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 fifth 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, 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 and nine months ended September 30 , 2022, we sold 944 and 2,947 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, 2021, we sold 1,044 and 2,709 home sections, respectively.
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 nine months ended September 30, 2022, approximately 51% of our manufactured homes were sold in Texas, followed by 11% in Georgia, 6% in Florida, 5% in Louisiana and 5% in Arizona. 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.
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 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.
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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 September 30, 2022, these properties include the following (dollars in 000’s):
Location
Description
Date of Acquisition
Land
Improvements
Total
Bastrop County, Texas
368 Acres
April 2018
$
4,215
$
3,139
$
7,354
Bexar County, Texas
69 Acres
November 2018
842
107
949
Horseshoe Bay, Texas
133 Acres
Various 2018-2019
2,639
1,232
3,871
Johnson County, Texas
91.5 Acres
July 2019
449
-
449
Venus, Texas
50 Acres
August 2019
422
24
446
Wise County, Texas
81.5 Acres
September 2020
889
-
889
Bexar County, Texas
233 Acres
February 2021
1,550
254
1,804
$
11,006
$
4,756
$
15,762
● 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.
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.
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Comparison of Three Months ended September 30, 2022 and 2021 (in thousands)
Three months ended
September 30,
2022
2021
$ change
% change
Net revenue:
Product sales
$
48,678
$
48,300
$
378
0.8
%
Consumer and MHP loans interest
7,002
7,259
(257)
(3.5)
%
Other
1,645
911
734
80.6
%
Total net revenue
57,325
56,470
855
1.5
%
Operating expenses:
Cost of product sales
33,510
35,676
(2,166)
(6.1)
%
Selling, general administrative expenses
6,727
5,046
1,681
33.3
%
Dealer incentive
226
420
(194)
(46.2)
%
Income from operations
16,862
15,328
1,534
10.0
%
Other income (expense)
Non‑operating interest income
611
588
23
3.9
%
Miscellaneous, net
186
116
70
60.3
%
Interest expense
(88)
(318)
230
(72.3)
%
Total other
709
386
323
83.7
%
Income before income tax expense
17,571
15,714
1,857
11.8
%
Income tax expense
(2,836)
(2,721)
(115)
4.2
%
Net income
$
14,735
$
12,993
$
1,742
13.4
%
Product sales primarily consist of direct sales, commercial sales, consignment sales and retail store sales. Product sales increased $0.4 million, or 0.8%, during the three months ended September 30, 2022 as compared to the same period in 2021. This increase was driven by higher average sales price offset by a decrease 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)
2022
2021
$ Change
% Change
Net revenue:
Products sold
$
48,678
$
48,300
$
378
0.8
%
Total products sold
753
816
(63)
(7.7)
%
Net revenue per product sold
$
64.6
$
59.2
$
5
9.2
%
For the three months ended September 30, 2022, our net revenue per product sold increased because of increases to our product prices due to rising material and labor costs, which resulted in higher home sales prices and more revenue generated per home sold. We had increases in direct sales and commercial sales partially offset by a decline in consignment sales, retail store sales and other product sales. Sales through our company-owned retail stores have higher margins than our direct sales and consignment sales. For the three months ending September 30, 2022, we experienced a decrease in net revenue attributable to product sales due to 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. We plan to increase shipments from our Eatonton facility during the fourth quarter and meet or exceed historical levels by early 2023.
Consumer and MHP loans interest income declined $0.3 million, or 3.5%, during the three months ended September 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. On
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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 decreased during 2022 as compared to 2021. Between September 30, 2022 and September 30, 2021 our consumer loan portfolio increased by $12.8 million, partially offsetting the decline in MHP loan interest income.
Other revenue primarily consists of consignment fees, commercial lease rents and servicer fee revenue and increased $0.7 million, or 80.6% during the three months ended September 30, 2022 as compared to the same period in 2021. This increase was primarily due to a $0.4 million increase in servicer fee revenue, a $0.2 million increase in commercial lease rents and a $0.1 million increase in consignment fees.
The cost of product sales decreased $2.2 million, or 6.1%, during the three months ended September 30, 2022 as compared to the same period in 2021. The decrease in costs is primarily related to a decrease in units sold, partially offset by 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 $1.7 million, or 33.3%, during the three months ended September 30, 2022 as compared to the same period in 2021. This increase was primarily due to a $0.8 million increase in warranty costs, a $0.4 million increase in salaries and incentive costs, a $0.2 million increase in consulting and professional fees, a $0.2 million increase in bad debts, a $0.1 million increase in loan loss provision and a $0.1 million increase in advertising and promotions, partially offset by a net $0.1 million decrease in other miscellaneous costs.
Dealer incentive expense decreased $0.2 million, or 46.2% during the three months ended September 30, 2022 as compared to the same period in 2021.
Other income (expense), net increased $0.3 million, or 83.7% during the three months ended September 30, 2022 as compared to the same period in 2021. This increase was primarily due to a $0.2 million decrease in interest expense and an increase of $0.1 million in miscellaneous income, net.
Income tax expense was $2.8 million during the three months ended September 30, 2022 compared to $2.7 million for the same period in 2021. The effective tax rate for the three months ended September 30, 2022 was 16.1% 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, 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.
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Comparison of Nine Months ended September 30, 2022 and 2021 (in thousands)
Nine months ended
September 30,
2022
2021
$ change
% change
Net revenue:
Product sales
$
155,563
$
121,689
$
33,874
27.8
%
Consumer and MHP loans interest
21,264
20,631
633
3.1
%
Other
4,637
2,679
1,958
73.1
%
Total net revenue
181,464
144,999
36,465
25.1
%
Operating expenses:
Cost of product sales
104,648
86,020
18,628
21.7
%
Selling, general administrative expenses
20,287
15,005
5,282
35.2
%
Dealer incentive
939
998
(59)
(5.9)
%
Income from operations
55,590
42,976
12,614
29.4
%
Other income (expense)
Non‑operating interest income
2,246
1,265
981
77.5
%
Miscellaneous, net
788
354
434
122.6
%
Interest expense
(326)
(827)
501
(60.6)
%
Total other
2,708
792
1,916
241.9
%
Income before income tax expense
58,298
43,768
14,530
33.2
%
Income tax expense
(10,210)
(7,427)
(2,783)
37.5
%
Net income
$
48,088
$
36,341
$
11,747
32.3
%
Product sales primarily consist of direct sales, commercial sales, consignment sales and retail store sales. Product sales increased $33.9 million, or 27.8%, during the nine months ended September 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 nine months of 2022 and 2021:
Nine Months Ended
September 30,
(in thousands)
2022
2021
$ Change
% Change
Net revenue:
Products sold
$
155,563
$
121,689
$
33,874
27.8
%
Total products sold
2,349
2,226
123
5.5
%
Net revenue per product sold
$
66.2
$
54.7
$
11.6
21.1
%
For the nine months ended September 30, 2022, our net revenue per product sold increased primarily because of the increase in unit prices over the first half of 2022, as rising material and labor costs were passed on to our customers. We had increases in consignment sales, direct sales, commercial sales and other product sales, slightly offset by a decrease in retail store sales. Sales through our company-owned retail stores have higher margins than our direct sales and consignment sales. For the three months ending September 30, 2022, we experienced a decrease in net revenue attributable to product sales due to 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. We plan to increase shipments from our Eatonton facility during the fourth quarter and meet or exceed historical levels by early 2023.
Consumer and MHP loans interest income grew $0.6 million, or 3.1%, during the nine months ended September 30, 2022 as compared to the same period in 2021 and is primarily related to our increase in average outstanding consumer loan portfolio balance partially offset by a decrease in average outstanding MHP Note portfolio
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balance. The consumer loan portfolio has a higher average contractual interest rate compared to the MHP Note portfolio average contractual interest rate. Between September 30, 2022 and September 30, 2021 our consumer loan portfolio increased by $12.8 million resulting in an increase of consumer loan interest income. 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 decreased during 2022 as compared to 2021, partially offsetting the increase in consumer loan interest income.
Other revenue primarily consists of consignment fees, commercial lease rents and servicer fee revenue and increased $2.0 million, or 73.1% during the nine months ended September 30, 2022 as compared to the same period in 2021. This increase was primarily due to a $1.0 million increase in consignment fees, a $0.5 million increase in commercial lease rents and a $0.5 million increase in servicer fee revenue.
The cost of product sales increased $18.6 million, or 21.7%, during the nine months ended September 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 $5.3 million, or 35.2%, during the nine months ended September 30, 2022 as compared to the same period in 2021. This increase was primarily due to a $5.0 million increase in salaries and incentive costs, a $0.6 million increase in legal expense, a $0.5 million increase in warranty costs, a $0.3 million increase in consulting and professional fees, a $0.2 million increase in bad debts, and a $0.2 million increase in depreciation and amortization expense, partially offset by a $0.3 million increase in loan loss provision and a net $1.2 million decrease in other miscellaneous costs.
Dealer incentive expense decreased $0.1 million, or 5.9%, during the nine months ended September 30, 2022 as compared to the same period in 2021.
Other income (expense), net increased $1.9 million, or 241.9% during the nine months ended September 30, 2022 as compared to the same period in 2021. This increase was primarily due to a $1.0 million increase in non-operating interest income, an increase of $0.4 million in miscellaneous income, net and a decrease of $0.5 million in interest expense.
Income tax expense was $10.2 million during the nine months ended September 30, 2022 compared to $7.4 million for the same period in 2021. The effective tax rate for the nine months ended September 30, 2022 was 17.5% 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. The effective tax rate for the nine months ended September 30, 2021 was 17.0% 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 September 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 September 30, 2022, we had approximately $11.3 million in cash and cash equivalents, compared to $1.0 million as of December 31, 2021.
Cash Flow Activities
Nine Months Ended
September 30,
(in thousands)
2022
2021
Net cash provided by operating activities
$
790
$
50,458
Net cash provided by (used in) investing activities
$
17,595
$
(22,395)
Net cash used in financing activities
$
(8,159)
$
(27,978)
Net change in cash and cash equivalents
$
10,226
$
85
Cash and cash equivalents at beginning of period
$
1,042
$
768
Cash and cash equivalents at end of period
$
11,268
$
853
Comparison of Cash Flow Activities from September 30, 2022 to September 30, 2021
Net cash provided by operating activities decreased $49.7 million during the nine months ended September 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, increase in other assets and a decrease in accounts payable and accrued liabilities. 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 $17.6 million in 2022 was primarily attributable to $23.5 million of collections related to loans we made to third parties for the development of manufactured housing parks and collections of $0.4 million from our purchased consumer loans. These were offset by $3.1 million used for loans to third parties for the development of manufactured housing parks and $3.3 million used for the acquisition of property plant and equipment.
Net cash used in financing activities of $8.2 million in 2022 was attributable to net payments of $8.2 million on our lines of credit. Net cash used in financing activities of $28.0 million in 2021 was attributable to net payments of $28.1 million on our lines of credit offset by $0.1 million received from the exercise of stock options.
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 had 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.
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 entered into a Limited Waiver and First Amendment to Credit Agreement (the “Amendment”) with Capital One, N.A. The Amendment replaces the LIBOR borrowing rate with a secured overnight financing rate and waives a default arising out of a monetary judgement against us that exceeded the amount allowed in the New Revolver.
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 under the New Revolver. As a result, the available line of credit in the New Revolver has been limited to $20,000.
The New Revolver accrues interest at one-month LIBOR plus 2.00%. The interest rate in effect as of September 30, 2022 was 4.56%. 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 $20,000 as of September 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 nine months ended September 30, 2022 and 2021, interest expense under the New Revolver was $326 and $827, respectively. The outstanding balance as of September 30, 2022 and December 31, 2021 was $0 and $7,993 respectively. The New Revolver requires the Company to comply with certain financial and non-financial covenants. As of September 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.
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. No amounts have been drawn on this credit facility.
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Contractual Obligations
The following table is a summary of contractual cash obligations as of September 30, 2022:
Payments Due by Period (in thousands)
Contractual Obligations
Total
2022
2023 - 2024
2025 - 2026
After 2026
Operating lease obligations
$
3,112
176
1,352
1,154
430
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 $9,905 and $4,908 as of September 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 September 30, 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 September 30, 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.