What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-09-12 compared with 2021-11-09 · 286 added, 206 removed, 455 unchanged (52% of the section changed)

3 unchanged sentences

(in thousands, except share and per share data)

September 30,

Current assets:

1 unchanged sentence

Accounts receivable, net

Current portion of consumer loans

Accounts receivable - dealer financed

Current portion of consumer loans receivable

Current portion of notes receivable from mobile home parks (“MHP”)

2 unchanged sentences

Total current assets

Consumer loans, net

Consumer loans receivable, net

Notes receivable from mobile home parks (“MHP”)

1 unchanged sentence

Inventories, net

Other assets - leased mobile homes

ROU assets - operating leases

Property, plant and equipment, net

5 unchanged sentences

Escrow liability

Operating lease obligation

Total current liabilities

Long ‑ term liabilities:

Operating lease obligation, less current portion

Lines of credit

Deferred income taxes

Accrued liabilities, net of current portion

Deferred income taxes, net

Dealer incentive liability

5 unchanged sentences

Common stock, $ .001 par value, 90,000,000 shares authorized;

24,654,621 and 24,639,125 issued and 24,209,556 and 24,194,060 outstanding at September 30, 2021 and December 31, 2020, respectively

Treasury stock at cost, 445,065 shares at September 30, 2021 and December 31, 2020

24,851,085 and 24,654,621 issued and 24,406,020 and 24,209,556 outstanding at March 31, 2022 and December 31, 2021, respectively

Treasury stock at cost, 445,065 shares at March 31, 2022 and December 31, 2021

Additional paid-in-capital

4 unchanged sentences

LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

CONDENSED STATEMENTS OF INCOME

(in thousands, except share and per share data)

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

Product sales

9 unchanged sentences

Miscellaneous, net

Gain on settlement, net

Interest expense

Total other income

Income before income tax expense

6 unchanged sentences

(unaudited, in thousands)

Nine months ended September 30,

Three months ended March 31,

Operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation expense

Amortization of debt discount and issuance costs

Provision for loan loss—consumer loans

Depreciation and amortization expense

Amortization of deferred revenue

Provision for accounts and notes receivable

Provision for long term inventory

Share based payment expense

1 unchanged sentence

Accounts receivable

Consumer loans originations

Consumer loans principal collections

Notes receivable MHP originations

Notes receivable MHP principal collections

Consumer loans activity, net

Notes receivable MHP activity, net

Inventory loan activity, net

Prepaid expenses and other current assets

Accounts payable

Accrued liabilities

Customer deposits

1 unchanged sentence

Dealer incentive liability

Net cash provided by (used in) operating activities

Net cash used in operating activities

Investing activities:

2 unchanged sentences

Notes receivable collections

Purchases of loans

Collections from purchased loans

Net cash used in investing activities

Net cash provided by (used in) investing activities

Financing activities:

Proceeds from exercise of stock options

Treasury stock purchase

Proceeds from issuance of note payable

Principal payments on note payable

Proceeds from other liabilities

Proceeds from lines of credit

Payments on lines of credit

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

10 unchanged sentences

Share based compensation expense and stock units vested

Purchase of treasury stock

Balances, March 31, 2020

Share based compensation expense and stock units vested

Purchase of treasury stock

Balances, June 30, 2020

Share based compensation expense and stock units vested

Balances, September 30, 2020

Net income (restated)

Balances, March 31, 2021 (restated)

paid-in-capital

2 unchanged sentences

Balances, March 31, 2022

Share based compensation expense and stock units vested

Balances, June 30, 2021

Share based compensation expense and stock units vested

Share based compensation expense - stock options exercised

Balances, September 30, 2021

See accompanying notes to condensed financial statements.

32 unchanged sentences

Basis of Presentation

The accompanying unaudited interim condensed financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020, respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S.

The accompanying unaudited interim condensed financial statements as of March 31, 2022 and for the three months ended March 31, 2022 and 2021, respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S.

Securities and Exchange Commission ("SEC") as required by Regulation S-X, Rule 8-03.

In the opinion of management, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company's financial position for the periods presented.

The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be

The results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending

LEGACY HOUSING CORPORATION

1 unchanged sentence

(dollars in thousands)

expected for the year ending December 31, 2021, or any other period.

December 31, 2022, or any other period.

The accompanying balance sheet as of December 31, 2021 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2021 (the "Form 10-K").

1 unchanged sentence

Accordingly, they should be read in conjunction with the audited financial statements and notes thereto included in the Form 10-K.

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.

These reclassifications had no effect on the previously reported net income.

Restatement of Previously Issued Condensed Financial Statements (unaudited)

As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the Company has restated its interim financial statements for the period ended March 31, 2021 to correct (i) an overstatement of costs errantly assigned to accounts payable for inventory received but not invoiced, (ii) a reclassification between prepaid expenses and other current assets and other assets, (iii) a reclassification between prepaid expenses and other current assets and lines of credit, and (iv) a change in accrued liabilities and income tax expense.

The effects of the restatement on the line items within the Company’s condensed statement of operations for the three months ended March 31, 2021 were as follows:

Three Months Ended March 31, 2021

Operating expenses:

Cost of product sale

Income from operations

Income before income tax expense

Income tax expense

Net income per share:

The effects of the restatement on the line items within the Company’s condensed statement of cash flows for the three months ended March 31, 2021 were as follows:

Three months March 31, 2021

As Originally

Operating activities:

Prepaid expenses and other current assets

Accounts payable

Accrued liabilities

Net cash provided by (used in) operating activities

Investing activities:

Purchases of property, plant and equipment

Net cash used in investing activities

Financing activities:

Payments on lines of credit

Net cash provided by (used in) financing activities

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Use of Estimates

14 unchanged sentences

For financed sales by the Company, the individual customer enters into a sales and financing contract and is required to make a down payment.

These financed sales contain a significant financing component and any interest income is separately recorded in the statement of operations.

These financed sales contain a significant financing component and any interest income is separately recorded in the statement of income.

Revenue is measured as the amount of consideration expected to be received in exchange for transferring the homes to the customers.

4 unchanged sentences

Contract costs, which include commissions incurred related to the sale of homes, are expensed at the point-in-time when the related revenue is recognized.

Warranty costs and contract costs are included in selling, general and administrative expenses in the statements of operations.

For the three months ended September 30, 2021 and 2020, sales to an independent third-party and its affiliates accounted for $ 2,335 or 4.8 % and $ 13,253 or 36.2 % of our product sales, respectively.

For the nine months ended

Warranty costs and contract costs are included in selling, general and administrative expenses in the statements of income.

For the three months ended March 31, 2022 and 2021, sales to an independent third-party and its affiliates accounted for $ 3,134 or 6.1 % and $ 2,664 or 8.3 % of our product sales, respectively.

For the three months ended March 31, 2022 and 2021, total cost of product sales included $ 2,999 and $ 2,182 of costs relating to subcontracted production for commercial sales, reimbursed dealer expenses for consignment sales, and certain other similar costs incurred for retail store and commercial sales .

Other revenue consists of consignment fees, commercial lease rents, service fees and other miscellaneous income.

Consignment fees are charged to independent retailers on a monthly basis for homes held by the independent

LEGACY HOUSING CORPORATION

1 unchanged sentence

(dollars in thousands)

September 30, 2021 and 2020, sales to an independent third-party and its affiliates accounted for $ 7,399 or 6.1 % and $ 39,559 or 37.0 % of our product sales, respectively.

For the three months ended September 30, 2021 and 2020, total cost of product sales included $ 3,978 and $ 7,073 of costs relating to subcontracted production for commercial sales, reimbursed dealer expenses for consignment sales, and certain other similar costs incurred for retail store and commercial sales .

For the nine months ended September 30, 2021 and 2020, total cost of product sales included $ 8,976 and $ 15,878 of costs relating to subcontracted production for commercial sales, reimbursed dealer expenses for consignment sales, and certain other similar costs incurred for retail store and commercial sales .

Other revenue consists of consignment fees, commercial lease rents, service fees and other miscellaneous income.

Consignment fees are charged to independent retailers on a monthly basis for homes held by the independent retailers pursuant to a consignment arrangement until the home is sold to an individual customer.

retailers pursuant to a consignment arrangement until the home is sold to an individual customer.

Consignment fees are determined as a percentage of the home’s wholesale price to the independent dealer.

2 unchanged sentences

Revenue for service fees and miscellaneous income is recognized at a point in time when the performance obligation is satisfied.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Disaggregation of Revenue .

The following table summarizes customer contract revenues disaggregated by source of the revenue for the three and nine months ended September 30, 2021 and 2020:

The following table summarizes customer contract revenues disaggregated by source of the revenue for the three months ended March 31, 2022 and 2021:

Three months ended

Nine months ended

September 30,

Product sales:

15 unchanged sentences

The fair value of each option grant with only service-based conditions is estimated using the Black-Scholes pricing model.

The fair value of each restricted stock unit (the ”RSU”) is calculated based on the closing price of the Company’s common stock on the grant date.

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

The fair value of each RSU with market based conditions is estimated using the Monte-Carlo Simulation valuation model.

The fair value of stock option awards on the date of grant is estimated using the Black-Scholes option pricing model, which requires the Company to make certain predictive assumptions.

2 unchanged sentences

As a recently formed public entity with a small public float and limited trading of its common shares on the NASDAQ Global Market, it was not practicable for the Company to estimate the volatility of its common shares;

therefore, management estimated volatility based on the historical volatilities of a small group of companies considered as close to comparable to the Company as available, all equally weighted, over the expected life of the option.

Management concluded that this group is more characteristic of the Company’s business than a broad industry index.

The expected life of awards granted represents the period of time that the awards are expected to be outstanding based on the “simplified” method, which is allowed for companies that cannot reasonably estimate the expected life of options based on its historical award exercise experience.

The Company does not expect to pay dividends on its common stock.

therefore, management estimated

LEGACY HOUSING CORPORATION

1 unchanged sentence

(dollars in thousands)

volatility based on the historical volatilities of a small group of companies considered as close to comparable to the Company as available, all equally weighted, over the expected life of the option.

Management concluded that this group is more characteristic of the Company’s business than a broad industry index.

The Company does not expect to pay dividends on its common stock.

The fair value of RSU awards with market based conditions on the date of grant is estimated using the Monte-Carlo Simulation valuation model, and the Company uses the following methods to determine its underlying assumptions:

expected volatilities are based on the Company’s historic stock price volatility;

the expected term of the awards is based on performance measurement period;

the risk-free interest rate is based on the U.S.

Treasury bond yield issued with similar life terms to the expected life of the grant.

The Company does not expect to pay dividends on its common stock.

Accounts Receivable

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

Accounts receivables are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.

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

Accounts receivable “dealer financed” are receivables for interest, fees and curtailments owed from dealers under their inventory finance agreements.

Accounts receivables “net” are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.

Accounts receivables “dealer financed” are due upon receipt and are stated at amounts due from customers net of an allowance for doubtful accounts.

Accounts outstanding longer than the contractual payment terms are considered past due.

1 unchanged sentence

The Company establishes an allowance for doubtful accounts for amounts that are deemed to be uncollectible.

At September 30, 2021 and December 31, 2020, the allowance for doubtful accounts totaled $ 318 and $ 97 , respectively.

At March 31, 2022 and December 31, 2021, the allowance for doubtful accounts totaled $ 375 and $ 343 , respectively.

Leased Property

14 unchanged sentences

Homes returned to the Company upon expiration of the lease or in the event of default will be sold by the Company through its standard sales and distribution channels.

Future minimum lease income under all operating leases for each of the next five years at September 30, 2021, are as follows:

LEGACY HOUSING CORPORATION

1 unchanged sentence

(dollars in thousands)

Future minimum lease income under all operating leases for each of the next five years at March 31, 2022, are as follows:

Recent Accounting Pronouncements

2 unchanged sentences

A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term.

The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous requirements.

The Company plans to use the longer phase-in period for adoption, and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2022.

Modified retrospective application and early adoption is permitted.

The Company expects that the adoption of this standard will result in a material increase to assets and liabilities on the balance sheet, but will not have a material impact on the statement of operations.

While the Company is continuing to assess all the effects of adoption, it currently believes the most significant effects relate to (i) the recognition of new right-of-use assets and lease liabilities on its balance sheet for its property and equipment operating leases and (ii) providing significant new disclosures about its leasing activities.

As an emerging growth company, ASU 2016-02 is effective for fiscal years beginning after December 15, 2021, and interim periods within those years.

The Company adopted this standard in the first quarter of fiscal 2022 and elected certain practical expedients permitted under the transition guidance, including the package of practical expedients;

however, the Company did not elect the hindsight practical expedient.

Additionally, the Company elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption and did not restate prior periods.

The adoption of ASU 2016-02 resulted in an increase in total assets and total liabilities of $ 3,258 at transition.

However, this standard did not have a material impact on the consolidated statement of income or the consolidated statement of cash flows.

See Note 5 for further discussion on leases.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments—Credit Losses (Topic 326):

8 unchanged sentences

Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

CONSUMER LOANS

2 unchanged sentences

Interest income is recognized monthly per the terms of the financing agreements.

The average contractual interest rate per loan was approximately 13.6 % as of September 30, 2021 and 13.8 % as of December 31, 2020.

The average contractual interest rate per loan was approximately 13.5 % as of March 31, 2022 and December 31, 2021, respectively.

Consumer loans receivable have maturities that range from 3 to 30 years .

1 unchanged sentence

Interest rates on approved loans are determined based on consumer credit score, payment ability and down payment amount.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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

The Company may also receive escrow payments for property taxes and insurance included in its consumer loan collections.

The liabilities associated with these escrow collections totaled $ 9,350 and $ 7,729 as of September 30, 2021 and December 31, 2020, respectively, and are included in escrow liability in the balance sheets.

The liabilities associated with these escrow collections totaled $ 9,142 and $ 9,350 as of March 31, 2022 and December 31, 2021, respectively, and are included in escrow liability in the condensed balance sheets.

Allowance for Loan Losses—Consumer Loans Receivable

The allowance for loan losses reflects management’s estimate of losses inherent in the consumer loans that may be uncollectible based upon review and evaluation of the consumer loan portfolio as of the date of the balance sheet.

An allowance for loan losses is determined after giving consideration to, among other things, the loan characteristics, including the financial condition of borrowers, the value and liquidity of collateral, delinquency and historical loss experience.

20 unchanged sentences

and (7) the experience and expertise of the particular dealer assisting in collection efforts.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell.

2 unchanged sentences

At each reporting period, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information.

Repossessed homes totaled $ 698 and $ 1,395 as of September 30, 2021 and December 31, 2020, respectively, and are included in other assets in the balance sheets.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Repossessed homes totaled $ 793 and $ 517 as of March 31, 2022 and December 31, 2021, respectively, and are included in other assets in the condensed balance sheets.

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

As of September 30,

As of March 31,

As of December 31,

4 unchanged sentences

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

Three months ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Allowance for loan losses, beginning of period

Provision for loan losses

Charge offs (recoveries)

Allowance for loan losses

The reserve for loan losses consists of the following:

As of September 30,

As of March 31,

As of December 31,

5 unchanged sentences

General allowance for loan losses

As of September 30, 2021 and December 31, 2020, the total principal outstanding for consumer loans on nonaccrual status was $ 1,328 and $ 1,603 , respectively.

A detailed aging of consumer loans receivable that are past due as of September 30, 2021 and December 31, 2020 were as follows:

As of September 30,

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

As of March 31, 2022 and December 31, 2021, the total principal outstanding for consumer loans on nonaccrual status was $ 1,274 and $ 1,239 , respectively.

A detailed aging of consumer loans receivable that are past due as of March 31, 2022 and December 31, 2021 were as follows:

As of March 31,

As of December 31,

10 unchanged sentences

The interest rate on the MHP Notes can be fixed or variable.

Approximately $ 82 million of the

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

MHP Notes have a fixed interest rate ranging from 6.9 % to 8.9 %.

Approximately $ 98 million of the MHP Notes have a fixed interest rate ranging from 6.9 % to 8.9 %.

The remaining MHP Notes have a variable rate typically set at 4.0 % above prime with a minimum of 8.0 %.

The average interest rate per loan was approximately 7.7 % and 7.7 % as of September 30, 2021 and December 31, 2020, respectively, with maturities that range from 1 to 20 years .

The average interest rate per loan was approximately 7.7 % and 7.6 % as of March 31, 2022 and December 31, 2021, respectively, with maturities that range from 1 to 18 years .

The collateral underlying the MHP Notes are individual mobile homes which can be repossessed and resold.

The MHP Notes are generally guaranteed by the borrowers personally.

The Company had concentrations of MHP Notes with an independent third-party and its affiliates that equaled 29.8 % and 52.9 % of the principal balance outstanding, all of which was secured by the mobile homes, as of September 30, 2021 and December 31, 2020, respectively.

As of March 31, 2022, the Company had concentrations of MHP Notes with two independent third-parties and their respective affiliates that equaled 29.1 % and 12.9 % of the principal balance outstanding, all of which was secured by the mobile homes.

As of December 31, 2021, the Company had concentrations of MHP Notes with two independent third-parties and their respective affiliates that equaled 30.1 % and 10.4 % of the principal balance outstanding, all of which was secured by the mobile homesrespectively.

MHP Notes are stated at amounts due from customers, net of allowance for loan losses.

1 unchanged sentence

The Company establishes an allowance reserve composed of specific and general reserve amounts.

There were minimal past due balances on the MHP Notes as of September 30, 2021 and December 31, 2020 and no charge offs were recorded for MHP Notes during the three and nine months ended September 30, 2021 and 2020, respectively.

Allowance for loan loss is considered immaterial and accordingly no loss is recorded against the MHP Notes as of September 30, 2021 and December 31, 2020.

As of March 31, 2022 and December 31, 2021, the MHP Note balance is presented net of unamortized finance fees of $ 591 and $ 445 , respectively.

The finance fees are amortized over the life of the MHP Notes.

There were minimal past due balances on the MHP Notes as of March 31, 2022 and December 31, 2021 and no charge offs were recorded for MHP Notes during the three months ended March 31, 2022 and 2021, respectively.

Allowance for loan loss is considered immaterial and accordingly no loss is recorded against the MHP Notes as of March 31, 2022 and December 31, 2021.

There were no impaired MHP Notes as of March 31, 2022 and December 31, 2021, respectively, and there were no repossessed homes balances as of March 31, 2022 and December 31, 2021, respectively.

Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

OTHER NOTES RECEIVABLE

4 unchanged sentences

The Company reserves for estimated losses on the other notes based on current economic conditions that may affect the borrower’s ability to pay, the borrower’s financial strength, and historical loss experience.

There were no past due balances for other notes as of March 31, 2022 and December 31, 2021, respectively, and there were no impaired balances for other notes as of March 31, 2022 and December 31, 2021, respectively.

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

As of September 30,

As of March 31,

As of December 31,

1 unchanged sentence

Allowance for loan losses

The Company currently has 13 operating leases, 8 of which are for the Company’s Heritage Housing and Tiny Homes retail locations, three which are subleased by the Company and two are for corporate and administrative offices in Bedford, TX and Norcross, GA.

These leases typically have initial terms ranging from 5 to 10 years and include one or more options to renew.

Under ASC 842, a modified retrospective transition is required, applying the new standard to all leases at the date of initial application.

The Company chose to use the adoption date of January 1, 2022 for ASC 842.

As such, all periods presented after January 1, 2022, are under ASC 842 whereas periods presented prior to January 1, 2022, are in accordance with prior lease accounting of ASC 840.

Financial information was not updated and the disclosures required under ASC 842 were not provided for dates and periods before January 1, 2022.

We determine if an arrangement is a lease at inception.

Operating leases are right-of-use (“ROU”) assets and are shown as ROU assets – operating leases on our Condensed Balance Sheet.

The lease liabilities are shown as Operating lease obligation and Operating lease obligation, less current portion on our Condensed Balance Sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

We have elected the practical expedient to not separate lease and non-lease components.

Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement.

We record a ROU asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives.

We remeasure the lease liability and ROU asset when a change to our future minimum lease payments occurs.

Key assumptions and judgments included in the determination of the lease liability include the discount rate used in the present value calculation and the exercise of renewal options.

Many of our leases contain renewal options.

As the exercise of the renewal options is not certain at commencement of a lease, we generally do not include the option periods in the lease term when determining the lease

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

liabilities and ROU assets.

We remeasure the lease liability and ROU asset when we are reasonably certain that we will exercise a renewal option.

Our leases do not provide information about the rate implicit in the lease.

Therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations.

The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.

The remaining weighted-average lease term is 5.2 years and the weighted-average discount rate is 2.12 %.

We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities.

There were no variable lease costs for the three months ended March 31, 2022.

Short-term leases, those with a term of 12 months or less, are not recorded on our Condensed Balance Sheet.

Our short-term lease costs were not material for the three months ended March 31, 2022.

As of March 31, 2022, future minimum lease payments under our operating lease liabilities were as follows:

Total lease payments

Less amount representing interest

Total lease liability

Less current lease liability

Total non-current lease liability

Inventories consists of the following:

As of September 30,

As of March 31,

As of December 31,

3 unchanged sentences

Allowance for obsolescence

(1) Finished goods includes $ 3,524 and $ 8,656 as of September 30, 2021 and December 31, 2020, respectively, is held for more than twelve months and classified as long-term.

(1) Finished goods includes $ 3,738 and $ 2,678 as of March 31, 2022 and December 31, 2021, respectively , held for more than twelve months and classified as long-term.

LEGACY HOUSING CORPORATION

3 unchanged sentences

Property, plant and equipment consists of the following:

As of September 30,

As of March 31,

As of December 31,

4 unchanged sentences

Total property, plant and equipment

Depreciation expense was $ 403 with $ 113 included as a component of cost of product sales for the three months ended September 30, 2021 and $ 249 with $ 88 included as a component of cost of product sales for the three months ended September 30, 2020.

Depreciation expense was $ 784 with $ 327 included as a component of cost of product sales for the nine months ended September 30, 2021 and $ 750 with $ 267 included as a component of cost of product sales for the nine months ended September 30, 2020.

Depreciation expense was $ 260 with $ 121 included as a component of cost of product sales for the three months ended March 31, 2022 and $ 264 with $ 104 included as a component of cost of product sales for the three months ended March 31, 2021.

Other assets consists of the following:

As of September 30,

As of March 31,

As of December 31,

Leased property, net of accumulated depreciation

Repossessed homes

Depreciation expense for the leased property was $ 143 and $ 53 for the three months ended September 30, 2021 and 2020, respectively, and $ 373 and $ 124 for the nine months ended September 30, 2021 and 2020, respectively.

Depreciation expense for the leased property was $ 170 and $ 98 for the three months ended March 31, 2022 and 2021, respectively.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

ACCRUED LIABILITIES

Accrued liabilities consists of the following:

As of September 30,

As of March 31,

As of December 31,

Warranty liability

Warranty reserve

Litigation reserve

Federal and state income taxes payable

Accrued expenses & other accrued liabilities

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Portfolio taxes and title

Dealer rebates

Federal and state income taxes

Total accrued liabilities

Lines of Credit

7 unchanged sentences

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

The interest rate in effect as of September 30, 2021 and December 31, 2020 was 2.14 % and 2.15 %, respectively.

The interest rate in effect as of March 31, 2022 and December 31, 2021 was 2.23 % and 2.10 %, 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, consumer loans and MHP Notes.

The New Revolver requires the Company to comply with certain quarterly financial and non-financial covenants.

The amount of available credit under the New Revolver was $ 61,719 and $ 33,826 as of September 30, 2021 and December 31, 2020, respectively.

In connection with the New Revolver, we paid certain arrangement fees and other fees of approximately $ 300 , which were capitalized as deferred debt issuance costs and will be amortized to interest expense over the life of the New Revolver.

For the three months ended September 30, 2021 and 2020, interest expense under the Capital One Revolvers was $ 318 and $ 239 , respectively.

For the nine months ended September 30, 2021 and 2020, interest expense under the Capital One Revolvers was $ 827 and $ 785 , respectively.

The outstanding balance as of September 30, 2021 and December 31, 2020 was $ 8,281 and $ 36,174 , respectively.

In April 2016, the Company entered into an agreement with Veritex Community Bank to secure an additional revolving line of credit of $ 15,000 (“Revolver 2”).

On May 12, 2017, the Company entered into an agreement to increase the line of credit to $ 20,000 .

On October 15, 2018, Revolver 2 was amended to extend the maturity date from April 4, 2019 to April 4, 2021.

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.

Revolver 2 requires the Company to comply with certain quarterly financial and non-financial covenants.

Amounts available under Revolver 2 are subject to a formula based on eligible inventory.

The interest rate in effect as of March 31, 2020 was 4.17 %.

The amount of available credit under Revolver 2 was $ 12,028 at March 31, 2020.

For the three and nine months ended September 30, 2020 interest expense was $ 0 and $ 17 .

In April 2020, this note was paid in full and the facility was terminated.

On April 10, 2020, the Company entered into a loan with Peoples Bank as the lender in an aggregate principal amount of $ 6,546 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act.

The PPP Loan was evidenced by a promissory note dated April 10, 2020 and had a maturity date of April 10, 2022.

The PPP Loan had an interest rate of 1.00 % per annum, with the first six months of interest deferred.

Principal and interest were payable monthly commencing on November 10, 2020 and could be prepaid by the Company at any time prior to maturity with no prepayment penalties.

On May 1, 2020, this loan was paid in full.

The amount of available credit under the New Revolver was $ 64,923 and $ 61,841 as of March 31, 2022 and December 31, 2021, respectively.

In connection with the New Revolver, the Company paid certain arrangement fees and other fees of approximately $ 295 , which were capitalized as unamortized debt issuance costs and will be amortized to interest expense over the life of the New Revolver.

For the three months ended March 31, 2022 and 2021, interest expense under the New Revolver was $ 56 and $ 226 , respectively.

The outstanding balance as of March 31, 2022 and December 31, 2021 was $ 5,224 and $ 8,159 , respectively.

The New Revolver requires the Company to comply with certain financial and non-financial covenants.

As of March 31, 2022, the Company was in compliance with all financial covenants, including that it maintain a tangible net worth of at least $ 120,000 and that it maintain a ratio of debt to EBITDA of 4 to 1, or less.

As of March 31, 2022, the Company was not in compliance with certain non-financial covenants and obtained a waiver from Capital One.

PILOT Agreement

In December 2016, the Company entered into a Payment in Lieu of Taxes (“PILOT”) agreement commonly offered in Georgia by local community development programs to encourage industry development.

The net effect of the PILOT agreement is to provide the Company with incentives through the abatement of local, city and county property

LEGACY HOUSING CORPORATION

1 unchanged sentence

(dollars in thousands)

PILOT Agreement

In December 2016, the Company entered into a Payment in Lieu of Taxes (“PILOT”) agreement commonly offered in Georgia by local community development programs to encourage industry development.

The net effect of the PILOT agreement is to provide the Company with incentives through the abatement of local, city and county property taxes and to provide financing for improvements to the Company’s Georgia plant (the “Project”).

taxes and to provide financing for improvements to the Company’s Georgia plant (the “Project”).

In connection with the PILOT agreement, the Putman County Development Authority provides a credit facility for up to $ 10,000 , which can be drawn upon to fund Project improvements and capital expenditures as defined in the agreement.

2 unchanged sentences

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

As of September 30, 2021 and December 31, 2020, the Company had not drawn on this credit facility.

As of March 31, 2022, the Company had not drawn on this credit facility.

SHARE-BASED COMPENSATION

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Stock options may be granted with a contractual life of up to ten years .

At September 30, 2021, the Company had 9.7 million shares available for grant under the Compensation Plan.

At March 31, 2022, the Company had 9.2 million shares available for grant under the Compensation Plan.

In February 2019, the Company granted 120,000 restricted shares of its common stock to members of senior management.

2 unchanged sentences

During the second quarter of 2020, 42,857 of these restricted shares were forfeited due to the departure of a member of senior management.

In February 2019, the Company granted 2,936 restricted shares of its common stock to the independent directors on the Company’s Board of Directors.

The shares were granted on February 7, 2019 and had a grant date fair value of $ 40 .

The shares became fully vested on December 13, 2019.

In August 2019, the Company granted 39,526 restricted shares of its common stock to a member of senior management.

The shares were granted on August 2, 2019 and had a grant date fair value of $ 496 .

The shares vest at a rate of 20.0 % annually, beginning on August 2, 2020, becoming fully vested on August 2, 2024.

This grant was canceled during the second quarter of 2020 due to the departure of the member of senior management.

In March 2020, the Company granted 1,903 restricted shares of its common stock to the independent directors on the Company’s Board of Directors.

The shares were granted on March 27, 2020 and had a grant date fair value of $ 18 .

The shares became fully vested on December 13, 2020.

In December 2020, the Company granted 2,022 restricted shares of its common stock to the independent directors on the Company’s Board of Directors.

1 unchanged sentence

The shares become fully vested on October 4, 2021.

In November 2021, the Company granted 1,202 restricted shares of its common stock to the independent directors on the Company’s Board of Directors.

The shares were granted on November 30, 2021 and had a grant date fair value of $ 30 .

The shares become fully vested on October 24, 2022.

In January 2022, the Company granted 150,000 restricted shares of its common stock to the Executive Chairman of the Company pursuant to an amended and restated employment agreement.

The shares were granted on January 6, 2022 and had a grant date fair value of $ 3,741 .

The shares became fully vested upon grant.

On January 6, 2022, the Company gave contingent equity awards of 350,000 shares of the Company’s restricted stock to the Executive Chairman of the Company pursuant to an amended and restated employment agreement.

An equity award of 175,000 shares will be granted if the Company’s stock price reaches and remains for a period of fifteen consecutive market days at a closing price of $ 36 per share (the “$ 36 Equity Award”).

The $ 36 Equity Awards had a grant date fair value of $ 1,412 and fifty percent of the shares shall be vested when the consecutive closing price condition is met and fifty percent shall vest on June 16, 2024, so long as the Executive Chairman is employed by the Company on that date.

An additional equity award of 175,000 shares of the Company’s restricted stock will be granted if the Company’s stock price reaches and remains for a period of fifteen consecutive market days at a closing price of $ 48 per share (the “$ 48 Equity Award”).

The $ 48 Equity Awards had a grant date fair value of $ 683 and fifty percent of the shares shall be vested when the consecutive closing price condition is met and fifty percent shall vest on June 16, 2024, so long as the Executive Chairman is employed by the Company on that date.

As of March 31, 2022, none of the conditions have been met for the vesting of the $ 36 Equity Awards or the $ 48 Equity Awards.

LEGACY HOUSING CORPORATION

5 unchanged sentences

Nonvested, January 1, 2022

Nonvested, September 30, 2021

As of September 30, 2021, approximately 36,000 RSUs remained unvested.

Unrecognized compensation expense related to these RSUs at September 30, 2021 was $ 392 and is expected to be recognized over 3.36 years.

The Company granted 58,694 incentive stock options to a member of senior management.

The options were granted on February 7, 2019 at an exercise price of $ 13.63 per share.

The options vest at a rate of 12.5 % annually, beginning on February 7, 2019, and becoming fully vested on February 7, 2026.

All options expire ten years after the date of grant.

Weighted-average assumptions used in the Black-Scholes option pricing model for stock options granted were as follows:

risk free interest rate of 2.41 %;

dividend yield of 0.00 %;

expected volatility of common stock of 65.0 % and expected life of options of 7.9 years.

During the second quarter of 2020, these options were forfeited due to the departure of the senior manager.

Nonvested, March 31, 2022

As of March 31, 2022, approximately 377,000 RSUs remained unvested.

Unrecognized compensation expense related to these RSUs at March 31, 2022 was $ 2,238 and is expected to be recognized over 2.30 years.

The Company granted 34,626 incentive stock options to a member of senior management.

6 unchanged sentences

expected volatility of common stock of 75.0 % and expected life of options of 6.5 years.

During the first quarter of 2022, 27,701 of these options were forfeited due to the departure of the senior manager.

The Company granted 55,490 incentive stock options to a member of management.

13 unchanged sentences

Outstanding, January 1, 2022, nonvested

Outstanding, September 30, 2021, nonvested

Exercisable, September 30, 2021

Outstanding, March 31, 2022, nonvested

Exercisable, March 31, 2022

As of March 31, 2022, approximately 55,000 options remained nonvested.

Unrecognized compensation expense related to these options at March 31, 2022 was $ 740 and is expected to be recognized over 9.49 years.

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

The registration statement became effective upon filing.

LEGACY HOUSING CORPORATION

1 unchanged sentence

(dollars in thousands)

As of September 30, 2021, approximately 83,000 options remained nonvested.

Unrecognized compensation expense related to these options at September 30, 2021 was $ 1,011 and is expected to be recognized over 9.98 years.

The registration statement became effective upon filing.

The provision for income tax expense for the nine months ended September 30, 2021 and 2020 was $ 7,581 and $ 8,097 , respectively.

The effective tax rate for the nine months ended September 30, 2021 was 17.3 % and 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 nine months ended September 30, 2020 was 22.7 % and differs from the federal statutory rate of 21 % due to state income taxes.

The provision for income tax expense for the three months ended March 31, 2022 and 2021 was $ 3,558 and $ 2,208 , respectively.

The effective tax rate for the three months ended March 31, 2022 was 18.1 % and 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 three months ended March 31, 2021 was 17.1 % and 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.

COMMITMENTS AND CONTINGENCIES

3 unchanged sentences

The Company will adjust its self-insured medical benefits reserve based on actual experience, estimated costs and changes to assumptions.

At September 30, 2021 and December 31, 2020, the Company accrued a $ 323 and $ 110 , respectively, liability for incurred but not reported claims.

At March 31, 2022 and December 31, 2021, the Company accrued a $ 326 and $ 373 , respectively, liability for incurred but not reported claims.

The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products.

1 unchanged sentence

The Company’s obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer.

The maximum amount for which the Company was liable under such agreements totaled $ 5,292 and $ 2,967 at September 30, 2021 and December 31, 2020, respectively, without reduction for the resale value of the homes.

The Company considers its obligations on current contracts to be insignificant and accordingly have not recorded any reserve for repurchase commitment as of September 30, 2021 or December 31, 2020.

The maximum amount for which the Company was liable under such agreements totaled $ 14,749 and $ 4,908 at March 31, 2022 and December 31, 2021, respectively, without reduction for the resale value of the homes.

The Company considers its obligations on current contracts to be insignificant and accordingly have not recorded any reserve for repurchase commitment as of March 31, 2022 and December 31, 2021.

The Company leases facilities under operating leases that typically have 10-year terms.

These leases usually offer the Company a right of first refusal that affords the Company the option to purchase the leased premises under certain terms in the event the landlord attempts to sell the leased premises to a third party.

Rent expense was $ 140 and $ 135 for the three months ended September 30, 2021, and 2020, respectively, and $ 436 and $ 423 for the nine months ended September 30, 2021, and 2020, respectively.

Rent expense was $ 163 and $ 151 for the three months ended March 31, 2022 and 2021, respectively.

The Company also subleases properties to third parties, ranging from 3-year to 11-year terms with various renewal options.

Rental income from the subleased property was approximately $ 82 and $ 90 for the three months ended September 30, 2021 and 2020, respectively, and $ 263 and $ 264 for the nine months ended September 30, 2021 and 2020, respectively.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Future minimum lease commitments under all non-cancelable operating leases for each of the next five years at September 30, 2021, are as follows:

Rental income from the subleased property was approximately $ 82 and $ 91 for the three months ended March 31, 2022 and 2021, respectively.

See Note 5 – Leases, for a schedule of the Company’s future minimum lease commitments.

Legal Matters

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Certain of the claims pending against the Company in these proceedings allege, among other things, breach of contract and warranty, product liability and personal injury.

The Company has determined that it is probable that it has some liability related to the claims.

The Company has included legal reserves of $ 2,707 and $ 2,764 as of March 31, 2022 and December 31, 2021, respectively, in accrued liabilities on the accompanying balance sheets.

Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s financial position, liquidity or results of operations.

However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company’s financial position, liquidity or results of operations in any future reporting periods.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

5 unchanged sentences

This interest rate swap agreement matured on May 11, 2020.

Included in the statements of operations for the nine months ended September 30, 2020 is a loss of $ 15 which was the result of the change in the fair value of the interest rate swap agreement.

Fair Value Measurements

8 unchanged sentences

(3) Inputs other than quoted prices that are observable;

(4) Inputs that are derived principally from or corroborated

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

by observable market data by correlation or other means.

(4) Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability.

6 unchanged sentences

Management reviewed the fair values for the instruments as provided by the lender and determined the related asset and liability to be an accurate estimate of future gains and losses to the Company.

The Company is not a party to any interest rate swaps as of September 30, 2021.

The Company is not a party to any interest rate swaps as of March 31, 2022.

Fair Value of Financial Instruments

2 unchanged sentences

This is considered a Level I valuation technique.

The lines of credit, notes payable, part of the MHP Notes and part of the other note receivables have variable interest rates that reflect market rates and their fair value approximates their carrying value.

This is considered a Level II valuation technique.

The Company also assessed the fair value of the consumer loans receivable, the fixed rate MHP Notes and the portion of other note receivables with fixed rates based on the discounted value of the remaining principal and interest cash flows.

The Company determined that the fair value of the consumer loan portfolio was approximately $ 123,000 compared to the book value of $ 121,637 as of September 30, 2021, and a fair value of approximately $ 115,000 compared to the book value of $ 111,920 as of December 31, 2020.

The Company determined that the fair value of the fixed rate MHP Notes was approximately $ 81,000 compared to the book value of $ 82,118 as of September 30, 2021, and a fair value of approximately $ 108,000 compared to the book value of $ 109,806 as of December 31, 2020.

The Company determined that the fair value of the other notes was approximately $ 33,859 compared to the book value of $ 34,066 as of September 30, 2021, and a fair value of approximately $ 15,000 compared to the book value of $ 15,104 as of December 31, 2020.

This is a Level III valuation technique.

The lines of credit, notes payable, part of the MHP Notes and part of the other

LEGACY HOUSING CORPORATION

1 unchanged sentence

(dollars in thousands)

note receivables have variable interest rates that reflect market rates and their fair value approximates their carrying value.

This is considered a Level II valuation technique.

The Company determined that the fair value of the consumer loan portfolio was approximately $ 127,600 compared to the book value of $ 127,259 as of March 31, 2022, and a fair value of approximately $ 125,600 compared to the book value of $ 125,623 as of December 31, 2021.

The Company determined that the fair value of the fixed rate MHP Notes was approximately $ 92,000 compared to the book value of $ 97,782 as of March 31, 2022, and a fair value of approximately $ 83,000 compared to the book value of $ 83,773 as of December 31, 2021.

The Company determined that the fair value of the other notes was approximately $ 33,300 compared to the book value of $ 38,748 as of March 31, 2022, and a fair value of approximately $ 38,500 compared to the book value of $ 38,886 as of December 31, 2021.

This is a Level III valuation technique.

EARNINGS PER SHARE

3 unchanged sentences

Three months ended

Nine months ended

September 30,

Net income (in 000's)

5 unchanged sentences

Earnings per share attributable to Legacy Housing Corporation

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

RELATED PARTY TRANSACTIONS

Bell Mobile Homes, a retailer owned by one of the Company’s significant owners, purchases manufactured homes from the Company.

Accounts receivable balances due from Bell Mobile Homes were $ 124 and $ 1 as of September 30, 2021 and December 31, 2020, respectively.

Accounts payable balances due to Bell Mobile Homes for maintenance and related services were $ 84 and $ 61 as of September 30, 2021 and December 31, 2020, respectively.

Home sales to Bell Mobile Homes were $ 1,750 and $ 383 for the three months ended September 30, 2021 and 2020, respectively and $ 3,143 and $ 1,800 for the nine months ended September 30, 2021 and 2020, respectively.

Accounts receivable balances due from Bell Mobile Homes were $ 139 and $ 1 as of March 31, 2022 and December 31, 2021, respectively.

Accounts payable balances due to Bell Mobile Homes for maintenance and related services were $ 69 and $ 49 as of March 31, 2022 and December 31, 2021, respectively.

Home sales to Bell Mobile Homes were $ 632 and $ 699 for the three months ended March 31, 2022 and 2021, respectively.

Shipley Bros., Ltd.

(“Shipley Bros.”), a retailer owned by one of the Company’s significant shareholders, purchases manufactured homes from the Company.

Accounts receivable balances due from Shipley Bros.

were $ 424 and zero as of March 31, 2022 and December 31, 2021, respectively.

Home sales to Shipley Bros.

were $ 693 and $ 914 for the three months ended March 31, 2022 and 2021, respectively.

There were no accounts payable balances due to Shipley Bros.

as of March 31, 2022 and December 31, 2021, respectively.

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

SUBSEQUENT EVENTS

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

On May 30, 2022, the Company submitted to Nasdaq a plan to regain compliance with Nasdaq Listing Rule 5250(c)(1) (the “Rule”) regarding the Company’s failure to file timely Form 10-K for the year ended December 31, 2021 and Form 10-Q for the period ended March 31, 2022.

On June 9, 2022, the Company received a response from Nasdaq informing the Company that Nasdaq granted an exception to the filing requirements set forth in the Rule that allows the Company to file these reports and any other required filings as required by the Rule on or before September 27, 2022.

On August 3, 2022, the Company filed Form 10-K for the year ended December 31, 2021.

On August 11, 2022, the Company received notice from Nasdaq regarding the Company’s failure to file timely Form 10-Q for the period ending June 30, 2022.

As a result of this delinquency, the Company must submit an update to its original plan to regain compliance with the Rule.

The updated plan must be submitted to Nasdaq by September 12, 2022.

On June 7, 2022, the Company entered into an employment agreement (the “Employment Agreement”) with Duncan Bates, to serve as President and Chief Executive Officer of the Company.

The Employment Agreement provides for a term that commences on June 7, 2022 and expires on June 7, 2027 (the “Initial Employment Period”).

The Employment Agreement provides for Mr.

Bates to receive a base salary of $ 300 per year and a signing bonus of 14,700 shares of restricted stock, which shall vest 50 % on June 7, 2023 and 50 % on June 7, 2024.

Bates also received 62,460 incentive stock options, an option to purchase 300,000 shares of the Company’s common stock at an exercise price of $ 36 per share and an option to purchase 600,000 shares of the Company’s common stock at an exercise price of $ 48 per share.

The incentive stock options have an exercise price of $ 16.01 per share.

The incentive stock options and the options to purchase shares vest at a rate of 10.0 % annually, beginning on June 7, 2023, becoming fully vested on June 7, 2032.

On June 7, 2022, the Company granted 62,460 incentive stock options to Ronald Arrington, the Chief Financial Officer.

The options were granted on June 7, 2022 at an exercise price of $ 16.01 per share.

The options vest at a rate of 10.0 % annually, beginning on June 7, 2023, and becoming fully vested on June 7, 2032.

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

The letter stated that the Company’s New Revolver was in default.

The default condition occurred due to the Company’s failure to timely file the Form 10-K and deliver certain financial statement to Capital One, N.A.

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

On August 24, 2022, the Company received a Notice of Default and Partial Suspension of Loan Commitments from Capital One, N.A.

The notice stated that the July 28, 2022 forbearance agreement had been terminated and that Capital One, N.A.

was permitted to suspend $ 50,000 of the $ 70,000 loan commitment in the New Revolver.

As a result, the available line of credit in the New Revolver is $ 20,000 .

The Company is not currently using any of the available credit under the New Revolver.

In connection with the preparation of these financial statements, an evaluation of subsequent events was performed through the date of filing.

The Company recently updated its management of escrow collections.

Historically, escrow collections were deposited in an unsegregated deposit account subject to the Company's credit agreement with Capital One, N.A.

On June 28, 2022, the Company segregated escrow collections by purchasing an $ 8.5 M certificate of deposit that is not subject to the credit agreement.

The certificate of deposit principal amount will be adjusted periodically.

The Company will continue to hold escrow collections separately from its other operating funds where required by law.

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 1. Financial Statements