NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION
(A) Organization
The Company is a Nevada corporation whose principal activities
together with its affiliates, acquires, owns, and operates
manufactured housing communities. Mobile Home Rental Holdings
(“MHRH”) was formed in April 2016 to acquire the assets
for Pecan Grove MHP in November 2016 and Butternut MHP in April
2017. To continue the acquisition and aggregation of mobile home
parks, MHRH intend to raise capital in the public markets.
Therefore, on October 21, 2017, MHRH was acquired by and merged
with a public entity Stack-it Storage, Inc. (OTC: STAK). As part of
the merger transaction, Stack-it Storage, Inc. changed its name to
Manufactured Housing Properties Inc. (OTC: MHPC).
For accounting purposes, this transaction was accounted for as a
reverse merger and has been treated as a recapitalization of
Stack-it Storage, Inc. with Manufactured Housing Properties, Inc.
as the accounting acquirer.
Basis of Presentation
The Company prepares its consolidated financial statements under
the accrual basis of accounting, in conformity with accounting
principles generally accepted in the United States of America
(“GAAP”).
The Company’s subsidiaries are all formed in the state of
North Carolina as Limited Liability Companies. The acquisition and
date of consolidation are as follows:
|
Date of Consolidation
|
|
Subsidiary
|
|
Ownership
|
|
October
2016
|
|
Pecan
Grove MHP, LLC
|
|
100%
|
|
April
2018
|
|
Butternut
MHP, LLC
|
|
100%
|
|
November
2018
|
|
Azalea
MHP, LLC
|
|
100%
|
|
November
2018
|
|
Holly
Faye MHP, LLC
|
|
100%
|
|
November
2018
|
|
Chatham
MHP, LLC
|
|
100%
|
|
November
20178
|
|
Lake
View MHP, LLC
|
|
100%
|
|
December,
2018
|
|
Maple
Hills MHP, LLC
|
|
100%
|
All intercompany transactions and balances have been eliminated in
consolidation. The Company does not have a majority or minority
interest in any other company, either consolidated or
unconsolidated.
Revenue Recognition
The Company follows Topic 606 of the FASB Accounting Standards
Codification for revenue recognition and ASU 2014-09. On January 1,
2018, the Company adopted ASU 2014-09, which is a comprehensive new
revenue recognition model that requires revenue to be recognized in
a manner to depict the transfer of goods or services to a customer
at an amount that reflects the consideration expected to be
received in exchange for those goods or services. The Company
considers revenue realized or realizable and earned when all the
five following criteria are met: (1) Identify the Contract with a
Customer, (2) Identify the Performance Obligations in the Contract,
(3) Determine the Transaction Price, (4) Allocate the Transaction
Price to the Performance Obligations in the Contract, and (5)
Recognize Revenue When (or As) the Entity Satisfies a Performance
Obligation. Results for reporting periods beginning after January
1, 2018 are presented under ASU 2014-09, while prior period amounts
are not adjusted and continue to be reported under the previous
accounting standards. There was no impact to revenues as a result
of applying ASU 2014-09 for the quarter ended March 31, 2019, and
there have not been any significant changes to our business
processes, systems, or internal controls as a result of
implementing the standard. The Company recognizes rental income
revenues on a monthly basis based on the terms of the lease
agreement which are for either the land or a combination of both,
the mobile home and land. Home sales revenues are recognized upon
the sale of a home with an executed sales agreement. The Company
has deferred revenues from home lease purchase options and records
those option fees as deferred revenues and then records them as
revenues when (1) the lease purchase option term is completed and
title has been transferred, or (2) the leaseholder defaults on the
lease terms resulting in a termination of the agreement which
allows us to keep any payments as liquidated damages.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Accounts Receivable
Accounts receivable consist primarily of amounts currently due from
residence. Accounts receivables are reported in the balance sheet
at outstanding principal adjusted for any charge-offs and the
allowance for losses. The Company records an allowance for bad debt
when receivables are over 90 days old.
Acquisitions
The Company accounts for acquisitions in accordance with ASC 805,
Business Combinations (“ASC 805”) and allocates the
purchase price of the property based upon the fair value of the
assets acquired, which generally consist of land, site and land
improvements, buildings and improvements and rental homes. The
Company allocates the purchase price of an acquired property
generally determined by internal evaluation as well as third-party
appraisal of the property obtained in conjunction with the
purchase.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share
is calculated by dividing net income (loss) by the weighted average
number of common shares outstanding plus the weighted average
number of net shares that would be issued upon exercise of stock
options pursuant to the treasury stock method. Total dilutive
securities outstanding as of March 31, 2019 and 2018 totaled
541,334 and 698,000 stock options, respectively and 0 and 786,695
convertible shares, respectively, which are not included in
dilutive loss per share as the effect would be
anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period.
The Company’s significant accounting estimates and
assumptions affecting the consolidated financial statements were
the estimates and assumptions used in valuation of equity and
derivative instruments. Those significant accounting estimates or
assumptions bear the risk of change due to the fact that there are
uncertainties attached to those estimates or assumptions, and
certain estimates or assumptions are difficult to measure or
value.
Management bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources.
Management regularly reviews its estimates utilizing currently
available information, changes in facts and circumstances,
historical experience and reasonable assumptions. After such
reviews, and if deemed appropriate, those estimates are adjusted
accordingly. Actual results could differ from those estimates.
Significant estimates include the assumptions used in valuing
equity-based transactions, valuation of deferred tax assets,
depreciable lives of property and equipment and valuation of
investment property.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Investment Property and Equipment and Depreciation
Property and equipment are carried at cost. Depreciation for Sites
and Building is computed principally on the straight-line method
over the estimated useful lives of the assets (ranging from 15 to
25 years). Depreciation of Improvements to Sites and Buildings,
Rental Homes and Equipment and Vehicles is computed principally on
the straight-line method over the estimated useful lives of the
assets (ranging from 3 to 25 years). Land Development Costs are not
depreciated until they are put in use, at which time they are
capitalized as Sites and Land Improvements. Interest Expense
pertaining to Land Development Costs are capitalized. Maintenance
and Repairs are charged to expense as incurred and improvements are
capitalized. The costs and related accumulated depreciation of
property sold or otherwise disposed of are removed from the
financial statement and any gain or loss is reflected in the
current year’s results of operations.
Impairment Policy
The Company applies Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) 360-10, Property, Plant
& Equipment (“ASC 360-10”) to measure impairment in
real estate investments. Rental properties are individually
evaluated for impairment when conditions exist which may indicate
that it is probable that the sum of expected future cash flows (on
an undiscounted basis without interest) from a rental property is
less than the carrying value under its historical net cost basis.
These expected future cash flows consider factors such as future
operating income, trends and prospects as well as the effects of
leasing demand, competition and other factors. Upon determination
that a permanent impairment has occurred, rental properties are
reduced to their fair value. For properties to be disposed of, an
impairment loss is recognized when the fair value of the property,
less the estimated cost to sell, is less than the carrying amount
of the property measured at the time there is a commitment to sell
the property and/or it is actively being marketed for sale. A
property to be disposed of is reported at the lower of its carrying
amount or its estimated fair value, less its cost to sell.
Subsequent to the date that a property is held for disposition,
depreciation expense is not recorded.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments
purchased with an original maturity of three months or less to be
cash equivalents.
The Company maintains cash balances at banks and deposits at times
may exceed federally insured limits. Management believes that the
financial institutions that hold the Company's cash are financially
secure and, accordingly, minimal credit risk exists. At March 31,
2019 and December 31, 2018, the Company had no cash balances above
the FDIC-insured limit, respectively.
Stock Based Compensation
All stock based payments to employees, nonemployee consultants, and
to nonemployee directors for their services as directors, including
any grants of restricted stock and stock options, are measured at
fair value on the grant date and recognized in the statements of
operations as compensation or other expense over the relevant
service period in accordance with FASB Accounting Standards
Codification Topic 718. Stock based payments to nonemployees are
recognized as an expense over the period of performance. Such
payments are measured at fair value at the earlier of the date a
performance commitment is reached or the date performance is
completed. In addition, for awards that vest immediately and are
nonforfeitable the measurement date is the date the award is
issued. The Company recorded stock option expense of $8 and $17
during the three months ended March 31, 2019 and 2018,
respectively.
Fair Value of Financial Instruments
We follow paragraph 825-10-50-10 of the FASB Accounting Standards
Codification for disclosures about fair value of our financial
instruments and paragraph 820-10-35-37 of the FASB Accounting
Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of our financial instruments. Paragraph
820-10-35-37 establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and expands disclosures about
fair value measurements. To increase consistency and comparability
in fair value measurements and related disclosures, Paragraph
820-10-35-37 establishes a fair value hierarchy which prioritizes
the inputs to valuation techniques used to measure fair value into
broad levels. The fair value hierarchy gives the highest priority
to quoted prices (unadjusted) in active markets for identical
assets or liabilities and the lowest priority to unobservable
inputs.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments.” ASU 2016-13 requires
that entities use a new forward looking “expected loss”
model that generally will result in the earlier recognition of
allowance for credit losses. The measurement of expected credit
losses is based upon historical experience, current conditions, and
reasonable and supportable forecasts that affect the collectability
of the reported amount. ASU No. 2016-13 is effective for annual
reporting periods, including interim reporting periods within those
periods, beginning after December 15, 2019. The Company is
currently evaluating the potential impact this standard may have on
the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
“Leases.” ASU 2016-02 amends the existing accounting
standards for lease accounting, including requiring lessees to
recognize most leases on their balance sheets and making targeted
changes to lessor accounting. The standard requires a modified
retrospective transition approach for all leases existing at, or
entered into after, the date of initial application, with an option
to use certain transition relief. ASU 2016-02 will be effective for
annual reporting periods beginning after December 15, 2018. Early
adoption is permitted. The Company has evaluated the potential
impact this standard may have on the consolidated financial
statements and determined that it had no impact on the consolidated
financial statements.
In June 2018, the FASB issued ASU 2018-07
“Compensation –
Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.”
This ASU relates to the accounting for
non-employee share-based payments. The amendment in this Update
expands the scope of Topic 718 to include all share-based payment
transactions in which a grantor acquired goods or services to be
used or consumed in a grantor’s own operations by issuing
share-based payment awards. The ASU excludes share-based payment
awards that relate to (1) financing to the issuer or (2) awards
granted in conjunction with selling goods or services to customers
as part of a contract accounted for under Topic 606, Revenue from
Contracts from Customers. The share-based payments are to be
measured at grant-date fair value of the equity instruments that
the entity is obligated to issue when the good or service has been
delivered or rendered and all other conditions necessary to earn
the right to benefit from the equity instruments have been
satisfied. This standard will be effective for public business
entities for fiscal years beginning after December 15, 2018,
including interim periods within that fiscal year. For all other
entities, the amendments are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted, but
no earlier than an entity’s adoption of Topic 606. We are
currently reviewing the provisions of this ASU to determine if
there will be any impact on our results of operations, cash flows
or financial condition.
Management does not believe that any other recently issued, but not
yet effective accounting pronouncements, if adopted, would have a
material effect on the accompanying Consolidated Financial
Statements.
NOTE 2 – GOING CONCERN
The ability of the Company to continue its operations as a going
concern is dependent on management’s plans, which include the
raising of capital through debt and/or equity markets with some
additional funding from other traditional financing sources,
including term notes, until such time that funds provided by
operations are sufficient to fund working capital requirements.
There is substantial doubt about the Company’s ability to
continue as a going concern.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The Company will require additional funding to finance the growth
of its current and expected future operations as well as to achieve
its strategic objectives. The Company believes its current
available cash along with anticipated revenues may be insufficient
to meet its cash needs for the near future. There can be no
assurance that financing will be available in amounts or terms
acceptable to the Company, if at all. The accompanying unaudited
condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. These unaudited condensed consolidated financial
statements do not include any adjustments relating to the recovery
of the recorded assets or the classification of the liabilities
that might be necessary should the Company be unable to continue as
a going concern.
Our working capital has been provided by our operating activities
and our related party note. As of March 31, 2019, the related party
entity with a common ownership to the Company’s president
loaned the Company $897,708 for costs related to Reorganization
cost and working capital. The related party note has a five-year
term with no annual interest and principal payments are deferred to
maturity date for a total credit line of $1.5 million. Except our
line of credit, generally, our promissory notes on our acquisitions
range from 4.5% to 7.0% with 20 to 25 years principal amortization.
Two of the promissory notes had an initial 6 months period on
interest only payments. The Line of Credit is interest only payment
based on 8%, and 10% deferred till maturity to be paid with
principal balance. We plan to meet our short-term liquidity
requirements of approximately $1,890,348 for the next twelve
months, generally through available cash as well as net cash
provided by operating activities and availability under our
existing related party note of $897,708. We also have availability
from our lenders under our loan agreements for Capital expenditure
needs on our acquisitions. We expect these resources to help the
Company meet operating working capital requirements. The ability of
the Company to continue its operations as a going concern is
dependent on management’s plans, which include raising of
capital through debt and/or equity markets with some additional
funding from other traditional financing sources, including term
notes.
NOTE 3 –
Fixed Assets
|
Property and
equipment consists of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$
4,602,271
|
$
4,357,950
|
|
Site and Land
Improvements
|
6,781,845
|
6,781,845
|
|
Buildings and
Improvements
|
1,474,736
|
1,441,222
|
|
Acquisition
Cost
|
151,007
|
140,758
|
|
|
13,009,859
|
12,721,775
|
|
Less: accumulated
depreciation and amortization
|
(802,516
)
|
(699,184
)
|
|
|
$
12,207,343
|
$
12,022,591
|
Depreciation
and amortization expense totaled $134,926 and $132,822
for the three months ended March 31,
2019, and 2018
,
respectively.
During
the three months ended March 31, 2019 the Company acquired the 25%
minority interest in Pecan Grove MHP LLC resulting in a purchase
price difference of 244,321 that was allocated to land. The company
also invested in additional buildings and improvements totaling
$33,514 and $3,502 for the three months ended March 31, 2019 and
2018, respectively.
As of
March 31, 2019, the Company wrote off mortgage cost of $68,195 and
capitalized $110,039 of mortgage cost related to the refinancing
from five of our nine existing communities.
NOTE 4 – PROMISSORY NOTES
During
the years ended December 31, 2017 and 2016, the company entered
into promissory notes payable to lenders related to the acquisition
of seven manufactured housing communities.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
During
the three months ended March 31, 2019, the Company refinanced a
total of $4,942,319 from our current loans payable to $8,241,000 of
new notes payable from five of our nine existing communities,
resulting in an additional loan payable of $3,320,859. The Company
used the additional loans payable proceeds from the refinance to
retire our Convertible Note Payable of $2,754,550 plus accrued
interest. As of March 31, 2019, the Company wrote off mortgage cost
of $68,195 and capitalized $110,039 of mortgage cost due to the
refinancing.
Except
our line of credit, generally, the promissory notes range from 4.5%
to 7.0% with 20 to 25 years principal amortization. Two of the
promissory notes had an initial 6 months period on interest only
payments. The Line of Credit is interest only payment based on 8%,
and 10% deferred till maturity to be paid with principal balance.
The Line of Credit originally awarded the lender 455,000 shares of
common stock as compensation, which resulted in making the lender a
related party due to their significant ownership.
The promissory
notes are secured by the real estate assets, and the line of credit
is guaranteed by the principal stockholder of the company. During
the three months ended March 31, 2019, the Company paid off the
entire balance on the Line of Credit of $2,754,550 plus interest
and amended the agreement to allow for the redeployment of the
$3,000,000 available, eliminated the conversion option
whereby the lender can convert the ratio of total
outstanding debt at time of exercise of the option into an amount
of newly issued shares of the company’s common stock equal
determined by dividing the outstanding indebtedness by $3,000,000
multiplied by 10% with a cap of 864,500 shares. The amendment
resulted in issuing an additional 545,000 shares with a fair value
of $305,200 for a total of 1,000,000 shares awarded to the
lender.
The
line of credit gives the lender the right and option to purchase
it’s pro rata share of debt or equity securities issued to
maintain up to 10% equity interest in the Company at the most
recent price of any equity transaction for seven years from the
amendment dated February 26, 2019.
|
The following are
terms of our secured outstanding debt:
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
Butternut MHP Land
LLC
|
3/30/20
|
6.500
%
|
$
1,129,802
|
$
1,134,971
|
|
Butternut MHP Land
LLC Mezz
|
4/1/27
|
7.000
%
|
285,318
|
287,086
|
|
Pecan Grove MHP
LLC
|
2/22/29
|
5.250
%
|
3,150,000
|
1,270,577
|
|
Azalea MHP
LLC
|
3/1/29
|
5.400
%
|
843,175
|
598,571
|
|
Holly Faye MHP
LLC
|
3/1/29
|
5.400
%
|
579,825
|
462,328
|
|
Chatham MHP
LLC
|
4/1/24
|
5.875
%
|
1,793,000
|
1,366,753
|
|
Lake View MHP
LLC
|
3/1/29
|
5.400
%
|
1,875,000
|
1,222,521
|
|
Maple MHP
LLC
|
1/1/23
|
5.125
%
|
2,728,670
|
2,743,303
|
|
Totals note
payables
|
|
|
12,384,791
|
9,086,110
|
|
|
|
|
|
|
Convertible notes
payable
|
12/12/21
|
18.000
%
|
-
|
2,754,550
|
|
Related Party notes
payable
|
9/30/22
|
(*)
|
897,708
|
890,632
|
|
Total convertible
note and notes payable including related party
|
|
|
$
13,282,499
|
$
12,731,292
|
(*)
As of March 31, 2019, a related
party entity with a common ownership to the Company’s
president loaned the Company $897,708 for working capital. The note
has a three-year term with no annual interest and principal
payments are deferred to maturity date. As of March 31, 2019 and
2018, the Company recorded imputed interest related to the note of
$14,004 and $0, respectively.
Maturities of Long Term Obligations for Five Years and
Beyond
The
minimum annual principal payments of notes payable at March 31,
2019 by fiscal year were:
|
The minimum annual
principal payments of notes payable at September 30, 2018
were:
|
|
|
2019
|
$
164,981
|
|
2020
|
1,332,457
|
|
2021
|
230,828
|
|
2022
|
1,141,403
|
|
2023 and
Thereafter
|
10,412,830
|
|
Total minimum
principal payments
|
$
13,282,499
|
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 5 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various
lawsuits and legal proceedings, which arise in the ordinary course
of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may
arise that may harm its business. The Company is currently not
aware of any such legal proceedings or claims that they believe
will have, individually or in the aggregate, a material adverse
effect on its business, financial condition or operating
results.
NOTE 6 – STOCKHOLDERS’ EQUITY
Preferred Stock
Our Articles of Incorporation, as amended, further authorize the
Board of Directors to issue, from time to time, without stockholder
approval, up to 10,000,000 shares of preferred stock ($0.01par
value).
On May 8, 2019, we filed a certificate of designation with the
Nevada Secretary of State to establish our Series A Preferred
Stock. We designated a total of 4,000,000 shares of Preferred
Stock as “Series A Cumulative Convertible Preferred
Stock.” In the first quarter of 2019, we executed
Subscription Agreements relating to the sale of 280,000 shares of
our Series A Cumulative Convertible Preferred Stock for a total of
$700,000 in cash. This is a part of a total of $10,000,000 that we
are seeking through the sale of shares of our preferred stock to
acquire assets of manufactured housing communities in our pipeline.
The preferred share that will be issued will provide purchasers
with an annual return of 8% annually, paid in monthly
distributions, and 1.5 times the initial investment at redemption
after 5 years for a total IRR of approximately 16%. Our Series A
Cumulative Convertible Preferred Stockholder shall have the right
to convert into common stock at $2.50 per share at any time. The
Company shall have the right, but not the obligation, to cause a
conversion of the shares of its Series A Preferred Stock into
shares of our Common Stock at a conversion rate of $2.50 per share
of Common Stock when the Market Price of the shares of our Common
Stock reaches $2.50. Our Series A Cumulative Convertible Preferred
Stock have liquidity rights over our common shareholders. Our
Series A Cumulative Convertible Preferred Stock requires that the
Company may not authorize or issue any class or series of equity
securities ranking senior to the Shares as to dividends or
distributions upon liquidation or amend our charter to materially
and adversely change the terms of the shares of Series A Preferred
Stock without the affirmative vote of at least two-thirds of the
votes entitled to be cast on such matter by holders of outstanding
shares of Series A Preferred Stock, voting together as a class.
Otherwise, holders of the shares of Series A Preferred Stock will
not have any voting rights.
On May 8, 2019, we designated 1,000,000 shares of Series B
Cumulative Redeemable Preferred Stock, which we refer to as the
Series B Preferred Stock. The Series B Preferred Stock will rank,
as to dividend rights and rights upon our liquidation, dissolution,
or winding up, senior to our Common Stock
and
pari passu
with our Series A Cumulative Convertible
Preferred Stock, which we refer to as our Series A Preferred Stock.
Holders of our Series B Preferred Stock will be entitled to receive
cumulative dividends in the amount of $0.067 per share each month;
provided that upon an event of default (generally defined as our
failure to pay dividends when due or to redeem shares when
requested by a holder), such amount shall be increased to $0.083
per month. The liquidation preference for each share of our Series
B Preferred Stock is $10.00. Upon a liquidation, dissolution or
winding up of our company, holders of shares of our Series B
Preferred Stock will be entitled to receive the liquidation
preference with respect to their shares plus an amount equal to any
accrued but unpaid dividends (whether or not declared) to, but not
including, the date of payment with respect to such shares.
Commencing five years after any issuances and continuing
indefinitely thereafter, we shall have a right to call for
redemption the outstanding shares of our Series B Preferred Stock
at a call price equal to 150% of the original issue price of our
Series B Preferred Stock, and correspondingly, each holder of
shares of our Series B Preferred Stock shall have a right to put
the shares of Series B Preferred Stock held by such holder back to
us at a put price equal to 150% of the original issue purchase
price of such shares. The Series B Preferred Stock will have no
voting rights (except for certain matters) and are not convertible
into shares of our Common Stock.
Common Stock
Our authorized capital stock consists of 200,000,000 shares of
common stock, par value $0.01 per share.
Stock issued for Service
In November 2018, the Company issued 350,000 shares of stock for
services to an investment bank for advisory services with a fair
value of $171,500. $24,500 of that fair value was expensed during
the three months ended March 31, 2019.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
In February 2019, the Company issued an additional 545,000 shares
of stock for services to the same lender under an amendment to the
line of credit facility agreement with a fair value of
$305,200.
Equity Incentive Plan
In December 2017, the Board of Directors, with the approval of a
majority of the stockholders of the Company, adopted the Equity
Incentive Plan (the “Plan”) which will be administered
by a committee appointed by the Board.
The Company, under its Equity Incentive Plan, issues options to
various officers and directors. One third of the options vest
immediately, and two thirds vest in equal annual installments over
a two-year period. All of the options are exercisable at a purchase
price of $.01 per share.
The Company recorded stock option expense of $8 and $245 during the
three months ended March 31, 2019 and 2018,
respectively.
The following table summarizes the stock options outstanding as of
March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2018
|
541,334
|
$
0.01
|
9.0
|
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
Forfeited
/ cancelled / expired
|
-
|
-
|
-
|
Outstanding
at March 31, 2019
|
541,334
|
$
0.01
|
8.75
|
The aggregate intrinsic value in the table above represents the
total intrinsic value (the difference between the Company’s
closing stock price at fiscal year-end and the exercise price,
multiplied by the number of in-the-money options) that would have
been received by the option holder had all options holders
exercised their options on March 31, 2019. As of March 31, 2019,
there were 377,000 “in-the-money” options with an
aggregate intrinsic value of $373,230.
The
following table summarizes information concerning options
outstanding as of March 31, 2019 and December 31,
2018:
The
table below presents the weighted average expected life in years of
options granted under the Plan as described above. The
riskfree rate of the stock options is based on the U.S.
Treasury yield curve in effect at the time of grant, which
corresponds with the expected term of the option
granted.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The
fair value of stock options was estimated using the Black Scholes
option pricing model with the following assumptions for grants made
during the periods indicated.
|
|
|
|
|
Stock option assumptions
|
|
|
|
Risk-free
interest rate
|
-
|
1.95
%
|
|
Expected
dividend yield
|
-
|
0.00
%
|
|
Expected
volatility
|
-
|
16.71
%
|
|
Expected
life of options (in years)
|
-
|
10
|
Non-Controlling Interest
Prior to January 1st, 2019, the Company owned 75% of membership
interest in Pecan Grove MHP LLC. The remaining 25% was owned by
unaffiliated non-controlling investors.
In January 2019, we agreed to acquire the 25% minority interest in
Pecan Grove, and we issued 2,000,000 shares of our common stock to
Gvest Real Estate for the minority interest acquisition which were
valued at the historical cost value of $537,562.
NOTE 7
–
RELATED PARTY TRANSACTIONS
As of March 31, 2019, an entity with a common ownership to the
Company’s founder loaned the Company $897,708 for
reorganization cost and working capital. The note has a five-year
term with no annual interest and principal payments are deferred to
maturity date. The Company recorded an In-kind contribution of
interest in the amount of $14,004 and $0 for the three months ended
March 31, 2019 and 2018, respectively.
During the year ended December 31, 2017, the Company entered into a
debt agreement for a revolving line of credit. The Line of Credit
is interest only payment based on 8%, and 10% deferred until
maturity to be paid with principal balance. The Line of Credit is
personally guaranteed by the owner of the principal stockholder of
the Company.
During
the three months ended March 31, 2019, the Company paid off the
entire balance on the Line of Credit of $2,754,550 plus interest
and amended the agreement to allow for the redeployment of the
$3,000,000 available, eliminated the conversion option
whereby the lender can convert the ratio of total
outstanding debt at time of exercise of the option into an amount
of newly issued shares of the company’s common stock equal
determined by dividing the outstanding indebtedness by $3,000,000
multiplied by 10% with a cap of 864,500 shares. The amendment
resulted in issuing an additional 545,000 shares with a fair value
of $305,200 for a total of 1,000,000 shares awarded to the
lender.
The line of credit gives the lender an option to
purchase up to 10% of outstanding common shares at the most recent
price of any equity transaction.
In January 2019, we executed an agreement to acquire the 25%
minority interest in Pecan Grove, and issued 2,000,000 shares of
our common stock to Gvest Real Estate for the minority interest
acquisition which were valued at the historical cost value of
$537,562.
During the three months ended March 31, 2019, The Company recorded
$12,000 in revenues related to property management consulting
services provided to an entity with common ownership as our founder
and Chairman of the Board.
NOTE 8 – SUBSEQUENT EVENTS
In April 2019, we completed the acquisition of a manufactured
housing community comprised of 79 pads, located in the Columbia, SC
metro area totaling $1,965,000.
In May 2019, we completed the acquisition of a manufactured housing
community comprised of 96 pads, located in Chester, SC totaling
$2,500,000.
In April and May 2019, the Company used $270,000 and $1,000,000,
respectively from its Line of Credit for the two above
acquisitions.
In April and May 2019, we executed Subscription Agreements relating
to the sale of 90,000 shares of our Series A Cumulative Convertible
Preferred Stock for a total of $225,000 in cash, including 25,000
from a related party.
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Introductory Statements
Information
included or incorporated by reference in this filing may contain
forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to be materially
different from the future results, performance or achievements
expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally
identifiable by use of the words “may,”
“will,” “should,” “expect,”
“anticipate,” “estimate,”
“believe,” “intend” or
“project” or the negative of these words or other
variations on these words or comparable terminology.
Our Company
Manufactured
Housing Properties Inc. (“MHPC”), together with
its predecessors and consolidated subsidiaries, are referred to
herein as “we”, “us”, “our”, or
“the Company”, unless the context requires
otherwise.
MHPC
is a self-administered, self-managed, vertically integrated owner
and operator of manufactured housing communities. The Company earns
income from leasing manufactured home sites to tenants who own
their manufactured home and the rental of Company-owned
manufactured homes to residents of the communities.
We
originally incorporated in the State of Nevada as Frontier
Staffing, Inc. on September 3, 2003. Since our incorporation, we
have experienced several name changes and have engaged in several
different business endeavors. On October 12, 2017, Mobile Home
Rental Holdings LLC, a North Carolina limited liability company
which engaged in acquiring and operating manufactured housing
properties, merged with and into the Company. In connection with
the merger, the name of the Company was changed to Manufactured
Housing Properties Inc., the former business and management of MHRH
became the business and management, respectively, of the
Company.
As
of March 31, 2019, the Company owned and operated nine manufactured
housing communities containing approximately 512 developed sites,
and a total of approximately 190 Company-owned manufactured homes.
The communities are located in North Carolina, South Carolina, and
Tennessee.
The Manufactured Housing Community Industry
Manufactured
housing communities are residential developments designed and
improved for the placement of detached, single-family manufactured
homes that are produced off-site and installed and set on
residential sites within the community. The owner of a manufactured
home leases the site on which it is located and the lessee of a
manufactured home leases both the home and site on which the home
is located.
Manufactured
housing is accepted by the public as a viable and economically
attractive alternative to common stick-built single-family housing.
The affordability of the modern manufactured home makes it a very
attractive housing alternative. Manufactured housing is one of the
only non-subsidized affordable housing options in the U.S. Demand
for housing affordability continues to increase, but supply remains
static, as there are virtually no new manufactured housing
communities being developed. MHPC is committed to be an industry
leader in providing this affordable housing option and an improved
level of service to its residents, while producing an attractive
and stable risk adjusted return to our investors.
A
manufactured housing community is a land-lease community designed
and improved with home sites for the placement of manufactured
homes and includes related improvements and amenities. Each
homeowner in a manufactured housing community leases from the
community a site on which a home is located. The manufactured
housing community owner owns the underlying land, utility
connections, streets, lighting, driveways, common area amenities,
and other capital improvements and is responsible for enforcement
of community guidelines and maintenance of the community.
Generally, each homeowner is responsible for the maintenance of his
or her home and upkeep of his or her leased site. In some cases,
customers may rent homes with the community owner’s
maintaining ownership and responsibility for the maintenance and
upkeep of the home. This option provides flexibility for customers
seeking a more affordable, shorter-term housing option and enables
the community owner to meet a broader demand for housing and
improve occupancy and cash flow.
We
believe that manufactured housing communities have several
characteristics that make them an attractive investment when
compared to certain other types of real estate, particularly
multifamily, including:
●
Significant
Barriers to Entry
.
We believe that the supply of new
manufactured housing communities will be constrained due to
significant barriers to entry in the industry, including: (i)
various zoning restrictions and negative zoning biases against
manufactured housing communities; (ii) substantial upfront
costs associated with the development of infrastructure, amenities
and other offsite improvements required by various governmental
agencies, and (iii) a significant length of time before lease-up
and revenues can commence.
●
Diminishing
Supply
. Supply is decreasing
due to redevelopment of older parks.
Large Demographic Group of Potential Customers
.
We consider households earning between
$25,000 and $50,000 per year to be our core customer base. This
demographic group represents about 43 percent of overall U.S.
households, according to 2016 U.S. Census data.
●
Stable
Resident Base
.
We believe that manufactured housing
communities tend to achieve and maintain a stable rate of
occupancy, due to the following factors: (i) residents generally
own their own homes; moving a manufactured home from one community
to another involves substantial cost and effort and often results
in the abandonment of on-site improvements made by the resident
such as decks, garages, carports, and landscaping; and (iii)
residents enjoy a sense of community inherent in
manufactured housing communities similar to residential
subdivisions.
●
Fragmented
Ownership of Communities
.
Manufactured housing community
ownership in the United States is highly fragmented, with a
majority of manufactured housing communities owned by
individuals. The top five manufactured housing community
owners control approximately 7% of manufactured housing
community home sites.
●
Low
Recurring Capital Requirements
.
Although manufactured housing community
owners are responsible for maintaining the infrastructure of the
community, each homeowner is responsible for the upkeep of his or
her own home and home site, thereby reducing the
manufactured housing community owner’s ongoing
maintenance expenses and capital requirements.
●
Affordable
Homeowner Lifestyle
.
Manufactured housing communities offer
an affordable lifestyle typically unavailable in apartments,
including lack of common walls, a yard for each resident, the
ability to park by the front door, and a sense of
community.
Our Business Strategy
Our
business strategy is to acquire both stable and undervalued and
underperforming manufactured housing properties that have current
income. We believe that we can enhance value through our
professional asset and property management. Our property management
services are mainly comprised of tenant contracts and leasing,
marketing vacancies, community maintenance, enforce community
policies, establish and collect rent, and pay vendors. Our lot and
manufactured home leases are generally for one month and auto
renews monthly for an additional month.
Our
investment mission on behalf of our stockholders is to deliver an
attractive risk-adjusted return with a focus on value creation,
capital preservation, and growth. In our ongoing search for
acquisition opportunities we target and evaluate manufactured
housing communities nationwide.
The
Company may invest in improved and unimproved real property and may
develop unimproved real property. These property investments may be
located throughout the United States, but the Company has
concentrated on the Southeast. We are focused on acquiring
communities with significant upside potential and leveraging our
expertise to build long-term capital appreciation.
We
are one of four public companies in the manufactured housing
sector, but we are the only one not organized as a REIT, thereby
giving us flexibility to focus on growth through reinvestment of
income and employing higher leverage upon acquisition than the
REITs traditionally utilize due to market held norms around 50-60%.
This can give us a competitive advantage when bidding for assets.
Additionally, due to our small size, non-institutional sized deals
of less than 150 sites, which have less bidders and lower prices,
are accretive to our balance sheet.
Regulations, Insurance and Property Maintenance and
Improvement
Manufactured
home communities are subject to various laws, ordinances and
regulations. We believe that each community has all material
operating permits and approvals.
Our
properties are insured against risks that may cause property damage
and business interruption including events such as fire, business
interruption, general liability and if applicable, flood. Our
insurance policies contain deductible requirements, coverage limits
and particular exclusions. It is the policy of the Company to
maintain adequate insurance coverage on all of our properties; and,
in the opinion of management, all of our properties are adequately
insured. We also obtain title insurance insuring fee title to the
properties in an aggregate amount which we believe to be
adequate.
It
is the policy of the Company to properly maintain, modernize,
expand and make improvements to its properties when
required.
Results of Operations for the Three Months Ended March 31, 2019, as
Compared to the Three Months Ended March 31, 2018
Revenues
For
the three months ended March 31, 2019, we had net revenues of
$536,374 as compared to net revenues of $490,813 for the three
months ended March 31, 2018, an increase of $45,561. The increase
in revenues between the periods was primarily due to an average 10%
increase in occupancy and rates and the Company also recorded
$12,000 of property management revenues from a related
party.
Community Operating Expenses
Community
operating expenses of $199,821, or 37% of revenues, for the three
months ended March 31, 2019, decreased by $37,048 over the three
months ended March 31, 2018. The decrease in community operating
expenses between the periods was primarily due to approximately
$7,000 decrease in bad debt, and the ramp up of operational
efficiencies.
Corporate General and Administrative Expenses
Corporate
General and administrative expenses of $270,889 for the three
months ended March 31, 2019, increased by $14,593 over the three
months ended March 31, 2018. Corporate General and administrative
expenses are mainly comprised of Depreciation and Amortization of
$134,926, and corporate compensation related expenses of
$135,963.
Refinancing Expenses
During
the three months ended March 31, 2019, the Company refinanced a
total of $4,920,750 from our current loans payable to $8,241,000 of
new notes payable from five of our nine existing communities,
resulting in an additional loan payable of $3,320,859. The Company
used the additional loans payable proceeds from the refinance to
retire our Convertible Note Payable of $2,754,550 plus accrued
interest. As of March 31, 2019, the Company wrote off mortgage cost
of $68,195 and capitalized $110,039 of mortgage cost due to the
refinancing.
Interest Expense
Interest
expense of $232,706 for the three months ended March 31, 2019, a
nominal decrease of $1,426 over interest expense of $234,132 for
the three months ended March 31, 2018.
Net Loss
Net
loss was $719,314 for the three months ended March 31, 2019,
compared to net loss of $244,056 for the three months ended March
31, 2018. The increase in net loss during the three months ended
March 31, 2019 was primarily related to our refinancing cost of
$552,272, and depreciation expense of $134,926.
Liquidity and Capital Resources
The
Company’s principal liquidity demands have historically been,
and are expected to continue to be, acquisitions, capital
improvements, development and expansions of properties, debt
service, and purchases of manufactured home inventory and rental
homes.
In
addition to cash generated through operations, the Company uses a
variety of sources to fund its cash needs, including acquisitions.
The Company intends to continue to increase its real estate
investments. Our business plan includes acquiring communities that
yield in excess of our cost of funds and then investing in physical
improvements, including adding rental homes onto otherwise vacant
sites. Our ability to continue acquiring communities are dependent
on our ability to raise capital. There is no guarantee that any of
these additional opportunities will materialize or that the Company
will be able to take advantage of such opportunities. The growth of
our real estate portfolio depends on the availability of suitable
properties which meet the Company’s investment criteria and
appropriate financing.
Our
working capital has been provided by our operating activities and
our related party note. As of March 31, 2019, the related party
entity with a common ownership to the Company’s president
loaned the Company $897,708 for costs related to Reorganization
cost and working capital. The related party note has a five-year
term with no annual interest and principal payments are deferred to
maturity date for a total credit line of $1.5 million. Except our
line of credit, generally, our promissory notes on our acquisitions
range from 4.5% to 7.0% with 20 to 25 years principal amortization.
Two of the promissory notes had an initial 6 months period on
interest only payments. The Line of Credit is interest only payment
based on 8%, and 10% deferred till maturity to be paid with
principal balance. We plan to meet our short-term liquidity
requirements of approximately $1,890,348 for the next twelve
months, generally through available cash as well as net cash
provided by operating activities and availability under our
existing related party note of $897,708. We also have availability
from our lenders under our loan agreements for Capital expenditure
needs on our acquisitions. We expect these resources to help the
Company meet operating working capital requirements. The ability of
the Company to continue its operations as a going concern is
dependent on management’s plans, which include raising of
capital through debt and/or equity markets with some additional
funding from other traditional financing sources, including term
notes.
The
following table summarizes total current assets, liabilities and
working capital at March 31, 2019 compared to December 31,
2018.
|
|
|
|
|
|
|
|
|
Current
Assets
|
$
1,144,210
|
$
570,730
|
|
Current
Liabilities
|
$
1,890,348
|
$
1,053,174
|
|
Working Capital
(Deficit)
|
$
(746,138
)
|
$
(482,444
)
|
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Not
Applicable to Smaller Reporting Company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) that are designed to be
effective in providing reasonable assurance that information
required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC, and that such
information is accumulated and communicated to our management to
allow timely decisions regarding required disclosure. The
Company’s management, under the supervision and with the
participation of Raymond M. Gee, the Company’s Chief
Executive Officer and Michael Z. Anise, Chief Financial (and
principal accounting) Officer, carried out an evaluation of the
effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) of the Exchange Act) as March 31, 2019. Based upon
that evaluation and the identification of the material weakness in
the Company’s internal control over financial reporting as
described below under “Management’s Report on Internal
Control over Financial Reporting,” the Chief Executive
Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were ineffective
as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial
Reporting
Management is
responsible for establishing and maintaining adequate internal
control over financial reporting of the Company. Management, with
the participation of our principal executive officer and principal
financial officer, has evaluated the effectiveness of our internal
control over financial reporting as of March 31, 2019, based on the
criteria established in 2013 Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of
March 31, 2019, our internal control over financial reporting is
not effective in providing reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally
accepted accounting principles because of the Company’s
limited resources and limited number of employees. To mitigate the
current limited resources and limited employees, we rely heavily on
direct management oversight of transactions, along with the use of
legal and accounting professionals. As we grow, we expect to
increase our number of employees, which will enable us to implement
adequate segregation of duties within the internal control
framework.
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 errors 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, but are not limited to, the realities that judgments in
decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events and there
can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
Changes in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting as
defined in Rule 13a-15(f) under the Exchange Act that occurred
during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.