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 inthe United States as ranked by number of homes manufactured based on information available from theManufactured Housing Institute and IBTS for the fourth quarter of 2020. With current operations focused primarily in the southernUnited 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 endedMarch 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 endedMarch 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 inthe United States at one of our three manufacturing facilities in accordance with the construction and safety standards of theU.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 11Heritage Housing stores and twoTiny House Outlet stores exclusively sell our homes. For the three months endedMarch 31, 2021 , approximately 49% of our manufactured homes were sold inTexas , followed by 11% inGeorgia , 8% inAlabama , 6% inLouisiana and 5% inKansas . For the three months endedMarch 31, 2020 , approximately 47% of our manufactured homes were sold inTexas , followed by 10% inKentucky , 9% inNorth Carolina , 8% inGeorgia , and 5% inKansas . 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 23
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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 toJanuary 1, 2018 , we were aTexas limited partnership namedLegacy Housing, Ltd. EffectiveJanuary 1, 2018 , we converted into aDelaware corporation pursuant to a statutory conversion, or the Corporate Conversion, and changed our name toLegacy Housing Corporation . All of our outstanding partnership interests were converted on a proportional basis into shares of common stock ofLegacy Housing Corporation . EffectiveDecember 31, 2019 , the Company reincorporated from aDelaware corporation to aTexas 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 ofLegacy Housing, Ltd. and all of the debts and obligations ofLegacy Housing, Ltd. continue as the debts and obligations ofLegacy 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 ofLegacy 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
? 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
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
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operating at near maximum capacity, with limited ability to increase the volume of
houses produced in these factories. Our
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
increasingly generated orders from new markets
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
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. 25 Table of Contents
Comparison of three months completed
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 endedMarch 31, 2021 as compared to the same period in 2020. This increase, though broad based, was muted by the week-long closure of ourTexas -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 ourTexas -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 endedMarch 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 endedMarch 31, 2021 as compared to the same period in 2020 and is related to our increase in outstanding MHP Note portfolio. BetweenMarch 31, 2021 andMarch 31, 2020 our MHP Note portfolio increased by$35.0 million . Consumer loan interest was$4.1 million for the three months endedMarch 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 endedMarch 31, 2021 as compared to the same period in 2020 and is primarily due to continued growth in our commercial lease revenue. 26
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The cost of product sales increased$2.2 million , or 9.9%, during the three months endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2020 was 22.3% and differs from the federal statutory rate of 21% primarily due to state income taxes. 27 Table of Contents
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 atMarch 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 ofMarch 31, 2021 , we had approximately$2.4 million in cash and cash equivalents, compared to$0.8 million as ofDecember 31, 2020 . In the first quarter of 2020, we negotiated a new credit agreement with our primary bank that expanded and extended our credit facility. The new credit agreement closed onMarch 30, 2020 . Cash Flow Activities Three Months EndedMarch 31 , (in thousands) 2021 2020
Net cash used in operating activities$ (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
Cash and cash equivalents at the end of the period
Comparison of treasury activities
Net cash used in operating activities decreased$2.8 million during the three months endedMarch 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. AtDecember 31, 2019 , we had a revolving line of credit ("Revolver 1") withCapital One, N.A. with a maximum credit limit of$45,000,000 and a maturity date ofMay 11, 2020 . OnMarch 30, 2020 , we entered into an agreement withCapital 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 ofMarch 30, 2024 . For the periodJanuary 1, 2020 throughMarch 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 ofMarch 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 ofMarch 31, 2021 andDecember 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 ofMarch 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 endedDecember 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 ourMarch 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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