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 | ☐ |
| ☒ | |||
| 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, 2023, based upon the closing sales price of the registrant’s Shares of Beneficial Interest on that date, as reported on the NYSE AMERICAN: $5,352,582.
Number of outstanding Shares of Beneficial Interest, without par value, as of December 7, 2023: .
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 OCTOBER 31, 2022
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| OCTOBER 31, 2023 | JANUARY 31, 2023 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Employee Retention Credit Receivable | ||||||||
| Prepaid Expenses and Other Current Assets | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment, net | ||||||||
| Notes 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 | ||||||||
| Mortgage Notes Payable, net of Discount | ||||||||
| 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 October 31, 2023 and January 31, 2023, respectively | ||||||||
| Treasury Stock, and shares held at cost at October 31, 2023 and January 31, 2023, 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 NINE MONTHS | ||||||||
| OCTOBER 31, | ||||||||
| 2023 | 2022 | |||||||
| REVENUE | ||||||||
| Room | $ | $ | ||||||
| Food and Beverage | ||||||||
| 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 | ||||||||
| Other | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| OPERATING INCOME | ( | ) | ||||||
| Other Income | ||||||||
| Interest Income | ||||||||
| TOTAL OTHER INCOME | ||||||||
| Interest on Mortgage Notes Payable | ||||||||
| Interest on Other Notes Payable | ||||||||
| TOTAL INTEREST EXPENSE | ||||||||
| CONSOLIDATED NET LOSS BEFORE EMPLOYEE RETENTION CREDIT | ( | ) | ( | ) | ||||
| Employee Retention Credit | ||||||||
| CONSOLIDATED NET INCOME | $ | $ | ||||||
| LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST | $ | $ | ||||||
| NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS | $ | $ | ||||||
| NET INCOME PER SHARE – 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 | ||||||||
| OCTOBER 31, | ||||||||
| 2023 | 2022 | |||||||
| REVENUE | ||||||||
| Room | $ | $ | ||||||
| Food and Beverage | ||||||||
| 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 | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| OPERATING LOSS | ( | ) | ( | ) | ||||
| Other Income | ||||||||
| Interest Income | ||||||||
| TOTAL OTHER INCOME | ||||||||
| Interest on Mortgage Notes Payable | ||||||||
| Interest on Other Notes Payable | ||||||||
| TOTAL INTEREST EXPENSE | ||||||||
| CONSOLIDATED NET LOSS BEFORE EMPLOYEE RETENTION CREDIT | ( | ) | ( | ) | ||||
| Employee Retention Credit | ||||||||
| CONSOLIDATED NET INCOME | $ | $ | ||||||
| LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST | $ | $ | ||||||
| NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS | $ | $ | ||||||
| NET INCOME PER SHARE – 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 THREE AND NINE MONTHS ENDED OCTOBER 31, 2023
| Trust | Non- | |||||||||||||||||||||||||||
| Shares of Beneficial Interest | Treasury Stock | Shareholders’ | Controlling | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Equity | Interest | Total Equity | ||||||||||||||||||||||
| Balance, January 31, 2023 | $ | $ | ( | ) | $ | $ | ( | ) | $ | | ||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Purchase of Treasury Stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Shares of Beneficial Interest Issued for Services Rendered | ||||||||||||||||||||||||||||
| Dividends | - | ( | ) | - | ( | ) | ( | ) | ||||||||||||||||||||
| Reconciliation of Treasury Shares | - | ( | ) | |||||||||||||||||||||||||
| Distribution to Non-Controlling Interests | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, October 31, 2023 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2023
| Trust | Non- | |||||||||||||||||||||||||||
| Shares of Beneficial Interest | Treasury Stock | Shareholders’ | Controlling | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Equity | Interest | Total Equity | ||||||||||||||||||||||
| Balance, January 31, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | | ||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Purchase of Treasury Stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Shares of Beneficial Interest Issued for Services Rendered | ||||||||||||||||||||||||||||
| Sales of Ownership Interests in Subsidiary, net | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Dividends | - | ( | ) | - | ( | ) | ( | ) | ||||||||||||||||||||
| Distribution to Non-Controlling Interests | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, October 31, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 5 |
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| FOR THE NINE MONTHS ENDED | ||||||||
| OCTOBER 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Consolidated Net Income | $ | $ | ||||||
| Adjustments to Reconcile Consolidated Net Income to Net Cash Provided By Operating Activities: | ||||||||
| Oher Notes Payable Correction | ||||||||
| Employee Retention Credit | ( | ) | ||||||
| Stock-Based Compensation | ||||||||
| Depreciation | ||||||||
| Changes in Assets and Liabilities: | ||||||||
| Accounts Receivable | ||||||||
| Prepaid Expenses and Other Assets | ( | ) | ( | ) | ||||
| Operating Lease | ( | ) | ( | ) | ||||
| Finance Lease | ( | ) | ( | ) | ||||
| Accounts Payable and Accrued Expenses | ( | ) | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Improvements and Additions to Hotel Properties | ( | ) | ( | ) | ||||
| Payments on Investments in Unigen | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Principal Payments on Mortgage Notes Payable | ( | ) | ( | ) | ||||
| Borrowings on Mortgage Notes Payable | ||||||||
| Payments on Notes Payable - Related Party | ( | ) | ||||||
| Borrowings on Note Payable - Related Party | ||||||||
| Payments on Other Notes Payable | ( | ) | ( | ) | ||||
| Payment of Dividends | ( | ) | ( | ) | ||||
| Distributions to Non-Controlling Interest Holders | ( | ) | ( | ) | ||||
| Sale of Ownership Interest in Subsidiary, net | ( | ) | ||||||
| Repurchase of Treasury Stock | ( | ) | ( | ) | ||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | ( | ) | ||||||
| NET (DECREASE) INCREASE 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 OCTOBER 31, 2023, AND JANUARY 31, 2023
AND FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2023, AND 2022
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of October 31, 2023, InnSuites Hospitality Trust (the “Trust”, “IHT”, “we”, “us” or “our”)
is a publicly traded unincorporated Ohio business real estate investment trust (REIT) with two hotels that IHT has an ownership interest
in 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 are operated under the federally trademarked name “InnSuites”, as well as
operating under the brand name “Best Western”. The Trust and its shareholders hold a diversification $
Hotel Operations:
Our Tucson, Arizona Hotel and our Hotel located in Albuquerque, New Mexico are moderate service hotels. Both hotels offer swimming pools, fitness centers, business centers, and complimentary breakfast. In addition the Hotels offer complementary social areas and modest conference facilities. The Tucson hotel has “PJ’s” Pub and Café, as well.
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. The Trust also provides the use of the “InnSuites” trademark to the Hotels. All expenses and reimbursements between the Trust and RRF 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 for sale but the Trust is willing to consider offers for each Hotel. Each of the Hotels is being made available at a price that management believes is reasonable in relation to its current fair market value, earnings, profits, and replacement cost.
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 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 | % | |||||||
| (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. On October 31, 2023 and January 31, 2023,
LIQUIDITY
The Trust’s principal source of cash to meet its cash requirements is revenues from hotel room reservations and from RRF Management fees from the Tucson, Arizona and Albuquerque, New Mexico properties. The Trust’s liquidity, including our ability to make distributions to its shareholders, and to service debt, will depend upon the ability of the Trust and the Partnership’s ability to generate sufficient cash flow from hotel operations, as well as to generate funds from repayment of intercompany advances and sale of assets.
At a future date, the Trust may receive cash from hotel and energy operations and/or full or partial sale of one or both hotels, and/or full or partial sale of its UniGen diversification investment.
As
of October 31, 2023, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount payable of approximately
$
As
of October 31, 2023, the Trust had three Revolving lines of Credit totaling $
With
approximately $
There can be no assurance that the Trust will be successful selling properties, merging, 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 or refinance certain of our assets to meet liquidity needs, which may not be on terms that are favorable.
| 8 |
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 Fiscal Nine Months ended October 31, 2023 are not necessarily indicative of the results that may be expected for the Fiscal Year ending January 31, 2024. 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 Fiscal Year ended January 31, 2023.
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 including the economic and business activity, the Company 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 the general partner of the Partnership, the Trust exercises unilateral control over the Partnership. Therefore, the financial statements of the Partnership 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 (summer low season) 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.
| 9 |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the unaudited condensed consolidated 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 audited 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, inflation, 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 indicate 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 October 31, 2023.
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 currently 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. Management and trademark fees include a monthly accounting fee and a percentage of hotel room revenues for managing the daily operations of the Hotels.
Each room night consumed by a guest with a cancelable 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, and high speed internet), 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
| 11 |
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 fully paid restricted 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. From time to time, the Trustees and key employees receive one-time fully paid restricted share grants, as well.
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. InnSuites Hospitality Trust continues its Company Stock Buyback Plan allowed within the NYSE American limitations.
Basic
and diluted net income 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
| 12 |
For the Fiscal Nine Months ended October 31, 2023 and 2022, 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 Fiscal Third Quarter, Fiscal Three Months ended October 31, 2023 and 2022, 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 October 31, 2023 and 2022 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 continuing 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. | |
| ● | 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. |
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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. (“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 at IHT’s sole discretion 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:
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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 could hold up to approximately
During
the year ended January 31, 2023, the Trust reinvested $
During
the Third Fiscal Quarter (August 1, 2023 to October 31, 2023), three months ended October 31, 2023, the Trust reinvested $
As
of October 31, 2023, IHT held common shares of UniGen, purchased at a cost of $
UniGen Power Inc. (UPI), management reports progress of the UPI efficient clean energy innovation.
1. Despite travel and supply chain disruptions including “reshoring” of a portion of UniGen parts, progress continues on the UPI 1000TA. In early 2023, with prototype engineering substantially complete, UniGen paused engineering to raise additional capital.
2. Due to global travel and economic events, an increasingly unreliable American power grid, increasing demand for electric vehicles, inflation, and supply chain pressures, the UniGen marketing team estimates product’s market has grown, and has increased the MSP planned power plant price. The initial order for thirty units has been reaffirmed.
3. UniGen is currently seeking an investor for its next round of financing, to complete the prototype to get assembled, and then ready for testing.
James
Wirth (President) and Marc Berg (Executive Vice President) both lack significant control. They have two of the seven Board of Directors
seats or
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. OWNERSHIP INTERESTS IN ALBQUERQUE AND TUCSON 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 1, 2023 with the Securities and Exchange Commissions. Generally, interests have sold for $
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 $
| 15 |
On
October 1, 2013, the Partnership entered into an updated restructured limited partnership agreement with Rare Earth to allow for the
sale of additional interest units in the Tucson entity for $
For
the Albuquerque entity, three Class A units were sold back to the Trust during the Fiscal Year ended January 31, 2023 for $
For
the Tucson entity, as of October 31, 2023 and January 31, 2023, respectively, the Partnership held a
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, including.
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.
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 nine months ended October 31, 2023 and the Fiscal Year ended January 31, 2023, 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, including the refinance of the Tucson Hotel on March 29, 2022.
5. PROPERTY AND EQUIPMENT
As of October 31, 2023, and January 31, 2023, hotel properties consisted of the following:
| HOTEL SEGMENT | ||||||||
| October 31, 2023 | January 31, 2023 | |||||||
| Land | $ | $ | ||||||
| Building and improvements | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Total hotel properties | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Hotel properties, net | ||||||||
As of October 31, 2023, and January 31, 2023, corporate property, plant, and equipment consisted of the following:
| CORPORATE PP&E | ||||||||
| October 31, 2023 | January 31, 2023 | |||||||
| Land | $ | $ | ||||||
| Building and improvements | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Total property, plant and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property, Plant and Equipment, net | $ | $ | ||||||
| 16 |
6. MORTGAGE NOTES PAYABLE
On
March 29, 2022 Tucson Hospitality Properties LLLP,
As
of October 31, 2023, and January 31, 2023, the mortgage loan balance was approximately $
On
December 2, 2019, Albuquerque Suites Hospitality, LLC entered into a $
7. NOTES PAYABLE AND NOTES RECEIVABLE – RELATED PARTY
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 October 31, 2023, the Trust had a $
On
July 1, 2019, the Trust and the Partnership together entered into an unsecured loan totaling $
See Note 9 – “Minimum Debt Payments” for scheduled minimum payments on the debt liabilities.
| 17 |
9. MINIMUM DEBT PAYMENTS
Scheduled minimum payments of debt, net of debt discounts, as of October 31, 2023 are approximately as follows in the respective Fiscal Years indicated:
| OTHER NOTES | NOTES PAYABLE - | ||||||||||||||||
| FISCAL YEAR | MORTGAGES | PAYABLE | RELATED PARTY | TOTAL | |||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| 2026 | |||||||||||||||||
| 2027 | |||||||||||||||||
| 2028 | |||||||||||||||||
| 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 pre-emptive rights.
For the nine months ended October 31, 2023, and 2022, 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 October 31, 2023, and January 31, 2023, Mr. Wirth and his affiliates held
| 18 |
As
of October 31, 2023, and January 31, 2023, the Trust owned
The
Trust directly manages the Hotels through the Trust’s majority-owned subsidiary, RRF Limited Partnership. Under the management
agreements, RRF manages the daily operations of both Trust Hotels. All Trust managed Hotel expenses, revenues and reimbursements among
the Trust, and the Partnership have been eliminated in consolidation. The management fees for the Hotels are
The
Trust employs part time, an immediate family member of Mr. Wirth, Brian James Wirth, who provides part time IT Technology support services
to the Trust, receiving approximately $
12. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The
Trust paid $
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 $
| 19 |
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 and land leased in Albuquerque, New Mexico, and a cable equipment finance lease in Tucson, Arizona. The Trust’s corporate office lease is month to month. All leases are non-cancelable.
Operating Leases
The
Trust holds a month to month office lease agreement with Northpoint Properties for a commercial office lease at 1730 E Northern Ave,
Suite 122, Phoenix, Arizona 85020. Base monthly rent is $
The
Trust’s Albuquerque Hotel is subject to non-cancelable ground lease.
The following table presents the Trust’s lease costs for the nine months ended October 31, 2023:
| Nine Months Ended | ||||
October 31, 2023 | ||||
| Operating Lease Costs: | ||||
| Operating lease cost* | ||||
| * |
| 20 |
Supplemental cash flow information is as follows:
| Nine Months Ended | ||||
| October 31, 2023 | ||||
| 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) | October 31, 2023 | |||
| Operating leases | ||||
| Weighted average discount rate Operating leases | % | |||
The aggregate future lease payments for Operating Lease Liability as of October 31, 2023 are as follows:
| For the Years Ending October 31, | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 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 | |||||
| 21 |
Finance Leases
The following table presents the Company’s lease costs for the nine months ended October 31, 2023:
| Nine Months Ended | ||||
| October 31, 2023 | ||||
| Finance Lease Costs: | ||||
| Amortization of right-of-use assets | $ | |||
| Interest on lease obligations | ||||
Supplemental cash flow information is as follows:
| Nine Months Ended | ||||
| October 31, 2023 | ||||
| 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) | October 31, 2023 | |||
| Finance leases | ||||
| Weighted average discount rate | % | |||
| Finance leases | ||||
The aggregate future lease payments for Finance Lease Liability as of October 31, 2023 are as follows:
| For the Years Ending October 31, | ||||
| 2024 | ||||
| 2025 | ||||
| Total minimum lease payments | $ | |||
| Less: amount representing interest | ||||
| Total present value of minimum payments | ||||
| Less: current portion | $ | |||
| Long term portion of finance lease liability |
| 22 |
On
May 15, 2023, the Trust’s Board of Trustees approved a grant to issue Officers, Trustees, and Key Employees totaling fully
paid IHT restricted shares. The aggregate grant date fair value of these Shares was approximately $
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 of its technology subsidiary, IBC Hotels LLC (IBC),
to an unrelated third-party buyer (Buyer). As a part of the amended sale agreement, the Trust received a secured promissory note adjusted
to the principal amount of $
| ● | No interest accrued through May 2023, and no payments on the note receivable including principal and interest based on the extended time period were due through May 2023. | |
| ● | Note is secured by (1) pledge of the Buyer’s interest in IBC, and (2) a security interest in all assets of IBC, provided IHT shall agree to subordinate such equity interest to commercially reasonable debt financing upon request. | |
| ● | ||
| ● | The note matures on June 1, 2024. IHT is in discussions for a further extension/modification. | |
| ● | Future payments on this note are shown in the table below. |
| FISCAL YEAR | |||||
| 2024 | |||||
| $ | |||||
| ● | 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 October 31, 2023, management evaluated the carrying value of the note determined no further impairment is needed at this time. This is detailed further with ongoing discussions of an extension, which allows time for IBC to benefit from the current rebound in the travel, hospitality services, and hotel industries currently being experienced.
| 23 |
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.
17. 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 from time to time received various IRS and state tax jurisdiction notices which the Trust is in
the process of responding to in which management believes the notices are without merit and expect full remediation of all tax notices.
The Trust and subsidiaries have deferred tax assets of $
18. 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. Its consequences had dramatically reduced travel and demand for hotel rooms, in Fiscal Year 2021. We believe that lodging demand and revenue level have now significantly recovered.
In Fiscal Year 2022, ended January 31, 2022, and Fiscal Year 2023, starting February 1, 2022 and ending January 31, 2023, InnSuites and the travel industry showed a significant rebound. The start of Fiscal Year 2024, starting February 1, 2023 and ending January 31, 2024, has shown no material ill effects.
COVID-19 and its consequences previously reduced travel and demand for hotel rooms, which previously had an adverse impact our business, operations, and financial results. We believe that lodging demand and revenue level has now rebounded to near full recovery. The extent to which COVID-19 currently impacts our business, operations, and financial results, including the duration and magnitude of such effects, is diminished. The negative impact COVID-19 had on global and regional economies and economic activity, including the duration and magnitude of its impact on consumer discretionary spending has been reduced significantly, and its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence is no longer considered a major factor for Fiscal Year 2024, (February 1, 2023 to January 31, 2024).
19. EMPLOYEE RETENTION TAX CREDIT
The Trust is participating in Economic Relief through a Credit allowed for Entities that suffered financial hardship during the Covid-19 Pandemic, under the CARES (The Coronavirus Aid, Relief, and Economic Security) Act (2020), and The Consolidated Appropriations Act (2021). Both provided fast and direct economic assistance for American workers, families, small businesses, and industries, by the U.S. Department of the Treasury along with Congress. This Credit was available for all Entities impacted by the Virus and who paid Employment Taxes, while trying to remain solvent and viable. It is a fully refundable tax credit for Eligible Employers that paid employees to carry on a trade or business that was partially or fully suspended during any calendar year 2020; or that experienced significant decline in gross receipts during any calendar quarter in 2020, due to COVID-19.
As
a result of both legislative acts, the Trust has and is expected to be receiving a net of approximately $
20. SUBSEQUENT EVENTS
The Trust intends to maintain its current conservative dividend policy. The Trust currently is, and has been paying two semi-annual dividends each Fiscal Year totaling $ per share per Fiscal Year. In the Fiscal Years ended January 31, 2023 and 2022, the Trust paid dividends of $ per share per share in each of the second and the fourth quarters. The Trust has paid uninterrupted dividends each Fiscal Year since its inception in 1971. The Trust paid the scheduled semi-annual $ dividend payable on July 31, 2023, as well as February 1, 2023, and is once again anticipated for February 1, 2024.
The Trust’s Management received communication from the NYSE-American on August 29, 2022, indicating IHT is fully compliant with all of the Continued Listing Standards Equity Requirements set forth in Part 10 of the NYSE American Company Guide, of the NYSE-American.
Subsequent
to the Fiscal Third Quarter ended October 31, 2023, the Trust repurchased Shares of Beneficial Interest on the open market for
a total cash repurchase price of approximately $
Hotel
Operation results of the Albuquerque Hotel and the Tucson Hotel both achieved record results for the Fiscal Year ended January 31, 2023.
Continued record results have taken place, and are expected for the two hotels, during Fiscal Year 2024, ending January 31, 2024. IHT
reported a strong annual improvement of results in Fiscal Year 2023, (February 1, 2022, to January 31, 2023), with Net Income Attributable
to Controlling Interests doubling, increasing by
| 24 |
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, 2023.
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 in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels and our other investments, 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:
| ● | Virus Pandemic and its effect on the Travel Industry; | |
| ● | potential risk of investments, including the investment in UniGen; | |
| ● | inflation and economic recession; | |
| ● | terrorist attacks or other acts of war; | |
| ● | political instability; | |
| ● | available cash, supply chain issues, and increased labor costs for diversified clean energy development and production; | |
| ● | fluctuations in hotel occupancy rates; | |
| ● | changes in room rental rates that may be charged by InnSuites in response to market rental rate changes or otherwise; | |
| ● | seasonality of our hotel operations business; | |
| ● | collectability of all receivables | |
| ● | 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; | |
| ● | insufficient resources to pursue our current strategy; | |
| ● | concentration of our investments in the InnSuites ® brand; | |
| ● | loss of membership contracts; |
| 25 |
| ● | the financial condition of franchises, brand membership companies, travel related companies, and receivables from 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 and security of the Trust’s software program; | |
| ● | 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; | |
| ● | presence of drugs or 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 property and liability insurance coverage including liability coverage, and increases in cost for property, liability, and 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 tax laws, and other legislation. |
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 October 31, 2023 the Trust had two moderate-service hotels, one in Tucson, Arizona and one in Albuquerque, New Mexico with 270 hotel suites. Both of our Trust Hotels are branded through membership agreements with Best Western, and both are also trademarked as InnSuites Hotels and Suites. We are also involved in various operations incidental to the operation of hotels, such as the operation of a limited service restaurant, and bar, as well as meeting/banquet room rentals.
At October 31, 2023, we owned a direct 21.50% 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 & 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 hotel and travel industries. Although hotel operations have now bounced back, virus-related travel slowdown in the Fiscal Year 2021, (February 1, 2020 to January 31, 2021), negatively impacted hotel room demand and pricing, which reduced our profit margins. Increases in supply or 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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Over time, we expect our UniGen diversification efficient clean energy generation investment to mature, grow, and provide a substantial source of income in the foreseeable future.
We expect the current Fiscal Year 2024 to continue strong for the travel industry, with a modest increase of occupancy and room rates, as well as continuation of current cost control all leading to improved profitability of our hotels. We believe that we have positioned the Hotels to remain competitive through our now fully completed Tucson and Albuquerque hotel refurbishments, by offering fully refurbished studios and two-room suites at each location, and by maintaining 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 ultimately obtaining full market value for our two Hotels at market value, which is believed by management to be 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”), 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., the Trust has invested in 525,000 UniGen shares, and in addition has acquired warrants to purchase approximately an additional 2 million UniGen shares over the next approximately 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 labor, property taxes, insurance, 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:
| For the Nine Months Ended | ||||||||||||||||
| Albuquerque | October 31, | |||||||||||||||
| 2023 | 2022 | Change | %-Incr/Decr | |||||||||||||
| Occupancy | 91.12 | % | 81.97 | % | 9.15 | % | 11.16 | % | ||||||||
| Average Daily Rate (ADR) | $ | 101.27 | $ | 99.40 | $ | 1.87 | 1.88 | % | ||||||||
| Revenue Per Available Room (REVPAR) | $ | 92.28 | $ | 81.48 | $ | 10.80 | 13.25 | % | ||||||||
| For the Nine Months Ended | ||||||||||||||||
| Tucson | October 31, | |||||||||||||||
| 2023 | 2022 | Change | %-Incr/Decr | |||||||||||||
| Occupancy | 73.85 | % | 67.40 | % | 6.45 | % | 9.57 | % | ||||||||
| Average Daily Rate (ADR) | $ | 88.58 | $ | 95.07 | $ | (6.49 | ) | -6.83 | % | |||||||
| Revenue Per Available Room (REVPAR) | $ | 65.42 | $ | 64.08 | $ | 1.34 | 2.09 | % | ||||||||
| For the Nine Months Ended | ||||||||||||||||
| Combined | October 31, | |||||||||||||||
| 2023 | 2022 | Change | %-Incr/Decr | |||||||||||||
| Occupancy | 81.01 | % | 73.44 | % | 7.57 | % | 10.31 | % | ||||||||
| Average Daily Rate (ADR) | $ | 94.50 | $ | 97.08 | $ | (2.58 | ) | -2.66 | % | |||||||
| Revenue Per Available Room (REVPAR) | $ | 76.56 | $ | 71.30 | $ | 5.26 | 7.38 | % | ||||||||
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 FISCAL TWELVE MONTH TRAILING ENDED OCTOBER 31, 2023 COMPARED TO THE FISCAL TWELVE MONTH TRAILING ENDED OCTOBER 31, 2022.
A summary of total operating results of the Trust for the twelve month trailing periods ended October 31, 2023 and 2022 is as follows:
| FY 2023/2024 | FY 2022/2023 | Change | % Change | |||||||||||||
| Total Revenues | $ | 7,357,456 | $ | 7,186,491 | $ | 170,965 | 2 | % | ||||||||
| Operating Expenses | 7,800,529 | 7,125,531 | 674,998 | 9 | % | |||||||||||
| Operating (Loss) Income | (443,073 | ) | 60,960 | (504,033 | ) | (827 | )% | |||||||||
| Interest Income and Other | 84,923 | 68,322 | 16,601 | 24 | % | |||||||||||
| Interest Expense | (519,550 | ) | (452,131 | ) | (67,419 | ) | (15 | )% | ||||||||
| Employee Retention Benefit | 1,403,164 | 1,403,164 | - | 100 | % | |||||||||||
| Sales and Occupancy Taxes | - | 798,000 | (798,000 | ) | (100 | )% | ||||||||||
| Income Tax Benefit | 93,497 | 50 | 93,447 | 186,894 | % | |||||||||||
| Consolidated Net Income | 618,961 | 1,878,365 | (1,259,404 | ) | (67 | )% | ||||||||||
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 2023 COMPARED TO THE NINE MONTHS ENDED OCTOBER 31, 2022
A summary of total operating results of the Trust for the nine months ended October 31, 2023 and 2022 is as follows:
| 2023 | 2022 | Change | % Change | |||||||||||||
| Total Revenues | $ | 5,751,583 | $ | 5,539,814 | $ | 211,769 | 4 | % | ||||||||
| Operating Expenses | 5,881,402 | 5,523,895 | 357,507 | 6 | % | |||||||||||
| Operating (Loss) Income | (129,819 | ) | 15,919 | (145,738 | ) | (915 | )% | |||||||||
| Interest Income and Other | 66,678 | 49,827 | 16,851 | 34 | % | |||||||||||
| Interest Expense | (377,539 | ) | (388,336 | ) | 10,797 | 3 | % | |||||||||
| Employee Retention Benefit | 1,052,373 | 1,052,373 | - | 0 | % | |||||||||||
| Consolidated Net Income | 611,693 | 729,783 | (118,090 | ) | (16) | % | ||||||||||
The Trust operations are comprised of one reportable segment, Hotel Ownership & Hotel Management Services (continuing operations) segment that performs management services and has ownership interest in 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 Trust does not review assets by geographical region; therefore, no income statement or balance sheet information by geographical region is provided.
REVENUE:
For the nine months ended October 31, 2023, we had total revenue of approximately $5.75 million compared to approximately $5.54 million for the nine months ended October 31, 2022, an increase of approximately $0.8 million. In the prior Fiscal Years ended January 31, 2023, 2022 and 2021, we made significant improvements to our Albuquerque, New Mexico and Tucson, Arizona hotels. During the nine months ended October 31, 2023, we had an increase in total revenue resulting from the recovery of demand after the virus related travel restrictions imposed due to COVID-19, and benefitting from prior refurbishments.
Total Consolidated Net Income for the nine months ended October 31, 2023 was approximately $612,000 compared to approximately $730,000 for the nine months ended October 31, 2022, a decrease of approximately $118,000. Earnings Per Share based on this Consolidated Net Income amount were $0.07, down $0.01 from the prior year of $0.08, which is a decrease of 16%, and also far exceeding their pre-Covid counterpart of Fiscal Year 2020. Earnings Per Share based on net income attributable to Controlling Interest was $0.03, down from the prior year similar period of $0.04.
Total Trust Equity decreased to approximately $3,258,000 at the end of the nine months in the current Fiscal Year 2024, down approximately $0.7 million, from approximately $3,955,000 reported at the end of the nine months in the prior Fiscal Year 2023. Net Income before non-cash depreciation expense was approximately $257,000 for the nine months ended October 31 2023, compared to approximately $296,000 for the nine months ended October 31, 2022, which is an decrease of approximately $36,000.
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We realized a 4% increase in room revenues during the nine months ended October 31, 2023, as room revenues were approximately $5.64 million for the nine months ending October 31, 2023 as compared to approximately $5.42 million for the nine months ending October 31, 2022. During Fiscal Year 2024, we expect modest additional improvements in occupancy, rates, and food and beverage revenues.
EXPENSES:
Total expenses net of interest expense was approximately $5.88 million for the nine months ended October 31, 2023, reflecting an increase of approximately $0.36 million, or 6%, compared to total expenses net of interest expense of approximately $5.52 million for the nine months ended October 31, 2022. The increase was primarily due to an increase in operating expenses related to increased occupancy and revenues at the hotel properties.
Room expenses consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation fees and room supplies were approximately $1.87 million for the nine months ended October 31, 2023, compared to approximately $1.65 million in the prior year nine month period for an increase of approximately $212,000, or 13%. Room expenses increased as occupancy at the hotels increased, and increased 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 nine months ended October 31, 2023, food and beverage expenses decreased approximately $11,000, or 7%, to approximately $138,000 for the nine months ended October 31, 2023, compared to approximately $149,000 for the nine months ended October 31, 2022. The decrease in cost is relative to the decrease in food and beverage revenue and keeping a tight control on expenses.
General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $1.77 million for the nine months ended October 31, 2023, increased approximately $141,000 from approximately $1.63 million for the nine months ended October 31, 2022, primarily due to higher charges in corporate staffing in support of the hotels and property sales efforts.
Sales and marketing expense decreased approximately $67,000, or 19%, to approximately $294,000 for the nine months ended October 31, 2023, from approximately $361,000 for the nine months ended October 31, 2022. Decreased focus on sales and marketing due to the rebound in hotel occupancy drove the decrease.
Repairs and maintenance expense increased from approximately $290,000 reported for the nine months ended October 31, 2022, compared to approximately $338,000 for the nine months ended October 31, 2023. 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 $89,000, or 35%, from $257,000 for the nine months ended October 31, 2022, to approximately $346,000 for the nine months ended October 31, 2023. The increase was primarily due to COVID-19 regulations minimizing and reducing food service availability, restricting our complimentary breakfast and social hour offerings.
Utility expenses remained relatively flat at approximately $315,000 reported for the nine months ended October 31, 2023, compared with approximately $321,000 for the nine months ended October 31, 2022.
Hotel property depreciation expenses decreased by approximately $28,000 from approximately $530,000 reported for the nine months ended October 31, 2022, compared to approximately $502,000 for the nine months ended October 31, 2023. Decreased depreciation resulted from the capital expenditures being fully depreciated.
Real estate and personal property taxes, Insurance and Ground Rent expenses decreased approximately $26,000, or 9%, to approximately $278,000 reported for the nine months ended October 31, 2023 compared with approximately $305,000 for the nine months ended October 31, 2022 due to adjustments in our operating lease accounts.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2023, COMPARED TO THE THREE MONTHS ENDED OCTOBER 31, 2022
A summary of total operating results of the Trust for the three months ended October 31, 2023, and 2022 is as follows:
| 2023 | 2022 | Change | % Change | |||||||||||||
| Total Revenues | $ | 1,824,499 | $ | 1,704,612 | $ | 119,887 | 7 | % | ||||||||
| Operating Expenses | 1,974,539 | 1,834,828 | (139,711 | ) | (8) | % | ||||||||||
| Operating Loss | (150,040 | ) | (130,216 | ) | (19,824 | ) | (15 | )% | ||||||||
| Interest Income | 14,226 | 17,634 | (3,408 | ) | (19 | )% | ||||||||||
| Interest Expense | (124,889 | ) | (130,214 | ) | 5,325 | 4 | % | |||||||||
| Employee Retention Benefit | 350,791 | 350,791 | - | 0 | % | |||||||||||
| Consolidated Net Income | 90,088 | 107,995 | (17,907 | ) | (17) | % | ||||||||||
REVENUE:
For the three months ended October 31, 2023, we had total revenue of approximately $1.82 million compared to approximately $1.70 million for the three months ended October 31, 2022, an increase of approximately $0.01 million. In the prior fiscal years ended January 31, 2023, 2022 and 2021, we made significant improvements to our Albuquerque, New Mexico and Tucson, Arizona hotels. During the three months ended October 31, 2023, we had an increase in total revenue resulting from the recovery of demand after the virus related travel restrictions imposed due to COVID-19, and benefitting from prior refurbishments.
Total Consolidated Net Income for the three months ended October 31, 2023 was approximately $90,000 compared to approximately $108,000 for the three months ended October 31, 2022, a decrease of approximately $18,000. Earnings Per Share based on this Consolidated Net Income amount were flat to the prior year of $0.01, and also far exceeding their pre-Covid counterpart of Fiscal Year 2020. Earnings Per Share based on net income attributable to Controlling Interest was $0.01, flat to the prior year similar three month period of $0.01.
Net Income before non-cash depreciation expense was approximately $257,000 for the three months ended October 31 2023, compared to approximately $293,000 for the three months ended October 31, 2022, which is a decrease of approximately $36,000.
We realized a 6% increase in room revenues during the three months ended October 31, 2023 as room revenues were approximately $1.78 million for the three months ending October 31, 2023 as compared to approximately $1.67 million for the three months ending October 31, 2022. During Fiscal Year 2024, we expect additional improvements in occupancy, modest improvements in rates and steady food and beverage revenues.
EXPENSES:
Total expenses net of interest expense was approximately $1.97 million for the three months ended October 31, 2023 reflecting an increase of approximately $0.01 million, or 8%, compared to total expenses net of interest expense of approximately $1.83 million for the three months ended October 31, 2022.
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Room expenses consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation fees and room supplies were approximately $605,000 for the three months ended October 31, 2023 compared to approximately $542,000 in the prior year three month period for an increase of approximately $63,000, or 12%. Room expenses increased as occupancy at the hotels increased, and increased 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 October 31, 2023, food and beverage expenses were relatively flat, at approximately $45,000 for the three months ended October 31, 2023, compared to approximately $43,000 for the three months ended October 31, 2022.
General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $551,000 for the three months ended October 31, 2023, increased approximately $40,000 from approximately $511,000 for the three months ended October 31, 2022 primarily due to savings initiatives at corporate staffing in support of the hotels and property sales efforts.
Sales and marketing expense decreased approximately $18,000, or 16%, to approximately $96,000 for the three months ended October 31, 2023 from approximately $114,000 for the three months ended October 31, 2022.
Repairs and maintenance expense decreased from approximately $114,000 reported for the three months ended October 31, 2022 compared to approximately $96,000 for the three months ended October 31, 2023. 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 $20,000, or 21%, from $94,000 for the three months ended October 31, 2022 to approximately $114,000 for the three months ended October 31, 2023. The increase was primarily due to reduction of regulations minimizing and reducing food service availability, no longer restricting our complimentary breakfast and social hour offerings.
Utility expenses decreased approximately $5,000, or 5%, to approximately $105,000 reported for the three months ended October 31, 2023 compared with approximately $100,000 for the three months ended October 31, 2022.
Hotel property depreciation expenses decreased by approximately $18,000 from approximately $185,000 reported for the three months ended October 31, 2022 compared to approximately $167,000 for the three months ended October 31, 2023. Decreased depreciation resulted from the capital expenditures being fully depreciated.
Real estate and personal property taxes, Insurance and Ground Rent expenses increased approximately $18,000, or 12%, to approximately $163,000 reported for the three months ended October 31, 2023 compared with approximately $145,000 for the three months ended October 31, 2022 due to adjustments in our operating lease accounts.
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LIQUIDITY AND CAPITAL RESOURCES
Overview – Hotel Operations & Corporate Overhead
Two principal sources of cash to meet our cash requirements, include monthly management fees from our two hotels and distributions of our share of the Partnership’s cash flow of the Tucson hotel and quarterly distributions from the Albuquerque, New Mexico properties. Additional sources of cash include intercompany loan repayments, potential future real estate hotel sales, and potential returns on diversified investments. The Partnership’s principal source of revenue is hotel operations for the hotel property it owns in Tucson, Arizona. 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 including repayment of intercompany loan from Tucson.
Hotel operations were positively affected by increased room rates at the Hotels in the Fiscal Year 2023, as the travel industry continued to rebound.
With approximately $1.9 million of cash as of October 31, 2023 and the availability of three $250,000 bank lines of credit, and $2,000,000 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. Our management is analyzing other strategic options available to us, including raising additional funds, asset sales, and benefitting from clean energy investment cash flow as our diversification investment matures.
IHT and InnDependent Boutique Collections Hotels (IBC), agreed to extend the payment schedule on IBC’s note receivable to allow IBC to fully use its revenues to build market share as the hotel industry rebounds. Management believes that with an additional extension repayment term, 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 October 31, 2023.
There can be no assurance that we will be successful fully collecting receivables, 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 limited additional new-build hotel supply in our markets during the remaining Fiscal Year 2024, and accordingly we anticipate a continued rebound of revenues and operating margins. We expect challenges for the remaining Fiscal Year to be the economy, inflation, and cost control. Travel, leisure, corporate, group, and government business continued rebound to grow and further increase room rates while maintaining and/or building market share thus far in Fiscal Year 2024.
Cash provided by operating activities totaled approximately $1.51 million during the nine months ended October 31, 2023 as compared to net cash provided of approximately $115,000 during the nine months ended October 31, 2022. Consolidated net income was approximately $612,000 for the nine months ended October 31, 2023 as compared to consolidated net income for the nine months ended October 31, 2022 of approximately $730,000. 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 for the nine months ended October 31, 2023 and 2022, respectively, consist primarily of operating lease costs, stock-based compensation, hotel property depreciation, and changes in assets and liabilities. Hotel property depreciation was approximately $502,000 during the nine months ended October 31, 2023 compared to approximately $530,000 during the nine months ended October 31, 2022, a decrease of $28,000 as the Trust recognized less depreciation as capitalized fixed assets became fully depreciated.
Changes in assets and liabilities for accounts receivable, prepaid expenses and other assets and accounts payable and accrued expenses totaled approximately ($497,000) and ($143,000) for the nine months ended October 31, 2023 and 2022, respectively. This significant decrease in changes in assets and liabilities for the nine months ended October 31, 2023 compared to the nine months ended October 31, 2022 was due to the decrease in operating liabilities related to ongoing operations.
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Net cash used in investing activities totaled approximately $390,000 for the nine months ended October 31, 2023 compared to net cash used in investing activities of approximately $323,000 for the nine months ended October 31, 2022. The increase in net cash used in activities during the nine months ended October 31, 2023 was due primarily due to the additional investment into UniGen in 2023.
Net cash (used in) provided by financing activities totaled approximately ($1,328,000) and $1,830,000, respectively, for the nine months ended October 31, 2023 and 2022. The decrease of approximately $3,158,000 was primarily due to the refinance of the Tucson Oracle mortgage, offset by repayments to Rare Earth on the Note Payable – Related Party.
Principal payments on mortgage notes payable for continuing operations was approximately $169,000 and $113,000 during the nine months ended October 31, 2023 and 2022, respectively.
Net payments and borrowings on other notes payable was approximately ($100,000) and approximately ($24,000) during the nine months ended October 31, 2023 and 2022, respectively.
Payments on notes payables–related party, netted against borrowings on note payable–related party, was approximately $0 and ($977,000) of cash used in financing activities during the nine months ended October 31, 2023 and 2022, respectively.
Treasury Stock repurchases of IHT stock for cash was approximately $399,000 and $244,000 of cash used in financing activities during the nine months ended October 31, 2023 and 2022, respectively.
During the nine months ended October 31, 2023, our distributions to non-controlling interest holders was approximately $569,000 compared with approximately $574,000 for the nine months ended October 31, 2022.
We continue to contribute to a Capital Expenditures Fund (the “Fund”) an amount equal to 4% of our Tucson InnSuites Hotel revenues from operation of the Hotel. The Fund is restricted by the mortgage lender for our Tucson property. As of October 31, 2023, and 2022, there were no monies held in these accounts reported on our unaudited condensed 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 nine months ended October 31, 2023 and 2022, the Hotel spent approximately $183,000 and $119,000 respectively, for capital expenditures. The capital expenditures were primarily associated with the property improvements at the Hotel, 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 2024 capital expenditures, we plan on spending less on capital improvements as we have completed our property improvements at our Tucson, Arizona hotel and our Albuquerque hotel, both of which required significant amounts of capital improvements in prior periods. Repairs and maintenance were charged to expense as incurred and approximated $338,000 and $290,000 for the nine months ended October 31, 2023 and 2022, respectively.
We have minimum debt payments, net of debt discounts, of approximately $525,000 and approximately $234,000 due during Fiscal Years 2024 and 2025, respectively. Minimum debt payments due during Fiscal Year 2024 and 2025 include approximately $55,000 and $234,000 of mortgage notes payable, and approximately $470,000 and $0 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 competitive. The hotel industry has been recovering and growing since April, 2021. 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 expected to see incremental demand during the next 18 months, as supply has been relatively steady in those respective markets. 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 the impact of virus-related restrictions and reduction of travel after February 1, 2020, to January 31, 2023. The continued recovery has and is benefiting our hotels in the First Three Fiscal Quarters of 2024, (February 1, 2023 to October 31, 2023). This improvement and continued upward trend is expected to continue for the balance of Fiscal Year 2024, through January 31, 2024, as the Travel Industry continues its recovery.
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. (UniGen), efficient clean energy power generation company. The Trust may continue to seek further diversification through a merger or reverse merger with a larger non-public entity seeking an NYSE-American public stock market listing.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As a partial diversification offset of the hotel industry fluctuation of supply and demand, the Trust looks to benefit from, and expand, its UniGen clean energy operation diversification investments in the 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, 2023 filed with the SEC on May 1, 2023, 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 October 31, 2023. 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 nine months ended October 31, 2023 or 2022. As of October 31, 2023, 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 both hotels 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. The plan is to work to sell the remaining two hotel properties over the next 12-36 months, and if needed beyond.
Revenue Recognition
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.
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 cancelable 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 or hot 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
The Trust’s Management received communication from the NYSE-American on August 29, 2022, indicating IHT is fully compliant with all of the Continued Listing Standards Equity Requirements set forth in Part 10 of the NYSE American Company Guide, of the NYSE-American.
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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 income or loss attributable to controlling interests to Adjusted EBITDA for the nine and three months ended October 31, 2023 and 2022 is approximately as follows:
| Nine Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income attributable to controlling interests | $ | 297,000 | $ | 371,000 | ||||
| Add back: | ||||||||
| Depreciation | 502,000 | 530,000 | ||||||
| Interest expense | 378,000 | 388,000 | ||||||
| Less: | ||||||||
| Interest Income | (34,000 | ) | (50,000 | ) | ||||
| Adjusted EBITDA | $ | 1,143,000 | $ | 1,239,000 | ||||
| Three Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income attributable to controlling interests | $ | 61,000 | $ | 95,000 | ||||
| Add back: | ||||||||
| Depreciation | 167,000 | 186,000 | ||||||
| Interest expense | 125,000 | 130,000 | ||||||
| Less: | ||||||||
| Interest Income | - | (18,000 | ) | |||||
| Adjusted EBITDA | $ | 353,000 | $ | 393,000 | ||||
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 non-cash 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 business investment, (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 consolidated financial statements.
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An approximate reconciliation of net income (loss) attributable to controlling interests to FFO for the nine and three months ended October 31, 2023 and 2022:
| Nine Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income attributable to controlling interests | $ | 297,000 | $ | 371,000 | ||||
| Add back: | ||||||||
| Depreciation | 502,000 | 530,000 | ||||||
| Non-controlling interest | 315,000 | 359,000 | ||||||
| FFO | $ | 1,114,000 | $ | 1,260,000 | ||||
| Three Months Ended October 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income attributable to controlling interests | $ | 61,000 | $ | 95,000 | ||||
| Add back: | ||||||||
| Depreciation | 502,000 | 530,000 | ||||||
| Non-controlling interest | 29,000 | 13,000 | ||||||
| FFO | $ | 592,000 | $ | 638,000 | ||||
FUTURE POSITIONING
In viewing the hotel industry cycles, recently reconfirmed by the disruption of travel and hospitality, the Board of Trustees determined that it was appropriate to continue 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, on the website www.suitehotelsrealty.com.
The table below provides book values, mortgage balances and Estimated Market Asking Price for the Hotels.
| Hotel Property | Book Value | Mortgage Balance | Estimated Market Asking Price | |||||||||
| Albuquerque | $ | 1,011,219 | $ | 1,216,340 | 9,500,000 | |||||||
| Tucson Oracle | 6,019,604 | 8,089,338 | 18,500,000 | |||||||||
| $ | 7,030,823 | $ | 9,305,678 | $ | 28,000,000 | |||||||
The “Estimated Market Asking Price” is the amount at which we believe may 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 hotel 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, the Tucson and Albuquerque hotels have an estimated market asking 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. 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 current strong local market conditions, comparable sales, and anticipated continued 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., (UniGen) 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 1, 2023. The stock and unit Repurchase Program was highly successful during Fiscal Year 2023 (February 1, 2022 to January 31, 2023). We plan to continue the stock and unit buy backs in the current Fiscal Year 2024.
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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 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 (summer low season) 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.
INFLATION
We rely entirely on the performance of the Hotels and InnSuites ability to increase revenue to keep pace with inflation. Operators of hotels in general, and InnSuites in particular, can change room rates quickly, but competitive pressures may limit InnSuites ability to raise rates as fast as or faster than inflation. During Fiscal Year 2023, ended January 31, 2023, InnSuites did experience substantial increases in rates to offset the inflationary increase labor and other expenses. During the current Fiscal 2024, rates continue to increase although at a slower pace than the prior year.
INVESTMENT IN UNIGEN POWER, INC.
On December 16, 2019, the Trust entered into a Convertible Debenture Purchase Agreement with UniGen Power Inc. (“UniGen”). InnSuites Hospitality Trust (IHT) made an initial $1 million diversification investment in late Fiscal Year 2020 and early Fiscal Year 2021. UniGen is in the process of developing a patented high profit potential new efficient clean energy generation innovation. The initial investment was made December 16, 2019, with positive progress to date despite the virus, economic setbacks, international vendor travel disruptions, cost overruns, and delays. The investment includes convertible bonds, stocks, and warrants to purchase 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.
The Trust purchased secured convertible debentures (“Debentures”) in the aggregate amount of $1,000,000 (the “Loan Amount”) (the “Loan”) at an annual interest rate of 6% ($15,000 per quarter). 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.
The Trust has purchased approximately 525,000 shares of UniGen stock.
UniGen issued the Trust common stock purchase warrants (the “Debenture Warrants”) including to purchase up to 1,000,000 shares of Class A Common Stock. The Debenture Warrants are exercisable at an exercise price of $1.00 per share of Class A Common Stock.
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UniGen, also, issued the Trust additional common stock purchase warrants (“Additional Warrants”) to purchase up to 500,000 shares of Class A Common Stock. The Additional Warrants are exercisable at an exercise price of $2.25 per share of Class A Common Stock.
UniGen has agreed to allow IHT to fund a $500,000 line of credit at the option of IHT convertible into 500,000 shares of UniGen stock at $1 per share. Currently, there is no outstanding balance at this time.
The total of all stock ownership upon conversion of the note receivable and exercise of warrants could total up to 3 million UniGen shares, which amounts to approximately 25% of fully diluted UniGen equity.
On the Trust’s balance sheet, the investment of the $1,618,750 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 $618,750 of UniGen Common Stock (525,000 shares), at cost. The value of the premium related to the fair value of the warrant will accrete over the life of the debentures.
Privately held UniGen Power, Inc. (UniGen) is developing a patented high profit potential new efficient clean energy generation innovation. 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.
Engineering work is substantially complete on the prototype and has been placed on hold, while UniGen concentrates on its next round of capital raising. IHT may participate in the upcoming round of capital raising through the exercise of existing warrants.
UniGen is a high risk investment offering high potential investment return if and when successful.
Based on a 96 core “super computer “ simulated test together with advanced software, UniGen has confirmed that the UPI 1000TA engine with the addition of recent technological advancements, is approximately 33% more fuel efficient than first estimated and will emit only approximately 25% of the maximum admissions allowed by CARB, the strictest of the regulatory standards issued by the state of California.
The UniGen design is to produce generators fueled not only with abundant relatively clean natural gas but also with other even cleaner fuels such as ethanol and hydrogen (that emits only water).
James Wirth (IHT President) and Marc Berg (IHT Executive Vice President) both lack significant UniGen control. They have two of the seven UniGen Board of Directors seats or 28% and were elected in December 2019 to serve on the board of UniGen to closely monitor and assist in the success of this potentially power industry disruptive relatively clean energy generation innovation.
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.
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 fully effective as of October 31, 2023.
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 Chief Executive Officer and Chief Financial Officer 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.
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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.
Assessment of Internal Control over Financial Reporting
Our management assessed the effectiveness of our internal control over financial reporting as of January 31, 2023. 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 fully effective as of October 31, 2023.
Management’s Remediation Initiatives
In an effort to remediate past deficiencies and enhance the Trust’s internal control over financial reporting, the Trust previously increased its technical accounting expertise through an increasingly seasoned Chief Financial Officer, and in Fiscal Years 2023/2024 promoting its Corporate Controller, and employing two full-time Staff Accountants to assist with the Trust’s technical accounting and internal control issues. The CFO has extensive public company reporting experience, to further assist with the Trust’s technical accounting and internal controls.
We have taken several appropriate and reasonable additional steps, as outlined above, to make the necessary improvements to our Accounting staff and internal control over financial reporting, which resulted in management providing the support previously needed with the additional hiring and training of sufficient personnel with appropriate training and expertise in accounting principles generally accepted in the United States. This additional staffing and training has allowed 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
| |
| ● | IHT previously strengthened the position of Chief Financial Officer (CFO), to assist with the Trust’s internal controls oversight. | |
| ● | IHT filled the position of Controller, to further assist with the Trust’s internal controls oversight, and process accounting. |
We believe that the remediation measures described above have and will continue to strengthen our internal control over financial reporting and remediate any material weaknesses that may be identified. These remediation efforts were implemented throughout Fiscal Year 2023, and early Fiscal Year 2024. Additional strengthening may take place in the balance of the current Fiscal Year 2024, as well.
Our management believes that our financial statements included in this Quarterly Report on Form 10-Q for the nine months ended October 31, 2023 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 continued positive changes in our internal control over financial reporting during the nine months ended October 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. With the several new additions aforementioned above, these new additions should 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 2022, ended January 31, 2022, COVID-19 had shrinking impact on our business, financial results and liquidity. Fiscal Year 2023, (starting February 1, 2022 and ending January 31, 2023), showed a significant strong rebound and encouraging progress, with signs of complete recovery. The start of Fiscal Year 2024, (starting February 1, 2023 and ending January 31, 2024), has shown no material ill effects from the pandemic.
COVID-19 and its consequences previously reduced travel and demand for hotel rooms, which previously had an impact our business, operations, and financial results. We believe that lodging demand and revenue level is largely recovered. The extent to which COVID-19 currently impacts our business, operations, and financial results, including the duration and magnitude of such effects, is diminished. The negative impact COVID-19 had on global and regional economies and economic activity, including the duration and magnitude of its impact on consumer discretionary spending has been reduced significantly, and its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence is no longer considered a major factor for Fiscal Year 2024, (February 1, 2023 to January 31, 2024).
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 three months ended October 31, 2023 and 2022, the Trust repurchased 120,126 and 15,795 Shares of Beneficial Interest at an average price of $1.44 and $2.53 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 nine months ended October 31, 2023, the Trust acquired 223,738 Shares of Beneficial Interest in open market transactions, at an average price of $1.78. During Fiscal Year 2023 (February 1, 2022 to January 31, 2023), the Trust repurchased 106,604 IHT Shares at an average price of $2.69 per share.
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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: December 7, 2023 | /s/ James F. Wirth |
| James F. Wirth | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: December 7, 2023 | /s/ Sylvin R. Lange |
| Sylvin R. Lange | |
Sylvin Lange, Chief Financial Officer (Principal Financial and Accounting Officer) |
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