Legacy Housing(LEGH) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements (Unaudited) Unaudited Q1 2022 financial statements show significant revenue and net income growth, with total assets at $390.7 million, after restating Q1 2021 figures Condensed Balance Sheet Data (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $109,091 | $92,541 | | Total Assets | $390,667 | $366,667 | | Total Current Liabilities | $45,790 | $41,940 | | Total Liabilities | $61,174 | $57,273 | | Total Stockholders' Equity | $329,493 | $309,394 | Condensed Statements of Income (in thousands, except per share data) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 (restated) | | :--- | :--- | :--- | | Total net revenue | $59,928 | $39,940 | | Income from operations | $18,267 | $12,683 | | Net income | $16,092 | $10,701 | | Diluted EPS | $0.65 | $0.44 | Condensed Statements of Cash Flows (in thousands) | Activity | Three months ended March 31, 2022 | Three months ended March 31, 2021 (restated) | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,057) | $(1,471) | | Net cash provided by (used in) investing activities | $2,754 | $(6,127) | | Net cash (used in) provided by financing activities | $(211) | $9,238 | | Net increase in cash | $1,486 | $1,640 | - The company restated its financial statements for the period ended March 31, 2021, to correct errors, increasing previously reported net income for Q1 2021 from $9.0 million to $10.7 million, and diluted EPS from $0.37 to $0.44[29][30] Note 1. Nature of Operations Legacy Housing Corporation manufactures, transports, and finances mobile homes, with revenue from product sales and interest on consumer and MHP loans - The company's business model includes manufacturing, transportation, wholesale financing for dealers, retail financing for consumers, and financing/developing manufactured home communities[20] Disaggregation of Revenue (in thousands) | Revenue Source | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Product Sales | | | | Direct sales | $10,863 | $3,422 | | Commercial sales | $14,059 | $12,318 | | Consignment sales | $20,040 | $10,599 | | Retail store sales | $4,160 | $3,321 | | Total Product Sales | $51,787 | $32,274 | | Consumer and MHP loans interest | $6,765 | $6,638 | | Other | $1,376 | $1,028 | | Total Net Revenue | $59,928 | $39,940 | Note 2. Consumer Loans The company provides consumer financing for mobile homes at an average 13.5% interest, with a $127.3 million net portfolio and 1.2% of loans past due Consumer Loans Receivable, Net (in thousands) | Component | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Consumer loans receivable | $130,539 | $129,119 | | Allowance for loan losses | $(724) | $(884) | | Consumer loans receivable, net | $127,259 | $125,623 | Aging of Past Due Consumer Loans (in thousands) | Days Past Due | March 31, 2022 | % of Total | | :--- | :--- | :--- | | 31 - 60 days | $243 | 0.2% | | 61 - 90 days | $111 | 0.1% | | 91 - 120 days | $109 | 0.1% | | > 120 days | $1,071 | 0.8% | | Total past due | $1,534 | 1.2% | Note 3. Notes Receivable from Mobile Home Parks The company finances MHP sales at an average 7.7% interest, with significant concentration in two third-parties and an immaterial allowance for loan losses - As of March 31, 2022, the company had significant concentrations of MHP Notes with two independent third-parties, representing 29.1% and 12.9% of the total principal balance outstanding[75] - There were minimal past due balances on MHP Notes, and no allowance for loan loss was recorded as of March 31, 2022, as it was considered immaterial[77] Note 10. Debt The company has a $70 million revolving credit line with Capital One, $5.2 million outstanding, and received a waiver for non-compliance with non-financial covenants - The company has a revolving line of credit with Capital One with a maximum limit of $70,000 thousand and a maturity date of March 30, 2024, with an outstanding balance of $5,224 thousand as of March 31, 2022[100][101] - As of March 31, 2022, the company was not in compliance with certain non-financial covenants of its credit facility and obtained a waiver from Capital One[101] Note 13. Commitments and Contingencies The company has $14.7 million in contingent repurchase liabilities for retailer inventory financing and $2.7 million in legal reserves for ongoing proceedings - The company is contingently liable under repurchase agreements for retailer inventory financing, with a maximum potential liability of $14.7 million at March 31, 2022, up from $4.9 million at December 31, 2021, with no reserve recorded as the obligation is considered insignificant[121] - The company has accrued legal reserves of $2.7 million as of March 31, 2022, for various legal proceedings, which management does not believe will have a material adverse effect on the company's financial position[123] Note 17. Subsequent Events Subsequent events include a credit line default with Capital One, reducing it to $20 million, a new CEO appointment, and Nasdaq non-compliance notices for late filings - The company failed to timely file its Form 10-K and 10-Q reports, leading to non-compliance notices from Nasdaq, which granted an exception allowing the company until September 27, 2022, to regain compliance[139][140] - On June 7, 2022, Duncan Bates was appointed as the new President and Chief Executive Officer of the company[141] - Due to late filings, the company defaulted on its credit agreement with Capital One, leading to the termination of a forbearance agreement and a reduction of the available line of credit from $70 million to $20 million on August 24, 2022[143][144] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q1 2022 performance to higher sales prices and unit volumes, driving 50.0% revenue growth, while noting increased operating expenses and a subsequent credit line reduction Results of Operations Q1 2022 net revenue grew 50.0% to $59.9 million and net income rose 50.4% to $16.1 million, driven by product sales and unit volume, offset by rising costs Comparison of Results of Operations (in thousands) | Line Item | Q1 2022 | Q1 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total net revenue | $59,928 | $39,940 | $19,988 | 50.0% | | Cost of product sales | $33,727 | $22,001 | $11,726 | 53.3% | | Income from operations | $18,267 | $12,683 | $5,584 | 44.0% | | Net income | $16,092 | $10,701 | $5,391 | 50.4% | - The increase in product sales was driven by both a higher average sales price per unit and an increase in unit volumes sold during the quarter[162] - Selling, general and administrative expenses increased by $2.9 million (59.8%), primarily due to a $4.2 million increase in salaries and incentive costs, partially offset by decreases in loan losses and warranty costs[167] Liquidity and Capital Resources Cash was $2.5 million as of March 31, 2022, with $1.1 million net cash used in operations, and liquidity is now constrained by a subsequent credit line reduction and $14.7 million in contingent obligations Summary of Cash Flow Activities (in thousands) | Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,057) | $(1,471) | | Net cash provided by (used in) investing activities | $2,754 | $(6,127) | | Net cash (used in) provided by financing activities | $(211) | $9,238 | - Subsequent to the quarter, the company's revolving credit facility was declared in default due to failure to timely file reports, and the available credit was reduced from $70 million to $20 million[180][181] - The company has off-balance sheet contingent obligations under repurchase agreements with a maximum exposure of approximately $14.7 million as of March 31, 2022[185] Quantitative and Qualitative Disclosures About Market Risk This section is omitted as the company qualifies as a smaller reporting company - The company has omitted this section as it is not applicable for smaller reporting companies[189] Controls and Procedures Management concluded disclosure controls and procedures were ineffective as of March 31, 2022, due to material weaknesses in internal control over financial reporting, with remediation underway - Management concluded that disclosure controls and procedures were not effective as of March 31, 2022, due to previously disclosed material weaknesses in internal control over financial reporting[191] - Identified material weaknesses include insufficient accounting systems and procedures, inadequate processes for timely financial reporting, lack of segregation of duties and approval for journal entries, and insufficient IT infrastructure safeguards[193] - The company is implementing remediation plans and expects the majority of the remediation to be completed by the end of fiscal 2022[193] PART II - OTHER INFORMATION Legal Proceedings Legal proceedings information is referenced in Note 13, with a $2.7 million legal reserve for ordinary course claims - For details on legal proceedings, the report refers to Note 13 in the financial statements[195] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported for the period - None reported for the period[196] Defaults Upon Senior Securities No defaults on senior securities were reported for the period, though a credit line default occurred subsequently - None reported for the period[196] Exhibits The report includes filed exhibits, such as CEO/CFO certifications and XBRL data files - The filing includes certifications from the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act, along with XBRL interactive data files[197]