019, (iv) Consolidated Statements of Shareholders' Deficit for the years ended December 31, 20162020 and 2015,2019, (v) Consolidated Statements of Cash Flows for the years ended December 31, 20162020 and 2015,2019, and (vi) the Notes to Consolidated Financial Statements.October 25, 2017March 4, 2021/s/ JEFFREY E. EBERWEINJeffrey E. Eberwein, Executive ChairmanDATE:October 25, 2017DATE:October 25, 2017/s/ JEFFREY E. EBERWEINJeffrey E. Eberwein, Executive ChairmanOctober 25, 2017October 25, 2017October 25, 2017CHARLES M. GILLMANHOWARD TIMOTHY ERIKSENCharles M. Gillman,October 25, 2017October 25, 2017ROBERT G. PEARSELEE D. KEDDIERobert G. Pearse,51
