Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

Commission file number 001-38761


Legacy Housing Corporation

(Exact name of registrant as specified in its charter)


Texas

20-2897516

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1600 Airport Freeway, #100

Bedford, Texas 76022

(Address of principal executive offices)

(Zip Code)

(817) 799-4900

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  .

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock ($0.001 par value)

LEGH

NASDAQ Global Market

There were 24,192,157 shares of Common Stock ($0.001 par value) outstanding as of August 10, 2020.


Table of Contents

LEGACY HOUSING CORPORATION

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

2

Item 1.

Financial Statements (Unaudited)

2

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

PART II - OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

32

SIGNATURES

33


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

LEGACY HOUSING CORPORATION

CONDENSED BALANCE SHEETS (in thousands, except share and per share data)

(unaudited)

    

June 30, 

    

December 31, 

2020

2019

Assets

Current assets:

 

  

 

  

Cash and cash equivalents

$

1,024

$

1,724

Accounts receivable, net of allowance for doubtful accounts

 

1,451

 

1,767

Current portion of consumer loans

 

5,070

 

5,994

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

 

11,795

 

10,969

Current portion of other notes receivable

 

582

 

428

Inventories

 

26,377

 

27,228

Prepaid expenses and other current assets

 

3,205

 

4,857

Total current assets

 

49,504

 

52,967

Property, plant and equipment, net

 

21,320

 

21,038

Consumer loans, net of deferred financing fees and allowance for loan losses

 

102,166

 

99,048

Notes receivable from mobile home parks (“MHP”)

 

108,274

 

81,375

Other notes receivable, net of allowance for loan losses

 

13,058

 

13,050

Other assets

 

5,346

 

4,212

Inventory noncurrent

 

12,516

 

11,930

Total assets

$

312,184

$

283,620

Liabilities and Stockholders' Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

4,476

$

5,168

Accrued liabilities

 

14,794

 

8,808

Customer deposits

 

1,738

 

1,567

Escrow liability

 

7,548

 

7,530

Line of credit

28,860

Total current liabilities

 

28,556

 

51,933

Longterm liabilities:

 

  

 

  

Lines of credit

 

37,535

 

2,001

Deferred income taxes

1,766

1,766

Dealer incentive liability

 

5,601

 

5,531

Total liabilities

 

73,458

 

61,231

Commitments and contingencies (Note 12)

 

  

 

  

Stockholders' equity:

Preferred stock, $.001 par value, 10,000,000 shares authorized: issued -0-

Common stock, $.001 par value, 90,000,000 shares authorized; 24,637,222 and 24,620,079 issued and 24,192,157 and 24,320,079 outstanding at June 30, 2020 and December 31, 2019, respectively

25

25

Treasury stock at cost, 445,065 and 300,000 shares at June 30, 2020 and December 31, 2019, respectively

(4,477)

(3,060)

Additional paid-in-capital

175,200

175,067

Retained earnings

67,978

50,357

Total stockholders' equity

238,726

222,389

Total liabilities and stockholders' equity

$

312,184

$

283,620

See accompanying notes to condensed financial statements.

2


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LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

Three Months Ended June 30, 

Six months ended June 30, 

2020

2019

    

2020

    

2019

Net revenue:

 

  

 

  

 

  

 

  

 

Product sales

$

39,179

$

39,766

$

70,375

$

71,316

Consumer and MHP loans interest

 

6,067

 

5,112

 

12,491

 

10,642

Other

 

760

 

883

 

1,414

 

1,757

Total net revenue

 

46,006

 

45,761

 

84,280

 

83,715

Operating expenses:

 

  

 

  

 

  

 

  

Cost of product sales

 

30,557

 

27,876

 

52,416

 

49,760

Selling, general administrative expenses

 

4,064

 

6,144

 

9,676

 

12,635

Dealer incentive

 

186

 

239

 

380

 

449

Income from operations

 

11,199

 

11,502

 

21,808

 

20,871

Other income (expense):

 

  

 

  

 

  

 

  

Non‑operating interest income

 

215

 

46

 

451

 

85

Miscellaneous, net

 

11

 

31

 

48

 

33

Gain on settlement, net

1,075

Interest expense

 

(239)

 

(158)

 

(577)

 

(347)

Total other

 

(13)

 

(81)

 

997

 

(229)

Income before income tax expense

 

11,186

 

11,421

 

22,805

 

20,642

Income tax expense

 

(2,590)

 

(2,788)

 

(5,186)

 

(4,796)

Net income

$

8,596

$

8,633

$

17,619

$

15,846

Weighted average shares outstanding:

Basic

24,201,220

24,369,890

24,260,274

24,442,921

Diluted

24,201,823

24,369,890

24,260,938

24,457,967

Net income per share:

Basic

$

0.36

$

0.35

$

0.73

$

0.65

Diluted

$

0.36

$

0.35

$

0.73

$

0.65

See accompanying notes to condensed financial statements.

3


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LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

Six months ended June 30, 

    

2020

    

2019

    

Operating activities:

 

  

 

  

 

Net income

$

17,619

$

15,846

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

 

  

 

  

Depreciation expense

 

572

 

494

Amortization of debt discount and issuance costs

18

Provision for loan loss—consumer loans

 

280

 

1,449

Share based payment expense

133

422

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

316

 

(535)

Consumer loans originations

 

(7,918)

 

(9,789)

Consumer loans principal collections

 

4,915

 

4,128

Notes receivable MHP originations

 

(37,538)

 

(29,079)

Notes receivable MHP principal collections

 

9,813

 

15,016

Inventories

 

264

 

4,419

Prepaid expenses and other current assets

 

1,928

 

388

Other assets

 

(1,204)

 

(1,248)

Accounts payable

 

(691)

 

934

Accrued liabilities

 

5,987

 

1,449

Customer deposits

 

171

 

(625)

Dealer incentive liability

 

69

 

72

Net cash provided by (used in) operating activities

 

(5,266)

 

3,341

Investing activities:

 

  

 

  

Purchases of property, plant and equipment

 

(782)

 

(1,454)

Issuance of notes receivable

 

(278)

 

(1,531)

Notes receivable collections

116

522

Purchases of consumer loans

(191)

(101)

Collections from purchased consumer loans

721

364

Net cash used in investing activities

 

(414)

 

(2,200)

Financing activities:

 

  

 

  

Proceeds from sale of over-allotment common stock in initial public offering

7,200

Offering cost for over-allotment of initial public offering

(505)

Treasury stock purchase

(1,417)

(3,060)

Proceeds from issuance of note payable

 

6,546

 

Principal payments on note payable

(6,546)

(504)

Escrow liability, net

 

18

 

106

Proceeds from lines of credit, net

 

30,232

 

26,284

Payments on lines of credit

 

(23,853)

 

(30,839)

Net cash provided by (used in) financing activities

 

4,980

 

(1,318)

Net increase in cash and cash equivalents

 

(700)

 

(177)

Cash and cash equivalents at beginning of period

 

1,724

 

2,599

Cash and cash equivalents at end of period

$

1,024

$

2,422

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

553

$

405

Cash paid for taxes

$

$

3,051

See accompanying notes to condensed financial statements.

4


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LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 

Common Stock

Treasury

Additional

Retained

    

Shares

    

Amount

stock

    

paid-in-capital

    

earnings

    

Total

Balances, December 31, 2018

24,000,000

$

24

$

$

167,743

$

21,513

$

189,280

Sale of over-allotment common stock in initial public offering, net of offering costs of $505

600,000

1

6,694

6,695

Share based compensation expense and stock units vested

17,143

234

234

Net income

7,213

7,213

Balances, March 31, 2019

24,617,143

$

25

$

$

174,671

$

28,726

$

203,422

Share based compensation expense and stock units vested

187

187

Purchase of treasury stock

(3,060)

(3,060)

Net income

8,633

8,633

Balances, June 30, 2019

24,617,143

$

25

$

(3,060)

$

174,858

$

37,359

$

209,182

Common Stock

Treasury

Additional

Retained

    

Shares

    

Amount

    

stock

paid-in-capital

    

earnings

    

Total

Balances, December 31, 2019

24,620,079

$

25

$

(3,060)

$

175,067

$

50,357

$

222,389

Share based compensation expense and stock units vested

17,143

97

97

Purchase of treasury stock

(682)

(682)

Net income

9,025

9,025

Balances, March 31, 2020

24,637,222

$

25

$

(3,742)

$

175,164

$

59,382

$

230,829

Share based compensation expense and stock units vested

36

36

Purchase of treasury stock

(735)

(735)

Net income

8,596

8,596

Balances, June 30, 2020

24,637,222

$

25

$

(4,477)

$

175,200

$

67,978

$

238,726

See accompanying notes to condensed financial statements.

5


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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

1. NATURE OF OPERATIONS

Legacy Housing Corporation (the “Company”) was formed on January 1, 2018 as a Delaware corporation through a corporate conversion of Legacy Housing, Ltd. (the “Partnership”), a Texas limited partnership formed in May 2005. Effective December 31, 2019, the Company reincorporated from a Delaware corporation to a Texas corporation. The Company is headquartered in Bedford, Texas. 

The Company (1) manufactures and provides for the transport of mobile homes, (2) provides wholesale financing to dealers and mobile home parks, (3) provides retail financing to consumers and (4) is involved in financing and developing new manufactured home communities. The Company manufactures its mobile homes at plants located in Fort Worth, Texas, Commerce, Texas and Eatonton, Georgia. The Company relies on a network of dealers to market and sell its mobile homes. The Company also sells homes directly to dealers and mobile home parks. 

In December 2018, the Company sold 4,000,000 shares of its common stock through an initial public offering (“IPO”) at $12.00 per share. Proceeds from the IPO, net of $4,504 of underwriting discounts and offering expenses paid by the Company, were $43,492. In January 2019, the Company sold an additional 600,000 shares of its common stock as part of the IPO at $12.00 per share. Proceeds from the January 2019 issuance, net of $505 of underwriting discounts and offering expenses paid by the Company, were $6,695. 

On April 17, 2019, the Company purchased 300,000 shares of its common stock at the price of $10.20 per share, pursuant to the Company’s repurchase program. During the six months ended June 30, 2020, the Company purchased 145,065 shares of its common stock at an average price of $9.77 per share, pursuant to the Company’s repurchase program. Under the repurchase program, the Company may purchase up to $10,000 of its common stock. Share purchases may be made from time to time in the open market or through privately negotiated transactions depending on market conditions, share price, trading volume and other factors.  Such purchases, if any, will be made in accordance with applicable insider trading and other securities laws and regulations.  These repurchases may be commenced or suspended at any time or from time to time without prior notice.

Corporate Conversion

Effective January 1, 2018, the Partnership converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Legacy Housing Corporation. In order to consummate the corporate conversion completed on January 1, 2018, a certificate of conversion was filed with the Secretary of State of the State of Delaware and with the Secretary of State of the State of Texas. Holders of partnership interests in Legacy Housing, Ltd. received an initial allocation, on a proportional basis, of 20,000,000 shares of common stock of Legacy Housing Corporation.

Following the corporate conversion, Legacy Housing Corporation continues to hold all property and assets of Legacy Housing, Ltd. and all of the debts and obligations of Legacy Housing, Ltd. On the effective date of the corporate conversion, the officers of Legacy Housing, Ltd. became the officers of Legacy Housing Corporation. As a result of the corporate conversion, the Company is now a federal corporate taxpayer.

Basis of Presentation

The accompanying unaudited interim condensed financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019, respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") as required by Regulation S-X, Rule 8-03. In the opinion of management, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company's financial position for the periods presented. The results for the three and six

6


Table of Contents

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

months ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or any other period. The accompanying balance sheet as of December 31, 2019 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2019 (the "Form 10-K"). The accompanying financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. Accordingly, they should be read in conjunction with the audited financial statements and notes thereto included in the Form 10-K.

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period.  Material estimates that are susceptible to significant change in the near term primarily relate to the determination of accounts receivable, consumer loans and notes receivable, inventory obsolescence, income taxes, fair value of financial instruments and contingent liabilities. Actual results could differ from these estimates.

Revenue Recognition

Product sales primarily consist of sales of mobile homes to consumers and mobile home parks through various sales channels, which include Direct Sales, Commercial Sales, Consignment Sales, and Retail Store Sales. Direct Sales include homes sold directly to independent retailers or customers that are not financed by the Company and are not sold under a consignment arrangement. These types of homes are generally paid for prior to shipment. Commercial Sales include homes sold to mobile home parks under commercial loan programs or paid for upfront. The Company provides floor plan financing for independent retailers, which takes the form of a consignment arrangement. Consignment Sales are considered sales of consigned homes from independent dealers to individual customers. Retail Store Sales are homes sold through Company-owned retail locations. Consignment Sales and Retail Sales of homes may be financed by the Company, by a third party, or in paid in cash.

Revenue from product sales is recognized at a point in time when the performance obligation under the terms of a contract with our customers is satisfied which typically occurs upon delivery and transfer of title of the home, as this depicts when control of the promised good is transferred to our customers. For financed sales by the Company, the individual customer enters into a sales and financing contract and is required to make a down payment. These financed sales contain a significant financing component and any interest income is separately recorded in the statement of operations.

Revenue is measured as the amount of consideration expected to be received in exchange for transferring the homes to the customers. Sales and other similar taxes collected concurrently with revenue-producing activities are excluded from revenue.

The Company made an accounting policy election to account for any shipping and handling costs that occur after the transfer of control as a fulfillment cost that is accrued when control is transferred. Warranty obligations associated with the sale of a unit are assurance-type warranties for a period of twelve months that are a guarantee of the home’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. The Company has elected to use the practical expedient to expense the incremental costs of obtaining a contract if the amortization period of the asset that the Company would have otherwise recognized is one year or less. Contract costs, which include commissions incurred related to the sale of homes, are expensed at the point-in-time when the related revenue is recognized.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

For the three months ended June 30, 2020 and 2019, sales to an independent third-party and its affiliates accounted for $14,320 or 36.6% and $8,520 or 21.4% of our product sales, respectively. For the six months ended June 30, 2020 and 2019, sales to an independent third-party and its affiliates accounted for $26,306 or 37.4% and $13,323 or 18.7% of our product sales, respectively.

For the three and six months ended June 30, 2020, total cost of product sales included $7,849 and $12,756 of costs, mainly relating to up front dealer commission and reimbursed dealer expenses for consignment sales and certain other similar costs incurred for retail store and commercial sales. For the three and six months ended June 30, 2019, total cost of product sales included $7,573 and $11,900 of costs, mainly relating to up front dealer commission and reimbursed dealer expenses for consignment sales and certain other similar costs incurred for retail store and commercial sales.

Other revenue consists of consignment fees, service fees and other miscellaneous income. Consignment fees are charged to independent retailers on a monthly basis for homes held by the independent retailers pursuant to a consignment arrangement until the home is sold to an individual customer. Consignment fees are determined as a percentage of the home’s wholesale price to the independent dealer. Revenue recognition for consignment fees are recognized over time using the output method as it provides a faithful depiction of the Company’s performance toward completion of the performance obligation under the contract and the value transferred to the independent retailer for the time the home is held under consignment. Revenue for service fees and miscellaneous income is recognized at a point in time when the performance obligation is satisfied.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by source of the revenue for the three and six months ended June 30, 2020 and 2019:

Three months ended

Six months ended

June 30, 

June 30, 

2020

    

2019

2020

    

2019

Product sales:

Direct sales

$

3,850

$

5,553

$

6,076

$

10,000

Commercial sales

 

21,059

 

17,604

 

36,851

 

30,107

Consignment sales

9,114

10,625

17,924

20,662

Retail store sales

4,325

4,928

7,536

8,269

Other (1)

 

831

 

1,056

 

1,988

 

2,278

Total product sales

 

39,179

 

39,766

 

70,375

 

71,316

Consumer and MHP loans interest:

 

  

 

  

 

  

 

  

Interest - consumer installment notes

 

3,820

 

3,697

 

7,969

 

7,828

Interest - MHP notes

 

2,247

 

1,415

 

4,522

 

2,814

Total consumer and MHP loans interest

 

6,067

 

5,112

 

12,491

 

10,642

Other

 

760

 

883

 

1,414

 

1,757

Total net revenue

$

46,006

$

45,761

$

84,280

$

83,715

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

Share-Based Compensation

The Company accounts for share-based compensation in accordance with the provisions of ASC 718, Compensation—Stock Compensation. Share-based compensation expense is recognized based on the award’s estimated grant date fair value in order to recognize compensation cost for those shares expected to vest. The Company has elected to record forfeitures as they occur. Compensation cost is recognized on a straight-line basis over the vesting period of the awards and adjusted as forfeitures occur.

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

The fair value of stock option awards on the date of grant is estimated using the Black-Scholes option pricing model, which requires the Company to make certain predictive assumptions. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon securities that correspond to the expected life of the award. As a recently formed public entity with a small public float and limited trading of its common shares on the NASDAQ Global Market, it was not practicable for the Company to estimate the volatility of its common shares; therefore, management estimated volatility based on the historical volatilities of a small group of companies considered as close to comparable to the Company as available, all equally weighted, over the expected life of the option. Management concluded that this group is more characteristic of the Company’s business than a broad industry index. The expected life of awards granted represents the period of time that the awards are expected to be outstanding based on the “simplified” method, which is allowed for companies that cannot reasonably estimate the expected life of options based on its historical award exercise experience. The Company does not expect to pay dividends on its common stock.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

Accounts Receivable

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

Accounts receivables are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines the allowance by considering several factors, including the aging of the past due balance, the customer’s payment history, and the Company’s previous loss history. The Company establishes an allowance for doubtful accounts for amounts that are deemed to be uncollectible. At June 30, 2020 and December 31, 2019, the allowance for doubtful accounts totaled $374 and $457, respectively.

Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous requirements. The Company plans to use longer phase-in period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2022. Modified retrospective application and early adoption is permitted. The Company expects that the adoption of this standard will result in a material increase to assets and liabilities on the balance sheet but will not have a material impact on the statement of operations.  While the Company is continuing to assess all the effects of adoption, it currently believes the most significant effects relate to (i) the recognition of new right-of-use assets and lease liabilities on its balance sheet for its property and equipment operating leases and (ii) providing significant new disclosures about its leasing activities.

In June 2016, the FASB issued an accounting standards update ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): 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 plans to use longer phase-in period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2023. The Company is continuing to evaluate the impact of the adoption of this ASU and is uncertain of the impact on the financial statements and disclosures at this point in time.

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.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

2. CONSUMER LOANS RECEIVABLE

Consumer loans receivable result from financing transactions entered into with retail consumers of mobile homes sold through independent retailers and company-owned retail locations. Consumer loans receivable generally consist of the sales price and any additional financing fees, less the buyer’s down payment. Interest income is recognized monthly per the terms of the financing agreements. The average contractual interest rate per loan was approximately 13.9% as of June 30, 2020 and 14.0% as of December 31, 2019. Consumer loans receivable have maturities that range from 3 to 30 years.

Loan applications go through an underwriting process that considers credit history to evaluate credit risk of the consumer. Interest rates on approved loans are determined based on consumer credit score, payment ability and down payment amount.

The Company uses payment history to monitor the credit quality of the consumer loans on an ongoing basis.

The Company may also receive escrow payments for property taxes and insurance included in its consumer loan collections. The liabilities associated with these escrow collections totaled $7,548 and $7,530 as of June 30, 2020 and December 31, 2019, respectively, and are included in escrow liability in the balance sheets.

Allowance for Loan Losses—Consumer Loans 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. An allowance for loan losses is determined after giving consideration to, 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. The Company’s 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 the Company. Specific reserves are determined based on probable losses on specific classified impaired loans.

The Company’s 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, current 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 the Company 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. The Company uses various 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; (4) units located on private property as opposed to a manufactured home park; (5) the length of time

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

the borrower has lived in the house without making payments; (6) location, size, and 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. Repossessed homes totaled $1,651 and $1,846 as of June 30, 2020 and December 31, 2019, respectively, and are included in other assets in the balance sheets.

Consumer loans receivable, net of allowance for loan losses and deferred financing fees, consisted of the following:

    

As of June 30, 

    

As of December 31, 

2020

2019

Consumer loans receivable

$

111,118

$

109,005

Loan discount and deferred financing fees, net

 

(2,966)

 

(3,050)

Allowance for loan losses

 

(916)

 

(913)

Consumer loans receivable, net

$

107,236

$

105,042

The following table presents a detail of the activity in the allowance for loan losses:

    

Three Months Ended June 30, 

Six Months Ended June 30, 

2020

    

2019

2020

    

2019

    

Allowance for loan losses, beginning of period

$

1,020

$

885

$

913

$

712

Provision for loan losses

 

65

 

30

 

280

 

437

Charge offs

 

(169)

 

(102)

 

(277)

 

(336)

Allowance for loan losses

$

916

$

813

$

916

$

813

The impaired and general reserve for allowance for loan losses consisted of the following:

    

As of June 30, 

    

As of December 31, 

2020

2019

Total consumer loans

$

111,118

$

109,005

Total allowance for loan losses

 

916

 

913

Impaired loans individually evaluated for impairment

 

1,646

 

1,677

Specific reserve against impaired loans

 

567

 

529

Other loans collectively evaluated for allowance

 

109,472

 

107,328

General allowance for loan losses

 

349

 

384

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

As of June 30, 2020 and December 31, 2019, the total principal outstanding for consumer loans on nonaccrual status was $1,646 and $1,677, respectively. A detailed aging of consumer loans receivable that are past due as of June 30, 2020 and December 31, 2019 were as follows:

As of June 30, 

    

    

As of December 31, 

    

2020

%

2019

%

Total consumer loans receivable

$

111,118

 

100.0

   

$

109,005

 

100.0

Past due consumer loans:

 

  

 

  

 

  

 

  

31 - 60 days past due

$

438

 

0.4

$

267

 

0.2

61 - 90 days past due

 

134

 

0.1

 

122

 

0.1

91 - 120 days past due

 

51

 

0.0

 

103

 

0.1

Greater than 120 days past due

 

1,268

 

1.1

 

1,065

 

1.0

Total past due

$

1,891

 

1.7

$

1,557

 

1.4

3. NOTES RECEIVABLE FROM MOBILE HOME PARKS (“MHP Notes”)

MHP Notes are stated at amounts due from customers, net of allowance for loan losses. The Company determines the allowance by considering several factors including the aging of the past due balance, the customer’s payment history, and the Company’s previous loss history. The Company establishes an allowance reserve composed of specific and general reserve amounts. 

The Company had concentrations of MHP Notes with an independent third-party and its affiliates that equaled 47.4% and 38.3% of the principal balance outstanding, all of which was secured, as of June 30, 2020 and December 31, 2019, respectively.

There were minimal past due balances on the MHP Notes as of June 30, 2020 and December 31, 2019 and no charge offs were recorded for MHP Notes during the three and six months ended June 30, 2020 and 2019, respectively. Allowance for loan loss is considered immaterial and accordingly no loss is recorded against the MHP Notes as of June 30, 2020 and December 31, 2019.

4. OTHER NOTES RECEIVABLE

Other notes receivable relate to various notes issued to mobile park owners and dealers, which are not directly tied to sale of mobile homes. The other notes have varying maturity dates and call for monthly principal and interest payments. The other notes are collateralized by mortgages on real estate, units being financed and used as offices, as well as vehicles, and are typically personally guaranteed by the borrowers. The interest rate on the other notes are fixed and range from 6.25% to 12.00%. The Company reserves for estimated losses on the other notes based on current economic conditions that may affect the borrower’s ability to pay, the borrower’s financial strength, and historical loss experience.

The balance outstanding on the other notes receivable were as follows:

    

As of June 30, 

    

As of December 31, 

2020

2019

Outstanding principal balance

$

13,712

$

13,552

Allowance for loan losses

 

(72)

 

(74)

Total

$

13,640

$

13,478

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

5. INVENTORIES

Inventories consisted of the following:

    

As of June 30, 

    

As of December 31, 

2020

2019

Raw materials

$

10,496

$

9,434

Work in progress

 

410

 

383

Finished goods

 

27,987

 

29,341

Total

$

38,893

$

39,158

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

    

As of June 30, 

    

As of December 31, 

2020

2019

Land

$

11,671

$

11,659

Buildings and leasehold improvements

 

10,422

 

10,059

Vehicles

 

1,663

 

1,580

Machinery and equipment

 

3,894

 

3,653

Furniture and fixtures

 

298

 

214

Total

 

27,948

 

27,165

Less accumulated depreciation

 

(6,628)

 

(6,127)

Total property, plant and equipment

$

21,320

$

21,038

Depreciation expense was $252 with $98 included as a component of cost of product sales for the three months ended June 30, 2020 and $253 with $91 included as a component of cost of product sales for the three months ended June 30, 2019. Depreciation expense was $501 with $203 included as a component of cost of product sales for the six months ended June 30, 2020 and $494 with $181 included as a component of cost of product sales for the six months ended June 30, 2019.

7. OTHER ASSETS

Other assets consisted of the following:

    

As of June 30, 

    

As of December 31, 

2020

2019

Leased property

$

3,408

$

2,067

Prepaid rent

 

287

 

299

Repossessed homes

 

1,651

 

1,846

Total

$

5,346

$

4,212

Depreciation expense for the leased property was $38 and $71 for the three and six months ended June 30, 2020.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

    

As of June 30, 

    

As of December 31, 

2020

2019

Warranty liability

$

2,893

$

3,078

Litigation reserve

 

320

 

325

Federal and state taxes payable

 

6,422

 

1,761

Accrued expenses & other accrued liabilities

 

5,159

 

3,644

Total

$

14,794

$

8,808

9. DEBT

Lines of Credit

Revolver 1

At December 31, 2019, the Company had a revolving line of credit (“Revolver 1”) with Capital One, N.A. with a maximum credit limit of $45,000 and a maturity date of May 11, 2020. On March 30, 2020, the Company entered into an agreement with Capital One, N.A. to replace Revolver 1 with a new revolving line of credit (“New Revolver”). The New Revolver has a maximum credit limit of $70,000 and a maturity date of March 30, 2024. For the period January 1, 2020 through March 30, 2020 and for the year ended December 31, 2019, Revolver 1 accrued interest at one-month LIBOR plus 2.40%. The interest rate in effect as of December 31, 2019 was 4.09%. Amounts available under Revolver 1 were subject to a formula based on eligible consumer loans and MHP Notes and were secured by all accounts receivable and the consumer loans receivable and MHP Notes. The amount of available credit under Revolver 1 was $16,140 as of December 31, 2019.

The New Revolver accrues interest at one-month LIBOR plus 2.00%. The interest rate in effect as of June 30, 2020 was 2.18%. As with Revolver 1, amounts available under the New Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable and the consumer loans receivable and MHP Notes. The amount of available credit under the New Revolver was $32,465 as of June 30, 2020. In connection with the New Revolver, we paid certain arrangement fees and other fees of approximately $0.3 million, which were capitalized as unamortized debt issuance costs and will be amortized to interest expense over the life of the New Revolver.

For the three months ended June 30, 2020 and 2019, interest expense under the Capital One Revolvers was $226 and $66, respectively, and for the six months ended June 30, 2020 and 2019, interest expense under the Capital One Revolvers was $545 and $139, respectively. The outstanding balance as of June 30, 2020 and December 31, 2019 was $37,535 and $28,860, respectively. The Company was in compliance with all financial covenants as of June 30, 2020, including that it maintain a tangible net worth of at least $120,000 and that it maintain a ratio of debt to EBITDA of 4 to 1, or less.

Revolver 2

In April 2016, the Company entered into an agreement with Veritex Community Bank to secure an additional revolving line of credit of $15,000 (“Revolver 2”). Revolver 2 accrues interest at one month LIBOR plus 2.50% and all unpaid principal and interest is due at maturity on April 4, 2021. Revolver 2 is secured by all finished goods inventory excluding repossessed homes. Amounts available under Revolver 2 are subject to a formula based on eligible inventory.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

The interest rates in effect as of March 31, 2020 and December 31, 2019 were 4.17% and 4.19%, respectively. On May 12, 2017, the Company entered into an agreement to increase the line of credit to $20,000. On October 15, 2018, Revolver 2 was amended to extend the maturity date from April 4, 2019 to April 4, 2021. The amount of available credit under Revolver 2 was $12,028 at March 31, 2020. The Company was in compliance with all required covenants as of March 31, 2020. For the six months ended June 30, 2020 and 2019, interest expense was $17 and $86, respectively. The outstanding balance as of March 31, 2020 and December 31, 2019 was $2,001. The Company was in compliance with the other financial covenants that it maintain a tangible net worth of at least $80,000. In April 2020, this note was paid in full and the facility was terminated.

PPP Loan

On April 10, 2020, the Company entered into a loan with Peoples Bank as the lender in an aggregate principal amount of $6,545,700 (the “Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. The Loan was evidenced by a promissory note (the “Note”) dated April 10, 2020 and had a maturity date of April 10, 2022. The Note had an interest rate of 1.00% per annum, with the first six months of interest deferred. Principal and interest were payable monthly commencing on November 10, 2020 and could be prepaid by the Company at any time prior to maturity with no prepayment penalties. On May 1, 2020, this loan was paid in full.

Notes Payable

On April 7, 2011, the Company signed a promissory note for $4,830 with Woodhaven Bank. The amount due under the promissory note accrues interest at an annual rate of 3.85% through February 2, 2017 and then at the prime interest rate plus 0.60% through maturity on April 7, 2018. On April 7, 2018, the promissory note with Woodhaven Bank was renewed with varying amounts of principal and interest due through the maturity date, April 7, 2033. The promissory note calls for an interest rate of 4.25% and monthly payments of $30 with a final payment due at maturity. The note is secured by certain real property of the Company. Interest expense was $38 and $76 for the three and six months ended June 30, 2019. In October 2019, this note was paid in full.

On May 24, 2016, the Company signed a promissory note for $515 with Eagle One, LLC collateralized by the purchase of real property located in Oklahoma City, Oklahoma. The amount due under the promissory note accrues interest at an annual rate of 6.00%. The promissory note calls for monthly principal and interest payments of $6 until June 1, 2026. Interest expense was $0 and $1 for the three and six months ended June 30, 2019. In January 2019, this note was paid in full.

PILOT Agreement

In December 2016, the Company entered into a Payment in Lieu of Taxes (“PILOT”) agreement commonly offered in Georgia by local community development programs to encourage industry development. The net effect of the PILOT agreement is to provide the Company with incentives through the abatement of local, city and county property taxes and to provide financing for improvements to the Company’s Georgia plant (the “Project”). In connection with the PILOT agreement, the Putman County Development Authority provides a credit facility for up to $10,000 which can be drawn upon to fund Project improvements and capital expenditures as defined in the agreement. If funds are drawn, the Company would pay transactions costs and debt service payments. The PILOT agreement requires interest payments of 6.00% per annum on outstanding balances, which are due each December 1st through maturity on December 1, 2021, at which time all unpaid principal and interest are due. The PILOT agreement is collateralized by the assets of the Project. As of June 30, 2020, the Company had not drawn on this credit facility.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

10. SHARE-BASED COMPENSATION

Pursuant to the Legacy Housing Corporation 2018 Incentive Compensation Plan (the “Compensation Plan”), the Company may issue up to 10.0 million equity awards to employees, directors, consultants and nonemployee service providers in the form of stock options, stock and stock appreciation rights. Stock options may be granted with a contractual life of up to ten years. At June 30, 2020, the Company had 9.8 million shares available for grant under the Compensation Plan.

In February 2019, the Company granted 120,000 restricted shares of its common stock to members of senior management. The shares were granted on February 7, 2019 and had a grant date fair value of $1,636. The shares vest at a rate of 14.3% annually, beginning on February 7, 2019, and becoming fully vested on February 7, 2025. During the second quarter of 2020, 42,857 of these restricted shares were forfeited due to the departure of a member of senior managment.

The Company granted 2,936 restricted shares of its common stock to the independent directors on the Company’s Board of Directors. The shares were granted on February 7, 2019 and become fully vested on December 13, 2019.

In August 2019, the Company granted 39,526 restricted shares of its common stock to a member of senior management. The shares were granted on August 2, 2019 and had a grant date fair value of $496. The shares vest at a rate of 20.0% annually, beginning on August 2, 2020, becoming fully vested on August 2, 2024. This grant was canceled during the second quarter of 2020 due to the departure of the member of senior managment.

The Company granted 1,903 restricted shares of its common stock to the independent directors on the Company’s Board of Directors. The shares were granted on March 27, 2020 and become fully vested on December 13, 2020.

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

Number of Units

Weighted Average Grant date Fair Value

Nonvested, January 1, 2020

142

$

13.34

Granted

2

$

9.59

Vested

17

$

13.63

Canceled

(82)

$

13.12

Nonvested, June 30, 2020

45

$

13.46

As of June 30, 2020, approximately 45,000 RSUs remained unvested. Unrecognized compensation expense related to these RSUs at June 30, 2020 was $550 and is expected to be recognized over 4.52 years.

The Company granted 58,694 incentive stock options to a member of senior management. The options were granted on February 7, 2019 at an exercise price of $13.63 per share. The options vest at a rate of 12.5% annually, beginning on February 7, 2019, and becoming fully vested on February 7, 2026. All options expire ten years after the date of grant. Weighted-average assumptions used in the Black-Scholes option pricing model for stock options granted were as follows: risk free interest rate of 2.41%; dividend yield of 0.00%; expected volatility of common stock of 65.0% and expected life of options of 7.9 years. During the second quarter of 2020, these options were forfeited due to the departure of a senior manager.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

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

    

Number of Units

    

Weighted
Average
Exercise Price

    

Weighted
Average
Fair Value

    

Weighted
Average
Remaining
Contractual Life

    

Aggregate
Intrinsic
Value

Outstanding, January 1, 2020

59

13.63

7.69

8.85

Granted

$

$

$

Exercised

Forfeited

(59)

13.63

7.69

Outstanding, June 30, 2020

$

$

$

Exercisable, June 30, 2020

$

$

$

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

11. INCOME TAXES

The provision for income tax expense for the six months ended June 30, 2020 and 2019 was $5.2 million and $4.8 million, respectively. The effective tax rate for the six months ended June 30, 2020 was 22.7% and differs from the federal statutory rate of 21% primarily due to state income taxes. The effective tax rate for the six months ended June 30, 2019 was 23.2% and differs from the federal statutory rate of 21% due to state income taxes.

12. COMMITMENTS AND CONTINGENCIES

As of January 1, 2020, the Company instituted a self-insured health benefits plan with a stop-loss policy, which provides medical benefits to employees electing coverage under the plan. The Company estimates and records costs for incurred but not reported medical claims and claim development. This reserve is based on historical experience and other assumptions, some of which are subjective. The Company will adjust its self-insured medical benefits reserve based on actual experience, estimated costs and changes to assumptions. At June 30, 2020, the Company accrued a $179 liability for incurred but not reported claims.

The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The Company’s obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The maximum amount for which the Company was liable under such agreements approximated $404 and $260 at June 30, 2020 and December 31, 2019, respectively, without reduction for the resale value of the homes. The Company considers its obligations on current contracts to be immaterial and accordingly have not recorded any reserve for repurchase commitment as of June 30, 2020 or December 31, 2019.

Leases. The Company leases facilities under operating leases that typically have 10-year terms. These leases usually offer the Company a right of first refusal that affords the Company the option to purchase the leased premises under certain terms in the event the landlord attempts to sell the leased premises to a third party. Rent expense was $144 and $133 for the three months ended June 30, 2020, and 2019, respectively, and $288 and $264 for the six months ended June 30, 2020, and 2019, respectively. The Company also subleases properties to third parties, ranging from 3-year to 11-year terms with various renewal options. Rental income from the subleased property was approximately $89 and $97

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

for the three months ended June 30, 2020 and 2019, respectively, and $182 and $186 for the six months ended June 30, 2020 and 2019, respectively.

Future minimum lease commitments under all non-cancelable operating leases for each of the next five years at June 30, 2020, are as follows:

2020

    

$

296

2021

 

505

2022

 

435

2023

 

422

2024

 

314

Thereafter

 

808

Total

$

2,780

Legal Matters

The Company is party to certain legal proceedings that arise in the ordinary course and are incidental to its business. Certain of the claims pending against the Company in these proceedings allege, among other things, breach of contract and warranty, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s financial position, liquidity or results of operations. However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company’s financial position, liquidity or results of operations in any future reporting periods.

13. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

On February 2, 2012, the Company entered into a master interest rate swap agreement. The Company elected not to designate the interest rate swap agreements as cash flow hedges and, therefore, gains or losses on the agreements as well as the other offsetting gains or losses on the hedged items attributable to the hedged risk are recognized in current earnings. ASC 815-10, Derivatives and Hedging, requires derivative instruments to be measured at fair value and recorded in the statements of financial position as either assets or liabilities. The Company entered into interest rate swap agreement with Capital One Bank on June 12, 2017 to fix the variable rate portion for $8,000 of the line of credit. This interest rate swap agreement matured on May 11, 2020 and is the only one outstanding during 2020.  The fair values of the interest rate swap agreement was an asset included in prepaid expenses and other current assets and was $3 at December 31, 2019. Included in the statements of operations for the six months ended June 30, 2020 and 2019 were losses of $15 and $46, respectively, which are the result of the changes in the fair values of the interest rate swap agreement.

Fair Value Measurements

The Company accounts for its investments and derivative instruments in accordance with ASC 820-10, Fair Value Measurement, which among other things provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

measurement) and the lowest priority to unobservable inputs (Level III measurements). The three levels of fair value hierarchy under ASC 820-10, Fair Value Measurement, are as follows:

Level I       Quoted prices are available in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level II      Significant observable inputs other than quoted prices in active markets for which inputs to the valuation methodology include: (1) Quoted prices for similar assets or liabilities in active markets; (2) Quoted prices for identical or similar assets or liabilities in inactive markets; (3) Inputs other than quoted prices that are observable; (4) Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability.

Level III     Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

The asset or liability fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company uses derivatives to manage risks related to interest rate movements. The Company does not enter into derivative contracts for speculative purposes. Interest rate swap contracts are recognized as assets or liabilities on the balance sheets and are measured at fair value. The fair value was calculated and provided by the lender, a Level II valuation technique. Management reviewed the fair values for the instruments as provided by the lender and determined the related asset and liability to be an accurate estimate of future gains and losses to the Company. The fair value of the interest rate swap was an asset valued at $3 at December 31, 2019.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, consumer loans, MHP Notes, other notes, accounts payable, lines of credit, notes payable, and dealer portion of consumer loans.

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate their respective fair values because of the short-term maturities or expected settlement dates of these instruments. This is considered a Level I valuation technique. The MHP Notes, other notes, lines of credit, and notes payable have variable interest rates that reflect market rates and their fair value approximates their carrying value. This is considered a Level II valuation technique. The Company also assessed the fair value of the consumer loans receivable based on the discounted value of the remaining principal and interest cash flows. The Company determined that the fair value of the consumer loan portfolio was approximately $123,000 compared to the book value of $107,236 as of June 30, 2020, and a fair value of approximately $119,000 compared to the book value of $105,042 as of December 31, 2019. This is a Level III valuation technique.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(dollars in thousands)

14. EARNINGS PER SHARE

Basic earnings per common share (“EPS”) is computed based on the weighted-average number of common shares outstanding during each reporting period. Diluted EPS is based on the weighted-average number of common shares outstanding plus the number of additional shares that would have been outstanding had the dilutive common shares been issued. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS.

Three months ended

Six months ended

June 30, 

June 30, 

2020

    

2019

2020

    

2019

Numerator:

Net income (in 000's)

$

8,596

$

8,633

$

17,619

$

15,846

Denominator:

Basic weighted-average common shares outstanding

24,201,220

24,369,890

24,260,274

24,442,921

Effect of dilutive securities:

Restricted stock grants

603

-

664

15,046

Diluted weighted-average common shares outstanding

24,201,823

24,369,890

24,260,938

24,457,967

Earnings per share attributable to Legacy Housing Corporation

Basic

$

0.36

$

0.35

$

0.73

$

0.65

Diluted

$

0.36

$

0.35

$

0.73

$

0.65

The diluted earnings per share calculation excludes 79,459 and 164,487 potential shares for the three months ended June 30, 2020 and 2019, respectively, and excludes 90,783 and 149,441 potential shares for the six months ended June 30, 2020 and 2019, respectively because the effect of including theses potential shares would be antidilutive.

15. RELATED PARTY TRANSACTIONS

Bell Mobile Homes, a retailer owned by one of the Company’s significant owners, purchases manufactured homes from the Company. Accounts receivable balances due from Bell Mobile Homes were $208 and $549 as of June 30, 2020 and December 31, 2019, respectively. Accounts payable balances due to Bell Mobile Homes for maintenance and related services were $0 and $74 as of June 30, 2020 and December 31, 2019, respectively. Home sales to Bell Mobile Homes were $533 and $1,432 for the three months ended June 30, 2020 and 2019, respectively and $1,416 and $2,290 for the six months ended June 30, 2020 and 2019, respectively.

16. SUBSEQUENT EVENTS

In connection with the preparation of these financial statements, an evaluation of subsequent events was performed through the date of filing and there were no other events that have occurred that would require adjustments to the financial statements.

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Item 2. 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-Q. 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.”

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 fourth 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 fourth quarter of 2019. With current operations focused primarily in the southern United States, we offer our customers an array of quality homes ranging in size from approximately 390 to 2,667 square feet consisting of 1 to 5 bedrooms, with 1 to 31/2 bathrooms. Our homes range in price, at retail, from approximately $22,000 to $140,000. For the three and six months ended June 30, 2020, we sold 1,056 and 1,905 home sections, respectively (which are entire homes or single floors that are combined to create complete homes). For the three and six months ended June 30, 2019, we sold 1,028 and 1,946 home sections, respectively.

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 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. 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 75 home sections, or 62 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 84 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 six months ended June 30, 2020, approximately 46% of our manufactured homes were sold in Texas, followed by 9% in Michigan, 8% in Georgia, 7% in North Carolina, and 6% in Kentucky. For the six months ended June 30, 2019, approximately 52% of our manufactured homes were sold in Texas, followed by 8% in Georgia, 7% in Florida, 6% in Kansas and 5% in South Carolina. We plan to deepen our distribution channel by using cash from operations and borrowings from our lines of credit to expand our company-owned retail locations in new and existing markets.

We offer three types of financing solutions to our customers. We provide floor plan financing for our independent retailers, which takes the form of a consignment arrangement between the retailer and us. We 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

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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-Q are those of Legacy Housing Corporation.

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:

Consistent with our long-term strategy of conservatively deploying our capital to achieve above average rates of return, we intend to expand our retail presence in the geographic markets we now serve, particularly in the southern United States. Each retail center requires between $500,000 and $1,500,000 to acquire the location, situate an office, provide inventory, and provide the initial working capital. We initially anticipated opening 2 to 4 additional retail centers by the end of 2020, but we will reassess those plans once we have a clearer understanding of the COVID-19 pandemic’s impact on the retail business.
We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions. As of June 30, 2020, these properties include the following:

Location

    

Description

Date of Acquisition

Cost

Bastrop County, Texas

 

400 Acres

 

April 2018

$

4,400,000

Bexar County, Texas

    

100 Acres

     

November 2018

    

1,300,000

Horseshoe Bay, Texas

133 Acres

 

Various 2018-2019

 

2,431,000

Johnson County, Texas

91.5 Acres

 

July 2019

 

445,000

Venus, Texas

50 Acres

 

August 2019

 

422,000

$

8,998,000

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.
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 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

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be able to continue to properly estimate anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the timing of production schedules and the levels and utilization of inventory, equipment and personnel.
The coronavirus pandemic is an evolving threat to the economy and all businesses. At this time both the duration of the pandemic and the magnitude of the economic consequences are unknown. Risks to the Company include but are not limited to:
oincreased loan losses or deferred loan payments as loan obligors suffer cash flow issues resulting from reduced employment, reduced rental income or unit sales, or other factors;
oreduced sales volume as potential customers are unable to shop for new homes or cannot qualify for a home purchase, retail dealers or company stores reduce or stop operations, or MHP owners reduce their future home purchases;
oreduced production resulting from factors such as the spread of the illness through the Company’s workforce, reduced product demand, or government-mandated closures of our factories, company-owned stores, or retail lots of independent dealers who carry our products;
odelays in development projects as zoning, regulatory, and permitting decisions are likely to be postponed and the expected negative impact of the pandemic on the construction industry;
oreduced raw material availability related to global supply chain disruption from the pandemic, including possible border closures;
odecreased cash flow from operations which could negatively affect our liquidity;
oan outbreak of illness among our management and accounting staff could negatively affect our ability to maintain operations, operate our financial systems, delay our statutory reporting, and reduce our internal control of financial reporting.

We continue to monitor government responses to support the economy and evaluate how those actions might mitigate the risks noted above. At this time, we believe that the pandemic will have a negative effect on our financial results that could range from minor to material.

Management has taken a number of actions in recent months, including stimulating demand by offering discounts and modified purchase terms, reducing production labor, suspending overtime, and reducing rates of pay for non-production workers. Additionally, the Company negotiated a new credit agreement with its primary bank that expanded and extended our credit facility. The new credit agreement closed on March 30, 2020.

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.

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Comparison of Three Months ended June 30, 2020 and 2019 (in thousands)

Three months ended

    

    

 

June 30, 

    

2020

    

2019

    

$ change

    

% change

 

Net revenue:

Product sales

$

39,179

$

39,766

$

(587)

 

(1.5)

%

Consumer and MHP loans interest

 

6,067

 

5,112

 

955

 

18.7

%

Other

 

760

 

883

 

(123)

 

(13.9)

%

Total net revenue

 

46,006

 

45,761

 

245

 

0.5

%

Operating expenses:

 

  

 

  

 

  

 

  

Cost of product sales

 

30,557

 

27,876

 

2,681

 

9.6

%

Selling, general administrative expenses

 

4,064

 

6,144

 

(2,080)

 

(33.9)

%

Dealer incentive

 

186

 

239

 

(53)

 

(22.2)

%

Income from operations

 

11,199

 

11,502

 

(303)

 

(2.6)

%

Other income (expense)

 

  

 

  

 

  

 

  

Non‑operating interest income

 

215

 

46

 

169

 

367.4

%

Miscellaneous, net

 

11

 

31

 

(20)

 

(64.5)

%

Gain on settlement, net

%

Interest expense

 

(239)

 

(158)

 

(81)

 

51.3

%

Total other

 

(13)

 

(81)

 

68

 

(84.0)

%

Income before income tax expense

 

11,186

 

11,421

 

(235)

 

(2.1)

%

Income tax expense

 

(2,590)

 

(2,788)

 

198

 

(7.1)

%

Net income

$

8,596

$

8,633

$

(37)

 

(0.4)

%

Product sales primarily consist of direct sales, commercial sales, consignment sales and retail store sales. Product sales decreased $0.6 million, or 1.5%, during the three months ended June 30, 2020 as compared to the same period in 2019. This change was driven by an increase in commercial sales offset by a decline in consignment sales, direct sales, retail store sales and other product sales. Commercial sales increased $3.5 million to $21.1 million in 2020 from $17.6 million in 2019. This increase was offset by a net $1.5 million decrease in consignment sales to $9.1 million in 2020 from $10.6 million in 2019, a $1.7 million decrease in direct sales to $3.9 million in 2020 from $5.5 million in 2019 and a $0.6 million decrease in our company-owned retail stores sales to $4.3 million in 2020 from $4.9 million in 2019. Other product sales decreased $0.2 million to $0.8 million in 2020 from $1.0 million in 2019 and is primarily due to a decrease in parts sales and miscellaneous sales income.

Net revenue attributable to our factory-built housing consisted of the following during the three months of 2020 and 2019:

    

Three Months Ended

    

    

 

June 30, 

(in thousands)

 

    

2020

    

2019

    

$ Change

    

% Change

 

Net revenue:

 

  

 

  

 

  

 

  

Products sold

$

39,179

$

39,766

$

(587)

 

(1.5)

%

Total products sold

 

954

 

891

 

63

 

7.1

%

Net revenue per product sold

$

41.1

$

44.6

$

(4)

 

(8.4)

%

For the three months ended June 30, 2020, our net revenue per product sold decreased slightly because of changes in our product sales mix. We had declines in direct sales, consignment sales and company-owned retail stores partially offset by increases in sales to manufactured home communities. Sales through our company-owned retail stores and sales to manufactured home communities have higher margins than our direct sales and consignment sales.

Consumer and MHP loans interest income grew $1.0 million, or 18.7%, during the three months ended June 30, 2020 as compared to the same period in 2019 and is related to our increase in outstanding MHP Note portfolio and

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consumer loan portfolio. Between June 30, 2019 and June 30, 2020 our MHP Note portfolio increased by $48.1 million and the consumer loan portfolio increased by $6.2 million.  

Other revenue primarily consists of service fees and consignment fees. Other revenue decreased $0.1 million or 13.9% during the three months ended June 30, 2020 as compared to the same period in 2019 and is primarily due to a $0.2 million decrease in other income offset by a $0.1 million increase in service fees revenue.

The cost of product sales increased $2.7 million, or 9.6%, during the three months ended June 30, 2020 as compared to the same period in 2019. The increase in costs is primarily related to the increasing number of home units sold and increases in the cost of materials and labor in 2020.

Selling, general and administrative expenses decreased $2.1 million, or 33.9%, during the three months ended June 30, 2020 as compared to the same period in 2019. This decrease was primarily due to $0.7 million of retail store expenses recorded as SG&A in the second quarter of 2019 that were subsequently recorded in cost of sales later in 2019, a $0.9 million decrease in warranty costs, a $0.3 million decrease in salaries and incentive costs, a $0.3 decrease in loan loss reserve and a $0.1 million decrease in advertising and promotions. These decreases were partially offset by $0.2 million increase in delivery and other miscellaneous costs. In addition, dealer incentive expense increased $0.1 million in 2020 as compared to 2019.

Other income (expense), net increased $0.1 million, or 84.0%, during the three months ended June 30, 2020 as compared to the same period in 2019.  This increase was primarily due to an increase of $0.2 million in non-operating interest income offset by a $0.1 million increase in interest expense.

Income tax expense during the three months ended June 30, 2020 was $2.6 million compared to $2.8 million for the same period in 2019. The effective tax rate for the three months ended June 30, 2020 was 23.2% and differs from the federal statutory rate of 21% primarily due to state income taxes. The effective tax rate for the three months ended June 30, 2019 was 24.4% and differs from the federal statutory rate of 21% primarily due to state income taxes.

Comparison of Six Months ended June 30, 2020 and 2019 (in thousands)

Six months ended

    

    

 

June 30, 

    

2020

    

2019

    

$ change

    

% change

 

Net revenue:

Product sales

$

70,375

$

71,316

$

(941)

 

(1.3)

%

Consumer and MHP loans interest

 

12,491

 

10,642

 

1,849

 

17.4

%

Other

 

1,414

 

1,757

 

(343)

 

(19.5)

%

Total net revenue

 

84,280

 

83,715

 

565

 

0.7

%

Operating expenses:

 

  

 

  

 

  

 

  

Cost of product sales

 

52,416

 

49,760

 

2,656

 

5.3

%

Selling, general administrative expenses

 

9,676

 

12,635

 

(2,959)

 

(23.4)

%

Dealer incentive

 

380

 

449

 

(69)

 

(15.4)

%

Income from operations

 

21,808

 

20,871

 

937

 

4.5

%

Other income (expense)

 

  

 

  

 

  

 

  

Non‑operating interest income

 

451

 

85

 

366

 

430.6

%

Miscellaneous, net

 

48

 

33

 

15

 

45.5

%

Gain on settlement, net

1,075

1,075