10-Q

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 June 30, 2019

☐ 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 August 8, 2019 was 101,303,893.

NOVATION COMPANIES, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2019

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	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
PART II	Other Information	17
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Mine Safety Disclosures	18
Item 5.	Other Information	18
Item 6.	Exhibits	19
	Signatures	20

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

NOVATION COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	June 30, 2019 (unaudited)			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	4,256		$	9,249
Accounts and unbilled receivables		6,149			6,122
Prepaid expenses		478			350
Other		22			131
Total current assets		10,905			15,852
Non-current assets:
Goodwill		5,605			8,205
Intangible assets, net		6,380			6,978
Operating lease right-of-use asset		294			—
Other		99			95
Total non-current assets		12,378			15,278
Total assets	$	23,283		$	31,130
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable and accrued expenses	$	518		$	670
Accrued compensation and benefits payable		3,530			2,731
Borrowings under revolving line of credit		—			1,948
Operating lease liability		148			—
Accrued interest payable		1,323			1,295
Accrued claim settlements		246			459
Other		11			35
Total current liabilities		5,776			7,138
Non-current liabilities:
Long-term debt		85,938			85,969
Accrued claim settlements		430			553
Operating lease liability		155			—
Other		100			426
Total non-current liabilities		86,623			86,948
Total liabilities		92,399			94,086
Shareholders' deficit:
Common stock, $.01 par value per share, 780,000,000 shares authorized:
101,303,893 and 99,137,893 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively		1,013			991
Additional paid-in capital		745,235			745,104
Accumulated deficit		(815,364	)		(809,050	)
Accumulated other comprehensive loss		—			(1	)
Total shareholders' deficit		(69,116	)		(62,956	)
Total liabilities and shareholders' deficit	$	23,283		$	31,130

See notes to condensed consolidated financial statements.

1

NOVATION COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

	Six Months Ended June 30,						Three Months Ended June 30,
	2019			2018			2019			2018
Service fee income	$	32,151		$	26,490		$	16,297		$	13,270
Cost and expenses:
Cost of services		28,615			23,492			14,518			11,768
General and administrative expenses		4,463			4,151			2,206			1,890
Goodwill impairment charge		2,600			—			2,600			—
Operating loss		(3,527	)		(1,153	)		(3,027	)		(388	)
Interest income - mortgage securities		—			916			—			453
Other income		4			2,938			23			1,925
Interest expense		(2,706	)		(2,548	)		(1,324	)		(1,345	)
Reorganization items, net		(62	)		(1,750	)		(31	)		(1,610	)
Loss before income taxes		(6,291	)		(1,597	)		(4,359	)		(965	)
Income tax expense (benefit)		4			(8	)		11			7
Net loss		(6,295	)		(1,589	)		(4,370	)		(972	)
Other comprehensive loss:
Reclassification gain on marketable securities included in net income		—			(2,931	)		—			(1,956	)
Unrealized gain (loss) on marketable securities		1			(1,801	)		—			611
Total other comprehensive income (loss)		1			(4,732	)		—			(1,345	)
Total comprehensive loss	$	(6,294	)	$	(6,321	)	$	(4,370	)	$	(2,317	)
Loss per share:
Basic	$	(0.07	)	$	(0.02	)	$	(0.05	)	$	(0.01	)
Diluted	$	(0.07	)	$	(0.02	)	$	(0.05	)	$	(0.01	)
Weighted average common shares outstanding:
Basic		95,103,986			93,416,496			97,675,946			93,658,567
Diluted		95,103,986			93,416,496			97,675,946			93,658,567

See notes to condensed consolidated financial statements.

2

NOVATION COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(unaudited; in thousands)

	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total Shareholders’ Deficit
Balance, December 31, 2018	$	991		$	745,104		$	(809,050	)	$	(1	)	$	(62,956	)
Issuances and cancellations of nonvested shares		22			(22	)		—			—			—
Compensation recognized under stock compensation plans		—			153			—			—			153
Net loss		—			—			(6,295	)		—			(6,295	)
Adjustment to retained earnings for adoption of accounting standard		—			—			(19	)		—			(19	)
Other comprehensive income		—			—			—			1			1
Balance, June 30, 2019	$	1,013		$	745,235		$	(815,364	)		—		$	(69,116	)
Balance, March 31, 2019	$	1,016		$	745,149		$	(810,994	)	$	—		$	(64,829	)
Cancellations of nonvested shares		(3	)		3			—			—			—
Compensation recognized under stock compensation plans		—			83			—			—			83
Net loss		—			—			(4,370	)		—			(4,370	)
Adjustment to retained earnings for adoption of accounting standard		—			—			—			—			—
Other comprehensive loss		—			—			—			—			—
Balance, June 30, 2019	$	1,013		$	745,235		$	(815,364	)	$	—		$	(69,116	)

	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total Shareholders’ Deficit
Balance, December 31, 2017	$	971		$	744,937	$	(815,185	)	$	11,394		$	(57,883	)
Cancellations of nonvested shares		(11	)		11		—
Compensation recognized under stock compensation plans		—			103		—			—			103
Net loss		—			—		(1,589	)		—			(1,589	)
Other comprehensive loss		—			—		—			(4,732	)		(4,732	)
Balance, June 30, 2018	$	960		$	745,051	$	(816,774	)	$	6,662		$	(64,101	)
Balance, March 31, 2018	$	971		$	744,983	$	(815,802	)	$	8,007		$	(61,841	)
Cancellations of nonvested shares		(11	)		11		—
Compensation recognized under stock compensation plans		—			57		—			—			57
Net loss		—			—		(972	)		—			(972	)
Other comprehensive loss		—			—		—			(1,345	)		(1,345	)
Balance, June 30, 2018	$	960		$	745,051	$	(816,774	)	$	6,662		$	(64,101	)

See notes to condensed consolidated financial statements.

3

NOVATION COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(6,295	)	$	(1,589	)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of marketable securities, net		—			(60	)
Amortization of intangible assets		598			598
Amortization of prepaid expenses		432			198
Realized gain on marketable securities		—			(2,931	)
Depreciation expense		14			223
Settlement claims		(336	)		1,487
Lease expense		(9	)		—
Goodwill impairment		2,600			—
Compensation recognized under stock compensation plans		153			103
Changes in operating assets and liabilities
Accounts and unbilled receivables		(27	)		1,769
Accounts payable and accrued expenses		(152	)		(1,430	)
Accrued compensation and benefits payable		799			(1,423	)
Accrued interest payable		28			199
Other current assets and liabilities, net		(475	)		470
Other noncurrent assets and liabilities, net		(327	)		335
Net cash used in operating activities		(2,997	)		(2,051	)
Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities		—			2,931
Purchase of property and equipment		(17	)		—
Net cash provided by (used in) investing activities		(17	)		2,931
Cash flows from financing activities:
Borrowings under revolving line of credit		8,685			27,138
Repayments of borrowings under revolving line of credit		(10,633	)		(28,259	)
Paydowns of long-term debt		(31	)		(77	)
Net cash used in financing activities		(1,979	)		(1,198	)
Net decrease in cash and cash equivalents		(4,993	)		(318	)
Cash and cash equivalents, beginning of period		9,249			2,740
Cash and cash equivalents, end of period	$	4,256		$	2,422
Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,693		$	2,349
Cash paid for reorganization items	$	—		$	1,072

See notes to condensed consolidated financial statements.

4

NOVATION COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the period ended June 30, 2019 (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 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”.

Liquidity and Going Concern – During the six months ended June 30, 2019, the Company incurred a net loss of $6.3 million and generated negative operating cash flow of $3.0 million. As of June 30, 2019, the Company had an overall shareholders deficit of $69.1 million, an aggregate of $4.3 million in cash and cash equivalents and total liabilities of $92.4 million. Of the $4.3 million in cash, $0.9 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.

While HCS has demonstrated that it can provide positive cash flow sufficient to support HCS operations, management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers and targeting new customers that have not previously been served by HCS.

After engaging major investment firms to evaluate the marketplace for its mortgage securities, the Company executed trades to sell all of its mortgage securities during 2018. These sales generated $13.0 million in cash proceeds for the Company. For the year ended December 31, 2018, the Company recorded $12.9 million in gains in other income in the Statements of Operations and Comprehensive Income (Loss) related to the sale of these securities. However, the Company will no longer have any future cash flows from these securities since they were sold. 

The Company had significant on-going obligations 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.  The last interest payment on long-term debt made on July 1, 2019 was $1.3 million. See Note 11 to the condensed consolidated financial statements regarding the amendment to the Note Purchase Agreement, which significantly reduces the interest rate due under the senior notes agreement from January 2019 through the end of 2028 and allows the Company to apply the surplus interest paid on April 1, 2019 and July 1, 2019 against future quarterly interest payments.

While our historical operating results and poor cash flow suggest substantial doubt exists related to the Company's ability to continue as a going concern, with the amendment to the senior notes agreement, the Company's cash position is forecasted to be sufficient to cover current and on-going obligations. As a result, management has concluded that the factors discussed above have alleviated 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.

The accompanying condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  However, we cannot provide assurance that revenue and cash generated from HCS will be sufficient to sustain our operations in the long term. 

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.

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, 2018 (the "2018 Form 10-K").

Recent Accounting Pronouncements Adopted in 2019 - In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement.  The Company adopted ASU No. 2016-02 using the modified retrospective method. See Note 6 to the condensed consolidated financial statements for further details.

5

Note 2. Reorganization

On July 20, 2016, (the "Bankruptcy Petition Date"), Novation and three of its subsidiaries, NMLLC, NovaStar Mortgage Funding Corporation and 2114 Central LLC (collectively, the “Debtors”), filed voluntary petitions (the "Bankruptcy Petitions") for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (the "Bankruptcy Court"). The Company and one of its subsidiaries subsequently filed with the Bankruptcy Court, and amended, a plan of reorganization for the resolution of the outstanding claims against and interests pursuant to Section 1121(a) of the Bankruptcy Code (as amended as supplemented, the “Plan”) and a related disclosure statement. The Bankruptcy Court entered an order on June 12, 2017, confirming the Plan (the “Confirmation Order”) solely with respect to the Company, which provided that the effective date of the Plan will occur when all conditions precedent to effectiveness, as set forth in the Plan, have been satisfied or waived. Two of the conditions to the effectiveness of the Plan were (i) the closing of the Company’s acquisition (the “HCS Acquisition”) of all of the capital stock of HCS and (ii) the restructuring of the Company’s then outstanding senior notes. The HCS Acquisition and the note restructuring were completed on July 27, 2017 and the Company filed a Notice of Occurrence of Effective Date of the Plan with the Bankruptcy Court. Under the Plan, holders of existing equity interests in the Company (i.e., the common stock) retained their interests. On September 25, 2017, the bankruptcy case of 2114 Central, LLC was dismissed by order of the Bankruptcy Court. Thereafter, on December 22, 2017, NMLLC filed with the Bankruptcy Court a Chapter 11 plan of reorganization, and on December 26, 2017 filed a related disclosure statement. The Bankruptcy Court entered an order on February 16, 2018 approving the disclosure statement, as revised. On April 11, 2018, the Bankruptcy Court confirmed NMLLC’s plan of reorganization. This plan allows NMLLC to exit bankruptcy, but prohibits the use of NMLLC assets for anything other than for the payment of NMLLC obligations. On April 19, 2019, the Bankruptcy Court approved the Motion for Final Decrees for Novation and NMLLC.  On July 16, 2019, the bankruptcy case of NovaStar Mortgage Funding Corporation was dismissed by order of the Bankruptcy Court.

The Company incurred significant costs in 2016 and 2017 associated with our reorganization and the Chapter 11 proceedings. These costs are expensed as incurred, and have decreased significantly since 2017 and 2018.  Reorganization expenses for the six months ended June 30, 2019 and June 30, 2018 were $0.06 million and $1.8 million, respectively.

Note 3. 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.

	Six Months Ended June 30, 2019				Three Months Ended June 30, 2019				Six Months Ended June 30, 2018				Three Months Ended June 30, 2018
Type of Customer
CSB	$	31,033	96.5	%	$	15,778	96.8	%	$	25,537	96.4	%	$	12,793	96.4	%
Other		1,118	3.5	%		519	3.2	%		953	3.6	%		477	3.6	%
Total	$	32,151	100.0	%	$	16,297	100.0	%	$	26,490	100.0	%	$	13,270	100.0	%

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

	June 30, 2019 (unaudited)		December 31, 2018
Accounts receivable	$	3,476	$	3,952
Unbilled receivables (Contract Assets)		2,673		2,170
Total	$	6,149	$	6,122

As of June 30, 2019 and December 31, 2018, management has determined no allowance for doubtful accounts is necessary. For the six months ended June 30, 2019, 52% of service fee income was generated from three customers. For the six months ended June 30, 2018, 55% of service fee income was generated from four customers. As of June 30, 2019 and June 30, 2018, 68% and 77% of accounts receivables and unbilled receivables were due from five and six customers, respectively. At June 30, 2019 and June 30, 2018, 96% and 95% of accounts receivables and unbilled receivables were due from 14 Community Service Board customers, respectively.

6

Note 4. Marketable Securities

Prior to 2018, the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. As a result of those activities, the Company held mortgage securities that were a source of its earnings and cash flow. These mortgage securities consisted entirely of the Company's investment in the interest-only and overcollateralization bonds issued by securitization trusts sponsored by the Company. Maturities of these retained mortgage securities depend on repayment characteristics, performance and other experience of the underlying financial instruments. During 2018, the Company sold all but 33 non-performing mortgage securities. These sales generated proceeds of $13.0 million and realized gains of $12.9 million recognized, included in other income in the Company's consolidated statements of operations and comprehensive income (loss). Of the 33 mortgage securities retained, the Company determined that these securities have no fair value. There were other-than-temporary impairments relating to available-for-sale securities in 2018 of $0.3 million.

As part of the mortgage securitization process, the Company owned the mortgage servicing rights on the mortgage loans in each securitization deal. These servicing rights were sold to a third party on October 12, 2007 as documented in the Servicing Rights Transfer Agreement by and between Saxon Mortgage Services as purchaser and NovaStar Mortgage, Inc. as seller, which was discussed in the Company's third quarter 2007 report on Form 10-Q. As part of this transaction, the Company retained the clean-up call rights for most of the securitization deals. The Company attempted to sell the clean-up call rights with the securities sold in 2018.  However, no bids were received for the clean-up call rights and the Company determined these clean-up call rights have no fair value.  

See Note 9 to the condensed consolidated financial statements for details on the Company's fair value methodology.

Note 5. Goodwill and Intangible Assets

	June 30, 2019 (unaudited)						December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Indefinite-lived assets (in thousands)
Goodwill	$	5,605	$	-	$	5,605	$	8,205	$	-	$	8,205
Tradenames		1,147		-		1,147		1,147		-		1,147
	$	6,752	$	-	$	6,752	$	9,352	$	-	$	9,352
Finite-lived assets (in thousands)
Customer relationships	$	6,895	$	1,888	$	5,007	$	6,895	$	1,395	$	5,500
Non-compete agreement		627		401		226		627		296		331
	$	7,522	$	2,289	$	5,233	$	7,522	$	1,691	$	5,831

Amortization expense (unaudited, in thousands)
Six Months Ended June 30, 2019	$	598
Estimated future amortization expense (unaudited, in thousands)
2019	$	596
2020		1,107
2021		985
2022		985
Thereafter		1,560
Total estimated amortization expense	$	5,233

	June 30, 2019, (unaudited)
Goodwill activity (in thousands):
Beginning balance	$	8,205
Impairment charge		(2,600	)
Ending balance	$	5,605

Management completed its annual goodwill impairment assessment as of April 30, 2019.  Increased cost of services and administrative expenses at HCS have resulted in declining cash flow for the business.  Based on the likelihood of these expenses remaining higher than initially forecast, management determined that the carrying value of the HCS goodwill exceeded its fair value by $2.6 million. A goodwill impairment charge in this amount has been recorded for the quarter. Management assessed the other indefinite and definite lived intangible assets and determined no impairment was necessary.

7

Note 6. Leases

We adopted ASU No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. The Company elected to adopt the ‘package of practical expedients’, which permitted the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs, the practical expedients pertaining to land easements, the use-of hindsight, the short-term lease recognition exemption for all leases that qualified, and the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate.

Adoption of the new standard resulted in the recording of an additional net operating lease right-of-use asset and operating lease liability of approximately $0.2 million each, as of January 1, 2019. The difference between the additional lease assets and lease liabilities was recorded as an adjustment to accumulated deficit. The standard did not materially impact our consolidated net loss and had no impact on cash flows.  The Company does not have any finance 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 balance sheet.  For these leases we recognize lease expense on a straight-line basis over the lease term.

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 June 30, 2019 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):

	June 30, 2019 (unaudited)
Remaining 2019	$	86
2020		133
2021		88
Thereafter		20
Total	$	327
Less interest		24
Present value of lease liabilities	$	303

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

	June 30, 2019 (unaudited)
Supplemental Cash Flow Information
Operating cash flows from leases	$	(9	)
Lease Term and Discount Rate
Weighted average remaining lease term (years)		2.10
Weighted average discount rate		6.75	%

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Note 7. Borrowings

Revolving Credit Agreement — As of  December 31, 2018, HCS had $1.9 million outstanding under a Revolving Credit and Security Agreement (the “White Oak Credit Agreement”) between HCS and White Oak Global Advisors, LLC ("White Oak'), which provided HCS with a line of credit of up to $5,000,000. The White Oak Credit Agreement was originally with Federal National Payables, Inc. (d/b/a Federal National Commercial Credit) (“FNCC”), which White Oak acquired in February 2018. Availability under the White Oak Credit Agreement was based on a formula tied to HCS’s eligible accounts receivable. Borrowings bore interest at the prime rate plus 1.25%. The initial term of the White Oak Credit Agreement expired on November 17, 2018, but was renewed automatically for a consecutive one-year term per the provisions of the White Oak Credit Agreement. The obligations of HCS under the White Oak Credit Agreement were secured by HCS’s inventory and accounts receivable. The White Oak Credit Agreement provided for customary origination and collateral monitoring fees payable to White Oak during its term, customary representations, warranties and affirmative and negative covenants, including but not limited to financial covenants and contained 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, White Oak was able to, among other remedies, have accelerated payment of all obligations under the White Oak Credit Agreement. In connection with the White Oak Credit Agreement, the Company executed a guaranty in favor of White Oak guaranteeing all of HCS’s obligations under the White Oak Credit Agreement. HCS terminated the White Oak Credit Agreement in February 2019 and the Company fully repaid the all the outstanding obligations at that time.  

Note Refinancing and 2017 Notes — The Company has $85.9 million in aggregate borrowings outstanding under three senior secured promissory notes (the "2017 Notes"). The unpaid principal amounts of the 2017 Notes bear interest at a variable rate equal to LIBOR plus 3.5% per annum, payable quarterly in arrears until maturity on March 30, 2033. 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. The refinancing was completed through the execution of the Senior Secured Note Purchase Agreement, dated as of the same date (the “Note Purchase Agreement”), with NHI and HCS as guarantors (together with the Company, collectively, the “Credit Parties”).

The Note Purchase Agreement contains customary affirmative and negative covenants, including but not limited to certain financial covenants. 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.

See Note 11 to the condensed consolidated financial statements for details on the amendment to the Note Purchase Agreement which was signed subsequent to the quarter ended June 30, 2019.

Note 8. 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.

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. 

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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.  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. 

On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. NMFC filed a motion to dismiss the amended complaint which was denied on September 12, 2013. The defendants claimed the case should be dismissed based upon a statute of limitations and sought an appeal of the court's denial of this defense. An interlocutory appeal of this issue was allowed, and on August 27, 2013, the United States Court of Appeals for the Tenth Circuit (the "Tenth Circuit") affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the Tenth Circuit held that the Extender Statute, 12 U.S.C. §1787(b)(14) applied to plaintiff’s claims. On June 16, 2014, the United States Supreme Court (the "Supreme Court") granted a petition of NMFC and its co-defendants for certiorari, vacated the ruling of the Tenth Circuit, and remanded the case back to that court for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). On August 19, 2014, the Tenth Circuit reaffirmed its prior decision, and on October 2, 2014, the defendants filed a petition for writ of certiorari with the Supreme Court, which was denied. On March 22, 2016, NMFC filed motions for summary judgment, and plaintiff filed a motion for partial summary judgment. Those motions remain pending. Given that plaintiff did not file a timely proof of claim in NMFC’s bankruptcy case, the Company believes it is likely that the case will be dismissed. The Company believes that NMFC has meritorious defenses to the case and expects it to defend the case vigorously in the event it proceeds.

On February 28, 2013, the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and purportedly on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series 2007-1 (the “Trust”), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, New York County against the Company and NMI. The notice provides that this is a breach of contract action with respect to certain, unspecified mortgage loans and defendants’ failure to repurchase such loans under the applicable agreements. Plaintiff alleges that defendants, from the closing date of the transaction that created the Trust, were aware of the breach of the representations and warranties made and failed to give notice of and cure such breaches, and due to the failure of defendants to cure any breach, notice to defendants would have been futile. The summons with notice was not served until June 28, 2013. By letter dated June 24, 2013, the Trustee of the Trust forwarded a notice from Freddie Mac alleging breaches of representations and warranties with respect to 43 loans, as more fully set forth in included documentation. The 43 loans had an aggregate, original principal balance of about $6.5 million. On August 19, 2013, Deutsche Bank National Trust Company, as Trustee, filed a complaint identifying alleged breaches of representations and warranties with respect to seven loans that were included in the earlier list of 43 loans. Plaintiff also generally alleged a trust-wide breach of representations and warranties by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, recessionary and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; indemnification (indemnification against NMI only) and damages for breach of the implied covenant of good faith and fair dealing. On October 9, 2013, the Company and NMI filed a motion to dismiss plaintiff’s complaint.

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This motion to dismiss was withdrawn after plaintiff filed an amended complaint on January 28, 2014, and on March 4, 2014, the Company and NMI filed a motion to dismiss the amended complaint. By a Decision/Order dated November 30, 2017, the court granted in part and denied in part the motion to dismiss the amended complaint. The court dismissed all claims except for plaintiff’s claim for damages for breach of contract, to the extent that claim is based on the Company’s and NMI’s alleged failure to notify plaintiff of allegedly defective loans, and plaintiff’s claim for indemnification. The court denied the motion to dismiss these claims without prejudice to the Company’s and NMI’s right to file a new motion to dismiss in conformity with procedures to be established in coordinated proceedings before the court addressing similar claims against numerous defendants. Briefing of the indemnification issue was completed.

The parties have reached a settlement of this matter.  On October 25, 2018, the bankruptcy court overseeing the Company's bankruptcy case entered an order approving the settlement, and on November 19, 2018, the New York State Court "so ordered" a Stipulation of Voluntary Discontinuance terminating the case.  Pursuant to the terms of the settlement agreement, the required upfront payment of $0.3 million was made on March 1, 2019.  The settlement also requires equal quarterly installments over a three year period, which total an additional $0.3 million.  Based on the probability of all contingencies associated with the settlement being satisfied, the Company recorded an expense in the second quarter of 2018 in the Reorganization Items, net expense line item of the income statement and the short and long-term liability totals in the applicable Accrued Settlement Claims lines per the balance sheet.

DB Structured Products, Inc., Deutsche Bank AG, Deutsche Bank National Trust Company, Deutsche Bank Securities Inc., Greenwich Capital Derivatives, Inc., RBS Acceptance Inc., RBS Financial Products Inc., RBS Securities Inc., The Royal Bank of Scotland PLC, Wachovia Investment Holdings, LLC, Wells Fargo & Company, Wells Fargo Advisors, LLC, Wells Fargo Bank, N.A. and Wells Fargo Securities, LLC (collectively, the “Indemnity Claimants”) filed proofs of claim in the Company’s bankruptcy case asserting the right to be indemnified by the Company for, and/or to receive contribution from the company in respect of, certain liabilities incurred as a result of their roles in the issuance of residential mortgage-backed securities sponsored by the Company.  The Company filed an objection in the bankruptcy case seeking to disallow and expunge the Indemnity Claimants’ proofs of claim.  The Indemnity Claimants’ claims were not discharged by the confirmation of the Company’s plan of reorganization, and the bankruptcy court has not ruled on the Company’s objection to those claims.

The parties have reached a settlement in this matter, which was approved by the court on November 29, 2018.  This settlement includes an upfront payment of $0.5 million, which was paid on December 21, 2018.  In addition, the settlement provides for equal quarterly installments over a three year period, which total an additional $0.4 million.  Based on the probability of this settlement receiving court approval, the Company recorded an expense during the second quarter of 2018 in the Reorganization Items, net expense line item of the income statement and the short and long-term liability totals in the applicable Accrued Settlement Claims lines per the balance sheet.

Note 9. 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.

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.

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The estimated fair values of the Company's financial instruments are (in thousands):

	June 30, 2019 (unaudited)				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Equity securities (Level 1)	$	1	$	1	$	1	$	1
Financial liabilities:
Senior notes (Level 3)	$	85,938	$	22,348	$	85,938	$	24,659

The equity securities are valued based on quoted market prices and are included in other current assets on the condensed consolidated balance sheets. The senior 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 senior 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.

Senior Notes — 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 three-month LIBOR plus 3.5% per annum until maturity in March 2033. The three-month LIBOR used in the analysis was projected using a forward interest rate curve.

Financial assets reported at fair value (Level 3) on a nonrecurring basis include the following (in thousands):

	June 30, 2019 (unaudited)
	Fair Value (Level 3)		Gains and (Losses)
Goodwill	$	5,605	$	(2,600	)

See Note 5 for additional information regarding the Company's Goodwill and Intangible Assets.

Note 10. 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 June 30, 2019 and December 31, 2018, the Company maintained a full valuation allowance against its net deferred tax assets of $164.9 million and $164.0 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 30, 2019, the Company had a federal NOL of approximately$730.0 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 2018 tax return has not been filed as of the date of this report, however the estimated federal NOL that does not expire included in the total above is $20.0 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.

Note 11. Subsequent Events

As discussed in Note 7 to the condensed consolidated financial statements, the Company has $85.9 million in aggregate borrowings outstanding under the 2017 Notes. The Company and Noteholders executed a First Amendment to Senior Secured Note Purchase Agreement (the "Amendment") amending the terms of the Note Purchase Agreement and 2017 Notes on August 9, 2019.  The Amendment modifies the interest rate of the 2017 Notes as follows - 1% interest rate per annum from April 1, 2019 through December 31, 2023, 2% interest rate per annum from January 1, 2024 through December 31, 2028 and 10% interest rate per annum from January 1, 2029 through the maturity date on March 30, 2033.   Additionally, the Company will be required to remit 50% of excess cash flow each year, as defined per the Amendment, to the Noteholders to be applied as a principal reduction to the outstanding balance of the debt. The financial covenants required under the Note Purchase Agreement are waived until the quarter ending December 31, 2021.

Under the terms of the Amendment, the Company issued 9,000,000 shares of common stock of the Company to the Noteholders upon execution of the Amendment.  In addition, the Company has issued ten-year warrants allowing the Noteholders to purchase 22,250,000 shares of the Company's common stock, at an exercise price of $.01 per share.

On April 1, 2019 and on July 1, 2019, the Company made payments under the 2017 Notes totaling $2.7 million.  The actual aggregate amounts due under the Amendment for those dates totaled $0.4 million.  Under the terms of the Amendment, the Company is allowed to apply this payment surplus of $2.2 million against future quarterly interest payments.  At the 1% annual interest rate per the Amendment, the Company will not have another quarterly interest payment due until April 1, 2022.

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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, 2018, (the "2018 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”.  

Since April of 2019, David W. Pointer has served as both the Chief Executive Officer of Novation and HCS.  

Emergence from Bankruptcy. On July 20, 2016 (the “Bankruptcy Petition Date”), Novation and three of its subsidiaries, NovaStar Mortgage LLC (“NMLLC”), NovaStar Mortgage Funding Corporation and 2114 Central LLC (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (the “Bankruptcy Court”). The Company and one of its subsidiaries subsequently filed with the Bankruptcy Court and amended a plan of reorganization (the “Plan”) and a related disclosure statement. The Bankruptcy Court entered an order on June 12, 2017 confirming the Plan (the “Confirmation Order”) solely with respect to the Company. On July 27, 2017, upon the completion of the HCS Acquisition and the Note Refinancing (each as defined below), and the satisfaction or waiver of all other conditions precedent to effectiveness, the effective date of the Plan occurred and the Company filed a Notice of Occurrence of Effective Date of the Plan with the Bankruptcy Court. Under the Plan, holders of existing equity interests in the Company (i.e., the common stock) retain their interests.

On September 25, 2017, the bankruptcy case of 2114 Central, LLC was dismissed by order of the Bankruptcy Court. Thereafter, on December 22, 2017, NMLLC filed with the Bankruptcy Court a Chapter 11 plan of reorganization, and on December 26, 2017 filed a related disclosure statement. The Bankruptcy Court entered an order on February 16, 2018 approving the disclosure statement, as revised. On April 11, 2018 the Bankruptcy Court confirmed NMLLC’s plan of reorganization. This plan allows NMLLC to exit bankruptcy, but prohibits the use of NMLLC assets for anything other than for the payment of NMLLC obligations. On April 19, 2019, the Bankruptcy Court approved the Motion for Final Decrees for Novation and NMLLC. On July 16, 2019, the bankruptcy case of NovaStar Mortgage Funding Corporation was dismissed by order of the Bankruptcy Court.

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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, 2019 (unaudited)		December 31, 2018
Cash and cash equivalents	$	4,256	$	9,249

	Six Months Ended June 30, (unaudited)						Three Months Ended June 30, (unaudited)
	2019			2018			2019			2018
Service fee income	$	32,151		$	26,490		$	16,297		$	13,270
Net loss available to common shareholders, per basic share	$	(0.07	)	$	(0.02	)	$	(0.05	)	$	(0.01	)

Critical Accounting Policies

In our 2018 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 June 30, 2019 as Compared to June 30, 2018

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, 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.

HCS revenue for the three and six months ended June 30, 2019 was $16.3 and $32.2, respectively. This increase in revenue compared to the three and six months ended June 30, 2018 of $13.3 and $26.5, respectively, is due to the addition of two new CSB clients, one which started late in the third quarter of 2018 and another which started at the beginning of 2019. HCS cost of goods sold for the three and six months ended June 30, 2019 was $14.5 and $28.6, respectively. This increase in cost of goods sold compared to the three and six months ended June 30, 2018 of $11.8 and $23.5, respectively, is also due to the addition of the two new CSB clients in the third quarter of 2018 and the beginning of 2019. 

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 June 30, 2019, $1.6 million and $3.4 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 ended June 30, 2018. Corporate-level general and administrative expenses for the three and six months ended June 30, 2019 were $0.6 million and $1.1 million, respectively, as compared to $0.5 million and $1.2 million for the three and six months ended June 30, 2018. 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.

Goodwill Impairment Charge

Management completed its annual goodwill impairment assessment as of April 30, 2019.  Increased cost of services and administrative expenses at HCS have resulted in declining cash flow for the business.  Based on the likelihood of these expenses remaining higher than initially forecast, management determined that the carrying value of the HCS goodwill exceeded its fair value by $2.6 million. A goodwill impairment charge in this amount has been recorded for the quarter.

14

Interest Income – Mortgage Securities

All of our mortgage securities were sold in December 2018, and therefore the Company will have no future interest income or cash flow from these securities. For the three and six months ended June 30, 2018, interest income on our mortgage securities was approximately $0.5 million and $0.9 million, respectively.

Reorganization Items, Net

The Company incurred approximately$0.06 million and $1.8 million in legal & settlement expenses for the six months ended June 30, 2019 and 2018, respectively. These costs have decreased as a result of the completion of the Company's reorganization of NMLLC. See Note 2 to the condensed consolidated financial statements.

Interest Expense

Interest expense increased slightly period over period, with the Company incurring $2.7 million and $2.5 million during the six months ended June 30, 2019 and 2018, respectively. The increase is due to an increase in LIBOR, as the underlying obligations pay interest at a variable rate based on 3-month LIBOR. See "Liquidity and Capital Resources" below and Note 11 to the condensed consolidated financial statements for the Amendment to the 2017 Notes, which significantly reduces the interest rate due under the senior notes agreement from January 2019 through the end of 2028 and allows the Company to apply the surplus interest paid on April 1, 2019 and July 1, 2019 against future quarterly interest payments.  This Amendment was executed subsequent to the period ended June 30, 2019.

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 – During the six months ended June 30, 2019, the Company incurred a net loss of $6.3 million and generated negative operating cash flow of $3.0 million. As of June 30, 2019, the Company had an overall shareholders deficit of $69.1 million, and an aggregate of $4.3 million in cash and total liabilities of $92.4 million. Of the $4.3 million in cash, $0.9 million is held by the Company's subsidiary NMLLC, which has filed a Chapter 11 plan of reorganization that was confirmed by the court on April 11, 2018. This cash is available only to pay general creditors of NMLLC. 

After engaging major investment firms to evaluate the marketplace for its mortgage securities, the Company executed trades to sell all of its mortgage securities during 2018. These sales generated $13.0 million in cash proceeds for the Company. For the year ended December 31, 2018, the Company recorded $12.9 million in gains in other income in the Statements of Operations and Comprehensive Loss related to the sale of these securities. However, the Company will no longer have any future cash flows from these securities since they were sold.  

While HCS has demonstrated that it can provide positive cash flow sufficient to support HCS operations, management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers and targeting new customers that have not previously been served by HCS.

The Company had significant on-going obligations 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.  The last interest payment on long-term debt made on July 1, 2019 was $1.3 million. See Note 11 to the condensed consolidated financial statements regarding the Amendment to the Note Purchase Agreement, which significantly reduces the interest rate due under the senior notes agreement from January 2019 through the end of 2028 and allows the Company to apply the surplus interest paid on April 1, 2019 and July 1, 2019 against future quarterly interest payments.

While our historical operating results and poor cash flow suggest substantial doubt exists related to the Company's ability to continue as a going concern, with the amendment to the senior notes agreement, the Company's cash position is forecasted to be sufficient to cover current and on-going obligations. As a result, management has concluded that the factors discussed above have alleviated the substantial doubt about the Company's ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued.

The accompanying condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  However, we cannot provide assurance that revenue and cash generated from HCS will be sufficient to sustain our operations in the long term. 

15

Overview of Cash Flow for the six months ended June 30, 2019

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 ended June 30, 2019 and 2018 (in thousands).

	Six Months Ended June 30,
	2019			2018
Cash flows used in operating activities	$	(2,997	)	$	(2,051	)
Cash flows provided by (used in) investing activities		(17	)		2,931
Cash flows used in financing activities		(1,979	)		(1,198	)

Operating Activities – The increase in net cash flows used in operating activities to approximately $3.0 million during the six months ended June 30, 2019 from cash used of $2.1 million during the six months ended June 30, 2018 was driven primarily by the Company's increase in net loss and a decrease in both the Company's accounts payable and accrued expenses and accrued compensation and benefits payable balances.

Investing Activities – The decrease in the net cash flows provided by (used in) investing activities is due to the sale of the Company's marketable securities in 2018, compared to no sales of securities in 2019.

Financing Activities – The increase in cash used in financing activities is due to the payoff of HCS’s line of credit in 2019.

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 June 30, 2019, 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

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, 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 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.

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.

16

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.  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.

On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On August 24, 2012, the plaintiff filed an amended complaint making essentially the same claims against NMFC. NMFC filed a motion to dismiss the amended complaint which was denied on September 12, 2013. The defendants claimed the case should be dismissed based upon a statute of limitations and sought an appeal of the court's denial of this defense. An interlocutory appeal of this issue was allowed, and on August 27, 2013, the United States Court of Appeals for the Tenth Circuit (the “Tenth Circuit”) affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the Tenth Circuit held that the Extender Statute, 12 U.S.C. §1787(b)(14) applied to plaintiff’s claims. On June 16, 2014, the United States Supreme Court (the "Supreme Court") granted a petition of NMFC and its co-defendants for certiorari, vacated the ruling of the Tenth Circuit, and remanded the case back to that court for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). On August 19, 2014, the Tenth Circuit reaffirmed its prior decision, and on October 2, 2014, the defendants filed a petition for writ of certiorari with the Supreme Court, which was denied. On March 22, 2016, NMFC filed motions for summary judgment, and plaintiff filed a motion for partial summary judgment. Those motions remain pending. Given that plaintiff did not file a timely proof of claim in NMFC’s bankruptcy case, the Company believes it is likely that the case will be dismissed. The Company believes that NMFC has meritorious defenses to the case and expects it to defend the case vigorously in the event it proceeds.

17

On February 28, 2013, the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and purportedly on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series 2007-1 (the “Trust”), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, New York County against the Company and NMI. The notice provides that this is a breach of contract action with respect to certain, unspecified mortgage loans and defendants' failure to repurchase such loans under the applicable agreements. Plaintiff alleges that defendants, from the closing date of the transaction that created the Trust, were aware of the breach of the representations and warranties made and failed to give notice of and cure such breaches, and due to the failure of defendants to cure any breach, notice to defendants would have been futile. The summons with notice was not served until June 28, 2013. By letter dated June 24, 2013, the Trustee of the Trust forwarded a notice from Freddie Mac alleging breaches of representations and warranties with respect to 43 loans, as more fully set forth in included documentation. The 43 loans had an aggregate, original principal balance of about $6.5 million. On August 19, 2013, Deutsche Bank National Trust Company, as Trustee, filed a complaint identifying alleged breaches of representations and warranties with respect to seven loans that were included in the earlier list of 43 loans. Plaintiff also generally alleged a trust-wide breach of representations and warranties by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, recessionary and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; indemnification (indemnification against NMI only) and damages for breach of the implied covenant of good faith and fair dealing. On October 9, 2013, the Company and NMI filed a motion to dismiss plaintiff’s complaint. This motion to dismiss was withdrawn after plaintiff filed an amended complaint on January 28, 2014, and on March 4, 2014, the Company and NMI filed a motion to dismiss the amended complaint. By a Decision/Order dated November 30, 2017, the court granted in part and denied in part the motion to dismiss the amended complaint. The court dismissed all claims except for plaintiff’s claim for damages for breach of contract, to the extent that claim is based on the Company’s and NMI’s alleged failure to notify plaintiff of allegedly defective loans, and plaintiff’s claim for indemnification. The court denied the motion to dismiss these claims without prejudice to the Company’s and NMI’s right to file a new motion to dismiss in conformity with procedures to be established in coordinated proceedings before the court addressing similar claims against numerous defendants. Briefing of the indemnification issue was completed.

The parties have reached a settlement of this matter.  On October 25, 2018, the bankruptcy court overseeing the Company's bankruptcy case entered an order approving the settlement, and on November 19, 2018, the New York State Court “so ordered” a Stipulation of Voluntary Discontinuance terminating the case.  Pursuant to the terms of the settlement agreement, the required upfront payment of $0.3 million was made on March 1, 2019.  The settlement also requires equal quarterly installments over a three years period, which total an additional $0.3 million.  Based on the probability of all contingencies associated with the settlement being satisfied, the Company has recorded an expense in the second quarter of 2018 in the Reorganization Items, net expense line item of the income statement and the short and long-term liability totals in the applicable Accrued Settlement Claims lines per the balance sheet.

See the "Corporate Overview" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to the condensed consolidated financial statements for a description of the Company’s Chapter 11 proceedings.

Item 1A. Risk Factors

There have been no material changes to the risk factors included in the 2018 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

18

Item 6. Exhibits

Exhibit No.	Description of Document
10.1	First Amendment to Senior Secured Note Purchase Agreement
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 June 30, 2019, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2019 and 2018, (iii) Condensed Consolidated Statements of Shareholders' Deficit for the six months ended June 30, 2019 and 2018, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, and (v) Notes to Condensed Consolidated Financial Statements.

19

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:	August 12, 2019	/s/ David W. Pointer
		David W. Pointer, Chief Executive Officer
		(Principal Executive Officer)
DATE:	August 12, 2019	/s/ Carolyn K. Campbell
		Carolyn K. Campbell, Chief Financial Officer
		(Principal Financial Officer)

20

EX-10.1

Exhibit 10.1

FIRST AMENDMENT TO SENIOR SECURED NOTE PURCHASE AGREEMENT

THIS FIRST AMENDMENT TO SENIOR SECURED NOTE PURCHASE AGREEMENT is dated as of August 9, 2019, by and among NOVATION COMPANIES, INC., a Maryland corporation (“Issuer”), each of those Subsidiaries of the Issuer identified as a “Guarantor” on the signature pages hereto and such other Subsidiaries of the Issuer as may from time to time become a party hereto (each a “Guarantor” and collectively, the “Guarantors”), the Noteholders listed on the signature page hereof (together with such Persons who may become Noteholders hereunder from time to time, each a “Noteholder” and collectively, the “Noteholders”), and Wilmington Savings Fund Society, FSB as Collateral Agent (the “Collateral Agent”) (the “Amendment”).

R E C I T A L S

A.     Issuer, the Guarantors, the Noteholders and the Collateral Agent are parties to that certain Senior Secured Note Purchase Agreement dated as of July 27, 2017 (as amended, modified or supplemented, the “Note Purchase Agreement”).

B.     Issuer’s obligations under the Note Purchase Agreement are further evidenced by Notes executed by Issuer payable to the Noteholders.

C.     On April 1, 2019, Issuer made an interest payment in an amount equal to $1,337,839.19 (One million three hundred and thirty-seven thousand eight hundred and thirty-nine dollars and nineteen cents) which exceeded the amount due under the Amended and Restated Notes (as defined herein) by $1,125,382.59 (One million one hundred and twenty-five thousand three hundred and eighty-two dollars and fifty-nine cents) (the “April 2019 Payment Surplus”).

D.     On July 1, 2019, Issuer made an interest payment in an amount equal to $1,323,316.35 (One million three hundred and twenty-three thousand three hundred and sixteen dollars and thirty-five cents) which exceeded the amount due under the Amended and Restated Notes (as defined herein) by $1,110,859.75 (One million one hundred and ten thousand eight hundred and fifty-nine dollars and seventy-five cents) (the “July 2019 Payment Surplus”, and, together with the April 2019 Payment Surplus, the “2019 Payment Surplus”).

E.     The parties desire to amend the Note Purchase Agreement and the Notes to, among other things, adjust the Applicable Rate in effect as of April 1, 2019 and to provide Issuer a credit against future interest payments in an amount equal to the 2019 Payment Surplus, on the terms as hereinafter provided.

NOW, THEREFORE, in consideration of these premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.     Same Terms. All terms used herein which are defined in the Note Purchase Agreement shall have the same meanings when used herein, unless the context hereof otherwise requires or provides. In addition, all references in the Note Purchase Agreement and the Notes to the “Agreement” shall mean the Note Purchase Agreement, as amended by this Amendment, as the same shall hereafter be amended from time to time. In addition, the following terms have the meanings set forth below:

“Amended and Restated Notes” shall mean collectively the amended and restated senior secured notes issued by Issuer hereunder in substantially the form of Exhibit A attached hereto.

“Effective Date” means August 9, 2019.

“Modification Papers” means this Amendment, the Amended and Restated Notes and all of the other documents and agreements executed in connection with the transactions contemplated by this Amendment.

2.     Conditions Precedent. The transactions contemplated by this Amendment shall be deemed to be effective as of the Effective Date, when the following conditions have been complied with to the satisfaction of the Noteholders, unless waived in writing by the Noteholders:

A.     Amendment. This Amendment shall be fully executed by the parties hereto.

B.     Amended and Restated Notes. The Amended and Restated Notes shall be executed and delivered to the Noteholders.

C.     Shares of Common Stock of Issuer. Issuer shall issue an aggregate of nine million (9,000,000) shares of common stock of Issuer to the Noteholders to be allocated ratably among the Noteholders as set forth on Schedule 1 attached hereto.

D.     Warrants. Issuer shall issue warrants substantially in the form of Exhibit B attached hereto to purchase an aggregate of twenty-two million two hundred fifty thousand (22,250,000) shares of common stock of Issuer to the Noteholders to be allocated ratably among the Noteholders as set forth on Schedule 1 attached hereto.

E.     Further Assurances. Execution and/or delivery of all other agreements, instruments and documents requested by the Noteholders to effectuate and implement the terms hereof.

F.     Representations and Warranties. All representations and warranties contained herein or in the documents referred to herein or otherwise made in writing in connection herewith or therewith shall be true and correct in all material respects as of the date hereof, in each case other than representations and warranties that relate to a specific date.

G.     No Event of Default. After giving effect to this Amendment, no Event of Default shall have occurred and be continuing.

3.     Amendments to Note Purchase Agreement. On the Effective Date, the Note Purchase Agreement shall be amended as follows:

A.     Section 1.1 of the Note Purchase Agreement shall be amended by amending and restating the definition of “Applicable Rate” in its entirety to read as follows:

“Applicate Rate” shall have the meaning set forth in Section 2 of the Notes.

B.     Section 1.1 of the Note Purchase Agreement shall be amended by adding the following new definitions in their proper alphabetical order:

“Excess Cash Flow” shall mean Consolidated Net Income plus depreciation and amortization expense of the Issuer and its Subsidiaries for such period less the sum of, without duplication, (i) all cash principal payments on the Notes made during such period and all cash payments on Indebtedness (other than Indebtedness incurred under this Agreement) of the Issuer or its Subsidiaries during such period to the extent such other Indebtedness is permitted to be incurred, and such payments are permitted to be made, under this Agreement, (ii) any capital expenditures made by the Issuer or its Subsidiaries during such period, (iii) fees and expenses paid in cash and incurred in connection with any amendments or other modifications to this Agreement or the Notes, (iv) all scheduled loan servicing fees and other similar fees in respect of Indebtedness of the Issuer or its Subsidiaries paid in cash during such period, to the extent such Indebtedness is permitted to be incurred, and such payments are permitted to be made, under this Agreement, (v) fees and expenses paid in cash and incurred in connection with any consummated Permitted Acquisition and (vi) the excess, if any of working capital at the end of such period over working capital at the beginning of such period (or plus the excess, if any, of the working capital at the beginning of such period over working capital at the end of such period).

“First Amendment Effective Date” shall mean August 9, 2019.”

C.     The Note Purchase Agreement shall be amended by adding the following as a new Section 2.9 to the Note Purchase Agreement to read as follows:

“Section 2.9     Mandatory Prepayment.

Contemporaneously with the delivery to the Noteholders of annual financial statements pursuant to Section 5.1(a) hereof, commencing with the delivery to the Noteholders of the financial statements for the fiscal year ended on December 31, 2019 or, if such financial statements are not delivered to the Noteholders on the date such statements are required to be delivered pursuant to Section 5.1(a) hereof, on the date such statements are required to be delivered to the Noteholders pursuant to Section 5.1(a) hereof, the Issuer shall prepay the outstanding principal amount of the Notes in accordance with Section 2.4 in an amount equal to the result of (to the extent positive) (1) 50% of the Excess Cash Flow of the Issuer and its Subsidiaries for such fiscal year minus (2) the aggregate principal amount of all payments made by the Issuer pursuant to Section 2.5 for such fiscal year (solely to the extent not included in the calculation of Excess Cash Flow). Notwithstanding the foregoing, Excess Cash Flow shall exclude any amounts attributable to periods prior to (x) the First Amendment Effective Date and (y) in the case of any Person that becomes a Subsidiary of the Issuer after the First Amendment Effective Date pursuant to a Permitted Acquisition, the consummation date of such Permitted Acquisition.”

D.     Section 5.4 of the Note Purchase Agreement shall be amended by amending and restating such section in its entirety to read as follows:

“Preserve, renew and keep in full force and effect its corporate or other formative existence and good standing, take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business and to maintain its goodwill and comply with all Contractual Obligations and Requirements of Law, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. Notwithstanding the foregoing, upon consultation and consent of the Required Noteholders (such consent not to be unreasonably withheld or delayed), the Issuer shall be permitted to liquidate any Guarantor (other than in connection with an Asset Sale) so long as 100% of its assets are distributed to the Issuer or another Guarantor.”

E.     Sections 5.9 of the Note Purchase Agreement shall be amended by amending and restating the introductory clause of such section in its entirety to read as follows:

“Beginning on December 31, 2021, comply with the following financial covenants:”

F.     Exhibit 1.1(b) to the Note Purchase Agreement shall be amended in its entirety by replacing it with Exhibit A attached hereto.

4.     Retroactive Effect. For purposes of clarification, the Applicable Rate as amended herein shall be applied retroactively in accordance with the terms of the Amended and Restated Notes.

5.     Continuation of Obligations. As of the Effective Date, Issuer does hereby agree that it remains liable for the payment and performance of all of the terms, conditions, liabilities, indemnities, and obligations under the Note Purchase Agreement and the Notes, including, without limitation, the Obligations, whether now or hereafter arising or accruing.

6.     Reaffirmation. Issuer hereby represents and agrees that there are no oral agreements which modify any of the Note Purchase Agreement or the Notes and that the Note Purchase Agreement and the Notes, as expressly modified herein, constitute the entire agreement between Issuer and the Noteholders with respect to the Obligations. Nothing herein shall constitute any novation with respect to the Note Purchase Agreement or the Notes. Except as expressly modified herein, all terms, covenants and provisions of the Note Purchase Agreement and the Notes shall remain unaltered and in full force and effect.

7.     Certain Representations. Issuer represents and warrants that, as of the date hereof: (a) Issuer has full power and authority to execute the Modification Papers to which it is a party, and such Modification Papers constitute the legal, valid and binding obligation of Issuer enforceable in accordance with their terms, except as enforceability may be limited by general principles of equity and applicable bankruptcy, insolvency, reorganization, moratorium, and other similar laws affecting the enforcement of creditors’ rights generally; and (b) no authorization, approval, consent or other action by, notice to, or filing with, any governmental authority or other person is required for the execution, delivery and performance by Issuer of the Modification Papers to which it is a party.

8.     Limitation on Agreements. Except as expressly set forth herein, the modifications set forth herein are limited precisely as written and shall not be deemed (a) to be a consent under or a waiver of or an amendment to any other term or condition in the Note Purchase Agreement, or (b) to prejudice any right or rights which any Noteholder now has or may have in the future under or in connection with the Note Purchase Agreement, as amended hereby, or any of the other documents referred to herein or therein.

9.     Counterparts. This Amendment may be executed in any number of counterparts, each of which when executed and delivered shall be deemed an original, but all of which constitute one instrument. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto.

10.     Incorporation of Certain Provisions by Reference. The provisions of Sections 9.1 and 9.2 of the Note Purchase Agreement are incorporated herein by reference for all purposes.

11.     Entirety, Etc. This instrument and the Note Purchase Agreement and the Notes embody the entire agreement between the parties. THIS AMENDMENT AND THE NOTE PURCHASE AGREEMENT AND THE AMENDED AND RESTATED NOTES REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Signature Page Follows.]

IN WITNESS WHEREOF, the parties hereto have executed this Amendment to be effective as of the Effective Date.

ISSUER: NOVATION COMPANIES, INC., a Maryland corporation

By:       /s/ Carolyn Campbell

Name: Carolyn Campbell

Title: Chief Financial Officer

GUARANTORS: NOVATION HOLDING, INC., a Delaware corporation

By:       /s/ Carolyn Campbell

Name: Carolyn Campbell

Title: Chief Financial Officer

HEALTHCARE STAFFING, INC., a Georgia corporation

By:       /s/ Carolyn Campbell

Name: Carolyn Campbell

Title: Chief Financial Officer

[Signatures Continue on Following Pages]

NOTEHOLDERS:          

TABERNA PREFERRED FUNDING II, LTD.

By: TP Management LLC, as attorney-in-fact for Taberna Capital Management, LLC, its Collateral Manager

By:     /s/ Daniel Bass                    

Name: Daniel Bass

Title:    Authorized Signatory

KODIAK CDO I, LTD.

By: EJF CDO Manager LLC, its Collateral Manager

By: EJF Investments Manager LLC, its Managing Member

By:      /s/ Neal J. Wilson

Name: Neal J. Wilson

Title: Chief Executive Officer

[Signatures Continue on Following Pages]

COLLATERAL AGENT:          Wilmington Savings fund society, FSB

By:       /s/ Haley Harris

Name: Haley Harris

Title: Trust Officer

SCHEDULE 1

Allocation of Shares

Kodiak CDO I, Ltd. – 3,240,000 shares

Taberna Preferred Funding I, Ltd. – 2,880,000 shares

Taberna Preferred Funding II, Ltd. – 2,880,000 shares

Allocation of Warrants

Kodiak CDO I, Ltd. – 8,010,000 shares

Taberna Preferred Funding I, Ltd. – 7,120,000 shares

Taberna Preferred Funding II, Ltd. – 7,120,000 shares

EXHIBIT A

Exhibit 1.1(b)

[FORM OF AMENDED AND RESTATED SENIOR SECURED PROMISSSORY NOTE]

THE OFFER AND SALE OF THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND THIS NOTE MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT IS IN EFFECT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS.

AMENDED AND RESTATED SENIOR SECURED PROMISSORY NOTE

$[ ]     [City/State of Issuer]

_________, 2019

FOR VALUE RECEIVED, the undersigned, NOVATION COMPANIES, INC., a Maryland corporation (the "Maker"), hereby promises to pay to the order of [Noteholder], a [jurisdiction and entity], its successors and assigns (collectively, the "Holder"), the principal sum of [AMOUNT] U.S. DOLLARS ($[#########]), together with interest on the outstanding balance hereof at the rate specified herein.

This Amended and Restated Senior Secured Promissory Note (this "Note") is one of the Notes referred to in, and is entitled to the benefits of, the Senior Secured Note Purchase Agreement dated as of July 27, 2017, among the Holder, the Maker and certain other parties (as the same may be amended, the "Note Purchase Agreement"). This Note amends and restates that certain promissory note issued by the Maker to the Holder, dated July 27, 2017 in the principal amount of [AMOUNT] U.S. DOLLARS ($[#########]). The Note Purchase Agreement contains provisions, among others, for the acceleration of the maturity hereof in certain circumstances. All capitalized terms used herein and not otherwise defined will have the meanings assigned to such terms in the Note Purchase Agreement, as amended.

Applicable Rate: The unpaid principal balance of the Note will bear interest at the rates set forth below (in each case, as applicable, the “Applicable Rate”):

Period	Interest Rate
From July 27, 2017 through March 31, 2019	LIBOR plus 3.50%
From April 1, 2019 through December 31, 2023	1.00% per annum
From January 1, 2024 through December 31, 2028	2.00% per annum
From January 1, 2029 until the later of (a) the Maturity Date or (b) the date on which all unpaid principal under the Notes, together with all accrued and unpaid interest thereon, is paid in full	10.00% per annum

The Applicable Rate shall be based on a year of 360 days and actual days elapsed. Accrued interest on the unpaid principal balance hereof will be due and payable in arrears commencing on April 1, 2019, and on the first day of each January, April, July and October thereafter (each an "Interest Payment Date") and on the Maturity Date (defined below); provided, however, the 2019 Payment Surplus shall be credited against Maker’s ratable share of the payment obligations due to it under the Note Purchase Agreement as of October 1, 2019 and each succeeding quarter thereafter until the 2019 Payment Surplus is exhausted.

The unpaid principal balance hereof, all accrued and unpaid interest due hereunder and any other amounts due from the Maker to the Holder hereunder will be due and payable on the date (the "Maturity Date") which is the earliest to occur of (a) the date when the payment of this Note has been accelerated pursuant to Section 7.2 of the Note Purchase Agreement, (b) upon the date of redemption set forth in a Redemption Notice pursuant to Section 2.5 of the Note Purchase Agreement (to the extent of the principal amount to be redeemed), or (c) March 30, 2033.

If any payment of principal or interest is not paid on the date when due, and upon the occurrence and during the continuance of any financial covenant, voluntary or involuntary Bankruptcy Event of Default, then any overdue payment and the entire principal amount hereof will bear interest at the rate of 3.0% per annum plus the Applicable Rate and will be payable on demand until such default is cured (if capable of cure) or until all amounts due hereunder are paid in full, which interest is payable upon demand. If any amount due under this Note is not paid when due, the Maker will pay reasonable attorneys' fees and other reasonable costs of collection in accordance with Section 9.6(a) of the Note Purchase Agreement.

Payments hereunder will be made in accordance with Section 2.4 of the Note Purchase Agreement. Subject to the provisions of the next sentence, the Maker may redeem this Note in whole or in part at any time. Any redemption of the Note will be at a redemption price equal to 101% of the principal amount of Notes redeemed plus accrued and unpaid interest thereon, if any, to the redemption date. Any partial prepayment shall be in an amount equal to $500,000 or a higher integral multiple of $100,000.

The Maker hereby: (a) waives presentment for payment, demand, notice of protest and all other notices (not expressly provided for in this Note or the Note Purchase Agreement) in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note; (b) agrees that its liability is unconditional without regard to the liability of any other party and will not be affected in any manner by any indulgence, extensions of time, renewal, waiver or modification granted or consented to by the Holder at any time; (c) consents to any and all indulgences, extensions of time, renewals, waivers or modifications granted or consented to by the Holder at any time; and (d) agrees that additional makers, endorsers, guarantors or sureties may become parties to this Note or the Note Purchase Agreement without notice to it and without affecting its liability under this Note.

This Note: (a) may be amended only by a writing signed by the Maker and the Holder; (b) may not be assigned or otherwise transferred, whether by operation of law or otherwise, (i) by the Maker without the prior consent of the Holder or (ii) by the Holder, except as permitted under Section 8.2 of the Note Purchase Agreement; (c) is governed by, and will be construed and enforced in accordance with, the laws of the State of New York without regard to conflict of law rules (other than Section 5-1401 of the New York General Obligations Law); and (d) is binding upon the Maker and its successors and permitted assigns, and will inure to the benefit of the Holder and its successors and permitted assigns.

[Signature Page Follows]

SIGNATURE PAGE TO AMENDED AND RESTATED SENIOR SECURED PROMISSORY NOTE

NOVATION COMPANIES, INC.

By:

Title:

EXHIBIT B

FORM OF WARRANT

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

[FORM OF] WARRANT

 NOVATION COMPANIES, INC.

Warrant Shares:_____                              Initial Exercise Date: ________, 2019

THIS WARRANT (the “Warrant”) certifies that, for value received, ____________ (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to the close of business on the ten year anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Novation Companies, Inc., a Maryland corporation (the “Company”), up to _______ shares (as subject to adjustment hereunder, the “Warrant Shares”) of common stock of the Company (“Common Stock”). The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1.     Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Senior Secured Note Purchase Agreement (the “Note Purchase Agreement”), dated July 27, 2017, as amended, among the Company, certain subsidiaries of the Company as guarantors, the purchasers signatory thereto and Wilmington Saving Fund Society, FSB as collateral agent.

Section 2.     Exercise.

a)     Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise form annexed hereto. Within three (3) Business Days following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Business Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Company shall maintain records showing the number of Warrant Shares purchased, the date of such purchases and the number of Warrant Shares that remain unpurchased. The Company shall deliver any objection to any Notice of Exercise Form within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

b)     Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $0.01, subject to adjustment hereunder (the “Exercise Price”).

c) Mechanics of Exercise.

i.     Delivery of Certificates Upon Exercise. Warrant Shares purchased hereunder shall be transmitted by the Company’s transfer agent (the “Transfer Agent”) to the Holder by crediting the account of the Holder’s prime broker with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise, at the option of the Holder, either in book entry form on the records of the Company’s transfer agent or by physical delivery in certificated form to the address specified by the Holder in the Notice of Exercise by the date that is five (5) Business Days after the latest of (A) the delivery to the Company of the Notice of Exercise, (B) surrender of this Warrant (if required), and (C) payment of the aggregate Exercise Price as set forth above (including by cashless exercise, if permitted) (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant is exercised, with payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 2(c)(v) prior to the issuance of such shares, having been paid

ii.     Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iii.     Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(c)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

iv.     No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

v.     Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

vi.     Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

Section 3.     Certain Adjustments.

a)     Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant or the other warrants being issued in connection with the Note Purchase Agreement), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. Upon any such adjustment, the Company shall deliver to the Holder a new Warrant evidencing the adjustment in the number of Warrant Shares issuable hereunder and in all other respects identical with this Warrant.

b)     Calculations. All calculations under Section 3(a) shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of Section 3(a), the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

c)     Notice to Holder. Whenever the Exercise Price is adjusted pursuant to Section 3(a) , the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

Section 4.     Transfer of Warrant.

a)     Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d) hereof, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

b)     New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Initial Exercise Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

c)     Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

d)     Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions pursuant to Rule 144.e) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.

Section 5.     Miscellaneous.

a)     No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(c)(i).

b)     Notice of Fundamental Transaction. At any time while this Warrant is outstanding, the Company shall give notice with reasonable detail to the Holder at least five (5) Business Days prior to the anticipating taking any of the following actions: (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination).

c)     Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

d)     Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

e)     Authorized Shares.

The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares, or to take such other action necessary to effect the issuance of the Warrant Shares, upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the trading market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value and (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant

Except as have been obtained prior to the date hereof and as may be required in connection with any of the events described in Section 3(a), no authorizations, exemptions or consents from any public regulatory body having jurisdiction over the Company are necessary to enable the Company to perform its obligations under this Warrant.

Before taking any action described in Section 3(a) which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

f)     Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Note Purchase Agreement.

g)     Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

h)     Nonwaiver. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date.

i)     Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Note Purchase Agreement.

j)     Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

k)     Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

l)     Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or successors and permitted assigns of this Warrant.

m)     Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

n)     Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

o)     Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

********************

(Signature Page Follows)

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

NOVATION COMPANIES, INC.

By:__________________________________________

     Name:

     Title:

NOTICE OF EXERCISE

To:     NOVATION COMPANIES, INC.

(1)     ()The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)     () Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

_______________________________

The Warrant Shares shall be delivered to the following DWAC Account Number, in the following name on the books and records of the Company’s transfer agent or by physical delivery of a certificate to:

_______________________________

_______________________________

_______________________________

(3) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[SIGNATURE OF HOLDER]

Name of Investing Entity: ________________________________________________________________________

Signature of Authorized Signatory of Investing Entity: _________________________________________________

Name of Authorized Signatory: ___________________________________________________________________

Title of Authorized Signatory: ____________________________________________________________________

Date: ________________________________________________________________________________________

ASSIGNMENT FORM

(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

Dated: ______________, _______

Holder’s Signature:     _____________________________

Holder’s Address:     _____________________________

_____________________________

Signature Guaranteed: ___________________________________________

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David W. Pointer, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Novation Companies, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

DATE:	August 12, 2019	/s/ David W. Pointer
		David W. Pointer
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Carolyn K. Campbell, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Novation Companies, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

DATE:	August 12, 2019	/s/ Carolyn K. Campbell
		Carolyn K. Campbell
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 

In connection with the Quarterly Report of Novation Companies, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David W. Pointer, Chief Executive Officer of the Company, certify as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

DATE:	August 12, 2019	/s/ David W. Pointer
		David W. Pointer
		Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 

In connection with the Quarterly Report of Novation Companies, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carolyn K. Campbell, Chief Financial Officer of the Company, certify as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

DATE:	August 12, 2019	/s/ Carolyn K. Campbell
		Carolyn K. Campbell
		Chief Financial Officer

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2019	Aug. 08, 2019
Document Information [Line Items]
Entity Registrant Name	NOVATION COMPANIES, INC.
Entity Central Index Key	0001025953
Trading Symbol	novc
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)		101,303,893
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Jun. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 4,256	$ 9,249
Accounts and unbilled receivables	6,149	6,122
Prepaid expenses	478	350
Other	22	131
Total current assets	10,905	15,852
Non-current assets:
Goodwill	5,605	8,205
Intangible assets, net	6,380	6,978
Operating lease right-of-use asset	294
Other	99	95
Total non-current assets	12,378	15,278
Total assets	23,283	31,130
Current liabilities:
Accounts payable and accrued expenses	518	670
Accrued compensation and benefits payable	3,530	2,731
Borrowings under revolving line of credit		1,948
Operating lease liability	148
Accrued interest payable	1,323	1,295
Accrued claim settlements	246	459
Other	11	35
Total current liabilities	5,776	7,138
Non-current liabilities:
Long-term debt	85,938	85,969
Accrued claim settlements	430	553
Operating lease liability	155
Other	100	426
Total non-current liabilities	86,623	86,948
Total liabilities	92,399	94,086
Shareholders' deficit:
Common stock, $.01 par value per share, 780,000,000 shares authorized: 101,303,893 and 99,137,893 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	1,013	991
Additional paid-in capital	745,235	745,104
Accumulated deficit	(815,364)	(809,050)
Accumulated other comprehensive loss		(1)
Total shareholders' deficit	(69,116)	(62,956)
Total liabilities and shareholders' deficit	$ 23,283	$ 31,130

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Jun. 30, 2019	Dec. 31, 2018
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	780,000,000	780,000,000
Common stock, shares issued (in shares)	101,303,893	99,137,893
Common stock, shares outstanding (in shares)	101,303,893	99,137,893

XML

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Service fee income	$ 16,297	$ 13,270	$ 32,151	$ 26,490
Cost and expenses:
Cost of services	14,518	11,768	28,615	23,492
General and administrative expenses	2,206	1,890	4,463	4,151
Goodwill impairment	2,600		2,600
Operating loss	(3,027)	(388)	(3,527)	(1,153)
Interest income - mortgage securities		453		916
Other income	23	1,925	4	2,938
Interest expense	(1,324)	(1,345)	(2,706)	(2,548)
Reorganization items, net	(31)	(1,610)	(62)	(1,750)
Loss before income taxes	(4,359)	(965)	(6,291)	(1,597)
Income tax expense (benefit)	11	7	4	(8)
Net loss	(4,370)	(972)	(6,295)	(1,589)
Other comprehensive loss:
Reclassification gain on marketable securities included in net income		(1,956)		(2,931)
Unrealized gain (loss) on marketable securities		611	1	(1,801)
Total other comprehensive income (loss)		(1,345)	1	(4,732)
Total comprehensive loss	$ (4,370)	$ (2,317)	$ (6,294)	$ (6,321)
Loss per share:
Basic (in dollars per share)	$ (0.05)	$ (0.01)	$ (0.07)	$ (0.02)
Diluted (in dollars per share)	$ (0.05)	$ (0.01)	$ (0.07)	$ (0.02)
Weighted average common shares outstanding:
Basic (in shares)	97,675,946	93,658,567	95,103,986	93,416,496
Diluted (in shares)	97,675,946	93,658,567	95,103,986	93,416,496

XML

Condensed Consolidated Statements of Shareholders' Deficit (Unaudited) - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balance at Dec. 31, 2017	$ 971	$ 744,937	$ (815,185)	$ 11,394	$ (57,883)
Compensation recognized under stock compensation plans		103			103
Net loss			(1,589)		(1,589)
Other comprehensive income (loss)				(4,732)	(4,732)
Cancellations of nonvested shares	(11)	11
Balance at Jun. 30, 2018	960	745,051	(816,774)	6,662	(64,101)
Balance at Mar. 31, 2018	971	744,983	(815,802)	8,007	(61,841)
Compensation recognized under stock compensation plans		57			57
Net loss			(972)		(972)
Other comprehensive income (loss)				(1,345)	(1,345)
Cancellations of nonvested shares	(11)	11
Balance at Jun. 30, 2018	960	745,051	(816,774)	6,662	(64,101)
Balance at Dec. 31, 2018	991	745,104	(809,050)	(1)	(62,956)
Issuances and cancellations of nonvested shares	22	(22)
Compensation recognized under stock compensation plans		153			153
Net loss			(6,295)		(6,295)
Adjustment to retained earnings for adoption of accounting standard			(19)		(19)
Other comprehensive income (loss)				1	1
Balance at Jun. 30, 2019	1,013	745,235	(815,364)		(69,116)
Balance at Mar. 31, 2019	1,016	745,149	(810,994)		(64,829)
Compensation recognized under stock compensation plans		83			83
Net loss			(4,370)		(4,370)
Adjustment to retained earnings for adoption of accounting standard
Other comprehensive income (loss)
Cancellations of nonvested shares	(3)	3
Balance at Jun. 30, 2019	$ 1,013	$ 745,235	$ (815,364)		$ (69,116)

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Cash flows from operating activities:
Net loss	$ (6,295)	$ (1,589)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of marketable securities, net		(60)
Amortization of intangible assets	598	598
Amortization of prepaid expenses	432	198
Realized gain on marketable securities		(2,931)
Depreciation expense	14	223
Settlement claims	(336)	1,487
Lease expense	(9)
Goodwill impairment	2,600
Compensation recognized under stock compensation plans	153	103
Changes in operating assets and liabilities
Accounts and unbilled receivables	(27)	1,769
Accounts payable and accrued expenses	(152)	(1,430)
Accrued compensation and benefits payable	799	(1,423)
Accrued interest payable	28	199
Other current assets and liabilities, net	(475)	470
Other noncurrent assets and liabilities, net	(327)	335
Net cash used in operating activities	(2,997)	(2,051)
Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities		2,931
Purchase of property and equipment	(17)
Net cash provided by (used in) investing activities	(17)	2,931
Cash flows from financing activities:
Borrowings under revolving line of credit	8,685	27,138
Repayments of borrowings under revolving line of credit	(10,633)	(28,259)
Paydowns of long-term debt	(31)	(77)
Net cash used in financing activities	(1,979)	(1,198)
Net decrease in cash and cash equivalents	(4,993)	(318)
Cash and cash equivalents, beginning of period	9,249	2,740
Cash and cash equivalents, end of period	4,256	2,422
Supplemental disclosure of cash flow information:
Cash paid for interest	2,693	2,349
Cash paid for reorganization items		$ 1,072

XML

Note 1 - Condensed Consolidated Financial Statement Presentation

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

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 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”.

Liquidity and Going Concern –

During the

six

months ended

June 30, 2019

, the Company incurred a net loss of $

6.3

million and generated negative operating cash flow of $

3.0

million. As of

June 30, 2019

, the Company had an overall shareholders deficit of $

69.1

million, an aggregate of $

4.3

million in cash and cash equivalents and total liabilities of $

92.4

million. Of the $

4.3

million in cash, $

0.9

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.

While HCS has demonstrated that it can provide positive cash flow sufficient to support HCS operations, management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers and targeting new customers that have

not

previously been served by HCS.

After engaging major investment firms to evaluate the marketplace for its mortgage securities, the Company executed trades to sell all of its mortgage securities during

2018.

These sales generated

$13.0

million in cash proceeds for the Company. For the year ended

December 31, 2018,

the Company recorded

$12.9

million in gains in other income in the Statements of Operations and Comprehensive Income (Loss) related to the sale of these securities. However, the Company will

no

longer have any future cash flows from these securities since they were sold. 

The Company had significant on-going obligations 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. 

The last interest payment on long-term debt made on

July 1, 2019

was 

$1.3

million. See Note

11

to the condensed consolidated financial statements regarding the amendment to the Note Purchase Agreement, which significantly reduces the interest rate due under the senior notes agreement from

January 2019

through the end of

2028

and allows the Company to apply the surplus interest paid on

April 1, 2019

and

July 1, 2019

against future quarterly interest payments.

While our historical operating results and poor cash flow suggest substantial doubt exists related to the Company's ability to continue as a going concern, with the amendment to the senior notes agreement, the Company's cash position is forecasted to be sufficient to cover current and on-going obligations. As a result, management has concluded that the factors discussed above have alleviated 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.

The accompanying condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  However, we cannot provide assurance that revenue and cash generated from HCS will be sufficient to sustain our operations in the long term. 

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.

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, 2018

(the "

2018

Form

10

-K").

Recent Accounting Pronouncements Adopted in

2019

 - 

In

February 2016,

the FASB established Topic

842,

Leases

, by issuing Accounting Standards Update (ASU)

No.

2016

-

02,

which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic

842

was subsequently amended by ASU

No.

2018

-

01,

Land Easement Practical Expedient for Transition to Topic

842;

ASU

No.

2018

-

10,

Codification Improvements to Topic

842,

Leases; and ASU

No.

2018

-

11,

Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than

12

months. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement.  The Company adopted ASU

No.

2016

-

02

using the modified retrospective method. See Note

6

to the condensed consolidated financial statements for further details.

XML

Note 2 - Reorganization

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Reorganization under Chapter 11 of US Bankruptcy Code Disclosure [Text Block]

Note

2.

Reorganization

On

July 

20,

2016,

(the "Bankruptcy Petition Date"), Novation and

three

of its subsidiaries, NMLLC, NovaStar Mortgage Funding Corporation and

2114

Central LLC (collectively, the “Debtors”), filed voluntary petitions (the "Bankruptcy Petitions") for reorganization under Chapter

11

of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland (the "Bankruptcy Court"). The Company and

one

of its subsidiaries subsequently filed with the Bankruptcy Court, and amended, a plan of reorganization for the resolution of the outstanding claims against and interests pursuant to Section

1121

(a) of the Bankruptcy Code (as amended as supplemented, the “Plan”) and a related disclosure statement. The Bankruptcy Court entered an order on

June 12, 2017,

confirming the Plan (the “Confirmation Order”) solely with respect to the Company, which provided that the effective date of the Plan will occur when all conditions precedent to effectiveness, as set forth in the Plan, have been satisfied or waived. Two of the conditions to the effectiveness of the Plan were (i) the closing of the Company’s acquisition (the “HCS Acquisition”) of all of the capital stock of HCS and (ii) the restructuring of the Company’s then outstanding senior notes. The HCS Acquisition and the note restructuring were completed on

July 27, 2017

and the Company filed a Notice of Occurrence of Effective Date of the Plan with the Bankruptcy Court. Under the Plan, holders of existing equity interests in the Company (i.e., the common stock) retained their interests. On

September 25, 2017,

the bankruptcy case of

2114

Central, LLC was dismissed by order of the Bankruptcy Court. Thereafter, on

December 22, 2017,

NMLLC filed with the Bankruptcy Court a Chapter

11

plan of reorganization, and on

December 26, 2017

filed a related disclosure statement. The Bankruptcy Court entered an order on

February 16, 2018

approving the disclosure statement, as revised. On

April 11, 2018,

the Bankruptcy Court confirmed NMLLC’s plan of reorganization. This plan allows NMLLC to exit bankruptcy, but prohibits the use of NMLLC assets for anything other than for the payment of NMLLC obligations. On

April 19, 2019,

the Bankruptcy Court approved the Motion for Final Decrees for Novation and NMLLC.  On

July 16, 2019,

the bankruptcy case of NovaStar Mortgage Funding Corporation was dismissed by order of the Bankruptcy Court.

The Company incurred significant costs in

2016

and

2017

associated with our reorganization and the Chapter

11

proceedings. These costs are expensed as incurred, and have decreased significantly since

2017

and

2018.

  Reorganization expenses for the 

six

months ended 

June 30, 2019

and 

June 30, 2018

were $

0.06

million and $

1.8

million, respectively.

XML

Note 3 - Revenue; Accounts and Unbilled Receivables

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note

3.

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.

	Six Months Ended June 30, 2019				Three Months Ended June 30, 2019				Six Months Ended June 30, 2018				Three Months Ended June 30, 2018
Type of Customer
CSB	$	31,033	96.5	%	$	15,778	96.8	%	$	25,537	96.4	%	$	12,793	96.4	%
Other		1,118	3.5	%		519	3.2	%		953	3.6	%		477	3.6	%
Total	$	32,151	100.0	%	$	16,297	100.0	%	$	26,490	100.0	%	$	13,270	100.0	%

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

	June 30, 2019 (unaudited)		December 31, 2018
Accounts receivable	$	3,476	$	3,952
Unbilled receivables (Contract Assets)		2,673		2,170
Total	$	6,149	$	6,122

As of

June 30, 2019

and

December 31, 2018

, management has determined

no

allowance for doubtful accounts is necessary. For the

six

months ended

June 30, 2019

, 

52%

of service fee income was generated from

three

customers. For the

six

months ended

June 30, 2018

, 

55%

of service fee income was generated from 

four

customers. As of

June 30, 2019

 and 

June 30, 2018

, 

68%

and 

77%

of accounts receivables and unbilled receivables were due from 

five

and 

six

customers, respectively. At 

June 30, 2019

 and 

June 30, 2018

, 

96%

and 

95%

of accounts receivables and unbilled receivables were due from

14

Community Service Board customers, respectively.

XML

Note 4 - Marketable Securities

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

Note

4.

Marketable Securities

Prior to

2018,

the Company originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage securities. As a result of those activities, the Company held mortgage securities that were a source of its earnings and cash flow. These mortgage securities consisted entirely of the Company's investment in the interest-only and overcollateralization bonds issued by securitization trusts sponsored by the Company. Maturities of these retained mortgage securities depend on repayment characteristics, performance and other experience of the underlying financial instruments. During

2018,

the Company sold all but

33

non-performing mortgage securities. These sales generated proceeds of

$13.0

million and realized gains of

$12.9

million recognized, included in other income in the Company's consolidated statements of operations and comprehensive income (loss). Of the

33

mortgage securities retained, the Company determined that these securities have

no

fair value. There were other-than-temporary impairments relating to available-for-sale securities in

2018

of

$0.3

million.

As part of the mortgage securitization process, the Company owned the mortgage servicing rights on the mortgage loans in each securitization deal. These servicing rights were sold to a

third

party on

October 12, 2007

as documented in the Servicing Rights Transfer Agreement by and between Saxon Mortgage Services as purchaser and NovaStar Mortgage, Inc. as seller, which was discussed in the Company's

third

quarter

2007

report on Form

10

-Q. As part of this transaction, the Company retained the clean-up call rights for most of the securitization deals. The Company attempted to sell the clean-up call rights with the securities sold in

2018.

  However,

no

bids were received for the clean-up call rights and the Company determined these clean-up call rights have

no

 fair value.  

See Note

9

to the condensed consolidated financial statements for details on the Company's fair value methodology.

XML

Note 5 - Goodwill and Intangible Assets

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

Note

5.

Goodwill and Intangible Assets

	June 30, 2019 (unaudited)						December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Indefinite-lived assets (in thousands)
Goodwill	$	5,605	$	-	$	5,605	$	8,205	$	-	$	8,205
Tradenames		1,147		-		1,147		1,147		-		1,147
	$	6,752	$	-	$	6,752	$	9,352	$	-	$	9,352
Finite-lived assets (in thousands)
Customer relationships	$	6,895	$	1,888	$	5,007	$	6,895	$	1,395	$	5,500
Non-compete agreement		627		401		226		627		296		331
	$	7,522	$	2,289	$	5,233	$	7,522	$	1,691	$	5,831

Amortization expense (unaudited, in thousands)
Six Months Ended June 30, 2019	$	598
Estimated future amortization expense (unaudited, in thousands)
2019	$	596
2020		1,107
2021		985
2022		985
Thereafter		1,560
Total estimated amortization expense	$	5,233

	June 30, 2019, (unaudited)
Goodwill activity (in thousands):
Beginning balance	$	8,205
Impairment charge		(2,600	)
Ending balance	$	5,605

Management completed its annual goodwill impairment assessment as of

April 30, 2019. 

Increased cost of services and administrative expenses at HCS have resulted in declining cash flow for the business.  Based on the likelihood of these expenses remaining higher than initially forecast, management determined that the carrying value of the HCS goodwill exceeded its fair value by

$2.6

million. A goodwill impairment charge in this amount has been recorded for the quarter. Management assessed the other indefinite and definite lived intangible assets and determined

no

impairment was necessary.

XML

Note 6 - Leases

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

Note

6.

Leases

We adopted ASU

No.

2016

-

02—Leases

(Topic

842

), as amended, as of

January 1, 2019,

using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. The Company elected to adopt the ‘package of practical expedients’, which permitted the Company

not

to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs, the practical expedients pertaining to land easements, the use-of hindsight, the short-term lease recognition exemption for all leases that qualified, and the practical expedient to

not

separate lease and non-lease components for all leases other than leases of real estate.

Adoption of the new standard resulted in the recording of an additional net operating lease right-of-use asset and operating lease liability of approximately

$0.2

million each, as of

January 1, 2019.

The difference between the additional lease assets and lease liabilities was recorded as an adjustment to accumulated deficit. The standard did

not

materially impact our consolidated net loss and had

no

impact on cash flows.  The Company does

not

have any finance 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 balance sheet.  For these leases we recognize lease expense on a straight-line basis over the lease term.

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

June 30, 2019

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):

	June 30, 2019 (unaudited)
Remaining 2019	$	86
2020		133
2021		88
Thereafter		20
Total	$	327
Less interest		24
Present value of lease liabilities	$	303

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

	June 30, 2019 (unaudited)
Supplemental Cash Flow Information
Operating cash flows from leases	$	(9	)
Lease Term and Discount Rate
Weighted average remaining lease term (years)		2.10
Weighted average discount rate		6.75	%

XML

Note 7 - Borrowings

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Debt Disclosure [Text Block]

Note

7.

Borrowings

Revolving Credit Agreement — 

As of  

December 31, 2018

, HCS had $

1.9

 million outstanding under a Revolving Credit and Security Agreement (the “White Oak Credit Agreement”) between HCS and White Oak Global Advisors, LLC ("White Oak'), which provided HCS with a line of credit of up to

$5,000,000.

 The White Oak Credit Agreement was originally with Federal National Payables, Inc. (d/b/a Federal National Commercial Credit) (“FNCC”), which White Oak acquired in

February 2018.

Availability under the White Oak Credit Agreement was based on a formula tied to HCS’s eligible accounts receivable. Borrowings bore interest at the prime rate plus

1.25%.

The initial term of the White Oak Credit Agreement expired on

November 17, 2018,

but was renewed automatically for a consecutive

one

-year term per the provisions of the White Oak Credit Agreement. The obligations of HCS under the White Oak Credit Agreement were secured by HCS’s inventory and accounts receivable. The White Oak Credit Agreement provided for customary origination and collateral monitoring fees payable to White Oak during its term, customary representations, warranties and affirmative and negative covenants, including but

not

limited to financial covenants and contained 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, White Oak was able to, among other remedies, have accelerated payment of all obligations under the White Oak Credit Agreement. In connection with the White Oak Credit Agreement, the Company executed a guaranty in favor of White Oak guaranteeing all of HCS’s obligations under the White Oak Credit Agreement. HCS terminated the White Oak Credit Agreement in

February 2019

and the Company fully repaid the all the outstanding obligations at that time. 

Note Refinancing and

2017

Notes —

The Company has

$85.9

million in aggregate borrowings outstanding under

three

senior secured promissory notes (the

"2017

Notes"). The unpaid principal amounts of the

2017

Notes bear interest at a variable rate equal to LIBOR plus

3.5%

per annum, payable quarterly in arrears until maturity on

March 30, 2033.

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. The refinancing was completed through the execution of the Senior Secured Note Purchase Agreement, dated as of the same date (the “Note Purchase Agreement”), with NHI and HCS as guarantors (together with the Company, collectively, the “Credit Parties”).

The Note Purchase Agreement contains customary affirmative and negative covenants, including but

not

limited to certain financial covenants. 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.

See Note

11

to the condensed consolidated financial statements for details on the amendment to the Note Purchase Agreement which was signed subsequent to the quarter ended

June 30, 2019.

XML

Note 8 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

Note

8.

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.

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. 

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. 

On

June 20, 2011,

the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On

August 24, 2012,

the plaintiff filed an amended complaint making essentially the same claims against NMFC. NMFC filed a motion to dismiss the amended complaint which was denied on

September 12, 2013.

The defendants claimed the case should be dismissed based upon a statute of limitations and sought an appeal of the court's denial of this defense. An interlocutory appeal of this issue was allowed, and on

August 27, 2013,

the United States Court of Appeals for the Tenth Circuit (the "Tenth Circuit") affirmed the lower court’s denial of defendants’ motion to dismiss the plaintiff’s claims as being time barred; the Tenth Circuit held that the Extender Statute,

12

U.S.C.

§1787

(b)(

14

) applied to plaintiff’s claims. On

June 16, 2014,

the United States Supreme Court (the "Supreme Court") granted a petition of NMFC and its co-defendants for certiorari, vacated the ruling of the Tenth Circuit, and remanded the case back to that court for further consideration in light of the Supreme Court’s decision in CTS Corp. v. Waldburger,

134

S. Ct.

2175

(

2014

). On

August 19, 2014,

the Tenth Circuit reaffirmed its prior decision, and on

October 2, 2014,

the defendants filed a petition for writ of certiorari with the Supreme Court, which was denied. On

March 22, 2016,

NMFC filed motions for summary judgment, and plaintiff filed a motion for partial summary judgment. Those motions remain pending. Given that plaintiff did

not

file a timely proof of claim in NMFC’s bankruptcy case, the Company believes it is likely that the case will be dismissed. The Company believes that NMFC has meritorious defenses to the case and expects it to defend the case vigorously in the event it proceeds.

On

February 28, 2013,

the Federal Housing Finance Agency, as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) and purportedly on behalf of the Trustee of the NovaStar Mortgage Funding Trust, Series

2007

-

1

(the “Trust”), a securitization trust in which the Company retains a residual interest, filed a summons with notice in the Supreme Court of the State of New York, New York County against the Company and NMI. The notice provides that this is a breach of contract action with respect to certain, unspecified mortgage loans and defendants’ failure to repurchase such loans under the applicable agreements. Plaintiff alleges that defendants, from the closing date of the transaction that created the Trust, were aware of the breach of the representations and warranties made and failed to give notice of and cure such breaches, and due to the failure of defendants to cure any breach, notice to defendants would have been futile. The summons with notice was

not

served until

June 28, 2013.

By letter dated

June 24, 2013,

the Trustee of the Trust forwarded a notice from Freddie Mac alleging breaches of representations and warranties with respect to

43

loans, as more fully set forth in included documentation. The

43

loans had an aggregate, original principal balance of about

$6.5

million. On

August 19, 2013,

Deutsche Bank National Trust Company, as Trustee, filed a complaint identifying alleged breaches of representations and warranties with respect to

seven

loans that were included in the earlier list of

43

loans. Plaintiff also generally alleged a trust-wide breach of representations and warranties by defendants with respect to loans sold and transferred to the trust. Plaintiff seeks specific performance of repurchase obligations; compensatory, consequential, recessionary and equitable damages for breach of contract; specific performance and damages for anticipatory breach of contract; indemnification (indemnification against NMI only) and damages for breach of the implied covenant of good faith and fair dealing. On

October 9, 2013,

the Company and NMI filed a motion to dismiss plaintiff’s complaint.

This motion to dismiss was withdrawn after plaintiff filed an amended complaint on

January 28, 2014,

and on

March 4, 2014,

the Company and NMI filed a motion to dismiss the amended complaint. By a Decision/Order dated

November 30, 2017,

the court granted in part and denied in part the motion to dismiss the amended complaint. The court dismissed all claims except for plaintiff’s claim for damages for breach of contract, to the extent that claim is based on the Company’s and NMI’s alleged failure to notify plaintiff of allegedly defective loans, and plaintiff’s claim for indemnification. The court denied the motion to dismiss these claims without prejudice to the Company’s and NMI’s right to file a new motion to dismiss in conformity with procedures to be established in coordinated proceedings before the court addressing similar claims against numerous defendants. Briefing of the indemnification issue was completed.

The parties have reached a settlement of this matter.  On

October 25, 2018,

the bankruptcy court overseeing the Company's bankruptcy case entered an order approving the settlement, and on

November 19, 2018,

the New York State Court "so ordered" a Stipulation of Voluntary Discontinuance terminating the case.  Pursuant to the terms of the settlement agreement, the required upfront payment of

$0.3

million was made on

March 1, 2019. 

The settlement also requires equal quarterly installments over a

three

year period, which total an additional

$0.3

million.  Based on the probability of all contingencies associated with the settlement being satisfied, the Company recorded an expense in the

second

quarter of

2018

in the Reorganization Items, net expense line item of the income statement and the short and long-term liability totals in the applicable Accrued Settlement Claims lines per the balance sheet.

DB Structured Products, Inc., Deutsche Bank AG, Deutsche Bank National Trust Company, Deutsche Bank Securities Inc., Greenwich Capital Derivatives, Inc., RBS Acceptance Inc., RBS Financial Products Inc., RBS Securities Inc., The Royal Bank of Scotland PLC, Wachovia Investment Holdings, LLC, Wells Fargo & Company, Wells Fargo Advisors, LLC, Wells Fargo Bank, N.A. and Wells Fargo Securities, LLC (collectively, the “Indemnity Claimants”) filed proofs of claim in the Company’s bankruptcy case asserting the right to be indemnified by the Company for, and/or to receive contribution from the company in respect of, certain liabilities incurred as a result of their roles in the issuance of residential mortgage-backed securities sponsored by the Company.  The Company filed an objection in the bankruptcy case seeking to disallow and expunge the Indemnity Claimants’ proofs of claim.  The Indemnity Claimants’ claims were

not

discharged by the confirmation of the Company’s plan of reorganization, and the bankruptcy court has

not

ruled on the Company’s objection to those claims.

The parties have reached a settlement in this matter, which was approved by the court on

November 29, 2018. 

This settlement includes an upfront payment of

$0.5

million, which was paid on

December 21, 2018. 

In addition, the settlement provides for equal quarterly installments over a

three

year period, which total an additional

$0.4

million.  Based on the probability of this settlement receiving court approval, the Company recorded an expense during the

second

quarter of

2018

 in the Reorganization Items, net expense line item of the income statement and the short and long-term liability totals in the applicable Accrued Settlement Claims lines per the balance sheet.

XML

Note 9 - Fair Value Accounting

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note

9.

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.

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):

	June 30, 2019 (unaudited)				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Equity securities (Level 1)	$	1	$	1	$	1	$	1
Financial liabilities:
Senior notes (Level 3)	$	85,938	$	22,348	$	85,938	$	24,659

The equity securities are valued based on quoted market prices and are included in other current assets on the condensed consolidated balance sheets. The senior 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 senior 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.

Senior Notes

—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

three

-month LIBOR plus 

3.5%

per annum until maturity in

March 2033.

The

three

-month LIBOR used in the analysis was projected using a forward interest rate curve.

Financial assets reported at fair value (Level

3

) on a nonrecurring basis include the following (in thousands):

	June 30, 2019 (unaudited)
	Fair Value (Level 3)		Gains and (Losses)
Goodwill	$	5,605	$	(2,600	)

See Note

5

for additional information regarding the Company's Goodwill and Intangible Assets.

XML

Note 10 - Income Taxes

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note

10.

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

June 30, 2019

and

December 31, 2018

, the Company maintained a full valuation allowance against its net deferred tax assets of

$

164.9

million and $

164.0

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 30, 2019

, the Company had a federal NOL of approximately

$

730.0

million, i

ncluding

$

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 

2018

tax return has

not

been filed as of the date of this report, however the estimated federal NOL that does

not

expire included in the total above is $

20.0

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

.

XML

Note 11 - Subsequent Events

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Subsequent Events [Text Block]

Note

11.

Subsequent Events

As discussed in Note

7

to the condensed consolidated financial statements, the Company has

$85.9

million in aggregate borrowings outstanding under the

2017

Notes. The Company and Noteholders executed a First Amendment to Senior Secured Note Purchase Agreement (the "Amendment") amending the terms of the Note Purchase Agreement and

2017

Notes on

August 9, 2019. 

The Amendment modifies the interest rate of the

2017

Notes as follows -

1%

interest rate per annum from

April 1, 2019

through

December 31, 2023,

2%

interest rate per annum from

January 1, 2024

through

December 31, 2028

and

10%

interest rate per annum from

January 1, 2029

through the maturity date on

March 30, 2033.   

Additionally, the Company will be required to remit

50%

of excess cash flow each year, as defined per the Amendment, to the Noteholders to be applied as a principal reduction to the outstanding balance of the debt. The financial covenants required under the Note Purchase Agreement are waived until the quarter ending

December 31, 2021.

Under the terms of the Amendment, the Company issued

9,000,000

shares of common stock of the Company to the Noteholders upon execution of the Amendment.  In addition, the Company has issued

ten

-year warrants allowing the Noteholders to purchase

22,250,000

shares of the Company's common stock, at an exercise price of

$.01

per share.

On

April 1, 2019

and on

July 1, 2019,

the Company made payments under the

2017

Notes totaling

$2.7

million.  The actual aggregate amounts due under the Amendment for those dates totaled

$0.4

million.  Under the terms of the Amendment, the Company is allowed to apply this payment surplus of

$2.2

million against future quarterly interest payments.  At the

1%

annual interest rate per the Amendment, the Company will

not

have another quarterly interest payment due until

April 1, 2022.

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2019

Accounting Policies [Abstract]

Liquidity and Going Concern [Policy Text Block]

Liquidity and Going Concern –

During the

six

months ended

June 30, 2019

, the Company incurred a net loss of $

6.3

million and generated negative operating cash flow of $

3.0

million. As of

June 30, 2019

, the Company had an overall shareholders deficit of $

69.1

million, an aggregate of $

4.3

million in cash and cash equivalents and total liabilities of $

92.4

million. Of the $

4.3

million in cash, $

0.9

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.

While HCS has demonstrated that it can provide positive cash flow sufficient to support HCS operations, management continues to work toward expanding HCS’s customer base by increasing revenue from existing customers and targeting new customers that have

not

previously been served by HCS.

After engaging major investment firms to evaluate the marketplace for its mortgage securities, the Company executed trades to sell all of its mortgage securities during

2018.

These sales generated

$13.0

million in cash proceeds for the Company. For the year ended

December 31, 2018,

the Company recorded

$12.9

million in gains in other income in the Statements of Operations and Comprehensive Income (Loss) related to the sale of these securities. However, the Company will

no

longer have any future cash flows from these securities since they were sold. 

The Company had significant on-going obligations 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. 

The last interest payment on long-term debt made on

July 1, 2019

was 

$1.3

million. See Note

11

to the condensed consolidated financial statements regarding the amendment to the Note Purchase Agreement, which significantly reduces the interest rate due under the senior notes agreement from

January 2019

through the end of

2028

and allows the Company to apply the surplus interest paid on

April 1, 2019

and

July 1, 2019

against future quarterly interest payments.

While our historical operating results and poor cash flow suggest substantial doubt exists related to the Company's ability to continue as a going concern, with the amendment to the senior notes agreement, the Company's cash position is forecasted to be sufficient to cover current and on-going obligations. As a result, management has concluded that the factors discussed above have alleviated 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.

The accompanying condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  However, we cannot provide assurance that revenue and cash generated from HCS will be sufficient to sustain our operations in the long term. 

Consolidation, Policy [Policy Text Block]

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.

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, 2018

(the "

2018

Form

10

-K").

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements Adopted in

2019

 - 

In

February 2016,

the FASB established Topic

842,

Leases

, by issuing Accounting Standards Update (ASU)

No.

2016

-

02,

which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic

842

was subsequently amended by ASU

No.

2018

-

01,

Land Easement Practical Expedient for Transition to Topic

842;

ASU

No.

2018

-

10,

Codification Improvements to Topic

842,

Leases; and ASU

No.

2018

-

11,

Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than

12

months. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement.  The Company adopted ASU

No.

2016

-

02

using the modified retrospective method. See Note

6

to the condensed consolidated financial statements for further details.

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Note 3 - Revenue; Accounts and Unbilled Receivables (Tables)

6 Months Ended

Jun. 30, 2019

Notes Tables

Disaggregation of Revenue [Table Text Block]

	Six Months Ended June 30, 2019				Three Months Ended June 30, 2019				Six Months Ended June 30, 2018				Three Months Ended June 30, 2018
Type of Customer
CSB	$	31,033	96.5	%	$	15,778	96.8	%	$	25,537	96.4	%	$	12,793	96.4	%
Other		1,118	3.5	%		519	3.2	%		953	3.6	%		477	3.6	%
Total	$	32,151	100.0	%	$	16,297	100.0	%	$	26,490	100.0	%	$	13,270	100.0	%

Contract with Customer, Asset and Liability [Table Text Block]

	June 30, 2019 (unaudited)		December 31, 2018
Accounts receivable	$	3,476	$	3,952
Unbilled receivables (Contract Assets)		2,673		2,170
Total	$	6,149	$	6,122

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Note 5 - Goodwill and Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2019

Notes Tables

Schedule of Intangible Assets and Goodwill [Table Text Block]

	June 30, 2019 (unaudited)						December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Indefinite-lived assets (in thousands)
Goodwill	$	5,605	$	-	$	5,605	$	8,205	$	-	$	8,205
Tradenames		1,147		-		1,147		1,147		-		1,147
	$	6,752	$	-	$	6,752	$	9,352	$	-	$	9,352
Finite-lived assets (in thousands)
Customer relationships	$	6,895	$	1,888	$	5,007	$	6,895	$	1,395	$	5,500
Non-compete agreement		627		401		226		627		296		331
	$	7,522	$	2,289	$	5,233	$	7,522	$	1,691	$	5,831

Finite-lived Intangible Assets Amortization Expense [Table Text Block]

Amortization expense (unaudited, in thousands)
Six Months Ended June 30, 2019	$	598
Estimated future amortization expense (unaudited, in thousands)
2019	$	596
2020		1,107
2021		985
2022		985
Thereafter		1,560
Total estimated amortization expense	$	5,233

Schedule of Goodwill [Table Text Block]

	June 30, 2019, (unaudited)
Goodwill activity (in thousands):
Beginning balance	$	8,205
Impairment charge		(2,600	)
Ending balance	$	5,605

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Note 6 - Leases (Tables)

6 Months Ended

Jun. 30, 2019

Notes Tables

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

	June 30, 2019 (unaudited)
Remaining 2019	$	86
2020		133
2021		88
Thereafter		20
Total	$	327
Less interest		24
Present value of lease liabilities	$	303

Operating Lease, Other Information [Table Text Block]

	June 30, 2019 (unaudited)
Supplemental Cash Flow Information
Operating cash flows from leases	$	(9	)
Lease Term and Discount Rate
Weighted average remaining lease term (years)		2.10
Weighted average discount rate		6.75	%

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Note 9 - Fair Value Accounting (Tables)

6 Months Ended

Jun. 30, 2019

Notes Tables

Fair Value, by Balance Sheet Grouping [Table Text Block]

	June 30, 2019 (unaudited)				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Equity securities (Level 1)	$	1	$	1	$	1	$	1
Financial liabilities:
Senior notes (Level 3)	$	85,938	$	22,348	$	85,938	$	24,659

Fair Value Measurements, Nonrecurring [Table Text Block]

	June 30, 2019 (unaudited)
	Fair Value (Level 3)		Gains and (Losses)
Goodwill	$	5,605	$	(2,600	)

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Note 1 - Condensed Consolidated Financial Statement Presentation (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018	Dec. 31, 2017	Mar. 31, 2019	Mar. 31, 2018
Common Stock, Par or Stated Value Per Share	$ 0.01		$ 0.01		$ 0.01
Net Income (Loss) Attributable to Parent, Total	$ (4,370)	$ (972)	$ (6,295)	$ (1,589)
Net Cash Provided by (Used in) Operating Activities, Total			(2,997)	(2,051)
Stockholders' Equity Attributable to Parent, Ending Balance	(69,116)	$ (64,101)	(69,116)	(64,101)	$ (62,956)	$ (57,883)	$ (64,829)	$ (61,841)
Cash and Cash Equivalents, at Carrying Value, Ending Balance	4,256		4,256		9,249
Liabilities, Total	92,399		92,399		94,086
Interest Paid, Excluding Capitalized Interest, Operating Activities			$ 2,693	$ 2,349
Senior Notes [Member] | The 2017 Notes [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate			3.50%			3.50%
Interest Paid, Excluding Capitalized Interest, Operating Activities			$ 1,300
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Proceeds from Sale of Debt Securities, Available-for-sale					13,000
Debt Securities, Available-for-sale, Realized Gain					$ 12,900
NovaStar Mortgage LLC [Member]
Cash and Cash Equivalents, at Carrying Value, Ending Balance	$ 900		$ 900

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Note 2 - Reorganization (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Reorganization Items, Total	$ 31	$ 1,610	$ 62	$ 1,750

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Note 3 - Revenue; Accounts and Unbilled Receivables (Details Textual) $ in Thousands	6 Months Ended		15 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Mar. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Customer Contracts, Notice of Termination Period			60 days
Accounts Receivable, Allowance for Credit Loss, Ending Balance			$ 0	$ 0
Customer Concentration Risk [Member] | Revenue Benchmark [Member]
Number of Major Customers	3	4
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Three Customers [Member]
Concentration Risk, Percentage	52.00%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Four Customers [Member]
Concentration Risk, Percentage		55.00%
Customer Concentration Risk [Member] | Accounts and Unbilled Receivables [Member]
Number of Major Customers	5	6
Customer Concentration Risk [Member] | Accounts and Unbilled Receivables [Member] | Five Non CSB Customers [Member]
Concentration Risk, Percentage	68.00%
Customer Concentration Risk [Member] | Accounts and Unbilled Receivables [Member] | Six Non CSB Customers [Member]
Concentration Risk, Percentage		77.00%
Customer Concentration Risk [Member] | Accounts and Unbilled Receivables [Member] | Fourteen CSB Customers [Member]
Concentration Risk, Percentage	96.00%	95.00%
Customer Concentration Risk [Member] | Accounts and Unbilled Receivables [Member] | CSB Customers [Member]
Number of Major Customers	14	14

XML

Note 3 - Revenue; Accounts and Unbilled Receivables - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Financial services revenue, amount	$ 16,297	$ 13,270	$ 32,151	$ 26,490
Financial services revenue, percentage	100.00%	100.00%	100.00%	100.00%
CSB Customers [Member]
Financial services revenue, amount	$ 15,778	$ 12,793	$ 31,033	$ 25,537
Financial services revenue, percentage	96.80%	96.40%	96.50%	96.40%
Non-CSB Customers [Member]
Financial services revenue, amount	$ 519	$ 477	$ 1,118	$ 953
Financial services revenue, percentage	3.20%	3.60%	3.50%	3.60%

XML

Note 3 - Revenue; Accounts and Unbilled Receivables - Accounts and Unbilled Receivables (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Accounts receivable	$ 3,476	$ 3,952
Unbilled receivables (Contract Assets)	2,673	2,170
Total	$ 6,149	$ 6,122

XML

Note 4 - Marketable Securities (Details Textual) $ in Thousands	12 Months Ended
	Dec. 31, 2018 USD ($)
Other-than-temporary Impairment Loss, Debt Securities, Available-for-sale, Recognized in Earnings	$ 300
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Number of Debt Securities Unsold	33
Proceeds from Sale of Debt Securities, Available-for-sale	$ 13,000
Debt Securities, Available-for-sale, Realized Gain	12,900
Debt Securities, Available-for-sale, Total	$ 0

XML

Note 5 - Goodwill and Intangible Assets (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Goodwill, Impairment Loss	$ 2,600		$ 2,600
Impairment of Intangible Assets, Indefinite-lived (Excluding Goodwill)			$ 0

XML

Note 5 - Goodwill and Intangible Assets - Summary of Goodwill and Intangible Assets (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Goodwill	$ 5,605	$ 8,205
Tradenames	1,147	1,147
Indefinite-lived assets	6,752	9,352
Finite-lived intangible assets, gross	7,522	7,522
Finite-lived intangible assets, accumulated amortization	2,289	1,691
Finite-lived intangible assets, net	5,233	5,831
Customer Relationships [Member]
Finite-lived intangible assets, gross	6,895	6,895
Finite-lived intangible assets, accumulated amortization	1,888	1,395
Finite-lived intangible assets, net	5,007	5,500
Noncompete Agreements [Member]
Finite-lived intangible assets, gross	627	627
Finite-lived intangible assets, accumulated amortization	401	296
Finite-lived intangible assets, net	$ 226	$ 331

XML

Note 5 - Goodwill and Intangible Assets - Estimated Amortization Expense (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Six Months Ended June 30, 2019	$ 598	$ 598
2019	596
2020	1,107
2021	985
2022	985
Thereafter	1,560
Total estimated amortization expense	$ 5,233

XML

Note 5 - Goodwill and Intangible Assets - Goodwill Activity (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Beginning balance			$ 8,205
Impairment charge	$ (2,600)		(2,600)
Ending balance	$ 5,605		$ 5,605

XML

Note 6 - Leases (Details Textual) - USD ($) $ in Thousands	Jun. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Operating Lease, Right-of-Use Asset	$ 294	$ 200
Operating Lease, Liability, Total	$ 303	$ 200
Minimum [Member]
Lessee, Operating Lease, Renewal Term	1 year
Maximum [Member]
Lessee, Operating Lease, Renewal Term	3 years

XML

Note 6 - Leases - Maturities of lease liabilities (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Jan. 01, 2019
Remaining 2019	$ 86
2020	133
2021	88
Thereafter	20
Total	327
Less interest	24
Present value of lease liabilities	$ 303	$ 200

XML

Note 6 - Leases - Operating Lease Information (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Lease expense	$ (9)
Weighted average remaining lease term (years) (Year)	2 years 36 days
Weighted average discount rate	6.75%

XML

Note 7 - Borrowings (Details Textual) - USD ($)		6 Months Ended	12 Months Ended
	Nov. 17, 2018	Jun. 30, 2019	Dec. 31, 2018	Dec. 31, 2017	Jun. 30, 2017
Line of Credit, Current			$ 1,948,000
Debt Instrument, Term	1 year
Post-modification Notes [Member] | Senior Notes [Member]
Debt Instrument, Face Amount					$ 85,900,000
Post-modification Notes [Member] | London Interbank Offered Rate (LIBOR) [Member] | Senior Notes [Member]
Debt Instrument, Basis Spread on Variable Rate		3.50%
The 2017 Notes [Member] | Senior Notes [Member]
Debt Instrument, Redemption Notice, Number Of Days				30 days
Debt Instrument, Redemption Price, Percentage of Principal Amount Redeemed				101.00%
The 2017 Notes [Member] | London Interbank Offered Rate (LIBOR) [Member] | Senior Notes [Member]
Debt Instrument, Basis Spread on Variable Rate		3.50%		3.50%
Revolving Credit Facility [Member] | White Oak Credit Agreement [Member]
Line of Credit, Current			1,900,000
Line of Credit Facility, Maximum Borrowing Capacity			$ 5,000,000
Revolving Credit Facility [Member] | White Oak Credit Agreement [Member] | Prime Rate [Member]
Debt Instrument, Basis Spread on Variable Rate			1.25%

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Note 8 - Commitments and Contingencies (Details Textual) $ in Millions	Mar. 01, 2019 USD ($)	Dec. 21, 2018 USD ($)	Nov. 29, 2018 USD ($)	Oct. 25, 2018	Jun. 24, 2013 USD ($)	Dec. 31, 2007 USD ($)
NovaStar Mortgage Funding Trust Case [Member]
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate, Number of Loans					43
Loans Summoned in Litigation Case					$ 6.5
Payments for Legal Settlements	$ 0.3
Settlement Period for Quarterly Payments				3 years
Loss Contingency Accrual, Ending Balance	$ 0.3
Indemnity Claimants’ Claims [Member]
Settlement Period for Quarterly Payments			3 years
Loss Contingency Accrual, Ending Balance			$ 0.4
Litigation Settlement, Amount Awarded to Other Party		$ 0.5
Claims to Repurchase Securitized Loans [Member]
Principal Amount Outstanding on Loans Securitized or Asset-backed Financing Arrangement						$ 43,100.0

XML

Note 9 - Fair Value Accounting (Details Textual)	6 Months Ended
	Jun. 30, 2019
Post-modification Notes [Member] | Senior Notes [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate	3.50%

XML

Note 9 - Fair Value Accounting - Carrying Values and Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Reported Value Measurement [Member] | Fair Value, Inputs, Level 1 [Member]
Equity securities (Level 1)	$ 1	$ 1
Reported Value Measurement [Member] | Fair Value, Inputs, Level 3 [Member]
Senior notes (Level 3)	85,938	85,938
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 1 [Member]
Equity securities (Level 1)	1	1
Estimate of Fair Value Measurement [Member] | Fair Value, Inputs, Level 3 [Member]
Senior notes (Level 3)	$ 22,348	$ 24,659

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Note 9 - Fair Value Accounting - Financial Assets Reported at Fair Value on a Nonrecurring Basis (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Goodwill, gains and (losses)	$ (2,600)		$ (2,600)
Fair Value, Inputs, Level 3 [Member] | Fair Value, Nonrecurring [Member]
Goodwill, fair value (level 3)	$ 5,605		5,605
Goodwill, gains and (losses)			$ (2,600)

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Note 10 - Income Taxes (Details Textual) - USD ($) $ in Millions	6 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Deferred Tax Assets, Valuation Allowance, Total	$ 164.9	$ 164.0
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	0.00%
Operating Loss Carryforwards, Total	$ 730.0
Operating Loss Carryforwards, Mortgage Securities	$ 250.3
Operating Loss Carryforwards with No Expiration		$ 20.0
Domestic Tax Authority [Member] | Internal Revenue Service (IRS) [Member] | Earliest Tax Year [Member]
Operating Loss Carryforwards, Expiration Date	Dec. 31, 2025
Domestic Tax Authority [Member] | Internal Revenue Service (IRS) [Member] | Latest Tax Year [Member]
Operating Loss Carryforwards, Expiration Date	Dec. 31, 2037
State and Local Jurisdiction [Member] | Earliest Tax Year [Member]
Operating Loss Carryforwards, Expiration Date	Dec. 31, 2024
State and Local Jurisdiction [Member] | Latest Tax Year [Member]
Operating Loss Carryforwards, Expiration Date	Dec. 31, 2037

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Note 11 - Subsequent Events (Details Textual) - USD ($) $ / shares in Units, $ in Thousands				6 Months Ended
	Aug. 31, 2019	Jul. 01, 2019	Apr. 01, 2019	Jun. 30, 2019	Jun. 30, 2018	Jan. 01, 2029	Jan. 01, 2024
Repayments of Long-term Debt, Total				$ 31	$ 77
Forecast [Member] | Warrants Issued in Connection with 2017 Notes [Member]
Warrants and Rights Outstanding, Term	10 years
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	22,250,000
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.01
Senior Notes [Member] | The 2017 Notes [Member]
Long-term Debt, Total				$ 85,900
Debt Instrument, Interest Rate, Stated Percentage			1.00%
Repayments of Long-term Debt, Total			$ 2,700
Debt Instrument, Periodic Payment, Total			400
Debt Instrument, Covenant, Surplus Paid Applied to Future Interest Payments			$ 2,200
Senior Notes [Member] | The 2017 Notes [Member] | Subsequent Event [Member]
Repayments of Long-term Debt, Total		$ 2,700
Debt Instrument, Periodic Payment, Total		400
Debt Instrument, Covenant, Surplus Paid Applied to Future Interest Payments		$ 2,200
Senior Notes [Member] | The 2017 Notes [Member] | Forecast [Member]
Debt Instrument, Interest Rate, Stated Percentage						10.00%	2.00%
Debt Instrument, Covenant, Percent of Excess Cash Remitted Each Year	50.00%
Stock Issued During Period, Shares, New Issues	9,000,000