Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial statements and accompanying notes and the information contained in other sections of this Form 10-Q. It contains forward-looking statements that involve risks and uncertainties, and is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those anticipated by our management in these forward-looking statements as a result of various factors, including those discussed in this Form 10-Q and in our Registration Statement on Form S-1, particularly under the heading “Risk Factors.”
Overview
Legacy Housing Corporation builds, sells and finances manufactured homes and “tiny houses” that are distributed through a network of independent retailers and company-owned stores and are sold directly to manufactured housing communities. We are the fourth largest producer of manufactured homes in the United States as ranked by number of homes manufactured based on information available from the Manufactured Housing Institute and IBTS for the fourth quarter of 2019. With current operations focused primarily in the southern United States, we offer our customers an array of quality homes ranging in size from approximately 390 to 2,667 square feet consisting of 1 to 5 bedrooms, with 1 to 3 1 / 2 bathrooms. Our homes range in price, at retail, from approximately $22,000 to $140,000. 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. All of our activities are interrelated, and each activity is dependent and assessed based on how each of the activities of Company supports the others. For example, the sale of manufactured homes includes providing transportation and consignment arrangements with dealers. We also provide financing options to the customers to facilitate such sale of homes. In addition, the sale of homes is directly related to financing provided by us. Accordingly, all significant operating and strategic decisions by the chief operating decision-maker, the Executive Chairman of the Board, are based upon analyses of our company as one segment or unit.
We believe our company is one of the most vertically integrated in the manufactured housing industry, allowing us to offer a complete solution to our customers, from manufacturing custom-made homes using quality materials and distributing those homes through our expansive network of independent retailers and company-owned distribution locations, to providing tailored financing solutions for our customers. Our homes are constructed in the United States at one of our three manufacturing facilities in accordance with the construction and safety standards of the U.S. Department of Housing and Urban Development (“HUD”). Our factories employ high-volume production techniques that allow us to produce, on average, approximately 75 home sections, or 62 fully-completed homes depending on product mix, in total per week. We use quality materials and operate our own component manufacturing facilities for many of the items used in the construction of our homes. Each home can be configured according to a variety of floor plans and equipped with such features as fireplaces, central air conditioning and state-of-the-art kitchens.
Our homes are marketed under our premier “Legacy” brand name and currently are sold primarily across 15 states through a network of 84 independent retail locations, 13 company-owned retail locations and through direct sales to owners of manufactured home communities. Our 13 company-owned retail locations, including 11 Heritage Housing stores and two Tiny House Outlet stores exclusively sell our homes. 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.
We offer three types of financing solutions to our customers. We provide floor plan financing for our independent retailers, which takes the form of a consignment arrangement between the retailer and us. We also provide consumer financing for our products which are sold to end-users through both independent and company-owned retail locations, and we provide financing solutions to manufactured housing community owners that buy our products for use in their manufactured housing communities. Our ability to offer competitive financing options at our retail locations
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provides us with several competitive advantages and allows us to capture sales which may not have otherwise occurred without our ability to offer consumer financing.
Corporate Conversion
Prior to January 1, 2018, we were a Texas limited partnership named Legacy Housing, Ltd. Effective January 1, 2018, we converted into a Delaware corporation pursuant to a statutory conversion, or the Corporate Conversion, and changed our name to Legacy Housing Corporation. All of our outstanding partnership interests were converted on a proportional basis into shares of common stock of Legacy Housing Corporation. Effective December 31, 2019, the Company reincorporated from a Delaware corporation to a Texas corporation. For more information, see “Corporate Conversion” in Note 1.
Following the Corporate Conversion, Legacy Housing Corporation continues to hold all of the property and assets of Legacy Housing, Ltd. and all of the debts and obligations of Legacy Housing, Ltd. continue as the debts and obligations of Legacy Housing Corporation. The purpose of the Corporate Conversion was to reorganize our corporate structure so that the top-tier 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 Corporation.
Factors Affecting Our Performance
We believe that the growth of our business and our future success depend on various opportunities, challenges, trends and other factors, including the following:
● Consistent with our long-term strategy of conservatively deploying our capital to achieve above average rates of return, we intend to expand our retail presence in the geographic markets we now serve, particularly in the southern United States. Each retail center requires between $500,000 and $1,500,000 to acquire the location, situate an office, provide inventory, and provide the initial working capital. We initially anticipated opening 2 to 4 additional retail centers by the end of 2020, but we will reassess those plans once we have a clearer understanding of the COVID-19 pandemic’s impact on the retail business.
● We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions. As of September 30, 2020, these properties include the following:
Location
Description
Date of Acquisition
Cost
Bastrop County, Texas
400 Acres
April 2018
$
4,400,000
Bexar County, Texas
100 Acres
November 2018
1,300,000
Horseshoe Bay, Texas
133 Acres
Various 2018-2019
2,431,000
Johnson County, Texas
91.5 Acres
July 2019
445,000
Venus, Texas
50 Acres
August 2019
422,000
$
8,998,000
● We also expect to provide financing solutions to a select group of our manufactured housing community-owner customers in a manner that includes developing new sites for products in or near urban locations where there is a shortage of sites to place our products. These solutions will be structured to give us an attractive return on investment when coupled with the gross margin we expect to make on products specifically targeted for sale to these new manufactured housing communities.
● Finally, our financial performance will be impacted by our ability to fulfill current orders for our manufactured homes from dealers and customers. Currently, our two Texas manufacturing facilities are operating at near peak capacity, with limited ability to increase the volume of homes produced at those plants. Our Georgia manufacturing facility has unutilized square footage available and with additional investment can add capacity to increase the number of homes that can be manufactured. We intend to increase production at the Georgia facility over time, particularly in response to orders increasingly being generated from new markets in Florida and the Carolinas. In order to maintain our growth, we will need to
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be able to continue to properly estimate anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the timing of production schedules and the levels and utilization of inventory, equipment and personnel.
● The coronavirus pandemic is an evolving threat to the economy and all businesses. At this time both the duration of the pandemic and the magnitude of the economic consequences are unknown. Risks to the Company include but are not limited to:
o increased loan losses or deferred loan payments as loan obligors suffer cash flow issues resulting from reduced employment, reduced rental income or unit sales, or other factors;
o reduced sales volume as potential customers are unable to shop for new homes or cannot qualify for a home purchase, retail dealers or company stores reduce or stop operations, or MHP owners reduce their future home purchases;
o reduced production resulting from factors such as the spread of the illness through the Company’s workforce, reduced product demand, or government-mandated closures of our factories, company-owned stores, or retail lots of independent dealers who carry our products;
o delays in development projects as zoning, regulatory, and permitting decisions are likely to be postponed and the expected negative impact of the pandemic on the construction industry;
o reduced raw material availability related to global supply chain disruption from the pandemic, including possible border closures;
o decreased cash flow from operations which could negatively affect our liquidity;
o an outbreak of illness among our management and accounting staff could negatively affect our ability to maintain operations, operate our financial systems, delay our statutory reporting, and reduce our internal control of financial reporting.
We continue to monitor government responses to support the economy and evaluate how those actions might mitigate the risks noted above. At this time, we believe that the pandemic will have a negative effect on our financial results that could range from minor to material.
Management has taken a number of actions in recent months, including stimulating demand by offering discounts and modified purchase terms, reducing production labor, suspending overtime, and reducing rates of pay for non-production workers. Additionally, the Company negotiated a new credit agreement with its primary bank that expanded and extended our credit facility. The new credit agreement closed on March 30, 2020.
Results of Operations
The following discussion should be read in conjunction with the information set forth in the financial statements and the accompanying notes appearing elsewhere in this Form 10-Q.
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Comparison of Three Months ended September 30, 2020 and 2019 (in thousands)
Three months ended
September 30,
2020
2019
$ change
% change
Net revenue:
Product sales
$
36,566
$
35,355
$
1,211
3.4
%
Consumer and MHP loans interest
6,428
5,688
740
13.0
%
Other
749
893
(144)
(16.1)
%
Total net revenue
43,743
41,936
1,807
4.3
%
Operating expenses:
Cost of product sales
27,839
27,504
335
1.2
%
Selling, general administrative expenses
4,525
6,293
(1,768)
(28.1)
%
Dealer incentive
550
85
465
547.1
%
Income from operations
10,829
8,054
2,775
34.5
%
Other income (expense)
Non‑operating interest income
246
115
131
113.9
%
Miscellaneous, net
96
12
84
700.0
%
Gain on settlement, net
—
—
—
%
Interest expense
(239)
(148)
(91)
61.5
%
Total other
103
(21)
124
(590.5)
%
Income before income tax expense
10,932
8,033
2,899
36.1
%
Income tax expense
(2,486)
(1,895)
(591)
31.2
%
Net income
$
8,446
$
6,138
$
2,308
37.6
%
Product sales primarily consist of direct sales, commercial sales, consignment sales and retail store sales. Product sales decreased $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)
2020
2019
$ Change
% Change
Net revenue:
Products sold
$
36,566
$
35,355
$
1,211
3.4
%
Total products sold
830
864
(34)
(3.9)
%
Net revenue per product sold
$
44.1
$
40.9
$
3
7.7
%
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. 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.
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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 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 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.
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Comparison of Nine Months ended September 30, 2020 and 2019 (in thousands)
Nine months ended
September 30,
2020
2019
$ change
% change
Net revenue:
Product sales
$
106,940
$
106,671
$
269
0.3
%
Consumer and MHP loans interest
18,919
16,330
2,589
15.9
%
Other
2,163
2,650
(487)
(18.4)
%
Total net revenue
128,022
125,651
2,371
1.9
%
Operating expenses:
Cost of product sales
78,387
77,265
1,122
1.5
%
Selling, general administrative expenses
14,202
18,928
(4,726)
(25.0)
%
Dealer incentive
929
534
395
74.0
%
Income from operations
34,504
28,924
5,580
19.3
%
Other income (expense)
Non‑operating interest income
697
200
497
248.5
%
Miscellaneous, net
145
46
99
215.2
%
Gain on settlement, net
1,075
—
1,075
%
Interest expense
(817)
(495)
(322)
65.1
%
Total other
1,100
(249)
1,349
(541.8)
%
Income before income tax expense
35,604
28,675
6,929
24.2
%
Income tax expense
(8,097)
(6,691)
(1,406)
21.0
%
Net income
$
27,507
$
21,984
$
5,523
25.1
%
Product sales increased $0.3 million, or 0.3%, during the nine months ended September 30, 2020 as compared to the same period in 2019. This change was driven by an increase in commercial sales and retail store sales offset by a decline in direct sales, consignment sales and other product sales. Commercial sales increased $7.6 million to $54.5 million in 2020 from $47.0 million in 2019 and our company-owned retail stores sales increased $0.2 million to $11.5 million in 2020 from $11.3 million in 2019. This increase was partially offset by a net $2.3 million decrease in consignment sales to $29.9 million in 2020 from $32.2 million in 2019, a $5.1 million decrease in direct sales to $7.5 million in 2020 from $12.6 million in 2019. Other product sales decreased $.01 million to $3.5 million in 2020 from $3.6 million in 2019 and is primarily due to a decrease in parts sales and miscellaneous sales income.
Net revenue attributable to our factory-built housing consisted of the following during the nine months of 2020 and 2019:
Nine Months Ended
September 30,
(in thousands)
2020
2019
$ Change
% Change
Net revenue:
Products sold
$
106,940
$
106,671
$
269
0.3
%
Total products sold
2,539
2,522
17
0.7
%
Net revenue per product sold
$
42.1
$
42.3
$
(0)
(0.4)
%
For the nine months ended September 30, 2020, our net revenue per product sold remained flat. We had declines in direct sales and consignment sales offset by increases in sales to manufactured home communities and company-owned retail stores. Sales through our company-owned retail stores and sales to manufactured home communities have higher margins than our direct sales and consignment sales.
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Consumer and MHP loans interest income grew $2.6 million, or 15.9%, during the nine months ended September 30, 2020 as compared to the same period in 2019 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio. Between September 30, 2020 and September 30, 2019 our MHP Note portfolio increased by $46.4 million and the consumer loan portfolio increased by $5.5 million.
Other revenue primarily consists of service fees and consignment fees. Other revenue decreased $0.5 million or 18.4% during the nine months ended September 30, 2020 as compared to the same period in 2019 due to a $0.2 million decrease in service fee revenue, $0.2 million decrease in other income and a $0.1 decrease in consignment fees revenue.
The cost of product sales increased $1.1 million, or 1.5%, during the nine months ended September 30, 2020 as compared to the same period in 2019. The increase in costs is primarily related to the increasing number of home units sold and increases in the cost of materials and labor in 2020.
Selling, general and administrative expenses decreased $4.7 million, or 25.0%, during the nine months ended September 30, 2020 as compared to the same period in 2019. This decrease was primarily due to $1.2 million of retail store expenses recorded as SG&A in the first quarter of 2019 that were subsequently recorded in cost of sales later in 2019, a $1.1 million decrease in warranty costs, a $0.4 million decrease in advertising and promotions, a $0.7 decrease in loan loss reserve, a $0.4 million decrease in consulting and professional fees, a $0.2 million decrease in salaries and incentive costs, a $0.2 million expense in the first quarter of 2019 for settlement of a 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
Cash and Cash Equivalents
We consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. We maintain cash balances in bank accounts that may, at times, exceed federally insured limits. We have not incurred any losses from such accounts and management considers the risk of loss to be minimal. We believe that cash flow from operations, cash and cash equivalents at 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. The new credit agreement closed on March 30, 2020.
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Cash Flow Activities
Nine Months Ended
September 30,
(in thousands)
2020
2019
Net cash provided by (used in) operating activities
$
(8,348)
$
3,076
Net cash used in investing activities
$
(3,754)
$
(6,886)
Net cash provided by financing activities
$
12,021
$
3,075
Net change in cash and cash equivalents
$
(81)
$
(735)
Cash and cash equivalents at beginning of period
$
1,724
$
2,599
Cash and cash equivalents at end of period
$
1,643
$
1,864
Comparison of Cash Flow Activities from 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 $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.
Indebtedness
Capital One Revolver. At December 31, 2019, we had a revolving line of credit (“Revolver 1”) with Capital One, N.A. with a maximum credit limit of $45,000,000 and a maturity date of May 11, 2020. On March 30, 2020, we entered into an agreement with Capital One, N.A. to replace Revolver 1 with a new revolving line of credit (“New Revolver”). The New Revolver has a maximum credit limit of $70,000,000 and a maturity date of March 30, 2024. For the period January 1, 2020 through March 30, 2020 and for the year ended December 31, 2019, Revolver 1 accrued interest at one-month LIBOR plus 2.40%. 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. The amount of available credit under Revolver 1 was $16,140,000 as of December 31, 2019.
The New Revolver accrues interest at one-month LIBOR plus 2.00%. The interest rate in effect as of September 30, 2020 was 2.16%. As with Revolver 1, amounts available under the New Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable and the consumer loans receivable and MHP Notes. 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 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,
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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. 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, 2020 and December 31, 2019 was 4.17% and 4.19%, respectively. On May 12, 2017, we entered into an agreement to increase the maximum borrowing availability under Revolver 2 to $20,000,000. On October 15, 2018, Revolver 2 was amended to extend the maturity date from April 4, 2019 to April 4, 2021. The amount of available credit under Revolver 2 was $12,028,000 and $11,262,000 at March 31, 2020 and December 31, 2019, 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. We were in compliance with all financial covenants as of March 31, 2020, including that we maintain a tangible net worth of at least $80,000,000. In April 2020, this note was paid in full and the facility was terminated.
PPP Loan. On April 10, 2020, we Company entered into a loan with Peoples Bank as the lender in an aggregate principal amount of $6,545,700 (the “Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. The Loan was evidenced by a promissory note (the “Note”) dated April 10, 2020 and had a maturity date of April 10, 2022. The Note had an interest rate of 1.000% per annum, with the first six months of interest deferred. Principal and interest were payable monthly commencing on November 10, 2020 and could be prepaid by us at any time prior to maturity with no prepayment penalties. On May 1, 2020, this loan was paid in full.
Notes Payable. We have a promissory note with Woodhaven Bank. The amount due under the promissory note accrued interest at an annual rate of 3.85% through February 2, 2017 and then at the prime interest rate plus 0.60% through maturity on April 7, 2018. The loan was subsequently renewed through April 7, 2033. The promissory note calls for an interest rate of 4.25% and monthly payments of $30,000 with a final payment due at maturity. The note is secured by certain of our real property. Interest expense was $113,000 for the nine months ended September 30, 2019. In October 2019, this note was paid in full.
On May 24, 2016, we signed a promissory note for $515,000 with Eagle One, LLC collateralized by the purchase of real property located in Oklahoma City, Oklahoma. The amount due under the promissory note accrues interest at an annual rate of 6.00%. The promissory note calls for monthly principal and interest payments of $6,000 until June 1, 2026. Interest expense was $1,000 for the nine months ended September 30, 2019. In January 2019, this note 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 September 30, 2020, we had not drawn down on this credit facility.
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Contractual Obligations
The following table is a summary of contractual cash obligations as of September 30, 2020:
Payments Due by Period
Contractual Obligations
Total
2020
2021 - 2022
2023 - 2024
After 2024
Lines of credit
$
43,820,000
—
—
43,820,000
—
Operating lease obligations
$
2,632,000
148,000
940,000
736,000
808,000
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, results of operations, liquidity or capital expenditures. However, we do have a repurchase agreement with a financial institution providing inventory financing for independent retailers of our products. Under this agreement, we have agreed to repurchase homes at declining prices over the term of the agreement (24 months). Our obligation under this repurchase agreement ceases upon the purchase of the home by the retail customer. The maximum amount of our contingent obligations under such repurchase agreements was approximately $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 September 30, 2020.
Critical Accounting Estimates
Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. Our critical accounting estimates are identified and described in our annual report on Form 10-K for the year ended December 31, 2019. Other than recent accounting pronouncement adoptions discussed in Note 1 of our condensed financial statements, we had no significant changes in those critical accounting estimates since our last annual report.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our September 30, 2020 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the JOBS Act. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of these exemptions until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of this exemption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for smaller reporting companies
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