What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-09-23 compared with 2022-09-12 · 98 added, 50 removed, 161 unchanged (48% of the section changed)

7 unchanged sentences

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.

For the three and six months ended June 30 , 2022, we sold 999 and 2,003 home sections, respectively (which are entire homes or single floors that are combined to create complete homes).

For the three and six months ended June 30, 2021, we sold 945 and 1,665 home sections, respectively.

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 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.

For the six months ended June 30, 2022, approximately 50% of our manufactured homes were sold in Texas, followed by 11% in Georgia, 8% in Florida, 5% in Louisiana and 5% in Alabama.

For the six months ended June 30, 2021, approximately 50% of our manufactured homes were sold in Texas, followed by 13% in Georgia, 9% in Louisiana and 4% in Alabama.

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.

18 unchanged sentences

● 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):

As of June 30, 2022, these properties include the following (dollars in 000’s):

Date of Acquisition

30 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 March 31, 2022 and 2021 (in thousands)

Comparison of Three Months ended June 30, 2022 and 2021 (in thousands)

Three months ended

14 unchanged sentences

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.

Product sales increased $14.0 million, or 34.0%, during the three months ended June 30, 2022 as compared to the same period in 2021.

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

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

4 unchanged sentences

Net revenue per product 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.

For the three months ended June 30, 2022, our net revenue per product sold increased because of the increase in units sold and increases to our product prices in the second 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, commercial sales and other product sales partially offset by a decline in retail store 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

million in principal payment from one of our borrowers.

For the three months ending September 30, 2022, we expect a decrease in net revenue attributable to product sales because of the Company and the State of Georgia’s efforts to evaluate and improve the quality and consistency of homes manufactured in our Eatonton facility.

These efforts have resulted in a temporary decrease in the rate of issuing HUD Labels of Certification and shipping finished homes from our Eatonton facility.

Consumer and MHP loans interest income grew $0.8 million, or 11.3%, during the three months ended June 30, 2022 as compared to the same period in 2021 and is primarily related to our increase in outstanding consumer loan portfolio partially offset by a decrease in outstanding MHP Note portfolio.

The consumer loan portfolio has a higher average contractual interest rate compared to the MHP Note portfolio average contractual interest rate.

Between June 30, 2022 and June 30, 2021 our MHP Note portfolio decreased by $23.5 million and the consumer loan portfolio increased

by $14.9 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.

Other revenue primarily consists of consignment fees, commercial lease rents and servicer fee revenue and increased $0.9 million, or 118.4% during the three months ended June 30, 2022 as compared to the same period in 2021.

The cost of product sales increased $9.1 million, or 32.0%, during the three months ended June 30, 2022 as compared to the same period in 2021.

The increase in costs is primarily related to a slight 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 $0.7 million, or 14.2%, during the three months ended June 30, 2022 as compared to the same period in 2021.

This increase was primarily due to a $0.5 million increase in salaries and incentive costs, a $0.3 million increase in consulting and professional fees, a $0.2 million increase in title fees & expenses and a $0.2 million increase in loan losses partially offset by a net $0.5 million decrease in other miscellaneous costs.

Dealer incentive expense increased $0.3 million during the three months ended June 30, 2022 as compared to the same period in 2021.

Other income (expense), net increased $0.4 million during the three months ended June 30, 2022 as compared to the same period in 2021.

This increase was primarily due to a $0.4 million increase in non-operating interest income and a decrease of $0.1 million in interest expense.

Income tax expense was $3.8 million during the three months ended June 30, 2022 compared to $2.5 million for the same period in 2021.

The effective tax rate for the three months ended June 30, 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 June 30, 2021 was 16.5% 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.

Comparison of Six Months ended June 30, 2022 and 2021 (in thousands)

Six months ended

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

Interest expense

Income before income tax expense

Income tax expense

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

Product sales increased $33.5 million, or 45.6%, during the six months ended June 30, 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 six months of 2022 and 2021:

Six Months Ended

(in thousands)

Products sold

Total products sold

Net revenue per product sold

For the six months ended June 30, 2022, our net revenue per product sold increased because of the increase in units sold and increases to our product prices in the first half 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, commercial sales, other product sales and retail store sales.

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

These efforts have resulted in a temporary decrease in the rate of issuing HUD Labels of Certification and shipping finished homes from our Eatonton facility.

Consumer and MHP loans interest income grew $0.9 million, or 6.7%, during the six months ended June 30, 2022 as compared to the same period in 2021 and is primarily related to our increase in outstanding consumer loan portfolio partially offset by a decrease in outstanding MHP Note portfolio.

The consumer loan portfolio has a higher average contractual interest rate compared to the MHP Note portfolio average contractual interest rate.

Between June 30, 2022 and June 30, 2021 our MHP Note portfolio decreased by $23.5 million and the consumer loan portfolio increased by $14.9 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 $1.2 million, or 69.3% during the six months ended June 30, 2022 as compared to the same period in 2021.

The cost of product sales increased $20.1 million, or 41.3%, during the six months ended June 30, 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.

Selling, general and administrative expenses increased $3.6 million, or 36.2%, during the six months ended June 30, 2022 as compared to the same period in 2021.

This increase was primarily due to a $4.7 million increase in salaries and incentive costs and a $0.5 million increase in legal expense, a $0.1 million increase in consulting and professional fees, a $0.2 million increase in title fees & expenses partially offset by a $0.4 million decrease in loan losses, a $0.3 million decrease in warranty costs and a net $1.2 million decrease in other miscellaneous costs.

Dealer incentive expense increased $0.1 million, or 23.8%, during the six months ended June 30, 2022 as compared to the same period in 2021.

Other income (expense), net increased $1.6 million during the six months ended June 30, 2022 as compared to the same period in 2021.

This increase was primarily due to a $0.9 million increase in non-operating interest income, an increase of $0.4 million in miscellaneous income, net and a decrease of $0.3 million in interest expense.

Income tax expense was $7.4 million during the six months ended June 30, 2022 compared to $4.7 million for the same period in 2021.

The effective tax rate for the six months ended June 30, 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 six months ended June 30, 2021 was 16.8% 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

3 unchanged sentences

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.

We believe that cash flow from operations, cash and cash equivalents at June 30, 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.

As of June 30, 2022, we had approximately $14.3 million in cash and cash equivalents, compared to $1.0 million as of December 31, 2021.

Cash Flow Activities

Three Months Ended

Six Months Ended

(in thousands)

1 unchanged sentence

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net cash provided by 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 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.

Comparison of Cash Flow Activities from June 30, 2022 to June 30, 2021

Net cash used in operating activities decreased $0.8 million during the six months ended June 30, 2022, compared to the comparable period in 2021, primarily as a result of increased MHP originations net of collections, increased dealer inventory loan originations net of collections, increased volume of consumer loan originations net of principal collections, increased inventories, increased accounts receivable, increase in other assets and a decrease in accounts payable.

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

Net cash provided by investing activities of $10.1 million in 2022 was primarily attributable to $13.7 million of collections related to loans we made to third parties for the development of manufactured housing parks and collections of $0.3 million from our purchased consumer loans.

These were offset by $2.4 million used for loans to third parties for the development of manufactured housing parks and $1.5 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 $7.1 million in 2022 was attributable to net proceeds of $4.6 million on our lines of credit and $2.5 million of proceeds from other liabilities.

Net cash provided by financing activities of $13.5 million in 2021 was attributable to net proceeds of $13.5 million on our lines of credit.

8 unchanged sentences

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%.

The interest rate in effect as of June 30, 2022 was 3.06%.

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.

The amount of available credit under the New Revolver was $57,386 as of June 30, 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.

For the six months ended June 30, 2022 and 2021, interest expense under the New Revolver was $239 and $509, respectively.

The outstanding balance as of June 30, 2022 and December 31, 2021 was $12,614 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.

As of June 30, 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.

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

The letter stated that our New Revolver was in default.

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

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

On August 24, 2022, we 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.

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

As a result, the available line of credit in the New Revolver has been limited to $20,000.

PILOT Agreement.

5 unchanged sentences

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.

As of June 30, 2022, we had not drawn down on this credit facility.

Contractual Obligations

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

The following table is a summary of contractual cash obligations as of June 30, 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 $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.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $11,400 and $4,908 as of June 30, 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.

We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of June 30, 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 March 31, 2022 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 June 30, 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