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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-15 · 134 added, 155 removed, 126 unchanged (70% of the section changed)

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It contains forward-looking statements that involve risks and uncertainties, and is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management.

Our actual results could differ materially from those anticipated by our management in these forward-looking statements as a result of various factors, including those discussed in this Form 10-K and in our Registration Statement on Form S-1, particularly under the heading “Risk Factors.”

Legacy Housing Corporation builds, sells and finances manufactured homes and “tiny houses” that are distributed through a network of independent retailers and company-owned stores and are sold directly to manufactured housing communities.

We are the fifth largest producer of manufactured homes in the United States as ranked by number of homes manufactured based on information available from the Manufactured Housing Institute and IBTS for the twelve month period ending September 30, 2022.

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 nine month period ending September 30, 2023.

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

For example, the sale of manufactured homes includes providing transportation and consignment arrangements with dealers.

For example, the sale of manufactured homes includes providing transportation for dealers.

We also provide financing options to the customers to facilitate such sale of homes.

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

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

We believe our company is one of the most vertically integrated in the manufactured housing industry, allowing us to offer a complete solution to our customers, from manufacturing custom-made homes using quality materials and distributing those homes through our expansive network of independent retailers and company-owned distribution locations, to providing tailored financing solutions for our customers.

Accordingly, all significant operating and strategic decisions by the chief operating decision-maker, the Chief Executive Officer, are based upon analyses of our company as one segment or unit.

We believe our company is one of the most vertically integrated in the manufactured housing industry, allowing us to offer a complete solution to our customers.

We manufacture custom-made homes using quality materials, distribute those homes through our expansive network of independent retailers and company-owned distribution locations and provide tailored financing solutions for our customers.

Our homes are constructed in the United States at one of our three manufacturing facilities in accordance with the construction and safety standards of the U.S.

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We use quality materials and operate our own component manufacturing facilities for many of the items used in the construction of our homes.

Each home can be configured according to a variety of floor plans and equipped with such features as fireplaces, central air conditioning and state-of-the-art kitchens.

Our homes are marketed under our premier “Legacy” brand name and currently are sold primarily across 15 states through a network of 156 independent retail locations, 13 company-owned retail locations and through direct sales to owners of manufactured home communities.

Each home can be configured according to a variety of floor plans and equipped with features such as fireplaces, central air conditioning and state-of-the-art kitchens.

Our homes are marketed under our premier “Legacy” brand name and currently are sold primarily across 15 states through a network of over 150 independent retail locations, 13 company-owned retail locations and through direct sales to owners of manufactured home communities.

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

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 the years ended December 31, 2023 and 2022, no independent retailer accounted for 10% or more of our product sales.

Approximately 51% of our 2023 product sales were attributable to our independent retail distributors, 12% to our company-owned retail locations and 37% directly to owners of manufactured housing communities.

Approximately 63% of our 2022 product sales were attributable to our independent retail distributors, 9% to our company-owned retail locations and 29% directly to owners of manufactured housing communities.

The following table shows the states in which we sold most of our manufactured homes and the approximate percentage of this sales to our total product sales:

North Carolina

South Carolina

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 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.

Corporate Conversion

Prior to January 1, 2018, we were a Texas limited partnership named Legacy Housing, Ltd.

Effective January 1, 2018, we converted into a Delaware corporation pursuant to a statutory conversion, or the Corporate Conversion, and changed our name to Legacy Housing Corporation.

All of our outstanding partnership interests were converted on a proportional basis into shares of common stock of Legacy Housing Corporation.

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

For more information, see “Corporate Conversion” in Note 1.

Following the Corporate Conversion, Legacy Housing Corporation continues to hold all of the property and assets of Legacy Housing, Ltd.

and all of the debts and obligations of Legacy Housing, Ltd.

continue as the debts and obligations of Legacy Housing Corporation.

The purpose of the Corporate Conversion was to reorganize our corporate structure so that the top-tier entity in our corporate structure is a corporation rather than a limited partnership and so that our existing owners own shares of our common stock rather than partnership interests in a limited partnership.

Except as otherwise noted, the financial statements included in this Form 10-K are those of Legacy Housing Corporation.

We provide inventory financing for our independent retailers who purchase homes from us and then sell them to consumers.

We provide consumer financing for our products which are sold to end-users through both independent and company-owned retail locations.

We also 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.

Factors Affecting Our Performance

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These solutions will be structured to give us an attractive return on investment when coupled with the gross margin we expect to make on products specifically targeted for sale to these new manufactured housing communities.

● Inflation recently was near its highest rates in the U.S.

over the last 30 years.

Our ability to maintain gross margins can be adversely impacted by sudden increases in specific costs, such as the increases in material and labor.

In addition, measures used to combat inflation, such as increases in interest rates, could also have an impact on the ability of home buyers to obtain affordable financing.

We continue to explore opportunities to minimize the impact of inflation on our future profitability.

● Finally, our financial performance will be impacted by our ability to fulfill current orders for our manufactured homes from dealers and customers.

Currently, our two Texas manufacturing facilities are operating at or near peak capacity, with limited ability to increase the volume of homes produced at those plants.

Our Georgia manufacturing facility has unutilized square footage available and with additional investment can add capacity to increase the number of homes that can be manufactured.

We intend to increase production at the Georgia facility over time, particularly in response to orders increasingly being generated from new markets in Florida and the Carolinas.

In order to maintain our growth, we will need to be able to continue to properly estimate anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the

timing of production schedules and the levels and utilization of inventory, equipment and personnel.

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

We intend to increase production at the Georgia facility over time, particularly in response to orders increasingly being generated from new markets.

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

Critical Accounting Policies and Estimates

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Specific reserves are determined based on probable losses on specific classified impaired loans.

Our policy is to place a loan on nonaccrual status when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is normally when either principal or interest is past due and remains unpaid for more than 90 days.

Management implemented this policy based on an analysis of historical data and performance of loans and the likelihood of recovery once principal or interest payments became delinquent and were aged more than 90 days.

Payments received on nonaccrual loans are accounted for on a cash basis, first to interest and then to principal, as long as the remaining book balance of the asset is deemed to be collectible.

The accrual of interest resumes when the past due principal or interest payments are brought within 90 days of being current.

Impaired loans are those loans where it is probable we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.

Impaired loans, or portions thereof, are charged-off when deemed uncollectible.

A loan is generally deemed impaired if it is more than 90 days past due on principal or interest, is in bankruptcy proceedings, or is in the process of repossession.

A specific reserve is created for impaired loans based on fair value of underlying collateral value, less estimated selling costs.

We use certain factors to determine the value of the underlying collateral for impaired loans.

These factors are:

(1) the length of time the unit was unsold after construction;

(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 will reduce the value;

(4) units located on private property present additional value loss because it tends to be more expensive to remove units from private property as opposed to a manufactured home park;

(5) the length of time the borrower has lived in the house without making payments;

(6) location and size, including market conditions;

and (7) the experience and expertise of the particular dealer assisting in collection efforts.

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;

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.

For further information, see Note 2, Summary of Significant Accounting Policies, to our December 31, 2023 financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Form-10K.

Allowance for Loan Losses—MHP Notes

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Estimates of the lower of cost and net realizable value of inventory are determined by comparing the actual cost of the product to the estimated selling prices in the ordinary course of business based on current market and economic conditions, less reasonably predictable costs of completion, disposal, and transportation of the inventory.

We evaluate inventory based on historical experience to estimate our inventory not expected to be sold in less than a year.

We classify our inventory not expected to be sold in one year as non-current.

Property, Plant and Equipment

Property, plant and equipment are carried at cost less accumulated depreciation.

Depreciation expense is calculated using the straight-line method over the estimated useful lives of each asset.

Estimated useful lives for significant classes of assets are as follows:

buildings and improvements, 30 to 39 years;

vehicles, 5 years;

machinery and equipment, 7 years;

and furniture and fixtures, 7 years.

Repair and maintenance charges are expensed as incurred.

Expenditures for major renewals or betterments which extend the useful lives of existing property, plant, and equipment are capitalized and depreciated.

We periodically evaluate the carrying value of long-lived assets to be held and used and when events and circumstances warrant such a review.

The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is less than its carrying value.

In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets.

Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.

Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair values are based primarily on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose.

We evaluate finished goods inventory based on age, and we classify our finished goods inventory greater than one year old as non-current.

Revenue Recognition

Revenue from homes sold to independent retailers that are not financed and not under a consignment arrangement are generally recognized upon execution of a sales contract and when the home is shipped, at which time title passes to the independent retailer and collectability is reasonably assured.

Revenue from homes sold to independent retailers that are not financed and not under an inventory finance arrangement generally is recognized upon execution of a sales contract and when the home is shipped, at which time title passes to the independent retailer and collectability is reasonably assured.

These types of homes are generally either paid for prior to shipment or floor plan financed through a third party lender by the independent retailer through standard industry arrangements, which can include repurchase agreements.

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Revenue from homes sold to mobile home parks under commercial loan programs involving funds provided by our company is recognized when the home is shipped, at which time title passes to the customer and a sales and financing contract is executed, down payment received, and collectability is reasonably assured.

Consignment Sales

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;

or, upon execution of a sales and financing contract, with a down payment received from and upon delivery of the home to the final individual customer, at which time title passes and collectability is reasonably assured.

For homes sold to customers through independent retailers under consignment arrangements and financed by us, a percentage of profit is paid to the independent retailer up front as a commission for sale and also reimburses certain direct expenses incurred by the independent retailer for each transaction.

Such payments are recorded as cost of product sales in our statement of operations.

Inventory Finance Sales

We provide inventory financing for independent retailers who purchase homes from us and then resell them to consumers.

Sales under an 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.

Retail Store Sales

Revenue from direct retail sales through company-owned retail locations are generally recognized when the customer has entered into a legally binding sales contract, payment is received, the home is delivered at the customer’s site, title has transferred, and collection is reasonably assured.

Retail sales financed by us are recognized as revenue upon the execution of a sales and financing contract with a down payment received and upon delivery of the home to the final customer, at which time title passes and collectability is reasonably assured.

Revenue from direct retail sales through company-owned retail locations generally is recognized when the customer has entered into a legally binding sales contract, payment is received, the home is delivered at the customer’s site, title has transferred, and collection is reasonably assured.

Retail sales financed by us are recognized as revenue upon the execution of a sales and financing contract, receipt of a down payment and delivery of the home to the final customer, at which time title passes and collectability is reasonably assured.

Revenue is recognized net of sales taxes.

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Dealer incentive

Total operating expenses

Income from operations

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Income tax expense

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

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

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.

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

Product sales decreased $77.0 million, or 34.7%, in 2023 as compared to 2022.

This decrease was driven by (i) the conversion of certain independent dealer consignment arrangements to inventory finance arrangements in 2022 that did not occur in 2023 and (ii) a decrease in unit volumes.

The conversion of consignment arrangements to inventory finance arrangements resulted in an increase to product sales of approximately $29.1 million during 2022, and the conversion had a minimal impact on product sales in 2023.

Net revenue attributable to our factory-built housing consisted of the following in 2023 and 2022:

($ in thousands)

Products sold

Total products sold

Net revenue per product sold

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 $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 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 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 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.

Product Sales

Total units sold

Net revenue per unit sold

In 2023, our net revenue per product sold decreased primarily because of the conversion of consignment arrangements to inventory finance arrangements that occurred in 2022 but not in 2023, and this was partially offset by an increase in unit prices in 2023, as rising material and labor costs were passed on to our customers.

We had decreases in direct sales, commercial sales, inventory finance sales and retail store sales.

We believe the market for mobile homes in 2023 slowed considerably from prior years due to the economic environment, including higher inflation and rising home costs.

Direct sales decreased $28.0 million, or 61.5% from 2023 to 2022, mainly due to general slowdown in the market for mobile homes.

Commercial sales decreased $6.4 million, or 10.5% from 2023 to 2022, due to mobile home park operators slowing or delaying purchases of mobile homes.

Retail store sales decreased $0.5 million, or 2.4% from 2023 to 2022, and we believe our efforts to to focus on our own retail sales channel in 2023 helped moderate the impact of market conditions.

Inventory finance sales decreased $39.9 million, or 47.5% from 2023 to 2022, due to the conversion of consignment arrangements to inventory finance arrangements that occurred in 2022 but not in 2023.

Consumer, MHP and dealer loans interest income increased $8.9 million, or 31.0%, from 2023 to 2022 due to growth in our loan portfolios.

Interest income in 2023 from dealer finance notes resulted from the 2022 conversion of consignment arrangements to inventory finance arrangements and the addition of new dealer finance notes in 2023.

Between December 31, 2023 and December 31, 2022 our consumer loan portfolio increased by $17.5 million, our MHP loan portfolio increased by $39.2 million, our other notes portfolio increased by $11.9 million and our dealer finance notes increased by $2.5 million.

Other revenue primarily consists of contract deposit forfeitures, consignment fees, commercial lease rents, service fees and other miscellaneous income and increased $0.2 million, or 3.5%, primarily due to a $2.7 million increase in forfeited deposits, a $0.3 million increase in servicer fee revenue and a $2.8 million decrease in consignment fees.

The cost of product sales decreased $50.4 million, or 33.6%, in 2023 as compared to 2022.

The decrease in costs is primarily related to a decrease in units sold.

Selling, general and administrative expenses decreased $3.3 million, or 11.9%, in 2023 as compared to 2022.

This decrease was primarily due to a $3.2 million decrease in salaries and benefits costs, a $0.4 million decrease in warranty costs, a $0.1 million decrease in consulting and professional fees, and a $0.1 million decrease in depreciation and amortization expense, partially offset by a $1.0 million increase in loan loss provision, a $0.7 million increase in legal expense, a $0.4 million increase in marketing and advertising expense and a net $1.5 million decrease in other miscellaneous costs.

Dealer incentive expense decreased $0.7 million, or 55.4% in 2023 as compared to 2022.

Other income (expense), net did not change in 2023, as compared to 2022.

Net changes included a $1.3 million increase in income from gains related to financing dealer and consumer loans, a decrease of $0.2 million in capital gains related to the sale of leased property, an increase of $0.1 million in interest income, a decrease of $0.5 million in other income, a $0.6 million increase in interest expense and an increase of $0.1 million in other expense.

Income tax expense was $14.3 million for 2023 compared to $14.4 million for and 2022.

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Liquidity and Capital Resources

Cash and Cash Equivalents

We consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents.

We believe that cash flow from operations and cash at December 31, 2023, and availability on our lines of credit will be sufficient to fund our operations and provide for growth for the next 12 to 18 months and into the foreseeable future.

On July 28, 2023, we terminated our credit agreement with Capital One, N.A.

and entered into a new credit agreement with Prosperity Bank that expanded and extended our credit availability (see Lines of Credit , below).

We maintain cash balances in bank accounts that may, at times, exceed federally insured limits.

We have not incurred any losses from such accounts and management considers the risk of loss to be minimal.

We believe that cash flow from operations, cash and cash equivalents at December 31, 2022, and availability on our lines of credit will be sufficient to fund our operations and provide for growth for the next 12 to 18 months and into the foreseeable future.

In 2020, we negotiated a new credit agreement with Capital One, N.A.

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

As of 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.

As of December 31, 2023, we had approximately $0.7 million in cash, compared to $2.8 million as of December 31, 2022.

We consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents.

Cash Flow Activities

(in thousands)

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 year

Cash and cash equivalents at end of year

Net cash used in operating activities

Net cash (used in) provided by investing activities

Net cash provided by (used in) financing activities

Net change in cash

Cash at beginning of year

Cash at end of year

Comparison of Cash Flow Activities from 2023 to 2022

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 operating activities was $13.5 million during the year ended December 31, 2023, compared to net cash of $1.7 million used in operating activities during 2022.

This change was primarily a result of increased cash used for a decrease in operating income before non-cash adjustments, increased volume of consumer loan originations net of principal collections, increased inventories, increased prepaid expenses and other current assets, decreased customer deposits and a decrease in dealer incentives.

The increase in cash used in operating activities was partially offset by a decreased volume of dealer inventory loans net of collections, decreased other assets, and decreased accounts payable and accrued liabilities.

Net cash used in investing activities of $9.8 million in 2023 was primarily attributable to $14.8 million of originations related to loans we made to third parties for the development of manufactured housing parks, $8.5 million in proceeds from the sale of U.S.

treasury notes, and $7.7 million in improvements and development related to property, plant and equipment.

These were offset by $2.7 million of collections related to loans we made to third parties for the development of manufactured housing parks, proceeds of $1.1 million for the sale of leased property and collections of $0.4 million from our purchased consumer loans.

Net cash provided by financing activities of $21.2 million in 2023 was attributable to net uses of $21.1 million on our lines of credit offset by $0.1 million received from the exercise of stock options.

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.

Lines of Credit

Capital One Revolver.

On March 30, 2020, we entered into an agreement with Capital One, N.A.

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

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

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

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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.

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.

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 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.

No amounts were drawn on this credit facility.

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

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

The Amendment replaced the LIBOR borrowing rate with a secured overnight financing rate (“SOFR”) and waived a default arising out of a monetary judgment 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.

The notice stated that the July 28, 2022 forbearance agreement had been terminated and that Capital One 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 was limited to $20,000.

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

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

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

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

On July 28, 2023, upon entry into the New Revolver described below, the Capital One Revolver was repaid in full, and all commitments thereunder were terminated.

Prosperity Revolver.

On July 28, 2023, the Company entered into a new Credit Agreement (the “New Revolver”), by and among the Company as borrower, the financial institutions from time to time party thereto, as lenders, and Prosperity Bank as administrative agent.

The New Revolver provides for a four-year senior secured revolving credit facility with an initial commitment of $50,000 and an additional $25,000 commitment under an accordion feature.

The New Revolver is secured by the Company’s consumer loans receivables and all escrow accounts associated with the consumer loans receivables.

At the Company's option, borrowings will bear interest at a per annum rate equal to, (i) Term Secured Overnight Financing Rate (“SOFR”) plus an applicable margin of 2.5% or 2.75% based upon the Company's average quarterly borrowings under the New Revolving Credit Agreement or (ii) a base rate plus an applicable margin of 2.5% or 2.75% based upon the Company's average quarterly borrowings under the New Revolver.

The Company paid certain arrangement fees and other fees in connection with the New Revolver of approximately $271, which were capitalized as unamortized debt issuance costs and are amortized to interest expense over the life of the New Revolver.

The New Revolver matures July 28, 2027.

For the year ended December 31, 2023, interest expense under the Revolver and New Revolver was $930, and for the year ended December 31, 2022, interest expense under the Revolver was $225.

The outstanding balance of the New Revolver as of December 31, 2023 was $23,680, and the outstanding balance of the Revolver as of December 31, 2022 was $2,545.

The interest rate in effect as of December 31, 2023 for the New Revolver was 7.95% and the interest rate in effect as of December 31, 2022 for the Revolver was 6.12%.

The amount of available credit under the New Revolver was $26,320 as of December 31, 2023 and the amount of available credit under the Revolver was $17,400 as of December 31, 2022.

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

As of December 31, 2023, the Company was in compliance with all financial covenants, including that it maintain a maximum leverage ratio of no more than 1.00 to 1.00 and a minimum fixed charge coverage ratio of no less than 1.75 to 1.00.

Contractual Obligations

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Recent Accounting Pronouncements

For information regarding recently issued and adopted accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, to our December 31, 2022 financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Form-10K.

The Company elected to use longer phase in periods for the adoption of new or revised financial accounting standards under the JOBS Act while it was 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.

ASU 2016-02 was effective for the Company 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 8 for further discussion on leases.

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.

For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.

For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write down and affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income.

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 used the longer phase in period for adoption, and accordingly this ASU became effective for the Company’s fiscal year beginning January 1, 2023.

The adoption of ASU 2016-13 resulted in an increase in portfolio allowances of $900 at transition.

The $900 was comprised of a $225 increase for MHP notes, a $187 increase for dealer financed contracts and a $488 increase for other notes receivable.

The cumulative effect of the adoption was a net decrease of $698 to beginning retained earnings at January 1, 2023.

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.

Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s Financial Statements upon adoption.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the JOBS Act.

The Company’s status as an “emerging growth company” ended on December 31, 2023.

An “emerging growth company,” as defined in the JOBS Act.

Section 107 of the JOBS Act, provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.

In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We have elected to take advantage of these exemptions until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of this exemption.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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What changed 10-K

Item 7. Management’s Discussion and Analysis