SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended
March 31,☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From
toCommission File Number 001-13533
NOVATION COMPANIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland (State or Other Jurisdiction of Incorporation or Organization) | 74-2830661 (I.R.S. Employer Identification No.) | |
9229 Ward Parkway, Suite (Address of Principal Executive Office) | 64114 (Zip Code) |
Registrant's Telephone Number, Including Area Code:
(816) 237-7000Indicate 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
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company ☒ | Emerging growth company ☐ |
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
Securities registered pursuant to Section 12(b) of the Act: None
The number of shares of the Registrant's Common Stock outstanding on May 10, 20188, 2019 was 96,007,321.101,303,893.
FORM 10-Q For the Quarterly Period Ended TABLE OF CONTENTS PART I 13 16 16 17 17 18 18 18 18 18 19 202018Financial Information
Item 1. Financial Statements
NOVATION COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31, 2019 (unaudited) | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,198 | $ | 9,249 | ||||
Accounts and unbilled receivables | 6,405 | 6,122 | ||||||
Prepaid expenses | 590 | 350 | ||||||
Other | 42 | 131 | ||||||
Total current assets | 12,235 | 15,852 | ||||||
Non-current assets: | ||||||||
Goodwill | 8,205 | 8,205 | ||||||
Intangible assets, net | 6,679 | 6,978 | ||||||
Operating lease right-of-use asset | 180 | — | ||||||
Other | 96 | 95 | ||||||
Total non-current assets | 15,160 | 15,278 | ||||||
Total assets | $ | 27,395 | $ | 31,130 | ||||
Liabilities and Shareholders' Deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 676 | 670 | |||||
Accrued compensation and benefits payable | 3,071 | 2,731 | ||||||
Borrowings under revolving line of credit | — | 1,948 | ||||||
Operating lease liability | 83 | — | ||||||
Accrued interest payable | 1,338 | 1,295 | ||||||
Accrued claim settlements | 246 | 459 | ||||||
Other | 16 | 35 | ||||||
Total current liabilities | 5,430 | 7,138 | ||||||
Non-current liabilities: | ||||||||
Long-term debt | 85,938 | 85,969 | ||||||
Accrued claim settlements | 492 | 553 | ||||||
Operating lease liability | 103 | — | ||||||
Other | 261 | 426 | ||||||
Total non-current liabilities | 86,794 | 86,948 | ||||||
Total liabilities | 92,224 | 94,086 | ||||||
Shareholders' deficit: | ||||||||
Common stock, $.01 par value per share, 780,000,000 shares authorized: 101,577,893 and 99,137,893 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | 1,016 | 991 | ||||||
Additional paid-in capital | 745,149 | 745,104 | ||||||
Accumulated deficit | (810,994 | ) | (809,050 | ) | ||||
Accumulated other comprehensive income (loss) | — | (1 | ) | |||||
Total shareholders' deficit | (64,829 | ) | (62,956 | ) | ||||
Total liabilities and shareholders' deficit | $ | 27,395 | $ | 31,130 | ||||
| March 31, 2018 (unaudited) | December 31, 2017 | ||||||
| Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 2,232 | $ | 2,740 | |||
| Accounts and unbilled receivables | 5,825 | 7,922 | |||||
| Marketable securities | 8,455 | 11,795 | |||||
| Other | 458 | 578 | |||||
| Total current assets | 16,970 | 23,035 | |||||
| Non-current assets | |||||||
| Goodwill | 8,205 | 8,205 | |||||
| Intangible assets, net | 7,874 | 8,172 | |||||
| Other | 313 | 425 | |||||
| Total non-current assets | 16,392 | 16,802 | |||||
| Total assets | $ | 33,362 | $ | 39,837 | |||
| Liabilities and Shareholders' Deficit | |||||||
| Current liabilities: | |||||||
| Accrued compensation and benefits payable | $ | 3,421 | $ | 4,213 | |||
| Borrowings under revolving line of credit | 2,162 | 3,333 | |||||
| Accrued interest payable | 1,104 | 1,050 | |||||
| Accrued professional fees payable | 461 | 1,037 | |||||
| Other | 2,081 | 1,650 | |||||
| Total current liabilities | 9,229 | 11,283 | |||||
| Non-current liabilities: | |||||||
| Long-term debt | 85,974 | 86,050 | |||||
| Other | — | 386 | |||||
| Total non-current liabilities | 85,974 | 86,436 | |||||
| Total liabilities | 95,203 | 97,719 | |||||
| Commitments and contingencies | |||||||
| Shareholders' deficit: | |||||||
| Capital stock, $0.01 par value per share, 120,000,000 shares authorized: | |||||||
| Common stock, 97,078,750 and 97,138,750 shares issued and outstanding, as of March 31, 2018 and December 31, 2017, respectively | 971 | 971 | |||||
| Additional paid-in capital | 744,983 | 744,937 | |||||
| Accumulated deficit | (815,801 | ) | (815,184 | ) | |||
| Accumulated other comprehensive income | 8,006 | 11,394 | |||||
| Total shareholders' deficit | (61,841 | ) | (57,882 | ) | |||
| Total liabilities and shareholders' deficit | $ | 33,362 | $ | 39,837 | |||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited; in thousands, except share and per share amounts)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Service fee income | $ | 15,854 | $ | 13,220 | ||||
Cost and expenses: | ||||||||
Cost of services | 14,097 | 11,725 | ||||||
General and administrative expenses | 2,258 | 2,261 | ||||||
Operating loss | (501 | ) | (766 | ) | ||||
Interest income - mortgage securities | — | 462 | ||||||
Other income (expense) | (19 | ) | 1,014 | |||||
Interest expense | (1,381 | ) | (1,203 | ) | ||||
Reorganization items, net | (31 | ) | (139 | ) | ||||
Loss before income taxes | (1,932 | ) | (632 | ) | ||||
Income tax benefit | (7 | ) | (15 | ) | ||||
Net loss | (1,925 | ) | (617 | ) | ||||
Other comprehensive loss: | ||||||||
Reclassification gain on marketable securities included in net income | — | (975 | ) | |||||
Unrealized gain (loss) on marketable securities | 1 | (2,413 | ) | |||||
Total other comprehensive income (loss) | 1 | (3,388 | ) | |||||
Total comprehensive loss | $ | (1,924 | ) | $ | (4,005 | ) | ||
Loss per share: | ||||||||
Basic | $ | (0.02 | ) | $ | (0.01 | ) | ||
Diluted | $ | (0.02 | ) | $ | (0.01 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic | 94,970,561 | 93,232,402 | ||||||
Diluted | 94,970,561 | 93,232,402 | ||||||
| Three Months Ended March 31, | |||||||
| 2018 | 2017 | ||||||
| Service fee income | $ | 13,220 | $ | — | |||
| Costs and expenses: | |||||||
| Cost of services | 11,725 | — | |||||
| General and administrative expenses | 2,261 | 1,037 | |||||
| Operating loss | (766 | ) | (1,037 | ) | |||
| Interest income – mortgage securities | 462 | 991 | |||||
| Other income | 1,014 | 143 | |||||
| Reorganization items, net | (139 | ) | (1,210 | ) | |||
| Interest expense | (1,203 | ) | (1,007 | ) | |||
| Loss from continuing operations before income taxes | (632 | ) | (2,120 | ) | |||
| Income tax expense (benefit), continuing operations | (15 | ) | 7 | ||||
| Net loss from continuing operations | (617 | ) | (2,127 | ) | |||
| Income from discontinued operations, net of income taxes | — | 1,020 | |||||
| Net loss | (617 | ) | (1,107 | ) | |||
| Other comprehensive loss: | |||||||
| Gains realized upon the sale of securities | (975 | ) | — | ||||
| Unrealized loss on marketable securities – available-for-sale | (2,413 | ) | (704 | ) | |||
| Total other comprehensive loss | (3,388 | ) | (704 | ) | |||
| Total comprehensive loss | $ | (4,005 | ) | $ | (1,811 | ) | |
| Earnings (loss) per share: | |||||||
| Basic | $ | (0.01 | ) | $ | (0.01 | ) | |
| Diluted | $ | (0.01 | ) | $ | (0.01 | ) | |
| Weighted average shares outstanding: | |||||||
| Basic | 93,232,402 | 92,780,250 | |||||
| Diluted | 93,232,402 | 92,780,250 | |||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(unaudited; in thousands)
Common | Additional | Accumulated | Accumulated | Total | ||||||||||||||||
Balance, December 31, 2018 | $ | 991 | $ | 745,104 | $ | (809,050 | ) | $ | (1 | ) | $ | (62,956 | ) | |||||||
Issuances of nonvested shares | 25 | (25 | ) | — | — | — | ||||||||||||||
Compensation recognized under stock compensation plans | — | 70 | — | — | 70 | |||||||||||||||
Net loss | — | — | (1,925 | ) | — | (1,925 | ) | |||||||||||||
Adjustment to retained earnings for adoption of accounting standard | — | — | (19 | ) | — | (19 | ) | |||||||||||||
Other comprehensive income | — | — | — | 1 | 1 | |||||||||||||||
Balance, March 31, 2019 | $ | 1,016 | $ | 745,149 | $ | (810,994 | ) | - | $ | (64,829 | ) | |||||||||
Balance, December 31, 2017 | $ | 971 | $ | 744,937 | $ | (815,184 | ) | $ | 11,394 | $ | (57,882 | ) | ||||||||
Compensation recognized under stock compensation plans | — | 46 | — | — | 46 | |||||||||||||||
Net loss | — | — | (617 | ) | — | (617 | ) | |||||||||||||
Other comprehensive loss | — | — | — | (3,388 | ) | (3,388 | ) | |||||||||||||
Balance, March 31, 2018 | $ | 971 | $ | 744,983 | $ | (815,801 | ) | $ | 8,006 | $ | (61,841 | ) | ||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Shareholders’ Deficit | |||||||||||||||
| Balance, December 31, 2017 | $ | 971 | $ | 744,937 | $ | (815,184 | ) | $ | 11,394 | $ | (57,882 | ) | |||||||
| Compensation recognized under stock compensation plans | — | 46 | — | — | 46 | ||||||||||||||
| Net loss | — | — | (617 | ) | — | (617 | ) | ||||||||||||
| Other comprehensive loss | — | — | — | (3,388 | ) | (3,388 | ) | ||||||||||||
| Balance, March 31, 2018 | $ | 971 | $ | 744,983 | $ | (815,801 | ) | $ | 8,006 | $ | (61,841 | ) | |||||||
| Balance, December 31, 2016 | $ | 928 | $ | 744,873 | $ | (804,319 | ) | $ | 9,319 | $ | (49,199 | ) | |||||||
| Compensation recognized under stock compensation plans | — | 9 | — | — | 9 | ||||||||||||||
| Net loss | — | — | (1,107 | ) | — | (1,107 | ) | ||||||||||||
| Other comprehensive loss | — | — | — | (704 | ) | (704 | ) | ||||||||||||
| Balance, March 31, 2017 | $ | 928 | $ | 744,882 | $ | (805,426 | ) | $ | 8,615 | $ | (51,001 | ) | |||||||
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,925 | ) | $ | (617 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Accretion of marketable securities, net | — | (48 | ) | |||||
Amortization of intangible assets | 299 | 298 | ||||||
Amortization of prepaid expenses | 293 | 87 | ||||||
Realized gain on marketable securities | — | (975 | ) | |||||
Depreciation expense | 7 | 112 | ||||||
Lease expense | (13 | ) | — | |||||
Compensation recognized under stock compensation plans | 70 | 46 | ||||||
Changes in operating assets and liabilities, net of acquisition: | ||||||||
Accounts and unbilled receivables | (283 | ) | 2,097 | |||||
Accounts payable and accrued expenses | (268 | ) | (591 | ) | ||||
Accrued compensation and benefits payable | 340 | (792 | ) | |||||
Accrued interest payable | 43 | 54 | ||||||
Other current assets and liabilities, net | (462 | ) | 479 | |||||
Other noncurrent assets and liabilities, net | (166 | ) | (386 | ) | ||||
Net cash used in operating activities | (2,065 | ) | (236 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from sales and maturities of marketable securities | — | 975 | ||||||
Purchase of property and equipment | (7 | ) | — | |||||
Net cash provided by (used in) investing activities | (7 | ) | 975 | |||||
Cash flows from financing activities: | ||||||||
Borrowings under revolving line of credit | 8,685 | 14,135 | ||||||
Repayments of borrowings under revolving line of credit | (10,633 | ) | (15,306 | ) | ||||
Paydowns of long-term debt | (31 | ) | (76 | ) | ||||
Net cash used in financing activities | (1,979 | ) | (1,247 | ) | ||||
Net decrease in cash and cash equivalents | (4,051 | ) | (508 | ) | ||||
Cash and cash equivalents, beginning of period | 9,249 | 2,740 | ||||||
Cash and cash equivalents, end of period | $ | 5,198 | $ | 2,232 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 1,353 | $ | 1,050 | ||||
Cash paid for reorganization items | $ | — | $ | 639 | ||||
| Three Months Ended March 31, | |||||||
| 2018 | 2017 | ||||||
| Cash flows from operating activities: | |||||||
| Net loss | $ | (617 | ) | $ | (1,107 | ) | |
| Net income from discontinued operations | — | 1,020 | |||||
| Net loss from continuing operations | (617 | ) | (2,127 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
| Amortization of intangible assets | 298 | — | |||||
| Realized gain on sale of marketable securities | (975 | ) | — | ||||
| Accretion of marketable securities | (48 | ) | 39 | ||||
| Compensation recognized under stock compensation plans | 46 | 9 | |||||
| Changes in: | |||||||
| Accounts and unbilled receivables | 2,097 | — | |||||
| Accrued professional fees payable | (576 | ) | (67 | ) | |||
| Accrued compensation and benefits payable | (792 | ) | (5 | ) | |||
| Accrued interest payable | 54 | 1,008 | |||||
| Other current assets and liabilities, net | 551 | 700 | |||||
| Other noncurrent assets and liabilities, net | (274 | ) | 28 | ||||
| Net cash used in operating activities of continuing operations | (236 | ) | (415 | ) | |||
| Net cash provided by operating activities of discontinued operations | — | 998 | |||||
| Net cash provided by (used in) operating activities | (236 | ) | 583 | ||||
| Cash flows from investing activities: | |||||||
| Proceeds from sales and maturities of marketable securities | 975 | 765 | |||||
| Net cash provided by investing activities | 975 | 765 | |||||
| Cash flows from financing activities: | |||||||
| Borrowings under revolving line of credit | 14,135 | — | |||||
| Repayments of borrowings under revolving line of credit | (15,306 | ) | — | ||||
| Paydowns of long-term debt | (76 | ) | — | ||||
| Net cash used in financing activities | (1,247 | ) | — | ||||
| Cash and cash equivalents: | |||||||
| Net increase (decrease) | (508 | ) | 1,348 | ||||
| Beginning of period | 2,740 | 5,000 | |||||
| End of period | $ | 2,232 | $ | 6,348 | |||
| Supplemental disclosure of cash flow information: | |||||||
| Cash paid for: | |||||||
| Interest | $ | 1,050 | $ | — | |||
| Reorganization items | $ | 639 | $ | 1,244 | |||
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the period ended
March 31, 2018 (unaudited)Note 1. Condensed Consolidated Financial Statement Presentation
Description of Operations
– Novation Companies, Inc. and its subsidiaries (the “Company,” “Novation,” “we,” or “us”), through Healthcare Staffing, Inc. ("HCS"), our wholly-owned subsidiary acquired on July 27, 2017, provides outsourced health care staffing and related services in the State of Georgia. We alsoLiquidity and Going Concern –
During the three months ended March 31,After engaging major investment firms to HCS.
As a result of the foregoing, the Company's cash position is exploring cost cutting initiatives that will reduce overall corporate overheadnot forecasted to be sufficient to cover current and operating costs. While our historical operating results and poor cash flow suggeston-going obligations within one year from May 13, 2019 , which gives rise to substantial doubt exists related to the Company’s ability to continue as a going concern, management has concluded that the factors discussed above have alleviated the substantial doubt aboutregarding the Company's ability to continue as a going concern within one year afterconcern. Management is exploring its options to mitigate the dateconditions or events that raise substantial doubt. The Company has been in discussions with the senior note holders to renegotiate terms of its borrowing arrangements in order to lower the quarterly interest payments, which would allow HCS additional time to expand its operations and increase revenue. However, there is no assurance that these condensed consolidated financial statements are issued.
Condensed Consolidated Financial Statement Presentation –
The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expense during the period. The Company uses estimates and judgments inThe Company's condensed consolidated financial statements are unaudited. In the opinion of management, all necessary adjustments have been made, which were of a normal and recurring nature, for a fair presentation of the condensed consolidated financial statements. The Company's condensed consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included herein and the consolidated financial statements of the Company and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 20172018 (the "2017"2018 Form 10-K").
Recent Accounting Pronouncements Adopted in 2019 - In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement. The Company adopted new accounting guidance on revenue recognition prescribed by Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. We usedASU No. 2016-02 using the modified retrospective approach appliedmethod. See Note 6 to those customer contracts that were not completed asthe condensed consolidated financial statements for further details.
Note 2. Reorganization
On July 20, 2016, (the "Bankruptcy Petition Date"), Novation and three of its subsidiaries, NMLLC, NovaStar Mortgage Funding Corporation and 2114 Central LLC (collectively, the “Debtors”), filed voluntary petitions (the "Bankruptcy Petitions") for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (the "Bankruptcy Court"). The Company and one of its subsidiaries subsequently filed with the Bankruptcy Court, and amended, a plan of reorganization for the resolution of the outstanding claims against and interests pursuant to Section 1121(a) of the Bankruptcy Code (as amended as supplemented, the “Plan”) and a related disclosure statement. The Bankruptcy Court entered an order on June 12, 2017, confirming the Plan (the “Confirmation Order”) solely with respect to the Company, which provided that the effective date of the Plan will occur when all conditions precedent to effectiveness, as set forth in the Plan, have been satisfied or waived. Two of the conditions to the effectiveness of the Plan were (i) the closing of the Company’s acquisition (the “HCS Acquisition”) of all of the capital stock of HCS and (ii) the restructuring of the Company’s then outstanding senior notes. The HCS Acquisition and the note restructuring were completed on July 27, 2017 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. OnThereafter, 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. On April 11, 2018, the Bankruptcy Court confirmed NMLLC’s plan of reorganization. This plan allows NMLLC to exit bankruptcy, but prohibits the use of NMLLC assets for anything other than for the payment of NMLLC obligations.
The Company incurred significant costs in 2016 and 2017 associated with our reorganization and the Chapter 11 proceedings. These costs which are being expensed as incurred, include (unaudited and in thousands):
| Three Months Ended March 31, | |||||||
| 2018 | 2017 | ||||||
| Professional fees | $ | 139 | $ | 1,168 | |||
| Adjustments to other liabilities for claims made or rejected contracts | — | 33 | |||||
| Other | — | 9 | |||||
| Reorganization items, net | $ | 139 | $ | 1,210 | |||
| Service fee income | $ | 15,316 | |
| Loss from continuing operations | $ | (1,641 | ) |
| Net loss | $ | (628 | ) |
| Basic and diluted earnings per share: | |||
| Net loss from continuing operations | $ | (0.02 | ) |
| Net loss | $ | (0.01 | ) |
Note 4.3. Revenue; Accounts and Unbilled Receivables
Staffing services include the augmentation of customers' workforce with our contingent employees performing services under the customer's 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, unaudited, in thousands, into categories that best depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors.Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |||||||||||||||
Type of Customer | ||||||||||||||||
CSB | $ | 15,255 | 96.2 | % | $ | 12,744 | 96.4 | % | ||||||||
Other | 599 | 3.8 | % | 476 | 3.6 | % | ||||||||||
| Total | $ | 15,854 | 100.0 | % | $ | 13,220 | 100.0 | % | ||||||||
| Three Months Ended March 31, 2018 | ||||||
| (unaudited) | ||||||
| Type of Customer | ||||||
| Community Service Board | $ | 12,744 | 96.4 | % | ||
| Other | 476 | 3.6 | % | |||
| $ | 13,220 | 100 | % | |||
Accounts and unbilled receivables are summarized as follows, in thousands:
March 31, 2019 (unaudited) | December 31, 2018 | |||||||
Accounts receivable | $ | 3,953 | $ | 3,952 | ||||
Unbilled receivables (Contract Assets) | 2,452 | 2,170 | ||||||
| Total | $ | 6,405 | $ | 6,122 | ||||
| March 31, 2018 (unaudited) | December 31, 2017 | |||||||
| Accounts receivable | $ | 3,791 | $ | 5,418 | ||||
| Unbilled receivables (contract assets) | 2,034 | 2,504 | ||||||
| $ | 5,825 | $ | 7,922 | |||||
As of March 31, 20182019 and December 31, 2017,2018, management has determined no allowance for doubtful accounts is necessary. During the three months ended March 31, 2018, 34%2019, 50% of service fee income was generategenerated from 2three customers. For the three months ended March 31, 2018, 34% of service fee income was generated from two customers. As of March 31, 2019 and March 31, 2018, 48% and 43% of accounts receivables and unbilled receivables 43% waswere due from three customers, respectively. At March 31, 2019and March 31, 2018, 95% and 92% was of accounts receivables and unbilled receivables were due from 14 Community Service Board customers.
Note 5.4. Marketable Securities
| Gross Unrealized | Estimated Fair Value | ||||||||||||||
| Amortized Cost | Gains | Losses | |||||||||||||
| As of March 31, 2018 (unaudited) | |||||||||||||||
| Marketable securities, current | |||||||||||||||
| Mortgage securities | $ | 446 | $ | 8,008 | $ | — | $ | 8,454 | |||||||
| Equity securities | 1 | — | — | 1 | |||||||||||
| Total | $ | 447 | $ | 8,008 | $ | — | $ | 8,455 | |||||||
| 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 | |||||||
Prior to 2017,2018, 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 holdsheld mortgage securities that continue to bewere a source of its earnings and cash flow. As of
As part of the mortgage securitization process, the Company owned the mortgage servicing rights on the mortgage loans in each securitization deal. These servicing rights were sold to a third party on October 12, 2007 as documented in the Servicing Rights Transfer Agreement by and between Saxon Mortgage Services as purchaser and NovaStar Mortgage, Inc. as seller, which was discussed in the Company's third quarter 2007 report on Form 10-Q. As part of this transaction, the Company retained the clean-up call rights for most of the securitization deals. The Company attempted to sell the clean-up call rights with the securities sold in 2018. However, no bids were received for the clean-up call rights and the Company determined these clean-up call rights have no fair value.
See
Note 9 to the condensed consolidated financial statements for details on the Company's fair value methodology.| Size/Principal Outstanding (A) | Assets on Balance Sheet | Liabilities on Balance Sheet | Maximum Exposure to Loss | Year to Date Loss on Sale | Year to Date Cash Flows | |||||||||||||||||||
| March 31, 2018 | (unaudited) | $ | 157,607 | $ | 8,454 | $ | — | $ | 8,454 | $ | — | $ | 416 | |||||||||||
| December 31, 2017 | 166,686 | 11,794 | — | 11,794 | — | 3,193 | ||||||||||||||||||
Note 6.5. Goodwill and Intangible Assets
March 31, 2019 (unaudited) | December 31, 2018 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
Indefinite-lived assets (in thousands) | ||||||||||||||||||||||||
Goodwill | $ | 8,205 | $ | - | $ | 8,205 | $ | 8,205 | $ | - | $ | 8,205 | ||||||||||||
Tradenames | 1,147 | - | 1,147 | 1,147 | - | 1,147 | ||||||||||||||||||
| $ | 9,352 | $ | - | $ | 9,352 | $ | 9,352 | $ | - | $ | 9,352 | |||||||||||||
Finite-lived assets (in thousands) | ||||||||||||||||||||||||
Customer relationships | $ | 6,895 | $ | 1,642 | $ | 5,253 | $ | 6,895 | $ | 1,395 | $ | 5,500 | ||||||||||||
Non-compete agreement | 627 | 348 | 279 | 627 | 296 | 331 | ||||||||||||||||||
| $ | 7,522 | $ | 1,990 | $ | 5,532 | $ | 7,522 | $ | 1,691 | $ | 5,831 | |||||||||||||
Amortization expense (unaudited, in thousands) | ||||
Three Months Ended March 31, 2019 | $ | 299 | ||
Estimated future amortization expense (unaudited, in thousands) | ||||
2019 | $ | 895 | ||
2020 | 1,107 | |||
2021 | 985 | |||
2022 | 985 | |||
Thereafter | 1,560 | |||
Total estimated amortization expense | $ | 5,532 |
Note 6. Leases
We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. The Company elected to adopt the ‘package of practical expedients’, which permitted the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs, the practical expedients pertaining to land easements, the use-of hindsight, the short-term lease recognition exemption for all leases that qualified, and the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate.
Adoption of the new standard resulted in the recording of an additional net operating lease right-of-use asset and operating lease liability of approximately $0.2 million each, as of January 1, 2019. The difference between the additional lease assets and lease liabilities was recorded as an adjustment to retained earnings. The standard did not materially impact our consolidated net earnings and had no impact on cash flows. The Company does not have any finance leases.
Our leases consist primarily of office space. Leases with an initial term of 12 months or less, and leases which are on a month-to-month basis, are not recorded on the balance sheet. For these leases we recognize lease expense on a straight-line basis over the lease term.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to three years or more. The exercise of lease renewal options is at our discretion. Our lease agreements do not contain any variable lease payments, residual value guarantees or restrictive covenants. The components of lease expense for the three months ended March 31, 2019 totaled $0.04 million.
As our leases do not provide an implicit interest rate, we use our incremental current borrowing rate in determining the present value of lease payments.
Maturities of lease liabilities were as follows (in thousands):
| March 31, 2019 (unaudited) | |||
Remaining 2019 | $ | 74 | ||
2020 | 73 | |||
2021 | 52 | |||
Thereafter | 3 | |||
Total | $ | 202 | ||
Less interest | 16 | |||
Present value of lease liabilities | $ | 186 | ||
Other information related to the Company's operating leases was as follows (in thousands):
March 31, 2019 (unaudited) | ||||
Supplemental Cash Flow Information | ||||
Operating cash flows from leases | $ | (13 | ) | |
Lease Term and Discount Rate | ||||
Weighted average remaining lease term (years) | 1.47 | |||
Weighted average discount rate | 6.75 | % | ||
| March 31, 2018 (unaudited) | December 31, 2017 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| Indefinite-lived assets (in thousands) | |||||||||||||||||||||||
| Goodwill | $ | 8,205 | $ | — | $ | 8,205 | $ | 8,205 | $ | — | $ | 8,205 | |||||||||||
| Tradenames | 1,147 | — | 1,147 | 1,147 | — | 1,147 | |||||||||||||||||
| $ | 9,352 | $ | — | $ | 9,352 | $ | 9,352 | $ | — | $ | 9,352 | ||||||||||||
| Finite-lived assets (in thousands) | |||||||||||||||||||||||
| Customer relationships | $ | 6,895 | $ | 656 | $ | 6,239 | $ | 6,895 | $ | 410 | $ | 6,485 | |||||||||||
| Non-compete agreement | 627 | 139 | 488 | 627 | 87 | 540 | |||||||||||||||||
| $ | 7,522 | $ | 795 | $ | 6,727 | $ | 7,522 | $ | 497 | $ | 7,025 | ||||||||||||
| Amortization expense (unaudited, in thousands) | |||
| Three months ended March 31, 2018 | $ | 298 | |
| Estimated future amortization expense (unaudited, in thousands) | |||
| 2018 | $ | 896 | |
| 2019 | 1,194 | ||
| 2020 | 1,107 | ||
| 2021 | 985 | ||
| 2022 | 985 | ||
| Thereafter | 1,560 | ||
| Total estimated amortization expense | $ | 6,727 | |
Note 7. Borrowings
Revolving Credit Agreement —
As ofNote Refinancing and 2017 Notes and Note Refinancing —
The Note Purchase Agreement contains customary affirmative and negative covenants, including but not limited to certain financial covenants. The Note Purchase Agreement also contains customary events of default, including but not limited to payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, the Noteholders may, among other remedies, accelerate the payment of all obligations under the Note Purchase Agreement and the 2017 Notes. 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.
Note 8. Commitments and Contingencies
Contingencies —
Prior to 2016, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. The Company has received indemnification and loan repurchase demands with respect to alleged violations of representations and warranties (“defects”) and with respect to other alleged misrepresentations and contractual commitments made in loan sale and securitization agreements. These demands have been received substantially beginning in 2006 and have continued into recent years. Prior to the Company ceasing the origination of loans in its mortgage lending business, it sold loans to securitization trusts and other third parties and agreed to repurchase loans with material defects and to otherwise indemnify parties to these transactions. Beginning in 1997 and ending in 2007, affiliates of the Company sold loans to securitization trusts and third parties with the potential of such obligations. The aggregate original principal balance of these loans was $43.1 billion at the time of sale or securitization. The remaining principal balance of these loans is not available as these loans are serviced by third parties and may have been refinanced, sold or liquidated. Claims to repurchase loans or to indemnify under securitization documents have not been acknowledged as valid by the Company. In some cases, claims were made against affiliates of the Company that have ceased operations and have no or limited assets. The Company has not repurchased any loans or made any such indemnification payments since 2010.Historically, repurchases of loans or indemnification of losses where a loan defect has been alleged have been insignificant and any future losses for alleged loan defects have not been deemed to be probable or reasonably estimable; therefore, the Company has recorded no reserves related to these claims. The Company does not use internal groupings for purposes of determining the status of these loans. The Company is unable to develop an estimate of the maximum potential amount of future payments related to repurchase demands because the Company does not have access to information relating to loans sold and securitized and the number or amount of claims deemed probable of assertion is not known nor is it reasonably estimated. Further, the validity of claims received remains questionable. Also, considering that the Company completed its last sale or securitization of loans during 2007, the Company believes that it will be difficult for a claimant to successfully validate any additional repurchase demands. Management does not expect that the potential impact of claims will be material to the condensed consolidated financial statements.
Pending Litigation —
The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and routine nature. Any legal fees associated with these proceedings are expensed as incurred.Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than the active proceedings described in detail below, proceedings and actions against the Company should not, individually, or in the aggregate, have a material effect on the Company’s financial condition, operations and liquidity. Furthermore, due to the uncertainty of any potential loss as a result of pending litigation and due to the Company's belief that an adverse ruling is not probable, the Company has not accrued a loss contingency related to the following matters in its condensed consolidated financial statements. However, a material outcome in one or more of the active proceedings described below could have a material impact on the results of operations in a particular quarter or fiscal year. See Note 2 for a description
On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included NovaStar Mortgage Funding Corporation (“NMFC”) 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, plaintiff filed an amended complaint. 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 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. 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 plaintiff's second amended complaint with prejudice and without leave to replead. Plaintiff filed an appeal in the United States Court of Appeals for the Second Circuit (the "Appellate Court"). 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 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 plaintiff filed its memorandum with the lower court seeking a reconsideration of the earlier dismissal of plaintiff's claims as to five offerings in which plaintiff was not invested, and on February 5, 2015, the lower court granted plaintiff's motion for reconsideration and vacated its earlier dismissal. On March 8, 2017, the affiliated defendants and all other parties executed an agreement to settle the action, with the contribution of the affiliated defendants to the settlement fund being paid by their insurance carriers. The court certified a settlement class and granted preliminary approval to the settlement on May 10, 2017. One member of the settlement class objected to the settlement and sought a stay of the final settlement approval hearing on the ground that it did not receive notice of the settlement and had no opportunity to timely opt out of the class. After the court rejected the motion for a stay, the objector filed an appeal and requested a stay of the district court proceedings pending disposition of the appeal. The Appellate Courtcourt of appeals denied the temporary stay of the district court proceedings pending a decisionand on October 19, 2018 dismissed the appeal as moot. Following the court of appeals’ denial of the objector’s requestpetition for rehearing, the district court on March 7, 2019 held a stay.fairness hearing. On March 8, 2019, the district court issued a memorandum and order approving the settlement as fair, reasonable and adequate, and dismissing the action with prejudice. Following entry of judgment, the objector filed a notice of appeal on March 26, 2019. Assuming the settlement is approved and completed,approval becomes final, which is expected, the Company will incur no loss. The Company believes that the affiliated defendants have meritorious defenses to the case and, if the settlement isapproval does not approved,become final, expects them to defend the case vigorously.
On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. NMFC filed a motion to dismiss the amended complaint which was denied on September 12, 2013. The defendants claimed 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 United States Court of Appeals for the Tenth Circuit (the "Tenth Circuit") affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the Tenth Circuit 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 (the "Supreme Court") granted a petition of NMFC and its co-defendants for certiorari, vacated the ruling of the Tenth Circuit, and remanded the case back to that court for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). On August 19, 2014, the Tenth Circuit reaffirmed its prior decision, and on October 2, 2014, the defendants filed a petition for writ of certiorari with the Supreme Court, which was denied. On March 22, 2016, NMFC filed motions for summary judgment, and plaintiff filed a motion for partial summary judgment. Those motions remain pending. Given that plaintiff did not file a timely proof of claim in NMFC’s bankruptcy case, the Company believes it is likely that the case will be dismissed. The Company believes that NMFC has meritorious defenses to the case and expects it to defend the case vigorously in the event it proceeds.
On February 28, 2013, the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and purportedly on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series 2007-1 (the “Trust”), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, 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’ failure to repurchase such loans under the applicable agreements. Plaintiff alleges that defendants, from the closing date of the transaction that created the Trust, were aware of the breach of the representations and warranties made and failed to give notice of and cure such breaches, and due to the failure of defendants to cure any breach, notice to defendants would have been futile. The summons with notice was not served until June 28, 2013. By letter dated June 24, 2013, the Trustee of the Trust forwarded a notice from Freddie Mac alleging breaches of representations and warranties with respect to 43 loans, as more fully set forth in included documentation. The 43 loans had an aggregate, original principal balance of about $6.5 million. On August 19, 2013, Deutsche Bank National Trust Company, as Trustee, filed a complaint identifying alleged breaches of representations and warranties with respect to seven loans that were included in the earlier list of 43 loans. Plaintiff also generally alleged a trust-wide breach of representations and warranties by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, recessionary and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; indemnification (indemnification against NMI only) and damages for breach of the implied covenant of good faith and fair dealing. On October 9, 2013, the Company and NMI filed a motion to dismiss plaintiff’s complaint.
This motion to dismiss was withdrawn after plaintiff filed an amended complaint on January 28, 2014, and on March 4, 2014, the Company and NMI filed a motion to dismiss the amended complaint. By a Decision/Order dated November 30, 2017, the court granted in part and denied in part the motion to dismiss the amended complaint. The court dismissed all claims except for plaintiff’s claim for damages for breach of contract, to the extent that claim is based on the Company’s and NMI’s alleged failure to notify plaintiff of allegedly defective loans, and plaintiff’s claim for indemnification. The court denied the motion to dismiss these claims without prejudice to the Company’s and NMI’s right to file a new motion to dismiss in conformity with procedures to be established in coordinated proceedings before the court addressing similar claims against numerous defendants. Briefing of the indemnification issue is complete,was completed.
The parties have reached a settlement of this matter. On October 25, 2018, the bankruptcy court overseeing the Company's bankruptcy case entered an order approving the settlement, and on November 19, 2018, the New York State Court "so ordered" a Stipulation of Voluntary Discontinuance terminating the case. Pursuant to the terms of the settlement agreement, the required upfront payment of $0.3 million was made on March 1, 2019. The settlement also requires equal quarterly installments over a three years period, which total an additional $0.3 million. Based on the probability of all contingencies associated with the settlement being satisfied, the Company recorded an expense in the second quarter of 2018 in the Reorganization Items, net expense line item of the income statement and the oral argument is yetshort and long-term liability totals in the applicable Accrued Settlement Claims lines per the balance sheet.
DB Structured Products, Inc., Deutsche Bank AG, Deutsche Bank National Trust Company, Deutsche Bank Securities Inc., Greenwich Capital Derivatives, Inc., RBS Acceptance Inc., RBS Financial Products Inc., RBS Securities Inc., The Royal Bank of Scotland PLC, Wachovia Investment Holdings, LLC, Wells Fargo & Company, Wells Fargo Advisors, LLC, Wells Fargo Bank, N.A. and Wells Fargo Securities, LLC (collectively, the “Indemnity Claimants”) filed proofs of claim in the Company’s bankruptcy case asserting the right to be scheduled. Givenindemnified by the stageCompany for, and/or to receive contribution from the company in respect of, certain liabilities incurred as a result of their roles in the issuance of residential mortgage-backed securities sponsored by the Company. The Company filed an objection in the bankruptcy case seeking to disallow and expunge the Indemnity Claimants’ proofs of claim. The Indemnity Claimants’ claims were not discharged by the confirmation of the litigation,Company’s plan of reorganization, and the bankruptcy court has not ruled on the Company’s objection to those claims.
The parties have reached a settlement in this matter, which was approved by the court on November 29, 2018. This settlement includes an upfront payment of $0.5 million, which was paid on December 21, 2018. In addition, the settlement provides for equal quarterly installments over a three years period, which total an additional $0.4 million. Based on the probability of this settlement receiving court approval, the Company cannot providerecorded an estimateexpense during the second quarter of 2018 in the Reorganization Items, net expense line item of the range of any loss. The Company believes that it has meritorious defenses toincome statement and the caseshort and expects to defendlong-term liability totals in the case vigorously.applicable Accrued Settlement Claims lines per the balance sheet.
Note 9. Fair Value Accounting
Fair Value Measurements —
The Company's valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:Level 1 - Valuations based on quoted prices in active markets for identical assets and liabilities.
| Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Marketable securities, current: | ||||||||||||||||
| March 31, 2018 (unaudited) | $ | 8,455 | $ | 1 | $ | — | $ | 8,454 | ||||||||
| December 31, 2017 | $ | 11,795 | $ | 1 | $ | — | $ | 11,794 | ||||||||
| March 31, 2018 (unaudited) | December 31, 2017 | ||||
| Weighted average: | |||||
| Loss severity | 63.7 | % | 62.1 | % | |
| Default rate | 2.3 | % | 2.0 | % | |
| Prepayment speed | 15.3 | % | 13.5 | % | |
| Servicer's optional redemption date | None | None | |||
| Three Months Ended March 31, | |||||||
| 2018 | 2017 | ||||||
| Balance, beginning of period | $ | 11,794 | $ | 9,791 | |||
| Increases (decreases) to mortgage securities – available-for-sale: | |||||||
| Accretion | 48 | 86 | |||||
| Proceeds from paydowns of securities (A) | — | (116 | ) | ||||
| Gains realized upon sale of mortgage securities | (975 | ) | — | ||||
| Market value adjustment | (2,413 | ) | (751 | ) | |||
| Net decrease to mortgage securities – available-for-sale | (3,340 | ) | (781 | ) | |||
| Balance, end of period | $ | 8,454 | $ | 9,010 | |||
• | 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 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 carrying value approximates their fair value.
The estimated fair values of the Company's financial instruments are (in thousands):
March 31, 2019 (unaudited) | December 31, 2018 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Financial assets: | ||||||||||||||||
Equity securities (Level 1) | $ | 2 | $ | 2 | $ | 1 | $ | 1 | ||||||||
Financial liabilities: | ||||||||||||||||
Senior notes (Level 3) | $ | 85,938 | $ | 23,828 | $ | 85,938 | $ | 24,659 | ||||||||
| March 31, 2018 (unaudited) | December 31, 2017 | ||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
| Financial assets: | |||||||||||||||
| Marketable securities | $ | 8,455 | $ | 8,455 | $ | 11,795 | $ | 11,795 | |||||||
| Financial liabilities: | |||||||||||||||
| Senior notes | $ | 85,938 | $ | 24,515 | $ | 85,938 | $ | 23,018 | |||||||
The equity securities are valued based on quoted market prices and are included in other current assets on the itemscondensed consolidated balance sheets. The senior notes in the table above are not measured at fair value in the statement of financial positioncondensed consolidated balance sheets but for which theare required to be disclosed at fair value. The fair value is disclosed,of the fair valuesenior 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% per annum until maturity in March 2033. The three-month LIBOR used in the analysis was projected using a forward interest rate curve.Note 10. Income Taxes
Prior to 2017, the Company determinedconcluded that it was no longer more likely than not that it will recognizewould realize a portion of its deferred tax assets. Therefore, as of March 31, 20182019 and December 31, 2017,2018, the Company maintained a full valuation allowance against its net deferred tax assets of $162.9$164.4 million and $162.7$164.0 million, respectively. The Company's determination of the extent to which itsrealizable deferred tax assets will be realized 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. Because of the full valuation allowance, the Company's effective tax rate is expected to be near 0% and therefore the income tax expense is not material for any period presented.
As of March 31, 2018,2019, the Company had a federal NOL of approximately $692.0$729.6 million, including $307.3including $250.3 million in losses on
| Three Months Ended March 31, | ||||||||
| (unaudited) | ||||||||
| 2018 | 2017 | |||||||
| Numerator, in thousands: | ||||||||
| Net loss from continuing operations | $ | (617 | ) | $ | (2,127 | ) | ||
| Net income from discontinued operations | — | 1,020 | ||||||
| Net loss available to common shareholders | $ | (617 | ) | $ | (1,107 | ) | ||
| Denominator: | ||||||||
| Weighted average common shares outstanding – basic | 93,232,402 | 92,780,250 | ||||||
| Weighted average common shares outstanding – dilutive: | ||||||||
| Weighted average common shares outstanding – basic | 93,232,402 | 92,780,250 | ||||||
| Stock options | — | — | ||||||
| Nonvested shares | — | — | ||||||
| Weighted average common shares outstanding – dilutive | 93,232,402 | 92,780,250 | ||||||
| Basic earnings (loss) per share: | ||||||||
| Net loss from continuing operations | $ | (0.01 | ) | $ | (0.02 | ) | ||
| Net income from discontinued operations | — | 0.01 | ||||||
| Net loss available to common shareholders | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Diluted earnings (loss) per share: | ||||||||
| Net loss from continuing operations | $ | (0.01 | ) | $ | (0.02 | ) | ||
| Net income from discontinued operations | — | 0.01 | ||||||
| Net loss available to common shareholders | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Three Months Ended March 31, | |||||||
| (unaudited) | |||||||
| 2018 | 2017 | ||||||
| Number of stock options | 72 | 2,394 | |||||
| Weighted average exercise price of stock options | $ | 1.17 | $ | 0.81 | |||
Forward-Looking Statements
Statements in this report regarding Novation Companies, Inc. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and those identified in “Risk Factors” in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, (the "2017"2018 Form 10-K"), 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.
Corporate Overview
Novation Companies, Inc. and its subsidiaries (the "Company," "Novation," "we," "us," or "our") through our wholly-owned subsidiary Healthcare Staffing, Inc. ("HCS") acquired on July 27, 2017, provides 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 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”.
Emergence from Bankruptcy.
On July 20, 2016 (the “Bankruptcy Petition Date”), Novation and three of its subsidiaries, NovaStar Mortgage LLC (“NMLLC”), NovaStar Mortgage Funding Corporation and 2114 Central LLC (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (the “Bankruptcy Court”). The Company and one of its subsidiaries subsequently filed with the Bankruptcy Court and amended a plan of reorganization (the “Plan”) and a related disclosure statement. The Bankruptcy Court entered an order on June 12, 2017 confirming the Plan (the “Confirmation Order”) solely with respect to the Company. On July 27, 2017, upon the completion of the HCS Acquisition and the Note Refinancing (each as defined below), and the satisfaction or waiver of all other conditions precedent to effectiveness, the effective date of the Plan occurred and the Company filed a Notice of Occurrence of Effective Date of the Plan with the Bankruptcy Court. Under the Plan, holders of existing equity interests in the Company (i.e., the common stock) retain their interests.On September 25, 2017, the bankruptcy case of 2114 Central, LLC was dismissed by order of the Bankruptcy Court.
Financial Highlights and Key Performance Metrics.
The following key performance metrics (in thousands, except per share| March 31, 2018 (unaudited) | December 31, 2017 | ||||||
| Cash and cash equivalents | $ | 2,232 | $ | 2,740 | |||
| Marketable securities | $ | 8,455 | $ | 11,795 | |||
| Three months ended March 31, | |||||||
| (unaudited) | |||||||
| 2018 | 2017 | ||||||
| Net loss per diluted share | $ | (0.01 | ) | $ | (0.01 | ) | |
March 31, 2019 (unaudited) | December 31, 2018 | |||||||
Cash and cash equivalents | $ | 5,198 | $ | 9,249 | ||||
Three Months Ended March 31, (unaudited) | ||||||||
2019 | 2018 | |||||||
Service fee income | $ | 15,854 | $ | 13,220 | ||||
Net loss available to common shareholders, per basic share | $ | (0.02 | ) | $ | (0.01 | ) | ||
Critical Accounting Policies
In our 20172018 Form 10-K, we disclose critical accounting policies that require management to use significant judgment or that require significant estimates. Management regularly reviews the selection and application of our critical accounting policies. See Note 1 to the condensed consolidated financial statements for a discussion of significant accounting policies.
Results of Operations for the Three Month Period Ended March 31, 20182019 as Compared to March 31, 2017
Service Fee Income and Cost of Services
HCS delivers outsourced full-time and part-time employees primarily to Community Service Boards (“CSBs”), quasi state organizations that provide behavioral health services at facilities across Georgia including mental health services, developmental disabilities programs and substance abuse treatments. The State of Georgia has a total of 25 CSBs. Each CSB has a number of facilities, including crisis centers, outpatient centers and 24-hour group homes that require a broad range of employees, such as registered nurses, social workers, house parents and supervisors. The CSB market in Georgia is large and growing steadily, as the demand for the services provided by the CSBs continues to grow. In addition to providing outsourced employees to CSBs, HCS also provides healthcare outsourcing and staffing services to hospitals, schools and a variety of privately owned businesses. The services and positions provided to non CSB clients are similar to the ones provided to CSB clients. The service fee income and costs of services in the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 20182019 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 CSBs and outsourced to HCS. Customer contracts typically establish a fixed markup on the pay rate for the associates, therefore cost of services will generally fluctuate consistently with fee income. HCS offers a health and welfare benefit plan to its associates. The cost of this benefit is passed through to customers plus a small markup to cover cost of administration.
HCS revenue and cost of goods sold for the three months ended March 31, 2019 was $15.9 and $14.1, respectively. This increase in revenue and cost of goods sold compared to the three months ended March 31, 2018 of $13.2 and $11.7, respectively, is due to the addition of two new CSB clients, one which started late in the third quarter of 2018 and another which started at the beginning of 2019.
General and Administrative
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 results from the HCS Acquisition and the combination of HCS's expenses with those of Novation. For the three months ended March 31, 2019 and 2018 $1.6, $1.7 million and $1.6 million of the total general and administrative expenses were incurred by HCS. Corporate-level general and administrative expenses for the three months ended March 31, 20182019 and 20172018 were $0.7$0.5 million and $1.0$0.7 million, respectively. The decrease in corporate level expenses results from a reduction in staffing, professional fees and other costs of administration as the Company continues to focus on cost containment. These costs are expected to continue to decline.
The future amount of corporate-level general and administrative expenses will depend largely on corporate activities, professional fees associated with those activities and staffing needs based on the evolving business strategy. For HCS, the amount of these expenses will depend on business growth.
All of our mortgage securities were sold in December 2018, and therefore the Company will have no future interest income or cash flow from these securities. Interest income on our mortgage securities decreased towas approximately $0.5 million during the three months ended March 31, 2018 compared to $1.02018.
Reorganization Items, Net
The Company incurred approximately $0.03 million duringand $0.1 million in legal costs for the three months ended March 31, 2017. Fluctuations in the interest income received from our mortgage portfolio are typically due to factors beyond the Company's control, such as the performance of the underlying loan collateral, prepayment speeds, interest rates, etc.
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Gains on sales of investments | $ | 975 | $ | — | ||||
| Dividends and interest income | 4 | 141 | ||||||
| Other income | 35 | 2 | ||||||
| Total | $ | 1,014 | $ | 143 | ||||
Interest Expense
Interest expense increased period over period, with the Company incurring $1.2$1.4 million and $1.0$1.2 million during the three months ended March 31, 20182019 and 2017,2018, respectively. The increase is due to an increase in LIBOR, as the underlying obligations pay interest at a variable rate based on 3-month LIBOR. See "Liquidity and Capital Resources" below and
Income Tax Expense
Because of the Company's significant net operating losses and full valuation allowance, the income tax expense was not material for any period presented and is not expected to be material for the foreseeable future.
Liquidity and Capital Resources
Liquidity and Going Concern –
During the three months ended March 31,After engaging major investment firms to HCS.
As a result of the foregoing, the Company's cash position is exploring cost cutting initiatives that will reduce overall corporate overheadnot forecasted to be sufficient to cover current and operating costs. While our historical operating results and poor cash flow suggeston-going obligations within one year from May 13, 2019, which gives rise to substantial doubt exists related to the Company’s ability to continue as a going concern, management has concluded that the factors discussed above have alleviated the substantial doubt aboutregarding the Company's ability to continue as a going concern for at least one year afterconcern. Management is exploring its options to mitigate the conditions or events that raise substantial doubt. The Company has been in discussions with the senior note holders to renegotiate terms of its borrowing arrangements in order to lower the quarterly interest payments, which would allow HCS additional time to expand its operations and increase revenue. However, there is no assurance that these condensed consolidated financial statements are issued.
Overview of Cash Flow
for the three months ended March 31,The following table provides a summary of our operating, investing and financing cash flows as taken from our condensed consolidated statements of cash flows for the
three months ended March 31,| Three Months Ended March 31, | |||||||
| 2018 | 2017 | ||||||
| Consolidated Statements of Cash Flows: | |||||||
| Cash provided by (used in) operating activities | $ | (236 | ) | $ | 583 | ||
| Cash flows provided by investing activities | $ | 975 | $ | 765 | |||
| Cash flows used in financing activities | $ | (1,247 | ) | $ | — | ||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows used in operating activities | $ | (2,065 | ) | $ | (236 | ) | ||
Cash flows provided by (used in) investing activities | (7 | ) | 975 | |||||
Cash flows used in financing activities | (1,979 | ) | (1,247 | ) | ||||
Operating Activities –
TheInvesting Activities –
TheFinancing Activities –
Not applicable.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our chief executive chairmanofficer and our chief financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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 March 31, 2018,2019, 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.
Description of Material Weakness
As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations above and in Note 31 to the condensed consolidated financial statements, in July 2017, we acquired HCS, which now is our primary business activity. Prior to the acquisition,HCS Acquisition, HCS was a privately-owned business with limited administrative and accounting resources, accounting software inappropriate for the size of the business and generally weak accounting processes, procedures and controls. Specifically, material weaknesses existed in HCS's processes, procedures and controls with respect to revenue, receivables, payment of payroll taxes and estimating various accrued expenses.
Remediation of Material Weakness
We are working to improve the processes, procedures and controls at HCS and remediate this material weakness. Since the acquisition of 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 professionalsresources with relevant experience are needed. We will disclose in future periods the progress we have made in efforts to remediate this material weakness.
Changes in Internal Control Over Financial Reporting
As a result of the HCS acquisition and the generally weak controls at HCS discussed above, we determined that we have a material weakness in our disclosure controls and procedures. We are working to remediate this material weakness as discussed above.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In designing and operating a control system, one must consider the potential benefits of controls relative to their costs and the reality of limited resources available to allocate to control activities, particularly in smaller companies. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and there can be no 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.
The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and
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
On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union,
On February 28, 2013, the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation
The parties have reached a settlement of this matter. On October 25, 2018, the bankruptcy court overseeing the Company's bankruptcy case entered an order approving the settlement, and on November 19, 2018, the New York State Court “so ordered” a Stipulation of Voluntary Discontinuance terminating the case. Pursuant to the terms of the settlement agreement, the required upfront payment of $0.3 million was made on March 1, 2019. The settlement also requires equal quarterly installments over a three years period, which total an additional $0.3 million. Based on the probability of all contingencies associated with the settlement being satisfied, the Company has recorded an expense in the second quarter of 2018 in the Reorganization Items, net expense line item of the income statement and the oral argument is yet to be scheduled. Givenshort and long-term liability totals in the stage ofapplicable Accrued Settlement Claims lines per the litigation, the Company cannot provide an estimate of the range of any loss. The Company believes that it has meritorious defenses to the case and expects to defend the case vigorously.
See the "Corporate Overview" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to the condensed consolidated financial statements for a description of the Company’s Chapter 11 proceedings.
There have been no material changes to the risk factors included in the 20172018 Form 10-K.
None.
None.
None.
None
Exhibit No. | Description of Document | ||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101 | The following financial information from Novation Companies, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, |
Pursuant to the requirements 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: | May | /s/ David W. Pointer | |
David W. Pointer, Chief Executive Officer | |||
(Principal Executive Officer) | |||
DATE: | May | /s/ Carolyn K. Campbell | |
Carolyn K. Campbell, Chief Financial Officer | |||
(Principal Financial Officer) | |||
20