IHT 10-Q
Innsuites Hospitality Trust (IHT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
(Address of principal executive offices)
Registrant’s
telephone number, including area code:
Indicate
by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☐ Yes ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ (Do not check if a smaller reporting company) | |||
| Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Aggregate market value of Shares of Beneficial Interest held by non-affiliates of the registrant as of July 31, 2021, based upon the closing sales price of the registrant’s Shares of Beneficial Interest on that date, as reported on the NYSE AMERICAN: $17,006,992
Number of outstanding Shares of Beneficial Interest, without par value, as of October 20, 2021:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) |
Name of each exchange on which registered | ||
TABLE OF CONTENTS
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2021
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| JULY 31, 2021 | JANUARY 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Income Tax Receivable | ||||||||
| Current Portion of Note Receivable (net) | ||||||||
| Prepaid Expenses and Other Current Assets | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment, net | ||||||||
| Note Receivable (net) | ||||||||
| Operating Lease – Right of Use | ||||||||
| Finance Lease – Right of Use | ||||||||
| Convertible Note Receivable | ||||||||
| Investment in Private Company Stock | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Current Portion of Mortgage Notes Payable, net of Discount | ||||||||
| Current Portion of Other Notes Payable | ||||||||
| Current Portion of Operating Lease Liability | ||||||||
| Current Portion of Finance Lease Liability | ||||||||
| Total Current Liabilities | ||||||||
| Notes Payable - Related Party | ||||||||
| Mortgage Notes Payable, net of Discount | ||||||||
| Other Notes Payable | ||||||||
| Operating Lease Liability, net of current portion | ||||||||
| Finance Lease Liability, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Shares of Beneficial Interest, par value, authorization; and shares issued and and shares outstanding at July 31, 2021 and January 31, 2021, respectively | ||||||||
| Treasury Stock, and shares held at cost at July 31, 2021 and January 31, 2021, respectively | ( | ) | ( | ) | ||||
| TOTAL TRUST SHAREHOLDERS’ EQUITY | ||||||||
| NON-CONTROLLING INTEREST | ( | ) | ( | ) | ||||
| TOTAL EQUITY | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 2 |
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| FOR THE SIX MONTHS ENDED | ||||||||
| JULY 31, | ||||||||
| 2021 | 2020 | |||||||
| REVENUE | ||||||||
| Room | $ | $ | ||||||
| Food and Beverage | ||||||||
| Management and Trademark Fees | ||||||||
| Other | ||||||||
| TOTAL REVENUE | ||||||||
| OPERATING EXPENSES | ||||||||
| Room | ||||||||
| Food and Beverage | ||||||||
| Telecommunications | ||||||||
| General and Administrative | ||||||||
| Sales and Marketing | ||||||||
| Repairs and Maintenance | ||||||||
| Hospitality | ||||||||
| Utilities | ||||||||
| Depreciation | ||||||||
| Real Estate and Personal Property Taxes, Insurance and Ground Rent | ||||||||
| Sales and Occupancy Tax | ||||||||
| Other | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| OPERATING LOSS | ( | ) | ( | ) | ||||
| Other Income | - | |||||||
| Interest Income | ||||||||
| PPP Loan Forgiveness | - | |||||||
| TOTAL OTHER INCOME | ||||||||
| Interest on Mortgage Notes Payable | ||||||||
| Interest on Notes Payable to Banks | - | |||||||
| Interest on Notes Payable – Related Party | - | |||||||
| Interest on Other Notes Payable | ||||||||
| TOTAL INTEREST EXPENSE | ||||||||
| CONSOLIDATED NET INCOME (LOSS) | $ | $ | ( | ) | ||||
| LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST | $ | $ | ( | ) | ||||
| NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS | $ | ( | ) | $ | ( | ) | ||
| NET LOSS PER SHARE TOTAL – BASIC & DILUTED | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC & DILUTED | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 3 |
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| FOR THE THREE MONTHS ENDED | ||||||||
| JULY 31, | ||||||||
| 2021 | 2020 | |||||||
| REVENUE | ||||||||
| Room | $ | $ | ||||||
| Food and Beverage | ||||||||
| Management and Trademark Fees | ||||||||
| Other | ||||||||
| TOTAL REVENUE | ||||||||
| OPERATING EXPENSES | ||||||||
| Room | ||||||||
| Food and Beverage | ||||||||
| Telecommunications | ||||||||
| General and Administrative | ||||||||
| Sales and Marketing | ||||||||
| Repairs and Maintenance | ||||||||
| Hospitality | ||||||||
| Utilities | ||||||||
| Depreciation | ||||||||
| Real Estate and Personal Property Taxes, Insurance and Ground Rent | ||||||||
| Sales and Occupancy Tax | ||||||||
| Other | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| OPERATING LOSS | ( | ) | ( | ) | ||||
| Other Expense | ( | ) | - | |||||
| Interest Income | ||||||||
| PPP Loan Forgiveness | - | |||||||
| TOTAL OTHER INCOME | ||||||||
| Interest on Mortgage Notes Payable | ||||||||
| Interest on Notes Payable to Banks | - | - | ||||||
| Interest on Notes Payable – Related Party | - | |||||||
| Interest on Other Notes Payable | ||||||||
| TOTAL INTEREST EXPENSE | ||||||||
| CONSOLIDATED NET INCOME (LOSS) | $ | $ | ( | ) | ||||
| LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST | $ | $ | ( | ) | ||||
| NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS | $ | ( | ) | $ | ( | ) | ||
| NET LOSS PER SHARE TOTAL – BASIC & DILUTED | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC & DILUTED | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 4 |
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JULY 31, 2021
| Shares of Beneficial Interest | Treasury Stock | Trust Shareholders’ | Non- Controlling | Total | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Equity | Interest | Equity | ||||||||||||||||||||||
| Balance, January 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net Loss | - | ( | ) | - | - | ( | ) | |||||||||||||||||||||
| Shares of Beneficial Interest Issued for Services Rendered | - | - | - | |||||||||||||||||||||||||
| Balance, April 30, 2021 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Net Loss | - | ( | ) | - | - | ( | ) | |||||||||||||||||||||
| Dividends | - | ( | ) | - | - | ( | ) | - | ( | ) | ||||||||||||||||||
| Shares of Beneficial Interest Issued for Services Rendered | - | - | - | |||||||||||||||||||||||||
| Purchase of Ownership Interest from Subsidiary, net | - | - | ( | ) | - | |||||||||||||||||||||||
| Reconciliation of Treasury Shares | ( | ) | - | - | - | - | - | |||||||||||||||||||||
| Balance, July 31, 2021 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
FOR THE SIX MONTHS ENDED JULY 31, 2020
| Shares of Beneficial Interest | Treasury Stock | Trust Shareholders’ | Non- Controlling | Total | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Equity | Interest | Equity | ||||||||||||||||||||||
| Balance, January 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net Loss | - | ( | ) | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Purchase of Treasury Stock | ( | ) | - | ( | ) | ( | ) | - | ( | ) | ||||||||||||||||||
| Shares of Beneficial Interest Issued for Services Rendered | - | - | - | |||||||||||||||||||||||||
| Sales of Ownership Interests in Subsidiary, net | - | - | - | - | - | |||||||||||||||||||||||
| Distribution to Non-Controlling Interests | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Reallocation of Non-Controlling Interests and Other | - | - | - | ( | ) | - | ||||||||||||||||||||||
| Balance, April 30, 2020 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Net Loss | - | ( | ) | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Dividends | - | ( | ) | - | - | ( | ) | - | ( | ) | ||||||||||||||||||
| Purchase of Treasury Stock | ( | ) | - | ( | ) | ( | ) | - | ( | ) | ||||||||||||||||||
| Shares of Beneficial Interest Issued for Services Rendered | - | - | - | |||||||||||||||||||||||||
| Balance, July 31, 2020 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 5 |
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| FOR THE SIX MONTHS ENDED | ||||||||
| JULY 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Consolidated Net Income (Loss) | $ | $ | ( | ) | ||||
| Adjustments to Reconcile Consolidated Net Loss to Net Cash Provided By (Used In) Operating Activities: | ||||||||
| PPP Loan Forgiveness | ( | ) | - | |||||
| Stock-Based Compensation | ||||||||
| Depreciation | ||||||||
| Changes in Assets and Liabilities: | ||||||||
| Accounts Receivable | ||||||||
| Prepaid Expenses and Other Current Assets | ( | ) | ( | ) | ||||
| Operating Lease Asset | ( | ) | ||||||
| Finance Lease Asset | ||||||||
| Income Tax Receivable | ( | ) | ||||||
| Operating Lease Liability | ( | ) | ( | ) | ||||
| Finance Lease Liability | ( | ) | ||||||
| Accounts Payable and Accrued Expenses | ( | ) | ||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Improvements and Additions to Hotel Properties | ( | ) | - | |||||
| Payment on Investments in Unigen | ( | ) | ( | ) | ||||
| Redemption (purchase) of Marketable Securities | - | ( | ) | |||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Principal Payments on Mortgage Notes Payable | ( | ) | ( | ) | ||||
| Payments on Notes Payable to Banks, net of financing costs | - | ( | ) | |||||
| Lendings on Notes Receivable - Related Party | - | ( | ) | |||||
| Collections on Notes Receivable - Related Party | - | |||||||
| Payments on Notes Payable - Related Party | ( | ) | ( | ) | ||||
| Borrowings on Notes Payable - Related Party | - | |||||||
| Payments on Other Notes Payable | ( | ) | ( | ) | ||||
| Borrowings on Other Notes Payable | ||||||||
| Payment of Dividends | ( | ) | ( | ) | ||||
| Proceeds from Sale of Non-Controlling Ownership Interest in Subsidiary, net | - | |||||||
| Distributions to Non-Controlling Interest Holders | - | ( | ) | |||||
| Repurchase of Treasury Stock | - | ( | ) | |||||
| NET CASH USED IN FINANCING ACTIVITIES | ( | ) | ( | ) | ||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ( | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 6 |
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JULY 31, 2021 AND JANUARY 31, 2021
AND FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2021 AND 2020
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of July 31, 2021, InnSuites Hospitality Trust (the “Trust”, “IHT”, “we”, “us” or “our”)
is a publicly traded unincorporated Ohio real estate investment trust (REIT) with two hotels IHT owns and manages. The Trust and its
shareholders directly in and through a Partnership, own interests in two hotels with an aggregate of 270 hotel suites in Arizona and
New Mexico, both (the “Hotels”) operated under the federally trademarked name “InnSuites Hotels” or “InnSuites”
as well as operating under the brand name “Best Western”. The Trust and its shareholders hold a $
Hotel Operations:
Our Tucson, Arizona Hotel and our Hotel located in Albuquerque, New Mexico are both moderate service hotels. Both hotels offer swimming pools, fitness centers, business centers, and complimentary breakfast. In addition the Hotels offer social areas and modest conference facilities.
The
Trust is the sole general partner of RRF Limited Partnership, a Delaware limited partnership (the “Partnership”), and owned
a
RRF Limited Partnership, a subsidiary, manages the Hotels’ daily operations under 2 management agreements, commencing May 1, 2021. Prior to this, InnSuites Hotels Inc. (“IHI”), also a subsidiary, managed the Hotels’ daily operations through April 30, 2021, and no longer provides management services to the Hotels thereafter. The Trust also provides the use of the “InnSuites” trademark to the Hotels. All expenses and reimbursements between the Trust, RRF and the Partnership have been eliminated in consolidation.
The Trust classified the Hotels as operating assets, but these assets are available for sale. At this time, the Trust is unable to predict when, and if, either of these will be sold. Neither the Tucson Hotel nor the Albuquerque Hotel is currently listed but the Trust is willing to consider offers for the Hotel. Each of the Hotels is being made available at a price that management believes is reasonable in relation to its current fair value.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and include all assets, liabilities, revenues and expenses of the Trust and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. Certain items have been reclassified to conform to the current fiscal year presentation. The Trust exercises unilateral control over the Partnership and the entities listed below. Therefore, the unaudited condensed financial statements of the Partnership and the entities listed below are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated.
| IHT OWNERSHIP % | ||||||||
| ENTITY | DIRECT | INDIRECT (i) | ||||||
| Albuquerque Suite Hospitality, LLC | % | |||||||
| Tucson Hospitality Properties, LLLP | % | |||||||
| RRF Limited Partnership | % | |||||||
| InnSuites Hotels Inc. | % | |||||||
| (i) |
| 7 |
PARTNERSHIP AGREEMENT
The
Partnership Agreement of the Partnership provides for the issuance of two classes of Limited Partnership units, Class A and Class B.
Class A and Class B Partnership units are identical in all respects, except that each Class A Partnership unit is convertible into one
newly-issued Share of Beneficial Interest of the Trust at any time at the option of the limited partner holding the units. The Class
B Partnership units may only become convertible, each into one newly issued Share of Beneficial Interest of the Trust, with the approval
of the Board of Trustees, in its sole discretion. On July 31, 2021 and January 31, 2021,
On July 27, 2021, an investor converted
LIQUIDITY
The Trust’s principal source of cash to meet its cash requirements is revenues from hotel room reservations from the Tucson, Arizona and Albuquerque, New Mexico properties. The Trust’s liquidity, including our ability to make distributions to its shareholders, will depend upon the ability of the Trust and the Partnership’s ability to generate sufficient cash flow from hotel operations and to service debt, as well as to generate funds from repayment of loans and sale of assets. The Covid-19 Virus (the “Virus”) as of May 15, 2020, had previously disrupted the quarterly distributions from both the Albuquerque and Tucson hotels. These quarterly distributions from both the Albuquerque and Tucson hotels are projected to resume February 15, 2022.
As
of July 31, 2021, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount payable of approximately
$
As
of July 31, 2021, the Trust had three Revolving lines of Credit totaling $
With
approximately $
There can be no assurance that the Trust will be successful selling properties, refinancing debt or raising additional or replacement funds, or that these funds may be available on terms that are favorable to it. If the Trust is unable to raise additional or replacement funds, it may be required to sell certain of our assets to meet liquidity needs, which may not be on terms that are favorable.
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BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by the Trust in accordance with Generally Accepted Accounting Principles (“GAAP”), for interim financial information, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statement presentation. However, the Trust believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended July 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2022. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended January 31, 2021.
The Trust has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed, the Trust is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Trust’s financial statements.
As sole general partner of the Partnership, the Trust exercises unilateral control over the Partnership, and the Trust owns all of the issued and outstanding classes of shares of InnSuites Hotels Inc. Therefore, the financial statements of the Partnership and InnSuites Hotels Inc. are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated.
Under Accounting Standards Codification (“ASC”) Topic 810-10-25, Albuquerque Suite Hospitality, LLC has been determined to be a variable interest entity with the Trust as the primary beneficiary (see Note 4 – “Variable Interest Entity”). Therefore, the financial statements of Albuquerque Suite Hospitality, LLC, are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated.
The financial statements of the Partnership and Tucson Hospitality Properties, LLLP are consolidated with the Partnership and the Trust, and all significant intercompany transactions and balances have been eliminated.
SEASONALITY OF THE HOTEL BUSINESS
The Hotels’ operations historically have been somewhat seasonal. The Tucson Arizona Hotel historically experiences the highest occupancy in the first fiscal quarter (the winter high season) and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter historically tends to be the lowest occupancy period at this Arizona Hotel. This seasonality pattern can be expected to cause fluctuations in the Trust’s quarterly revenues. The Hotel located in Albuquerque, New Mexico historically experiences its most profitable periods during the second and third fiscal quarters (the summer high season), providing some balance to the general seasonality of the Trust’s hotel business.
The seasonal nature of the Trust’s business increases its vulnerability to risks such as travel disruptions, labor force shortages and cash flow issues. Further, if an adverse event such as an actual or threatened virus pandemic, terrorist attack, international conflict, data breach, regional economic downturn or poor weather should occur at either of its two hotels, the adverse impact to the Trust’s revenues and profit could be significant.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Trust’s operations are affected by numerous factors, including the economy, virus/pandemic, competition in the hotel industry and the effect of the economy on the travel and hospitality industries. The Trust cannot predict if any of the above items will have a significant impact in the future, nor can it predict what impact, if any, the occurrence of these or other events might have on the Trust’s operations and cash flows. Significant estimates and assumptions made by management include, but are not limited to, the estimated useful lives of long-lived assets and recoverability of long-lived assets and the fair values of the long-lived assets.
PROPERTY AND EQUIPMENT
Furniture,
fixtures, building and improvements and hotel properties are stated at cost, except for land, and depreciated using the straight-line
method over estimated lives ranging up to
Land is an indefinite-lived asset. The Trust tests its land for impairment annually, or whenever events or changes in circumstances indicates an impairment may have occurred, by comparing its carrying value to its implied fair value.
For tax purposes the Trust takes advantage of accelerated depreciation methods (MACRS) for new capital additions and improvements to its Hotels.
Management applies guidance ASC 360-10-35, to determine when it is required to test an asset for recoverability of its carrying value and whether, or not, an impairment exists. Under ASC 360-10-35, the Trust is required to test a long-lived asset for impairment when there is an indicator of impairment. Impairment indicators may include, but are not limited to, a drop in the performance of a long-lived asset, a decline in the hospitality industry or a decline in the economy. If an indicator of potential impairment is present, then an assessment is performed of whether the carrying amount of an asset exceeds its estimated undiscounted future cash flows over its estimated remaining life.
If the estimated undiscounted future cash flows over the asset’s estimated remaining life are greater than the asset’s carrying value, no impairment is recognized; however, if the carrying value of the asset exceeds the estimated undiscounted future cash flows, then the Trust would recognize an impairment expense to the extent the asset’s carrying value exceeds its fair value, if any. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are analyzed on a property-specific basis independent of the cash flows of other groups of assets. Evaluation of future cash flows is based on historical experience and other factors, including certain economic conditions, and committed future bookings. Management has determined that no further impairment is required of long-lived assets for the fiscal period ended July 31, 2021.
CASH
The Trust believes it places its cash only with high credit quality financial institutions, although these balances periodically exceed federally insured limits.
REVENUE RECOGNITION
Hotel and Operations
Revenues are primarily derived from the sources below and are recognized as services are rendered and when collectability is reasonably assured. Amounts received in advance of revenue recognition are considered deferred liabilities and are generally not significant.
| 10 |
Revenues primarily consist of room rentals, food and beverage sales, management and trademark fees and other miscellaneous revenues from our properties. Revenues are recorded when rooms are occupied and when food and beverage sales are delivered.
Each room night consumed by a guest with a cancellable reservation represents a contract whereby the Trust has a performance obligation to provide the room night at an agreed upon price. For cancellable reservations, the Trust recognizes revenue as each performance obligation (i.e., each room night) is met. Such contract is renewed if the guest continues their stay. For room nights consumed by a guest with a non-cancellable reservation, the entire reservation period represents the contract term whereby the Trust has a performance obligation to provide the room night or nights at an agreed upon price. For non-cancellable reservations, the Trust recognizes revenue over the term of the performance period (i.e., the reservation period) as room nights are consumed. For these reservations, the room rate is typically fixed over the reservation period. The Trust uses an output method based on performance completed to date (i.e., room nights consumed) to determine the amount of revenue it recognizes on a daily basis if the length of a non-cancellable reservation exceeds one night since consumption of room nights indicates when services are transferred to the guest. In certain instances, variable consideration may exist with respect to the transaction price, such as discounts, coupons and price concessions made upon guest checkout.
In evaluating its performance obligation, the Trust bundles the obligation to provide the guest the room itself with other obligations (such as free Wi-Fi, complimentary breakfast, access to on-site laundry facilities and parking), as the other obligations are not distinct and separable because the guest cannot benefit from the additional amenities without the consumed room night. The Trust’s obligation to provide the additional items or services is not separately identifiable from the fundamental contractual obligation (i.e., providing the room and its contents). The Trust has no performance obligations once a guest’s stay is complete.
We are required to collect certain taxes and fees from customers on behalf of government agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and fees and, therefore, they are not included in revenues. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.
ACCOUNTS RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts
receivable are derived from guest stays and other reservations at the Hotels. Accounts receivable are carried at original amounts billed
less an estimate made for doubtful accounts based on a review of outstanding amounts on a quarterly basis. Management generally records
an allowance for doubtful accounts for
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INCOME TAX RECEIVABLE
The
Trust amended its corporate tax returns for the year ended January 31, 2019. Such amendments resulted in a refund of approximately $
LEASE ACCOUNTING
The Trust determines, at the inception of a contract, if the arrangement is a lease and whether it meets the classification criteria for a finance or operating lease. Right-of-use (“ROU”), assets represent the Trust’s right to use an underlying asset during the lease term and lease liabilities represent the Trust’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. ROU assets also include any advance lease payments and exclude lease incentives. As most of the Trust’s operating leases do not provide an implicit rate, the Trust uses its incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. Finance lease agreements generally include an interest rate that is used to determine the present value of future lease payments. Operating fixed lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term (see Note 14).
The Trust has an employee equity incentive plan, which is described more fully in Note 15 - “Share-Based Payments.” The three independent members of the Board of Trustees each earn IHT Shares per year. All shares vest over one year from date of grant. The Trust has paid the annual fees due to its Trustees by issuing Shares of Beneficial Interest out of its authorized but unissued Shares. Upon issuance, the Trust recognizes the shares as outstanding. The Trust recognizes expense related to the issuance based on the fair value of the shares upon the date of the restricted share grant and amortizes the expense equally over the period during which the shares vest to the Trustees.
TREASURY STOCK
Treasury stock is carried at cost, including any brokerage commissions paid to repurchase the shares. Any shares issued from treasury stock are removed at cost, with the difference between cost and fair value at the time of issuance recorded against Shares of Beneficial Interest.
Basic
and diluted net income/(loss) per Share of Beneficial Interest is computed based on the weighted-average number of Shares of Beneficial
Interest and potentially dilutive securities outstanding during the period. Dilutive securities are limited to the Class A and Class
B units of the Partnership, which are convertible into
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For the six months ended July 31, 2021 and 2020, there were Class A and Class B Partnership units outstanding, which are convertible into Shares of Beneficial Interest of the Trust. Assuming conversion at the beginning of each period, the aggregate weighted-average of these Shares of Beneficial Interest would have been and in addition to the basic shares outstanding for the three months ended July 31, 2021 and 2020, respectively. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B Partnership units were anti-dilutive during the three months ended July 31, 2021 and 2020 and are excluded in the calculation of diluted earnings per share for those periods.
ADVERTISING COSTS
Amounts
incurred for advertising costs are expensed as incurred. Advertising expense for operations totaled approximately $
CONCENTRATION OF CREDIT RISK
Credit risk is the risk of an unexpected loss if a third party to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Trust to a concentration of credit risk consist primarily of cash and cash equivalents. Management’s assessment of the Trust’s credit risk for cash and cash equivalents is low as cash and cash equivalents are held in financial institutions believed to be credit worthy. The Trust limits its exposure to credit loss by placing its cash with various major financial institutions and invests only in short-term obligations.
While the Trust is exposed to credit losses due to the non-performance of its counterparties, the Trust considers the risk of this remote. The Trust estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For disclosure purposes, fair value is determined by using available market information and appropriate valuation methodologies. Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. The fair value framework specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The fair value hierarchy levels are as follows:
| ● | Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured. |
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| ● | Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and / or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are level 2 valuation techniques. | |
| ● | Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect a company’s own judgments about the assumptions that market participants would use in pricing an asset or liability. |
The Trust has assets that are carried at fair value on a recurring basis, including stock and warrants in a 3rd party private company on the unaudited condensed consolidated balance sheet.
Due to their short maturities, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value. The fair value of mortgage notes payable, notes payable to banks and notes and advances payable to related parties is estimated by using the current rates which would be available for similar loans having the same remaining maturities and are based on level 3 inputs.
CONVERTIBLE NOTE RECEIVABLE IN UNIGEN POWER, INC.
On December 16, 2019 the Trust entered into a Convertible Debenture Purchase Agreement with UniGen Power Inc. (“UPI” or “UniGen”).
The
Trust purchased secured convertible debentures (“Debentures”) in the aggregate amount of $
UniGen
issued the Trust common stock purchase warrants (the “Debenture Warrants”) to purchase up to
UniGen,
also, issued the Trust additional common stock purchase warrants (“Additional Warrants”) to purchase up to
IHT
may fund a $
The
total of all stock ownership upon conversion of the note receivable is
On
the Trust’s balance sheet, the investment of the $
The value of the warrants issued with the note receivable was based on Black-Scholes pricing model based on the following inputs:
Debenture Warrants
| Type of option | Call option | |||
| Stock price | $ | |||
| Exercise (Strike) price | $ | |||
| Time to maturity (years) | ||||
| Annualized risk-free rate | % | |||
| Annualized volatility | % | |||
Additional Warrants
| Type of option | Call option | |||
| Stock price | $ | |||
| Exercise (Strike) price | $ | |||
| Time to maturity (years) | ||||
| Annualized risk-free rate | % | |||
| Annualized volatility | % | |||
If
all notes are converted and all available but not outstanding warrants exercised, IHT would hold up to approximately
During
the Fiscal Quarter ended July 31, 2021, warrants were exercised for $ and in return the Trust received shares of
UniGen. As of July 31, 2021, IHT held
The Trust has valued Unigen investment as a level 3 fair value measurement, for the following reasons: The investment does not qualify for level 1 since there are no identical actively traded instruments or level 2 identical or similar unobservable markets.
3. SALE OF OWNERSHIP INTERESTS IN SUBSIDIARIES
The
Trust has sold non-controlling interests in certain subsidiaries, including Albuquerque Suite Hospitality, LLC (the “Albuquerque
entity”) and Tucson Hospitality Properties, LLLP (the “Tucson entity, which sales are described in detail in our Annual Report
on Form 10-K filed on May 14, 2021 with the Securities and Exchange Commissions. Generally, interests have sold for $ per unit
with a two-unit minimum subscription. The Trust maintains at least
On February 15, 2017, the Trust and Partnership entered into a restructuring agreement with Rare Earth Financial, LLC (“REF”) to allow for the sale of non-controlling partnership units in Albuquerque Suite Hospitality LLC (“Albuquerque”) for $per unit, which operates the Best Western InnSuites Albuquerque Hotel and Suites Airport hotel property, a unit hotel in Albuquerque, New Mexico (the “Property”). REF and IHT restructured the Albuquerque Membership Interest by creating additional Class A membership interests from General Member majority-owned to accredited investor member-owned. Upon sale of Class A Interests, total interests outstanding changed from to with Class A, Class B and Class C Limited Liability Company Interests (referred to collectively as “Interests”) restructured with IHT selling approximately 200 Class B Interests to accredited investors as Class A Interest. This restructuring is part of the Trust’s Equity Enhancement Plan to comply with Section 1003(a)(iii) of the NYSE American Company Guide. For the six months ending July 31, 2021 and 2020, the Trust sold 0 units, and 1 unit, respectively.
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4. VARIABLE INTEREST ENTITIES
Management evaluates the Trust’s explicit and implicit variable interests to determine if they have any interests in variable interest entities (“VIEs”). Variable interests are contractual, ownership, or other pecuniary interests in an entity whose value changes with changes in the fair value of the entity’s net assets, exclusive of variable interests. Explicit variable interests are those which directly absorb the variability of a VIE and can include contractual interests such as loans or guarantees as well as equity investments. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing of variability indirectly, such as through related party arrangements or implicit guarantees. The analysis includes consideration of the design of the entity, its organizational structure, including decision making ability over the activities that most significantly impact the VIE’s economic performance. GAAP requires a reporting entity to consolidate a VIE when the reporting entity has a variable interest, or combination of variable interest, that provides it with a controlling financial interest in the VIE. The entity that consolidates a VIE is referred to as the primary beneficiary of that VIE.
The Partnership has determined that the Albuquerque entity is a variable interest entity with the Partnership as the primary beneficiary with the ability to exercise control, as determined under the guidance of ASC Topic 810-10-25. In its determination, management considered the following qualitative and quantitative factors:
a) The Partnership, Trust, and their related parties, which share common ownership and management, have guaranteed material financial obligations of the Albuquerque hotel.
b) The Partnership, Trust and their related parties have maintained, as a group, a controlling ownership interest in the Albuquerque hotel, with the largest ownership belonging to the Trust.
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c) The Partnership, Trust and their related parties have maintained control over the decisions which most impact the financial performance of the Albuquerque hotel, including providing the personnel to operate the property daily.
During the six months ended July 31, 2021 and the fiscal year ended January 31, 2021, neither the Trust nor the Partnership have provided any implicit or explicit financial support for which they were not previously contracted. Both the Partnership and the Trust provided mortgage loan guarantees which allow our properties to obtain new financing as needed.
5. PROPERTY AND EQUIPMENT
As of July 31, 2021, and January 31, 2021, hotel properties consisted of the following:
| HOTEL SEGMENT | ||||||||
| July 31, 2021 | January 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Building and improvements | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Total property and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property and Equipment, net | $ | $ | ||||||
As of July 31, 2021, and January 31, 2021, corporate property, plant, and equipment consisted of the following:
| CORPORATE SEGMENT | ||||||||
| July 31, 2021 | January 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Building and improvements | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Total property and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property and Equipment, net | $ | $ | ||||||
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6. MORTGAGE NOTES PAYABLE
On
July 31, 2021 and January 31, 2021, the Trust had a mortgage note payable outstanding with respect to the Tucson Hotel.
On
June 29, 2017, Tucson Oracle entered into a $
On
December 2, 2019, Albuquerque Suites Hospitality, LLC entered into a $
See Note 9 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.
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7. RELATED PARTY NOTES
On
December 1, 2014, the Trust entered a Demand/Revolving Line of Credit/Promissory Note with Rare Earth Financial, LLC, an entity which
is wholly owned by Mr. Wirth and his family members. The Demand/Revolving Line of Credit/Promissory Note, as amended on June 19, 2017,
bears interest at
8. OTHER NOTES PAYABLE
As
of July 31, 2021, the Trust had approximately $
As
of July 31, 2021, the Trust had a $
On
June 20, 2016, March 1 2017, May 30, 2018, and July 18, 2018 the Trust and the Partnership together entered into multiple unsecured loans
totaling $
On
March 20, 2017, the Trust and Partnership entered multiple, unsecured loans to Lisa Sweitzer Hayes (“Sweitzer Loans”), totaling
$100,000. As of July 1, 2019, these loans were consolidated and extended at
As
a result of the Covid-19 Virus Pandemic, and the subsequent Legislation passed within the CARES Act of 2020, the Trust applied for and
received Small Business Administration (“SBA”) loans through the Paycheck Protection Program (“PPP”). Loans in
the amount of approximately $
As
of January 31, 2021 the PPP Loan in other income received by the Trust was fully forgiven in the amount of approximately $
On
March 5, 2021, the Albuquerque hotel received another PPP Loan in the amount of $
See Note 9 – “Minimum Debt Payments” for scheduled minimum payments on the debt liabilities.
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9. MINIMUM DEBT PAYMENTS
Scheduled minimum payments of debt, net of debt discounts, as of July 31, 2021 are approximately as follows in the respective fiscal years indicated:
| FISCAL YEAR | MORTGAGES | OTHER NOTES PAYABLE | NOTES PAYABLE - RELATED PARTY | TOTAL | ||||||||||||
| 2022 | $ | $ | ||||||||||||||
| 2023 | ||||||||||||||||
| 2245 | ||||||||||||||||
| 2025 | ||||||||||||||||
| 2026 | ||||||||||||||||
| 2027 | ||||||||||||||||
| Thereafter | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
10. DESCRIPTION OF BENEFICIAL INTERESTS
Holders of the Trust’s Shares of Beneficial Interest are entitled to receive dividends when and if declared by the Board of Trustees of the Trust out of funds legally available. The holders of Shares of Beneficial Interest, upon any liquidation, dissolution or winding-down of the Trust, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the Trust. The Shares of Beneficial Interest possess ordinary voting rights, each share entitling the holder thereof to one vote. Holders of Shares of Beneficial Interest do not have cumulative voting rights in the election of Trustees and do not have preemptive rights.
For the three months ended July 31, 2021 and 2020, the Trust repurchased and Shares of Beneficial Interest at an average price of $ and $ per share, respectively. The average price paid includes brokerage commissions. The Trust intends to continue repurchasing Shares of Beneficial Interest in compliance with applicable legal and NYSE AMERICAN requirements.
11. RELATED PARTY TRANSACTIONS
As
of July 31, 2021 and January 31, 2021, Mr. Wirth and his affiliates held
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As
of July 31, 2021 and January 31, 2021, the Trust owned
The
Trust directly manages the Hotels through the Trust’s wholly owned subsidiary, RRF Limited Partnership. Under the management agreements,
RRF manages the daily operations of the two Hotels. Revenues and reimbursements among the Trust, RRF, and the Partnership have been eliminated
in consolidation. The management fees for the Hotels are set at
The
Trust employs an immediate family member of Mr. Wirth, Brian James Wirth, who provides technology support services to the Trust, receiving
a $
12. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The
Trust paid approximately $
13. COMMITMENTS AND CONTINGENCIES
Restricted Cash:
The
Trust is obligated under a loan agreement relating to the Tucson Oracle property to deposit
Membership Agreements:
The
Tucson and Albuquerque Hotels have entered into membership agreements with Best Western International, Inc. (“Best Western”)
for both hotel properties. In exchange for use of the Best Western name, trademark and reservation system, all Hotels pay fees to Best
Western based on reservations received through the use of the Best Western reservation system and the number of available suites at the
Hotels. The agreements with Best Western have no specific expiration terms and may be cancelled annually by either party. Best Western
requires that the hotels meet certain requirements for room quality. The two Best Western Hotels receive significant reservations through
the Best Western reservation system, and through Online Travel Agent (OTA) reservations systems, Expedia and Booking.com. Under these
arrangements, fees paid for membership fees and reservations were approximately $
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Litigation:
The Trust and/or its hotel affiliates, are involved from time to time in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Trust’s unaudited condensed consolidated financial position, results of operations or liquidity.
The nature of the operations of the Hotels exposes them to risks of claims and litigation in the normal course of their business. Although the outcome of these matters cannot be determined and is covered by insurance, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the unaudited condensed consolidated financial position, results of operations or liquidity of the Trust.
Indemnification:
The Trust has entered into indemnification agreements with all our executive officers and Trustees. The agreements provide for indemnification against all liabilities and expenses reasonably incurred by an officer or Trustee in connection with the defense or disposition of any suit or other proceeding, in which he or she may be involved or with which he or she may be threatened, while in office or thereafter, because of his or her position at the Trust. There is no indemnification for any matter as to which an officer or Trustee is adjudicated to have acted in bad faith, with willful misconduct or reckless disregard of his or her duties, with gross negligence, or not in good faith in the reasonable belief that his or her action was in the Trust’s best interests. These agreements require the Trust, among other things, to indemnify the Trustee or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status or service as our Trustee or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by us. The Trust may advance payments in connection with indemnification under the agreements. The level of indemnification is to the full extent of the net equity based on appraised and/or market value of the Trust. Historically, the Trust has not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets.
See Note 14 – Leases, for discussion on lease payment commitments.
14. LEASES
The Trust has operating leases for its corporate offices in Phoenix, Arizona, land leased in Albuquerque, New Mexico, and a cable equipment finance lease in Tucson, Arizona. The Trust’s corporate office lease includes options to extend or terminate the leases and the Trust includes these options in the lease term when it is reasonably certain to exercise that option. All leases are non-cancelable.
Operating Leases
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The
Company’s Albuquerque Hotel is subject to non-cancelable ground lease.
The following table presents the Company’s lease costs for the six months ended July 31, 2021:
| Six Months Ended | ||||
| July 31, 2021 | ||||
| Operating Lease Costs: | ||||
| Operating lease cost* | ||||
| * |
Supplemental cash flow information is as follows:
| Six Months Ended | ||||
| July 31, 2021 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | |||
| Lease obligations: | ||||
| Operating leases, net | $ | |||
| Long-term obligations | $ | |||
Weighted average remaining lease terms and discount rates were as follows:
| Weighted average remaining lease term (years) | July 31, 2021 | |||
| Operating leases | ||||
| Weighted average discount rate Operating leases | % | |||
The aggregate future lease payments for Operating Lease Liability as of July 31, 2021 are as follows:
| For the Years Ending July 31, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum lease payments | $ | |||
| Less: amount representing interest | ||||
| Total present value of minimum payments | ||||
| Less: current portion | $ | |||
| Long term portion of operating lease liability | ||||
Finance Leases
The following table presents the Company’s lease costs for the six months ended July 31, 2021:
| Six Months Ended | ||||
| July 31, 2021 | ||||
| Finance Lease Costs: | ||||
| Amortization of right-of-use assets | $ | |||
| Interest on lease obligations | ||||
Supplemental cash flow information is as follows:
| Six Months Ended | ||||
| July 31, 2021 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from finance leases | $ | |||
| Lease obligations: | ||||
| Finance leases, net | $ | |||
| Long-term obligations | $ | |||
Weighted average remaining lease terms and discount rates were as follows:
| Weighted average remaining lease term (years) | July 31, 2021 | |||
| Finance leases | ||||
| Weighted average discount rate | % | |||
| Finance leases | ||||
The aggregate future lease payments for Finance Lease Liability as of July 31, 2021 are as follows:
| For the Years Ending July 31, | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total minimum lease payments | $ | |||
| Less: amount representing interest | ||||
| Total present value of minimum payments | ||||
| Less: current portion | $ | |||
| Long term portion of finance lease liability | ||||
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The
Trust compensates its three independent non-employee Trustees for their services through grants of restricted Shares. The aggregate grant
date fair value of these Shares was $
In
addition, IHT restricted shares were issued to each of
the Trust’s three accountants, and restricted IHT Shares to each of three IHT employees.
The aggregate grant date fair value of these Shares was $
See Note 2 – “Summary of Significant Accounting Policies” for information related to grants of restricted shares under “Stock-Based Compensation.”
16. NOTES RECEIVEABLE
Sale of IBC Hospitality Technologies; IBC Hotels LLC (IBC)
On
August 15, 2018 InnSuites Hospitality Trust (IHT) entered into a final sale agreement for its technology subsidiary, IBC Hotels LLC (IBC),
with an effective sale date as of August 1, 2018 to an unrelated third-party buyer (Buyer). The payment terms to the sale agreement were
later amended due to the effects of Covid-19, on December 7, 2020, as further described below. As a part of the sale, the Trust received
a secured promissory note in the principal amount of $
| ● | No interest accrued through November 2021. |
| ● | Payments on the note receivable include principal and interest beginning in November 2021 | |
| ● | ||
| ● | ||
| ● | The note matures on June 1, 2024 | |
| ● | Future payments on this note are shown in the table below. |
| FISCAL YEAR | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| $ | ||||
| Impairment | ( | ) | ||
| $ | ||||
| Less: current portion of note receivable | $ | |||
| Long term portion of note receivable | $ | |||
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As
of January 31, 2020, the Trust evaluated the carrying value of the note of $
| ● | Management’s evaluation of the current financial position of the Buyer, based on unaudited financial statements provided. | |
| ● | Management’s best, conservative valuation of IBC’s assets, and their marketability, in the case of a default by the Buyer. | |
| ● | The current and future impact of the COVID-19 pandemic, on the travel and hospitality industry, in which IBC’s reservation and booking technology operates. |
As of July 31, 2021, management evaluated the carrying value of the note and the impairment taken to date and determined no further impairment is needed at this time.
IHT has no managerial control nor does IHT have the ability to direct the operations or capital requirements of IBC as of August 1, 2018. IHT has no rights to any benefits or losses from IBC as of August 1, 2018.
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Effective February 5, 2015, the Board of Trustees of the Trust adopted the 2015 Equity Incentive Plan (“2015 Plan”), subject to shareholder approval, under which up to Shares of Beneficial Interest of the Trust are authorized to be issued pursuant to grant of stock options, stock appreciation rights, restricted shares, restricted share units or other awards.
The Board of Trustees of the Trust has decided to terminate the 2015 Plan. Effective October 31, 2016, it has been determined that the Shareholders will not approve the 2015 Plan and the proposed grants have been rescinded. During the 2017 Annual Meeting of Shareholders, the IHT Shareholders approved the InnSuites Hospitality Trust 2017 Equity Incentive Plan (“2017 Plan”). Management has not granted any options under the 2017 Plan.
18. INCOME TAXES
The
Trust is taxed as a C-Corporation. The Trust’s practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. The Trust has received various IRS and state tax jurisdiction notices which the Trust in the process of responding
to in which management believes the notices are without merit and/or has set up a reserve subject to full resolution. The Trust and subsidiaries
have deferred tax assets of $
19. COVID-19 DISCLOSURE
COVID-19 had a material detrimental impact on our business, financial results and liquidity, in Fiscal Year 2021, ended January 31, 2021. More recent developments in the U.S., lead IHT Management to believe the severe adverse effects of the Virus on Fiscal Year 2021 on IHT and the entire hotel and travel industry will be reduced as the economy recovers, and travel recovers in the current Fiscal Year 2022, (February 1, 2021 to January 31, 2022).
The global spread of COVID-19 has been and continues to be a complex and evolving situation, with governments, public institutions and other organizations imposing or recommending, and business and individuals implementing, at various times and to varying degrees, restrictions on various activities or other actions to combat its spread, such as restrictions on travel or transportation, or operating limitations on work facilities, schools, public buildings and business, cancellation of events, including sporting events, conferences and meetings, and quarantines and lock-downs. COVID-19 and its consequences initially dramatically reduced travel and demand for hotel rooms, which has impacted our business, operations, and financial results. We believe that since April 2021, lodging demand and revenue level are now in a recovery stage.
20. SUBSEQUENT EVENTS
On August 9, 2021, the Trust retired all shares of its Treasury Stock held as of July 31, 2021, as approved by the Board of Trustees, and resumed repurchasing IHT stock in late August, 2021.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and our Form 10-K for the fiscal year ended January 31, 2021.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including statements containing the phrases “believes,” “intends,” “expects,” “anticipates,” “predicts,” “projects,” “will be,” “should be,” “looking ahead,” “may” or similar words, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that such forward-looking statements be subject to the safe harbors created by such Acts. These forward-looking statements include statements regarding our intent, belief or current expectations in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) our financing plans; (v) our position regarding investments, acquisitions, developments, financings, conflicts of interest and other matters; (vi) expansion of UniGen; (vii) our plans and expectations regarding future sales of hotel properties; and (viii) trends affecting our or any Hotel’s financial condition or results of operations.
These forward-looking statements reflect our current views with respect to future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels that may cause our actual results to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to:
| ● | Covid-19 Virus Pandemic and its effect and recovery on the Economic and Travel Industry slowdown; | |
| ● | local, national or international, political economic and business conditions, including, without limitation, conditions that may, or may continue to, affect public securities markets generally, the hospitality industry or the markets in which we operate or will operate; | |
| ● | fluctuations in hotel occupancy rates; | |
| ● | changes in room rental rates that may be charged by InnSuites Hotels in response to market rental rate changes or otherwise; | |
| ● | seasonality of our hotel operations business; | |
| ● | our ability to sell any of our Hotels at market value, or at all; | |
| ● | interest rate fluctuations; | |
| ● | changes in, or reinterpretations of, governmental regulations, including, but not limited to, environmental and other regulations, the Americans with Disability Act, Covid-19 restrictions, and federal income tax laws and regulations; | |
| ● | competition including supply and demand for hotel rooms and hotel properties; |
| ● | availability of credit or other financing; | |
| ● | our ability to meet present and future debt service obligations; | |
| ● | our ability to refinance or extend the maturity of indebtedness at, prior to, or after the time it matures; | |
| ● | any changes in our financial condition or operating results due to acquisitions or dispositions of hotel properties; | |
| ● | concentration of our investments in the InnSuites Hotels® brand; | |
| ● | loss of membership contracts; | |
| ● | the financial condition of franchises, brand membership companies and travel related companies; | |
| ● | ability to develop and maintain positive relations with “Best Western” and potential future franchises or brands; | |
| ● | real estate and hospitality market conditions; | |
| ● | hospitality industry factors; | |
| ● | our ability to carry out our strategy, including our strategy regarding diversification and investments; | |
| ● | the Trust’s ability to remain listed on the NYSE American; | |
| ● | effectiveness of the Trust’s software and cyber security; |
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| ● | the need to periodically repair and renovate our Hotels at a cost at or in excess of our standard 4% reserve; | |
| ● | tariffs and health travel restrictions may affect trade and travel; | |
| ● | our ability to cost effectively integrate any acquisitions with the Trust in a timely manner; | |
| ● | increases in the cost and availability of labor, energy, healthcare, insurance and other operating expenses as a result of inflation, or changed or increased regulation, or otherwise; | |
| ● | terrorist attacks or other acts of war; | |
| ● | outbreaks of communicable diseases attributed to our hotels or impacting the hotel industry in general; | |
| ● | natural disasters, including adverse climate changes in the areas where we have or serve hotels; | |
| ● | airline strikes; | |
| ● | transportation and fuel price increases; | |
| ● | adequacy of insurance coverage and increases in cost for health care coverage for employees and potential government regulation with respect to health care coverage; | |
| ● | data breaches or cybersecurity attacks, including breaches impacting the integrity and security of employee and guest data; and | |
| ● | loss of key personnel and uncertainties in the interpretation and application of ever-changing tax laws. |
We do not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise except as may be required by law. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, as amended, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Form 10-K relating to the operations of the Partnership.
OVERVIEW
We are engaged in the ownership and operation of hotel properties. On July 31, 2021. The Trust had two moderate service hotels in Tucson, Arizona and Albuquerque, New Mexico with 270 hotel suites. Both of our Hotels are branded through membership agreements with Best Western, and both are trademarked as InnSuites Hotels. We are also involved in various operations incidental to the operation of hotels, such as the operation of restaurants and meeting/banquet room rentals.
At July 31, 2021, we owned a direct 20.67% interest in the Albuquerque, New Mexico Hotel, and, together with the Partnership, owned an indirect 51.01% interest in the Tucson, Arizona Hotel.
Our operations consist of one reportable segment – Hotel Ownership Operations & Hotel Management Services. Hotel Ownership Operations derives its revenue from the operation of the Trust’s two hotel properties with an aggregate of 270 hotel suites in Arizona and New Mexico. Hotel management services, provides management services for the Trust’s two Hotels. As part of our management services, we also provide trademark and licensing services.
Our results are significantly affected by the overall economy and travel, occupancy and room rates at the Hotels, our ability to manage costs, changes in room rates, and changes in the number of available suites caused by the Trust’s disposition activities. Results are also significantly impacted by overall economic conditions and conditions in the travel industry. Unfavorable changes in these factors, such as the virus-related travel slowdown in the Fiscal Year 2021, (February 1, 2020 to January 31, 2021), can and have negatively impacted hotel room demand and pricing, which reduces our profit margins. Additionally, our ability to manage costs could be adversely impacted by significant increases in operating expenses, resulting in lower operating margins and higher hourly labor costs. Either a further increase in supply or a further decline in demand could result in increased competition, which could have an adverse effect on the rates and occupancy revenue of the Hotels in their respective markets.
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We experienced extremely weak economic conditions during the first six months of Fiscal Year 2021, February 1, 2020 to July 31, 2020, compared to Fiscal Year 2020 due to the Virus. primarily a result of the Covid-19 virus pandemic. As of July 31, 2021, we are experiencing a solid recovery of travel and hospitality industry which is expected to continue for the remainder of the current Fiscal Year 2022, ending January 31, 2022 due to recovering from the Covid-19 travel related restrictions. We expect the major challenge for current Fiscal Year 2022 to be the continued recovery of the travel industry, continued recovery of our Hotel’s occupancy levels, continued by recovery of room rates, as well as continuation of current strong cost control all leading to improved profitability of our hotels. We believe that we have positioned the Hotels to remain competitive through our now completed refurbishment(s), by offering a relatively large number of fully refurbished two-room suites at each location, and by maintaining robust complementary guest items, including complimentary breakfast and free Internet access.
Our strategic plan is to continue to obtain the full benefit of our real estate equity, by seeking buyers for the remaining two Hotels at market value which is substantially higher than lower book values, over the next 12-36 months. In addition, the Trust is seeking a larger private reverse merger partner that may benefit from a merger that would afford that partner access to our listing on the NYSE AMERICAN. In the process of reviewing merger opportunities, the Trust identified in December 2019, and invested $1 million in Unigen Power, Inc. (“Unigen”, or “UPI), an innovative efficient clean energy power generation company. The Trust has invested $1 million in debentures convertible into 1 million shares of UniGen Power Inc., and in addition has acquired warrants to purchase approximately an additional 2 million UniGen shares over the next approximately two to three years, which could result up to 25% ownership in UniGen. For more information on our strategic plan, including information on our progress in disposing of our hotel properties and expanding energy diversification, see “Future Positioning” in this Management Discussion and Analysis of Financial Condition and Results of Operations
HOTEL OPERATIONS
Our expenses consist primarily of property taxes, insurance, labor, corporate overhead, interest on mortgage debt, professional fees, depreciation of the Hotels and hotel operating expenses. Hotel operating expenses consist primarily of payroll, guest and maintenance supplies, marketing and utilities expenses. Under the terms of its Partnership Agreement, the Partnership is required to reimburse us for all such expenses. Accordingly, management believes that a review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, which is calculated as rooms sold divided by total rooms available, average daily rate (“ADR”), calculated as total room revenue divided by number of rooms sold, and revenue per available room (“REVPAR”), calculated as total room revenue divided by number of rooms available, is appropriate for understanding revenue from the Hotels.
The following tables show historical financial and other information for the periods indicated:
| Albuquerque | For the Six Months Ended July 31, | |||||||||||||||
| 2021 | 2020 | Change | %-Incr/Decr | |||||||||||||
| Occupancy | 85.00 | % | 58.90 | % | 26.10 | % | 44.31 | % | ||||||||
| Average Daily Rate (ADR) | $ | 77.92 | $ | 70.84 | $ | 7.08 | 9.99 | % | ||||||||
| Revenue Per Available Room (REVPAR) | $ | 66.23 | $ | 41.73 | $ | 24.50 | 58.71 | % | ||||||||
| Tucson | For the Six Months Ended July 31, | |||||||||||||||
| 2021 | 2020 | Change | %-Incr/Decr | |||||||||||||
| Occupancy | 73.80 | % | 55.90 | % | 17.90 | % | 32.02 | % | ||||||||
| Average Daily Rate (ADR) | $ | 76.59 | $ | 85.14 | $ | (8.55 | ) | -10.04 | % | |||||||
| Revenue Per Available Room (REVPAR) | $ | 56.52 | $ | 47.59 | $ | 8.93 | 18.76 | % | ||||||||
| Total | For the Six Months Ended July 31, | |||||||||||||||
| 2021 | 2020 | Change | %-Incr/Decr | |||||||||||||
| Occupancy | 78.43 | % | 57.06 | % | 21.37 | % | 37.45 | % | ||||||||
| Average Daily Rate (ADR) | $ | 77.19 | $ | 79.42 | $ | (2.23 | ) | -2.81 | % | |||||||
| Revenue Per Available Room (REVPAR) | $ | 60.54 | $ | 45.32 | $ | 15.22 | 33.58 | % | ||||||||
No assurance can be given that occupancy, ADR and/or REVPAR will not increase or decrease as a result of changes in national or local economic or hospitality industry conditions.
We enter transactions with certain related parties from time to time. For information relating to such related party transactions see the following:
| ● | For a discussion of management and licensing agreements with certain related parties, see “Note 2 to our Unaudited Condensed Consolidated Financial Statements – Summary of Significant Policies – Revenue Recognition – Hotel Operations” | |
| ● | For a discussion of guarantees of our mortgage notes payable by certain related parties, see Note 6 to our Unaudited Condensed Consolidated Financial Statements – “Mortgage Notes Payable.” | |
| ● | For a discussion of our equity sales and restructuring agreements involving certain related parties, see Notes 3 to our Unaudited Condensed Consolidated Financial Statements – “Sale of Ownership Interests in Subsidiaries”. | |
| ● | For a discussion of other related party transactions, see Note 11 to our Unaudited Condensed Consolidated Financial Statements – “Related Party Transactions.” |
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 2021 COMPARED TO THE SIX MONTHS ENDED JULY 31, 2020
A summary of total operating results of the Trust for the six months ended July 31, 2021 and 2020 is as follows:
| 2021 | 2020 | Change | % Change | |||||||||||||
| Total Revenues | $ | 3,069,189 | $ | 2,370,798 | $ | 698,391 | 29 | % | ||||||||
| Operating Expenses | 3,313,337 | 3,887,365 | (574,028 | ) | (15 | )% | ||||||||||
| Operating Loss | (244,148 | ) | (1,516,567 | ) | 1,272,419 | 84 | % | |||||||||
| Interest Income and Other | 967,463 | 64,352 | 903,111 | 1,403 | % | |||||||||||
| Interest Expense | (164,590 | ) | (168,027 | ) | 3,437 | 2 | % | |||||||||
| Consolidated Net Income (Loss) | 558,725 | (1,620,242 | ) | 2,178,967 | 134 | % | ||||||||||
The Chief Operating Decision Maker (“CODM”), Mr. Wirth, CEO of the Trust, has determined that the Trust operations are comprised of one reportable segment, Hotel Operations & Hotel Management Services (continuing operations) segment that has ownership interest and manages two hotel properties with an aggregate of 270 suites in Arizona and New Mexico.
The Trust has chosen to focus its hotel investments on the southwest region of the United States. The CODM does not review assets by geographical region; therefore, no income statement or balance sheet information by geographical region is provided.
REVENUE:
For the six months ended July 31, 2021, we had total revenue of approximately $3.1 million compared to approximately $2.4 million for the six months ended July 31, 2020, an increase of approximately $0.7 million. In the prior fiscal years ended January 31, 2021, 2020 and 2018, we made significant refurbishment improvements to our Albuquerque, New Mexico and Tucson, Arizona. During the six months ended July 31, 2021, we began to see increases in occupancy as demand and travel began to recover from COVID-19. Consolidated Net Income for the six months ended July 31, 2021 was $558,725 which is an increase in excess of $2.1 million from the same prior year period of ($1,620,242). Earnings Per Share based on net loss attributable to Controlling Interest was ($0.02), up from the prior year six month period of ($0.18), and based on the Non-GAAP calculation of Consolidated Net Income (Loss), the earnings per share was $0.06, up $0.15 from prior year similar period loss of ($0.09).
We realized a 39% increase in room revenues during the six months ended July 31, 2021 as room revenues were approximately $2.9 million for the six months ending July 31, 2021 as compared to approximately $2.1 million for the six months ending July 31, 2020. Due to continued COVID-19 restrictions, food and beverage revenue decreased slightly by 13% to approximately $29,000 for the six months ending July 31, 2021 as compared to approximately $33,000 during the six months ending July 31, 2020, a decrease of approximately $4,000. During the remainder of Fiscal year 2021, we expect improvements in occupancy. Management and trademark fee revenues decreased due to the sale of the Tempe hotel in December 2020, and were $0 compared to approximately $75,000 during the six months ended July 31, 2020. We realized an approximate 34% decrease in other revenues from the hotel properties during the six months ended July 31, 2021 to approximately $89,000 as compared to approximately $135,000 during the six months ended July 31, 2020.
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EXPENSES:
Total expenses net of interest expense was approximately $3.3 million for the six months ended July 31, 2021 reflecting a decrease of approximately $574,000, or 15%, compared to total expenses net of interest expense of approximately $3.9 million for the six months ended July 31, 2020. The decrease was primarily due to a decrease in sales and occupancy expense due to an occupancy tax discrepancy generated from our Tucson Oracle and Albuquerque hotels from prior periods.
Room expenses consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation fees and room supplies were approximately $919,000 for the six months ended July 31, 2021 compared to approximately $826,000 in the prior year six month period for an increase of approximately $93,000, or 11%. Room expenses increased as occupancy at the hotels increased, and expenses were incurred with the increased occupancy.
Food and beverage expenses included food and beverage costs, personnel, and miscellaneous costs to provide banquet events. For the six months ended July 31, 2021, food and beverage expenses increased approximately $31,000, or 50%, to approximately $95,000 for six months ended July 31, 2021, compared to approximately $63,000 for the six months ended July 31, 2020. The increase in cost relative to the decrease in food and beverage revenue is due to increasing food and beverage purchasing costs combined with additional staff associated with increased demand.
General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $954,000 for the six months ended July 31, 2021, increased approximately $36,000 from approximately $918,000 for the six months ended July 31, 2020 primarily due to higher charges in corporate staffing in support of the hotels and property sales efforts.
Sales and marketing expense decreased approximately $37,000, or 17%, to approximately $185,000 for the six months ended July 31, 2021 from approximately $222,000 for the six months ended July 31, 2020. Open positions for sales and marketing resources, due to a tight labor market, accounted for the decrease.
Repairs and maintenance expense increased by approximately $19,000, or 11%, to approximately $194,000 for the six months ended July 31, 2021 from approximately $175,000 for the six months ended July 31, 2020. Having completed the refurbishment property improvements at our Tucson, Arizona hotel Management anticipates the improvements which complies with the increasing Best Western standards, will continue to lead to improvement in guest satisfaction and will drive additional revenue growth through increased occupancy and increased rates.
Hospitality expense increased by approximately $10,000, or 10%, to approximately $105,000 for the six months ended July 31, 2021 from approximately $95,000 for the six months ended July 31, 2020. The increase was primarily due to the increased occupancy at the hotel properties as demands and travel began to recover from COVID-19.
Utility expenses increased approximately $22,000, or 10%, to approximately $200,000 reported for the six months ended July 31, 2021 from approximately $178,000 for the six months ended July 31, 2020. The increase was due to increased occupancy at the hotel properties as demands and travel began to recover from COVID-19.
Hotel property depreciation expenses decreased by approximately $63,000 to approximately $363,000 for the six months ended July 31, 2021 from approximately $426,000 for the six months ended July 31, 2020. Decreased depreciation resulted from the capital expenditures being fully depreciated.
Real estate and Personal Property Taxes, Insurance and Ground Rent expenses increased approximately $42,000, or 20%, to approximately $252,000 for the six months ended July 31, 2021 from approximately $210,000 for the six months ended July 31, 2020. The increase was primarily due to increased insurance costs combined with increased property taxes.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2021 COMPARED TO THE THREE MONTHS ENDED JULY 31, 2020
A summary of total operating results of the Trust for the three months ended July 31, 2021 and 2020 is as follows:
| 2021 | 2020 | Change | % Change | |||||||||||||
| Total Revenues | $ | 1,670,063 | $ | 924,720 | $ | 745,343 | 81 | % | ||||||||
| Operating Expenses | 1,707,632 | 2,158,467 | (450,835 | ) | (21 | )% | ||||||||||
| Operating Loss | (37,569 | ) | (1,233,747 | ) | 1,196,178 | 97 | % | |||||||||
| Interest Income and Other | 513,913 | 46,596 | 467,317 | 1,003 | % | |||||||||||
| Interest Expense | (74,780 | ) | (80,234 | ) | 73,454 | (7 | )% | |||||||||
| Income Tax Provision | - | - | - | 0 | % | |||||||||||
| Consolidated Net Income (Loss) | 401,564 | (1,267,385 | ) | 1,668,949 | 132 | % | ||||||||||
REVENUE:
For the three months ended July 31, 2021, we had total revenue of approximately $1.7 million compared to approximately $925k for the three months ended July 31, 2020, an increase of approximately $745,000. In the prior fiscal years ended January 31, 2021, 2020 and 2018, we made significant improvements to our Albuquerque, New Mexico and Tucson, Arizona. During the three months ended July 31, 2021, we began to see increases in occupancy as demand and travel began to recover from COVID-19. Consolidated Net Income for the three months ended July 31, 2021 was $401,564 which is an increase of over $1.6 million from the same prior year period of ($1,267,385).
Earnings Per Share based on net loss attributable to Controlling Interest was ($0.01), up from the prior year three month period of ($0.14), and based on the Non-GAAP calculation of Consolidated Net Income (Loss), the earnings per share was $0.04, up $0.11 from prior year similar period loss of ($0.07).
We realized a 25% increase in room revenues during the three months ended July 31, 2021 as room revenues were approximately $446,000 for the three months ending July 31, 2021 as compared to approximately $357,000 for the three months ending July 31, 2020. Due to COVID-19 eased restrictions and associated removal of lockdowns elsewhere, which allowed more dining out options instead of eating in the Hotels, food and beverage revenue decreased by 25% to approximately $13,000 for the three months ending July 31, 2021 as compared to approximately $18,000 during the three months ending July 31, 2020, a decrease of approximately $5,000. During fiscal year 2021, we expect additional improvements in occupancy, modest improvements in rates and steady food and beverage revenues. Management and trademark fee revenues decreased due to the sale of the Tempe hotel in December 2020, and were $0 compared to approximately $32,000 during the three months ended July 31, 2020. We realized an approximate 143% increase in other revenues from the hotel properties during the three months ended July 31, 2021 to approximately $69,000 as compared to approximately $28,000 during the three months ended July 31, 2020.
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EXPENSES:
Total expenses net of interest expense was approximately $1.7 million for the three months ended July 31, 2021 reflecting a decrease of approximately $451,000, or 21%, compared to total expenses net of interest expense and income tax provision of approximately $2.1 million for the three months ended July 31, 2020. The decrease was primarily due to the sales and occupancy tax expense incurred in the prior three month period and not incurred in the current period.
Room expenses consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation fees and room supplies were approximately $446,000 for the three months ended July 31, 2021 compared to approximately $357,000 in the prior year three month period for a increase of approximately $89,000, or 25%. Room expenses increased as occupancy at the hotels increased, and additional expenses were incurred with the increased occupancy.
Food and beverage expenses included food and beverage costs, personnel, and miscellaneous costs to provide banquet events. For the three months ended July 31, 2021, food and beverage expenses increased approximately $24,000, or 77%, to approximately $55,000 for three months ended July 31, 2021, compared to approximately $31,000 for the three months ended July 31, 2020. The increase in cost relative to the decrease in food and beverage revenue is due to increasing food and beverage purchasing costs.
General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $498,000 for the three months ended July 31, 2021, increased approximately $157,000 from approximately $340,000 for the three months ended July 31, 2020 primarily due to higher charges in corporate staffing in support of the hotels and property sales efforts.
Sales and marketing expense decreased approximately $8,000, or 7%, to approximately $104,000 for the three months ended July 31, 2021 from approximately $112,000 for the three months ended July 31, 2020. Open positions for sales and marketing resources, due to a tight labor market, accounted for the decrease.
Repairs and maintenance expense decreased by approximately $16,000, or 19%, to approximately $103,000 for the three months ended July 31, 2021 from approximately $87,000 for the three months ended July 31, 2020. Having completed the property improvements at our Tucson, Arizona hotel Management anticipates the improvements which complies with the increasing Best Western standards, will (after the adverse effects of travel restrictions and slowdown), lead to improvement in guest satisfaction and will drive additional revenue growth through increased occupancy and increased rates.
Hospitality expense increased by approximately $26,000, or 102%, to approximately $52,000 for the three months ended July 31, 2021 from approximately $26,000 for the three months ended July 31, 2020. The increase was primarily due to the increased occupancy at the hotel properties due to the removal of COVID-19 restrictions and lockdowns.
Utility expenses increased approximately $18,000, or 19%, to approximately $115,000 reported for the three months ended July 31, 2021 from approximately $97,000 for the three months ended July 31, 2020. The increase was due to increased occupancy at the hotel properties as demands and travel began to recover from COVID-19.
Hotel property depreciation expenses decreased by approximately $34,000 to approximately $178,000 for the three months ended July 31, 2021 from approximately $212,000 for the three months ended July 31, 2020. Decreased depreciation resulted from the capital expenditures being fully depreciated.
Real Estate and Personal Property Taxes, Insurance and Ground Rent expenses increased approximately $2,000, or 2%, to approximately $129,000 for the three months ended July 31, 2021 from approximately $127,000 for the three months ended July 31, 2020. The increase was primarily due to increased insurance costs.
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LIQUIDITY AND CAPITAL RESOURCES
Overview – Hotel Operations & Corporate Overhead
One principal source of cash to meet our cash requirements, including dividends to our shareholders, is our share of the Partnership’s cash flow, and quarterly distributions from the Tucson and Albuquerque hotel properties. Potential future real estate hotel sales is another future source of cash. The Partnership’s principal source of revenue is hotel operations for the hotel property it owns in Tucson, Arizona and Albuquerque, New Mexico. Our liquidity, including our ability to make distributions to our shareholders, will depend upon our ability, and the Partnership’s ability, to generate sufficient cash flow from hotel operations, from management fees, and from the potential sale and/or refinance of the hotel, and to service our debt.
Hotel operations were significantly affected by occupancy and room rates at the Hotels in the Fiscal year 2021. As the Covid-19 vaccine becomes more readily available and desired, and as the economy and travel industry continue to recover, occupancy has begun to recover from the Virus, as has the related economic and travel slowdown since April 2021 and is anticipated to continue throughout Fiscal 2022. Capital improvements are expected to decrease from the prior year due to the completed refurbishments mentioned previously.
With approximately $1.7 million of cash as of July 31, 2021 and the availability of three $250,000 bank lines of credit, and $788,000 available from the $2,000,000 related party Demand/Revolving Line of Credit/Promissory Note, and the availability of Advances to Affiliate credit facilities and available Bank line of Credit, we believe that we will have enough cash on hand to meet all of our financial obligations as they become due for at least the next twelve months from the issuance date of the these consolidated financial statements. In addition, our management is analyzing other strategic options available to us, including additional asset sales, and increasing borrowings at our Tucson hotel. However, such transactions may not be available on terms that are favorable to us, or at all.
IHT and InnDependent Boutique Collections Hotels (IBC), agreed to extend the payment schedule on IBC’s note receivable by one (1) year, extending the first payment from November 2020 to November 2021. The reason for the extension is in support of IBC’s cash requirements; related to IBC’s realization of fully benefiting from a return in occupancy and travel. These potential benefits in turn improve IHT’s secured position on its note receivable from IBC, with secured UCC Filings in place. Management also believes that even with an additional extension repayment term due to COVID-19 that the future collectability of the current carrying value of the note is probable and not subject to further impairment, or allowance for the Quarter ended July 31, 2021.
Refer to Note 16 – “Note Receivable” for information related to the Sale of IBC Hospitality Technologies (IBC).
There can be no assurance that we will be successful in refinancing debt or raising additional or replacement funds, or that these funds may be available on terms that are favorable to us. If we are unable to raise additional or replacement funds, we may be required to sell certain of our assets to meet our liquidity needs, which may not be on terms that are favorable.
We anticipate no additional new-build hotel supply in our markets during the remaining Fiscal Year 2022 and most likely Fiscal Year 2023, and accordingly we anticipate continuation since April 2021 of the recovery of revenues, room rates, and operating margins. We expect the major challenge for the current Fiscal Year to be the continued economic and travel recovery of leisure, corporate, group, and government business in the markets in Fiscal 2022 in which we operate, which may affect our ability to continue to maintain and recover occupancy and further increase room rates while maintaining and/or building market share.
Net cash provided by operating activities from operations totaled approximately $184,000 during the six months ended July 31, 2021 as compared to net cash used in by approximately $393,000 during the six months ended July 31, 2020. Consolidated net income was approximately $559,000 for the six months ended July 31, 2021 as compared to consolidated net loss for the six months ended July 31, 2020 of approximately $1.6 million. Explanation of the differences between these fiscal years are explained above in the results of operations of the Trust.
Changes in the adjustments to reconcile net income (loss) for the six months ended July 31, 2021 and 2020, respectively, consist primarily of PPP Loan Forgiveness, operating lease costs, stock-based compensation, hotel property depreciation, and changes in assets and liabilities.
Changes in assets and liabilities for accounts receivable, prepaid expenses and other assets and accounts payable and accrued expenses totaled approximately $42,000 and $786,000 for the six months ended July 31, 2021 and 2020, respectively. This significant decrease in changes in assets and liabilities for the six months ended July 31, 2021 compared to the six months ended July 31, 2020 was due primarily to a large reduction in accounts receivable from the prior six month period compared to the current six month period of greater than $500,000 which was a result of accounts receivable being better accounted for timely, reducing balances, combined with payments received in the current period.
Net cash used in investing activities totaled approximately $117,000 for the six months ended July 31, 2021 compared to net cash used in investing activities of approximately $400,000 for six three months ended July 31, 2020. The change in net cash provided by investing activities during the six months ended July 31, 2021 was due primarily due to the completed investment into UniGen in 2020.
Net cash used in financing activities totaled approximately $67,000 and $277,000, respectively, for the six months ended July 31, 2021 and 2020. The decrease of approximately $210,000 was primarily due to repayments and borrowings on the note payable - related party, approximately $105,000 in distributions, and approximately $207,000 in repurchases in treasury shares and treasury stock in the prior period that did not occur in the current period.
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Principal payments on mortgage notes payable for operations was approximately $101,000 and $81,000 during the six months ended July 31, 2021 and 2020, respectively. Net payments and borrowings on notes payable to banks was approximately $0 and approximately $17,000 during the six months ended July 31, 2021 and 2020, respectively.
Borrowings on notes payables – related party, netted against payments on note payable–related party, was approximately $382,000 and $161,000 of cash used in financing activities during the six months ended July 31, 2021 and 2020, respectively.
Borrowings on other notes payables netted against payments on other note payable was approximately $511,000 and $381,000 of net cash provided by financing activities during the six months ended July 31, 2021 and 2020, respectively.
Proceeds from sales of non-controlling ownership interests in subsidiaries decreased by approximately $10,000 as sales of non-controlling ownership interest was $0 for the six months ended July 31, 2021 and approximately $10,000 for the six months ended July 31, 2020. We had no sales of our IHT stock for cash for the six months ended July 31, 2021.
During the six months ended July 31, 2021, our distributions to non-controlling interest holders was approximately $0 compared with approximately $105,000 for the six months ended July 31, 2020.
We continue to contribute to a Capital Expenditures Fund (the “Fund”) an amount equal to 4% of the InnSuites Hotels’ revenues from operation of the Hotels. The Fund is restricted by the mortgage lender for one of our properties. As of July 31, 2021, and 2020, there were no monies held in these accounts reported on our Consolidated Balance Sheet as “Restricted Cash.” The Fund is intended to be used for capital improvements to the Hotels and refurbishment and replacement of furniture, fixtures and equipment. During the six months ended July 31, 2021 and 2020, the Hotels spent approximately $0 and $191,000, respectively, for capital expenditures. The capital expenditures were primarily associated with the property improvements at the Hotels, as required to meet continuing Best Western standards. We consider most of these improvements to be revenue producing. Therefore, these amounts are capitalized and depreciated over their estimated useful lives. For the remaining fiscal year 2021 capital expenditures, we plan on spending less on capital improvements as we have completed our property improvements at our Tucson, Arizona hotel which required significant amounts of capital improvements during the six months ending July 31, 2020. Repairs and maintenance were charged to expense as incurred and approximated $194,000 and $175,000 for the six months ended July 31, 2021 and 2020, respectively.
We have minimum debt payments, net of debt discounts, of approximately $99,000 and approximately $1.9 million due during fiscal years 2022 and 2023, respectively. Minimum debt payments due during fiscal year 2022 and 2023 include approximately $84,000 and $175,000 of mortgage notes payable, and approximately $15,000 and $577,000 of other notes payable, which are secured promissory notes outstanding to unrelated third parties arising from the Shares of Beneficial Interest and Partnership unit repurchases, respectively.
We may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by us may be secured or unsecured, long-term, medium-term, or short-term, bear interest at a fixed or variable rate and be subject to such other terms as we consider prudent.
COMPETITION IN THE HOTEL INDUSTRY
The hotel industry is highly competitive. There are clear signs and trends of economic recovery since April 2021, in this early part of the current Fiscal Year 2022 from the prior year, as most of our operations for Fiscal Year 2021 from February 1, 2020 until January 31, 2021 were down and well below previous averages in all aspects of our hotel operations, due to the impact of COVID-19. In the current Second Fiscal Quarter of Fiscal Year 2022, ending July 31, 2021, both the Tucson and Albuquerque hotels have experienced strong recovery of revenue and even stronger rebounds of gross operating profit to continue due to the ongoing stringent cost control measures. Revenues are growing, and gross operating profit is growing even more again due to stringent cost control measures. The drastic impact of COVID-19 to the world economy and hospitality industry resulted in severely reduced occupancy and significant reduction in room rates. Continued competition for reduced demand in corporate, leisure, group, and government business in the markets in which we operate, may affect our ability to maintain room rates and maintain market share. Each of the Hotels faces competition primarily from other mid-market hotels located in its immediate vicinity, but also competes with hotel properties located in other geographic markets, and increasingly from alternative lodging facilities, such as Airbnb. While none of the Hotels’ competitors dominate any of their geographic markets, some of those competitors may have greater marketing and financial resources than the Trust.
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Certain additional hotel property refurbishments have been completed by competitors in both Hotels’ markets, and additional hotel property developments may be built in the future. Such hotel developments could have an adverse effect on the revenue of our Hotels in their respective markets.
The Trust’s hotel investments are located in Arizona and New Mexico. With the completed renovations at our Tucson, Arizona and Albuquerque, New Mexico hotel properties, those hotels are now seeing incremental demand which is expected to continue during the next 18 months, as supply had been steady in those respective markets, and demand is expected to continue to increase as COVID-19 restrictions phase out. Either an increase in supply or a decline in demand could result in increased competition, which could have an adverse effect on occupancy, room rates and revenues of our Hotels in their respective markets. The hotels experienced a decrease in demand due to impact of the COVID-19 virus and the related restrictions and reduction of travel after February 1, 2020 to January 31, 2021. The recovery is benefitting our hotels especially since April 2021 and continuing throughout the Second Fiscal Quarter May 1, 2021 to July 31, 2021. This improvement and continued upward trend is expected to continue for the balance of Fiscal Year 2022, through January 31, 2022, as the Covid-19 vaccines become more readily available both nationally and internationally, and the Travel Industry continues its recovery worldwide.
The Trust may not invest further in hotels, but rather diversify into investments such as the investment made by the Trust in December 2019 in the innovative UniGen Power, Inc. (UPI), efficient clean energy power generation company. The Trust may continue to seek further diversification through a reverse merger with a larger non-public entity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As a partial offset to the current hotel industry Virus induced fluctuation of demand, the Trust looks to benefit from, and expand, its UniGen clean energy operation diversification investments in the months, and years ahead. See Note 2 of the unaudited consolidated financial statements for discussion on UniGen.
In our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 filed with the SEC on May 17, 2021, we identified the critical accounting policies that affect our more significant estimates and assumptions used in preparing our condensed consolidated financial statements. We believe that the policies we follow for the valuation of our Hotel properties, which constitute a major portion of our assets, are our most critical policies which have not changed in the period ended July 31, 2021. Those policies include methods used to recognize and measure any identified impairment of our Hotel property assets.
Asset Impairment
We believe that the policies we follow for the valuation of our hotel properties, which constitute most of our assets, are our most critical policies. The Financial Accounting Standards Board (“FASB”) has issued authoritative guidance related to the impairment or disposal of long-lived assets, codified in ASC Topic 360-10-35, which we apply to determine when it is necessary to test an asset for recoverability. On an events and circumstances basis, we review the carrying value of our hotel properties. We will record an impairment loss and reduce the carrying value of a property when anticipated undiscounted future cash flows and the current market value of the property do not support it carrying value. In cases where we do not expect to recover the carrying cost of hotel properties held for use, we will reduce the carrying value to the fair value of the hotel, as determined by a current appraisal or other acceptable valuation methods. We did not recognize a hotel properties impairment loss for the six months ended July 31, 2021 or 2020. As of July 31, 2021, our management does not believe that the carrying values of any of our hotel properties are impaired.
Sale of Hotel Assets
Management believes that our currently owned Hotels are valued at prices that are reasonable in relation to their current fair market value. At this time, the Trust is unable to predict when, and if, either of its Hotel properties will be sold. The Trust seeks to sell one hotel per year or both over the next 12-36 months. We believe that each of the assets is available at a price that is reasonable in relation to its current fair market value.
Revenue Recognition
Revenues are primarily derived from the following sources and are recognized as services are rendered and when collectability is reasonably assured. Amounts received in advance of revenue recognition are considered deferred liabilities.
Revenues primarily consist of room rentals, food and beverage sales, management and trademark fees and other miscellaneous revenues from our properties. Revenues are recorded when rooms are occupied and when food and beverage sales are delivered.
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Each room night consumed by a guest with a cancellable reservation represents a contract whereby the Trust has a performance obligation to provide the room night at an agreed upon price. For cancellable reservations, the Trust recognizes revenue as each performance obligation (i.e., each room night) is met. Such contract is renewed if the guest continues their stay. For room nights consumed by a guest with a non-cancellable reservation, the entire reservation period represents the contract term whereby the Trust has a performance obligation to provide the room night or nights at an agreed upon price. For non-cancellable reservations, the Trust recognizes revenue over the term of the performance period (i.e., the reservation period) as room nights are consumed. For these reservations, the room rate is typically fixed over the reservation period. The Trust uses an output method based on performance completed to date (i.e., room nights consumed) to determine the amount of revenue it recognizes on a daily basis if the length of a non-cancellable reservation exceeds one night since consumption of room nights indicates when services are transferred to the guest. In certain instances, variable consideration may exist with respect to the transaction price, such as discounts, coupons and price concessions made upon guest checkout.
In evaluating its performance obligation, the Trust bundles the obligation to provide the guest the room itself with other obligations (such as free Wi-Fi, grab and go breakfast, access to on-site laundry facilities and parking), as the other obligations are not distinct and separable because the guest cannot benefit from the additional amenities without the consumed room night. The Trust’s obligation to provide the additional items or services is not separately identifiable from the fundamental contractual obligation (i.e., providing the room and its contents). The Trust has no performance obligations once a guest’s stay is complete.
We are required to collect certain taxes and fees from customers on behalf of government agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and fees and, therefore, they are not included in revenues. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.
COMPLIANCE WITH CONTINUED LISTING STANDARDS OF NYSE AMERICAN
On April 30, 2021, the Trust requested and was granted an extension for their annual Form 10-K. As a result, the NT 10-K filed (Form 12b-25 Filing Extension), granted a fifteen day extension for the Trust to file its’ annual Form 10-K, until May 17, 2021. Consequently, the Trust completed and filed its’ annual 10-K and corresponding press release on May 14, 2021, and is still considered to be in compliance currently. On June 23, 2021, the Trust received communication from the NYSE AMERICAN indicating a Late-Filer Notification would be issued, provided it’s current quarterly 10-Q for the period ended April 30, 2021 would be considered delinquent if not filed on or before June 29, 2021. The Trust is now current and compliant, and was able to complete their 10-Q for the period ended April 30, 2021, filing it on June 28, 2021, thus avoiding any delinquency status and adhering to this timeline. On September 15, 2021, the Trust filed Form 12b-25, requesting an extension for their 10-Q for the period ended July 31, 2021.The trust is currently making every effort to remain current and compliant.
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NON-GAAP FINANCIAL MEASURES
The following non-GAAP presentations of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and funds from operations (“FFO”) are made to assist our investors in evaluating our operating performance.
Adjusted EBITDA is defined as earnings before interest expense, amortization of loan costs, interest income, income taxes, depreciation and amortization, and non-controlling interests in the Trust. We present Adjusted EBITDA because we believe these measurements (a) more accurately reflect the ongoing performance of our hotel assets and other investments, (b) provide more useful information to investors as indicators of our ability to meet our future debt payments and working capital requirements, and (c) provide an overall evaluation of our financial condition. Adjusted EBITDA as calculated by us may not be comparable to Adjusted EBITDA reported by other companies that do not define Adjusted EBITDA exactly as we define the term. Adjusted EBITDA does not represent cash generated from operating activities determined in accordance with GAAP and should not be considered as an alternative to (a) GAAP net income or loss as an indication of our financial performance or (b) GAAP cash flows from operating activities as a measure of our liquidity.
A reconciliation of net loss attributable to controlling interests to Adjusted EBITDA for the three and six months ended July 31, 2021 and 2020 is approximately as follows:
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss attributable to controlling interests | $ | (59,000 | ) | $ | (665,000 | ) | $ | (166,000 | ) | $ | (807,000 | ) | ||||
| Add back: | ||||||||||||||||
| Depreciation | 178,000 | 212,000 | 363,000 | 427,000 | ||||||||||||
| Interest expense | 75,000 | 80,000 | 165,000 | 168,000 | ||||||||||||
| Taxes | - | - | - | - | ||||||||||||
| Less: | ||||||||||||||||
| Interest Income | - | (47,000 | ) | - | (64,000 | ) | ||||||||||
| Adjusted EBITDA | $ | 194,000 | $ | (420,000 | ) | $ | 362,000 | $ | (276,000 | ) | ||||||
FFO is calculated on the basis defined by the National Association of Real Estate Investment Trusts (“NAREIT”), which is net income (loss) attributable to common shareholders, computed in accordance with GAAP, excluding gains or losses on sales of properties, asset impairment adjustments, and extraordinary items as defined by GAAP, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated joint ventures and non-controlling interests in the operating partnership. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP. The Trust is an unincorporated Ohio real estate investment trust; however, the Trust is not a real estate investment trust for federal taxation purposes. Management uses this measurement to compare itself to REITs with similar depreciable assets. We consider FFO to be an appropriate measure of our ongoing normalized operating performance. We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other companies that either do not define the term in accordance with the current NAREIT definition or interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to (a) GAAP net income or loss as an indication of our financial performance or (b) GAAP cash flows from operating activities as a measure of our liquidity, nor is it indicative of funds available to satisfy our cash needs, including our ability to make cash distributions. However, to facilitate a clear understanding of our historical operating results, we believe that FFO should be considered along with our net income or loss and cash flows reported in the unaudited condensed consolidated financial statements.
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An approximate reconciliation of net loss attributable to controlling interests to FFO for the three and six months ended July 31, 2021 and 2020:
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss attributable to controlling interests | $ | (59,000 | ) | $ | (665,000 | ) | $ | (166,000 | ) | $ | (807,000 | ) | ||||
| Add back: | ||||||||||||||||
| Depreciation | 178,000 | 212,000 | 363,000 | 427,000 | ||||||||||||
| Non-controlling interest | 461,000 | (602,000 | ) | 724,000 | (813,000 | ) | ||||||||||
| FFO | $ | 580,000 | $ | (1,055,000 | ) | $ | 921,000 | $ | (1,193,000 | ) | ||||||
FUTURE POSITIONING
In viewing the hotel industry cycles, recently reconfirmed by the COVID-19 disruption of travel and hospitality, the Board of Trustees determined that it was appropriate to actively seek buyers for our two remaining Hotel properties. We continue to make our Tucson Hotel and Albuquerque Hotel available for sale at market value, (which is substantially higher than the carrying book value which reflects years of non-cash depreciation expense), on the website www.suitehotelsrealty.com.
The table below provides book values, mortgage balances and listed asking price for the Hotels.
| Hotel Property | Book Value | Mortgage Balance | Estimated Market/Asking Price | |||||||||
| Albuquerque | $ | 1,223,600 | $ | 1,317,223 | 7,995,000 | |||||||
| Tucson Oracle | 6,652,756 | 4,519,491 | 16,600,000 | |||||||||
| $ | 7,876,356 | $ | 5,836,714 | $ | 24,595,000 | |||||||
The “Estimated Market/Asking Price” is the amount at which we believe would sell each of the Hotels and is adjusted to reflect hotel sales in the Hotels’ areas of operation and projected upcoming 12 month earnings of each of the Hotels. The Estimated Market/Asking Price is not based on appraisals of the properties.
We have from time to time listed each of the properties with a long time highly successful local real estate hotel broker who has successfully sold four of our hotel properties. We believe that each of the assets are being marketed at a price that is reasonable in relation to its current fair market value. We plan to sell our remaining two Hotel properties within 12-36 months, based on feedback received by our local hotel real estate property professional brokers, who specialize in the selling/buying hotel real estate properties. We can provide no assurance that we will be able to sell either or both of the Hotel properties on terms favorable to us or within our expected time frame, or at all.
Although believed feasible, we may be unable to realize the asking price for the individual Hotel properties or to sell and/or refinance one or both. However, we believe that the asking price values are reasonable based on upturn local market conditions, comparable sales, and anticipated upturns in occupancy, rates, and profits per hotel. Changes in market conditions have in part resulted, and may in the future result, in our changing one or all of the asking prices.
Our long-term strategic plan is to obtain the full benefit of our real estate equity, to benefit from our UniGen Power, Inc., (UPI) clean energy operation diversified investment, and to pursue a merger with another company, likely a private larger entity that seeks to go public to list on the NYSE AMERICAN Exchange.
SHARE REPURCHASE PROGRAM
For information on the Trust’s Share Repurchase Program, see Part II, Item 5. “Market for the Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities.” of our most recent 10-K Annual Report filed on May 17, 2021. The stock and unit Repurchase Program was highly successful during the Covid-19 Pandemic, throughout Fiscal Year 2021 (February 1, 2020 to January 31, 2021). We plan to continue the stock and unit buy backs in the current Fiscal Year 2022.
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OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements or liabilities. We do not have any majority-owned or controlled subsidiaries that are not included in our consolidated financial statements.
SEASONALITY
The Hotels’ operations historically have been somewhat seasonal. The Tucson Hotel typically experiences its highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter (the winter high season). The second fiscal quarter tends to be the lowest occupancy period at the Tucson Hotel. This seasonality pattern can be expected to cause fluctuations in the Trust’s quarterly revenues. The hotel located in New Mexico historically experiences their most profitable periods during the second and third fiscal quarters (the summer high season), providing balance to the general seasonality of the Trust’s hotel business.
The seasonal nature of the Trust’s business increases its vulnerability to risks such as labor force shortages and cash flow issues. Further, if an adverse event such as an actual or threatened terrorist attack, viral outbreak or pandemic, international conflict, data breach, regional economic downturn or poor weather conditions should occur during the high season, the adverse impact to the Trust’s revenues could likely be greater as a result of its seasonal business.
INFLATION
We rely entirely on the performance of the Hotels and InnSuites Hotels’ ability to increase revenue to keep pace with inflation. Operators of hotels in general, and InnSuites Hotels in particular, can change room rates quickly, but competitive pressures may limit InnSuites Hotels’ ability to raise rates as fast as or faster than inflation.
INVESTMENT IN UNIGEN POWER, INC.
On December 16, 2019 the Trust entered into a Convertible Debenture Purchase Agreement with UniGen Power Inc. (“UPI” or “UniGen”).
The Trust purchased secured convertible debentures (“Debentures”) in the aggregate amount of $1,000,000 (the “Loan Amount”) (the “Loan”) yielding at an annual interest rate of 6%. The Debentures are convertible into 1,000,000 Class A shares of UniGen Common Stock at an initial conversion rate of $1.00 per share.
UniGen issued the Trust common stock purchase warrants (the “Debenture Warrants”) to purchase up to 1,000,000 shares of Class A Common. The Debenture Warrants are exercisable at an exercise price of $1.00 per share of Class A Common Stock.
UniGen, also, issued the Trust additional common stock purchase warrants (“Additional Warrants”) to purchase up to 200,000 shares of Class A Common Stock and a separate grant of 300,000 warrants. The Additional Warrants are exercisable at an exercise price of $2.25 per share of Class A Common Stock.
On the Trust’s balance sheet, the investment of the $1,090,000 consists of approximately $700,000 in note receivables, approximately $300,000 as the fair value of the warrants issued with the Trust’s investment in UniGen, and $90,000 of UniGen Common Stock. The value of the premium related to the fair value of the warrant will accrete over the life of the debentures.
InnSuites Hospitality Trust (IHT) made an initial $1 million diversification investment in late Fiscal Year 2020 and early Fiscal Year 2021 that could expand into a multi-million-dollar investment totaling up to approximately 25 percent ownership in privately held UniGen Power, Inc. (UniGen) to develop a patented high profit potential new efficient clean energy generation innovation. The initial investment was made December 16, 2019, with significant positive progress to date despite the virus, economic, and travel disruptions of 2020. The investment includes warrants convertible to UniGen stock upon election of the Trust. The investment is valued at fair value (level 3), as defined in Note 2 of the Consolidated Financial Statements. There is no Investment Commitment to Unigen requiring any restriction of cash.
IHT is likely to obtain an opportunity to extend and then convert a $500,000 UniGen line of credit into 500,000 shares of UniGen. IHT, but not UniGen, has an option to extend the line of credit up to $500,000, and also has the option to receive payment convertible into stock at $1 per share. Full conversion of all IHT held convertible debt and UniGen warrants could result in 3 million shares of UniGen stock. If all shares from all parties are fully exercised, it would result in approximately 12 million UniGen shares outstanding, of which approximately up to 25% of the total equity of UniGen would be held by IHT. The Trust owns less than 1% of the outstanding shares of UniGen as of July 31, 2021.
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According to UniGen Management, the UniGen clean energy innovation project has made positive progress, with the first two GenSet prototypes anticipated to be in operation in a time period around year-end, 2021. A time delay is related to several factors, including the Covid-19 travel restrictions on UniGen engineers to travel to UniGen China suppliers, time needed to incorporate three additional patentable innovations discovered, and design improvements. Global Supply sources include China, Italy, Israel, and the United States. IHT has confidence in the UniGen technical team based in Detroit and in the encouraging progress to date. Unigen profitability is anticipated to be 15 months into the future, but future high profit potential is encouraging for IHT investors, especially considering 22 months of successful design and development work, now complete.
James Wirth (President) and Marc Berg (Executive Vice President) both lack significant control. They hold two of the six Board of Directors seats or 33% and were elected in December 2019 to serve on the board of UPI to closely monitor and assist in the success of this potentially power industry disruptive relatively clean energy generation innovation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer (CEO), and our Chief Financial Officer (CFO), concluded that our disclosure controls and procedures were not fully effective as of July 31, 2021.
Our management, including our CEO and CFO, do not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of the Trust’s CEO and CFO and effected by the Trust’s Board of Trustees, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Assessment of Internal Control over Financial Reporting
Our management assessed the effectiveness of our internal control over financial reporting as of January 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded our internal control over financial reporting was not fully effective as of July 31, 2021.
Management’s Remediation Initiatives
In an effort to remediate deficiencies and enhance the Trust’s internal control over financial reporting, the Trust made attempts to increase its technical accounting expertise by hiring a new Chief Financial Officer, Corporate Controller, and Staff Accountant with public company reporting experience to assist with the Trust’s technical accounting and internal control issues.
We need to take appropriate and reasonable steps to make necessary improvements to our Accounting staff and internal control over financial reporting, which will require management to support the hiring and training of sufficient personnel with appropriate training and expertise in accounting principles generally accepted in the United States. This increase to staffing and training will allow us to make the necessary improvements, including:
| ● | Continuing to improve the control environment through (i) being staffed with sufficient number of personnel to address segregation of duties issues, ineffective controls and to perform control monitoring activities, (ii) increasing the level of GAAP knowledge by retaining additional technical accountants, (iii) implementing formal process to account for non-standard transactions, and (iv) implementing and formalizing management oversight of financial reporting at regular intervals; | |
| ● | Continuing to update the documentation of our internal control processes, including implementing formal risk assessment processes and entity level controls; | |
| ● | Implementing control activities that address relevant risks and assure that all transactions are subject to such control activities; Ensure systems that impact financial information and disclosures have effective information technology controls; | |
| ● | Implementing plan to increase oversight and review of ad hoc spreadsheets while also working to reduce their use; | |
| ● | We are in the process of further enhancing the supervisory procedures to include additional levels of analysis and quality control reviews within the accounting and financial reporting functions; and
| |
| ● | We previously filled the previously vacant position of Chief Financial Officer (CFO), to assist with the Trust’s internal controls oversight. |
We believe that the remediation measures described above have and will continue to strengthen our internal control over financial reporting and remediate the material weaknesses we have identified. We expect these remediation efforts will be implemented throughout Fiscal Year 2022.
Despite the deficiencies reported above, our management believes that our financial statements included in this Quarterly Report on Form 10-Q for the six months ended July 31, 2021 fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the six months ended July 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have had significant turnover in our accounting department over the last 36 months. Continued training and experience should further assist with the Trust’s stability, technical accounting, and internal control issues.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Risks Relating to COVID-19
In Fiscal year 2021, ended January 31, 2021, COVID-19 has had a material detrimental impact on our business, financial results and liquidity. Since April 2021 at the start of Fiscal Year 2022, starting February 1, 2021 and ending January 31, 2022, the current Fiscal Year has shown significantly strong and encouraging recovery.
The global spread of COVID-19 has been and continues to be a complex and rapidly evolving situation, with governments, public institutions and other organizations imposing or recommending, and business and individuals implementing, at various times and to varying degrees, restrictions on various activities or other actions to combat its spread, such as restrictions and bans on travel or transportation, limitations on the size of gatherings, closures of or occupancy or other operating limitations on work facilities, schools, public buildings and business, cancellation of events, including sporting events, conferences and meetings, and quarantines and lock-downs. COVID-19 and its consequences have dramatically reduced travel and demand for hotel rooms, which has and will continue to impact our business, operations, and financial results. We believe that it will be some time before lodging demand and revenue level fully recover. Such recovery could vary across markets or regions around the world. The extent to which COVID-19 impacts our business, operations, and financial results, including the duration and magnitude of such effects, will depend on numerous evolving factors that we may not be able to accurately predict or assess, including availability of the Covid-19 vaccine, as well as including the duration and scope of COVID-19 (including the location and extent of resurgences of the virus and the availability of effective treatments or vaccines); the negative impact COVID-19 has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Holders of the Trust’s Shares of Beneficial Interest are entitled to receive dividends when and if declared by the Board of Trustees of the Trust out of funds legally available. The holders of Shares of Beneficial Interest, upon any liquidation, dissolution or winding-down of the Trust, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the Trust. The Shares of Beneficial Interest possess ordinary voting rights, each share entitling the holder thereof to one vote. Holders of Shares of Beneficial Interest do not have cumulative voting rights in the election of Trustees and do not have preemptive rights.
For the six months ended July 31, 2021 and 2020, the Trust repurchased 0 and 198,889 Shares of Beneficial Interest at an average price of $0 and $1.04 per share, respectively. The average price paid includes brokerage commissions. The Trust intends to continue repurchasing Shares of Beneficial Interest in compliance with applicable legal and NYSE AMERICAN requirements. The Trust’s management believes the Trust share price does not fully recognize the Trust’s full value and/or full potential. During the six months ended July 31, 2021, the Trust acquired 0 Shares of Beneficial Interest in open market transactions. During Fiscal Year 2021 (February 1, 2020 to January 31, 2021), the Trust repurchased 233,569 IHT Shares at an average price of $1.11 per share. IHT resumed repurchasing of shares in August of the third Fiscal Quarter, of the current Fiscal Year, August 1, 2021 to October 31, 2021.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit No. | Exhibit | |
| 31.1 | Section 302 Certification by Chief Executive Officer | |
| 31.2 | Section 302 Certification by Chief Financial Officer | |
| 32.1 * | Section 906 Certification of Principal Executive Officer and Principal Financial Officer | |
| 101 | Inline XBRL Exhibits | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
+ Management contract or compensation plan or arrangement.
* Furnished, note filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| INNSUITES HOSPITALITY TRUST | |
| Date: October 20, 2021 | /s/ James F. Wirth |
| James F. Wirth | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: October 20, 2021 | /s/ Sylvin R. Lange |
| Sylvin R. Lange | |
Sylvin Lange, Chief Financial Officer (Principal Financial and Accounting Officer) |
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