Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial statements and accompanying notes and the information contained in other sections of this Form 10-Q. It contains forward-looking statements that involve risks and uncertainties, and is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those anticipated by our management in these forward-looking statements as a result of various factors, including those discussed in this Form 10-Q and in our Registration Statement on Form S-1, particularly under the heading “Risk Factors.”
Overview
Legacy Housing Corporation builds, sells and finances manufactured homes and “tiny houses” that are distributed through a network of independent retailers and company-owned stores and are sold directly to manufactured housing communities. We are the 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 March 31 , 2022. 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 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. All of our activities are interrelated, and each activity is dependent and assessed based on how each of the activities of Company supports the others. For example, the sale of manufactured homes includes providing transportation and consignment arrangements with dealers. We also provide financing options to the customers to facilitate such sale of homes. In addition, the sale of homes is directly related to financing provided by us. Accordingly, all significant operating and strategic decisions by the chief operating decision-maker, the Executive Chairman of the Board, are based upon analyses of our company as one segment or unit.
We believe our company is one of the most vertically integrated in the manufactured housing industry, allowing us to offer a complete solution to our customers, from manufacturing custom-made homes using quality materials and distributing those homes through our expansive network of independent retailers and company-owned distribution locations, to providing tailored financing solutions for our customers. Our homes are constructed in the United States at one of our three manufacturing facilities in accordance with the construction and safety standards of the U.S. Department of Housing and Urban Development (“HUD”). Our factories employ high-volume production techniques that allow us to produce, on average, approximately 75 home sections, or 62 fully-completed homes depending on product mix, in total per week. We use quality materials and operate our own component manufacturing facilities for many of the items used in the construction of our homes. Each home can be configured according to a variety of floor plans and equipped with such features as fireplaces, central air conditioning and state-of-the-art kitchens.
Our homes are marketed under our premier “Legacy” brand name and currently are sold primarily across 15 states through a network of 71 independent retail locations, 13 company-owned retail locations and through direct sales to owners of manufactured home communities. Our 13 company-owned retail locations, including 11 Heritage Housing stores and two Tiny House Outlet stores exclusively sell our homes. For the 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.
We offer three types of financing solutions to our customers. We provide floor plan financing for our independent retailers, which takes the form of a consignment arrangement between the retailer and us. We also provide consumer financing for our products which are sold to end-users through both independent and company-owned retail locations, and we provide financing solutions to manufactured housing community owners that buy our products for use in their manufactured housing communities. Our ability to offer competitive financing options at our retail locations
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provides us with several competitive advantages and allows us to capture sales which may not have otherwise occurred without our ability to offer consumer financing.
Corporate Conversion
Prior to January 1, 2018, we were a Texas limited partnership named Legacy Housing, Ltd. Effective January 1, 2018, we converted into a Delaware corporation pursuant to a statutory conversion, or the Corporate Conversion, and changed our name to Legacy Housing Corporation. All of our outstanding partnership interests were converted on a proportional basis into shares of common stock of Legacy Housing Corporation. Effective December 31, 2019, the Company reincorporated from a Delaware corporation to a Texas corporation. For more information, see “Corporate Conversion” in Note 1.
Following the Corporate Conversion, Legacy Housing Corporation continues to hold all of the property and assets of Legacy Housing, Ltd. and all of the debts and obligations of Legacy Housing, Ltd. continue as the debts and obligations of Legacy Housing Corporation. The purpose of the Corporate Conversion was to reorganize our corporate structure so that the top-tier entity in our corporate structure is a corporation rather than a limited partnership and so that our existing owners own shares of our common stock rather than partnership interests in a limited partnership. Except as otherwise noted, the financial statements included in this Form 10-Q are those of Legacy Housing Corporation.
Factors Affecting Our Performance
We believe that the growth of our business and our future success depend on various opportunities, challenges, trends and other factors, including the following:
● We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions. As of March 31 , 2022, these properties include the following (dollars in 000’s):
Location
Description
Date of Acquisition
Land
Improvements
Total
Bastrop County, Texas
400 Acres
April 2018
$
4,400
$
1,001
$
5,401
Bexar County, Texas
100 Acres
November 2018
1,300
114
1,414
Horseshoe Bay, Texas
133 Acres
Various 2018-2019
2,431
1,970
4,401
Johnson County, Texas
91.5 Acres
July 2019
445
16
461
Venus, Texas
50 Acres
August 2019
422
7
429
Wise County, Texas
81.5 Acres
September 2020
889
-
889
Bexar County, Texas
233 Acres
February 2021
1,550
102
1,652
$
11,437
$
3,210
$
14,647
● We also expect to provide financing solutions to a select group of our manufactured housing community-owner customers in a manner that includes developing new sites for products in or near urban locations where there is a shortage of sites to place our products. These solutions will be structured to give us an attractive return on investment when coupled with the gross margin we expect to make on products specifically targeted for sale to these new manufactured housing communities.
● Finally, our financial performance will be impacted by our ability to fulfill current orders for our manufactured homes from dealers and customers. Currently, our two Texas manufacturing facilities are operating at near peak capacity, with limited ability to increase the volume of homes produced at those plants. Our Georgia manufacturing facility has unutilized square footage available and with additional investment can add capacity to increase the number of homes that can be manufactured. We intend to increase production at the Georgia facility over time, particularly in response to orders increasingly being generated from new markets in Florida and the Carolinas. In order to maintain our growth, we will need to 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.
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● The coronavirus pandemic is an evolving threat to the economy and all businesses. At this time both the duration of the pandemic and the magnitude of the economic consequences are unknown. Risks to the Company include but are not limited to:
o increased loan losses or deferred loan payments as loan obligors suffer cash flow issues resulting from reduced employment, reduced rental income or unit sales, or other factors;
o reduced sales volume as potential customers are unable to shop for new homes or cannot qualify for a home purchase, retail dealers or company stores reduce or stop operations, or MHP owners reduce their future home purchases;
o reduced production resulting from factors such as the spread of the illness through the Company’s workforce or the impact of government interventions on labor force participation, reduced product demand, or government-mandated closures of our factories, company-owned stores, or retail lots of independent dealers who carry our products;
o delays in development projects as zoning, regulatory, and permitting decisions are likely to be postponed and the expected negative impact of the pandemic on the construction industry;
o reduced raw material availability related to global supply chain disruption from the pandemic, including possible border closures;
o decreased cash flow from operations which could negatively affect our liquidity;
o an outbreak of illness among our management and accounting staff could negatively affect our ability to maintain operations, operate our financial systems, delay our statutory reporting, and reduce our internal control of financial reporting.
We continue to monitor government responses to support the economy and evaluate how those actions might mitigate the risks noted above. At this time, we believe that the pandemic will have a negative effect on our financial results that could range from minor to material.
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Results of Operations
The following discussion should be read in conjunction with the information set forth in the financial statements and the accompanying notes appearing elsewhere in this Form 10-Q.
Comparison of Three Months ended March 31, 2022 and 2021 (in thousands)
Three months ended
March 31,
2022
2021
$ change
% change
Net revenue:
Product sales
$
51,787
$
32,274
$
19,513
60.5
%
Consumer and MHP loans interest
6,765
6,638
127
1.9
%
Other
1,376
1,028
348
33.9
%
Total net revenue
59,928
39,940
19,988
50.0
%
Operating expenses:
Cost of product sales
33,727
22,001
11,726
53.3
%
Selling, general administrative expenses
7,659
4,793
2,866
59.8
%
Dealer incentive
275
463
(188)
(40.6)
%
Income from operations
18,267
12,683
5,584
44.0
%
Other income (expense)
Non‑operating interest income
853
248
605
244.0
%
Miscellaneous, net
586
204
382
187.3
%
Interest expense
(56)
(226)
170
(75.2)
%
Total other
1,383
226
1,157
511.9
%
Income before income tax expense
19,650
12,909
6,741
52.2
%
Income tax expense
(3,558)
(2,208)
(1,350)
61.1
%
Net income
$
16,092
$
10,701
$
5,391
50.4
%
Product sales primarily consist of direct sales, commercial sales, consignment sales and retail store sales. 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
March 31,
(in thousands)
2022
2021
$ Change
% Change
Net revenue:
Products sold
$
51,787
$
32,274
$
19,513
60.5
%
Total products sold
802
627
175
27.9
%
Net revenue per product sold
$
64.6
$
51.5
$
13
25.4
%
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 $0.1 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
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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 $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.
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Liquidity and Capital Resources
Cash and Cash Equivalents
We consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. We maintain cash balances in bank accounts that may, at times, exceed federally insured limits. We have not incurred any losses from such accounts and management considers the risk of loss to be minimal. We believe that cash flow from operations, cash and cash equivalents at 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
Three Months Ended
March 31,
(in thousands)
2022
2021
Net cash used in operating activities
$
(1,057)
$
(1,471)
Net cash provided by (used in) investing activities
$
2,754
$
(6,127)
Net cash provided by (used in) financing activities
$
(211)
$
9,238
Net change in cash and cash equivalents
$
1,486
$
1,640
Cash and cash equivalents at beginning of period
$
1,042
$
768
Cash and cash equivalents at end of period
$
2,528
$
2,408
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.
Indebtedness
Capital One Revolver. At December 31, 2019, we had a revolving line of credit (“Revolver 1”) with Capital One, N.A. with a maximum credit limit of $45,000 and a maturity date of May 11, 2020. On March 30, 2020, we entered into an agreement with Capital One, N.A. to replace Revolver 1 with a new revolving line of credit (“New Revolver”). The New Revolver has a maximum credit limit of $70,000 and a maturity date of March 30, 2024. For the period January 1, 2020 through March 30, 2020, Revolver 1 accrued interest at one-month LIBOR plus 2.40%. Amounts
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available under Revolver 1 were subject to a formula based on eligible consumer loans and MHP Notes and were secured by all accounts receivable, consumer loans and MHP Notes.
The New Revolver accrues interest at one-month LIBOR plus 2.00%. 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 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 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. In December 2016, we entered into a Payment in Lieu of Taxes (“PILOT”) agreement commonly offered in Georgia by local community development programs to encourage industry development. The net effect of the PILOT agreement is to provide us with incentives through the abatement of local, city and county property taxes and to provide financing for improvements to our Georgia plant (the “Project”). In connection with the PILOT agreement, the Putman County Development Authority provides a credit facility for up to $10,000, which can be drawn upon to fund Project improvements and capital expenditures as defined in the agreement. If funds are drawn, we would pay transaction costs and debt service payments. The PILOT agreement requires interest payments of 6.00% per annum on outstanding balances, which are due each December 1 through maturity on December 1, 2021, at which time all unpaid principal and interest are due. The PILOT agreement is collateralized by the assets of the Project. As of March 31, 2022, we had not drawn down on this credit facility.
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Contractual Obligations
The following table is a summary of contractual cash obligations as of March 31, 2022:
Payments Due by Period (in thousands)
Contractual Obligations
Total
2022
2023 - 2024
2025 - 2026
After 2026
Lines of credit
$
5,224
—
5,224
—
—
Operating lease obligations
$
3,458
522
1,353
1,154
429
Off Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, results of operations, liquidity or capital expenditures. However, we do have a repurchase agreement with a financial institution providing inventory financing for independent retailers of our products. Under this agreement, we have agreed to repurchase homes at declining prices over the term of the agreement (24 months). Our obligation under this repurchase agreement ceases upon the purchase of the home by the retail customer. The maximum amount of our contingent obligations under such repurchase agreements was approximately $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 March 31, 2022.
Critical Accounting Estimates
Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. Our critical accounting estimates are identified and described in our Annual Report on Form 10-K for the year ended December 31, 2021. Subsequent to the filing of our Annual Report, there have been no material changes to our critical accounting estimates.
Recent Accounting Pronouncements
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
We are an “emerging growth company,” as defined in the JOBS Act. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of these exemptions until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of this exemption.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for smaller reporting companies
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.