# Legacy Housing Corp: Form 10-Q for the period ended Mar 31, 2024

- Company: [Legacy Housing Corp](/companies/legh.md) (CIK 1436208)
- Form: 10-Q
- Filed: 2024-05-09
- Accepted by EDGAR: May 9, 2024, 17:11 ET
- Period: 2024-03-31
- Accession: 0001558370-24-007647
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1436208/000155837024007647/legh-20240331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1436208/000155837024007647/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $30.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $20.5m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $5.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $16.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $276.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $3.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $15.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.60 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.62 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 25,125,016 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $10.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $871.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $1.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-03-31 | $621.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $146.3m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $510.0m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $38.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $59.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $450.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 24,466 characters.

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

### Overview

We build, sell and finance manufactured homes and “tiny houses” that are distributed through a network of independent retailers and company owned stores and also sold directly to manufactured home communities. We are the fourth largest producer of manufactured homes in the United States as ranked by the number of homes manufactured based on information available from the Manufactured Housing Institute and the Institute for Building Technology and Safety for the twelve month period ending December 31, 2023. With current operations focused primarily in the southern United States, we offer our customers an array of quality homes ranging in size from approximately 395 to 2,667 square feet consisting of 1 to 5 bedrooms and 1 to 3 1/2 bathrooms. Our homes range in price, at retail, from approximately $33,000 to $180,000. For the three months ended March 31, 2024 and 2023, we sold 645 and 810 home sections, respectively (which are entire modules or single floors).

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

We believe our company is one of the most vertically integrated in the manufactured housing industry, allowing us to offer a complete solution to our customers. We manufacture custom made homes using quality materials, distribute those homes through our expansive network of independent retailers and company owned distribution locations and provide tailored financing solutions for our customers. Our homes are constructed in the United States at one of our three manufacturing facilities in accordance with the construction and safety standards of the U.S. Department of Housing and Urban Development (“HUD”). Our factories employ high volume production techniques that allow us to produce, on average, approximately 70 home sections, or 60 fully completed homes depending on product mix, in total per week. We use quality materials and operate our own component manufacturing facilities for many of the items used in the construction of our homes. Each home can be configured according to a variety of floor plans and equipped with features such as fireplaces, central air conditioning and state of the art kitchens.

Our homes are marketed under our premier “Legacy” brand name and, as of March 31, 2024, are sold to consumers, primarily across 15 states through a network of independent retail locations, 13 company owned retail locations and through direct sales to owners of manufactured home communities. Our 13 company owned retail locations, including 11 Heritage Housing stores and two Tiny House Outlet stores, exclusively sell our homes. For the three months ended March 31, 2024, approximately 54% of our manufactured homes were sold in Texas, followed by 18% in North Carolina, 8% in Oklahoma, 4% in Georgia, and 2% in New Mexico. For the three months ended March 31, 2023, approximately 38% of our manufactured homes were sold in Texas, followed by 19% in Georgia, 8% in Louisiana, 7% in Florida, and 4% in Alabama.

We offer three types of financing solutions to our customers. We provide inventory financing for our independent retailers who purchase homes from us and then sell them to consumers. We provide consumer financing for our products which are sold to end users through both independent and company owned retail locations. We also provide financing solutions to manufactured housing community owners that buy our products for use in their manufactured housing communities. Our ability to offer competitive financing options at our retail locations provides us with several competitive advantages and allows us to capture sales which may not have otherwise occurred without our ability to offer consumer financing.

### Factors Affecting Our Performance

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

- We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions. As of March 31, 2024, these properties include the following (dollars in thousands):

| ​ Location | ​ | ​ Description | ​ ​ | ​ Date of Acquisition | ​ ​ | ​ ​ Land | ​ ​ | ​ ​ ​ Improvements | ​ ​ | ​ ​ Total |
| --- | --- | --- | --- | --- | --- | ---: | --- | ---: | --- | ---: |
| Bastrop County, Texas |  | 368 Acres |  | April 2018 | ​ | $4,215 | ​ | $9,316 | ​ | $13,531 |
| Bexar County, Texas |  | 69 Acres |  | November 2018 | ​ | 842 | ​ | 107 | ​ | 949 |
| Horseshoe Bay, Texas | ​ | 133 Acres |  | Various 2018-2019 | ​ | 2,639 | ​ | 2,142 | ​ | 4,781 |
| Johnson County, Texas | ​ | 91.5 Acres |  | July 2019 | ​ | 449 | ​ | - | ​ | 449 |
| Venus, Texas | ​ | 50 Acres |  | August 2019 | ​ | 422 | ​ | 51 | ​ | 473 |
| Wise County, Texas | ​ | 81.5 Acres | ​ | September 2020 | ​ | ​ 889 | ​ | ​ - | ​ | ​ 889 |
| Bexar County, Texas | ​ | 233 Acres | ​ | February 2021 | ​ | ​ 1,550 | ​ | ​ 394 | ​ | ​ 1,944 |
| ​ | ​ | ​ | ​ | ​ | ​ | $11,006 | ​ | $12,010 | ​ | $23,016 |

- We also expect to provide financing solutions to owners of manufactured housing communities in a manner that includes developing new sites for products in or near urban locations where there is a shortage of sites to place our products. These solutions will be structured to give us an attractive return on investment and competitive the gross margins on the sale of homes to these new manufactured housing communities.
- Inflation recently was near its highest rate in the U.S. over the last 30 years. Our ability to maintain gross margins can be impacted adversely by sudden increases in specific costs, such as increases in material and labor. In addition, measures used to combat inflation, such as increases in interest rates, could also have an impact on the ability of home buyers and community developers to obtain affordable financing. We continue to explore opportunities to minimize the impact of inflation on our future profitability.
- Finally, our financial performance will be impacted by our ability to fulfill current orders for our manufactured homes from dealers and customers. Our Georgia manufacturing facility has unutilized square footage available and, with additional investment, we can add capacity to increase the number of homes that we can manufacture in that facility. We intend to increase production at the Georgia facility over time, particularly in response to orders generated from new markets. In order to maintain long term growth, we will need to be able to continue to properly estimate anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the timing of production schedules and the levels and utilization of inventory, equipment and personnel. We actively review organic and inorganic opportunities to add production capacity in attractive regions to meet future demand.

### Results of Operations

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

### Comparison of Three Months ended March 31, 2024 and 2023 (in thousands)

| ​ ​ ​ ​ Net revenue: | ​ ​ ​ ​ | ​ ​ Three months ended March 31, 2024 ​ ​ | ​ ​ | ​ ​ 2023 ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ $ change ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ % change ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Product sales | ​ | $30,833 | ​ | $43,318 | ​ | $(12,485) |  | (28.8)% |
| Consumer, MHP and dealer loans interest | ​ | 10,633 | ​ | 7,705 | ​ | 2,928 |  | 38.0% |
| Other | ​ | 1,777 | ​ | 1,834 | ​ | (57) |  | (3.1)% |
| Total net revenue | ​ | 43,243 | ​ | 52,857 | ​ | (9,614) |  | (18.2)% |
| Operating expenses: | ​ |  | ​ |  | ​ |  |  | ​ |
| Cost of product sales | ​ | 20,466 | ​ | 28,960 | ​ | (8,494) |  | (29.3)% |
| Selling, general administrative expenses | ​ | 5,889 | ​ | 5,412 | ​ | 477 |  | 8.8% |
| Dealer incentive | ​ | 138 | ​ | 131 | ​ | 7 |  | 5.3% |
| Total operating expenses | ​ | ​ 26,493 | ​ | ​ 34,503 | ​ | ​ (8,010) | ​ | (23.2)% |
| Income from operations | ​ | 16,750 | ​ | 18,354 | ​ | (1,604) |  | (8.7)% |
| Other income (expense) | ​ |  | ​ |  | ​ |  |  | ​ |
| Non‑operating interest income | ​ | 1,302 | ​ | 695 | ​ | 607 |  | 87.3% |
| Miscellaneous, net | ​ | 737 | ​ | 753 | ​ | (16) |  | (2.1)% |
| Interest expense | ​ | (276) | ​ | (91) | ​ | (185) |  | 203.3% |
| Total other | ​ | 1,763 | ​ | 1,357 | ​ | 406 |  | 29.9% |
| Income before income tax expense | ​ | 18,513 | ​ | 19,711 | ​ | (1,198) |  | (6.1)% |
| Income tax expense | ​ | (3,373) | ​ | (3,435) | ​ | 62 |  | (1.8)% |
| Net income | ​ | $15,140 | ​ | $16,276 | ​ | $(1,136) |  | (7.0)% |

Product sales primarily consist of direct sales, commercial sales, inventory finance sales and retail store sales. Product sales decreased $12.5 million, or 28.8%, during the three months ended March 31, 2024 as compared to the same period in 2023. This decrease was driven by an industry wide decrease in unit volumes shipped, primarily in direct sales, mobile home park sales and inventory finance sales categories.

Net revenue attributable to our factory-built housing consisted of the following during the first three months of 2024 and 2023:

*(in thousands)*

| ​ ​ ​ ​ ​ Net revenue: | ​ ​ ​ | ​ ​ Three months ended March 31, 2024 ​ | ​ | ​ ​ 2023 ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ ​ ​ $ Change ​ | ​ ​ ​ ​ ​ ​ ​ ​ % Change ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: |
| Product Sales | ​ | $30,833 | ​ | $43,318 | ​ | $(12,485) | (28.8)% |
| Total units sold | ​ | 547 | ​ | 688 | ​ | (141) | (20.5)% |
| Net revenue per unit sold | ​ | $56.4 | ​ | $63.0 | ​ | $(7) | (10.5)% |

For the three months ended March 31, 2024, our net revenue per product sold decreased primarily due to a shift in product mix to smaller units and to a large sale of homes from our leased home portfolio to a mobile home park customer at a lower average price than our typical new home. We had decreases in direct sales, commercial sales, inventory finance sales and other product sales, partially offset by an increase in retail store sales. Direct sales decreased $5.6 million, or 75.8% during the three months ended March 31, 2024 as compared to the same period in 2023. Commercial sales decreased $2.0 million, or 12.6% during the three months ended March 31, 2024 as compared to the same period in 2023. Inventory finance sales to dealers decreased $5.2 million, or 37.8% during the three months ended March 31, 2024 as compared to the same period in 2023. Retail store sales increased $0.8 million, or 20.9% during the three months ended March 31, 2024 as compared to the same period in 2023. Our revenue has decreased primarily due to a lower volume of shipments, a shift in product mix generally to smaller units and a slowdown in our dealer and mobile home park sales. Our current business is dependent on dealer sales, as reflected in direct sales and inventory finance sales, and our sales have slowed due to high levels of inventory on dealer lots and seasonality. Our retail sales have improved as we have focused on improving the performance of our company owned stores. Our mobile home park business has been impacted by higher interest rates, and transaction volumes and new development have declined.

Consumer, MHP and dealer loans interest income increased $2.9 million, or 38.0%, during the three months ended March 31, 2024 as compared to the same period in 2023 due to growth in our loan portfolios. Between March 31, 2024 and March 31, 2023 our consumer loan portfolio increased by $17.9 million, our MHP loan portfolio increased by $28.2 million, and our dealer finance notes increased by $2.1 million.

Other revenue primarily consists of contract deposit forfeitures, consignment fees, commercial lease rents, service fees and other miscellaneous income and decreased $0.1 million, or 3.1%, during the three months ended March 31, 2024 as compared to the same period in 2023. This decrease was primarily due to a $1.0 million decrease in dealer finance fees, a $0.2 million decrease in commercial lease rents, partially offset by a $1.1 million increase in forfeited deposits.

The cost of product sales decreased $8.5 million, or 29.3%, during the three months ended March 31, 2024 as compared to the same period in 2023. The decrease in costs is primarily related to the decrease in units sold.

Selling, general and administrative expenses increased $0.5 million, or 8.8%, during the three months ended March 31, 2024 as compared to the same period in 2023. This increase was primarily due to a $0.3 million increase in warranty costs, a $0.1 million increase in legal expense, a $0.2 million increase in professional fees and a net $0.2 million increase in other miscellaneous costs, partially offset by a $0.3 million decrease in loan loss provision.

Dealer incentive expense remained the same during the three months ended March 31, 2024 as compared to the same period in 2023.

Other income (expense) increased $0.4 million, or 29.9%, during the three months ended March 31, 2024 as compared to the same period in 2023. There was an increase of $0.6 million in non-operating interest income offset by an increase of $0.2 million in interest expense.

Income tax expense remained the same during the three months ended March 31, 2024 as compared to the same period in 2023. The effective tax rate for the three months ended March 31, 2024 and 2023 was 18.2% and 17.4%, respectively, and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes.

### Liquidity and Capital Resources

### Liquidity

We believe that cash flow from operations and cash at March 31, 2024, and availability on our lines of credit will be sufficient to fund our operations and provide for growth for the next 12 to 18 months and into the foreseeable future. On July 28, 2023, we terminated our credit agreement with Capital One, N.A. and entered into a new credit agreement with Prosperity Bank that expanded and extended our credit availability (see ***Lines of Credit***, below).

### Cash

We maintain cash balances in bank accounts that may, at times, exceed federally insured limits. We have not incurred any losses from such accounts, and management considers the risk of loss to be minimal. As of March 31, 2024, we had approximately $0.6 million in cash, compared to $0.7 million as of December 31, 2023. We consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents.

### Cash Flow Activities

*(in thousands)*

| ​ ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ | ​ ​ Three Months Ended March 31, 2024 ​ ​ | ​ ​ | ​ ​ 2023 ​ ​ |
| --- | --- | ---: | --- | ---: |
| Net cash provided by (used in) operating activities | ​ | $10,806 | ​ | $(2,691) |
| Net cash provided by (used in) investing activities | ​ | $2,721 | ​ | $(2,186) |
| Net cash (used in) provided by financing activities | ​ | $(13,654) | ​ | $5,292 |
| Net change in cash | ​ | $(127) | ​ | $415 |
| Cash at beginning of period | ​ | $748 | ​ | $2,818 |
| Cash at end of period | ​ | $621 | ​ | $3,233 |

### Comparison of Cash Flow Activities from March 31, 2024 to March 31, 2023

Net cash provided by operating activities was $10.8 million during the three months ended March 31, 2024, compared to net cash of $2.7 million used in operating activities during the three months ended March 31, 2023. This change was a result of an increase of cash used for a decrease in operating income before non-cash adjustments, decreased MHP originations net of collections, decreased dealer inventory loan originations net of collections, decrease in the reduction of accounts receivable, an increase in the change in inventories, an increase in the change in prepaid expenses and other current assets, an increase in the change in accounts payable and accrued liabilities, an increase in the change in customer deposits, and increase in the change in other assets – leased mobile homes and an increase in the change in escrow liability.

Net cash provided by investing activities of $2.7 million during the three months ended March 31, 2024 was primarily attributable to $4.1 million of collections of loans we made to third parties for the development of manufactured housing parks, offset by $0.9 million used in improvements and development of property, plant and equipment and $0.6 million used to issue notes to third parties for the development of manufactured housing parks.

Net cash used in financing activities of $13.7 million during the three months ended March 31, 2024 was attributable to net payments of $11.9 million on our lines of credit, $1.9 million of stock repurchases and $0.1 million received from the exercise of stock options. Net cash provided by financing activities of $5.3 million during the three months ended March 31, 2023 was attributable to net proceeds of $5.3 million on our lines of credit.

In November 2022, our Board of Directors approved a share repurchase program to authorize the repurchase of up to $10.0 million of the Company’s common stock. We repurchased 91,187 shares for $1.9 million in the open market during the three months ended March 31, 2024. As of March 31, 2024, we had a remaining authorization of approximately $8.1 million. Between April 1, 2024 and May 9, 2024, we repurchased 170,342 shares for $3.5 million in the open market.

### Lines of Credit

On July 28, 2023, the Company entered into a new Credit Agreement (the “Revolver”), by and among the Company as borrower, the financial institutions from time to time party thereto, as lenders, and Prosperity Bank as administrative agent. Subsequently, the Company repaid in full the balance due on its prior line of credit with Capital One, N.A. and all commitments under this prior line of credit were terminated. The Revolver provides for a four-year senior secured revolving credit facility with an initial commitment of $50,000 and an additional $25,000 commitment under an accordion feature. The Revolver is secured by the Company’s consumer loans receivables and all escrow accounts associated with the consumer loans receivables. At the Company’s option, borrowings will bear interest at a per annum rate equal to, (i) Term Secured Overnight Financing Rate (“SOFR”) plus an applicable margin of 2.5% or 2.75% based upon the Company’s average quarterly borrowings under the Revolver or (ii) a base rate plus an applicable margin of 2.5% or 2.75% based upon the Company’s average quarterly borrowings under the Revolver. The Company paid certain arrangement fees and other fees in connection with the Revolver of approximately $271, which were capitalized as unamortized debt issuance costs and included within lines of credit balance in the accompanying balance sheets and are amortized to interest expense over the life of the Revolver. The Revolver matures July 28, 2027.

For the three months ended March 31, 2024, interest expense for the under the Revolver was $276, and for the three months ended March 31, 2023, interest expense under the prior line of credit was $91. The outstanding balance of the Revolver as of March 31, 2024 and December 31, 2023 was $11,797 and $23,680, respectively. The interest rate in effect as of March 31, 2024 and December 31, 2023 for the Revolver was 7.67% and 7.95%, respectively. The amount of available credit under the Revolver was $38,203 and $26,320 as of March 31, 2024 and December 31, 2023, respectively. The Revolver requires the Company to comply with certain financial and non-financial covenants. As of March 31, 2024, the Company was in compliance with all financial covenants, including that it maintain a maximum leverage ratio of no more than 1.00 to 1.00 and a minimum fixed charge coverage ratio of no less than 1.75 to 1.00.

### Contractual Obligations

The following table is a summary of contractual cash obligations as of March 31, 2024:

| ​ ​ ​ Contractual Obligations | ​ | ​ ​ Payments Due by Period (in thousands) ​ ​ Total | ​ ​ ​ ​ 2024 | ​ ​ ​ 2025 – 2026 | ​ ​ ​ 2027 – 2028 | ​ ​ After 2028 |
| --- | --- | ---: | ---: | ---: | ---: | ---: |
| Lines of credit | ​ | $11,797 | — | — | 11,797 | — |
| Operating lease obligations | ​ | $1,788 | 373 | 925 | 490 | — |

### Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, results of operations, liquidity or capital expenditures. However, we do have a repurchase agreement with a financial institution that provides inventory financing for independent retailers of our products. Under this agreement, we have agreed to repurchase homes at declining prices over the term of the agreement (24 months). Our obligation under this repurchase agreement ceases upon the purchase of the home by the retail customer. The maximum amount of our contingent obligations under such repurchase agreements was approximately $1,671 and $3,030 as of March 31, 2024 and December 31, 2023, respectively, without reduction for the resale value of the homes. We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements. We consider our obligations on current contracts to be immaterial, and accordingly we have not recorded any reserve for repurchase commitment as of March 31, 2024.

### Critical Accounting Estimates

Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. Our critical accounting estimates are identified and described in our Annual Report on Form 10-K for the year ended December 31, 2023.

### Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our March 31, 2024 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

### Emerging Growth Company Status

The Company’s status as an “emerging growth company” ended on December 31, 2023. An “emerging growth company,” as defined in the JOBS Act. Section 107 of the JOBS Act, provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

## Controls and procedures

As filed, 5,385 characters.

### Disclosure Controls and Procedures

We are subject to the periodic reporting requirements of the Exchange Act which requires designing disclosure controls and procedures to provide reasonable assurance that information we disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report. Based on the evaluation of our disclosure controls and procedures as of March 31, 2024, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of such date due to material weaknesses in internal control over financial reporting.

In light of the conclusion that our disclosure controls and procedures are considered ineffective as of March 31, 2024, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regard to this quarterly report. Accordingly, the Company believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this quarterly report.

### Material Weaknesses in Internal Control Over Financial Reporting

As previously disclosed in our Annual report on Form 10-K filed with the SEC for the year ended December 31, 2023 we identified material weaknesses in our internal control over financial reporting during the preparation of our financial statements. Under standards established by the PCAOB, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

The material weaknesses in financial reporting as of March 31, 2024 are summarized as follows:

- We determined that we have not sufficiently or adequately designed or implemented control activities and have a lack of documentation, review and approval of certain control activities. Additionally, those activities are not sufficiently monitored and tested;
- We determined that we do not have sufficient qualified accounting personnel to support the preparation of financial statements that are in compliance with U.S. GAAP and SEC reporting requirements; and
- We determined that we have not sufficiently or adequately designed or implemented information technology general controls over in-scope business processes and financial reporting systems.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the first quarter of fiscal 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake or fraud. Additionally, controls can be circumvented by individuals or groups of persons or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements in our public reports due to error or fraud may occur and not be detected.

Filed May 9, 2024.
Source: SEC EDGAR, the filing index for accession 0001558370-24-007647. Last ingested by Listed: Nov 4, 2026, 16:53 ET. No prices; not investment advice.