NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
Organization
Manufactured
Housing Properties Inc. (the “Company”) is a Nevada corporation whose principal activities are to acquire, own, and
operate manufactured housing communities.
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 accompanying unaudited condensed
consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information and
with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by GAAP for complete
financial statements. The December 31, 2019 consolidated balance sheet data were derived from audited financial statements but
do not include all disclosures required by GAAP. However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to the consolidated financial statements for the year ended December 31, 2019 included in the
Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on April 14, 2020. The interim
unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements
included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair statement of the financial
statements, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended March
31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
The
Company’s formation of all subsidiaries and date of consolidation are as follows:
Name
of Subsidiary
|
|
State
of Formation
|
|
Date
of Formation
|
|
Ownership
|
Pecan
Grove MHP LLC
|
|
North
Carolina
|
|
October
12, 2016
|
|
100%*
|
Butternut
MHP Land LLC
|
|
Delaware
|
|
March
1, 2017
|
|
100%
|
Azalea
MHP LLC
|
|
North
Carolina
|
|
October
25, 2017
|
|
100%
|
Holly
Faye MHP LLC
|
|
North
Carolina
|
|
October
25, 2017
|
|
100%
|
Chatham
Pines MHP LLC
|
|
North
Carolina
|
|
October
31, 2017
|
|
100%
|
Maple
Hills MHP LLC
|
|
North
Carolina
|
|
October
31, 2017
|
|
100%
|
Lakeview
MHP LLC
|
|
South
Carolina
|
|
November
1, 2017
|
|
100%
|
MHP
Pursuits LLC
|
|
North
Carolina
|
|
January
31, 2019
|
|
100%
|
Mobile
Home Rentals LLC
|
|
North
Carolina
|
|
September
30, 2016
|
|
100%
|
Hunt
Club MHP LLC
|
|
South
Carolina
|
|
March
8, 2019
|
|
100%
|
B&D
MHP LLC
|
|
South
Carolina
|
|
April
4, 2019
|
|
100%
|
Crestview
MHP LLC
|
|
North
Carolina
|
|
June
28, 2019
|
|
100%
|
Springlake
MHP LLC
|
|
Georgia
|
|
October
10, 2019
|
|
100%
|
ARC
MHP LLC
|
|
South
Carolina
|
|
November
13, 2019
|
|
100%
|
Countryside
MHP LLC
|
|
South
Carolina
|
|
March
12, 2020
|
|
100%
|
Evergreen
MHP LLC
|
|
Tennessee
|
|
March
17, 2020
|
|
100%
|
*
|
The
Company originally acquired a 75% interest. In January 2019, the Company acquired the
remaining 25% interest from a related party.
|
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.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue
Recognition
The Company’s revenues primarily
consist of rental revenues and fee and other income. The Company has the following revenue sources and revenue recognition policies:
|
·
|
Rental revenues include revenues from the leasing land lot or a combination of both, the mobile
home and land at our properties to tenants.
|
|
o
|
Revenues from the leasing of land lot or a combination of both, the mobile home and land at the
Company’s properties to tenants include (i) lease components, including land lot or a combination of both, the mobile home
and land, and (ii) reimbursement of utilities and account for the components as a single lease component in accordance with Accounting
Standards Codification (“ASC”) 842.
|
|
o
|
Revenues derived from fixed lease payments are recognized on a straight-line basis over the non-cancelable
period of the lease. The Company commences rental revenue recognition when the underlying asset is available for use by the lessee.
Revenue derived from the reimbursement of utilities are generally recognized in the same period as the related expenses are incurred.
The Company’s leases are month-to-month.
|
|
·
|
Fee and other income include late fees, violation fees and other revenue arising from contractual
agreements with third parties. This revenue is recognized as the services are transferred in accordance with ASC 606.
|
|
·
|
Mobile home sale revenues are recognized in accordance with Topic 606 of the Financial Accounting
Standards Board (“FASB”) ASC for revenue recognition. On January 1, 2018, the Company adopted Accounting Standards
Update (“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) identification of the contract with a customer, (2) identification of the performance obligations
in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations
in the contract, and (5) recognition of revenue when (or as) we satisfy a performance obligation.
|
Under ASC 842, the Company must assess
on an individual lease basis whether it is probable that the Company will collect the future lease payments. The Company considers
the tenant's payment history and current credit status when assessing collectability. When collectability is not deemed probable,
the Company will write-off the tenant's receivables, including straight-line rent receivable, and limit lease income to cash received.
Accounts
Receivable
Accounts
receivable consist primarily of amounts currently due from residents. 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 as asset acquisitions in accordance with ASC 805, “Business Combinations,” 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, 2020 and 2019 totaled 656,175 and
541,334 stock options, respectively, 1,890,000 and 280,000 convertible Preferred Series A shares, respectively, which are
convertible into common shares at $2.50 per share for a total of 756,000 and 112,000, respectively, which are not included in
dilutive loss per share as the effect would be anti-dilutive.
Use
of Estimates
The
presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that effect
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 reported period. Actual results could differ from those
estimates.
Investment
Property and Depreciation
Investment
property which consists of 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 period’s results of operations.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Impairment
Policy
The
Company applies FASB ASC 360-10, “Property, Plant & Equipment,” 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. There was no impairment during the three
months ended March 31, 2020 and 2019.
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, 2020 and December 31, 2019, the Company had approximately $1,155,724 and $2,553,454 above the
FDIC-insured limit, respectively, including restricted cash held for tenants security deposits of $335,905 and $316,035,
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 ASC 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 $539 and $8 during the three months ended March 31, 2020 and 2019, respectively.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB ASC for disclosures about fair value of its financial instruments and paragraph
820-10-35-37 of the FASB ASC to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework
for measuring fair value in 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.
Reclassifications
Certain
amounts in the prior period presentation have been reclassified to conform with the current presentation.
Income
Taxes
The Company accounts for income taxes under
the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements. Under this method, the Company determines deferred
tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities
by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets
to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination,
the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would
be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment
to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions
in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than
not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions
that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more
than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties,
if any, with income tax expense in the accompanying consolidated statement of operations. As of March 31, 2020, and December 31,
2019, there were no such accrued interest or penalties.
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,
2022. The Company is currently evaluating the potential impact this standard may have on the consolidated financial statements.
In March 2019, the FASB issued ASU No.
2019-01, “Leases (Topic 842): Codification Improvements.” ASU 2019-01 aligns the guidance for fair value of the underlying
asset by lessors with existing guidance in Topic 842. The ASU requires that the fair value of the underlying asset at lease commencement
is its cost reflecting in volume or trade discounts that may apply. However, if there has been a significant lapse of time between
the date the asset was acquired and the lease commencement date, the definition of fair value as outlined in Topic 820 should be
applied. In addition, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal
year in which a company adopts the new leases standard. The update is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. The Company is still evaluating the impact of this ASU on the Company’s
consolidated financial statements.
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 condensed consolidated financial statements.
Impact of Coronavirus Pandemic
In December 2019, a novel strain of coronavirus
was reported to have surfaced in Wuhan, China. The virus has since spread to over 150 countries and every state in the United States.
On March 11, 2020, the World Health Organization declared the outbreak a pandemic, and on March 13, 2020, the United
States declared a national emergency.
Most states and cities, including where
the Company’s properties are located, have reacted by instituting quarantines, restrictions on travel, “stay at home”
rules and restrictions on the types of businesses that may continue to operate, as well as guidance in response to the pandemic
and the need to contain it.
The Company is carefully reviewing all
rules, regulations, and orders and responding accordingly. The Company has taken steps to take care of its employees, including
providing the ability for employees to work remotely and implementing strategies to support appropriate social distancing techniques
for those employees who are not able to work remotely. The Company has also taken precautions with regard to employee, facility
and office hygiene as well as implementing significant travel restrictions. The Company is also assessing its business continuity
plans for all business units in the context of the pandemic. This is a rapidly evolving situation, and the Company will continue
to monitor and mitigate developments affecting its workforce, its tenants, and the public at large to the extent the Company is
able to do so.
The rules and restrictions put in place
have had a negative impact on the economy and business activity and may adversely impact the ability of the Company’s tenants,
many of whom may be restricted in their ability to work, to pay their rent as and when due. In addition, the Company’s
property managers may be limited in their ability to properly maintain the Company’s properties. Enforcing the
Company’s rights as landlord against tenants who fail to pay rent or otherwise do not comply with the terms of
their leases may not be possible as many jurisdictions, including those where are properties are located, have established rules
and/or regulations preventing us from evicting tenants for certain periods in response to the pandemic. If the Company is unable
to enforce its rights as landlords, our business would be materially affected.
If the current pace of the pandemic
cannot be slowed and the spread of the virus is not contained, the Company’s business operations could be further delayed
or interrupted. The Company expects that government and health authorities may announce new or extend existing restrictions, which
could require the Company to make further adjustments to its operations in order to comply with any such restrictions. The duration
of any business disruption cannot be reasonably estimated at this time but may materially affect the Company’s ability to
operate its business and result in additional costs.
The extent to which the pandemic may
impact the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted as of
the date hereof, including new information that may emerge concerning the severity of the pandemic and steps taken to
contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial, economic
and capital markets environment present material uncertainty and risk with respect to the Company’s performance, financial
condition, results of operations and cash flows.
NOTE 2 – Revision of Prior Year
Immaterial Misstatement
During the quarter ended March 31, 2020, the
Company identified a certain error in recording our minority interest buyout for Pecan Grove during the first quarter of 2019.
This error resulted in decreasing our land Investment Property and Equity by $244,321 and had no impact on our income statements.
The Company assessed the materiality of this
error considering both qualitative and quantitative factors and determined that for both the quarter and fiscal year ended December
31, 2019, the error was immaterial. The Company has decided to correct this error as revisions to our previously issued financial
statements and will adjust the Form 10-K when filed in succeeding periods of this fiscal year.
The table below present the impact of the revision
in the Company’s condensed consolidated financial statements.
|
|
December 31, 2019
|
|
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Balance Sheet / Statement of Changes in Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Investment Property
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
11,130,259
|
|
|
$
|
(244,321
|
)
|
|
$
|
10,885,938
|
|
Total Investment Property
|
|
|
34,811,785
|
|
|
|
(244,321
|
)
|
|
|
34,567,464
|
|
Net Investment Property
|
|
|
33,416,827
|
|
|
|
(244,321
|
)
|
|
|
33,172,506
|
|
Total Assets
|
|
|
38,152,131
|
|
|
|
(244,321
|
)
|
|
|
37,907,810
|
|
Additional Paid in Capital
|
|
|
1,004,170
|
|
|
|
(244,321
|
)
|
|
|
759,849
|
|
Total Stockholders’ Deficit
|
|
|
(2,712,554
|
)
|
|
|
(244,321
|
)
|
|
|
(2,956,875
|
)
|
Total Liabilities and Stockholders' Deficit
|
|
$
|
38,152,131
|
|
|
$
|
(244,321
|
)
|
|
$
|
37,907,810
|
|
The unaudited condensed consolidated
income statement and statement of cash flows are not presented because there is no impact to these statements.
NOTE 3 – INVESTMENT PROPERTY
Investment Property consists of the following
as of:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
(As Revised)
|
|
Investment Property
|
|
|
|
|
|
|
Land
|
|
$
|
12,094,338
|
|
|
$
|
10,885,938
|
|
Site and Land Improvements
|
|
|
20,286,401
|
|
|
|
17,466,801
|
|
Buildings and Improvements
|
|
|
7,396,472
|
|
|
|
6,214,725
|
|
Total Investment Property
|
|
|
39,777,211
|
|
|
|
34,567,464
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,750,330
|
)
|
|
|
(1,394,958
|
)
|
Net Investment Property
|
|
$
|
38,026,881
|
|
|
$
|
33,172,506
|
|
Depreciation and amortization expense totaled
$389,993 and $134,926 for the three months ended March 31, 2020, and 2019, respectively.
During the three months ended March 31,
2019, the Company acquired the 25% minority interest in Pecan Grove MHP LLC. The Company also acquired two manufactured
housing communities and accounted for them as asset acquisitions during the three months ended March 31, 2020 totaling
$5,310,767 (See note 8).
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – PROMISSORY NOTES
Secured Promissory Notes
The Company has issued promissory notes
payable to lenders related to the acquisition of its manufactured housing communities. These promissory notes range from 3.3% to
7.0% with 5 to 30 years principal amortization. Two of the promissory notes had an initial 6 months period on interest only payments.
The promissory notes are secured by the real estate assets and $7,471,738 for four assets were guaranteed by Raymond M. Gee, the
Company’s chairman, chief executive officer and owner of the principal stockholder of the Company.
During
the three months ended March 31, 2019, the Company refinanced a total of $4,940,750 from current loans payable to $8,241,000 of
new notes payable from five of the communities, resulting in an additional loan payable of $3,320,859. The Company used the additional
loans payable proceeds from the refinance to retire the related party note payable described below. During the three months ended
March 31, 2019, the Company wrote off mortgage costs of $68,195 and capitalized $110,039 of mortgage costs due to the refinancing.
As
of March 31, 2020, the Company recorded $222,768 of mortgage cost related to the two acquisitions.
The
following are terms of these notes:
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Balance
03/31/20
|
|
|
Balance
12/31/19
|
|
Butternut
MHP Land LLC
|
|
03/30/20
|
|
|
6.500
|
%
|
|
$
|
1,111,166
|
|
|
$
|
1,114,819
|
|
Butternut
MHP Land LLC Mezz
|
|
04/01/27
|
|
|
7.000
|
%
|
|
|
278,834
|
|
|
|
280,013
|
|
Pecan
Grove MHP LLC
|
|
02/22/29
|
|
|
5.250
|
%
|
|
|
3,086,021
|
|
|
|
3,095,274
|
|
Azalea
MHP LLC
|
|
03/01/29
|
|
|
5.400
|
%
|
|
|
824,965
|
|
|
|
835,445
|
|
Holly
Faye MHP LLC
|
|
03/01/29
|
|
|
5.400
|
%
|
|
|
579,825
|
|
|
|
574,096
|
|
Chatham
MHP LLC
|
|
04/01/24
|
|
|
5.875
|
%
|
|
|
1,760,497
|
|
|
|
1,771,506
|
|
Lake
View MHP LLC
|
|
03/01/29
|
|
|
5.400
|
%
|
|
|
1,851,006
|
|
|
|
1,857,266
|
|
B&D
MHP LLC
|
|
04/25/29
|
|
|
5.500
|
%
|
|
|
1,845,717
|
|
|
|
1,854,788
|
|
Hunt
Club MHP LLC
|
|
05/01/24
|
|
|
5.750
|
%
|
|
|
1,438,294
|
|
|
|
1,447,364
|
|
Crestview
MHP LLC
|
|
07/31/24
|
|
|
5.500
|
%
|
|
|
4,146,819
|
|
|
|
4,173,652
|
|
Maple
MHP LLC
|
|
01/01/23
|
|
|
5.125
|
%
|
|
|
2,668,253
|
|
|
|
2,688,653
|
|
Springlake
MHP LLC
|
|
11/14/22
|
|
|
3.310
|
%
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
ARC
MHP LLC
|
|
01/01/30
|
|
|
5.500
|
%
|
|
|
5,275,121
|
|
|
|
5,300,000
|
|
Countryside
MHP LLC
|
|
03/20/50
|
|
|
5.500
|
%
|
|
|
3,000,000
|
|
|
|
-
|
|
Evergreen
MHP LLC
|
|
04/01/32
|
|
|
3.990
|
%
|
|
|
1,150,000
|
|
|
|
-
|
|
Totals
note payables
|
|
|
|
|
|
|
|
|
33,016,518
|
|
|
|
28,992,876
|
|
Discount
Direct Lender Fees
|
|
|
|
|
|
|
|
|
(821,772
|
)
|
|
|
(633,629
|
)
|
Total
net of Discount
|
|
|
|
|
|
|
|
$
|
32,194,746
|
|
|
$
|
28,359,247
|
|
Related
Party Promissory Note
On May 8, 2017, the Company issued a
promissory note to Metrolina Loan Holdings, LLC (“Metrolina”) in the principal amount of $3,000,000. The note is interest
only payment based on 8%, and 10% deferred until maturity to be paid with principal balance. The note originally awarded Metrolina
455,000 shares of Common Stock as consideration, which resulted in making Metrolina a related party due to its significant ownership.
During the year ended December 31, 2019, the Company paid off the entire balance on the note 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 Metrolina could
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 determined by dividing the outstanding indebtedness by $3,000,000 multiplied by 10% with a cap of 864,500 shares.
As of March 31, 2010, there was $2,183,500 available for redeployment. 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 Metrolina. The note gives Metrolina the right and
option to purchase its 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. This note matures
in May of 2023. As of March 31, 2020, and December 31, 2019, the balance on this note was $816,500 and $1,730,000, respectively.
During the three months ended March 31, 2020 and 2019, the Company recorded interest expense related to the note totaling $36,028
and $86,238, respectively. The related party note is guaranteed by Mr. Gee, the Company’s Chief Executive Officer.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revolving
Promissory Note
On
October 1, 2017, the Company issued a revolving promissory note to Raymond M. Gee, the Company’s chairman and chief executive
officer, pursuant to which the Company may borrow up to $1,500,000 from Mr. Gee on a revolving basis for working capital purposes.
This note has a five-year term with no annual interest and principal payment is deferred until the maturity date. As of March
31, 2020, and December 31, 2019, the outstanding balance on this note was $689,546 and $797,906, respectively. During the three
months ended March 31, 2020, and 2019, the Company recorded imputed interest related to the note of $0 and $14,004, respectively.
Maturities
of Long-Term Obligations for Five Years and Beyond
The
minimum annual principal payments of notes payable at March 31, 2020 by fiscal year were:
2020
(remainder of year)
|
|
$
|
358,920
|
|
2021
|
|
|
572,362
|
|
2022
|
|
|
4,606,975
|
|
2023
|
|
|
3,065,286
|
|
2024
|
|
|
7,192,359
|
|
Thereafter
|
|
|
17,220,616
|
|
Total
minimum principal payments
|
|
$
|
33,016,518
|
|
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
The
Company is authorized to issue up to 10,000,000 shares of preferred stock, $0.01 par value.
Series
A Preferred Stock
On
May 8, 2019, the Company filed a certificate of designation with the Nevada Secretary of State pursuant to which the Company designated
4,000,000 shares of its preferred stock as Series A Cumulative Convertible Preferred Stock (the “Series A Preferred Stock”).
The Series A Preferred Stock has the following voting powers, designations, preferences and relative rights, qualifications, limitations
or restrictions:
Ranking.
The Series A Preferred Stock ranks, as to dividend rights and rights upon our liquidation, dissolution, or winding up, senior
to the Common Stock.
Dividend
Rate and Payment Dates. Dividends on the Series A Preferred Stock are cumulative and payable monthly in arrears to all
holders of record on the applicable record date. Holders of Series A Preferred Stock will be entitled to receive cumulative dividends
in the amount of $0.017 per share each month, which is equivalent to the rate of 8% of the $2.50 liquidation preference per share.
Dividends on shares of Series A Preferred Stock will continue to accrue even if any of the Company’s agreements prohibit
the current payment of dividends or the Company does not have earnings. During the three months ended March 31, 2020, and 2019,
the Company paid dividends of $94,500 and $4,667, respectively.
Liquidation
Preference. The liquidation preference for each share of Series A Preferred Stock is $2.50. Upon a liquidation, dissolution
or winding up of the Company, holders of shares of Series A 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.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stockholder
Optional Conversion. Each share of Series A Preferred Stock is convertible, at any time and from time to time, at the
option of the holder thereof and without the payment of additional consideration, into that number of shares of Common Stock determined
by dividing the liquidation preference of such share by the conversion price then in effect. The conversion price is initially
equal $2.50, subject to adjustment as set forth in the certificate of designation. In addition, if at any time the trading price
of the Common Stock is greater than the liquidation preference of $2.50, the Company may deliver a written notice to all holders
to cause each holder to convert all or part of such holders’ Series A Preferred Stock.
Company
Call and Stockholder Put Options. Commencing on the fifth anniversary of the initial issuance of shares of Series A Preferred
Stock and continuing indefinitely thereafter, the Company will have a right to call for redemption the outstanding shares of Series
A Preferred Stock at a call price equal to $3.75, or 150% of the original issue price of the Series A Preferred Stock, and correspondingly,
each holder of shares of Series A Preferred Stock shall have a right to put the shares of Series A Preferred Stock held by such
holder back to us at a put price equal to $3.75, or 150% of the original issue purchase price of such shares. During the three
months ended March 31, 2020 and 2019, the Company recorded a put option value accretion of $118,125 and $0, respectively.
Voting
Rights. The Company may not authorize or issue any class or series of equity securities ranking senior to the Series A
Preferred Stock as to dividends or distributions upon liquidation (including securities convertible into or exchangeable for any
such senior securities) or amend the Company’s articles of incorporation (whether by merger, consolidation, or otherwise)
to materially and adversely change the terms of the 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 the outstanding shares of Series A Preferred Stock, voting together
as a class. Otherwise, holders of the shares of Series A Preferred Stock do not have any voting rights.
As
of March 31, 2020, there were 1,890,000 shares of Series A Preferred Stock issued and outstanding. As of March 31, 2020, the Series
A Preferred Stock balance was made up of Series A Preferred Stock totaling $4,725,000 and accretion of put options totaling $302,125.
As of December 31, 2019, the Series A Preferred Stock balance was made up of Series A Preferred Stock totaling $4,725,000 and
accretion of put options totaling $184,000.
Series
B Preferred Stock
On
December 2, 2019, the Company filed a certificate of designation with the Nevada Secretary of State pursuant to which the Company
designated 1,000,000 shares of its preferred stock as Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred
Stock”). The Series B Preferred Stock has the following voting powers, designations, preferences and relative rights, qualifications,
limitations or restrictions:
Ranking.
The Series B Preferred Stock rank, as to dividend rights and rights upon liquidation, dissolution, or winding up, senior to the
Common Stock and pari passu with the Series A Preferred Stock.
Dividend
Rate and Payment Dates. Dividends on the Series B Preferred Stock are cumulative and payable monthly in arrears to all
holders of record on the applicable record date. Holders of Series B Preferred Stock will be entitled to receive cumulative dividends
in the amount of $0.067 per share each month, which is equivalent to the annual rate of 8% of the $10.00 liquidation preference
per share; provided that upon an event of default (generally defined as the Company’s 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, which is equivalent to the
annual rate of 10% of the $10.00 liquidation preference per share. During the three months ended March 31, 2020 and 2019, the
Company paid dividends of $92,996 and $0, respectively.
Liquidation
Preference. The liquidation preference for each share of Series B Preferred Stock is $10.00. Upon a liquidation, dissolution
or winding up of the Company, holders of shares of 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.
Company
Call and Stockholder Put Options. Commencing on the fifth anniversary of the initial issuance of shares of Series B Preferred
Stock and continuing indefinitely thereafter, the Company will have a right to call for redemption the outstanding shares of Series
B Preferred Stock at a call price equal to $15.00, or 150% of the original issue price of the Series B Preferred Stock, and correspondingly,
each holder of shares of Series B Preferred Stock shall have a right to put the shares of Series B Preferred Stock held by such
holder back to the Company at a put price equal to $15.00, or 150% of the original issue purchase price of such shares. During
the three months ended March 31, 2020 and 2019, the Company recorded a put option value accretion of $127,368 and $0, respectively.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Voting
Rights. The Company may not authorize or issue any class or series of equity securities ranking senior to the Series B
Preferred Stock as to dividends or distributions upon liquidation (including securities convertible into or exchangeable for any
such senior securities) or amend the Company’s articles of incorporation (whether by merger, consolidation, or otherwise)
to materially and adversely change the terms of the Series B 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 B Preferred Stock, voting together
as a class. Otherwise, holders of the shares of Series B Preferred Stock do not have any voting rights.
No
Conversion Right. The Series B Preferred Stock is not convertible into shares of Common Stock.
On
November 1, 2019, the Company launched an offering under Regulation A of Section 3(6) of the Securities Act of 1933, as, amended,
for Tier 2 offerings, pursuant to which the Company is offering up to 1,000,000 shares of Series B Preferred Stock at an offering
price of $10.00 per share, for a maximum offering amount of $10,000,000. In addition, the Company is offering bonus shares to
early investors in this offering, whereby the first 400 investors will receive, in addition to Series B Preferred Stock, 100 shares
of Common Stock, regardless of the amount invested, for a total of 40,000 shares of Common Stock.
During
the three months ended March 31, 2020, the Company sold an aggregate of 115,235 shares of Series B Preferred Stock for total gross
proceeds of $1,152,350. After deducting a placement fee and other expenses, the Company received net proceeds of $1,071,686. During
the three months ended March 31, 2020 and 2019, the Company recorded a put option value accretion of $127,368.
As
of March 31, 2020, there were 524,957 shares of Series B Preferred Stock issued and outstanding.
Common
Stock
The
Company is authorized to issue up to 200,000,000 shares of common stock, par value $0.01 per share. As of March 31, 2020, there
were 12,342,080 shares of common stock issued and outstanding.
Stock
Issued for Service
In
February 2019, the Company issued an additional 545,000 shares of Common Stock for services to Metrolina with a fair value of
$305,200.
Stock
Issued for Cash
During
the three months ended March 31, 2020 and 2019, the Company issued 6,000 and 0 shares of Common Stock, respectively, to early
investors in the Regulation A offering, valued at $1,620 and $0, respectively.
Stock
issued for Acquisition
In January 2019, the Company issued
2,000,000 shares of Common Stock to Gvest Real Estate Capital LLC, which is controlled and owned by Mr. Gee, the Company’s
Chief Executive Officer, to acquire the 25% minority interest in Pecan Grove, which were valued at the historical cost value of
$537,562.
Equity Incentive Plan
In December 2017, the Board of Directors,
with the approval of a majority of the stockholders of the Company, adopted the Manufactured Housing Properties Inc. Stock Compensation
Plan (the “Plan”) which is administered by the Compensation Committee. As of March 31, 2020, there were 656,175 shares
granted and 343,825 shares remaining available under the Plan.
The Company has issued options to directors
and officers under the Plan. One third of the options vest immediately, and two thirds vest in equal annual installments over a
two-year period. The Company issued 519,675 shares in December 2017 and 136,500 shares in December 2019. The Company recorded stock
option expense of $539 and $8 during the three months ended March 31, 2020 and 2019, respectively.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes the stock options outstanding as of March 31, 2020:
|
|
Number
of options
|
|
|
Weighted
average exercise price
(per share)
|
|
|
Weighted
average remaining contractual term
(in years)
|
|
Outstanding
at December 31, 2019
|
|
|
656,175
|
|
|
$
|
0.03
|
|
|
|
8.7
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
/ cancelled / expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at March 31, 2020
|
|
|
656,175
|
|
|
$
|
0.03
|
|
|
|
8.4
|
|
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, 2020. As of March 31, 2020, there
were 519,675 “in-the-money” options with an aggregate intrinsic value of $135,116.
The
following table summarizes information concerning options outstanding as of March 31, 2020.
Strike
Price Range ($)
|
|
|
Outstanding
stock options
|
|
|
Weighted
average remaining contractual term
(in years)
|
|
|
Weighted
average outstanding strike price
|
|
|
Vested
stock options
|
|
|
Weighted
average vested strike price
|
|
$
|
0.01
|
|
|
|
519,675
|
|
|
|
8.0
|
|
|
$
|
0.01
|
|
|
|
519,675
|
|
|
$
|
0.01
|
|
$
|
0.27
|
|
|
|
136,500
|
|
|
|
10.0
|
|
|
$
|
0.27
|
|
|
|
45,500
|
|
|
$
|
0.27
|
|
The
table below presents the weighted average expected life in years of options granted under the Plan as described above. The risk-free
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.
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
|
|
March
31,
2020
|
|
|
December 31,
2019
|
|
Risk-free
interest rate
|
|
|
-
|
|
|
|
0.26
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
0.00
|
%
|
Expected
volatility
|
|
|
-
|
|
|
|
15.17
|
%
|
Expected
life of options (in years)
|
|
|
-
|
|
|
|
10.0
|
|
NOTE
7 – RELATED PARTY TRANSACTIONS
On
October 1, 2017, the Company issued a revolving promissory note to Raymond M. Gee, the Company’s chairman and chief executive
officer, pursuant to which the Company may borrow up to $1,500,000 from Mr. Gee on a revolving basis for working capital purposes.
This note has a five-year term with no annual interest and principal payment is deferred until the maturity date. As of March
31, 2020, and December 31, 2019, the outstanding balance on this note was $689,546 and $797,906, respectively. During the three
months ended March 31, 2020, and 2019, the Company recorded imputed interest related to the note of $0 and $14,004, respectively.
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 8, 2017, the Company issued a
promissory note to Metrolina in the principal amount of $3,000,000. The note is interest only payment based on 8%, and 10% deferred
until maturity to be paid with principal balance. The note originally awarded Metrolina 455,000 shares of Common Stock as consideration,
which resulted in making Metrolina a related party due to its significant ownership. During the year ended December 31, 2019, the
Company paid off the entire balance on the note 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 Metrolina could 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 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 Metrolina. The note gives Metrolina
the right and option to purchase its 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. This
note matures in May of 2023. As of March 31, 2020, and December 31, 2019, the balance on this note was $816,500 and $1,730,000,
respectively. During the three months ended March 31, 2020 and 2019, the Company recorded interest expense related to the note
totaling $36,028 and $86,238, respectively. The related party note is guaranteed by Mr. Gee, the Company’s Chief Executive
Officer.
In January 2019, the Company issued
2,000,000 shares of Common Stock to Gvest Real Estate Capital LLC, an entity controlled by Mr. Gee, the Company’s Chief Executive
Officer, to acquire the 25% minority interest in Pecan Grove, which were valued at the historical cost value of $537,562.
In
August, 2019, the Company entered into an office lease agreement with Gvest Real Estate Capital LLC for the lease of its offices.
The lease is $4,000 per month and is on a month-to-month term. Total rent expense for the three months ended March 31, 2020 and
2019 was $12,000 and $0, respectively.
During the three months ended March 31, 2020
and 2019, the Company recorded $3,725 and $12,000, respectively, in revenues related to property management consulting services
provided to Gvest Real Estate Capital LLC. During the three months ended March 31, 2020, Mr. Gee, the Company’s Chief Executive
Officer, received a $50,000 fee for his personal guarantee on a promissory note relating to a loan for one of the Company’s
acquisitions.
NOTE 8 – ACQUISITIONS
The
Company completed two acquisitions during the three months ended March 31, 2020. These were asset acquisitions from third parties
and have been accounted for as asset acquisitions. The acquisition date estimated fair value was determined by third party
appraisals.
Acquisition
Date
|
|
Name
|
|
Land
|
|
|
Improvements
|
|
|
Building
|
|
|
Acquisition
Cost
|
|
|
Total
Purchase Price
|
|
March
2020
|
|
Countryside
MHP
|
|
$
|
777,000
|
|
|
$
|
1,813,000
|
|
|
$
|
1,110,000
|
|
|
$
|
21,642
|
|
|
$
|
3,721,642
|
|
March
2020
|
|
Evergreen
MHP
|
|
|
431,400
|
|
|
|
1,006,600
|
|
|
|
-
|
|
|
|
151,126
|
|
|
|
1,589,126
|
|
|
|
|
|
$
|
1,208,400
|
|
|
$
|
2,819,600
|
|
|
$
|
1,110,000
|
|
|
$
|
172,768
|
|
|
$
|
5,310,768
|
|
MANUFACTURED
HOUSING PROPERTIES INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pro-forma
Financial Information
The
following unaudited pro-forma information presents the combined results of operations for the three months ended March 31,
20120 and 2019 as if the above acquisitions of manufactured housing communities had been completed on January 1, 2020 and
2019.
|
|
3/31/2020
Consolidated
|
|
|
Acquisitions
|
|
|
Adjustment
|
|
|
3/31/2020
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
1,306,137
|
|
|
$
|
167,618
|
|
|
$
|
|
|
|
$
|
1,473,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
1,660,302
|
|
|
|
60,297
|
|
|
|
|
|
|
|
1,720,599
|
|
Depreciation
and amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
49,445
|
|
|
|
49,445
|
|
Interest
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
40,719
|
|
|
|
40,719
|
|
Net
income (loss)
|
|
$
|
(354,165
|
)
|
|
$
|
107,321
|
|
|
|
|
|
|
|
(337,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends and put option value accretion
|
|
|
432,989
|
|
|
|
-
|
|
|
|
|
|
|
|
432,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss attributable to common shareholders
|
|
$
|
(787,154
|
)
|
|
$
|
107,321
|
|
|
|
|
|
|
$
|
(769,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average - basic and fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
3/31/2019
Consolidated
|
|
|
Acquisitions
|
|
|
Adjustment
|
|
|
3/31/2019
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
536,374
|
|
|
$
|
667,503
|
|
|
$
|
|
|
|
$
|
1,203,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
1,255,688
|
|
|
|
329,873
|
|
|
|
|
|
|
|
1,585,561
|
|
Depreciation
and amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
341,232
|
|
|
|
341,232
|
|
Interest
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
332,506
|
|
|
|
332,506
|
|
Net
income (loss)
|
|
$
|
(719,314
|
)
|
|
$
|
337,630
|
|
|
|
|
|
|
|
(1,055,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends and put option value accretion
|
|
|
4,667
|
|
|
|
-
|
|
|
|
|
|
|
|
4,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss attributable to common shareholders
|
|
$
|
(723,981
|
)
|
|
$
|
337,630
|
|
|
|
|
|
|
$
|
(1,060,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average - basic and fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.08
|
)
|
NOTE 9 – SUBSEQUENT EVENTS
Loan Refinancing
On April 1, 2020, the Company refinanced
the loans for Butternut MHP Land LLC (see Note 4) with the existing lender to increase the loan amount to $1,388,019 and to extend
the maturity date to April 10, 2025. In addition, the interest rate was changed to 6% per annum, provided that on April 10, 2023
and thereafter, the interest rate shall be equal to (i) the per annum rate of interest identified as the “Prime Rate”
as published in the monthly rates section of the Wall Street Journal plus (ii) 1% per annum, adjusted as the first day of each
calendar quarter. The loan, as modified, is secured by the real estate assets of Butternut MHP Land LLC and is guaranteed by the
Company and Raymond M. Gee, who received a loan guarantee fee of $70,000.
PPP Loan
On May 1, 2020, the Company received
$139,300 from the Federal Payroll Protection Program loan.