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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 June 30, 2022

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 24,406,020 shares of Common Stock ($0.001 par value) outstanding as of September 18, 2022.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

37

PART II - OTHER INFORMATION

38

Item 1.

Legal Proceedings

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults Upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

39

SIGNATURES

40

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, 

2022

2021

Assets

Current assets:

 

  

 

  

Cash and cash equivalents

$

14,267

$

1,042

Accounts receivable, net

 

5,688

 

5,118

Accounts receivable - dealer financed

10,394

3,496

Current portion of consumer loans receivable

 

5,759

 

6,080

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

 

10,310

 

10,049

Current portion of other notes receivable

 

16,791

 

21,070

Inventories

 

46,770

 

41,230

Prepaid expenses and other current assets

 

4,284

 

4,456

Total current assets

 

114,263

 

92,541

Consumer loans receivable, net

 

125,172

 

119,543

Notes receivable from mobile home parks (“MHP”)

 

111,972

 

92,943

Other notes receivable, net

 

14,090

 

20,930

Inventories, net

4,603

2,678

Other assets - leased mobile homes

9,943

9,419

ROU assets - operating leases

3,083

Other assets

 

1,406

 

1,097

Property, plant and equipment, net

 

28,497

 

27,516

Total assets

$

413,029

$

366,667

Liabilities and Stockholders' Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

5,505

$

4,155

Accrued liabilities

 

14,980

 

20,686

Customer deposits

 

11,934

 

7,749

Escrow liability

 

9,771

 

9,350

Operating lease obligation

662

Total current liabilities

 

42,852

 

41,940

Long‑term liabilities:

 

  

 

  

Operating lease obligation, less current portion

2,525

Lines of credit

 

12,614

 

7,993

Deferred income taxes, net

3,004

3,004

Dealer incentive liability

 

4,974

 

4,336

Total liabilities

 

65,969

 

57,273

Commitments and contingencies (Note 13)

 

  

 

  

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; 24,851,085 and 24,654,621 issued and 24,406,020 and 24,209,556 outstanding at June 30, 2022 and December 31, 2021, respectively

29

25

Treasury stock at cost, 445,065 shares at June 30, 2022 and December 31, 2021

(4,477)

(4,477)

Additional paid-in-capital

179,932

175,623

Retained earnings

171,576

138,223

Total stockholders' equity

347,060

309,394

Total liabilities and stockholders' equity

$

413,029

$

366,667

See accompanying notes to condensed financial statements.

2

Table of Contents

LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF INCOME

(in thousands, except share and per share data)

(unaudited)

Three months ended June 30, 

Six months ended June 30, 

2022

2021

    

2022

    

2021

Net revenue:

 

  

 

(restated)

 

  

 

(restated)

 

Product sales

$

55,098

$

41,115

$

106,885

$

73,389

Consumer and MHP loans interest

 

7,497

 

6,734

 

14,262

 

13,372

Other

 

1,616

 

740

 

2,992

 

1,767

Total net revenue

 

64,211

 

48,589

 

124,139

 

88,528

Operating expenses:

 

  

 

  

 

  

 

  

Cost of product sales

 

37,411

 

28,343

 

71,138

 

50,344

Selling, general and administrative expenses

 

5,901

 

5,165

 

13,560

 

9,958

Dealer incentive

 

439

 

114

 

713

 

576

Income from operations

 

20,460

 

14,967

 

38,728

 

27,650

Other income (expense):

 

  

 

  

 

  

 

  

Non‑operating interest income

 

783

 

429

 

1,635

 

677

Miscellaneous, net

 

17

 

34

 

603

 

238

Interest expense

 

(183)

 

(283)

 

(239)

 

(509)

Total other

 

617

 

180

 

1,999

 

406

Income before income tax expense

 

21,077

 

15,147

 

40,727

 

28,056

Income tax expense

 

(3,816)

 

(2,498)

 

(7,375)

 

(4,707)

Net income

$

17,261

$

12,649

$

33,352

$

23,349

Weighted average shares outstanding:

Basic

24,406,020

24,202,631

24,355,412

24,200,879

Diluted

24,922,125

24,234,913

24,773,345

24,229,265

Net income per share:

Basic

$

0.71

$

0.52

$

1.37

$

0.96

Diluted

$

0.69

$

0.52

$

1.35

$

0.96

See accompanying notes to condensed financial statements.

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LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

Six months ended June 30, 

    

2022

    

2021

    

Operating activities:

 

  

 

(restated)

 

Net income

$

33,352

$

23,349

Adjustments to reconcile net income to net cash used in operating activities:

 

  

 

  

Depreciation and amortization expense

 

880

 

754

Amortization of deferred revenue

(727)

267

Provision for accounts and notes receivable

29

558

Provision for long term inventory

(117)

Share based payment expense

4,313

108

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

(684)

 

(2,040)

Consumer loans activity, net

 

(5,205)

 

(5,337)

Notes receivable MHP activity, net

 

(19,169)

 

(10,221)

Dealer inventory loan activity, net

(6,937)

Inventories

 

(7,122)

 

(8,864)

Prepaid expenses and other current assets

 

146

 

(358)

Other assets

 

(4,265)

 

(1,208)

Accounts payable and accrued liabilities

 

(3,939)

 

(4,694)

Customer deposits

 

4,185

 

2,125

Escrow liability

666

1,008

Dealer incentive liability

 

638

 

(222)

Net cash used in operating activities

 

(3,956)

 

(4,775)

Investing activities:

 

  

 

  

Purchases of property, plant and equipment

 

(1,506)

 

(2,330)

Issuance of notes receivable

 

(2,423)

 

(13,554)

Notes receivable collections

13,731

5,940

Collections from purchased loans

270

1,462

Net cash provided by (used in) investing activities

 

10,072

 

(8,482)

Financing activities:

 

  

 

  

Proceeds from other liabilities

 

2,525

 

Proceeds from lines of credit

 

62,863

 

46,109

Payments on lines of credit

 

(58,279)

 

(32,811)

Net cash provided by financing activities

 

7,109

 

13,298

Net increase in cash and cash equivalents

 

13,225

 

41

Cash and cash equivalents at beginning of period

 

1,042

 

768

Cash and cash equivalents at end of period

$

14,267

$

809

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

204

$

464

Cash paid for taxes

$

9,601

$

5,700

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, 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 (restated)

10,700

10,700

Balances, March 31, 2021 (restated)

24,647,696

25

(4,477)

175,337

99,052

269,937

Share based compensation expense and stock units vested

64

64

Net income (restated)

12,649

12,649

Balances, June 30, 2021 (restated)

24,647,696

25

(4,477)

175,401

111,701

282,650

Common Stock

Treasury

Additional

Retained

    

Shares

    

Amount

    

stock

paid-in-capital

    

earnings

    

Total

Balances, December 31, 2021

24,654,621

$

25

$

(4,477)

$

175,623

$

138,223

$

309,394

Share based compensation expense and stock units vested

158,571

4

4,003

4,007

Net income

16,092

16,092

Balances, March 31, 2022

24,813,192

29

(4,477)

179,626

154,315

329,493

Share based compensation expense and stock units vested

306

306

Net income

17,261

17,261

Balances, June 30, 2022

24,813,192

29

(4,477)

179,932

171,576

347,060

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 June 30, 2022 and for the three and six months ended June 30, 2022 and 2021, 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 months ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31,

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

2022, or any other period. The accompanying balance sheet as of December 31, 2021 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2021 (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. Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net income.

Restatement of Previously Issued Condensed Financial Statements (unaudited)

As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the Company has restated its interim financial statements for the period ended June 30, 2021 to correct (i) an overstatement of costs errantly assigned to accounts payable for inventory received but not invoiced, (ii) a reclassification between prepaid expenses and other current assets and other assets, (iii) a reclassification between prepaid expenses and other current assets and lines of credit, and (iv) a change in accrued liabilities and income tax expense.

The effects of the restatement on the line items within the Company’s condensed statement of income for the three months ended June 30, 2021 were as follows:

Three Months Ended June 30, 2021

As

Originally

As

    

Reported

    

Adjustments

    

Restated

Operating expenses:

Cost of product sale

$

28,608

$

(265)

$

28,343

Income from operations

$

14,702

$

265

$

14,967

Income before income tax expense

$

14,882

$

265

$

15,147

Income tax expense

$

(2,454)

$

(44)

$

(2,498)

Net income

$

12,428

$

221

$

12,649

Net income per share:

Basic

$

0.51

$

0.01

$

0.52

Diluted

$

0.51

$

0.01

$

0.52

The effects of the restatement on the line items within the Company’s condensed statement of income for the six months ended June 30, 2021 were as follows:

Six Months Ended June 30, 2021

As

Originally

As

    

Reported

    

Adjustments

    

Restated

Operating expenses:

Cost of product sale

$

52,632

$

(2,288)

$

50,344

Income from operations

$

25,362

$

2,288

$

27,650

Income before income tax expense

$

25,768

$

2,288

$

28,056

Income tax expense

$

(4,317)

$

(390)

$

(4,707)

Net income

$

21,451

$

1,898

$

23,349

Net income per share:

Basic

$

0.89

$

0.07

$

0.96

Diluted

$

0.89

$

0.07

$

0.96

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

The effects of the restatement on the line items within the Company’s condensed statement of cash flows for the six months ended June 30, 2021 were as follows:

    

Six months June 30, 2021

As Originally

As

Reported

Adjustments

Restated

Operating activities:

Net income

$

21,451

$

1,898

$

23,349

Inventories

$

(8,864)

$

$

(8,864)

Prepaid expenses and other current assets

$

(893)

$

535

$

(358)

Other assets

$

(876)

$

(332)

$

(1,208)

Accounts payable

$

(2,004)

$

(2,288)

$

(4,292)

Accrued liabilities

$

(792)

$

390

$

(402)

Net cash used in operating activities

$

(4,978)

$

203

$

(4,775)

Investing activities:

Purchases of property, plant and equipment

$

(2,330)

$

$

(2,330)

Net cash used in investing activities

$

(8,482)

$

$

(8,482)

Financing activities:

Payments on lines of credit

$

(32,608)

$

(203)

$

(32,811)

Net cash provided by financing activities

$

13,501

$

(203)

$

13,298

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.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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 income.

For the three months ended June 30, 2022 and 2021, sales to an independent third-party and its affiliates accounted for $3,296 or 6.0% and $2,643 or 6.4% of our product sales, respectively. For the six months ended June 30, 2022 and 2021, sales to an independent third-party and its affiliates accounted for $6,194 or 5.8% and $4,948 or 6.7% of our product sales, respectively.

For the three months ended June 30, 2022 and 2021, total cost of product sales included $3,253 and $3,206 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 six months ended June 30, 2022 and 2021, total cost of product sales included $6,252 and $5,407 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 is 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 six months ended June 30, 2022 and 2021:

Three months ended

Six months ended

June 30, 

June 30, 

2022

    

2021

2022

    

2021

Product sales:

Direct sales

$

11,745

$

5,493

$

22,608

$

8,915

Commercial sales

 

14,305

 

13,050

 

28,364

 

25,368

Consignment sales

20,247

13,889

40,287

24,488

Retail store sales

5,657

6,183

9,816

9,504

Other (1)

 

3,144

 

2,500

 

5,810

 

5,114

Total product sales

 

55,098

 

41,115

 

106,885

 

73,389

Consumer and MHP loans interest:

 

  

 

  

 

  

 

  

Interest - consumer installment notes

 

4,701

 

4,046

 

9,158

 

8,189

Interest - MHP notes

 

2,796

 

2,688

 

5,104

 

5,183

Total consumer and MHP loans interest

 

7,497

 

6,734

 

14,262

 

13,372

Other

 

1,616

 

740

 

2,992

 

1,767

Total net revenue

$

64,211

$

48,589

$

124,139

$

88,528

(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”) with only service-based conditions is calculated based on the closing price of the Company’s common stock on the grant date. The fair value of each RSU with market based conditions is estimated using the Monte-Carlo Simulation valuation model.

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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Table of Contents

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

The fair value of RSU awards with market based conditions on the date of grant is estimated using the Monte-Carlo Simulation valuation model, and the Company uses the following methods to determine its underlying assumptions: expected volatilities are based on the Company’s historic stock price volatility; the expected term of the awards is based on performance measurement period; the risk-free interest rate is based on the U.S. Treasury bond yield issued with similar life terms to the expected life of the grant.

Accounts Receivable

Included in accounts receivable “net” are receivables from direct sales of mobile homes, sales of parts and supplies to customers, consignment fees and interest. Accounts receivable “dealer financed” are receivables for interest, fees and curtailments owed from dealers under their inventory finance agreements.

Accounts receivables “net” are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts receivables “dealer financed” are due upon receipt 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. On June 30, 2022 and December 31, 2021, the allowance for doubtful accounts totaled $456 and $343, 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. Depreciation expense for the leased property was $180 and $132 for the three months ended June 30, 2022 and 2021, respectively, and $340 and $230 for the six months ended June 30, 2022 and 2021, respectively.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

Future minimum lease income under all operating leases for each of the next five years at June 30, 2022, are as follows:

2022

    

$

1,082

2023

 

2,163

2024

 

2,163

2025

 

2,163

2026

 

2,163

Thereafter

 

4,929

Total

$

14,663

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. As an emerging growth company, ASU 2016-02 is effective for fiscal years beginning after December 15, 2021, and interim periods within those years. The Company adopted this standard in the first quarter of fiscal 2022 and elected certain practical expedients permitted under the transition guidance, including the package of practical expedients; however, the Company did not elect the hindsight practical expedient. Additionally, the Company elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The adoption of ASU 2016-02 resulted in an increase in total assets and total liabilities of $3,258 at transition. However, this standard did not have a material impact on the consolidated statement of income or the consolidated statement of cash flows. See Note 5 for further discussion on leases.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down and affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company 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.

12

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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 13.5% as of June 30, 2022 and December 31, 2021, respectively. 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 $9,771 and $9,350 as of June 30, 2022 and December 31, 2021, respectively, and are included in escrow liability in the condensed 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 condensed 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.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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 $725 and $517 as of June 30, 2022 and December 31, 2021, respectively, and are included in other assets in the condensed balance sheets.

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

    

As of June 30, 

    

As of December 31, 

2022

2021

Consumer loans receivable

$

134,215

$

129,119

Loan discount and deferred financing fees

 

(2,522)

 

(2,612)

Allowance for loan losses

 

(763)

 

(884)

Consumer loans receivable, net

$

130,930

$

125,623

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, 

2022

    

2021

2022

    

2021

    

Allowance for loan losses, beginning of period

$

724

$

927

$

884

$

905

Provision for loan losses

 

55

 

23

 

(257)

 

558

Charge offs (recoveries)

 

(16)

 

(136)

 

136

 

(649)

Allowance for loan losses

$

763

$

814

$

763

$

814

The reserve for loan losses consists of the following:

    

As of June 30, 

    

As of December 31, 

2022

2021

Total consumer loans

$

134,215

$

129,119

Allowance for loan losses

$

763

$

884

Impaired loans individually evaluated for impairment

$

1,180

$

1,239

Specific reserve against impaired loans

$

502

$

533

Other loans collectively evaluated for allowance

$

133,035

$

127,880

General allowance for loan losses

$

261

$

351

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

As of June 30, 2022 and December 31, 2021, the total principal outstanding for consumer loans on nonaccrual status was $1,180 and $1,239, respectively. A detailed aging of consumer loans receivable that are past due as of June 30, 2022 and December 31, 2021 were as follows:

As of June 30, 

    

    

As of December 31, 

    

2022

%

2021

%

Total consumer loans receivable

$

134,215

 

100.0

   

$

129,119

 

100.0

Past due consumer loans:

 

  

 

  

 

  

 

  

31 - 60 days past due

$

191

 

0.1

$

594

 

0.5

61 - 90 days past due

 

402

 

0.3

 

407

 

0.3

91 - 120 days past due

 

94

 

0.1

 

114

 

0.1

Greater than 120 days past due

 

1,105

 

0.8

 

967

 

0.7

Total past due

$

1,792

 

1.3

$

2,082

 

1.6

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 $102 million of the 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 7.6% and 7.6% as of June 30, 2022 and December 31, 2021, respectively, with maturities that range from 1 to 18 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 29.1% and 52.1% of the principal balance outstanding, all of which was secured by the mobile homes, as of June 30, 2022 and December 31, 2021, 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. As of June 30, 2022 and December 31, 2021, the MHP Note balance is presented net of unamortized finance fees of $771 and $445, respectively. The finance fees are amortized over the life of the MHP Notes.

There were minimal past due balances on the MHP Notes as of June 30, 2022 and December 31, 2021 and no charge offs were recorded for MHP Notes during the three and six months ended June 30, 2022 and 2021, respectively. Allowance for loan loss is considered immaterial and accordingly no loss is recorded against the MHP Notes as of June 30, 2022 and December 31, 2021.

There were no impaired MHP Notes as of June 30, 2022 and December 31, 2021, respectively, and there were no repossessed homes balances as of June 30, 2022 and December 31, 2021, respectively. 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.

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

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

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 5.00% 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. There were no past due balances for other notes as of June 30, 2022 and December 31, 2021, respectively, and there were no impaired balances for other notes as of June 30, 2022 and December 31, 2021, respectively.

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

    

As of June 30, 

    

As of December 31, 

2022

2021

Outstanding principal balance

$

30,934

$

42,074

Allowance for loan losses

 

(53)

 

(74)

Total

$

30,881

$

42,000

5. LEASES

The Company currently has 13 operating leases, eight of which are for the Company’s Heritage Housing and Tiny Homes retail locations, three which are subleased by the Company and two are for corporate and administrative offices in Bedford, TX and Norcross, GA. These leases typically have initial terms ranging from 5 to 10 years and include one or more options to renew.

Under ASC 842, a modified retrospective transition is required, applying the new standard to all leases at the date of initial application. The Company chose to use the adoption date of January 1, 2022 for ASC 842. As such, all periods presented after January 1, 2022, are under ASC 842 whereas periods presented prior to January 1, 2022, are in accordance with prior lease accounting of ASC 840. Financial information was not updated and the disclosures required under ASC 842 were not provided for dates and periods before January 1, 2022.

We determine if an arrangement is a lease at inception. Operating leases are right-of-use (“ROU”) assets and are shown as ROU assets – operating leases on our Condensed Balance Sheet. The lease liabilities are shown as Operating lease obligation and Operating lease obligation, less current portion on our Condensed Balance Sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a ROU asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and ROU asset when a change to our future minimum lease payments occurs. Key assumptions and judgments included in the determination of the lease liability include the discount rate used in the present value calculation and the exercise of renewal options.

Many of our leases contain renewal options. As the exercise of the renewal options is not certain at commencement of a lease, we generally do not include the option periods in the lease term when determining the lease liabilities and ROU assets. We remeasure the lease liability and ROU asset when we are reasonably certain that we will exercise a renewal option.

Our leases do not provide information about the rate implicit in the lease. Therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(dollars in thousands)

a similar term and in a similar economic environment. The remaining weighted-average lease term is 5.0 years and the weighted-average discount rate is 2.12%.

We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. There were no variable lease costs for the three months ended June 30, 2022.

Short-term leases, those with a term of 12 months or less, are not recorded on our Condensed Balance Sheet. Our short-term lease costs were not material for the three months ended June 30, 2022.

As of June 30, 2022, future minimum lease payments under our operating lease liabilities were as follows:

2022

    

$

350

2023

 

709

2024

 

644

2025

 

608

2026