What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-15 compared with 2022-08-03 · 320 added, 234 removed, 626 unchanged (47% of the section changed)

13 unchanged sentences

Opinion on the financial statements

We have audited the accompanying balance sheet of Legacy Housing Corporation (the Company) as of December 31, 2021, and the related statements of operations, changes in stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).

We have audited the accompanying balance sheet of Legacy Housing Corporation (the Company) as of December 31, 2022, and the related statements of income, changes in stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for year then ended, in conformity with accounting principles generally accepted in the United States of America.

13 unchanged sentences

We believe that our audit provide a reasonable basis for our opinion .

/s/ Weaver, LLP

/s/ Daszkal Bolton, LLP

We have served as the Company’s auditor since 2022.

Dallas, Texas

August 3, 2022

Sunrise, Florida

March 15, 2023

Report of Independent Registered Public Accounting Firm (PCAOB ID:

3 unchanged sentences

Opinion on the financial statements

We have audited the accompanying balance sheet of Legacy Housing Corporation (the Company) as of December 31, 2020, the related statements of operations, changes in stockholders’ equity and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for year then ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for opinion

1 unchanged sentence

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (Unites States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

8 unchanged sentences

We believe that our audit provide a reasonable basis for our opinion .

/s/ Weaver, LLP

We served as the Company’s auditor from 2021 to 2022.

Dallas, Texas

March 17, 2021

August 3, 2022

LEGACY HOUSING CORPORATION

2 unchanged sentences

Cash and cash equivalents

Held to Maturity Securities

Accounts receivable, net

Current portion of consumer loans

Current portion of contracts - dealer financed

Current portion of consumer loans receivable

Current portion of notes receivable from mobile home parks (“MHP”)

2 unchanged sentences

Total current assets

Consumer loans, net

Notes receivable from mobile home parks (“MHP”)

Contracts - dealer financed

Consumer loans receivable, net

Notes receivable from mobile home parks (“MHP”), net

Other notes receivable, net

Inventories, net

Other assets - leased mobile homes

ROU assets - operating leases

Property, plant and equipment, net

5 unchanged sentences

Escrow liability

Operating lease obligation

Total current liabilities

Long‑term liabilities:

Operating lease obligation, less current portion

Lines of credit

Deferred income taxes, net

Accrued liabilities, net of current portion

Dealer incentive liability

13 unchanged sentences

LEGACY HOUSING CORPORATION

StatementS of Operations (in thousands, except share and per share data)

StatementS of Income (in thousands, except share and per share data)

Year ended December 31,

10 unchanged sentences

Miscellaneous, net

Gain on settlement, net

Interest expense

10 unchanged sentences

Share based compensation expense and stock units vested

Purchase of treasury stock

Share based compensation expense - stock options exercised

Balances, December 31, 2021

Share based compensation expense and stock units vested

Proceeds from exercise of stock options

Balances, December 31, 2022

4 unchanged sentences

Operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation expense

Amortization of debt discount and issuance costs

Provision for accounts receivable

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense

Amortization of deferred revenue

Amortization of Treasury Note Discount

Amortization of lines of credit cost

Provision for accounts and notes receivable

Provision for long term inventory

Sale of leased property

Provision for loan loss—consumer loans

Gain from sale of leased property

Amortization of operating lease right of use asset

Deferred income taxes

Share based payment expense

Gain on sale of land

Changes in operating assets and liabilities:

Accounts receivable

Consumer loans originations

Consumer loans principal collections

Notes receivable MHP originations

Notes receivable MHP principal collections

Consumer loans activity, net

Notes receivable MHP activity, net

Dealer inventory loan activity, net

Prepaid expenses and other current assets

Accounts payable

Accrued liabilities

Accounts payable and accrued liabilities

Right of use activity, net

Customer deposits

1 unchanged sentence

Dealer incentive liability

Net cash provided by (used in) operating activities

Net cash (used in) provided by operating activities

Investing activities:

Purchases of property, plant and equipment

Proceeds from sale of land

Proceeds from sale of leased property

Purchase of investments - treasury notes

Issuance of notes receivable

Notes receivable collections

Purchases of loans

Collections from purchased loans

Net cash used in investing activities

Net cash provided by (used in) investing activities

Financing activities:

Proceeds from exercise of stock options

Treasury stock purchase

Proceeds from issuance of note payable

Principal payments on note payable

Proceeds from lines of credit

Payments on lines of credit

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Year ended December 31,

Net cash used in financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental disclosure of cash flow information:

1 unchanged sentence

Cash paid for taxes

Supplemental disclosure of non ‑ cash transactions:

Note receivable received in exchange of asset

See accompanying notes to financial statements

4 unchanged sentences

NATURE OF OPERATIONS

Legacy Housing Corporation (the “Company”) was formed on January 1, 2018 as a Delaware corporation through a corporate conversion of Legacy Housing, Ltd., (the “Partnership”) a Texas limited partnership formed in May 2005.

Legacy Housing Corporation (referred herein as ”Legacy”, “we”, “our”, “us”, or the “Company”) was formed on January 1, 2018 as a Delaware corporation through a corporate conversion of Legacy Housing, Ltd., (the “Partnership”) a Texas limited partnership formed in May 2005.

Effective December 31, 2019, the Company reincorporated from a Delaware corporation to a Texas corporation.

10 unchanged sentences

During the year ended December 31, 2020, the Company purchased 145,065 shares of its common stock at an average price of $ 9.77 per share, pursuant to the Company’s repurchase program.

In November 2022, the Company’s Board of Directors approved a new repurchase program (the “2022 Repurchase Program”).

Under the 2022 Repurchase Program, the Company may purchase up to $ 10,000 of its common stock.

2 unchanged sentences

These repurchases may be commenced or suspended at any time or from time to time without prior notice.

The 2022 Repurchase Program expires October 31, 2025.

Corporate Conversion

7 unchanged sentences

became the officers of Legacy Housing Corporation.

As a result of the corporate conversion, The Company is now a federal corporate taxpayer.

As a result of the corporate conversion, the Company is a federal corporate taxpayer.

Basis of Presentation

3 unchanged sentences

These reclassifications had no effect on the previously reported net income.

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions.

These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure

LEGACY HOUSING CORPORATION

2 unchanged sentences

(Dollars in thousands, except per share amounts)

of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period.

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions.

These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period.

Material estimates that are susceptible to significant change in the near term primarily relate to the determination of accounts receivable, loans to mobile home parks, consumer loans and notes receivable, inventory obsolescence, income taxes, fair value of financial instruments and contingent liabilities.

3 unchanged sentences

All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others.

For example, the sale of manufactured homes is done through wholesale and retail operations that include providing transportation and consignment arrangements with dealers.

The Company also provides financing options to the customers to facilitate such sale of homes.

In addition, the sale of homes is directly related to financing provided by the Company.

Accordingly, all significant operating and strategic decisions by the chief operating decision-maker, the Executive Chairman of the Board, are based upon analyses of the Company as one segment or unit.

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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 unchanged sentences

The Company has not incurred any losses from such accounts and management considers the risk of loss to be minimal.

As of December 31, 2021, the Company had one bank account that exceeded the FDIC limit by an aggregate amount of $ 490 .

As of December 31, 2022, the Company had two bank accounts that exceeded the FDIC limit.

One account exceeded the FDIC limit by $ 1,504 and the second account exceeded the FDIC limit by $ 133 .

Held to Maturity Securities

Management determines the appropriate classification of its investment securities at the time of purchase.

The Company’s investments consist of US Treasury Notes with a maturity date of November 2023.

Accounts Receivable

Included in accounts receivable are receivables from direct sales of mobile homes and sales of parts and supplies to customers, consignment fees and interest receivables.

Accounts receivables are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.

Included in accounts receivable “net” are receivables from direct sales of mobile homes, sales of parts and supplies to customers, consignment fees and interest.

Accounts receivable “dealer financed” are receivables for interest, fees and curtailments owed from dealers under their inventory finance agreements.

Accounts receivables “net” are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.

Accounts receivables “dealer financed” are due upon receipt and are stated at amounts due from customers net of an allowance for doubtful accounts.

Accounts outstanding longer than the contractual payment terms are considered past due.

2 unchanged sentences

At December 31, 2022 and 2021, the allowance for doubtful accounts totaled $ 279 and $ 343 , respectively.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

Consumer Loans Receivable

4 unchanged sentences

Consumer loans receivable have maturities that range from 2 to 30 years .

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollars in thousands, except per share amounts)

Loan applications go through an underwriting process which considers credit history to evaluate credit risk of the consumer.

23 unchanged sentences

(2) the amount of time the house was occupied;

(3) the cooperation level of the borrowers, i.e., loans requiring legal action or extensive field collection efforts;

(3) the cooperation level of the borrowers, i.e., loans requiring legal action or extensive field

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

collection efforts;

(4) units located on private property as opposed to a manufactured home park;

3 unchanged sentences

Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell.

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

At repossession, the collateral is recorded at the same amount as the principal balance as the loan.

The fair value of the collateral is then 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.

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.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollars in thousands, except per share amounts)

Repossessed homes totaled $ 795 and $ 517 as of December 31, 2022 and 2021, respectively, and are included in other assets in the balance sheets.

8 unchanged sentences

The MHP Notes are generally personally guaranteed by the borrowers with substantial financial resources.

As of December 31, 2022, the Company had concentrations of MHP Notes with three independent third-parties and their respective affiliates that equaled 12.3 %, 16.6 % and 34.0 % of the principal balance outstanding, all of which was secured by the mobile homes.

As of December 31, 2021, the Company had concentrations of MHP Notes with two independent third-parties and their respective affiliates that equaled 10.4 % and 30.1 % of the principal balance outstanding, all of which was secured by the mobile homes.

As of December 31, 2020, the Company had concentrations of MHP Notes with one independent third-party and its affiliates that equaled 52.9 % of the principal balance outstanding, all of which was secured by the mobile homes.

Allowance for Loan Losses—MHP Notes

10 unchanged sentences

The other notes are collateralized by mortgages on real estate, units being financed and used as offices, as well as vehicles, and are typically personally guaranteed by the borrowers.

The interest rate on the other notes are fixed and range from 5.00 % to 12.00 %.

The Company reserves for estimated losses on the other notes based on current economic conditions that may affect the borrower’s ability to pay, the borrower’s financial strength, and historical loss experience.

As of December 31, 2021 and 2020, the allowance for loan losses on other notes was $ 74 and $ 75 , respectively.

There were no past due balances for other notes as of December 31, 2021 and 2020, respectively, and there were no impaired balances for other notes as of December 31, 2021 and 2020, respectively.

The interest rate on the other notes

LEGACY HOUSING CORPORATION

2 unchanged sentences

(Dollars in thousands, except per share amounts)

are fixed and range from 5.00 % to 17.90 %.

As of December 31, 2022 and 2021, the allowance for loan losses on other notes was $ 0 and $ 5 , respectively.

There were no past due balances for other notes as of December 31, 2022 and 2021, respectively, and there were no impaired balances for other notes as of December 31, 2022 and 2021, respectively.

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

6 unchanged sentences

As of December 31, 2022 and 2021, non-current inventory was $ 6,987 and $ 2,678 , respectively.

Leased Property

The Company offers mobile home park operators the opportunity to lease mobile homes for rent in lieu of purchasing the homes for cash or under a longer-term financing agreement.

In this arrangement title for the mobile homes remains with the Company, and the lease is accounted for as an operating lease.

The standard lease agreement is typically for 96 months or 120 months .

Under the lease arrangement, the lessee (mobile home park operator) uses the mobile homes as personal property to be rented as a residence at the lessee's mobile home park.

The lessee makes monthly, periodic lease payments to the Company over the term of the lease.

The lessee is responsible for maintaining the homes during the term of the lease.

The lessee is also responsible for repairing all damages caused by force majeure events even in cases of total or partial loss of the property.

At the end of the lease term or in the event of default, the lessee is required to deliver to the Company the homes with all improvements in good repair and condition in substantially the same condition as existed at the commencement of the lease.

The lessee may terminate the lease with 30 days written notice to the Company and pay a lease termination fee equal to 10 % of the remaining lease payments or six month ’s rent, whichever is greater.

The lessee has an option to purchase the homes at the end of the lease term for fair market value based on an agreed upon determination of fair market value by both parties using comparable sales, recent appraisal, or NADA official guidance.

The lessee must provide the Company with 30 days written notice prior to expiration of the lease of intent to purchase the property for fair market value.

The lease also includes a renewal option whereby the lessee has the option to extend the lease for an additional 48 months (the extended term) at the same terms and conditions as the original lease.

The lessee must notify the Company of the intent to exercise the renewal extension option not less than six months prior to expiration of the lease term.

The leased mobile homes are included in other assets on the Company’s balance sheet, capitalized at manufactured cost and depreciated over a 15 year useful life.

Homes returned to the Company upon expiration of the lease or in the event of default will be sold by the Company through its standard sales and distribution channels.

Depreciation expense for the leased property was $ 582 and $ 442 for the years ended December 31, 2022 and 2021, respectively.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

Future minimum lease income under all operating leases for each of the next five years at December 31, 2022, are as follows:

Property, Plant, and Equipment

18 unchanged sentences

As of December 31, 2022 and 2021, the dealer incentive liability was $ 5,516 and $ 4,336 , respectively.

Dealer incentive expense for the years ended December 31, 2021 and 2020 totaled $ 1,235 and $ 336 , respectively, and is included in the Company’s statements of operations.

Dealer incentive expense for the years ended December 31, 2022 and 2021 totaled $ 1,315 and $ 1,235 , respectively, and is included in the Company’s statements of income.

LEGACY HOUSING CORPORATION

9 unchanged sentences

A tabular presentation of the activity within the warranty liability account for the years ended December 31, 2022 and 2021 is presented below:

Warranty liability, beginning of period

Warranty liability, beginning of year

Product warranty accrued

Warranty costs incurred

Warranty liability, end of period

Warranty liability, end of year

Advertising Costs

2 unchanged sentences

Fair Value Measurements

The Company accounts for its investments and derivative instruments in accordance with ASC 820-10, Fair Value Measurement, which among other things provides the framework for measuring fair value.

The Company accounts for its investments and derivative instruments in accordance with the provisions of Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurement, which among other things provides the framework for measuring fair value.

That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

19 unchanged sentences

Management reviewed the fair values for the instruments as provided by the lender and determined the related asset and liability to be an accurate estimate of future gains and losses to the Company.

The Company is not a party to any interest rate swaps as of December 31, 2021.

The Company was not a party to any interest rate swap agreements during the years ended December 31, 2022 and 2021.

Fair Value of Financial Instruments

2 unchanged sentences

This is considered a Level I valuation technique.

The lines of credit, notes payable and part of the MHP Notes have variable interest rates that reflect market rates and their fair value approximates their carrying value.

The lines of credit, notes payable, part of the MHP Notes and part of the other note receivables have variable interest rates that reflect market rates and their fair value approximates their carrying value.

This is considered a Level II valuation technique.

The Company also assessed the fair value of the consumer loans receivable, the fixed rate MHP Notes and the other notes based on the discounted value of the remaining principal and interest cash flows.

The Company also assessed the fair value of the consumer loans receivable, the fixed rate MHP Notes and the portion of other note receivables with fixed rates based on the discounted value of the remaining principal and interest cash flows.

The Company determined that the fair value of the consumer loan portfolio was approximately $ 138,800 compared to the book value of $ 139,009 as of December 31, 2022, and a fair value of approximately $ 125,600 compared to the book value of $ 125,623 as of December 31, 2021.

1 unchanged sentence

The Company determined that the fair value of the fixed rate other notes was approximately $ 21,600 compared to the book value of $ 22,722 as of December 31, 2022, and a fair value of approximately $ 38,500 compared to the book value of $ 38,886 as of December 31, 2021.

This is a Level III valuation technique.

This is a Level II valuation technique.

Revenue Recognition

3 unchanged sentences

Commercial Sales include homes sold to mobile home parks under commercial loan programs or paid for upfront.

The Company provides floor plan financing for independent retailers, which takes the form of a consignment arrangement.

Consignment Sales are considered sales of consigned homes from independent dealers to individual customers.

The Company provides floor plan financing for independent retailers, which can take the form of a consignment arrangement or an inventory financing arrangement.

Consignment Sales under the consignment arrangement are considered sales of consigned homes from independent dealers to individual customers.

Consignment Sales under the inventory financing arrangement are considered sales of homes to the independent dealer.

Retail Store Sales are homes sold through Company-owned retail locations.

Consignment Sales and Retail Sales of homes may be financed by the Company, by a third party, or in paid in cash.

Revenue from product sales is recognized at a point in time when the performance obligation under the terms of a contract with our customers is satisfied which typically occurs upon delivery and transfer of title of the home, as this depicts when control of the promised good is transferred to our customers.

For financed sales by the Company, the individual customer enters into a sales and financing contract and is required to make a down payment.

These financed sales contain a significant financing component and any interest income is separately recorded in the statement of operations.

Revenue is measured as the amount of consideration expected to be received in exchange for transferring the homes to the customers.

Sales and other similar taxes collected concurrently with revenue-producing activities are excluded from revenue.

Consignment Sales and Retail Sales of homes may be financed by the Company, by a third party, or paid in cash.

Revenue from product sales is recognized at a point in time when the performance obligation under the terms of a contract with our customer is satisfied, which typically occurs upon delivery and transfer of title of the home, as this depicts when control of the promised good is transferred to our customers.

For inventory financed sales, the independent dealer enters into a financing arrangement with the Company and is required to make monthly interest payments and an annual curtailment payment for the first two years .

After three years , they are required to payoff any remaining principle balance.

Interest income is separately recorded in the statement of income.

For other financed sales by the Company, the individual customer enters into a sales and financing contract and is required to make a down payment.

These financed sales contain a significant financing component and any interest income is separately recorded in the statement of income.

LEGACY HOUSING CORPORATION

2 unchanged sentences

(Dollars in thousands, except per share amounts)

Revenue is measured as the amount of consideration expected to be received in exchange for transferring the homes to the customers.

Sales and other similar taxes collected concurrently with revenue-producing activities are excluded from revenue.

The Company made an accounting policy election to account for any shipping and handling costs that occur after the transfer of control as a fulfillment cost that is accrued when control is transferred.

2 unchanged sentences

Contract costs, which include commissions incurred related to the sale of homes, are expensed at the point-in-time when the related revenue is recognized.

For the years ended December 31, 2021 and 2020, sales to an independent third-party and its affiliates accounted for $ 9,165 or 5.5 % and $ 41,263 or 28.7 % of our product sales, respectively.

For the years ended December 31, 2021 and 2020, total cost of product sales included $ 11,303 and $ 24,165 of costs, mainly relating to up front dealer commission and reimbursed dealer expenses for consignment sales and certain other similar costs incurred for retail store and commercial sales.

Other revenue consists of consignment fees, service fees and other miscellaneous income.

Warranty costs and contract costs are included in selling, general and administrative expenses in the statements of income.

For the year ended December 31, 2022, sales to two independent third-parties and their affiliates accounted for $ 13,008 or 5.9 % and $ 11,879 or 5.4 % of our product sales, respectively.

For the years ended December 31, 2021, sales to an independent third-party and its affiliates accounted for $ 9,165 or 5.5 % of our product sales, respectively.

For the years ended December 31, 2022 and 2021, total cost of product sales included $ 11,588 and $ 11,303 of costs relating to subcontracted production for commercial sales, reimbursed dealer expenses for consignment sales, and certain other similar costs incurred for retail store and commercial sales .

Other revenue consists of consignment fees, commercial lease rents, service fees and other miscellaneous income.

Consignment fees are charged to independent retailers on a monthly basis for homes held by the independent retailers pursuant to a consignment arrangement until the home is sold to an individual customer.

Consignment fees are determined as a percentage of the home’s wholesale price to the independent dealer.

Revenue recognition for consignment fees are recognized over time using the output method as it provides a faithful depiction of the Company’s performance toward completion of the performance obligation under the contract and the value transferred to the independent retailer for the time the home is held under consignment.

Revenue recognition for consignment fees is recognized over time using the output method as it provides a faithful depiction of the Company’s performance toward completion of the performance obligation under the contract and the value transferred to the independent retailer for the time the home is held under consignment.

Revenue for commercial leases is recognized as earned monthly over a contractual period of 96 or 120 months .

Revenue for service fees and miscellaneous income is recognized at a point in time when the performance obligation is satisfied.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

Disaggregation of Revenue .

11 unchanged sentences

(1) Other product sales revenue from ancillary products and services including parts, freight and other services

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollars in thousands, except per share amounts)

Reserve for Repurchase Commitments

8 unchanged sentences

Fees associated with the origination of loans and certain direct loan origination costs are netted and the net amount is deferred and recognized over the life of the loan as an adjustment of yield.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

Share-Based Compensation

4 unchanged sentences

The fair value of each option grant with only service-based conditions is estimated using the Black-Scholes pricing model.

The fair value of each restricted stock unit (the ”RSU”) is calculated based on the closing price of the Company’s common stock on the grant date.

The fair value of each restricted stock unit (the ”RSU”) with only service-based conditions is calculated based on the closing price of the Company’s common stock on the grant date.

The fair value of each RSU with market based conditions is estimated using the Monte-Carlo Simulation valuation model.

The fair value of stock option awards on the date of grant is estimated using the Black-Scholes option pricing model, which requires the Company to make certain predictive assumptions.

6 unchanged sentences

The Company does not expect to pay dividends on its common stock.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollars in thousands, except per share amounts)

The fair value of RSU awards with market based conditions on the date of grant is estimated using the Monte-Carlo Simulation valuation model, and the Company uses the following methods to determine its underlying assumptions:

expected volatilities are based on the Company’s historic stock price volatility;

the expected term of the awards is based on performance measurement period;

the risk-free interest rate is based on the U.S.

Treasury bond yield issued with similar life terms to the expected life of the grant.

Shipping and Handling Costs

10 unchanged sentences

The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled.

Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.

Deferred tax assets and liabilities are reflected at income tax rates

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.

As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

8 unchanged sentences

The Company recognizes interest and penalties relating to uncertain tax provisions as a component of tax expense.

For the periods presented, management has determined there are no material uncertain tax positions which was performed for the tax years that remain subject to examination by major tax jurisdictions as of December 31, 2021, which includes the tax years 2018, 2019 and 2020.

For the periods presented, management has determined there are no material uncertain tax positions for the tax years that remain subject to examination by major tax jurisdictions as of December 31, 2022, which includes the tax years 2019, 2020 and 2021.

Concentrations

4 unchanged sentences

The MHP Notes personal guarantor may cover multiple parks and each park is treated as a customer.

Recent Accounting Pronouncements

The Company has elected to use longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act as an emerging growth company.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) , to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term.

As an emerging growth company, ASU 2016-02 is effective for fiscal years beginning after December 15, 2021, and interim periods within those years.

The Company adopted this standard in the first quarter of fiscal 2022 and elected certain practical expedients permitted under the transition guidance, including the package of practical expedients;

however, the Company did not elect the hindsight practical expedient.

Additionally, the Company elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption and did not restate prior periods.

The adoption of ASU 2016-02 resulted in an increase in total assets and total liabilities of $ 3,258 at transition.

However, this standard did not have a material impact on the consolidated statement of income or the consolidated statement of cash flows.

See Note 6 for further discussion on leases.

LEGACY HOUSING CORPORATION

2 unchanged sentences

(Dollars in thousands, except per share amounts)

Recent Accounting Pronouncements

The Company has elected to use longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act as an emerging growth company.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term.

The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous requirements.

The Company plans to use longer phase-in period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2022.

Modified retrospective application and early adoption is permitted.

The Company expects that the adoption of this standard will result in a material increase to assets and liabilities on the balance sheet but will not have a material impact on the statement of operations.

While the Company is continuing to assess all the effects of adoption, it currently believes the most significant effects relate to (i) the recognition of new right-of-use assets and lease liabilities on its balance sheet for its property and equipment operating leases and (ii) providing significant new disclosures about its leasing activities.

In June 2016, the FASB issued an accounting standards update ASU 2016-13 Financial Instruments—Credit Losses (Topic 326):

In June 2016, the FASB issued ASU 2016-13 Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.

3 unchanged sentences

The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

The Company plans to use longer phase-in period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2023.

The Company is continuing to evaluate the impact of the adoption of this ASU and is uncertain of the impact on the financial statements and disclosures at this point in time.

The Company plans to use the longer phase-in period for adoption, and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2023.

The Company expects that allowance amounts will increase due to the adoption of this ASU.

In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 .

The amendments in this update extend the transition relief period for reference rate reform from December 31, 2022 to December 31, 2024.

The amendments in ASU 2022-06 apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

ASU 2022-06 was effective upon issuance.

The new standard has had no material impact on the Company's financial statements.

From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates.

6 unchanged sentences

Consumer loans receivable, net

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollars in thousands, except per share amounts)

The following table presents a detail of the activity in the allowance for loan losses for the years ended December 31, 2022 and 2021:

1 unchanged sentence

Provision for loan losses

Charge offs (recoveries)

Allowance for loan losses

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

The impaired and general reserve for allowance for loan losses at December 31, 2022 and 2021:

21 unchanged sentences

Allowance for loan loss is considered immaterial and accordingly no loss is recorded against the MHP Notes as of December 31, 2022 and 2021.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollars in thousands, except per share amounts)

Other Notes Receivable

2 unchanged sentences

Allowance for loan losses

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

The Company currently has 13 operating leases, eight of which are for the Company’s Heritage Housing and Tiny Homes retail locations, three which are subleased by the Company and two are for corporate and administrative offices in Bedford, TX and Norcross, GA.

These leases typically have initial terms ranging from 5 to 10 years and include one or more options to renew.

Under ASC 842, a modified retrospective transition is required, applying the new standard to all leases at the date of initial application.

The Company chose to use the adoption date of January 1, 2022 for ASC 842.

As such, all periods presented after January 1, 2022, are under ASC 842 whereas periods presented prior to January 1, 2022, are in accordance with prior lease accounting of ASC 840.

Financial information was not updated and the disclosures required under ASC 842 were not provided for dates and periods before January 1, 2022.

We determine if an arrangement is a lease at inception.

Operating leases are right-of-use (“ROU”) assets and are shown as ROU assets – operating leases on our Condensed Balance Sheet.

The lease liabilities are shown as Operating lease obligation and Operating lease obligation, less current portion on our Condensed Balance Sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

We have elected the practical expedient to not separate lease and non-lease components.

Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement.

We record a ROU asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives.

We remeasure the lease liability and ROU asset when a change to our future minimum lease payments occurs.

Key assumptions and judgments included in the determination of the lease liability include the discount rate used in the present value calculation and the exercise of renewal options.

Many of our leases contain renewal options.

As the exercise of the renewal options is not certain at commencement of a lease, we generally do not include the option periods in the lease term when determining the lease liabilities and ROU assets.

We remeasure the lease liability and ROU asset when we are reasonably certain that we will exercise a renewal option.

Our leases do not provide information about the rate implicit in the lease.

Therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations.

The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.

The remaining weighted-average lease term is 4.54 years and the weighted-average discount rate is 2.12 %.

We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities.

There were no variable lease costs for the year ended December 31, 2022.

Short-term leases, those with a term of 12 months or less, are not recorded on our Balance Sheet.

Our short-term lease costs were not material for the year ended December 31, 2022.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

As of December 31, 2022, future minimum lease payments under our operating lease liabilities were as follows:

Total lease payments

Less amount representing interest

Total lease liability

Less current lease liability

Total non-current lease liability

Inventories consisted of the following at December 31, 2022 and 2021:

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Other assets consisted of the following at December 31, 2022 and 2021:

Leased property, net of accumulated depreciation

Repossessed homes

Depreciation expense for leased property was $ 442 and $ 199 for the years ended December 31, 2021 and 2020, respectively.

DEBT SECURITIES

Debt Securities have been classified according to management’s intent.

The Company purchased US Treasury Notes in November 2022 and they mature in November 2023.

The debt securities have been classified as held-to-maturity and the amortized cost are $ 8,412 and $ 0 at December 31, 2022 and 2021, respectively.

ACCRUED LIABILITIES

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Total accrued liabilities

Accrued liabilities, non-current

Accrued liabilities, current

Lines of Credit

At December 31, 2019, the Company 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, the Company 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 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 %.

The interest rates in effect as of December 31, 2021 and 2020 were 2.10 % and 2.15 %, 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

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

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

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

The letter stated that the Company’s Revolver was in default.

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

On July 28, 2022, the Company entered into a Limited Waiver and First Amendment to Credit Agreement (the “Amendment”) with Capital One, N.A.

LEGACY HOUSING CORPORATION

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(Dollars in thousands, except per share amounts)

receivable and the consumer loans receivable and MHP Notes.

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

In connection with the New Revolver, the Company 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 years ended December 31, 2021 and 2020, interest expense under the Capital One Revolvers was $ 887 and $ 1,020 , respectively.

The Amendment replaced the LIBOR borrowing rate with a secured overnight financing rate (“SOFR”) and waived a default arising out of a monetary judgement against the Company that exceeded the amount allowed in the Revolver.

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 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 2022 were 6.12 % and 2.10 %, 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 and $ 61,841 as of December 31, 2022 and 2021, respectively.

In connection with the Revolver, the Company 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 Revolver.

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

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

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

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

As of December 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 December 31, 2021, the Company was not in compliance with certain non-financial covenants and obtained a waiver from Capital One.

In April 2016, the Company entered into an agreement with Veritex Community Bank to secure an additional revolving line of credit of $ 15,000 (“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, the Company entered into an agreement to increase the line of credit to $ 20,000 .

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 at March 31, 2020 and the interest rate in effect as of March 31, 2020 was 4.17 %.

The Company was in compliance with all required covenants as of March 31, 2020.

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

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

The Company was in compliance with the other financial covenants that it maintain a tangible net worth of at least $ 80,000 when the facility was terminated.

On April 10, 2020, the Company entered into a loan with Peoples Bank as the lender in an aggregate principal amount of $ 6,546 (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 1.00 % per annum, with the first six months of interest deferred.

Principal and interest were payable monthly commencing on November 10, 2020 and could be prepaid by the Company 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, the Company 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 the Company with incentives through the abatement of local, city and county property taxes and to provide financing for improvements to the Company’s 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, the Company would pay transactions costs and debt service payments.

The PILOT agreement requires interest payments of 6.00 % per annum on outstanding balances, which are due each December 1st 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 December 31, 2021, the Company had not drawn on this credit facility.

The net effect of the PILOT agreement was to provide the Company with incentives through the abatement of local, city and county property taxes and to provide financing for improvements to the Company’s 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, the Company 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 1st through maturity on December 1, 2021, at which time all unpaid principal and interest would have been due.

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

No amounts were drawn on this credit facility.

LEGACY HOUSING CORPORATION

36 unchanged sentences

During the second quarter of 2020, 42,857 of these restricted shares were forfeited due to the departure of a member of senior management.

The Company granted 2,936 restricted shares of its common stock to the independent directors on the Company’s Board of Directors.

The shares were granted on February 7, 2019 and became fully vested on December 13, 2019.

In August 2019, the Company granted 39,526 restricted shares of its common stock to a member of senior management.

The shares were granted on August 2, 2019 and had a grant date fair value of $ 496 .

The shares vest at a rate of 20.0 % annually, beginning on August 2, 2020, becoming fully vested on August 2, 2024.

This grant was canceled during the second quarter of 2020 due to the departure of the member of senior management.

In March 2020, the Company granted 1,903 restricted shares of its common stock to the independent directors on the Company’s Board of Directors.

The shares were granted on March 27, 2020 and had a grant date fair value of $ 18 .

The shares became fully vested on December 13, 2020.

In December 2020, the Company granted 2,022 restricted shares of its common stock to the independent directors on the Company’s Board of Directors.

3 unchanged sentences

The shares were granted on November 30, 2021 and had a grant date fair value of $ 30 .

The shares become fully vested on October 24, 2022.

The shares became fully vested on October 24, 2022.

In January 2022, the Company granted 150,000 restricted shares of its common stock to the Executive Chairman of the Company pursuant to an amended and restated employment agreement.

The shares were granted on January 6, 2022 and had a grant date fair value of $ 3,741 .

The shares became fully vested upon grant.

On January 6, 2022, the Company gave contingent equity awards of 350,000 shares of the Company’s restricted stock to the Executive Chairman of the Company pursuant to an amended and restated employment agreement.

An equity award of 175,000 shares will be granted if the Company’s stock price reaches and remains for a period of fifteen consecutive market days at a closing price of $ 36 per share (the “$ 36 Equity Award”).

The $ 36 Equity Awards had a grant date fair value of $ 1,412 and fifty percent of the shares shall be vested at grant and fifty percent shall vest on June 16, 2024, so long as the Executive Chairman is employed by the Company on that date.

An additional equity award of 175,000 shares of the Company’s restricted stock will be granted if the Company’s stock price reaches and remains for a period of fifteen consecutive market days at a closing price of $ 48 per share (the “$ 48 Equity Award”).

The $ 48 Equity Awards had a grant date fair value of $ 683 and fifty percent of the shares shall be vested at grant and fifty percent shall vest on June 16, 2024, so long as the Executive Chairman is employed by the Company on that date.

On November 15, 2022, the Company entered into a rescission and relinquishment agreement (the “Rescission Agreement”) with the Executive Chairman.

The Rescission Agreement allows the Executive Chairman to rescind and relinquish the $ 36 Equity Awards and the $ 48 Equity Awards granted under the amended and restated employment agreement and allows the Company to accept such rescission and relinquishment, without any payment therefor.

The effective date of the Rescission Agreement is October 1, 2022.

On June 7, 2022, the Company granted 14,700 restricted shares of its common stock to the Chief Executive Officer of the Company pursuant to an employment agreement.

The shares were granted on June 7, 2022 and had a grant date fair value of $ 235 .

One -half of the shares vest on June 7, 2023 and the remaining half vest on June 7, 2024.

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

On June 7, 2022, the Company granted 301 restricted shares of its common stock to an independent director on the Company’s Board of Directors.

The shares were granted on June 7, 2022 and had a grant date fair value of $ 5 .

The shares became fully vested on October 24, 2022.

In November 2022, the Company granted 1,734 restricted shares of its common stock to the independent directors on the Company’s Board of Directors.

The shares were granted on November 29, 2022 and had a grant date fair value of $ 30 .

The shares became fully vested on October 23, 2023.

The following is a summary of restricted stock units (the “RSU”) activity (in thousands, except per unit data):

5 unchanged sentences

Unrecognized compensation expense related to these RSUs at December 31, 2022 was $ 442 and is expected to be recognized over 1.77 years.

In February 2019, the Company granted 58,694 incentive stock options to a member of senior management at an exercise price of $ 13.63 per share.

The options vest at a rate of 12.5 % annually, beginning on February 7, 2019, and

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollars in thousands, except per share amounts)

becoming fully vested on February 7, 2026.

The Company granted 34,626 incentive stock options to a member of senior management.

The options were granted on August 10, 2020 at an exercise price of $ 14.44 per share.

The options vest at a rate of 20.0 % annually, beginning on August 10, 2021, and becoming fully vested on August 10, 2025.

All options expire ten years after the date of grant.

3 unchanged sentences

expected volatility of common stock of 75.0 % and expected life of options of 6.5 years.

During the second quarter of 2020, these options were forfeited due to the departure of a senior manager.

In August 2020, the Company granted 34,626 incentive stock options to a member of senior management at an exercise price of $ 14.44 per share.

The options vest at a rate of 20.0 % annually, beginning on August 10, 2021, and becoming fully vested on August 10, 2025.

During the first quarter of 2022, 27,701 of these options were forfeited due to the individual’s departure.

The Company granted 55,490 incentive stock options to a member of management.

The options were granted on September 23, 2021 at an exercise price of $ 18.02 per share.

The options vest at a rate of 10.0 % annually, beginning on September 23, 2022, and becoming fully vested on September 23, 2031.

All options expire ten years after the date of grant.

3 unchanged sentences

expected volatility of common stock of 75.0 % and expected life of options of 7.8 years.

In September 2021, the Company granted 55,490 incentive stock options to a member of management at an exercise price of $ 18.02 per share.

The options vest at a rate of 10.0 % annually, beginning on September 23, 2022, and becoming fully vested on September 23, 2031.

During the fourth quarter of 2022, these options were forfeited due to the individual’s departure.

The Company granted 62,460 incentive stock options to the Chief Executive Officer.

The options were granted on June 7, 2022 at an exercise price of $ 16.01 per share.

The options vest at a rate of 10.0 % annually, beginning on June 7, 2023, and becoming fully vested on June 7, 2032.

All options expire ten years after the date of grant.

3 unchanged sentences

expected volatility of common stock of 45.7 % and expected life of options of 7.8 years.

The Company granted options to purchase 900,000 shares of the Company’s stock to the Chief Executive Officer.

An option to purchase 300,000 shares of the Company’s stock was granted on June 7, 2022 at an exercise price of $ 36.00 per share and an option to purchase 600,000 shares of the Company’s stock was granted on June 7, 2022 at an exercise price of $ 48.00 per share.

The options vest at a rate of 10.0 % annually, beginning on June 7, 2023, and

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2022 and 2021

(Dollars in thousands, except per share amounts)

becoming fully vested on June 7, 2032.

All options expire ten years after the date of grant.

Weighted-average assumptions used in the Black-Scholes option pricing model for stock options granted were as follows:

risk free interest rate of 2.98 %;

dividend yield of 0.00 %;

expected volatility of common stock of 45.7 % and expected life of options of 7.8 years.

The Company granted 62,460 incentive stock options to the Chief Financial Officer.

The options were granted on June 7, 2022 at an exercise price of $ 16.01 per share.

The options vest at a rate of 10.0 % annually, beginning on June 7, 2023, and becoming fully vested on June 7, 2032.

All options expire ten years after the date of grant.

Weighted-average assumptions used in the Black-Scholes option pricing model for stock options granted were as follows:

risk free interest rate of 2.98 %;

dividend yield of 0.00 %;

expected volatility of common stock of 45.7 % and expected life of options of 7.8 years.

The following is a summary of option activity (in thousands, except per unit data):

4 unchanged sentences

Contractual Life

Outstanding, January 1, 2021, nonvested

Outstanding, December 31, 2021, nonvested

Outstanding, January 1, 2021

Outstanding, December 31, 2021

Exercisable, December 31, 2021

Outstanding, January 1, 2022

Outstanding, December 31, 2022

Exercisable, December 31, 2022

As of December 31, 2022, approximately 1,025,000 options remain nonvested.

Unrecognized compensation expense related to these options at December 31, 2022 was $ 4,825 and is expected to be recognized over 9.44 years.

On March 31, 2020, the Company filed a registration statement on Form S-8 to register with the SEC approximately 2.3 million shares of Legacy common stock available for issuance under the 2018 Incentive Compensation Plan.

The registration statement became effective upon filing.

COMMITMENTS AND CONTINGENCIES

4 unchanged sentences

At December 31, 2022 and 2021, the Company accrued a $ 149 and $ 373 liability for incurred but not reported claims, respectively.

The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products.

These arrangements, which are customary in the industry,

LEGACY HOUSING CORPORATION

2 unchanged sentences

(Dollars in thousands, except per share amounts)

The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products.

These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer.

provide for the repurchase of products sold to retailers in the event of default by the retailer.

The Company’s obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer.

5 unchanged sentences

The Company also subleases properties to third parties, ranging from 3-year to 11-year terms with various renewal options.

Rental income from the subleased property is included in other revenue in the Company’s statements of operations and was approximately $ 394 and $ 343 for the years ended December 31, 2021 and 2020, respectively.

Future minimum lease commitments under all non-cancelable operating leases for each of the next five years at December 31, 2021, are as follows:

Rental income from the subleased property was approximately $ 326 and $ 394 for the years ended December 31, 2022 and 2021, respectively.

See Note 6 – Leases, for a schedule of the Company’s future minimum lease commitments.

Legal Matters

2 unchanged sentences

The Company has determined that it is probable that it has some liability related to the claims.

The Company's reasonable estimate of this liability is a range between $ 2,613 and $ 5,038 and has included legal reserves of $ 2,764 and $ 899 as of December 31, 2021 and 2020, respectively, in accrued liabilities on the accompanying balance sheets.

The Company has included legal reserves of $ 753 and $ 2,764 as of December 31, 2022 and 2021, respectively, in accrued liabilities on the accompanying balance sheets.

Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s financial position, liquidity or results of operations.

However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company’s financial position, liquidity or results of operations in any future reporting periods.

On February 2, 2012, the Company entered into a master interest rate swap agreement.

The Company elected not to designate the interest rate swap agreements as cash flow hedges and, therefore, gains or losses on the agreements as well as the other offsetting gains or losses on the hedged items attributable to the hedged risk are recognized in current earnings.

ASC 815-10, Derivatives and Hedging , requires derivative instruments to be measured at fair value and recorded in the statements of financial position as either assets or liabilities.

The Company entered into interest rate swap agreement with Capital One Bank on June 12, 2017 to fix the variable rate portion for $ 8,000 of the line of credit.

EARNINGS PER SHARE

Basic earnings per common share (“EPS”) is computed based on the weighted-average number of common shares outstanding during the reporting period.

Diluted EPS is based on the weighted-average number of common shares outstanding plus the number of additional shares that would have been outstanding had the dilutive common shares been

LEGACY HOUSING CORPORATION

2 unchanged sentences

(Dollars in thousands, except per share amounts)

interest rate swap agreement matured on May 11, 2020.

Included in the statements of operations for the years ended December 31, 2020 is a loss of $ 15 which was the result of the changes in the fair values of the interest rate swap agreement.

EARNINGS PER SHARE

Basic earnings per common share (“EPS”) is computed based on the weighted-average number of common shares outstanding during the reporting period.

Diluted EPS is based on the weighted-average number of common shares outstanding plus the number of additional shares that would have been outstanding had the dilutive common shares been issued.

The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS.

6 unchanged sentences

Earnings per share attributable to Legacy Housing Corporation

The diluted earnings per share calculation excludes zero and 35,935 potential shares related to stock grants and stock options for the years ended December 31, 2021 and 2020, respectively, because the effect of including these potential shares would be antidilutive.

The diluted earnings per share calculation excludes 102,408 and zero potential shares related to stock grants and stock options for the years ended December 31, 2022 and 2021, respectively, because the effect of including these potential shares would be antidilutive.

RELATED PARTY TRANSACTIONS

9 unchanged sentences

as of December 31, 2022 and 2021, respectively.

At December 31, 2022, the Company had a receivable of $ 68 from a principal shareholder.

This amount is included in the Company’s accounts receivable balance as of December 31, 2022.

SUBSEQUENT EVENTS

On January 5, 2022, the Company entered into an amended and restated employment agreement (the “Employment Agreement”) with Curtis D.

Hodgson, Executive Chairman of the Company.

The Employment Agreement provides for a term that commences on January 1, 2022 and expires on June 16, 2024, unless earlier terminated (the “Employment Period”).

Pursuant to the Employment Agreement, Mr.

Hodgson will continue to serve in his current

LEGACY HOUSING CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollars in thousands, except per share amounts)

position with the Company, as set forth above, and will have duties, responsibilities, and authority that are customary to such position.

The Employment Agreement provides for Mr.

Hodgson to receive a base salary of $ 200,000 per year and a signing bonus of 150,000 shares of restricted stock, which shall be vested upon grant.

Hodgson is also eligible for an annual incentive bonus and equity awards.

The annual inventive bonus will be determined by the Board but will not exceed 100 % of Mr.

Hodgson’s base salary.

An equity award of 175,000 shares of the Company’s restricted stock will be granted if the Company’s stock price reaches and remains for a period of fifteen consecutive market days at a closing price of $ 36 per share.

On May 30, 2022, the Company submitted to Nasdaq a plan to regain compliance with Nasdaq Listing Rule 5250(c)(1) (the “Rule”) regarding the Company’s failure to file timely Form 10-K for the period ending December 31, 2021 and Form 10-Q for the period ending on March 31, 2022.

On June 9, 2022, the Company received a response from Nasdaq informing the Company that Nasdaq granted an exception to the filing requirements set forth in the Rule that allows the Company to file these reports and any other required filings as required by the Rule on or before September 27, 2022.

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.

In connection with the preparation of these financial statements, an evaluation of subsequent events was performed through the date of filing.

The Company recently updated its management of escrow collections.

Historically, escrow collections were deposited in an unsegregated deposit account subject to the Company's credit agreement with Capital One, N.A.

On June 28, 2022, the Company segregated escrow collections by purchasing an $ 8.5 M certificate of deposit that is not subject to the credit agreement.

The certificate of deposit principal amount will be adjusted periodically.

The Company will continue to hold escrow collections separately from its other operating funds where required by law..

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

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 8. Financial Statements and Supplementary Data