Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the financial statements and accompanying notes and the information contained in other sections of this Form 10-K. 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.”Dollar amounts are in thousands unless otherwise noted.
Overview
Legacy Housing Corporation builds, sells and finances manufactured homes and “tiny houses” that are distributed through a network of independent retailers and company-owned stores and are sold directly to manufactured housing communities. We are the 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. Our homes range in price, at retail, from approximately $33 to $180. During 2023, we sold 2,877 home sections (which are entire homes or single floors that are combined to create complete homes) and in 2022, we sold 4,189 home sections.
The Company has one reportable segment. All of our activities are interrelated, and each activity is dependent and assessed based on how each of the activities of Company supports the others. For example, the sale of manufactured homes includes providing transportation 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 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. Department of Housing and Urban Development (“HUD”). Our factories employ high-volume production techniques that allow us to produce, on average, approximately 70 home sections, or 60 fully-completed homes depending on product mix, in total per week. We use quality materials and operate our own component manufacturing facilities for many of the items used in the construction of our homes. Each home can be configured according to a variety of floor plans and equipped with 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 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.
18
Table of Contents
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:
% of 2023
% of 2022
Total
Total
Location
Net Sales
Net Sales
Texas
53
%
53
%
Georgia
12
%
9
%
Louisiana
9
%
4
%
Oklahoma
4
%
3
%
Michigan
3
%
—
%
Florida
3
%
5
%
New Mexico
2
%
2
%
North Carolina
2
%
2
%
Alabama
2
%
5
%
Colorado
1
%
1
%
Indiana
1
%
—
%
Kansas
1
%
1
%
South Carolina
1
%
2
%
Arizona
1
%
5
%
We offer three types of financing solutions to our customers. 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
We believe that the growth of our business and our future success depend on various opportunities, challenges, trends and other factors, including the following:
● We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions. As of December 31, 2023, these properties include the following ($’s in thousands):
Location
Description
Date of Acquisition
Land
Improvements
Total
Bastrop County, Texas
368 Acres
April 2018
$
4,215
$
8,884
$
13,099
Bexar County, Texas
69 Acres
November 2018
842
107
949
Horseshoe Bay, Texas
133 Acres
Various 2018-2019
2,639
2,161
4,800
Johnson County, Texas
91.5 Acres
July 2019
449
-
449
Venus, Texas
50 Acres
August 2019
422
42
464
Wise County, Texas
81.5 Acres
September 2020
889
-
889
Bexar County, Texas
233 Acres
February 2021
1,550
382
1,932
$
11,006
$
11,576
$
22,582
● We also expect to provide financing solutions to a select group of our manufactured housing community-owner customers in a manner that includes developing new sites for products in or near urban locations where there is a shortage of sites to place our products. These solutions will be structured to give us an attractive return on investment when coupled with the gross margin we expect to make on products specifically targeted for sale to these new manufactured housing communities.
19
Table of Contents
● 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. 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 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 actively review organic and inorganic opportunities to add production capacity in attractive regions to meet future demand.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following accounting policies are critical to our operating results or may affect significant judgments and estimates used in the preparation of our financial statements.
Allowance for Loan Losses—Consumer Loan Receivable
The allowance for loan losses reflects management’s estimate of losses inherent in the consumer loans that may be uncollectible based upon review and evaluation of the consumer loan portfolio as of the date of the balance sheet. A reserve is calculated after considering, among other things, the loan characteristics, including the financial condition of borrowers, the value and liquidity of collateral, delinquency and historical loss experience.
The allowance for loan losses is comprised of two components: the general reserve and specific reserves. Our calculation of the general reserve considers the historical loss rate for the last three years, adjusted for the estimated loss discovery period and any qualitative factors both internal and external to our company. Specific reserves are determined based on probable losses on specific classified impaired loans. 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
MHP Notes are stated at amounts due from customers net of allowance for loan losses. We determine the allowance by considering several factors including the aging of the past due balance, the customer’s payment history, and our previous loss history. We establish an allowance reserve composed of specific and general reserve amounts that are deemed to be uncollectible. Historically we have not experienced material losses on the MHP Notes.
20
Table of Contents
Inventories
Inventories consist of raw materials, work-in-process, and finished goods. Finished goods are stated at the lower of cost or net realizable value. Raw materials cost approximates the first-in first-out method. Finished goods and work-in-process are based on a standard cost system that approximates actual costs using the specific identification method.
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 finished goods inventory based on age, and we classify our finished goods inventory greater than one year old as non-current.
Revenue Recognition
Direct Sales
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.
Commercial Sales
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.
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 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.
Product Warranties
We provide retail home buyers with a one-year warranty from the date of purchase on manufactured inventory. Product warranty costs are accrued when the covered homes are sold to customers. Product warranty expense is recognized based on the terms of the product warranty and the related estimated costs. Factors used to determine the warranty liability include the number of homes under warranty and the historical costs incurred in servicing the warranties. The accrued warranty liability is reduced as costs are incurred, and warranty liability balance is included as part of accrued liabilities in our balance sheet.
21
Table of Contents
Results of Operations
The following discussion should be read in conjunction with the information set forth in the financial statements and the accompanying notes appearing elsewhere in this Form 10-K.
Comparison of Years ended December 31, 2023 and 2022 (in thousands)
Year ended
December 31,
2023
2022
$ change
% change
Net revenue:
Product sales
$
145,100
$
222,052
$
(76,952)
(34.7)
%
Consumer and MHP loans interest
37,420
28,564
8,856
31.0
%
Other
6,624
6,399
225
3.5
%
Total net revenue
189,144
257,015
(67,871)
(26.4)
%
Operating expenses:
Cost of product sales
99,692
150,114
(50,422)
(33.6)
%
Selling, general administrative expenses
24,279
27,568
(3,289)
(11.9)
%
Dealer incentive
586
1,315
(729)
(55.4)
%
Total operating expenses
124,557
178,997
(54,440)
(30.4)
%
Income from operations
64,587
78,018
(13,431)
(17.2)
%
Other income (expense)
Non‑operating interest income
3,019
2,942
77
2.6
%
Miscellaneous, net
2,060
1,563
497
31.8
%
Interest expense
(930)
(375)
(555)
148.0
%
Total other
4,149
4,130
19
0.5
%
Income before income tax expense
68,736
82,148
(13,412)
(16.3)
%
Income tax expense
(14,276)
(14,375)
99
(0.7)
%
Net income
$
54,460
$
67,773
$
(13,313)
(19.6)
%
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 $29.1 million during 2022, and the conversion had a minimal impact on product sales in 2023.
Net revenue attributable to our factory-built housing consisted of the following in 2023 and 2022:
Year Ended
December 31,
($ in thousands)
2023
2022
$ Change
% Change
Net revenue:
Product Sales
$
145,100
$
222,052
$
(76,952)
(34.7)
%
Total units sold
2,434
3,339
(905)
(27.1)
%
Net revenue per unit sold
$
59.6
$
66.5
$
(6.9)
(10.4)
%
22
Table of Contents
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. The effective tax rate for the year ended December 31, 2023 was 20.8% and primarily differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction and partially offset by state income taxes. The effective tax rate for the year ended December 31, 2022 was 17.5% and primarily differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction and partially offset by state income taxes.
Liquidity and Capital Resources
Liquidity
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).
23
Table of Contents
Cash
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. 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
Year Ended
December 31,
(in thousands)
2023
2022
Net cash used in operating activities
$
(13,536)
$
(1,691)
Net cash (used in) provided by investing activities
$
(9,769)
$
9,081
Net cash provided by (used in) financing activities
$
21,235
$
(5,614)
Net change in cash
$
(2,070)
$
1,776
Cash at beginning of year
$
2,818
$
1,042
Cash at end of year
$
748
$
2,818
Comparison of Cash Flow Activities from 2023 to 2022
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.
Lines of Credit
Capital One Revolver. On March 30, 2020, we entered into an agreement with Capital One, N.A. (“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.
On June 21, 2022, we received a Reservation of Rights notice from Capital One, N.A. The letter stated that our Revolver was in default. The default condition occurred due to our failure to timely file the Form 10-K and deliver certain financial 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.
24
Table of Contents
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
The following table is a summary of contractual cash obligations as of December 31, 2023:
Payments Due by Period (in thousands)
Contractual Obligations
Total
2024
2025 - 2026
2027 - 2028
After 2028
Lines of credit
$
23,680
—
—
23,680
—
Operating lease obligations
$
1,935
519
925
491
—
25
Table of Contents
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, results of operations, liquidity or capital expenditures. However, we do have a repurchase agreement with a financial institution providing inventory financing for independent retailers of our products. Under this agreement, we have agreed to repurchase homes at declining prices over the term of the agreement (24 months). Our obligation under this repurchase agreement ceases upon the purchase of the home by the retail customer. The maximum amount of our contingent obligations under such repurchase agreements was approximately $3,030,000 and $8,925,000 as of December 31, 2023 and 2022, respectively, without reduction for the resale value of the homes. We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements. We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of December 31, 2023.
Recent Accounting Pronouncements
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.
26
Table of Contents
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
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for smaller reporting companies.
27
Table of Contents