Forward-Looking Statements





Statements in this report regarding Novation Companies, Inc. and its business
that are not historical facts are "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Forward-looking statements are those that predict or describe
future events, do not relate solely to historical matters and include statements
regarding management's beliefs, estimates, projections, and assumptions with
respect to, among other things, our future operations, business plans and
strategies, as well as industry and market conditions, all of which are subject
to change at any time without notice. Words such as "believe," "expect,"
"anticipate," "promise," "plan," and other expressions or words of similar
meanings, as well as future or conditional auxiliary verbs such as "would,"
"should," "could," or "may" are generally intended to identify forward-looking
statements. Risks, uncertainties, contingencies, and developments, including
those discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this report and those identified in "Risk Factors"
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2019, (the "2019 Form 10-K"), could cause our future operating results to
differ materially from those set forth in any forward-looking statement. Given
these uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. We disclaim any obligation to update any such
factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future results, events or
developments.



Corporate Overview



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



Financial Highlights and Key Performance Metrics. The following key performance
metrics (in thousands, except per share amounts) are derived from our condensed
consolidated financial statements for the periods presented and should be read
in conjunction with the more detailed information therein and with the
disclosure included in this report under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations."



                             June 30, 2020 (unaudited)      December 31, 2019
Cash and cash equivalents   $                     2,134    $             2,032






                                   Six Months Ended June 30, (unaudited)             Three Months Ended June 30, (unaudited)
                                      2020                       2019                   2020                        2019
Service fee income             $           26,366         $           32,151     $            12,332         $            16,297
Net loss available to common
shareholders, per basic
share                          $            (0.06 )       $            (0.07 )   $             (0.05 )       $             (0.05 )

Critical Accounting Policies



In our 2019 Form 10-K, we disclose critical accounting policies that require
management to use significant judgment or that require significant
estimates. Management regularly reviews the selection and application of our
critical accounting policies. See Note 1 to the condensed consolidated financial
statements for a discussion of significant accounting policies.

Results of Operations for the Three and Six Month Period Ended June 30, 2020 as Compared to June 30, 2019

Service Fee Income and Cost of Services



HCS delivers outsourced full-time and part-time employees primarily to Community
Service Boards ("CSBs"), quasi state organizations that provide behavioral
health services at facilities across Georgia including mental health services,
developmental disabilities programs and substance abuse treatments. The State of
Georgia has a total of 25 CSBs. Each CSB has a number of facilities, including
crisis centers, outpatient centers and 24-hour group homes that require a broad
range of employees, such as registered nurses, social workers, house parents and
supervisors. In addition to providing outsourced employees to CSBs, HCS also
provides healthcare outsourcing and staffing services to hospitals, schools and
a variety of privately owned businesses. The services and positions provided to
non CSB clients are similar to the ones provided to CSB clients. The service fee
income and costs of services in the condensed consolidated statement of
operations and comprehensive loss for the three and six months ended June 30,
2020 are from the operations of HCS.



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



HCS revenue for the three and six months ended June 30, 2020 was $12.3 and
$26.4, respectively. This decrease in revenue compared to the three and six
months ended June 30, 2019 of $16.3 and $32.2, respectively, is due to the loss
of a significant customer during the first quarter of 2020, in addition to the
reduction of revenue with other CSBs and retail customers during the first and
second quarters of 2020. HCS cost of goods sold for the three and six months
ended June 30, 2020 was $11.2 and $23.8, respectively. This decrease in cost of
goods sold compared to the three and six months ended June 30, 2019 of $14.5 and
$28.6, respectively, is also consistent with the decrease in revenue.





                                       12

--------------------------------------------------------------------------------


  Table of Contents

In addition, due to the recent developments of COVID-19, the Company has experienced an impact to service fee income and cost of services starting in the second quarter of 2020. Please see Note 1 to the condensed consolidated financial statements for a discussion regarding this impact.

General and Administrative



General and administrative expenses consist of salaries, office costs, legal and
professional expenses and other customary costs of corporate administration. For
the three and six months ended June 30, 2020, $1.4 million and $3.0 million
of the total general and administrative expenses were incurred by HCS, as
compared to $1.6 million and $3.4 million for the three and six months ended
June 30, 2019. Corporate-level general and administrative expenses for the three
and six months ended June 30, 2020 were $0.6 million and $1.1 million,
respectively, as compared to $0.6 million and $1.1 million for the three and six
months ended June 30, 2019. The decrease in general and administrative expenses
results from a reduction in staffing, professional fees and other costs of
administration as the Company continues to focus on cost containment.



The future amount of corporate-level general and administrative expenses will
depend largely on corporate activities, professional fees associated with those
activities and staffing needs based on the evolving business strategy. For HCS,
the amount of these expenses will depend on business growth.

Goodwill Impairment Charge



Management completed its annual goodwill impairment assessment as of April 30,
2020.  Increased cost of services and administrative expenses at HCS and the
loss of a significant customer during the first quarter of 2020 have resulted in
declining cash flow for the business. In addition, COVID-19 concerns were
attributable to a lay-off of staffed employees during the second quarter of
2020. Based on these factors, management determined that the carrying value of
the HCS goodwill exceeded its fair value by the full amount recorded on the
condensed consolidated balance sheets of $3.9 million. A goodwill impairment
charge in this amount has been recorded for the quarter.

Reorganization Items, Net



There were no reorganization and bankruptcy-related expenses for the six months
ended June 30, 2020, and expenses for the six months ended June 30, 2019 were
approximately $0.06 million. These costs have decreased as a result of the
completion of the Company's reorganization of NMLLC.

Interest Expense



Interest expense decreased period over period, with the Company incurring $1.6
million and $2.7 million during the six months ended June 30, 2020 and 2019,
respectively. See Note 5 to the condensed consolidated financial statements for
a discussion of the Note Purchase Agreement and the 2017 Notes, which were
amended on August 9, 2019. This Amendment, among other things, significantly
reduced the interest rate applicable from January 2019 through the third quarter
of 2028.



Income Tax Expense

Because of the Company's significant net operating losses and full valuation
allowance, the income tax expense was not material for any period presented and
is not expected to be material for the foreseeable future.

Liquidity and Capital Resources

Liquidity and Going Concern

See discussion of our liquidity and capital resources in Note 1 to the condensed consolidated financial statements.

Overview of Cash Flow for the six months ended June 30, 2020



The following table provides a summary of our operating, investing and financing
cash flows as taken from our condensed consolidated statements of cash flows for
the six months ended June 30, 2020 and 2019 (in thousands).



                                                              Six Months Ended June 30,
                                                             2020                  2019
Cash flows provided by (used in) operating activities   $           113       $        (2,997 )
Cash flows used in investing activities                             (11 )                 (17 )
Cash flows used in financing activities                               -                (1,979 )




Operating Activities - The increase in net cash flows provided by (used in)
operating activities to approximately $0.1 million during the six months
ended June 30, 2020 from cash used of $3.0 million during the six months
ended June 30, 2019 was driven primarily by collections on accounts receivable,
the goodwill impairment charge, and the amortization of the debt premium and
prepaid interest into interest expense for the 2017 Notes.

Investing Activities - The decrease in net cash flows used in investing activities is due to a reduction in purchases of property and equipment.





Financing Activities - The decrease in cash used in financing activities is due
to the payoff of HCS's line of credit in 2019. The Company did not participate
in any financing activities during the first and second quarters of 2020.





                                       13

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses