NOVATION COMPANIES, INC. 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, 2020 , (the "2020 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"), acquired onJuly 27, 2017 , provides outsourced health care staffing and related services in theState of Georgia . Our common stock, par value$0.01 per share, is traded on the OTC Pink marketplace of the OTC Markets Group, Inc. under the symbol "NOVC".
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, 2021 (unaudited) December 31, 2020
Cash and cash equivalents $ 1,543 $ 1,340
Nine Months Ended September 30, Three Months Ended September
(unaudited) 30, (unaudited)
2021 2020 2021 2020
Service fee income $ 35,379 $ 38,747 $ 9,943 $ 12,381
General and administrative expenses $ 5,212 $ 5,894 $ 1,659 $ 1,877
Net loss available to common
shareholders, per basic share $ (0.04 ) $ (0.07 ) $ (0.01 ) $ (0.01 ) Critical Accounting Policies
In our 2020 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 across Georgia including mental health services,
developmental disabilities programs and substance abuse treatments. The State of
Georgia has a total of 25 CSBs. Each CSB has a number of facilities, including
crisis centers, outpatient centers and 24-hour group homes that require a broad
range of employees, such as registered nurses, social workers, house parents and
supervisors. The CSB market in Georgia is large and growing steadily, as the
demand for the services provided by the CSBs continues to grow. In addition to
providing outsourced employees to CSBs, HCS also provides healthcare outsourcing
and staffing services to hospitals, schools and a variety of privately-owned
businesses. The services and positions provided to non CSB clients are similar
to the ones provided to CSB clients. The service fee income and costs of
services in the condensed consolidated statement of operations and comprehensive
loss for the three and nine months ended September 30, 2021 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.
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Table of Contents In June of 2021, two customers, one significant, notified HCS of their intent to terminate their contract services during the third quarter of 2021. As a result, we determined that the loss of this customers generated a triggering event for analysis of impairment of our other indefinite and definite lived intangible assets balance as ofJune 30, 2021 . It was determined that the fair value of the HCS intangible assets exceeded the carrying value, so no impairment was necessary. In addition, due to the developments of COVID-19, and the resulting reduction of programs and staff utilized by CSBs, the Company experienced an impact to service fee income and cost of services starting during the second quarter of 2020 and continuing through the current quarter. However, HCS has continued to focus on growing the traditional staffing line of business in 2021, and has seen a positive impact to service fee income from this growth. HCS revenue for the three and nine months endedSeptember 30, 2021 was$9.9 million and$35.4 million , respectively, and for the three and nine months endedSeptember 30, 2020 was$12.4 million and$38.7 million , respectively. This decrease is attributable to the loss of two customers during the third quarter of 2021, the reduction of programs and staff utilized by CSBs, and the developments of COVID-19 throughout 2020 and into 2021. Please see Note 1 to the condensed consolidated financial statements for a discussion regarding these impacts. HCS cost of goods sold for the three and nine months endedSeptember 30, 2021 was$8.8 million and$31.7 million , respectively, and for the three and nine months endedSeptember 30, 2020 was$10.6 million and$34.4 million , respectively. This decrease in cost of goods sold is consistent with the decrease in revenue. 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, 2021 ,$1.3 million and$3.9 million of the total general and administrative expenses were incurred by HCS, as compared to$1.4 million and$4.3 million for the three and nine months endedSeptember 30, 2020 . Corporate-level general and administrative expenses for the three and nine months endedSeptember 30, 2021 were$0.4 million and$1.3 million , respectively, as compared to$0.5 million and$1.5 million for the three and nine months endedSeptember 30, 2020 . The decrease in total general and administrative expenses results from a reduction in staffing, worker's compensation expense, 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.
Interest Expense
Interest expense remained static period over period, with the Company incurring$0.9 million and$2.5 million during the three and nine months endedSeptember 30, 2021 , respectively, compared to$0.8 million and$2.5 million during the three and nine months endedSeptember 30, 2020 , 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 and investing cash flows as taken from our condensed consolidated statements of cash flows for the nine months endedSeptember 30, 2021 and 2020 (in thousands). Nine Months Ended September 30, 2021 2020 Cash flows provided by (used in) operating activities $ 218 $ (889 ) Cash flows used in investing activities (15 ) (11 ) Operating Activities - The change in net cash flows provided operating activities to approximately$0.2 million during the nine months endedSeptember 30, 2021 from cash used of$0.9 million during the nine months endedSeptember 30, 2020 was driven primarily by reductions in the accounts receivable and other current asset balances.
Investing Activities - The increase in the net cash flows used in investing activities is due to the purchase of fixed assets.
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