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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


FORM 10-K

☒

x

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

For the Fiscal Year Ended December 31, 2017


2020

  
o

☐

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

Maryland74-2830661

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

500 Grand Boulevard,

9229 Ward Parkway, Suite 201B,340, Kansas City, MO

64106

64114

(Address of Principal Executive Office)

(Zip Code)

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 o☐ No x


☒

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 o☐ No x

☒

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 x☒ No o

☐

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 x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
☒No ☐

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 o ☐ Accelerated filer o ☐ Non-accelerated filer o☒ Smaller reporting company x ☒ Emerging growth company o

☐

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. o


☐

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 o ☐ No x

☒

The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of June 30, 20172020 was approximately $8,117,000, $1,574,911, based upon the closing sales price of the registrant’s common stock on that date ($0.14).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 x☒ No ☐

o

The number of shares of the registrant's common stock outstanding on April 9, 2018February 25, 2021 was 96,007,321.116,655,893.

Table of Contents






NOVATION COMPANIES, INC.

FORM 10-K

For the Fiscal Year ended December 31, 2017

2020

TABLE OF CONTENTS

PART I

Item 1.


Business

1

Item 1A.

Risk Factors

2

TABLE OF CONTENTS
PART I
Item 1.Business
1
Item 1A.Risk Factors
3

Item 1B.

Unresolved Staff Comments

76

Item 2.

Properties

76

Item 3.

Legal Proceedings

76

Item 4.

Mine Safety Disclosures

86

PART II

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

107

Item 6.

Selected Financial Data

Removed and Reserved

107

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

118

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

1610

Item 8.

Financial Statements and Supplementary Data

1711

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

3928

Item 9A.

Controls and Procedures

3928

Item 9B.

Other Information

3928

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

4029

Item 11.

Executive Compensation

4432

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

4633

Item 13.

Certain Relationships and Related Transactions, and Director Independence

4834

Item 14.

Principal Accountant Fees and Services

4835

PART IV

Item 15.

Exhibits and Financial Statement Schedules

5035

Item 16.

Form 10-K Summary

35

Exhibit Index

5036

Signatures

5238

Table of Contents





PART I

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,” and other expressions or words of similar meanings, as well as future or conditional auxiliary verbs such as “would,” “should,” “could,” or “may” are generally intended to identify forward-looking statements. Risks, uncertainties, contingencies, and developments, including those discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report could cause our future operating results to differ materially from those set forth in any forward-looking statement. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments.


Item 1. Business


Overview


Through

Novation Companies, Inc. and its subsidiaries (the "Company," "Novation," "we," "us," or "our") through Healthcare Staffing, Inc. ("HCS"), our wholly-owned subsidiary acquired on July 27, 2017, we provide outsourced health care staffing and related services in the State of Georgia. 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


Emergence from Bankruptcy. On July 20, 2016 (the “Bankruptcy Petition Date”), Novation and three of its subsidiaries, NovaStar Mortgage LLC (“NMLLC”), NovaStar Mortgage Funding Corporation and 2114 Central LLC (the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (the “Bankruptcy Court”). The Company and one of its subsidiaries subsequently filed with the Bankruptcy Court and amended a plan of reorganization (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. On July 27, 2017, upon the completion of the HCS Acquisition and the

Note Refinancing (each as defined below), and the satisfaction or waiver of all other conditions precedent to effectiveness, the effective date of the Plan occurred and2017 Notes. On August 9, 2019, 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.


On September 25, 2017, the bankruptcy case of 2114 Central, LLC was dismissed by order of the Bankruptcy Court.
Thereafter, on December 22, 2017, NMLLC filed with the Bankruptcy Court a Chapter 11 plan of reorganization, and on
December 26, 2017 filed a related disclosure statement. The Bankruptcy Court entered an order on February 16, 2018
approving the disclosure statement, as revised. The Bankruptcy Court will conduct a hearing on April 11, 2018 to consider
confirmation of NMLLC’s plan of reorganization.

Acquisition of Healthcare Staffing, Inc. On July 27, 2017, the Company acquired all of the outstanding capital stock of HCS from Butler America, LLC (“Butler”) for approximately $24.0 million in cash (the “HCS Acquisition”), pursuant to the terms and conditions of a Stock Purchase Agreement, dated as of February 1, 2017 (as amended, the “HCS Purchase Agreement”), by and among the Company, Novation Holding, Inc., a wholly-owned subsidiary of the Company (“NHI”), HCS and Butler. The purchase price is subject to adjustment as provided in the HCS Purchase Agreement. See Note 4 to the consolidated financial statements for additional information regarding the HCS Acquisition. The operations of HCS are the Company’s primary operations.

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”), Taberna Preferred Funding I, Ltd. (“("Taberna I”I"), Taberna Preferred Funding II, Ltd. (“("Taberna II”II") and Kodiak CDO I Ltd. (“Kodiak”("Kodiak" and, together with Taberna I and Taberna II, the “Noteholders”"Noteholders") and Wilmington Savings Fund Society, FSB, as collateral agent forexecuted a First Amendment to Senior Secured Note Purchase Agreement (the “Amendment”) amending the benefitterms of the Noteholders, to refinance $85,937,500 of principal indebtedness of the Company under the Company’s senior notes (collectively, the “2011 Notes”) held by the Noteholders, issued pursuant to three Indentures, each dated as of March 22, 2011 (the “Note Refinancing”). Pursuant to the Note Purchase Agreement (as defined below) and the Noteholders exchanged their 20112017 Notes for new 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 the same aggregate principal amount (collectively, theborrowings outstanding under three senior secured promissory notes (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,the following rates until the maturity date on March 30, 2033, with interest payable quarterly in arrears untilas 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 on March 30, 2033.date. Commencing with the delivery to the Noteholders of the financial statements for the fiscal year ending December 31, 2019, the Company is required to remit 50% of excess cash flow each year to the Noteholders to be applied as a principal reduction to the outstanding balance of the debt. The 2017 Notes


generally rank senior in right of payment to any existing or future subordinated indebtedness of the Credit Parties.Parties (as defined below).  The Company may at any time upon 30 days’ notice to the Noteholders redeem all or part of the 2017 Notes at a redemption price equal to 101% of the principal amount redeemed plus any accrued and unpaid interest thereon. The 2017 Notes were entered into on July 27, 2017 as a result of a refinancing of the Company’s then outstanding senior notes with the same aggregate principal amount through the execution of the Senior Secured Note Purchase Agreement, dated as of the same date (as amended, the “Note Purchase Agreement”), with Novation Holding, Inc., a wholly-owned subsidiary of the Company ("NHI") and HCS as guarantors (together with the Company, collectively, the “Credit Parties”).

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

The Note Purchase Agreement contains customary affirmative and negative covenants, including but not limited to certain financial covenants. Under the terms of the Amendment, the financial covenants have been waived until the quarter ending December 31, 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 obligations under the Note Purchase Agreement and the 2017 Notes. The Credit Parties entered into a Pledge and Security Agreement, dated as of the same date, pursuant to which each of the Credit Parties granted a first priority lien generally covering all of its assets, other than accounts receivable and inventory, for the benefit of the Noteholders, to secure the obligations under the Note Purchase Agreement and the 2017 Notes.

Under the terms of the Amendment, the Company 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 Notes 2 and 8the Company’s discussion in Note 6 to the consolidated financial statements for additional information regarding the Note Refinancing.Amendment.

1

Business

Our business includes the operationTable of HCS and the management of our other investments, as described below.Contents

HCS

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 (“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 25 CSB.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 CSB continues to grow.  The Georgia Association for CSB estimates that CSB in Georgia provided services to more than 173,000 people in 2010, a figure that grew to more than 188,000 people in 2016. In addition to providing outsourced employees to CSB,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.


Over the past 15 years, HCS has become the largest medical services outsource provider in Georgia, operating throughout the state. HCS has long-term relationships with its customers and has been providing services to several clients for more than 15 years. The services and positions provided to non-CSBthese clients are similar to the ones provided to CSB client.

Other Investments

Prior to 2016, 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. Residual securities consist of interest-only and overcollateralization bonds. Collectively, these securities are referred to as our retained mortgage securities.

clients.

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.


We expect to use profits from HCS along with, potentially, other funding sources to acquire other businesses or make investments.

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

other things, conduct of operations, and costs and payment for services. HCS is not directly regulated as a healthcare provider,
although the customers of HCS are highly regulated. Therefore, HCS complies with many of the regulations prescribed for its
customers.

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. Therefore, HCS also may be affected indirectly by reimbursement changes in government programs, particularly Medicare and Medicaid.

Employees


Employees


As of April 9, 2018,February 25, 2021, the Company employed 1,798 1,025full-time employees and 201388 part-time employees. None of the Company's employees are represented by a union or covered by a collective bargaining agreement.

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 500 Grand Boulevard,9229 Ward Parkway, Suite 201B,340, Kansas City, MO 6410664114 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 Annual Report on Form 10-K (this "Form 10-K").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 or viewed or obtained at the SEC Public Reference Room at 100 F Street, N.E., Washington, DC 20549.


www.sec.gov.

Item 1A. Risk Factors


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 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.


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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 1412 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.

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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 2017,2020, we incurredhad a net loss of $10.9 million and$9.2 million. We also generated negative operating cashflowcash flow of $8.7$0.7 million. As of December 31, 2017,2020, we had an overall shareholders deficit of $57.9$81.1 million. As of December 31, 2017,2020, we had an aggregate of $2.7$1.3 million in cash and cash equivalents and total liabilities of $97.7$93.3 million. Of the $2.7$1.3 million in cash, $1.1$0.3 million was held by our subsidiary NMLLC, which has filed a Chapter 11 plan of reorganization that remains subject to court approval.NMLLC.  This cash is not available only to pay general creditors and expenses of NMLLC. The

From January 2019 through August 2019, the Company also hashad a significant on-going obligation to pay interest under its senior note agreement. In addition, beginningagreements at LIBOR plus 3.5% per annum, payable quarterly in 2018 a significant customer significantly reducedarrears until maturity on March 30, 2033. The Company was successful in amending the levelsenior note agreements to lower the interest rate and receive future credit for cash interest payments made in 2019 in exchange for the issuance of staff outsourced to HCS.


Atcommon stock and warrants. Based on the timeterms of the Company's filing of its Quarterly Reportamendment, the Company is not required to make cash interest payments on Form 10-Q for the quarter ended September 30, 2017, management concluded that substantial doubt existed about the Company's ability to continue as a going concernsenior notes from August 2019 through March 2022. There is no cash interest payment due within one year afterfrom the date thatof the consolidated financial statements were issued. Management’s assessment was based on the expected negative impact on cash flow related to the loss of a significant customer of HCS. In addition, management was unsure of its ability to generate cash flow through other means, such as selling the Company's marketable securities at acceptable prices and uncertainty as to whether the Company could efficiently transfer the securities and receive cash proceeds in order to meet obligations as they come due.

Subsequent to that filing and subsequent to year end, the Company engaged a major investment firm to evaluate the marketplace for its mortgage securities. Management learned during that process that a market exists for the Company’s mortgage securities and that those securities may be sold at prices acceptable to the Company. The Company executed trades to sell a portion of its overcollateralization mortgage securities. These sales are expected to generate $2.9 million in cash proceeds for the Company. Management believes that other mortgage securities may be sold on similar terms in the event additional cash proceeds are needed. In addition, through the date of this filing, HCS has demonstrated that it can provide


positive cash flow sufficient to support HCS operations. statements.

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

costs, both at HCS and at the corporate level.


While ourOur historical operating results and poor cashflowcash flow suggest substantial doubt exists related to the Company’s ability to continue as a going concern, management has concludedconcern. Furthermore, there is still significant uncertainty regarding the future impact that COVID-19 will have on our business. Based on these uncertainties, there is no guarantee the factors discussed aboveCompany's cash position will cover current obligations. As a result, we have alleviatednot been able to alleviate the substantial doubt about the Company's ability to continue as a going concern withinfor at least one year after the date that these consolidated financial statements are issued.


We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term. Additionally, we cannot be certain that we will be successful at raising capital whether from divesting of mortgage securities or other assets, or from equity or debt financing, on commercially reasonable terms, if at all.in the future. Such failures would have a material adverse effect on our business, including the possible cessation of operations.

We found material weaknesses in our disclosure controls and procedures and internal control over financial reporting and concluded that they were not effective as ofDecember 31, 2017.2020.

As disclosed in Part II, Item 9. Controls and Procedures of this Form 10-K, our chief executive chairmanofficer and chief financial officer, with the participation of the Company’s management, concluded that our disclosure controls and procedures and internal controls over financial reporting were not effective as of December 31, 20172020 due to the lack of adequate processes, procedures and controls at HCS. Our failure to successfully remediate these material weaknesses could cause us to fail to meet our reporting obligations and to produce timely and reliable financial information. Additionally, such failure could cause investors to lose confidence in our public disclosures, which could have a negative impact on our stock price. For a discussion of these material weaknesses and our remediation efforts, please see Part II, Item 9. Controls and Procedures of this Form 10-K.


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Our ability to use our net operating loss carryforwards and net unrealized built-in losses could be severely limited.


As of December 31, 2017,2020, we had federal net operating losses ("NOLs") of approximately $692.0approximately $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”). Our NOL Rights Plan expires on July 23, 2018. We intend to ask the shareholders to voteShareholders voted to extend the NOL Rights Plan through July 20, 2021 at the Company's next2018 annual meeting of shareholders.


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


On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (“2017 Tax Act”), which contains substantial changes to the Code. The 2017 Tax Act, among other things, reduces the federal corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limits the tax deduction for interest expense to 30% of adjusted earnings, eliminates NOL carrybacks, limits the deductibility of loss carryforwards to 80% of current-year taxable income, and modifies or repeals many business deductions and credits. The tax rate reduction took effect on January 1, 2018. The lower tax rate and other new limits on the recognition of tax loss carryforwards have also reduced the value of existing NOL carryforwards and other tax assets. See Note 12 to our consolidated financial statements. There was no net effect of the tax reform enactment on the consolidated financial


statements as of December 31, 2017. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected. We continue to examine the impact these changes may have on our deferred tax assets and our business.

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


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

incur indebtedness;

create certain liens;

make payments to our shareholders;

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

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

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


There can be no assurance that we will be able to receive the consent of the Noteholders should we have a need to take one of the restricted actions, which 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 key members of management could have a material adverse effect on our business, financial condition and results of operations. We may not be able to retain our existing senior management, fill new positions or vacancies created by expansion or turnover or attract additional qualified senior management personnel.


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

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

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

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

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


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.


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Risks Related to our Capital Stock


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


Our common stock currently trades on the OTC Pink marketplace of the OTC Markets Group, Inc.Pink. Trading of securities on this quotation service is generally limited and is 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;

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

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

additions or departures of senior management and key personnel; and

actions by institutional shareholders.


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


Certain provisions of our charter, bylaws, Maryland law, and our NOL Rights Plan could discourage, delay or prevent transactions that involve an actual or threatened change in control, and may make it more difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders. Under our charter, generally a director may only be removed for cause and only by the affirmative vote of the holders of at least a majority of all classes of shares entitled to vote in the election for directors together as a single class. Maryland law provides protection for Maryland corporations against unsolicited takeover situations. Further, our charter includes provisions designed to protect the tax benefits of our NOLs by generally restricting any direct or indirect transfers of our common stock that increase the direct or indirect ownership of our common stock by any person from less than 4.99% to 4.99% or more, or increase the percentage of our common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of our common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions will be void as of the date of the prohibited transfer as to the purported transferee. These transfer restrictions expireexpired 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. Our NOL Rights Plan expires on July 23, 2018. We intend to ask the shareholders to voteShareholders voted to extend the NOL Rights Plan through July 20, 2021 at the Company's next2018 annual meeting of shareholders.


Item 1B. Unresolved Staff Comments

None.



Item 2. Properties

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


Item 3. Legal Proceedings
 

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


On May 21, 2008, For a purported class action case was filed in the Supreme Courtdiscussion of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included NovaStar Mortgage Funding Corporation (“NMFC”) 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 removedmaterial legal proceedings, see Note 7 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 pending a decision on the objector’s request for a stay. Assuming the settlement is approved and completed, the Company will incur no loss. The Company believes that the affiliated defendants have meritorious defenses to the case and, if the settlement is not approved, expects them to defend the case vigorously.

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

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

See "Reorganization" in Part I, Item 1. Business of the Form 10-K and Note 2 to theour consolidated financial statements for a descriptionincluded in Part II, Item 8 of the Chapter 11 cases of Novation and the other Debtors.

this Annual Report on Form 10-K, which is incorporated herein by reference.

Item 4. Mine Safety Disclosures

None.

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PART II


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 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
2017    
First Quarter $0.18
 $0.03
Second Quarter 0.23
 0.12
Third Quarter 0.14
 0.09
Fourth Quarter 0.12
 0.06
     
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
     

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

         
  

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 April 9, 2018,February 25, 2021, we had approximately 705696 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 20172020 or 2016 2019,nor do we expect to declare any stock dividend distributions in the near future.Thefuture. The Note Purchase Agreement governing the Company's senior notes contains restrictive covenants which prohibit the Company and its subsidiaries, from among other things, making any cash dividend or distribution to Novation shareholders. Should the restrictions be relieved, any future determination to pay dividends will be made at the discretion of our Board and will depend on earnings, financial condition, cost of equity, investment opportunities and other factors as our Board may deem relevant.


Item 6. Selected Financial DataRemoved and Reserved

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Not applicable.



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

The following is a discussion and analysis of our financial condition and results of operations for the years ended December 31, 20172020 and 2016.2019. 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 ownpreviously owned a portfolio of mortgage securities which generategenerated earnings to support on-going financial obligations.obligations through the end of 2018. The mortgage securities were sold during 2018 for a total of $13.0 million. 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”.


See Part I, Item 1 of this Form 10-K for a discussion of recent events, includingour note refinancing, which occurred in the completionthird quarter of the HCS Acquisition2017, and the Note Refinancing, andnote amendment, which occurred in the effectivenessthird quarter of the Plan on July 27, 2017.


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 Results of Operations.”
  December 31,
  2017 2016
Cash and cash equivalents $2,740
 $4,805
Marketable securities $11,795
 $36,488
Net income (loss) available to common shareholders, per basic and diluted share $(0.12) $0.06

  

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 Ended December 31, 20172020 as Compared to the Year Ended December 31, 2016

2019

Service Fee Income and Cost of Services

HCS delivers outsourced full-time and part-time employees primarily to Community Service Boards (“CSBs”), quasi state organizations that provide behavioral health services at facilities across Georgia including mental health services, developmental disabilities programs and substance abuse treatments. The State of Georgia has a total of 25 CSBs. Each CSB has a number of facilities, including crisis centers, outpatient centers and 24-hour group homes that require a broad range of employees, such as registered nurses, social workers, house parents and supervisors. The CSB market in Georgia is large and growing steadily, as the demand for the services provided by the CSBs continues to grow. In addition to providing outsourced employees to CSBs, HCS also provides healthcare outsourcing and staffing services to hospitals, schools and a variety of privately owned businesses. The services and positions provided to non CSBnon-CSB clients are similar to the ones provided to CSB clients. The service fee income and costs of services in the consolidated statement of operations and comprehensive income (loss) during 2017 are from the operations of HCS.


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


During

A significant CSB customer terminated its contract services with HCS as of January 29, 2020. In addition, due to the fourth quarterrecent developments of 2017, HCS was notified that a customer would be significantly reducingCOVID-19, and the levelresulting reduction of programs and staff outsourcedutilized by CSBs, the Company has experienced an impact to HCS. The last pay period in 2017 was the final service period for these employees. This customer represented more than 20% of the Company's service fee income during 2017. While HCS has increased revenue from other sources and expects to continue adding new customers and adding revenue from existing customers, the Company does not expect to fully replace the lost revenuecost of services starting in the near term.


second quarter of 2020 and continuing through the end of 2020.

General and Administrative Expenses

General and administrative expenses consist of salaries, office costs, legal and professional expenses and other customary costs of corporate administration. The large increase in these expenses during 2017 results from the HCS AcquisitionDuring 2020 and the combination of HCS's expenses with those of Novation. During 2017, $2.82019, $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 20172020 and 20162019 were $3.9 $2.0 million and $4.4$2.1 million, respectively. The costs associated with the HCS Acquisition was the primary reason for the increase in corporate-level general and administrative expenses.




TheThe future amount of corporate-level general and administrative expenses will depend largely on corporate activities, professional fees associated with those 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 corporate-level staffing are the primary reasons for the decrease in general and administrative expenses incurred by HCS.

Goodwill Impairment Charge


As discussed above, during the fourth quarter of 2017, HCS was notified that a customer would be significantly reducing the level of staff outsourced to HCS. The last pay period in 2017 was the final service period for these employees. Accordingly, management

Management completed aits annual goodwill impairment assessment as of December 31, 2017, whichApril 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 flow for the business. In addition, COVID-19 concerns were attributable to a lay-off of staffed employees during the second quarter of 2020. Based on these factors, management determined that the carrying value of the HCS goodwill exceeded theits fair value by $4.5 million.


Interest Income – Mortgage Securities

Interest incomethe full amount recorded on our mortgage securities decreasedthe consolidated balance sheets of $3.9 million, as compared to approximately $3.1fair value adjustments totaling $4.3 million in 2017 from $5.12019. A goodwill impairment charge in this amount was recorded during the second quarter of 2020.

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Interest Expense

Interest expense decreased period over period, with the Company incurring $3.3 million in 2016. Fluctuations2020 and $4.5 million in2019. See "Liquidity and Capital Resources" below and Note 6 to the consolidated financial statements for a discussion of the Note Purchase Agreement and the 2017 Notes, which were amended on August 9, 2019. The Amendment, among other things, significantly reduced the interest income receivedrate applicable from our mortgage portfolio are typically due to factors beyondJanuary 2019 through the third quarter of 2028.

Income Tax Expense

Because of the Company's control, such as the performance of the underlying loan collateral, prepayment speeds, interest rates, etc. The Company expects interestsignificant net operating losses and full valuation allowance, income tax expense was not material for any period presented and cash flow from these securities to decline as the principal on the underlying loan collateral is paid, written down, or written off. However, the Company owns overcollateralization ("OC") mortgage securities that arenot expected to generate cash flow. These securities represent the excess of securitized mortgage loan collateral over mortgage bonds sold to third parties. When the third party bonds are fully repaid, the mortgage loan principal and interest payments will be paid to the Company as the owner of the OC bonds. The timing of receipt of these payments is unknown and depends on the timing of the mortgage loan principal and interest payments.


Other Income
The Company uses available cash to acquire various equity and fixed income securities as part of its strategy to generate taxable earnings. Other income consists primarily of the interest, dividend, and other income received from these securities. Fluctuations in the income received from these securities results from the timing of purchases/sales and amounts of dividends and interest paid. Subsequent to the HCS Acquisition, the Company has significantly less available funds to invest. Therefore,material for the foreseeable future, income related to investments is expected to be significantly lower than has been demonstrated through December 31, 2017.
  For the Year Ended December 31,
  2017 2016
Dividends and interest income $230
 $1,741
Gains on sales of investments 137
 3,672
Other (19) 59
     
Total $348
 $5,472


Reorganization items, net
The Company has incurred significant costs associated with our reorganization and the Chapter 11 proceedings, which are being expensed as incurred. In addition, during 2016, 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. Reorganization items include (in thousands):
 For the Year Ended December 31,
 2017 2016
Adjustments to deferred debt issuance costs and senior debt premium$—
 $2,399
Professional fees(3,460) (1,252)
Adjustments to other liabilities for claims made or rejected contracts(87) (449)
Other(34) (31)
Reorganization items, net$(3,581) $667



We expect these costs to decline significantly in 2018.

Interest Expense

Interest expense is comprised primarily of interest on our senior notes, which is variable based on 3-month LIBOR. Interest expense increased to $3.9 million in 2017 from $3.6 million in 2016. The increase in interest expense is a result of an increase in LIBOR.

future.

Liquidity and Capital Resources

During 2017,2020, the Company incurred ahad net loss of $10.9$9.2 million and generated negative operating cash flow of $8.7 million.$0.7 million. As of December 31, 20172020, the Company hashad an overall shareholders deficit of $57.9 million.$81.1 million. As of December 31, 2017,2020, the Company had an aggregate of $2.7$1.3 million in cash and cash equivalents and total liabilities of $97.7 million.$93.3 million. Of the $2.7$1.3 million in cash, $1.1 $0.3 million is held by the Company's subsidiary NMLLC, which has filed a Chapter 11 plan of reorganization that remains subject to court approval.NMLLC. This cash is only available to pay general creditors and expenses of NMLLC. The Company also has a significant on-going obligation to pay interest under its senior note agreement. In addition, beginning in 2018 a significant customer significantly reduced the level of staff outsourced to HCS.


On November 17, 2017, HCS entered into a Revolving Credit and Security Agreement, dated as of the same date (the “FNCC
Credit Agreement”), with Federal National Payables, Inc. (d/b/a Federal National Commercial Credit) (“FNCC”) providing HCS
with a line of credit of up to $5,000,000. Availability under the FNCC Credit Agreement is based on a formula tied to HCS’s
eligible accounts receivable, and borrowings under the FNCC Credit Agreement bear interest at the prime rate plus 1.25%. The
FNCC Credit Agreement also provides for customary origination and collateral monitoring fees payable to FNCC during its term.
The initial term of the FNCC Credit Agreement expires on November 17, 2018, but it will be renewed automatically for
consecutive one-year terms thereafter unless the FNCC Credit Agreement is terminated pursuant to its terms. The obligations
of HCS under the FNCC Credit Agreement are secured by HCS’s inventory and accounts receivable.

The FNCC Credit Agreement contains customary representations, warranties and affirmative and negative covenants, including
but not limited to financial covenants. The FNCC Credit 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, FNCC may, among other remedies, accelerate payment of all obligations under the FNCC
Credit Agreement. In connection with the FNCC Credit Agreement, the Company executed a guaranty in favor of FNCC
guaranteeing all of HCS’s obligations under the FNCC Credit Agreement.

At the time of the Company's filing of its Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, management concluded that substantial doubt existed about the Company's ability to continue as a going concern within one year after the date that the consolidated financial statements were issued. Management’s assessment was based on the expected negative impact on cash flow related to the loss of a significant customer of HCS. In addition, management was unsure of its ability to generate cash flow through other means, such as selling the Company's marketable securities at acceptable prices and uncertainty as to whether the Company could efficiently transfer the securities and receive cash proceeds in order to meet obligations as they come due.

Subsequent to that filing and subsequent to year end, the Company engaged a major investment firm to evaluate the marketplace for its mortgage securities. Management learned during that process that a market exists for the Company’s mortgage securities and that those securities may be sold at prices acceptable to the Company. The Company executed trades to sell a portion of its overcollateralization mortgage securities. These sales are expected to generate $2.9 million in cash proceeds for the Company. Management believes that other mortgage securities may be sold on similar terms in the event additional cash proceeds are needed. In addition, through the date of this filing, HCS has demonstrated that it can provide positive cash flow sufficient to support HCS operations.

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 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 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.

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, managementthere is exploring cost cutting initiatives that will reduce overall corporate overheadstill 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 operating costs.


While our historical operating results and poor cashflow suggestnegative cash flow, substantial doubt exists related to the Company’s ability to continue as a going concern, management has concluded that the factors discussed above have alleviated the substantial doubt about the Company's ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.



concern.

Overview of Cash Flow for the Year Ended December 31, 2017

2020

The following table provides a summary of our operating, investing and financing cash flows as taken from our consolidated statements of cash flows for 2017the years ended December 31, 2020 and 20162019 (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)
Operating Activities
 For the Year Ended
December 31,
 2017 2016
Consolidated Statements of Cash Flows:   
Cash flows (used in) provided by operating activities of continuing operations$(9,621) $2,116
Cash flows provided by investing activities of continuing operations3,510
 1,591
Cash flows used in financing activities of continuing operations3,151
 (205)


Operating Activities
The decrease in net cash flows fromused in operating activities to approximately $9.6$0.7 million during 2020 from cash used in operating activities of $5.2 millionduring 2017 from approximately $2.1 million provided by operating activities during 20162019 was driven primarily by the Company's decrease in net loss, along with a decrease in and paydowns of accounts receivable. Another contributor is the paymentreduction of interest onpayments in 2020 resulting from the 2017 Notes andamendment of the Company's unpaid accounts payable and accrued expenses, primarily accrued professional fees.senior note agreements, effective August 9, 2019.

Investing Activities

The increasedecrease in the net cash flows provided byused in investing activities is due primarily to proceeds from the salereduction in purchases of marketable securities, less the investment by the Company in HCS.property and equipment.
 
Financing Activities
During 2017, HCS entered into
The decrease in cash used in financing activities is due to the FNCC Credit Agreement with FNCC providing HCS with apayoff of HCS’s line of credit of up to $5,000,000. Availability under the FNCC Credit Agreement is based on a formula tied to HCS’s eligible accounts receivable.in 2019. The Company’sCompany did not participate in any financing activities include the borrowings and payments under that credit facility during 2017.2020.

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Critical Accounting Estimates

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


Marketable Securities
Our marketable securities include corporate equity and debt instruments and other traditional liquid investments, such as agency mortgage-backed securities. In addition, they include beneficial interests in the mortgage securitizations we executed prior to 2008. These beneficial interests include interest-only mortgage securities, residual interests and over-collateralization bonds, collectively "retained mortgage securities."

The accounting estimates used in valuing the retained mortgage securities and determining their income recognition rate are “critical accounting estimates” because they can materially affect net income (loss) and shareholders’ equity. In order to determine value, we must forecast interest rates, mortgage principal payments, prepayments and loan default assumptions and when, or if, the servicer for the underlying mortgage loans will exercise optional redemption rights (the "call date"). Making these assumptions requires a large degree of judgment. The rate used to discount the projected cash flows is also critical in the valuation of our residual securities. Management’s best estimate of key assumptions, including credit losses, prepayment speeds, expected call dates, market discount rates and forward yield curves commensurate with the risks involved, are used in estimating future cash flows.

We use historical collateral performance data, market economic data and published forward yield curves when modeling future expected cash flows and establishing the rate of income recognized on our retained mortgage securities. At each reporting date, future expected cash flows to be received is forecasted based on the assumptions made. The fair value of the retained mortgage securities is estimated by discounting these cash flows. We have relied heavily on historical performance of non-prime mortgage loans, in general, to determine assumptions. However, market trends for housing prices, labor statistics and other economic


factors have consistently improved for several years. Sufficient time has passed to suggest that these trends are sustainable. Therefore, we are now relying more heavily on the specific performance of these loans in forecasting cash flow from our retained mortgage securities. To date, these specific loans have performed significantly better than non-prime loans in general. Better performance by the underlying mortgage securities generally results in more cash flow and higher values for our retained mortgage securities.

We believe the value of our residual securities is appropriate, but can provide no assurance that future changes in interest rates, prepayment and loss experience or changes in the market discount rate will not require material adjustments to the retained mortgage securities. See Note 10 to the consolidated financial statements for additional information on the estimates used in the valuation of our retained mortgage securities.

Impairment of Goodwill and Indefinite-Lived Intangible Assets


and Long-Lived Assets with Finite Lives

The values of indefinite-lived assets such as 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, theyindefinite-lived assets are tested on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce their fair value below carrying value.value and for long-lived purchased intangible assets this occurs whenever an event or circumstances indicate the carrying value of the asset may not be fully recoverable. If we determine the fair value of goodwill or trademarksthe asset is less than theirits 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 annual tests of goodwill and trademarks during the second quarter of each fiscal year.


Impairment of Long-Lived Assets with Finite Lives

The value of purchased intangible assets is 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 an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition. An impairment loss is measured by comparing the fair value of the asset to its carrying value. If we determine the fair value of an asset is less than the carrying value, an impairment loss is incurred. Impairment losses, if any, are reflected in operating income or loss in our consolidated statements of operations during the period incurred.

Income Taxes

In determining the amount of deferred tax assets to recognize in the consolidated financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. The income 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

Information regarding the impact of recently issued

No new accounting pronouncements is includedstandards were adopted in Note 3 to the consolidated financial statements.


2020.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk


Not applicable.

10

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Item 8. Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

NOVATION COMPANIES, INC. AND SUBSIDIARIES


Report of Independent Registered Public Accounting Firm

1812

Consolidated Balance Sheets

1914

Consolidated Statements of Operations and Comprehensive Income (Loss)Loss

2015

Consolidated Statements of Shareholders' Deficit

2016

Consolidated Statements of Cash Flow

2217

Notes to Consolidated Financial Statements

2418

11

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Novation Companies, Inc.


Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Novation Companies, Inc. (the Company) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of operations and comprehensive income (loss), shareholdersshareholders' deficit, and cash flows for each of the years in the two-yeartwo year period ended December 31, 2017,2020, 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 as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the two-yeartwo year period ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America.

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

The accompanying consolidated financial statements 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 matter

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the 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, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.

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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (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 which they relate.

Valuation of Intangible Assets and Goodwill

Description of the Matter:

As disclosed in Notes 2 and 4 to the consolidated financial statements, the Company's intangible assets totaled $4.7 million at December 31, 2020 and goodwill was impaired by $3.9 million to its fair value of $0 during the second quarter of 2020. As disclosed in Note 2 to the consolidated financial statements, indefinite-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 be recoverable. The Company determined that the onset of the COVID-19 pandemic and its negative effect on its service fee income was a triggering event that required an assessment of impairment for its finite-lived intangible assets.

12

Table of Contents


Auditing the valuation of the Company's intangible assets and goodwill was highly judgmental due to the significant estimation required to determine the fair value of these assets as a result of the Company's current operating performance and the current industry and economic environment in which the Company operates. The Company's estimate of fair value for intangible assets and goodwill required significant judgment to estimate the impact of the decline in service fee income and profitability, industry trends, economic condition, including the impact of COVID-19, on future operating results and the future cash flows expected to be generated.

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/ BOULAY PLLP

We have served as the Company's auditor since 2016.

Minneapolis, Minnesota

March 4, 2021

13
April 10, 2018
Table of Contents



NOVATION COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

  

December 31, 2020

  

December 31, 2019

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $1,340  $2,032 

Accounts and unbilled receivables

  5,008   6,583 

Prepaid expenses

  663   647 

Other

  53   21 

Total current assets

  7,064   9,283 

Non-current assets:

        

Goodwill

  —   3,905 

Intangible assets, net

  4,677   5,784 

Property and equipment, net

  92   125 

Operating lease right-of-use asset

  339   316 

Other

  4   4 

Total non-current assets

  5,112   10,134 

Total assets

 $12,176  $19,417 
         

Liabilities and Shareholders' Deficit

        

Current liabilities:

        

Accounts payable and accrued expenses

 $315  $524 

Accrued compensation and benefits payable

  2,176   2,717 

Health and wellness program liability

  —   492 

Operating lease liability

  195   205 

Accrued claim settlements

  246   246 

Other

  4   36 

Total current liabilities

  2,936   4,220 
         

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

  90,115   86,824 

Accrued claim settlements

  62   307 

Operating lease liability

  153   125 

Total non-current liabilities

  90,330   87,256 

Total liabilities

  93,266   91,476 
         

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

  1,146   1,123 

Additional paid-in capital

  746,227   746,112 

Accumulated deficit

  (828,463)  (819,294)

Total shareholders' deficit

  (81,090)  (72,059)

Total liabilities and shareholders' deficit

 $12,176  $19,417 
 December 31,
 2017 2016
Assets   
Current Assets   
Cash and cash equivalents$2,740
 $4,805
Accounts and unbilled receivables7,922
 —
Marketable securities11,795
 9,943
Other current assets578
 1,091
Total current assets23,035
 15,839
Non-Current Assets   
Goodwill8,205
 —
Intangible assets, net8,172
 —
Marketable securities—
 26,545
Other425
 246
Total non-current assets16,802
 26,791
Total assets$39,837
 $42,630
    
Liabilities and Shareholders' Deficit   
Liabilities:   
Current Liabilities   
Borrowings under revolving line of credit$3,333
 $—
Accrued compensation and benefits payable4,213
 75
Accrued professional fees payable1,037
 691
Accrued interest payable1,050
 3,689
Other1,650
 1,063
Total current liabilities11,283
 5,518
Non-Current Liabilities   
Long-term debt86,050
 85,938
Other386
 373
Total non-current liabilities86,436
 86,311
Total liabilities97,719
 91,829
    
Commitments and contingencies

 

    
Shareholders' Deficit:   
Capital stock, $0.01 par value per share, 120,000,000 shares authorized:   
Common stock, 97,138,750 and 92,844,907shares issued and outstanding as of December 31, 2017 and 2016, respectively971
 928
Additional paid-in capital744,937
 744,873
Accumulated deficit(815,184) (804,319)
Accumulated other comprehensive income11,394
 9,319
Total shareholders' deficit(57,882) (49,199)
Total liabilities and shareholders' deficit$39,837
 $42,630
    

See notes to consolidated financial statements.

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NOVATION COMPANIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

LOSS

(in thousands, except share and per share amounts)

  

For the Years Ended December 31,

 
  

2020

  

2019

 

Service fee income

 $51,354  $63,474 

Cost and expenses:

        

Cost of services

  45,819   56,483 

General and administrative expenses

  7,503   8,345 

Goodwill impairment charge

  3,905   4,300 

Operating loss

  (5,873)  (5,654)
         

Other income

  43   39 

Interest expense

  (3,311)  (4,522)

Reorganization items, net

  —   (63)
         

Loss before income taxes

  (9,141)  (10,200)

Income tax expense

  28   25 

Net loss

  (9,169)  (10,225)
         

Other comprehensive income:

        

Unrealized gains on marketable securities

  —   1 

Total other comprehensive income

  —   1 

Total comprehensive loss

 $(9,169) $(10,224)
         

Loss per share:

        

Basic

 $(0.08) $(0.10)

Diluted

 $(0.08) $(0.10)

Weighted average common shares outstanding:

        

Basic

  111,045,292   100,472,515 

Diluted

  111,045,292   100,472,515 
 For the Year Ended
December 31,
 2017 2016
Service fee income$27,965
 $—
Cost and expenses:   
Cost of services24,473
 —
General and administrative6,713
 4,367
Goodwill impairment charge4,500
 —
Operating loss(7,721) (4,367)
    
Interest income – mortgage securities3,143
 5,060
Other income (expense)348
 5,472
Reorganization items, net(3,581) 667
Interest expense(3,935) (3,606)
    
Income (loss) from continuing operations before income taxes(11,746) 3,226
Income tax expense (benefit)14
 (21)
Net income (loss) from continuing operations(11,760) 3,247
Income from discontinued operations, net of income taxes895
 1,966
Net income (loss)(10,865) 5,213
    
Other comprehensive income:   
Less reclassification gain included in net income

(137) (3,672)
Change in unrealized gain (loss) on marketable securities2,212
 11,555
Other comprehensive income (loss)2,075
 7,883
Net comprehensive income (loss)$(8,790) $13,096
    
Earnings (loss) per common share:   
Basic$(0.12) $0.06
Diluted$(0.12) $0.06
Weighted average basic common shares outstanding92,800,392
 91,905,941
Weighted average diluted common shares outstanding92,800,392
 91,905,941




NOVATION COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(in thousands)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Deficit
Balance, December 31, 2016$928
 $744,873
 $(804,319) $9,319
 $(49,199)
Issuance of nonvested shares43
 (43) —
 —
 —
Compensation recognized under stock compensation plans—
 107
 —
 —
 107
Net loss—
 —
 (10,865) —
 (10,865)
Other comprehensive income—
 —
 —
 2,075
 2,075
Balance, December 31, 2017$971
 $744,937
 $(815,184) $11,394
 $(57,882)

Balance, December 31, 2015$928
 $744,575
 $(809,532) $1,436
 $(62,593)
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)
          
See notes to consolidated financial statements.         



NOVATION COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 For the Year Ended
December 31,
 2017 2016
Cash flows from operating activities:   
Net income (loss)$(10,865) $5,213
Income from discontinued operations, net of income taxes895
 1,966
Net income (loss) from continuing operations(11,760) 3,247
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:   
Goodwill impairment charge4,500
 —
Gains on sales of marketable securities, net(137) (3,672)
Accretion of marketable securities, net58
 16
Adjustments to and amortization of deferred debt issuance costs and senior debt discount—
 (2,447)
Compensation recognized under stock compensation plans107
 274
Amortization of intangible assets496
 —
Changes in operating assets and liabilities, net of acquisition:   
Accounts receivable(457) —
Accrued professional fees payable346
 315
Accrued compensation and benefits payable(613) (200)
Accrued interest payable(2,639) 3,687
Due from discontinued operations—
 (26)
Other current assets and liabilities, net63
 329
Other noncurrent assets and liabilities, net415
 593
Net cash provided by (used in) operating activities of continuing operations(9,621) 2,116
Net cash provided by (used in) operating activities of discontinued operations895
 (1,921)
Net cash provided by (used in) operating activities(8,726) 195
    
Cash flows from investing activities:   
Proceeds from sales and maturities of marketable securities26,847
 33,468
Purchase of business, net of cash received(23,337) —
Proceeds from sale of subsidiary—
 7,643
Purchases of available for sale securities—
 (39,520)
Net cash provided by investing activities of continuing operations3,510
 1,591
Net cash used in investing activities of discontinued operations—
 (159)
Net cash provided by investing activities3,510
 1,432
    
Cash flows from financing activities:   
Borrowings under revolving line of credit10,043
 —
Repayments of borrowings under revolving line of credit(6,710) —
Paydowns of long-term debt(182) —
Cash receipts from distributions of earnings from discontinued operations—
 (205)
Net cash used in financing activities of continuing operations3,151
 (205)
Net cash provided by financing activities of discontinued operations—
 205
Net cash provided by financing activities3,151
 —
Net increase (decrease) in cash and cash equivalents(2,065) 1,627
Cash and cash equivalents, beginning of period4,805
 3,178
Cash and cash equivalents, end of period$2,740
 $4,805
    
    
    
    


 For the Year Ended
December 31,
 2017 2016
Supplemental disclosure of cash flow information:   
Cash paid for reorganization items$4,501
 $902
Cash paid for interest$6,557
 $—
Cash income taxes paid, net$—
 (17)
    
Supplemental disclosure of financing and investing activities:   
Assets acquired and liabilities assumed in connection with purchase of business:   
Cash and cash equivalents$246
 $—
Accounts receivable7,465
 —
Other current assets59
 —
Other assets581
 —
Intangible assets8,669
 —
Goodwill12,705
 —
Accrued compensation and benefits(4,751) —
Long-term debt, including current portion of $426(683) —
Other current liabilities(708) —
Purchase price$23,583
 $—

See notes to consolidated financial statements.

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NOVATION COMPANIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(in thousands)


  

Common
Stock

  

Additional
Paid-in
Capital

  

Accumulated
Deficit

  

Accumulated
Other
Comprehensive
Income

  

Total
Shareholders’
Deficit

 

Balance, December 31, 2019

 $1,123  $746,112  $(819,294) $—  $(72,059)

Issuances of nonvested stock

  23   (23)  —   —   — 

Compensation recognized under stock compensation plans

  —   138   —   —   138 

Net loss

  —   —   (9,169)  —   (9,169)

Balance, December 31, 2020

 $1,146  $746,227  $(828,463) $—  $(81,090)


  

Common
Stock

  

Additional
Paid-in
Capital

  

Accumulated
Deficit

  

Accumulated
Other
Comprehensive
Income

  

Total
Shareholders’
Deficit

 

Balance, December 31, 2018

 $991  $745,104  $(809,050) $(1) $(62,956)

Issuances and cancellations of nonvested stock, net

  42   (42)  —   —   — 

Common stock granted in debt restructure

  90   (90)  —   —   — 

Common stock and common stock warrants granted in debt restructure

  —   916   —   —   916 

Compensation recognized under stock compensation plans

  —   224   —   —   224 

Net loss

  —   —   (10,225)  —   (10,225)

Adjustment to retained earnings for adoption of accounting standard

  —   —   (19)  —   (19)

Other comprehensive income

  —   —   —   1   1 

Balance, December 31, 2019

 $1,123  $746,112  $(819,294) $—  $(72,059)

See notes to consolidated financial statements.

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NOVATION COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

  

For the Years Ended December 31,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net loss

 $(9,169) $(10,225)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Amortization of intangible assets

  1,107   1,194 

Amortization of debt premium and prepaid interest into interest expense

  3,291   1,262 

Depreciation expense

  48   27 

(Gain) loss on disposal of fixed assets

  —   9 

Lease expense

  (5)  (5)

Goodwill impairment

  3,905   4,300 

Compensation recognized under stock compensation plans

  138   224 

Changes in operating assets and liabilities:

        

Accounts and unbilled receivables

  1,575   (461)

Accounts payable and accrued expenses

  (209)  (146)

Accrued compensation and benefits payable

  (541)  (14)

Accrued health and wellness program payable

  (492)  492 

Accrued interest payable

  —   (754)

Accrued claim settlements

  (245)  (459)

Other current assets and liabilities, net

  (80)  (186)

Other noncurrent assets and liabilities, net

  —   (426)

Net cash used in operating activities

  (677)  (5,168)
         

Cash flows from investing activities:

        

Purchases of property and equipment

  (15)  (96)

Proceeds from sale of property and equipment

  —   26 

Net cash used in investing activities

  (15)  (70)
         

Cash flows from financing activities:

        

Borrowings under revolving line of credit

  —   8,685 

Repayments of borrowings under revolving line of credit

  —   (10,633)

Paydowns of long-term debt

  —   (31)

Net cash used in financing activities

  —   (1,979)
         

Net decrease in cash and cash equivalents

  (692)  (7,217)

Cash and cash equivalents, beginning of period

  2,032   9,249 

Cash and cash equivalents, end of period

 $1,340  $2,032 
         
         

Supplemental disclosure of cash flow information:

        

Cash paid for interest

 $21  $4,030 

Cash paid for income taxes, net

 $45  $30 
         

Supplemental disclosure of non-cash investing and financing activities:

        

Issuance of common stock in restructure of debt (Note 6)

 $—  $311 

Issuance of common stock warrants in restructure of debt (Note 6)

 $—  $605 

See notes to consolidated financial statements.

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Table of Contents

NOVATION COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Basis of Presentation, Business Plan and Liquidity


Description of Operations – Novation Companies, Inc. and its subsidiaries (the “Company,” “Novation,” “we,” or “us”), through Healthcare Staffing, Inc. ("HCS"), our wholly-owned subsidiary acquired on July 27, 2017, provides outsourced health care staffing and related services in the State of Georgia. 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”.


Liquidity and Going Concern – During 2017,2020, the Company incurred a net loss of $10.9$9.2 million and generated negative operating cashflowcash flow of $8.7$0.7 million. As of December 31, 20172020, the Company has an overall shareholders deficit of $57.9 million. As of December 31, 2017 the Company had$81.1 million, an aggregate of $2.7$1.3 million in cash and cash equivalents and total liabilities of $97.7$93.3 million. Of the $2.7$1.3 million in cash, $1.1$0.3 million is held by the Company's subsidiary NovaStar Mortgage LLC ("NMLLC"), which has filed a Chapter 11 plan of reorganization that remains subject to court approval.. This cash is available only to pay only general creditors and expenses of NMLLC. The

Prior to executing the Amendment with the Noteholders in August 2019 (Note 6), the Company also hashad a significant on-going obligation to pay interest under its senior note agreement. In addition, beginningagreements at LIBOR plus 3.5% per annum, payable quarterly in 2018arrears until maturity on March 30, 2033, leading to a significant customer significantly reduced the level of staff outsourcedannual cash outflow. HCS has also experienced lower than anticipated cash flows in general due to HCS.


At the time of the Company's filing of its Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, management concluded thatincreased costs and a decrease in business from certain customers. These items initially led to substantial doubt existed about the Company's ability to continue as a going concern within one year after the date that the consolidated financial statements were issued. Management’s assessment was based on the expected negative impact on cash flow related to the loss of a significant customer of HCS. In addition, management was unsure of its ability to generate cash flow through other means, such as selling the Company's marketable securities at acceptable prices and uncertainty as to whether the Company could efficiently transfer the securities and receive cash proceeds in order to meet obligations as they come due.

Subsequent to that filing and subsequent to year end, the Company engaged a major investment firm to evaluate the marketplace for its mortgage securities. Management learned during that process that a market exists for the Company’s mortgage securities and that those securities may be sold at prices acceptable to the Company. The Company executed trades to sell a portion of its overcollateralization mortgage securities. These sales are expected to generate $2.9 million in cash proceeds for the Company. Management believes that other mortgage securities may be sold on similar terms in the event additional cash proceeds are needed. In addition, through the date of this filing, HCS has demonstrated that it can provide positive cash flow sufficient to support HCS operations. concern.

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 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 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.

In late March 2020, HCS started experiencing a reduction in CSB customer needs related to the COVID-19 pandemic. 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, managementthere is exploring cost cutting initiatives that will reduce overall corporate overhead and operating costs.


Whilestill concern at the Company about the ongoing effects of COVID-19 on our services for the foreseeable future.

Our historical operating results and poor cashflownegative cash flow suggest substantial doubt exists related to the Company’sCompany's ability to continue as a going concern, management has concludedconcern. Furthermore, there is still significant uncertainty regarding the future impact that COVID-19 will have on our business. Based on these uncertainties, there is no guarantee the factors discussed aboveCompany's cash position will cover current obligations. As a result, we have alleviatednot been able to alleviate the substantial doubt about the Company's ability to continue as a going concern withinfor at least one year after the date that these condensed consolidated financial statements are issued. The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.


We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term. Additionally, we cannot be certain that we will be successful at raising capital, whether from divesting of mortgage securities or other assets, or from equity or debt financing, on commercially reasonable terms, if at all. Such failures would have a material adverse effect on our business, including the possible cessation of operations.

Financial Statement Presentation. The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expense during the period. The Company uses estimates and judgments in establishing the fair value of its mortgage securities, assessing the recoverability of goodwill intangibleits long-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.


Note 2. Reorganization

On July 20, 2016, (the "Bankruptcy Petition Date"), Novation and three of its subsidiaries, NMLLC, NovaStar Mortgage Funding Corporation and 2114 Central LLC (collectively, the “Debtors”), filed voluntary petitions (the "Bankruptcy Petitions") for reorganization under Chapter 11 Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy


Court for the District of Maryland (the "Bankruptcy Court"). 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 would occur when all conditions precedent to effectiveness, as set forth in the Plan, had 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 4 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 (the “Indentures”), between the Company and The Bank of New York Mellon Trust Company, National Association. The HCS Acquisitionestimates, and the Note Refinancing were completed on July 27, 2017, and are discussed in Note 4 and Note 8, respectively.amounts could be material.


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) retained their interests.

On September 25, 2017, the bankruptcy case of 2114 Central, LLC was dismissed by order of the Bankruptcy Court. Thereafter, on December 22, 2017, NMLLC filed with the Bankruptcy Court a Chapter 11 plan of reorganization, and on December 26, 2017 filed a related disclosure statement. The Bankruptcy Court entered an order on February 16, 2018 approving the disclosure statement, as revised. The Bankruptcy Court will conduct a hearing on April 11, 2018 to consider confirmation of NMLLC’s plan of reorganization.

We incurred significant costs associated with our reorganization and the Chapter 11 proceedings. These costs, which are being expensed as incurred, include (in thousands):
 Year Ended December 31,
 2017 2016
Adjustments to deferred debt issuance costs and senior debt premium$—
 $2,399
Professional fees(3,460) (1,252)
Adjustments to other liabilities for claims made or rejected contracts(87) (449)
Other(34) (31)
Reorganization items, net$(3,581) $667

Note 3.2. Summary of Significant Accounting and Reporting Policies


Recently Adopted Accounting Principles. In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment to eliminate a step in the quantitative goodwill impairment test. The new single quantitative step test requires companies to compare the fair value of a reporting unit with its carrying amount and record an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit. The Company will continue to have the option of first performing a qualitative assessment to determine whether it is necessary to complete the quantitative goodwill impairment test. The Company early adopted this guidance in the fourth quarter of 2017 by applying the single quantitative step test to our interim goodwill impairment analysis. See Note 7.

Cash and Cash Equivalents.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 four major financial institutions in the United States. Accounts are secured by the Federal Deposit Insurance Corporation up to $250,000. The uninsured balances of the Company’s unrestricted cash and cash equivalents accounts aggregated $2.0$0.8 million as of December 31, 2017.2020.


Accounts and Unbilled Receivables.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.


18

Marketable Securities – Available-for-Sale. Marketable securities are stated at fair value in accordance with the relevant accounting guidance. The Company determines the fair value
Table of its marketable securities based on pricing from our third party service provider 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, 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 estimate the fair value of the Company's mortgage securities are discussed further below.Contents

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 loans 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 the carrying basis of the mortgage security. The Company estimates the fair value of its residual securities retained based on the present value of future expected cash flows to be received, except for those securities for which a portion was sold subsequent to year end as discussed in Note 10. 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 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 Company uses the specific identification method in computing realized gains or losses.

Goodwill and Indefinite-Lived Intangible Assets.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 below carrying value. If we determine the fair value of goodwill or trademarks is less than their carrying value, an impairment loss is recognized. Impairment losses, if any, are reflected in operating income or loss in the period incurred. The Company performs its annual tests of goodwill and trademarks during the second quarter of each fiscal year.


Impairment of Long-Lived Intangible Assets with Finite Lives.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 an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition. An impairment loss is measured by comparing the fair value of the asset to its carrying value. If we determine the fair value of an asset is less than the carrying value, an impairment loss is incurred. Impairment losses, if any, are reflected in operating income or loss in the period incurred.


Revenue and Cost Recognition - The Company recognizes revenue when therecontrol of the promised services is persuasive evidencetransferred to customers and for the amount that reflects the consideration we are entitled to receive in exchange for those services. Furthermore, revenue is recognized at a point in time based on a fixed amount for each hour of an arrangement, thestaffing service has been 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 service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s customer fees forcontracts have a single performance obligation to transfer the individual services, and it is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Performance obligations are fixed or determinablesatisfied at the point in time the HCS employees work on behalf of the customer. Contract costs include compensation, benefits and collectability is reasonably assured. HCS'soverhead when appropriate. Because of the nature of the contracts and the fact that revenue is generated fromearned at the time and material contracts where there is a signed agreement in place that specifies the fixed hourly rate and other reimbursable costs to be billed based on direct labor hours incurred. Revenue is recognized on these contracts based on direct labor hours and reimbursable costs incurred.


During 2017, 43% of Service Fee employee works for the customer, no contract estimates are necessary.

Income was generated from two customers and 98% was generated from 16 Community Service Board ("CSB") customers. As of December 31, 2017, 48% of accounts and unbilled receivables were due from three customers and 97% was due from the 16 CSB customers.


Income Taxes.Taxes - The Company had a gross deferred tax asset of $164.7$168.8 million and $295.9$166.5 million as of December 31, 20172020 and 2016,2019, respectively. In determining the amount of deferred tax assets to recognize in the consolidated financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. The income tax guidance requires the recognition of a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Income tax guidance indicates the more likely than not threshold is a level of likelihood that is more than 50%.

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




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.

19

Table of Contents

Earnings (Loss) Per Share (“EPS”). - Basic EPS excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of 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 11 to the consolidated financial statements for additional details on earnings per share calculation.


New Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, which amended Revenue from Contracts with Customers (Topic 606). The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. With respect to public entities, this guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early application is not permitted.

Segments - The Company has evaluated it’s operations and determined the adoption of this guidance will have no material impact on the way revenue is recognized. Additional disclosure will be required in the footnotes to the consolidated financial statements.it has one reportable segment.


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in its balance sheet a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the impact this guidance will have on its consolidated financial statements.

Note 4. Acquisition and Divestiture


Acquisition 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, 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 was 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. We have made claims against Butler for a working capital adjustment, indemnification and other reimbursements and payments under the terms of the HCS Purchase Agreement and are in discussions with Butler regarding these claims. As of the date of this filing, the claims are unresolved and the Company has not recorded any amounts for these claims in the consolidated financial statements.

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 follows (in thousands):
Cash$246
Accounts receivable7,465
Other assets59
Property and equipment581
Intangible assets: 
Customer relationships6,895
Trademark1,147
Non-compete627
Goodwill12,705
Accrued compensation and benefits(4,751)
Long-term debt, including current portion of $426(683)
Other current liabilities(708)
Net assets acquired$23,583

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 certain assets and liabilities acquired.

The gross contractual amount of accounts receivable is $7.5 million, which approximates 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 amortization period for the intangibles for customer relationships and the non-compete agreement are seven and three years, respectively. The goodwill will be deductible for tax purposes.

HCS’s results are included in our consolidated statement of operations beginning July 27, 2017. The following unaudited pro forma financial information presents the combined results of HCS and Novation as if the HCS Acquisition had occurred on January 1, 2016 (in thousands). The unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually would have been or what results may be expected in the future.
 For the Year Ended December 31,
 2017 2016
Service fee income$63,246
 $55,161
Income (loss) from continuing operations$(9,331) $3,903
Net income (loss)$(8,450) $5,869
    
Basic and diluted earnings per share:   
Net income (loss) from continuing operations$(0.10) $0.04
Net income (loss)$(0.09) $0.06

Included in general and administrative expenses, primarily during 2017, are approximately $1.3 million in fees associated with the HCS Acquisition, including $0.9 million in investment advisor fees.



Sale of Corvisa LLC. Subject to the terms and conditions of the Membership Interest Purchase Agreement, dated as of December 21, 2015, by and among the Company, Corvisa Services, LLC ("Corvisa") and ShoreTel, Inc. ("Shoretel"), Shoretel agreed to purchase 100% of the membership interests of Corvisa, at the time a wholly-owned subsidiary of the Company. The sale closed on January 6, 2016. During the first quarter of 2017, the Company received $1.0 million from the release of the indemnification escrow which was recorded as a gain and included in discontinued operations during 2017.

Results of Discontinued Operations - The results of the Company's discontinued operations are summarized below (in thousands):
 For the Year Ended December 31,
 2017 2016
Recognition of gain upon release of indemnification escrow - Corvisa sale$1,020
 $—
Gain on sale of Corvisa—
 1,966
Expenses related to discontinued operations(125) —
Income from discontinued operations, net of income taxes$895
 $1,966

The assets and liabilities of discontinued operations are not material.

Note 5.3. 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 our customers benefit from our services and as we provide them.

Performance Obligations — A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company's customer contracts have a single performance obligation to transfer the individual goods or services, and it is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Performance obligations are satisfied at the point in time the HCS employees work on behalf of the 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 customer, no contract estimates are necessary.

Contract Balances — The timing of revenue recognition, billings and cash collections results in accounts receivable and unbilled receivables (the "contract assets"). The Company bills customers generally every other week based on the work 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.

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

 $50,054   97.5% $61,620   97.1%

Other

  1,300   2.5%  1,854   2.9%

Total

 $51,354   100.0% $63,474   100.0%

Accounts and unbilled receivables are summarized as follows, in thousands:


  

December 31, 2020

  

December 31, 2019

 

Accounts receivable

 $2,705  $4,083 

Unbilled receivables (Contract Assets)

  2,303   2,500 

Total accounts and unbilled receivables

 $5,008  $6,583 
 December 31, 2017 (in thousands)
Accounts receivable$5,418
Unbilled receivables2,504
  
 $7,922

As of December 31, 2017,2020 and December 31, 2019, management has determined no allowance for doubtful accounts is necessary.


For the years ended December 31, 2020
Note 6. Marketable Securities

The Company's portfolio and December 31, 2019, 63.3% and 63.1% of available-for-sale securities includes (dollars in thousands):
 Amortized Cost Gross Unrealized Estimated Fair Value
  Gains Losses 
As of December 31, 2017
Marketable securities, current       
Mortgage securities$400
 $11,394
 $—
 $11,794
Equity securities1
 —
 —
 1
Total$401
 $11,394
 $—
 $11,795
        
As of December 31, 2016
Marketable securities, current       
Mortgage securities$450
 $9,341
 $—
 $9,791
Equity securities112
 47
 (7) 152
Total$562
 $9,388
 $(7) $9,943
        
Marketable securities, non-current       
Agency mortgage-backed securities$26,607
 $—
 $(62) $26,545

See Note 10 for a discussion of the Company's fair value methods and measurements.



During 2017, the Company's entire portfolio of agency mortgage-backed securitiesservice fee income was sold. Proceedsgenerated from the sale were $25.2 million and a gain of $79 thousand recognized, included in other income in the Company's consolidated statements of operations and comprehensive income (loss).

Prior to 2016, 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.four customers. As of December 31, 20172020, 64.0% of accounts and 2016, these mortgage securities consisted entirelyunbilled receivables was due from four customers and 88.8% was due from 12 CSB customers. As of the Company's investment in the residual securities issued by securitization trusts sponsored by the Company. Residual securities consistDecember 31, 2019, 61.6% of interest-onlyaccounts and overcollateralization bonds. There were no other-than-temporary impairments relating to available-for-sale securities for 2017unbilled receivables was due from four customers and 2016. Maturities96.6% was due from 14 CSB customers.

20
Table of retained mortgage securities owned by the Company depend on repayment characteristics and experience of the underlying financial instruments. See Note 10 to the consolidated financial statements for details on the Company's fair value methodology.Contents


The following table relates to the securitizations where the Company retained an interest in the assets issued by the securitization trust (in thousands):
 Principal Outstanding (A) Assets on Balance Sheet (B) Liabilities on Balance Sheet Maximum Exposure to Loss(B) Year to Date Loss on Sale Year to Date Cash Flows
December 31, 2017$2,714,823
 $11,794
 $—
 $11,794
 $—
 $3,193
December 31, 2016$3,185,270
 $9,791
 $—
 $9,791
 $—
 $5,153
(A)    Principal Outstanding is the aggregate principal of the underlying loans held by the securitization trusts.
(B)    Assets on Balance Sheet and Maximum Exposure to Loss is the estimated fair value of securities issued by the entity and recorded as marketable securities, current in the consolidated balance sheets.


Note 7.4. 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

 $—  $—  $—  $3,905  $—  $3,905 

Tradenames

  1,147   —   1,147   1,147   —   1,147 
Total indefinite-lived assets $1,147  $—  $1,147  $5,052  $—  $5,052 
                         

Finite-lived assets (in thousands):

                        

Customer relationships

 $6,895  $3,365  $3,530  $6,895  $2,380  $4,515 

Non-compete agreement

  627   627   —   627   505   122 
Total finite-lived assets $7,522  $3,992  $3,530  $7,522  $2,885  $4,637 

Amortization expense (in thousands):

    

2019

 $1,194 

2020

  1,107 

Estimated future amortization expense (in thousands):

    

2021

 $985 

2022

  985 

2023

  985 

Thereafter

  575 

Total estimated amortization expense

 $3,530 

 

Years Ended December 31,

 
 

2020

 

2019

 

Goodwill activity (in thousands):

      

Beginning balance

$3,905 $8,205 

Impairment charge

 (3,905) (4,300)

Ending balance

$— $3,905 
 December 31, 2017 (in thousands)
 Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Indefinite-lived assets     
Goodwill$8,205
 $—
 $8,205
Tradenames1,147
 —
 1,147
 $9,352
 $—
 $9,352
      
Finite-lived assets     
Customer relationships6,895
 410
 6,485
Non-compete agreement627
 87
 540
 $7,522
 $497
 $7,025

 Year Ended December 31, 2017
Goodwill activity (in thousands): 
Balance, December 31, 2016$—
Goodwill recorded in connection with the HCS Acquisition12,705
Impairment charge(4,500)
  
Balance, December 31, 2017$8,205

During the fourth quarter of 2017, HCS was notified that a customer was significantly reducing the level of staff outsourced to HCS. The last pay period in 2017 was the final service period for these employees. This customer represented more than 20% of the Company's service fee income during 2017. Accordingly, management

Management completed aits annual goodwill impairment assessment as of December 31, 2017,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 flow for the business. In addition, COVID-19 concerns were attributable to a lay-off of staffed employees starting in the second quarter of 2020. Based on these factors, management determined that the carrying value of the HCS goodwill exceeded theits fair value by $4.5 million andthe full amount recorded aon the consolidated balance sheets of $3.9 million. A goodwill impairment charge forin this amount was recorded during the year ended December 31, 2017.second quarter of 2020. Management assessed the other indefinite and definite lived intangible assets and determined no impairment existed aswas necessary.

21
Table of December 31, 2017.Contents



Amortization expense (in thousands) 
2017$496
Estimated amortization expense (in thousands) 
20181,194
20191,194
20201,107
2021985
2022985
Thereafter1,560
Total estimated amortization expense$7,025

Note 8. Borrowings


Revolving Credit Agreement. As5. Leases

Our leases consist primarily of December 31, 2017, HCS had $3.3 million outstanding under a Revolving Credit and Security Agreement (the “FNCC Credit Agreement”) between HCS and Federal National Payables, Inc. (d/b/a Federal National Commercial Credit) (“FNCC”) providing HCSoffice space. Leases with a line of credit of up to $5,000,000. Availability under the FNCC Credit Agreement is based on a formula tied to HCS’s eligible accounts receivable. Borrowings, and borrowings under the FNCC Credit Agreement bear interest at the prime rate plus 1.25%. The FNCC Credit Agreement also provides for customary origination and collateral monitoring fees payable to FNCC during its term. Thean initial term of 12 months or less, and leases which are on a month-to-month basis, are not recorded on the FNCC Credit Agreement expiresbalance sheet.  For these leases we recognize lease expense on November 17, 2018, but it will be renewed automatically for consecutive one-yeara straight-line basis over the lease term. The Company does not have any finance leases.

Most leases include one or more options to renew, with renewal terms thereafter unlessthat can extend the FNCC Credit Agreementlease term from one to three years or more. The exercise of lease renewal options is

terminated pursuant to its terms. The obligations of HCS under the FNCC Credit Agreement are secured by HCS’s inventory
and accounts receivable.

The FNCC Credit Agreement contains customary representations, warranties and affirmative and negative covenants, including but at our discretion. Our lease agreements do not limited to financialcontain any variable lease payments, residual value guarantees or restrictive covenants. The FNCC Credit Agreement also contains customary eventscomponents of default, including butlease expense for the twelve months ended December 31, 2020 were immaterial. As our leases do not limitedprovide an implicit interest rate, we use our incremental current borrowing rate in determining the present value of lease payments.

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

  

December 31, 2020

 

2021

 $212 

2022

  88 

2023

  57 

Thereafter

  19 

Total

 $376 

Less interest

  28 

Present value of lease liabilities

 $348 

Other information related to payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, FNCC may, among other remedies, accelerate payment of all obligations under the FNCC Credit Agreement. In connection with the FNCC Credit Agreement, the Company executed a guaranty in favor of FNCC guaranteeing all of HCS’s obligations under the FNCC Credit Agreement.Company's operating leases was as follows (in thousands):

December31, 2020

Lease Term and Discount Rate:

Weighted average remaining lease term (years)

2.20

Weighted average discount rate

6.75%


Note 6. Borrowings

Note Refinancing and 2017 Notes.Prior to the third quarter of 2017,Notes — On August 9, 2019, the Company had outstanding three series of unsecured 2011 Notes pursuantand 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 three separate “Indentures” with an aggregate principal balance of $85.9 million. On July 27, 2017, the Company entered into a Senior Secured Note Purchase Agreement dated as(the “Amendment”) amending the terms 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 $85.9 million of principal indebtedness of the Company under the 2011 Notes. Pursuant to the Note Purchase Agreement (as defined below) and the Noteholders exchanged their 20112017 Notes for new 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 the same aggregate principal amount (collectively, theborrowings outstanding under three senior secured promissory notes (the “2017 Notes”) on the terms and conditions set forth therein.


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 $5.8 million, and paid $0.5 million in fees and expenses incurred by the Noteholders.

. The unpaid principal amounts of the 2017 Notes bear interest at a variable rate equal to LIBOR plus 3.5% per annum,the following rates until the maturity date on March 30, 2033, with interest payable quarterly in arrears untilas 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 on March 30, 2033.date. Commencing with the delivery to the Noteholders of the financial statements for the fiscal year ending December 31, 2019, the Company is required to remit 50% of excess cash flow each year to the Noteholders to be applied as a principal reduction to the outstanding balance of the debt. The 2017 Notes generally rank senior in right of payment to any existing or future subordinated indebtedness of the Credit Parties.Parties (as defined below). The Company may at any time upon 30 days’ notice to the Noteholders redeem all or part of the 2017 Notes at a redemption price equal to 101% of the principal amount redeemed plus any accrued and unpaid interest thereon.

The 2017 Notes were entered into on July 27, 2017 as a result of a refinancing of the Company’s then outstanding senior notes with the same aggregate principal amount through the execution of the Senior Secured Note Purchase Agreement, dated as of the same date (as amended, the “Note Purchase Agreement”), with Novation Holding, Inc., a wholly-owned subsidiary of the Company ("NHI") and HCS as guarantors (together with the Company, collectively, the “Credit Parties”).

On April 1, 2019 and on July 1, 2019, the Company made payments under the 2017 Notes totaling $2.6 million. The actual aggregate amounts due for those dates totaled $0.4 million. Under the terms of the Amendment, the Company is permitted to apply the payment surplus of $2.2 million against future quarterly interest payments. Therefore, the Company will not have another quarterly interest payment due until April 1, 2022. The Note Purchase Agreement contains customary affirmative and negative covenants, including but not limited to certain financial covenants. Under the terms of the Amendment, the financial covenants have been waived until the quarter ending December 31, 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 obligations under the Note Purchase Agreement and the 2017 Notes. The Credit Parties entered into a Pledge and Security Agreement, dated as of the same date, pursuant to which each of the Credit Parties granted a first priority lien generally covering all of its assets, other than accounts receivable and inventory, for the benefit of the Noteholders, to secure the obligations under the Note Purchase Agreement and the 2017 Notes.

22
Table of Contents


Property Financing. HCS financedUnder the acquisitionterms of property used in its operations under two separate financing agreements. The total amount financed under the agreements was $1.3 millionAmendment, 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. At the time of the Amendment, the outstanding principal balance of the notes were reduced by the fair value of the common stock and warrants issued by the Company, resulting in debt premium of $0.9 million, offset by accrued interest of $0.5 million. The Company will amortize the debt premium and prepaid interest over the amended term of the Note Purchase Agreement using the effective interest method. Under the effective interest method, significant changes in the rate at which a debt instrument accrues interest over its term can result in a recorded balance in excess of the aggregate nominal interest rateprincipal balance of 4.1%. the debt instrument.

The totalcarrying value of the 2017 Notes is as follows (in thousands):

  

December 31, 2020

  

December 31, 2019

 

Principal balance

 $85,938  $85,938 

Unamortized debt premium

  4,177   886 

Total, 2017 Notes

 $90,115  $86,824 



amount outstanding under these loans was $0.6 million as of December 31, 2017 of which $0.4 million was current and is included in other current liabilities.

Note 9.7. Commitments and Contingencies

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


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


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


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

23
Table of the impact of the Company's Chapter 11 case on these proceedings.Contents

On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included NovaStar Mortgage Funding Corporation (“NMFC”)NMFC and NovaStar Mortgage, Inc. ("NMI"), wholly-owned subsidiaries of the Company, and NMFC's individual directors, several securitization trusts sponsored by the Company (“affiliated defendants”) and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. The plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933, as amended, by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by the plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff's claims, which the court granted on March 31, 2011, with leave to amend. The plaintiff filed a second amended complaint on May 16, 2011, and the Company again filed a motion to dismiss. On March 29, 2012, the court dismissed the plaintiff's second amended complaint with prejudice and without leave to replead. The plaintiff filed an appeal. On March 1, 2013, the appellate court reversed the judgment of the lower court, which had dismissed the case. Also, the appellate court vacated the judgment of the lower court which had held that the plaintiff lacked standing, even as a class representative, to sue on behalf of investors in securities in which plaintiff had not invested, and the appellate court remanded the case back to the lower court for further proceedings. On April 23, 2013 the plaintiff filed its memorandum with the lower court seeking a reconsideration of the earlier dismissal of plaintiff's claims as to five offerings in which plaintiff was not invested, and on February 5, 2015 the lower court granted plaintiff's motion for reconsideration and vacated its earlier dismissal. On March 8, 2017, the affiliated defendants and all other parties executed an agreement to settle the action, with the contribution of the affiliated defendants to the settlement fund being paid by their insurance carriers. The court certified a settlement class and granted preliminary approval to the settlement on May 10, 2017.  One member of the settlement class objected to the settlement and sought a stay of the final settlement approval hearing on the ground that it did not receive notice of the settlement and had no opportunity to timely opt out of the class.  After the court



rejected the motion for a stay, the objector filed an appeal and requested a stay of the district court proceedings pending disposition of the appeal. The court of appeals denied the temporary stay of the district court proceedings pending a decision
and on October 19, 2018 dismissed the appeal as moot.  Following the court of appeals’ denial of the objector’s requestpetition for rehearing, the district court on March 7, 2019 held a stay. Assumingfairness hearing.  On March 8, 2019, the district court issued a memorandum and order approving the settlement is approvedas fair, reasonable and completed,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 objector replied on October 18, 2019.  Oral argument was held on February 19, 2020.  Assuming the settlement approval becomes final, which is expected, the Company will incur no loss. The Company believes that the affiliated defendantsAffiliated Defendants have meritorious defenses to the case and, if the settlement isapproval does not approved,become final, expects them to defend the case vigorously.

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


Court.

On February 28, 2013, the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and purportedly on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series 2007-1 (the “Trust”), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, County of New York County against the Company and NMI. The notice provides that this is a breach of contract action with respect to certain, unspecified mortgage loans and defendants'defendants’ failure to repurchase such loans under the applicable agreements. Plaintiff alleges that defendants, from the closing date of the transaction that created the Trust, were aware of the breach of the representations and warranties made and failed to give notice of and cure such breaches, and due to the failure of defendants to cure any breach, notice to defendants would have been futile. The summons with notice was not served until June 28, 2013. By letter dated June 24, 2013,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,

DB Structured Products, Inc., Deutsche Bank AG, Deutsche Bank National Trust Company, 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 a complaint 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; indemnification (indemnification against NMI only) and damages for breach of the implied covenant of good faith and fair dealing. On October 9, 2013, the Company 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. By a Decision/Order dated November 30, 2017, the court granted in part and denied in part the motion to dismiss the amended complaint. The court dismissed all claims except for plaintiff’s claim for damages for breachadditional $0.4 million.

24
Table of contract, to the extent that claim is based on the Company’s and NMI’s alleged failure to notify plaintiff of allegedly defective loans, and plaintiff’s claim for indemnification. The court denied the motion to dismiss these claims without prejudice to the Company’s and NMI’s right to file a new motion to dismiss in conformity with procedures to be established in coordinated proceedings before the court addressing similar claims against numerous defendants. Briefing of the indemnification issues is now underway. Given the stage of the litigation, the Company cannot provide an estimate of the range of any loss. The Company believes it has meritorious defenses to the case and expects to defend the case vigorously.Contents


Note 10.8. 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 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):
   Fair Value Measurements at Reporting Date Using
 Fair Value 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
December 31, 2017       
Marketable securities, current$11,795
 $1
 $—
—
$11,794
December 31, 2016       
Marketable securities, current$9,943
 $152
 $—
 $9,791
Marketable securities, non-current26,545
 26,545
 —
 —
 $36,488
 $26,697
 $—
 $9,791

Valuation Methods and Processes

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

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

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

Mortgage securities - available-for-sale. The Company's mortgage securities include traditional agency mortgage-backed securities, with valuations based on quoted prices in active markets for identical assets (Level 1). Additionally, mortgage securities include investments that were retained during the Company's lending and securitization process, conducted prior to 2016. For the retained mortgage 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, 2017, 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.

As discussed in Note 1, the Company sold a portion of its retained mortgage securities subsequent to December 31, 2017. The Company evaluated the market conditions and other factors existing at the time of the sale as compared to December 31, 2017 and determined that conditions were substantially the same as of the sale date and December 31, 2017. Therefore, as of December 31, 2017 the Company valued these securities at the price at which it was sold. However, the Company determined that it could not extrapolate that price to the other retained mortgage securities because the underlying assets and their performance are not substantially similar to that of the security that was sold. Therefore, the other mortgage securities have been valued as discussed below.

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. The significant unobservable inputs used in preparing the fair value estimates are:
 As of December 31,
 20172016
Weighted average:  
Loss severity62.1%49.6%
Default rate2%2.1%
Prepayment speed13.5%9.8%
Servicer's optional redemption dateNoneNone

•

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

•

Level 2 – Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates for substantially the full term of the asset or liability.

•

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

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

 For the Year Ended
December 31,
 2017 2016
Balance, beginning of period$9,791
 $2,011
Increases (decreases) to mortgage securities – available-for-sale:   
Proceeds from paydowns of securities, net (A)(51) (75)
Mark-to-market value adjustment2,054
 7,855
Net increases (decreases) to mortgage securities – available-for-sale2,003
 7,780
Balance, end of period$11,794
 $9,791
(A)Cash received on mortgage securities with no cost basis was $2.8 million and $4.7 million during 2017 and 2016, 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.

The estimated fair values of the Company's financial instruments are as follows as of December 31, 20172020 and 20162019 (in thousands):

  

December 31, 2020

  

December 31, 2019

 
  

Carrying Value

  

Fair Value

  

Carrying Value

  

Fair Value

 

Financial liabilities:

                

2017 Notes (Level 3)

 $90,115  $11,365  $86,824  $21,289 
 As of December 31,
 2017 2016
 Carrying Value Fair Value Carrying Value Fair Value
Financial assets:       
Marketable securities$11,795
 $11,795
 $36,488
 $36,488
Financial liabilities:       
Senior notes$85,938
 $23,018
 $85,938
 $23,349

For the items

The 2017 Notes in the table above are not measured at fair value in the consolidated 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.


Senior Notes. The fair value is estimated by discounting future projected cash flows using a discount rate commensurate with the risks involved. The interest rate on the senior notes is three-month LIBOR plus 3.5%1% per annum untilfrom 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 in March 2033. The three-month LIBOR used


Goodwill — See Note 4 to the consolidated financial statements for more information on the goodwill impairment assessments performed in the analysis was projected using a forward interest rate curve.


Financial assets2020.

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

  

December 31, 2020

 
  

Fair Value (Level 3)

  

Gains and (Losses)

 

Goodwill

 $—  $(3,905)


 December 31, 2017
 Fair Value (Level 3) Gains and (Losses)
Goodwill$8,205
 $(4,500)

Activity during 20172020 for Goodwill, the Company's only Level 3 asset, measured on a nonrecurring basis is included in the following table (in thousands):

Goodwill Activity:

    

Balance, December 31, 2019

 $3,905 

Impairment charge

  (3,905)

Balance, December 31, 2020

 $— 
Goodwill 
Balance, December 31, 2016$—
Goodwill recorded in connection with the HCS Acquisition12,705
Impairment charge(4,500)
Balance, December 31, 2017$8,205

See note 7 for additional information regarding

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 Goodwill and Intangible Assets.


Note 11. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average numberacquisition of shares of common stock outstanding during the period. Diluted earnings per share include the effect of conversions of stock options and nonvested shares. The computations of basic and diluted earnings per share for 2017 and 2016 (dollarsHCS in thousands, except share and per share amounts) are as follows:
 For the Year Ended
December 31,
 2017 2016
Numerator:   
Net income (loss) from continuing operations$(11,760) $3,247
Income (loss) from discontinued operations895
 1,966
Net income (loss)$(10,865) $5,213
Denominator:   
Weighted average common shares outstanding – basic92,800,392
 91,905,941
    
Weighted average common shares outstanding – diluted:   
Weighted average common shares outstanding – basic92,800,392
 91,905,941
Stock options—
 —
Nonvested shares—
 —
Weighted average common shares outstanding – diluted92,800,392
 91,905,941
Basic earnings per share:   
Net income (loss) from continuing operations$(0.13) $0.04
Income (loss) from discontinued operations0.01
 0.02
Net income (loss)$(0.12) $0.06
Diluted earnings per share:   
Net income (loss) from continuing operations$(0.13) $0.04
Income (loss) from discontinued operations0.01
 0.02
Net income (loss)$(0.12) $0.06



The following weighted-average stock options to purchase shares of common stock were outstanding, but were not included in the computation of diluted earnings (loss) per share because the number of shares assumed to be repurchased, as calculated was greater than the number of shares to be obtained upon exercise, therefore, the effect would be antidilutive. There were no options granted during 2016 and 2017.
 For the Year Ended
December 31,
 2017 2016
Number of stock options1,411
 4,719
Weighted average exercise price of stock options$0.89
 $0.68

During 2016, the Company granted 0.1 million nonvested shares to a director and these shares vested in 2016. During 2017, the Company granted 4.3 million shares to directors, officersoriginated, purchased, securitized, sold, invested in and other members of management. Substantially all ofserviced residential nonconforming mortgage loans and mortgage securities. The Company retains clean-up call rights associated with prior servicing activities and has determined these shares will vest in 2018, assuming the grantees are employed at the vest date. Asclean-up call rights have no fair value as of December 31, 20172020 and 2016, respectively, the Company had approximately 4.3 million and 0.1 million nonvested shares outstanding. The weighted average impact2019.

25
Table of 1.1 million and 0.9 million nonvested shares were not included in the calculation of earnings per share for 2017 and 2016, respectively, because they were anti-dilutive.Contents


Note 12.9. Income Taxes


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

  

For the Years Ended December 31,

 
  

2020

  

2019

 

Current:

        

Federal

 $—  $(11)

State and local

  28   36 

Total current

 $28  $25 
 
For the Year Ended
December 31,
 2017 2016
Current: 
  
Federal$(1) $(14)
State and local15
 (7)
Total current$14
 $(21)

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

  

For the Years Ended December 31,

 
  

2020

  

2019

 
         

Income tax benefit at statutory rate

 $(1,926) $(2,949)
         

State income taxes, net of federal tax benefit

  (71)  36 

Valuation allowance

  2,278   2,528 

Bankruptcy reorganization

  —   9 

Other

  (253)  401 

Total income tax expense

 $28  $25 
 
For the Year Ended
December 31,
 2017 2016
Income tax (benefit) at statutory rate$(3,802) $1,129
    
State income taxes, net of federal tax benefit(54) 211
Valuation allowance(131,234) 14,595
Change in federal tax rate33,640
 —
Change in state tax rate100,899
 (16,475)
Bankruptcy reorganization746
 437
Uncertain tax positions(4) (35)
Other(177) 117
Total income tax expense (benefit)$14
 $(21)

In 2017, the federal statutory rate for periods beginning after December 31, 2017 was changed to 21%. This change in rate caused a significant change to the Company's deferred tax assets as they pertain to its net operating losses ("NOLs"). The 2017 change in deferred tax assets related to the federal NOLs was $100.9 million in the current year. This was offset by a decrease in the valuation allowance by $100.9 million.

Prior to 2016,2019, the Company concluded that it was no longer more likely than not that it would realize a portion of its deferred tax assets. Therefore,As such, the Company maintained a full valuation allowance against its net deferred tax assets as of both December 31, 20172020 and 2016.


2019.

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, 20172020 and 2016,2019, the Company maintained a valuation allowance of $162.7$168.8 million and $292.2$166.5 million, respectively, for its deferred tax assets.

In 2017, due to the purchase of HCS, 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, 2017 it was no longer appropriate to apportion 100% of the Federal NOL to the state of Missouri, but rather the company would apportion approximately 13%. As a result of this reassessment, the Company recalculated the deferred tax assets which resulted in the reduction of the deferred tax asset related to state NOLs totaling approximately $33.6 million in the current year. This was offset by a decrease in the valuation allowance of approximately $33.6 million.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019are (in thousands):

  

December 31,

 
  

2020

  

2019

 

Deferred tax assets:

        

Federal NOL carryforwards

 $153,320  $152,705 

State NOL carryforwards

  9,044   9,003 

Goodwill impairment, HCS

  2,069   1,084 

Business interest expense limitation

  2,578   1,877 

Other

  1,812   1,876 

Gross deferred tax asset

  168,823   166,545 

Valuation allowance

  (168,823)  (166,545)

Deferred tax asset

  —   — 

Deferred tax liabilities:

        

Other

  —   — 

Deferred tax liability

  —   — 

Net deferred tax asset

 $—  $— 
 December 31,
 2017 2016
Deferred tax assets:   
Basis difference – investments$8,015
 $17,261
Federal NOL carryforwards145,608
 239,942
State NOL carryforwards8,301
 35,896
Other2,756
 2,816
Gross deferred tax asset164,680
 295,915
Valuation allowance(162,708) (292,214)
Deferred tax asset1,972
 3,701
Deferred tax liabilities:   
Other1,972
 3,701
Deferred tax liability1,972
 3,701
Net deferred tax asset$—
 $—

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, 2017,2020, the Company had a federal NOL of approximately $692.0 $730.1million, including $307.3$250.3 million in losses on mortgage securities that have not been recognized for income tax purposes. The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code (the "Code"). If not used, these NOLs will expire in years 2025 through 2037. TheDue 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 NOL carryforwards arising from both combined and separate filings from as early as 2004. The state NOL carryforwards may expire as early as 20172019 and as late as 2037.

26

Table of Contents

The activity in the accrued liability for unrecognized tax benefits included in other current liabilities,for the years ended December 31, 2020 and 2019 was (in thousands):

  

For the Years Ended December 31,

 
  

2020

  

2019

 

Beginning balance

 $—  $11 

Gross increases – tax positions in current period

  —   — 

Lapse of statute of limitations

  —   (11)

Ending balance

 $—  $— 
 
For the Year Ended
December 31,
 2017 2016
Beginning balance$331
 $368
Gross increases – tax positions in current period22
 2
Lapse of statute of limitations(25) (39)
Ending balance$328
 $331

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, 20172020 and 2016, the total gross amount of2019. there were no unrecognized tax benefits was $0.3 million, 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 20172020 and 2016.2019. There were accrued interest and penalties of less than $0.1 million as of both December 31, 20172020 and 2016.2019. 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 20132017 to 20172020 remain open to examination for both U.S. federal income tax and major state tax jurisdictions.

27
Table of Contents



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

None.


Item 9A. Controls and Procedures


Evaluation of Disclosure Controls and Procedures


As of the end of the period covered by this report, our chief executive chairmanofficer 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 chairmanofficer and chief financial officer, with the participation of the Company’s management, concluded that our disclosure controls and procedures were not effective as of December 31, 2017,2020, to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.


Management’s Annual Report on Internal Control over Financial Reporting


The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting

as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated
financial statements for external purposes in accordance with GAAP. Under the supervision and with the participation of
management, including the Company’s principal executive officer and principal financial officer, the Company conducted an
evaluation of the effectiveness of its internal control over financial reporting as of December 31, 20172020 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, 2017.

2020.

Description of Material Weakness

of Disclosure Controls

As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations above, and in Note 4 to our accompanying consolidated financial statements, in July 2017, we acquired HCS, which now is our primary business activity. Prior to the HCS Acquisition, HCS was a privately-owned business with limited administrative and accounting resources, accounting software inappropriate for the size of the business and generally weak accounting processes, procedures and controls. Specifically, material weaknesses existed in HCS's processes, procedures and controls with respect to revenue, receivables, payment of payroll taxes and estimating various accrued expenses.


Remediation of Material Weakness


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


Changes in Internal Control Over Financial Reporting


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 disclosure controls and procedures and internal control over financial reporting.procedures. We are working to remediate this material weakness as discussed above.


above, but have not completed the process to document and test the new control processes.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In designing and operating a control system, one must consider the potential benefits of controls relative to their costs and the reality of limited resources available to allocate to control activities, particularly in smaller companies. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that 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 fraud will be prevented or detected.


Item 9B. Other Information

None.

28
None.



Table of Contents

PART III


Item 10. Directors, Executive Officers and Corporate Governance


DIRECTORS AND EXECUTIVE OFFICERS


Howard M. Amster, age 70,73, has been a member of the Board since 2009. Mr. Amster currently is an owner and operator of

multiple real estate investments. Since March 1998, Mr. Amster has served as President of Pleasant Lake Apts. Corp., the
corporate general partner of Pleasant Lake Apts. Limited Partnership. In addition, Mr. Amster also serveshas served as a director of Phenixfin Corp since August 2020.  Mr. Amster served as a director of Maple Leaf
Financial, Inc., the holding company for Geauga Savings Bank, and 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.
Charles M. Gillman

Howard Timothy Eriksen, age 48,52, has been a member of the Board since JanuaryApril 2018. Mr. Eriksen has been the Chief Executive Officer and Interim Chief Financial Officer of Solitron Devices, Inc. (“Solitron”), a manufacturer of solid-state semiconductor components, since July 2016. Mr. Gillman isEriksen also serves as the headManaging Member of the IDWR Multi-Family OfficeEriksen Capital Management LLC (“IDWR”ECM”), a positionLynden, Washington based investment advisory firm that he founded in 2005. Previously, Mr. Eriksen worked for Walker’s Manual, Inc., a publisher of books and newsletters on micro-cap stocks, unlisted stocks and community banks, from 2004 to 2005, and prior to that for Kiewit Pacific Co, a subsidiary of Peter Kiewit Sons, a construction and mining services company, as an administrative engineer on the Benicia Martinez Bridge project. Mr. Eriksen has held since 2013. IDWR employsbeen a teammember of analysts with expertise in finding publicly traded companies that require operational enhancement and an improvement in corporate capital allocation. From 2001 to 2013, Mr. Gillman was a portfolio manager of certain family office investment portfolios at Nadel and Gussman, LLC. Prior to his employment at Nadel and Gussman, Mr. Gillman worked in the investment industry and as a strategic management consultant at McKinsey & Company, where he gained experience designing operational turnarounds of U.S. and international companies. Mr. Gillman currently serves on the board of directors of Points International, Digirad and Solitron.Solitron since August 2015. Mr. Gillman isEriksen has been a Summa Cum Laude graduatemember of the Wharton Schoolboard of directors of TSR Inc. since October 2019, and since December 2019 Lead Independent Director, Chairman of the Audit and Nominating Committees, and a Directormember of the Penn ClubCompensation and Special Committees.  Mr. Eriksen received a Bachelor of New York which serves as the Manhattan homeArts from The Master’s University and a Master of the Wharton and Penn alumni community.Business Administration from Texas A&M University.  The Board believes that Mr. Gillman’sEriksen’s qualifications to serve on the Board include his significantfinancial expertise and operating experience as a successful portfolio manager, M&A experience and divestiture experience.


at other small-cap companies.

Barry A. Igdaloff, age 63,66, has been a member of the Board since 2009.2009 and Chairman of the Board since 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. Pearse

Lee D. Keddie, age 58,52, 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 servesKeddie spent 13 years with HKX, Inc., a developer of control systems for excavators, as a Managing Partner at Yucatan Rock Ventures, where he specializesCo-Owner, President & General Manager, from January 1999 to September 2013. Prior to his business leadership roles, Mr. Keddie spent over eight years in technology investmentsboth the commercial and consulting, andmilitary sectors of the aircraft industry. He has served in that position since August 2012. Mr. Pearse serves asbeen a director for Ameri Holdings, Inc. (OTC:AMRH), Chairman of the

Compensation Committee and member of the Audit Committee since May 2015. Previously, Mr. Pearse served as Chairman of the Boardboard of directors for Crossroads Systems, Inc. (NASDAQ:CRDS) from May 2016 to October 2017,of CompuMed since November 2014 and chairman of the Compensation Committee andStephan Co. (OTC:SPCO), a manufacturer of hair care products, since March 2015. Mr. Keddie was a board member of the Audit CommitteeEssex Rental Corp. (NASDAQ:ESSX), a company that rents and the Nomination and Governance Committeedistributes construction lifting equipment, from July 2013June 2015 to OctoberFebruary 2017. Mr. Pearse served asKeddie is a director for Aviat Networks, Inc. (NASDAQ:AVNW),professional engineer and member of the Compensation Committee and the Nominating and Governance Committee from January 2015 to November 2016. From 2005 to 2012, Mr.
Pearse served as vice president of Strategy and Market Development at NetApp, Inc. (NASDAQ:NTAP), a computer storage and data management company. From 1987 to 2004, Mr. Pearse held leadership positions at Hewlett-Packard Inc. (NYSE:HPQ), most recently as the vice president of Strategy and Corporate Development from 2001 to 2004. Mr. Pearse’s professional experience also includes positions at PricewaterhouseCoopers LLP, Eastman Chemical Company (NYSE:EMN), and General Motors Company (NYSE:GM). 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 financial expertise.

experience as a director of public companies.

David W. Pointer, age 48,51, has been our Chief Executive Officer and Chairman of the Board since March 27, 2018. He

has served as the Managing Partner of V.I. Capital Management, LLC, a registered investment advisory firm that he founded, since January 2008. Prior to that, Mr. Pointer was a Senior Portfolio Manager and Senior Vice President at ICM Asset Management, an employee ownedemployee-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, Inc., 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 markets. Mr. Pointer holds a Bachelor of Science in Business Administration from Central Washington University and a Master of Business


Administration from the Wharton School of Business at the University of Pennsylvania. Mr. Pointer is a member of the CFA Institute and a Chartered Financial Analyst.

Carolyn K. Campbell, age 47,50, 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.


Richard M. Rector, age 61, is the President of HCS. Mr. Rector has more than 30 years of experience in Staffing and Business
Management of mid-size to large businesses. Prior to joining HCS in October 2015, Mr. Rector was Executive Vice President and Co-Owner of an international modernization and staffing company for ten years. Before that, he served as a Regional Manager for two mid-sized companies in the staffing industry. He has extensive experience in business administration, staffing, operations, and automation. Mr. Rector has a Bachelor of Business Administration in Administrative Management and Marketing from the University of North Texas.

CORPORATE GOVERNANCE AND RELATED MATTERS

Board Leadership Structure

The Board is led by Mr. Pointer, the Company's Chief Executive Officer and Chairman of the Board, and by Mr. Igdaloff, who serves as the Company's Lead Independent DirectorChairman of the Board 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.

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Board and Committee Meetings

During 2017,2020, there were 45 meetings of the Board, 24 meetings of the Audit Committee, 2 meetings of the Compensation Committee and no2 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. We have no written policy regarding director attendance at our annual meetings of shareholders.


Board Committees

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

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

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



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

Compensation Committee Process and Advisors

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

The charter of the Compensation Committee permits the Compensation Committee to engage outside consultants. In 2017,2020, the Compensation Committee did not retain a compensation consultant.

Corporate Governance Documents

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


64114.

Code of Ethics


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

Our investor relations contact information follows:

Investor Relations

500 Grand Boulevard,

9229 Ward Parkway, Suite 201B

340

Kansas City, Missouri 64106

64114

816.237.7000

Email:  ir@novationcompanies.com

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Table of Contents

Shareholder Communications with the Board

Shareholders may communicate directly with any member of the Board or any individual chairman of a Board committee by writing directly to those individuals at the following address: Novation Companies, Inc., 500 Grand Boulevard,9229 Ward Parkway, Suite 201B,340, Kansas City, MO 64106.64114. Communications that are intended for the non-management, independent directors generally should be marked to the attention of the chairman of the Nominating and Corporate Governance Committee.  The Company’s general policy is to forward, and not to intentionally screen, any substantive mail received at the Company’s corporate office that is sent directly to a director; however, (i) routine advertisements and business solicitations and (ii) communications deemed to be a security risk or principally for harassment purposes, may not be forwarded in the discretion of the Corporate Secretary, provided that in the latter case the Chairman of the Board is notified thereof.


Risk Oversight

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



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

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

Identifying and Evaluating Nominees for Directors

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


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

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


Involvement in Certain Legal Proceedings


Company director Charles M. Gillman is subject to an SEC administrative order, dated February 14, 2017 (Securities Exchange Act Release No. 80038), relating to alleged violations of Section 13(d) of the Exchange Act and the rules promulgated thereunder, including failing to disclose the members of a stockholder group, and further allegations that he violated Section 16(a) of the Exchange Act and the rules promulgated thereunder, including failing to timely file initial statements of beneficial ownership on Form 3 and changes thereto on Form 4. Without admitting or denying any violations,Mr. Gillman agreed to cease and desist from committing or causing any violations of (i) Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 promulgated thereunder and (ii) Section 16(a) of the Exchange Act and Rules 16a-2 and 16a-3 promulgated thereunder, and paid a civil penalty to the SEC in the amount of $30,000.

V.I. Capital Management, LLC (“V.I. Capital”) and Chief Executive Officer and Chairman of the Board David W. Pointer are

subject to a consent order (the “Consent Order”) from the State of Washington Department of Financial Institutions, Securities
Division, dated March 12, 2018 (Order Number S-16-2093-17-CO01), relating to alleged breaches of 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 Boards of Directors of CompuMed Inc. and Solitron Devices, Inc., (ii) pledging V.I. Capital investment
fund assets as collateral for a line of credit for CompuMed, Inc. and failing to disclose such pledge to V.I. Capital’s year-end auditor, and (iii) failure to timely distribute audited financial statements and a final fund audit to investors. As conditions of the Consent Order, V.I. Capital and Mr. Pointer agreed to (i) cease and desist from violating the Securities Act of 1933, (ii) pay a fine of $10,000 and (iii) pay costs of $2,500. Mr. Pointer also agreed that he will not be a principal, officer or owner of an investment


adviser or broker-dealer for 10 years following the entry of the Consent Order, but he may apply for a securities salesperson or investment adviser representative registration with an acceptable plan of supervision.

31


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a)Table 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 2017, except that Messrs. Eberwein and Igdaloff each filed a Form 4 on
December 18, 2017, reporting a transaction that occurred on December 13, 2017, and Mr. Rector filed a Form 4 on August 2,
2017, reporting a transaction that occurred on July 27, 2017.

Item 11. Executive Compensation


DIRECTOR COMPENSATION


The following table presents a summary of the compensation earned by each director who served on the Board during the fiscal year ended December 31, 2017,2020, other than our formerChief Executive ChairmanOfficer Mr. Eberwein,Pointer, whose compensation is described in the Executive Compensation section below:

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

Total ($)
Barry A. Igdaloff$21,411
$25,000
$46,411
Howard M. Amster8,921
25,000
33,921
Charles M. Gillman8,921
25,000
33,921
Robert G. Pearse11,598
25,000
36,598
(1) Represents the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718.

Name

 

Fees earned or paid in cash

  

Stock Awards
(1) (2)

  

Total

 

Barry A. Igdaloff

 $68,500   —  $68,500 

Howard M. Amster

 $36,000   —  $36,000 

Howard Timothy Eriksen

 $36,000   —  $36,000 

Lee D. Keddie

 $41,000   —  $41,000 

(1)

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

(2)

There were no stock awards granted to the Board in 2020.

On August 23, 2017,September 20, 2019, the Board approved base compensation for each of the Company’s non-employee directors, Barry A. Igdaloff, Howard M. Amster, Charles M. 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.

In payment of the 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.


On December 12, 2017, the Compensation Committee approved one-time additional compensationgrant date, October 1, 2020, and 50% on the second anniversary of $25,000the grant date, October 1, 2021. As stated in cash and 357,143 shares of restricted stock for Mr. Igdaloff in recognition of his considerable time and effort in connection with the Company’s successful emergence from bankruptcy. These restrictedtable above, there were no stock awards vest one year fromgranted to the grant date.

Board in 2020.

EXECUTIVE COMPENSATION


Our named executive officers during 20172020 (each a “Named Executive Officer”) were (i)were(i) David W. Pointer, our Chief Executive Officer, and (ii) Carolyn K. Campbell, our Chief Financial Officer (ii) Richard M. Rector, President of HCS, (iii) Jeffrey E. Eberwein, our former Executive Chairman and (iv) Rodney E. Schwatken, our former Chief Executive Officer, Chief Financial Officer and Treasurer.


.

Summary Compensation Table


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



Name and Principal PositionYearSalaryBonus
Stock
Awards(1)
All Other CompensationTotal
Carolyn K. Campbell (2)
2017$43,934
$—
$15,750
$—
$59,684
Chief Financial Officer      
Richard M. Rector (3)
2017101,923
35,000
97,000
6,720
240,643
President, Healthcare Staffing, Inc.      
Jeffrey E. Eberwein (4)
201741,369
25,000
75,000
—
141,369
Former Executive Chairman      
Rodney E. Schwatken (5)
2017289,904
—
42,400
—
332,304
Former Chief Executive Officer and Chief Financial Officer2016300,000
—
—
—
300,000

Name and Principal Position

Year

 

Salary

  

Bonus

  

Stock Awards (1)

  

All Other Compensation

  

Total

 

David W. Pointer (2) (3) (4)

2020

 $250,000  $18,000  $80,000  $109  $348,109 

Chief Executive Officer

2019

 $131,154  $150,000  $100,000  $90  $381,244 

Carolyn K. Campbell (5) (6) (7)

2020

 $150,000  $50,000  $8,250  $368  $208,618 

Chief Financial Officer

2019

 $150,000  $46,750  $12,500  $340  $209,590 

(1)

(1)

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

(2)

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

(3)Represents the grant date fair value of 2,000,000 shares of restricted stock granted to Mr. Pointer on February 4, 2020. 100% of these shares vested on October 1, 2020.
(2)

(4)

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 was appointedserves as the Chief Financial Officer of both Novation and HCS.

(6)

Represents the grant date fair value of 165,000 shares of restricted stock granted to Ms. Campbell on August 14, 2017.February 4, 2020. 100% of these shares vested on October 1, 2020.
(7)   
(3)Compensation for Mr. Rector is presented beginningRepresents the grant date fair value of 250,000 shares of restricted stock granted to Ms. Campbell on July 27, 2017, the dateJanuary 22, 2019. 100% of the HCS Acquisition. Other compensation includes a payment to Mr. Rector for his buyout of accrued paid time off pursuant to the HCS paid time off policy.
(4)Mr. Eberwein resigned from his position as our Executive Chairman effective March 27, 2018.
(5)Mr. Schwatken resigned from his position as our Chief Executive Officer effectivethese shares vested on October 1, 2017.2019.

Outstanding Equity Awards at Fiscal Year-End 2017

The following table sets forth2020

There were no outstanding equity incentive plan awards for each of our Named Executive Officers outstanding as of December 31, 2017. There were no outstanding stock options for our Named Executive Officers as of December 31, 2017.

2020.

32
 Stock Awards
NameNumber of shares or units of stock that have not vested
Market value of shares of units of stock that have not vested (1)
Carolyn K. Campbell (2)
150,000
$10,050
Richard M. Rector (3)
1,000,000
67,000
Jeffrey E. Eberwein (4)
1,071,429
71,786
(1)    Based on the closing share price on December 29, 2017
Table of $0.067.Contents
(2)    Shares of restricted stock granted under the 2015 Incentive Stock Plan. 100% of these shares vest on September 1, 2018, subject to continuous employment with Novation through the vesting date.
(3)    Shares of restricted stock granted under the 2015 Incentive Stock Plan. 40% of these shares vest on July 27, 2018, 35% of these shares vest on July 27, 2019 and 25% of these shares vest on July 27, 2020, subject to continuous employment with HCS through each applicable vesting date.
(4)    Shares of restricted stock granted under the 2015 Incentive Stock Plan. 100% of these shares were forfeited to the
Company as of March 31, 2018, upon Mr. Eberwein’s resignation as a director.


Employment Agreements and Arrangements with Named Executive Officers



David W. Pointer

Mr. Pointer entered an employment agreement with the Company on October 1, 2019 (the “Pointer Employment Agreement”). Mr. Pointer's base salary is $250,000, and he is eligible to earn an annual bonus, based on performance benchmarks, and to participate in any equity programs of the Company, at the Company's discretion. The Pointer Employment Agreement has an indefinite term and provided that Mr. Pointer is an employee “at-will,” and his employment may be terminated at any time by either party, with or without cause, for any reason or no reason. If Mr. Pointer’s employment is terminated by the Company other than for “cause” or by Mr. Pointer for “good reason” (each as defined in the Pointer Employment Agreement), Mr. Pointer will receive, over a period of 6 months following termination, compensation at an annual rate equal to his then-existing annual base salary.

Carolyn K. Campbell


Ms. Campbell entered an employment agreement with the Company on August 9, 2017 (the “Campbell Employment

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

Richard M. Rector

Mr. Rector entered an employment agreement with the Company and HCS on July 27, 2017 (the “Rector Employment Agreement”). Mr. Rector’s base salary is $225,000, and he is eligible to earn a quarterly bonus, based on the Company’s EBITA achievement, and to participate in the Company’s 2015 Incentive Stock Plan. The Rector Employment Agreement also provides for a grant of 1,000,000 restricted shares of the Company’s common stock pursuant to the terms of the Rector Employment Agreement and the Company’s 2015 Incentive Stock Plan. The Rector Employment Agreement has an indefinite term and provides that Mr. Rector is an employee “at-will,” and his employment may be terminated at any time by either party, with or


without cause, for any reason or no reason. If Mr. Rector’s employment is terminated by the Company other than for “cause” or by Mr. Rector for “good reason” (each as defined in the Rector Employment Agreement), Mr. Rector will receive, over a period of 6 months following termination, compensation at an annual rate equal to his then-existing annual base salary and immediate vesting of any Novation restricted shares that are scheduled to vest within one year after the date of termination of employment, if any, pursuant to Novation’s 2015 Incentive Stock Plan.

Jeffrey E. Eberwein

Mr. Eberwein was not party to an employment agreement with the Company. Mr. Eberwein received a base salary of $100,000 per annum and, on December 12, 2017, received a restricted stock award of $50,000 of shares vesting one year from the grant date, for serving as Executive Chairman. On December 12, 2017, Mr. Eberwein received one-time additional compensation of $25,000 in cash and 357,143 shares of restricted stock in recognition of his considerable time and effort in connection with the Company’s successful emergence from bankruptcy. Mr. Eberwein resigned from his position as Executive Chairman effective March 27, 2018 and from the Board effective March 31, 2018.

Rodney E. Schwatken

Mr. Schwatken resigned from his positions as the Company’s Chief Executive Officer and Chief Financial Officer effective October 1, 2017. In connection with his resignation, to assist with our transition to a new Chief Executive Officer, Mr. Schwatken entered into an agreement (the “Schwatken Transition Agreement”) with the Company providing for his continued employment as an Executive Advisor on an “at-will” basis from October 2, 2017 to December 31, 2017 (subject to an extension of up to three months at the Company’s discretion) in exchange for (i) a base salary of $18,750 per month from October 2, 2017 through December 1, 2017 and $12,500 per month thereafter, (ii) an award of 400,000 restricted shares of the Company’s common stock pursuant to the terms and conditions of the 2015 Incentive Plan and an award agreement, such shares vesting in full on January 1, 2018, and (iii) certain other benefits. The Schwatken Transition Agreement also provides for the termination of all of Mr. Schwatken’s outstanding options (vested and unvested) to purchase shares of the Company common stock. Mr. Schwatken continues to be bound by certain non-competition, non-solicitation, confidentiality and similar obligations under, and as more particularly described in, his employment agreement.

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 April 9, 2018March 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% beneficial owners is based on information we received from such holders. Except as otherwise set forth below, the address of the persons listed below is c/o Novation Companies, Inc., 500 Grand Boulevard,9229 Ward Parkway, Suite 201B,340, Kansas City, Missouri 64106.



MO 64114.

 

Beneficial Ownership of Common Stock

Name of Beneficial Owner

Shares

Percent of Class (1)

Directors and Named Executive Officers

  

Howard M. Amster (2)

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)

Consists of 1,083,333 shares of common stock and 250,000 shares unvested restricted stock.

(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.

33
 Beneficial Ownership of Common Stock
Name of Beneficial OwnerShares
Percent of
Class (1)
Directors and Named Executive Officers  
Howard M. Amster (2)
4,267,331
4.4%
Charles M. Gillman (3)
304,487
*
Barry A. Igdaloff (4)
8,473,709
8.7%
Robert G. Pearse (5)
419,872
*
David W. Pointer—
—%
Carolyn K. Campbell  (6)
150,000
*
Richard M. Rector (7)
1,000,000
1.0%
Rodney E. Schwatken (8)
461,543
*
Jeffrey E. Eberwein (9)
1,282,368
1.3%
All current directors and executive officers as a group (7 persons) (10)
14,615,399
15.0%
   
5% Beneficial Owners  
Massachusetts Mutual Life Insurance Company (11)
19,258,775
19.8%
*Less than 1%
(1)Based on 97,138,750 shares of common stock outstanding as of April 9, 2018.  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 96,154 shares of common stock and 208,333 shares of unvested restricted stock.
(4)Consists of 4,702,497 shares of common stock, 565,476 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.
(5)Consists of 211,539 shares of common stock and 208,333 shares of unvested restricted stock.
(6)Consists of 150,000 shares of unvested restricted stock.
(7)Consists of 1,000,000 shares of unvested restricted stock.
(8)Consists of 401,276 shares of common stock held directly and 60,267 shares of stock owned by the Rodney E. Schwatken Trust.
(9)
Consists of 1,274,339 shares of common stock held directly and 8,029 shares of common stock held by Lone Star Value Investors GP, LLC.  Mr. Eberwein, as the manager of Lone Star Value Investors GP, LLC, may be deemed the beneficial owner of the securities owned by Lone Star Value Investors GP, LLC. Mr. Eberwein expressly disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein.

(10)
Consists of 12,202,588 shares of common stock; 2,340,475 shares of unvested restricted stock; and 72,336 shares of common stock issuable upon exercise of options. Excludes shares beneficially owned by Mr. Eberwein and Mr. Schwatken, who are no longer executive officers or directors of the Company.

(11)Based on a Form 3 filed on December 14, 2011, Massachusetts Mutual Life Insurance Company (“MassMutual”) may be deemed to own beneficially and indirectly 19,258,775 shares of common stock held in one or more advisory accounts and private investment funds. Babson Capital Management LLC acts as investment adviser to these advisory accounts and private investment funds, and in such capacities may also be deemed to be the beneficial owner of such shares.  The address of MassMutual is 1295 State Street, Springfield, MA 01111.
Table of Contents

Equity Compensation Plan Information

The following table sets forth information as of December 31, 20172020 with respect to compensation plans under which the Company’s common stock may be issued.



Plan Category
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
Number of
Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Shares
Reflected in the First
Column)
Equity compensation plans approved by stockholders (1)
72,336
$1.176,152,088
Equity compensation plans not approved by stockholder—
—
—
Total72,336
$1.176,152,088

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)

——3,974,211
(1)

Equity compensation plans not approved by stockholder

———

Total

——3,974,211

(1)

Represents shares that may be issued pursuant to outstanding options awarded under the 2015 Incentive Plan.

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


Related Party Transactions


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


•

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

•

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

•

Any immediate family member of any of the foregoing; or

•

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

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

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


Director Independence

The Board has determined that all of our non-employee directors 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.

34

Table of Contents

Item 14. Principal Accountant Fees and Services


Audit Fees

The following table presents aggregate fees billed for professional services rendered by Boulay PLLP. There were no other professional services rendered or fees billed by Boulay PLLP .



 For the Fiscal Year Ended December 31,
 20172016
Audit fees (1)
$144,977
$74,381
Audit-related (2)
—
75,632
Tax35,883
 
Other (3)
20,311
—
   
Total$201,171
$150,013
PLLP.

  

For the Fiscal Years Ended December 31,

 
  

2020

  

2019

 

Audit Fees (1)

 $95,400  $122,000 

Tax Fees (2)

  7,020   11,000 

Total Fees

 $102,420  $133,000 

(1)

(1)

Annual audit and quarterly reviews of our consolidated financial statements, assistance with and review of documents filed with the SEC and an audit of the opening balance sheet of HCS.SEC.

(2)

(2)Payments for due diligence for the HCS Acquisition

Preparation and the Company's bankruptcy filings.filing of annual state and federal income taxes.

(3)Payments for the audit of the Company's 401(k) plan.

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 20172020 and 20162019 were pre-approved in accordance with these policies. Generally, the policy requires that the Audit Committee annually approve fees exceeding $50,000 for audit services, audit-related and tax services. Fees expected to exceed $10,000 for all other services must be approved prior to engagement for those services.



PART IV

Item 15. Exhibits and Financial Statements Schedules


Financial Statements and Schedules

(1)

The financial statements as set forth under Item 8 of this Form 10-K are included herein.

(2)

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


Exhibits


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

Item 16. Form 10-K Summary

None.

35

Table of Contents

EXHIBIT INDEX

Exhibit No.

Description of Document

2.1

Membership Interest Purchase Agreement, dated as of December 21, 2015, by and among Novation Companies, Inc., Corvisa Services LLC and ShoreTel, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on December 21, 2015).

2.2

Stock Purchase Agreement, dated as of February 1, 2017, by and among Novation Companies, Inc., Novation Holding, Inc., Healthcare Staffing, Inc. and Butler America, LLC (incorporated by reference to Exhibit 2.1 on the Current Report on Form 8-K filed on February 3, 2017).**

2.3

Closing Agreement, dated as of July 27, 2017, by and among Novation Companies, Inc., Novation Holding, Inc., Healthcare Staffing, Inc. and Butler America, LLC (incorporated by reference to Exhibit 2.1 on the Quarterly Report on Form 10-Q filed on February 26, 2018).

3.1

Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on August 2, 2017).

3.2 
Articles of Amendment to Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on December 14, 2018).

3.3

Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on August 2, 2017).

4.1

Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Quarterly Report Form 10-Q filed on August 5, 2005).

4.2

Rights Agreement, dated as of September 15, 2011, by and between NovaStar Financial, Inc. and Computershare Trust Company, N.A., as rights agent (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on September 21, 2011).

4.3

First Amendment to Rights Agreement, dated June 20, 2014, by and between the Company and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.2 to Form 8-A/A filed on June 20, 2014).

4.4

Second Amendment to Rights Agreement, dated August 24, 2015, by and between the Company and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.3 to the Form 8-A12G filed on August 28, 2015).

10.14.5 
FormThird Amendment to Rights Agreement, dated as of Indemnification Agreement for Officers and Directors of NovaStar Financial,July 20, 2018, between Novation Companies, Inc. and its SubsidiariesComputershare Trust Company, N.A. (incorporated by reference to Exhibit 10.1 to4.1 on the Current Report on Form 8-K filed on November 16, 2005)July 25, 2018).*
10.24.6 

Description of the Company's Securities (incorporated by reference to Exhibit 4.6 to the Annual Report on Form 10-K filed on March 23, 2020).

10.1

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).*
10.3

10.2

Form of Restricted Stock Award Agreement for Non-Employee Directors under the Novation Companies, Inc. 2015 Incentive Stock Plan (incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K filed on October 26, 2017).*

10.4

10.3

Form of Restricted Stock Award Agreement for Employees under the Novation Companies, Inc. 2015 Incentive Stock Plan (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K filed on October 26, 2017).*


10.5

10.4

Amended and Restated 2004 Incentive Stock Plan (as amended May 29, 2014) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 30, 2014).*

10.6

10.5

First Amendment to the Company's Amended and Restated 2004 Incentive Stock Plan (incorporated by reference to Appendix A to Form DEF 14A filed on April 25, 2014).*

10.7

10.6

Form of Stock Option Agreement under NovaStar Financial, Inc. 2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.25.1 to the Current Report on Form 8-K filed on February 4, 2005).*

10.8

10.7

Form of Restricted Stock Award Agreement under NovaStar Financial, Inc. 2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.25.2 to the Current Report on Form 8-K filed on February 4, 2005).*

10.9

10.8

Form of Employee Non-Qualified Stock Option Agreement under the Company's Amended and Restated 2004 Incentive Stock Plan (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-Q filed on August 7, 2014).*

10.10

10.9

Employment Agreement, dated as of January 7, 2008,October 1, 2019, by and between NovaStar Financial,Novation Companies, Inc. and Rodney E. SchwatkenDavid W. Pointer (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K/A8-K filed on January 10, 2008)September 25, 2019).*



36
Table of Contents

10.10

10.11
Employment Agreement, dated as of August 9, 2017, by and between Novation Companies, Inc. and Carolyn Campbell.*
10.12
Employment Agreement, dated as of July 27, 2017, by and among Healthcare Staffing, Inc., Novation Companies, Inc. and Richard Rector.*
10.13
Employment Agreement, dated as of March 27, 2018, by and between Novation Companies, Inc. and David PointerCampbell (incorporated by reference to Exhibit 10.110.11 to the CurrentAnnual Report on Form 8-K filed on March 28, 2018).*

10.14
Agreement, by and among Novation Companies, Inc. a Maryland corporation, Lone Star Value Investors, LP, Lone Star Value Investors GP, LLC, Lone Star Value Management, LLC and Jeffrey E. Eberwein, dated April 22, 2015 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K10-K filed on April 27, 2015)10, 2018).*
10.15

10.11

Senior Secured Note Purchase Agreement, dated as of July 27, 2017, among Novation Companies, Inc., Novation Holding, Inc., Healthcare Staffing, Inc., Taberna Preferred Funding I, Ltd., Taberna Preferred Funding II, Ltd., Kodiak CDO I, Ltd., and Wilmington Savings Fund Society, FSB (incorporated by reference to Exhibit 10.1 on the Quarterly Report on Form 10-Q filed on February 26, 2018).

10.16

10.12

Revolving Credit and SecurityFirst Amendment to Senior Secured Note Purchase Agreement dated as of November 17, 2017, by and between HCS and Federal National Payables, Inc. (incorporated by reference to Exhibit 10.1 toon the CurrentQuarterly Report on Form 8-K10-Q filed on November 20, 2017)August 12, 2019).

21.1

Subsidiaries of the Registrant.

23.1

Consent of Boulay PLLP.

31.1

Principal Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Principal Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Principal Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Principal Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following financial information from Novation Companies, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2017,2020, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Balance Sheets as of December 31, 20172020 and December 31, 2016,2019, (ii) Consolidated Statements of Operations for the years ended December 31, 20172020 and 2016,2019, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 20172020 and 2016,2019, (iv) Consolidated Statements of Shareholders' Deficit for the years ended December 31, 20172020 and 2016,2019, (v) Consolidated Statements of Cash Flows for the years ended December 31, 20172020 and 2016,2019, and (vi) the Notes to Consolidated Financial Statements.

  * Management contract or compensatory plan or arrangement.

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

37
Table of Contents



SIGNATURES

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

NOVATION COMPANIES, INC.

DATE:

March 4, 2021

DATE:April 10, 2018

/s/ DAVID W. POINTER

David W. Pointer, Chief Executive Officer and Chairman

DATE:

March 4, 2021

DATE:April 10, 2018

/s/ CAROLYN K. CAMPBELL

Carolyn K. Campbell, Chief Financial Officer


Power of Attorney

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
David Pointer and Carolyn Campbell, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for
him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying
and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.

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

DATE:

March 4, 2021

DATE:April 10, 2018

/s/ DAVID W. POINTER

David W. Pointer, Chief Executive Officer and Chairman

(Principal Executive Officer)

DATE:

April 10, 2018

March 4, 2021

/s/ CAROLYN K. CAMPBELL

Carolyn K. Campbell, Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

DATE:

April 10, 2018

March 4, 2021

/s/ HOWARD M. AMSTER

Howard M. Amster, Director

DATE:

April 10, 2018

March 4, 2021

/s/ CHARLES M. GILLMANHOWARD TIMOTHY ERIKSEN

Charles M. Gillman,

Howard T. Eriksen, Director

DATE:

April 10, 2018

March 4, 2021

/s/ BARRY A. IGDALOFF

Barry A. Igdaloff, Director and Chairman

DATE:

April 10, 2018

March 4, 2021

/s/ ROBERT G. PEARSELEE D. KEDDIE

Robert G. Pearse,

Lee D. Keddie, Director




52
38