NOVATION COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share amounts)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Service fee income
|
|
$
|
63,474
|
|
|
$
|
55,126
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
56,483
|
|
|
|
48,149
|
|
General and administrative expenses
|
|
|
8,345
|
|
|
|
8,089
|
|
Goodwill impairment charge
|
|
|
4,300
|
|
|
|
—
|
|
Operating loss
|
|
|
(5,654
|
)
|
|
|
(1,112
|
)
|
|
|
|
|
|
|
|
|
|
Interest income - mortgage securities
|
|
|
—
|
|
|
|
1,133
|
|
Impairment on mortgage securities
|
|
|
—
|
|
|
|
(325
|
)
|
Gains on sales of investments
|
|
|
—
|
|
|
|
12,881
|
|
Other income
|
|
|
39
|
|
|
|
411
|
|
Interest expense
|
|
|
(4,522
|
)
|
|
|
(5,279
|
)
|
Reorganization items, net
|
|
|
(63
|
)
|
|
|
(1,864
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(10,200
|
)
|
|
|
5,845
|
|
Income tax expense (benefit)
|
|
|
25
|
|
|
|
(289
|
)
|
Net income (loss)
|
|
|
(10,225
|
)
|
|
|
6,134
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Reclassification gain on marketable securities included in net income
|
|
|
—
|
|
|
|
(12,881
|
)
|
Unrealized gains on marketable securities
|
|
|
1
|
|
|
|
1,486
|
|
Total other comprehensive income (loss)
|
|
|
1
|
|
|
|
(11,395
|
)
|
Total comprehensive loss
|
|
$
|
(10,224
|
)
|
|
$
|
(5,261
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10
|
)
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
(0.10
|
)
|
|
$
|
0.06
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
100,472,515
|
|
|
|
93,961,799
|
|
Diluted
|
|
|
100,472,515
|
|
|
|
94,470,057
|
|
See notes to consolidated financial statements.
NOVATION COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(in thousands)
|
|
Common Stock
|
|
|
Additional Paid-in Capital
|
|
|
Accumulated Deficit
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
Total Shareholders’ Deficit
|
|
Balance, December 31, 2018
|
|
$
|
991
|
|
|
$
|
745,104
|
|
|
$
|
(809,050
|
)
|
|
$
|
(1
|
)
|
|
$
|
(62,956
|
)
|
Issuances and cancellations of nonvested stock
|
|
|
42
|
|
|
|
(42
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common stock granted in debt restructure
|
|
|
90
|
|
|
|
(90
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common stock and common stock warrants granted in debt restructure
|
|
|
—
|
|
|
|
916
|
|
|
|
—
|
|
|
|
—
|
|
|
|
916
|
|
Compensation recognized under stock compensation plans
|
|
|
—
|
|
|
|
224
|
|
|
|
—
|
|
|
|
—
|
|
|
|
224
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,225
|
)
|
|
|
—
|
|
|
|
(10,225
|
)
|
Adjustment to retained earnings for adoption of accounting standard
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
(19
|
)
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Balance, December 31, 2019
|
|
$
|
1,123
|
|
|
$
|
746,112
|
|
|
$
|
(819,294
|
)
|
|
$
|
—
|
|
|
$
|
(72,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
$
|
971
|
|
|
$
|
744,937
|
|
|
$
|
(815,184
|
)
|
|
$
|
11,394
|
|
|
$
|
(57,882
|
)
|
Issuances and cancellations of nonvested stock
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Compensation recognized under stock compensation plans
|
|
|
—
|
|
|
|
187
|
|
|
|
—
|
|
|
|
—
|
|
|
|
187
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
6,134
|
|
|
|
—
|
|
|
|
6,134
|
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,395
|
)
|
|
|
(11,395
|
)
|
Balance, December 31, 2018
|
|
$
|
991
|
|
|
$
|
745,104
|
|
|
$
|
(809,050
|
)
|
|
$
|
(1
|
)
|
|
$
|
(62,956
|
)
|
See notes to consolidated financial statements.
NOVATION COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,225
|
)
|
|
$
|
6,134
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Accretion of marketable securities, net
|
|
|
—
|
|
|
|
(76
|
)
|
Impairment on mortgage securities
|
|
|
—
|
|
|
|
325
|
|
Amortization of intangible assets
|
|
|
1,194
|
|
|
|
1,194
|
|
Amortization of debt discount
|
|
|
1,262
|
|
|
|
—
|
|
Realized gain on marketable securities
|
|
|
—
|
|
|
|
(12,881
|
)
|
Settlement claims
|
|
|
—
|
|
|
|
1,012
|
|
Depreciation expense
|
|
|
27
|
|
|
|
334
|
|
Loss on disposal of fixed assets
|
|
|
9
|
|
|
|
—
|
|
Lease expense
|
|
|
(5
|
)
|
|
|
—
|
|
Goodwill impairment
|
|
|
4,300
|
|
|
|
—
|
|
Compensation recognized under stock compensation plans
|
|
|
224
|
|
|
|
187
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and unbilled receivables
|
|
|
(461
|
)
|
|
|
1,800
|
|
Accounts payable and accrued expenses
|
|
|
(146
|
)
|
|
|
(2,012
|
)
|
Accrued compensation and benefits payable
|
|
|
(14
|
)
|
|
|
(1,482
|
)
|
Accrued health and wellness program payable
|
|
|
492
|
|
|
|
—
|
|
Accrued interest payable
|
|
|
(754
|
)
|
|
|
245
|
|
Accrued claim settlements
|
|
|
(459
|
)
|
|
|
—
|
|
Other current assets and liabilities, net
|
|
|
(186
|
)
|
|
|
128
|
|
Other noncurrent assets and liabilities, net
|
|
|
(426
|
)
|
|
|
36
|
|
Net cash used in operating activities
|
|
|
(5,168
|
)
|
|
|
(5,056
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of marketable securities
|
|
|
—
|
|
|
|
13,031
|
|
Purchase of property and equipment
|
|
|
(96
|
)
|
|
|
—
|
|
Proceeds from sale of property and equipment
|
|
|
26
|
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
|
|
(70
|
)
|
|
|
13,031
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under revolving line of credit
|
|
|
8,685
|
|
|
|
55,537
|
|
Repayments of borrowings under revolving line of credit
|
|
|
(10,633
|
)
|
|
|
(56,922
|
)
|
Paydowns of long-term debt
|
|
|
(31
|
)
|
|
|
(81
|
)
|
Net cash used in financing activities
|
|
|
(1,979
|
)
|
|
|
(1,466
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(7,217
|
)
|
|
|
6,509
|
|
Cash and cash equivalents, beginning of period
|
|
|
9,249
|
|
|
|
2,740
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,032
|
|
|
$
|
9,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
4,030
|
|
|
$
|
5,034
|
|
Cash paid for reorganization items
|
|
$
|
94
|
|
|
$
|
1,175
|
|
Cash paid for income taxes, net
|
|
$
|
30
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock in restructure of debt (Note 8)
|
|
$
|
311
|
|
|
$
|
—
|
|
Issuance of common stock warrants in restructure of debt (Note 8)
|
|
$
|
605
|
|
|
$
|
—
|
|
See notes to consolidated financial statements.
NOVATION COMPANIES, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 1. Basis of Presentation, Business Plan and Liquidity
Description of Operations – Novation Companies, Inc. and its subsidiaries (the “Company,” “Novation,” “we,” or “us”), through Healthcare Staffing, Inc. ("HCS"), our wholly-owned subsidiary acquired on July 27, 2017, provides outsourced health care staffing and related services in the State of Georgia. Our common stock, par value $0.01 per share, is traded on the OTC Pink marketplace of the OTC Markets Group, Inc. under the symbol “NOVC”.
Liquidity and Going Concern – During 2019, the Company incurred a net loss of $10.2 million and generated negative operating cash flow of $5.2 million. As of December 31, 2019, the Company has an overall shareholders deficit of $72.1 million, an aggregate of $2.0 million in cash and cash equivalents and total liabilities of $91.5 million. Of the $2.0 million in cash, $0.7 million is held by the Company's subsidiary NovaStar Mortgage LLC ("NMLLC"). This cash is available only to pay only general creditors and expenses of NMLLC.
From January 2019 through August 2019, the Company had a significant on-going obligation to pay interest under its senior note agreements at LIBOR plus 3.5% per annum, payable quarterly in arrears until maturity on March 30, 2033, leading to a significant annual cash outflow. In addition, HCS has experienced lower than anticipated cash flows due to increased costs and changes in customers. These items have led to substantial doubt about the Company's ability to continue as a going concern.
Management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers, looking at methods to reduce overall operating costs, both at HCS and the corporate level, and targeting new customers that have not previously been served by HCS. As disclosed in Note 8 to the consolidated financial statements, the Company was successful in amending the senior note agreements to lower the interest rate and receive future credit for cash interest payments made in 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.
As discussed, the 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. However, our historical operating results and poor cash flow suggest substantial doubt exists related to the Company's ability to continue as a going concern. In addition, based on the recent global developments regarding the coronavirus (COVID-19) situation, there is significant uncertainty regarding the potential impact to our business. Based on these uncertainties, there is no guarantee the Company's cash position will cover current obligations. As a result, we have not been able to alleviate the substantial doubt about the Company's ability to continue as a going concern for at least one year after the date that these consolidated financial statements are issued.
Financial Statement Presentation. The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expense during the period. The Company uses estimates and judgments in assessing the recoverability of goodwill and other intangible assets and accounting for income taxes, including the determination of the timing of the establishment or release of the valuation allowance related to the deferred tax asset balances and reserves for uncertain tax positions. While the consolidated financial statements and footnotes reflect the best estimates and judgments of management at the time, actual results could differ significantly from those estimates.
Note 2. Reorganization
On July 20, 2016, Novation and three of its subsidiaries, NMLLC, NovaStar Mortgage Funding Corporation ("NMFC") and 2114 Central LLC, filed voluntary 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. 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. 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. On April 19, 2019, the Bankruptcy Court approved the Motion for Final Decrees for Novation and NMLLC. On July 16, 2019, the bankruptcy case of NMFC was dismissed by order of the Bankruptcy Court.
Reorganization and bankruptcy-related expenses for the twelve months ended December 31, 2019 and December 31, 2018 were $0.06 million and $1.9 million, respectively.
Note 3. Summary of Significant Accounting and Reporting Policies
Cash and Cash Equivalents. Cash equivalents consist of liquid investments with an original maturity of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Company maintains cash balances at 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 cash and cash equivalents accounts aggregated $1.4 million as of December 31, 2019.
Accounts and Unbilled Receivables. Accounts receivable are uncollateralized customer obligations due under normal trade terms. Customer account balances that are not paid within contract terms are considered delinquent. Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company maintains an allowance for potential losses primarily based upon management's analysis of delinquent accounts, routine assessment of its customers' financial condition, and any other known factors impacting collectability, including disputed amounts. When management has exhausted all collection efforts, amounts deemed uncollectible are written off. Recoveries of previously written off accounts receivable are recognized in the period in which they are received. The ultimate amount of accounts receivable that becomes uncollectible could differ from management's estimate.
Goodwill and Indefinite-Lived Intangible Assets. Goodwill and trademarks are assessed annually to determine whether their carrying value exceeds their fair value. In addition, they are tested on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce their fair value below carrying value. If we determine the fair value of goodwill or trademarks is less than their carrying value, an impairment loss is recognized. Impairment losses, if any, are reflected in operating income or loss in the period incurred. The Company performs its annual tests of goodwill and trademarks during the second quarter of each fiscal year.
Impairment of Long-Lived Intangible Assets with Finite Lives. Long-lived intangible assets held and used by us which have finite lives are assessed for impairment whenever an event or change in circumstances indicates that the carrying value of the asset may not be fully recoverable. Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition. An impairment loss is measured by comparing the fair value of the asset to its carrying value. If we determine the fair value of an asset is less than the carrying value, an impairment loss is incurred. Impairment losses, if any, are reflected in operating income or loss in the period incurred.
Revenue and Cost Recognition - The Company recognizes revenue when 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. 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.
Income Taxes. The Company had a gross deferred tax asset of $166.5 million and $164.0 million as of December 31, 2019 and 2018, respectively. In determining the amount of deferred tax assets to recognize in the consolidated financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. The income tax guidance requires the recognition of a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Income tax guidance indicates the more likely than not threshold is a level of likelihood that is more than 50%.
Under the income tax guidance, companies are required to identify and consider all available evidence, both positive and negative, in determining whether it is more likely than not that all or some portion of its deferred tax assets will not be realized. Positive evidence includes but is not limited to the following: cumulative earnings in recent years, earnings expected in future years, excess appreciated asset value over the tax basis and positive industry trends. Negative evidence includes but is not limited to the following: cumulative losses in recent years, losses expected in future years, a history of operating losses or tax credit carryforwards expiring, and adverse industry trends.
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 support a conclusion that a valuation allowance is not needed for all or some of the deferred tax assets. Cumulative losses in recent years are significant negative evidence that is difficult to overcome when determining the need for a valuation allowance. Similarly, cumulative earnings in recent years represent significant positive objective evidence. If the weight of the positive evidence is sufficient to support a conclusion that it is more likely than not that a deferred tax asset will be realized, a valuation allowance should not be recorded.
The Company examines and weighs all available evidence (both positive and negative and both historical and forecasted) in the process of determining whether it is more likely than not that a deferred tax asset will be realized. The Company considers the relevance of historical and forecasted evidence when there has been a significant change in circumstances. Additionally, the Company evaluates the realization of its recorded deferred tax assets on an interim and annual basis. The Company does not record a full valuation allowance if the weight of the positive evidence exceeds the negative evidence and is sufficient to support a conclusion that it is more likely than not that its deferred tax asset will be realized.
If a valuation allowance is necessary, the Company considers all sources of taxable income in determining the amount of valuation allowance to be recorded. Sources of taxable income identified in the income tax guidance include the following: 1) taxable income in prior carryback year, 2) future reversals of existing taxable temporary differences, 3) future taxable income exclusive of reversing temporary differences and carryforwards, and 4) tax planning strategies.
The Company currently evaluates estimates of uncertainty in income taxes based upon a framework established in the income tax accounting guidance. The guidance prescribes a recognition threshold and measurement standard for the recognition and measurement of tax positions taken or expected to be taken in a tax return. In accordance with the guidance, the Company evaluates whether a tax position will more likely than not be sustained upon examination by the appropriate taxing authority. The Company measures the amount to recognize in its consolidated financial statements as the largest amount that is greater than 50% likely of being realized upon ultimate settlement. The recognition and measurement of tax benefits is often judgmental, and determinations regarding the tax benefit can change as additional developments occur relative to the issue.
Earnings (Loss) Per Share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is calculated assuming all options, nonvested shares and performance-based awards of the Company's common stock have been exercised, unless the exercise would be antidilutive. See Note 12 to the consolidated financial statements for additional details on earnings per share calculation.
Recently Adopted Accounting Principles
In February 2016, the Financial Accounting Standards Board (FASB) established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 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 ASU No. 2016-02 effective January 1, 2019 using the modified retrospective method. See Note 7 to the consolidated financial statements for further details.
Note 4. Revenue; Accounts and Unbilled Receivables
Staffing services include the augmentation of customers' workforce with our contingent employees performing services under the customers' supervision, which provides our customers with a source of flexible labor at a competitive cost. Customer contracts are typically annual contracts but may be terminated upon 60 days' notice for any reason.
The Company recognizes revenue when control of the 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, 2019
|
|
|
For the Year Ended December 31, 2018
|
|
Type of Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSB
|
|
$
|
61,620
|
|
|
|
97.1
|
%
|
|
$
|
52,491
|
|
|
|
95.2
|
%
|
Other
|
|
|
1,854
|
|
|
|
2.9
|
%
|
|
|
2,635
|
|
|
|
4.8
|
%
|
Total
|
|
$
|
63,474
|
|
|
|
100.0
|
%
|
|
$
|
55,126
|
|
|
|
100.0
|
%
|
Accounts and unbilled receivables are summarized as follows, in thousands:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Accounts receivable
|
|
$
|
4,083
|
|
|
$
|
3,952
|
|
Unbilled receivables (Contract Assets)
|
|
|
2,500
|
|
|
|
2,170
|
|
Total accounts and unbilled receivables
|
|
$
|
6,583
|
|
|
$
|
6,122
|
|
As of December 31, 2019 and December 31, 2018, management has determined no allowance for doubtful accounts is necessary. For the years ended December 31, 2019 and December 31, 2018, 63.1% and 44.6% of service fee income was generated from four and two customers, respectively. As of December 31, 2019, 61.6% of accounts and unbilled receivables was due from four customers and 96.6% was due from 14 CSB customers. As of December 31, 2018, 60.9% of accounts and unbilled receivables was due from four customers and 95.3% was due from 14 CSB customers.
Note 5. Marketable Securities
Prior to 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 held mortgage securities that were a source of its earnings and cash flow. These mortgage securities consisted entirely of the Company's investment in the interest-only and overcollateralization bonds issued by securitization trusts sponsored by the Company. Maturities of these retained mortgage securities depend on repayment characteristics, performance and other experience of the underlying financial instruments. During 2018, the Company sold all but 33 non-performing mortgage securities. These sales generated proceeds of $13.0 million and realized gains of $12.9 million recognized, included in other income in the Company's consolidated statements of operations and comprehensive income (loss). Of the 33 mortgage securities retained, the Company determined that these securities have no fair value. There were other-than-temporary impairments relating to available-for-sale securities in 2018 of $0.3 million.
As part of the mortgage securitization process, the Company owned the mortgage servicing rights on the mortgage loans in each securitization deal. These servicing rights were sold to a third party on October 12, 2007 as documented in the Servicing Rights Transfer Agreement by and between Saxon Mortgage Services as purchaser and NovaStar Mortgage, Inc. as seller, which was discussed in the Company's third quarter 2007 report on Form 10-Q. As part of this transaction, the Company retained the clean-up call rights for most of the securitization deals. The Company attempted to sell those clean-up call rights with the securities sold in 2018. However, no bids were received for the clean-up call rights and the Company determined that such clean-up call rights have no fair value.
Note 6. Goodwill and Intangible Assets
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
Indefinite-lived assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,905
|
|
|
$
|
—
|
|
|
$
|
3,905
|
|
|
$
|
8,205
|
|
|
$
|
—
|
|
|
$
|
8,205
|
|
Tradenames
|
|
|
1,147
|
|
|
|
—
|
|
|
|
1,147
|
|
|
|
1,147
|
|
|
|
—
|
|
|
|
1,147
|
|
|
|
$
|
5,052
|
|
|
$
|
—
|
|
|
$
|
5,052
|
|
|
$
|
9,352
|
|
|
$
|
—
|
|
|
$
|
9,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
6,895
|
|
|
$
|
2,380
|
|
|
$
|
4,515
|
|
|
$
|
6,895
|
|
|
$
|
1,395
|
|
|
$
|
5,500
|
|
Non-compete agreement
|
|
|
627
|
|
|
|
505
|
|
|
|
122
|
|
|
|
627
|
|
|
|
296
|
|
|
|
331
|
|
|
|
$
|
7,522
|
|
|
$
|
2,885
|
|
|
$
|
4,637
|
|
|
$
|
7,522
|
|
|
$
|
1,691
|
|
|
$
|
5,831
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Goodwill activity (in thousands):
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,205
|
|
|
$
|
8,205
|
|
Impairment charge
|
|
|
(4,300
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
3,905
|
|
|
$
|
8,205
|
|
Management completed its annual goodwill impairment assessment as of April 30, 2019. Increased cost of services and administrative expenses at HCS have resulted in declining cash flow for the business. Based on the likelihood of these expenses remaining higher than initially forecast, management determined that the carrying value of the HCS goodwill exceeded its fair value by $2.6 million. A goodwill impairment charge in this amount was recorded during the second quarter of 2019. Management assessed the other indefinite and definite lived intangible assets and determined no impairment was necessary.
During the fourth quarter of 2019, HCS was notified by a significant customer of its intent to terminate its contract services as of January 29, 2020. As a result, confirmation of the loss of the customer represented a triggering event for analysis of impairment of our intangible asset and goodwill balances as of September 30, 2019. It was determined that the carrying value of the HCS goodwill exceeded the fair value by $1.7 million, and this adjustment was recorded during the third quarter of 2019.
Amortization expense (in thousands):
|
|
|
|
|
2018
|
|
$
|
1,194
|
|
2019
|
|
|
1,194
|
|
Estimated future amortization expense (in thousands):
|
|
|
|
|
2020
|
|
$
|
1,107
|
|
2021
|
|
|
985
|
|
2022
|
|
|
985
|
|
2023
|
|
|
985
|
|
Thereafter
|
|
|
575
|
|
Total estimated amortization expense
|
|
$
|
4,637
|
|
Note 7. Leases
We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. The Company elected to adopt the ‘package of practical expedients’, which permitted the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs, the practical expedients pertaining to land easements, the use-of hindsight, the short-term lease recognition exemption for all leases that qualified, and the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate.
Adoption of the new standard resulted in the recording of an additional net operating lease right-of-use asset and operating lease liability of approximately $0.2 million each, as of January 1, 2019. The difference between the additional lease assets and lease liabilities was recorded as an adjustment to accumulated deficit. The standard did not materially impact our consolidated net loss and had no impact on cash flows. The Company does not have any finance leases.
Our leases consist primarily of office space. Leases with an initial term of 12 months or less, and leases which are on a month-to-month basis, are not recorded on the balance sheet. For these leases we recognize lease expense on a straight-line basis over the lease term.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to three years or more. The exercise of lease renewal options is at our discretion. Our lease agreements do not contain any variable lease payments, residual value guarantees or restrictive covenants. The components of lease expense for the twelve months ended December 31, 2019 were immaterial. As our leases do not provide an implicit interest rate, we use our incremental current borrowing rate in determining the present value of lease payments.
Maturities of lease liabilities were as follows (in thousands):
|
|
December 31, 2019
|
|
2020
|
|
$
|
220
|
|
2021
|
|
|
110
|
|
2022
|
|
|
20
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
350
|
|
Less interest
|
|
|
20
|
|
Present value of lease liabilities
|
|
$
|
330
|
|
Other information related to the Company's operating leases was as follows (in thousands):
|
|
December 31, 2019
|
|
Supplemental Cash Flow Information
|
|
|
|
|
Operating cash flows from leases
|
|
$
|
(5
|
)
|
Lease Term and Discount Rate
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
1.67
|
|
Weighted average discount rate
|
|
|
6.75
|
%
|
Note 8. Borrowings
Note Refinancing and 2017 Notes — On August 9, 2019, the Company and Taberna Preferred Funding I, Ltd. (“Taberna I”), Taberna Preferred Funding II, Ltd. (“Taberna II”) and Kodiak CDO I, Ltd. (“Kodiak” and, together with Taberna I and Taberna II, the “Noteholders”) executed a First Amendment to Senior Secured Note Purchase Agreement (the “Amendment”) amending the terms of the Note Purchase Agreement (as defined below) and the 2017 Notes (as defined below) to, among other things, significantly reduce the interest rate applicable from January 2019 through the third quarter of 2028 and allow the Company to apply certain surplus interest payments against future quarterly interest payments. As of December 31, 2019, the Company had $85.9 million in aggregate borrowings outstanding under three senior secured promissory notes (the “2017 Notes”). The unpaid principal amounts of the 2017 Notes bear interest at the following rates until the maturity date on March 30, 2033, with interest payable quarterly in arrears as follows: 1% per annum from April 1, 2019 through December 31, 2023; 2% per annum from January 1, 2024 through December 31, 2028; and 10% per annum from January 1, 2029 through the maturity date. Commencing with the delivery to the Noteholders of the financial statements for the fiscal year ending December 31, 2019, the Company is required to remit 50% of excess cash flow each year to the Noteholders to be applied as a principal reduction to the outstanding balance of the debt. The 2017 Notes generally rank senior in right of payment to any existing or future subordinated indebtedness of the Credit Parties (as defined below). The Company may at any time upon 30 days’ notice to the Noteholders redeem all or part of the 2017 Notes at a redemption price equal to 101% of the principal amount redeemed plus any accrued and unpaid interest thereon. The 2017 Notes were entered into on July 27, 2017 as a result of a refinancing of the Company’s then outstanding senior notes with the same aggregate principal amount through the execution of the Senior Secured Note Purchase Agreement, dated as of the same date (as amended, the “Note Purchase Agreement”), with NHI and HCS as guarantors (together with the Company, collectively, the “Credit Parties”).
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 the Company’s discussion in Note 10 to the consolidated financial statements for additional information regarding the Amendment.
Revolving Credit Agreement — As of December 31, 2018, HCS had $1.9 million outstanding under a Revolving Credit and Security Agreement (the “White Oak Credit Agreement”) between HCS and White Oak Global Advisors, LLC ("White Oak'), which provided HCS with a line of credit of up to $5,000,000. Availability under the White Oak Credit Agreement was based on a formula tied to HCS’s eligible accounts receivable. Borrowings bore interest at the prime rate plus 1.25%. The initial term of the White Oak Credit Agreement expired on November 17, 2018 but was renewed automatically for a consecutive one-year term per the provisions of the White Oak Credit Agreement. The obligations of HCS under the White Oak Credit Agreement were secured by HCS’s inventory and accounts receivable. In the case of an event of default, White Oak was able to, among other remedies, have accelerated payment of all obligations under the White Oak Credit Agreement. In connection with the White Oak Credit Agreement, the Company executed a guaranty in favor of White Oak guaranteeing all of HCS’s obligations under the White Oak Credit Agreement. HCS terminated the White Oak Credit Agreement in February 2019 and the Company fully repaid the outstanding obligations at that time.
Note 9. 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 Company's consolidated financial statements.
Pending Litigation. The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and routine nature. Any legal fees associated with these proceedings are expensed as incurred.
Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than the active proceedings described in detail below, proceedings and actions against the Company should not, individually, or in the aggregate, have a material effect on the Company's financial condition, operations and liquidity. Furthermore, due to the uncertainty of any potential loss as a result of pending litigation and due to the Company's belief that an adverse ruling is not probable, the Company has not accrued a loss contingency related to the following matters in its consolidated financial statements. However, a material outcome in one or more of the active proceedings described below could have a material impact on the results of operations in a particular quarter or fiscal year. See Note 2 to the consolidated financial statements for a description of the impact of the Company's Chapter 11 case on these proceedings.
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 NMFC and NovaStar Mortgage, Inc. ("NMI"), wholly-owned subsidiaries of the Company, and NMFC's individual directors, several securitization trusts sponsored by the Company (“affiliated defendants”) and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. The plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933, as amended, by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by the plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff's claims, which the court granted on March 31, 2011, with leave to amend. The plaintiff filed a second amended complaint on May 16, 2011, and the Company again filed a motion to dismiss. On March 29, 2012, the court dismissed the plaintiff's second amended complaint with prejudice and without leave to replead. The plaintiff filed an appeal. On March 1, 2013, the appellate court reversed the judgment of the lower court, which had dismissed the case. Also, the appellate court vacated the judgment of the lower court which had held that the plaintiff lacked standing, even as a class representative, to sue on behalf of investors in securities in which plaintiff had not invested, and the appellate court remanded the case back to the lower court for further proceedings. On April 23, 2013 the plaintiff filed its memorandum with the lower court seeking a reconsideration of the earlier dismissal of plaintiff's claims as to five offerings in which plaintiff was not invested, and on February 5, 2015 the lower court granted plaintiff's motion for reconsideration and vacated its earlier dismissal. On March 8, 2017, the affiliated defendants and all other parties executed an agreement to settle the action, with the contribution of the affiliated defendants to the settlement fund being paid by their insurance carriers. The court certified a settlement class and granted preliminary approval to the settlement on May 10, 2017. One member of the settlement class objected to the settlement and sought a stay of the final settlement approval hearing on the ground that it did not receive notice of the settlement and had no opportunity to timely opt out of the class. After the court rejected the motion for a stay, the objector filed an appeal and requested a stay of the district court proceedings pending disposition of the appeal. The court of appeals denied the temporary stay of the district court proceedings and on October 19, 2018 dismissed the appeal as moot. Following the court of appeals’ denial of the objector’s petition for rehearing, the district court on March 7, 2019 held a fairness hearing. On March 8, 2019, the district court issued a memorandum and order approving the settlement as fair, reasonable and adequate, and dismissing the action with prejudice. Following entry of judgment, the objector filed a notice of appeal on March 26, 2019 and their opening brief was filed on June 28, 2019. The defendants answered on September 27, 2019, and the 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 Defendants have meritorious defenses to the case and, if the settlement approval does not become final, expects them to defend the case vigorously.
On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. NMFC filed a motion to dismiss the amended complaint which was denied on September 12, 2013. The defendants had claimed that the case should be dismissed based upon a statute of limitations and sought an appeal of the court's denial of this defense. An interlocutory appeal of this issue was allowed, and on August 27, 2013, the Tenth Circuit affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the appellate court held that the Extender Statute, 12 U.S.C. §1787(b)(14) applied to plaintiff’s claims. On June 16, 2014, the United States Supreme Court granted a petition of NMFC and its co-defendants for certiorari, vacated the ruling of the Tenth Circuit, and remanded the case back to that court for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). On August 19, 2014, the Tenth Circuit reaffirmed its prior decision, and on October 2, 2014 the defendants filed a petition for writ of certiorari with the Supreme Court, which was denied. On March 22, 2016, NMFC filed motions for summary judgment, and plaintiff filed a motion for partial summary judgment. Those motions remain pending. Given that plaintiff did not file a timely proof of claim in NMFC’s bankruptcy case, the Company believes it is likely that the case will be dismissed. The Company and NMFC have 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, rescissory 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 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 short and long-term liability totals in the applicable Accrued Settlement Claims lines per the consolidated 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 indemnified by the Company for, and/or to receive contribution from the company in respect of, certain liabilities incurred as a result of their roles in the issuance of residential mortgage-backed securities sponsored by the Company. The Company filed an objection in the bankruptcy case seeking to disallow and expunge the Indemnity Claimants’ proofs of claim. The Indemnity Claimants’ claims were not discharged by the confirmation of the Company’s plan of reorganization, and the bankruptcy court has not ruled on the Company’s objection to those claims.
The parties have reached a settlement in this matter, which was approved by the court on November 29, 2018. This settlement includes an upfront payment of $0.5 million, which was paid on December 21, 2018. In addition, the settlement provides for equal quarterly installments over a three years period, which total an additional $0.4 million. Based on the probability of this settlement receiving court approval, the Company recorded an expense during the second quarter of 2018 in the Reorganization Items, net expense line item of the income statement and the short and long-term liability totals in the applicable Accrued Settlement Claims lines per the balance sheet.
Note 10. Troubled Debt Restructuring
The Company evaluated whether the terms of the Amendment, as discussed in Note 8 to the consolidated financial statements, qualified as a troubled debt restructuring under applicable accounting standards. The Company determined that this transaction did qualify. Under the terms of the Amendment, there were no transfers of other assets and there was no gain or loss recorded on this transaction.
The outstanding balance on the 2017 Notes as of December 31, 2019 and 2018 was $86.8 and $85.9, respectively. At the time of the troubled debt restructuring, the carrying value of the debt was decreased by the fair value of the common stock and warrants issued by the Company under the terms of the Amendment of $0.3 and $0.6 million, respectively, less the total accrued interest from July 1, 2019 through August 8, 2019 of $0.5 million at the original variable rate equal to LIBOR plus 3.5% per annum. Future interest expense is computed using the effective interest method.
The carrying value of long-term debt is as follows (in thousands):
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Principal balance, 2017 Notes
|
|
$
|
85,938
|
|
|
$
|
85,938
|
|
Unamortized debt premium, 2017 Notes
|
|
|
886
|
|
|
|
-
|
|
Other long-term debt
|
|
|
-
|
|
|
|
31
|
|
Total long-term debt
|
|
$
|
86,824
|
|
|
$
|
85,969
|
|
Note 11. Fair Value Accounting
Fair Value Measurements
The Company's valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:
•
|
Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities.
|
•
|
Level 2 – Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates 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 as follows as of December 31, 2019 and 2018 (in thousands):
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (Level 1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes (Level 3)
|
|
$
|
86,824
|
|
|
$
|
21,289
|
|
|
$
|
85,938
|
|
|
$
|
24,659
|
|
Valuation Methods and Processes
The equity securities are valued based on quoted market prices and are included in other current assets on the consolidated balance sheets. All equity securities held by the Company were sold during the third quarter of 2019. The senior notes in the table above are not measured at fair value in the consolidated balance sheets but are required to be disclosed at fair value. The fair value of the senior notes has been estimated using Level 3 methodologies, based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow calculations based on internal cash flow forecasts. No assets or liabilities have been transferred between levels during any period presented.
Senior Notes — The fair value is estimated by discounting future projected cash flows using a discount rate commensurate with the risks involved. The interest rate used in calculating the fair value 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.
Goodwill — See Note 6 to the consolidated financial statements for more information on the goodwill impairment assessments performed in 2019.
Financial assets reported at fair value on a nonrecurring basis include the following (in thousands):
|
|
December 31, 2019
|
|
|
|
Fair Value (Level 3)
|
|
|
Gains and (Losses)
|
|
Goodwill
|
|
$
|
3,905
|
|
|
$
|
(4,300
|
)
|
Activity during 2019 for Goodwill, the Company's only Level 3 asset, measured on a nonrecurring basis is included in the following table (in thousands):
Goodwill Activity:
|
|
|
|
|
Balance, December 31, 2018
|
|
$
|
8,205
|
|
Impairment charge
|
|
|
(4,300
|
)
|
Balance, December 31, 2019
|
|
$
|
3,905
|
|
Note 12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the effect of conversions of stock options and nonvested shares. The computations of basic and diluted earnings per share for 2019 and 2018 (dollars in thousands, except share and per share amounts) are as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator, in thousands:
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(10,225
|
)
|
|
$
|
6,134
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
100,472,515
|
|
|
|
93,961,799
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – dilutive:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
100,472,515
|
|
|
|
93,961,799
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Common stock warrants
|
|
|
—
|
|
|
|
—
|
|
Nonvested shares
|
|
|
—
|
|
|
|
508,258
|
|
Weighted average common shares outstanding – dilutive
|
|
|
100,472,515
|
|
|
|
94,470,057
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(0.10
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(0.10
|
)
|
|
$
|
0.06
|
|
Options and warrants to purchase shares of common stock were outstanding during each period as presented below (in thousands, except exercise price), but were not included in the computation of diluted earnings (loss) per share because the number of shares assumed to be repurchased was greater than the number of shares to be obtained upon exercise, therefore, the effect would be anti-dilutive.
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Number of stock options (in thousands)
|
|
|
24
|
|
|
|
72
|
|
Weighted average exercise price of stock options
|
|
$
|
1.00
|
|
|
$
|
1.17
|
|
There have been no options granted during 2018 or 2019. During 2018, the Company granted 3.3 million shares to the Board, and all of these shares vested in 2019. During 2019, the Company granted 4.5 million shares to the directors, officers and other members of management, of which 2.4 million of these shares vested during the year. The remaining 2.1 million shares will vest equally in 2020 and 2021, assuming the grantees are still directors at the vest date. As of December 31, 2019 and 2018, respectively, the Company had approximately 2.2 million and 4.2 million non-vested shares outstanding. The weighted average impact of 0.1 million and 0.8 million non-vested shares and common stock warrants of 22.3 million granted in the debt restructure were not included in the calculation of earnings per share for 2019 and 2018, respectively, because they were anti-dilutive.
Note 13. Income Taxes
The components of income tax expense (benefit) from continuing operations are (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(11
|
)
|
|
$
|
(113
|
)
|
State and local
|
|
|
36
|
|
|
|
(176
|
)
|
Total current
|
|
$
|
25
|
|
|
$
|
(289
|
)
|
Below is a reconciliation of the expected federal income tax expense (benefit) using the federal statutory tax rate of 21% to the Company’s actual income tax benefit and resulting effective tax rate (in thousands).
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) at statutory rate
|
|
$
|
(2,949
|
)
|
|
$
|
984
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
|
36
|
|
|
|
36
|
|
Valuation allowance
|
|
|
2,528
|
|
|
|
(688
|
)
|
Change in federal tax rate
|
|
|
—
|
|
|
|
—
|
|
Change in state tax rate
|
|
|
—
|
|
|
|
—
|
|
Bankruptcy reorganization
|
|
|
9
|
|
|
|
17
|
|
Uncertain tax positions
|
|
|
—
|
|
|
|
(371
|
)
|
Other
|
|
|
401
|
|
|
|
(267
|
)
|
Total income tax expense (benefit)
|
|
$
|
25
|
|
|
$
|
(289
|
)
|
Prior to 2018, the Company concluded that it was no longer more likely than not that it would realize a portion of its deferred tax assets. As such, the Company maintained a full valuation allowance against its net deferred tax assets as of both December 31, 2019 and 2018.
The Company's determination of the realizable deferred tax assets requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. In the event the actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. The Company will continue to assess the need for a valuation allowance in future periods. As of December 31, 2019 and 2018, the Company maintained a valuation allowance of $166.5 million and $164.0 million, respectively, for its deferred tax assets.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 are (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal NOL carryforwards
|
|
$
|
152,705
|
|
|
$
|
153,139
|
|
State NOL carryforwards
|
|
|
9,003
|
|
|
|
9,016
|
|
Goodwill impairment, HCS
|
|
|
1,084
|
|
|
|
—
|
|
Business interest expense limitation
|
|
|
1,877
|
|
|
|
—
|
|
Other
|
|
|
1,876
|
|
|
|
1,866
|
|
Gross deferred tax asset
|
|
|
166,545
|
|
|
|
164,021
|
|
Valuation allowance
|
|
|
(166,545
|
)
|
|
|
(163,992
|
)
|
Deferred tax asset
|
|
|
—
|
|
|
|
29
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
—
|
|
|
|
29
|
|
Deferred tax liability
|
|
|
—
|
|
|
|
29
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
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, 2019, the Company had a federal NOL of approximately $727.2 million, including $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. Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely; the portion of NOLs that will not expire is $92.6 million. The Company has state NOL carryforwards arising from both combined and separate filings from as early as 2004. The state NOL carryforwards may expire as early as 2018 and as late as 2037.
The activity in the accrued liability for unrecognized tax benefits for the years ended December 31, 2019 and 2018 was (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
11
|
|
|
$
|
328
|
|
Gross increases – tax positions in current period
|
|
|
—
|
|
|
|
1
|
|
Lapse of statute of limitations
|
|
|
(11
|
)
|
|
|
(318
|
)
|
Ending balance
|
|
$
|
—
|
|
|
$
|
11
|
|
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, 2019, there were no unrecognized tax benefits, and as of December 31, 2018, the total gross amount of unrecognized tax benefits was $0.01 million, which also represents the total amount of unrecognized tax benefits that would impact the effective tax rate. The change in unrecognized tax benefits of $0.01 million was due the lapse of statute of limitations in 2019. The Company does not expect any other significant change in the liability for unrecognized tax benefits in the next twelve months. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. The benefit for interest and penalties recorded in income tax expense was not significant for 2019 and 2018. There were accrued interest and penalties of less than $0.1 million as of both December 31, 2019 and 2018. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions. Tax years 2016 to 2019 remain open to examination for both U.S. federal income tax and major state tax jurisdictions.