Forward-Looking Statements
Statements in this report regardingNovation 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 endedDecember 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 OverviewNovation Companies, Inc. and its subsidiaries (the "Company," "Novation," "we," "us," or "our") through our wholly-owned subsidiaryHealthcare Staffing, Inc. ("HCS"), provides outsourced health care staffing and related services in theState 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." September 30, 2020 (unaudited) December 31, 2019 Cash and cash equivalents $ 1,132 $ 2,032 Nine Months Ended September 30,
Three Months Ended
(unaudited) (unaudited) 2020 2019 2020 2019 Service fee income$ 38,747 $ 47,822 $ 12,381 $ 15,671 Net loss, per basic share$ (0.07 ) $ (0.09 ) $ (0.01 ) $ (0.03 )
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 Nine Month Period Ended
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 acrossGeorgia including mental health services, developmental disabilities programs and substance abuse treatments. TheState of Georgia has a total of 25 CSBs. Each CSB has a number of facilities, including crisis centers, outpatient centers and 24-hour group homes that require a broad range of employees, such as registered nurses, social workers, house parents and supervisors. The CSB market inGeorgia is large and growing steadily, as the demand for the services provided by the CSBs continues to grow. In addition to providing outsourced employees to CSBs, HCS also provides healthcare outsourcing and staffing services to hospitals, schools and a variety of privately-owned businesses. The services and positions provided to non CSB clients are similar to the ones provided to CSB clients. The service fee income and costs of services in the condensed consolidated statement of operations and comprehensive loss for the three and nine months endedSeptember 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 nine months endedSeptember 30, 2020 was$12.4 and$38.7 , respectively. This decrease in revenue compared to the three and nine months endedSeptember 30, 2019 of$15.7 and$47.8 , 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 2020. HCS cost of goods sold for the three and nine months endedSeptember 30, 2020 was$10.6 and$34.4 , respectively. This decrease in cost of goods sold compared to the three and nine months endedSeptember 30, 2019 of$13.9 and$42.5 , respectively, is consistent with the decrease in revenue. 12
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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 and continuing through the third 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 nine months endedSeptember 30, 2020 ,$1.4 million and$4.3 million of the total general and administrative expenses were incurred by HCS, as compared to$1.4 million and$4.7 million for the three and nine months endedSeptember 30, 2019 . Corporate-level general and administrative expenses for the three and nine months endedSeptember 30, 2020 were$0.5 million and$1.5 million , respectively, as compared to$0.6 million and$1.7 million for the three and nine months endedSeptember 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 ofApril 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 was recorded for the second quarter.
Reorganization Items, Net
There were no reorganization and bankruptcy-related expenses for the nine months endedSeptember 30, 2020 , and expenses for the nine months endedSeptember 30, 2019 were approximately$0.1 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$0.8 million and$2.5 million during the three and nine months endedSeptember 30, 2020 , respectively, compared to$1.0 million and$3.7 million during the three and nine months endedSeptember 30, 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 onAugust 9, 2019 . The Amendment, among other things, significantly reduce the interest rate applicable fromJanuary 2019 through the end 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 nine months ended
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 nine months endedSeptember 30, 2020 and 2019 (in thousands). Nine Months EndedSeptember 30, 2020 2019
Cash flows used in operating activities
(11 ) (1 ) Cash flows used in financing activities - (1,979 ) Operating Activities - The decrease in net cash flows used in operating activities to approximately$0.9 million during the nine months endedSeptember 30, 2020 from cash used of$5.2 million during the nine months endedSeptember 30, 2019 was driven primarily by the Company's decrease in net loss, along with a decrease in accounts receivable. Another contributor is the reduction of interest payments in 2020 resulting from the amendment of the senior note agreements, effectiveAugust 9, 2019 .
Investing Activities - The decrease in the 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 nine months endedSeptember 30, 2020 . 13
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