SEC Filing - Legacy Housing Corporation

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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 September 30, 2021

☐	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 24,209,556 shares of Common Stock ($0.001 par value) outstanding as of November 5, 2021.

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	23

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

	Item 4.	Controls and Procedures	32

PART II - OTHER INFORMATION			33

	Item 1.	Legal Proceedings	33

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

	Item 3.	Defaults Upon Senior Securities	33

	Item 4.	Mine Safety Disclosures	33

	Item 5.	Other Information	33

	Item 6.	Exhibits	33

SIGNATURES			34

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)


	September 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	853	$	768
Accounts receivable, net		8,226		3,867
Current portion of consumer loans		5,883		5,348
Current portion of notes receivable from mobile home parks (“MHP”)		10,591		12,468
Current portion of other notes receivable		15,128		2,054
Inventories		36,951		27,224
Prepaid expenses and other current assets		5,805		3,234
Total current assets		83,437		54,963
Consumer loans, net		115,754		106,572
Notes receivable from mobile home parks (“MHP”)		89,642		123,872
Other notes receivable, net		19,342		13,050
Inventories, net		3,524		8,656
Other assets		10,862		8,887
Property, plant and equipment, net		26,428		22,616
Total assets	$	348,989	$	338,616
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	6,170	$	10,197
Accrued liabilities		17,073		14,860
Customer deposits		6,344		3,620
Escrow liability		9,350		7,729
Total current liabilities		38,937		36,406
Long‑term liabilities:
Lines of credit		8,281		36,174
Deferred income taxes		1,971		1,971
Accrued liabilities, net of current portion		—		630
Dealer incentive liability		4,160		4,242
Total liabilities		53,349		79,423
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized: no shares issued or outstanding		—		—
Common stock, $.001 par value, 90,000,000 shares authorized; 24,654,621 and 24,639,125 issued and 24,209,556 and 24,194,060 outstanding at September 30, 2021 and December 31, 2020, respectively		25		25
Treasury stock at cost, 445,065 shares at September 30, 2021 and December 31, 2020		(4,477)		(4,477)
Additional paid-in-capital		175,556		175,293
Retained earnings		124,536		88,352
Total stockholders' equity		295,640		259,193
Total liabilities and stockholders' equity	$	348,989	$	338,616

See accompanying notes to condensed financial statements.

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LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Net revenue:
Product sales	$	48,300	$	36,566	$	121,689	$	106,940
Consumer and MHP loans interest		7,259		6,428		20,631		18,919
Other		911		749		2,679		2,163
Total net revenue		56,470		43,743		144,999		128,022
Operating expenses:
Cost of product sales		33,392		27,839		86,024		78,387
Selling, general and administrative expenses		5,045		4,525		15,005		14,202
Dealer incentive		421		550		998		929
Income from operations		17,612		10,829		42,972		34,504
Other income (expense):
Non‑operating interest income		588		246		1,265		697
Miscellaneous, net		116		96		354		145
Gain on settlement, net		—		—		—		1,075
Interest expense		(318)		(239)		(827)		(817)
Total other		386		103		792		1,100
Income before income tax expense		17,998		10,932		43,764		35,604
Income tax expense		(3,265)		(2,486)		(7,581)		(8,097)
Net income	$	14,733	$	8,446	$	36,183	$	27,507
Weighted average shares outstanding:
Basic		24,204,362		24,192,157		24,202,053		24,237,402
Diluted		24,283,666		24,214,279		24,279,846		24,243,927
Net income per share:
Basic	$	0.61	$	0.35	$	1.50	$	1.13
Diluted	$	0.61	$	0.35	$	1.49	$	1.13

See accompanying notes to condensed financial statements.

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LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Nine months ended September 30,
	2021		2020
Operating activities:
Net income	$	36,183	$	27,507
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense		1,157		874
Amortization of debt discount and issuance costs		(542)		35
Provision for loan loss—consumer loans		586		586
Share based payment expense		163		177
Changes in operating assets and liabilities:
Accounts receivable		(4,359)		(741)
Consumer loans originations		(19,954)		(12,647)
Consumer loans principal collections		9,379		7,945
Notes receivable MHP originations		(36,897)		(54,630)
Notes receivable MHP principal collections		72,209		17,364
Inventories		(4,595)		1,166
Prepaid expenses and other current assets		(2,571)		1,959
Other assets		(2,352)		(2,704)
Accounts payable		(4,027)		(405)
Accrued liabilities		1,583		3,797
Customer deposits		2,724		902
Escrow liability		1,621		775
Dealer incentive liability		(82)		467
Net cash provided by (used in) operating activities		50,226		(7,573)
Investing activities:
Purchases of property, plant and equipment		(4,596)		(2,156)
Issuance of notes receivable		(27,127)		(5,430)
Notes receivable collections		7,761		3,247
Purchases of loans		—		(317)
Collections from purchased loans		1,614		902
Net cash used in investing activities		(22,348)		(3,754)
Financing activities:
Proceeds from exercise of stock options		100		—
Treasury stock purchase		—		(1,417)
Proceeds from issuance of note payable		—		6,546
Principal payments on note payable		—		(6,546)
Proceeds from lines of credit		75,272		52,148
Payments on lines of credit		(103,165)		(39,485)
Net cash used in financing activities		(27,793)		11,246
Net increase (decrease) in cash and cash equivalents		85		(81)
Cash and cash equivalents at beginning of period		768		1,724
Cash and cash equivalents at end of period	$	853	$	1,643
Supplemental disclosure of cash flow information:
Cash paid for interest	$	548	$	770
Cash paid for taxes	$	8,194	$	6,728

See accompanying notes to condensed financial statements.

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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, 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	—		—		—		—		9,023		9,023
Balances, March 31, 2020	24,637,222		25		(3,742)		175,164		59,380		230,827
Share based compensation expense and stock units vested	—		—		—		36		—		36
Purchase of treasury stock	—		—		(735)		—		—		(735)
Net income	—		—		—		—		10,040		10,040
Balances, June 30, 2020	24,637,222		25		(4,477)		175,200		69,420		240,168
Share based compensation expense and stock units vested	—		—		—		44		—		44
Net income	—		—		—		—		8,446		8,446
Balances, September 30, 2020	24,637,222	$	25	$	(4,477)	$	175,244	$	77,866	$	248,658


	Common Stock			Treasury		Additional		Retained
	Shares	Amount		stock		paid-in-capital		earnings		Total
Balances, December 31, 2020	24,639,125	$	25	$	(4,477)	$	175,293	$	88,352	$	259,193
Share based compensation expense and stock units vested	8,571		—		—		44		—		44
Net income	—		—		—		—		9,023		9,023
Balances, March 31, 2021	24,647,696		25		(4,477)		175,337		97,375		268,260
Share based compensation expense and stock units vested	—		—		—		64		—		64
Net income	—		—		—		—		12,428		12,428
Balances, June 30, 2021	24,647,696		25		(4,477)		175,401		109,803		280,752
Share based compensation expense and stock units vested	—		—		—		55		—		55
Share based compensation expense - stock options exercised	6,925		—		—		100		—		100
Net income	—		—		—		—		14,733		14,733
Balances, September 30, 2021	24,654,621	$	25	$	(4,477)	$	175,556	$	124,536	$	295,640

See accompanying notes to condensed financial statements.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

1. NATURE OF OPERATIONS

Legacy Housing Corporation (referred herein as ”Legacy”, “we”, “our”, “us”, or the “Company”) was formed on January 1, 2018 as a Delaware corporation through a corporate conversion of Legacy Housing, Ltd. (the “Partnership”), a Texas limited partnership formed in May 2005. Effective December 31, 2019, the Company reincorporated from a Delaware corporation to a Texas corporation. 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 year ended December 31, 2020, the Company purchased 145,065 shares of its common stock at an average price of $9.77 per share, pursuant to the Company’s repurchase program. 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 September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020, 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 nine months ended September 30, 2021 are not necessarily indicative of the results to be

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

expected for the year ending December 31, 2021, or any other period. The accompanying balance sheet as of December 31, 2020 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2020 (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, loans to mobile home parks, consumer loans, other 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 paid in cash.

Revenue from product sales is recognized at a point in time when the performance obligation under the terms of a contract with our customer is satisfied, which typically occurs upon delivery and transfer of title of the home, as this depicts when control of the promised good is transferred to our customer. 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. Warranty costs and contract costs are included in selling, general and administrative expenses in the statements of operations.

For the three months ended September 30, 2021 and 2020, sales to an independent third-party and its affiliates accounted for $2,335 or 4.8% and $13,253 or 36.2% of our product sales, respectively. For the nine months ended

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

September 30, 2021 and 2020, sales to an independent third-party and its affiliates accounted for $7,399 or 6.1% and $39,559 or 37.0% of our product sales, respectively.

For the three months ended September 30, 2021 and 2020, total cost of product sales included $3,978 and $7,073 of costs relating to subcontracted production for commercial sales, reimbursed dealer expenses for consignment sales, and certain other similar costs incurred for retail store and commercial sales. For the nine months ended September 30, 2021 and 2020, total cost of product sales included $8,976 and $15,878 of costs relating to subcontracted production for commercial sales, reimbursed dealer expenses for consignment sales, and certain other similar costs incurred for retail store and commercial sales.

Other revenue consists of consignment fees, commercial lease rents, service fees and other miscellaneous income. Consignment fees are charged to independent retailers on a monthly basis for homes held by the independent retailers pursuant to a consignment arrangement until the home is sold to an individual customer. Consignment fees are determined as a percentage of the home’s wholesale price to the independent dealer. Revenue recognition for consignment fees are recognized over time using the output method as it provides a faithful depiction of the Company’s performance toward completion of the performance obligation under the contract and the value transferred to the independent retailer for the time the home is held under consignment. Revenue for commercial leases is recognized as earned monthly over a contractual period of 96 or 120 months. Revenue for service fees and miscellaneous income is recognized at a point in time when the performance obligation is satisfied.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by source of the revenue for the three and nine months ended September 30, 2021 and 2020:


	Three months ended				Nine months ended
	September 30,				September 30,
	2021		2020		2021		2020
Product sales:
Direct sales	$	8,434	$	1,453	$	17,093	$	7,528
Commercial sales		12,198		17,681		37,840		54,532
Consignment sales		18,641		11,950		43,381		29,875
Retail store sales		5,929		3,939		15,435		11,475
Other (1)		3,098		1,543		7,940		3,530
Total product sales		48,300		36,566		121,689		106,940
Consumer and MHP loans interest:
Interest - consumer installment notes		4,019		4,014		12,208		11,983
Interest - MHP notes		3,240		2,414		8,423		6,936
Total consumer and MHP loans interest		7,259		6,428		20,631		18,919
Other		911		749		2,679		2,163
Total net revenue	$	56,470	$	43,743	$	144,999	$	128,022

(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 Accounting Standards Codification (“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)

(dollars in thousands)

Accounts Receivable

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

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 September 30, 2021 and December 31, 2020, the allowance for doubtful accounts totaled $318 and $97, respectively.

Leased Property

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

The standard lease agreement is typically for 96 months or 120 months. Under the lease arrangement, the lessee (mobile home park operator) uses the mobile homes as personal property to be rented as a residence at the lessee's mobile home park. The lessee makes monthly, periodic lease payments to the Company over the term of the lease. The lessee is responsible for maintaining the homes during the term of the lease. The lessee is also responsible for repairing all damages caused by force majeure events even in cases of total or partial loss of the property. At the end of the lease term or in the event of default, the lessee is required to deliver to the Company the homes with all improvements in good repair and condition in substantially the same condition as existed at the commencement of the lease. The lessee may terminate the lease with 30 days written notice to the Company and pay a lease termination fee equal to 10% of the remaining lease payments or six month’s rent, whichever is greater. The lessee has an option to purchase the homes at the end of the lease term for fair market value based on an agreed upon determination of fair market value by both parties using comparable sales, recent appraisal, or NADA official guidance. The lessee must provide the Company with 30 days written notice prior to expiration of the lease of intent to purchase the property for fair market value. The lease also includes a renewal option whereby the lessee has the option to extend the lease for an additional 48 months (the extended term) at the same terms and conditions as the original lease. The lessee must notify the Company of the intent to exercise the renewal extension option not less than six months prior to expiration of the lease term. The leased mobile homes are included in other assets on the Company’s balance sheet, capitalized at manufactured cost and depreciated over a 15 year useful life. Homes returned to the Company upon expiration of the lease or in the event of default will be sold by the Company through its standard sales and distribution channels.

Future minimum lease income under all operating leases for each of the next five years at September 30, 2021, are as follows:


2021	$	473
2022		1,924
2023		1,924
2024		1,924
2025		1,924
Thereafter		6,052
Total	$	14,221

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Recent Accounting Pronouncements

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

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term. 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 the 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 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 the longer phase-in period for adoption, and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2023. The Company 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.

2. CONSUMER LOANS

Consumer loans 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 13.6% as of September 30, 2021 and 13.8% as of December 31, 2020. 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.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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 $9,350 and $7,729 as of September 30, 2021 and December 31, 2020, 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 when either principal or interest is past due and remains unpaid for more than 90 days or other indications of distress. 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 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 $698 and $1,395 as of September 30, 2021 and December 31, 2020, respectively, and are included in other assets in the balance sheets.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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


	As of September 30,		As of December 31,
	2021		2020
Consumer loans receivable	$	125,089	$	115,639
Loan discount and deferred financing fees		(2,650)		(2,814)
Allowance for loan losses		(802)		(905)
Consumer loans receivable, net	$	121,637	$	111,920

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


	Three months ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Allowance for loan losses, beginning of period	$	814	$	916	$	905	$	913
Provision for loan losses		27		306		586		586
Charge offs		(39)		(172)		(689)		(449)
Allowance for loan losses	$	802	$	1,050	$	802	$	1,050

The reserve for loan losses consists of the following:


	As of September 30,		As of December 31,
	2021		2020
Total consumer loans	$	125,089	$	115,639
Allowance for loan losses	$	802	$	905
Impaired loans individually evaluated for impairment	$	1,328	$	1,603
Specific reserve against impaired loans	$	437	$	558
Other loans collectively evaluated for allowance	$	123,761	$	114,036
General allowance for loan losses	$	365	$	347

As of September 30, 2021 and December 31, 2020, the total principal outstanding for consumer loans on nonaccrual status was $1,328 and $1,603, respectively. A detailed aging of consumer loans receivable that are past due as of September 30, 2021 and December 31, 2020 were as follows:


	As of September 30,			As of December 31,
	2021		%	2020		%
Total consumer loans receivable	$	125,089	100.0	$	115,639	100.0
Past due consumer loans:
31 - 60 days past due	$	316	0.3	$	954	0.8
61 - 90 days past due		440	0.4		221	0.2
91 - 120 days past due		111	0.1		141	0.1
Greater than 120 days past due		885	0.7		1,261	1.1
Total past due	$	1,752	1.4	$	2,577	2.2

3. NOTES RECEIVABLE FROM MOBILE HOME PARKS

The notes receivable from mobile home parks (“MHP Notes”) relate to mobile homes sold to mobile home parks and financed through notes receivable. The MHP Notes have varying maturity dates and call for monthly principal and interest payments. The interest rate on the MHP Notes can be fixed or variable. Approximately $82 million of the

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

MHP Notes have a fixed interest rate ranging from 6.9% to 8.9%. The remaining MHP Notes have a variable rate typically set at 4.0% above prime with a minimum of 8.0%. The average interest rate per loan was approximately 7.7% and 7.7% as of September 30, 2021 and December 31, 2020, respectively, with maturities that range from 1 to 20 years. The collateral underlying the MHP Notes are individual mobile homes which can be repossessed and resold. The MHP Notes are generally guaranteed by the borrowers personally.

The Company had concentrations of MHP Notes with an independent third-party and its affiliates that equaled 29.8% and 52.9% of the principal balance outstanding, all of which was secured by the mobile homes, as of September 30, 2021 and December 31, 2020, respectively.

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. There were minimal past due balances on the MHP Notes as of September 30, 2021 and December 31, 2020 and no charge offs were recorded for MHP Notes during the three and nine months ended September 30, 2021 and 2020, respectively. Allowance for loan loss is considered immaterial and accordingly no loss is recorded against the MHP Notes as of September 30, 2021 and December 31, 2020.

4. OTHER NOTES RECEIVABLE

Other notes receivable relate to various notes issued to mobile home park owners and dealers, which are not directly tied to sales 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 guaranteed by the borrowers personally. 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 September 30,		As of December 31,
	2021		2020
Outstanding principal balance	$	34,544	$	15,179
Allowance for loan losses		(74)		(75)
Total	$	34,470	$	15,104

5. INVENTORIES

Inventories consists of the following:


	As of September 30,		As of December 31,
	2021		2020
Raw materials	$	16,398	$	12,713
Work in progress		339		412
Finished goods (1)		24,207		23,375
Allowance for obsolescence		(469)		(620)
Total	$	40,475	$	35,880

(1) Finished goods includes $3,524 and $8,656 as of September 30, 2021 and December 31, 2020, respectively, is held for more than twelve months and classified as long-term.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:


	As of September 30,		As of December 31,
	2021		2020
Land	$	14,850	$	12,968
Buildings and leasehold improvements		13,037		10,700
Vehicles		1,682		1,664
Machinery and equipment		4,486		4,127
Furniture and fixtures		298		298
Total		34,353		29,757
Less accumulated depreciation		(7,925)		(7,141)
Total property, plant and equipment	$	26,428	$	22,616

Depreciation expense was $403 with $113 included as a component of cost of product sales for the three months ended September 30, 2021 and $249 with $88 included as a component of cost of product sales for the three months ended September 30, 2020. Depreciation expense was $784 with $327 included as a component of cost of product sales for the nine months ended September 30, 2021 and $750 with $267 included as a component of cost of product sales for the nine months ended September 30, 2020.

7. OTHER ASSETS

Other assets consists of the following:


	As of September 30,		As of December 31,
	2021		2020
Leased property, net of accumulated depreciation	$	9,909	$	7,218
Prepaid rent		255		274
Repossessed homes		698		1,395
Total	$	10,862	$	8,887

Depreciation expense for the leased property was $143 and $53 for the three months ended September 30, 2021 and 2020, respectively, and $373 and $124 for the nine months ended September 30, 2021 and 2020, respectively.

8. ACCRUED LIABILITIES

Accrued liabilities consists of the following:


	As of September 30,		As of December 31,
	2021		2020
Warranty liability	$	2,494	$	2,594
Litigation reserve		607		899
Federal and state income taxes payable		5,353		5,603
Accrued expenses & other accrued liabilities		8,619		6,394
Total	$	17,073	$	15,490

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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, Revolver 1 accrued interest at one-month LIBOR plus 2.40%. Amounts available under Revolver 1 were subject to a formula based on eligible consumer loans and MHP Notes and were secured by all accounts receivable, consumer loans and MHP Notes.

The New Revolver accrues interest at one-month LIBOR plus 2.00%. The interest rate in effect as of September 30, 2021 and December 31, 2020 was 2.14% and 2.15%, respectively. As with Revolver 1, amounts available under the New Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable, consumer loans and MHP Notes. The New Revolver requires the Company to comply with certain quarterly financial and non-financial covenants. The amount of available credit under the New Revolver was $61,719 and $33,826 as of September 30, 2021 and December 31, 2020, respectively. In connection with the New Revolver, we paid certain arrangement fees and other fees of approximately $300, which were capitalized as deferred debt issuance costs and will be amortized to interest expense over the life of the New Revolver.

For the three months ended September 30, 2021 and 2020, interest expense under the Capital One Revolvers was $318 and $239, respectively. For the nine months ended September 30, 2021 and 2020, interest expense under the Capital One Revolvers was $827 and $785, respectively. The outstanding balance as of September 30, 2021 and December 31, 2020 was $8,281 and $36,174, respectively.

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”). 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. 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. Revolver 2 requires the Company to comply with certain quarterly financial and non-financial covenants. Amounts available under Revolver 2 are subject to a formula based on eligible inventory. The interest rate in effect as of March 31, 2020 was 4.17%. The amount of available credit under Revolver 2 was $12,028 at March 31, 2020. For the three and nine months ended September 30, 2020 interest expense was $0 and $17. 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 $6,546 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. The PPP Loan was evidenced by a promissory note dated April 10, 2020 and had a maturity date of April 10, 2022. The PPP Loan 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.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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 wi