UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10‑Q~~10-Q

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

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

For the quarterly period ended ~~March 31, 2019~~September 30, 2020

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

~~☐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 ~~001‑38761~~001-38761

Legacy Housing Corporation

(Exact name of registrant as specified in its charter)

~~Delaware~~Texas	~~20‑2897516~~20-2897516
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1600 Airport Freeway, #100

Bedford, Texas 76022

(Address of principal executive offices)

(Zip Code)

(817)~~‑799‑4900~~ 799-4900

(Registrant’s telephone number, including area code)

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 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, 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~~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‑~~12b-2 of the Exchange Act). Yes ☐◻ No ☒.

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock ($0.001 par value)	LEGH	NASDAQ Global Market

There were ~~24,722,936~~24,192,157 shares of Common Stock ($00.001 par value) outstanding as of ~~May 13, 2019.~~November 12, 2020.

Table of Contents

LEGACY HOUSING CORPORATION

TABLE OF CONTENTS

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

LEGACY HOUSING CORPORATION

CONDENSED BALANCE SHEETS (in thousands, except share and per share data)

(unaudited)


	March 31,		December 31,
	2019		2018

					September 30,		December 31,
					2020		2019
Assets
Current assets:
Cash and cash equivalents	$	3,098	$	2,599	$	1,643	$	1,724
Accounts receivable, net of allowance for doubtful accounts		3,095		2,953		2,508		1,767
Current portion consumer loans		5,132		4,945
Current portion of consumer loans						5,167		5,994
Current portion of notes receivable from mobile home parks (“MHP”)		8,339		7,297		12,768		10,969
Current portion of other notes receivable		773		379		2,574		428
Inventories		37,966		42,033		27,852		27,228
Prepaid expenses and other current assets		3,327		2,938		3,158		4,857
Total current assets		61,730		63,144		55,670		52,967
Property, plant and equipment, net		17,644		17,128		22,445		21,038
Consumer loans, net of deferred financing fees and allowance for loan losses		93,772		92,230		103,406		99,048
Notes receivable from mobile home parks (“MHP”)		54,207		50,638		116,842		81,375
Other notes receivable, net of allowance for loan losses		2,817		1,912		13,088		13,050
Other assets		3,054		2,587		6,789		4,212
Inventory non‑current		10,451		7,399		10,140		11,930
Total assets	$	243,675	$	235,038	$	328,380	$	283,620
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,714	$	2,828	$	4,762	$	5,168
Accrued liabilities		10,309		9,156		12,603		8,808
Customer deposits		2,274		2,222		2,469		1,567
Escrow liability		5,325		5,951		8,305		7,530
Current portion of notes payable		185		228
Line of credit						—		28,860
Total current liabilities		21,807		20,385		28,139		51,933
Long‑term liabilities:
Lines of credit		7,163		13,679		43,820		2,001
Deferred income taxes		1,842		1,842		1,766		1,766
Note payable, net of current portion		3,321		3,737
Dealer incentive liability		6,120		6,115		5,998		5,531
Total liabilities		40,253		45,758		79,723		61,231
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized: issued -0-		—		—		—		—
Common stock, $.001 par value, 90,000,000 shares authorized; 24,617,143 and
24,000,000 issued and outstanding at March 31, 2019 and December 31, 2018, respectively		25		24
Common stock, $.001 par value, 90,000,000 shares authorized; 24,637,222 and 24,620,079 issued and 24,192,157 and 24,320,079 outstanding at September 30, 2020 and December 31, 2019, respectively						25		25
Treasury stock at cost, 445,065 and 300,000 shares at September 30, 2020 and December 31, 2019, respectively						(4,477)		(3,060)
Additional paid-in-capital		174,671		167,743		175,244		175,067
Retained earnings		28,726		21,513		77,865		50,357
Total stockholders' equity		203,422		189,280		248,657		222,389
Total liabilities and stockholders' equity	$	243,675	$	235,038	$	328,380	$	283,620

See accompanying notes to condensed financial statements.

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LEGACY HOUSING ~~COPRORATION~~CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)


	Three months ended March 31,
	2019		2018

					Three months ended September 30,				Nine months ended September 30,
					2020		2019		2020		2019
Net revenue:
Product sales	$	31,550	$	37,414	$	36,566	$	35,355	$	106,940	$	106,671
Consumer and MHP loans interest		5,530		4,394		6,428		5,688		18,919		16,330
Other		874		878		749		893		2,163		2,650
Total net revenue		37,954		42,686		43,743		41,936		128,022		125,651
Operating expenses:
Cost of product sales		21,885		27,647		27,839		27,504		78,387		77,265
Selling, general administrative expenses		6,491		4,799		4,525		6,293		14,202		18,928
Dealer incentive		210		335		550		85		929		534
Income from operations		9,368		9,905		10,829		8,054		34,504		28,924
Other income (expense):
Non‑operating interest income		39		51		246		115		697		200
Miscellaneous, net		3		34		96		12		145		46
Gain on settlement, net						—		—		1,075		—
Interest expense		(189)		(639)		(239)		(148)		(817)		(495)
Total other		(147)		(554)		103		(21)		1,100		(249)
Income before income tax expense		9,221		9,351		10,932		8,033		35,604		28,675
Income tax expense		(2,008)		(3,990)		(2,486)		(1,895)		(8,097)		(6,691)
Net income	$	7,213	$	5,361	$	8,446	$	6,138	$	27,507	$	21,984
Weighted average shares outstanding:
Basic		24,516,762		20,000,000		24,192,157		24,317,143		24,237,402		24,400,534
Diluted		24,571,088		20,000,000		24,214,279		24,338,839		24,243,927		24,421,355
Net income per share:
Basic	$	0.29	$	0.27	$	0.35	$	0.25	$	1.13	$	0.90
Diluted	$	0.29	$	0.27	$	0.35	$	0.25	$	1.13	$	0.90

See accompanying notes to condensed financial statements.

Table of Contents

LEGACY HOUSING ~~COPRORATION~~CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Three months ended March 31,
	2019		2018

					Nine months ended September 30,
					2020		2019
Operating activities:
Net income	$	7,213	$	5,361	$	27,507	$	21,984
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		241		196		874		765
Amortization of debt discount and issuance costs						35		—
Provision for loan loss—consumer loans		406		118		586		650
Deferred income taxes		—		2,068
Share based payment expense		234		—		177		522
Changes in operating assets and liabilities:
Accounts receivable		(142)		2,162		(741)		768
Consumer loans originations		(5,053)		(3,661)		(12,647)		(14,356)
Consumer loans principal collections		2,847		2,134		7,945		7,280
Notes receivable MHP originations		(12,849)		(9,427)		(54,630)		(47,261)
Notes receivable MHP principal collections		8,238		7,570		17,364		23,190
Inventories		1,015		(2,206)		1,166		9,150
Prepaid expenses and other current assets		(390)		(1,700)		1,959		133
Other assets		(467)		147		(2,704)		(1,473)
Accounts payable		888		(81)		(405)		801
Accrued liabilities		1,153		2,494		3,797		1,573
Customer deposits		52		(522)		902		(477)
Dealer incentive liability		5		(165)		467		(173)
Net cash provided by operating activities		3,391		4,488
Net cash provided by (used in) operating activities						(8,348)		3,076
Investing activities:
Purchases of property, plant and equipment		(757)		(389)		(2,156)		(4,478)
Issuance of notes receivable		(1,400)		(255)		(5,430)		(3,391)
Notes receivable collections		101		44		3,247		572
Purchases of consumer loans		(101)		—		(317)		(101)
Collections from purchased consumer loans		172		111		902		512
Net cash used in investing activities		(1,985)		(489)		(3,754)		(6,886)
Financing activities:
Proceeds from sale of over-allotment common stock in initial public offering		7,200		—		—		7,200
Offering cost for over-allotment of initial public offering		(505)		—		—		(505)
Escrow liability		(626)		(341)
Treasury stock purchase						(1,417)		(3,060)
Proceeds from issuance of note payable						6,546		—
Principal payments on note payable		(459)		(56)		(6,546)		(550)
Proceeds from lines of credit		1,482		14,213
Escrow liability, net						775		818
Proceeds from lines of credit, net						52,148		39,205
Payments on lines of credit		(7,999)		(16,533)		(39,485)		(40,033)
Net cash used in financing activities		(907)		(2,717)
Net increase in cash and cash equivalents		499		1,282
Net cash provided by financing activities						12,021		3,075
Net decrease in cash and cash equivalents						(81)		(735)
Cash and cash equivalents at beginning of period		2,599		428		1,724		2,599
Cash and cash equivalents at end of period	$	3,098	$	1,710	$	1,643	$	1,864
Supplemental disclosure of cash flow information:
Cash paid for interest	$	227	$	585	$	770	$	552
Cash paid for taxes					$	6,728	$	5,039

See accompanying notes to ~~consolidated~~condensed financial statements.

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LEGACY HOUSING CORPORATION

CONDENSED ~~STATEMENT~~STATEMENTS OF CHANGES IN ~~STOCKHOLDER’S~~STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

Total Partners’

Common Stock

Additional

Retained


Capital

Shares

Amount

paid in capital

earnings

Total
Balances, December 31, 2017

$
124,271

—

$
—

$
—

$
—

$
—
Shares issued upon incorporation

(124,271)

20,000,000

20

124,251

—

124,271
Net income

—

—

—

—

5,361

5,361
Balances, March 31, 2018

$
—

20,000,000

$
20

$
124,251

$
5,361

$
129,632


	Common Stock			Treasury		Additional		Retained
	Shares	Amount		stock		paid-in-capital		earnings		Total
Balances, December 31, 2018	24,000,000	$	24	$	—	$	167,743	$	21,513	$	189,280
Sale of over-allotment common stock in initial public offering, net of offering costs of $505	600,000		1		—		6,694		—		6,695
Share based compensation expense and stock units vested	17,143		—		—		234		—		234
Net income	—		—		—		—		7,213		7,213
Balances, March 31, 2019	24,617,143		25		—		174,671		28,726		203,422
Share based compensation expense and stock units vested	—		—		—		187		—		187
Purchase of treasury stock	—		—		(3,060)		—		—		(3,060)
Net income	—		—		—		—		8,633		8,633
Balances, June 30, 2019	24,617,143		25		(3,060)		174,858		37,359		209,182
Share based compensation expense and stock units vested	—		—		—		101		—		101
Net income	—		—		—		—		6,138		6,138
Balances, September 30, 2019	24,617,143	$	25	$	(3,060)	$	174,959	$	43,497	$	215,421

Common Stock

Additional

Retained


Shares

Amount

paid in capital

earnings

Total
Balances, December 31, 2018

24,000,000

$
24

$
167,743

$
21,513

$
189,280
Sale of over-allotment common stock in initial public offering, net of offering costs of $505

600,000

1

6,694

—

6,695
Share based compensation expense and stock units vested

17,143

—

234

—

234
Net income

—

—

—

7,213

7,213
Balances, March 31, 2019

24,617,143

$
25

$
174,671

$
28,726

$
203,422


	Common Stock			Treasury		Additional		Retained
	Shares	Amount		stock		paid-in-capital		earnings		Total
Balances, December 31, 2019	24,620,079	$	25	$	(3,060)	$	175,067	$	50,357	$	222,389
Share based compensation expense and stock units vested	17,143		—		—		97		—		97
Purchase of treasury stock	—		—		(682)		—		—		(682)
Net income	—		—		—		—		9,025		9,025
Balances, March 31, 2020	24,637,222		25		(3,742)		175,164		59,382		230,829
Share based compensation expense and stock units vested	—		—		—		36		—		36
Purchase of treasury stock	—		—		(735)		—		—		(735)
Net income	—		—		—		—		10,037		10,037
Balances, June 30, 2020	24,637,222		25		(4,477)		175,200		69,419		240,167
Share based compensation expense and stock units vested	—		—		—		44		—		44
Net income	—		—		—		—		8,446		8,446
Balances, September 30, 2020	24,637,222	$	25	$	(4,477)	$	175,244	$	77,865	$	248,657

See accompanying notes to condensed financial statements.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

~~FOR THE~~ THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019 ~~AND 2018~~

(dollars in thousands)

1. NATURE OF OPERATIONS

Legacy Housing Corporation (the “Company”) was formed on January 1, 2018 as a Delaware corporation through a corporate conversion of Legacy Housing, Ltd., (the “Partnership”), a Texas limited partnership formed in May 2005. ~~The~~Effective December 31, 2019, the Company ~~is incorporated as~~reincorporated from a Delaware corporation ~~and~~to a Texas corporation. The Company is headquartered in Bedford, Texas.

The Company (1) manufactures and provides for the transport of mobile homes, (2) provides wholesale financing to dealers and mobile home parks, ~~and~~ (3) provides retail financing to ~~consumers.~~consumers and (4) is involved in financing and developing new manufactured home communities. The Company manufactures its mobile homes at plants located in Fort Worth, Texas, Commerce, Texas and Eatonton, Georgia. The Company relies on a network of dealers to market and sell its mobile homes. The Company also sells homes directly to dealers and mobile home parks.

In December 2018, the Company sold 4,000,000 shares of its common stock through an initial public offering (“IPO”) at $12.00 per share. Proceeds from the IPO, net of $4,504 of underwriting discounts and offering expenses paid by the Company, were $43,492. In January 2019, the Company sold an additional 600,000 shares of its common stock as part of the IPO at $12.00 per share. Proceeds from the January 2019 issuance, net of ~~$504~~$505 of underwriting discounts and offering expenses paid by the Company, were ~~$6,696.~~ $6,695.

On April 17, 2019, the Company purchased 300,000 shares of its common stock at the price of $10.20 per share, pursuant to the Company’s repurchase program. During the nine months ended September 30, 2020, the Company purchased 145,065 shares of its common stock at an average price of $9.77 per share, pursuant to the Company’s repurchase program. Under the repurchase program, the Company may purchase up to $10,000 of its common stock. Share purchases may be made from time to time in the open market or through privately negotiated transactions depending on market conditions, share price, trading volume and other factors. Such purchases, if any, will be made in accordance with applicable insider trading and other securities laws and regulations. These repurchases may be commenced or suspended at any time or from time to time without prior notice.

Corporate Conversion

Effective January 1, 2018, the Partnership converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Legacy Housing Corporation. In order to consummate the corporate conversion completed on January 1, 2018, a certificate of conversion was filed with the Secretary of State of the State of Delaware and with the Secretary of State of the State of Texas. Holders of partnership interests in Legacy Housing, Ltd. received an initial allocation, on a proportional basis, of 20,000,000 shares of common stock of Legacy Housing Corporation.

Following the corporate conversion, Legacy Housing Corporation continues to hold all property and assets of Legacy Housing, Ltd. and all of the debts and obligations of Legacy Housing, Ltd. On the effective date of the corporate conversion, the officers of Legacy Housing, Ltd. became the officers of Legacy Housing Corporation. As a result of the corporate conversion, ~~The~~the Company is now a federal corporate taxpayer.

Basis of Presentation

The accompanying unaudited interim condensed financial statements as of ~~March 31, 2019~~September 30, 2020 and for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019, ~~and 2018,~~ respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") as required by Regulation S-X, Rule 8-03. In the opinion of management, the unaudited interim ~~consolidated~~ financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company's financial position for the periods presented. The

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

results for the three and nine months ended ~~March 31, 2019~~September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2019,~~2020, or any other period. The accompanying ~~consolidated~~ balance sheet as of December 31, ~~2018~~2019 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, ~~2018~~2019 (the "Form 10-K"). The accompanying ~~consolidated~~ financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. Accordingly, they should be read in conjunction with the audited financial statements and notes thereto included in the Form 10-K. ~~Certain prior year amounts have been reclassified to conform to current year presentation.~~

~~Table of Contents~~

~~LEGACY HOUSING CORPORATION~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)~~

~~FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018~~

~~(dollars in thousands)~~

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Material estimates that are susceptible to significant change in the near term primarily relate to the determination of accounts receivable, consumer loans and notes receivable, inventory obsolescence, ~~repossessed assets,~~ income taxes, fair value of financial instruments and contingent ~~liabilities and accruals related to warranty costs.~~ liabilities. Actual results could differ from these estimates.

Revenue Recognition

~~In May 2014, the FASB issued ASU 2014‑09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~, which outlines a comprehensive five‑step model for entities to use in accounting for revenue arising from contracts with customers and supersedes most previous revenue recognition guidance, including industry‑specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the requirements of the new revenue standard on January 1, 2019 using the modified retrospective transition method which did not have a material impact on the financial statements.

The new guidance under ASU 2014-09 is applicable to our product sales which includes sales of homes through various sales channels, and other revenue which includes consignment fees, service fees and miscellaneous income. Income generated from interest, other lending activities, and investment income are excluded from ASU 2014-09 and will continue to be accounted for under existing guidance.

For those revenue streams that are subject to ASU 2014-09, the Company evaluated the impact of adopting the new standard on our revenue recognition policies under existing guidance and determined there is no impact. ~~The adoption did not have a significant impact on the consolidated operating results, financial position or cash flows of the Company.~~ ~~The Company’s evaluation of ASU 2014-09 impact on primary revenue streams are as follows:~~

Product sales primarily consist of sales of mobile homes to consumers and mobile home parks through various sales channels, which include Direct Sales, Commercial Sales, Consignment Sales, and Retail Store Sales. Direct Sales include homes sold directly to independent retailers or customers that are not financed by the Company and are not sold under a consignment arrangement. These types of homes are generally paid for prior to shipment. Commercial Sales include homes sold to mobile home parks under commercial loan programs or paid for upfront. The Company provides floor plan financing for independent retailers, which takes the form of a consignment arrangement. Consignment Sales are considered sales of consigned homes from independent dealers to individual customers. Retail Store Sales are ~~home~~homes sold through Company-owned retail locations. Consignment Sales and Retail Sales of homes may be financed by the Company, by a third party, or in paid in cash.

Revenue from product sales is recognized at a point in time when the performance obligation under the terms of a contract with our customers is satisfied which typically occurs upon delivery and transfer of title of the home, as this depicts when control of the promised good is transferred to our customers. For financed sales by the Company, the individual customer enters into a sales and financing contract and is required to make a down payment. These financed sales contain a significant financing component and any interest income is separately recorded in the statement of operations.

~~Table of Contents~~

~~LEGACY HOUSING CORPORATION~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)~~

~~FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018~~

~~(dollars in thousands)~~

Revenue is measured as the amount of consideration expected to be received in exchange for transferring the homes to the customers. Sales and other similar taxes collected concurrently with revenue-producing activities are excluded from revenue.

The Company made an accounting policy election to account for any shipping and handling costs that occur after the transfer of control as a fulfillment cost that is accrued when control is transferred. Warranty obligations associated with the sale of a unit are assurance-type warranties for a period of twelve months that are a guarantee of the home’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. The Company has elected to use the practical expedient to expense the incremental costs of obtaining a contract if the amortization period of the asset that the Company would have otherwise recognized is one year or less. Contract costs, which include commissions incurred related to the sale of homes, are expensed at the point-in-time when the related revenue is recognized.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

For the three months ended ~~March 31,~~September 30, 2020 and 2019, sales to an independent third-party and ~~2018,~~its affiliates accounted for $13,253 or 36.2% and $13,027 or 36.9% of our product sales, respectively. For the nine months ended September 30, 2020 and 2019, sales to an independent third-party and its affiliates accounted for $39,559 or 37.0% and $26,350 or 24.7% of our product sales, respectively.

For the three and nine months ended September 30, 2020, total cost of product sales included ~~$4,327~~$7,073 and ~~$5,975~~$15,878 of costs, mainly relating to up front dealer commission and reimbursed dealer expenses for consignment sales and certain other similar costs incurred for retail store and commercial sales. For the three and nine months ended September 30, 2019, total cost of product sales included $4,713 and $16,600 of costs, mainly relating to up front dealer commission and reimbursed dealer expenses for consignment sales and certain other similar costs incurred for retail store and commercial sales.

Other revenue consists of consignment fees, service fees and other miscellaneous income. Consignment fees are charged to independent retailers on a monthly basis for homes held by the independent retailers pursuant to a consignment arrangement until the home is sold to an individual customer. Consignment fees are determined as a percentage of the home’s wholesale price to the independent dealer. Revenue recognition for consignment fees are recognized over time using the output method as it provides a faithful depiction of the Company’s performance toward completion of the performance obligation under the contract and the value transferred to the independent retailer for the time the home is held under consignment. Revenue for service fees and miscellaneous income is recognized at a point in time when the performance obligation is satisfied.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by source of the revenue for the three and nine months ended ~~March 31, 2019~~September 30, 2020 and ~~2018:~~2019:


	Three months ended
	March 31,
	2019		2018

					Three months ended				Nine months ended
					September 30,				September 30,
					2020		2019		2020		2019
Product sales:
Direct sales	$	4,457	$	12,499	$	1,453	$	2,605	$	7,528	$	12,605
Commercial sales		12,503		7,034		17,681		16,851		54,532		46,958
Consignment sales		10,037		12,751		11,950		11,552		29,875		32,215
Retail store sales		3,341		2,559		3,939		2,988		11,475		11,257
Other (1)		1,212		2,571		1,543		1,359		3,530		3,636
Total product sales		31,550		37,414		36,566		35,355		106,940		106,671
Consumer and MHP loans interest:
Interest - consumer installment notes		4,130		3,321		4,014		4,066		11,983		11,892
Interest - MHP notes		1,400		1,073		2,414		1,622		6,936		4,438
Total consumer and MHP loans interest		5,530		4,394		6,428		5,688		18,919		16,330
Other		874		878		749		893		2,163		2,650
Total net revenue	$	37,954	$	42,686	$	43,743	$	41,936	$	128,022	$	125,651

(1)

Other product sales revenue from ancillary products and services including parts, freight and other services

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~~LEGACY HOUSING CORPORATION~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)~~

~~FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018~~

~~(dollars in thousands)~~

Share-Based Compensation

The Company accounts for share-based compensation in accordance with the provisions of ASC 718, Compensation—Stock Compensation. Share-based compensation expense is recognized based on the award’s estimated grant date fair value in order to recognize compensation cost for those shares expected to vest. The Company has elected to record forfeitures as they occur. Compensation cost is recognized on a straight-line basis over the vesting period of the awards and adjusted as forfeitures occur.

The fair value of each option grant with only service-based conditions is estimated using the Black-Scholes pricing model. The fair value of each restricted stock unit (the”RSU”) is calculated based on the closing price of the Company’s common stock on the grant date.

The fair value of stock option awards on the date of grant is estimated using the Black-Scholes option pricing model, which requires the Company to make certain predictive assumptions. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon securities that correspond to the expected life of the award. As a recently formed public entity with a small public float and limited trading of its common shares on the NASDAQ Global Market, it was not practicable for the Company to estimate the volatility of its common shares; therefore, management estimated volatility based on the historical volatilities of a small group of companies considered as close to comparable to the Company as available, all equally weighted, over the expected life of the option. Management concluded that this group is more characteristic of the Company’s business than a broad industry index. The expected life of awards granted represents the period of time that the awards are expected to be outstanding based on the “simplified” method, which is allowed for companies that cannot reasonably estimate the expected life of options based on its historical award exercise experience. The Company does not expect to pay dividends on its common stock. ~~Due~~

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

Accounts Receivable

Included in accounts receivable are receivables from direct sales of mobile homes and sales of parts and supplies to customers, consignment fees and interest receivables.

Accounts receivables are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the ~~nature~~contractual payment terms are considered past due. The Company determines the allowance by considering several factors, including the aging of the ~~grants,~~past due balance, the ~~company estimated zero option forfeitures. Share-based~~customer’s payment ~~expense is recorded only~~history, and the Company’s previous loss history. The Company establishes an allowance for ~~those awards~~doubtful accounts for amounts that are ~~expected~~deemed to ~~vest.~~be uncollectible. At September 30, 2020 and December 31, 2019, the allowance for doubtful accounts totaled $414 and $457, respectively.

Recent Accounting Pronouncements

The Company has elected to use longer ~~phase‑in~~phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act as an emerging growth company.

In February 2016, the FASB issued ASU ~~2016‑02,~~ 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous requirements. The Company plans to use longer ~~phase‑in~~phase-in period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, ~~2020.~~2022. Modified retrospective application and early adoption is permitted. The Company expects that the adoption of this standard will result in a material increase to assets and liabilities on the ~~consolidated~~ balance ~~sheets~~sheet but will not have a material impact on the ~~consolidated~~ statement of ~~income and comprehensive income.~~operations. While the Company is continuing to assess all the effects of adoption, it currently believes the most significant effects relate to (i) the recognition of new right-of-use assets and lease liabilities on its balance sheet for its property and equipment operating leases and (ii) providing significant new disclosures about its leasing activities.

In June 2016, the FASB issued an accounting standards update ASU ~~2016‑13~~ 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For

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~~LEGACY HOUSING CORPORATION~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)~~

~~FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018~~

~~(dollars in thousands)~~

available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a ~~write‑down~~write-down and affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company plans to use longer ~~phase‑in~~phase-in period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, ~~2021. The Company is continuing to evaluate the impact of the adoption of this ASU and is uncertain of the impact on the financial statements and disclosures at this point in time.~~

In March 2017, the FASB issued ASU 2017‑08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310‑20), Premium Amortization on Purchased Callable Debt Securities (“ASU 2017‑08”), which requires the premium on callable debt securities to be amortized to the earliest call date as opposed to the contractual life of the security. ASU 2017‑08 will be effective beginning with the first quarter of the Company’s fiscal year 2020.2023. The Company is continuing to evaluate the impact of the adoption of this ASU and is uncertain of the impact on the financial statements and disclosures at this point in time.

From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s Financial Statements upon adoption.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

2. CONSUMER LOANS RECEIVABLE

Consumer loans receivable result from financing transactions entered into with retail consumers of mobile homes sold through independent retailers and company-owned retail locations. Consumer loans receivable generally consist of the sales price and any additional financing fees, less the buyer’s down payment. Interest income is recognized monthly per the terms of the financing agreements. The average contractual interest rate per loan was approximately 13.9% as of September 30, 2020 and 14.0% as of December 31, 2019. Consumer loans receivable have maturities that range from 3 to 30 years.

Loan applications go through an underwriting process that considers credit history to evaluate credit risk of the consumer. Interest rates on approved loans are determined based on consumer credit score, payment ability and down payment amount.

The Company uses payment history to monitor the credit quality of the consumer loans on an ongoing basis.

The Company may also receive escrow payments for property taxes and insurance included in its consumer loan collections. The liabilities associated with these escrow collections totaled $8,305 and $7,530 as of September 30, 2020 and December 31, 2019, respectively, and are included in escrow liability in the balance sheets.

Allowance for Loan Losses—Consumer Loans Receivable

The allowance for loan losses reflects management’s estimate of losses inherent in the consumer loans that may be uncollectible based upon review and evaluation of the consumer loan portfolio as of the date of the balance sheet. An allowance for loan losses is determined after giving consideration to, among other things, the loan characteristics, including the financial condition of borrowers, the value and liquidity of collateral, delinquency and historical loss experience.

The allowance for loan losses is comprised of two components: the general reserve and specific reserves. The Company’s calculation of the general reserve considers the historical loss rate for the last three years, adjusted for the estimated loss discovery period and any qualitative factors both internal and external to the Company. Specific reserves are determined based on probable losses on specific classified impaired loans.

The Company’s policy is to place a loan on nonaccrual status when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is normally when either principal or interest is past due and remains unpaid for more than 90 days. Management implemented this policy based on an analysis of historical data, current performance of loans and the likelihood of recovery once principal or interest payments became delinquent and were aged more than 90 days. Payments received on nonaccrual loans are accounted for on a cash basis, first to interest and then to principal, as long as the remaining book balance of the asset is deemed to be collectible. The accrual of interest resumes when the past due principal or interest payments are brought within 90 days of being current.

Impaired loans are those loans where it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impaired loans, or portions thereof, are charged off when deemed uncollectible. A loan is generally deemed impaired if it is more than 90 days past due on principal or interest, is in bankruptcy proceedings, or is in the process of repossession. A specific reserve is created for impaired loans based on fair value of underlying collateral value, less estimated selling costs. The Company uses various factors to determine the value of the underlying collateral for impaired loans. These factors are: (1) the length of time the unit was unsold after construction; (2) the amount of time the house was occupied; (3) the cooperation level of the borrowers, i.e., loans requiring legal action or extensive field collection efforts; (4) units located on private property as opposed to a manufactured home park; (5) the length of time

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

the borrower has lived in the house without making payments; (6) location, size, and market conditions; and (7) the experience and expertise of the particular dealer assisting in collection efforts.

Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell. At repossession, the fair value of the collateral is computed based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is charged to the allowance for loan losses. At each reporting period, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled $2,121 and $1,846 as of September 30, 2020 and December 31, 2019, respectively, and are included in other assets in the balance sheets.

Consumer loans receivable, net of allowance for loan losses and deferred financing fees, consisted of the following:


	As of March 31,		As of December 31,
	2019		2018
Consumer loan receivable	$	102,938	$	101,049

					As of September 30,		As of December 31,
					2020		2019
Consumer loans receivable					$	112,564	$	109,005
Loan discount and deferred financing fees, net		(3,149)		(3,162)		(2,941)		(3,050)
Allowance for loan losses		(885)		(712)		(1,050)		(913)
Consumer loans receivable, net	$	98,904	$	97,175	$	108,573	$	105,042

The following table presents a detail of the activity in the allowance for loan losses:


	Three Months Ended March 31,
	2019		2018

					Three months ended September 30,				Nine Months Ended September 30,
					2020		2019		2020		2019
Allowance for loan losses, beginning of period	$	712	$	805	$	916	$	813	$	913	$	712
Provision for loan losses		406		118		306		132		586		572
Charge offs		(233)		(69)		(172)		(138)		(449)		(477)
Allowance for loan losses	$	885	$	854	$	1,050	$	807	$	1,050	$	807

The impaired and general reserve for allowance for loan losses consisted of the following:


	As of September 30,		As of December 31,
	2020		2019
Total consumer loans	$	112,564	$	109,005
Total allowance for loan losses		1,050		913
Impaired loans individually evaluated for impairment		1,898		1,677
Specific reserve against impaired loans		669		529
Other loans collectively evaluated for allowance		110,666		107,328
General allowance for loan losses		381		384

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

~~FOR THE~~ THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019 ~~AND 2018~~

(dollars in thousands)

~~The impaired and general reserve for allowance for loan losses:~~

As of March 31,

As of December 31,

2019

2018
Total consumer loans

$
102,938

$
101,049
Total allowance for loan losses

885

712
Impaired loans individually evaluated for impairment

1,546

1,445
Specific reserve against impaired loans

456

427
Other loans collectively evaluated for allowance

101,392

99,604
General allowance for loan losses

429

285

As of ~~March 31, 2019~~September 30, 2020 and December 31, ~~2018,~~2019, the total principal outstanding for consumer loans on nonaccrual status was ~~$1,546~~$1,898 and ~~$1,445,~~$1,677, respectively. A detailed aging of consumer loans receivable that are past due as of ~~March 31, 2019~~September 30, 2020 and December 31, ~~2018~~2019 were as follows:


	March 31,			December 31,
	2019		%	2018		%

							As of September 30,			As of December 31,
							2020		%	2019		%
Total consumer loans receivable	$	102,938	100.0	$	101,049	100.0	$	112,564	100.0	$	109,005	100.0
Past due consumer loans:
31 - 60 days past due	$	591	0.6	$	968	1.0	$	210	0.2	$	267	0.2
61 - 90 days past due		269	0.3		404	0.4		305	0.3		122	0.1
91 - 120 days past due		—	—		133	0.1		81	0.1		103	0.1
Greater than 120 days past due		890	0.9		843	0.8		1,349	1.2		1,065	1.0
Total past due	$	1,750	1.7	$	2,348	2.3	$	1,945	1.7	$	1,557	1.4

3. NOTES RECEIVABLE FROM MOBILE HOME PARKS (“MHP Notes”)

MHP Notes are stated at amounts due from customers, net of allowance for loan losses. The Company determines the allowance by considering several factors including the aging of the past due balance, the customer’s payment history, and the Company’s previous loss history. The Company establishes an allowance reserve composed of specific and general reserve amounts.

The Company had concentrations of MHP Notes with an independent third-party and its affiliates that equaled 51.1% and 38.3% of the principal balance outstanding, all of which was secured, as of September 30, 2020 and December 31, 2019, respectively.

There were nominimal past due balances on the MHP Notes as of ~~March 31, 2019~~September 30, 2020 and December 31, ~~2018~~2019 and no charge offs were recorded for MHP Notes during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~There is no allowance~~Allowance for loan loss is considered immaterial and accordingly no loss is recorded against the MHP Notes as of ~~March 31, 2019~~September 30, 2020 and December 31, ~~2018.~~2019.

4. OTHER NOTES RECEIVABLE

Other notes receivable relate to various notes issued to mobile park owners and dealers, which are not directly tied to sale of mobile homes. The other notes have varying maturity dates and call for monthly principal and interest payments. The other notes are collateralized by mortgages on real estate, units being financed and used as offices, as well as vehicles, and are typically personally guaranteed by the borrowers. The interest rate on the other notes are fixed and range from 6.25% to 12.00%. The Company reserves for estimated losses on the other notes based on current economic conditions that may affect the borrower’s ability to pay, the borrower’s financial strength, and historical loss experience.

The balance outstanding on the other notes receivable were as follows:


	As of March 31,		As of December 31,
	2019		2018

					As of September 30,		As of December 31,
					2020		2019
Outstanding principal balance	$	3,658	$	2,354	$	15,737	$	13,552
Allowance for loan losses		(68)		(63)		(75)		(74)
Total	$	3,590	$	2,291	$	15,662	$	13,478

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

~~FOR THE~~ THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019 ~~AND 2018~~

(dollars in thousands)

5. INVENTORIES

Inventories consisted of the following:


	As of March 31,		As of December 31,
	2019		2018

					As of September 30,		As of December 31,
					2020		2019
Raw materials	$	11,492	$	13,481	$	11,510	$	9,434
Work in progress		160		526		412		383
Finished goods		36,766		35,425		26,070		29,341
Total	$	48,418	$	49,432	$	37,992	$	39,158

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:


	As of March 31,		As of December 31,
	2019		2018

					As of September 30,		As of December 31,
					2020		2019
Land	$	8,616	$	8,081	$	12,807	$	11,659
Buildings and leasehold improvements		9,344		9,234		10,469		10,059
Vehicles		1,566		1,477		1,664		1,580
Machinery and equipment		3,394		3,385		4,085		3,653
Furniture and fixtures		175		161		298		214
Total		23,095		22,338		29,323		27,165
Less accumulated depreciation		(5,451)		(5,210)		(6,878)		(6,127)
Total property, plant and equipment	$	17,644	$	17,128	$	22,445	$	21,038

Depreciation expense was ~~$241~~$249 with ~~$89~~$88 included as a component of cost of product sales for the ~~three‑~~three months ended ~~March 31, 2019~~September 30, 2020 and ~~$196~~$272 with ~~$75~~$94 included as a component of cost of product sales for the ~~three‑~~three months ended ~~March 31, 2018.~~September 30, 2019. Depreciation expense was $750 with $267 included as a component of cost of product sales for the nine months ended September 30, 2020 and $766 with $275 included as a component of cost of product sales for the nine months ended September 30, 2019.

7. OTHER ASSETS

Other assets includes prepaid rent in the amount of $1,726 and $1,412 at March 31, 2019 and December 31, 2018, respectively, and repossessed loans of $1,328 and $1,175 at March 31, 2019 and December 31, 2018, respectively.

~~8. ACCRUED LIABILITIES~~

~~Accrued liabilities~~ consisted of the ~~following at March 31, 2019~~following:


	As of September 30,		As of December 31,
	2020		2019
Leased property	$	4,388	$	2,067
Prepaid rent		280		299
Repossessed homes		2,121		1,846
Total	$	6,789	$	4,212

Depreciation expense for the leased property was $53 and ~~December 31, 2018:~~

As of March 31,

As of December 31,

2019

2018
Warranty liability

$
2,886

$
3,027
Litigation reserve

495

570
Federal and state taxes payable

4,255

2,252
Accrued expenses & other accrued liabilities

2,673

3,307
Total

$
10,309

$
9,156

$124 for the three and nine months ended September 30, 2020.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

~~FOR THE~~ THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019 ~~AND 2018~~

(dollars in thousands)

8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:


	As of September 30,		As of December 31,
	2020		2019
Warranty liability	$	2,640	$	3,078
Litigation reserve		388		325
Federal and state taxes payable		2,150		1,761
Accrued expenses & other accrued liabilities		7,425		3,644
Total	$	12,603	$	8,808

9. DEBT

Lines of Credit

Revolver 1

~~The~~At December 31, 2019, the Company ~~has~~had a revolving line of credit (“Revolver 1”) with Capital One, N.A. with a maximum credit limit of $45,000 asand a maturity date of May 11, 2020. On March 30, 2020, the Company entered into an agreement with Capital One, N.A. to replace Revolver 1 with a new revolving line of credit (“New Revolver”). The New Revolver has a maximum credit limit of $70,000 and a maturity date of March ~~31, 2019. On May 12, 2017, Revolver 1 was amended to extend the maturity date to May 11, 2020 and increase the maximum borrowing availability to $45,000.~~30, 2024. For the ~~three months ended~~period January 1, 2020 through March ~~31, 2019~~30, 2020 and for the year ended December 31, ~~2018,~~2019, Revolver 1 accrued interest at ~~one month~~one-month LIBOR plus 2.40%. The interest ~~rates~~rate in effect as of ~~March~~December 31, 2019 ~~and December 31, 2018 were 4.88% and 4.78%, respectively.~~was 4.09%. Amounts available under Revolver 1 were subject to a formula based on eligible consumer loans and MHP Notes and were secured by all accounts receivable and the consumer loans receivable and MHP Notes. The amount of available credit under Revolver 1 was $16,140 as of December 31, 2019.

The New Revolver accrues interest at one-month LIBOR plus 2.00%. The interest rate in effect as of September 30, 2020 was 2.16%. As with Revolver 1, amounts available under the New Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable and ~~a percentage of~~ the consumer loans receivable and MHP Notes. The amount of available credit under the New Revolver 1 was ~~$39,839~~$26,180 as of September 30, 2020. In connection with the New Revolver, we paid certain arrangement fees and ~~$41,321 at March 31,~~other fees of approximately $0.3 million, which were capitalized as unamortized debt issuance costs and will be amortized to interest expense over the life of the New Revolver.

For the three months ended September 30, 2020 and 2019, interest expense under the Capital One Revolvers was $239 and $94, respectively, and for the nine months ended September 30, 2020 and 2019, interest expense under the Capital One Revolvers was $785 and $233, respectively. The outstanding balance as of September 30, 2020 and December 31, ~~2018,~~2019 was $43,820 and $28,860, respectively. The Company was in compliance with all ~~required~~financial covenants as of March 31, 2019. For the three months ended March 31, 2019 and 2018, interest expense was $73 and $416, respectively. The outstanding balance as of March 31, 2019 and December 31, 2018 $5,161 and $3,679, respectively. The Company was in compliance with the other financial covenantsSeptember 30, 2020, including that it maintain a tangible net worth of at least ~~$90,000~~$120,000 and that it maintain a ratio of debt to EBITDA of 4 to 1, or less.

Revolver 2

In April 2016, the Company entered into an agreement with Veritex Community Bank to secure an additional revolving line of credit of $15,000 (“Revolver 2”). Revolver 2 accrues interest at one month LIBOR plus 2.50% and all unpaid principal and interest is due at maturity on April 4, 2021. Revolver 2 is secured by all finished goods inventory excluding repossessed homes. Amounts available under Revolver 2 are subject to a formula based on eligible inventory.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

The interest rates in effect as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 were ~~4.99%~~4.17% and ~~4.85%~~4.19%, respectively. On May 12, 2017, the Company entered into an agreement to increase the line of credit to $20,000. On October 15, 2018, Revolver 2 was amended to extend the maturity date from April 4, 2019 to April 4, 2021. The amount of available credit under Revolver 2 was ~~$17,999 and $10,000~~$12,028 at March 31, ~~2019 and December 31, 2018, respectively.~~2020. The Company was in compliance with all required covenants as of March 31, ~~2019.~~2020. For the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, ~~and 2018,~~ interest expense was ~~$61~~$17 and ~~$154,~~$111, respectively. The outstanding balance as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$2,001 and $10,000.~~$2,001. The Company was in compliance with the other financial covenants that it maintain a tangible net worth of at least $80,000. In April 2020, this note was paid in full and the facility was terminated.

PPP Loan

On April 10, 2020, the Company entered into a loan with Peoples Bank as the lender in an aggregate principal amount of $6,545,700 (the “Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. The Loan was evidenced by a promissory note (the “Note”) dated April 10, 2020 and had a maturity date of April 10, 2022. The Note had an interest rate of 1.00% per annum, with the first six months of interest deferred. Principal and interest were payable monthly commencing on November 10, 2020 and could be prepaid by the Company at any time prior to maturity with no prepayment penalties. On May 1, 2020, this loan was paid in full.

Notes Payable

On April 7, 2011, the Company signed a promissory note for $4,830 with Woodhaven Bank. The amount due under the promissory note accrues interest at an annual rate of 3.85% through February 2, 2017 and then at the prime interest rate plus 0.60% through maturity on April 7, 2018. On April 7, 2018, the promissory note with Woodhaven Bank was renewed with varying amounts of principal and interest due through the maturity date, April 7, 2033. The promissory note calls for an interest rate of 4.25% and monthly payments of $30 with a final payment due at maturity. ~~The interest rates in effect as of March 31, 2019 and December 31, 2018 were 4.25% and 4.25%, respectively.~~ The note is secured by certain real property of the Company. Interest expense was ~~$38~~$37 and ~~$40~~$113 for the three and nine months ended ~~March 31,~~September 30, 2019. In October 2019, ~~and 2018, respectively. The balance outstanding on the~~this note ~~payable at March 31, 2019 and December 31, 2018~~ was ~~$3,506 and $3,552, respectively.~~paid in full.

On May 24, 2016, the Company signed a promissory note for $515 with Eagle One, LLC collateralized by the purchase of real property located in Oklahoma City, Oklahoma. The amount due under the promissory note accrues interest at an annual rate of 6.00%. The promissory note calls for monthly principal and interest payments of $6 until

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~~LEGACY HOUSING CORPORATION~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)~~

~~FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018~~

~~(dollars in thousands)~~

June 1, 2026. Interest expense was $1$0 and $7$1 for the three and nine months ended ~~March 31, 2019 and 2018, respectively. The balance outstanding on the note payable at December 31, 2018 was $414.~~September 30, 2019. In January 2019, this note ~~was paid in full.~~

~~Future minimum principal payments on notes payable at March 31, 2019 were as follows:~~

2019

$
138
2020

191
2021

201
2022

210
2023

219
Thereafter

2,547

$
3,506

On February 2, 2016, the Company entered into a $1,500 note payable agreement with stated annual interest rates of 3.75% with a related party through common ownership. The note is due on demand. Interest paid on the note payable was $14 for the three months ended March 31, 2018. In October 2018, this note payable was paid in full.

PILOT Agreement

In December 2016, the Company entered into a Payment in Lieu of Taxes (“PILOT”) agreement commonly offered in Georgia by local community development programs to encourage industry development. The net effect of the PILOT agreement is to provide the Company with incentives through the abatement of local, city and county property taxes and to provide financing for improvements to the Company’s Georgia plant (the “Project”). In connection with the PILOT agreement, the Putman County Development Authority provides a credit facility for up to $10,000 which can be drawn upon to fund Project improvements and capital expenditures as defined in the agreement. If funds are drawn, the Company would pay transactions costs and debt service payments. The PILOT agreement requires interest payments of 6.00% per annum on outstanding balances, which are due each December 1st through maturity on December 1, 2021, at which time all unpaid principal and interest are due. The PILOT agreement is collateralized by the assets of the Project. As of ~~March 31, 2019,~~September 30, 2020, the Company had not drawn on this credit facility.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

10. SHARE-BASED COMPENSATION

Pursuant to the Legacy Housing Corporation 2018 Incentive Compensation Plan (the “Compensation Plan”), the Company may issue up to 10.0 million equity awards to employees, directors, consultants and nonemployee service providers in the form of stock options, stock and stock appreciation rights. Stock options may be granted with a contractual life of up to ten years. At ~~March 31, 2019,~~September 30, 2020, the Company had ~~9.8~~9.7 million shares available for grant under the Compensation Plan.

~~The~~In February 2019, the Company granted 120,000 restricted shares of its common stock to members of senior management. The shares were granted on February 7, 2019 and had a grant date fair value of ~~$234.~~$1,636. The shares vest at a rate of 14.3% annually, beginning on February 7, 2019, and becoming fully vested on February 7, 2025. During the second quarter of 2020, 42,857 of these restricted shares were forfeited due to the departure of a member of senior managment.

The Company granted 2,936 restricted shares of its common stock to the independent directors on the Company’s Board of Directors. The shares were granted on February 7, 2019 and become fully vested on December 13, 2019.

~~Table~~In August 2019, the Company granted 39,526 restricted shares of ~~Contents~~its common stock to a member of senior management. The shares were granted on August 2, 2019 and had a grant date fair value of $496. The shares vest at a rate of 20.0% annually, beginning on August 2, 2020, becoming fully vested on August 2, 2024. This grant was canceled during the second quarter of 2020 due to the departure of the member of senior managment.

~~LEGACY HOUSING CORPORATION~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)~~

~~FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018~~

~~(dollars in thousands)~~

The Company granted 1,903 restricted shares of its common stock to the independent directors on the Company’s Board of Directors. The shares were granted on March 27, 2020 and become fully vested on December 13, 2020.

The following is a summary of restricted stock units (the “RSU”) activity (in thousands, except per unit data):


	Number of Units		Weighted Average Fair Value
Outstanding, January 1, 2019	-		-

				Number of Units		Weighted Average Grant date Fair Value
Nonvested, January 1, 2020				142	$	13.34
Granted	123	$	13.63	2	$	9.59
Vested	17	$	13.63	17	$	13.63
Outstanding, March 31, 2019	106	$	13.63
Canceled				(82)	$	13.12
Nonvested, September 30, 2020				45	$	13.46

As of ~~March 31, 2019,~~September 30, 2020, approximately ~~106,000~~45,000 RSUs remained unvested. Unrecognized compensation expense related to these RSUs at ~~March 31, 2019~~September 30, 2020 was ~~$1,402~~$512 and is expected to be recognized over ~~5.86~~4.32 years.

The Company granted 58,694 incentive stock options to a member of senior management. The options were granted on February 7, 2019 at an exercise price of $13.63 per share. The options vest at a rate of 12.5% annually, beginning on February 7, 2019, and becoming fully vested on February 7, 2026. All options expire ten years after the date of grant. Weighted-average assumptions used in the Black-Scholes option pricing model for stock options granted were as follows: risk free interest rate of 2.41%; dividend yield of 0.00%; expected volatility of common stock of 65.0% and expected life of options of 7.9 years. During the second quarter of 2020, these options were forfeited due to the departure of a senior manager.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

The Company granted 34,626 incentive stock options to a member of senior management. The options were granted on August 10, 2020 at an exercise price of $14.44 per share. The options vest at a rate of 20.0% annually, beginning on August 10, 2021, and becoming fully vested on August 10, 2025. All options expire ten years after the date of grant. Weighted-average assumptions used in the Black-Scholes option pricing model for stock options granted were as follows: risk free interest rate of 0.24%; dividend yield of 0.00%; expected volatility of common stock of 75.0% and expected life of options of 6.5 years.

The following is a summary of option activity (in thousands, except per unit data):


	Number of Units		Weighted Average Exercise Price		Weighted Average Fair Value	Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding, January 1, 2019	-		-		-	-		-

									Number of Units	Weighted Average Exercise Price		Weighted Average Fair Value		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding, January 1, 2020									59		13.63		7.69	8.85
Granted	59	$	13.63	$	7.69	6.86	$	102	35	$	14.44	$	8.67	9.86	$	—
Exercised	-		-		-	-		-	—		—		—	—
Forfeited	-		-		-	-		-	(59)		13.63		7.69	—
Outstanding, March 31, 2019	59	$	13.63	$	7.69	6.86	$	102
Outstanding, September 30, 2020									35	$	14.44	$	8.67	9.86	$	—
Exercisable, September 30, 2020									—	$	—	$	—	—	$	—

On March 31, 2020, the Company filed a registration statement on Form S-8 to register with the SEC approximately 2.3 million shares of Legacy common stock available for issuance under the 2018 Incentive Compensation Plan. The registration statement became effective upon filing.

11. INCOME TAXES

The provision for income tax expense for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019 ~~and 2018~~ was ~~$2.0~~$8.1 million and ~~$4.0~~$6.7 million, respectively. The effective tax rate for the ~~three~~nine months ended ~~March 31, 2019~~September 30, 2020 was ~~21.8%~~22.7% and differs from the federal statutory rate of 21% primarily due to state income taxes. The effective tax rate for the ~~three~~nine months ended ~~March 31, 2018~~September 30, 2019 was ~~42.7%~~23.3% and differs from the federal statutory rate of 21% due to ~~deferred tax expense associated with the corporate reorganization,~~ state income ~~taxes and other permanent differences between book and tax basis.~~taxes.

12. COMMITMENTS AND CONTINGENCIES

As of January 1, 2020, the Company instituted a self-insured health benefits plan with a stop-loss policy, which provides medical benefits to employees electing coverage under the plan. The Company estimates and records costs for incurred but not reported medical claims and claim development. This reserve is based on historical experience and other assumptions, some of which are subjective. The Company will adjust its self-insured medical benefits reserve based on actual experience, estimated costs and changes to assumptions. At September 30, 2020, the Company accrued a $271 liability for incurred but not reported claims.

The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The Company’s obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The maximum amount for which the Company was liable under such agreements approximated ~~$1,549~~$603 and ~~$2,186~~$260 at ~~March 31, 2019~~September 30, 2020 and ~~December 31, 2018, respectively, without reduction for the resale value of the homes. The Company considers its~~

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

~~FOR THE~~ THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019 ~~AND 2018~~

(dollars in thousands)

December 31, 2019, respectively, without reduction for the resale value of the homes. The Company considers its obligations on current contracts to be immaterial and accordingly have not recorded any reserve for repurchase commitment as of ~~March 31, 2019~~September 30, 2020 or December 31, ~~2018.~~2019.

Leases. The Company leases facilities under operating leases that typically have ~~10 ‑year~~10-year terms. These leases usually offer the Company a right of first refusal that affords the Company the option to purchase the leased premises under certain terms in the event the landlord attempts to sell the leased premises to a third party. Rent expense was ~~$131~~$135 and ~~$91~~$139 for the three months ended ~~March 31,~~September 30, 2020, and 2019, respectively, and ~~2018,~~$423 and $403 for the nine months ended September 30, 2020, and 2019, respectively. The Company also subleases properties to third parties, ranging from ~~3 ‑year~~3-year to ~~11 ‑year~~11-year terms with various renewal options. Rental income from the subleased property was approximately ~~$89~~$90 and ~~$92~~$86 for the three months ended ~~March 31,~~September 30, 2020 and 2019, respectively, and ~~2018,~~$264 and $272 for the nine months ended September 30, 2020 and 2019, respectively.

Future minimum lease commitments under all ~~non‑cancelable~~non-cancelable operating leases for each of the next five years at ~~March 31, 2019,~~September 30, 2020, are as follows:


2019	$	451

2020		513	$	148
2021		450		505
2022		374		435
2023		318		422
2024				314
Thereafter		969		808
Total	$	3,075	$	2,632

Legal Matters

The Company is party to certain legal proceedings that arise in the ordinary course and are incidental to its business. Certain of the claims pending against the Company in these proceedings allege, among other things, breach of contract and warranty, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s financial position, liquidity or results of operations. However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company’s financial position, liquidity or results of operations in any future reporting periods.

13. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

On February 2, 2012, the Company entered into a master interest rate swap agreement. The Company elected not to designate the interest rate swap agreements as cash flow hedges and, therefore, gains or losses on the agreements as well as the other offsetting gains or losses on the hedged items attributable to the hedged risk are recognized in current earnings. ASC ~~815‑10,~~815-10, Derivatives and Hedging, requires derivative instruments to be measured at fair value and recorded in the statements of financial position as either assets or liabilities. The Company entered into interest rate swap agreement with Capital One Bank on June 12, 2017 to fix the variable rate portion for $8,000 of the line of credit. This interest rate swap agreement matured on May 11, 2020 and is the only one outstanding ~~at March 31, 2019 and has a maturity of May 11,~~during 2020. The fair values of the interest rate swap agreement ~~are assets~~was an asset included in prepaid expenses and other current assets and ~~were $50 and $80~~was $3 at ~~March 31, 2019 and~~ December 31, ~~2018, respectively.~~2019. Included in the statements of operations for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019 ~~and 2018~~ were losses of ~~$16~~$15 and ~~$7,~~$37, respectively, which are the result of the changes in the fair values of the interest rate swap agreement.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

~~FOR THE~~ THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019 ~~AND 2018~~

(dollars in thousands)

Fair Value Measurements

The Company accounts for its investments and derivative instruments in accordance with ASC ~~820‑10,~~ 820-10, Fair Value Measurement, which among other things provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurement) and the lowest priority to unobservable inputs (Level III measurements). The three levels of fair value hierarchy under ASC ~~820‑10,~~ 820-10, Fair Value Measurement, are as follows:

Level I Quoted prices are available in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement ~~date~~.date.

Level II Significant observable inputs other than quoted prices in active markets for which inputs to the valuation methodology include: (1) Quoted prices for similar assets or liabilities in active markets; (2) Quoted prices for identical or similar assets or liabilities in inactive markets; (3) Inputs other than quoted prices that are observable; (4) Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability.

Level III Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

The asset or liability fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value ~~measurement~~.measurement.

The Company uses derivatives to manage risks related to interest rate movements. The Company does not enter into derivative contracts for speculative purposes. Interest rate swap contracts are recognized as assets or liabilities on the balance sheets and are measured at fair value. The fair value was calculated and provided by the lender, a Level II valuation technique. Management reviewed the fair values for the instruments as provided by the lender and determined the related asset and liability to be an accurate estimate of future gains and losses to the Company. The fair value of the interest rate swap was an asset valued at $3 at December 31, 2019.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, consumer loans, MHP Notes, other notes, accounts payable, lines of credit, notes payable, and dealer portion of consumer loans.

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate their respective fair values because of the ~~short‑term~~short-term maturities or expected settlement dates of these instruments. This is considered a Level I valuation technique. The MHP Notes, other notes, lines of credit, and notes payable have variable interest rates that reflect market rates and their fair value approximates their carrying value. This is considered a Level II valuation technique. The Company also assessed the fair value of the consumer loans receivable based on the discounted value of the remaining principal and interest cash flows. The Company determined that the fair value of the consumer loan portfolio was approximately ~~$105,108~~$134,000 compared to the book value of ~~$98,904~~$108,573 as of ~~March 31, 2019,~~September 30, 2020, and a fair value of approximately ~~$109,231~~$119,000 compared to the book value of ~~$97,175~~$105,042 as of December 31, ~~2018.~~2019. This is a Level III valuation technique.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

~~FOR THE~~ THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019 ~~AND 2018~~

(dollars in thousands)

14. EARNINGS PER SHARE

Basic earnings per common share (“EPS”) is computed based on the ~~weighted‑average~~weighted-average number of common shares outstanding during each reporting period. Diluted EPS is based on the weighted-average number of common shares outstanding plus the number of additional shares that would have been outstanding had the dilutive common shares been issued. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS.


	Three months ended
	March 31,
	2019		2018

					Three months ended				Nine months ended
					September 30,				September 30,
					2020		2019		2020		2019
Numerator:
Net income (in 000's)	$	7,213	$	5,361	$	8,446	$	6,138	$	27,507	$	21,984
Denominator:
Basic weighted-average common shares outstanding		24,516,762		20,000,000		24,192,157		24,317,143		24,237,402		24,400,534
Effect of dilutive securites:
Effect of dilutive securities:
Restricted stock grants		54,326		-		9,450		21,696		879		20,821
Stock options						12,672		—		5,646		—
Diluted weighted-average common shares outstanding		24,571,088		20,000,000		24,214,279		24,338,839		24,243,927		24,421,355
Earnings per share attributable to Legacy Housing Corp
Earnings per share attributable to Legacy Housing Corporation
Basic	$	0.29	$	0.27	$	0.35	$	0.25	$	1.13	$	0.90
Diluted	$	0.29	$	0.27	$	0.35	$	0.25	$	1.13	$	0.90

The diluted earnings per share calculation excludes 123,624 potential shares for the three months ended September 30, 2019, and excludes 54,446 and 124,498 potential shares for the nine months ended September 30, 2020 and 2019, respectively because the effect of including theses potential shares would be antidilutive.

15. RELATED PARTY TRANSACTIONS

Bell Mobile Homes, a retailer owned by one of the Company’s significant owners, purchases manufactured homes from the Company. Accounts receivable balances due from Bell Mobile Homes were ~~$481~~$34 and ~~$414~~$549 as of ~~March 31, 2019~~September 30, 2020 and December 31, ~~2018,~~2019, respectively. Accounts payable balances due to Bell Mobile Homes for maintenance and related services were $0$33 and ~~$123~~$74 as of ~~March 31, 2019~~September 30, 2020 and December 31, ~~2018,~~2019, respectively. Home sales to Bell Mobile Homes were ~~$858~~$383 and ~~$583~~$829 for the three months ended ~~March 31,~~September 30, 2020 and 2019, respectively and ~~2018, respectively.~~

Shipley Bros., Ltd. (“Shipley Bros.”), a retailer owned by one of the Company’s significant shareholders, purchases manufactured homes from the Company. Accounts receivable balances due from Shipley Bros. were $224$1,800 and ~~$832 as of March 31, 2019 and December 31, 2018, respectively.~~

On February 2, 2016, the Company entered into a $1,500 note payable agreement with stated annual interest rates of 3.75% with a related party through common ownership. The note was due on demand. Interest paid on the note payable to Shipley and Sons was $14$3,118 for the ~~three~~nine months ended ~~March 31, 2018. On October 18, 2018, this note payable was paid in full.~~

~~At March 31,~~September 30, 2020 and 2019, the Company has a receivable of $375 from a principal shareholder for certain business expenses related to a potential business venture. This amount is included in the Company’s accounts receivable balance as of March 31, 2019.

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~~LEGACY HOUSING CORPORATION~~

~~NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)~~

~~FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018~~

~~(dollars in thousands)~~

respectively.

16. SUBSEQUENT EVENTS

On April 17, 2019, the Company purchased 300,000 shares of its common stock at the price of $10.20 per share, pursuant to the Company’s repurchase program. Under the repurchase program, the Company may purchase up to $10,000 of its common stock, Share purchases may be made from time to time in the open market or through privately negotiated transactions depending on market conditions, share price, trading volume and other factors. Such purchases, if any, will be made in accordance with applicable insider trading and other securities laws and regulations. These repurchases may be commenced or suspended at any time or from time to time without prior notice.

In connection with the preparation of these financial statements, an evaluation of subsequent events was performed through the date of filing and there were no other events that have occurred that would require adjustments to the financial statements.

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

The following discussion should be read in conjunction with the financial statements and accompanying notes and the information contained in other sections of this Form 10-Q. It contains ~~forward‑looking~~forward-looking statements that involve risks and uncertainties, and is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those anticipated by our management in these ~~forward‑looking~~forward-looking statements as a result of various factors, including those discussed in this Form 10-Q and in our Registration Statement on Form S-1, particularly under the heading “Risk Factors.”

Overview

Legacy Housing Corporation builds, sells and finances manufactured homes and “tiny houses” that are distributed through a network of independent retailers and ~~company‑owned~~company-owned stores and are sold directly to manufactured housing communities. We are the fourth largest producer of manufactured homes in the United States as ranked by number of homes manufactured based on information available from the Manufactured Housing Institute and IBTS for the ~~second~~fourth quarter of ~~2018.~~2019. With current operations focused primarily in the southern United States, we offer our customers an array of quality homes ranging in size from approximately 390 to 2,667 square feet consisting of 1 to 5bedrooms, with 1 to 31/₂ bathrooms. Our homes range in price, at retail, from approximately ~~$18,000~~$22,000 to ~~$122,000.~~$140,000. For the three and nine months ended ~~March 31, 2019,~~September 30, 2020, we sold ~~918~~961 and 2,866 home sections, respectively (which are entire homes or single floors that are combined to create complete homes) ~~and for~~. For the three and nine months ended ~~March 31, 2018,~~September 30, 2019, we sold ~~1,032~~968 and 2,914 home sections. We commenced operations in 2005 and have experienced strong sales growth and increased our equity holders’ capital at a compound annual growth rate of approximately 28% between 2009 and 2018.sections, respectively.

The Company has one reportable segment. All of our activities are interrelated, and each activity is dependent and assessed based on how each of the activities of Company supports the others. For example, the sale of manufactured homes includes providing transportation and consignment arrangements with dealers. We also provide financing options to the customers to facilitate such sale of homes. In addition, the sale of homes is directly related to financing provided by us. Accordingly, all significant operating and strategic decisions by the chief operating ~~decision‑maker,~~decision-maker, the Executive Chairman of the Board, are based upon analyses of our company as one segment or unit.

We believe our company is one of the most vertically integrated in the manufactured housing industry, allowing us to offer a complete solution to our customers, from manufacturing ~~custom‑made~~custom-made homes using quality materials and distributing those homes through our expansive network of independent retailers and ~~company‑owned~~company-owned distribution locations, to providing tailored financing solutions for our customers. Our homes are constructed in the United States at one of our three manufacturing facilities in accordance with the construction and safety standards of the U.S. Department of Housing and Urban Development (“HUD”). Our factories employ ~~high‑volume~~high-volume production techniques that allow us to produce, on average, approximately 75 home sections, or 62 ~~fully‑completed~~fully-completed homes depending on product mix, in total per week. We use quality materials and operate our own component manufacturing facilities for many of the items used in the construction of our homes. Each home can be configured according to a variety of floor plans and equipped with such features as fireplaces, central air conditioning and ~~state‑of‑the‑art~~state-of-the-art kitchens.

Our homes are marketed under our premier “Legacy” brand name and currently are sold primarily across 15 states through a network of ~~111~~84 independent retail locations, ~~12 company‑owned~~13 company-owned retail locations and through direct sales to owners of manufactured home communities. Our ~~12 company‑owned~~13 company-owned retail locations, including ~~ten~~11 Heritage Housing stores and two Tiny House Outlet stores exclusively sell our homes. For the ~~three~~nine months ended ~~March 31, 2019,~~September 30, 2020, approximately ~~54%~~45% of our manufactured homes were sold in Texas, followed by ~~10%~~11% in Michigan, 7% in Georgia, 8%5% in ~~Florida, 8%~~Kansas, 5% in ~~Kansas~~North Carolina, and 5% in ~~Michigan.~~Kentucky. For the ~~three~~nine months ended ~~March 31, 2018, 48%~~September 30, 2019, approximately 43% of our manufactured homes were sold in Texas, followed by ~~20%~~12% in Oklahoma, 7% in Alabama, 7% in Georgia, ~~13%~~and 5% in ~~Louisiana, 4% in Colorado and 4% in Oklahoma.~~Tennessee. We plan to deepen our distribution channel by using cash from operations and borrowings from our lines of credit to expand our ~~company‑owned~~company-owned retail locations in new and existing markets.

We offer three types of financing solutions to our customers. We provide floor plan financing for our independent retailers, which takes the form of a consignment arrangement between the retailer and us. We also provide consumer financing for our products which are sold to ~~end‑users~~end-users through both independent and ~~company‑owned~~company-owned retail locations, and we provide financing solutions to manufactured housing community owners that buy our products for use

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in their manufactured housing communities. Our ability to offer competitive financing options at our retail locations

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provides us with several competitive advantages and allows us to capture sales which may not have otherwise occurred without our ability to offer consumer financing.

Corporate Conversion

Prior to January 1, 2018, we were a Texas limited partnership named Legacy Housing, Ltd. Effective January 1, 2018, we converted into a Delaware corporation pursuant to a statutory conversion, or the Corporate Conversion, and changed our name to Legacy Housing Corporation. All of our outstanding partnership interests were converted on a proportional basis into shares of common stock of Legacy Housing Corporation. Effective December 31, 2019, the Company reincorporated from a Delaware corporation to a Texas corporation. For more information, see “Corporate Conversion” in Note 1.

Following the Corporate Conversion, Legacy Housing Corporation continues to hold all of the property and assets of Legacy Housing, Ltd. and all of the debts and obligations of Legacy Housing, Ltd. continue as the debts and obligations of Legacy Housing Corporation. The purpose of the Corporate Conversion was to reorganize our corporate structure so that the ~~top‑tier~~top-tier entity in our corporate structure is a corporation rather than a limited partnership and so that our existing owners own shares of our common stock rather than partnership interests in a limited partnership. Except as otherwise noted, the financial statements included in this Form 10-Q are those of Legacy Housing ~~Ltd.~~Corporation.

Factors Affecting Our Performance

We believe that the growth of our business and our future success depend on various opportunities, challenges, trends and other factors, including the following:

●

Consistent with our ~~long‑term~~long-term strategy of conservatively deploying our capital to achieve above average rates of return, we intend to expand our retail presence in the geographic markets we now serve, particularly in the southern United States. Each retail center requires between ~~$1,000,000~~$500,000 and ~~$2,000,000~~$1,500,000 to acquire the location, situate an office, provide inventory, and provide the initial working capital. We ~~expect~~initially anticipated opening 2 to ~~open 8 to 12~~4 additional retail centers by the end of ~~2020.~~

2020, but we will reassess those plans once we have a clearer understanding of the COVID-19 pandemic’s impact on the retail business.

●

We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions. As of September 30, 2020, these properties include the following:


Location	Description	Date of Acquisition	Cost
Bastrop County, Texas	400 Acres	April 2018	$	4,400,000
Bexar County, Texas	100 Acres	November 2018		1,300,000
Horseshoe Bay, Texas	133 Acres	Various 2018-2019		2,431,000
Johnson County, Texas	91.5 Acres	July 2019		445,000
Venus, Texas	50 Acres	August 2019		422,000
			$	8,998,000

●

We also expect to provide financing solutions to a select group of our manufactured housing ~~community‑owner~~community-owner customers in a manner that includes developing new sites for products in or near urbanlocations where there is a shortage of sites to place our products. These solutions will be structured to give us an attractive return on investment when coupled with the gross margin we expect to make on products specifically targeted for sale to these new manufactured housing communities.

●

Finally, our financial performance will be impacted by our ability to fulfill current orders for our manufactured homes from dealers and customers. Currently, our two Texas manufacturing facilities are operating at near peak capacity, with limited ability to increase the volume of homes produced at those plants. Our Georgia manufacturing facility has unutilized square footage available and with additional investment can add capacity to increase the number of homes that can be manufactured. We intend to increase production at the Georgia facility over time, particularly in response to orders increasingly being generated from new markets in Florida and the Carolinas. In order to maintain our growth, we will need to

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be able to continue to properly estimate anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the timing of production schedules and the levels and utilization of inventory, equipment and personnel.

●

The coronavirus pandemic is an evolving threat to the economy and all businesses. At this time both the duration of the pandemic and the magnitude of the economic consequences are unknown. Risks to the Company include but are not limited to:

increased loan losses or deferred loan payments as loan obligors suffer cash flow issues resulting from reduced employment, reduced rental income or unit sales, or other factors;

reduced sales volume as potential customers are unable to shop for new homes or cannot qualify for a home purchase, retail dealers or company stores reduce or stop operations, or MHP owners reduce their future home purchases;

reduced production resulting from factors such as the spread of the illness through the Company’s workforce, reduced product demand, or government-mandated closures of our factories, company-owned stores, or retail lots of independent dealers who carry our products;

delays in development projects as zoning, regulatory, and permitting decisions are likely to be postponed and the expected negative impact of the pandemic on the construction industry;

reduced raw material availability related to global supply chain disruption from the pandemic, including possible border closures;

decreased cash flow from operations which could negatively affect our liquidity;

an outbreak of illness among our management and accounting staff could negatively affect our ability to maintain operations, operate our financial systems, delay our statutory reporting, and reduce our internal control of financial reporting.

We continue to monitor government responses to support the economy and evaluate how those actions might mitigate the risks noted above. At this time, we believe that the pandemic will have a negative effect on our financial results that could range from minor to material.

Management has taken a number of actions in recent months, including stimulating demand by offering discounts and modified purchase terms, reducing production labor, suspending overtime, and reducing rates of pay for non-production workers. Additionally, the Company negotiated a new credit agreement with its primary bank that expanded and extended our credit facility. The new credit agreement closed on March 30, 2020.

Results of Operations

The following discussion should be read in conjunction with the information set forth in the financial statements and the accompanying notes appearing elsewhere in this Form 10-Q.

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Comparison of Three Months ended ~~March 31,~~September 30, 2020 and 2019 ~~and 2018~~ (in thousands)


	Three months ended
	March 31,
	2019		2018		$ change		% change

									Three months ended
									September 30,
									2020		2019		$ change		% change
Net revenue:
Product sales	$	31,550	$	37,414	$	(5,864)	(15.7)	%	$	36,566	$	35,355	$	1,211	3.4	%
Consumer and MHP loans interest		5,530		4,394		1,136	25.9	%		6,428		5,688		740	13.0	%
Other		874		878		(4)	(0.5)	%		749		893		(144)	(16.1)	%
Total net revenue		37,954		42,686		(4,732)	(11.1)	%		43,743		41,936		1,807	4.3	%
Operating expenses:
Cost of product sales		21,885		27,647		(5,762)	(20.8)	%		27,839		27,504		335	1.2	%
Selling, general administrative expenses		6,491		4,799		1,692	35.3	%		4,525		6,293		(1,768)	(28.1)	%
Dealer incentive		210		335		(125)	(37.3)	%		550		85		465	547.1	%
Income from operations		9,368		9,905		(537)	(5.4)	%		10,829		8,054		2,775	34.5	%
Other income (expense)
Non‑operating interest income		39		51		(12)	(23.5)	%		246		115		131	113.9	%
Miscellaneous, net		3		34		(31)	(91.2)	%		96		12		84	700.0	%
Gain on settlement, net										—		—		—		%
Interest expense		(189)		(639)		450	(70.4)	%		(239)		(148)		(91)	61.5	%
Total other		(147)		(554)		407	(73.5)	%		103		(21)		124	(590.5)	%
Income before income tax expense		9,221		9,351		(130)	(1.4)	%		10,932		8,033		2,899	36.1	%
Income tax expense		(2,008)		(3,990)		1,982	(49.7)	%		(2,486)		(1,895)		(591)	31.2	%
Net income	$	7,213	$	5,361	$	1,852	34.5	%	$	8,446	$	6,138	$	2,308	37.6	%

Product sales primarily consist of direct sales, commercial sales, consignment sales and retail store sales. Product sales decreased ~~$5.9~~$1.2 million, or ~~15.7%~~3.4%, during the three months ended ~~March 31, 2019~~September 30, 2020 as compared to the same period in ~~2018.~~2019. This change was driven by an increase in commercial sales, consignment sales and other product sales offset by a ~~15.9% decrease~~decline in ~~volume of homes sold. The first quarter of 2018 included $8.9 million of~~direct sales ~~as a subcontractor operating under a contract with FEMA to provide housing for victims of Hurricane Harvey. Direct~~and retail store sales. Consignment sales ~~decreased $8.1~~increased $0.4 million to ~~$4.5~~$12.0 million in 2020 from $11.6 million in 2019, from $12.5 million in 2018 primarily due to the nonrecurring sales to FEMA. Commercial sales increased $5.5 million to $12.5 million in 2019 from $7.0 million in 2018, and our company‑owned retail storescommercial sales increased $0.8 million to ~~$3.3~~$17.7 million in 2020 from $16.9 million in 2019 ~~from $2.5~~and our company-owned retail stores sales increased $1.0 million to $3.9 million in ~~2018. These increases were~~2020 from $3.0 million in 2019. This increase was partially offset by a net ~~$2.7~~$1.2 million decrease in ~~consignment sales. The remaining decrease of $1.4~~direct sales to $1.5 million in 2020 from $2.6 million in 2019. Other product sales increased $0.2 million to $1.5 million in 2020 from $1.3 million in 2019 and is primarily due to ~~a decline~~an increase in ~~direct freight related to the 2018 FEMA sales.~~parts sales and miscellaneous sales income.

Net revenue attributable to our ~~factory‑built~~factory-built housing consisted of the following during the ~~first~~ three months of ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended
	March 31,
	(in thousands)
	2019		2018		$ Change		% Change

									Three Months Ended
									September 30,
									(in thousands)
									2020		2019		$ Change		% Change
Net revenue:
Products sold	$	31,550	$	37,414	$	(5,864)	(15.7)	%	$	36,566	$	35,355	$	1,211	3.4	%
Total products sold		767		912		(145)	(15.9)	%		830		864		(34)	(3.9)	%
Net revenue per product sold	$	41,134	$	41,024	$	110	0.3	%	$	44.1	$	40.9	$	3	7.7	%

For the three months ended ~~2019,~~ September 30, 2020, our net revenue per product sold increased ~~in part~~ because of ~~increased~~changes in our product sales mix. We had increases in consignment sales and sales to manufactured home communities partially offset by declines in direct sales and ~~increased sales~~company-owned retail store sales. Sales through our ~~company‑owned~~company-owned retail stores ~~all of which carry~~and sales to manufactured home communities have higher ~~margins.~~margins than our direct sales and consignment sales. In addition, there ~~were multiple~~was a price ~~increases~~increase to our product prices in the third quarter of 2020 due to rising material and labor costs, which resulted in higherhome sales prices and more revenue generated per home sold.

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Consumer and MHP loans interest income grew ~~$1.1~~$0.7 million, or ~~25.9%~~13.0%, during the three months ended ~~March 31, 2019~~September 30, 2020 as compared to the same period in ~~2018~~2019 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio. Between ~~March 31,~~September 30, 2019 and ~~March 31, 2018~~September 30, 2020 our MHP Note portfolio increased by $46.4 million and the consumer loan portfolio increased by ~~$10.3 million and the MHP Note portfolio increased by $11.2~~$5.5 million.

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Other revenue primarily consists of service fees and consignment fees. Other revenue ~~remained flat at $0.9 million for the three months ended March 31, 2019 and 2018 as a~~decreased $0.1 million ~~increase in consignment fees was offset by a $0.1 decrease in service fees.~~

~~The cost of product sales decreased $5.8 million,~~ or ~~20.8%,~~16.1% during the three months ended ~~March 31, 2019~~September 30, 2020 as compared to the same period in ~~2018. The reduction in costs~~2019 and is primarily ~~related~~due to ~~the declining number~~a $0.1 million decrease in consignment fees revenue.

The cost of ~~homes sold in 2019.~~

~~Selling, general and administrative expenses~~product sales increased ~~$1.7~~$0.3 million, or ~~35.3%~~1.2%, during the three months ended ~~March 31, 2019~~September 30, 2020 as compared to the same period in ~~2018.~~2019. The increase in costs is primarily related to increases in the cost of materials and labor in 2020.

Selling, general and administrative expenses decreased $1.8 million, or 28.1%, during the three months ended September 30, 2020 as compared to the same period in 2019. This ~~increase~~decrease was primarily due to ~~increased operations of our company‑owned retail lots, increases in advertisng and promotions, the opening of~~ a corporate office in Bedford, Texas and a sales office in Norcross, Georgia. We also incurred an increase in accounting fees, incentive compensation and non-capitalizable costs related to our operations as a public company. These increases were partially offset by a $0.6$0.4 million decrease in warranty costs, ~~related to the decline~~a $0.3 million decrease in ~~product sales to FEMA.~~delivery costs, a $0.1 million decrease in salaries and incentive costs, a $0.4 decrease in loan loss reserve, a $0.3 million decrease in insurance expense, a $0.1 million decrease in consulting and professional fees and a net $0.2 million decrease in other miscellaneous costs. In addition, dealer incentive expense ~~decreased $0.1~~increased $0.5 million ~~or 37.3%~~ in ~~2019~~2020 as compared to ~~2018. This decrease was the result of our decline in consignment sales.~~2019.

Other income (expense), net ~~was a loss of~~increased $0.1 million during the three months ended ~~March 31, 2019~~September 30, 2020 as compared to ~~a loss of $0.6 million~~the same period in ~~2018.~~2019. This ~~decline~~increase was primarily due to ~~a decrease~~an increase of ~~$43.6~~$0.1 million in ~~our average borrowings outstanding on our lines~~non-operating interest income and an increase of ~~credit after the completion of our IPO. Following the completion of our IPO, we paid off over $40.0~~$0.1 million ~~borrowed against our lines of credit.~~in miscellaneous, net partially offset by a $0.1 million increase in interest expense.

Income tax expense during the three months ended ~~March 31, 2019~~September 30, 2020 was ~~$2.0~~$2.5 million compared to ~~$4.0~~$1.9 million for the same period in ~~2018.~~ 2019. The effective tax rate for the three months ended ~~March 31, 2019~~September 30, 2020 was ~~21.8%~~22.7% and differs from the federal statutory rate of 21% primarily due to state income taxes. The effective tax rate for the three months ended ~~March 31, 2018~~September 30, 2019 was ~~42.7%~~23.6% and differs from the federal statutory rate of 21% primarily due to ~~recognition~~state income taxes.

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Comparison of Nine Months ended September 30, 2020 and 2019 (in thousands)


	Nine months ended
	September 30,
	2020		2019		$ change		% change
Net revenue:
Product sales	$	106,940	$	106,671	$	269	0.3	%
Consumer and MHP loans interest		18,919		16,330		2,589	15.9	%
Other		2,163		2,650		(487)	(18.4)	%
Total net revenue		128,022		125,651		2,371	1.9	%
Operating expenses:
Cost of product sales		78,387		77,265		1,122	1.5	%
Selling, general administrative expenses		14,202		18,928		(4,726)	(25.0)	%
Dealer incentive		929		534		395	74.0	%
Income from operations		34,504		28,924		5,580	19.3	%
Other income (expense)
Non‑operating interest income		697		200		497	248.5	%
Miscellaneous, net		145		46		99	215.2	%
Gain on settlement, net		1,075		—		1,075		%
Interest expense		(817)		(495)		(322)	65.1	%
Total other		1,100		(249)		1,349	(541.8)	%
Income before income tax expense		35,604		28,675		6,929	24.2	%
Income tax expense		(8,097)		(6,691)		(1,406)	21.0	%
Net income	$	27,507	$	21,984	$	5,523	25.1	%

Product sales increased $0.3 million, or 0.3%, during the nine months ended September 30, 2020 as compared to the same period in 2019. This change was driven by an increase in commercial sales and retail store sales offset by a decline in direct sales, consignment sales and other product sales. Commercial sales increased $7.6 million to $54.5 million in 2020 from $47.0 million in 2019 and our company-owned retail stores sales increased $0.2 million to $11.5 million in 2020 from $11.3 million in 2019. This increase was partially offset by a net $2.3 million decrease in consignment sales to $29.9 million in 2020 from $32.2 million in 2019, a $5.1 million decrease in direct sales to $7.5 million in 2020 from $12.6 million in 2019. Other product sales decreased $.01 million to $3.5 million in 2020 from $3.6 million in 2019 and is primarily due to a decrease in parts sales and miscellaneous sales income.

Net revenue attributable to our factory-built housing consisted of the following during the nine months of 2020 and 2019:


	Nine Months Ended
	September 30,
	(in thousands)
	2020		2019		$ Change		% Change
Net revenue:
Products sold	$	106,940	$	106,671	$	269	0.3	%
Total products sold		2,539		2,522		17	0.7	%
Net revenue per product sold	$	42.1	$	42.3	$	(0)	(0.4)	%

For the nine months ended September 30, 2020, our net revenue per product sold remained flat. We had declines in direct sales and consignment sales offset by increases in sales to manufactured home communities and company-owned retail stores. Sales through our company-owned retail stores and sales to manufactured home communities have higher margins than our direct sales and consignment sales.

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Consumer and MHP loans interest income grew $2.6 million, or 15.9%, during the nine months ended September 30, 2020 as compared to the same period in 2019 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio. Between September 30, 2020 and September 30, 2019 our MHP Note portfolio increased by $46.4 million and the consumer loan portfolio increased by $5.5 million.

Other revenue primarily consists of service fees and consignment fees. Other revenue decreased $0.5 million or 18.4% during the nine months ended September 30, 2020 as compared to the same period in 2019 due to a $0.2 million decrease in service fee revenue, $0.2 million decrease in other income and a $0.1 decrease in consignment fees revenue.

The cost of product sales increased $1.1 million, or 1.5%, during the nine months ended September 30, 2020 as compared to the same period in 2019. The increase in costs is primarily related to the increasing number of home units sold and increases in the cost of materials and labor in 2020.

Selling, general and administrative expenses decreased $4.7 million, or 25.0%, during the nine months ended September 30, 2020 as compared to the same period in 2019. This decrease was primarily due to $1.2 million of retail store expenses recorded as SG&A in the first quarter of 2019 that were subsequently recorded in cost of sales later in 2019, a $1.1 million decrease in warranty costs, a $0.4 million decrease in advertising and promotions, a $0.7 decrease in loan loss reserve, a $0.4 million decrease in consulting and professional fees, a $0.2 million decrease in salaries and incentive costs, a $0.2 million expense in the first quarter of 2019 for settlement of a ~~$2.1~~lawsuit and a net $0.4 million ~~deferred~~decrease in other miscellaneous costs. In addition, dealer incentive expense increased $0.4 million, or 74.0% in 2020 as compared to 2019.

Other income (expense), net increased $1.3 million during the nine months ended September 30, 2020 as compared to the same period in 2019. This increase was primarily due to a $1.1 million gain due to the settlement of a lawsuit with a previous vendor for the Company, an increase of $0.5 million in non-operating interest income and an increase of $0.1 million in miscellaneous, net income offset by a $0.3 million increase in interest expense.

Income tax expense ~~associated with~~during the ~~corporate reorganization,~~nine months ended September 30, 2020 was $8.1 million compared to $6.7 million for the same period in 2019. The effective tax rate for the nine months ended September 30, 2020 was 22.7% and differs from the federal statutory rate of 21% primarily due to state income ~~taxes~~taxes. The effective tax rate for the nine months ended September 30, 2019 was 23.3% and ~~other permanent differences between book and tax basis.~~differs from the federal statutory rate of 21% primarily due to state income taxes.

Liquidity and Capital Resources

Cash and Cash Equivalents

We consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. We maintain cash balances in bank accounts that may, at times, exceed federally insured limits. We have not incurred any losses from such accounts and management considers the risk of loss to be minimal. We believe that cash flow from operations, cash and cash equivalents at ~~March 31, 2019, together with cash flow from operations,~~September 30, 2020, and availability on our lines of credit will be sufficient to fund our operations and provide for growth for the next 12 to 18 months and into the foreseeable future. As of ~~March 31, 2019,~~September 30, 2020, we had approximately ~~$3.1~~$1.6 million in cash and cash equivalents, compared to ~~$2.6~~$1.7 million as of December 31, ~~2018. In January 2019, we recived gross proceeds of $7.2 million from the exercise of the underwriters’ option to purchase additional shares to cover over-allotments in connection~~2019. We negotiated a new credit agreement with ~~the IPO. These proceeds were primarily used for payments to reduce~~ our ~~borrowings under the lines of credit.~~

~~Cash Flow Activities~~

Three Months Ended

March 31,

(in thousands)

2019

2018

Net cash provided by operating activities

$
3,391

$
4,488
Net cash used in investing activities

$
(1,985)

$
(489)
Net cash provided by (used in) financing activities

$
(907)

$
(2,717)
Net change in cash and cash equivalents

$
499

$
1,282
Cash and cash equivalents at beginning of period

$
2,599

$
428
Cash and cash equivalents at end of period

$
3,098

$
1,710

primary bank that expanded and extended our credit facility. The new credit agreement closed on March 30, 2020.

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Cash Flow Activities


	Nine Months Ended
	September 30,
	(in thousands)
	2020		2019

Net cash provided by (used in) operating activities	$	(8,348)	$	3,076
Net cash used in investing activities	$	(3,754)	$	(6,886)
Net cash provided by financing activities	$	12,021	$	3,075
Net change in cash and cash equivalents	$	(81)	$	(735)
Cash and cash equivalents at beginning of period	$	1,724	$	2,599
Cash and cash equivalents at end of period	$	1,643	$	1,864

Comparison of Cash Flow Activities from ~~March 31,~~September 30, 2020 to September 30, 2019 ~~to March 31, 2018~~

Net cash provided by operating activities decreased ~~$1.1~~$11.4 million during the ~~three~~nine months ended ~~March 31, 2019,~~September 30, 2020, compared to the comparable period in ~~2018,~~2019, primarily as a result of ~~an increase in net working capital used for additional~~increased volume of loan originations ~~associated with higher demand for home~~supporting sales to MHPs net of principal collections, increased growth in growth in consumer loan originations net of principal collections, decreased payables and ~~a decrease in cash collections on~~increased accounts receivable. The decrease in operating cash flows described above was partially offset ~~from~~by cash generated by operating income before non-cash adjustments, ~~a decrease in inventory purchases~~increased accrued expenses, reduced prepaid expenses and ~~an increase in accounts payable and accrued liabilities.~~reduced inventory.

Net cash used in investing activities of ~~$2.0~~$3.8 million in ~~2019~~2020 was primarily attributable to ~~$0.6~~$2.2 million used for the acquisition of ~~land for development, $0.1~~property plant and equipment, $0.3 million used to purchase consumer loans and ~~$1.4~~$5.4 million used for loans to third parties for the development of manufactured housing parks. ~~In addition, we had capital expenditures of $0.1 million for property plant and equipment and $0.1 million for transportion equipment.~~ These were offset by collections of ~~$0.1~~$3.2 million of loans we made to third parties for the development of manufactured housing parks and collections of ~~$0.2~~$0.9 million from our purchased consumer loans.

Net cash ~~used in~~provided by financing activities of ~~$0.9~~$12.0 million in ~~2019~~2020 was primarily attributable to net ~~payments~~proceeds of ~~$6.5~~$12.7 million on our lines of credit ~~$0.5~~and $0.8 million ~~of payments on our notes payable and $0.6 million of payments to reduce our~~increase in escrow ~~liability,~~deposits received by the company offset by ~~net proceeds~~$1.4 million for purchase of ~~$6.7 million from the issuance of our common~~treasury stock.

Indebtedness

Capital One Revolver. ~~We have~~At December 31, 2019, we had a revolving line of credit (“Revolver 1”) with Capital One, N.A. with a maximum credit limit of $~~45,000,000 as~~$45,000,000 and a maturity date of May 11, 2020. On March 30, 2020, we entered into an agreement with Capital One, N.A. to replace Revolver 1 with a new revolving line of credit (“New Revolver”). The New Revolver has a maximum credit limit of $70,000,000 and a maturity date of March ~~31, 2019. On May 12, 2017, Revolver 1 was amended to extend the maturity date to May 11, 2020 and increase the maximum borrowing availability under Revolver 1 to $45,000,000.~~ 30, 2024. For the ~~three months ended~~period January 1, 2020 through March ~~31, 2019~~30, 2020 and for the year ended December 31, ~~2018,~~2019, Revolver 1 accrued interest at ~~one month~~one-month LIBOR plus 2.40%.The interest ~~rates~~rate in effect as of ~~March~~December 31, 2019 ~~and December 31, 2018 were 4.88% and 4.78%, respectively.~~was 4.09%. Amounts available under Revolver 1 were subject to a formula based on eligible consumer loans and MHP Notes and were secured by all accounts receivable and the consumer loans receivable and MHP Notes. The amount of available credit under Revolver 1 was $16,140,000 as of December 31, 2019.

The New Revolver accrues interest at one-month LIBOR plus 2.00%. The interest rate in effect as of September 30, 2020 was 2.16%. As with Revolver 1, amounts available under the New Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable and ~~a percentage of~~ the consumer loans receivable and MHP Notes. The amount of available credit under the New Revolver 1 was ~~$39,839,000~~$26,180,000 as of September 30, 2020. In connection with the New Revolver, we paid certain arrangement fees and ~~$41,321,000 at March 31, 2019~~other fees of approximately $0.3 million, which were capitalized as unamortized debt issuance costs and ~~December 31, 2018, respectively.~~ will be amortized to interest expense over the life of the New Revolver.

For the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, ~~and 2018,~~ interest expense under the Capital One Revolvers was ~~$73,000~~$785,000 and ~~$416,000,~~$233,000, respectively. The outstanding balance as of ~~March 31, 2019~~September 30, 2020 and December 31, ~~2018 $5,161,000~~2019 was $43,820,000 and ~~$3,679,000,~~$28,860,000, respectively. We were in compliance with all financial covenants as of ~~March 31, 2019,~~September 30,

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2020, including that we maintain a tangible net worth of at least ~~$90,000,000~~$120,000,000 and that we maintain a ratio of debt to EBITDA of ~~4‑to‑1,~~4-to-1, or less.

Veritex Community Bank Revolver. In April 2016, we entered into an agreement with Veritex Community Bank to secure an additional revolving line of credit of $15,000,000 (“Revolver 2”). Revolver 2 accrues interest at one month LIBOR plus 2.50% and all unpaid principal and interest is due at maturity on April 4, 2021. Revolver 2 is secured by all finished goods inventory excluding repossessed homes. Amounts available under Revolver 2 are subject to a formula based on eligible inventory. The interest rates in effect as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~4.99%~~4.17% and ~~4.85%~~4.19%, respectively. On May 12, 2017, we entered into an agreement to increase the maximum borrowing availability under Revolver 2 to $20,000,000. On October 15, 2018, Revolver 2 was amended to extend the maturity date from April 4, 2019 to April 4, 2021. The amount of available credit under Revolver 2 was ~~$17,999,000~~$12,028,000 and ~~$10,000,000~~$11,262,000 at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. For the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, ~~and 2018,~~ interest expense was ~~$61,000~~$17,000 and ~~$154,000,~~$111,000, respectively. The outstanding balance as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$2,001,000 and $10,000,000, respectively.~~$2,001,000. We were in compliance with all financial covenants as of March 31, ~~2019,~~2020, including that we maintain a tangible net worth of at least $80,000,000. In April 2020, this note was paid in full and the facility was terminated.

PPP Loan. On April 10, 2020, we Company entered into a loan with Peoples Bank as the lender in an aggregate principal amount of $6,545,700 (the “Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. The Loan was evidenced by a promissory note (the “Note”) dated April 10, 2020 and had a maturity date of April 10, 2022. The Note had an interest rate of 1.000% per annum, with the first six months of interest deferred. Principal and interest were payable monthly commencing on November 10, 2020 and could be prepaid by us at any time prior to maturity with no prepayment penalties. On May 1, 2020, this loan was paid in full.

Notes Payable. We have a promissory note with Woodhaven Bank. The amount due under the promissory note accrued interest at an annual rate of 3.85% through February 2, 2017 and then at the prime interest rate plus 0.60% through maturity on April 7, 2018. The loan was subsequently renewed through April 7, 2033. The promissory note calls for ~~monthly principal~~an interest rate of 4.25% and ~~interest~~monthly payments of $30,000 with a final payment due at maturity. ~~The interest rates in effect as of March 31, 2019 and December 31, 2018 were 4.25% and 4.25%, respectively.~~ The note is secured by certain of our real property. Interest expense was ~~$38,000 and $40,000~~$113,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2019. In October 2019, ~~and 2018~~,

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~~respectively. The balance outstanding on the~~this note ~~payable at March 31, 2019 and December 31, 2018~~ was ~~$3,506,000 and $3,552,000, respectively.~~paid in full.

On May 24, 2016, we signed a promissory note for $515,000 with Eagle One, LLC collateralized by the purchase of real property located in Oklahoma City, Oklahoma. The amount due under the promissory note accrues interest at an annual rate of 6.00%. The promissory note calls for monthly principal and interest payments of $6,000 until June 1, 2026. Interest expense was $1,000 ~~and $7,000~~ for the ~~three~~nine months ended ~~March 31, 2019 and 2018, respectively. The balance outstanding on the note payable at December 31, 2018 was $414,000.~~September 30, 2019. In January 2019, this note was paid in full.

~~Notes Payable to an Affiliate.~~ On February 2, 2016, we entered into a $1,500,000 note payable agreement with stated annual interest rates of 3.75% with Shipley & Sons, Ltd., a related party through the common ownership of Kenneth E. Shipley, a significant shareholder of our company and our Co‑Chief Executive Officer. The note is due on demand. Interest paid on the note payable was $14,000 for the three months ended March 31, 2018. On October 18, 2018, this note payable was paid in full.

PILOT Agreement. In December 2016, we entered into a Payment in Lieu of Taxes (“PILOT”) agreement commonly offered in Georgia by local community development programs to encourage industry development. The net effect of the PILOT agreement is to provide us with incentives through the abatement of local, city and county property taxes and to provide financing for improvements to our Georgia plant (the “Project”). In connection with the PILOT agreement, the Putman County Development Authority provides a credit facility for up to $10,000,000, which can be drawn upon to fund Project improvements and capital expenditures as defined in the agreement. If funds are drawn, we would pay transactions costs and debt service payments. The PILOT agreement requires interest payments of 6.00% per annum on outstanding balances, which are due each December 1 through maturity on December 1, 2021, at which time all unpaid principal and interest are due. The PILOT agreement is collateralized by the assets of the Project. As of ~~March 31, 2019,~~September 30, 2020, we had not drawn down on this credit facility.

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Contractual Obligations

The following table is a summary of contractual cash obligations as of ~~March 31, 2019:~~September 30, 2020:


	Payments Due by Period
			Less than			More than

							Payments Due by Period

Contractual Obligations	Total		1 year	2 - 3 years	4 - 5 years	5 years	Total		2020	2021 - 2022	2023 - 2024	After 2024
Lines of credit	$	7,163,000	—	7,163,000	—	—	$	43,820,000	—	—	43,820,000	—
Notes payable		3,506,000	138,000	392,000	429,000	2,547,000
Operating lease obligations	$	3,075,000	451,000	963,000	692,000	969,000	$	2,632,000	148,000	940,000	736,000	808,000

~~Off‑Balance~~Off-Balance Sheet Arrangements

We did not have any ~~off‑balance~~off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, results of operations, liquidity or capital expenditures. However, we do have a repurchase agreement with a financial institution providing inventory financing for independent retailers of our products. Under this agreement, we have agreed to repurchase homes at declining prices over the term of the agreement (24 months). Our obligation under this repurchase agreement ceases upon the purchase of the home by the retail customer. The maximum amount of our contingent obligations under such repurchase agreements was approximately ~~$1,549,000~~$603,000 and ~~$2,186,000~~$260,000 as of ~~March 31, 2019~~September 30, 2020 and December 31, ~~2018,~~2019, respectively, without reduction for the resale value of the homes. We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements. We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of ~~March 31, 2019.~~September 30, 2020.

Critical Accounting Estimates

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under

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the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. Our critical accounting estimates are identified and described in our annual report on Form 10-K for the year ended December 31, ~~2018.~~ 2019. Other than recent accounting pronouncement adoptions discussed in Note 1 of our condensed financial statements, we had no significant changes in those critical accounting estimates since our last annual report.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our ~~March 31, 2019~~September 30, 2020 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly ~~Report~~Report.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the JOBS Act. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of these exemptions until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of this exemption.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable for smaller reporting companies

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Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We are subject to the periodic reporting requirements of the Exchange Act ~~which~~that requires designing disclosure controls and procedures to provide reasonable assurance that information we disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief ~~Financial~~Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on this evaluation, the Chief Executive Officer and the Chief ~~Financial~~Accounting Officer each concluded, as of the end of the period, our disclosure controls and procedures were not effective as of ~~March 31, 2019~~September 30, 2020 due to material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018,~~2019, and as described ~~below~~.below.

Material Weaknesses in Internal Control Over Financial Reporting

As previously disclosed in our Annual report on Form 10-K filed with the SEC on ~~April 9, 2019,~~March 31, 2020, we identified material weaknesses in our internal control over financial reporting during the preparation of our financial statements for the year ended December 31, ~~2018.~~2019. Under standards established by the PCAOB, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

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The material weaknesses in financial reporting as of ~~March 31, 2019~~September 30, 2020 are summarized as follows:

	●
			We determined that we did not have sufficient accounting processes and procedures in place, particularly in the areas of allowance for loan ~~loss,~~loss; finished goods inventory ~~costing,~~costing; revenue ~~recognition,~~recognition; income ~~taxes, and~~taxes; processing of payroll, accounts payable, and treasury transactions; and accruals for period end cut-off.

	●
			We determined that we did not have sufficient experienced personnel to support preparation of financial statements for compliance with U.S. GAAP and ~~SEC rules.~~ SEC.



●

We determined that we did not have sufficient policies and procedures to ensure the appropriate review and approval of user access rights to our accounting system; and lack of approval of journal entries and segregation of duties in our financial reporting process.

●

We determined that our information technology infrastructure does not provide sufficient safeguards required by the COBIT framework.

Remediation Efforts to Address Previously-Identified Material Weaknesses

As previously described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, we began implementing remediation plans to address the material weaknesses. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed by the end of fiscal ~~2019.~~2021.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the ~~first~~third quarter of fiscal ~~2019~~2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 1112 - Commitments and Contingencies in our ~~March 31, 2019~~September 30, 2020 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

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

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

None

Item 5. Other Information

None

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Item 6. Exhibits.


Exhibit No.		Description
EXHIBIT 31.1 *	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.

EXHIBIT 31.2 *	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief ~~Financial~~Accounting Officer.

EXHIBIT 32.1 *	-	Section 1350 Certification.

EXHIBIT 32.2 *	-	Section 1350 Certification.

EXHIBIT 101.INS *	-	XBRL Instance Document.

EXHIBIT 101.SCH *	-	XBRL Taxonomy Extension Schema Document.

EXHIBIT 101.CAL *	-	XBRL Taxonomy Extension Calculation Linkbase Document.

EXHIBIT 101.DEF *	-	XBRL Taxonomy Extension Definition Linkbase Document.

EXHIBIT 101.LAB *	-	XBRL Taxonomy Extension Label Linkbase Document.

EXHIBIT 101.PRE *	-	XBRL Taxonomy Extension Presentation Linkbase Document.

*Filed herewith

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SIGNATURES

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

	LEGACY HOUSING CORPORATION

Dated: ~~May 15, 2019~~November 16, 2020	By:	/s/ ~~Jeffrey V. Burt~~Thomas Kerkaert
		Name: ~~Jeffrey V. Burt~~Thomas Kerkaert
		Title: Chief Financial Officer
		(On behalf of Registrant and as Principal Financial Officer)

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			Page
PART I - FINANCIAL INFORMATION			2
			2

	Item 1.	Financial Statements (Unaudited)	2


	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
			22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
			31

	Item 4.	Controls and Procedures	26 32

PART II - OTHER INFORMATION			27
			33

	Item 1.	Legal Proceedings	27
			33

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
			33

	Item 3.	Defaults Upon Senior Securities	27
			33

	Item 4.	Mine Safety Disclosures	27
			33

	Item 5.	Other Information	27
			33

	Item 6.	Exhibits	28 33

SIGNATURES			29 34


	Total Partners’		Common Stock			Additional		Retained
	Capital		Shares	Amount		paid in capital		earnings		Total
Balances, December 31, 2017	$	124,271	—	$	—	$	—	$	—	$	—
Shares issued upon incorporation		(124,271)	20,000,000		20		124,251		—		124,271
Net income		—	—		—		—		5,361		5,361
Balances, March 31, 2018	$	—	20,000,000	$	20	$	124,251	$	5,361	$	129,632