SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ | |||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the Fiscal Year Ended December 31, | |||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the Transition Period From __________to __________ |
Commission File Number 000-22897
NOVATION COMPANIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland | 74-2830661 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
9229 Ward Parkway, Suite | 64114 |
(Address of Principal Executive Office) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (816) 237-7000
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of June 30, 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.
Yeso
FORM 10-K For the Fiscal Year ended December 31, Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Removed and Reserved Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Item 16. Form 10-K Summary Exhibit Index Signatures2017TABLE OF CONTENTSPART IItem 1.BusinessItem 1A.Risk FactorsSelected Financial Data
Unless the context otherwise requires, references in this Annual Report on Form 10-K (this "Form 10-K") to “Novation,” the “Company,” “NOVC,” “we,” “us” and “our,” refer to Novation Companies, Inc. and its consolidated subsidiaries and their respective predecessors. Forward-Looking Statements Statements in this report regarding Novation and its business that are not historical facts are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are those that predict or describe future events, do not relate solely to historical matters and include statements regarding management's beliefs, estimates, projections, and assumptions with respect to, among other things, our future operations, business plans and strategies, as well as industry and market conditions, all of which are subject to change at any time without notice. Words such as “believe,” “expect,” “anticipate,” “promise,” “plan,” 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.
Overview
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
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 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.
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.
Strategy
The strategy of HCS is to continue expanding its market share in providing healthcare staffing services in Georgia and in particular serving Georgia CSBs. HCS is the dominant player in providing services to Georgia CSBs and has earned aplans to increase its market share of 55% of the CSB business. HCS will also continue to expand business to additional hospitals, private group homes, clinics, rest homes, prisons and retirement centers. Furthermore, the HCS strategy includes expanding clerical staff within existing customers, as well as gaining new clients. The longer-term strategy includes expansion beyond the Georgia market and may include acquisitions of staffing companies outside of Georgia, particularly in states that have public health infrastructure similar to that of Georgia.
Competition
HCS competes with numerous national staffing and recruiting businesses that specialize in the medical and healthcare industry, such as Nursefinders, Lighthouse Recruiting, Action Med and Brightstar. Other national staffing businesses have divisions that compete with HCS in Georgia, including ATC Healthcare, Kelly Services, Interim, Randstad and Maxim. Numerous Georgia non-national and smaller staffing providers also compete with HCS.
Regulation
The healthcare industry is subject to extensive and complex federal, state and local laws and regulations related to, among
HCS provides services directly to its clients on a contract basis and receives payment directly from them. However, many clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide. Therefore, HCS also may be affected indirectly by reimbursement changes in government programs, particularly Medicare and Medicaid.
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.
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.
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
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.
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.
Our ability to use our net operating loss carryforwards and net unrealized built-in losses could be severely limited. As of December 31, Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes an annual limitation on the amount of taxable income that may be offset by a corporation’s NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when the corporation’s “5-percent shareholders” (as defined in Section 382 of the Code) collectively increase their ownership in the corporation by more than 50 percentage points (by value) over a rolling three-year period. Additionally, various states have similar limitations on the use of state NOLs following an ownership change. Our charter includes provisions designed to protect the tax benefits of our NOLs by generally restricting any direct or indirect transfers of our common stock that increase the direct or indirect ownership of our common stock by any person from less than 4.99% to 4.99% or more, or increase the percentage of our common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of our common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions will be void as of the date of the prohibited transfer as to the purported transferee. These transfer restrictions expire on August 1, 2020. Additionally, we have adopted and our shareholders have approved a Rights Agreement (the “NOL Rights Plan”) that generally is designed to deter any person from acquiring shares of our common stock if the acquisition would result in such person beneficially owning 4.99% or more of our common stock without the approval of our Board of Directors (the “Board”). Although these measures are intended to reduce the likelihood of an ownership change, we cannot assure you that they will prevent all transfers of our common stock that could result in such an ownership change. Further, these measures could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, the Company or a large block of our common stock, which may adversely affect the marketability, and depress the market price, of our common stock. In addition, these provisions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our shareholders. Covenant restrictions under our indebtedness may limit our ability to operate our business. The 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: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.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.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 financialstatements 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.
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.
We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could further harm our liquidity.
Prior to its acquisition of HCS, the Company originated, purchased, securitized, sold, invested in, and serviced residential nonconforming mortgage loans and mortgage securities. When we sold these mortgage loans, whether as whole loans or pursuant to a securitization, we made customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower, broker, or employee fraud. Likewise, we are required to repurchase or substitute mortgage loans if we breach a representation or warranty in connection with our securitizations. We have received various repurchase demands as performance of subprime mortgage loans has deteriorated. A majority of repurchase requests have been denied, otherwise a negotiated purchase price adjustment was agreed upon with the purchaser. Enforcement of repurchase obligations against us would further harm our liquidity.
There can be no assurance that our common stock will continue to be traded in an active market.
Our common stock currently trades on the OTC Pink marketplace of the OTC Markets Group, Inc.Pink. Trading of securities on this quotation service is generally limited and is effectedaffected on a less regular basis than on exchanges, such as the NYSE, and accordingly investors who own or purchase our stock will find that the liquidity or transferability of the stock may be limited. Additionally, a shareholder may find it more difficult to dispose of, or obtain accurate quotations as to the market value of, our stock. If an active public trading market cannot be sustained, the trading price of our common stock could be adversely affected and the ability of an investor to transfer their shares of our common stock may be limited.
The market price and trading volume of our common stock may be volatile, which could result in substantial losses for our shareholders.
The market price of our capital stock can be highly volatile and subject to wide fluctuations. In addition, the trading volume in our capital stock may fluctuate and cause significant price variations to occur. Investors may experience volatile returns and material losses. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our capital stock include:
actual or anticipated changes in our earnings and cash flow;
general market and economic conditions, including the operations and stock performance of other industry participants;
the impact of new state or federal legislation or adverse court decisions;
sales, or the perception that sales could occur, of a substantial number of shares of our common stock by insiders;
additions or departures of senior management and key personnel; and
actions by institutional shareholders.
Some provisions of our charter, bylaws, Maryland law and our NOL Rights Plan may deter takeover attempts, which may limit the opportunity of our shareholders to sell their common stock at favorable prices.
Certain provisions of our charter, bylaws, Maryland law, and our NOL Rights Plan could discourage, delay or prevent transactions that involve an actual or threatened change in control, and may make it more difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders. Under our charter, generally a director may only be removed for cause and only by the affirmative vote of the holders of at least a majority of all classes of shares entitled to vote in the election for directors together as a single class. Maryland law provides protection for Maryland corporations against unsolicited takeover situations. Further, our charter includes provisions designed to protect the tax benefits of our NOLs by generally restricting any direct or indirect transfers of our common stock that increase the direct or indirect ownership of our common stock by any person from less than 4.99% to 4.99% or more, or increase the percentage of our common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of our common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions will be void as of the date of the prohibited transfer as to the purported transferee. These transfer restrictions 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.
None.
The executive and administrative offices for the Company are located in Kansas City, Missouri, and consist of approximately 2,3001,400 square feet of leased office space. 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.
The Company is a party to various legal proceedings. Except as set forth below, theseThese proceedings are of an ordinary and routine nature.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock currently trades on the OTC Pink marketplace of the OTC Markets Group, Inc. under the symbol “NOVC”. Prior to the commencement of the Company's Chapter 11 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 | ||||||
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.
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.
Financial Highlights and Key Performance Metrics.
The following key performance metrics (in thousands, except per shareDecember 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
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.
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.
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.
Goodwill Impairment Charge
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 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.
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 |
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 |
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.
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.
Overview of Cash Flow for the Year Ended December 31, 2017
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 | ) |
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 operations | 3,510 | 1,591 | |||||
Cash flows used in financing activities of continuing operations | 3,151 | (205 | ) |
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with GAAP and, therefore, are required to make estimates regarding the values of our assets and liabilities and in recording income and expenses. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. These estimates affect reported amounts of assets, liabilities and accumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income during the periods presented. The following summarizes the components of our consolidated financial statements where understanding accounting policies is critical to understanding and evaluating our reported financial results, especially given the significant estimates used in applying the policies. The discussion is intended to demonstrate the significance of estimates to our consolidated financial statements and the related accounting policies. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board and the Audit Committee has reviewed our disclosure.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
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.
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
Impact of Recently Issued Accounting Pronouncements
No new accounting pronouncements is includedstandards were adopted in Note 3 to the consolidated financial statements.
Not applicable.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NOVATION COMPANIES, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets | |
Consolidated Statements of Operations and Comprehensive | |
Consolidated Statements of Shareholders' Deficit | |
Consolidated Statements of Cash Flow | |
Notes to Consolidated Financial Statements | |
To the Board of Directors and Stockholders of Novation Companies, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Novation Companies, Inc. (the Company) as of December 31, 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. 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 CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents Accounts and unbilled receivables Prepaid expenses Other Total current assets Non-current assets: Goodwill Intangible assets, net Property and equipment, net Operating lease right-of-use asset Other Total non-current assets Total assets Liabilities and Shareholders' Deficit Current liabilities: Accounts payable and accrued expenses Accrued compensation and benefits payable Health and wellness program liability Operating lease liability Accrued claim settlements Other Total current liabilities Non-current liabilities: Senior notes, net of unamortized debt premium of $4.2 million and $0.9 million as of December 31, 2020 and 2019, respectively Accrued claim settlements Operating lease liability Total non-current liabilities Total liabilities Shareholders' deficit: Common stock, $.01 par value per share, 780,000,000 shares authorized: 114,655,893 and 112,355,893 shares issued and outstanding as of December 31, 2020 and 2019, respectively Additional paid-in capital Accumulated deficit Total shareholders' deficit Total liabilities and shareholders' deficit See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (in thousands, except share and per share amounts) For the Years Ended December 31, 2020 2019 Service fee income Cost and expenses: Cost of services General and administrative expenses Goodwill impairment charge Operating loss Other income Interest expense Reorganization items, net Loss before income taxes Income tax expense Net loss Other comprehensive income: Unrealized gains on marketable securities Total other comprehensive income Total comprehensive loss Loss per share: Basic Diluted Weighted average common shares outstanding: Basic Diluted See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT (in thousands) Common Additional Accumulated Accumulated Total Balance, December 31, 2019 Issuances of nonvested stock Compensation recognized under stock compensation plans Net loss Balance, December 31, 2020 Common Additional Accumulated Accumulated Total Balance, December 31, 2018 Issuances and cancellations of nonvested stock, net Common stock granted in debt restructure Common stock and common stock warrants granted in debt restructure Compensation recognized under stock compensation plans Net loss Adjustment to retained earnings for adoption of accounting standard Other comprehensive income Balance, December 31, 2019 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2020 2019 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Amortization of intangible assets Amortization of debt premium and prepaid interest into interest expense Depreciation expense (Gain) loss on disposal of fixed assets Lease expense Goodwill impairment Compensation recognized under stock compensation plans Changes in operating assets and liabilities: Accounts and unbilled receivables Accounts payable and accrued expenses Accrued compensation and benefits payable Accrued health and wellness program payable Accrued interest payable Accrued claim settlements Other current assets and liabilities, net Other noncurrent assets and liabilities, net Net cash used in operating activities Cash flows from investing activities: Purchases of property and equipment Proceeds from sale of property and equipment Net cash used in investing activities Cash flows from financing activities: Borrowings under revolving line of credit Repayments of borrowings under revolving line of credit Paydowns of long-term debt Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental disclosure of cash flow information: Cash paid for interest Cash paid for income taxes, net Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock in restructure of debt (Note 6) Issuance of common stock warrants in restructure of debt (Note 6) See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation, Business Plan and Liquidity Description of Operations Liquidity and Going Concern Prior to executing the Amendment with the Noteholders in August 2019 (Note 6), the Company 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, Our historical operating results and Financial Statement Presentation. Goodwill and Indefinite-Lived Intangible Impairment of Long-Lived Intangible Assets with Finite Revenue and Cost Recognition - Income Under the income tax guidance, companies are required to identify and consider all available evidence, both positive and negative, in determining whether it is more likely than not that all or some portion of its deferred tax assets will not be realized. Positive evidence includes but is not limited to the following: cumulative earnings in recent years, earnings expected in future years, excess appreciated asset value over the tax basis and positive industry trends. Negative evidence includes but is not limited to the following: cumulative losses in recent years, losses expected in future years, a history of operating losses or tax credit carryforwards expiring, and adverse industry trends. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is required The Company examines and weighs all available evidence (both positive and negative and both historical and forecasted) in the process of determining whether it is more likely than not that a deferred tax asset will be realized. The Company considers the relevance of historical and forecasted evidence when there has been a significant change in circumstances. Additionally, the Company evaluates the realization of its recorded deferred tax assets on an interim and annual basis. The Company does not record a full valuation allowance if the weight of the positive evidence exceeds the negative evidence and is sufficient to support a conclusion that it is more likely than not that its deferred tax asset will be realized. If a valuation allowance is necessary, the Company considers all sources of taxable income in determining the amount of valuation allowance to be recorded. Sources of taxable income identified in the income tax guidance include the following: 1) taxable income in prior carryback year, 2) future reversals of existing taxable temporary differences, 3) future taxable income exclusive of reversing temporary differences and carryforwards, and 4) tax planning strategies. The Company currently evaluates estimates of uncertainty in income taxes based upon a framework established in the income tax accounting guidance. The guidance prescribes a recognition threshold and measurement standard for the recognition and measurement of tax positions taken or expected to be taken in a tax return. In accordance with the guidance, the Company evaluates whether a tax position will more likely than not be sustained upon examination by the appropriate taxing authority. The Company measures the amount to recognize in its consolidated financial statements as the largest amount that is greater than 50% likely of being realized upon ultimate settlement. The recognition and measurement of tax benefits is often judgmental, and determinations regarding the tax benefit can change as additional developments occur relative to the issue. Earnings (Loss) Per Share (“EPS”) Segments - The Company has evaluated it’s operations and determined Note 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 Other Total Accounts and unbilled receivables are summarized as follows, in thousands: December 31, 2020 December 31, 2019 Accounts receivable Unbilled receivables (Contract Assets) Total accounts and unbilled receivables As of December 31, Note December 31, 2020 December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Indefinite-lived assets (in thousands): Goodwill Tradenames Finite-lived assets (in thousands): Customer relationships Non-compete agreement Amortization expense (in thousands): 2019 2020 Estimated future amortization expense (in thousands): 2021 2022 2023 Thereafter Total estimated amortization expense Years Ended December 31, 2020 2019 Goodwill activity (in thousands): Beginning balance Impairment charge Ending balance Management completed Note Our leases consist primarily of Most leases include one or more options to renew, with renewal terms Maturities of lease liabilities were as follows (in thousands): December 31, 2020 2021 2022 2023 Thereafter Total Less interest Present value of lease liabilities Other information related to December31, 2020 Lease Term and Discount Rate: Weighted average remaining lease term (years) Weighted average discount rate Note 6. Borrowings Note Refinancing and 2017 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. The December 31, 2020 December 31, 2019 Principal balance Unamortized debt premium Total, 2017 Notes Note Contingencies Historically, repurchases of loans or indemnification of losses where a loan defect has been alleged have been insignificant and any future losses for alleged loan defects have not been deemed to be probable or reasonably estimable; therefore, the Company has recorded no reserves related to these claims. The Company does not use internal groupings for purposes of determining the status of these loans. The Company is unable to develop an estimate of the maximum potential amount of future payments related to repurchase demands because the Company does not have access to information relating to loans sold and securitized and the number or amount of claims deemed probable of assertion is not known nor is it reasonably estimated. Further, the validity of claims received remains questionable. Also, considering that the Company completed its last sale or securitization of loans during 2007, the Company believes that it will be difficult for a claimant to successfully validate any additional repurchase demands. Management does not expect that the potential impact of claims will be material to the Company's consolidated financial statements. Pending Litigation Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than the active 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. On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. NMFC filed a motion to dismiss the amended complaint which was denied on September 12, 2013. The defendants had claimed that the case should be dismissed based upon a statute of limitations and sought an appeal of the court's denial of this defense. An interlocutory appeal of this issue was allowed, and on August 27, 2013, the Tenth Circuit affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the appellate court held that the Extender Statute, 12 U.S.C. §1787(b)(14) applied to plaintiff’s claims. On June 16, 2014, the United States Supreme Court granted a petition of NMFC and its co-defendants for certiorari, vacated the ruling of the Tenth Circuit, and remanded the case back to that court for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). On August 19, 2014, the Tenth Circuit reaffirmed its prior decision, and on October 2, 2014 the defendants filed a petition for writ of certiorari with the Supreme Court, which was denied. On March 22, 2016, NMFC filed motions for summary judgment, and plaintiff filed a motion for partial summary judgment. On February 28, 2013, the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and purportedly on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series 2007-1 (the “Trust”), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, DB Structured Products, Inc., Deutsche Bank AG, Deutsche Bank National Trust Company, Note Fair Value Measurements The Company's valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy: • Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities. • Level 2 – Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates for substantially the full term of the asset or liability. • Level 3 – Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts. The following table provides The estimated fair values of the Company's financial instruments are as follows as of December 31, December 31, 2020 December 31, 2019 Carrying Value Fair Value Carrying Value Fair Value Financial liabilities: 2017 Notes (Level 3) The 2017 Notes in the table above are not measured at fair value in the consolidated balance sheets but 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 Activity during Goodwill Activity: Balance, December 31, 2019 Impairment charge Balance, December 31, 2020 The determination of the goodwill impairment was based on a discounted cash flow approach utilizing forecasted revenue ranging from $57 million to $69 million, historical operating income percentages, and a cost of capital of approximately 15%. Prior to the Company's Note The components of income tax expense (benefit) from continuing operations are (in thousands): For the Years Ended December 31, 2020 2019 Current: Federal State and local Total current Below is a reconciliation of the expected federal income tax expense (benefit) using the federal statutory tax rate of For the Years Ended December 31, 2020 2019 Income tax benefit at statutory rate State income taxes, net of federal tax benefit Valuation allowance Bankruptcy reorganization Other Total income tax expense Prior to The Company's determination of the realizable deferred tax assets requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. The Company will continue to assess the need for a valuation allowance in future periods. As of December 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 State NOL carryforwards Goodwill impairment, HCS Business interest expense limitation Other Gross deferred tax asset Valuation allowance Deferred tax asset Deferred tax liabilities: Other Deferred tax liability Net deferred tax asset The other deferred tax assets consist of differences in various accrued expenses, debt restructuring expenses, goodwill and intangible asset book to tax differences, and various other book to tax differences. As of December 31, The activity in the accrued liability for unrecognized tax benefits For the Years Ended December 31, 2020 2019 Beginning balance Gross increases – tax positions in current period Lapse of statute of limitations Ending balance Accounting for income taxes, including uncertain tax positions, represents management's best estimate of various events and transactions, and requires significant judgment. As of December 31, None. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, our chief executive 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 Description of Material Weakness As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations above, 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 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. DIRECTORS AND EXECUTIVE OFFICERS Howard M. Amster Howard Timothy Eriksen, age Barry A. Igdaloff Lee D. Keddie, age David W. Pointer, Carolyn K. Campbell CORPORATE GOVERNANCE AND RELATED MATTERS Board Leadership Structure The Board is led During Board Committees The Board has a standing Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The Board has determined that all directors serving on the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are independent with the meaning of SEC and NASDAQ rules. Descriptions of the responsibilities of such committees are provided below. These descriptions are qualified in their entirety by the full text of the written committee charters that may be found on the Company’s website at www.novationcompanies.com. Audit Committee. Nominating and Corporate Governance Committee. Compensation Committee Compensation Committee Process and Advisors The Compensation Committee is responsible for discharging the responsibilities of the Board with respect to the compensation of our executive officers. The Compensation Committee recommends overall compensation of our executive officers to the 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 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, 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 9229 Ward Parkway, Suite Kansas City, Missouri 816.237.7000 Email: ir@novationcompanies.com Shareholders may communicate directly with any member of the Board or any individual chairman of a Board committee by writing directly to those individuals at the following address: Novation Companies, Inc., Risk Oversight The Board oversees an enterprise-wide approach to risk management, designed to support the achievement of Company objectives, improve long-term Company performance and create shareholder value. A fundamental part of risk management is understanding the risks the Company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The involvement of the full Board in setting the Company’s business strategy and objectives is integral to the Board’s assessment of the Company’s risk and also a determination of what constitutes an appropriate level of risk for the Company. The full Board conducts an annual risk assessment of the Company’s financial risk, legal/compliance risk and operational/strategic risk and addresses individual risk issues throughout the year as necessary. While the Board has the ultimate oversight responsibility for the risk management process, the Board delegates responsibility for certain aspects of risk management to the Audit Committee. Per its charter, the Audit Committee focuses on key financial risks and related controls and processes and discusses with management the Company’s major financial reporting exposures and the steps management has taken to monitor and control such exposures. The Board believes its leadership structure enhances overall risk oversight. While the Board requires risk assessments from management, the combination of Board member experience, diversity of perspectives, continuing education and independence of governance processes provide an effective basis for testing, overseeing and supplementing management assessments. Identifying and Evaluating Nominees for Directors The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. The Nominating and Corporate Governance Committee regularly assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee considers various potential candidates for director. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current members of the Board, professional search firms, shareholders or other persons. These candidates are evaluated at regular or special meetings of the Nominating and Corporate Governance Committee, and may be considered at any point during the year. Shareholder nominations should be addressed to: Novation Companies, Inc., The Nominating and Corporate Governance Committee considers candidates for the Board based upon several criteria set forth in the Company’s Corporate Governance Guidelines, including their broad-based business and professional skills and experience, education, accounting and financial expertise, age, reputation, civic and community relationships, concern for the long-term interest of shareholders, personal integrity and judgment, knowledge and experience in the Company’s industry (such as operations, finance, accounting and marketing experience and education) and diversity. The Nominating and Corporate Governance Committee considers diversity in the broadest sense, thus including factors such as age, 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 V.I. Capital Management, LLC (“V.I. Capital”) and Chief Executive Officer 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, Name Fees earned or paid in cash Stock Awards Total Barry A. Igdaloff Howard M. Amster Howard Timothy Eriksen Lee D. Keddie (1) (2) On In payment of the EXECUTIVE COMPENSATION Our named executive officers during Summary Compensation Table The following table sets forth the compensation of our Named Executive Officers for the periods indicated. Name and Principal Position Year Salary Bonus Stock Awards (1) All Other Compensation Total David W. Pointer (2) (3) (4) 2020 Chief Executive Officer 2019 Carolyn K. Campbell (5) (6) (7) 2020 Chief Financial Officer 2019 (1) Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. (2) Mr. Pointer serves as the Chief Executive Officer of both Novation and HCS. (4) (6) Outstanding Equity Awards at Fiscal Year-End There were no outstanding equity incentive plan awards 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 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth sets forth certain information with respect to beneficial ownership of the Company’s common stock as of Beneficial Ownership of Common Stock Name of Beneficial Owner Shares Percent of Class (1) Directors and Named Executive Officers Howard M. Amster (2) 500,000 * Howard Timothy Eriksen (3) 1,333,333 1.1% Barry A. Igdaloff (4) 6,953,390 6.2% Lee D. Keddie (5) 1,333,333 1.1% Carolyn K. Campbell (6) 565,000 * David W. Pointer (7) 5,000,000 4.3% All current directors and executive officers as a group (6 persons) (8) 15,685,056 13.7% 5% Beneficial Owners Massachusetts Mutual Life Insurance Company (9) 19,258,775 16.5% * Less than 1% (1) Based on 116,655,893shares of common stock outstanding as of February 25, 2021. Shares of common stock issuable upon exercise of options, warrants or other rights or the conversion of other convertible securities beneficially owned that are exercisable or convertible within 60 days are deemed outstanding for the purpose of computing the percentage ownership of the person holding such securities and rights and all directors and executive officers as a group. (2) Consists of 250,000 shares of common stock, 250,000 shares of unvested restricted stock. (3) Consists of 1,083,333 shares of common stock and 250,000 shares unvested restricted stock. (4) Consists of 3,529,707 shares of common stock, 300,000 shares of unvested restricted stock and 3,123,683 shares of common stock controlled by Mr. Igdaloff as a registered investment advisor. (5) (6) Consists of 565,000 shares of common stock. (7) Consists of 3,000,000 shares of common stock and 2,000,000 shares of unvested restricted stock. (8) Consists of 9,511,373 shares of common stock; 3,050,000 shares of unvested restricted stock. (9) Based on a Form 3 filed on December 14, 2011, Massachusetts Mutual Life Insurance Company (“MassMutual”) may be deemed to own beneficially and indirectly 19,258,775 shares of common stock held in one or more advisory accounts and private investment funds. Babson Capital Management LLC acts as investment adviser to these advisory accounts and private investment funds, and in such capacities may also be deemed to be the beneficial owner of such shares. The address of MassMutual is 1295 State Street, Springfield, MA 01111. Equity Compensation Plan Information The following table sets forth information as of December 31, Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in the First Column) Equity compensation plans approved by stockholders (1) Equity compensation plans not approved by stockholder Total (1) Represents shares that may be issued pursuant to outstanding options awarded under the 2015 Incentive Plan. 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. 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 For the Fiscal Years Ended December 31, 2020 2019 Audit Fees (1) Tax Fees (2) Total Fees (1) Annual audit and quarterly reviews of our consolidated financial statements, assistance with and review of documents filed with the (2) Preparation and Pre-Approval Policies and Procedures The Audit Committee has adopted a policy with respect to the pre-approval of all audit and non-audit services provided by our independent registered public accounting firm. All fees paid to our independent registered public accounting firm for fiscal years Financial Statements and Schedules (1) The financial statements as set forth under Item 8 of this 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 None. Exhibit No. Description of Document 2.1 2.2 2.3 3.1 3.3 4.1 4.2 4.3 4.4 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 21.1 23.1 31.1 31.2 32.1 32.2 101 The following financial information from Novation Companies, Inc.'s Annual Report on Form 10-K for the year ended December 31, * Management contract or compensatory plan or arrangement. ** The registrant has omitted certain schedules and exhibits to this agreement in accordance with Item 601(b)(2) of Regulation S-K, and will supplementally furnish a copy of any omitted schedule and/or exhibit to the Securities and Exchange Commission upon request. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOVATION COMPANIES, INC. DATE: /s/ DAVID W. POINTER David W. Pointer, Chief Executive Officer DATE: /s/ CAROLYN K. CAMPBELL Carolyn K. Campbell, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and dates indicated. DATE: /s/ DAVID W. POINTER David W. Pointer, Chief Executive Officer (Principal Executive Officer) DATE: /s/ CAROLYN K. CAMPBELL Carolyn K. Campbell, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) DATE: /s/ HOWARD M. AMSTER Howard M. Amster, Director DATE: /s/ Howard T. Eriksen, Director DATE: /s/ BARRY A. IGDALOFF Barry A. Igdaloff, Director and Chairman DATE: /s/ Lee D. Keddie, Director20172020 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. $ 1,340 $ 2,032 5,008 6,583 663 647 53 21 7,064 9,283 — 3,905 4,677 5,784 92 125 339 316 4 4 5,112 10,134 $ 12,176 $ 19,417 $ 315 $ 524 2,176 2,717 — 492 195 205 246 246 4 36 2,936 4,220 90,115 86,824 62 307 153 125 90,330 87,256 93,266 91,476 1,146 1,123 746,227 746,112 (828,463 ) (819,294 ) (81,090 ) (72,059 ) $ 12,176 $ 19,417 December 31, 2017 2016 Assets Current Assets Cash and cash equivalents $ 2,740 $ 4,805 Accounts and unbilled receivables 7,922 — Marketable securities 11,795 9,943 Other current assets 578 1,091 Total current assets 23,035 15,839 Non-Current Assets Goodwill 8,205 — Intangible assets, net 8,172 — Marketable securities — 26,545 Other 425 246 Total non-current assets 16,802 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 payable 4,213 75 Accrued professional fees payable 1,037 691 Accrued interest payable 1,050 3,689 Other 1,650 1,063 Total current liabilities 11,283 5,518 Non-Current Liabilities Long-term debt 86,050 85,938 Other 386 373 Total non-current liabilities 86,436 86,311 Total liabilities 97,719 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, respectively 971 928 Additional paid-in capital 744,937 744,873 Accumulated deficit (815,184 ) (804,319 ) Accumulated other comprehensive income 11,394 9,319 Total shareholders' deficit (57,882 ) (49,199 ) Total liabilities and shareholders' deficit $ 39,837 $ 42,630 INCOME (LOSS) $ 51,354 $ 63,474 45,819 56,483 7,503 8,345 3,905 4,300 (5,873 ) (5,654 ) 43 39 (3,311 ) (4,522 ) — (63 ) (9,141 ) (10,200 ) 28 25 (9,169 ) (10,225 ) — 1 — 1 $ (9,169 ) $ (10,224 ) $ (0.08 ) $ (0.10 ) $ (0.08 ) $ (0.10 ) 111,045,292 100,472,515 111,045,292 100,472,515 For the Year Ended
December 31, 2017 2016 Service fee income $ 27,965 $ — Cost and expenses: Cost of services 24,473 — General and administrative 6,713 4,367 Goodwill impairment charge 4,500 — Operating loss (7,721 ) (4,367 ) Interest income – mortgage securities 3,143 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 taxes 895 1,966 Net income (loss) (10,865 ) 5,213 Other comprehensive income: (137 ) (3,672 ) Change in unrealized gain (loss) on marketable securities 2,212 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 outstanding 92,800,392 91,905,941 Weighted average diluted common shares outstanding 92,800,392 91,905,941 NOVATION COMPANIES, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT(in thousands) Balance, December 31, 2016 $ 928 $ 744,873 $ (804,319 ) $ 9,319 $ (49,199 ) Issuance of nonvested shares 43 (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 taxes 895 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 charge 4,500 — Gains on sales of marketable securities, net (137 ) (3,672 ) Accretion of marketable securities, net 58 16 Adjustments to and amortization of deferred debt issuance costs and senior debt discount — (2,447 ) Compensation recognized under stock compensation plans 107 274 Amortization of intangible assets 496 — Changes in operating assets and liabilities, net of acquisition: Accounts receivable (457 ) — Accrued professional fees payable 346 315 Accrued compensation and benefits payable (613 ) (200 ) Accrued interest payable (2,639 ) 3,687 Due from discontinued operations — (26 ) Other current assets and liabilities, net 63 329 Other noncurrent assets and liabilities, net 415 593 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 operations 895 (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 securities 26,847 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 operations 3,510 1,591 Net cash used in investing activities of discontinued operations — (159 ) Net cash provided by investing activities 3,510 1,432 Cash flows from financing activities: Borrowings under revolving line of credit 10,043 — 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 operations 3,151 (205 ) Net cash provided by financing activities of discontinued operations — 205 Net cash provided by financing activities 3,151 — Net increase (decrease) in cash and cash equivalents (2,065 ) 1,627 Cash and cash equivalents, beginning of period 4,805 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 receivable 7,465 — Other current assets 59 — Other assets 581 — Intangible assets 8,669 — Goodwill 12,705 — Accrued compensation and benefits (4,751 ) — Long-term debt, including current portion of $426 (683 ) — Other current liabilities (708 ) — Purchase price $ 23,583 $ —
Stock
Paid-in
Capital
Deficit
Other
Comprehensive
Income
Shareholders’
Deficit $ 1,123 $ 746,112 $ (819,294 ) $ — $ (72,059 ) 23 (23 ) — — — — 138 — — 138 — — (9,169 ) — (9,169 ) $ 1,146 $ 746,227 $ (828,463 ) $ — $ (81,090 )
Stock
Paid-in
Capital
Deficit
Other
Comprehensive
Income
Shareholders’
Deficit $ 991 $ 745,104 $ (809,050 ) $ (1 ) $ (62,956 ) 42 (42 ) — — — 90 (90 ) — — — — 916 — — 916 — 224 — — 224 — — (10,225 ) — (10,225 ) — — (19 ) — (19 ) — — — 1 1 $ 1,123 $ 746,112 $ (819,294 ) $ — $ (72,059 ) $ (9,169 ) $ (10,225 ) 1,107 1,194 3,291 1,262 48 27 — 9 (5 ) (5 ) 3,905 4,300 138 224 1,575 (461 ) (209 ) (146 ) (541 ) (14 ) (492 ) 492 — (754 ) (245 ) (459 ) (80 ) (186 ) — (426 ) (677 ) (5,168 ) (15 ) (96 ) — 26 (15 ) (70 ) — 8,685 — (10,633 ) — (31 ) — (1,979 ) (692 ) (7,217 ) 2,032 9,249 $ 1,340 $ 2,032 $ 21 $ 4,030 $ 45 $ 30 $ — $ 311 $ — $ 605 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”.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. Thealso 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.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.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.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. ReorganizationOn 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 BankruptcyCourt 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 3.2. Summary of Significant Accounting and Reporting PoliciesRecently 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.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.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.Marketable Securities – Available-for-Sale. Marketable securities are stated at fair value in accordance with the relevant accounting guidance. The Company determines the fair valueMortgage 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.Assets.Lives.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.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%. 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.. - 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 PronouncementsIn 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. 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.4. Acquisition and DivestitureAcquisition 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 termsof 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 receivable 7,465 Other assets 59 Property and equipment 581 Intangible assets: Customer relationships 6,895 Trademark 1,147 Non-compete 627 Goodwill 12,705 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 $ 50,054 97.5 % $ 61,620 97.1 % 1,300 2.5 % 1,854 2.9 % $ 51,354 100.0 % $ 63,474 100.0 % $ 2,705 $ 4,083 2,303 2,500 $ 5,008 $ 6,583 December 31, 2017 (in thousands) Accounts receivable $ 5,418 Unbilled receivables 2,504 $ 7,922 2017,2020 and December 31, 2019, management has determined no allowance for doubtful accounts is necessary.Note 6. Marketable SecuritiesThe 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 securities 1 — — 1 Total $ 401 $ 11,394 $ — $ 11,795 As of December 31, 2016 Marketable securities, current Mortgage securities $ 450 $ 9,341 $ — $ 9,791 Equity securities 112 47 (7 ) 152 Total $ 562 $ 9,388 $ (7 ) $ 9,943 Marketable securities, non-current Agency mortgage-backed securities $ 26,607 $ — $ (62 ) $ 26,545 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.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.7.4. Goodwill and Intangible Assets $ — $ — $ — $ 3,905 $ — $ 3,905 1,147 — 1,147 1,147 — 1,147 Total indefinite-lived assets $ 1,147 $ — $ 1,147 $ 5,052 $ — $ 5,052 $ 6,895 $ 3,365 $ 3,530 $ 6,895 $ 2,380 $ 4,515 627 627 — 627 505 122 Total finite-lived assets $ 7,522 $ 3,992 $ 3,530 $ 7,522 $ 2,885 $ 4,637 $ 1,194 1,107 $ 985 985 985 575 $ 3,530 $ 3,905 $ 8,205 (3,905 ) (4,300 ) $ — $ 3,905 December 31, 2017 (in thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Indefinite-lived assets Goodwill $ 8,205 $ — $ 8,205 Tradenames 1,147 — 1,147 $ 9,352 $ — $ 9,352 Finite-lived assets Customer relationships 6,895 410 6,485 Non-compete agreement 627 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 Acquisition 12,705 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, managementaits 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.Amortization expense (in thousands) 2017 $ 496 Estimated amortization expense (in thousands) 2018 1,194 2019 1,194 2020 1,107 2021 985 2022 985 Thereafter 1,560 Total estimated amortization expense $ 7,025 8. BorrowingsRevolving Credit Agreement. As5. LeasesDecember 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.thereafter unlessthat can extend the FNCC Credit Agreementlease term from one to three years or more. The exercise of lease renewal options isterminated pursuant to its terms. The obligations of HCS under the FNCC Credit Agreement are secured by HCS’s inventoryand 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. $ 212 88 57 19 $ 376 28 $ 348 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):2.20 6.75 % 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.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.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.total $ 85,938 $ 85,938 4,177 886 $ 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.9.7. Commitments and Contingencies$43.1$43.1 billion at the time of sale or securitization. The remaining principal balance of these loans is not available as these loans are serviced by third parties and may have been refinanced, sold or liquidated. Claims to repurchase loans or to indemnify under securitization documents have not been acknowledged as valid by the Company. In some cases, claims were made against affiliates of the Company that have ceased operations and have no or limited assets. The Company has not repurchased any loans or made any such indemnification payments since 2010. See Note 2 to the consolidated financial statements for a descriptionNovaStar Mortgage Funding Corporation (“NMFC”)NMFC and NovaStar Mortgage, Inc. ("NMI"), wholly-owned subsidiaries of the Company, and NMFC's individual directors, several securitization trusts sponsored by the Company (“affiliated defendants”) and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. The plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933, as amended, by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by the plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff's claims, which the court granted on March 31, 2011, with leave to amend. The plaintiff filed a second amended complaint on May 16, 2011, and the Company again filed a motion to dismiss. On March 29, 2012, the court dismissed the plaintiff's second amended complaint with prejudice and without leave to replead. The plaintiff filed an appeal. On March 1, 2013, the appellate court reversed the judgment of the lower court, which had dismissed the case. Also, the appellate court vacated the judgment of the lower court which had held that the plaintiff lacked standing, even as a class representative, to sue on behalf of investors in securities in which plaintiff had not invested, and the appellate court remanded the case back to the lower court for further proceedings. On April 23, 2013 the plaintiff filed its memorandum with the lower court seeking a reconsideration of the earlier dismissal of plaintiff's claims as to five offerings in which plaintiff was not invested, and on February 5, 2015 the lower court granted plaintiff's motion for reconsideration and vacated its earlier dismissal. On March 8, 2017, the affiliated defendants and all other parties executed an agreement to settle the action, with the contribution of the affiliated defendants to the settlement fund being paid by their insurance carriers. The court certified a settlement class and granted preliminary approval to the settlement on May 10, 2017. One member of the settlement class objected to the settlement and sought a stay of the final settlement approval hearing on the ground that it did not receive notice of the settlement and had no opportunity to timely opt out of the class. After the courtpending a decisionrequestpetition 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.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.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,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.10.8. Fair Value AccountingLevel 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 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-current 26,545 26,545 — — $ 36,488 $ 26,697 $ — $ 9,791 Valuation Methods and ProcessesWhen available, the Company determines the fair value of its marketable securities using market prices from industry-standard independent data providers. Market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.To the extent observable inputs are not available, as is the case with the Company's retained mortgage securities, the Company estimates fair value using present value techniques and generally does not have the option to choose other valuation methods for these securities. The methods and processes used to estimate the fair value of the Company's retained mortgage securities are discussed further below. There have been no significant changes to the Company's valuation techniques. Accordingly, there have been no material changes to the consolidated financial statements resulting from changes to our valuation techniques.The Company's marketable securities are classified as available-for-sale and are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of the Company's marketable securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses.Mortgage securities - available-for-sale. The Company's mortgage securities include traditional agency mortgage-backed securities, with valuations based on quoted prices in active markets for identical assets (Level 1). Additionally, mortgage securities include investments that were retained during the Company's lending and securitization process, conducted prior to 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, theCompany 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, 2017 2016 Weighted average: Loss severity 62.1 % 49.6 % Default rate 2 % 2.1 % Prepayment speed 13.5 % 9.8 % Servicer's optional redemption date None None 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 adjustment 2,054 7,855 Net increases (decreases) to mortgage securities – available-for-sale 2,003 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.20172020 and 20162019 (in thousands): $ 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 itemsfor 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. $ — $ (3,905 ) December 31, 2017 Fair Value (Level 3) Gains and (Losses) Goodwill $ 8,205 $ (4,500 ) 20172020 for Goodwill, the Company's only Level 3 asset, measured on a nonrecurring basis is included in the following table (in thousands): $ 3,905 (3,905 ) $ — Goodwill Balance, December 31, 2016 $ — Goodwill recorded in connection with the HCS Acquisition 12,705 Impairment charge (4,500 ) Balance, December 31, 2017 $ 8,205 See note 7 for additional information regardingGoodwill and Intangible Assets.Note 11. Earnings (Loss) Per ShareBasic 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 operations 895 1,966 Net income (loss) $ (10,865 ) $ 5,213 Denominator: Weighted average common shares outstanding – basic 92,800,392 91,905,941 Weighted average common shares outstanding – diluted: Weighted average common shares outstanding – basic 92,800,392 91,905,941 Stock options — — Nonvested shares — — Weighted average common shares outstanding – diluted 92,800,392 91,905,941 Basic earnings per share: Net income (loss) from continuing operations $ (0.13 ) $ 0.04 Income (loss) from discontinued operations 0.01 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 operations 0.01 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 options 1,411 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 impact2019.12.9. Income Taxes $ — $ (11 ) 28 36 $ 28 $ 25 2017 2016 Current: Federal $ (1 ) $ (14 ) State and local 15 (7 ) Total current $ 14 $ (21 ) 35%21% to the Company’s actual income tax benefitexpense (benefit) and resulting effective tax rate (in thousands). $ (1,926 ) $ (2,949 ) (71 ) 36 2,278 2,528 — 9 (253 ) 401 $ 28 $ 25 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 rate 33,640 — Change in state tax rate 100,899 (16,475 ) Bankruptcy reorganization 746 437 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. 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 2016.20172020 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. $ 153,320 $ 152,705 9,044 9,003 2,069 1,084 2,578 1,877 1,812 1,876 168,823 166,545 (168,823 ) (166,545 ) — — — — — — $ — $ — December 31, 2017 2016 Deferred tax assets: Basis difference – investments $ 8,015 $ 17,261 Federal NOL carryforwards 145,608 239,942 State NOL carryforwards 8,301 35,896 Other 2,756 2,816 Gross deferred tax asset 164,680 295,915 Valuation allowance (162,708 ) (292,214 ) Deferred tax asset 1,972 3,701 Deferred tax liabilities: Other 1,972 3,701 Deferred tax liability 1,972 3,701 Net deferred tax asset $ — $ — 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.included in other current liabilities,for the years ended December 31, 2020 and 2019 was (in thousands): $ — $ 11 — — — (11 ) $ — $ — 2017 2016 Beginning balance $ 331 $ 368 Gross increases – tax positions in current period 22 2 Lapse of statute of limitations (25 ) (39 ) Ending balance $ 328 $ 331 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.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.20172020 based on the framework2017. 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.procedures and internal control over financial reporting.procedures. We are working to remediate this material weakness as discussed above.70,73, has been a member of the Board since 2009. Mr. Amster currently is an owner and operator ofalso serveshas served as a director of Phenixfin Corp since August 2020. Mr. Amster served as a director of Maple Leafand newAX, Inc. (formerly Astrex, Inc.). Since June 2015,until it was acquired by Farmers Banc Corp in 2020. Mr. Amster also has served as a Financial Advisor at McDonald Partners, LLC, a securities brokerage firm.firm from 2015 to 2020. From 2000 to May 2015, Mr. Amster served as a Principal with Ramat Securities Ltd., a securities brokerage firm. From 1992 to 2000, Mr. Amster was an investment consultant with First Union Securities (formerly EVEREN Securities and formerly Kemper Securities). The Board believes Mr. Amster’s qualifications to serve on the Board include his investment experience and his service as a director of public companies.Charles M. Gillman48,52, 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.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. Pearse58,52, 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 theCompensation 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.48,51, has been our Chief Executive Officer and Chairman of the Board since March 27, 2018. Heemployee 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 Business47,50, 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 BusinessManagement 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. 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.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.Robert G. Pearse,Howard Timothy Eriksen, with Mr. Igdaloff serving as the chairman. The Board has determined that Barry A. Igdaloff and Robert G. PearseHoward Timothy Eriksen qualify as “audit committee financial experts” under SEC rules and that each Audit Committee member has sufficient knowledge in reading and understanding the Company’s consolidated financial statements to serve on the Audit Committee.Barry A. Igdaloff,Lee D. Keddie, Howard M. Amster and Robert G. Pearse,Barry A. Igdaloff, with Mr. IgdaloffKeddie serving as the chairman.Robert G. Pearse,Barry A. Igdaloff, Howard M. Amster and Charles M. Gillman,Lee D. Keddie, with Mr. PearseIgdaloff serving as the chairman.2017,2020, the Compensation Committee did not retain a compensation consultant.500 Grand Boulevard,9229 Ward Parkway, Suite 201B,340, Kansas City, MO 64106.500 Grand Boulevard,201B64106500 Grand Boulevard,9229 Ward Parkway, Suite 201B,340, Kansas City, MO 64106.64114. Communications that are intended for the non-management, independent directors generally should be marked to the attention of the chairman of the Nominating and Corporate Governance Committee. The Company’s general policy is to forward, and not to intentionally screen, any substantive mail received at the Company’s corporate office that is sent directly to a director; however, (i) routine advertisements and business solicitations and (ii) communications deemed to be a security risk or principally for harassment purposes, may not be forwarded in the discretion of the Corporate Secretary, provided that in the latter case the Chairman of the Board is notified thereof.500 Grand Boulevard,9229 Ward Parkway, Suite 201B,340, Kansas City, MO 64106,64114, attention Corporate Secretary. The Nominating and Corporate Governance Committee will consider properly submitted shareholder nominations for candidates for the Board, following verification of the shareholder status of persons proposing candidates. If any materials are provided by a shareholder in connection with the nominating of a director candidate, such material will be forwarded to the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee will also review materials provided by professional search firms or other parties.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 $30,000.and Chairman of the Board David W. Pointer are Inc. and Solitron Devices, Inc., (ii) pledging V.I. Capital investmentSECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCEDecember 18, 2017, reporting a transaction that occurred on December 13, 2017, and Mr. Rector filed a Form 4 on August 2,2017, reporting a transaction that occurred on July 27, 2017.2017,2020, other than our formerChief Executive ChairmanOfficer Mr. Eberwein,Pointer, whose compensation is described in the Executive Compensation section below:Name and Principal Position Fees earned or paid in cash ($) Barry A. Igdaloff $ 21,411 $ 25,000 $ 46,411 Howard M. Amster 8,921 25,000 33,921 Charles M. Gillman 8,921 25,000 33,921 Robert G. Pearse 11,598 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.
(1) (2) $ 68,500 — $ 68,500 $ 36,000 — $ 36,000 $ 36,000 — $ 36,000 $ 41,000 — $ 41,000 Represents the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. There were no stock awards granted to the Board in 2020. August 23, 2017,September 20, 2019, the Board approved base compensation for each of the Company’s non-employee directors, Barry A. Igdaloff, Howard M. Amster, Charles M. GillmanHoward Timothy Eriksen and Robert G. Pearse,Lee D. Keddie, in an amount of $50,000$36,000 per annum, including (i) $25,000payable in restricted stock awards, vesting on the first anniversary of the grant date, and (ii) $25,000 in cash payable on a quarterly basis.basis and 500,000 shares of restricted stock. The Board approved additional compensation for the chairmen of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and the Lead Independent Director in the amounts of $10,000, $7,500,$15,000, $5,000, and $20,000,$5,000 per annum, respectively, payable in cash payable on a quarterly basis. In order to satisfyaddition, the foregoingBoard approved additional compensation for the Lead Independent Director of 100,000 shares of restricted stock. This base compensation was applicable for non-employee directors for the year ended December 31, 2020. On August 13, 2020, the Board appointed Barry A. Igdaloff as Chairman of the Board and approved additional compensation in the amount of $25,000 per annum, payable in cash on a quarterly basis.same date,equity component of the Compensation Committee granted todirectors' base compensation as discussed above, on October 1, 2019, each of the non-employee directors a $25,000received 500,000 shares of restricted stock, award, which vests on the first anniversary of the grant date,except Mr. Igdaloff received 600,000 shares, pursuant to the terms and conditions of the 2015 Incentive Plan and each director’s respective award agreement, as a componentagreement. These shares vested at 50% on the first anniversary of such director’s base compensation.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.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.Name and Principal Position Year Salary Bonus All Other Compensation Total 2017 $ 43,934 $ — $ 15,750 $ — $ 59,684 Chief Financial Officer 2017 101,923 35,000 97,000 6,720 240,643 President, Healthcare Staffing, Inc. 2017 41,369 25,000 75,000 — 141,369 Former Executive Chairman 2017 289,904 — 42,400 — 332,304 Former Chief Executive Officer and Chief Financial Officer 2016 300,000 — — — 300,000 $ 250,000 $ 18,000 $ 80,000 $ 109 $ 348,109 $ 131,154 $ 150,000 $ 100,000 $ 90 $ 381,244 $ 150,000 $ 50,000 $ 8,250 $ 368 $ 208,618 $ 150,000 $ 46,750 $ 12,500 $ 340 $ 209,590 (1)(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)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.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, 2017.2019.2017The following table sets forth2020 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. Stock Awards Name Number of shares or units of stock that have not vested 150,000 $ 10,050 1,000,000 67,000 1,071,429 71,786 (1) Based on the closing share price on December 29, 2017(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 theCompany as of March 31, 2018, upon Mr. Eberwein’s resignation as a director.Richard M. RectorMr. 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 orwithout 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. EberweinMr. 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. SchwatkenMr. 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.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. Consists of 1,083,333 shares of common stock and 250,000 shares unvested restricted stock. Beneficial Ownership of Common Stock Name of Beneficial Owner Shares Directors and Named Executive Officers 4,267,331 4.4 % 304,487 * 8,473,709 8.7 % 419,872 * David W. Pointer — — % 150,000 * 1,000,000 1.0 % 461,543 * 1,282,368 1.3 % 14,615,399 15.0 % 5% Beneficial Owners 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) (10) (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. 20172020 with respect to compensation plans under which the Company’s common stock may be issued.Plan Category 72,336 $1.17 6,152,088 Equity compensation plans not approved by stockholder — — — Total 72,336 $1.17 6,152,088 — — 3,974,211 (1)— — — — — 3,974,211 ••••PLLP . For the Fiscal Year Ended December 31, 2017 2016 $ 144,977 $ 74,381 — 75,632 Tax 35,883 20,311 — Total $ 201,171 $ 150,013 $ 95,400 $ 122,000 7,020 11,000 $ 102,420 $ 133,000 (1)SEC and an audit of the opening balance sheet of HCS.SEC.(2)Payments for due diligence for the HCS Acquisitionthe Company's bankruptcy filings.filing of annual state and federal income taxes.(3)Payments for the audit of the Company's 401(k) plan.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.attached Exhibit Index.Index below.3.2 10.14.5 10.24.6 Novation Companies, Inc. Amended 2015 Incentive Stock Plan (incorporated by reference to Exhibit 10.14.1 to the Quarterly ReportRegistration Statement on Form 10-QS-8 filed on August 7, 2015)September 21, 2020).*10.310.410.510.610.710.810.910.1010.1110.1210.1310.1410.1510.162017,2020, 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.DATE:April 10, 2018 and ChairmanMarch 4, 2021 DATE:April 10, 2018Power of AttorneyKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appointsDavid Pointer and Carolyn Campbell, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, forhim or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, withexhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifyingand confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtuehereof.DATE:April 10, 2018 and ChairmanApril 10, 2018April 10, 2018April 10, 2018CHARLES M. GILLMANHOWARD TIMOTHY ERIKSENCharles M. Gillman,April 10, 2018April 10, 2018ROBERT G. PEARSELEE D. KEDDIERobert G. Pearse,52