NOBILITY HOMES INC 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm—Daszkal Bolton LLP 13 Consolidated Balance Sheets 14 Consolidated Statements of Income 15 Consolidated Statements of Changes in Stockholders’ Equity 16 Consolidated Statements of Cash Flows 17 Notes to Consolidated Financial Statements 18 12 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Nobility Homes, Inc. Ocala, Florida Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Nobility Homes, Inc. (the “Company”) at November 6, 2021 and October 31, 2020, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended November 6, 2021, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Daszkal Bolton LLP We have served as the Company’s auditor since 2018. Jupiter, Florida February 4, 2022 13 Table of Contents Nobility Homes, Inc. Consolidated Balance Sheets November 6, 2021 and October 31, 2020 November 6, 2021 October 31,2020 Assets Current assets: Cash and cash equivalents $ 36,126,059 $ 30,305,902 Certificates of deposit 2,093,015 4,602,307 Short-term investments 621,928 358,960 Accounts receivable—trade 680,228 790,046 Note receivable 32,825 35,997 Mortgage notes receivable 22,589 20,162 Income taxes receivable — 105,676 Inventories 10,394,288 9,294,677 Pre-owned homes, net 542,081 441,937 Prepaid expenses and other current assets 1,821,267 1,014,849 Total current assets 52,334,280 46,970,513 Property, plant and equipment, net 6,847,780 5,142,714 Pre-owned homes, net 755,394 1,077,240 Note receivable, less current portion 38,895 6,573 Mortgage notes receivable, less current portion 222,459 227,509 Mobile home park note receivable 72,731 — Other investments 1,788,436 1,729,364 Deferred income taxes — 3,598 Operating lease right of use asset 1,597 715,368 Cash surrender value of life insurance 3,966,939 3,795,902 Other assets 156,287 156,287 Total assets $ 66,184,798 $ 59,825,068 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 939,964 $ 928,095 Accrued compensation 555,222 670,520 Accrued expenses and other current liabilities 1,513,967 1,383,833 Income taxes payable 89,083 — Operating lease obligation 1,597 24,192 Customer deposits 13,671,092 5,098,633 Total current liabilities 16,770,925 8,105,273 Deferred income taxes 99,568 — Operating lease obligation, less current portion — 778,519 Total liabilities 16,870,493 8,883,792 Commitments and contingent liabilities Stockholders’ equity: Preferred stock, $ .10 par value, 500,000 shares authorized; none issued and outstanding — — Common stock, $ .10 par value, 10,000,000 shares authorized; 5,364,907 shares issued, 3,532,100 and 3,631,196 outstanding, respectively 536,491 536,491 Additional paid in capital 10,766,253 10,694,554 Retained earnings 59,742,759 57,976,051 Less treasury stock at cost, 1,832,807 shares in 2021 and 1,733,711 shares in 2020 ( 21,731,198 ) ( 18,265,820 ) Total stockholders’ equity 49,314,305 50,941,276 Total liabilities and stockholders’ equity $ 66,184,798 $ 59,825,068 The accompanying notes are an integral part of these financial statements. 14 Table of Contents Nobility Homes, Inc. Consolidated Statements of Income For the years ended November 6, 2021 and October 31, 2020 Year Ended November 6, 2021 October 31, 2020 Net sales $ 45,062,558 $ 41,612,307 Cost of sales ( 33,630,362 ) ( 29,481,820 ) Gross profit 11,432,196 12,130,487 Selling, general and administrative expenses ( 5,286,172 ) ( 4,984,318 ) Operating income 6,146,024 7,146,169 Other income (loss): Interest income 180,635 286,897 Undistributed earnings in joint venture—Majestic 21 59,072 80,091 Proceeds received under escrow arrangement 246,216 421,099 Increase (decrease) in fair value of equity investment 262,968 ( 155,406 ) Gain on sale of assets — 32,041 Miscellaneous 223,818 58,194 Total other income 972,709 722,916 Income before provision for income taxes 7,118,733 7,869,085 Income tax expense ( 1,719,925 ) ( 1,885,387 ) Net income 5,398,808 5,983,698 Weighted average number of shares outstanding: Basic 3,597,756 3,638,592 Diluted 3,607,448 3,639,950 Net income per share: Basic $ 1.50 $ 1.64 Diluted $ 1.50 $ 1.64 The accompanying notes are an integral part of these financial statements. 15 Table of Contents Nobility Homes, Inc. Consolidated Statements of Changes in Stockholders’ Equity For the years ended November 6, 2021 and October 31, 2020 Common Stock Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Treasury Stock Total Balance at October 31, 2020 3,631,196 $ 536,491 $ 10,694,554 $ 57,976,051 $ — $ ( 18,265,820 ) $ 50,941,276 Cash dividend — — — ( 3,632,100 ) — — ( 3,632,100 ) Purchase of treasury stock ( 100,346 ) — — — — ( 3,478,553 ) ( 3,478,553 ) Stock-based compensation — — 69,749 — — — 69,749 Exercise of employee stock options 1,250 — 1,950 — — 13,175 15,125 Net income — — — 5,398,808 — — 5,398,808 Balance at November 6, 2021 3,532,100 $ 536,491 $ 10,766,253 $ 59,742,759 $ — $ ( 21,731,198 ) $ 49,314,305 Balance at November 2, 2019 3,664,070 $ 536,491 $ 10,687,662 $ 55,298,750 $ 389,164 $ ( 17,445,752 ) $ 49,466,315 Adoption of ASU 2016-01 — — — 389,164 ( 389,164 ) — — Adoption of ASU 2016-02 — — — ( 64,591 ) — — ( 64,591 ) Balance at November 2, 2019 as adjusted 3,664,070 536,491 10,687,662 55,623,323 — ( 17,445,752 ) 49,401,724 Cash dividend — — — ( 3,630,970 ) — — ( 3,630,970 ) Purchase of treasury stock ( 33,100 ) — — — — ( 822,450 ) ( 822,450 ) Stock-based compensation 226 — 6,892 — — 2,382 9,274 Net income — — — 5,983,698 — — 5,983,698 Balance at October 31, 202 0 3,631,196 $ 536,491 $ 10,694,554 $ 57,976,051 $ — $ ( 18,265,820 ) $ 50,941,276 The accompanying notes are an integral part of these financial statements. 16 Table of Contents Nobility Homes, Inc. Consolidated Statements of Cash Flows For the years ended November 6, 2021 and October 31, 2020 Year Ended November 6, 2021 October 31, 2020 Cash flows from operating activities: Net income $ 5,398,808 $ 5,983,698 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 186,320 180,047 Deferred income taxes 103,166 83,724 Undistributed earnings in joint venture—Majestic 21 ( 59,072 ) ( 80,091 ) Gain on disposal of property, plant and equipment — ( 32,041 ) (Increase) decrease in fair value of equity investments ( 262,968 ) 155,406 Stock-based compensation 69,750 9,274 Amortization of operating lease right of use assets 713,771 36,340 Decrease (increase) in: Accounts receivable—trade 109,818 561,792 Inventories ( 1,099,611 ) 1,322,101 Pre-owned homes 221,702 ( 379,946 ) Prepaid expenses and other current assets ( 806,420 ) 202,913 Interest receivable ( 18,328 ) ( 150,459 ) Income taxes receivable — ( 105,676 ) (Decrease) increase in: Accounts payable 11,869 ( 183,121 ) Accrued compensation ( 115,298 ) ( 78,106 ) Accrued expenses and other current liabilities 130,135 ( 672,119 ) Income taxes payable 194,759 ( 2,016,132 ) Customer deposits 8,572,459 2,075,815 Net cash provided by operating activities 13,350,860 6,913,419 Cash flows from investing activities: Purchase of property, plant and equipment ( 1,891,386 ) ( 318,215 ) Purchase of certificates of deposit — ( 20,000 ) Proceeds from certificates of deposit 2,496,000 5,574,124 Proceeds from disposal of property, plant and equipment — 33,139 Collections on interest receivable 31,620 147,603 Collections on mortgage notes receivable 2,623 2,373 Collections on equipment and other notes receivable 39,350 84,430 Issuance of equipment note receivable ( 68,500 ) Issuance of mobile home park not receivable ( 72,731 ) — Increase in cash surrender value of life insurance ( 171,037 ) ( 177,928 ) Net cash provided by investing activities 365,939 5,325,526 Cash flows from financing activities: Payment of cash dividend ( 3,632,100 ) ( 3,630,970 ) Proceeds from exercise of employee stock options 15,125 — Proceeds from paycheck protection program — 1,449,700 Return of proceeds from paycheck protection program — ( 1,449,700 ) Purchase of treasury stock ( 3,478,553 ) ( 822,450 ) Reduction of operating lease obligation ( 801,114 ) ( 13,588 ) Net cash used in financing activities ( 7,896,642 ) ( 4,467,008 ) Increase cash and cash equivalents 5,820,157 7,771,937 Cash and cash equivalents at beginning of year 30,305,902 22,533,965 Cash and cash equivalents at end of year $ 36,126,059 $ 30,305,902 Supplemental disclosure of cash flow information: Income taxes paid $ 1,422,000 $ 4,002,000 The accompanying notes are an integral part of these financial statements. 17 Table of Contents NOTE 1 Reporting Entity and Significant Accounting Policies Description of Business and Principles of Consolidation – The consolidated financial statements include the accounts of Nobility Homes, Inc. (“Nobility”), its wholly-owned subsidiaries, Prestige Home Centers, Inc. (“Prestige”), and Prestige’s wholly-owned subsidiaries, Mountain Financial, Inc., an independent insurance agency and licensed mortgage loan originator and Majestic Homes, Inc., (collectively the “Company”). The Company is engaged in the manufacture and sale of manufactured and modular homes to various dealerships, including its own retail sales centers, and manufactured housing communities throughout Florida. The Company has one manufacturing plant in operation that is located in Ocala, Florida. At November 6, 2021, Prestige operated ten Florida retail sales centers: Ocala (2), Chiefland, Auburndale, Inverness, Hudson, Tavares, Yulee, Panama City and Punta Gorda. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates and assumptions are based upon management’s best knowledge of current events and actions that the Company may take in the future. The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in the reported financial condition and results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Significant estimates and assumptions by management affect: valuation of pre-owned homes, the allowance for doubtful accounts, the carrying value of long-lived assets, the provision for income taxes and related deferred tax accounts, certain accrued expenses and contingencies, warranty reserve and stock-based compensation. Fiscal Year – The Company’s fiscal year ends on the first Saturday on or after October 31. The year ended November 6, 2021 (fiscal year 2021) consisted of a fifty-three week period and the year ended October 31, 2020 (fiscal year 2020) consisted of a fifty-two week period. Revenue Recognition – The Company’s revenue comes substantially from the sale of manufactured housing, modular housing and park models, along with freight billed to customers, parts sold and aftermarket services. The Company recognizes revenue following the comprehensive framework of Financial Accounting Standards Board ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09), which established a methodology for determining how much revenue to recognize and when it should be recognized through application of the following five-step approach: 1. Identify the contract(s) with a customer; 2. Identify each performance obligation in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to each performance obligation; and 5. Recognize revenue when or as each performance obligation is satisfied. The Company recognizes revenue from its retail sales of new manufactured homes upon the occurrence of the following: • Its receipt of a down payment, • Construction of the home is complete, • Home has been delivered and set up at the retail home buyer’s site, and title has been transferred to the retail home buyer, • Remaining funds have been released by the finance company (financed sales transaction), remaining funds have been committed by the finance company by an agreement with respect to financing obtained by the customer, usually in the form of a written approval for permanent home financing received from a lending institution, (financed construction sales transaction) or cash has been received from the home buyer (cash sales transaction), and • Completion of any other significant obligations. The accompanying notes are an integral part of these financial statements. 18 Table of Contents The Company recognizes revenue from the sale of the repurchased homes upon transfer of title to the new purchaser. The Company recognizes revenues from its independent dealers upon receiving wholesale floor plan financing or establishing retail credit approval for terms, shipping of the home, and transferring title and risk of loss to the independent dealer. For wholesale shipments to independent dealers, the Company has no obligation to setup the home or to complete any other significant obligations. The Company recognizes revenues from its wholly-owned subsidiary, Mountain Financial, Inc., as follows: commission income (and fees in lieu of commissions) is recorded as of the effective date of insurance coverage or the billing date, whichever is later. Commissions on premiums billed and collected directly by insurance companies are recorded as revenue when received which, in many cases, is the Company’s first notification of amounts earned due to the lack of policy and renewal information. Contingent commissions are recorded as revenue when received. Contingent commissions are commissions paid by insurance underwriters and are based on the estimated profit and/or overall volume of business placed with the underwriter. The data necessary for the calculation of contingent commissions cannot be reasonably obtained prior to the receipt of the commission which, in many cases, is the Company’s first notification of amounts earned. The Company provides appropriate reserves for policy cancellations based on numerous factors, including past transaction history with customers, historical experience, and other information, which is periodically evaluated and adjusted as deemed necessary. In the opinion of management, no reserve was deemed necessary for policy cancellations at November 6, 2021 and October 31, 2020. Sales of homes to affiliated entities that are subject to contingent payment terms are considered inventory consignment arrangements. Revenue from such arrangements is recognized when the homes are sold to the end users and payment is collected by the affiliated entity. See Note 4 “Related Party Transactions”. Revenues by Products and Services – Revenues by net sales from manufactured housing, pre-owned homes, and insurance agent commissions for the years ended November 6, 2021 and October 31, 2020 are as follows: 2021 2020 Manufactured housing $ 43,963,239 $ 40,775,887 Pre-owned homes 816,165 552,421 Insurance agent commissions 283,154 283,999 Total net sales $ 45,062,558 $ 41,612,307 Cash and Cash Equivalents – The Company considers all money market accounts and highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Certificates of Deposit – Certificates of deposits are recorded at cost plus accrued interest and have maturities of twelve months or less. Accounts Receivable – Accounts receivable are stated at net realizable value. An allowance for doubtful accounts is provided based on prior collection experiences and management’s analysis of specific accounts. At November 6, 2021 or October 31, 2020, in the opinion of management, all accounts were considered fully collectible and, accordingly, no allowance was deemed necessary. Accounts receivable fluctuate due to the number of homes sold to independent dealers. The Company recognizes revenues from its independent dealers upon receiving wholesale floor plan financing or establishing retail credit approval for terms, shipping of the home, and transferring title and risk of loss to the independent dealer. Investments – The Company’s investments consist of equity securities of a public company. Investments with maturities of less than one year are classified as short-term investments. The Company’s equity investment in a public company is classified as “available-for-sale” and carried at fair value. Unrealized gains on the available-for-sale securities, net of taxes, were recorded in accumulated other comprehensive income. Upon the Company’s adoption of ASU 2016-01, unrealized gains and losses on these available-for-sale securities, are reflected in the statement of income and comprehensive income. Inventories – New home inventory is carried at the lower of cost or net realizable value. The cost of finished home inventories determined on the specific identification method is removed from inventories and recorded as a component of cost of sales at the time revenue is recognized. In addition, an allocation of depreciation and amortization is included in cost of goods sold. Under the specific identification method, if finished home inventory can be sold for a profit there is no basis to write down the inventory below the lower of cost or net realizable value. The accompanying notes are an integral part of these financial statements. 19 Table of Contents Other pre-owned homes are acquired (Repossessions Inventory) as a convenience to the Company’s joint venture partner, 21st Mortgage Corporation. This inventory has been repossessed by 21 st Mortgage Corporation or through mortgage foreclosure. The Company acquired this inventory at the amount of the uncollected balance of the financing at the time of the foreclosure/repossessions by 21st Mortgage Corporation. The Company records this inventory at cost determined on the specific identification method. All of the refurbishment costs are paid by 21 st Mortgage Corporation. This arrangement assists 21 st Mortgage Corporation with liquidation of their repossessed inventory. The timing of these repurchases by the Company is unpredictable as it is based on the repossessions 21 st Mortgage Corporation incurs in the portfolio. When the home is sold, the Company retains the cost of the home, an interest factor on the cost of the home and a sales commission, from the sales proceeds. Any additional proceeds are paid to 21 st Mortgage. Any shortfall from the proceeds to cover these amounts is paid by 21 st Mortgage to the Company. As the Company has no risk of loss on the sale, there is no valuation allowance necessary for this inventory. Inventory held at consignment locations by affiliated entities is included in the Company’s inventory on the Company’s consolidated balance sheets. Consigned inventory was $ 794,766 and $ 1,277,681 as of November 6, 2021 and October 31, 2020, respectively. Pre-owned homes are also taken as trade-ins on new home sales (Trade-in Inventory). This inventory is recorded at estimated actual wholesale value, which is generally lower than market value, determined on the specific identification method, plus refurbishment costs incurred to date to bring the inventory to a more saleable state. The Trade-in Inventory amount is reduced where necessary on a unit specific basis by a valuation reserve, which management believes results in inventory being valued at market. Other inventory costs are determined on a first-in, first-out basis. See Note 6 “Inventories”. Property, Plant and Equipment – Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Routine maintenance and repairs are charged to expense when incurred. Major replacements and improvements are capitalized. Gains or losses are credited or charged to earnings upon disposition. Investment in Majestic 21 – Majestic 21 was formed in 1997 as a joint venture with our joint venture partner, an unrelated entity, 21 st Mortgage Corporation (“21 st Mortgage”). We have been allocated our share of net income and distributions on a 50/50 basis since Majestic 21’s formation. While Majestic 21 has been deemed to be a variable interest entity, the Company only holds a 50 % interest in this entity and all allocations of profit and loss are on a 50/50 basis. Since all allocations are to be made on a 50/50 basis and joint decisions with the joint venture partner are made which most significantly impact Majestic 21 economic performance therefore, the Company is not required to consolidate Majestic 21 with the accounts of Nobility Homes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 810, “Consolidations” (ASC 810). Management believes that the Company’s maximum exposure to loss as a result of its involvement with Majestic 21 is its investment in the joint venture. Based on management’s evaluation, there was no impairment of this investment at November 6, 2021 or October 31, 2020. The Company entered into an arrangement in 2002 with 21 st Mortgage to repurchase certain pre-owned homes. Under this arrangement or any other arrangement, the Company is not obligated to repurchase any foreclosed/repossessed units of Majestic 21 as it does not have a repurchase agreement or any other guarantees with Majestic 21. However, the Company buys from 21 st Mortgage foreclosed/repossessed units from the Majestic 21 portfolio and acts as a remarketing agent. It resells those units through the Company’s network of retail centers which management believes benefits the historical loss experience of the joint venture. The only impact on the Company’s operations from this arrangement are commissions earned on the resale of these units and interest earned for the Company’s carrying costs of the units while in inventory. See Note 14 “Commitments and Contingent Liabilities”. Impairment of Long-Lived Assets – In the event that facts and circumstances indicate that the carrying value of a long-lived asset may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset’s carrying amount to determine if a write-down is required. If such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. The accompanying notes are an integral part of these financial statements. 20 Table of Contents Customer Deposits – A retail customer is required to make a down payment ranging from $ 500 to 35 % of the retail contract price based upon the credit worthiness of the customer. The retail customer receives the full down payment back when the Company is not able to obtain retail financing. If the retail customer receives retail financing and decides not to go through with the retail sale, the Company can withhold 20 % of the retail contract price. The Company does not typically receive any deposits from independent dealers. Company Owned Life Insurance – The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Warranty Costs – The Company provides for a warranty as the manufactured homes are sold. Amounts related to these warranties for fiscal years 2021 and 2020 are as follows: 2021 2020 Beginning accrued warranty expense $ 125,000 $ 125,000 Less: reduction for payments ( 465,549 ) ( 419,731 ) Plus: additions to accrual 465,549 419,731 Ending accrued warranty expense $ 125,000 $ 125,000 The Company’s limited warranty covers substantial defects in material or workmanship in specified components of the home including structural elements, plumbing systems, electrical systems, and heating and cooling systems which are supplied by the Company that may occur under normal use and service during a period of twelve (12) months from the date of delivery to the original homeowner, and applies to the original homeowner or any subsequent homeowner to whom this product is transferred during the duration of this twelve ( 12 ) month period. The Company tracks the warranty claims per home. Based on the history of the warranty claims, the Company has determined that a majority of warranty claims usually occur within the first three months after the home is sold. The Company determines its warranty accrual using the last three months of home sales. Accrued warranty costs are included in accrued expenses in the accompanying consolidated balance sheets. Accrued Home Setup Costs – Accrued home setup costs represent amounts due to vendors and/or independent contractors for various items related to the actual setup of the home on the retail home buyers’ site. These costs include appliances, air conditioners, electrical/plumbing hook-ups, furniture, insurance, impact/permit fees, land/home fees, extended service plan, freight, skirting, steps, well, septic tanks and other setup costs and are included in accrued expenses in the accompanying consolidated balance sheets. Stock-Based Compensation – The Company has a stock incentive plan (the “Plan”) which authorizes the issuance of options to purchase common stock. Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). Rebate Program – The Company has a rebate program for some dealers based upon the number and type of home purchased, which pays rebates based upon sales volume to the dealers. Volume rebates are recorded as a reduction of sales in the accompanying consolidated financial statements. The rebate liability is calculated and recognized as eligible homes are sold based upon factors surrounding the activity and prior experience of specific dealers and is included in accrued expenses in the accompanying consolidated balance sheets. There were no rebates earned by dealers during fiscal years 2021 and 2020. Advertising – Advertising for Prestige retail sales centers consists primarily of internet, newspaper, radio and television advertising. All costs are expensed as incurred. Advertising expense amounted to approximately $ 141,581 and $ 144,600 for fiscal years 2021 and 2020, respectively. Income Taxes – The Company accounts for income taxes utilizing the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The accompanying notes are an integral part of these financial statements. 21 Table of Contents Net Income per Share – These financial statements include “basic” and “diluted” net income per share information for all periods presented. The basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding. The diluted net income per share is calculated by dividing net income by the weighted-average number of shares outstanding, adjusted for dilutive common shares. Shipping and Handling Costs – Net sales include the revenue related to shipping and handling charges billed to customers. The related costs associated with shipping and handling is included as a component of cost of goods sold. Comprehensive Income – Comprehensive income includes net income as well as other comprehensive income or loss. The Company’s other comprehensive income or loss consists of unrealized gains or losses on available-for-sale securities, net of related taxes. Segments – The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information on a company-wide or consolidated basis. Accordingly, the Company accounts for its operations in accordance with FASB ASC No. 280, “Segment Reporting.” No segment disclosures have been made as the Company considers its business activities as a single segment. Major Customers – There were no customers that accounted for more than 10 % of our total net sales in fiscal year 2021 or 2020. Concentration of Credit Risk – The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term and long-term investments and accounts receivable. At times, the Company’s deposits may exceed federally insured limits. However, the Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk on these accounts. The majority of the Company’s sales are credit sales which are made primarily to customers whose ability to pay is dependent upon the industry economics prevailing in the areas where they operate; however, concentrations of credit risk with respect to accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. The Company maintains reserves for potential credit losses when deemed necessary and such losses have historically been within management’s expectations. Concentration of Retail Financing Sources – There are two national lenders that service the manufactured housing industry with several others who specialize in government insured loans (Fannie, Freddie, FHA, VA, etc.). With only a few lenders dedicated to our industry, the loss of any of them could adversely affect our retail sales. Recently Issued or Adopted Accounting Pronouncements – In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The Company adopted ASU 2016-01 resulting in recognition changes in the fair value of equity investment in earnings. NOTE 2 Investments The following is a summary of short-term investments (available for sale): November 6, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Equity securities in a public company $ 167,930 $ 453,998 $ — $ 621,928 The accompanying notes are an integral part of these financial statements. 22 Table of Contents October 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Equity securities in a public company $ 167,930 $ 191,030 $ — $ 358,960 The fair values were estimated based on unadjusted quoted prices at each respective period end.​​​​​​​ NOTE 3 Fair Values of Financial Investments The carrying amount of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses approximates fair value because of the short maturity of those instruments. The Company accounts for the fair value of financial investments in accordance with FASB ASC No. 820, “Fair Value Measurements” (ASC 820). ASC 820 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability (i.e. exit price) in an orderly transaction between market participants at the measurement date. ASC 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e. inputs) used in the valuation. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The ASC 820 fair value hierarchy is defined as follows: • Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly. • Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date. The following table represents the Company’s financial assets and liabilities which are carried at fair value at November 6, 2021 and October 31, 2020. November 6, 2021 Level 1 Level 2 Level 3 Equity securities in a public company $ 621,928 $ — $ — October 31, 2020 Level 1 Level 2 Level 3 Equity securities in a public company $ 358,960 $ — $ — NOTE 4 Related Party Transactions Affiliated Entities TLT, Inc. – Our President and Chairman of the Board of Directors (“President”) and the Executive Vice President each own 50 % of the stock of TLT, Inc. TLT, Inc. is the general partner of limited partnerships which are developing manufactured housing communities in Central Florida (the “TLT Communities”). Our President owns between a 24.75 % and a 56 % direct and indirect interest in each of these limited partnerships. Our Executive Vice President owns between a 23.0 % and a 57.75 % direct and indirect interest in each of these limited partnerships. The TLT Communities have purchased manufactured homes exclusively from the Company since 1990. Sales to TLT Communities were not significant during fiscal years 2021 and 2020. Repurchase of Common Stock – In July 2021, the Company repurchased 100,000 shares of common stock from our President at $ 34.68 per share. The accompanying notes are an integral part of these financial statements. 23 Table of Contents NOTE 5 Other Investments Investment in Joint Venture – Majestic 21 – During fiscal 1997, the Company contributed $ 250,000 for a 50 % interest in a joint venture engaged in providing mortgage financing on manufactured homes. This investment is accounted for under the equity method of accounting. While Majestic 21 has been deemed to be a variable interest entity, the Company only holds a 50 % interest in this entity and all allocations of profit and loss are on a 50/50 basis . Since all allocations are to be made on a 50/50 basis and the Company’s maximum exposure is limited to its investment in Majestic 21, management has concluded that the Company would not absorb a majority of Majestic 21’s expected losses nor receive a majority of Majestic 21’s expected residual returns; therefore, the Company is not required to consolidate Majestic 21 with the accounts of Nobility Homes in accordance with ASC 810. See Note 14 “Commitments and Contingent Liabilities”. We received no distributions from the joint venture in fiscal year 2021 or 2020. With regard to our investment in Majestic 21, there are no differences between our investment balance and the amount of underlying equity in net assets owned by Majestic 21. NOTE 6 Inventories A breakdown of the elements of inventory at November 6, 2021 and October 31, 2020 is as follows: November 6, 2021 October 31, 2020 Raw materials $ 2,225,532 $ 1,203,282 Work-in-process 97,021 107,651 Inventory consigned to affiliated entities 794,766 1,277,681 Finished homes 7,140,880 6,543,861 Model home furniture 136,089 162,202 Inventories $ 10,394,288 $ 9,294,677 Pre-owned homes $ 1,297,475 $ 1,686,373 Less homes expected to sell in 12 months ( 542,081 ) ( 441,937 ) Pre-owned homes, long-term $ 755,394 $ 1,077,240 The accompanying notes are an integral part of these financial statements. 24 Table of Contents NOTE 7 Property, Plant and Equipment Property, plant and equipment, along with their estimated useful lives and related accumulated depreciation are summarized as follows: Range of Lives in Years November 6, 2021 October 31, 2020 Land — $ 4,880,416 $ 3,092,463 Land improvements 10 - 20 1,245,975 1,245,975 Buildings and improvements 15 - 40 2,579,772 2,529,048 Machinery and equipment 3 - 10 1,038,455 985,746 Furniture and fixtures 3 - 10 301,889 301,889 Construction in progress — — — 10,046,507 8,155,121 Less accumulated depreciation ( 3,198,727 ) ( 3,012,407 ) $ 6,847,780 $ 5,142,714 Depreciation expense during the years ended November 6, 2021 and October 31, 2020 totaled $ 186,320 and $ 180,047 , respectively. NOTE 8 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities are comprised of the following: November 6, 2021 October 31, 2020 Accrued warranty expense $ 125,000 $ 125,000 Accrued property and sales taxes 351,784 370,694 Other accrued expenses 1,037,183 888,139 Total accrued expenses and other current liabilities $ 1,513,967 $ 1,383,833 NOTE 9 Proceeds Received Under Escrow Arrangement The Company received $ 246,216 in fiscal year 2021 and $ 421,099 in fiscal year 2020 under an escrow arrangement related to a Finance Revenue Sharing Agreement between 21 st Mortgage Corporation and the Company. The distributions from the escrow account, related to certain loans financed by 21 st Mortgage Corporation, are recorded in income by the Company when received, which has been the Company’s past practice. NOTE 10 Income Taxes The Company computes income tax expense using the liability method. Under this method, deferred income taxes are provided, to the extent considered realizable by management, for basis differences of assets and liabilities for financial reporting and income tax purposes. The Company follows guidance issued by the FASB with respect to accounting for uncertainty in income taxes. A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 % likely of being realized on examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded. The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the state of Florida. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not reflect any amounts for interest and penalties in its 2021 or 2020 statements of operations, nor are any amounts accrued for interest and penalties at November 6, 2021 and October 31, 2020. The accompanying notes are an integral part of these financial statements. 25 Table of Contents The provision for income taxes for the years ended consists of the following: November 6, 2021 October 31, 2020 Current tax expense: Federal $ 1,327,166 $ 1,524,703 State 289,593 283,877 Deferred tax (benefit) 103,166 76,807 Provision for income taxes $ 1,719,925 $ 1,885,387 The following table shows the reconciliation between the statutory federal income tax rate and the actual provision for income taxes for the years ended: November 6, 2021 October 31, 2020 Provision—federal statutory tax rate $ 1,494,934 $ 1,652,508 Increase (decrease) resulting from: State taxes, net of federal tax benefit 250,708 277,135 Permanent differences: Stock option expirations — — Decrease in FL corporate tax rate ( 135 ) ( 3,306 ) Other comprehensive income — — Other ( 25,582 ) ( 40,950 ) Provision for income taxes $ 1,719,925 $ 1,885,387 The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts and the related deferred tax assets and deferred tax liabilities are as follows: November 6, 2021 October 31, 2020 Deferred tax assets: Allowance for doubtful accounts $ 55,455 $ 56,864 Inventories — 46,790 Prepaid Expenses 14,295 — Accrued expenses 107,893 112,999 Other assets 17,789 23,224 Lease right of use liability 382 196,839 Stock-based compensation 19,502 2,894 Total deferred tax assets 215,316 439,610 Deferred tax liabilities: Depreciation ( 135,466 ) ( 141,270 ) Carrying value of investments ( 109,146 ) ( 47,435 ) Amortization ( 37,374 ) ( 38,324 ) Prepaid expenses ( 32,516 ) ( 33,562 ) Lease right of use asset ( 382 ) ( 175,421 ) Net deferred tax assets (liabilities) $ ( 99,568 ) $ 3,598 The accompanying notes are an integral part of these financial statements. 26 Table of Contents These amounts are included in the accompanying consolidated balance sheets under the following captions: November 6, 2021 October 31, 2020 Current assets (liabilities): Deferred tax assets $ — $ — Deferred tax liabilities — — Net current deferred tax assets — — Non-current assets (liabilities): Deferred tax assets 215,316 439,610 Deferred tax liabilities ( 314,884 ) ( 436,012 ) Net non-current deferred tax assets (liabilities) ( 99,568 ) 3,598 Net deferred tax assets (liabilities) $ ( 99,568 ) $ 3,598 In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. For fiscal years 2021 and 2020, the Company determined that a valuation reserve for the Company’s deferred tax assets was not considered necessary as the deferred tax assets were fully realizable. NOTE 11 Stockholders’ Equity Authorized preferred stock may be issued in series with rights and preferences designated by the Board of Directors at the time it authorizes the issuance of such stock. The Company has never issued any preferred stock. Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the accompanying consolidated financial statements. The Company repurchased 100,346 and 33,100 shares of its common stock during fiscal years 2021 and 2020, respectively. NOTE 12 Stock Option Plan In June 2011, the Company’s Board of Directors adopted and the Company’s shareholders later approved, the Nobility Homes, Inc. 2011 Stock Incentive Plan (the “Plan”), providing for the issuance of options to purchase shares of common stock, stock appreciation rights and other stock-based awards to employees and non-employee directors. A total of 300,000 shares were reserved for issuance under the Plan, all of which may be issued pursuant to the exercise of incentive stock options. The Plan was amended by the Board of Directors to extend the termination date from June 2021 until June 1, 2026 . At November 6, 2021, 252,700 options were available for future grant under the Plan and 47,300 options were outstanding. The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is to be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. During fiscal years 2021 and 2020, the Company recognized compensation cost related to the vesting of stock options of approximately $ 69,750 and $ 3,624 respectively. The accompanying notes are an integral part of these financial statements. 27 Table of Contents A summary of information with respect to options granted is as follows: Number of Shares Stock Option Price Range Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding at November 2, 2019 2,750 $ 12.10 $ 12.10 Granted 24,550 24.00 24.00 Exercised — — — Canceled — — — Outstanding at October 3 1, 2020 27,300 $ 12.10 - 24.00 23.36 Granted 21,250 25.75 25.75 Exercised 1,250 12.10 12.10 Canceled — — — Outstanding at November 6, 2021 47,300 $ 12.10 - 25.75 $ 24.41 $ 453,662 The aggregate intrinsic value in the table above represents total intrinsic value (of options in the money), which is the difference between the Company’s closing stock price on the last trading day of fiscal year 2021 and the exercise price times the number of shares, that would have been received by the option holder had the option holder exercised their options on November 6, 2021. The following table summarizes information about the outstanding stock options at November 6, 2021: Options Outstanding Options Exercisable Exercise Price Shares Outstanding Weighted Average Remaining Contractual Life (years) Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $ 12.10 1,500 1 $ 12.10 1,500 $ 12.10 $ 24.00 24,550 4 24.00 24,550 24.00 $ 25.75 21,250 5 25.75 21,250 25.75 47,300 4.35 $ 24.41 47,300 $ 24.41 The fair value of each option is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments, and the risk-free interest rate over the expected life of the option. The dividend yield was calculated by dividing the current annualized dividend by the option exercise price for each grant. The expected volatility was determined considering the Company’s historical stock prices for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term equal to the expected life of the option. The expected life of the option was estimated based on the exercise history from previous grants. NOTE 13 Employee Benefit Plan The Company has a defined contribution retirement plan (the “Plan”) qualifying under Section 401(k) of the Internal Revenue Code. The Plan covers employees who have met certain service requirements. The Company makes a discretionary matching contribution, up to a maximum of 6 % of an employee’s compensation. The contribution expense charged to operations amounted to approximately $ 219,900 and $ 175,000 in fiscal years 2021 and 2020, respectively. NOTE 14 Commitments and Contingent Liabilities Operating Leases – The Company leases the property for several Prestige retail sales centers from various unrelated entities under operating lease agreements expiring through December 2021. The Company also leases certain equipment under unrelated operating leases. The accompanying notes are an integral part of these financial statements. 28 Table of Contents On November 3, 2019, the Company adopted ASC Topic 842 using the modified retrospective method applied to leases that were in place as of November 3, 2019. Results for reporting periods beginning after November 3, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company elected the package of practical expedients permitted under the transition guidance, which allows for the historical lease classification to be carried forward, the Company’s assessments on whether a contract is or contains a lease, and the Company’s initial direct costs for any leases that exist prior to adoption of the new standard. The Company also elected the short-term lease recognition exemption for all leases that qualify. To determine the present value of minimum future lease payments for operating leases at November 3, 2019, the Company was required to estimate a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the “incremental borrowing rate” or “IBR”). The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used mortgage interest rates for similar terms. Right of use assets are included as a non-current asset in the amount of $ 1,597 , net of amortization in the consolidated Balance Sheet as of November 6, 2021. Based on the terms of the lease agreements, all of the Company’s leases are classified as operating leases. The weighted average remaining lease term and weighted average discount rate of the operating leases is . 08 years and 3.0 %, respectively. Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease. Individual components of the total lease cost incurred by the Company in the amount of $ 179,802 for the twelve months ended November 6, 2021. Other Contingent Liabilities – Certain claims and suits arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, the ultimate outcome of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. Accordingly, the Company has not made any accrual provisions for litigation in the accompanying consolidated financial statements. The Company does not maintain casualty insurance on some of its property, including the inventory at our retail centers, our plant machinery and plant equipment and is at risk for those types of losses. The accompanying notes are an integral part of these financial statements. 29 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with accountants on accounting and financial disclosure matters.