UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q10-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, 2019September 30, 2023
OR
☐ | 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 001‑38761001-38761
Legacy Housing Corporation
(Exact name of registrant as specified in its charter)
|
|
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
1600 Airport Freeway, #100
Bedford, Texas76022
(Address of principal executive offices)
(Zip Code)
(817)‑799‑4900(817) 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‑212b-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 24,722,93624,391,797 shares of Common Stock ($00.001 par value) outstanding as of May 13, 2019.November 6, 2023.
LEGACY HOUSING CORPORATION
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
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PART I – FINANCIAL INFORMATION
LEGACY HOUSING CORPORATION
CONDENSED BALANCE SHEETS (in thousands, except share data)
(unaudited)
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|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 3,098 |
| $ | 2,599 |
Accounts receivable, net of allowance for doubtful accounts |
|
| 3,095 |
|
| 2,953 |
Current portion consumer loans |
|
| 5,132 |
|
| 4,945 |
Current portion of notes receivable from mobile home parks (“MHP”) |
|
| 8,339 |
|
| 7,297 |
Current portion of other notes receivable |
|
| 773 |
|
| 379 |
Inventories |
|
| 37,966 |
|
| 42,033 |
Prepaid expenses and other current assets |
|
| 3,327 |
|
| 2,938 |
Total current assets |
|
| 61,730 |
|
| 63,144 |
Property, plant and equipment, net |
|
| 17,644 |
|
| 17,128 |
Consumer loans, net of deferred financing fees and allowance for loan losses |
|
| 93,772 |
|
| 92,230 |
Notes receivable from mobile home parks (“MHP”) |
|
| 54,207 |
|
| 50,638 |
Other notes receivable, net of allowance for loan losses |
|
| 2,817 |
|
| 1,912 |
Other assets |
|
| 3,054 |
|
| 2,587 |
Inventory non‑current |
|
| 10,451 |
|
| 7,399 |
Total assets |
| $ | 243,675 |
| $ | 235,038 |
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
| $ | 3,714 |
| $ | 2,828 |
Accrued liabilities |
|
| 10,309 |
|
| 9,156 |
Customer deposits |
|
| 2,274 |
|
| 2,222 |
Escrow liability |
|
| 5,325 |
|
| 5,951 |
Current portion of notes payable |
|
| 185 |
|
| 228 |
Total current liabilities |
|
| 21,807 |
|
| 20,385 |
Long‑term liabilities: |
|
|
|
|
|
|
Lines of credit |
|
| 7,163 |
|
| 13,679 |
Deferred income taxes |
|
| 1,842 |
|
| 1,842 |
Note payable, net of current portion |
|
| 3,321 |
|
| 3,737 |
Dealer incentive liability |
|
| 6,120 |
|
| 6,115 |
Total liabilities |
|
| 40,253 |
|
| 45,758 |
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 |
Additional paid-in-capital |
|
| 174,671 |
|
| 167,743 |
Retained earnings |
|
| 28,726 |
|
| 21,513 |
Total stockholders' equity |
|
| 203,422 |
|
| 189,280 |
Total liabilities and stockholders' equity |
| $ | 243,675 |
| $ | 235,038 |
See accompanying notes to financial statements.
2
LEGACY HOUSING COPRORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2023 | | 2022 | ||
Assets | | | (unaudited) | | | |
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 546 | | $ | 2,818 |
Held to maturity securities | | | — | | | 8,412 |
Accounts receivable, net | |
| 4,011 | |
| 4,873 |
Current portion of contracts - dealer financed | | | 21,044 | | | 29,441 |
Current portion of consumer loans receivable | |
| 7,408 | |
| 6,801 |
Current portion of notes receivable from mobile home parks (“MHP”) | |
| 15,496 | |
| 9,670 |
Current portion of other notes receivable | |
| 6,258 | |
| 8,927 |
Inventories | |
| 35,355 | |
| 32,075 |
Prepaid expenses and other current assets | |
| 4,998 | |
| 4,064 |
Total current assets | |
| 95,116 | |
| 107,081 |
Contracts - dealer financed, net | |
| 11,388 | |
| 595 |
Consumer loans receivable, net | |
| 143,849 | |
| 132,208 |
Notes receivable from MHP, net | |
| 163,987 | |
| 133,072 |
Other notes receivable, net | |
| 29,191 | |
| 13,795 |
Inventories | | | 6,704 | | | 6,987 |
Other assets - leased mobile homes | | | 7,758 | | | 8,824 |
ROU assets - operating leases | | | 1,934 | | | 2,663 |
Other assets | |
| 1,842 | |
| 1,482 |
Property, plant and equipment, net | |
| 33,874 | |
| 30,106 |
Total assets | | $ | 495,643 | | $ | 436,813 |
Liabilities and Stockholders' Equity | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 5,945 | | $ | 4,549 |
Accrued liabilities | |
| 20,609 | |
| 16,895 |
Customer deposits | |
| 5,876 | |
| 9,715 |
Escrow liability | |
| 11,008 | |
| 9,653 |
Operating lease obligations | | | 514 | | | 650 |
Total current liabilities | |
| 43,952 | |
| 41,462 |
Long‑term liabilities: | |
|
| |
|
|
Operating lease obligations, less current portion | | | 1,515 | | | 2,121 |
Lines of credit | |
| 13,013 | |
| 2,545 |
Deferred income taxes, net | | | 2,862 | | | 3,065 |
Dealer incentive liability | |
| 4,825 | |
| 5,516 |
Total liabilities | |
| 66,167 | |
| 54,709 |
Commitments and contingencies (Note 14) | |
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| |
|
|
Stockholders' equity: | | | | | | |
Preferred stock, $.001 par value, 10,000,000 shares authorized: no shares issued or outstanding | | | — | | | — |
Common stock, $.001 par value, 90,000,000 shares authorized; 24,836,862 and 24,814,695 issued and 24,391,797 and 24,369,630 outstanding at September 30, 2023 and December 31, 2022, respectively | | | 30 | | | 30 |
Treasury stock at cost, 445,065 shares at September 30, 2023 and December 31, 2022 | | | (4,477) | | | (4,477) |
Additional paid-in-capital | | | 181,240 | | | 180,555 |
Retained earnings | | | 252,683 | | | 205,996 |
Total stockholders' equity | | | 429,476 | | | 382,104 |
Total liabilities and stockholders' equity | | $ | 495,643 | | $ | 436,813 |
See accompanying notes to unaudited condensed financial statements.
2
LEGACY HOUSING CORPORATION
CONDENSED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)
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|
| Three months ended March 31, |
| ||||
|
| 2019 |
| 2018 |
| ||
Net revenue: |
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|
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Product sales |
| $ | 31,550 |
| $ | 37,414 |
|
Consumer and MHP loans interest |
|
| 5,530 |
|
| 4,394 |
|
Other |
|
| 874 |
|
| 878 |
|
Total net revenue |
|
| 37,954 |
|
| 42,686 |
|
Operating expenses: |
|
|
|
|
|
|
|
Cost of product sales |
|
| 21,885 |
|
| 27,647 |
|
Selling, general administrative expenses |
|
| 6,491 |
|
| 4,799 |
|
Dealer incentive |
|
| 210 |
|
| 335 |
|
Income from operations |
|
| 9,368 |
|
| 9,905 |
|
Other income (expense): |
|
|
|
|
|
|
|
Non‑operating interest income |
|
| 39 |
|
| 51 |
|
Miscellaneous, net |
|
| 3 |
|
| 34 |
|
Interest expense |
|
| (189) |
|
| (639) |
|
Total other |
|
| (147) |
|
| (554) |
|
Income before income tax expense |
|
| 9,221 |
|
| 9,351 |
|
Income tax expense |
|
| (2,008) |
|
| (3,990) |
|
Net income |
| $ | 7,213 |
| $ | 5,361 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
Basic |
|
| 24,516,762 |
|
| 20,000,000 |
|
Diluted |
|
| 24,571,088 |
|
| 20,000,000 |
|
Net income per share: |
|
|
|
|
|
|
|
Basic |
| $ | 0.29 |
| $ | 0.27 |
|
Diluted |
| $ | 0.29 |
| $ | 0.27 |
|
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
| | 2023 | | 2022 |
| 2023 |
| 2022 | | ||||
Net revenue: |
| |
|
| | |
| |
|
| | |
|
Product sales | | $ | 37,008 | | $ | 48,678 | | $ | 122,505 | | $ | 155,563 | |
Consumer and MHP loans interest | |
| 8,803 | |
| 7,002 | |
| 24,996 | |
| 21,264 | |
Other | |
| 4,126 | |
| 1,645 | |
| 7,929 | |
| 4,637 | |
Total net revenue | |
| 49,937 | |
| 57,325 | |
| 155,430 | |
| 181,464 | |
Operating expenses: | |
|
| |
|
| |
|
| |
|
| |
Cost of product sales | |
| 24,820 | |
| 33,510 | |
| 83,490 | |
| 104,648 | |
Selling, general and administrative expenses | |
| 6,108 | |
| 6,727 | |
| 17,046 | |
| 20,287 | |
Dealer incentive | |
| (5) | |
| 226 | |
| 27 | |
| 939 | |
Income from operations | |
| 19,014 | |
| 16,862 | |
| 54,867 | |
| 55,590 | |
Other income (expense): | |
|
| |
|
| |
|
| |
|
| |
Non‑operating interest income | |
| 794 | |
| 611 | |
| 2,115 | |
| 2,246 | |
Miscellaneous, net | |
| (37) | |
| 186 | |
| 875 | |
| 788 | |
Interest expense | |
| (303) | |
| (88) | |
| (588) | |
| (326) | |
Total other | |
| 454 | |
| 709 | |
| 2,402 | |
| 2,708 | |
Income before income tax expense | |
| 19,468 | |
| 17,571 | |
| 57,269 | |
| 58,298 | |
Income tax expense | |
| (3,380) | |
| (2,836) | |
| (9,885) | |
| (10,210) | |
Net income | | $ | 16,088 | | $ | 14,735 | | $ | 47,384 | | $ | 48,088 | |
Weighted average shares outstanding: | | | | | | | | | | | | | |
Basic | | | 24,391,797 | | | 24,406,020 | | | 24,382,519 | | | 24,356,809 | |
Diluted | | | 25,128,679 | | | 25,379,116 | | | 25,099,985 | | | 25,024,488 | |
Net income per share: | | | | | | | | | | | | | |
Basic | | $ | 0.66 | | $ | 0.60 | | $ | 1.94 | | $ | 1.97 | |
Diluted | | $ | 0.64 | | $ | 0.58 | | $ | 1.89 | | $ | 1.92 | |
See accompanying notes to unaudited condensed financial statements.
3
LEGACY HOUSING COPRORATIONCORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
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|
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|
|
|
|
|
| Three months ended March 31, |
| ||||
|
| 2019 |
| 2018 |
| ||
Operating activities: |
|
|
|
|
|
|
|
Net income |
| $ | 7,213 |
| $ | 5,361 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation expense |
|
| 241 |
|
| 196 |
|
Provision for loan loss—consumer loans |
|
| 406 |
|
| 118 |
|
Deferred income taxes |
|
| — |
|
| 2,068 |
|
Share based payment expense |
|
| 234 |
|
| — |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
| (142) |
|
| 2,162 |
|
Consumer loans originations |
|
| (5,053) |
|
| (3,661) |
|
Consumer loans principal collections |
|
| 2,847 |
|
| 2,134 |
|
Notes receivable MHP originations |
|
| (12,849) |
|
| (9,427) |
|
Notes receivable MHP principal collections |
|
| 8,238 |
|
| 7,570 |
|
Inventories |
|
| 1,015 |
|
| (2,206) |
|
Prepaid expenses and other current assets |
|
| (390) |
|
| (1,700) |
|
Other assets |
|
| (467) |
|
| 147 |
|
Accounts payable |
|
| 888 |
|
| (81) |
|
Accrued liabilities |
|
| 1,153 |
|
| 2,494 |
|
Customer deposits |
|
| 52 |
|
| (522) |
|
Dealer incentive liability |
|
| 5 |
|
| (165) |
|
Net cash provided by operating activities |
|
| 3,391 |
|
| 4,488 |
|
Investing activities: |
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
| (757) |
|
| (389) |
|
Issuance of notes receivable |
|
| (1,400) |
|
| (255) |
|
Notes receivable collections |
|
| 101 |
|
| 44 |
|
Purchases of consumer loans |
|
| (101) |
|
| — |
|
Collections from purchased consumer loans |
|
| 172 |
|
| 111 |
|
Net cash used in investing activities |
|
| (1,985) |
|
| (489) |
|
Financing activities: |
|
|
|
|
|
|
|
Proceeds from sale of over-allotment common stock in initial public offering |
|
| 7,200 |
|
| — |
|
Offering cost for over-allotment of initial public offering |
|
| (505) |
|
| — |
|
Escrow liability |
|
| (626) |
|
| (341) |
|
Principal payments on note payable |
|
| (459) |
|
| (56) |
|
Proceeds from lines of credit |
|
| 1,482 |
|
| 14,213 |
|
Payments on lines of credit |
|
| (7,999) |
|
| (16,533) |
|
Net cash used in financing activities |
|
| (907) |
|
| (2,717) |
|
Net increase 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 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 227 |
| $ | 585 |
|
| | | | | | | |
| | Nine months ended September 30, | | ||||
|
| 2023 |
| 2022 |
| ||
Operating activities: |
| |
|
| | |
|
Net income | | $ | 47,384 | | $ | 48,088 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |
|
| |
|
| |
Depreciation and amortization expense | |
| 1,279 | |
| 1,386 | |
Amortization of deferred revenue | | | (956) | | | (1,542) | |
Amortization of treasury note discount | | | (76) | | | — | |
Amortization of lines of credit cost | | | 53 | | | — | |
Provision for accounts and notes receivable | | | 955 | | | (80) | |
Provision for inventory | | | 15 | | | (69) | |
Gain from sale of leased property | | | (507) | | | — | |
Amortization of operating lease right of use asset | |
| (38) | |
| 3,022 | |
Gain on disposal of treasury note | | | (12) | | | — | |
Share-based payment expense | | | 586 | | | 4,744 | |
Changes in operating assets and liabilities: | |
| | | | | |
Accounts receivable | |
| 490 | |
| 186 | |
Consumer loans activity, net | |
| (12,199) | |
| (8,752) | |
Notes receivable MHP activity, net | |
| (36,868) | |
| (28,052) | |
Dealer inventory loan activity, net | | | (2,831) | | | (7,757) | |
Inventories | |
| (3,011) | |
| (10,025) | |
Prepaid expenses and other current assets | |
| (1,497) | |
| 417 | |
Other assets | |
| (10) | |
| (4,421) | |
Accounts payable and accrued liabilities | |
| 5,110 | |
| (2,987) | |
Right of use activity, net | |
| 25 | |
| — | |
Customer deposits | |
| (3,839) | |
| 4,491 | |
Escrow liability | | | 1,355 | | | 1,222 | |
Dealer incentive liability | |
| (692) | |
| 919 | |
Net cash (used in) provided by operating activities | |
| (5,284) | |
| 790 | |
Investing activities: | |
|
| |
|
| |
Purchases of property, plant and equipment | |
| (4,572) | |
| (3,268) | |
Proceeds from sale of leased property | | | 1,108 | | | — | |
Sale of investments - treasury notes | | | 8,500 | | | — | |
Issuance of notes receivable | |
| (13,946) | |
| (3,053) | |
Notes receivable collections | | | 1,028 | | | 23,544 | |
Collections from purchased loans | | | 326 | | | 372 | |
Net cash (used in) provided by investing activities | |
| (7,556) | |
| 17,595 | |
Financing activities: | |
| | |
| | |
Proceeds from exercise of stock options | | | 100 | | | — | |
Proceeds from lines of credit | |
| 84,336 | |
| 108,594 | |
Payments on lines of credit | |
| (73,868) | |
| (116,753) | |
Net cash (used in) provided by financing activities | |
| 10,568 | |
| (8,159) | |
Net (decrease) increase in cash and cash equivalents | |
| (2,272) | |
| 10,226 | |
Cash and cash equivalents at beginning of period | |
| 2,819 | |
| 1,042 | |
Cash and cash equivalents at end of period | | $ | 547 | | $ | 11,268 | |
Supplemental disclosure of cash flow information: | |
|
| |
|
| |
Cash paid for interest | | $ | 272 | | $ | 208 | |
Cash paid for taxes | | $ | 10,512 | | $ | 11,673 | |
See accompanying notes to consolidatedunaudited condensed financial statements.
4
LEGACY HOUSING CORPORATION
CONDENSED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDER’SSTOCKHOLDERS’ 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, 2021 | | 24,654,621 | | $ | 25 | | $ | (4,477) | | $ | 175,623 | | $ | 138,223 | | $ | 309,394 |
Share based compensation expense | | 158,571 | | | 4 | | | — | | | 4,003 | | | — | | | 4,007 |
Net income | | — | | | — | | | — | | | — | | | 16,092 | | | 16,092 |
Balances, March 31, 2022 | | 24,813,192 | | $ | 29 | | $ | (4,477) | | $ | 179,626 | | $ | 154,315 | | $ | 329,493 |
Share based compensation expense | | — | | | — | | | — | | | 306 | | | — | | | 306 |
Net income | | — | | | — | | | — | | | — | | | 17,261 | | | 17,261 |
Balances, June 30, 2022 | | 24,813,192 | | $ | 29 | | $ | (4,477) | | $ | 179,932 | | $ | 171,576 | | $ | 347,060 |
Share based compensation expense | | — | | | 1 | | | — | | | 429 | | | — | | | 430 |
Net income | | — | | | — | | | — | | | — | | | 14,735 | | | 14,735 |
Balances, September 30, 2022 | | 24,813,192 | | $ | 30 | | $ | (4,477) | | $ | 180,361 | | $ | 186,311 | | $ | 362,225 |
| | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, 2022 | | 24,814,695 | | $ | 30 | | $ | (4,477) | | $ | 180,555 | | $ | 205,996 | | $ | 382,104 |
Cumulative change in accounting principle, net of taxes (Note 1) | | — | | | — | | | — | | | — | | | (698) | | | (698) |
Balances, January 1, 2023 (as adjusted for change in accounting principle) | | 24,814,695 | | $ | 30 | | $ | (4,477) | | $ | 180,555 | | $ | 205,298 | | $ | 381,406 |
Share based compensation expense | | 8,571 | | | — | | | — | | | 191 | | | — | | | 191 |
Net income | | — | | | — | | | — | | | — | | | 16,276 | | | 16,276 |
Balances, March 31, 2023 | | 24,823,266 | | $ | 30 | | $ | (4,477) | | $ | 180,746 | | $ | 221,574 | | $ | 397,873 |
Share based compensation expense | | 7,350 | | | — | | | — | | | 196 | | | — | | | 196 |
Proceeds from exercise of stock options | | 6,246 | | | — | | | — | | | 100 | | | — | | | 100 |
Net income | | — | | | — | | | — | | | — | | | 15,020 | | | 15,020 |
Balances, June 30, 2023 | | 24,836,862 | | $ | 30 | | $ | (4,477) | | $ | 181,042 | | $ | 236,594 | | $ | 413,189 |
Share based compensation expense | | — | | | — | | | — | | | 199 | | | — | | | 199 |
Net income | | — | | | — | | | — | | | — | | | 16,088 | | | 16,088 |
Balances, September 30, 2023 | | 24,836,862 | | $ | 30 | | $ | (4,477) | | $ | 181,241 | | $ | 252,682 | | $ | 429,476 |
See accompanying notes to unaudited condensed financial statements.
5
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
1. NATURE OF OPERATIONS
Legacy Housing Corporation (the(referred herein as ”Legacy”, “we”, “our”, “us”, or 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. TheEffective December 31, 2019, the Company is incorporated asreincorporated from a Delaware corporation andto 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 of underwriting discounts and offering expenses paid by the Company, were $6,696.
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 Company is now a federal corporate taxpayer.
Basis of Presentation
The accompanying unaudited interim condensed financial statements as of March 31, 2019September 30, 2023 and for the three and nine months ended March 31, 2019September 30, 2023 and 2018,2022, 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 annual 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 results for the three and nine months ended March 31, 2019September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2019,2023, or any other period. The accompanying consolidated balance sheet as of December 31, 20182022 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 20182022 (the "Form 10-K"“Form 10-K”)., filed on March 15, 2023. 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.
6
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 and valuation of accounts receivable, loans to mobile home parks, consumer loans, andother notes receivable, inventory valuation and 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 takescan take the form of a consignment arrangement or an inventory financing arrangement. Consignment Sales under the consignment arrangement are considered sales of consigned homes from independent dealers to individual customers. Consignment Sales under the inventory financing arrangement are
6
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
considered sales of homes to the independent dealer. Retail Store Sales are homehomes 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 customerscustomer is satisfied, which typically occurs upon delivery and transfer of title ofto the home, as this depicts when control of the promised good is transferred to our customers. For inventory financed sales, the independent dealer enters into a financing arrangement with the Company and is required to make monthly interest payments and an annual curtailment payment for the first two years. After three years, they are required to payoff any remaining principal balance. Interest income is separately recorded in the statement of income. For other 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.
7
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
income.
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. Warranty costs and contract costs are included in selling, general and administrative expenses in the statements of income. Warranty and contract costs were $666 and $2,024 for the three and nine months ended September 30, 2023, respectively, and $861 and $1,941 for the three and nine months ended September 30, 2022, respectively.
For the three months ended March 31, 2019September 30, 2023 and 2018, total cost2022, mobile home park (“MHP”) sales to an independent third party and it’s affiliates accounted for $601 or 1.7% and $5,226 or 10.7% of our product sales, respectively, and sales to another independent third party and it’s affiliates accounted for $3,202 or 9.1% and $2,307 or 4.7% of our product sales, respectively. For the nine months ended September 30, 2023 and 2022, MHP sales to an independent third party and its affiliates accounted for $10,134 or 8.8% and $11,420 or 7.3% of our product sales, respectively, and sales to another independent third party and its affiliates accounted for $4,894 or 4.2% and $3,711 or 2.4% of our product sales, respectively. No other customer accounted for more than 5.0% of our product sales.
For the three months ended September 30, 2023 and 2022, product sales included $4,327$3,285 and $5,975$2,711 of costs mainly relating to up front dealer commission andsubcontracted production for commercial sales, reimbursed dealer expenses for consignment sales, and certain other similar costs incurred for retail store and commercial sales. For the nine months ended September 30, 2023 and 2022, product sales included $9,857 and $8,964 of costs relating to subcontracted production for commercial sales, reimbursed dealer expenses for consignment sales, and certain other similar costs incurred for retail store and commercial sales.
Other revenue consists of consignment fees, commercial lease rents, contract deposit forfeitures, 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 areis 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 commercial
7
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
leases is recognized as earned monthly over a contractual period of 96 or 120 months. Revenue for contract deposit forfeitures is recognized when the deposit is forfeited by the customer. Revenue for service fees and miscellaneous income is recognized at a point in time when the performance obligation is satisfied.
Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by the source of the revenue for the three and nine months ended March 31, 2019September 30, 2023 and 2018:2022:
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2023 |
| 2022 | | 2023 |
| 2022 | ||||
Product sales: | | | | | | | | | | | | |
Direct sales | | $ | 2,584 | | $ | 12,325 | | $ | 13,762 | | $ | 34,933 |
Commercial sales | |
| 14,089 | |
| 13,784 | |
| 45,547 | |
| 42,147 |
Inventory finance sales | | | 12,494 | | | 14,210 | | | 41,785 | | | 54,497 |
Retail store sales | | | 5,455 | | | 5,572 | | | 13,703 | | | 15,388 |
Other (1) | |
| 2,386 | |
| 2,787 | |
| 7,708 | |
| 8,598 |
Total product sales | |
| 37,008 | |
| 48,678 | |
| 122,505 | |
| 155,563 |
Consumer and MHP loans interest: | |
|
| |
|
| |
|
| |
|
|
Interest - consumer installment notes | |
| 4,890 | |
| 4,559 | |
| 14,372 | |
| 13,717 |
Interest - MHP notes | |
| 3,913 | |
| 2,443 | |
| 10,624 | |
| 7,547 |
Total consumer and MHP loans interest | |
| 8,803 | |
| 7,002 | |
| 24,996 | |
| 21,264 |
Other (2) | |
| 4,126 | |
| 1,645 | |
| 7,929 | |
| 4,637 |
Total net revenue | | $ | 49,937 | | $ | 57,325 | | $ | 155,430 | | $ | 181,464 |
|
|
|
|
|
|
|
|
| Three months ended | ||||
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
Product sales: |
|
|
|
|
|
|
Direct sales |
| $ | 4,457 |
| $ | 12,499 |
Commercial sales |
|
| 12,503 |
|
| 7,034 |
Consignment sales |
|
| 10,037 |
|
| 12,751 |
Retail store sales |
|
| 3,341 |
|
| 2,559 |
Other (1) |
|
| 1,212 |
|
| 2,571 |
Total product sales |
|
| 31,550 |
|
| 37,414 |
Consumer and MHP loans interest: |
|
|
|
|
|
|
Interest - consumer installment notes |
|
| 4,130 |
|
| 3,321 |
Interest - MHP notes |
|
| 1,400 |
|
| 1,073 |
Total consumer and MHP loans interest |
|
| 5,530 |
|
| 4,394 |
Other |
|
| 874 |
|
| 878 |
Total net revenue |
| $ | 37,954 |
| $ | 42,686 |
(1) | Other product sales revenue from ancillary products and services including parts, freight and other services |
(2) | Other revenue includes dealer finance charges, contract deposit forfeitures, lease income and other miscellaneous income |
8
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 ASCAccounting Standards Codification (“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”(the ”RSU”) with only service-based conditions is calculated based on the closing price of the Company’s common stock on the grant date. The fair value of each RSU with market based conditions is estimated using the Monte-Carlo Simulation valuation model.
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 theThe volatility of its common shares; therefore, management estimated volatilityis based on the Company’s historical volatilities of a small group of companies considered as close to comparablevolatility calculated monthly over the most recent five year period prior to the Company as available, all equally weighted, over the expected life of the option.applicable grant date. 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
8
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
be outstanding based on the “simplified” method, which is allowed forcan be utilized by 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
The fair value of RSU awards with market based conditions on the date of grant is estimated using the Monte-Carlo Simulation valuation model, and the Company uses the following methods to determine its underlying assumptions: expected volatilities are based on the Company’s historic stock price volatility; the expected term of the awards is based on the performance measurement period; the risk-free interest rate is based on the U.S. Treasury bond yield issued with similar life terms to the natureexpected life of the grants,grant.
Accounts Receivable
Included in accounts receivable “net” are receivables from direct sales of mobile homes, sales of parts and supplies to customers, fees and interest. Accounts receivable “dealer financed” are receivables for interest, fees and curtailments owed by dealers under their inventory finance agreements.
Accounts receivables “net” are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts receivables “dealer financed” are due upon receipt and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the company estimated zero option forfeitures. Share-basedcontractual payment expense is recorded onlyterms are considered past due. The Company determines the allowance by considering several factors, including the aging of the past due balance, the customer’s payment history, the Company’s previous loss history and the Company’s expected losses over the term of the receivable. The Company establishes an allowance for those awardsdoubtful accounts for amounts that are expecteddeemed to vest.be uncollectible. On September 30, 2023 and December 31, 2022, the allowance for doubtful accounts totaled $651 and $279, respectively.
Leased Property
The Company offers mobile home park operators the opportunity to lease mobile homes for rent in lieu of purchasing the homes for cash or under a longer-term financing agreement. In this arrangement title to the mobile homes remains with the Company.
The standard lease agreement is typically for 96 months or 120 months. Under the lease agreement, the lessee (mobile home park operator) uses the mobile homes as personal property to be rented at the lessee's mobile home park. The lessee makes monthly, periodic lease payments to the Company over the term of the lease. The lessee is responsible for maintaining the homes during the term of the lease. The lessee is also responsible for repairing any damage caused by force majeure events. At the end of the lease term or in the event of default, the lessee is required to deliver the homes to the Company with all improvements and in substantially the same condition as existed at the commencement of the lease. The lessee may terminate the lease on 30 days written notice and pay a lease termination fee equal to 10% of the remaining lease payments or six months’ rent, whichever is greater. The lessee has an option to purchase the homes at the end of the lease term for fair market value based on an agreed determination of fair market value by both parties using comparable sales, recent appraisal, or National Automobile Dealers Association official guidance. The lessee must provide the Company with 30 days written notice prior to expiration of the lease of intent to purchase the property for fair market value. The lease also includes a renewal option whereby the lessee has the option to extend the lease for an additional 48 months (the extended term) at the same terms and conditions as the original lease. The lessee must notify the Company of the intent to exercise this renewal option not less than six months prior to expiration of the lease term. The leased mobile homes are included in other assets on the Company’s balance sheet, capitalized at manufactured cost and depreciated over a 15 year useful life. Homes returned to the Company upon expiration of the lease or in the event of default will be sold by the Company through its standard sales and distribution channels. Depreciation expense for the leased property was $157 and $184 for the three months ended September 30, 2023 and 2022, respectively, and $474 and $538 for the nine months ended September 30, 2023 and 2022, respectively.
9
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
Future minimum lease income under all operating leases for each of the next five years at September 30, 2023, are as follows:
| | | |
2023 |
| $ | 456 |
2024 | |
| 1,825 |
2025 | |
| 1,825 |
2026 | |
| 1,825 |
2027 | |
| 1,653 |
Thereafter | |
| 2,264 |
Total | | $ | 9,848 |
Recent Accounting Pronouncements
The Company has elected to use longer phase‑inphase-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, 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 period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2020. 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 but will not have a material impact on the consolidated statement of income and comprehensive income. 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 FASBFinancial Accounting Standards Board (“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 instead 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
9
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, howeverGAAP. However, Topic 326 will requirerequires that credit losses be presented as an allowance rather than as a write‑downwrite-down and affects entities holding financial assets and net investmentinvestments 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 useused the longer phase‑inphase-in period for adoption, and accordingly this ASU isbecame effective for the Company’s fiscal year beginning January 1, 2021.2023. The Company is continuing to evaluate the impactadoption of ASU 2016-13 resulted in an increase in portfolio allowances of $900 at transition. The $900 was comprised of a $225 increase for MHP notes, a $187 increase for dealer financed contracts and a $488 increase for other notes receivable. The cumulative effect of the adoption was a net decrease of this ASU and is uncertain of the impact on the financial statements and disclosures$698 to beginning retained earnings 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. 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.January 1, 2023.
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 Statementsfinancial statements upon adoption.
2. CONSUMER LOANS RECEIVABLE
Consumer loans 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 13.3% and 13.4% as of September 30, 2023 and December 31, 2022, respectively. Consumer loans receivable have maturities that range from 2 to 30 years.
Loan applications go through an underwriting process that considers credit history to evaluate the credit risk of the consumer. Interest rates on approved loans are determined based on consumer credit score, payment ability and down payment amount.
10
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
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 $11,008 and $9,653 as of September 30, 2023 and December 31, 2022, respectively, and are included in escrow liability in the condensed 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 under the 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 the fair value of the underlying collateral, 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 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 $1,486 and $795 as of September 30, 2023 and December 31, 2022, respectively, and are included in other assets in the condensed balance sheets.
11
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
Consumer loans receivable, net of allowance for loan losses and deferred financing fees, consistedconsists of the following:
|
|
|
|
|
|
|
|
| As of March 31, |
| As of December 31, | ||
|
| 2019 |
| 2018 | ||
Consumer loan receivable |
| $ | 102,938 |
| $ | 101,049 |
Loan discount and deferred financing fees, net |
|
| (3,149) |
|
| (3,162) |
Allowance for loan losses |
|
| (885) |
|
| (712) |
Consumer loans receivable, net |
| $ | 98,904 |
| $ | 97,175 |
| | | | | | |
|
| As of September 30, |
| As of December 31, | ||
| | 2023 | | 2022 | ||
Consumer loans receivable | | $ | 154,524 | | $ | 142,340 |
Loan discount and deferred financing fees | |
| (2,479) | |
| (2,501) |
Allowance for loan losses | |
| (788) | |
| (830) |
Consumer loans receivable, net | | $ | 151,257 | | $ | 139,009 |
The following table presents a detail of the activity in the allowance for loan losses:
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
| ||||
|
| 2019 |
| 2018 |
| ||
Allowance for loan losses, beginning of period |
| $ | 712 |
| $ | 805 |
|
Provision for loan losses |
|
| 406 |
|
| 118 |
|
Charge offs |
|
| (233) |
|
| (69) |
|
Allowance for loan losses |
| $ | 885 |
| $ | 854 |
|
| | | | | | | | | | | | | |
|
| Three months ended September 30, | | Nine Months Ended September 30, | | ||||||||
| | 2023 |
| 2022 | | 2023 |
| 2022 |
| ||||
Allowance for loan losses, beginning of period | | $ | 867 | | $ | 763 | | $ | 830 | | $ | 884 | |
Provision for loan losses | |
| (71) | |
| 54 | |
| (134) | |
| (203) | |
Charge offs (recoveries) | |
| (8) | |
| (13) | |
| 92 | |
| 123 | |
Allowance for loan losses | | $ | 788 | | $ | 804 | | $ | 788 | | $ | 804 | |
10
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
The impairedfollowing table presents loan loss and general reserveimpairment detail for allowance for loan losses:the consumer loans receivable portfolio:
|
|
|
|
|
|
|
|
| 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 September 30, |
| As of December 31, | ||
| | 2023 | | 2022 | ||
Total consumer loans | | $ | 154,524 | | $ | 142,340 |
Allowance for loan losses | | $ | 788 | | $ | 830 |
Impaired loans individually evaluated for impairment | | $ | 1,771 | | $ | 1,610 |
Specific reserve against impaired loans | | $ | 652 | | $ | 612 |
Other loans collectively evaluated for allowance | | $ | 152,753 | | $ | 140,730 |
General allowance for loan losses | | $ | 136 | | $ | 218 |
As of March 31, 2019September 30, 2023 and December 31, 2018,2022, the total principal outstanding for consumer loans on nonaccrual status was $1,546$1,771 and $1,445,$1,610, respectively. A detailed aging of consumer loans receivable that are past due as of March 31, 2019September 30, 2023 and December 31, 20182022 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
|
|
| December 31, |
|
| ||
|
| 2019 |
| % |
| 2018 |
| % | ||
Total consumer loans receivable |
| $ | 102,938 |
| 100.0 |
| $ | 101,049 |
| 100.0 |
Past due consumer loans: |
|
|
|
|
|
|
|
|
|
|
31 - 60 days past due |
| $ | 591 |
| 0.6 |
| $ | 968 |
| 1.0 |
61 - 90 days past due |
|
| 269 |
| 0.3 |
|
| 404 |
| 0.4 |
91 - 120 days past due |
|
| — |
| — |
|
| 133 |
| 0.1 |
Greater than 120 days past due |
|
| 890 |
| 0.9 |
|
| 843 |
| 0.8 |
Total past due |
| $ | 1,750 |
| 1.7 |
| $ | 2,348 |
| 2.3 |
| | | | | | | | | | |
| | As of September 30, |
| |
| As of December 31, |
| | ||
| | 2023 | | % | | 2022 | | % | ||
Total consumer loans receivable | | $ | 154,524 |
| 100.0 |
| $ | 142,340 |
| 100.0 |
Past due consumer loans: | |
|
|
|
| |
|
|
|
|
31 - 60 days past due | | $ | 273 |
| 0.2 | | $ | 1,150 |
| 0.8 |
61 - 90 days past due | |
| 231 |
| 0.1 | |
| 108 |
| 0.1 |
91 - 120 days past due | |
| 240 |
| 0.2 | |
| 486 |
| 0.3 |
Greater than 120 days past due | |
| 1,422 |
| 0.9 | |
| 1,255 |
| 0.9 |
Total past due | | $ | 2,166 |
| 1.4 | | $ | 2,999 |
| 2.1 |
3. NOTES RECEIVABLE FROM MOBILE HOME PARKS
The notes receivable from mobile home parks (“MHP Notes”) relate to mobile homes sold to mobile home parks and financed through notes receivable. The MHP Notes have varying maturity dates and call for monthly principal
12
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
and interest payments. The interest rate on the MHP Notes can be fixed or variable. Approximately $172 million of the MHP Notes have a fixed interest rate ranging from 6.9% to 12.5%. The remaining MHP Notes have a variable rate typically set at 4.0% above prime with a minimum of 8.0%. The average interest rate per loan was approximately 8.1% as of September 30, 2023 and December 31, 2022, with maturities that range from 1 to 10 years. The collateral underlying the MHP Notes are individual mobile homes which can be repossessed and resold. The MHP Notes are generally personally guaranteed by borrowers with substantial financial resources.
The Company had concentrations of MHP Notes with three independent third-parties and their respective affiliates that equated to 15.4%, 16.9% and 28.9% of the principal balance outstanding, all of which was secured by the mobile homes, as of September 30, 2023. As of December 31, 2022, the Company had concentrations of MHP Notes with three independent third-parties and their respective affiliates that equated to 12.3%, 16.6% and 34.0% of the principal balance outstanding, all of which was secured by the mobile homes.
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. As of September 30, 2023 and December 31, 2022, the MHP Notes balance is presented net of unamortized finance fees of $1,534 and $1,068, respectively. The finance fees are amortized over the life of the MHP Notes.
There were nominimal past due balances on the MHP Notes as of March 31, 2019September 30, 2023 and December 31, 20182022 and no charge offs were recorded for MHP Notes during the three and nine months ended March 31, 2019September 30, 2023 and 2018, respectively. There is no2022. The allowance for loan loss againstfor the MHP Notes is $751 and $0 at September 30, 2023 and December 31, 2022, respectively.
There were no impaired MHP Notes as of March 31, 2019September 30, 2023 and December 31, 2018.2022, and there were no repossessed homes balances as of September 30, 2023 and December 31, 2022. 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.
4. OTHER NOTES RECEIVABLE
Other notes receivable relate to various notes issued to mobile home park owners and dealers, which are not directly tied to the 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 5.00% to 17.90%. 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. There were minimal past due balances for other notes as of September 30, 2023 and no past due balances for other notes as of December 31, 2022, and there were no impaired balances for other notes as of September 30, 2023 and December 31, 2022.
The balance outstanding on the other notes receivable were as follows:
|
|
|
|
|
|
|
|
| As of March 31, |
| As of December 31, | ||
|
| 2019 |
| 2018 | ||
Outstanding principal balance |
| $ | 3,658 |
| $ | 2,354 |
Allowance for loan losses |
|
| (68) |
|
| (63) |
Total |
| $ | 3,590 |
| $ | 2,291 |
| | | | | | |
|
| As of September 30, |
| As of December 31, | ||
| | 2023 | | 2022 | ||
Outstanding principal balance | | $ | 35,638 | | $ | 22,722 |
Allowance for loan losses | |
| (189) | |
| — |
Total | | $ | 35,449 | | $ | 22,722 |
1113
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
5. LEASES
The Company currently has 13 operating leases, eight of which are for the Company’s Heritage Housing and Tiny Homes retail locations, three which are subleased by the Company and two of which are for corporate and administrative offices in Bedford, Texas and Norcross, Georgia. These leases typically have initial terms ranging from 5 to 10 years and include one or more options to renew.
We determine if an arrangement is a lease at inception. Operating leases are right-of-use (“ROU”) assets and are shown as ROU assets – operating leases on our condensed balance sheet. The lease liabilities are shown as operating lease obligations and operating lease obligations, less current portion on our condensed balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments under the lease agreement. We record a ROU asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and ROU asset when a change to our future minimum lease payments occurs. Key assumptions and judgments included in the determination of the lease liability include the discount rate used in the present value calculation and the exercise of renewal options.
Many of our leases contain renewal options. As the exercise of the renewal options is not certain at commencement of a lease, we generally do not include the option periods in the lease term when determining the lease liabilities and ROU assets. We remeasure the lease liability and ROU asset when we are reasonably certain that we will exercise a renewal option.
Our leases do not provide information about the rate implicit in the lease. Therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would otherwise pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment. The remaining weighted-average lease term is 4.23 years and the weighted-average discount rate is 2.10%. See Note 14 – Commitments and Contingencies for additional details on the Company’s lease expense.
We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. There were no variable lease costs for the three and nine months ended September 30, 2023 and 2022.
Short-term leases, defined as those with a term of 12 months or less, are not recorded on our Condensed Balance Sheet. Our short-term lease costs were not material for the three and nine months ended September 30, 2023 and 2022.
14
5.LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
As of September 30, 2023, future minimum lease payments under our operating lease liabilities were as follows:
| | | |
2023 |
| $ | 151 |
2024 | |
| 519 |
2025 | |
| 495 |
2026 | |
| 431 |
2027 | |
| 345 |
Thereafter | |
| 145 |
Total lease payments | | $ | 2,086 |
Less amount representing interest | | | (57) |
Total lease liability | | $ | 2,029 |
Less current lease liability | | | (514) |
Total non-current lease liability | | $ | 1,515 |
6. INVENTORIES
Inventories consistedconsists of the following:
|
|
|
|
|
|
|
|
| As of March 31, |
| As of December 31, | ||
|
| 2019 |
| 2018 | ||
Raw materials |
| $ | 11,492 |
| $ | 13,481 |
Work in progress |
|
| 160 |
|
| 526 |
Finished goods |
|
| 36,766 |
|
| 35,425 |
Total |
| $ | 48,418 |
| $ | 49,432 |
| | | | | | |
|
| As of September 30, |
| As of December 31, | ||
| | 2023 | | 2022 | ||
Raw materials | | $ | 14,846 | | $ | 17,442 |
Work in progress | |
| 764 | |
| 592 |
Finished goods | |
| 26,449 | |
| 21,028 |
Total | | $ | 42,059 | | $ | 39,062 |
Finished goods includes $6,704 and $6,987 as of September 30, 2023 and December 31, 2022, respectively, held for more than twelve months and classified as long-term. The Company has an inventory allowance of $402 as of both September 30, 2023 and December 31, 2022.
6.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consistedconsists of the following:
|
|
|
|
|
|
|
|
| As of March 31, |
| As of December 31, | ||
|
| 2019 |
| 2018 | ||
Land |
| $ | 8,616 |
| $ | 8,081 |
Buildings and leasehold improvements |
|
| 9,344 |
|
| 9,234 |
Vehicles |
|
| 1,566 |
|
| 1,477 |
Machinery and equipment |
|
| 3,394 |
|
| 3,385 |
Furniture and fixtures |
|
| 175 |
|
| 161 |
Total |
|
| 23,095 |
|
| 22,338 |
Less accumulated depreciation |
|
| (5,451) |
|
| (5,210) |
Total property, plant and equipment |
| $ | 17,644 |
| $ | 17,128 |
| | | | | | |
|
| As of September 30, |
| As of December 31, | ||
| | 2023 | | 2022 | ||
Land | | $ | 14,953 | | $ | 14,953 |
Buildings and leasehold improvements | |
| 20,807 | |
| 16,949 |
Vehicles | |
| 1,571 | |
| 1,556 |
Machinery and equipment | |
| 6,420 | |
| 5,750 |
Furniture and fixtures | |
| 329 | |
| 300 |
Total | |
| 44,080 | |
| 39,508 |
Less accumulated depreciation | |
| (10,206) | |
| (9,402) |
Total property, plant and equipment | | $ | 33,874 | | $ | 30,106 |
Depreciation expense was $241$273 with $89$127 included as a component of cost of product sales for the three‑three months ended March 31, 2019September 30, 2023, and $196$295 with $75$116 included as a component of cost of product sales for the three‑three months ended March 31, 2018.
7. OTHER ASSETS
Other assets includes prepaid rent in the amountSeptember 30, 2022. Depreciation expense was $812 with $377 included as a component of $1,726 and $1,412 at March 31, 2019 and December 31, 2018, respectively, and repossessed loanscost 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 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 |
1215
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
product sales for the nine months ended September 30, 2023, and $872 with $364 included as a component of cost of product sales for the nine months ended September 30, 2022.
8. OTHER ASSETS
Other assets consists of the following:
| | | | | | |
|
| As of September 30, |
| As of December 31, | ||
| | 2023 | | 2022 | ||
Stadium license | | $ | 349 | | $ | 349 |
Other | |
| 7 | |
| 338 |
Repossessed homes | |
| 1,486 | |
| 795 |
Total | | $ | 1,842 | | $ | 1,482 |
9. DEBT SECURITIES
Debt Securities have been classified according to management’s intent. The Company purchased US Treasury Notes in November 2022 that were scheduled to mature in November 2023. The Debt Securities were classified as held-to-maturity and the amortized costs are $8,412 at December 31, 2022. The Debt Securities were sold prior to maturity on June 22, 2023 and the proceeds were used to pay down the credit line. The Company recognized a gain of $12 when the Debt Securities were sold.
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
| | | | | | |
|
| As of September 30, |
| As of December 31, | ||
| | 2023 | | 2022 | ||
Warranty reserve | | $ | 2,799 | | $ | 3,049 |
Litigation reserve | |
| 660 | |
| 753 |
Payroll | | | 757 | | | 1,006 |
Portfolio taxes and title | |
| 2,360 | |
| 1,610 |
Property tax | | | 934 | | | 54 |
Dealer rebates | | | 1,105 | | | 1,402 |
Sales tax | |
| 55 | |
| 61 |
Federal and state income taxes | |
| 7,186 | |
| 6,699 |
Other | |
| 4,753 | |
| 2,261 |
Total accrued liabilities | | $ | 20,609 | | $ | 16,895 |
16
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
11. DEBT
Lines of Credit
Revolver 1
TheOn March 30, 2020, the Company hasentered into an agreement with Capital One, N.A. for a revolving line of credit (“Revolver”). The Revolver 1”) with Capital One, N.A. withhad a maximum credit limit of $45,000 as$70,000 and a maturity date of March 31, 2019. 30, 2024.
On May 12, 2017,June 21, 2022, the Company received a Reservation of Rights notice from Capital One, N.A. (“Capital One”). The letter stated that the Company’s Revolver 1 was amendedin default. The default condition occurred due to extend the maturity dateCompany’s failure to May 11, 2020timely file the Form 10-K and increasedeliver certain financial statements to Capital One. On July 28, 2022, the maximumCompany entered into a Limited Waiver and First Amendment to Credit Agreement (the “Amendment”) with Capital One. The Amendment replaced the LIBOR borrowing availabilityrate with a secured overnight financing rate (“SOFR”) and waived a default arising out of a monetary judgement against the Company that exceeded the amount allowed in the Revolver. On August 24, 2022, the Company received a Notice of Default and Partial Suspension of Loan Commitments from Capital One. The notice stated that the July 28, 2022 forbearance agreement had been terminated and that Capital One was suspending $50,000 of the $70,000 loan commitment under the Revolver. As a result, the available line of credit in the Revolver was limited to $45,000. For the three months ended March 31, 2019 and for the year ended December 31, 2018,$20,000.
The Revolver 1 accrued interest at one month LIBORone-month SOFR plus 2.40%2.00%. The interest rates in effect as of March 31, 2019 and December 31, 2018 were 4.88% and 4.78%, respectively. Amounts available under the Revolver 1 arewere subject to a formula based on eligible consumer loans and MHP Notes and arewere secured by all accounts receivable, consumer loans and MHP Notes. In connection with the Revolver, the Company paid certain arrangement fees and other fees of approximately $295, which were capitalized as unamortized debt issuance costs and was amortized to interest expense over the life of the Revolver. The Revolver required the Company to comply with certain financial and non-financial covenants.
On July 28, 2023, upon entry into the New Revolver described below, the Capital One Revolver was repaid in full, and all commitments thereunder were terminated.
New Revolver
On July 28, 2023, the Company entered into a percentagenew Credit Agreement (the “New Revolver”), by and among the Company as borrower, the financial institutions from time to time party thereto, as lenders, and Prosperity Bank as administrative agent. The New Revolver provides for a four-year senior secured revolving credit facility with an initial commitment of $50,000,000 and an additional $25,000,000 commitment under an accordion feature. The New Revolver is secured by the Company’s consumer loans receivables and all escrow accounts associated with the consumer loans receivablereceivables.
At the Company's option, borrowings bear interest at a per annum rate equal to, (i) Term Secured Overnight Financing Rate (“SOFR”) plus an applicable margin of 2.5% or 2.75% based upon the Company's average quarterly borrowings under the New Revolver or (ii) a base rate plus an applicable margin of 2.5% or 2.75% based upon the Company's average quarterly borrowings under the New Revolver. The Company paid certain arrangement fees and MHP Notes.other fees in connection with the New Revolver of approximately $271, which were capitalized as unamortized debt issuance costs and are amortized to interest expense over the life of the New Revolver. The amountNew Revolver matures July 28, 2027. The New Revolver requires the Company to comply with certain financial and non-financial covenants. As of available credit under Revolver 1 was $39,839 and $41,321 at March 31, 2019 and December 31, 2018, respectively. TheSeptember 30, 2023, the Company was in compliance with all requiredfinancial covenants, asincluding that it maintain a total debt to tangible net worth ratio of March 31, 2019. no more than 1.00 to 1.00 and a minimum fixed charge coverage ratio of no less than 1.75 to 1.00.
For the three months ended March 31, 2019September 30, 2023 and 2018,2022, interest expense under the Revolvers was $73$302 and $416,$87, 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 covenants that it maintain a tangible net worth of at least $90,000 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. The interest rates in effect as of March 31, 2019 and December 31, 2018 were 4.99% and 4.85%, 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 at March 31, 2019 and December 31, 2018, respectively. The Company was in compliance with all required covenants as of March 31, 2019. For the threenine months ended March 31, 2019September 30, 2023 and 2018,2022, interest expense was $61 and $154, respectively. The outstanding balance as of March 31, 2019 and December 31, 2018 was $2,001 and $10,000. The Company was in compliance with the other financial covenants that it maintain a tangible net worth of at least $80,000.
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 BankRevolvers was renewed with varying amounts of principal and interest due through the maturity date, April 7, 2033. The promissory note calls for 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 and $40 for the three months ended March 31, 2019 and 2018, respectively. The balance outstanding on the note payable at March 31, 2019 and December 31, 2018 was $3,506 and $3,552, respectively.
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
1317
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$588 and $326, respectively. The outstanding balance of the New Revolver as of September 30, 2023 was $1$13,013, and $7the outstanding balance of the Revolver as of December 31, 2022 was $2,545. The interest rate in effect as of September 30, 2023 for the three months ended March 31, 2019New Revolver was 7.95% and 2018, respectively. The balance outstanding on the note payable atinterest rate in effect as of December 31, 2018 was $414. 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 $142022 for the three months ended MarchRevolver was 6.12%. The amount of available credit under the New Revolver was $36,987 as of September 30, 2023 and the amount of available credit under the Revolver was $17,400 as of December 31, 2018. In October 2018, this note payable was paid in full.2022.
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, the Company had not drawn on this credit facility.
10.12. 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, restricted 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, 2023, the Company had 9.89.7 million shares available for grant under the Compensation Plan.
TheRestricted Stock Units
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 becomingbecome 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 management.
TheIn November 2021, the Company granted 2,9361,202 restricted shares of its common stock to the independent directors on the Company’s Board of Directors. The shares were granted on February 7, 2019November 30, 2021 and becomehad a grant date fair value of $30. The shares became fully vested on December 13, 2019.October 24, 2022.
In January 2022, the Company granted 150,000 restricted shares of its common stock to the Executive Chairman of the Company pursuant to an amended and restated employment agreement. The shares were granted on January 6, 2022 and had a grant date fair value of $3,741. The shares became fully vested upon grant.
On January 6, 2022, the Company gave contingent equity awards of 350,000 shares of the Company’s restricted stock to the Executive Chairman of the Company pursuant to an amended and restated employment agreement. An equity award of 175,000 shares will be granted if the Company’s stock price closes at $36 per share for a period of fifteen consecutive market days (the “$36 Equity Award”). The $36 Equity Awards had a grant date fair value of $1,412. Fifty percent of the shares vested at grant and fifty percent shall vest on June 16, 2024, so long as the Executive Chairman is employed by the Company on that date. An additional equity award of 175,000 shares of the Company’s restricted stock will be granted if the Company’s stock price closes at $48 per share for a period of fifteen consecutive market days (the “$48 Equity Award”). The $48 Equity Awards had a grant date fair value of $683. Fifty percent of the shares vested at grant and fifty percent shall vest on June 16, 2024, so long as the Executive Chairman is employed by the Company on that date.
On November 15, 2022, the Company entered into a rescission and relinquishment agreement (the “Rescission Agreement”) with the Executive Chairman. The Rescission Agreement allows the Executive Chairman to rescind and relinquish the $36 Equity Awards and the $48 Equity Awards granted under the amended and restated employment agreement and allows the Company to accept such rescission and relinquishment without penalty. The effective date of the Rescission Agreement was October 1, 2022.
1418
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
On June 7, 2022, the Company granted 14,700 restricted shares of its common stock to the Chief Executive Officer of the Company pursuant to an employment agreement. The shares were granted on June 7, 2022 and had a grant date fair value of $235. One-half of the shares vested on June 7, 2023 and the remaining half vest on June 7, 2024.
On June 7, 2022, the Company granted 301 restricted shares of its common stock to an independent director on the Company’s Board of Directors. The shares were granted on June 7, 2022 and had a grant date fair value of $5. The shares became fully vested on October 24, 2022.
In November 2022, the Company granted 1,734 restricted shares of its common stock to the independent directors on the Company’s Board of Directors. The shares were granted on November 29, 2022 and had a grant date fair value of $30. The shares become fully vested on October 23, 2023.
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 Per Unit | |||||
Nonvested, January 1, 2023 | | 42 | | $ | 14.61 | |||||
Granted |
| 123 |
| $ | 13.63 | | — | | $ | — |
Vested |
| 17 |
| $ | 13.63 | | (16) | | $ | 14.73 |
Outstanding, March 31, 2019 |
| 106 |
| $ | 13.63 | |||||
Canceled | | — | | $ | — | |||||
Nonvested, September 30, 2023 | | 26 | | $ | 14.54 |
As of March 31, 2019,September 30, 2023, approximately 106,00026,000 RSUs remained unvested. UnrecognizedThe unrecognized compensation expense related to these RSUs at March 31, 2019September 30, 2023 was $1,402$242 and is expected to be recognized over 5.861.33 years.
TheStock Options
On August 10, 2020, the Company granted 58,69434,626 incentive stock options to a member of senior management. The options were granted on February 7, 2019management at an exercise price of $13.63$14.44 per share. The options vest at a rate of 12.5%20.0% annually, beginning on February 7, 2019,August 10, 2021, and becomingbecome fully vested on February 7, 2026.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 2.41%;0.24%, dividend yield of 0.00%;, expected volatility of common stock of 65.0%75.0% and expected life of options of 7.96.5 years. During the first quarter of 2022, 27,701 of these options were forfeited due to the individual’s departure.
On September 23, 2021, the Company granted 55,490 incentive stock options to a member of management at an exercise price of $18.02 per share. The options vest at a rate of 10.0% annually, beginning on September 23, 2022, and become fully vested on September 23, 2031. 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 1.41%, dividend yield of 0.00%, expected volatility of common stock of 75.0% and expected life of options of 7.8 years. During the fourth quarter of 2022, these options were forfeited due to the individual’s departure.
On June 7, 2022, the Company granted 62,460 incentive stock options to the Chief Executive Officer at an exercise price of $16.01 per share. The options vest at a rate of 10.0% annually, beginning on June 7, 2023, and become fully vested on June 7, 2032. 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 2.98%, dividend yield of 0.00%, expected volatility of common stock of 45.7% and expected life of options of 7.8 years.
On June 7, 2022, the Company granted options to purchase 900,000 shares of the Company’s stock to the Chief Executive Officer. This grant included an option to purchase 300,000 shares of the Company’s stock at an exercise price
19
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
of $36.00 per share and an option to purchase 600,000 shares of the Company’s stock at an exercise price of $48.00 per share. The options vest at a rate of 10.0% annually, beginning on June 7, 2023, and become fully vested on June 7, 2032. 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 2.98%, dividend yield of 0.00%, expected volatility of common stock of 45.7% and expected life of options of 7.8 years.
On June 7, 2022, the Company granted 62,460 incentive stock options to the Chief Financial Officer at an exercise price of $16.01 per share. The options vest at a rate of 10.0% annually, beginning on June 7, 2023, and become fully vested on June 7, 2032. 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 2.98%, dividend yield of 0.00%, expected volatility of common stock of 45.7% and expected life of options of 7.8 years. During the third quarter of 2023, the unvested options were forfeited due to the individual’s departure.
On June 22, 2023, the Company granted 22,104 incentive stock options to a member of management at an exercise price of $22.62 per share. The options vest at a rate of 20.0% annually, beginning on June 22, 2023, and become fully vested on June 22, 2028. All options expire five 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 4.03%, dividend yield of 0.00%, expected volatility of common stock of 85.0% and expected life of options of 4.0 years.
The following is a summary of option activity (in thousands, except per unit data)(number of units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| 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 |
| Weighted |
| Weighted |
| Aggregate | ||||||||||||||||
Outstanding, January 1, 2022 | | 83 | | $ | 16.83 | | $ | 12.27 | | 9.36 | | | | |||||||||||||
Granted |
| 59 |
| $ | 13.63 |
| $ | 7.69 |
| 6.86 |
| $ | 102 | | 1,025 | | $ | 40.59 | | $ | 4.99 | | 9.94 | | | |
Exercised |
| - |
|
| - |
|
| - |
| - |
|
| - | | — | | $ | — | | $ | — | | — | | | |
Forfeited |
| - |
|
| - |
|
| - |
| - |
|
| - | | (28) | | $ | 14.44 | | $ | 8.67 | | — | | | |
Outstanding, March 31, 2019 |
| 59 |
| $ | 13.63 |
| $ | 7.69 |
| 6.86 |
| $ | 102 | |||||||||||||
Outstanding, September 30, 2022 | | 1,080 | | $ | 39.54 | | $ | 5.41 | | 9.66 | | $ | — | |||||||||||||
Exercisable, September 30, 2022 | | 5 | | $ | 18.02 | | $ | 14.07 | | 8.99 | | $ | — | |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Outstanding, January 1, 2023 | | 1,025 | | $ | 40.59 | | $ | 4.99 | | 9.44 | | | | |||||||||||||
Granted | | 22 | | $ | 22.62 | | $ | 14.39 | | 4.73 | | | | |||||||||||||
Exercised | | (6) | | $ | 16.01 | | $ | 8.57 | | — | | | | |||||||||||||
Forfeited | | (56) | | $ | 16.01 | | $ | 8.57 | | — | | | | |||||||||||||
Outstanding, September 30, 2023 | | 985 | | $ | 41.74 | | $ | 4.97 | | 8.60 | | $ | — | |||||||||||||
Exercisable, September 30, 2023 | | 6 | | $ | 16.01 | | $ | 8.57 | | 8.69 | | $ | 21 |
11.As of September 30, 2023, approximately 985,000 options remained nonvested. Unrecognized compensation expense related to these options at September 30, 2023 was $4,279 and is expected to be recognized over 8.6 years.
13. INCOME TAXES
The provision for income tax expense for the three months ended March 31, 2019September 30, 2023 and 20182022 was $2.0 million$3,380 and $4.0 million,$2,836 respectively and $9,885 and $10,210 for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate for the three and nine months ended March 31, 2019September 30, 2023 was 21.8%17.4% and differs17.3%, respectively. These
20
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
rates differ from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes. The effective tax raterates for the three and nine months ended March 31, 2018 was 42.7%September 30, 2022 were 16.1% and 17.5%, respectively, and differs from the federal statutory rate of 21% primarily due to deferreda federal tax expense associated with the corporate reorganization,credit for energy efficient construction, partially offset by state income taxes and other permanent differences between book and tax basis.taxes.
12.
14. 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 reserves estimated 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. As of September 30, 2023 and December 31, 2022, the Company had accrued a $260 and $149 liability for incurred but not reported claims, respectively. These accrued amounts are included in accrued liabilities on the condensed balance sheets.
The Company is contingently liable under the terms of repurchase agreements with financial institutions providingthat provide inventory financing for independent retailers of itsthat sell the Company’s 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 $1,549totaled $4,767 and $2,186$8,925 at March 31, 2019September 30, 2023 and December 31, 2018,2022, respectively, without reduction for the resale value of the homes. The Company considers its
15
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
obligations on current contracts to be immaterialinsignificant and accordingly havehas not recorded any reserve for repurchase commitment as of March 31, 2019 orSeptember 30, 2023 and December 31, 2018.2022.
Leases. The Company leases facilities under operating leases that typically have 10 ‑year10-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$159 and $91$180 for the three months ended March 31, 2019September 30, 2023 and 2018,2022, respectively, and $482 and $530 for the nine months ended September 30, 2023 and 2022, respectively. The Company also subleases properties to third parties, ranging from 3 ‑year3-year to 11 ‑year11-year terms with various renewal options. Rental income from the subleased propertyproperties was approximately $89$59 and $92$55 for the three months ended March 31, 2019September 30, 2023 and 2018,2022, respectively, and $184 and $165 for the nine months ended September 30, 2023 and 2022, respectively.
Future See Note 5 – Leases, for a schedule of the Company’s future minimum lease commitments under all non‑cancelable operating leases for each of the next five years at March 31, 2019, are as follows:
|
|
|
|
2019 |
| $ | 451 |
2020 |
|
| 513 |
2021 |
|
| 450 |
2022 |
|
| 374 |
2023 |
|
| 318 |
Thereafter |
|
| 969 |
Total |
| $ | 3,075 |
commitments.
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. The Company has determined that it is probable that it has some liability related to some of these claims. The Company has included legal reserves of $660 and $753 as of September 30, 2023 and December 31, 2022, respectively, in accrued liabilities on the accompanying condensed balance sheets. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending andor 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 AND15. 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 designateaccounts for its financial instruments in accordance with ASC 820-10, Fair Value Measurement, which among other things provides 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, Derivatives and Hedging , requires derivative instruments to be measured atframework for measuring 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.value. This interest rate swap agreement is the only one outstanding at March 31, 2019 and hasframework provides a maturity of May 11, 2020. The fair values of the interest rate swap agreement are assets included in prepaid expenses and other current assets and were $50 and $80 at March 31, 2019 and December 31, 2018, respectively. Included in the statements of operations for the three months ended March 31, 2019 and 2018 were losses of $16 and $7, respectively, which are the result of the changes in the fair values of the interest rate swap agreement.
value
1621
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
Fair Value Measurements
The Company accounts for its investments and derivative instruments in accordance with ASC 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; and (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.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, investments in US Treasury Notes, accounts receivable, consumer loans, MHP Notes, other notes, accounts payable, lines of credit, notes payable, and the 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‑termshort-term maturities or expected settlement dates of these instruments. This is considered a Level I valuation technique. The MHPinvestment in US Treasury Notes other notes,has quoted prices available in active markets that the Company can access at measurement dates. The US Treasury Notes were sold by the Company on June 22, 2023. The Company determined that the fair value of the investment in US Treasury Notes was approximately $8,409 compared to the book value of $8,412 as of December 31, 2022. This was considered a Level I valuation technique. The lines of credit, and notes payable, part of the MHP Notes and part of the other notes receivables 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, the fixed rate MHP Notes and the portion of other note receivables with fixed rates 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$150,603 compared to the book value of $98,904$151,528 as of March 31, 2019,September 30, 2023, and a fair value of approximately $109,231$138,800 compared to the book value of $97,175$139,009 as of December 31, 2018.2022. The Company determined that the fair value of the fixed rate MHP Notes was approximately $169,538 compared to the book value of $172,178 as of September 30, 2023, and a fair value of approximately $128,400 compared to the book value of $129,966 as of December 31, 2022. The difference between the book value and fair value as of September 30, 2023 primarily is due to the Company’s current average discount rate of 8.5% compared to the average coupon rate on the notes of 7.8%. The Company determined that the fair value of the fixed rate other notes was approximately $35,026 compared to the book value of $35,448 as of September 30, 2023, and a fair value of approximately $21,600 compared to the book value of $22,722 as of December 31, 2022. This is a Level IIIII valuation technique.
1722
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
14.16. EARNINGS PER SHARE
Basic earnings per common share (“EPS”) is computed based on the weighted‑averageweighted-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 | ||
Numerator: |
|
|
|
|
|
|
Net income (in 000's) |
| $ | 7,213 |
| $ | 5,361 |
Denominator: |
|
|
|
|
|
|
Basic weighted-average common shares outstanding |
|
| 24,516,762 |
|
| 20,000,000 |
Effect of dilutive securites: |
|
|
|
|
|
|
Restricted stock grants |
|
| 54,326 |
|
| - |
Diluted weighted-average common shares outstanding |
|
| 24,571,088 |
|
| 20,000,000 |
Earnings per share attributable to Legacy Housing Corp |
|
|
|
|
|
|
Basic |
| $ | 0.29 |
| $ | 0.27 |
Diluted |
| $ | 0.29 |
| $ | 0.27 |
15.
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2023 |
| 2022 | | 2023 |
| 2022 | ||||
Numerator: | | | | | | | | | | | | |
Net income (in 000's) | | $ | 16,088 | | $ | 14,735 | | $ | 47,384 | | $ | 48,088 |
Denominator: | | | | | | | | | | | | |
Basic weighted-average common shares outstanding | | | 24,391,797 | | | 24,406,020 | | | 24,382,519 | | | 24,356,809 |
Effect of dilutive securities: | | | | | | | | | | | | |
Restricted stock units | | | 13,755 | | | 260,114 | | | 10,206 | | | 267,796 |
Stock options | | | 723,127 | | | 712,982 | | | 707,260 | | | 399,883 |
Diluted weighted-average common shares outstanding | | | 25,128,679 | | | 25,379,116 | | | 25,099,985 | | | 25,024,488 |
Earnings per share attributable to Legacy Housing Corporation | | | | | | | | | | | | |
Basic | | $ | 0.66 | | $ | 0.60 | | $ | 1.94 | | $ | 1.97 |
Diluted | | $ | 0.64 | | $ | 0.58 | | $ | 1.89 | | $ | 1.92 |
17. RELATED PARTY TRANSACTIONS
Bell Mobile Homes (“Bell”), a retailer owned by one of the Company’s significant owners,stockholders, purchases manufactured homes from the Company. Accounts receivable balances due from Bell Mobile Homes were $481$242 and $414$0 as of March 31, 2019September 30, 2023 and December 31, 2018,2022, respectively. Accounts payable balances due to Bell Mobile Homes for maintenance and related services were $0$62 and $123$132 as of March 31, 2019September 30, 2023 and December 31, 2018,2022, respectively. Home sales to Bell Mobile Homes were $858$1,163 and $583$695 for the three months ended March 31, 2019September 30, 2023 and 2018,2022, respectively, and $3,150 and $2,550 for the nine months ended September 30, 2023 and 2022, respectively.
Shipley Bros., Ltd. (“Shipley Bros.”Shipley”), a retailer owned by one of the Company’s significant shareholders,stockholders, purchases manufactured homes from the Company. Home sales to Shipley were $207 and $524 for the three months ended September 30, 2023 and 2022, respectively, and $830 and $2,235 for the nine months ended September 30, 2023 and 2022, respectively. Accounts receivable balances due from Shipley Bros. were $224 and $832$0 as of March 31, 2019September 30, 2023 and December 31, 2018, respectively.2022. There were no accounts payable balances due to Shipley as of September 30, 2023 and December 31, 2022.
On February 2, 2016,At September 30, 2023, the Company entered intohad 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$4 to Shipley and Sons was $14 for the three months ended March 31, 2018. On October 18, 2018, this note payable was paid in full.
At March 31, 2019, the Company has a receivable of $375 from a principal shareholder for certain business expenses related to a potential business venture.shareholder. This amount is included in the Company’s accounts receivablepayable balance as of March 31, 2019.September 30, 2023.
LEGACY HOUSING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands)
16.18. 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 volumeLegacy evaluated events after September 30, 2023, 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 filingthe financial statements were issued, and there were no otherdetermined any events that have occurredor transactions occurring during this period that would require adjustments to therecognition or disclosure are appropriately addressed in these financial statements.
1923
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‑lookingforward-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‑lookingforward-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‑ownedcompany-owned stores to consumers and are sold directly to manufactured housing communities. We are the fourthfifth largest producer of manufactured homes in the United States as ranked by the number of homes manufactured based on information available from the Manufactured Housing Institute and IBTSthe Institute for Building Technology and Safety for the second quarter of 2018.twelve month period ending June 30, 2023. With current operations focused primarily in the southern United States, we offer our customers an array of quality homes ranging in size from approximately 390395 to 2,667 square feet consisting of 1 to 5bedrooms, with 1 to 31/ 1/2 bathrooms. Our homes range in price, at retail, from approximately $18,000$33,000 to $122,000.$180,000. For the three and nine months ended March 31, 2019,September 30, 2023, we sold 918643 and 2,246 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, 2022, we sold 1,032944 and 2,947 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 suchthe 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, the Executive Chairman of the Board,Company are based upon analyses of our company as one segment or unit.
We believe our companyCompany 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‑madecustom-made homes using quality materials and distributing those homes through our expansive network of independent retailers and company‑ownedcompany-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‑volumehigh-volume production techniques that allow us to produce, on average, approximately 7570 home sections, or 62 fully‑completed60 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‑artstate-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 111146 independent retail locations, 12 company‑owned13 company-owned retail locations and through direct sales to owners of manufactured home communities. Our 12 company‑owned13 company-owned retail locations, including ten11 Heritage Housing stores and two Tiny House Outlet stores exclusively sell our homes. For the threenine months ended March 31, 2019,September 30, 2023, approximately 54%49% of our manufactured homes were sold in Texas, followed by 10%15% in Georgia, 8%9% in Florida, 8%Louisiana, 4% in KansasOklahoma, and 5%3% in Michigan.Florida. For the threenine months ended March 31, 2018, 48%September 30, 2022, approximately 51% of our manufactured homes were sold in Texas, followed by 20%11% in Georgia, 13%6% in Florida, 5% in Louisiana 4%and 5% in Colorado and 4% in Oklahoma. We plan to deepen our distribution channel by using cash from operations and borrowings from our lines of credit to expand our company‑owned retail locations in new and existing markets.Arizona.
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 or a financed sale between the retailer and us. We also provide consumer financing for our products which are sold to end‑usersend-users through both independent and company‑ownedcompany-owned retail locations, and we provide financing solutions to manufactured housing community owners that buy our products for use
20
in their manufactured housing communities. Our ability to offer competitive financing options
24
at our retail locations 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. 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 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.
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:
|
|
| | | | | | | | | | | | | |
Location |
| Description | | Date of Acquisition | | Land | | | Improvements | | Total | ||
Bastrop County, Texas |
| 368 Acres |
| April 2018 | | $ | 4,215 | | $ | 5,616 | | $ | 9,831 |
Bexar County, Texas |
| 69 Acres |
| November 2018 | |
| 842 | |
| 107 | |
| 949 |
Horseshoe Bay, Texas | | 133 Acres |
| Various 2018-2019 | |
| 2,639 | |
| 2,024 | |
| 4,663 |
Johnson County, Texas | | 91.5 Acres |
| July 2019 | |
| 449 | |
| - | |
| 449 |
Venus, Texas | | 50 Acres |
| August 2019 | |
| 422 | |
| 25 | |
| 447 |
Wise County, Texas | | 81.5 Acres | | September 2020 | | | 889 | | | - | | | 889 |
Bexar County, Texas | | 233 Acres | | February 2021 | | | 1,550 | | | 382 | | | 1,932 |
| | | | | | $ | 11,006 | | $ | 8,154 | | $ | 19,160 |
| We also expect to provide financing solutions to a select group of our manufactured housing |
| Inflation most recently has been at or near its highest rate in the U.S. over the last 30 years. Our ability to maintain gross margins can be adversely impacted by sudden increases in specific costs, such as the increases in material and labor. In addition, measures used to combat inflation, such as increases in interest rates, could also have an impact on the ability of home buyers to obtain affordable financing. We continue to explore opportunities to minimize the impact of inflation on our future profitability. |
● | Finally, our financial performance will be impacted by our ability to fulfill current orders for our manufactured homes from dealers and customers. |
25
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.
21
Comparison of Three Months ended March 31, 2019September 30, 2023 and 20182022 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
|
|
|
|
|
| ||||
|
| March 31, |
|
|
|
|
|
| ||||
|
| 2019 |
| 2018 |
| $ change |
| % change |
| |||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
| $ | 31,550 |
| $ | 37,414 |
| $ | (5,864) |
| (15.7) | % |
Consumer and MHP loans interest |
|
| 5,530 |
|
| 4,394 |
|
| 1,136 |
| 25.9 | % |
Other |
|
| 874 |
|
| 878 |
|
| (4) |
| (0.5) | % |
Total net revenue |
|
| 37,954 |
|
| 42,686 |
|
| (4,732) |
| (11.1) | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales |
|
| 21,885 |
|
| 27,647 |
|
| (5,762) |
| (20.8) | % |
Selling, general administrative expenses |
|
| 6,491 |
|
| 4,799 |
|
| 1,692 |
| 35.3 | % |
Dealer incentive |
|
| 210 |
|
| 335 |
|
| (125) |
| (37.3) | % |
Income from operations |
|
| 9,368 |
|
| 9,905 |
|
| (537) |
| (5.4) | % |
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Non‑operating interest income |
|
| 39 |
|
| 51 |
|
| (12) |
| (23.5) | % |
Miscellaneous, net |
|
| 3 |
|
| 34 |
|
| (31) |
| (91.2) | % |
Interest expense |
|
| (189) |
|
| (639) |
|
| 450 |
| (70.4) | % |
Total other |
|
| (147) |
|
| (554) |
|
| 407 |
| (73.5) | % |
Income before income tax expense |
|
| 9,221 |
|
| 9,351 |
|
| (130) |
| (1.4) | % |
Income tax expense |
|
| (2,008) |
|
| (3,990) |
|
| 1,982 |
| (49.7) | % |
Net income |
| $ | 7,213 |
| $ | 5,361 |
| $ | 1,852 |
| 34.5 | % |
| | | | | | | | | | | | |
| | Three months ended | |
| | |
|
| ||||
| | September 30, | | | | | | | ||||
|
| 2023 |
| 2022 |
| $ change |
| % change |
| |||
Net revenue: | | | | | | | | | | | | |
Product sales | | $ | 37,008 | | $ | 48,678 | | $ | (11,670) |
| (24.0) | % |
Consumer and MHP loans interest | |
| 8,803 | |
| 7,002 | |
| 1,801 |
| 25.7 | % |
Other | |
| 4,126 | |
| 1,645 | |
| 2,481 |
| 150.8 | % |
Total net revenue | |
| 49,937 | |
| 57,325 | |
| (7,388) |
| (12.9) | % |
Operating expenses: | |
|
| |
|
| |
|
|
|
| |
Cost of product sales | |
| 24,820 | |
| 33,510 | |
| (8,690) |
| (25.9) | % |
Selling, general administrative expenses | |
| 6,108 | |
| 6,727 | |
| (619) |
| (9.2) | % |
Dealer incentive | |
| (5) | |
| 226 | |
| (231) |
| (102.2) | % |
Income from operations | |
| 19,014 | |
| 16,862 | |
| 2,152 |
| 12.8 | % |
Other income (expense) | |
|
| |
|
| |
|
|
|
| |
Non‑operating interest income | |
| 794 | |
| 611 | |
| 183 |
| 30.0 | % |
Miscellaneous, net | |
| (37) | |
| 186 | |
| (223) |
| (119.9) | % |
Interest expense | |
| (303) | |
| (88) | |
| (215) |
| 244.3 | % |
Total other | |
| 454 | |
| 709 | |
| (255) |
| (36.0) | % |
Income before income tax expense | |
| 19,468 | |
| 17,571 | |
| 1,897 |
| 10.8 | % |
Income tax expense | |
| (3,380) | |
| (2,836) | |
| (544) |
| 19.2 | % |
Net income | | $ | 16,088 | | $ | 14,735 | | $ | 1,353 |
| 9.2 | % |
Product sales primarily consist of direct sales, commercial sales, consignmentinventory finance sales and retail store sales. Product sales decreased $5.9$11.7 million, or 15.7%24%, during the three months ended March 31, 2019September 30, 2023 as compared to the same period in 2018.2022. This changedecrease was driven by a 15.9%an industry wide decrease in volume of homes sold. The first quarter of 2018 included $8.9 million of sales asunit volumes ($11.0 million), a subcontractor operating under a contract with FEMA to provide housing for victims of Hurricane Harvey. Direct sales decreased $8.1 million to $4.5 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 stores sales increased $0.8 million to $3.3 million in 2019 from $2.5 million in 2018. These increases were partially offset by a net $2.7 million decrease in net revenue per unit ($0.2 million) and a decrease in the conversion of certain independent dealer consignment sales. The remaining decrease of $1.4 million is primarily duearrangements to a decline in direct freight related to the 2018 FEMA sales.financing arrangements and other market factors ($0.5 million).
Net revenue attributable to our factory‑builtfactory-built housing consisted of the following during the first three months of 20192023 and 2018:2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
|
|
| ||||
|
| March 31, |
|
|
|
|
|
| ||||
|
| (in thousands) |
|
|
|
|
|
| ||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change |
| |||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Products sold |
| $ | 31,550 |
| $ | 37,414 |
| $ | (5,864) |
| (15.7) | % |
Total products sold |
|
| 767 |
|
| 912 |
|
| (145) |
| (15.9) | % |
Net revenue per product sold |
| $ | 41,134 |
| $ | 41,024 |
| $ | 110 |
| 0.3 | % |
| | | | | | | | | | | | |
|
| Three months ended | | | |
|
|
| ||||
| | September 30, | | | | | | | ||||
| | (in thousands) | | | | | |
| ||||
|
| 2023 |
| 2022 |
| $ Change |
| % Change |
| |||
Net revenue: |
| |
|
| |
|
| |
|
|
| |
Product sales | | $ | 37,008 | | $ | 48,678 | | $ | (11,670) |
| (24.0) | % |
Total units sold | |
| 582 | |
| 753 | |
| (171) |
| (22.7) | % |
Net revenue per unit sold | | $ | 63.6 | | $ | 64.6 | | $ | (1) |
| (1.6) | % |
For the three months ended 2019, September 30, 2023, our net revenue per productunit sold increaseddecreased primarily due to changes in part because of increased sales to manufactured home communities and increased sales through our company‑owned stores, all of which carry higher margins. In addition, there were multiple price increases to our product sales mix slightly offset by increases in unit prices due toover the same period in 2022, as rising material and labor costs which resultedwere passed on to our customers. We had decreases in higherhomedirect sales, pricesinventory finance sales and more revenue generated per home sold.retail store sales, partially offset by an increase in commercial sales and other product sales. Our commercial sales have lower margins than sales through our company-owned retail stores and our inventory financed sales.
26
Consumer and MHP loans interest income grew $1.1$1.8 million, or 25.7%, during the three months ended September 30, 2023 as compared to the same period in 2022 and is related to our increase in average outstanding MHP note portfolio balance and average outstanding consumer loan portfolio balance. Between September 30, 2023 and September 30, 2022 our MHP note portfolio increased by $47.8 million and our consumer loan portfolio increased by $16.8 million.
Other revenue primarily consists of contract deposit forfeitures, dealer finance fees and commercial lease rents and increased $2.5 million, or 150.8%, during the three months ended September 30, 2023 as compared to the same period in 2022. This increase was primarily due to $2.4 million increase in forfeited deposits, a $0.2 million increase in dealer finance fees, partially offset by a $0.1 million decrease in commercial lease rents.
The cost of product sales decreased $8.7 million, or 25.9%, during the three months ended March 31, 2019September 30, 2023 as compared to the same period in 2018 and2022. The decrease in costs is primarily related to our increase in outstanding MHP Note portfolio and consumer loan portfolio. Between March 31, 2019 and March 31, 2018 our consumer loan portfolio increased by $10.3 million and the MHP Note portfolio increased by $11.2 million.
22
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 $0.1 million increase in consignment fees was offset by a $0.1 decrease in service fees.units sold.
The cost of product salesSelling, general and administrative expenses decreased $5.8$0.6 million, or 20.8%9.2%, during the three months ended March 31, 2019September 30, 2023 as compared to the same period in 2018. The reduction2022. This decrease was primarily due to a $0.6 million decrease in warranty costs is primarily related to the declining number of homes soldand a net $0.4 million decrease in 2019.other miscellaneous costs, partially offset by a $0.2 million increase in legal expense, and a $0.2 million increase in loan loss provision.
Selling, general and administrative expenses increased $1.7Dealer incentive expense decreased $0.2 million, or 35.3%102.2%, during the three months ended March 31, 2019September 30, 2023 as compared to the same period in 2018. This increase2022.
Other income (expense) decreased $0.3 million, or 36.0%, during the three months ended September 30, 2023 as compared to the same period in 2022. There 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 of $0.2 million in accounting fees, incentive compensation and non-capitalizable costs related to our operations as a public company. These increases were partiallynon-operating interest income, offset by a $0.6decrease of $0.2 million decrease in warranty costs related to the declinemiscellaneous income, net, and an increase of $0.2 million in product sales to FEMA. In addition, dealer incentiveinterest expense.
Income tax expense decreased $0.1 million, or 37.3% in 2019 as compared to 2018. This decrease was the result of our decline in consignment sales.
Other income (expense), net was a loss of $0.1$3.4 million during the three months ended March 31, 2019 asSeptember 30, 2023 compared to a loss of $0.6 million in 2018. This decline was primarily due to a decrease of $43.6 million in our average borrowings outstanding on our lines of credit after the completion of our IPO. Following the completion of our IPO, we paid off over $40.0 million borrowed against our lines of credit.
Income tax expense during the three months ended March 31, 2019 was $2.0 million compared to $4.0$2.8 million for the same period in 2018. 2022. The effective tax rate for the three months ended March 31, 2019September 30, 2023 was 21.8%17.4% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes. The effective tax rate for the three months ended March 31, 2018September 30, 2022 was 42.7%16.1% and differs from the federal statutory rate of 21% primarily due to recognitiona federal tax credit for energy efficient construction, partially offset by state income taxes.
27
Comparison of Nine Months ended September 30, 2023 and 2022 (in thousands)
| | | | | | | | | | | | |
| | Nine months ended | |
| | |
|
| ||||
| | September 30, | | | | | | | ||||
|
| 2023 |
| 2022 |
| $ change |
| % change |
| |||
Net revenue: | | | | | | | | | | | | |
Product sales | | $ | 122,505 | | $ | 155,563 | | $ | (33,058) |
| (21.3) | % |
Consumer and MHP loans interest | |
| 24,996 | |
| 21,264 | |
| 3,732 |
| 17.6 | % |
Other | |
| 7,929 | |
| 4,637 | |
| 3,292 |
| 71.0 | % |
Total net revenue | |
| 155,430 | |
| 181,464 | |
| (26,034) |
| (14.3) | % |
Operating expenses: | |
|
| |
|
| |
|
|
|
| |
Cost of product sales | |
| 83,490 | |
| 104,648 | |
| (21,158) |
| (20.2) | % |
Selling, general administrative expenses | |
| 17,046 | |
| 20,287 | |
| (3,241) |
| (16.0) | % |
Dealer incentive | |
| 27 | |
| 939 | |
| (912) |
| (97.1) | % |
Income from operations | |
| 54,867 | |
| 55,590 | |
| (723) |
| (1.3) | % |
Other income (expense) | |
|
| |
|
| |
|
|
|
| |
Non‑operating interest income | |
| 2,115 | |
| 2,246 | |
| (131) |
| (5.8) | % |
Miscellaneous, net | |
| 875 | |
| 788 | |
| 87 |
| 11.0 | % |
Interest expense | |
| (588) | |
| (326) | |
| (262) |
| 80.4 | % |
Total other | |
| 2,402 | |
| 2,708 | |
| (306) |
| (11.3) | % |
Income before income tax expense | |
| 57,269 | |
| 58,298 | |
| (1,029) |
| (1.8) | % |
Income tax expense | |
| (9,885) | |
| (10,210) | |
| 325 |
| (3.2) | % |
Net income | | $ | 47,384 | | $ | 48,088 | | $ | (704) |
| (1.5) | % |
Product sales primarily consist of direct sales, commercial sales, inventory finance sales and retail store sales. Product sales decreased $33.0 million, or 21.3%, during the nine months ended September 30, 2023 as compared to the same period in 2022. This decrease was driven by an industry wide decrease in unit volumes ($26.6 million), a $2.1decrease in net revenue per unit ($1.3 million) and a decrease in the conversion of certain independent dealer consignment arrangements to financing arrangements and other market factors ($5.1 million).
Net revenue attributable to our factory-built housing consisted of the following during the nine months of 2023 and 2022:
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| Nine Months Ended | | | |
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| | September 30, | | | | | | | ||||
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| 2022 |
| $ Change |
| % Change |
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Net revenue: |
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Product sales | | $ | 122,505 | | $ | 155,563 | | $ | (33,058) |
| (21.3) | % |
Total units sold | |
| 1,948 | |
| 2,349 | |
| (401) |
| (17.1) | % |
Net revenue per unit sold | | $ | 62.9 | | $ | 66.2 | | $ | (3.3) |
| (5.0) | % |
For the nine months ended September 30, 2023, our net revenue per unit sold decreased primarily due to changes in our product sales mix slightly offset by increases in unit prices over the first nine months of 2022, as rising material and labor costs were passed on to our customers. We had decreases in inventory finance sales, direct sales, retail store sales, and other product sales, and commercial sales were flat. Our commercial sales have lower margins than sales through our company-owned retail stores and our inventory financed sales. For the nine months ending September 30, 2023, we experienced a decrease in net revenue attributable to product sales in our Eatonton facility. We have remediated the quality and consistency issues in this facility and are increasing our sales efforts in Eatonton. We plan to meet or exceed historical levels in 2024, pending market conditions.
Consumer and MHP loans interest income grew $3.7 million, deferredor 17.6%, during the nine months ended September 30, 2023 as compared to the same period in 2022 and is related to our increase in average outstanding MHP note portfolio balance and average outstanding consumer loan portfolio balance. Between September 30, 2023 and
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September 30, 2022, our MHP note portfolio increased by $47.8 million and our consumer loan portfolio increased by $16.8 million, both net of principal reduction.
Other revenue primarily consists of contract deposit forfeitures, dealer finance fees and commercial lease rents and increased $3.3 million, or 71.0%, during the nine months ended September 30, 2023 as compared to the same period in 2022. This increase was primarily due to $2.6 million increase in forfeited deposits, a $0.8 million increase in dealer finance fees and a $0.1 million increase in setup and service sales, partially offset by a $0.2 million decrease in portfolio fees & servicer revenue.
The cost of product sales decreased $21.2 million, or 20.2%, during the nine months ended September 30, 2023 as compared to the same period in 2022. The decrease in costs is primarily related to the decrease in units sold.
Selling, general and administrative expenses decreased $3.2 million, or 16.0%, during the nine months ended September 30, 2023 as compared to the same period in 2022. This decrease was primarily due to a $3.2 million decrease in payroll & related costs, a $0.3 million decrease in consulting and professional fees, a $0.2 million decrease in supplies and a net $0.6 million decrease in other miscellaneous costs, partially offset by a $1.1 million increase in loan loss provisions.
Dealer incentive expense decreased $0.9 million, or 97.1%, during the nine months ended September 30, 2023 as compared to the same period in 2022.
Other income (expense) decreased $0.3 million, or 11.3%, during the nine months ended September 30, 2023 as compared to the same period in 2022. There was a decrease of $0.1 million in non-operating interest income and an increase of $0.3 million in interest expense, offset by an increase of $0.1 million in miscellaneous income, net.
Income tax expense associated withwas $9.9 million during the corporate reorganization,nine months ended September 30, 2023 compared to $10.2 million for the same period in 2022. The effective tax rate for the nine months ended September 30, 2023 was 17.3% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxestaxes. The effective tax rate for the nine months ended September 30, 2022 was 17.5% and other permanent differences between bookdiffers from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction and tax basis.partially offset by state income taxes.
29
Liquidity and Capital Resources
Liquidity
We believe that cash flow from operations, cash and cash equivalents at September 30, 2023, 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. On July 28, 2023, we terminated our credit agreement with Capital One, N.A. and entered into a new credit agreement with Prosperity Bank that expanded and extended our credit availability (see Indebtedness, below).
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 and cash equivalents at March 31, 2019, together with cash flow from operations, 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, 2023, we had approximately $3.1$0.5 million in cash and cash equivalents, compared to $2.6$2.8 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 with the IPO. These proceeds were primarily used for payments to reduce our borrowings under the lines of credit.2022.
Cash Flow Activities
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| 2018 | ||||||||
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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) | ||||||
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| | Nine Months Ended | ||||||||||
| | September 30, | ||||||||||
| | (in thousands) | ||||||||||
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| 2023 |
| 2022 | ||||||||
| | | | | | | ||||||
Net cash (used in) provided by operating activities | | $ | (5,284) | | $ | 790 | ||||||
Net cash (used in) provided by investing activities | | $ | (7,556) | | $ | 17,595 | ||||||
Net cash provided (used in) by financing activities | | $ | 10,568 | | $ | (8,159) | ||||||
Net change in cash and cash equivalents |
| $ | 499 |
| $ | 1,282 | | $ | (2,272) | | $ | 10,226 |
Cash and cash equivalents at beginning of period |
| $ | 2,599 |
| $ | 428 | | $ | 2,818 | | $ | 1,042 |
Cash and cash equivalents at end of period |
| $ | 3,098 |
| $ | 1,710 | | $ | 546 | | $ | 11,268 |
23
Comparison of Cash Flow Activities from March 31, 2019September 30, 2023 to March 31, 2018September 30, 2022
Net cash provided byused in operating activities decreased $1.1increased $6.1 million during the threenine months ended March 31, 2019,September 30, 2023, compared to the comparablesame period in 2018,2022, primarily as a result of anincreased MHP originations net of collections, decreased dealer inventory loan originations net of collections, decrease in other assets, increase in net working capital used for additionalprepaid expenses and other current assets, increased volume of consumer loan originations associated with higher demand for home sales to MHPs and anet of principal collections, decreased inventories, decrease in cash collections on accounts receivable. The decrease in operating cash flows described above was partially offset from cash generated by operating income before non-cash adjustments, a decrease in inventory purchases and ancustomer deposits, increase in accounts payable and accrued liabilities.liabilities and a decrease in dealer incentive liability.
Net cash used in investing activities of $2.0$7.6 million in 2019during the nine months ended September 30, 2023 was primarily attributable to $0.6 million used for the acquisition of land for development, $0.1 million used to purchase consumer loans and $1.4$13.9 million used for loans to third parties for the development of manufactured housing parks. In addition, we had capital expendituresparks and $4.5M used for purchases of $0.1 million for property, plant and equipment and $0.1 million for transportion equipment. These wereThis was offset by collections$8.5 million in proceeds from the sale of $0.1treasury notes, $1.1 million in proceeds from the sale of leased property, $1.1 million of collections related to loans we made to third parties for the development of manufactured housing parks and collections of $0.2$0.3 million from our purchased consumer loans.
Net cash used inprovided by financing activities of $0.9$10.6 million in 2019during the nine months ended September 30, 2023 was primarily attributable to net paymentsproceeds of $6.5$10.5 million on our lines of credit $0.5and $0.1 million received from the exercise of stock options. Net cash used in financing activities of $8.2 million in 2022 was attributable to net payments of $8.2 million on our notes payable and $0.6 millionlines of payments to reduce our escrow liability, offset by net proceedscredit.
30
Indebtedness
Capital One Revolver. We haveOn March 30, 2020, we entered into an agreement with Capital One, N.A. (“Capital One”) for a revolving line of credit (“Revolver”). The Revolver 1”had a maximum credit limit of $70,000 and a maturity date of March 30, 2024.
On June 21, 2022, we received a Reservation of Rights notice from Capital One. The letter stated that our Revolver was in default. The default condition occurred due to our failure to timely file the Form 10-K and deliver certain financial statements to Capital One. On July 28, 2022, we entered into a Limited Waiver and First Amendment to Credit Agreement (the “Amendment”) with Capital One, N.A. The Amendment replaced the LIBOR borrowing rate with a maximumsecured overnight financing rate (“SOFR”) and waived a default arising out of a monetary judgement against the Company that exceeded the amount allowed in the Revolver.
On August 24, 2022, we received a Notice of Default and Partial Suspension of Loan Commitments from Capital One. The notice stated that the July 28, 2022 forbearance agreement had been terminated and that Capital One was suspending $50,000 of the $70,000 loan commitment under the Revolver. As a result, the available line of credit limit of $45,000,000 as of March 31, 2019. On May 12, 2017,in the Revolver 1 was amendedlimited to extend the maturity date to May 11, 2020 and increase the maximum borrowing availability under$20,000.
The Revolver 1 to $45,000,000. For the three months ended March 31, 2019 and for the year ended December 31, 2018, Revolver 1 accrued interest at one month LIBORone-month SOFR plus 2.40%2.00%.The interest rates in effect as of March 31, 2019 and December 31, 2018 were 4.88% and 4.78%, respectively. Amounts available under the Revolver 1 arewere subject to a formula based on eligible consumer loans and MHP Notes and arewere secured by all accounts receivable, consumer loans and MHP Notes. In connection with the Revolver, we paid certain arrangement fees and other fees of approximately $295, which were capitalized as unamortized debt issuance costs and were amortized to interest expense over the life of the Revolver. The Revolver required the Company to comply with certain financial and non-financial covenants.
On July 28, 2023, upon entry into the New Revolver described below, the Capital One Revolver was repaid in full, and all commitments thereunder were terminated.
Prosperity Revolver. On July 28, 2023, the Company entered into a percentagenew Credit Agreement (the “New Revolver”), by and among the Company as borrower, the financial institutions from time to time party thereto, as lenders, and Prosperity Bank as administrative agent. The New Revolver provides for a four-year senior secured revolving credit facility with an initial commitment of $50,000,000 and an additional $25,000,000 commitment under an accordion feature. The New Revolver is secured by the Company’s consumer loans receivables and all escrow accounts associated with the consumer loans receivablereceivables. At the Company's option, borrowings will bear interest at a per annum rate equal to, (i) Term Secured Overnight Financing Rate (“SOFR”) plus an applicable margin of 2.5% or 2.75% based upon the Company's average quarterly borrowings under the New Revolving Credit Agreement or (ii) a base rate plus an applicable margin of 2.5% or 2.75% based upon the Company's average quarterly borrowings under the New Revolver. The Company paid certain arrangement fees and MHP Notes.other fees in connection with the New Revolver of approximately $271, which were capitalized as unamortized debt issuance costs and are amortized to interest expense over the life of the New Revolver. The New Revolver matures July 28, 2027.
For the three months ended September 30, 2023, interest expense under the Revolver and New Revolver was $302, and for the three months ended September 30, 2022, interest expense under the Revolver was $87. For the nine months ended September 30, 2023, interest expense under the Revolver and New Revolver was $588 and for the nine months ended September 30, 2022, interest expense under the Revolver was $326, respectively. The outstanding balance of the New Revolver as of September 30, 2023 was $13,013, and the outstanding balance of the Revolver as of December 31, 2022 was $2,545. The interest rate in effect as of September 30, 2023 for the New Revolver was 7.95% and the interest rate in effect as of December 31, 2022 for the Revolver was 6.12%. The amount of available credit under the New Revolver 1 was $39,839,000$36,987 as of September 30, 2023 and $41,321,000 at March 31, 2019 andthe amount of available credit under the Revolver was $17,400 as of December 31, 2018, respectively. For2022. The New Revolver requires the three months ended March 31, 2019Company to comply with certain financial and 2018, interest expensenon-financial covenants. As of September 30, 2023, the Company was $73,000 and $416,000, respectively. The outstanding balance as of March 31, 2019 and December 31, 2018 $5,161,000 and $3,679,000, respectively. We were in compliance with all financial covenants, as of March 31, 2019, including that weit maintain a tangible net worth of at least $90,000,000 and that we maintain amaximum leverage ratio of debtno more than 1.00 to EBITDA1.00 and a minimum fixed charge coverage ratio of 4‑to‑1, or less.no less than 1.75 to 1.00.
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 and December 31, 2018 was 4.99% and 4.85%, 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 and $10,000,000 at March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019 and 2018, interest expense was $61,000 and $154,000, respectively. The outstanding balance as of March 31, 2019 and December 31, 2018 was $2,001,000 and $10,000,000, respectively. We were in compliance with all financial covenants as of March 31, 2019, including that we maintain a tangible net worth of at least $80,000,000.
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 and interest 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 for the three months ended March 31, 2019 and 2018,
2431
respectively. The balance outstanding on the note payable at March 31, 2019 and December 31, 2018 was $3,506,000 and $3,552,000, respectively.
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 months ended March 31, 2019 and 2018, respectively. The balance outstanding on the note payable at December 31, 2018 was $414,000. 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, we had not drawn down on this credit facility.
Contractual Obligations
The following table is a summary of contractual cash obligations as of March 31, 2019:September 30, 2023:
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Contractual Obligations |
| Total |
| 1 year |
| 2 - 3 years |
| 4 - 5 years |
| 5 years |
| Total |
| 2023 |
| 2024 - 2025 |
| 2026 - 2027 |
| After 2027 | ||
Lines of credit |
| $ | 7,163,000 |
| — |
| 7,163,000 |
| — |
| — | | $ | 13,013 |
| — |
| — |
| 13,013 |
| — |
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 | | $ | 2,086 |
| 151 |
| 1,014 |
| 776 |
| 145 |
Off‑Off Balance Sheet Arrangements
We did not have any off‑balanceoff-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 providingthat provides 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$4,767 and $2,186,000$8,925 as of March 31, 2019September 30, 2023 and December 31, 2018,2022, 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, 2023.
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
25
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 reportAnnual Report on Form 10-K for the year ended December 31, 2018. Other than recent accounting pronouncement adoptions discussed in Note 12022. Subsequent to the filing of our condensed financial statements, Annual Report, we had no significantadopted FASB’s ASC 326 for determining Current Expected Credit Losses. In connection with this adoption, we implemented certain changes in those critical accounting estimates sinceto our last annual report.processes and controls related to our methods for estimating allowances for credit losses.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our March 31, 2019September 30, 2023 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly ReportReport.
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. We expect our status as an emerging growth company to end on December 31, 2023, five years from our initial public offering.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for smaller reporting companiesapplicable.
32
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We are subject to the periodic reporting requirements as defined in Rule 13a-15(e) of the Exchange Act which requiresthat require designing disclosure controls and procedures to provide reasonable assurance that the information we disclose in reports we file or submit underwith the Exchange Act isSEC are recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.forms. 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 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 Officer each concluded, as of the end of the period, that our disclosure controls and procedures were not effective as of March 31, 2019September 30, 2023, 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, and2022, 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,for the year ended December 31, 2022 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.statements. 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.
26
The material weaknesses in financial reporting as of March 31, 2019September 30, 2023 are summarized as follows:
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● We determined that we did not have sufficient accounting systems and procedures in-place, particularly in the areas of revenue recognition, processing of accounts payable, prepaid expenses, and inventory costing and management.
● 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, 2018,2022, Management has evaluated the material weaknesses described above and implemented a remediation plan to address its material weaknesses. During the three-month period ending September 30, 2023 we begancontinued implementing remediation plansa broad range of remedial procedures to address the material weaknesses. Theweaknesses in our internal control over financial reporting and accounting functions.
While significant actions to improve our internal processes continue to be implemented, the enhanced controls have not operated for a sufficient period-of-time to demonstrate that the material weakness have been remediated as of September 30, 2023. Our material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of timeperiod-of-time and management has concluded, through testing, that thesethe controls operate effectively.
33
We are operating effectively.committed to improving our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. We expect thatare working to complete the remediation of theseour material weaknesses will be completed by the end of fiscal 2019.year 2023.
Changes in Internal Control over Financial Reporting
There were noUnder the applicable SEC rules, management is required to evaluate any 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 Actthat occurred during the firsteach fiscal quarter of fiscal 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As discussed in “Item 9A. Controls and Procedures” of the 2022 Report, we have undertaken a broad range of remedial procedures to address material weaknesses in our internal control over financial reporting. These remedial procedures continued throughout the three months ended September 30, 2023 and will continue throughout the remainder of 2023.
While we continue to implement remediation efforts and design enhancements to our internal control procedures, we believe there were no other changes to our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act during the third quarter of 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, as specified above. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
.
PART II - OTHER INFORMATION
See Note 1114 - Commitments and Contingencies in our March 31, 2019September 30, 2023 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
None
2734
| | |
Exhibit No. | | Description |
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EXHIBIT 31.1 * | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer. |
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EXHIBIT 31.2 * | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer. |
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EXHIBIT 32.1 * | - | |
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EXHIBIT 32.2 * | - | |
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EXHIBIT 101.INS * | - | XBRL Instance Document. |
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EXHIBIT 101.SCH * | - | Inline XBRL Taxonomy Extension Schema Document. |
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EXHIBIT 101.CAL * | - | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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EXHIBIT 101.DEF * | - | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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EXHIBIT 101.LAB * | - | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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EXHIBIT 101.PRE * | - | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*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: | By: | /s/ Jeffrey |
| | Name: Jeffrey |
| | Title: Chief Financial Officer |
| | (On behalf of Registrant and as Principal Financial Officer) |
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