NOVATION COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(in thousands)
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Shareholders’
Deficit
|
|
Balance, December 31, 2017
|
|
$
|
971
|
|
|
$
|
744,937
|
|
|
$
|
(815,184
|
)
|
|
$
|
11,394
|
|
|
$
|
(57,882
|
)
|
Issuances and cancellations of nonvested shares
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
928
|
|
|
$
|
744,873
|
|
|
$
|
(804,319
|
)
|
|
$
|
9,319
|
|
|
$
|
(49,199
|
)
|
Issuances and cancellations of nonvested shares
|
|
|
43
|
|
|
|
(43
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Compensation recognized under stock compensation plans
|
|
|
—
|
|
|
|
107
|
|
|
|
—
|
|
|
|
—
|
|
|
|
107
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,865
|
)
|
|
|
—
|
|
|
|
(10,865
|
)
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,075
|
|
|
|
2,075
|
|
Balance, December 31, 2017
|
|
$
|
971
|
|
|
$
|
744,937
|
|
|
$
|
(815,184
|
)
|
|
$
|
11,394
|
|
|
$
|
(57,882
|
)
|
See notes to consolidated financial statements.
NOVATION COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,134
|
|
|
$
|
(10,865
|
)
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
895
|
|
Net income (loss) from continuing operations
|
|
|
6,134
|
|
|
|
(11,760
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
4,500
|
|
Accretion of marketable securities, net
|
|
|
(76
|
)
|
|
|
58
|
|
Impairment on mortgage securities
|
|
|
325
|
|
|
|
—
|
|
Amortization of intangible assets
|
|
|
1,194
|
|
|
|
496
|
|
Realized gain on marketable securities
|
|
|
(12,881
|
)
|
|
|
(137
|
)
|
Settlement claims
|
|
|
1,012
|
|
|
|
—
|
|
Depreciation expense
|
|
|
334
|
|
|
|
264
|
|
Compensation recognized under stock compensation plans
|
|
|
187
|
|
|
|
107
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
Accounts and unbilled receivables
|
|
|
1,800
|
|
|
|
(457
|
)
|
Accounts payable and accrued expenses
|
|
|
(988
|
)
|
|
|
589
|
|
Accrued professional fees payable
|
|
|
(1,024
|
)
|
|
|
346
|
|
Accrued compensation and benefits payable
|
|
|
(1,482
|
)
|
|
|
(613
|
)
|
Accrued interest payable
|
|
|
245
|
|
|
|
(2,639
|
)
|
Other current assets and liabilities, net
|
|
|
128
|
|
|
|
(526
|
)
|
Other noncurrent assets and liabilities, net
|
|
|
36
|
|
|
|
151
|
|
Net cash used in operating activities from continuing operations
|
|
|
(5,056
|
)
|
|
|
(9,621
|
)
|
Net cash provided by operating activities of discontinued operations
|
|
|
—
|
|
|
|
895
|
|
Net cash used in operating activities
|
|
|
(5,056
|
)
|
|
|
(8,726
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of marketable securities
|
|
|
13,031
|
|
|
|
26,847
|
|
Purchase of business, net of cash received
|
|
|
—
|
|
|
|
(23,337
|
)
|
Net cash provided by investing activities
|
|
|
13,031
|
|
|
|
3,510
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under revolving line of credit
|
|
|
55,537
|
|
|
|
10,043
|
|
Repayments of borrowings under revolving line of credit
|
|
|
(56,922
|
)
|
|
|
(6,710
|
)
|
Paydowns of long-term debt
|
|
|
(81
|
)
|
|
|
(182
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(1,466
|
)
|
|
|
3,151
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents - continuing operations
|
|
|
6,509
|
|
|
|
(2,065
|
)
|
Cash and cash equivalents of continuing operations, beginning of period
|
|
|
2,740
|
|
|
|
4,805
|
|
Cash and cash equivalents of continuing operations, end of period
|
|
$
|
9,249
|
|
|
$
|
2,740
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
5,034
|
|
|
$
|
6,557
|
|
Cash paid for reorganization items
|
|
$
|
1,175
|
|
|
$
|
4,501
|
|
Cash paid for income taxes, net
|
|
$
|
75
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of financing and investing activities:
|
|
|
|
|
|
|
|
|
Assets acquired and liabilities assumed in connection with purchase of business:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
246
|
|
Accounts receivable
|
|
|
-
|
|
|
|
7,465
|
|
Other current assets
|
|
|
-
|
|
|
|
59
|
|
Other assets
|
|
|
-
|
|
|
|
581
|
|
Intangible assets
|
|
|
-
|
|
|
|
8,669
|
|
Goodwill
|
|
|
-
|
|
|
|
12,705
|
|
Accrued compensation and benefits
|
|
|
-
|
|
|
|
(4,751
|
)
|
Long-term debt, including current portion of $426
|
|
|
-
|
|
|
|
(683
|
)
|
Other current liabilities
|
|
|
-
|
|
|
|
(708
|
)
|
Purchase price
|
|
$
|
-
|
|
|
$
|
23,583
|
|
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. We also previously owned a portfolio of mortgage securities which generated earnings to support on-going financial 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”.
Management of the Company measures financial performance based on the results of the Company as a whole and not based on the performance of the Company's investments and HCS.
Liquidity and Going Concern
– During
2018
, the Company earned net income of $
6.1
million and generated negative operating cashflow of $
5.1
million. As of
December 31, 2018
the Company has an overall shareholders deficit of $
63.0
million. As of
December 31, 2018
, the Company had an aggregate of $
9.2
million in cash and cash equivalents and total liabilities of $
94.1
million. Of the $
9.2
million in cash, $
1.3
million is held by the Company's subsidiary NovaStar Mortgage LLC ("NMLLC")
.
This cash is available only to pay only general creditors and expenses of NMLLC. The Company also has a significant on-going obligation to pay interest under its senior note agreement. During the first quarter of 2018 a significant customer substantially reduced the level of staff outsourced to HCS. However, HCS replaced the majority of that lost revenue with new CSB customer agreements signed during the second and third quarters of 2018. These new customers started in September 2018 and January 2019. These events have led to substantial doubt about the ability of the Company to continue as a going concern.
After engaging major investment firms to evaluate the marketplace for its mortgage securities, the Company executed trades to sell all of its mortgage securities during 2018. These sales generated $
13.0
million in cash proceeds for the Company. For the year ended December 31, 2018, the Company recorded $
12.9
million in gains in other income in the Statements of Operations and Comprehensive Income (Loss) related to the sale of these securities. However, the Company will no longer have any future cash flows from these securities since they were sold. In addition, through the date of this filing, HCS believes it has demonstrated that it can provide positive cash flow sufficient to support HCS operations. Management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers and targeting new customers that have not previously been served by HCS. In addition, management is exploring cost cutting initiatives that will reduce overall corporate overhead and operating costs.
Management continues to work toward expanding HCS’s operations by building their customer base. This includes increasing revenue from existing customers in the Community Service Boards (“CSBs”) market and also targeting new customers, which have not previously been served by HCS. In addition, management is exploring cost cutting initiatives that will reduce overall corporate overhead and operating costs. While our historical operating results and poor cash flow suggest substantial doubt exists related to the Company’s ability to continue as a going concern, management has concluded that the factors discussed above have alleviated the substantial doubt about the Company's ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
We cannot provide assurance that revenue generated from our businesses will be sufficient to sustain our operations in the long term. Additionally, we cannot be certain that we will be successful at raising capital, whether from divesting of mortgage securities or other assets, or from equity or debt financing, on commercially reasonable terms, if at all. Such failures would have a material adverse effect on our business, including the possible cessation of operations.
Financial Statement Presentation.
The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expense during the period. The Company uses estimates and judgments in establishing the fair value of its mortgage securities, assessing the recoverability of goodwill 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. 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. See Note 9 - Commitments and Contingencies for settlement information that was agreed to by NMLLC as part of its reorganization efforts. These obligations of approximately $1.5 million are captured below in the numbers reported for the year ended
December 31, 2018
.
We incurred significant costs associated with our reorganization and the Chapter 11 proceedings. These costs, which are being expensed as incurred, include (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Professional fees
|
|
$
|
(374
|
)
|
|
$
|
(3,460
|
)
|
Adjustments to other liabilities for claims made or rejected contracts
|
|
|
(1,490
|
)
|
|
|
(87
|
)
|
Other
|
|
|
-
|
|
|
|
(34
|
)
|
Reorganization items, net
|
|
$
|
(1,864
|
)
|
|
$
|
(3,581
|
)
|
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 unrestricted cash and cash equivalents accounts aggregated $
8.6
million as of
December 31, 2018
.
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.
Marketable Securities – Available-for-Sale.
Marketable securities are stated at fair value in accordance with the relevant accounting guidance. The Company determines the fair value of its marketable securities using market prices from industry-standard independent data providers. Market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. For periods prior to June 30, 2018, retained mortgage-backed securities were valued at each reporting date using significant unobservable inputs (Level 3) by discounting the expected cash flows. An independent valuation specialist was engaged to assist management in estimating cash flows and values for the Company's mortgage securities. It is the Company's responsibility for the overall resulting valuation. During 2018, the Company engaged a broker to market and sell the interest-only and overcollateralization bonds. Through this broker and the subsequent sale of portions of these securities, the Company determined that a market of buyers exists for these securities. As a result, in the second quarter of 2018, the Company reassessed the previous valuation methodology and changed the valuation methodology from a discounted cash flow approach to a market-based approach. The Company determined the market for these securities is not an active market with quotes available to participants, but is instead based on quotes of similar investments. As a result, these investments now qualify as Level 2 investments for reporting purposes. See Note 10 to the consolidated financial statements for additional information on the estimates used in the valuation of our retained mortgage securities.
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
$
164.0
million and $
164.7
million
as of
December 31, 2018
and
2017
, respectively. In determining the amount of deferred tax assets to recognize in the consolidated financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. The income tax guidance requires the recognition of a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Income tax guidance indicates the more likely than not threshold is a level of likelihood that is more than 50%.
Under the income tax guidance, companies are required to identify and consider all available evidence, both positive and negative, in determining whether it is more likely than not that all or some portion of its deferred tax assets will not be realized. Positive evidence includes, but is not limited to the following: cumulative earnings in recent years, earnings expected in future years, excess appreciated asset value over the tax basis and positive industry trends. Negative evidence includes, but is not limited to the following: cumulative losses in recent years, losses expected in future years, a history of operating losses or tax credit carryforwards expiring, and adverse industry trends.
The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is required to counter to support a conclusion that a valuation allowance is not needed for all or some of the deferred tax assets. Cumulative losses in recent years are significant negative evidence that is difficult to overcome when determining the need for a valuation allowance. Similarly, cumulative earnings in recent years represent significant positive objective evidence. If the weight of the positive evidence is sufficient to support a conclusion that it is more likely than not that a deferred tax asset will be realized, a valuation allowance should not be recorded.
The Company examines and weighs all available evidence (both positive and negative and both historical and forecasted) in the process of determining whether it is more likely than not that a deferred tax asset will be realized. The Company considers the relevance of historical and forecasted evidence when there has been a significant change in circumstances. Additionally, the Company evaluates the realization of its recorded deferred tax assets on an interim and annual basis. The Company does not record a full valuation allowance if the weight of the positive evidence exceeds the negative evidence and is sufficient to support a conclusion that it is more likely than not that its deferred tax asset will be realized.
If a valuation allowance is necessary, the Company considers all sources of taxable income in determining the amount of valuation allowance to be recorded. Sources of taxable income identified in the income tax guidance include the following: 1) taxable income in prior carryback year, 2) future reversals of existing taxable temporary differences, 3) future taxable income exclusive of reversing temporary differences and carryforwards, and 4) tax planning strategies.
The Company currently evaluates estimates of uncertainty in income taxes based upon a framework established in the income tax accounting guidance. The guidance prescribes a recognition threshold and measurement standard for the recognition and measurement of tax positions taken or expected to be taken in a tax return. In accordance with the guidance, the Company evaluates whether a tax position will more likely than not be sustained upon examination by the appropriate taxing authority. The Company measures the amount to recognize in its consolidated financial statements as the largest amount that is greater than 50% likely of being realized upon ultimate settlement. The recognition and measurement of tax benefits is often judgmental, and determinations regarding the tax benefit can change as additional developments occur relative to the issue.
Earnings (Loss) Per Share (“EPS”).
Basic EPS excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is calculated assuming all options, nonvested shares and performance-based awards of the Company's common stock have been exercised, unless the exercise would be antidilutive. See Note 11 to the consolidated financial statements for additional details on earnings per share calculation.
Recently Issued and Adopted Accounting Principles
On January 1, 2018, the Company adopted new accounting guidance on revenue recognition prescribed by Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. We used the modified retrospective approach applied to those customer contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior periods continue to be reported in accordance with previous accounting guidance. We determined that no cumulative effect adjustment to accumulated deficit was necessary upon adoption as there were no significant revenue recognition differences identified between the new and previous accounting guidance.
In April 2015, the FASB issued Accounting Standards Update (ASU) 2015-05,
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
, or ASU 2015-05. ASU 2015-05 amends existing accounting guidance to provide explicit guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. Under the guidance, cloud computing arrangements that include a software license would be accounted for consistent with the acquisition of other software licenses. Conversely, cloud computing arrangements that do not include a software license would be accounted for as a service contract. The Company adopted ASU 2015-05 effective January 1, 2018 and there was no impact on the presentation of its results of operations, financial position or disclosures.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC 718, Compensation – Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees and to supersede the guidance in ASC 505-50. The new guidance will be substantially the same as current guidance for employee awards. The Company adopted this standard April 1, 2018 and applied it using the modified retrospective approach. The remeasurement of open awards to nonemployees was based on the fair value of such awards as of the date of adoption and resulted in no material change to accumulated deficit or additional paid-in capital.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in its balance sheet a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company estimates adoption of the standard will result in recognition of additional net lease assets and lease liabilities of approximately $0.2 million and $0.2 million, respectively, as of January 1, 2019. The difference between these amounts will be recorded as an adjustment to retained earnings. The Company does not believe the standard will materially affect our consolidated net earnings.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of operations and comprehensive income (loss) is required to be filed. The Company anticipates its first presentation of year-to-date quarterly changes in shareholders' deficit will be included in its Form 10-Q for the quarter ending March 31, 2019.
Note 4. Acquisition and Divestiture
Acquisition of Healthcare Staffing, Inc.
On February 1, 2017, the Company entered into a Stock Purchase Agreement (the “HCS Purchase Agreement”) with Novation Holding, Inc., a wholly-owned subsidiary of the Company (“NHI”), HCS and Butler America, LLC, the former owner of HCS (“Butler” and, together with HCS, the “Seller Parties”). Pursuant to the HCS Purchase Agreement, NHI agreed to purchase from Butler all of the outstanding capital stock of HCS for $24.0 million in cash, subject to terms and conditions as provided therein, including but not limited to the Company’s receipt of bankruptcy court approval for the HCS Acquisition in its Chapter 11 case. The purchase price was subject to a potential working capital adjustment, based on HCS having $5.0 million of working capital at closing.
On July 27, 2017, in connection with the anticipated closing of the HCS Acquisition, the Company, NHI, HCS and Butler entered into a Closing Agreement, dated as of the same date (the “Closing Agreement”), relating to certain closing matters and the terms of the HCS Purchase Agreement. The Closing Agreement provided for the following: (i) eliminate the $240,000 indemnification escrow under the HCS Purchase Agreement; (ii) provide for NHI’s reimbursement to Butler of $100,000 in costs and expenses incurred by Butler in consideration for the delay in closing the HCS Acquisition; (iii) clarify the treatment of certain of HCS’s outstanding tax obligations; (iv) provide that an adjustment to the purchase price under the HCS Purchase Agreement will be made in connection with the calculation of final closing date net working capital of HCS only if there is a difference between such amount and the pre-closing estimate of greater than three percent; and (v) make certain other changes to the HCS Purchase Agreement. On July 27, 2017, the Company and NHI completed the HCS Acquisition pursuant to the terms of the HCS Purchase Agreement and the Closing Agreement, as a result of which HCS became a wholly-owned subsidiary of NHI.
We have made claims against Butler for a working capital adjustment, indemnification and other reimbursements and payments under the terms of the HCS Purchase Agreement and have held discussions with Butler regarding these claims. As of the date of this filing, the claims are unresolved and the Company has not recorded any amounts for these claims in the consolidated financial statements. As part of the HCS Purchase Agreement, Novation purchased a Buyer-Side Representations and Warranties Insurance Policy ("reps and warranties insurance") covering the acquisition. In regards to the claims filed against Butler, the Company also filed a claim under the reps and warranties insurance. A settlement was reached with the reps and warranties insurers during the fourth quarter of 2018 and the Company received $.5 million in relation to this claim.
The net purchase price was allocated as follows (in thousands):
Cash
|
|
$
|
246
|
|
Accounts receivable
|
|
|
7,465
|
|
Other assets
|
|
|
59
|
|
Property and equipment
|
|
|
581
|
|
Intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
6,895
|
|
Trademark
|
|
|
1,147
|
|
Non-compete
|
|
|
627
|
|
Goodwill
|
|
|
12,705
|
|
Accrued compensation and benefits
|
|
|
(4,751
|
)
|
Long-term debt, including current portion of $426
|
|
|
(683
|
)
|
Other current liabilities
|
|
|
(708
|
)
|
Net assets acquired
|
|
$
|
23,583
|
|
The purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed at their estimated fair values as of the acquisition date. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 in the valuation hierarchy.
The gross contractual amount of accounts receivable is $7.5 million, which approximates fair value. Goodwill and trademarks are considered indefinite-lived assets and are not subject to future amortization, but will be tested for impairment at least annually. Goodwill is comprised primarily of processes for services and knowhow, assembled workforces and other intangible assets that do not qualify for separate recognition. The amortization period for the intangibles for customer relationships and the non-compete agreement are seven and three years, respectively. The goodwill will be deductible for tax purposes.
HCS’s results are included in our 2018 year to date consolidated statement of operations and comprehensive loss. The following unaudited pro forma financial information presents the combined results of HCS and Novation as if the HCS Acquisition had occurred on January 1, 2017 (in thousands). The unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually would have been or what results may be expected in the future.
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
Service fee income
|
|
$
|
63,246
|
|
Loss from continuing operations before taxes
|
|
$
|
(9,331
|
)
|
Net loss
|
|
$
|
(8,450
|
)
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(0.10
|
)
|
Net loss
|
|
$
|
(0.09
|
)
|
Included in general and administrative expenses, primarily during 2017, are approximately $1.3 million in fees associated with the HCS Acquisition, including $0.9 million in investment advisor fees.
Sale of Corvisa LLC
. Subject to the terms and conditions of the Membership Interest Purchase Agreement, dated as of December 21, 2015, by and among the Company, Corvisa Services, LLC ("Corvisa") and ShoreTel, Inc. ("Shoretel"), Shoretel agreed to purchase 100% of the membership interests of Corvisa, at the time a wholly-owned subsidiary of the Company. The sale closed on January 6, 2016. During the first quarter of 2017, the Company received $1.0 million from the release of the indemnification escrow which was recorded as a gain and included in discontinued operations during 2017.
Results of Discontinued Operations - The results of the Company's discontinued operations are summarized below (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Recognition of gain upon release of indemnification escrow - Corvisa sale
|
|
$
|
-
|
|
|
$
|
1,020
|
|
Expenses related to discontinued operations
|
|
|
-
|
|
|
|
(125
|
)
|
Income from discontinued operations, net of income taxes
|
|
$
|
-
|
|
|
$
|
895
|
|
The assets and liabilities of discontinued operations are not material.
Note 5. 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.
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, 2018
|
|
Type of Customer
|
|
|
|
|
|
|
|
|
CSB
|
|
$
|
52,491
|
|
|
|
95.2
|
%
|
Other
|
|
|
2,635
|
|
|
|
4.8
|
%
|
Total
|
|
$
|
55,126
|
|
|
|
100.0
|
%
|
Accounts and unbilled receivables are summarized as follows, in thousands:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Accounts receivable
|
|
$
|
3,952
|
|
|
$
|
5,418
|
|
Unbilled receivables (Contract Assets)
|
|
|
2,170
|
|
|
|
2,504
|
|
Total accounts and unbilled receivables
|
|
$
|
6,122
|
|
|
$
|
7,922
|
|
As of
December 31, 2018
and
December 31, 2017
management has determined no allowance for doubtful accounts is necessary. For the years ended
December 31, 2018
and
December 31, 2017
,
44.6%
and
56.9%
of service fee income was generated from
two
and
three
customers, respectively. 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. As of
December 31, 2017
,
61.1%
of accounts and unbilled receivables was due from
four
customers and
96.6%
was due from
15
CSB customers.
Note 6. Marketable Securities
The Company's portfolio of available-for-sale securities includes (dollars in thousands):
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Estimated
Fair Value
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Equity securities
|
|
|
2
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
1
|
|
Total
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
See Note 10 for a discussion of the Company's fair value methods and measurements.
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 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.
Prior to 2017, 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 continued to be a source of earnings and cash flow through December 2018. As of December 31, 2017, these mortgage securities consisted entirely of the Company's investment in the residual securities issued by securitization trusts sponsored by the Company. Residual securities consist of interest-only and overcollateralization bonds.
The following table relates to the securitizations where the Company retained an interest in the assets issued by the securitization trust (in thousands):
|
|
Size/Principal Outstanding (A)
|
|
|
Assets on Balance Sheet (B)
|
|
|
Liabilities on Balance Sheet
|
|
|
Maximum Exposure to Loss
|
|
|
Year to Date Loss on Sale
|
|
|
Year to Date Cash Flows
|
|
December 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,057
|
|
December 31, 2017
|
|
$
|
2,714,823
|
|
|
$
|
11,794
|
|
|
$
|
-
|
|
|
$
|
11,794
|
|
|
$
|
-
|
|
|
$
|
3,193
|
|
(A) Principal Outstanding is the aggregate principal of the underlying loans held by the securitization trusts.
(B) Assets on Balance Sheet and Maximum Exposure to Loss is the estimated fair value of securities issued by the entity and recorded as marketable securities, current in the consolidated balance sheets.
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 also attempted to sell the clean-up call rights along with the securities that were sold, as noted above. However, no bids were received for the clean-up call rights and the Company does not believe they have any fair value.
Note 7. Goodwill and Intangible Assets
|
|
December 31, 2018
|
|
|
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
|
|
|
$
|
1,395
|
|
|
$
|
5,500
|
|
|
$
|
6,895
|
|
|
$
|
410
|
|
|
$
|
6,485
|
|
Non-compete agreement
|
|
|
627
|
|
|
|
296
|
|
|
|
331
|
|
|
|
627
|
|
|
|
87
|
|
|
|
540
|
|
|
|
$
|
7,522
|
|
|
$
|
1,691
|
|
|
$
|
5,831
|
|
|
$
|
7,522
|
|
|
$
|
497
|
|
|
$
|
7,025
|
|
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Goodwill activity (in thousands):
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,205
|
|
|
$
|
-
|
|
Goodwill recorded in connection with the HCS Acquisition
|
|
|
-
|
|
|
|
12,705
|
|
Impairment charge
|
|
|
-
|
|
|
|
(4,500
|
)
|
Ending balance
|
|
$
|
8,205
|
|
|
$
|
8,205
|
|
As part of the goodwill impairment analysis completed annually on April 30th of each year, Management concluded no impairment was necessary for 2018 as a result of this review. In addition, Management has determined no impairment of indefinite and definite lived intangible assets existed as of December 31, 2018.
During the fourth quarter of 2017, HCS was notified that a customer was significantly reducing the level of staff outsourced to HCS. The last pay period in 2017 was the final service period for these employees. This customer represented more than 20% of the Company's service fee income during 2017. Accordingly, management completed a goodwill impairment assessment as of December 31, 2017, determined that the carrying value of the HCS goodwill exceeded the fair value by $4.5 million and recorded a goodwill impairment charge for the year ended December 31, 2017. Management assessed the other indefinite and definite lived intangible assets and determined no impairment existed as of December 31, 2017.
Amortization expense (in thousands)
|
|
|
|
|
2018
|
|
$
|
1,194
|
|
Estimated future amortization expense (in thousands)
|
|
|
|
|
2019
|
|
$
|
1,194
|
|
2020
|
|
|
1,107
|
|
2021
|
|
|
985
|
|
2022
|
|
|
985
|
|
Thereafter
|
|
|
1,560
|
|
Total estimated amortization expense
|
|
$
|
5,831
|
|
Note 8. Borrowings
Revolving Credit Agreement.
As of
December 31, 2018
, HCS had
$
1.9
million
outstanding under the White Oak Credit Agreement. This agreement provides HCS with a line of credit of up to $5,000,000. The obligations of HCS under the White Oak Credit Agreement are secured by HCS’s inventory and accounts receivable. Availability under the White Oak Credit Agreement is based on a formula tied to HCS’s eligible accounts receivable. Borrowings, and borrowings under the White Oak Credit Agreement bear interest at the prime rate plus 1.25%. The White Oak Credit Agreement also provides for customary origination and collateral monitoring fees payable to White Oak.
The White Oak Credit Agreement contains customary representations, warranties and affirmative and negative covenants, including but not limited to financial covenants. The White Oak Credit Agreement also contains customary events of default, including but not limited to payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of an event of default, White Oak may, among other remedies, accelerate 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.
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 agreement. HCS terminated the White Oak Credit Agreement in February 2019 and the Company fully repaid the outstanding obligations at that time.
Note Refinancing and 2017 Notes.
Prior to the third quarter of 2017, the Company had outstanding three series of unsecured 2011 Notes pursuant to three separate “Indentures” with an aggregate principal balance of $85.9 million. On July 27, 2017, the Company entered into a Senior Secured Note Purchase Agreement, dated as of the same date (the “Note Purchase Agreement”), with NHI and HCS as guarantors (together with the Company, collectively, the “Credit Parties”), the Noteholders and Wilmington Savings Fund Society, FSB, as collateral agent for the benefit of the Noteholders, to refinance $85.9 million of principal indebtedness of the Company under the 2011 Notes. Pursuant to the Note Purchase Agreement, the Noteholders exchanged their 2011 Notes for new notes from the Company in the same aggregate principal amount (collectively, the “2017 Notes”) on the terms and conditions set forth therein.
Pursuant to the Note Purchase Agreement, in connection with the Note Refinancing, the Company paid all overdue and unpaid accrued interest on the 2011 Notes in the agreed, reduced aggregate amount of $5.8 million, and paid $0.5 million in fees and expenses incurred by the Noteholders in 2017.
The unpaid principal amounts of the 2017 Notes bear interest at a variable rate equal to LIBOR plus 3.5% per annum, payable quarterly in arrears until maturity on March 30, 2033. The 2017 Notes generally rank senior in right of payment to any existing or future subordinated indebtedness of the Credit Parties. The Company may at any time upon 30 days’ notice to the 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 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 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 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, 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.
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 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. 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 Company's assets and liabilities which are measured at fair value on a recurring basis, include (in thousands):
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant Other Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Marketable securities, current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
December 31, 2017
|
|
$
|
11,795
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
11,794
|
|
Valuation Methods and Processes
When available, the Company determines the fair value of its marketable securities using market prices from industry-standard independent data providers. Market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.
For periods prior to June 30, 2018, retained mortgage-backed securities were valued at each reporting date using significant unobservable inputs (Level 3) by discounting the expected cash flows. An independent valuation specialist was engaged to assist management in estimating cash flows and values for the Company's mortgage securities. It is the Company's responsibility for the overall resulting valuation.
During 2018, the Company engaged a broker to market and sell the interest-only and overcollateralization bonds. Through this broker and the subsequent sale of portions of these securities, the Company determined that a market of buyers exists for these securities. As a result, in the second quarter of 2018, the Company reassessed the previous valuation methodology and changed the valuation methodology from a discounted cash flow approach to a market-based approach. The Company determined the market for these securities is not an active market with quotes available to participants, but is instead based on quotes of similar investments. As a result, these investments now qualify as Level 2 investments for reporting purposes.
The Company's marketable securities are classified as available-for-sale and are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of the Company's marketable securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses.
Mortgage securities - available-for-sale
.
Mortgage securities include investments that were retained during the Company's lending and securitization process, conducted prior to 2017. For the retained mortgage securities, the Company maintains the right to receive excess interest and other cash flow generated through the mortgage loan securitization vehicle. The Company receives the difference between the interest on the mortgage loans and the interest paid to the securitization bondholders. The Company also owns overcollateralization ("OC") classes of various securitization trusts. These OC bonds represent the difference in the principal of the underlying mortgage loans compared to the bonds sold to third parties. This extra collateral serves as a cushion for losses that have and may occur in the underlying mortgage pool. The OC bonds may receive cash if and when it is determined that actual losses are less than expectations. The timing and amount of cash to be generated by the OC bonds is contingent upon the performance of the underlying mortgage loan collateral.
The independent loan servicer controls and manages the individual mortgage loans and therefore the Company has no control over the loan performance. Collectively, these mortgage securities are identified by the Company as "retained mortgage securities," in order to distinguish them from the Company's traditional agency mortgage-backed securities.
As discussed in Note 1, the Company sold all but 33 non-performing mortgage securities in 2018. The Company evaluated the market conditions and other factors existing at the time of the sale as compared to December 31, 2017 and determined that conditions were substantially the same as of the sale date and December 31, 2017. Therefore, as of December 31, 2017 the Company valued these securities at the price at which it was sold. However, the Company determined that it could not extrapolate that price to the other retained mortgage securities because the underlying assets and their performance are not substantially similar to that of the security that was sold. Therefore, the other mortgage securities have been valued as discussed below.
For periods prior to June 30, 2018, the critical assumptions used in estimating the value of the mortgage securities include market interest rates, rate and severity of default, prepayment speeds and how long the security will continue to provide cash flow. To determine the assumptions, the Company and its independent valuation specialist rely primarily on historical mortgage loan performance and appropriate general economic indicators. The Company continuously reviews the assumptions used and monitors the efforts of the independent valuation specialist. The significant unobservable inputs used in preparing the fair value estimates are:
|
|
December 31, 2017
|
|
Weighted average:
|
|
|
|
|
Loss severity
|
|
|
62.1
|
%
|
Default rate
|
|
|
2.0
|
%
|
Prepayment speed
|
|
|
13.5
|
%
|
Servicer's optional redemption date
|
|
None
|
|
The following table provides a reconciliation of the beginning and ending balances for the Company's retained mortgage securities – available-for-sale which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance, beginning of period
|
|
$
|
11,794
|
|
|
$
|
9,791
|
|
Increases (decreases) to mortgage securities – available-for-sale:
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
151
|
|
|
|
-
|
|
Proceeds from paydowns of securities (A)
|
|
|
(93
|
)
|
|
|
(51
|
)
|
Gains realized upon sale of mortgage securities
|
|
|
(2,931
|
)
|
|
|
-
|
|
Market value adjustment (B)
|
|
|
(1,801
|
)
|
|
|
2,054
|
|
Securities transferred from Level 3 to Level 2
|
|
|
(7,120
|
)
|
|
|
-
|
|
Net decrease to level 3 mortgage securities – available-for-sale
|
|
|
(11,794
|
)
|
|
|
2,003
|
|
Balance, end of period
|
|
$
|
-
|
|
|
$
|
11,794
|
|
(A)
|
Cash received on mortgage securities with no cost basis was
$
0.9
million and $
2.8
million
during
2018
and
2017
, respectively.
|
(B)
|
The market value decrease shown is based on the normal decline in the security values based on the reduction of the future cash flows over time.
|
The following table provides the estimated fair value of financial instruments 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, 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, 2018
and
2017
(in thousands):
|
|
As of
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
11,795
|
|
|
$
|
11,795
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
$
|
85,938
|
|
|
$
|
24,659
|
|
|
$
|
85,938
|
|
|
$
|
23,018
|
|
For the items in the table above not measured at fair value in the consolidated balance sheets but for which the fair value is disclosed, the fair value has been estimated using Level 2 methodologies for the marketable securities, such as bids from buyers on the securities. The senior notes utilize 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. The debt balance from the revolving credit agreement is recorded in the consolidated balance sheet at an amount which approximates its fair value. No liabilities have been transferred between levels during any period presented. As disclosed above, the value of the marketable securities transferred from a Level 3 methodology as of December 31, 2017 to a Level 2 methodology for the second quarter of 2018.
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.
Financial assets reported at fair value on a nonrecurring basis include the following (in thousands):
|
|
December 31, 2017
|
|
|
|
Fair Value
(Level 3)
|
|
|
Gains and
(Losses)
|
|
Goodwill
|
|
$
|
8,205
|
|
|
$
|
(4,500
|
)
|
Activity during
2018
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, 2016
|
|
$
|
-
|
|
Goodwill recorded in connection with the HCS Acquisition
|
|
|
12,705
|
|
Impairment charge
|
|
|
(4,500
|
)
|
Balance, December 31, 2017
|
|
$
|
8,205
|
|
See Note 7 for additional information regarding the Company's Goodwill and Intangible Assets.
Note 11. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average 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
2018
and
2017
(dollars in thousands, except share and per share amounts) are as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator, in thousands:
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
6,134
|
|
|
$
|
(11,760
|
)
|
Net income from discontinued operations
|
|
$
|
-
|
|
|
|
895
|
|
Net income (loss) available to common shareholders
|
|
$
|
6,134
|
|
|
$
|
(10,865
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
93,961,799
|
|
|
|
92,800,392
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – dilutive:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
93,961,799
|
|
|
|
92,800,392
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Nonvested shares
|
|
|
508,258
|
|
|
|
—
|
|
Weighted average common shares outstanding – dilutive
|
|
|
94,470,057
|
|
|
|
92,800,392
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.07
|
|
|
$
|
(0.13
|
)
|
Net income from discontinued operations
|
|
|
-
|
|
|
|
0.01
|
|
Net income (loss) available to common shareholders
|
|
$
|
0.07
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.06
|
|
|
$
|
(0.13
|
)
|
Net income from discontinued operations
|
|
|
-
|
|
|
|
0.01
|
|
Net income (loss) available to common shareholders
|
|
$
|
0.06
|
|
|
$
|
(0.12
|
)
|
Options 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,
|
|
|
|
2018
|
|
|
2017
|
|
Number of stock options
|
|
|
72
|
|
|
|
1,411
|
|
Weighted average exercise price of stock options
|
|
$
|
1.17
|
|
|
$
|
0.89
|
|
There have been no options granted during
2017
or
2018
. During 2017, the Company granted 4.3 million shares to directors, officers and other members of management, of which 2.3 million vested, 1.1 million were forfeited and 0.8 million remaining outstanding to vest in 2019 and 2020, assuming the grantees are still employees or directors of the Company as of the vest date. During
2018
, the Company granted
3.3
million shares to the Board. All of these shares will vest in 2019, assuming the grantees are still directors at the vest date. As of
December 31, 2018
and
2017
, respectively, the Company had approximately
4.2
million and
4.3
million non-vested shares outstanding. The weighted average impact of
0.8
million
and
1.1
million non-vested shares were not included in the calculation of earnings per share for
2018
and
2017
, respectively, because they were anti-dilutive.
Note 12. Income Taxes
The components of income tax expense (benefit) from continuing operations are (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(113
|
)
|
|
$
|
(1
|
)
|
State and local
|
|
|
(176
|
)
|
|
|
15
|
|
Total current
|
|
$
|
(289
|
)
|
|
$
|
14
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) at statutory rate
|
|
$
|
984
|
|
|
$
|
(3,802
|
)
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
|
36
|
|
|
|
(54
|
)
|
Valuation allowance
|
|
|
(688
|
)
|
|
|
(131,234
|
)
|
Change in federal tax rate
|
|
|
-
|
|
|
|
33,640
|
|
Change in state tax rate
|
|
|
-
|
|
|
|
100,899
|
|
Bankruptcy reorganization
|
|
|
17
|
|
|
|
746
|
|
Uncertain tax positions
|
|
|
(371
|
)
|
|
|
(4
|
)
|
Other
|
|
|
(267
|
)
|
|
|
(177
|
)
|
Total income tax expense (benefit)
|
|
$
|
(289
|
)
|
|
$
|
14
|
|
Prior to 2017, 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, 2018
and
2017
.
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, 2018
and
2017
, the Company maintained a valuation allowance of
$164.0
million and
$162.7
million, respectively, for its deferred tax assets.
Significant components of the Company’s deferred tax assets and liabilities as of
December 31, 2018
and
2017
are (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Basis difference – investments
|
|
$
|
-
|
|
|
$
|
8,015
|
|
Federal NOL carryforwards
|
|
|
153,139
|
|
|
|
145,608
|
|
State NOL carryforwards
|
|
|
9,016
|
|
|
|
8,301
|
|
Other
|
|
|
1,866
|
|
|
|
2,756
|
|
Gross deferred tax asset
|
|
|
164,021
|
|
|
|
164,680
|
|
Valuation allowance
|
|
|
(163,992
|
)
|
|
|
(162,708
|
)
|
Deferred tax asset
|
|
|
30
|
|
|
|
1,972
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
30
|
|
|
|
1,972
|
|
Deferred tax liability
|
|
|
30
|
|
|
|
1,972
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
As of
December 31, 2018
, the Company had a federal NOL of approximately
$729.2
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 $94.6 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, 2018
and
2017
was (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
328
|
|
|
$
|
331
|
|
Gross increases – tax positions in current period
|
|
|
1
|
|
|
|
22
|
|
Lapse of statute of limitations
|
|
|
(318
|
)
|
|
|
(25
|
)
|
Ending balance
|
|
$
|
11
|
|
|
$
|
328
|
|
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, 2018
and
2017
, the total gross amount of unrecognized tax benefits was $
0.1
million and $
0.3
million, respectively, which also represents the total amount of unrecognized tax benefits that would impact the effective tax rate. The Company anticipates a reduction of unrecognized tax benefits of less than $0.1 million due the lapse of statute of limitations in the next twelve months. 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
2018
and
2017
. There were accrued interest and penalties of less than $0.1 million as of both
December 31, 2018
and
2017
. 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 2015 to 2018 remain open to examination for both U.S. federal income tax and major state tax jurisdictions.