HERITAGE HOUSING: Discussion and analysis by management of the financial situation and operating results. (form 10-Q)

The following discussion should be read in conjunction with the financial
statements and accompanying notes and the information contained in other
sections of this Form 10-Q. It contains forward-looking statements that involve
risks and uncertainties, and is based on the beliefs of our management, as well
as assumptions made by, and information currently available to, our management.
Our actual results could differ materially from those anticipated by our
management in these forward-looking statements as a result of various factors,
including those discussed in this Form 10-Q and in our Registration Statement on
Form S-1, particularly under the heading "Risk Factors."

Overview

Legacy Housing Corporation builds, sells and finances manufactured homes and
"tiny houses" that are distributed through a network of independent retailers
and company-owned stores and are sold directly to manufactured housing
communities. We are the fifth largest producer of manufactured homes in the
United States as ranked by number of homes manufactured based on information
available from the Manufactured Housing Institute and IBTS for the fourth
quarter of 2020. With current operations focused primarily in the southern
United States, we offer our customers an array of quality homes ranging in size
from approximately 390 to 2,667 square feet consisting of 1 to 5 bedrooms, with
1 to 31/2 bathrooms. Our homes range in price, at retail, from approximately
$22,000 to $140,000. For the three months ended March 31, 2021, we sold 720 home
sections (which are entire homes or single floors that are combined to create
complete homes) and for the three months ended March 31, 2020, we sold 849 home
sections.

The Company has one reportable segment. All of our activities are interrelated,
and each activity is dependent and assessed based on how each of the activities
of Company supports the others. For example, the sale of manufactured homes
includes providing transportation and consignment arrangements with dealers. We
also provide financing options to the customers to facilitate such sale of
homes. In addition, the sale of homes is directly related to financing provided
by us. Accordingly, all significant operating and strategic decisions by the
chief operating decision-maker, the Executive Chairman of the Board, are based
upon analyses of our company as one segment or unit.

We believe our company is one of the most vertically integrated in the
manufactured housing industry, allowing us to offer a complete solution to our
customers, from manufacturing custom-made homes using quality materials and
distributing those homes through our expansive network of independent retailers
and company-owned distribution locations, to providing tailored financing
solutions for our customers. Our homes are constructed in the United States at
one of our three manufacturing facilities in accordance with the construction
and safety standards of the U.S. Department of Housing and Urban Development
("HUD"). Our factories employ high-volume production techniques that allow us to
produce, on average, approximately 75 home sections, or 62 fully-completed homes
depending on product mix, in total per week. We use quality materials and
operate our own component manufacturing facilities for many of the items used in
the construction of our homes. Each home can be configured according to a
variety of floor plans and equipped with such features as fireplaces, central
air conditioning and state-of-the-art kitchens.

Our homes are marketed under our premier "Legacy" brand name and currently are
sold primarily across 15 states through a network of 106 independent retail
locations, 13 company-owned retail locations and through direct sales to owners
of manufactured home communities. Our 13 company-owned retail locations,
including 11 Heritage Housing stores and two Tiny House Outlet stores
exclusively sell our homes. For the three months ended March 31, 2021,
approximately 49% of our manufactured homes were sold in Texas, followed by 11%
in Georgia, 8% in Alabama, 6% in Louisiana and 5% in Kansas. For the three
months ended March 31, 2020, approximately 47% of our manufactured homes were
sold in Texas, followed by 10% in Kentucky, 9% in North Carolina, 8% in Georgia,
and 5% in Kansas. We plan to deepen our distribution channel by using cash from
operations and borrowings from our lines of credit to expand our company-owned
retail locations in new and existing markets.

We offer three types of financing solutions to our customers. We provide floor
plan financing for our independent retailers, which takes the form of a
consignment arrangement between the retailer and us. We also provide consumer
financing for our products which are sold to end-users through both independent
and company-owned retail locations, and we provide financing solutions to
manufactured housing community owners that buy our products for use in their
manufactured housing communities. Our ability to offer competitive financing
options at our retail locations

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provides us with several competitive advantages and allows us to capture sales that might not otherwise have occurred without our ability to provide consumer finance.

Business conversion

Prior to January 1, 2018, we were a Texas limited partnership named Legacy
Housing, Ltd. Effective January 1, 2018, we converted into a Delaware
corporation pursuant to a statutory conversion, or the Corporate Conversion, and
changed our name to Legacy Housing Corporation. All of our outstanding
partnership interests were converted on a proportional basis into shares of
common stock of Legacy Housing Corporation. Effective December 31, 2019, the
Company reincorporated from a Delaware corporation to a Texas corporation. For
more information, see "Corporate Conversion" in Note 1.

Following the Corporate Conversion, Legacy Housing Corporation continues to hold
all of the property and assets of Legacy Housing, Ltd. and all of the debts and
obligations of Legacy Housing, Ltd. continue as the debts and obligations of
Legacy Housing Corporation. The purpose of the Corporate Conversion was to
reorganize our corporate structure so that the top-tier entity in our corporate
structure is a corporation rather than a limited partnership and so that our
existing owners own shares of our common stock rather than partnership interests
in a limited partnership. Except as otherwise noted, the financial statements
included in this Form 10-Q are those of Legacy Housing Corporation.

Factors affecting our performance

We believe that the growth of our business and our future success depends on various opportunities, challenges, trends and other factors, including the following:

In line with our long-term strategy of prudent deployment of our capital

to achieve above average rates of return, we intend to expand our retail business

presence in the geographic markets we now serve, particularly in the south

United States. Each shopping center requires between $ 500,000 and 1,500,000 USD at

? acquire the location, locate an office, provide the inventory and provide the

initial working capital. We initially planned to open from 2 to 4

malls by the end of 2020, but we have delayed these plans due to

The impact of the COVID-19 pandemic on retail trade We plan to open 1 to 2

additional shopping centers by the end of 2021.

We have purchased several properties in our market area with the aim of

? the development of prefabricated communities and subdivisions. From March, 31st,

   2021, these properties include the following (dollars in 000's):



          Location              Description     Date of Acquisition     Land         Improvements     Total
Bastrop County, Texas           400 Acres       April 2018            $   4,400   $            92   $   4,492
Bexar County, Texas             100 Acres       November 2018             1,300               114       1,414
Horseshoe Bay, Texas            133 Acres       Various 2018-2019         2,431             1,323       3,754
Johnson County, Texas           91.5 Acres      July 2019                   445                15         460
Venus, Texas                    50 Acres        August 2019                 422                 7         429
Wise County, Texas              81.5 Acres      September 2020              889                 -         889
Bexar County, Texas             233 Acres       February 2021             1,550                 -       1,550
                                                                      $  11,437   $         1,551   $  12,988




   We also expect to provide financing solutions to a select group of our
   manufactured housing community-owner customers in a manner that includes

develop new sites for products in or near urban areas where there is a

? shortage of sites to place our products. These solutions will be structured to

give us an attractive return on investment when coupled with gross margin

we plan to manufacture products specifically for sale to these new

prefabricated housing communities.

Finally, our financial performance will be impacted by our ability to meet

? pending orders for our prefabricated homes with dealers and customers.

Currently our two Texas manufacturing facilities are

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operating at near maximum capacity, with limited ability to increase the volume of

houses produced in these factories. Our Georgia the manufacturing plant has

unused area available and with additional investment can add

ability to increase the number of houses that can be manufactured. We intend to

increase production at Georgia ease over time, especially in response

increasingly generated orders from new markets Florida and the

Carolinas. In order to maintain our growth, we will need to be able to continue

to correctly estimate the anticipated future volumes when making commitments

regarding the level of activity that we will seek and accept, the mixture of

the products we intend to manufacture, the schedule of production schedules and

the levels and use of stocks, equipment and personnel.

The coronavirus pandemic is an evolving threat to the economy and all

? companies. At present, both the duration of the pandemic and

the economic consequences are unknown. Risks to society include, but are not

limited to:

increase in loan losses or deferred repayments, with debtors incurring liquidity

o flow problems resulting from reduced employment, reduced rental income or unit

sales or other factors;

reduced sales volume because potential customers cannot buy new homes or

o cannot qualify to purchase a home, retailers or company stores are reducing or

stop operations, or MHP owners reduce their future home purchases;

reduction in production resulting from factors such as the spread of disease

by the workforce of the company or by the impact of government interventions on

o workforce participation, reduced or government mandated product demand

closures of factories, company-owned stores or retail lots

the resellers who sell our products;

delays in development projects as zoning, regulation and authorization decisions

o are likely to be postponed and the expected negative impact of the pandemic on

the construction industry;

o reduction in the availability of raw materials due to the disruption of the global supply chain

the pandemic, including possible border closures;

o a decrease in cash flow from operations that could have an impact

liquidity;

an outbreak of disease among our management and accounting staff could

o hinder our ability to maintain our activities, to operate our

systems, delay our statutory reports and reduce our internal control

financial report.

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

Results of operations

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

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Comparison of three months completed March 31, 2021 and 2020 (in thousands)

                                              Three months ended
                                                  March 31,
                                              2021         2020        $ change     % change
Net revenue:
Product sales                               $  32,274    $  31,195    $    1,079         3.5 %

Consumer and MHP loans interest                 6,638        6,424         

 214         3.3 %
Other                                           1,028          654           374        57.2 %
Total net revenue                              39,940       38,273         1,667         4.4 %
Operating expenses:
Cost of product sales                          24,024       21,858         2,166         9.9 %

Selling, general administrative expenses        4,793        5,612        

(819)      (14.6) %
Dealer incentive                                  463          194           269       138.7 %
Income from operations                         10,660       10,609            51         0.5 %
Other income (expense)

Non­operating interest income                     248          237        

   11         4.6 %
Miscellaneous, net                                204           38           166       436.8 %
Gain on settlement, net                             -        1,075       (1,075)             %
Interest expense                                (226)        (338)           112      (33.1) %
Total other                                       226        1,012         (786)      (77.7) %

Income before income tax expense               10,886       11,621        

(735)       (6.3) %
Income tax expense                            (1,862)      (2,596)           734      (28.3) %
Net income                                  $   9,024    $   9,025    $      (1)       (0.0) %




Product sales primarily consist of direct sales, commercial sales, consignment
sales and retail store sales. Product sales increased $1.1 million, or 3.5%,
during the three months ended March 31, 2021 as compared to the same period in
2020. This increase, though broad based, was muted by the week-long closure of
our Texas-based factories due to a February weather event. The disruption from
the weather event contributed to an increase in ending finished goods inventory
as our transportation schedule was disrupted, similar to our Texas-based
factories.

The net income attributable to our prefabricated housing consists of the following elements during the three months of 2021 and 2020:

                                  Three months ended
                                      March 31,
                                    (in thousands)
                                   2021         2020       $ Change     % Change
Net revenue:
Products sold                   $   32,274    $ 31,195    $    1,079         3.5 %
Total products sold                    627         755         (128)      (17.0) %
Net revenue per product sold    $     51.5    $   41.3    $       10        24.6 %

For the three months ended March 31, 2021, our net revenue per product sold
increased because of price increases in the first quarter of 2021 due to rising
material and labor costs. We had increases in consignment sales, direct sales
and company-owned retail store sales partially offset by a decline in sales to
manufactured home communities.

MHP loans interest income grew $0.2 million, or 9.7%, during the three months
ended March 31, 2021 as compared to the same period in 2020 and is related to
our increase in outstanding MHP Note portfolio. Between March 31, 2021 and March
31, 2020 our MHP Note portfolio increased by $35.0 million. Consumer loan
interest was $4.1 million for the three months ended March 31, 2021 and 2020.

Other revenue primarily consists of consignment fees, commercial lease rents,
and service fees. Other revenue increased $0.4 million or 57.2% during the three
months ended March 31, 2021 as compared to the same period in 2020 and is
primarily due to continued growth in our commercial lease revenue.

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The cost of product sales increased $2.2 million, or 9.9%, during the three
months ended March 31, 2021 as compared to the same period in 2020. The increase
in costs is primarily related to increases in the cost of materials and labor in
2021 and was materially passed along to our end-customer.

Selling, general and administrative expenses decreased $0.8 million, or 14.6%,
during the three months ended March 31, 2021 as compared to the same period in
2020. This decrease was primarily due to a $0.8 million decrease in warranty
costs, a $0.4 decrease in loan losses, a $0.2 million decrease in legal expense
and a $0.2 million decrease in advertising and promotions. These decreases were
partially offset by a $0.3 million increase in consulting and professional fees,
a $0.3 million increase in salaries and incentive costs and a net $0.2 million
increase in other miscellaneous costs. In addition, dealer incentive expense
increased $0.3 million in 2021 as compared to 2020.

Other income (expense), net decreased $0.8 million during the three months ended
March 31, 2021 as compared to the same period in 2020.  This decrease was
primarily due to a $1.1 million gain associated with the 2020 settlement of a
lawsuit with a previous vendor for the Company, partially offset by an increase
of $0.2 million in miscellaneous, net and a $0.1 million decrease in interest
expense.

Income tax expense during the three months ended March 31, 2021 was $1.9 million
compared to $2.6 million for the same period in 2020. The effective tax rate for
the three months ended March 31, 2021 was 17.1% and differs from the federal
statutory rate of 21% primarily due to a federal tax credit for energy efficient
construction partially offset by state income taxes. The effective tax rate for
the three months ended March 31, 2020 was 22.3% and differs from the federal
statutory rate of 21% primarily due to state income taxes.



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Liquidity and capital resources

Cash and cash equivalents

We consider all cash and highly liquid investments with an original maturity of
three months or less to be cash equivalents. We maintain cash balances in bank
accounts that may, at times, exceed federally insured limits. We have not
incurred any losses from such accounts and management considers the risk of loss
to be minimal. We believe that cash flow from operations, cash and cash
equivalents at March 31, 2021, and availability on our lines of credit will be
sufficient to fund our operations and provide for growth for the next 12 to
18 months and into the foreseeable future. As of March 31, 2021, we had
approximately $2.4 million in cash and cash equivalents, compared to $0.8
million as of December 31, 2020. In the first quarter of 2020, we negotiated a
new credit agreement with our primary bank that expanded and extended our credit
facility. The new credit agreement closed on March 30, 2020.

Cash Flow Activities


                                                      Three Months Ended
                                                          March 31,
                                                        (in thousands)
                                                      2021         2020

Net cash used in operating activities               $ (1,692)    $ (4,547)
Net cash used in investing activities               $ (6,127)    $   (377)
Net cash provided by financing activities           $   9,459    $   6,917
Net change in cash and cash equivalents             $   1,640    $   1,993

Cash and cash equivalents at the start of the period $ 768 $ 1,724
Cash and cash equivalents at the end of the period $ 2,408 $ 3,717

Comparison of treasury activities March 31, 2021 at March 31, 2020

Net cash used in operating activities decreased $2.8 million during the three
months ended March 31, 2021, compared to the comparable period in 2020,
primarily as a result of decreased volume of loan originations supporting sales
to MHPs net of principal collections and lower growth in net working capital.
The decrease in cash used in operating activities was partially offset by
increased growth in consumer loan originations net of principal collections.

Net cash used in investing activities of $6.1 million in 2021 was primarily
attributable to $1.7 million used for the acquisition of property plant and
equipment and $5.7 million used for loans to third parties for the development
of manufactured housing parks. These were offset by collections of $0.1 million
of loans we made to third parties for the development of manufactured housing
parks and collections of $1.2 million from our purchased consumer loans.

Net cash provided by financing activities of $9.5 million in 2021 was primarily
attributable to net proceeds of $9.2 million on our lines of credit and $0.3
million increase in escrow deposits received by the company.

Indebtedness

Capital One Revolver. At December 31, 2019, we had a revolving line of credit
("Revolver 1") with Capital One, N.A. with a maximum credit limit of $45,000,000
and a maturity date of May 11, 2020. On March 30, 2020, we 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
$70,000,000 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 and the consumer loans receivable and MHP Notes.

The New Revolver accrues interest at one-month LIBOR plus 2.00%. The interest
rate in effect as of March 31, 2021 was 2.11%. As with Revolver 1, amounts
available under the New Revolver are subject to a formula based on eligible
consumer loans and MHP Notes and are secured by all accounts receivable and

the
consumer loans receivable

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and MHP Notes. The amount of available credit under the New Revolver was
$24,653,000 as of March 31, 2021. In connection with the New Revolver, we paid
certain arrangement fees and other fees of approximately $0.3 million, which
were capitalized as unamortized debt issuance costs and will be amortized to
interest expense over the life of the New Revolver.

For the three months ended March 31, 2021 and 2020, interest expense under the
Capital One Revolvers was $226,000 and $320,000, respectively. The outstanding
balance as of March 31, 2021 and December 31, 2020 was $45,347,000 and
$36,174,000, respectively. We were in compliance with all financial covenants as
of March 31, 2021, including that we maintain a tangible net worth of at least
$120,000,000 and that we maintain a ratio of debt to EBITDA of 4-to-1, or less.

Veritex Community Bank Revolver. In April 2016, we entered into an agreement
with Veritex Community Bank to secure an additional revolving line of credit of
$15,000,000 ("Revolver 2"). Revolver 2 accrues interest at one month LIBOR plus
2.50% and all unpaid principal and interest is due at maturity on April 4, 2021.
Revolver 2 is secured by all finished goods inventory excluding repossessed
homes. Amounts available under Revolver 2 are subject to a formula based on
eligible inventory. The interest rates in effect as of March 31, 2020 was 4.17%.
On May 12, 2017, we entered into an agreement to increase the maximum borrowing
availability under Revolver 2 to $20,000,000. On October 15, 2018, Revolver 2
was amended to extend the maturity date from April 4, 2019 to April 4, 2021. The
amount of available credit under Revolver 2 was $12,028,000 at March 31, 2020.
For the three months ended March 31, 2021 interest expense was $21,000. The
outstanding balance as of March 31, 2020 was $2,001,000. We were in compliance
with all required covenants as of March 31, 2020. In April 2020, this note was
paid in full and the facility was terminated.

PPP Loan. On April 10, 2020, we Company entered into a loan with Peoples Bank as
the lender in an aggregate principal amount of $6,545,700 (the "Loan") pursuant
to the Paycheck Protection Program under the Coronavirus Aid, Relief, and
Economic Security Act. The Loan was evidenced by a promissory note (the "Note")
dated April 10, 2020 and had a maturity date of April 10, 2022. The Note had an
interest rate of 1.000% 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 us at any time prior to maturity with no prepayment
penalties. On May 1, 2020, this loan was paid in full.

PILOT Agreement. In December 2016, we 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 us with incentives through the abatement of local, city
and county property taxes and to provide financing for improvements to our
Georgia plant (the "Project").  In connection with the PILOT agreement, the
Putman County Development Authority provides a credit facility for up to
$10,000,000, which can be drawn upon to fund Project improvements and capital
expenditures as defined in the agreement.  If funds are drawn, we would pay
transactions costs and debt service payments. The PILOT agreement requires
interest payments of 6.00% per annum on outstanding balances, which are due each
December 1 through maturity on December 1, 2021, at which time all unpaid
principal and interest are due. The PILOT agreement is collateralized by the
assets of the Project. As of March 31, 2021, we had not drawn down on this

credit facility.



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Contractual Obligations

The following table is a summary of contractual cash obligations as of March 31,
2021:


                                                                  Payments Due by Period

Contractual Obligations                       Total         2021      2022 - 2023    2024 - 2025     After 2025
Lines of credit                            $    45,347           -              -         45,347              -
Operating lease obligations                $ 2,369,000     391,000        856,000        592,000        530,000

Off-balance sheet arrangements

We did not have any off-balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, net sales, results
of operations, liquidity or capital expenditures. However, we do have a
repurchase agreement with a financial institution providing inventory financing
for independent retailers of our products. Under this agreement, we have agreed
to repurchase homes at declining prices over the term of the agreement
(24 months). Our obligation under this repurchase agreement ceases upon the
purchase of the home by the retail customer. The maximum amount of our
contingent obligations under such repurchase agreements was approximately
$3,073,000 and $2,967,000 as of March 31, 2021 and December 31, 2020,
respectively, without reduction for the resale value of the homes. We may be
required to honor contingent repurchase obligations in the future and may incur
additional expense as a consequence of these repurchase agreements. We consider
our obligations on current contracts to be immaterial and accordingly we have
not recorded any reserve for repurchase commitment as of March 31, 2021.

Critical accounting estimates

Critical accounting estimates are those that we believe are both significant and
that require us to make difficult, subjective or complex judgments, often
because we need to estimate the effect of inherently uncertain matters. We base
our estimates and judgments on historical experiences and various other factors
that we believe to be appropriate under the circumstances. Actual results may
differ from these estimates, and we might obtain different estimates if we used
different assumptions or conditions. Our critical accounting estimates are
identified and described in our Annual Report on Form 10-K for the year ended
December 31, 2020. Subsequent to the filing of our Annual Report, there have
been no material changes to our critical accounting estimates.

Recent accounting statements

For information regarding recent accounting pronouncements, see Note 1 - Nature
of Operations, Recent Accounting Pronouncements to our March 31, 2021 Condensed
Financial Statements, included in Part I, Item 1, Financial Statements
(Unaudited), of this Quarterly Report.

Emerging Growth Company Status

We are an "emerging growth company," as defined in the JOBS Act.  Section 107 of
the JOBS Act provides that an "emerging growth company" can take advantage of
the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. In other words, an
"emerging growth company" can delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. We have
elected to take advantage of these exemptions until we are no longer an emerging
growth company or until we affirmatively and irrevocably opt out of this
exemption.

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