What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-16 compared with 2020-08-14 · 77 added, 76 removed, 213 unchanged (42% of the section changed)

7 unchanged sentences

Our homes range in price, at retail, from approximately $22,000 to $140,000.

For the three and six months ended June 30, 2020, we sold 1,056 and 1,905 home sections, respectively (which are entire homes or single floors that are combined to create complete homes).

For the three and six months ended June 30, 2019, we sold 1,028 and 1,946 home sections, respectively.

For the three and nine months ended September 30, 2020, we sold 961 and 2,866 home sections, respectively (which are entire homes or single floors that are combined to create complete homes).

For the three and nine months ended September 30, 2019, we sold 968 and 2,914 home sections, respectively.

The Company has one reportable segment.

12 unchanged sentences

Our 13 company-owned retail locations, including 11 Heritage Housing stores and two Tiny House Outlet stores exclusively sell our homes.

For the six months ended June 30, 2020, approximately 46% of our manufactured homes were sold in Texas, followed by 9% in Michigan, 8% in Georgia, 7% in North Carolina, and 6% in Kentucky.

For the six months ended June 30, 2019, approximately 52% of our manufactured homes were sold in Texas, followed by 8% in Georgia, 7% in Florida, 6% in Kansas and 5% in South Carolina.

For the nine months ended September 30, 2020, approximately 45% of our manufactured homes were sold in Texas, followed by 11% in Michigan, 7% in Georgia, 5% in Kansas, 5% in North Carolina, and 5% in Kentucky.

For the nine months ended September 30, 2019, approximately 43% of our manufactured homes were sold in Texas, followed by 12% in Oklahoma, 7% in Alabama, 7% in Georgia, and 5% in Tennessee.

We plan to deepen our distribution channel by using cash from operations and borrowings from our lines of credit to expand our company-owned retail locations in new and existing markets.

21 unchanged sentences

● We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions.

As of June 30, 2020, these properties include the following:

As of September 30, 2020, these properties include the following:

Date of Acquisition

30 unchanged sentences

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.

Comparison of Three Months ended June 30, 2020 and 2019 (in thousands)

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

Three months ended

September 30,

Product sales

14 unchanged sentences

Product sales primarily consist of direct sales, commercial sales, consignment sales and retail store sales.

Product sales decreased $0.6 million, or 1.5%, during the three months ended June 30, 2020 as compared to the same period in 2019.

This change was driven by an increase in commercial sales offset by a decline in consignment sales, direct sales, retail store sales and other product sales.

Commercial sales increased $3.5 million to $21.1 million in 2020 from $17.6 million in 2019.

This increase was offset by a net $1.5 million decrease in consignment sales to $9.1 million in 2020 from $10.6 million in 2019, a $1.7 million decrease in direct sales to $3.9 million in 2020 from $5.5 million in 2019 and a $0.6 million decrease in our company-owned retail stores sales to $4.3 million in 2020 from $4.9 million in 2019.

Other product sales decreased $0.2 million to $0.8 million in 2020 from $1.0 million in 2019 and is primarily due to a decrease in parts sales and miscellaneous sales income.

Product sales decreased $1.2 million, or 3.4%, during the three months ended September 30, 2020 as compared to the same period in 2019.

This change was driven by an increase in commercial sales, consignment sales and other product sales offset by a decline in direct sales and retail store sales.

Consignment sales increased $0.4 million to $12.0 million in 2020 from $11.6 million in 2019, commercial sales increased $0.8 million to $17.7 million in 2020 from $16.9 million in 2019 and our company-owned retail stores sales increased $1.0 million to $3.9 million in 2020 from $3.0 million in 2019.

This increase was partially offset by a net $1.2 million decrease in direct sales to $1.5 million in 2020 from $2.6 million in 2019.

Other product sales increased $0.2 million to $1.5 million in 2020 from $1.3 million in 2019 and is primarily due to an increase in parts sales and miscellaneous sales income.

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

Three Months Ended

September 30,

(in thousands)

2 unchanged sentences

Net revenue per product sold

For the three months ended June 30, 2020, our net revenue per product sold decreased slightly because of changes in our product sales mix.

We had declines in direct sales, consignment sales and company-owned retail stores partially offset by increases in sales to manufactured home communities.

For the three months ended September 30, 2020, our net revenue per product sold increased because of changes in our product sales mix.

We had increases in consignment sales and sales to manufactured home communities partially offset by declines in direct sales and company-owned retail store sales.

Sales through our company-owned retail stores and sales to manufactured home communities have higher margins than our direct sales and consignment sales.

Consumer and MHP loans interest income grew $1.0 million, or 18.7%, during the three months ended June 30, 2020 as compared to the same period in 2019 and is related to our increase in outstanding MHP Note portfolio and

consumer loan portfolio.

Between June 30, 2019 and June 30, 2020 our MHP Note portfolio increased by $48.1 million and the consumer loan portfolio increased by $6.2 million.

In addition, there was a price increase to our product prices in the third quarter of 2020 due to rising material and labor costs, which resulted in higher home sales prices and more revenue generated per home sold.

Consumer and MHP loans interest income grew $0.7 million, or 13.0%, during the three months ended September 30, 2020 as compared to the same period in 2019 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio.

Between September 30, 2019 and September 30, 2020 our MHP Note portfolio increased by $46.4 million and the consumer loan portfolio increased by $5.5 million.

Other revenue primarily consists of service fees and consignment fees.

Other revenue decreased $0.1 million or 13.9% during the three months ended June 30, 2020 as compared to the same period in 2019 and is primarily due to a $0.2 million decrease in other income offset by a $0.1 million increase in service fees revenue.

The cost of product sales increased $2.7 million, or 9.6%, during the three months ended June 30, 2020 as compared to the same period in 2019.

The increase in costs is primarily related to the increasing number of home units sold and increases in the cost of materials and labor in 2020.

Selling, general and administrative expenses decreased $2.1 million, or 33.9%, during the three months ended June 30, 2020 as compared to the same period in 2019.

This decrease was primarily due to $0.7 million of retail store expenses recorded as SG&A in the second quarter of 2019 that were subsequently recorded in cost of sales later in 2019, a $0.9 million decrease in warranty costs, a $0.3 million decrease in salaries and incentive costs, a $0.3 decrease in loan loss reserve and a $0.1 million decrease in advertising and promotions.

These decreases were partially offset by $0.2 million increase in delivery and other miscellaneous costs.

Other revenue decreased $0.1 million or 16.1% during the three months ended September 30, 2020 as compared to the same period in 2019 and is primarily due to a $0.1 million decrease in consignment fees revenue.

The cost of product sales increased $0.3 million, or 1.2%, during the three months ended September 30, 2020 as compared to the same period in 2019.

The increase in costs is primarily related to increases in the cost of materials and labor in 2020.

Selling, general and administrative expenses decreased $1.8 million, or 28.1%, during the three months ended September 30, 2020 as compared to the same period in 2019.

This decrease was primarily due to a $0.4 million decrease in warranty costs, a $0.3 million decrease in delivery costs, a $0.1 million decrease in salaries and incentive costs, a $0.4 decrease in loan loss reserve, a $0.3 million decrease in insurance expense, a $0.1 million decrease in consulting and professional fees and a net $0.2 million decrease in other miscellaneous costs.

In addition, dealer incentive expense increased $0.5 million in 2020 as compared to 2019.

Other income (expense), net increased $0.1 million, or 84.0%, during the three months ended June 30, 2020 as compared to the same period in 2019.

This increase was primarily due to an increase of $0.2 million in non-operating interest income offset by a $0.1 million increase in interest expense.

Income tax expense during the three months ended June 30, 2020 was $2.6 million compared to $2.8 million for the same period in 2019.

The effective tax rate for the three months ended June 30, 2020 was 23.2% and differs from the federal statutory rate of 21% primarily due to state income taxes.

The effective tax rate for the three months ended June 30, 2019 was 24.4% and differs from the federal statutory rate of 21% primarily due to state income taxes.

Comparison of Six Months ended June 30, 2020 and 2019 (in thousands)

Six months ended

Other income (expense), net increased $0.1 million during the three months ended September 30, 2020 as compared to the same period in 2019.

This increase was primarily due to an increase of $0.1 million in non-operating interest income and an increase of $0.1 million in miscellaneous, net partially offset by a $0.1 million increase in interest expense.

Income tax expense during the three months ended September 30, 2020 was $2.5 million compared to $1.9 million for the same period in 2019.

The effective tax rate for the three months ended September 30, 2020 was 22.7% and differs from the federal statutory rate of 21% primarily due to state income taxes.

The effective tax rate for the three months ended September 30, 2019 was 23.6% and differs from the federal statutory rate of 21% primarily due to state income taxes.

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

Nine months ended

September 30,

Product sales

13 unchanged sentences

Income tax expense

Product sales decreased $0.9 million, or 1.3%, during the six months ended June 30, 2020 as compared to the same period in 2019.

This change was driven by an increase in commercial sales offset by a decline in consignment sales, direct sales, retail store sales and other product sales.

Commercial sales increased $6.7 million to $36.8 million in 2020 from $30.1 million in 2019.

This increase was offset by a net $2.7 million decrease in consignment sales to $17.9 million in 2020 from $20.7 million in 2019, a $3.9 million decrease in direct sales to $6.1 million in 2020 from $10.0 million in 2019 and a $0.7 million decrease in our company-owned retail stores sales to $7.5 million in 2020 from $8.3 million in 2019.

Product sales increased $0.3 million, or 0.3%, during the nine months ended September 30, 2020 as compared to the same period in 2019.

This change was driven by an increase in commercial sales and retail store sales offset by a decline in direct sales, consignment sales and other product sales.

Commercial sales increased $7.6 million to $54.5 million in 2020 from $47.0 million in 2019 and our company-owned retail stores sales increased $0.2 million to $11.5 million in 2020 from $11.3 million in 2019.

This increase was partially offset by a net $2.3 million decrease in consignment sales to $29.9 million in 2020 from $32.2 million in 2019, a $5.1 million decrease in direct sales to $7.5 million in 2020 from $12.6 million in 2019.

Other product sales decreased $.01 million to $3.5 million in 2020 from $3.6 million in 2019 and is primarily due to a decrease in parts sales and miscellaneous sales income.

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

Six Months Ended

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

Nine Months Ended

September 30,

(in thousands)

2 unchanged sentences

Net revenue per product sold

For the six months ended June 30, 2020, our net revenue per product sold decreased slightly because of changes in our product sales mix.

We had declines in direct sales, consignment sales and company-owned retail stores partially offset by increases in sales to manufactured home communities.

For the nine months ended September 30, 2020, our net revenue per product sold remained flat.

We had declines in direct sales and consignment sales offset by increases in sales to manufactured home communities and company-owned retail stores.

Sales through our company-owned retail stores and sales to manufactured home communities have higher margins than our direct sales and consignment sales.

Consumer and MHP loans interest income grew $1.8 million, or 17.4%, during the six months ended June 30, 2020 as compared to the same period in 2019 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio.

Between June 30, 2020 and June 30, 2019 our MHP Note portfolio increased by $48.1 million and the consumer loan portfolio increased by $6.2 million.

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

Between September 30, 2020 and September 30, 2019 our MHP Note portfolio increased by $46.4 million and the consumer loan portfolio increased by $5.5 million.

Other revenue primarily consists of service fees and consignment fees.

Other revenue decreased $0.3 million or 19.5% during the six months ended June 30, 2020 as compared to the same period in 2019 due to a $0.2 million decrease in other income and a $0.1 decrease in consignment fees.

The cost of product sales increased $2.7 million, or 5.3%, during the six months ended June 30, 2020 as compared to the same period in 2019.

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

The cost of product sales increased $1.1 million, or 1.5%, during the nine months ended September 30, 2020 as compared to the same period in 2019.

The increase in costs is primarily related to the increasing number of home units sold and increases in the cost of materials and labor in 2020.

Selling, general and administrative expenses decreased $3.0 million, or 23.4%, during the six months ended June 30, 2020 as compared to the same period in 2019.

This decrease was primarily due to $1.2 million of retail store expenses recorded as SG&A in the first quarter of 2019 that were subsequently recorded in cost of sales later in 2019, a $0.7 million decrease in warranty costs, a $0.4 million decrease in advertising and promotions, a $0.3 decrease in loan loss reserve, a $0.2 million decrease in consulting and professional fees and a $0.2 million expense in the first quarter of 2019 for settlement of a lawsuit.

These decreases were partially offset by $0.1 million increase in salaries and incentive costs.

In addition, dealer incentive expense decreased $0.1 million, or 15.4% in 2020 as compared to 2019.

Other income (expense), net increased $1.2 million, or 535.4%, during the six months ended June 30, 2020 as compared to the same period in 2019.

This increase was primarily due to a $1.1 million gain due to the settlement of a lawsuit with a previous vendor for the Company and an increase of $0.4 million in non-operating interest income offset by a $0.2 million increase in interest expense.

Income tax expense during the six months ended June 30, 2020 was $5.2 million compared to $4.8 million for the same period in 2019.

The effective tax rate for the six months ended June 30, 2020 was 22.7% and differs from the

federal statutory rate of 21% primarily due to state income taxes.

The effective tax rate for the six months ended June 30, 2019 was 23.2% and differs from the federal statutory rate of 21% primarily due to state income taxes.

Selling, general and administrative expenses decreased $4.7 million, or 25.0%, during the nine months ended September 30, 2020 as compared to the same period in 2019.

This decrease was primarily due to $1.2 million of retail store expenses recorded as SG&A in the first quarter of 2019 that were subsequently recorded in cost of sales later in 2019, a $1.1 million decrease in warranty costs, a $0.4 million decrease in advertising and promotions, a $0.7 decrease in loan loss reserve, a $0.4 million decrease in consulting and professional fees, a $0.2 million decrease in salaries and incentive costs, a $0.2 million expense in the first quarter of 2019 for settlement of a lawsuit and a net $0.4 million decrease in other miscellaneous costs.

In addition, dealer incentive expense increased $0.4 million, or 74.0% in 2020 as compared to 2019.

Other income (expense), net increased $1.3 million during the nine months ended September 30, 2020 as compared to the same period in 2019.

This increase was primarily due to a $1.1 million gain due to the settlement of a lawsuit with a previous vendor for the Company, an increase of $0.5 million in non-operating interest income and an increase of $0.1 million in miscellaneous, net income offset by a $0.3 million increase in interest expense.

Income tax expense during the nine months ended September 30, 2020 was $8.1 million compared to $6.7 million for the same period in 2019.

The effective tax rate for the nine months ended September 30, 2020 was 22.7% and differs from the federal statutory rate of 21% primarily due to state income taxes.

The effective tax rate for the nine months ended September 30, 2019 was 23.3% and differs from the federal statutory rate of 21% primarily due to state income taxes.

Liquidity and Capital Resources

3 unchanged sentences

We have not incurred any losses from such accounts and management considers the risk of loss to be minimal.

We believe that cash flow from operations, cash and cash equivalents at June 30, 2020, and availability on our lines of credit will be sufficient to fund our operations and provide for growth for the next 12 to 18 months and into the foreseeable future.

As of June 30, 2020, we had approximately $1.0 million in cash and cash equivalents, compared to $1.7 million as of December 31, 2019.

We believe that cash flow from operations, cash and cash equivalents at September 30, 2020, and availability on our lines of credit will be sufficient to fund our operations and provide for growth for the next 12 to 18 months and into the foreseeable future.

As of September 30, 2020, we had approximately $1.6 million in cash and cash equivalents, compared to $1.7 million as of December 31, 2019.

We negotiated a new credit agreement with our primary bank that expanded and extended our credit facility.

1 unchanged sentence

Cash Flow Activities

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Net change in cash and cash equivalents

1 unchanged sentence

Cash and cash equivalents at end of period

Comparison of Cash Flow Activities from June 30, 2020 to June 30, 2019

Net cash provided by operating activities decreased $8.6 million during the six months ended June 30, 2020, compared to the comparable period in 2019, primarily as a result of increased volume of loan originations supporting sales to MHPs net of principal collections, decreased payables and increased accounts receivable.

The decrease in operating cash flows described above was partially offset by cash generated by operating income before non-cash adjustments, reduced growth in consumer loan originations net of principal collections, increased accrued expenses and reduced prepaid expenses.

Comparison of Cash Flow Activities from September 30, 2020 to September 30, 2019

Net cash provided by operating activities decreased $11.4 million during the nine months ended September 30, 2020, compared to the comparable period in 2019, primarily as a result of increased volume of loan originations supporting sales to MHPs net of principal collections, increased growth in growth in consumer loan originations net of principal collections, decreased payables and increased accounts receivable.

The decrease in operating cash flows described above was partially offset by cash generated by operating income before non-cash adjustments, increased accrued expenses, reduced prepaid expenses and reduced inventory.

Net cash used in investing activities of $3.8 million in 2020 was primarily attributable to $2.2 million used for the acquisition of property plant and equipment, $0.3 million used to purchase consumer loans and $5.4 million used for loans to third parties for the development of manufactured housing parks.

These were offset by collections of $3.2 million of loans we made to third parties for the development of manufactured housing parks and collections of $0.9 million from our purchased consumer loans.

Net cash provided by financing activities of $5.0 million in 2020 was primarily attributable to net proceeds of $6.4 million on our lines of credit offset by $1.4 million for purchase of treasury stock.

Net cash provided by financing activities of $12.0 million in 2020 was primarily attributable to net proceeds of $12.7 million on our lines of credit and $0.8 million increase in escrow deposits received by the company offset by $1.4 million for purchase of treasury stock.

Capital One Revolver.

6 unchanged sentences

The interest rate in effect as of December 31, 2019 was 4.09%.

Amounts available under Revolver 1 were subject to a formula based on eligible consumer loans and MHP Notes and were

secured by all accounts receivable and the consumer loans receivable and MHP Notes.

Amounts available under Revolver 1 were subject to a formula based on eligible consumer loans and MHP Notes and were secured by all accounts receivable and the consumer loans receivable and MHP Notes.

The amount of available credit under Revolver 1 was $16,140,000 as of December 31, 2019.

The New Revolver accrues interest at one-month LIBOR plus 2.00%.

The interest rate in effect as of June 30, 2020 was 2.18%.

The interest rate in effect as of September 30, 2020 was 2.16%.

As with Revolver 1, amounts available under the New Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable and the consumer loans receivable and MHP Notes.

The amount of available credit under the New Revolver was $32,465,000 as of June 30, 2020.

The amount of available credit under the New Revolver was $26,180,000 as of September 30, 2020.

In connection with the New Revolver, we paid certain arrangement fees and other fees of approximately $0.3 million, which were capitalized as unamortized debt issuance costs and will be amortized to interest expense over the life of the New Revolver.

For the six months ended June 30, 2020 and 2019, interest expense under the Capital One Revolvers was $563,000 and $139,000, respectively.

The outstanding balance as of June 30, 2020 and December 31, 2019 was $37,535,000 and $28,860,000, respectively.

We were in compliance with all financial covenants as of June 30, 2020, including that we maintain a tangible net worth of at least $120,000,000 and that we maintain a ratio of debt to EBITDA of 4-to-1, or less.

For the nine months ended September 30, 2020 and 2019, interest expense under the Capital One Revolvers was $785,000 and $233,000, respectively.

The outstanding balance as of September 30, 2020 and December 31, 2019 was $43,820,000 and $28,860,000, respectively.

We were in compliance with all financial covenants as of September 30,

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

Veritex Community Bank Revolver.

7 unchanged sentences

The amount of available credit under Revolver 2 was $12,028,000 and $11,262,000 at March 31, 2020 and December 31, 2019, respectively.

For the six months ended June 30, 2020 and 2019, interest expense was $17,000 and $86,000, respectively.

For the nine months ended September 30, 2020 and 2019, interest expense was $17,000 and $111,000, respectively.

The outstanding balance as of March 31, 2020 and December 31, 2019 was $2,001,000.

12 unchanged sentences

The note is secured by certain of our real property.

Interest expense was $76,000 for the six months ended June 30, 2019.

Interest expense was $113,000 for the nine months ended September 30, 2019.

In October 2019, this note was paid in full.

2 unchanged sentences

The promissory note calls for monthly principal and interest payments of $6,000 until June 1, 2026.

Interest expense was $1,000 for the six months ended June 30, 2019.

Interest expense was $1,000 for the nine months ended September 30, 2019.

In January 2019, this note was paid in full.

2 unchanged sentences

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.

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.

1 unchanged sentence

The PILOT agreement is collateralized by the assets of the Project.

As of June 30, 2020, we had not drawn down on this credit facility.

As of September 30, 2020, we had not drawn down on this credit facility.

Contractual Obligations

The following table is a summary of contractual cash obligations as of June 30, 2020:

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

Payments Due by Period

7 unchanged sentences

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 $404,000 and $260,000 as of June 30, 2020 and December 31, 2019, respectively, without reduction for the resale value of the homes.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $603,000 and $260,000 as of September 30, 2020 and December 31, 2019, respectively, without reduction for the resale value of the homes.

We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements.

We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of June 30, 2020.

We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of September 30, 2020.

Critical Accounting Estimates

5 unchanged sentences

Recent Accounting Pronouncements

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

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

Emerging Growth Company Status

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis