What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-15 compared with 2022-08-03 · 71 added, 92 removed, 210 unchanged (44% of the section changed)

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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 September 30, 2021.

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 September 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 395 to 2,667 square feet consisting of 1 to 5 bedrooms, with 1 to 3 1 / 2 bathrooms.

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

During 2022, approximately 53% of our manufactured homes were sold in Texas, followed by 9% in Georgia, 5 % in Florida, 5% in Alabama, 5% in Arizona and 4% in Louisiana.

During 2021, approximately 50% of our manufactured homes were sold in Texas, followed by 16% in Georgia, 8% in Louisiana and 5% in Alabama.

During 2020, 46% of our manufactured homes were sold in Texas, followed by 8% in Georgia, 8% in Michigan, 5% in Kansas and 5% in North Carolina.

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 provide floor plan financing for our independent retailers, which takes the form of a consignment arrangement or a financed sale 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.

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.

Corporate Conversion

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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.

● 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, 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.

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.

We are actively reviewing organic and inorganic opportunities to add production capacity in attractive regions to meet future demand.

Critical Accounting Policies and Estimates

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At repossession, the fair value of the collateral is computed based on the historical recovery rates of previously charged-off loans;

the loan is charged off and the loss is charged to the allowance for loan losses.

the loan is charged off and the loss is charged to the

allowance for loan losses.

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

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Historically we have not experienced material losses on the MHP Notes.

Inventories consist of raw materials, work-in-process, and finished goods and are stated at the lower of cost or net realizable value.

Inventories consist of raw materials, work-in-process, and finished goods.

Finished goods are stated at the lower of cost or net realizable value.

Raw materials cost approximates the first-in first-out method.

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Consignment Sales

We provide floor plan financing for independent retailers, which takes the form of a consignment arrangement.

We provide floor plan financing for independent retailers, which takes the form of a consignment arrangement or a financed sale.

Consignment sales under the inventory financing arrangement are considered sales of homes to the independent dealer and are recognized as revenue upon delivery of the home to the dealer’s location.

Sales under a consignment agreement are recognized as revenue when we enter into a sales contract and receive full payment for cash sales, and title passes;

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Miscellaneous, net

Gain on settlement, net

Interest expense

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Product sales increased $56.1 million, or 33.8%, in 2022 as compared to 2021.

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

This increase was driven by higher average sales price, the conversion of certain independent dealer consignment arrangements to financing arrangements and an increase in unit volumes.

The conversion of consignment arrangements to financing arrangements resulted in an increase to producet sales of approximately $29.1 million during 2022.

We expect the conversion of consignment arrangements to financing arrangements to have minimal impact on product sales in 2023.

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

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Net revenue per product sold

In 2021, our net revenue per product sold increased 26.3% 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 consignment sales, direct sales, and sales through our company-owned retail stores.

These increases were partially offset by declines in sales to manufactured home communities.

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

Other product sales increased $5.6 million, or 115.0% and is primarily due to an increase in direct freight, molding revenue and miscellaneous sales income partially offset by a decrease in parts sales.

Consumer and MHP loans interest income grew $1.8 million, or 7.2%, in 2021 as compared to 2020 and is related to our average increase in outstanding consumer loan portfolio and MHP Note portfolio.

Between December 31, 2021 and December 31, 2020 our consumer loan portfolio increased by $13.7 million.

Between September 29, 2021 and December 31, 2020 our MHP Note portfolio increased by $19.4 million.

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

As a result of this payment, MHP loan interest income is expected to decrease during 2022 as compared to 2021.

In 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 six months ending December 31, 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 of approximately 36% in the rate of issuing HUD Labels of Certification and shipping finished homes from our Eatonton facility.

We increased shipments from our Eatonton facility during the fourth quarter and plan to meet or exceed historical levels in 2023.

Consumer and MHP loans interest income grew $1.4 million, or 5.0%, in 2022 as compared to 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 balance.

The consumer loan portfolio has a higher average contractual interest

rate compared to the MHP Note portfolio average contractual interest rate.

Between December 31, 2022 and December 31, 2021 our consumer loan portfolio increased by $13.4 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 commercial lease rents, consignment fees and servicer fee revenue.

Other revenue increased $0.5 million or 11.8% primarily due to a $0.4 million increase in commercial lease rents and a $0.1 million increase in miscellaneous other revenue, net.

Other revenue increased $2.1 million or 48.2% primarily due to a $1.4 million increase in consignment fees, a $0.5 million increase in commercial lease rents and a $0.2 million increase in servicer fee revenue.

The cost of product sales increased $36.1 million, or 31.6%, in 2022 as compared to 2021.

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.

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 $4.3 million, or 18.3%, in 2022 as compared to 2021.

This increase was primarily due to $2.4 million increase in salaries and incentive costs, a $0.3 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, a $0.2 million increase in warranty costs, a $1.0 million increase in legal expenses.

and a net $0.1 million increase in other miscellaneous costs.

These increases were partially offset by a $0.4 million decrease in advertising and promotions.

This increase was primarily due to a $5.7 million increase in salaries and incentive costs, a $0.6 million increase in warranty costs, a $0.6 million increase in consulting and professional fees, and a $0.2 million increase in depreciation and amortization expense, partially offset by a $1.4 million decrease in legal expense, a $0.4 million increase in loan loss provision and a net $1.0 million decrease in other miscellaneous costs.

Dealer incentive expense increased $0.1 million, or 6.5% in 2022 as compared to 2021.

Other income (expense), net increased $2.4 million, or 141.4%, in 2022, as compared to 2021.

This increase was primarily due to an increase of $1.2 million in non-operating interest income, an increase of $0.2 million in miscellaneous income, net, and a decrease of $0.2 million in interest expense.

These increases were partially offset by 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.

Income tax expense was $10.8 million for 2021 and 2020.

This increase was primarily due to a $0.8 million increase in non-operating interest income, a $0.6 million increase in capital gains related to the sale of leased property, a $0.5 million increase in miscellaneous income, net, and a decrease of $0.5 million in interest expense.

Income tax expense was $14.4 million for 2022 compared to $10.8 million for and 2021.

The effective tax rate for the year ended December 31, 2022 was 17.5% and primarily 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 year ended December 31, 2020 was 22.2% and primarily differs from the federal statutory rate of 21% primarily due to state income taxes net of a federal tax credit for energy efficient construction.

The effective tax rate for the year ended December 31, 2021 was 17.7% and primarily 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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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).

that expanded and extended our credit availability (see Indebtedness – Capital One Revolver , below).

As of December 31, 2022, we had approximately $2.8 million in cash and cash equivalents, compared to $1.0 million as of December 31, 2021.

We also held an investment of $8.4 million in US Treasury Notes as of December 31, 2022.

Cash Flow Activities

(in thousands)

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash (used in) provided by operating activities

Net cash provided by (used in) investing activities

Net cash used in financing activities

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Comparison of Cash Flow Activities from 2022 to 2021

Net cash provided by operating activities increased $62.1 million during the year ended December 31, 2021, compared to 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 $31.9 million in 2021 was primarily attributable to $ $36.8 million used for loans to third parties for the development of manufactured housing parks and $6.0 million used for the acquisition of property plant and equipment.

These were offset by collections of $9.0 million of loans we made to third parties for the development of manufactured housing parks and collections of $1.8 million from our purchased consumer loans.

Net cash used in operating activities was $1.7 million during the year ended December 31, 2022, compared to net cash of $60.3 million provided by operating activities during 2021.

This change was primarily as a result of increased cash used for MHP originations net of collections, increased dealer inventory loan originations net of collections, increased volume of consumer loan originations net of principal collections, a decrease in accrued liabilities and an increase in other assets.

The increase in cash used in operating activities was partially offset by an increase in operating income before non-cash adjustments, increased volume of other notes receivables principal collections net of originations, decreased inventories, increase in customer deposits, and increased dealer incentive liability.

Net cash provided by investing activities of $9.1 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, proceeds of $1.7 million for the sale of leased property and collections of $0.5 million from our purchased consumer loans.

These were offset by $8.4 million used for the purchase of our investment in treasury notes, $4.4 million used for loans to third parties for the development of manufactured housing parks and $3.8 million used for the acquisition of property plant and equipment.

Net cash used in financing activities of $5.6 million in 2022 was attributable to net payments of $5.6 million on our lines of credit.

Net cash used in financing activities of $28.1 million in 2021 was attributable to net payments of $28.2 million on our lines of credit offset by $0.1 million received from the exercise of stock options.

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 $45,000,000 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 $70,000,000 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 available under Revolver 1 were subject to a formula based on eligible consumer loans and MHP Notes and were secured by all accounts receivable and the consumer loans receivable and MHP Notes.

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

for new revolving line of credit (“Revolver”).

The Revolver had a maximum credit limit of $70,000,000 and a maturity date of March 30, 2024.

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

The letter stated that our 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 (“SOFR”) and waives a default arising out of a monetary judgement against us that exceeded the amount allowed in the 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 Revolver.

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

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

The interest rates in effect as of December 31, 2022 and 2021 were 6.12% and 2.10%, respectively.

As with Revolver 1, amounts available under the New Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable and the consumer loans receivable and MHP Notes.

The amount of available credit under the New Revolver was $61,841,000 as of December 31, 2021.

In connection with the New Revolver, we paid certain arrangement fees and other fees of approximately $0.3 million, which were capitalized as unamortized debt issuance costs and will be amortized to interest expense over the life of the New Revolver.

For the years ended December 31, 2021 and 2020, interest expense under the Capital One Revolvers was $887,000 and $1,020,000, respectively.

Amounts available under the 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 Revolver was $17,400,000 as of December 31, 2022.

In connection with the Revolver, we paid certain arrangement fees and other fees of approximately $295,000, which were capitalized as unamortized debt issuance costs and will be amortized to interest expense over the life of the Revolver.

For the years ended December 31, 2022 and 2021, interest expense under the Revolver was $225,000 and $887,000, respectively.

The outstanding balance as of December 31, 2022 and 2021 was $2,545,000 and $7,993,000, respectively.

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

We were in compliance with all financial covenants as of December 31, 2022, including that we maintain a tangible net worth of at least $120,000,000 and that we 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 the New Revolver was in default.

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

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

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 $15,000,000 (“Revolver 2”).

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.

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

On May 12, 2017, we entered into an agreement to increase the maximum borrowing availability under Revolver 2 to $20,000,000.

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

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

The amount of available credit under Revolver 2 was $12,028,000 and the interest rates in effect as of March 31, 2020 was 4.17%.

For the year ended December 31, 2020 interest expense was $17,000.

The outstanding balance as of March 31, 2020 was $2,001,000.

We were in compliance with all financial covenants as of March 31, 2020 including that we maintain a tangible net worth of at least $80,000,000.

On April 10, 2020, we Company entered into a loan with Peoples Bank as the lender in an aggregate principal amount of $6,545,700 (the “Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act.

The Loan was evidenced by a promissory note (the “Note”) dated April 10, 2020 and had a maturity date of April 10, 2022.

The Note had an interest rate of 1.000% 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.

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 $10,000,000, which can be drawn upon to fund Project improvements and capital expenditures as defined in the agreement.

If funds are drawn, we would pay transactions costs and debt service payments.

The PILOT agreement requires interest payments of 6.00% per annum on outstanding balances, which were due each December 1 through maturity on December 1, 2021, at which time all unpaid principal and interest are due.

The net effect of the PILOT agreement was 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 provided a credit facility for up to $10,000, which could have been drawn upon to fund Project improvements and capital expenditures as defined in the agreement.

If funds had been drawn, we would have paid transaction costs and debt service payments.

The PILOT agreement required interest payments of 6.00% per annum on outstanding balances, which would have been due each December 1 through maturity on December 1, 2021, at which time all unpaid principal and interest would have been due.

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

As of December 31, 2021, we had not drawn down on this credit facility.

No amounts were drawn on this credit facility.

Contractual Obligations

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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

$4,908,000 and $140,000 as of December 31, 2021 and 2020, respectively, without reduction for the resale value of the homes.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $8,925,000 and $4,908,000 as of December 31, 2022 and 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.

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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-K

Item 7. Management’s Discussion and Analysis