Company Quick10K Filing
Legacy Housing
Price16.47 EPS1
Shares24 P/E18
MCap402 P/FCF131
Net Debt-2 EBIT29
TEV400 TEV/EBIT14
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-15
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-04-09
S-1 2018-11-09 Public Filing
8-K 2020-05-15
8-K 2020-05-15
8-K 2020-05-01
8-K 2020-04-10
8-K 2020-03-30
8-K 2020-03-30
8-K 2020-03-13
8-K 2019-12-30
8-K 2019-11-14
8-K 2019-11-08
8-K 2019-09-27
8-K 2019-08-13
8-K 2019-07-17
8-K 2019-05-13
8-K 2019-04-12
8-K 2019-04-08
8-K 2019-02-07

LEGH 10Q Quarterly Report

Part I – Financial Information
Item 1.Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information
Item 6. Exhibits.
EX-31.1 legh-20200331ex31153d05e.htm
EX-31.2 legh-20200331ex3123f1a47.htm
EX-32.1 legh-20200331ex321e1276f.htm
EX-32.2 legh-20200331ex322516ce8.htm

Legacy Housing Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
2652121591065302018201820192020
Assets, Equity
504030201002018201820192020
Rev, G Profit, Net Income
4.42.60.8-1.1-2.9-4.72018201820192020
Ops, Inv, Fin

10-Q 1 legh-20200331x10q.htm 10-Q legh_Current_Folio_10Q

 

 

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 March 31, 2020

OR

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

For the transition period from           to

Commission file number 001‑38761


 

Legacy Housing Corporation

(Exact name of registrant as specified in its charter)


 

Texas

20‑2897516

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

1600 Airport Freeway, #100

Bedford, Texas 76022

(Address of principal executive offices)

(Zip Code)

(817) 799‑4900

(Registrant’s telephone number, including area code)


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

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

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

Large accelerated filer ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer 

 

Smaller reporting company

 

 

Emerging growth company

 

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

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

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

 

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock ($0.001 par value)

 

LEGH

 

NASDAQ Global Market

There were 24,764,206 shares of Common Stock ($0.001 par value) outstanding as of May 11, 2020.

 

 

 

 

LEGACY HOUSING CORPORATION

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)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

Assets

 

 

 

 

 

 

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

3,717

 

$

1,724

Accounts receivable, net of allowance for doubtful accounts

 

 

3,171

 

 

1,767

Current portion of consumer loans

 

 

6,138

 

 

5,994

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

 

 

9,454

 

 

10,969

Current portion of other notes receivable

 

 

545

 

 

428

Inventories

 

 

31,523

 

 

27,228

Prepaid expenses and other current assets

 

 

3,429

 

 

4,857

Total current assets

 

 

57,977

 

 

52,967

Property, plant and equipment, net

 

 

21,124

 

 

21,038

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

 

 

99,448

 

 

99,048

Notes receivable from mobile home parks (“MHP”)

 

 

93,827

 

 

81,375

Other notes receivable, net of allowance for loan losses

 

 

13,064

 

 

13,050

Other assets

 

 

4,722

 

 

4,212

Inventory non‑current

 

 

11,456

 

 

11,930

Total assets

 

$

301,618

 

$

283,620

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

3,464

 

$

5,168

Accrued liabilities

 

 

11,818

 

 

8,808

Customer deposits

 

 

2,228

 

 

1,567

Escrow liability

 

 

6,964

 

 

7,530

Line of credit

 

 

 —

 

 

28,860

Total current liabilities

 

 

24,474

 

 

51,933

Long‑term liabilities:

 

 

  

 

 

  

Lines of credit

 

 

39,027

 

 

2,001

Deferred income taxes

 

 

1,766

 

 

1,766

Dealer incentive liability

 

 

5,522

 

 

5,531

Total liabilities

 

 

70,789

 

 

61,231

Commitments and contingencies (Note 12)

 

 

  

 

 

  

Stockholders' equity:

 

 

 

 

 

 

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

 

 

 —

 

 

 —

Common stock, $.001 par value, 90,000,000 shares authorized; 24,637,222 and 24,620,079 issued and 24,274,279 and 24,320,079 outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

25

 

 

25

Treasury stock at cost, 362,943 and 300,000 shares at March 31, 2020 and December 31, 2019, respectively

 

 

(3,742)

 

 

(3,060)

Additional paid-in-capital

 

 

175,164

 

 

175,067

Retained earnings

 

 

59,382

 

 

50,357

Total stockholders' equity

 

 

230,829

 

 

222,389

Total liabilities and stockholders' equity

 

$

301,618

 

$

283,620

See accompanying notes to condensed financial statements.

2

LEGACY HOUSING CORPORATION

CONDENSED  STATEMENTS OF  OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2020

    

2019

 

Net revenue:

 

 

  

 

 

  

 

Product sales

 

$

31,195

 

$

31,550

 

Consumer and MHP loans interest

 

 

6,424

 

 

5,530

 

Other

 

 

654

 

 

874

 

Total net revenue

 

 

38,273

 

 

37,954

 

Operating expenses:

 

 

  

 

 

  

 

Cost of product sales

 

 

21,858

 

 

21,885

 

Selling, general administrative expenses

 

 

5,612

 

 

6,491

 

Dealer incentive

 

 

194

 

 

210

 

Income from operations

 

 

10,609

 

 

9,368

 

Other income (expense):

 

 

  

 

 

  

 

Non‑operating interest income

 

 

237

 

 

39

 

Miscellaneous, net

 

 

38

 

 

 3

 

Gain on settlement, net

 

 

1,075

 

 

 —

 

Interest expense

 

 

(338)

 

 

(189)

 

Total other

 

 

1,012

 

 

(147)

 

Income before income tax expense

 

 

11,621

 

 

9,221

 

Income tax expense

 

 

(2,596)

 

 

(2,008)

 

Net income

 

$

9,025

 

$

7,213

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

24,319,328

 

 

24,516,762

 

Diluted

 

 

24,361,083

 

 

24,571,088

 

Net income per share:

 

 

 

 

 

 

 

Basic

 

$

0.37

 

$

0.29

 

Diluted

 

$

0.37

 

$

0.29

 

 

See accompanying notes to condensed financial statements.

3

LEGACY HOUSING CORPORATION

CONDENSED STATEMENTS OF  CASH  FLOWS

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2020

    

2019

    

Operating activities:

 

 

  

 

 

  

 

Net income

 

$

9,025

 

$

7,213

 

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

 

 

  

 

 

  

 

Depreciation expense

 

 

281

 

 

241

 

Provision for loan loss—consumer loans

 

 

215

 

 

406

 

Deferred income taxes

 

 

 —

 

 

 —

 

Share based payment expense

 

 

97

 

 

234

 

Changes in operating assets and liabilities:

 

 

  

 

 

  

 

Accounts receivable

 

 

(1,405)

 

 

(142)

 

Consumer loans originations

 

 

(3,174)

 

 

(5,053)

 

Consumer loans principal collections

 

 

2,297

 

 

2,847

 

Notes receivable MHP originations

 

 

(17,205)

 

 

(12,849)

 

Notes receivable MHP principal collections

 

 

6,267

 

 

8,238

 

Inventories

 

 

(3,821)

 

 

1,015

 

Prepaid expenses and other current assets

 

 

1,428

 

 

(390)

 

Other assets

 

 

(513)

 

 

(467)

 

Accounts payable

 

 

(1,703)

 

 

888

 

Accrued liabilities

 

 

3,012

 

 

1,153

 

Customer deposits

 

 

661

 

 

52

 

Dealer incentive liability

 

 

(9)

 

 

 5

 

Net cash provided by (used in) operating activities

 

 

(4,547)

 

 

3,391

 

Investing activities:

 

 

  

 

 

  

 

Purchases of property, plant and equipment

 

 

(366)

 

 

(757)

 

Issuance of notes receivable

 

 

(215)

 

 

(1,400)

 

Notes receivable collections

 

 

85

 

 

101

 

Purchases of consumer loans

 

 

(191)

 

 

(101)

 

Collections from purchased consumer loans

 

 

310

 

 

172

 

Net cash used in investing activities

 

 

(377)

 

 

(1,985)

 

Financing activities:

 

 

  

 

 

  

 

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

 

 

 —

 

 

7,200

 

Offering cost for over-allotment of initial public offering

 

 

 —

 

 

(505)

 

Treasury stock purchase

 

 

(682)

 

 

 —

 

Escrow liability, net

 

 

(567)

 

 

(626)

 

Principal payments on note payable

 

 

 —

 

 

(459)

 

Proceeds from lines of credit

 

 

18,430

 

 

1,482

 

Payments on lines of credit

 

 

(10,264)

 

 

(7,999)

 

Net cash provided by (used in) financing activities

 

 

6,917

 

 

(907)

 

Net increase in cash and cash equivalents

 

 

1,993

 

 

499

 

Cash and cash equivalents at beginning of period

 

 

1,724

 

 

2,599

 

Cash and cash equivalents at end of period

 

$

3,717

 

$

3,098

 

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

 

Cash paid for interest

 

$

301

 

$

227

 

 

See accompanying notes to condensed financial statements.

4

LEGACY HOUSING CORPORATION

CONDENSED  STATEMENTS OF  CHANGES IN  STOCKHOLDERS’  EQUITY

(in thousands, except share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Retained

 

 

 

 

    

Shares

    

Amount

 

paid-in-capital

    

earnings

    

Total

Balances, December 31, 2018

 

24,000,000

 

$

24

 

$

167,743

 

$

21,513

 

$

189,280

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

 

600,000

 

 

 1

 

 

6,694

 

 

 —

 

 

6,695

Share based compensation expense and stock units vested

 

17,143

 

 

 —

 

 

234

 

 

 —

 

 

234

Net income

 

 —

 

 

 —

 

 

 —

 

 

7,213

 

 

7,213

Balances, March 31, 2019

 

24,617,143

 

$

25

 

$

174,671

 

$

28,726

 

$

203,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury

 

Additional

 

Retained

 

 

 

 

    

Shares

    

Amount

    

stock

 

paid-in-capital

    

earnings

    

Total

Balances, December 31, 2019

 

24,620,079

 

$

25

 

$

(3,060)

 

$

175,067

 

$

50,357

 

$

222,389

Share based compensation expense and stock units vested

 

17,143

 

 

 —

 

 

 —

 

 

97

 

 

 —

 

 

97

Purchase of treasury stock

 

 —

 

 

 —

 

 

(682)

 

 

 —

 

 

 —

 

 

(682)

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,025

 

 

9,025

Balances, March 31, 2020

 

24,637,222

 

$

25

 

$

(3,742)

 

$

175,164

 

$

59,382

 

$

230,829

 

See accompanying notes to condensed financial statements.

 

 

5

Table of Contents

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

1. NATURE OF OPERATIONS

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

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

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

On April 17, 2019, the Company purchased 300,000 shares of its common stock at the price of $10.20 per share, pursuant to the Company’s repurchase program. During the first quarter of 2020, the Company purchased 62,943 shares of its common stock at an average price of $10.83 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 March 31, 2020 and for the three months ended March 31, 2020 and 2019, respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") as required by Regulation S-X, Rule 8-03. In the opinion of management, the unaudited interim consolidated 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

6

Table of Contents

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

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

Use of Estimates

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

Revenue Recognition

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

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

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

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

7

Table of Contents

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

For the three months ended March 31, 2020 and 2019, sales to an independent third-party and its affiliates accounted for $11,986 or 37.2% and $4,803 or 15.9% of our product sales, respectively.

For the three months ended March 31, 2020 and 2019, total cost of product sales included $4,907 and $4,327 of costs, mainly relating to up front dealer commission and reimbursed dealer expenses for consignment sales and certain other similar costs incurred for retail store and commercial sales.

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

8

Table of Contents

LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by source of the revenue for the three months ended March 31, 2020 and 2019:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31, 

 

 

2020

    

2019

Product sales:

 

 

 

 

 

 

Direct sales

 

$

2,225

 

$

4,457

Commercial sales

 

 

15,791

 

 

12,503

Consignment sales

 

 

8,840

 

 

10,037

Retail store sales

 

 

3,182

 

 

3,341

Other (1)

 

 

1,157

 

 

1,212

Total product sales

 

 

31,195

 

 

31,550

Consumer and MHP loans interest:

 

 

  

 

 

  

Interest - consumer installment notes

 

 

4,149

 

 

4,130

Interest - MHP notes

 

 

2,275

 

 

1,400

Total consumer and MHP loans interest

 

 

6,424

 

 

5,530

Other

 

 

654

 

 

874

Total net revenue

 

$

38,273

 

$

37,954

(1)

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

Share-Based Compensation

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

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

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

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

Accounts Receivable

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

Accounts receivables are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines the allowance by considering several factors, including the aging of the past due balance, the customer’s payment history, and the Company’s previous loss history. The Company establishes an allowance for doubtful accounts for amounts that are deemed to be uncollectible. At March 31, 2020 and December 31, 2019, the allowance for doubtful accounts totaled $572 and $457, respectively.

Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous requirements. The Company plans to use longer phase‑in period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2021. Modified retrospective application and early adoption is permitted. The Company expects that the adoption of this standard will result in a material increase to assets and liabilities on the balance sheet but will not have a material impact on the statement of operations.  While the Company is continuing to assess all the effects of adoption, it currently believes the most significant effects relate to (i) the recognition of new right-of-use assets and lease liabilities on its balance sheet for its property and equipment operating leases and (ii) providing significant new disclosures about its leasing activities.

In June 2016, the FASB issued an accounting standards update ASU 2016‑13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write‑down and affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company plans to use longer phase‑in period for adoption and accordingly this ASU is effective for the Company’s fiscal year beginning January 1, 2023. The Company is continuing to evaluate the impact of the adoption of this ASU and is uncertain of the impact on the financial statements and disclosures at this point in time.

From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s Financial Statements upon adoption.

 

 

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

2. CONSUMER LOANS RECEIVABLE

Consumer loans receivable result from financing transactions entered into with retail consumers of mobile homes sold through independent retailers and company-owned retail locations. Consumer loans receivable generally consist of the sales price and any additional financing fees, less the buyer’s down payment. Interest income is recognized monthly per the terms of the financing agreements. The average contractual interest rate per loan was approximately 14.0% as of March 31, 2020 and December 31, 2019. Consumer loans receivable have maturities that range from 5 to 25 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 $6,964 and $7,530 as of March 31, 2020 and December 31, 2019, respectively, and are included in escrow liability in the balance sheets.

Allowance for Loan Losses—Consumer Loans Receivable

The allowance for loan losses reflects management’s estimate of losses inherent in the consumer loans that may be uncollectible based upon review and evaluation of the consumer loan portfolio as of the date of the balance sheet. An allowance for loan losses is determined after giving consideration to, among other things, the loan characteristics, including the financial condition of borrowers, the value and liquidity of collateral, delinquency and historical loss experience.

The allowance for loan losses is comprised of two components: the general reserve and specific reserves. The Company’s calculation of the general reserve considers the historical loss rate for the last three years, adjusted for the estimated loss discovery period and any qualitative factors both internal and external to the Company. Specific reserves are determined based on probable losses on specific classified impaired loans.

The Company’s policy is to place a loan on nonaccrual status when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is normally when either principal or interest is past due and remains unpaid for more than 90 days. Management implemented this policy based on an analysis of historical data, current performance of loans and the likelihood of recovery once principal or interest payments became delinquent and were aged more than 90 days. Payments received on nonaccrual loans are accounted for on a cash basis, first to interest and then to principal, as long as the remaining book balance of the asset is deemed to be collectible. The accrual of interest resumes when the past due principal or interest payments are brought within 90 days of being current.

Impaired loans are those loans where it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impaired loans, or portions thereof, are charged off when deemed uncollectible. A loan is generally deemed impaired if it is more than 90 days past due on principal or interest, is in bankruptcy proceedings, or is in the process of repossession. A specific reserve is created for impaired loans based on fair value of underlying collateral value, less estimated selling costs. The Company uses various factors to determine the value of the underlying collateral for impaired loans. These factors are: (1) the length of time the unit was unsold after construction; (2) the amount of time the house was occupied; (3) the cooperation level of the borrowers, i.e., loans requiring legal action or extensive field collection efforts; (4) units located on private property as opposed to a manufactured home park; (5) the length of time

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

the borrower has lived in the house without making payments; (6) location, size, and market conditions; and (7) the experience and expertise of the particular dealer assisting in collection efforts.

Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell. At repossession, the fair value of the collateral is computed based on the historical recovery rates of previously charged‑off loans; the loan is charged off and the loss is charged to the allowance for loan losses. At each reporting period, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled $1,840 and $1,846 as of March 31, 2020 and December 31, 2019, respectively, and are included in other assets in the balance sheets.

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

 

 

 

 

 

 

 

 

    

As of March 31, 

    

As of December 31, 

 

 

2020

 

2019

Consumer loans receivable

 

$

109,635

 

$

109,005

Loan discount and deferred financing fees, net

 

 

(3,029)

 

 

(3,050)

Allowance for loan losses

 

 

(1,020)

 

 

(913)

Consumer loans receivable, net

 

$

105,586

 

$

105,042

 

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

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 

 

 

 

2020

    

2019

    

Allowance for loan losses, beginning of period

 

$

913

 

$

712

 

Provision for loan losses

 

 

215

 

 

406

 

Charge offs

 

 

(108)

 

 

(233)

 

Allowance for loan losses

 

$

1,020

 

$

885

 

 

The impaired and general reserve for allowance for loan losses:

 

 

 

 

 

 

 

 

    

As of March 31, 

    

As of December 31, 

 

 

2020

 

2019

Total consumer loans

 

$

109,635

 

$

109,005

Total allowance for loan losses

 

 

1,020

 

 

913

Impaired loans individually evaluated for impairment

 

 

1,928

 

 

1,677

Specific reserve against impaired loans

 

 

661

 

 

529

Other loans collectively evaluated for allowance

 

 

107,707

 

 

107,328

General allowance for loan losses

 

 

359

 

 

384

 

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

As of March 31, 2020 and December 31, 2019, the total principal outstanding for consumer loans on nonaccrual status was $1,928 and $1,677, respectively. A detailed aging of consumer loans receivable that are past due as of March 31, 2020 and December 31, 2019 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 

    

 

    

As of December 31, 

    

 

 

 

2020

 

%

 

2019

 

%

Total consumer loans receivable

 

$

109,635

 

100.0

   

$

109,005

 

100.0

Past due consumer loans:

 

 

  

 

  

 

 

  

 

  

31 - 60 days past due

 

$

386

 

0.4

 

$

267

 

0.2

61 - 90 days past due

 

 

239

 

0.2

 

 

122

 

0.1

91 - 120 days past due

 

 

105

 

0.1

 

 

103

 

0.1

Greater than 120 days past due

 

 

1,205

 

1.1

 

 

1,065

 

1.0

Total past due

 

$

1,935

 

1.8

 

$

1,557

 

1.4

 

 

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

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

The Company had concentrations of MHP Notes with an independent third-party and its affiliates that equaled 45.7% and 38.3% of the principal balance outstanding, all of which was secured, as of March 31, 2020 and December 31, 2019, respectively.

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

4. OTHER NOTES RECEIVABLE

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

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

 

 

 

 

 

 

 

 

    

As of March 31, 

    

As of December 31, 

 

 

2020

 

2019

Outstanding principal balance

 

$

13,681

 

$

13,552

Allowance for loan losses

 

 

(72)

 

 

(74)

Total

 

$

13,609

 

$

13,478

 

 

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

5. INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

    

As of March 31, 

    

As of December 31, 

 

 

2020

 

2019

Raw materials

 

$

10,649

 

$

9,434

Work in progress

 

 

513

 

 

383

Finished goods

 

 

31,817

 

 

29,341

Total

 

$

42,979

 

$

39,158

 

 

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

 

 

 

 

 

 

 

    

As of March 31, 

    

As of December 31, 

 

 

2020

 

2019

Land

 

$

11,671

 

$

11,659

Buildings and leasehold improvements

 

 

10,139

 

 

10,059

Vehicles

 

 

1,636

 

 

1,580

Machinery and equipment

 

 

3,780

 

 

3,653

Furniture and fixtures

 

 

274

 

 

214

Total

 

 

27,500

 

 

27,165

Less accumulated depreciation

 

 

(6,376)

 

 

(6,127)

Total property, plant and equipment

 

$

21,124

 

$

21,038

 

Depreciation expense was $248 with $106 included as a component of cost of product sales for the three months ended March 31, 2020 and $241 with $89 included as a component of cost of product sales for the three months ended March 31, 2019.

7. OTHER ASSETS

Other assets consisted of the following at March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

    

As of March 31, 

    

As of December 31, 

 

 

2020

 

2019

Leased property

 

$

2,589

 

$

2,067

Prepaid rent

 

 

293

 

 

299

Repossessed loans

 

 

1,840

 

 

1,846

Total

 

$

4,722

 

$

4,212

 

Depreciation expense for the leased property was $33 for the three months ended March 31, 2020. 

 

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

    

As of March 31, 

    

As of December 31, 

 

 

2020

 

2019

Warranty liability

 

$

3,093

 

$

3,078

Litigation reserve

 

 

283

 

 

325

Federal and state taxes payable

 

 

4,140

 

 

1,761

Accrued expenses & other accrued liabilities

 

 

4,302

 

 

3,644

Total

 

$

11,818

 

$

8,808

 

 

9. DEBT

Lines of Credit

Revolver 1

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

The New Revolver accrues interest at one-month LIBOR plus 2.00%. The interest rate in effect as of March 31, 2020 was 3.02%. As with Revolver 1, amounts available under the New Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable and the consumer loans receivable and MHP Notes. The amount of available credit under the New Revolver was $32,974 as of March 31, 2020.

For the three months ended March 31, 2020 and 2019, interest expense under the Capital One Revolvers was $320 and $73, respectively. The outstanding balance as of March 31, 2020 and December 31, 2019 was $37,026 and $28,860, respectively. The Company was in compliance with all financial covenants as of March 31, 2020, including that it maintain a tangible net worth of at least $120,000 and that it maintain a ratio of debt to EBITDA of 4 to 1, or less.

Revolver 2

In April 2016, the Company entered into an agreement with Veritex Community Bank to secure an additional revolving line of credit of $15,000 (“Revolver 2”). Revolver 2 accrues interest at one month LIBOR plus 2.50% and all unpaid principal and interest is due at maturity on April 4, 2021. Revolver 2 is secured by all finished goods inventory excluding repossessed homes. Amounts available under Revolver 2 are subject to a formula based on eligible inventory. The interest rates in effect as of March 31, 2020 and December 31, 2019 were 4.17% and 4.19%, respectively. On May 12, 2017, the Company entered into an agreement to increase the line of credit to $20,000. On October 15, 2018, Revolver 2 was amended to extend the maturity date from April 4, 2019 to April 4, 2021. The amount of available credit under Revolver 2 was $12,028 and $11,262 at March 31, 2020 and December 31, 2019, respectively. The Company was in compliance with all required covenants as of March 31, 2020. For the three months ended March 31, 2020 and 2019,

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

interest expense was $21 and $61, respectively. The outstanding balance as of March 31, 2020 and December 31, 2019 was $2,001. The Company was in compliance with the other financial covenants that it maintain a tangible net worth of at least $80,000. In April 2020, this note was paid in full and the facility was terminated.

Notes Payable

On April 7, 2011, the Company signed a promissory note for $4,830 with Woodhaven Bank. The amount due under the promissory note accrues interest at an annual rate of 3.85% through February 2, 2017 and then at the prime interest rate plus 0.60% through maturity on April 7, 2018. On April 7, 2018, the promissory note with Woodhaven Bank was renewed with varying amounts of principal and interest due through the maturity date, April 7, 2033. The promissory note calls for an interest rate of 4.25% and monthly payments of $30 with a final payment due at maturity. The note is secured by certain real property of the Company. Interest expense was $38 for the three months ended March 31, 2019. In October 2019, this note was paid in full.

On May 24, 2016, the Company signed a promissory note for $515 with Eagle One, LLC collateralized by the purchase of real property located in Oklahoma City, Oklahoma. The amount due under the promissory note accrues interest at an annual rate of 6.00%. The promissory note calls for monthly principal and interest payments of $6 until June 1, 2026. Interest expense was $1 for the three months ended March 31, 2019. In January 2019, this note was paid in full.

PILOT Agreement

In December 2016, the Company entered into a Payment in Lieu of Taxes (“PILOT”) agreement commonly offered in Georgia by local community development programs to encourage industry development. The net effect of the PILOT agreement is to provide the Company with incentives through the abatement of local, city and county property taxes and to provide financing for improvements to the Company’s Georgia plant (the “Project”). In connection with the PILOT agreement, the Putman County Development Authority provides a credit facility for up to $10,000 which can be drawn upon to fund Project improvements and capital expenditures as defined in the agreement. If funds are drawn, the Company would pay transactions costs and debt service payments. The PILOT agreement requires interest payments of 6.00% per annum on outstanding balances, which are due each December 1st through maturity on December 1, 2021, at which time all unpaid principal and interest are due. The PILOT agreement is collateralized by the assets of the Project. As of March 31, 2020, the Company had not drawn on this credit facility.

10. SHARE-BASED COMPENSATION

Pursuant to the Legacy Housing Corporation 2018 Incentive Compensation Plan (the “Compensation Plan”), the Company may issue up to 10.0 million equity awards to employees, directors, consultants and nonemployee service providers in the form of stock options, stock and stock appreciation rights. Stock options may be granted with a contractual life of up to ten years. At March 31, 2020, the Company had 9.8 million shares available for grant under the Compensation Plan.

In February 2019, the Company granted 120,000 restricted shares of its common stock to members of senior management. The shares were granted on February 7, 2019 and had a grant date fair value of $1,636. The shares vest at a rate of 14.3% annually, beginning on February 7, 2019, and becoming fully vested on February 7, 2025. 

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

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

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

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

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

 

 

 

 

 

 

 

 

Number of Units

 

 

Weighted Average Grant date Fair Value

Nonvested, January 1, 2020

 

142

 

$

13.34

Granted

 

 2

 

$

9.59

Vested

 

17

 

$

13.63

Nonvested, March 31, 2020

 

127

 

$

13.24

As of March 31, 2020, approximately 127,000 RSUs remained unvested. Unrecognized compensation expense related to these RSUs at March 31, 2020 was $1,583 and is expected to be recognized over 4.67 years.  

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Number of Units

    

Weighted
Average
Exercise Price

    

Weighted
Average
Fair Value

    

Weighted
Average
Remaining
Contractual Life

    

Aggregate
Intrinsic
Value

Outstanding, January 1, 2020

 

59

 

 

13.63

 

 

7.69

 

8.85

 

 

 

Granted

 

 —

 

$

 —

 

$

 —

 

 —

 

$

 —

Exercised

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 

Forfeited

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 

Outstanding, March 31, 2020

 

59

 

$

13.63

 

$

7.69

 

8.85

 

$

 —

Exercisable, March 31, 2020

 

15

 

$

13.63

 

$

7.69

 

8.85

 

$

 —

 

As of March 31, 2020, approximately 44,000 options remained unvested. Unrecognized compensation expense related to these options at March 31, 2020 was $330 and is expected to be recognized over 5.86 years.

 

11. INCOME TAXES

The provision for income tax expense for the three months ended March 31, 2020 and 2019 was $2.6 million and $2.0 million, respectively. The effective tax rate for the three months ended March 31, 2020 was 22.3% and differs

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

from the statutory rate of 21% primarily due to state income taxes. The effective tax rate for the three months ended March 31, 2019 was 21.8% and differs from the statutory rate of 21% due to state income taxes.

12. COMMITMENTS AND CONTINGENCIES

As of January 1, 2020, the Company instituted a self-insured health benefits plan with a stop-loss policy, which provides medical benefits to employees electing coverage under the plan. The Company estimates and records costs for incurred but not reported medical claims and claim development. This reserve is based on historical experience and other assumptions, some of which are subjective. The Company will adjust its self-insured medical benefits reserve based on actual experience, estimated costs and changes to assumptions. At March 31, 2020, the liability for incurred but not reported claims was insignificant.  

The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The Company’s obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The maximum amount for which the Company was liable under such agreements approximated $501 and $260 at March 31, 2020 and December 31, 2019, respectively, without reduction for the resale value of the homes. The Company considers its obligations on current contracts to be immaterial and accordingly have not recorded any reserve for repurchase commitment as of March 31, 2020 or December 31, 2019.

Leases.  The Company leases facilities under operating leases that typically have 10‑year terms. These leases usually offer the Company a right of first refusal that affords the Company the option to purchase the leased premises under certain terms in the event the landlord attempts to sell the leased premises to a third party. Rent expense was $144 and $131 for the three months ended March 31, 2020, and 2019, respectively. The Company also subleases properties to third parties, ranging from 3‑year to 11‑year terms with various renewal options. Rental income from the subleased property was approximately $85 and $89 for the three months ended March 31, 2020 and 2019, respectively.

Future minimum lease commitments under all non‑cancelable operating leases for each of the next five years at March 31, 2020, are as follows:

 

 

 

 

2020

    

$

474

2021

 

 

548

2022

 

 

476

2023

 

 

425

2024

 

 

314

Thereafter

 

 

808

Total

 

$

3,045

 

Legal Matters

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

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

13. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

On February 2, 2012, the Company entered into a master interest rate swap agreement. The Company elected not to designate the interest rate swap agreements as cash flow hedges and, therefore, gains or losses on the agreements as well as the other offsetting gains or losses on the hedged items attributable to the hedged risk are recognized in current earnings. ASC 815‑10, Derivatives and Hedging, requires derivative instruments to be measured at fair value and recorded in the statements of financial position as either assets or liabilities.  The Company entered into interest rate swap agreement with Capital One Bank on June 12, 2017 to fix the variable rate portion for $8,000 of the line of credit. This interest rate swap agreement is the only one outstanding at March 31, 2020 and has a maturity of May 11, 2020.  The fair values of the interest rate swap agreement are assets included in prepaid expenses and other current assets and were $7  and $3 at March 31, 2020 and December 31, 2019, respectively. Included in the statements of operations for the three months ended March 31, 2020 and 2019  was a gain of $2 and a loss of $16, respectively, which are the result of the changes in the fair values of the interest rate swap agreement.

Fair Value Measurements

The Company accounts for its investments and derivative instruments in accordance with ASC 820‑10, Fair Value Measurement, which among other things provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurement) and the lowest priority to unobservable inputs (Level III measurements). The three levels of fair value hierarchy under ASC 820‑10, Fair Value Measurement, are as follows:

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

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

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

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

The Company uses derivatives to manage risks related to interest rate movements. The Company does not enter into derivative contracts for speculative purposes. Interest rate swap contracts are recognized as assets or liabilities on the balance sheets and are measured at fair value. The fair value was calculated and provided by the lender, a Level II valuation technique. Management reviewed the fair values for the instruments as provided by the lender and determined the related asset and liability to be an accurate estimate of future gains and losses to the Company. The fair values of the interest rate swap are assets and valued at $7  and $3 as of March 31, 2020 and December 31, 2019, respectively.

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LEGACY HOUSING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)

 

Fair Value of Financial Instruments

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

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate their respective fair values because of the short‑term maturities or expected settlement dates of these instruments. This is considered a Level I valuation technique. The MHP Notes, other notes, lines of credit, and notes payable have variable interest rates that reflect market rates and their fair value approximates their carrying value. This is considered a Level II valuation technique. The Company also assessed the fair value of the consumer loans receivable based on the discounted value of the remaining principal and interest cash flows. The Company determined that the fair value of the consumer loan portfolio was approximately $125,000 compared to the book value of $105,714 as of March 31, 2020, and a fair value of approximately $119,000 compared to the book value of $105,042 as of December 31, 2019. This is a Level III valuation technique.

 

14. EARNINGS PER SHARE

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

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31,