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."
June 30, 2021 (unaudited) December 31, 2020
Cash and cash equivalents $ 1,085 $ 1,340
Six Months Ended June 30, Three Months Ended June 30,
(unaudited) (unaudited)
2021 2020 2021 2020
Service fee income $ 25,436 $ 26,366 $ 13,056 $ 12,332
General and administrative expenses $ 3,553 $ 4,018 $ 1,778 $ 2,038
Net loss available to common
shareholders, per basic share $ (0.02 ) $ (0.06 ) $ (0.01 ) $ (0.05 ) 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 Six 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 six months ended June 30, 2021 are from the operations of
HCS.
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Table of Contents 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. In June of 2021, two customers, one significant, notified HCS of their intent to terminate their contract services as ofJuly 31, 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. HCS revenue for the three months endedJune 30, 2021 and 2020 was$13.1 million and$12.3 million , respectively. The increase in revenue is primarily due to the Company's focus on increasing its traditional staffing business. HCS revenue for the six months endedJune 30, 2021 and 2020 was$25.4 million and$26.4 million , respectively. The decrease in revenue is attributable to 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 this impact. HCS cost of goods sold for the three months endedJune 30, 2021 and 2020 was$11.7 million and$11.2 million , respectively, and for the six months endedJune 30, 2021 and 2020 was$22.9 million and$23.8 million , respectively. The increase in cost of goods sold for the three months endedJune 30, 2021 and the decrease in cost of goods sold for the six months endedJune 30, 2021 is consistent with the change 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 six months endedJune 30, 2021 ,$1.3 million and$2.7 million of the total general and administrative expenses were incurred by HCS, as compared to$1.4 million and$3.0 million for the three and six months endedJune 30, 2020 . Corporate-level general and administrative expenses for the three and six months endedJune 30, 2021 were$0.5 million and$0.9 million , respectively, as compared to$0.6 million and$1.1 million for the three and six months endedJune 30, 2020 . 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.
Interest Expense
Interest expense increased slightly period over period, with the Company incurring$1.7 million and$1.6 million during the six months endedJune 30, 2021 and 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 . This Amendment, among other things, significantly reduced the interest rate applicable fromJanuary 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
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 endedJune 30, 2021 and 2020 (in thousands). Six Months Ended June 30, 2021 2020 Cash flows provided by (used in) operating activities $ (250 ) $ 113 Cash flows used in investing activities (5 ) (11 ) Operating Activities - The decrease in net cash flows provided by (used in) operating activities to approximately$0.3 million during the six months endedJune 30, 2021 from cash provided of$0.1 million during the six months endedJune 30, 2020 was driven primarily by an increase in accounts receivable and a decrease in accounts payable and accrued expenses.
Investing Activities - The decrease in net cash flows used in investing activities is due to a reduction in purchases of property and equipment.
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