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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~March~~June 3130, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 001-13533

NOVATION COMPANIES, INC.

(Exact Name of Registrant as Specified in its Charter)

Maryland

(State or Other Jurisdiction of Incorporation or Organization)

74-2830661

(I.R.S. Employer Identification No.)

9229 Ward Parkway, Suite 340, Kansas City, MO

(Address of Principal Executive Office)

64114

(Zip Code)

Registrant's Telephone Number, Including Area Code: (816) 237-7000

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

The number of shares of the Registrant's Common Stock outstanding on ~~May~~August 129, 2021 was 116,655,893.

Table of Contents

NOVATION COMPANIES, INC.

FORM 10-Q

For the Quarterly Period Ended ~~March~~June 3130, 2021

TABLE OF CONTENTS

PART I	Financial Information

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Condensed Consolidated Statements of Shareholders’ Deficit	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13

Item 4.	Controls and Procedures	13

PART II	Other Information	14

Item 1.	Legal Proceedings	14

Item 1A.	Risk Factors	15

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15

Item 3.	Defaults Upon Senior Securities	15

Item 4.	Mine Safety Disclosures	15

Item 5.	Other Information	15

Item 6.	Exhibits	16

	Signatures	17

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NOVATION COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31, 2021 (unaudited)			December 31, 2020
	June 30, 2021 (unaudited)			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	1,~~011~~085		$	1,340
Accounts and unbilled receivables		5,~~046~~034			5,008
Prepaid expenses		~~482~~348			663
Other		3122			53
Total current assets		6,~~570~~489			7,064
Non-current assets:
Intangible assets, net		4,~~430~~184			4,677
Property and equipment, net		8482			92
Operating lease right-of-use asset		~~383~~330			339
Other		5			4
Total non-current assets		4,~~902~~601			5,112
Total assets	$	11,~~472~~090		$	12,176
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable and accrued expenses	$	~~212~~215		$	315
Accrued compensation and benefits payable		2,~~106~~236			2,176
Operating lease liability		~~167~~128			195
Accrued claim settlements		~~246~~184			246
Other		59			4
Total current liabilities		2,~~736~~772			2,936
Non-current liabilities:
Senior notes, net of unamortized debt premium of $5.0 million and $4.2 million as of March 31, 2021 and December 31, 2020, respectively		90,943			90,115
Senior notes, net of unamortized debt premium of $5.9 million and $4.2 million as of June 30, 2021 and December 31, 2020, respectively		91,789			90,115
Accrued claim settlements		—			62
Operating lease liability		~~228~~208			153
Total non-current liabilities		91,~~171~~997			90,330
Total liabilities		9394,~~907~~769			93,266
Shareholders' deficit:
Common stock, $.01 par value per share, 780,000,000 shares authorized:
116,655,893 and 114,655,893 and shares issued and outstanding as of March 31, 2021 and December 31, 2020 respectively		1,166			1,146
116,655,893 and 114,655,893 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		1,166			1,146
Additional paid-in capital		746,~~242~~291			746,227
Accumulated deficit		(~~829~~831,~~843~~136	)		(828,463	)
Total shareholders' deficit		(8283,~~435~~679	)		(81,090	)
Total liabilities and shareholders' deficit	$	11,~~472~~090		$	12,176

See notes to condensed consolidated financial statements.

Table of Contents

NOVATION COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited; in thousands, except share and per share amounts)

	For the Three Months Ended March 31,
	Six Months Ended June 30,						Three Months Ended June 30,
	2021			2020			2021			2020
Service fee income	$	1225,~~380~~436		$	1426,~~033~~366		$	13,056		$	12,332
Cost and expenses:
Cost of services		1122,~~152~~876			1223,~~560~~788			11,724			11,228
General and administrative expenses		13,~~775~~553			14,~~979~~018			1,778			2,038
Operating loss		(547	)		(506	)
Goodwill impairment charge		—			3,905			—			3,905
Other income		3			13
Operating loss		(993	)		(5,345	)		(446	)		(4,839	)
Interest expense		(833	)		(810	)
Other income		5			25			3			12
Loss before income taxes		(1,377	)		(1,303	)
Interest expense		(1,680	)		(1,626	)		(847	)		(816	)
Income tax expense		3			11
Loss before income taxes		(2,668	)		(6,946	)		(1,290	)		(5,643	)
Net loss	$	(1,380	)	$	(1,314	)
Income tax expense		5			21			3			10
Loss per share:
Net loss		(2,673	)		(6,967	)		(1,293	)		(5,653	)
Basic	$	(0.01	)	$	(0.01	)
Loss per share:
Diluted	$	(0.01	)	$	(0.01	)
Basic	$	(0.02	)	$	(0.06	)	$	(0.01	)	$	(0.05	)
Weighted average common shares outstanding:
Diluted	$	(0.02	)	$	(0.06	)	$	(0.01	)	$	(0.05	)
Basic		113,605,893			110,188,393
Weighted average common shares outstanding:
Diluted		113,605,893			110,188,393
Basic		113,605,893			110,188,393			113,230,202			110,188,393
Diluted		113,605,893			110,188,393			113,230,202			110,188,393

See notes to condensed consolidated financial statements.

Table of Contents

NOVATION COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(unaudited; in thousands)

	Common Stock		Additional Paid-in Capital			Accumulated Deficit			~~Total~~Accumulated ~~Shareholders’~~Other ~~Deficit~~Comprehensive Income			Total Shareholders’ Deficit
Balance, December 31, 2020	$	1,146	$	746,227		$	(828,463	)	$	~~(81,090~~—	)	$	(81,090	)
Issuances of nonvested stock		20		(20	)		—			—			—
Compensation recognized under stock compensation plans		—		3584			—			35—			84
Net loss		—		—			(12,~~380~~673	)		~~(1,380~~—	)		(2,673	)
Balance, March 31, 2021	$	1,166	$	746,242		$	(829,843	)	$	(82,435	)
Balance, June 30, 2021	$	1,166	$	746,291		$	(831,136	)	$	—		$	(83,679	)
Balance, March 31, 2021	$	1,166	$	746,242		$	(829,843	)	$	—		$	(82,435	)
Compensation recognized under stock compensation plans		—		49			—			—			49
Net loss		—		—			(1,293	)		—			(1,293	)
Balance, June 30, 2021	$	1,166	$	746,291		$	(831,136	)	$	—		$	(83,679	)

	Common Stock		Additional Paid-in Capital			Accumulated Deficit			~~Total~~Accumulated ~~Shareholders’~~Other ~~Deficit~~Comprehensive Income (Loss)			Total Shareholders’ Deficit
Balance, December 31, 2019	$	1,123	$	746,112		$	(819,294	)	$	~~(72,059~~—	)	$	(72,059	)
Issuances of nonvested stock		23		(23	)		—			—			—
Compensation recognized under stock compensation plans		—		3481			—			34—			81
Net loss		—		—			(16,~~314~~967	)		~~(1,314~~—	)		(6,967	)
Balance, March 31, 2020	$	1,146	$	746,123		$	(820,608	)	$	(73,339	)
Balance, June 30, 2020	$	1,146	$	746,170		$	(826,261	)	$	—		$	(78,945	)
Balance, March 31, 2020	$	1,146	$	746,123		$	(820,608	)	$	—		$	(73,339	)
Compensation recognized under stock compensation plans		—		47			—			—			47
Net loss		—		—			(5,653	)		—			(5,653	)
Balance, June 30, 2020	$	1,146	$	746,170		$	(826,261	)	$	—		$	(78,945	)

See notes to condensed consolidated financial statements.

Table of Contents

NOVATION COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)

	For the Three Months Ended March 31,
	Six Months Ended June 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(12,~~380~~673	)	$	(16,~~314~~967	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of intangible assets		~~247~~493			~~299~~598
Amortization of debt premium and prepaid interest into interest expense		~~828~~1,674			~~807~~1,622
Depreciation expense		815			2232
Lease (income) expense		3			(2	)
Lease expense		(3	)		(3	)
Loss on disposal of fixed assets		—			11
Gain on disposal of fixed assets		—			(3	)
Compensation recognized under stock compensation plans		35			34
Goodwill impairment		—			3,905
Changes in operating assets and liabilities:
Compensation recognized under stock compensation plans		84			81
Accounts and unbilled receivables		(38	)		219
Changes in operating assets and liabilities
Accounts payable and accrued expenses		(103	)		(59	)
Accounts and unbilled receivables		(26	)		830
Accrued compensation and benefits payable		(70	)		(358	)
Accounts payable and accrued expenses		(99	)		128
Accrued claim settlements		(62	)		(61	)
Accrued compensation and benefits payable		60			(297	)
Other current and noncurrent assets and liabilities, net		203			(30	)
Accrued claim settlements		(124	)		(123	)
Net cash used in operating activities		(329	)		(432	)
Other current assets and liabilities, net		349			310
Net cash provided by (used in) operating activities		(250	)		113
Cash flows from investing activities:
Purchase of property and equipment		—(5	)		(11	)
Net cash used in investing activities		—(5	)		(11	)
Net decrease in cash and cash equivalents		(329	)		(443	)
Net increase (decrease) in cash and cash equivalents		(255	)		102
Cash and cash equivalents, beginning of period		1,340			2,032
Cash and cash equivalents, end of period	$	1,~~011~~085		$	12,~~589~~134
Supplemental disclosure of cash flow information:
Cash paid for interest	$	57		$	35

See notes to condensed consolidated financial statements.

Table of Contents

NOVATION COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the period ended ~~March~~June 3130, 2021 (unaudited)

Note 1. Condensed Consolidated Financial Statement Presentation

Description of Operations – Novation Companies, Inc. and its subsidiaries (the “Company,” “Novation,” “we,” or “us”), through Healthcare Staffing, Inc. ("HCS"), our wholly-owned subsidiary, provides outsourced health care staffing and related services in the State 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”.

Liquidity and Going Concern – During the ~~three~~six months ended June ~~March 31~~30, 2021, the Company incurred a net loss of $12.47 million and generated negative operating cash flow of $0.3 million. As of June ~~March 31~~30, 2021, the Company had an overall shareholders deficit of $8283.47 million, an aggregate of $1.01 million in cash and cash equivalents and total liabilities of $9394.98 million. Of the $1.01 million in cash, $0.32 million is held by the Company's subsidiary NovaStar Mortgage LLC ("NMLLC"). This cash is available only to pay general creditors and expenses of NMLLC. Prior to executing the Amendment with the Noteholders in August 2019 (Note 5), the Company had a significant on-going obligation to pay interest under its senior notes agreement at LIBOR plus 3.5% per annum, payable quarterly in arrears until maturity on March 30, 2033, leading to a significant annual cash outflow. HCS has also experienced lower than anticipated cash flows in general due to increased costs and decrease in business from certain customers. In addition, in June of 2021, two CSB customers, one significant, notified us of their intent to terminate their contract services with HCS. These items have led to substantial doubt about the Company's ability to continue as a going concern.

Management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers, looking at methods to reduce overall operating costs, both at HCS and the corporate level, and targeting new customers that have not previously been served by HCS. As disclosed in Note 5 to the condensed consolidated financial statements, the Company was successful in amending the senior note agreements to lower the interest rate and receive future credit for cash interest payments made in 2019 in exchange for the issuance of common stock and warrants. Based on the terms of the amendment, the Company is not required to make cash interest payments on the senior notes from August 2019 through March 2022, leading to significant cash savings for the Company. This amendment to the Note Purchase Agreement and waiver of interest payments through April 2022 has significantly improved our forecasted cash position over the next year.

In late March 2020, HCS started experiencing a reduction in Georgia Community Service Board ("CSB") customer needs related to the COVID-19 pandemic. This resulted in the layoff of approximately 8% of the Company’s employees. As HCS relies on providing healthcare staffing services to generate income, this has decreased our service fee income, and direct cost of services, accordingly. While the majority of these employees were rehired when customer demand returned, there have been some permanent loss of staffing opportunities based on changes to programs and services offered by CSBs. In addition, there is still concern at the ~~Company~~company about the ongoing effects of COVID-19 on our services for the foreseeable future. The Company is also experiencing increased expenses related to corporate insurance coverage (professional and general liability commercial lines). This increase has resulted in a significant rise in costs, even with the loss of staffing headcount as noted above. HCS also anticipates increased costs to provide health insurance for employees. While this expense is billed to our CSB customers, for employees staffed with them that elect coverage, the rise in cost impacts our ability to remain competitive in the market.

Our historical operating results and poor cash flow suggest substantial doubt exists related to the Company's ability to continue as a going concern. Furthermore, there is still ~~significant~~ uncertainty regarding the future impact that COVID-19 will have on our business. Based on these uncertainties, there is no guarantee the Company's cash position will cover current obligations. As a result, we have not been able to alleviate the substantial doubt about the Company's ability to continue as a going concern for at least one year after the date that these condensed consolidated financial statements are issued.

Earnings Per Share – For the ~~three~~Six ~~months~~Months ~~ended March~~Ended June 3130, 2021 and 2020, potentially dilutive securities excluded from the computations of diluted weighted-average shares outstanding were 3.1 million and 4.5 million shares of restricted common stock, respectively.

Condensed Consolidated Financial Statement Presentation – The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expense during the period. The Company uses estimates and judgments in assessing the recoverability of its long-lived assets, impairments, 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 these condensed consolidated financial statements and footnotes reflect the best estimates and judgments of management at the time, actual results could differ significantly from those estimates, and the amounts could be material.

The Company's condensed consolidated financial statements are unaudited. In the opinion of management, all necessary adjustments have been made, which were of a normal and recurring nature, for a fair presentation of the condensed consolidated financial statements. The Company's condensed consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included herein and the consolidated financial statements of the Company and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K").

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Note 2. Revenue; Accounts and Unbilled Receivables

Staffing services include the augmentation of customers' workforce with our contingent employees performing services under the customer's 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.

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.

Performance Obligations — 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.

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, unaudited, in thousands, into categories that best depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors.

	Three Months Ended March 31, 2021 (unaudited)				Three Months Ended March 31, 2020 (unaudited)
	Six Months Ended June 30, 2021				Three Months Ended June 30, 2021				Six Months Ended June 30, 2020				Three Months Ended June 30, 2020
Type of Customer
CSB	$	1123,~~739~~909	94.80	%	$	1312,~~767~~169	9893.12	%	$	25,847	98.0	%	$	12,079	98.0	%
Other		~~641~~1,527	56.20	%		~~266~~887	16.98	%		519	2.0	%		253	2.0	%
Total	$	1225,~~380~~436	100.0	%	$	1413,~~033~~056	100.0	%	$	26,366	100.0	%	$	12,332	100.0	%

Accounts and unbilled receivables are summarized as follows, in thousands:

	March 31, 2021 (unaudited)			December 31, 2020
	June 30, 2021 (unaudited)			December 31, 2020
Accounts receivable	$	2,~~928~~776		$	2,705
Unbilled receivables (Contract Assets)		2,~~119~~259			2,303
Allowance for doubtful accounts		(1	)		—
Total	$	5,034		$	5,008
Total	$	5,046		$	5,008

As of June 30, 2021 and December 31, 2020, management has determined no allowance for doubtful accounts is necessary. During the ~~three~~six months ended June ~~March 31~~30, 2021, 6667% of service fee income was generated from three customers. For the ~~three~~six months ended June ~~March 31~~30, 2020, 5971% of service fee income was generated from ~~three~~four customers. As of ~~March~~ June 3130, 2021 and June ~~March 31~~30, 2020, 5958% and 6768% of accounts receivables and unbilled receivables were due from three and four customers, respectively. At ~~March~~ June 3130, 2021 and June ~~March 31~~30, 2020, 8987% and 97% of accounts receivables and unbilled receivables were due from 12 CSB customers, respectively.

Note 3. Goodwill and Intangible Assets

	June 30, 2021 (unaudited)						December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Indefinite-lived assets (in thousands)
Tradenames	$	1,147	$	—	$	1,147	$	1,147	$	—	$	1,147
Total indefinite-lived assets	$	1,147	$	—	$	1,147	$	1,147	$	—	$	1,147

Finite-lived assets (in thousands)
Customer relationships	$	6,895	$	3,858	$	3,037	$	6,895	$	3,365	$	3,530
Non-compete agreement		627		627		—		627		627		—
Total finite-lived assets	$	7,522	$	4,485	$	3,037	$	7,522	$	3,992	$	3,530

~~Note~~ Table 3.of ~~Intangible Assets~~Contents

	March 31, 2021 (unaudited)						December 31, 2020
Amortization expense (unaudited, in thousands)
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Six Months Ended June 30, 2021 and 2020	$	493
Indefinite-lived assets (in thousands)
Estimated future amortization expense (unaudited, in thousands)
Tradenames	$	1,147	$	—	$	1,147	$	1,147	$	—	$	1,147
2021	$	493
Total indefinite-lived assets	$	1,147	$	—	$	1,147	$	1,147	$	—	$	1,147
2022		985
Finite-lived assets (in thousands)
2023		985
Customer relationships	$	6,895	$	3,612	$	3,283	$	6,895	$	3,365	$	3,530
Thereafter		575
Non-compete agreement		627		627		—		627		627		—
Total estimated amortization expense	$	3,037
Total finite-lived assets	$	7,522	$	4,239	$	3,283	$	7,522	$	3,992	$	3,530

Amortization expense (unaudited, in thousands)
Three Months Ended March 31, 2021	$	247
Estimated future amortization expense (unaudited, in thousands)
2021	$	739
2022		985
2023		985
Thereafter		575
Total estimated amortization expense	$	3,283

As disclosed in Note 1, the Company was notified of the loss of two CSB customers, one significant. As a result, we determined that the loss of these customers resulted in a triggering event for analysis of impairment of our other indefinite and definite lived intangible assets balances as of June 30, 2021. It was determined that the fair value of the HCS intangible assets exceeded the carrying value, so no impairment was necessary.

Note 4. Leases

Our leases consist primarily of office space. Leases with an initial term of 12 months or less, and leases which are on a month-to-month basis, are not recorded on the condensed consolidated balance sheets. For these leases we recognize lease expense on a straight-line basis over the lease term. The Company does not have any finance leases.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to three years or more. The exercise of lease renewal options is at our discretion. Our lease agreements do not contain any variable lease payments, residual value guarantees or restrictive covenants. The components of lease expense for the three and six months ended ~~March~~ June 3130, 2021 ~~and 2020~~ were immaterial.

As our leases do not provide an implicit interest rate, we use our incremental current borrowing rate in determining the present value of lease payments.

Maturities of lease liabilities were as follows (in thousands):

	March 31, 2021 (unaudited)
	June 30, 2021 (unaudited)
Remaining 2021	$	~~158~~86
2022		9097
2023		58
Thereafter		142
2024		60
Total	$	448
Thereafter		82
Less interest		53
Total	$	383
Present value of lease liabilities	$	395
Less interest		47
Present value of lease liabilities	$	336

Other information related to the Company's operating leases was as follows (in thousands):

	March 31, 2021 (unaudited)
	June 30, 2021 (unaudited)
Lease Term and Discount Rate
Weighted average remaining lease term (years)		3.6072
Weighted average discount rate		6.75	%

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Note 5. Borrowings

Note Refinancing and 2017 Notes — As of June ~~March 31~~30, 2021, the Company ~~has~~had $85.9 million in aggregate borrowings outstanding under three senior secured promissory notes, ~~as amended in 2019~~ (the “2017 Notes”). The unpaid principal amounts of the 2017 Notes bear interest at the following rates until the maturity date on March 30, 2033, with interest payable quarterly in arrears as follows: 1% per annum from April 1, 2019 through December 31, 2023; 2% per annum from January 1, 2024 through December 31, 2028; and 10% per annum from January 1, 2029 through the maturity date. Commencing with the delivery to the Noteholders of the financial statements for the fiscal year ended December 31, 2020, the Company is required to remit 50% of excess cash flow each year to the Noteholders to be applied as a principal reduction to the outstanding balance of the debt. The ~~Company did not have excess cash flow in 2020, therefore did not make any cash payments in 2021 towards the principal balance of the debt. The~~ 2017 Notes generally rank senior in right of payment to any existing or future subordinated indebtedness of the Credit Parties (as defined below). 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 2017 Notes were entered into on July 27, 2017 as a result of a refinancing of the Company’s then outstanding senior notes with the same aggregate principal amount through the execution of the Senior Secured Note Purchase Agreement, dated as of the same date (as amended, the “Note Purchase Agreement”), with NHI and HCS as guarantors (together with the Company, collectively, the “Credit Parties”).

On On April 1, 2019 and on July 1, 2019, the Company made payments under the 2017 Notes totaling $2.6 million. The actual aggregate amounts due for those dates totaled $0.4 million. Under the terms of the 2019 Amendment, the Company is permitted to apply the payment surplus of $2.2 million against future quarterly interest payments. Therefore, the Company will not have another quarterly interest payment due until April 1, 2022. The Note Purchase Agreement contains customary affirmative and negative covenants, including but not limited to certain financial covenants. Under the terms of the Amendment, the financial covenants have been waived until the quarter ending December 31, 2021. 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.

Under the terms of the 2019 Amendment, ~~which qualified as a troubled debt restructuring at that time,~~ the Company issued to the Noteholders 9,000,000 shares of common stock of the Company and ten-year warrants allowing the Noteholders to purchase up to 22,250,000 shares of the Company’s common stock at an exercise price of $0.01 per share. These warrants can be exercised at any time prior to expiration. At the time of the amendment, the outstanding principal balance of the notes were reduced by the fair value of the common stock and warrants issued by the Company, resulting in debt premium of $0.9 million, offset by accrued interest of $0.5 million. The Company will amortize the debt premium and prepaid interest over the amended term of the Note Purchase Agreement using the effective interest method.

The carrying value of the 2017 Notes is as follows (in thousands):

	March 31, 2021 (unaudited)		December 31, 2020
	June 30, 2021 (unaudited)		December 31, 2020
Principal balance	$	85,938	$	85,938
Unamortized debt premium		5,~~005~~851		4,177
Total, 2017 Notes	$	9091,~~943~~789	$	90,115

Note 6. 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 condensed consolidated financial statements.

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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 condensed 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.

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, plaintiff filed an amended complaint. 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 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. 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 plaintiff's second amended complaint with prejudice and without leave to replead. Plaintiff filed an appeal in the United States Court of Appeals for the Second Circuit (the "Appellate Court"). 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 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 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, and their opening brief was filed on June 28, 2019. The defendants answered on September 27, 2019, and the objector replied on October 18, 2019. Oral argument was held on February 19, 2020. 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.

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Note 7. 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.

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The following table provides the estimated fair value of financial instruments and 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, notes receivable, and 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 (in thousands):

March 31, 2021 (unaudited)

December 31, 2020

June 30, 2021 (unaudited)

December 31, 2020

Carrying Value

Fair Value

Carrying Value

Fair Value

Financial liabilities:

2017 Notes (Level 3)

9091,~~943~~789

12,~~075~~830

90,115

11,365

The 2017 Notes in the table above are not measured at fair value in the condensed consolidated balance sheets but are required to be disclosed at fair value. The fair value of the 2017 Notes has been estimated using 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. No assets or liabilities have been transferred between levels during any period presented. 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 1% per annum from April 1, 2019 through December 31, 2023; 2% per annum from January 1, 2024 through December 31, 2028; and 10% per annum from January 1, 2029 through the maturity date in March 2033.

Prior to the Company's acquisition of HCS in 2017, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. During 2018, the Company sold all but 33 non-performing mortgage securities. The Company retains clean-up call rights associated with prior servicing activities, and has determined these clean-up call rights have no fair value as of ~~March~~ June 3130, 2021 and December 31, 2020.

Note 8. Income Taxes

Prior to 2018, the Company concluded that it was no longer more likely than not that it would realize a portion of its deferred tax assets. Therefore, as of ~~March~~ June 3130, 2021 and December 31, 2020, the Company maintained a full valuation allowance against its net deferred tax assets of $169.14 million and $168.8 million, respectively. 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. Because of the full valuation allowance, the Company's effective tax rate is expected to be near 0% and therefore the income tax expense is not material for any period presented.

As of June ~~March 31~~30, 2021, the Company had a federal NOL of approximately $~~730~~731.62 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 2020 tax return has not been filed as of the date of this report., ~~The~~however the estimated federal NOL that does not expire included in the total above is $9596.50 million. States may vary in their treatment of post 2017 NOLs. 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 2024 and as late as 2037.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 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 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. 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.”

	March 31, 2021 (unaudited)		December 31, 2020
	June 30, 2021 (unaudited)		December 31, 2020
Cash and cash equivalents	$	1,~~011~~085	$	1,340

	For the Three Months Ended March 31, (unaudited)
	Six Months Ended June 30, (unaudited)						Three Months Ended June 30, (unaudited)
	2021			2020			2021			2020
Service fee income	$	1225,~~380~~436		$	1426,~~033~~366		$	13,056		$	12,332
General and administrative expenses	$	13,~~775~~553		$	14,~~979~~018		$	1,778		$	2,038
Net loss available to common shareholders, per basic share	$	(0.0102	)	$	(0.0106	)	$	(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 ~~March~~June 3130, 2021 as Compared to ~~March~~June 3130, 2020

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 ~~March~~June 3130, 2021 ~~and 2020~~ are from the operations of HCS.

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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.

AIn June of 2021, two customers, one significant, ~~CSB~~notified ~~customer~~HCS ~~terminated~~of ~~its~~their intent to terminate their contract services ~~with~~as ~~HCS~~of July 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 of ~~January~~June 2930, ~~2020~~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 ~~recent~~ developments of COVID-19, and the resulting reduction of programs and staff utilized by CSBs, the Company ~~did~~experienced ~~not experience~~ an impact to service fee income and cost of services ~~until~~starting during the second quarter of 2020 and continuing through the ~~end~~current ~~of 2020~~quarter.

HCS revenue ~~and cost of goods sold~~ for the three months ended ~~March~~ 31June 30, 2021 and 2020 was $1213.41 million and $1112.23 million, respectively. ~~This~~The ~~decrease~~increase in revenue ~~and~~is ~~cost~~primarily ofdue ~~goods~~to ~~sold~~the ~~compared~~Company's tofocus on increasing its traditional staffing business. HCS revenue for the ~~three~~six months ended ~~March~~June 3130, 2021 and 2020 ofwas $1425.04 million and $1226.64 million, respectively,. isThe ~~due~~decrease toin ~~the~~revenue ~~loss~~is ofattributable ato ~~significant CSB customer during~~ the ~~first quarter of 2020, 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 ended June 30, 2021 and 2020 was $11.7 million and $11.2 million, respectively, and for the six months ended June 30, 2021 and 2020 was $22.9 million and $23.8 million, respectively. The increase in cost of goods sold for the three months ended June 30, 2021 and the decrease in cost of goods sold for the six months ended June 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 ended ~~March~~ 31June 30, 2021 ~~and 2020~~, $1.3 million and $12.5 7 million, ~~respectively,~~ 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 ended June 30, 2020. Corporate-level general and administrative expenses for the three and six months ended ~~March~~June 3130, 2021 ~~and 2020~~ were $0.5 million and $0.4 9 million, respectively, as compared to $0.6 million and $1.1 million for the three and six months ended June 30, 2020. The decrease in general and administrative expenses results from a reduction in staffing, ~~travel,~~ 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

~~There~~Interest ~~was~~expense noincreased ~~change~~slightly ~~in interest expense~~ period over period, with the Company incurring $01.8 7 million and $1.6 million during the six ~~three~~ months ended ~~March~~June 3130, 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 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 ~~three~~six months ended ~~March~~June 3130, 2021

The following table provides a summary of our operating, investing and ~~investing~~financing cash flows as taken from our condensed consolidated statements of cash flows for the six ~~three~~ months ended ~~March~~June 3130, 2021 and 2020 (in thousands).

		For the Three Months Ended March 31, (unaudited)
	Six Months Ended June 30,
	2021	~~2021~~		2020		~~2020~~
Cash flows used in operating activities		$	(329	)		$	(432	)
Cash flows provided by (used in) operating activities	$	(250	)	$	113
Cash flows used in investing activities		$(5	—)		(11	$)	~~(11~~	)

Operating Activities – The decrease in net cash flows provided by (used in) operating activities to approximately $0.3 million during the six ~~three~~ months ended ~~March~~June 3130, 2021 from cash ~~used~~provided of $0.4 1 million during the ~~three~~six months ended ~~March~~June 3130, 2020 was driven primarily by ~~changes~~an increase in ~~the~~accounts ~~Company's~~receivable ~~other current~~ and ~~assets and liabilities, net, specifically~~ a ~~prepayment~~decrease ~~for~~in ~~worker's~~accounts ~~compensation~~payable ~~insurance~~and ~~paid~~accrued ~~during the first quarter of 2020 that was not required of the Company during the first quarter of 2021~~expenses.

Investing Activities – ~~There~~The ~~were~~decrease in nonet ~~investing activities during the three months ended March 31, 2021. The~~ cash flows used in investing activities ~~during~~is ~~the three months ended March 31, 2020 was~~ due to ~~the~~a ~~purchase~~reduction in purchases of property and equipment.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our chief executive officer and our chief financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on their evaluation of our disclosure controls and procedures, our chief executive officer and chief financial officer, with the participation of the Company’s management, concluded that our disclosure controls and procedures were not effective as of ~~March~~June 3130, 2021, to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

Description of Material Weakness of Disclosure Controls

As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations above and in Note 1 to the condensed consolidated financial statements, in July 2017, we acquired HCS, which now is our primary business activity. Prior to the HCS ~~Acquisition~~acquisition, HCS was a privately-owned business with limited administrative and accounting resources, accounting software inappropriate for the size of the business and generally weak accounting processes, procedures and controls. Specifically, material weaknesses existed in HCS's processes, procedures and controls with respect to revenue, receivables, payment of payroll taxes and estimating various accrued expenses.

Remediation of Material Weakness

We are working to improve the processes, procedures and controls at HCS and remediate this material weakness. Since the HCS ~~Acquisition~~acquisition in July 2017, we have implemented improvements in processes, procedures and controls and we will continue to do so. We are evaluating the accounting professionals at the Company and HCS and will determine if additional resources with relevant experience are needed. We will disclose in future periods the progress we have made in efforts to remediate this material weakness.

Changes in Internal Control Over Financial Reporting

As a result of the HCS acquisition and the generally weak controls at HCS discussed above, we determined that we have a material weakness in our disclosure controls and procedures. We are working to remediate this material weakness as discussed above, but have not completed the process to document and test the new control processes.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In designing and operating a control system, one must consider the potential benefits of controls relative to their costs and the reality of limited resources available to allocate to control activities, particularly in smaller companies. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any control will meet its objectives under all potential future conditions. Because of such inherent limitations in any control system, there can be no absolute assurance that control issues, misstatements, and/or fraud will be prevented or detected.

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FORM 10-Q

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and routine nature.

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. 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 plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss plaintiff's claims, which the court granted on March 31, 2011, with leave to amend. 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 plaintiff's second amended complaint with prejudice and without leave to replead. Plaintiff filed an appeal. On March 1, 2013, the United States Court of Appeals for the Second Circuit (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 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 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 and their opening brief was filed on June 28, 2019. The defendants answered on September 27, 2019, and the objector replied on October 18, 2019. Oral argument was held on February 19, 2020. 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.

See the "Corporate Overview" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations.

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Item 1A. Risk Factors

There have been no material changes to the risk factors included in the 2020 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit No.		Description of Document
31.1		Principal Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Principal Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Principal Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Principal Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following financial information from Novation Companies, Inc.'s Quarterly Report on Form 10-Q for the quarter ended ~~March~~June 3130, 2021, formatted in Inline XBRL (~~Extensible~~Inline eXtensible Business Reporting Language) includes: (i) Condensed Consolidated Balance Sheets as of ~~March~~June 3130, 2021 and December 31, 2020, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended ~~March~~June 3130, 2021 and 2020, (iii) Condensed Consolidated Statements of Shareholders' Deficit for the ~~three~~six months ended ~~March~~June 3130, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March~~June 3130, 2021 and 2020, and (v) Notes to Condensed Consolidated Financial Statements.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NOVATION COMPANIES, INC.
DATE:	~~May~~August 1311, 2021	/s/ David W. Pointer
		David W. Pointer, Chief Executive Officer
		(Principal Executive Officer)
DATE:	~~May~~August 1311, 2021	/s/ Carolyn K. Campbell
		Carolyn K. Campbell, Chief Financial Officer
		(Principal Financial Officer)

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