What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-03 compared with 2021-03-17 · 61 added, 78 removed, 241 unchanged (37% of the section changed)

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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 twelve month period ending September 30, 2020.

We are the sixth 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 twelve month period ending September 30, 2021.

With current operations focused primarily in the southern United States, we offer our customers an array of quality homes ranging in size from approximately 395 to 2,667 square feet consisting of 1 to 5 bedrooms, with 1 to 3 1 / 2 bathrooms.

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

During 2020, approximately 46% of our manufactured homes were sold in Texas, followed by 8% in Georgia, 8% in Michigan, 5% in Kansas, and 5% in North Carolina.

During 2019, 48% of our manufactured homes were sold in Texas, followed by 8% in Georgia, 6% in Kansas, 5% in Oklahoma and 5% in Florida.

During 2021, approximately 50% of our manufactured homes were sold in Texas, followed by 16% in Georgia, 8% in Louisiana and 5% in Alabama.

During 2020, 46% of our manufactured homes were sold in Texas, followed by 8% in Georgia, 8% in Michigan, 5% in Kansas and 5% in North Carolina.

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.

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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 delayed those plans due to the COVID-19 pandemic’s impact on the retail business.We expect to open 1 to 2 additional retail centers by the end of 2021.

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

As of December 31, 2020, these properties include the following:

As of December 31, 2021, these properties include the following ($’s in thousands):

Date of Acquisition

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September 2020

Bexar County, Texas

February 2021

● 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.

● Our financial performance will be impacted by our ability to fulfill current orders for our manufactured homes from dealers and customers.

● 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 or 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.

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 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.

In order to maintain our growth, we will need to 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.

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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 will expand and extend our credit facility.

The new credit agreement closed on March 30, 2020.

Critical Accounting Policies and Estimates

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A specific reserve is created for impaired loans based on fair value of underlying collateral value, less estimated selling costs.

We used certain factors to determine the value of the underlying collateral for impaired loans.

These factors were:

We use certain 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;

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Revenue from direct retail sales through company-owned retail locations are generally recognized when the customer has entered into a legally binding sales contract, payment is received, the home is delivered at the customer’s site, title has transferred, and collection is reasonably assured.

Retail sales financed by us are recognized as revenue upon

the execution of a sales and financing contract with a down payment received and upon delivery of the home to the final customer, at which time title passes and collectability is reasonably assured.

Retail sales financed by us are recognized as revenue upon the execution of a sales and financing contract with a down payment received and upon delivery of the home to the final customer, at which time title passes and collectability is reasonably assured.

Revenue is recognized net of sales taxes.

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

Product sales increased $4.8 million, or 3.4%, in 2020 as compared to 2019 while the volume of homes sold remained flat.

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

Commercial sales increased $5.8 million to $70.2 million in 2020 from $64.4 million in 2019, consignment sales increased $0.9 million to $43.8 million in 2020 from $42.9 million in 2019 and our company-owned retail stores sales increased $1.3 million to $17.4 million in 2020 from $16.1 million in 2019.

These increases were offset partially offset by a $3.5 million decrease in direct sales to $11.7 million in 2020 from $15.2 million in 2019.

Other product sales increased $0.3 million to $4.9 million in 2020 from $4.6 million in 2019

and is primarily due to an increase in molding revenue and miscellaneous sales income partially offset by a decrease in parts sales and direct freight.

Product sales increased $18.5 million, or 12.5%, in 2021 as compared to 2020.

This change was driven by higher average sales price partially offset by lower unit volumes.

Net revenue attributable to our factory-built housing consisted of the following in 2021 and 2020:

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Net revenue per product sold

In 2020, our net revenue per product sold increased slightly because of changes in our product sales mix.

We had increases in sales to manufactured home communities, consignment sales and sales through our company-owned retail stores.

These increases were partially offset by declines in direct sales.

In 2021, our net revenue per product sold increased 26.3% because of increases to our product prices due to rising material and labor costs, which resulted in higher home sales prices and more revenue generated per home sold.

We had increases in consignment sales, direct sales, and sales through our company-owned retail stores.

These increases were partially offset by declines in sales to manufactured home communities.

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 were price increases during 2020 to our product prices 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 $3.2 million, or 14.3%, in 2020 as compared to 2019 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio.

Between December 31, 2020 and December 31, 2019 our MHP Note portfolio increased by $44.2 million and the consumer loan portfolio increased by $6.7 million.

Other revenue primarily consists of service fees and consignment fees.

Other revenue decreased $0.2 million or 6.7% due to a $0.3 million decrease in other income and a $0.1 decrease in consignment fees revenue offset by a $0.2 million increase in service fee revenue.

Other product sales increased $5.6 million, or 115.0% and is primarily due to an increase in direct freight, molding revenue and miscellaneous sales income partially offset by a decrease in parts sales.

Consumer and MHP loans interest income grew $1.8 million, or 7.2%, in 2021 as compared to 2020 and is related to our average increase in outstanding consumer loan portfolio and MHP Note portfolio.

Between December 31, 2021 and December 31, 2020 our consumer loan portfolio increased by $13.7 million.

Between September 29, 2021 and December 31, 2020 our MHP Note portfolio increased by $19.4 million.

On September 30, 2021, we collected $44.9 million in principal payment from one of our MHP borrowers.

As a result of this payment, MHP loan interest income is expected to decrease during 2022 as compared to 2021.

Other revenue primarily consists of commercial lease rents, consignment fees and servicer fee revenue.

Other revenue increased $0.5 million or 11.8% primarily due to a $0.4 million increase in commercial lease rents and a $0.1 million increase in miscellaneous other revenue, net.

The cost of product sales increased $4.3 million, or 3.9%, in 2021 as compared to 2020.

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

Selling, general and administrative expenses decreased $6.4 million, or 25.6%, in 2020 as compared to 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 $1.7 million decrease in warranty costs, a $1.9 decrease in loan losses, a $0.5 million decrease in consulting and professional fees, a $0.8 million decrease in salaries and incentive costs and a $0.2 million expense in the first quarter of 2019 for settlement of a lawsuit partially offset by a $0.3 million increase in legal expense.

In addition, dealer incentive expense increased $0.4 million, or 58.0% in 2020 as compared to 2019.

Other income (expense), net increased $1.5 million in 2020, as compared to 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 $0.6 million in non-operating interest income and an increase of $0.1 million in miscellaneous, net income offset by a $0.4 million increase in interest expense.

Income tax expense for 2020 was $10.8 million compared to $8.7 million for 2019.

The increase in costs is primarily related to increases in the cost of materials and labor in 2021 and was materially passed along to our end-customer.

Selling, general and administrative expenses increased $4.2 million, or 22.2%, in 2021 as compared to 2020.

This increase was primarily due to $2.4 million increase in salaries and incentive costs, a $0.3 million increase in rent and facility costs, a $0.3 million increase in consulting and professional fees, a $0.3 million increase in depreciation & amortization expense, a $0.2 million increase in warranty costs, a $1.0 million increase in legal expenses.

and a net $0.1 million increase in other miscellaneous costs.

These increases were partially offset by a $0.4 million decrease in advertising and promotions.

Dealer incentive expense increased $0.9 million, or 267.6% in 2021 as compared to 2020.

Other income (expense), net increased $0.5 million, or 39.7%, in 2021, as compared to 2020.

This increase was primarily due to an increase of $1.2 million in non-operating interest income, an increase of $0.2 million in miscellaneous income, net, and a decrease of $0.2 million in interest expense.

These increases were partially offset by a $1.1 million gain in the second quarter of 2020 due to the settlement of a lawsuit with a previous vendor for the Company.

Income tax expense was $10.8 million for 2021 and 2020.

The effective tax rate for the year ended December 31, 2021 was 17.7% and primarily differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction and partially offset by state income taxes.

The effective tax rate for the year ended December 31, 2020 was 22.2% and primarily differs from the federal statutory rate of 21% primarily due to state income taxes net of a federal tax credit for energy efficient construction.

The effective tax rate for the year ended December 31, 2019 was 23.3% and differs from the federal statutory rate of 21% primarily due to state income taxes.

Liquidity and Capital Resources

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We believe that cash flow from operations, cash and cash equivalents at December 31, 2021, 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.

We have negotiated a new credit agreement with Capital One, N.A.

In 2020, we negotiated a new credit agreement with Capital One, N.A.

that expanded and extended our credit availability

(see Indebtedness – Capital One Revolver , below).

As of December 31, 2021, we had approximately $1.0 million in cash and cash equivalents, compared to $0.8 million as of December 31, 2020.

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(in thousands)

Net cash used in operating activities

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash used in financing activities

Net change in cash and cash equivalents

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Comparison of Cash Flow Activities from 2021 to 2020

Net cash used in operating activities decreased $2.7 million during the year ended December 31, 2020, compared to 2019, primarily due to increased volume of loan originations supporting sales to MHPs net of principal collections, growth in our portfolio of home units leased to MHPs, increased growth in consumer loan originations net of principal collections, increased accounts receivable and reduced dealer incentive liability.

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

Net cash used in investing activities of $3.3 million in 2020 was primarily attributable to $2.6 million used for the acquisition of property plant and equipment, $0.5 million used to purchase consumer loans and $5.9 million used for loans to third parties for the development of manufactured housing parks.

Net cash provided by operating activities increased $62.1 million during the year ended December 31, 2021, compared to 2020, primarily as a result of increased MHP principal collections, decreased MHP originations, and increased customer deposits and escrow.

The increase in cash used in operating activities was partially offset by increased volume of consumer loan originations net of principal collections, increased inventories, increased accounts receivable and decreased payables.

Net cash used in investing activities of $31.9 million in 2021 was primarily attributable to $ $36.8 million used for loans to third parties for the development of manufactured housing parks and $6.0 million used for the acquisition of property plant and equipment.

These were offset by collections of $9.0 million of loans we made to third parties for the development of manufactured housing parks and collections of $1.8 million from our purchased consumer loans.

Net cash provided by financing activities of $3.8 million in 2020 was primarily attributable to net proceeds of $5.0 million on our lines of credit and $0.2 million increase in escrow deposits received by the company offset by $1.4 million for purchase of treasury stock.

Net cash used in financing activities of $28.1 million in 2021 was attributable to net payments of $28.2 million on our lines of credit offset by $0.1 million received from the exercise of stock options.

Capital One Revolver.

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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.

For the period January 1, 2020 through March 30, 2020, Revolver 1 accrued interest at one-month LIBOR plus 2.40%.

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

The interest rate in effect as of December 31, 2020 was 2.15%.

The interest rates in effect as of December 31, 2021 and 2020 were 2.10% and 2.15%, respectively.

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.

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We were in compliance with all financial covenants as of December 31, 2021, 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.

On June 21, 2022, we received a Reservation of Rights notice from Capital One, N.A.

The letter stated that the New Revolver was in default.

The default condition occurred due to our failure to timely file the 10K and deliver certain financial statements to Capital One, N.A.

On July 28, 2022, we executed a forbearance agreement with Capital One, N.A.

Veritex Community Bank Revolver.

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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 were 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 years ended December 31, 2020 and 2019, interest expense was $17,000 and $131,000, 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 and December 31, 2019, 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.

The amount of available credit under Revolver 2 was $12,028,000 and the interest rates in effect as of March 31, 2020 was 4.17%.

For the year ended December 31, 2020 interest expense was $17,000.

The outstanding balance as of March 31, 2020 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.

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.

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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 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.

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 December 31, 2018 was 4.25%.

The note is secured by certain of our real property.

Interest paid on the note payable was $135,000 for the year ended December 31, 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 paid on the note payable was $1,000 for the year ended December 31, 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”).

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 requires interest payments of 6.00% per annum on outstanding balances, which were 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.

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The following table is a summary of contractual cash obligations as of December 31, 2021:

Payments Due by Period

Payments Due by Period (in thousands)

Contractual Obligations

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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 $140,000 and $260,000 as of December 31, 2020 and 2019, respectively, without reduction for the resale value of the homes.

The maximum amount of our contingent obligations under such repurchase agreements was approximately

$4,908,000 and $140,000 as of December 31, 2021 and 2020, 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.

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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-K

Item 7. Management’s Discussion and Analysis