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
Cash and cash equivalents   $                      1,011     $             1,340






                                                      For the Three Months Ended March 31,
                                                                   (unaudited)
                                                          2021                     2020
Service fee income                                  $         12,380         $         14,033
General and administrative expenses                 $          1,775         $          1,979
Net loss available to common shareholders, per
basic share                                         $          (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 Month Period Ended March 31, 2021 as Compared to March 31, 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 months ended March 31, 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.



A significant CSB customer terminated its contract services with HCS as of
January 29, 2020. In addition, due to the recent developments of COVID-19, and
the resulting reduction of programs and staff utilized by CSBs, the Company did
not experience an impact to service fee income and cost of services until the
second quarter of 2020 and continuing through the end of 2020.


HCS revenue and cost of goods sold for the three months ended March 31, 2021 and
was $12.4 million and $11.2 million, respectively. This decrease in revenue and
cost of goods sold compared to the three months ended March 31, 2020 of $14.0
million and $12.6 million, respectively, is due to the loss of a 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.

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, 2021 and 2020, $1.3 million and $1.5 million,
respectively, of the total general and administrative expenses were incurred by
HCS. Corporate-level general and administrative expenses for the three months
ended March 31, 2021 and 2020 were $0.5 million and $0.4 million, respectively.
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 was no change in interest expense period over period, with the Company
incurring $0.8 million during the three months ended March 31, 2021 and 2020.
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 months ended March 31, 2021



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 three
months ended March 31, 2021 and 2020 (in thousands).



                                                      For the Three Months Ended March 31, (unaudited)
                                                            2021                            2020
Cash flows used in operating activities             $                (329 )         $                (432 )
Cash flows used in investing activities             $                   -           $                 (11 )




Operating Activities - The decrease in net cash flows used in operating
activities to approximately $0.3 million during the three months ended March 31,
2021 from cash used of $0.4 million during the three months ended March 31, 2020
was driven primarily by changes in the Company's other current and assets and
liabilities, net, specifically a prepayment for worker's compensation insurance
paid during the first quarter of 2020 that was not required of the Company
during the first quarter of 2021.



Investing Activities - There were no investing activities during the three
months ended March 31, 2021. The cash flows used in investing activities during
the three months ended March 31, 2020 was due to the purchase of property and
equipment.





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