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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-09 · 102 added, 160 removed, 79 unchanged (77% of the section changed)

2 unchanged sentences

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

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

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 to consumers and manufactured housing communities.

We are the fifth largest producer of manufactured homes in the United States as ranked by the number of homes manufactured based on information available from the Manufactured Housing Institute and the Institute for Building Technology and Safety for the twelve month period ending June 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 actual results could differ materially from those anticipated by our management in these forward looking statements as a result of various factors, including those discussed in this Form 10-Q and in our Registration Statement on Form S-1, particularly under the heading “Risk Factors.” Dollar amounts are in thousands unless otherwise noted.

We build, sell and finance manufactured homes and “tiny houses” that are distributed through a network of independent retailers and company owned stores and also sold directly to manufactured home communities.

We are the fourth largest producer of manufactured homes in the United States as ranked by the number of homes manufactured based on information available from the Manufactured Housing Institute and the Institute for Building Technology and Safety for the twelve month period ending December 31, 2023.

Our homes range in price, at retail, from approximately $33,000 to $180,000.

For the three and nine months ended September 30, 2023, we sold 643 and 2,246 home sections, respectively (which are entire homes or single floors that are combined to create complete homes).

For the three and nine months ended September 30, 2022, we sold 944 and 2,947 home sections, respectively.

For the three months ended March 31, 2024 and 2023, we sold 645 and 810 home sections, respectively (which are entire modules or single floors).

The Company has one reportable segment.

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

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

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

All of our 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 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 Company 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 operating segment.

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, per week.

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 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 146 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, as of March 31, 2024, are sold to consumers, primarily across 15 states through a network of independent retail locations, 13 company owned retail locations and through direct sales to owners of manufactured home communities.

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

For the nine months ended September 30, 2023, approximately 49% of our manufactured homes were sold in Texas, followed by 15% in Georgia, 9% in Louisiana, 4% in Oklahoma, and 3% in Florida.

For the nine months ended September 30, 2022, approximately 51% of our manufactured homes were sold in Texas, followed by 11% in Georgia, 6% in Florida, 5% in Louisiana and 5% in Arizona.

For the three months ended March 31, 2024, approximately 54% of our manufactured homes were sold in Texas, followed by 18% in North Carolina, 8% in Oklahoma, 4% in Georgia, and 2% in New Mexico.

For the three months ended March 31, 2023, approximately 38% of our manufactured homes were sold in Texas, followed by 19% in Georgia, 8% in Louisiana, 7% in Florida, and 4% in Alabama.

We offer three types of financing solutions to our customers.

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

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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● We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions.

As of September 30, 2023, the cost of these properties include the following (dollars in thousands):

As of March 31, 2024, these properties include the following (dollars in thousands):

Date of Acquisition

9 unchanged sentences

February 2021

● 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 .

● Inflation most recently has been at or near its highest rate in the U.S.

● We also expect to provide financing solutions to owners of manufactured housing communities 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 and competitive the gross margins on the sale of homes to these new manufactured housing communities .

● Inflation recently was near its highest rate 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.

Our ability to maintain gross margins can be impacted adversely by sudden increases in specific costs, such as 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 and community developers 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 Florida and the Carolinas.

In order to maintain long term growth, we must 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.

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

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

In order to maintain long term 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.

Results of Operations

The following discussion should be read in conjunction with the information set forth in the financial statements and the accompanying notes appearing elsewhere in this Form 10-Q.

Comparison of Three Months ended September 30, 2023 and 2022 (in thousands)

Comparison of Three Months ended March 31, 2024 and 2023 (in thousands)

Three months ended

September 30,

Product sales

Consumer and MHP loans interest

Consumer, MHP and dealer loans interest

Total net revenue

3 unchanged sentences

Dealer incentive

Total operating expenses

Income from operations

6 unchanged sentences

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

Product sales decreased $11.7 million, or 24%, during the three months ended September 30, 2023 as compared to the same period in 2022.

This decrease was driven by an industry wide decrease in unit volumes ($11.0 million), a decrease in net revenue per unit ($0.2 million) and a decrease in the conversion of certain independent dealer consignment arrangements to financing arrangements and other market factors ($0.5 million).

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

Product sales decreased $12.5 million, or 28.8%, during the three months ended March 31, 2024 as compared to the same period in 2023.

This decrease was driven by an industry wide decrease in unit volumes shipped, primarily in direct sales, mobile home park sales and inventory finance sales categories.

Net revenue attributable to our factory-built housing consisted of the following during the first three months of 2024 and 2023:

Three months ended

September 30,

(in thousands)

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Net revenue per unit sold

For the three months ended September 30, 2023, our net revenue per unit sold decreased primarily due to changes in our product sales mix slightly offset by increases in unit prices over the same period in 2022, as rising material and labor costs were passed on to our customers.

We had decreases in direct sales, inventory finance sales and retail store sales, partially offset by an increase in commercial sales and other product sales.

Our commercial sales have lower margins than sales through our company-owned retail stores and our inventory financed sales.

Consumer and MHP loans interest income grew $1.8 million, or 25.7%, during the three months ended September 30, 2023 as compared to the same period in 2022 and is related to our increase in average outstanding MHP note portfolio balance and average outstanding consumer loan portfolio balance.

Between September 30, 2023 and September 30, 2022 our MHP note portfolio increased by $47.8 million and our consumer loan portfolio increased by $16.8 million.

Other revenue primarily consists of contract deposit forfeitures, dealer finance fees and commercial lease rents and increased $2.5 million, or 150.8%, during the three months ended September 30, 2023 as compared to the same period in 2022.

This increase was primarily due to $2.4 million increase in forfeited deposits, a $0.2 million increase in dealer finance fees, partially offset by a $0.1 million decrease in commercial lease rents.

The cost of product sales decreased $8.7 million, or 25.9%, during the three months ended September 30, 2023 as compared to the same period in 2022.

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

Selling, general and administrative expenses decreased $0.6 million, or 9.2%, during the three months ended September 30, 2023 as compared to the same period in 2022.

This decrease was primarily due to a $0.6 million decrease in warranty costs and a net $0.4 million decrease in other miscellaneous costs, partially offset by a $0.2 million increase in legal expense, and a $0.2 million increase in loan loss provision.

Dealer incentive expense decreased $0.2 million, or 102.2%, during the three months ended September 30, 2023 as compared to the same period in 2022.

Other income (expense) decreased $0.3 million, or 36.0%, during the three months ended September 30, 2023 as compared to the same period in 2022.

There was an increase of $0.2 million in non-operating interest income, offset by a decrease of $0.2 million in miscellaneous income, net, and an increase of $0.2 million in interest expense.

Income tax expense was $3.4 million during the three months ended September 30, 2023 compared to $2.8 million for the same period in 2022.

The effective tax rate for the three months ended September 30, 2023 was 17.4% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes.

The effective tax rate for the three months ended September 30, 2022 was 16.1% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes.

Comparison of Nine Months ended September 30, 2023 and 2022 (in thousands)

Nine months ended

September 30,

Product sales

Consumer and MHP loans interest

Total net revenue

Operating expenses:

Cost of product sales

Selling, general administrative expenses

Dealer incentive

Income from operations

Other income (expense)

Non‑operating interest income

Miscellaneous, net

Interest expense

Income before income tax expense

Income tax expense

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

Product sales decreased $33.0 million, or 21.3%, during the nine months ended September 30, 2023 as compared to the same period in 2022.

This decrease was driven by an industry wide decrease in unit volumes ($26.6 million), a decrease in net revenue per unit ($1.3 million) and a decrease in the conversion of certain independent dealer consignment arrangements to financing arrangements and other market factors ($5.1 million).

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

Nine Months Ended

September 30,

(in thousands)

Product sales

Total units sold

Net revenue per unit sold

For the nine months ended September 30, 2023, our net revenue per unit sold decreased primarily due to changes in our product sales mix slightly offset by increases in unit prices over the first nine months of 2022, as rising material and labor costs were passed on to our customers.

We had decreases in inventory finance sales, direct sales, retail store sales, and other product sales, and commercial sales were flat.

Our commercial sales have lower margins than sales through our company-owned retail stores and our inventory financed sales.

For the nine months ending September 30, 2023, we experienced a decrease in net revenue attributable to product sales in our Eatonton facility.

We have remediated the quality and consistency issues in this facility and are increasing our sales efforts in Eatonton.

We plan to meet or exceed historical levels in 2024, pending market conditions.

Consumer and MHP loans interest income grew $3.7 million, or 17.6%, during the nine months ended September 30, 2023 as compared to the same period in 2022 and is related to our increase in average outstanding MHP note portfolio balance and average outstanding consumer loan portfolio balance.

Between September 30, 2023 and

September 30, 2022, our MHP note portfolio increased by $47.8 million and our consumer loan portfolio increased by $16.8 million, both net of principal reduction.

Other revenue primarily consists of contract deposit forfeitures, dealer finance fees and commercial lease rents and increased $3.3 million, or 71.0%, during the nine months ended September 30, 2023 as compared to the same period in 2022.

This increase was primarily due to $2.6 million increase in forfeited deposits, a $0.8 million increase in dealer finance fees and a $0.1 million increase in setup and service sales, partially offset by a $0.2 million decrease in portfolio fees & servicer revenue.

The cost of product sales decreased $21.2 million, or 20.2%, during the nine months ended September 30, 2023 as compared to the same period in 2022.

For the three months ended March 31, 2024, our net revenue per product sold decreased primarily due to a shift in product mix to smaller units and to a large sale of homes from our leased home portfolio to a mobile home park customer at a lower average price than our typical new home.

We had decreases in direct sales, commercial sales, inventory finance sales and other product sales, partially offset by an increase in retail store sales.

Direct sales decreased $5.6 million, or 75.8% during the three months ended March 31, 2024 as compared to the same period in 2023.

Commercial sales decreased $2.0 million, or 12.6% during the three months ended March 31, 2024 as compared to the

same period in 2023.

Inventory finance sales to dealers decreased $5.2 million, or 37.8% during the three months ended March 31, 2024 as compared to the same period in 2023.

Retail store sales increased $0.8 million, or 20.9% during the three months ended March 31, 2024 as compared to the same period in 2023.

Our revenue has decreased primarily due to a lower volume of shipments, a shift in product mix generally to smaller units and a slowdown in our dealer and mobile home park sales.

Our current business is dependent on dealer sales, as reflected in direct sales and inventory finance sales, and our sales have slowed due to high levels of inventory on dealer lots and seasonality.

Our retail sales have improved as we have focused on improving the performance of our company owned stores.

Our mobile home park business has been impacted by higher interest rates, and transaction volumes and new development have declined.

Consumer, MHP and dealer loans interest income increased $2.9 million, or 38.0%, during the three months ended March 31, 2024 as compared to the same period in 2023 due to growth in our loan portfolios.

Between March 31, 2024 and March 31, 2023 our consumer loan portfolio increased by $17.9 million, our MHP loan portfolio increased by $28.2 million, and our dealer finance notes increased by $2.1 million.

Other revenue primarily consists of contract deposit forfeitures, consignment fees, commercial lease rents, service fees and other miscellaneous income and decreased $0.1 million, or 3.1%, during the three months ended March 31, 2024 as compared to the same period in 2023.

This decrease was primarily due to a $1.0 million decrease in dealer finance fees, a $0.2 million decrease in commercial lease rents, partially offset by a $1.1 million increase in forfeited deposits.

The cost of product sales decreased $8.5 million, or 29.3%, during the three months ended March 31, 2024 as compared to the same period in 2023.

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

Selling, general and administrative expenses decreased $3.2 million, or 16.0%, during the nine months ended September 30, 2023 as compared to the same period in 2022.

This decrease was primarily due to a $3.2 million decrease in payroll & related costs, a $0.3 million decrease in consulting and professional fees, a $0.2 million decrease in supplies and a net $0.6 million decrease in other miscellaneous costs, partially offset by a $1.1 million increase in loan loss provisions.

Dealer incentive expense decreased $0.9 million, or 97.1%, during the nine months ended September 30, 2023 as compared to the same period in 2022.

Other income (expense) decreased $0.3 million, or 11.3%, during the nine months ended September 30, 2023 as compared to the same period in 2022.

There was a decrease of $0.1 million in non-operating interest income and an increase of $0.3 million in interest expense, offset by an increase of $0.1 million in miscellaneous income, net.

Income tax expense was $9.9 million during the nine months ended September 30, 2023 compared to $10.2 million for the same period in 2022.

The effective tax rate for the nine months ended September 30, 2023 was 17.3% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes.

The effective tax rate for the nine months ended September 30, 2022 was 17.5% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction and partially offset by state income taxes.

Selling, general and administrative expenses increased $0.5 million, or 8.8%, during the three months ended March 31, 2024 as compared to the same period in 2023.

This increase was primarily due to a $0.3 million increase in warranty costs, a $0.1 million increase in legal expense, a $0.2 million increase in professional fees and a net $0.2 million increase in other miscellaneous costs, partially offset by a $0.3 million decrease in loan loss provision.

Dealer incentive expense remained the same during the three months ended March 31, 2024 as compared to the same period in 2023.

Other income (expense) increased $0.4 million, or 29.9%, during the three months ended March 31, 2024 as compared to the same period in 2023.

There was an increase of $0.6 million in non-operating interest income offset by an increase of $0.2 million in interest expense.

Income tax expense remained the same during the three months ended March 31, 2024 as compared to the same period in 2023.

The effective tax rate for the three months ended March 31, 2024 and 2023 was 18.2% and 17.4%, respectively, and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes.

Liquidity and Capital Resources

We believe that cash flow from operations, cash and cash equivalents at September 30, 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.

We believe that cash flow from operations and cash at March 31, 2024, 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 Indebtedness , below).

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.

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.

As of September 30, 2023, we had approximately $0.5 million in cash and cash equivalents, compared to $2.8 million as of December 31, 2022.

As of March 31, 2024, we had approximately $0.6 million in cash, compared to $0.7 million as of December 31, 2023.

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

Cash Flow Activities

Nine Months Ended

September 30,

Three Months Ended

(in thousands)

Net cash (used in) provided by operating activities

Net cash (used in) provided by investing activities

Net cash provided (used in) by financing activities

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Comparison of Cash Flow Activities from September 30, 2023 to September 30, 2022

Net cash used in operating activities increased $6.1 million during the nine months ended September 30, 2023, compared to the same period in 2022, primarily as a result of increased MHP originations net of collections, decreased dealer inventory loan originations net of collections, decrease in other assets, increase in prepaid expenses and other current assets, increased volume of consumer loan originations net of principal collections, decreased inventories, decrease in customer deposits, increase in accounts payable and accrued liabilities and a decrease in dealer incentive liability.

Net cash used in investing activities of $7.6 million during the nine months ended September 30, 2023 was primarily attributable to $13.9 million used for loans to third parties for the development of manufactured housing parks and $4.5M used for purchases of property, plant and equipment.

This was offset by $8.5 million in proceeds from the sale of treasury notes, $1.1 million in proceeds from the sale of leased property, $1.1 million of collections related to loans to third parties for the development of manufactured housing parks and collections of $0.3 million from our purchased consumer loans.

Net cash provided by financing activities of $10.6 million during the nine months ended September 30, 2023 was attributable to net proceeds of $10.5 million on our lines of credit and $0.1 million received from the exercise of stock options.

Net cash used in financing activities of $8.2 million in 2022 was attributable to net payments of $8.2 million on our lines of credit.

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.

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, N.A.

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, 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 suspending $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 $50,000,000 and an additional $25,000,000 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 three months ended September 30, 2023, interest expense under the Revolver and New Revolver was $302, and for the three months ended September 30, 2022, interest expense under the Revolver was $87.

For the nine months ended September 30, 2023, interest expense under the Revolver and New Revolver was $588 and for the nine months ended September 30, 2022, interest expense under the Revolver was $326, respectively.

The outstanding balance of the New Revolver as of September 30, 2023 was $13,013, and the outstanding balance of the Revolver as of December 31, 2022 was $2,545.

The interest rate in effect as of September 30, 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 $36,987 as of September 30, 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 September 30, 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.

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash (used in) provided by financing activities

Net change in cash

Cash at beginning of period

Cash at end of period

Comparison of Cash Flow Activities from March 31, 2024 to March 31, 2023

Net cash provided by operating activities was $10.8 million during the three months ended March 31, 2024, compared to net cash of $2.7 million used in operating activities during the three months ended March 31, 2023.

This change was a result of an increase of cash used for a decrease in operating income before non-cash adjustments, decreased MHP originations net of collections, decreased dealer inventory loan originations net of collections, decrease in the reduction of accounts receivable, an increase in the change in inventories, an increase in the change in prepaid expenses and other current assets, an increase in the change in accounts payable and accrued liabilities, an increase in the change in customer deposits, and increase in the change in other assets – leased mobile homes and an increase in the change in escrow liability.

Net cash provided by investing activities of $2.7 million during the three months ended March 31, 2024 was primarily attributable to $4.1 million of collections of loans we made to third parties for the development of manufactured housing parks, offset by $0.9 million used in improvements and development of property, plant and equipment and $0.6 million used to issue notes to third parties for the development of manufactured housing parks.

Net cash used in financing activities of $13.7 million during the three months ended March 31, 2024 was attributable to net payments of $11.9 million on our lines of credit, $1.9 million of stock repurchases and $0.1 million received from the exercise of stock options.

Net cash provided by financing activities of $5.3 million during the three months ended March 31, 2023 was attributable to net proceeds of $5.3 million on our lines of credit.

In November 2022, our Board of Directors approved a share repurchase program to authorize the repurchase of up to $10.0 million of the Company’s common stock.

We repurchased 91,187 shares for $1.9 million in the open market during the three months ended March 31, 2024.

As of March 31, 2024, we had a remaining authorization of approximately $8.1 million.

Between April 1, 2024 and May 9, 2024, we repurchased 170,342 shares for $3.5 million in the open market.

Lines of Credit

On July 28, 2023, the Company entered into a new Credit Agreement (the “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.

Subsequently, the Company repaid in full the balance due on its prior line of credit with Capital One, N.A.

and all commitments under this prior line of credit were terminated.

The 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 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 Revolver 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 Revolver.

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

The Revolver matures July 28, 2027.

For the three months ended March 31, 2024, interest expense for the under the Revolver was $276, and for the three months ended March 31, 2023, interest expense under the prior line of credit was $91.

The outstanding balance of the Revolver as of March 31, 2024 and December 31, 2023 was $11,797 and $23,680, respectively.

The interest rate in effect as of March 31, 2024 and December 31, 2023 for the Revolver was 7.67% and 7.95%, respectively.

The amount of available credit under the Revolver was $38,203 and $26,320 as of March 31, 2024 and December 31, 2023, respectively.

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

As of March 31, 2024, 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 September 30, 2023:

The following table is a summary of contractual cash obligations as of March 31, 2024:

Payments Due by Period (in thousands)

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Our obligation under this repurchase agreement ceases upon the purchase of the home by the retail customer.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $4,767 and $8,925 as of September 30, 2023 and December 31, 2022, respectively, without reduction for the resale value of the homes.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $1,671 and $3,030 as of March 31, 2024 and December 31, 2023, respectively, without reduction for the resale value of the homes.

We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements.

We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of September 30, 2023.

We consider our obligations on current contracts to be immaterial, and accordingly we have not recorded any reserve for repurchase commitment as of March 31, 2024.

Critical Accounting Estimates

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Our critical accounting estimates are identified and described in our Annual Report on Form 10-K for the year ended December 31, 2023.

Subsequent to the filing of our Annual Report, we adopted FASB’s ASC 326 for determining Current Expected Credit Losses.

In connection with this adoption, we implemented certain changes to our processes and controls related to our methods for estimating allowances for credit losses.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our September 30, 2023 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our March 31, 2024 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

Emerging Growth Company Status

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

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.

We expect our status as an emerging growth company to end on December 31, 2023, five years from our initial public offering.

Quantitative and Qualitative Disclosures About Market Risk.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis