to a formula based on eligible inventory. The interest rates in effect as of December 31, 2018 and 2017 was 4.85% and 3.87%, respectively. 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 $10,000,000 and $5,000,000 at December 31, 2018 and 2017, respectively. For the years ended December 31, 2018 and 2017, interest expense was $700,000 and 527,000, respectively. The outstanding balance as of December 31, 2018 and 2017 was $10,000,000 and $15,000,000, respectively. We were in compliance with all financial covenants as of December 31, 2018, including that we maintain a tangible net worth of at least $80,000,000.
Notes Payable.
We have a promissory note with Woodhaven Bank. The amount due under the promissory note accrued 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. The loan was subsequently renewed through April 7, 2033. The promissory note calls for monthly principal and interest payments of $30,000 with a final payment due at maturity. The interest rates in effect as of December 31, 2018 and 2017 were 4.25% and 4.35%, respectively. The note is secured by certain of our real property. Interest paid on the note payable was $159,000 and $166,000 for the years ended December 31, 2018 and 2017, respectively. The balance outstanding on the note payable at December 31, 2018 and 2017 was $3,552,000 and $3,734,000, respectively.
On May 24, 2016, we signed a promissory note for $515,000 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 $6,000 until June 1, 2026. Interest paid on the note payable was $26,000 and $28,000 for the years ended December 31, 2018 and 2017, respectively. The balance outstanding on the note payable at December 31, 2018 and 2017 was $414,000 and $453,000, respectively. In January 2019, this note was paid in full.
Notes Payable to an Affiliate.
On February 2, 2016, we entered into a $1,500,000 note payable agreement with stated annual interest rates of 3.75% with Shipley & Sons, Ltd., a related party through the common ownership of Kenneth E. Shipley, a significant shareholder of our company and our President and Chief Executive Officer. The note was due on demand. Interest paid on the note payable was $47,000 and $56,000 for the years ended December 31, 2018 and 2017, respectively. The balance outstanding on the note payable at December 31, 2017 was $1,500,000. On October 18, 2018, this note payable 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 December 31, 2018, we had not drawn down on this credit facility.
Contractual Obligations
The following table is a summary of contractual cash obligations as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
Less than
|
|
|
|
|
|
More than
|
Contractual Obligations
|
|
Total
|
|
1 year
|
|
2 - 3 years
|
|
4 - 5 years
|
|
5 years
|
Lines of credit
|
|
$
|
13,679,000
|
|
—
|
|
13,679,000
|
|
—
|
|
—
|
Notes payable
|
|
|
3,965,000
|
|
228,000
|
|
491,000
|
|
541,000
|
|
2,705,000
|
Operating lease obligations
|
|
$
|
3,190,000
|
|
566,000
|
|
963,000
|
|
692,000
|
|
969,000
|
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Legacy Housing Corporation
Opinion on the financial statements
We have audited the accompanying balance sheets of Legacy Housing Corporation (a Delaware corporation) (the “Company”) as of December 31, 2018 and 2017, the related statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2018.
Dallas, Texas
April 9, 2019
LEGACY HOUSING CORPORATION
BALANCE SHEETS (in thousands, except share data)
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,599
|
|
$
|
428
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
2,953
|
|
|
3,792
|
Current portion consumer loans
|
|
|
4,945
|
|
|
4,305
|
Current portion of notes receivable from mobile home parks (“MHP”)
|
|
|
7,297
|
|
|
7,216
|
Current portion of other notes receivable
|
|
|
379
|
|
|
2,339
|
Inventories
|
|
|
42,033
|
|
|
39,561
|
Prepaid expenses and other current assets
|
|
|
2,938
|
|
|
1,800
|
Total current assets
|
|
|
63,144
|
|
|
59,441
|
Property, plant and equipment, net
|
|
|
17,128
|
|
|
11,826
|
Consumer loans, net of deferred financing fees and allowance for loan losses
|
|
|
92,230
|
|
|
82,331
|
Notes receivable from mobile home parks (“MHP”)
|
|
|
50,638
|
|
|
42,286
|
Other notes receivable, net of allowance for loan losses
|
|
|
1,912
|
|
|
2,867
|
Other assets
|
|
|
2,587
|
|
|
2,205
|
Inventory non‑current
|
|
|
7,399
|
|
|
7,379
|
Total assets
|
|
$
|
235,038
|
|
$
|
208,335
|
Liabilities and Equity
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,828
|
|
$
|
6,280
|
Accrued liabilities
|
|
|
9,156
|
|
|
4,820
|
Customer deposits
|
|
|
2,222
|
|
|
2,903
|
Note payable to related party
|
|
|
—
|
|
|
1,500
|
Escrow liability
|
|
|
5,951
|
|
|
4,508
|
Current portion of notes payable
|
|
|
228
|
|
|
3,776
|
Total current liabilities
|
|
|
20,385
|
|
|
23,787
|
Long‑term liabilities:
|
|
|
|
|
|
|
Lines of credit
|
|
|
13,679
|
|
|
53,094
|
Deferred income taxes
|
|
|
1,842
|
|
|
—
|
Note payable, net of current portion
|
|
|
3,737
|
|
|
410
|
Dealer incentive liability
|
|
|
6,115
|
|
|
6,773
|
Total liabilities
|
|
|
45,758
|
|
|
84,064
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 10,000,000 shares authorized: issued -0-
|
|
|
—
|
|
|
—
|
Common stock, $.001 par value, 90,000,000 shares authorized; 24,000,000 and -0-
|
|
|
|
|
|
|
issued and outstanding as of December 31, 2018 and 2017, respectively
|
|
|
24
|
|
|
—
|
Partners’ Capital
|
|
|
—
|
|
|
124,271
|
Additional paid-in-capital
|
|
|
167,743
|
|
|
—
|
Retained earnings
|
|
|
21,513
|
|
|
—
|
Total equity
|
|
|
189,280
|
|
|
124,271
|
Total liabilities and equity
|
|
$
|
235,038
|
|
$
|
208,335
|
See accompanying notes to financial statements
LEGACY HOUSING CORPORATION
StatementS of Operations
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
Net revenue:
|
|
|
|
|
|
|
Product sales
|
|
$
|
139,165
|
|
$
|
109,750
|
Consumer and MHP loans interest
|
|
|
18,759
|
|
|
15,647
|
Other
|
|
|
3,953
|
|
|
3,339
|
Total net revenue
|
|
|
161,877
|
|
|
128,736
|
Operating expenses:
|
|
|
|
|
|
|
Cost of product sales
|
|
|
107,231
|
|
|
82,498
|
Selling, general administrative expenses
|
|
|
21,017
|
|
|
17,105
|
Dealer incentive
|
|
|
829
|
|
|
1,038
|
Income from operations
|
|
|
32,800
|
|
|
28,095
|
Other income (expense):
|
|
|
|
|
|
|
Non‑operating interest income
|
|
|
190
|
|
|
272
|
Miscellaneous, net
|
|
|
162
|
|
|
149
|
Interest expense
|
|
|
(2,507)
|
|
|
(2,044)
|
Total other
|
|
|
(2,155)
|
|
|
(1,623)
|
Income before income tax expense
|
|
|
30,645
|
|
|
26,472
|
Income tax expense
|
|
|
(9,132)
|
|
|
(124)
|
Net income
|
|
$
|
21,513
|
|
$
|
26,348
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
Basic and diluted
|
|
|
20,197,260
|
|
|
—
|
Net income per share:
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.07
|
|
$
|
—
|
Pro Forma Information:
|
|
|
|
|
|
|
Net income
|
|
|
|
|
$
|
26,348
|
Pro forma provision for income taxes
|
|
|
|
|
|
(9,448)
|
Pro forma net income
|
|
|
|
|
$
|
16,900
|
Pro forma weighted average shares outstanding:
|
|
|
|
|
|
|
Pro forma basic and diluted
|
|
|
|
|
|
20,000,000
|
Pro forma net income per share:
|
|
|
|
|
|
|
Pro forma basic and diluted
|
|
|
|
|
$
|
0.84
|
See accompanying notes to financial statements.
LEGACY HOUSING CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Partners’
|
|
Common Stock
|
|
Additional
|
|
Retained
|
|
|
|
|
|
Capital
|
|
Shares
|
|
Amount
|
|
paid in capital
|
|
earnings
|
|
Total
|
Balances, January 1, 2017
|
|
$
|
115,591
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Partner distributions
|
|
|
(17,668)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Net income
|
|
|
26,348
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Balances, December 31, 2017
|
|
$
|
124,271
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Shares issued upon incorporation
|
|
|
(124,271)
|
|
20,000,000
|
|
|
20
|
|
|
124,251
|
|
|
—
|
|
|
124,271
|
Sale of common stock in initial public offering, net of offering costs of $4,504
|
|
|
—
|
|
4,000,000
|
|
|
4
|
|
|
43,492
|
|
|
—
|
|
|
43,496
|
Net income
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,513
|
|
|
21,513
|
Balances, December 31, 2018
|
|
$
|
—
|
|
24,000,000
|
|
$
|
24
|
|
$
|
167,743
|
|
$
|
21,513
|
|
$
|
189,280
|
See accompanying notes to financial statements
LEGACY HOUSING CORPORATION
STATEMENTS OF CASH FLOWS (in thousands)
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
21,513
|
|
$
|
26,348
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation expense
|
|
|
838
|
|
|
652
|
Provision for loan loss—consumer loans
|
|
|
851
|
|
|
961
|
Deferred income taxes
|
|
|
1,842
|
|
|
—
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
|
839
|
|
|
(2,314)
|
Consumer loans originations
|
|
|
(19,615)
|
|
|
(17,980)
|
Consumer loans principal collections
|
|
|
9,455
|
|
|
6,814
|
Notes receivable MHP originations
|
|
|
(37,893)
|
|
|
(19,715)
|
Notes receivable MHP principal collections
|
|
|
29,459
|
|
|
13,971
|
Inventories
|
|
|
(2,493)
|
|
|
(9,960)
|
Prepaid expenses and other current assets
|
|
|
(1,138)
|
|
|
142
|
Other assets
|
|
|
(382)
|
|
|
435
|
Accounts payable
|
|
|
(3,452)
|
|
|
1,896
|
Accrued liabilities
|
|
|
4,335
|
|
|
767
|
Customer deposits
|
|
|
(681)
|
|
|
1,876
|
Dealer incentive liability
|
|
|
(658)
|
|
|
480
|
Net cash provided by operating activities
|
|
|
2,820
|
|
|
4,373
|
Investing activities:
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(6,137)
|
|
|
(1,428)
|
Issuance of notes receivable
|
|
|
(1,231)
|
|
|
(2,376)
|
Notes receivable collections
|
|
|
4,146
|
|
|
1,548
|
Purchases of consumer loans
|
|
|
(1,443)
|
|
|
—
|
Collections from purchased consumer loans
|
|
|
212
|
|
|
318
|
Net cash used in investing activities
|
|
|
(4,453)
|
|
|
(1,938)
|
Financing activities:
|
|
|
|
|
|
|
Proceeds from sale of common stock in initial public offering
|
|
|
48,000
|
|
|
—
|
Offering cost for initial public offering
|
|
|
(4,504)
|
|
|
—
|
Partner distributions
|
|
|
—
|
|
|
(17,668)
|
Escrow liability
|
|
|
1,444
|
|
|
1,350
|
Principal payments on affiliate note payable
|
|
|
(1,500)
|
|
|
—
|
Principal payments on note payable
|
|
|
(221)
|
|
|
(231)
|
Proceeds from lines of credit
|
|
|
63,052
|
|
|
59,599
|
Payments on lines of credit
|
|
|
(102,467)
|
|
|
(46,066)
|
Net cash provided by (used in) financing activities
|
|
|
3,804
|
|
|
(3,016)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,171
|
|
|
(581)
|
Cash and cash equivalents at beginning of period
|
|
|
428
|
|
|
1,009
|
Cash and cash equivalents at end of period
|
|
$
|
2,599
|
|
$
|
428
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,746
|
|
$
|
1,914
|
Cash paid for taxes
|
|
$
|
5,153
|
|
$
|
150
|
Supplemental disclosure of non‑cash transactions:
|
|
|
|
|
|
|
Sale of an asset in exchange for note receivable
|
|
$
|
—
|
|
$
|
156
|
See accompanying notes to financial statements
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
1. NATURE OF OPERATIONS
Legacy Housing Corporation (the “Company”) was formed on January 1, 2018 through a corporate conversion of Legacy Housing, Ltd., (the “Partnership”) a Texas limited partnership formed in May 2005. The Company is incorporated as a Delaware corporation and 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 and (3) provides retail financing to consumers. 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.
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 financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
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, repossessed assets, income taxes, fair value of financial instruments, contingent liabilities and accruals related to warranty costs.
Actual results could differ from these estimates.
Segment Reporting
The Company has one reportable segment. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, the sale of
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
manufactured homes is done through wholesale and retail operations that include providing transportation and consignment arrangements with dealers. The Company also provides financing options to the customers to facilitate such sale of homes. In addition, the sale of homes is directly related to financing provided by the Company. Accordingly, all significant operating and strategic decisions by the chief operating decision‑maker, the Executive Chairman of the Board, are based upon analyses of the Company as one segment or unit.
2
. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances in bank accounts that may, at times, exceed federally insured limits. The Company has not incurred any losses from such accounts and management considers the risk of loss to be minimal. As of December 31, 2018, the Company had two bank accounts that exceeded the FDIC limit by an aggregate amount of $1,534.
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 December 31, 2018 and 2017, the allowance for doubtful accounts totaled $341 and $115, respectively.
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 December 31, 2018 and approximately 13.9% as of December 31, 2017. Consumer loans receivable have maturities that range from 5 to 25 years.
Loan applications go through an underwriting process which 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 $5,951 and $4,508 as of December 31, 2018 and 2017, respectively, and are included in escrow liability in the balance sheets.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
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. As of December 31, 2018 and 2017, total principal outstanding for consumer loans on nonaccrual status was $976 and $1,237, respectively.
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 used various factors to determine the value of the underlying collateral for impaired loans. These factors were: (1) the length of time the unit was unsold after construction; (2) the amount of time the house was occupied; (3) the cooperation level of the borrowers, i.e., loans requiring legal action or extensive field collection efforts; (4) units located on private property as opposed to a manufactured home park; (5) the length of time the borrower has lived in the house without making payments; (6) location, size, and market conditions; and (7) the experience and expertise of the particular dealer assisting in collection efforts.
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 $1,175 and $1,856 as of December 31, 2018 and 2017, respectively, and are included in other assets in the balance sheets.
Notes Receivable from Mobile Home Parks
The notes receivable from mobile home parks (“MHP Notes” or “Notes”) relate to mobile homes sold to mobile home parks and financed through notes receivable. The Notes have varying maturity dates and call for monthly principal and interest payments. The interest rate on the MHP Notes are typically set at 4.0% above prime with a minimum of 8.0%. The average interest rate per loan was approximately 9.2% and 8.2% as of December 31, 2018 and 2017, respectively with maturities that range from 4 to 15 years. The collateral underlying the Notes are individual mobile
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
homes which can be repossessed and resold. The MHP Notes are generally personally guaranteed by the borrowers with substantial financial resources.
Allowance for Loan Losses—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 allowance for loan losses on MHP notes was $0 as of December 31, 2018 and 2017, respectively.
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 allowance for loan losses on other notes was $0 as of December 31, 2018 and 2017, respectively.
Inventories
Inventories consist of raw materials, work‑in‑process, and finished goods and are stated at the lower of cost or net realizable value. The cost of raw materials is based on the first‑in first‑out method. Finished goods and work‑in‑process are based on a standard cost system that approximates actual costs using the specific identification method.
Estimates of the lower of cost and net realizable value of inventory are determined by comparing the actual cost of the product to the estimated selling prices in the ordinary course of business based on current market and economic conditions, less reasonably predictable costs of completion, disposal, and transportation of the inventory. For the periods ending, December 31, 2018 and 2017, the Company recorded an insignificant amount of inventory write‑down.
The Company evaluates inventory based on historical experience to estimate its inventory not expected to be sold in less than a year. The company classifies its inventory not expected to be sold in one year as non‑current. As of December 31, 2018 and 2017 non‑current inventory was $7,399 and $7,379, respectively.
Property, Plant, and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation expense is calculated using the straight‑line method over the estimated useful lives of each asset. Estimated useful lives for significant classes of assets are as follows: buildings and improvements, 30 to 39 years; vehicles, 5 years; machinery and equipment, 7 years; and furniture and fixtures, 7 years. Repair and maintenance charges are expensed as incurred. Expenditures for major renewals or betterments which extend the useful lives of existing property, plant and equipment are capitalized and depreciated.
Impairment of Long‑Lived Assets
The Company reviews long‑lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Assets are grouped at the lowest level in which there are
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
identifiable cash flows that are largely independent of the cash flows of other groups of assets. In such cases, if the future undiscounted cash flows of the underlying assets are less than the carrying amount, then the carrying amount of the long‑lived asset will be adjusted for impairment to a level commensurate with a discounted cash flow analysis of the underlying asset or its determinable fair value. No impairment for long‑lived assets was recorded for the years ended December 31, 2018 or 2017.
Dealer Incentive Liability
Under a dealer agreement with qualifying independent retailers, a portfolio is created for houses sold by the independent retailer with consumer loan arrangements financed by the Company. The independent retailer is eligible to a receive dealer incentive, which is a portion of total collections expected on a consumer loan portfolio after the Company’s contribution (collection thresholds set per the terms of dealer agreement which includes Legacy’s initial contribution, plus an allocation of interest and other agreed upon periodic fees) is met.
A dealer incentive liability is recorded in the Company’s balance sheet based on total outstanding balance of individual dealer loan portfolios at period end, less the remaining portion of the Company’s contribution in respective portfolios. As of December 31, 2018 and 2017, the dealer incentive liability was $6,115 and $6,773, respectively. Dealer incentive expense for the years ended December 31, 2018 and 2017 totaled $829 and $1,038, respectively, and is included in the Company’s statements of operations.
Product Warranties
The Company provides retail home buyers with a one‑year warranty from the date of purchase on manufactured inventory. Product warranty costs are accrued when the covered homes are sold to customers. Product warranty expense is recognized based on the terms of the product warranty and the related estimated costs. Factors used to determine the warranty liability include the number of homes under warranty and the historical costs incurred in servicing the warranties. The accrued warranty liability is reduced as costs are incurred and warranty liability balance is included as part of accrued liabilities in the Company’s balance sheet.
A tabular presentation of the activity within the warranty liability account for the years ended December 31, 2018 and 2017 is presented below:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Warranty liability, beginning of period
|
|
$
|
2,602
|
|
$
|
2,126
|
Product warranty accrued
|
|
|
2,957
|
|
|
2,923
|
Warranty costs incurred
|
|
|
(2,532)
|
|
|
(2,447)
|
Warranty liability, end of period
|
|
$
|
3,027
|
|
$
|
2,602
|
Advertising Costs
The Company expenses all advertising and marketing expenses in the period incurred. Advertising costs for the years ended December 31, 2018 and 2017 were $762 and $982, respectively.
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
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
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 were valued at an $80 asset as of December 31, 2018 and $34 liability as of December 31, 2017.
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 $109,231 compared to the book value of $97,175 as of December 31, 2018, as well as a fair value of approximately $90,900 compared to the book value of $86,636 as of December 31, 2017. This is a Level III valuation technique.
Revenue Recognition
Direct Sales
Revenue from homes sold to independent retailers that are not financed and not under a consignment arrangement are generally recognized upon execution of a sales contract and when the home is shipped, at which time title passes to the independent retailer and collectability is reasonably assured. These types of homes are generally either
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
paid for prior to shipment or floor plan financed by the independent retailer through standard industry arrangements, which can include repurchase agreements.
Commercial Sales
Revenue from homes sold to mobile home parks under commercial loan programs involving funds provided by the Company is recognized when the home is shipped, at which time title passes to the customer and a sales and financing contract is executed, down payment received, and collectability is reasonably assured.
Consignment Sales
The Company provides floor plan financing for independent retailers, which takes the form of a consignment arrangement. Sales under a consignment agreement are recognized as revenue when the Company enters into a sales contract and receives full payment for cash sales, and title passes; or, upon execution of a sales and financing contract, with a down payment received and upon delivery of the home to the final individual customer, at which time title passes and collectability is reasonably assured. For homes sold to customers through independent retailers under consignment arrangements and financed by the Company, a percentage of profit is paid to the independent retailer up front as a commission for sale and also reimburses certain direct expenses incurred by the independent retailer for each transaction. Such payments are recorded as cost of product sales in the Company’s statement of operations.
Retail Store Sales
Revenue from direct retail sales through Company‑owned retail locations are generally recognized when the customer has entered into a legally binding sales contract, and full payment received, the home is delivered at the customer’s site, title has transferred and collection is reasonably assured. Retail sales financed by the Company are recognized as revenue upon the execution of a sales and financing contract with a down payment received and upon delivery of the home to the final customer, at which time title passes and collectability is reasonably assured. Revenue is recognized net of sales taxes.
For 2018 and 2017, total cost of product sales included $20,419 and $15,900 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 sales
Other sales revenue primarily consists of consignment fees, service fees and other miscellaneous income. These sales are recognized as revenue upon completion of the service and collectability is reasonably assured.
Reserve for Repurchase Commitments
In accordance with customary business practice in the manufactured housing industry, the Company has entered into certain repurchase agreements with certain financial institutions and other credit sources who provide floor plan financing to industry retailers, which provided that the Company will be obligated, under certain circumstances, to repurchase homes sold to retailers in the event of a default by a retailer in its obligation to such credit sources. The Company’s obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The Company applies ASC 460,
Guarantees
and ASC 450‑20,
Loss Contingencies
, to account for its liability for repurchase commitments. The Company considers its current obligations on current contracts to be immaterial and accordingly have not recorded any reserve for repurchase commitments as of December 31, 2018 and 2017.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
Other Income, Net
Other income primarily consists of interest related to commercial loan receivable balances and interest income earned on cash balances, reduced by interest expenses.
Interest Income
Interest on consumer loans, MHP Notes and other notes is recognized using the effective‑interest method on the daily balances of the principal amounts outstanding and recorded as part of total revenue. Fees associated with the origination of loans and certain direct loan origination costs are netted and the net amount is deferred and recognized over the life of the loan as an adjustment of yield.
Share-Based Compensation
Share-based compensation to employees, directors and other persons who provide services to the Company, including grants of employee stock options, are recognized in the financial statements based on their estimated grant-date fair value. No awards have been made as of December 31, 2018.
Shipping and Handling Costs
Shipping and handling costs incurred to deliver product to our customers are included as a component of cost of product sales in the statement of operations. Shipping and handling costs for the years ended December 31, 2018 and 2017 were $1,625 and $1,021, respectively.
Income Taxes
The Company is subject to U.S. federal and state income taxes as a corporation. Prior to the corporate conversion, the Partnership was treated as a flow‑through entity for U.S. federal income tax purposes, and as such, was generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to its taxable income was passed through to its partners. Accordingly, prior to the corporate conversion, the Partnership only recorded a provision for Texas franchise tax as the Partnership’s taxable income was included in the income tax returns of the individual partners.
Income tax expense for the Company is recognized for the tax effects of the transactions reported in the financial statements and consist of taxes currently due, plus deferred taxes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized. In addition, management does not believe there are any unrecorded deferred tax liabilities that are material to the financial statements.
In December 2017, a comprehensive U.S. tax reform package, the Tax Cuts and Jobs Act, or Tax Act, was enacted which, among other things, lowered the corporate income tax rate from 35% to 21%. As a result of the corporate conversion on January 1, 2018, the Company measured its opening deferred tax assets and liabilities at the newly enacted rate.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
The determination of the provision for income taxes requires significant judgment, use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more‑likely‑than‑not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes through the provision for income taxes. The Company recognizes interest and penalties relating to uncertain tax provisions as a component of tax expense. For the periods presented, management has determined there are no uncertain tax positions. There are no open tax years for the Company and 2018 will be the first filing year as a corporation.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable, consumer loans, MHP Notes and
other notes receivable. Management believes that its credit policies are adequate to minimize potential credit risk related to accounts receivable and other notes receivable. The consumer loans are secured by the mobile homes that were financed through the loans. The MHP Notes are secured by mobile homes, other assets, and are personally guaranteed. The MHP Notes personal guarantor may cover multiple parks and each park is treated as a customer. As of December 31, 2018, there were no customers that represented more than 10% of MHP Notes and as of December 31, 2017, two customers represented approximately 21% of MHP Notes.
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 May 2014, the FASB issued ASU 2014‑09,
Revenue from Contracts with Customers (Topic 606)
, which outlines a comprehensive five‑step model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry‑specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
In August 2015, the FASB issued ASU 2015‑14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date of the new revenue standard. The Company will adopt the requirements of the new standard in the fiscal year beginning January 1, 2019 using the modified retrospective transition method.
The following revenues streams are subject to the guidance under ASU 2014-09: (1) direct sales, (2) commercial sales, (3) consignment sales and (4) retail store sales. Revenue generated from interest income, lending activities and leasing activities are excluded from ASU 2014-09 and will continue to be accounted for under existing guidance.
The Company has evaluated the potential impacts of ASU 2014-09 by gaining an understanding of the new standard, inventorying its revenue streams, analyzing and mapping contract features to revenue streams and considering the enhancement of disclosures related to revenue. Based on its evaluation and the manner in which the Company recognizes revenue, the Company has concluded that the adoption of ASU 2014-09 will not have a material impact on the amount or timing of its revenue recognition.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
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.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"), which provides entities with an additional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings while continuing to present all prior periods under the previous lease accounting guidance. Also, in July 2018, the FASB issued Accounting Standards Update No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), which provides clarification about the proper implementation of several topics in ASU 2016-02.
Modified retrospective application and early adoption is permitted. 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, 2020.
The Company is continuing to evaluate the impact of the adoption of this ASU. The Company is anticipating a material change to the balance sheet due to recording the Right of Use Asset, however we do not expect there to be a material change to our Statement of Operations.
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, 2021. The Company is continuing to evaluate the impact of the adoption of this ASU and is uncertain of the impact on the financial statements at this point in time.
In March 2017, the FASB issued ASU 2017‑08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310‑20), Premium Amortization on Purchased Callable Debt Securities (“ASU 2017‑08”), which requires the premium on callable debt securities to be amortized to the earliest call date as opposed to the contractual life of the security. ASU 2017‑08 will be effective beginning with the first quarter of the Company’s fiscal year 2020. 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
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
3. CONSUMER LOANS RECEIVABLE
Consumer loans receivable, net of allowance for loan losses and deferred financing fees, consisted of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Consumer loan receivable
|
|
$
|
101,049
|
|
$
|
90,276
|
Loan discount and deferred financing fees, net
|
|
|
(3,162)
|
|
|
(2,835)
|
Allowance for loan losses
|
|
|
(712)
|
|
|
(805)
|
Consumer loans receivable, net
|
|
$
|
97,175
|
|
$
|
86,636
|
The following table presents a detail of the activity in the allowance for loan losses for the years ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Allowance for loan losses, beginning of period
|
|
$
|
805
|
|
$
|
578
|
|
Provision for loan losses
|
|
|
851
|
|
|
961
|
|
Charge offs
|
|
|
(944)
|
|
|
(734)
|
|
Allowance for loan losses
|
|
$
|
712
|
|
$
|
805
|
|
The impaired and general reserve for allowance for loan losses at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Total consumer loans
|
|
$
|
101,049
|
|
$
|
90,276
|
Total allowance for loan losses
|
|
|
712
|
|
|
805
|
Impaired loans individually evaluated for impairment
|
|
|
1,445
|
|
|
1,237
|
Specific reserve against impaired loans
|
|
|
427
|
|
|
447
|
Other loans collectively evaluated for allowance
|
|
|
99,604
|
|
|
89,039
|
General allowance for loan losses
|
|
|
285
|
|
|
358
|
As of December 31, 2018 and 2017, the total principal outstanding for consumer loans on nonaccrual status was $1,445 and $1,237 respectively. A detailed aging of consumer loans receivable that are past due as of December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
2018
|
|
%
|
Total consumer loans receivable
|
|
$
|
101,049
|
|
100.0
|
Past due consumer loans:
|
|
|
|
|
|
31 - 60 days past due
|
|
$
|
968
|
|
1.0
|
61 - 90 days past due
|
|
|
404
|
|
0.4
|
91 - 120 days past due
|
|
|
133
|
|
0.1
|
Greater than 120 days past due
|
|
|
843
|
|
0.8
|
Total past due
|
|
$
|
2,348
|
|
2.3
|
4
. NOTES RECEIVABLE FROM MOBILE HOME PARKS (“MHP Notes”)
There were no past due MHP Notes as of December 31, 2018 and 2017 and also no charge offs recorded for MHP Notes during the year ended December 31, 2018 and 2017. There is no allowance for loan loss against the MHP Notes as of December 31, 2018 or 2017.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
5
.
Other Notes Receivable
The balance outstanding on the other notes receivable were as follows as of December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Outstanding principal balance
|
|
$
|
2,354
|
|
$
|
5,270
|
Allowance for loan losses
|
|
|
(63)
|
|
|
(64)
|
Total
|
|
$
|
2,291
|
|
$
|
5,206
|
6
. INVENTORIES
Inventories consisted of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
13,481
|
|
$
|
11,956
|
Work in progress
|
|
|
526
|
|
|
703
|
Finished goods
|
|
|
35,425
|
|
|
34,281
|
Total
|
|
$
|
49,432
|
|
$
|
46,940
|
7
. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Land
|
|
$
|
8,081
|
|
$
|
3,004
|
Buildings and leasehold improvements
|
|
|
9,234
|
|
|
9,008
|
Vehicles
|
|
|
1,477
|
|
|
1,269
|
Machinery and equipment
|
|
|
3,385
|
|
|
2,788
|
Furniture and fixtures
|
|
|
161
|
|
|
135
|
Total
|
|
|
22,338
|
|
|
16,204
|
Less accumulated depreciation
|
|
|
(5,210)
|
|
|
(4,378)
|
Total property, plant and equipment
|
|
$
|
17,128
|
|
$
|
11,826
|
Depreciation expense was $838 with $306 included as a component of cost of product sales for the year ended December 31, 2018 and $652 with $222 included as a component of cost of product sales for the year ended December 31, 2017.
8
. OTHER ASSETS
Other assets includes prepaid rent in the amount of $1,412 and $349 at December 31, 2018 and 2017, respectively, and repossessed homes of $1,175 and $1,856 at December 31, 2018 and 2017, respectively.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Warranty liability
|
|
$
|
3,027
|
|
$
|
2,602
|
Litigation reserve
|
|
|
570
|
|
|
315
|
Derivative liabilities
|
|
|
—
|
|
|
34
|
Federal and state taxes payable
|
|
|
2,252
|
|
|
1,144
|
Accrued expenses & other accrued liabilities
|
|
|
3,307
|
|
|
725
|
Total
|
|
$
|
9,156
|
|
$
|
4,820
|
10. DEBT
Lines of Credit
Revolver 1
The Company has a revolving line of credit (“Revolver 1”) with Capital One, N.A. with a maximum credit limit of $45,000 as of December 31, 2018. On May 12, 2017, Revolver 1 was amended to extend the maturity date to May 11, 2020 and increase the maximum borrowing availability to $45,000. For the years ended December 31, 2018 and 2017, Revolver 1 accrued interest at one month LIBOR plus 2.40%. The interest rates in effect as of December 31, 2018 and 2017 were 4.78% and 3.78%, respectively. Amounts available under Revolver 1 are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable and a percentage of the consumer loans receivable and MHP Notes. The amount of available credit under Revolver 1 was $41,321 and $6,906 at December 31, 2018 and 2017, respectively. The Company was in compliance with all required covenants as of December 31, 2018. For the years ended December 31, 2018 and 2017, interest expense was $1,701 and $1,223, respectively. The outstanding balance as of December 31, 2018 and 2017 was $3,679 and $38,094, respectively. The Company was in compliance with the other financial covenants that it maintain a tangible net worth of at least $30,000 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 December 31, 2018 and 2017 were 4.85% and 3.87%, 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 $10,000 and $5,000 at December 31, 2018 and 2017, respectively. The Company was in compliance with all required covenants as of December 31, 2018. For the years ended December 31, 2018 and 2017, interest expense was $700 and $527, respectively. The outstanding balance as of December 31, 2018 and 2017 was $10,000 and $15,000. The Company was in compliance with the other financial covenants that it maintain a tangible net worth of at least $80,000.
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
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
Bank was renewed with varying amounts of principal and interest due through the maturity date, April 7, 2033. The promissory note calls for monthly payments of $30 with a final payment due at maturity. The interest rates in effect at December 31, 2018 and 2017 were 4.25% and 4.35%, respectively. The note is secured by certain real property of the Company. Interest expense was $159 and $166 for the years ended December 31, 2018 and 2017, respectively. The balance outstanding on the note payable at December 31, 2018 and 2017 was $3,552 and $3,734, respectively.
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 $26 and $28 for the years ended December 31, 2018 and 2017, respectively.The balance outstanding on the note payable at December 31, 2018 and 2017 was $414 and $453, respectively. In January 2019, this note was paid in full.
Future minimum principal payments on notes payable at December 31, 2018 were as follows:
|
|
|
|
2019
|
|
$
|
228
|
2020
|
|
|
239
|
2021
|
|
|
252
|
2022
|
|
|
264
|
2023
|
|
|
277
|
Thereafter
|
|
|
2,705
|
|
|
$
|
3,965
|
Note Payable to an Affiliate
On February 2, 2016, the Company entered into a $1,500 note payable agreement with stated annual interest rates of 3.75% with a related party through common ownership. The note is due on demand. Interest paid on the note payable was $47 and $56 for the years ended December 31, 2018 and 2017, respectively. The balance outstanding on the note payable at December 31, 2017 was $1,500. In October 2018, this note payable 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 December 31, 2018, the Company had not drawn on this credit facility.
11. INCOME TAXES
The Company became a corporation subject to federal income taxes on January 1, 2018, see corporate conversion in Note 1. The change in tax status required the recognition of a deferred tax asset or liability for the initial temporary differences at the time of the change in status. The resulting net deferred tax liability of $2,066 was recorded as income tax expense at the date of the completion of the corporate conversion.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
Significant components of the provision for income taxes are as follows(in thousands):
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
Current:
|
|
|
|
|
Federal
|
|
$
|
6,567
|
|
State
|
|
|
723
|
|
Total current income tax provision
|
|
|
7,290
|
|
Deferred:
|
|
|
|
|
Federal
|
|
|
1,777
|
|
State
|
|
|
65
|
|
Total deferred income tax provision
|
|
|
1,842
|
|
Provision for income taxes
|
|
$
|
9,132
|
|
For the year ended December 31, 2018, the Company recorded tax expense of $9,132 resulting in an effective tax rate of 29.8%. A reconciliation of the Company’s effective tax rate from operations to the U.S. federal income tax rate is as follows:
|
|
|
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
Federal statutory rate
|
|
21.0
|
%
|
State income taxes, net of federal tax benefit
|
|
2.3
|
|
Tax adjustment related to corporate conversion
|
|
6.5
|
|
Effective tax rate
|
|
29.8
|
%
|
The tax effects of cumulative temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
368
|
|
Reserve accounts
|
|
|
148
|
|
Uniform capitalization
|
|
|
54
|
|
Total deferred tax assets
|
|
|
570
|
|
Deferred tax liabilities:
|
|
|
|
|
Installment sale revenue
|
|
|
(1,356)
|
|
Depreciation
|
|
|
(732)
|
|
Accrued interest receivable
|
|
|
(288)
|
|
Other
|
|
|
(36)
|
|
Total deferred tax liabilities
|
|
|
(2,412)
|
|
Net deferred tax liabilities
|
|
$
|
(1,842)
|
|
12. COMMITMENTS AND CONTINGENCIES
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
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
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 $2,186 and $1,765 at December 31, 2018 and 2017, 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 December 31, 2018 or 2017.
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 $542 and $340 for the years ended December 31, 2018 and 2017, 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 is included in other revenue in the Company’s statements of operations and was approximately $373 and $369 for the years ended December 31, 2018 and 2017, respectively.
Future minimum lease commitments under all non‑cancelable operating leases for each of the next five years at December 31, 2018, are as follows:
|
|
|
|
2019
|
|
$
|
566
|
2020
|
|
|
513
|
2021
|
|
|
450
|
2022
|
|
|
374
|
2023
|
|
|
318
|
Thereafter
|
|
|
969
|
Total
|
|
$
|
3,190
|
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.
13. DERIVATIVES
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 December 31, 2018 and has a maturity of May 11, 2020. The fair value of the interest rate swap agreement at December 31, 2018 is an asset of $80 and is included in prepaid expenses and other current assets. The fair value of the interest rate swap agreement at December 31, 2017 is a liability of $34 and is included in accrued liabilities. Included in the statements of operations for the years ended December 31, 2018 and 2017 were gains of $87 and losses of $46, respectively, which are the result of the changes in the fair values of the interest rate swap agreement.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
14. EARNINGS PER SHARE
Basic earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. The Company has no common stock equivalents. As a result, there is no difference between diluted net income per share and basic net income per share amounts
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
Net earnings attributable to Legacy Housing Corp (in 000's)
|
|
$
|
21,513
|
|
$
|
26,348
|
Denominator:
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
20,197,260
|
|
|
-
|
Earnings per share attributable to Legacy Housing Corp
|
|
|
|
|
|
|
Basic
|
|
$
|
1.07
|
|
$
|
-
|
Diluted
|
|
$
|
1.07
|
|
$
|
-
|
Pro forma information (in 000's):
|
|
|
|
|
$
|
26,348
|
Net earnings attributable to Legacy Housing Corp
|
|
|
|
|
|
(9,448)
|
Pro forma provision for income taxes
|
|
|
|
|
$
|
16,900
|
Pro forma net income
|
|
|
|
|
|
|
Pro forma weighted-average common shares outstanding:
|
|
|
|
|
|
|
Pro forma basic and diluted
|
|
|
|
|
|
20,000,000
|
Pro forma net income per share:
|
|
|
|
|
|
|
Pro forma basic and diluted
|
|
|
|
|
$
|
0.84
|
15. RELATED PARTY TRANSACTIONS
Bell Mobile Homes, a retailer owned by one of the Company’s significant shareholders, purchases manufactured homes from the Company. Accounts receivable balances due from Bell Mobile Homes were $414 and $385 as of December 31, 2018 and 2017, respectively. Accounts payable balances due to Bell Mobile Homes for maintenance and related services were $123 and $57 as of December 31, 2018 and 2017, respectively. Home sales to Bell Mobile Homes were $3,640 and $2,529 for the years ended December 31, 2018 and 2017, respectively. Rebates paid to Bell Mobile Homes were $390 and $246 for the years ended December 31, 2018 and 2017, respectively.
Shipley Bros., Ltd. (“Shipley Bros.”), a retailer owned by one of the Company’s significant shareholders, purchases manufactured homes from the Company. Accounts receivable balances due from Shipley Bros. were $832 and $41 as of December 31, 2018 and 2017, respectively.
On February 2, 2016, the Company entered into a $1,500 note payable agreement with stated annual interest rates of 3.75% with a related party through common ownership. The note was due on demand. Interest paid on the note payable to an affiliate was $47 and $56 for the years ended December 31, 2018 and 2017, respectively. The balance outstanding on the note payable at December 31, 2017 was $1,500. On October 18, 2018, this note payable was paid in full.
During the fourth quarter of 2018, the Company has a receivable of $375 from a principal shareholder for certain business expenses related to a potential business venture. This amount is included in the Company’s accounts receivable balance as of December 31, 2018.
Table of Contents
LEGACY HOUSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
16. SUBSEQUENT EVENTS
On January 16, 2019, the Company sold an additional 600,000 shares of its common stock at the IPO price of $12.00 per share, less the underwriting discount, pursuant to the exercise in full of the underwriters’ option to purchase additional shares to cover over-allotments in connection with the Company’s IPO.
In connection with the preparation of these financial statements, an evaluation of subsequent events was performed through the date of filing and there were no other events that have occurred that would require adjustments to the financial statements.
17. UNAUDITED PRO FORMA TAX PROVISION AND NET INCOME PER SHARE
The Company computed a pro forma income tax provision for the year ended December 31, 2017, as if the Company was subject to income taxes since January 1, 2017, using an effective tax rate of 35.9%. The Company’s pro forma basic net income per common share amount for the year ended December 31, 2017 has been computed based on the weighted‑average number of shares of common stock outstanding as if the common shares issued at the corporate conversion were outstanding for that entire period.