Forward-Looking Statements





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



Corporate Overview



Novation Companies, Inc. and its subsidiaries (the "Company," "Novation," "we,"
"us," or "our") through our wholly-owned subsidiary Healthcare Staffing, Inc.
("HCS") acquired on July 27, 2017, provides outsourced health care staffing and
related services in the State of Georgia. We also previously owned a portfolio
of mortgage securities which generated earnings to support on-going financial
obligations through the end of 2018. The mortgage securities were sold during
2018 for a total of $13 million. Our common stock, par value $0.01 per share, is
traded on the OTC Pink marketplace of the OTC Markets Group, Inc. under the
symbol "NOVC".



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



                             March 31, 2020 (unaudited)       December 31, 2019
Cash and cash equivalents   $                      1,589     $             2,032






                                                       Three Months Ended March 31, (unaudited)
                                                           2020                        2019
Service fee income                                  $            14,033         $            15,854
Net loss available to common shareholders, per
basic share                                         $             (0.01 )       $             (0.02 )




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 Month Period Ended March 31, 2020 as Compared to March 31, 2019

Service Fee Income and Cost of Services



HCS delivers outsourced full-time and part-time employees primarily to Community
Service Boards ("CSBs"), quasi state organizations that provide behavioral
health services at facilities across Georgia including mental health services,
developmental disabilities programs and substance abuse treatments. The State of
Georgia has a total of 25 CSBs. Each CSB has a number of facilities, including
crisis centers, outpatient centers and 24-hour group homes that require a broad
range of employees, such as registered nurses, social workers, house parents and
supervisors. 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 months ended March 31, 2020 and 2019 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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HCS revenue and cost of goods sold for the three months ended March 31, 2020 and
was $14.0 and $12.6, respectively. This decrease in revenue and cost of goods
sold compared to the three months ended March 31, 2019 of $15.9 and $14.1,
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.

Due to the recent developments of COVID-19, the Company has experienced an impact to service fee income and cost of services. 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 months ended March 31, 2020 and 2019, $1.5 million and $1.7 million
of the total general and administrative expenses were incurred by HCS.
Corporate-level general and administrative expenses for the three months ended
March 31, 2020 and 2019 were $0.4 million and $0.5 million, respectively. 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.

Reorganization Items, Net



There were no reorganization and bankruptcy-related expenses for the three
months ended March 31, 2020, and expenses for the three months ended March 31,
2019 were approximately $0.03 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 $1.4 million during the three months ended March 31, 2020 and
2019, respectively. See Note 5 to the condensed consolidated financial
statements for a discussion of the Note Purchase Agreement and the 2017 Notes,
which were amended on August 9, 2019. This Amendment, among other things,
significantly reduced the interest rate applicable from January 2019 through the
third quarter of 2028 and allows the Company to apply certain surplus interest
payments against future quarterly interest payments.

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 months ended March 31, 2020



The following table provides a summary of our operating, investing and financing
cash flows as taken from our condensed consolidated statements of cash flows for
the three months ended March 31, 2020 and 2019 (in thousands).



                                            Three Months Ended March 31,
                                             2020                2019

Cash flows used in operating activities $ (432 ) $ (2,065 ) Cash flows used in investing activities

           (11 )                  (7 )
Cash flows used in financing activities             -                (1,979 )




Operating Activities - The decrease in net cash flows used in operating
activities to approximately $0.4 million during the three months ended March 31,
2020 from cash used of $2.1 million during the three months ended March 31, 2019
was driven primarily by the Company's decrease in net loss, the addition of the
amortization of the premium on the 2017 Notes, and the change in the Company's
other current and noncurrent assets and liabilities, net.

Investing Activities - The slight increase in the net cash flows used in investing activities is due to the purchase of property and equipment.





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



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