INNSUITES
HOSPITALITY TRUST AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
APRIL
30, 2017
|
|
|
JANUARY
31, 2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
468,248
|
|
|
$
|
568,396
|
|
Accounts
Receivable, including $16,224 and $1,783 from related parties and net of Allowance for Doubtful Accounts of $44,283 and $53,720
as of April 30, 2017 and January 31, 2017, respectively
|
|
|
1,173,540
|
|
|
|
718,917
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
185,313
|
|
|
|
177,654
|
|
Total
Current Assets
|
|
|
1,827,101
|
|
|
|
1,464,967
|
|
Property,
Plant and Equipment, net
|
|
|
20,001,683
|
|
|
|
19,774,865
|
|
Intangible
Assets, net
|
|
|
416,250
|
|
|
|
433,000
|
|
Goodwill
|
|
|
500,000
|
|
|
|
500,000
|
|
TOTAL
ASSETS
|
|
$
|
22,745,034
|
|
|
$
|
22,172,832
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$
|
2,553,309
|
|
|
$
|
2,163,900
|
|
Notes
Payable - Related Party
|
|
|
2,384
|
|
|
|
145,000
|
|
Lending
From Affiliates - Related Party
|
|
|
100,708
|
|
|
|
379,167
|
|
Current
Portion of Mortgage Notes Payable, net of Discount of $8,012 as of April 30, 2017 and January 31, 2017, respectively
|
|
|
505,400
|
|
|
|
505,400
|
|
Current
Portion of Notes Payable to Banks, net of Discount of $25,536 and $39,796 as of April 30, 2017 and January 31, 2017, respectively
|
|
|
296,376
|
|
|
|
646,376
|
|
Current
Portion of Other Notes Payable
|
|
|
651,026
|
|
|
|
565,657
|
|
Total
Current Liabilities
|
|
|
4,109,203
|
|
|
|
4,405,500
|
|
Mortgage
Notes Payable, net of discount of $48,888 and $50,891 as of April 30, 2017 and January 31, 2017, respectively
|
|
|
12,674,997
|
|
|
|
12,803,402
|
|
Notes
Payable to Banks, net of discount of $1,738 and $2,316 as of April 30, 2017 and January 31, 2017, respectively
|
|
|
827,028
|
|
|
|
1,331,270
|
|
Other
Notes Payable
|
|
|
6,250
|
|
|
|
7,411
|
|
TOTAL
LIABILITIES
|
|
|
17,617,478
|
|
|
|
18,547,583
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (SEE NOTE 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Shares
of Beneficial Interest, without par value, unlimited authorization; 18,441,853 and 18,292,601 shares issued and 9,788,070
and 9,665,328 shares outstanding at April 30, 2017 and January 31, 2017, respectively
|
|
|
18,314,109
|
|
|
|
16,794,132
|
|
Treasury
Stock, 8,653,783 and 8,645,573 shares held at cost at April 30, 2017 and January 31, 2017, respectively
|
|
|
(12,381,053
|
)
|
|
|
(12,362,952
|
)
|
TOTAL
TRUST SHAREHOLDERS’ EQUITY
|
|
|
5,933,056
|
|
|
|
4,431,180
|
|
NON-CONTROLLING
INTEREST
|
|
|
(805,499
|
)
|
|
|
(805,931
|
)
|
TOTAL
EQUITY
|
|
|
5,127,557
|
|
|
|
3,625,249
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
22,745,035
|
|
|
$
|
22,172,832
|
|
See
accompanying notes to unaudited
condensed
consolidated financial statements
INNSUITES
HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
FOR
THE THREE MONTHS ENDED
|
|
|
|
APRIL
30,
|
|
|
|
2017
|
|
|
2016
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Room
|
|
$
|
3,754,913
|
|
|
$
|
3,275,278
|
|
Food
and Beverage
|
|
|
59,785
|
|
|
|
61,482
|
|
Management
and Trademark Fees
|
|
|
80,284
|
|
|
|
76,993
|
|
Reservation
and Convention
|
|
|
229,247
|
|
|
|
202,781
|
|
Other
|
|
|
27,955
|
|
|
|
21,529
|
|
TOTAL
REVENUE
|
|
|
4,152,184
|
|
|
|
3,638,063
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Room
|
|
|
973,718
|
|
|
|
896,108
|
|
Food
and Beverage
|
|
|
66,660
|
|
|
|
93,179
|
|
Telecommunications
|
|
|
9,779
|
|
|
|
4,113
|
|
General
and Administrative
|
|
|
1,101,775
|
|
|
|
1,115,820
|
|
Sales
and Marketing
|
|
|
510,965
|
|
|
|
325,646
|
|
Repairs
and Maintenance
|
|
|
194,323
|
|
|
|
272,372
|
|
Hospitality
|
|
|
210,546
|
|
|
|
207,668
|
|
Utilities
|
|
|
174,372
|
|
|
|
207,177
|
|
Depreciation
|
|
|
413,398
|
|
|
|
133,654
|
|
Intangible
Amortization
|
|
|
16,750
|
|
|
|
16,750
|
|
Real
Estate and Personal Property Taxes, Insurance and Ground Rent
|
|
|
156,765
|
|
|
|
180,620
|
|
TOTAL
OPERATING EXPENSES
|
|
|
3,829,051
|
|
|
|
3,453,107
|
|
OPERATING
INCOME
|
|
|
323,133
|
|
|
|
184,956
|
|
Interest
Income
|
|
|
4
|
|
|
|
906
|
|
Interest
Income on Advances to Affiliates - Related Party
|
|
|
-
|
|
|
|
20,832
|
|
TOTAL
OTHER INCOME
|
|
|
4
|
|
|
|
21,738
|
|
Interest
on Mortgage Notes Payable
|
|
|
156,289
|
|
|
|
164,449
|
|
Interest
on Notes Payable to Banks
|
|
|
27,805
|
|
|
|
20,602
|
|
Interest
on Other Notes Payable
|
|
|
17,909
|
|
|
|
861
|
|
Interest
on Advances to Affiliates - Related Party
|
|
|
3,033
|
|
|
|
-
|
|
TOTAL
INTEREST EXPENSE
|
|
|
205,036
|
|
|
|
185,912
|
|
CONSOLIDATED
NET INCOME BEFORE INCOME TAX PROVISION
|
|
|
118,101
|
|
|
|
20,782
|
|
Income
Tax Provision
|
|
|
(60,000
|
)
|
|
|
-
|
|
CONSOLIDATED
NET INCOME
|
|
$
|
58,101
|
|
|
$
|
20,782
|
|
LESS:
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
|
$
|
297,870
|
|
|
$
|
210,478
|
|
NET
LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS
|
|
$
|
(239,769
|
)
|
|
$
|
(189,696
|
)
|
NET
LOSS PER SHARE – BASIC AND DILUTED
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
9,792,745
|
|
|
|
8,814,610
|
|
See
accompanying notes to unaudited
condensed
consolidated financial statements
INNSUITES
HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR
THE THREE MONTHS ENDED APRIL 30, 2017
|
|
Total
Equity
|
|
|
|
Shares
of Beneficial Interest
|
|
|
Treasury
Stock
|
|
|
Trust
Shareholders’
|
|
|
Non-Controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
Interest
|
|
|
Amount
|
|
Balance,
January 31, 2017
|
|
|
9,665,328
|
|
|
$
|
16,794,132
|
|
|
|
8,645,573
|
|
|
$
|
(12,362,952
|
)
|
|
$
|
4,431,180
|
|
|
$
|
(805,931
|
)
|
|
$
|
3,625,249
|
|
Net
(Loss) Income
|
|
|
-
|
|
|
|
(239,769
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(239,769
|
)
|
|
|
297,870
|
|
|
|
58,101
|
|
Purchase
of Treasury Stock
|
|
|
(8,210
|
)
|
|
|
-
|
|
|
|
8,210
|
|
|
|
(18,101
|
)
|
|
|
(18,101
|
)
|
|
|
-
|
|
|
|
(18,101
|
)
|
Shares
of Beneficial Interest Issued for Services Rendered
|
|
|
24,000
|
|
|
|
12,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,960
|
|
|
|
-
|
|
|
|
12,960
|
|
Sale
of Shares of Benficial Interest
|
|
|
106,952
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Sales
of Ownership Interests in Subsidiary, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,433,798
|
|
|
|
1,433,798
|
|
Distribution
to Non-Controlling Interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(184,450
|
)
|
|
|
(184,450
|
)
|
Reallocation
of Non-Controlling Interests and Other
|
|
|
-
|
|
|
|
1,546,786
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,546,786
|
|
|
|
(1,546,786
|
)
|
|
|
-
|
|
Balance,
April 30, 2017
|
|
|
9,788,070
|
|
|
$
|
18,314,109
|
|
|
|
8,653,783
|
|
|
$
|
(12,381,053
|
)
|
|
$
|
5,933,056
|
|
|
$
|
(805,499
|
)
|
|
$
|
5,127,557
|
|
See
accompanying notes to unaudited
condensed
consolidated financial statements
INNSUITES
HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
FOR
THE THREE MONTHS ENDED
|
|
|
|
2017
|
|
|
2016
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Consolidated
Net Income
|
|
$
|
58,101
|
|
|
$
|
20,782
|
|
Adjustments
to Reconcile Consolidated Net Income to Net Cash Provided By (Used In) Operating Activities:
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation
|
|
|
12,960
|
|
|
|
12,960
|
|
(Recovery
of) Provision For Uncollectible Receivables
|
|
|
(9,437
|
)
|
|
|
2,728
|
|
Depreciation
|
|
|
413,398
|
|
|
|
133,654
|
|
Amortization
of Intangibles
|
|
|
16,750
|
|
|
|
16,750
|
|
Amortization
of Debt Discounts and Deferred Financing Fees
|
|
|
16,841
|
|
|
|
2,582
|
|
Loss
on Disposal of Assets
|
|
|
13,806
|
|
|
|
-
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(445,186
|
)
|
|
|
(536,398
|
)
|
Prepaid
Expenses and Other Assets
|
|
|
(7,659
|
)
|
|
|
20,435
|
|
Accounts
Payable and Accrued Expenses
|
|
|
389,410
|
|
|
|
230,855
|
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
458,984
|
|
|
|
(95,652
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Improvements
and Additions to Hotel Properties
|
|
|
(654,022
|
)
|
|
|
(595,027
|
)
|
Lendings
on Advances to Affiliates - Related Party
|
|
|
-
|
|
|
|
(35,950
|
)
|
Collections
on Advances to Affiliates - Related Party
|
|
|
-
|
|
|
|
105,000
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(654,022
|
)
|
|
|
(525,977
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Principal
Payments on Mortgage Notes Payable
|
|
|
(130,408
|
)
|
|
|
(119,853
|
)
|
Payments
on Notes Payable to Banks, net of financing costs
|
|
|
(1,689,081
|
)
|
|
|
(52,603
|
)
|
Borrowings
on Notes Payable to Banks, net of financing costs
|
|
|
820,000
|
|
|
|
-
|
|
Lendings
on Advances to Affiliates - Related Party
|
|
|
(815,000
|
)
|
|
|
-
|
|
Collections
on Advances to Affiliates - Related Party
|
|
|
536,541
|
|
|
|
-
|
|
Payments
on Line of Credit - Related Party
|
|
|
(775,000
|
)
|
|
|
-
|
|
Borrowings
on Line of Credit - Related Party
|
|
|
632,384
|
|
|
|
-
|
|
Payments
on Notes Payable - Related Party
|
|
|
-
|
|
|
|
(475,113
|
)
|
Borrowings
on Notes Payable - Related Party
|
|
|
-
|
|
|
|
300,230
|
|
Payments
on Other Notes Payable
|
|
|
-
|
|
|
|
(16,475
|
)
|
Borrowings
on Other Notes Payable
|
|
|
84,208
|
|
|
|
-
|
|
Proceeds
from Sale of Non-Controlling Ownership Interest in Subsidiary, net
|
|
|
1,433,798
|
|
|
|
54,000
|
|
Sale
of Shares of Beneficial Interest
|
|
|
200,000
|
|
|
|
-
|
|
Distributions
to Non-Controlling Interest Holders
|
|
|
(184,450
|
)
|
|
|
(209,771
|
)
|
Repurchase
of Treasury Stock
|
|
|
(18,101
|
)
|
|
|
(5,422
|
)
|
Reallocation
of Non-Controlling Interests and Other
|
|
|
-
|
|
|
|
870
|
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
94,891
|
|
|
|
(524,137
|
)
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(100,148
|
)
|
|
|
(1,145,766
|
)
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
568,396
|
|
|
|
1,957,687
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
468,248
|
|
|
$
|
811,921
|
|
See
accompanying notes to unaudited
condensed
consolidated financial statements
INNSUITES
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF APRIL 30, 2017 AND JANUARY 31, 2017
AND
FOR THE THREE MONTHS ENDED APRIL 30, 2017 AND 2016
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of April 30, 2017, InnSuites Hospitality Trust (the “Trust”, “we” or “our”) owns interests
directly in and through a partnership interest, four hotels with an aggregate of 574 suites in Arizona, southern California and
New Mexico (the “Hotels”). The Hotels operate under the trade name “InnSuites Hotels.”
Full
service hotels often contain upscale full-service facilities with a large volume of full service accommodations, on-site full
service restaurant(s), and a variety of on-site amenities such as swimming pools, a health club, children’s activities,
ballrooms and on-site conference facilities. Moderate or limited service hotels are small to medium-sized hotel establishments
that offer a limited amount of on-site amenities. Most moderate or limited service establishments may still offer full service
accommodations but lack leisure amenities such as an on-site restaurant or a swimming pool. We consider our Tucson, Arizona hotel
and our hotel located in Albuquerque, New Mexico to be moderate or limited service establishments. All of our other properties
are full service hotels.
The
Trust is the sole general partner of RRF Limited Partnership, a Delaware limited partnership (the “Partnership”),
and owned a 72.11% interest in the Partnership as of April 30, 2017 and January 31, 2017, respectively. The Trust’s weighted
average ownership for the three month period ended April 30, 2017 and 2016 was 72.11%. As of April 30, 2017, the Partnership owned
a 51.01% interest in an InnSuites® hotel located in Tucson, Arizona, and a 51.33% interest in an InnSuites® hotel located
in Ontario, California. As of April 30, 2017, the Trust owns a direct 32.11% interest in a Yuma, Arizona hotel property (see Note
7), and a direct 50.91% interest in an InnSuites® hotel located in Albuquerque, New Mexico.
Under
certain management agreements, InnSuites Hotels Inc., our subsidiary, manages the Hotels’ daily operations. The Trust also
provides the use of the “InnSuites” trademark to the Hotels through wholly-owned InnSuites Hotels. All such expenses
and reimbursements between the Trust, InnSuites Hotels and the Partnership have been eliminated in consolidation.
InnDependent
Boutique Collection (“IBC Hotels” or “IBC Developments”), a wholly owned subsidiary of InnSuites Hospitality
Trust, has a network of approximately 6,300 unrelated hotel properties, of which over 1,800 hotel properties are exclusive and
provides revenue generating services and cost savings solutions to independent boutique hotels. During the fiscal year ended January
31, 2014 IBC Hotels formed a marketing alliance with the Independent Lodging Industry Association (“ILIA”). Included
in the 1,800 exclusive hotel properties are approximately 500 exclusive hotels obtained when IBC Hotels purchased International
Vacation Hotels (“IVH”) on January 8, 2016.
On
August 1, 2015, the Trust finalized and committed to a plan to sell all the hotel properties. As of May 1, 2016, the Trust listed
all the Hotel properties with a local real estate hotel broker, and management believes that each of the assets is being marketed
at a price that is reasonable in relation to its current fair value. The Trust believes that the plan to sell these assets will
not be withdrawn. Through the Trust’s Form 10-Q for the quarter ended July 31, 2016 filed with the SEC on September 14,
2016, the Trust classified all the Hotel properties as Assets Held for Sale. As of October 31, 2016, the Trust has decided to
reclassify these assets back into operations as many of these assets have been marketed for sale for more than one year. At this
time, the Trust is unable to predict when, and if, any of these Hotel properties will be sold. The Trust continues to list these
properties with local real estate hotel brokers, and believes that each of the assets is being marketed at a price that is reasonable
in relation to its current fair value. On June 2, 2017, the Ontario Hospitality Properties LLLP was sold to an unrelated third
party for $17,500,000 (see Note 11).
PARTNERSHIP
AGREEMENT
The
Partnership Agreement of the Partnership provides for the issuance of two classes of Limited Partnership units, Class A and Class
B. Class A and Class B Partnership units are identical in all respects, except that each Class A Partnership unit is convertible
into one newly-issued Share of Beneficial Interest of the Trust at any time at the option of the particular limited partner. The
Class B Partnership units may only become convertible, each into one newly-issued Share of Beneficial Interest of the Trust, with
the approval of the Board of Trustees, in its sole discretion. On April 30, 2017 and January 31, 2017, 276,131 Class A Partnership
units were issued and outstanding, representing 2.09% of the total Partnership units, respectively. Additionally, as of both April
30, 2017 and January 31, 2017, 3,407,938 Class B Partnership units were outstanding to James Wirth, the Trust’s Chairman
and Chief Executive Officer, and Mr. Wirth’s affiliates. If all of the Class A and B Partnership units were converted on
April 30, 2017, the limited partners in the Partnership would receive 3,684,069 Shares of Beneficial Interest of the Trust. As
of April 30, 2017 and January 31, 2017, the Trust owns 9,527,448 general partner units in the Partnership, representing 72.11%
of the total Partnership units, respectively.
LIQUIDITY
Our
principal source of cash to meet our cash requirements, including distributions to our shareholders, is our share of the Partnership’s
cash flow, quarterly distributions from the Albuquerque, New Mexico and Yuma, Arizona properties and more recently, sales of non-controlling
interests in certain of our Hotels. The Partnership’s principal source of cash flow is quarterly distributions from the
Tucson, Arizona. Our Ontario, California property was sold on June 2, 2017 and will no longer provide quarterly distributions.
However, the Trust received net proceeds of approximately $9.6 million in the sale. 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 and to service our debt.
As
of April 30, 2017 and January 31, 2017, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an
amount payable of $2,384 and $145,000, respectively. The Demand/Revolving Line of Credit/Promissory Note accrued interest at 7.0%
per annum and requires interest only payments. The Demand/Revolving Line of Credit/Promissory Note has a maximum borrowing capacity
to $1,000,000, which is available through December 31, 2017. As of June 7, 2017, the outstanding net balance receivable on the
Demand/Revolving Line of Credit/Promissory Note was $547,616.
As
of April 30, 2017 and January 31, 2017, the Trust had two available Advances to Affiliate credit facilities each with a maximum
borrowing capacity of $500,000 for a total maximum borrowing capacity of $1,000,000, which is available through June 30, 2017.
The Trust anticipates these credit facilities to be extended and available well after June 30, 2017. As of April 30, 2017 and
January 31, 2017, the Trust had an amount payable of both credit facilities of approximately $101,000 and $379,000, respectively.
With
approximately $468,000 of cash, as of April 30, 2017, the availability of approximately $4.9 million from the net proceeds after
paying our debt and our non-controlling investors from the sale of our Ontario, California property on June 2, 2017 (see Note
11 Subsequent Events), the availability of a $998,000 related party Demand/Revolving Line of Credit/Promissory Note and the availability
of the combined $899,000 Advance to Affiliate credit facilities, 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 year. In addition, our management is analyzing other strategic
options available to us, including the refinancing of another property or raising additional funds through additional non-controlling
interest sales; however, such transactions may not be available on terms that are favorable to us, or at all.
There
can be no assurance that we will be successful in obtaining extensions, 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.
BASIS
OF PRESENTATION
The
condensed consolidated balance sheet as of January 31, 2017, which has been derived from audited consolidated financial statements,
and these unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). Certain information related to the Trust’s organization, significant
accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) has been condensed or omitted. The accounting policies
followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed
in the Trust’s annual consolidated financial statements for the year ended January 31, 2017, as filed on Form 10-K. In the
opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting
only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for
the periods presented and the presentations and disclosures herein are adequate when read in conjunction with the Trust’s
Form 10-K for the year ended January 31, 2017.
As
sole general partner of the Partnership, the Trust exercises unilateral control over the Partnership, and the Trust owns all of
the issued and outstanding classes of shares of InnSuites Hotels Inc. Therefore, the financial statements of the Partnership and
InnSuites Hotels Inc. are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated.
Under
Accounting Standards Codification (“ASC”) Topic 810-10-25, Albuquerque Suite Hospitality, LLC has been determined
to be a variable interest entity with the Partnership as the primary beneficiary (see Note 7 – “Variable Interest
Entity”). Therefore, the financial statements of Albuquerque Suite Hospitality, LLC 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 two southern Arizona hotels experience their highest occupancy
in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest
occupancy period at those two southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust’s
quarterly revenues. The two hotels located in California and New Mexico historically experience their most profitable periods
during the second and third fiscal quarters (the summer 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 labor force shortages and cash flow
issues. Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, data breach, regional
economic downturn or poor weather conditions should occur during the first or fourth fiscal quarters, the adverse impact to the
Trust’s revenues could likely be greater as a result of its southern Arizona seasonal business.
RECENTLY
ISSUED ACCOUNTING GUIDANCE
In
August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). Under generally accepted accounting
principles (“GAAP”), continuation of a reporting entity as a going concern is presumed as the basis for preparing
financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under
this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes
imminent, financial statements should be prepared under the Liquidation Basis of Accounting. Even if an entity’s liquidation
is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as
a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting,
but the amendments in ASU 2014-15 require additional disclosure of information about the relevant conditions and events. The amendments
in ASU 2014-15 are effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. The Trust has adopted this guidance on its consolidated financial statements and we believe no
material impact exists at this time.
In
June 2014, FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”
(“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could
be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing
guidance in Accounting Standards Codification Topic No. 718, “Compensation—Stock Compensation” (“ASC 718”),
as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12
are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption
is permitted. Entities may apply the amendments in ASU 2014-12 either: (i) prospectively to all awards granted or modified after
the effective date; or (ii) retrospectively to all awards with performance targets that are outstanding as of the beginning of
the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Trust adopted
this ASU during the first fiscal quarter of 2017 and evaluated the impact of the adoption of this guidance on its consolidated
financial statements and we believe no material impact exists at this time.
In
February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”
(“ASU 2015-02”). This will improve certain areas of consolidation guidance for reporting organizations that are required
to evaluate whether to consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization
structures. ASU 2015-02 simplified and improved GAAP by: eliminating the presumption that a general partner should consolidate
a limited partnership, eliminating the indefinite deferral of FASB Statement No. 167, thereby reducing the number of Variable
Interest Entity (“VIE”) consolidation models from four to two (including the limited partnership consolidation model),
and clarifying when fees paid to a decision maker should be a factor to include in the consolidation of VIEs. ASU 2015-02 is effective
for periods beginning after December 15, 2015. The Trust adopted this guidance on April 30, 2017, such adoption did not have a
material impact on its consolidated financial statements.
In
April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs”. The ASU changes the presentation of debt issuance costs in financial statements. Under
the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than
as an asset. Amortization of the costs is reported as interest expense. The ASU specifies that “issue costs shall be reported
in the balance sheet as a direct deduction from the face amount of the note” and that “amortization of debt issue
costs shall also be reported as interest expense.” According to the ASU’s Basis for Conclusions, debt issuance costs
incurred before the associated funding is received (i.e., the debt liability) should be reported on the balance sheet as deferred
charges until that debt liability amount is recorded. For public business entities, the guidance in the ASU is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2015. For entities other than public business
entities, the guidance is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December
15, 2016. Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities would
apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). The Trust has
adopted this ASU during the first fiscal quarter of 2017 and evaluated the impact of the adoption of this guidance on its consolidated
financial statements and we believe no material impact exists at this time.
In
March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting,” a new standard which simplifies the accounting for share-based payment transactions. This
guidance requires that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the Consolidated
Statements of Operations rather than additional paid-in capital. Additionally, the excess tax benefits will be classified along
with other income tax cash flows as an operating activity, rather than a financing activity, on the Statement of Cash Flows. Further,
the update allows an entity to make a policy election to recognize forfeitures as they occur or estimate the number of awards
expected to be forfeited. It will be effective for us beginning in 2018 and should be applied prospectively, with certain cumulative
effect adjustments. Early adoption is permitted. We are currently assessing the impact this standard will have on our consolidated
financial statements.
In
January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 addresses certain aspects
of recognition, measurement, presentation and disclosures of financial instruments including the requirement to measure certain
equity investments at fair value with changes in fair value recognized in net income. ASU 2016-01 will become effective for the
Trust for the fiscal year ending January 31, 2018. The Trust is currently evaluating the guidance to determine the potential
impact on its financial condition, results of operations, cash flows and financial statement disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).”. This new standard establishes a right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. The Trust is currently evaluating the
impact of the adoption of ASU 2016-02 on the consolidated financial statements
The
FASB issued the following accounting standard updates related to Topic 606, Revenue Contracts with Customers:
●
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”)
No. 2014-09. “Revenue from Contracts with Customers.” This new standard will replace the existing revenue recognition
guidance in U.S. GAAP. The core principle of the ASU is the recognition of revenue for the transfer of goods and services equal
to the amount an entity expects to receive for those goods and services. This ASU requires additional disclosures about the nature,
amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and
estimates and changes in those estimates. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contacts with Customers:
Deferral of the Effective Date” that delayed the effective date of ASU 2014-09 by one year to January 1, 2018, as the Company’s
annual reporting period after December 15, 2017.
The
Trust has continued to analyze the impact of the new standard on its financial results based on an inventory of the Trust’s
current contacts with customers. The Trust has obtained an understanding of the new standard currently believes that I will retain
much of the same accounting treatment as used to recognized revenue under current standards. Revenue on a significant portion
of its contracts is currently recognized under percentage of completion accounting, applying a cost-to-cost method. Under the
new standard, the Trust will continue to recognize revenue on these contracts using a cost-to-cost method based on the continuous
transfer of control of the customer over time. Transfer of control in the Trust’s contacts is demonstrated by creating a
customized asset for customers, in conjunction with contact terms which provide the right to receive payment for goods and services.
In
addition, the standard may generally cause issuers to accelerate revenue recognition in contracts which were previously limited
by software revenue recognition rules. While the Trust may have contacts, which fall under these rules in the current standard,
it has not historically deferred significant amounts of revenue under these rules as many arrangements are single-element software
arrangements or sales if software with a tangible product which falls out of the scope of the current software rules. Based on
the contracts currently in place, the Trust does not anticipate a significant acceleration of revenue upon applying the new standard
to its current contacts under these fact patterns.
The
Trust continues to evaluate the impact of ASU No. 2014-09 on our financial results and prepare for the adoption of the standard
on February 1, 2018 including readying its internal processes and control environment for new requirements, particularly
around enhanced disclosures, under the new standard. The standard allows for both retrospective and modified retrospective methods
of adoption. The Trust is in the process of determining the method of adoption it will elect and the impact on our consolidated
financial statements and footnote disclosures, and will provide enhanced disclosures as we continue our assessment.
●
ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) in May 2014. ASU
2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of
the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction
price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.
●
ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)” (“ASU 2016-08”) in March 2016. ASU 2016-08 does not change the core principle of revenue
recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations.
●
ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations
and Licensing” (“ASU 2016-10”) in April 2016. ASU 2016-10 does not change the core principle of revenue recognition
in Topic 606 but clarifies the implementation guidance on identifying performance obligations and the licensing implementation
guidance, while retaining the related principles for those areas.
●
ASU No. 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because
of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)”
(“ASU 2016-11”) in May 2016. ASU 2016-11 rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March
3, 2016 EITF meeting. The SEC Staff is rescinding SEC Staff Observer comments that are codified in Topic 605 and Topic 932, effective
upon adoption of Topic 606.
●
ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”
(“ASU 2016-12”) in May 2016. ASU 2016-12 does not change the core principle of revenue recognition in Topic 606 but
clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance.
●
ASU No. 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control (ASU 2016-17”)
in October 2016. ASU 2016-17 amends the consolidation guidance on how a reporting entity that is the single decision maker of
a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that
are under common control with the reporting entity when determining whether it is the primary beneficiation of that VIE. The primary
beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the
VIE. ASU 2017-04 is effective for public companies that file with the SEC for annual or any interim beginning after December 15,
2017. The Trust has adopted this ASU for the fiscal year ending January 31, 2017 and evaluated the impact of the adoption of this
guidance on its consolidated financial statements and we believe no material impact exists at this time.
●
ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
(“ASU 2017-04”) in January 2017. ASU 2017-04 does not change the core principle of revenue recognition in Topic 606
but clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance. ASU 2017-04
allows companies to measure goodwill impairment as the excess of the reporting unit’s carrying value over its fair value.
ASU 2017-04 is effective for public companies that file with the SEC for annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2019. The Trust is in the process of determining the impact on our consolidated financial statements
and footnote disclosures, and will provide enhanced disclosures as we continue our assessment.
These
ASUs will become effective for the Trust beginning interim period February 1, 2018. The Trust is currently evaluating the impact
of ASU 606, but at the current time does not know what impact the new standard will have on revenue recognized and other accounting
decisions in future periods, if any, nor what method of adoption will be selected if the impact is material.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE
OF ESTIMATES
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the 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, 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 estimates of future cash flows used to test a long-lived asset for recoverability, the fair
values of the long-lived assets, collections of receivables and valuation of stock based compensation.
PROPERTY,
PLANT AND EQUIPMENT AND HOTEL PROPERTIES
Furniture,
fixtures, building improvements and hotel properties are stated at cost and are depreciated using the straight-line method over
estimated lives ranging up to 40 years for buildings and 3 to 10 years for furniture and equipment.
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 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 impairment
of long-lived assets existed during the Trust’s fiscal quarters ended April 30, 2017 and 2016.
REVENUE
RECOGNITION
Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” summarizes the SEC’s views in applying
generally accepted accounting principles to revenue recognition in financial statements. SAB No. 104 establishes the SEC’s
view that it is not appropriate to recognize revenue until all of the following criteria are met: persuasive evidence that an
arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable;
and collectability is reasonably assured. Further, SAB No. 104 requires that both title and the risks and rewards of ownership
be transferred to the buyer before revenue can be recognized. We believe that our revenue recognition policies as described below
are in compliance with SAB No. 104.
Revenues
are primarily derived from the following sources and are recognized as services are rendered and when collectability is reasonably
assured. Amounts received in advance of revenue recognition are considered deferred liabilities.
Revenues
primarily consist of room rentals, food and beverage sales, management and trademark fees and other miscellaneous revenues from
our properties. Revenues are recorded when rooms are occupied and when food and beverage sales are delivered. Management and trademark
fees from hotels include a monthly accounting fee and a percentage of hotel room revenues for managing the daily operations of
the Hotels and the two hotels owned by affiliates of Mr. Wirth. IBC Development revenues are recognized after services are rendered
by the IBC member hotel.
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.
Based
on our policy, we recognize revenue when we believe that persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the seller’s price to the buyer is fixed or determinable, and the collectability of our revenues
are reasonably assured.
INCOME
PER SHARE
Basic
and diluted income (loss) per Share of Beneficial Interest is computed based on the weighted-average number of Shares of Beneficial
Interest and potentially dilutive securities outstanding during the period. Dilutive securities are limited to the Class A and
Class B units of the Partnership, which are convertible into 3,684,069 Shares of the Beneficial Interest, as discussed in Note
1.
For
the periods ended April 30, 2017 and 2016, 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 3,684,069 in addition to the basic shares outstanding for the periods ended
April 30, 2017 and 2016, respectively. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B
Partnership units were dilutive during the periods ended April 30, 2017 and 2016, and are excluded in the calculation of diluted
loss per share for these periods as their effected would be anti-dilutive.
SEGMENT
REPORTING
The
Trust determined that its operations are comprised of two reportable segments, a Hotel Operations & Corporate Overhead segment
that has ownership interest in four hotel properties with an aggregate of 574 suites in Arizona, southern California and New Mexico,
and the IBC Developments segment serving 6,300 unrelated hotel properties. The Trust has a concentration of assets in the southwest
United States, and the southern Arizona market. Consistent with the change in reportable segments, the Trust revised its prior
period financial information for the new segment structure. Historical financial information presented in this Form 10-Q reflects
this change. On an overall basis, the Trust has elected to only put the costs directly attributable to the IBC Developments in
that segment. Included in these costs are sales, marketing and technology development costs.
IBC
Hotels was formed during the fiscal year ended January 31, 2014. IBC Hotels charges a 10% - 20% booking fee which, we believe,
increases the independent hotel profits. Competitors of IBC Hotels can charge anywhere from a 30% to 50% booking fee. InnDependent
InnCentives, IBC’s loyalty program, allows hoteliers to benefit from guests who frequently stay at IBC independent hotels.
We are planning significant expansion of IBC Hotels during the next couple of fiscal years as we concentrate our sales and marketing
efforts towards consumers, but can provide no assurance that we will be successful.
The
Chief Operating Decision Maker (“CODM”), the Trust’s CEO, Mr. Wirth, does not see any value in allocating costs
for items not directly attributable to the IBC Developments segment for several reasons. The first is that the Trust’s base
business is the Hotel Operations & Corporate Overhead segment, and the majority of the expenses of the Trust would continue
even if the Trust was not in the reservation business. If the Trust were to allocate general expenses to the reservation business
based on some allocation method (e.g., on sales), it would not improve the value of segment reporting, but it would only serve
to make the results of the Hotel Operations & Corporate Overhead segment look better and give investors a false sense of the
profitability of the Hotel Operations & Corporate Overhead segment without the IBC Developments segment. The CODM wants to
understand the true investment in the reservation business and that result is delivered by allocating only costs directly associated
with the IBC Developments segment. By retaining the remainder of costs not associated with the IBC Developments segment in the
Hotel Operations & Corporate Overhead segment, the Trust is able to compare the Hotel Operations & Corporate Overhead
segment to historical figures where the bulk of the business was only that segment of operations to gauge relative efficiency
of the Hotel Operations & Corporate Overhead segment as compared to historical norms.
The
Trust has chosen to focus its hotel investments in the southwest region of the United States. The CODM does not review assets
by geographical region; therefore, no income statement or balance sheet information by geographical region is provided.
NON-CONTROLLING
INTEREST
Non-controlling
interest in the Trust represents the limited partners’ proportionate share of the capital and earnings of the Partnership.
Income or loss is allocated to the non-controlling interest based on a weighted average ownership percentage in the entities throughout
the period, and capital is allocated based on the ownership percentage at quarter-end. Any difference between the weighted average
and point-in-time allocations is presented as a reallocation of non-controlling interest as a component of shareholders’
equity.
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.
|
The
Trust has no assets or liabilities that are carried at fair value on a recurring basis and had no fair value re-measurements during
the periods ended April 30, 2017 and 2016.
Due
to their short maturities, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates 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.
3.
STOCK-BASED COMPENSATION
TRUSTEE
STOCK COMPENSATION
For
the three months ended April 30, 2017, the Trust recognized expenses of $12,960 related to stock-based compensation. The Trust
issued 24,000 restricted shares with a total market value of $51,840 in the first fiscal quarter of fiscal year 2018 as compensation
to its three outside Trustees for fiscal year 2018. On a monthly basis through January 31, 2018, these shares vest
at a rate of approximately 500 shares for each outside Trustee.
The
following table summarizes restricted share activity during the three months ended April 30, 2017:
|
|
Restricted
Shares
|
|
|
|
Shares
|
|
|
Weighted-Average
Per Share Grant
Date Fair Value
|
|
Balance of
unvested awards at January 31, 2017
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
24,000
|
|
|
$
|
2.16
|
|
Vested
|
|
|
(6,000
|
)
|
|
$
|
2.16
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance
of unvested awards at April 30, 2017
|
|
|
18,000
|
|
|
$
|
2.16
|
|
OFFICER
STOCK COMPENSATION
On
February 22, 2016, the Compensation Committee of the Board of Trustees (the “Committee”) of Trust approved a stock
incentive bonus plan for Pamela J. Barnhill, President, Chief Operating Officer, Vice Chairperson, and Trustee of the Trust, Marc
E. Berg, Executive Vice President, Secretary, Treasurer and Trustee of the Trust and Adam B. Remis, Chief Financial Officer of
the Trust (individually, an “Executive” and collectively, the “Executives”).
To
give incentive to get hotel operations off to a strong start for the fiscal year starting February 1, 2016, the Committee also
adopted an incentive bonus programs for the Executives based on the targeted gross operating profit (i.e., total revenues less
operating expenses) (the “Target GOP”) for February 2016 and March 2016, the first two months of the fiscal year.
The program provided that if the Target GOP were achieved or exceeded, each Executive would be entitled to a bonus consisting
of cash and Shares of Beneficial Interest of the Trust in the amounts set forth below:
Executive
Officer
|
|
Cash
|
|
|
Equity
|
Pamela
J. Barnhill
|
|
$
|
10,000
|
|
|
10,000
Shares of Beneficial Interest
|
Marc
E. Berg
|
|
$
|
2,500
|
|
|
2,500 Shares
of Beneficial Interest
|
Adam
B. Remis
|
|
$
|
5,000
|
|
|
5,000 Shares
of Beneficial Interest
|
The
Trust met the Target GOP for February 2016 and March 2016. The Executives agreed to purchase the stock on the open market and
were reimbursed by the Trust. On May 16, 2016, Ms. Barnhill purchased 5,000 Shares of Beneficial Interest at $2.449 and on May
20, 2016, Ms. Barnhill purchased 2,000 Shares of Beneficial Interest at $2.4883 and 3,000 Shares of Beneficial Interest at $2.4999
as described on Forms 4 filed with the Securities Exchange Commission on May 18, 2016 and May 24, 2016, respectively. Mr. Berg
purchased 2,500 Shares of Beneficial Interest at $2.49 on May 10, 2016 as described on Form 4 filed with the Securities and Exchange
Commission on May 17, 2016. Mr. Remis purchased 5,000 Shares of Beneficial Interest at $2.50 on May 18, 2016 as described on Form
4 filed with the Securities and Exchange Commission on May 18, 2016.
The
Committee also adopted an incentive bonus program for the Executives for the fiscal year ended January 31, 2017 (the “2017
Fiscal Year Bonus Program”). Under the 2017 Fiscal Year Bonus Program, an Executive will be entitled to receive a bonus
consisting of cash and Shares of Beneficial Interest of the Trust of the maximum amount set forth below upon the achievement by
the Executive of performance-based objectives, which include revenue, gross operating profit and strategy for the hotel and IBC
Developments Division. These performance-based objectives were achieved for the period ended April 30, 2016.
Executive
Officer
|
|
Cash
|
|
|
Equity
|
Pamela
J. Barnhill
|
|
$
|
25,000
|
|
|
10,000
Shares of Beneficial Interest
|
Marc
E. Berg
|
|
$
|
5,000
|
|
|
2,500 Shares
of Beneficial Interest
|
Adam
B. Remis
|
|
$
|
10,000
|
|
|
5,000 Shares
of Beneficial Interest
|
On
January 24, 2017, the Committee exercised negative discretion, based on the Trust’s financial condition and its limited
cash flow in fiscal 2017, and the Committee and the Board approved the following payouts for Ms. Barnhill and Messrs. Berg and
Remis under the 2017 Fiscal Year Bonus Program:
Executive
|
|
Cash
|
|
|
Equity
|
Pamela
J. Barnhill
|
|
$
|
5,000
|
|
|
3,000
Shares of Beneficial Interest
|
Marc
E. Berg
|
|
$
|
1,000
|
|
|
750 Shares
of Beneficial Interest
|
Adam
B. Remis
|
|
$
|
2,000
|
|
|
1,500 Shares
of Beneficial Interest
|
Fiscal
2018 Bonuses
Fiscal
2018– Short-Term Cash and Equity Bonus Program
On
January 24, 2017, the Compensation Committee and the Board, with the advice from Mr. Wirth, our Chairman and Chief Executive Officer,
authorized the following additional bonuses for the Executives, up to the maximum amounts listed below, which may be earned based
on the growth and financial developments of IBC Hotels during the period from February 1, 2017 through May 31, 2017 and the Trust’s
cash availability, with such bonuses, if any, to be paid before January 31, 2018.
Executive
|
|
Cash
|
|
|
Equity
|
Pamela
J. Barnhill
|
|
$
|
5,000
|
|
|
3,000
Shares of Beneficial Interest
|
Marc
E. Berg
|
|
$
|
1,000
|
|
|
750 Shares
of Beneficial Interest
|
Adam
B. Remis
|
|
$
|
2,000
|
|
|
1,500 Shares
of Beneficial Interest
|
In
addition, the Compensation Committee and the Board, with the advice from Mr. Wirth, our Chairman and Chief Executive Officer,
also authorized the following bonuses for the Executives, up to the maximum amounts listed below, which may be earned based on
the IBC Hotels division growth and financial developments during the period from June 1, 2017 through December 31, 2017 and the
Trust’s cash availability, with such bonuses, if any, to be paid before January 31, 2018.
Executive
|
|
Cash
|
|
|
Equity
|
Pamela
J. Barnhill
|
|
$
|
10,000
|
|
|
4,000
Shares of Beneficial Interest
|
Marc
E. Berg
|
|
$
|
2,000
|
|
|
1,000 Shares
of Beneficial Interest
|
Adam
B. Remis
|
|
$
|
4,000
|
|
|
2,000 Shares
of Beneficial Interest
|
Fiscal
2018– Full Year Cash and Equity Bonus Program
On
January 24, 2017, the Compensation Committee also adopted an incentive bonus program for the Executives for the full fiscal year
ending January 31, 2018 (the “2018 Fiscal Year Bonus Program”). Under the 2018 Fiscal Year Bonus Program, an Executive
will be entitled to receive a bonus consisting of cash and Shares of Beneficial Interest of the Trust, up to the maximum amounts
set forth below, upon the achievement by the Executive of performance-based objectives which will be established by March 31,
2017.
Executive
|
|
Cash
|
|
|
Equity
|
Pamela
J. Barnhill
|
|
$
|
25,000
|
|
|
10,000
Shares of Beneficial Interest
|
Marc
E. Berg
|
|
$
|
5,000
|
|
|
2,500
Shares of Beneficial Interest
|
Adam
B. Remis
|
|
$
|
10,000
|
|
|
5,000
Shares of Beneficial Interest
|
4.
RELATED PARTY TRANSACTIONS
On
December 1, 2014, the Trust entered into a $1,000,000 net maximum 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, including Pamela Barnhill, Vice Chairperson
and President of the Trust. The Demand/Revolving Line of Credit/Promissory Note bears interest at 7.0% per annum, is interest
only quarterly and matures on December 31, 2017. No prepayment penalty exists on the Demand/Revolving Line of Credit/Promissory
Note. The balance fluctuates significantly through the period. The Demand/Revolving Line of Credit/Promissory Note has a net maximum
borrowing capacity of $1,000,000.
The
above Demand/Revolving Line of Credit/Promissory Note or Note Receivable is presented as one line item on the balance sheet and
totaled a payable of $2,384 at April 30, 2017 and $145,000 at January 31, 2017.
As
of April 30, 2017 and January 31, 2017, Mr. Wirth and his affiliates held 3,407,938 Class B Partnership units, which represented
25.80% of the total outstanding Partnership units. As of April 30, 2017 and January 31, 2017, Mr. Wirth and his affiliates held
6,939,429, respectively, Shares of Beneficial Interest in the Trust, which represented 71.68% and 71.93%, respectively, of the
total issued and outstanding Shares of Beneficial Interest. For the three months ended April 30, 2017, Mr. Wirth’s affiliates
paid the Trust $80,284 for management and licensing fees.
On
December 22, 2015, the Trust provided Advances to Affiliate – Related Party each in the amount of $500,000 to Phoenix Northern
Resort, LLC and Tempe/Phoenix Airport Resort LLC. Mr. Wirth, individually and thru one of his affiliates owns approximately 32%
and 42%, respectively, of Phoenix Northern Resort, LLC and Tempe/Phoenix Airport Resort LLC. Both notes have a due date of June
30, 2017 and accrue interest of 7.0%. During the period ended April 30, 2017, the Trust received $708 and $0 interest income from
Phoenix Northern Resort, LLC and Tempe/Phoenix Airport Resort LLC, respectively. As of April 30, 2017 and January 31, 2017, the
Lending from Affiliate – Related Party balance was $0 and $19,483 from Phoenix Northern Resort, LLC, respectively, and a
liability balance of $100,708 and $359,684 to Tempe/Phoenix Airport Resort LLC, respectively.
Besides
Pamela Barnhill, Vice Chairperson and President of the Trust and daughter of Mr. Wirth, the Trust’s Chairman and Chief Executive
Officer, the Trust also employs two other immediate family members of Mr. Wirth who provide technology and administrative support
services to the Trust with each receiving a $42,500 yearly salary.
See
Notes 3, 4, 5, 6, 7, 18 and 28 to our Consolidated Financial Statements – “Sale of Ownership Interests in Albuquerque
Subsidiary,” “Sale of Ownership Interests in Tucson Hospitality Properties Subsidiary,” “Sale of Ownership
Interests in Ontario Hospitality Properties Subsidiary,” “Sale of Ownership Interests in Yuma Hospitality Properties
Subsidiary,” and “Sale of Ownership Interests in Tucson Saint Mary’s Suite Hospitality,” “Other
Related Party Transactions,” and “Subsequent Events,” respectively, in our Form 10-K Annual Report filed with
the SEC on May 1, 2017 and below in Note 6 – “Sale of Ownership Interests in Subsidiaries” for further description
of the Trust’s related party transactions.
5.
NOTES PAYABLE
On
September 20, 2016, the Albuquerque entity entered into a $524,160 business loan, including $20,160 of loan fees which are classified
as debt discount and amortized to interest expense over the term of the loan using the effective interest rate method, with American
Express Bank, FSB (the “Albuquerque Merchant Agreement”) with a maturity date of September 19, 2017. The Albuquerque
Merchant Agreement includes a loan fee of 4% of the original principal balance of the loan with acceleration provisions upon default.
The business loan is secured and paid back with 14% of the Albuquerque American Express, VISA, MasterCard and Discover merchant
receipts received during the loan period. As of April 30, 2017 and January 31, 2017, the business loan balance was approximately
$125,000 and approximately $285,000, respectively, net of a discount of approximately $5,000 and approximately $10,000, respectively.
On
October 17, 2016, the Yuma entity, a subsidiary of the Trust, entered into a $520,000 business loan, including $20,000 of loan
fees which are classified as debt discount and amortized to interest expense over the term of the loan using the effective interest
rate method, with American Express Bank, FSB (the “Yuma Merchant Agreement”) with a maturity date of October 16, 2017.
The Yuma Merchant Agreement includes a loan fee of 4% of the original principal balance of the loan with acceleration provisions
upon default. The business loan is secured and paid back with 22% of the Yuma American Express, VISA, MasterCard and Discover
merchant receipts received during the loan period. As of April 30, 2017 and January 31, 2017, the business loan balance was approximately
$141,000 and approximately $316,000, respectively, net of a discount of approximately $8,000 and approximately $13,000, respectively.
On
December 19, 2016, Tucson Hospitality Properties LLLP, a subsidiary of the Trust, entered into a $438,880 business loan, including
$16,880 of loan fees, with American Express Bank, FSB (the “Tucson Oracle Merchant Agreement”) with a maturity date
of December 18, 2017. The Tucson Oracle Merchant Agreement included a loan fee of 4% of the original principal balance of the
loan with acceleration provisions upon default. The business loan is secured and paid back with 15% of the Tucson Oracle American
Express, VISA and MasterCard merchant receipts received during the loan period. As of April 30, 2017 and January 31, 2017, the
business loan balance was approximately $284,000 and $393,000, respectively, net of a discount of approximately $10,000 and approximately
$14,000, respectively.
On
July 7, 2015, the Trust’s revolving bank line of credit agreement, with a credit limit of $600,000, was changed to a four-year
non-revolving note payable. The non-revolving note payable has a variable interest rate of Wall Street Journal Prime Rate plus
a margin of 1% with a floor rate of 5.5%, maturing on July 3, 2019 and monthly payments of $13,978.08. The line is secured by
a junior security interest in the Yuma, Arizona property and the Trust’s trade receivables. As of April 30, 2017 and January
31, 2017, the non-revolving note payable balance was approximately $354,000 and $391,000, respectively.
On
January 8, 2016, in connection with the acquisition of substantially all of the assets of International Vacation Hotels, the Trust
entered into a $400,000 business loan with Laurence Holdings Limited, an Ontario, Canada corporation, with a maturity date of
February 1, 2019 pursuant to the terms of the Security Agreement and Promissory Note (the “Laurence Holdings Agreement”).
The Laurence Holdings Agreement required the funds be used for the purchase of International Vacation Hotels assets. The Laurence
Holdings Agreement provides for interest- only payments for the first three months of the term and principal and interest payments
for the remaining portion of the loan. The Laurence Holdings Agreement sets an interest rate of 8% per annum with no prepayment
penalty. As of April 30, 2017, the business loan balance was approximately $245,000, net of a discount of approximately $4,000.
As of January 31, 2017, the business loan balance was approximately $285,000, net of a discount of approximately $5,000.
On
May 3, 2016, the Trust and Yuma Hospitality Properties Limited Partnership, a subsidiary of the Trust entered into a $350,000
one-year line of credit with RepublicBank AZ, N.A. (the “RepublicBank AZ Agreement”). The Republic Bank AZ agreement
includes acceleration provisions upon default. The funds may be used for working capital and is guaranteed by James Wirth, the
Trust’s Chairman and CEO, Gail Wirth, the Trust’s Chairman and CEO’s spouse and the Wirth Family Trust Dated
July 14, 2006. As of April 30, 2017, the line of credit balance was $0. As of January 31, 2017, the line of credit balance was
$350,000.
6.
SALE OF OWNERSHIP INTERESTS IN SUBSIDIARIES
The
Trust has sold non-controlling interests in certain subsidiaries, including Albuquerque Suite Hospitality, LLC (the “Albuquerque
entity”), Tucson Hospitality Properties, LP (the “Tucson entity”), Ontario Hospitality Properties, LP (the “Ontario
entity”), and Yuma Hospitality Properties, Limited Partnership (the “Yuma entity”), which sales are described
in detail in our Annual Report on Form 10-K filed on May 1, 2017 with the Securities and Exchange Commissions. Generally, interests
have sold for $10,000 per unit with a two-unit minimum subscription. The Trust maintains at least 50.1% of the units in each entity
and intends to maintain this minimum ownership percentage. Generally, the units in the each of the entities are allocated to three
classes with differing cumulative discretionary priority distribution rights through a certain time period. Class A units are
owned by unrelated third parties and have first priority for distributions. Class B units are owned by the Trust and have second
priority for distributions. Class C units are owned by Rare Earth or other affiliates of Mr. Wirth and have the lowest priority
for distributions. Priority distributions of $700 per unit per year are cumulative until a certain date; however, after that date,
generally Class A unit holders continue to hold a preference on distributions over Class B and Class C unit holders. As of February
1, 2017, the Trust no longer accrues for these distributions as the preference period generally has expired. During the three
months ended April 30, 2017, the priority distributions were paid for the three months ended January 31, 2017 and no priority
distributions were accrued for the three months ended April 30, 2017.
During
the three months ended April 30, 2017, there were no Class A, B or C units of the Albuquerque entity sold. As of April 30, 2017
and January 31, 2017, the Trust held a 50.91% ownership interest, or 279 Class B units, in the Albuquerque entity, Mr. Wirth and
his affiliates held a 0.18% interest, or 1 Class C unit, and other third parties held a 48.91% interest, or 268 Class A units.
As of February 1, 2016, the Trust no longer accrues for these distributions as the preference period generally has expired. During
the three months ended April 30, 2017, the priority distributions were paid for the three months ended January 31, 2017 and no
priority distributions were accrued for the three months ended April 30, 2017.
During
the three months ended April 30, 2017, there were no Class A, B or C units of the Tucson entity sold. As of April 30, 2017 and
January 31, 2017, the Partnership held a 51.01% ownership interest, or 404 Class B units, in the Tucson entity, Mr. Wirth and
his affiliates held a 0.63% interest, or 5 Class C units, and other parties held a 48.36% interest, or 383 Class A units. As of
February 1, 2016, the Trust no longer accrues for these distributions as the preference period generally has expired. During the
three months ended April 30, 2017, the priority distributions were paid for the three months ended January 31, 2017 and no priority
distributions were accrued for the three months ended April 30, 2017.
During
the three months ended April 30, 2017, there were no Class A, B or C units of the Ontario entity sold. As of April 30, 2017, the
Partnership held a 51.65% ownership interest, or 498 Class B units, in the Ontario entity, Mr. Wirth and his affiliates held a
3.00% interest through Rare Earth, or 29 Class C units, and other parties held a 45.35% interest, or 437.25 Class A units. As
of February 1, 2016, the Trust no longer accrues for these distributions as the preference period generally has expired. During
the three months ended April 30, 2017, the priority distributions were paid for the three months ended January 31, 2017 and no
priority distributions were accrued for the three months ended April 30, 2017.
On
February 15, 2017, the Trust and Partnership entered into a restructuring agreement included in Exhibit 10.1 of the SEC Form 8-K
Current Event filed on February 21, 2017 with Rare Earth to allow for the sale of non-controlling partnership units in the Yuma
entity for $10,000 per unit. Rare Earth and the Trust are restructuring the Yuma Partnership Interest from General Partner majority-owned
to accredited investor majority-owned. Total interests outstanding will remain unchanged at 800 with Class A, Class B and Class
C Limited Liability Limited Partnership Interests (referred to collectively as “Interests”) restructured with the
Yuma entity purchasing 300 existing IHT Class B Interests and reissuing 300 Class A units to accredited investors as Class A Interests
causing the Yuma entity to offer and sell up to approximately 300 Class A (2017 series) Interests. Rare Earth, as a General Partner
of the Yuma entity, will coordinate the offering and sale of Class A Interests to qualified third parties. Rare Earth and other
Rare Earth affiliates may purchase Interests under the offering. This restructuring is part of the Trust’s Equity Enhancement
Plan to comply with Section 1003(a)(iii) of the NYSE MKT Company Guide. As described below, as of April 30, 2017, the Trust has
sold approximately $1,470,000 of non-controlling partnership units in the Yuma entity and incurred offering costs of $36,000.
During
the three months ended April 30, 2017, there were 145 Class A units of the Yuma entity sold, at $10,000 per unit, of which all
units were sold from the Trust. As of April 30, 2017, the Trust held a 32.11% ownership interest, or 256.90 Class B units, in
the Yuma entity, Mr. Wirth and his affiliates held a 0.51% interest, or 4.10 Class C units, and other parties held a 67.38% interest,
or 539 Class A units. As of February 1, 2017, the Trust no longer accrues for these distributions as the preference period generally
has expired. During the three months ended April 30, 2017, the priority distributions were paid for the three months ended January
31, 2017 and no priority distributions were accrued for the three months ended April 30, 2017.
7.
VARIABLE INTEREST ENTITY
Management
evaluates the Trust’s explicit and implicit variable interests to determine if they have any variable interests in 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 Yuma 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 Yuma entity, including its mortgage note payable and distribution obligations, which based on the capital structure
of the Yuma entity, management believes could potentially be significant.
b)
The Partnership, Trust and their related parties have maintained, as a group, a controlling ownership interest in the Albuquerque
entity, with the largest ownership belonging to the Partnership.
c)
The Partnership, Trust and their related parties have maintained control over the decisions which most impact the financial performance
of the Yuma entity, including providing the personnel to operate the property on a daily basis.
During
the fiscal quarter ended April 30, 2017, 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
allowed our properties to obtain new financing as needed.
8.
STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The
Trust paid $205,036 and $185,912 in cash for interest for the three months ended April 30, 2017 and 2016, respectively for continuing
operations. No cash was paid for the three months ended April 30, 2017 and 2016.
9.
COMMITMENTS AND CONTINGENCIES
The
Albuquerque Hotel is subject to a non-cancelable ground lease and expires in 2058. Total expense associated with the non-cancelable
ground lease for the three months ended April 30, 2017 and 2016 was approximately $37,000 and $46,000, respectively.
During
2010, the Trust entered into a five-year office lease for its corporate headquarters. On April 30, 2014, the lease was extended
for 36 months and expired in 2017. The lease provided for month to month terms after April 30, 2017. The Trust does not intend
to enter into a new lease. The Trust recorded approximately $9,000 of general and administrative expense related to the lease
during the each of the three months ended April 30, 2017 and 2016. The Trust has the option to cancel the lease after each lease
year for penalties of four months’ rent after the first year with the penalty decreasing by one month’s rent each
successive lease year. It is the Trust’s intention to remain in the office for the duration of the lease period, as extended.
Future
minimum lease payments under the non-cancelable ground leases and office lease are as follows:
Fiscal
Year Ending
|
|
|
|
Remainder
of FY 2018
|
|
|
95,794
|
|
FY 2019
|
|
|
113,508
|
|
FY 2020
|
|
|
113,508
|
|
FY 2021
|
|
|
113,508
|
|
FY 2022
|
|
|
113,508
|
|
FY 2023
|
|
|
113,508
|
|
Thereafter
|
|
|
5,473,313
|
|
Total
|
|
|
6,136,647
|
|
The
Trust is obligated under a loan agreement relating to the Tucson Oracle property to deposit 4% of the individual hotel’s
room revenue into an escrow account to be used for capital expenditures. The escrow funds applicable to the Tucson Oracle property
for which a mortgage lender escrow exists are not reported on the Trust’s Consolidated Balance Sheet as “Restricted
Cash” as the balance was $0 as of April 30, 2017 and January 31, 2017.
InnSuites
Hotels has entered into membership agreements with Best Western International, Inc. (“Best Western”) with respect
to all four of the Hotels. In exchange for use of the Best Western name, trademark and reservation system, the participating 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 participating Hotels. The agreements with Best Western have no specific expiration terms and may be
cancelled by either party. Best Western requires that the participating hotels meet certain requirements for room quality, and
the Hotels are subject to removal from its reservation system if these requirements are not met. The Hotels with third-party membership
agreements received significant reservations through the Best Western reservation system. Under these arrangements, fees paid
for membership fees and reservations were approximately $85,000 for the three months ended April 30, 2017 and 2016, respectively.
The
nature of the operations of the Hotels exposes them in most cases 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 consolidated financial position,
results of operations or liquidity of the Trust.
The
Trust is 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
consolidated financial position, results of operations or liquidity.
10.
SEGMENT REPORTING
The
Trust determined that its reportable segments are the Hotel Operations & Corporate Overhead and IBC Developments segments.
Reportable segments are determined based on discrete financial information reviewed by the Trust’s CODM. The Trust organizes
and reviews operations based on products and services, and currently there are no operating segments that are aggregated.
Information
relative to the Trust’s reportable segments for operations, for which there is no intersegment revenues, is as follows:
STATEMENT
OF OPERATIONS
|
|
THREE
MONTHS ENDED APRIL 30, 2017
|
|
|
|
Hotel
Operations & Corporate Overhead
|
|
|
IBC
Developments
|
|
|
Total
|
|
Total
Revenue
|
|
$
|
3,907,975
|
|
|
$
|
244,209
|
|
|
$
|
4,152,184
|
|
Income
(Loss) From Operations
|
|
|
637,800
|
|
|
|
(314,667
|
)
|
|
|
323,133
|
|
STATEMENT
OF OPERATIONS
|
|
THREE
MONTHS ENDED APRIL 30, 2016
|
|
|
|
Hotel
Operations & Corporate Overhead
|
|
|
IBC
Developments
|
|
|
Total
|
|
Total
Revenue
|
|
$
|
3,420,578
|
|
|
$
|
217,485
|
|
|
$
|
3,638,063
|
|
Income
(Loss) From Operations
|
|
|
303,547
|
|
|
|
(118,591
|
)
|
|
|
184,956
|
|
11.
SUBSEQUENT EVENTS
As
part of our NYSE Equity Enhancement Plan and as approved by our Board of Trustees, on May 4, 2017, the Trust sold 106,952 Shares
of Beneficial Interest of the Trust at the May 4, 2017 closing market price of $1.87 per Share, for the aggregate proceeds of
$200,000 to Rare Earth Financial, LLC. Rare Earth Financial, LLC, whose managing member is James F. Wirth, the Chairman and Chief
Executive Officer of the Trust, purchased 53,476 Shares of Beneficial Interest of the Trust and Charles E Strickland purchased
the remaining 53,476 Shares of Beneficial Interest. Rare Earth is wholly owned by Mr. Wirth and his family members, including
Pamela Barnhill, Vice Chairperson and President of the Trust.
On
May 9, 2017, Ontario Hospitality Properties LLLP, a subsidiary of the Trust, entered into a Purchase and Sale Agreement to sell
its Best Western InnSuites Ontario Hotel and Suites property to Minkum Investment Group, LLC or Assignee (“Buyer”)
an unrelated third party to the Trust for $17.5 million which was approved by our Board of Trustees and the partners of Ontario
Hospitality Properties LLLP. On June 2, 2017, the property was sold and the principal and interest of the debts of approximately
$7,270,000 were paid off. With the inclusion of the net book value of assets of approximately $6 million, we estimate the gain
on the sale to be approximately $10.8 million after transaction costs of approximately $0.7 million.
As
Management wasn’t certain that the sale of our Best Western InnSuites Ontario Hotel and Suites property was going to be
completed, on May 11, 2017, Ontario Hospitality Properties LLLP entered into a $5,700,000 Change in Terms Agreement (“Ontario
Loan Agreement”) to the existing first mortgage loan with Arizona Bank & Trust with a maturity date of August 22, 2024.
The Ontario Loan Agreement has a fixed interest rate until August 22, 2019 and then a variable interest rate of Wall Street Journal
Prime Rate plus 1.50% margin with a floor of 4.75% and no prepayment penalty with an origination fee of 0.50% or $10,000. The
Ontario Loan Agreement provides continuation of a guarantee from RRF, LP, James & Gail Wirth, The Wirth Family Trust and InnSuites
Hospitality Trust, secured by 51% ownership interest in Albuquerque Suite Hospitality, LLC.
On
May 11, 2017, Yuma Hospitality Properties, LLLP, a subsidiary of the Trust, entered into a $850,000 Promissory Note Agreement
(“Yuma Loan Agreement”) as a credit facility to replenish funds for the hotel remodel with 1
st
Bank of
Yuma Arizona Bank & Trust with a maturity date of September 1, 2022. The Yuma Loan Agreement has an initial interest rate
of 5.50% with a variable rate adjustment equal to the Wall Street Journal Prime Rate plus 1.50% with a floor of 5.50% and no prepayment
penalty. This credit facility is guaranteed by InnSuites Hospitality Trust.