What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-09-12 compared with 2021-11-09 · 61 added, 119 removed, 150 unchanged (55% of the section changed)

4 unchanged sentences

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 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 June 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 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, 2021, we sold 1,044 and 2,709 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, 2020, we sold 961 and 2,866 home sections, respectively.

For the three months ended March 31 , 2022, we sold 1,004 home sections (which are entire homes or single floors that are combined to create complete homes) and for the three months ended March 31 , 2021, we sold 720 home sections.

The Company has one reportable segment.

12 unchanged sentences

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

For the nine months ended September 30, 2021, approximately 47% of our manufactured homes were sold in Texas, followed by 15% in Georgia, 10% in Louisiana and 6% in Alabama.

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 three months ended March 31, 2022, approximately 49% of our manufactured homes were sold in Texas, followed by 11% in Georgia, 8% in Florida, 7% in Louisiana and 5% in Arizona.

For the three months ended March 31, 2021, approximately 49% of our manufactured homes were sold in Texas, followed by 11% in Georgia, 8% in Alabama, 6% in Louisiana and 5% in Kansas.

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

As of September 30, 2021, these properties include the following (dollars in 000’s):

As of March 31 , 2022, these properties include the following (dollars in 000’s):

Date of Acquisition

14 unchanged sentences

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.

increase production at the Georgia facility over time, particularly in response to orders increasingly being generated from new markets in Florida and the Carolinas.

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.

13 unchanged sentences

The following discussion should be read in conjunction with the information set forth in the financial statements and the accompanying notes appearing elsewhere in this Form 10-Q.

Comparison of Three Months ended September 30, 2021 and 2020 (in thousands)

Comparison of Three Months ended March 31, 2022 and 2021 (in thousands)

Three months ended

September 30,

Product sales

13 unchanged sentences

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

Product sales increased $11.7 million, or 32.1%, during the three months ended September 30, 2021 as compared to the same period in 2020.

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

Product sales increased $19.5 million, or 60.5%, during the three months ended March 31, 2022 as compared to the same period in 2021.

This increase was driven by higher average sales price and an increase in unit volumes.

Net revenue attributable to our factory-built housing consisted of the following during the three months of 2022 and 2021:

Three months ended

September 30,

(in thousands)

2 unchanged sentences

Net revenue per product sold

For the three months ended September 30, 2021, our net revenue per product sold increased because of increases to our product prices in the third quarter of 2021 due to rising material and labor costs, which resulted in higher home sales prices and more revenue generated per home sold.

For the three months ended March 31, 2022, our net revenue per product sold increased because of the increase in units sold and increases to our product prices in the first quarter of 2022 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, retail store sales and other product sales partially offset by a decline in commercial sales.

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

Consumer and MHP loans interest income grew $0.8 million, or 12.9%, during the three months ended September 30, 2021 as compared to the same period in 2020 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio.

Between September 29, 2021 and September 30, 2020 our MHP Note portfolio increased by $15.5 million and the consumer loan portfolio increased by $13.1 million.

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

As a result of this payment, MHP loan interest income is expected to decrease in the fourth quarter of 2021.

Other revenue primarily consists of consignment fees, commercial lease rents and servicer fee revenue and increased $0.2 million, or 21.8% during the three months ended September 30, 2021 as compared to the same period in 2020.

The cost of product sales increased $5.6 million, or 19.9%, during the three months ended September 30, 2021 as compared to the same period in 2020.

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 $0.5 million, or 11.5%, during the three months ended September 30, 2021 as compared to the same period in 2020.

This increase was primarily due to a $0.8 million increase in salaries and incentive costs and a $0.1 million increase in depreciation expense partially offset by a $0.4 million decrease in advertising expense.

Consumer and MHP loans interest income grew $0.1 million, or 1.9%, during the three months ended March 31, 2022 as compared to the same period in 2021 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio.

Between March 31, 2022 and March 31, 2021 our MHP Note portfolio decreased by $29.9 million and the consumer loan portfolio increased by $13.6 million.

On September 30, 2021, we collected $44.9

million in principal payment from one of our 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 consignment fees, commercial lease rents and servicer fee revenue and increased $0.3 million, or 33.9% during the three months ended March 31, 2022 as compared to the same period in 2021.

The cost of product sales increased $11.7 million, or 53.3%, during the three months ended March 31, 2022 as compared to the same period in 2021.

The increase in costs is primarily related to an increase in units sold and increases in the cost of materials and labor in 2022 which was materially passed along to our end-customer.

Selling, general and administrative expenses increased $2.9 million, or 59.8%, during the three months ended March 31, 2022 as compared to the same period in 2021.

This increase was primarily due to a $4.2 million increase in salaries and incentive costs and a $0.4 million increase in legal expense partially offset by a $0.5 million decrease in loan losses, a $0.4 million decrease in warranty costs, a $0.2 million decrease in consulting and professional fees and a net $0.6 million decrease in other miscellaneous costs.

Dealer incentive expense decreased $0.2 million, or 40.6% in 2022 as compared to 2021.

Other income (expense), net increased $0.3 million during the three months ended September 30, 2021 as compared to the same period in 2020.

This increase was primarily due to a $0.3 million increase in non-operating interest income offset by a $0.1 million increase in interest expense.

Income tax expense was $3.3 million during the three months ended September 30, 2021 compared to $2.5 million for the same period in 2020.

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

Comparison of Nine Months ended September 30, 2021 and 2020 (in thousands)

Nine months ended

September 30,

Product sales

Consumer and MHP loans interest

Total net revenue

Operating expenses:

Cost of product sales

Selling, general administrative expenses

Dealer incentive

Income from operations

Other income (expense)

Non‑operating interest income

Miscellaneous, net

Gain on settlement, net

Interest expense

Income before income tax expense

Income tax expense

Product sales increased $14.7 million, or 13.8%, during the nine months ended September 30, 2021 as compared to the same period in 2020.

This increase 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 during the nine months of 2021 and 2020:

Nine Months Ended

September 30,

(in thousands)

Products sold

Total products sold

Net revenue per product sold

For the nine months ended September 30, 2021, our net revenue per product sold increased because of increases to our product prices during the first three quarters of 2021 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 retail store sales and other product sales partially offset by a decline in commercial sales.

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

Consumer and MHP loans interest income grew $1.7 million, or 9.0%, during the nine months ended September 30, 2021 as compared to the same period in 2020 and is related to our increase in outstanding MHP Note portfolio and consumer loan portfolio.

Between September 29, 2021 and September 30, 2020 our MHP Note portfolio increased by $15.5 million and the consumer loan portfolio increased by $13.1 million.

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

As a result of this payment, MHP loan interest income is expected to decrease in the fourth quarter of 2021.

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

Other revenue increased $0.5 million or 23.8% during the nine months ended September 30, 2021 as compared to the same period in 2020 primarily due to a $0.7 million increase in commercial lease rents partially offset by a $0.1 million decrease in consignment fee revenue.

The cost of product sales increased $7.6 million, or 9.7%, during the nine months ended September 30, 2021 as compared to the same period in 2020.

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 $0.8 million, or 5.7%, during the nine months ended September 30, 2021 as compared to the same period in 2020.

This increase was primarily due to $1.8 million increase in salaries and incentive costs, a $0.4 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, and a net $0.2 million increase in other miscellaneous costs.

These increases were partially offset by a $0.7 million decrease in warranty costs, a $0.7 decrease in bad debt expense, a $0.6 million decrease in advertising and promotions and a $0.2 million decrease in legal expenses.

Dealer incentive expense increased $0.1 million, or 7.4% in 2021 as compared to 2020.

Other income (expense), net decreased $0.3 million, or 28.0%, during the nine months ended September 30, 2021 as compared to the same period in 2020.

This decrease was primarily due to 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, partially offset by an increase of $0.6 million in non-operating interest income, an increase of $0.2 million in miscellaneous income, net.

Income tax expense during the nine months ended September 30, 2021 was $7.6 million compared to $8.1 million for the same period in 2020.

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% primarily due to state income taxes.

Other income (expense), net increased $1.2 million during the three months ended March 31, 2022 as compared to the same period in 2021.

This increase was primarily due to a $0.6 million increase in non-operating interest income, a $0.4 million increase in miscellaneous income, net and a decrease of $0.2 million in interest expense.

Income tax expense was $3.6 million during the three months ended March 31, 2022 compared to $2.2 million for the same period in 2021.

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.

Liquidity and Capital Resources

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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, 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.

As of September 30, 2021, we had approximately $0.9 million in cash and cash equivalents, compared to $0.8 million as of December 31, 2020.

In the first quarter of 2020, 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.

We believe that cash flow from operations, cash and cash equivalents at March 31, 2022, 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.

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 March 31, 2022, we had approximately $2.5 million in cash and cash equivalents, compared to $1.0 million as of December 31, 2021.

Cash Flow Activities

Nine Months Ended

September 30,

Three Months Ended

(in thousands)

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash used in financing activities

Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net change in cash and cash equivalents

1 unchanged sentence

Cash and cash equivalents at end of period

Comparison of Cash Flow Activities from September 30, 2021 to September 30, 2020

Net cash provided by operating activities increased $57.8 million during the nine months ended September 30, 2021, compared to the comparable period in 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 $22.3 million in 2021 was primarily attributable to $4.6 million used for the acquisition of property plant and equipment and $27.1 million used for loans to third parties for the development of manufactured housing parks.

These were offset by collections of $7.8 million of loans we made to third parties for the development of manufactured housing parks and collections of $1.6 million from our purchased consumer loans.

Net cash used in financing activities of $27.8 million in 2021 was attributable to net payments of $27.9 million on our lines of credit offset by $0.1 million received from the exercise of stock options.

Comparison of Cash Flow Activities from March 31, 2022 to March 31, 2021

Net cash used in operating activities decreased $0.4 million during the three months ended March 31, 2022, compared to the comparable period in 2021, primarily as a result of increased MHP originations, increased dealer inventory loan originations net of collections, increased volume of consumer loan originations net of principal collections, increased inventories, increased accounts receivable and increase in other assets.

The increase in cash used in operating activities was partially offset by increased accounts payable, increase in customer deposits and increased dealer incentive liability.

Net cash provided by investing activities of $2.7 million in 2022 was primarily attributable to $5.1 million of collections related to loans we made to third parties for the development of manufactured housing parks and collections of $0.1 million from our purchased consumer loans.

These were offset by $1.6 million used for loans to third parties for the development of manufactured housing parks and $0.3 million used for the acquisition of property plant and equipment.

Net cash used in financing activities of $0.2 million in 2022 was attributable to net payments of $2.9 million on our lines of credit offset by $2.7 million of proceeds from other liabilities.

Net cash provided by financing activities of $9.2 million in 2021 was attributable to net proceeds of $9.2 million on our lines of credit.

Capital One Revolver.

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

The interest rate in effect as of September 30 , 2021 was 2.14%.

The interest rate in effect as of March 31, 2022 was 2.23%.

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 as of September 30, 2021.

The amount of available credit under the New Revolver was $64,923 as of March 31, 2022.

In connection with the New Revolver, we 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 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.

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 (“Revolver 2”).

On May 12, 2017, we entered into an agreement to increase the maximum borrowing availability under Revolver 2 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 rates 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 nine months ended September 30, 2020 interest expense was $17.

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

On April 10, 2020, we 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 us at any time prior to maturity with no prepayment penalties.

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

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 $5,077 and $7,993, 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.

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 10K 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.

PILOT Agreement.

5 unchanged sentences

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

As of September 30, 2021, we had not drawn down on this credit facility.

As of March 31, 2022, we had not drawn down on this credit facility.

Contractual Obligations

The following table is a summary of contractual cash obligations as of September 30, 2021:

The following table is a summary of contractual cash obligations as of March 31, 2022:

Payments Due by Period (in thousands)

7 unchanged sentences

Our obligation under this repurchase agreement ceases upon the purchase of the home by the retail customer.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $5,292 and $2,967 as of September 30, 2021 and December 31, 2020, respectively, without reduction for the resale value of the homes.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $14,749,000 and $4,908,000 as of March 31, 2022 and December 31, 2021, 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, 2021.

We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of March 31, 2022.

Critical Accounting Estimates

5 unchanged sentences

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our September 30, 2021 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our March 31, 2022 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

Emerging Growth Company Status

6 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis