NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE YEARS ENDED JANUARY 31, 2018 AND 2017
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of January 31, 2017, InnSuites Hospitality Trust (the “Trust”, “we”, “us” or “our”)
is a publicly traded company with hotels IHT owns, hotels IHT manages, software IHT develops, software IHT sells, and online loyalty
reward-based consumer travel services. The Trust and its shareholders owns interests directly in and through a partnership interest,
three hotels with an aggregate of 424 suites in Arizona and New Mexico (the “Hotels”) operated under the federally
trademarked name “InnSuites Hotels” or “InnSuites”. The Trust and its shareholders owns interests directly
in IBC Hospitality Technologies and IVHTravel.com.
Hotel
Operations:
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. IHT’s owned properties are limited
service hotels. IHT provides management services on a wide variety of hotels.
The
Trust is the sole general partner of RRF Limited Partnership, a Delaware limited partnership (the “Partnership”),
and owned a 74.80% and 72.11% interest in the Partnership as of January 31, 2018 and 2017. The Trust’s weighted average
ownership for the years ended January 31, 2018 and 2017 was 72.53% and 72.11%. As of January 31, 2018, the Partnership owned a
51.01% interest in an InnSuites® hotel located in Tucson, Arizona. The Trust owns a direct 12.79% interest in a Yuma, Arizona
hotel property, and a direct 22.83% 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.
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 believed that each of the assets was being marketed
at a price that was 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 December 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 (the “Ontario entity”)
was sold to an unrelated third party for $17,500,000 (see Note 24).
IBC
Hospitality Technologies:
InnDependent
Boutique Collection (“IBC”, “IBC Hotels”, “IBC Hospitality” or “IBC Hospitality Technologies”),
a wholly-owned subsidiary of InnSuites Hospitality Trust, has a network of approximately 2,000 unrelated hospitality properties
with proprietary software exclusive marketing distribution and services as well as brand-like cost savings solutions to independent
boutique hotels and alternative lodging (serviced apartments, B&B’s, villas and multi-unit ownership/management
of luxury private residences). Additionally, IBC provides software and solutions to a variety of branded hotels looking to increase
direct bookings and receive full guest information IBC’s patent-pending loyalty program allows consumers to book highly
discounted travel when logged in and shopping for lodging on
www.ivhtravel.com.
IVHTravel.com and its proprietary booking
engine has over 1.1 million lodging choices globally and provides add-on capability for activities, rental car and cancellation
protection with airfare on its roadmap in 2019.
IBC
was born out of an independent hotelier’s frustration over being denied cost-effective access to enterprise hospitality
services and software that served their large corporate competitors coupled with the inability to secure a global and robust guest
loyalty program. Instead of giving up independence, the founders of IBC hired a development team to create the patent-pending
InnDependent InnCentives guest loyalty program. With the success of the patent-pending InnCentives loyalty program IBC began adding
hotel services and software specifically for independent and boutique hotels. These solutions address the following challenges:
RevPAR and Profitability Optimization, Operational Management and Soft Brand Benefits. RevPAR, or revenue per available room,
is a hospitality performance metric that is calculated by dividing a hotels total guestroom revenue by the room count and the
number of days in the period being measured or by multiplying the average daily rate by the occupancy.
Our
technology division is broken into two business lines, International Vacation Hotels Travel (“IVH”) and IBC Hospitality
Technologies. Each of these divisions customer base is very different, and the services provided to each customer base ranges
dramatically.
Intellectual
Property
In
order to provide our business to business solutions thru IBC and our business to consumer solutions thru IVH, we use software,
business processes and proprietary information to carry out our business. These assets including related intellectual property
rights, copyrights and website domains are significant assets of our business. InnSuites Hospitality Trust relies on the combination
of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect these
assets and we license software and other intellectual property both to and from third parties. Intellectual property assets are
considered a valuable part of our business and have become a value-add portion of the services we provide. We consider our intellectual
property assets a valuable asset to our business and we renew appropriate registrations and regularly monitor potential infringements
of these assets.
PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION
These
consolidated financial statements have been prepared by management in accordance with accounting principles in accordance with
GAAP, and include all assets, liabilities, revenues and expenses of the Trust and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated. Certain items have been reclassified to conform to the current fiscal
year presentation. The Trust exercises unilateral control over the Partnership and the entities listed below. Therefore, the
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 (see Note 6)
|
|
|
22.83
|
%
|
|
|
-
|
|
Tucson Hospitality Properties, LLLP
|
|
|
-
|
|
|
|
51.01
|
%
|
Ontario Hospitality Properties, LLLP
(sold in June, 2017)
|
|
|
99.60
|
%
|
|
|
-
|
|
Yuma Hospitality Properties, LLLP
(see Note 6)
|
|
|
12.79
|
%
|
|
|
-
|
|
Tucson Saint Mary’s Hospitality
LLC
|
|
|
-
|
|
|
|
83.66
|
%
|
RRF Limited Partnership
|
|
|
74.80
|
%
|
|
|
-
|
|
InnSuites Hotels Inc.
|
|
|
100.00
|
%
|
|
|
-
|
|
IBC Hotels, LLC (including dba International
Vacation Hotels)
|
|
|
99.90
|
%
|
|
|
0.10
|
%
|
(i)
|
Indirect ownership is through
the Partnership
|
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 January 31, 2018 and 2017, 250,093 and 276,131 Class A Partnership
units were issued and outstanding, representing 1.95% and 2.09% of the total Partnership units, respectively. Additionally, as
of both January 31, 2018 and 2017, 2,974,038 and 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 January 31, 2018, the limited partners in the Partnership would receive 3,314,131 and 3,684,069 Shares
of Beneficial Interest of the Trust. As of January 31, 2018, and 2017, the Trust owns 9,527,448 general partner units in the Partnership,
representing 74.80% and 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 properties. 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 January 31, 2018, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount receivable of
approximately $811,000. The Demand/Revolving Line of Credit/Promissory Note accrues 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, 2018. As of April 18, 2018, the outstanding net balance receivable on the Demand/Revolving Line of Credit/Promissory
Note was $811,000.
As
of January 31, 2018, the Trust had an Advance to Affiliate credit facilities with an aggregate maximum borrowing capacity of $1,000,000,
which is available through June 30, 2018. As of January 31, 2018, the Trust had an amount receivable of the Advances to Affiliate
credit facility of approximately $971,000. As of April 18, 2018, the amount receivable from the Advance to Affiliate credit facility
was approximately $830,000.
With
approximately $5,775,000 of cash and short term investments, as of January 31, 2018, the availability of a $1,000,000 related
party Demand/Revolving Line of Credit/Promissory Note, and the availability of the combined $1,000,000 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.
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 hotel located in 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, 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 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
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 February 2018 and should be applied prospectively, with certain
cumulative effect adjustments. Early adoption is permitted. We are currently assessing the impact that this standard will have
on our consolidated financial statements.
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 Trust’s 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 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 February 1, 2018, as the Trust’s
annual reporting period is 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 and believes starting February 1,
2018, the Trust will change its accounting policy to record prepaid reservations on a net basis. Upon adoption of the
new standard, the Trust anticipates there will be no effect on retained earnings. Starting August 1, 2017, we changed our accounting
policy to record prepaid reservations on a “gross basis” which included recording an additional amount of reservation
revenues equal to an additional amount of reservation acquisition expenses representing the entire amount of the guest prepaid
reservation, excluding taxes and including IBC Hotels’ commission. Reservation acquisition costs included amounts owed to
hotels for prepaid reservations from August 2017 – January 2018 were approximately $234,000. Previous to August 1, 2017,
all prepaid reservations were recorded on a “net basis” and only the prepaid reservation commissions were included
in revenues. Therefore there was no effect on retained earnings during the fiscal year ending January 31, 2018.
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 change the core principle of revenue recognition
in Topic 606 but clarifies the implementation guidance on principal versus agent considerations. 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 and believes starting February 1, 2018, the Trust will change its
accounting policy to record prepaid reservations on a net basis.
●
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. 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. Based on our initial evaluation of the new
revenue recognition standards, the Trust believes that all of our revenues will need to be presented on a net basis instead of
a gross basis as currently presented.
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 recoverability of long-lived assets and the fair values of the long-lived assets.
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 impairment
of long-lived assets existed during the Trust’s fiscal years ended January 31, 2018 and 2017 (see Note 9).
Management
applies guidance ASC 350-40 Intangibles – Computer Software Developed or Obtained for Internal Use, to determine whether
it should capitalize internal use software developed for our IBC Technologies division. Under ASC 350-40, Management determined
that some of the internal-use software can possible be capitalized during the application development stage of development. The
application development stage of development includes software configuration, software interfaces and coding. Management has capitalized
internally developed software that meets the application development stage of development. Internally developed software is capitalized
over the estimated useful life, which ranges from 3-5 years.
INTANGIBLE
ASSETS
Intangible
assets with finite lives were amortized on a straight-line basis over the estimated useful lives, which ranged from 7 to 10 years.
The useful life of the intangible asset was evaluated each reporting period to determine whether events and circumstances warrant
a revision to the remaining useful life (see Note 9).
BUSINESS
COMBINATIONS
We
account for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair values on the acquisition date. The final purchase price may be adjusted up to one year from the date
of the acquisition. Identifying the fair value of the tangible and intangible assets and liabilities requires the use of estimates
by management and was based upon currently available data.
The
Trust allocates the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. Such goodwill
is not deductible for tax purposes and represents the value placed on entering new markets and expanding market share (see Note
9).
Unanticipated
events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date,
included changes from events after the acquisition date, such as changes in our estimate of relevant revenue or other targets,
will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related
contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have
a material effect on the consolidated statements of operations, financial position and cash flows in the period of the change
in the estimate.
GOODWILL
The
Trust tests goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred,
by comparing its reporting unit’s carrying value to its implied fair value. Impairment may result from, among other things,
deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations
and a variety of other circumstances. If the Trust determines that an impairment has occurred, it is required to record a write-down
of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating
the recoverability of the carrying value of goodwill, the Trust must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly
impact those judgements in the future and require an adjustment to the recorded balances. The goodwill was recorded as part of
the acquisition of International Vacation Hotels that occurred on January 8, 2016 (see Note 9) and an impairment existed as of
January 31, 2018.
CASH
AND CASH EQUIVALENTS
The
Trust considers all highly liquid short-term investments with maturities of three months or less at the time of purchase to be
cash equivalents. The Trust believes it places its cash and cash equivalents only with high credit quality financial institutions,
although these balances may periodically exceed federally insured limits.
REVENUE
RECOGNITION
Hotel
and Operations
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 non-affiliated hotels include a monthly accounting fee and a percentage of hotel room revenues for managing the daily
operations of the Hotels and the one hotel owned by affiliates of Mr. Wirth.
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.
IBC
Technologies Division
Our
operating results are affected by certain metrics, such as bookings and revenue margin, which we believe are necessary for understanding
and evaluating us. Gross bookings represent the total retail value of transactions booked for both agency and merchant transactions,
recorded at the time of booking reflecting the total price due for travel by travelers, including taxes, fees and other charges.
As travelers have increased their use of the internet to book travel arrangements, we have generally seen our gross bookings increase,
reflecting the growth in the online travel industry, our organic market share gains and our business acquisitions.
We
also evaluate the presentation of revenue on a gross versus a net basis. The consensus of the authoritative accounting literature
is that the presentation of revenue as “the gross amount billed to a customer because it has earned revenue from the sale
of goods or services or the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier)
because it has earned a commission or fee” is a matter of judgment that depends on the relevant facts and circumstances.
In making an evaluation of this issue, some of the factors that should be considered are: whether we are the primary obligor in
the arrangement (strong indicator); whether we have general supply risk (before customer order is placed or upon customer return)
(strong indicator); and whether we have latitude in establishing price. The guidance clearly indicates that the evaluation of
these factors, which at times can be contradictory, are subject to significant judgment and subjectivity. If the conclusion drawn
is that we perform as an agent or a broker without assuming the risks and rewards of ownership of goods, revenue should be reported
on a net basis. For our revenue models, discussed below, we have determined gross presentation is appropriate for certain of revenue
transactions and net for others. Based on our initial evaluation of the new revenue recognition standards effective for filing
periods after February 1, 2018, the Trust believes that all of our IBC revenues will be presented on a net basis.
IVH
- Business to Consumer
IVH
(Business to Consumer) and IBC (Business to Business) are two very different businesses that have two very different customer
bases and provide very different services. IVH’s (Business to Consumer) customer is the guest who is staying at the
hotel property. Their customer isn’t the hotel that the guest is staying at. The consumer gets to select which hotel and
which room type. In some cases IVH prepays for discounted inventory from suppliers and resells it to guests so IVH is holding
the supply. IVH plans on potentially doing more of this type of business based on the economics. We provide significant value
to the guest by providing a 24/7/365 reservation hotline, travel insurance and support up until the guest reaches the hotel property.
We are paid in a variety of ways, sometimes the full value of the reservation is paid to us, of which we remit the hotels portion,
sometime just our reservation fee which is equal to a non-refundable deposit made by the guest and sometime by billing the hotel
for our reservation fee. Regardless of payment method and mostly depending upon the contractual obligations between IVH and the
hotel, IVH typically is forced to pay for no-show reservations.
IBC
– Business to Business
IBC
is a leading technology solutions provider to the global travel and tourism industry. IBC’s customer base is the hospitality
properties, not the guests who are staying at the properties. The written agreements IBC has is directly with the properties.
IBC has significant information risks per their contractual obligations with the hotels. Services include a CRS, Digital Marketing
Services, Meta Services, Patent-pending loyalty services, websites and proprietary booking engines.
IBC
is the primary obligor in the arrangement to provide these services. The hotels look to IBC to fulfill the contractual obligations
of the arrangement. IBC is required to pay all upfront costs, regardless of usage and therefore has general inventory risk. IBC
sets the price of its contracts and has the latitude to sell our services at various prices to our hotels. IBC changes the product
before our network of hotels receive it as we have an entire onboarding team dedicated to ensure the content
is uploaded properly, we have a call center and we provide the technology updates as necessary. IBC has sole discretion in selecting
our suppliers and the product and service has been designed by IBC. In addition, IBC owns the software that the hotels license
the rights to we invoice all of our hotels on monthly basis and records the gross amount of our services as revenues.
IBC
derives substantially all of our digital marketing revenues from the performance of professional services on a fixed price monthly
basis. Our digital marketing services include, but are not limited to, metasearch, retargeting, website design, reputation management,
various online business listing services, social media marketing and rate shopping services. We recognize revenues as professional
services are performed. A significant component of our digital marketing is search engine marketing (“SEM”). With
SEM, we receive a commission on top of the amount of advertising we place for our clients. We incur digital advertising costs
on behalf of our clients which are reflected in our advertising and marketing expenses. These expenses include media and production
services to place advertisements strategically on various websites to maximize obtaining additional reservations for the hotel.
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.
ACCOUNTS
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
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 50% of balances over 90 days
and 100% of balances over 120 days. Accounts receivable are written off when collection efforts have been exhausted and they are
deemed uncollectible. Recoveries, if any, of receivables previously written off are recorded when received. The Trust does not
charge interest on accounts receivable balances and these receivables are unsecured. The following is a reconciliation of the
allowance for doubtful accounts for the fiscal years ending January 31, 2018 and 2017.
Fiscal
Year
|
|
Balance
at the Beginning of Year
|
|
|
Discontinued
Operations Adjustment
|
|
|
Charged
to Expense
|
|
|
Deductions
|
|
|
Balance
at the End of Year
|
|
2018
|
|
$
|
53,720
|
|
|
$
|
(19,750
|
)
|
|
$
|
11,356
|
|
|
$
|
(73,890
|
)
|
|
$
|
(28,564
|
)
|
2017
|
|
$
|
33,970
|
|
|
$
|
-
|
|
|
$
|
127,114
|
|
|
$
|
(107,364
|
)
|
|
$
|
53,720
|
|
STOCK-BASED
COMPENSATION
We
have an employee equity incentive plan, which is described more fully in Note 22 - “Share-Based Payments.” For fiscal
year 2018 and 2017, the Trust has paid the annual fees due to its Trustees by issuing Shares of Beneficial Interest out of its
authorized but unissued Shares of Beneficial Interest. 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.
During
fiscal year 2018, the Trust granted restricted stock awards of 24,000 Shares to members of the Board of Trustees, all of which
vested in fiscal year 2018 resulting in stock-based compensation of $51,840. During fiscal year 2017, the Trust granted restricted
stock awards of 24,000 Shares to members of the Board of Trustees, all of which vested in fiscal year 2017 resulting in stock-based
compensation of $55,920.
The
following table summarizes restricted share activity during fiscal years 2018 and 2017.
|
|
Restricted
Shares
|
|
|
|
Shares
|
|
|
Weighted-Average
Per Share
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Balance
at January 31, 2016
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
24,000
|
|
|
$
|
2.16
|
|
Vested
|
|
|
(24,000
|
)
|
|
$
|
2.16
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance
of unvested awards at January 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
24,000
|
|
|
$
|
2.16
|
|
Vested
|
|
|
(24,000
|
)
|
|
$
|
2.16
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance
of unvested awards at January 31, 2018
|
|
|
-
|
|
|
|
-
|
|
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.
INCOME
TAXES
The
Trust is subject to federal and state corporate income taxes, and accounts for deferred taxes utilizing an asset and liability
method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when it is determined to be more likely than not
that some portion, or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment (see Note 17).
DIVIDENDS
AND DISTRIBUTIONS
In
fiscal year 2017, the Trust paid a dividend of $0.01 per share in the fourth quarter for $96,630. In fiscal year 2018, the Trust
paid a dividend of $0.01 per share at end of the second fiscal quarter and at the end of the fourth fiscal quarter for a total
dividend of $0.02 for the fiscal year for $197,512. The Trust’s ability to pay dividends is largely dependent upon the operations
of the Hotels.
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 year-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.
INCOME
(LOSS) 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 3,314,131Shares of the Beneficial Interest, as discussed in Note
1.
For
the fiscal years ended January 31, 2018 and 2017, 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 3,473,085 in addition to the basic shares outstanding for fiscal years
2018 and 2017, respectively. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B Partnership
units were dilutive during fiscal 2017 and are included in the calculation of diluted earnings per share for that year below.
|
|
For
the Year Ended
|
|
|
|
January
31, 2018
|
|
Net
Income attributable to controlling interest
|
|
$
|
1,397,601
|
|
Plus:
Net Income attributable to non-controlling interests
|
|
|
5,410,300
|
|
Net
Income
|
|
$
|
6,807,901
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
9,612,139
|
|
Plus:
Weighted average incremental shares resulting from unit conversion
|
|
|
3,473,085
|
|
Weighted
average common shares outstanding after unit conversion
|
|
|
13,085,223
|
|
|
|
|
|
|
Diluted
Income Per Share
|
|
$
|
0.52
|
|
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 three hotel properties with an aggregate of 424 suites in Arizona and New Mexico, and the IBC Hospitality
segment serving 2,000 unrelated hotel properties. The Trust has a concentration of assets in the southwest United States and the
southern Arizona market. Historical financial information presented in this Form 10-K reflects this change. On an overall basis,
the Trust has elected to only put the costs directly attributable to the IBC Hospitality segment in that segment. Included in
these costs are salaries, employee taxes and benefits, sales, marketing and technology development costs.
IBC
Hotels, LLC was formed during the fiscal year ended January 31, 2014. IBC Hotels, LLC charges a 10% - 20% booking fee which, we
believe, increases the independent hotel net profits through lower guest acquisition costs and full guest information for lower
lifetime average acquisition cost. Competitors of IBC Hotels can charge anywhere from a 15% 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 actively
looking for investors to purchase all or part of IBC Hotels and we are looking to continue to expand IBC Hotels in the future
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 value in allocating costs
for items not directly attributable to the IBC Hospitality 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 an unfounded
sense of the profitability of the Hotel Operations & Corporate Overhead segment without the IBC Hospitality 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 Hospitality segment. By retaining the remainder of costs not associated with the IBC Hospitality 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.
ADVERTISING
COSTS
Amounts
incurred for advertising costs are expensed as incurred. Advertising expense totaled approximately $368,000 and $567,000 for the
years ended January 31, 2018 and 2017, respectively.
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 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.
|
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 years ended January 31, 2018 and 2017.
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.
3.
SALE OF OWNERSHIP INTERESTS IN ALBUQUERQUE SUBSIDIARY
On
July 22, 2010, the Board of Trustees unanimously approved, with Mr. Wirth abstaining, for the Partnership to enter into an agreement
with Rare Earth Financial, LLC (“Rare Earth”), an affiliate of Mr. Wirth, to sell units in Albuquerque Suite Hospitality,
LLC (the “Albuquerque entity”), which owns and operates the Albuquerque, New Mexico hotel property. Under the agreement,
Rare Earth agreed to either purchase or bring in other investors to purchase at least 49% of the membership interests in the Albuquerque
entity and the parties agreed to restructure the operating agreement of the Albuquerque entity. A total of 400 units were available
for sale for $10,000 per unit, with a two-unit minimum subscription. On September 24, 2010, the parties revised the Amended and
Restated Operating Agreement to name Rare Earth as the administrative member of the Albuquerque entity in charge of the day-to-day
management.
On
December 9, 2013, the Trust entered into an updated restructuring agreement with Rare Earth to allow for the sale of additional
interest units in the Albuquerque entity for $10,000 per unit. Under the updated restructuring agreement, Rare Earth agreed to
either purchase or bring in other investors to purchase up to 150 (and potentially up to 190 if the overallotment is exercised)
units. Under the terms of the updated restructuring agreement, the Trust agreed to hold at least 50.1% of the outstanding units
in the Albuquerque entity, on a post-transaction basis, and intends to maintain this minimum ownership percentage through the
purchase of units under this offering. The Board of Trustees approved this restructuring on December 9, 2013. The units in the
Albuquerque entity are allocated to three classes with differing cumulative discretionary priority distribution rights through
December 31, 2015. 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 from the Albuquerque entity. Priority distributions of $700 per unit
per year were cumulative until December 31, 2015; however, after December 31, 2015 Class A unit holders continue to hold a preference
on distributions over Class B and Class C unit holders.
If
certain triggering events related to the Albuquerque entity occur prior to the payment of all accumulated distributions to its
members, such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds
to the members. In the event that funds generated from a triggering event are insufficient to pay the total amount of all such
accumulated distributions owed to the members, all Class A members will participate pro rata in the funds available for distribution
to them until paid in full, then Class B, and then Class C. After all investors have received their initial capital plus a 7%
per annum simple return, any additional profits will be allocated 50% to Rare Earth, with the remaining 50% allocated proportionately
to all unit classes. Rare Earth received a restructuring fee of $128,000, conditioned upon and arising from the sale of the first
100 units in the Albuquerque entity following the December 31, 2013 restructuring. The Albuquerque entity plans to use its best
efforts to pay the discretionary priority distributions. The Trust does not guarantee and is not otherwise obligated to pay the
cumulative discretionary priority distributions. InnSuites Hotels will continue to provide management, licensing and reservation
services to the Albuquerque, New Mexico property.
On
February 15, 2017, the Trust and Partnership entered into a restructuring agreement with Rare Earth to allow for the sale of non-controlling
partnership units in the Albuquerque entity for $10,000 per unit. Rare Earth and the Trust have restructured the Albuquerque
Entity Membership Interest by creating 250 additional Class A membership interests from General Member majority-owned to accredited
investor member-owned. In the event of sale of 250 Class A Interests, total interests outstanding will change from 550 to 600
with Class A, Class B and Class C Limited Liability Company Interests (referred to collectively as “Interests”) restructured
with IHT selling approximately 200 Class B Interests to accredited investors as Class A Interest. Rare Earth, as a General
Partner of the Albuquerque 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. As part of this offering, Rare Earth was paid
$200,000 for a restructuring fee which was recorded in Equity.
During
the fiscal year ended January 31, 2018, there were 193 Class A units of the Albuquerque entity sold, of which 142 came from the
Trust at $10,000 per unit. As of January 31, 2018, the Trust held a 22.83% ownership interest, or 137 Class B units, in the Albuquerque
entity, Mr. Wirth and his affiliates held a 0.17% interest, or 1 Class C unit, and other parties held a 77.00% interest, or 462
Class A units. During the fiscal year ended January 31, 2018, the Albuquerque entity has made discretionary Priority
Return payments to unrelated unit holders of approximately $209,000, and to the Trust of approximately $177,000.
As of February 1, 2017, the Trust no longer accrues for these distributions as the preference period has expired.
4.
SALE OF OWNERSHIP INTERESTS IN TUCSON HOSPITALITY PROPERTIES SUBSIDIARY
On
February 17, 2011, the Partnership entered into a restructuring agreement with Rare Earth to allow for the sale of non-controlling
interest units in Tucson Hospitality Properties, LP (the “Tucson entity”), which operates the Tucson Oracle hotel
property, then wholly-owned by the Partnership. Under the agreement, Rare Earth agreed to either purchase or bring in other investors
to purchase up to 250 units, which represents approximately 41% of the outstanding limited partnership units in the Tucson entity,
on a post-transaction basis, and the parties agreed to restructure the limited partnership agreement of the Tucson entity. The
Board of Trustees approved this restructuring on January 31, 2011.
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 $10,000 per unit. Under the agreement, Rare Earth agreed to either
purchase or bring in other investors to purchase up to 160 (and potentially up to 200 if the overallotment is exercised) units.
Under the terms of the updated restructuring agreement, the Partnership agreed to hold at least 50.1% of the outstanding limited
partnership units in the Tucson entity, on a post-transaction basis, and intends to maintain this minimum ownership percentage
through the purchase of units under this offering. The Board of Trustees approved this restructuring on September 14, 2013. The
limited partnership interests in the Tucson entity are allocated to three classes with differing cumulative discretionary priority
distribution rights through June 30, 2017. Class A units are owned by unrelated third parties and have first priority for distributions.
Class B units are owned by the Partnership 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 from the Tucson entity. Priority distributions of
$700 per unit per year are cumulative until June 30, 2016; however, after June 30, 2016 Class A unit holders continue to hold
a preference on distributions over Class B and Class C unit holders.
If
certain triggering events related to the Tucson entity occur prior to the payment of all accumulated distributions to its members,
such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds to the
members. In the event that funds generated from a triggering event are insufficient to pay the total amount of all such accumulated
distributions owed to the members, all Class A members will participate pro rata in the funds available for distribution to them
until paid in full, then Class B, and then Class C. After all investors have received their initial capital plus a 7% per annum
simple return, any additional profits will be allocated 50% to Rare Earth, with the remaining 50% allocated proportionately to
all unit classes. Rare Earth also received a restructuring fee of $128,000, conditioned upon and arising from the sale of the
first 100 units in the Tucson entity following the October 1, 2013 restructuring. The Tucson entity plans to use its best efforts
to pay the discretionary priority distributions. The Trust does not guarantee and is not otherwise obligated to pay the cumulative
discretionary priority distributions. InnSuites Hotels will continue to provide management, licensing and reservation services
to the Tucson, Arizona property.
During
the fiscal year ended January 31, 2018, there were no units of the Tucson entity sold. As of January 31, 2018, the Partnership
held a 51.01% ownership interest, or 404 Class B units, in the Tucson entity, Mr. Wirth and his affiliates held a 0.38% interest,
or approximately 3 Class C units, and other parties held a 48.61% interest, or approximately 385 Class A units. For the fiscal
year ended January 31, 2018, the Tucson entity made discretionary Priority Return payments to unrelated unit holders of approximately
$272,000 and to the Partnership of approximately $283,000. As of February 1, 2017, the Trust no longer accrues for these
distributions as the preference period has expired.
5.
SALE OF OWNERSHIP INTERESTS IN YUMA HOSPITALITY PROPERTIES SUBSIDIARY
On
October 24, 2014, the Trust and Partnership entered into a restructuring agreement with Rare Earth to allow for the sale of non-controlling
interest units in Yuma Hospitality Properties, Limited Partnership (the “Yuma entity”) for $10,000 per unit, which
operates the Yuma hotel property, then wholly-owned by the Trust. Prior to the agreement there were 750 units outstanding and
as a result of the agreement, an additional 50 units will be created for sale. Under the agreement, Rare Earth agreed to either
purchase or bring in other investors to purchase up to 398 units, which represents approximately 49% of the outstanding partnership
units in the Yuma entity, on a post-transaction basis, and the parties agreed to restructure the limited partnership agreement
of the Yuma entity. The Board of Trustees approved this restructuring on October 24, 2014. Under the restructured limited partnership
agreement, Rare Earth became a general partner of the Yuma entity along with the Trust and Partnership.
The
limited partnership interests in the Yuma entity are allocated to three classes with differing cumulative discretionary priority
distribution rights through January 31, 2020. 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 from the Yuma entity. Priority distributions of $700 per
unit per year are cumulative until January 31, 2020. After January 31, 2020, all Partnership Interests will share equally in all
distributions.
If
certain triggering events related to the Yuma entity occur prior to the payment of all accumulated distributions to its members,
such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds to the
members. In the event that funds generated from a triggering event are insufficient to pay the total amount of all such accumulated
distributions owed to the members, all Class A members will participate pro rata in the funds available for distribution to them
until paid in full, then Class B, and then Class C. After all investors have received their initial capital plus a 7% per annum
simple return, any additional profits will be allocated 50% to Rare Earth, with the remaining 50% allocated proportionately to
all unit classes. Rare Earth will receive a restructuring fee of $350,000, conditioned upon and arising from the sale of the first
150 units in the Yuma entity following the October 24, 2014 restructuring. The Trust has paid out $350,000 of the restructuring
fee at January 31, 2016. The Yuma entity is required to use its best efforts to pay the priority distributions. The Trust does
not guarantee and is not otherwise obligated to pay the cumulative priority distributions. InnSuites Hotels will continue to provide
management, licensing and reservation services to the Yuma, Arizona property.
On
February 15, 2017, the Trust and Partnership entered into a restructuring agreement 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. The Trust paid $240,000 as a restructuring
fee to Rare Earth during the fiscal year ended January 31, 2018, which was included in equity.
During
the fiscal year ended January 31, 2018, there were 298.70 Class B units, of which all were sold from the Trust at $10,000
per unit. As of January 31, 2018, the Trust held a 12.79% ownership interest, or 102.30 Class B units, in the Yuma entity, Mr.
Wirth and his affiliates held a 0.63% interest, or 5.0 Class C units, and other parties held an 86.59% interest, or 692.70 Class
A units. For the fiscal year ending January 31, 2018, the Yuma entity made discretionary Priority Return payments to the Trust
of approximately $231,000 and to Rare Earth of approximately $360,500.
6.
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 and Albuquerque entities are variable interest entities 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 and Albuquerque, 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 and Yuma, 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 year ended January 31, 2018, 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.
7.
PROPERTY, PLANT, AND EQUIPMENT AND HOTEL PROPERTIES
As
of January 31, 2018 and 2017, hotel properties consisted of the following:
|
|
2018
|
|
|
2017
(i)
|
|
Land
|
|
$
|
2,805,015
|
|
|
$
|
4,438,079
|
|
Building
and improvements
|
|
|
18,066,151
|
|
|
|
25,458,137
|
|
Furniture,
fixtures and equipment
|
|
|
5,621,820
|
|
|
|
6,521,257
|
|
Total
hotel properties
|
|
|
26,492,986
|
|
|
|
36,417,473
|
|
Less
accumulated depreciation
|
|
|
(12,124,650
|
)
|
|
|
(17,022,739
|
)
|
Hotel
Properties in Service, net
|
|
|
14,368,336
|
|
|
|
19,394,734
|
|
Construction
in progress
|
|
|
76,683
|
|
|
|
-
|
|
Hotel
properties, net
|
|
$
|
14,445,019
|
|
|
$
|
19,394,734
|
|
|
(i)
|
Includes
discontinued operations
|
As
of January 31, 2018 and 2017, property, plant and equipment consisted of the following:
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
7,005
|
|
|
$
|
7,005
|
|
Building
and improvements
|
|
|
75,662
|
|
|
|
75,662
|
|
Furniture,
fixtures and equipment
|
|
|
1,178,941
|
|
|
|
852,332
|
|
Total
property, plant and equipment
|
|
|
1,261,608
|
|
|
|
934,999
|
|
Less
accumulated depreciation
|
|
|
(694,876
|
)
|
|
|
(554,868
|
)
|
Property,
Plant and Equipment, net
|
|
$
|
566,732
|
|
|
$
|
380,131
|
|
8.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets are carried at historic cost and are expected to be consumed within one year. As of January
31, 2018, and 2017, prepaid expenses and other current assets consisted of the following:
|
|
2018
|
|
|
2017
|
|
Prepaid
Assets
|
|
$
|
15,545
|
|
|
$
|
48,922
|
|
Tax
and Insurance Escrow
|
|
|
57,235
|
|
|
|
58,790
|
|
Deposits
|
|
|
8,000
|
|
|
|
14,805
|
|
Prepaid
Insurance
|
|
|
7,417
|
|
|
|
8,130
|
|
Prepaid
Workman’s Compensation
|
|
|
7,617
|
|
|
|
43,054
|
|
Miscellaneous
Prepaid Expenses
|
|
|
17,636
|
|
|
|
3,953
|
|
Total
Prepaid Expenses and Current Assets
|
|
$
|
113,450
|
|
|
$
|
177,654
|
|
9.
INTANGIBLE ASSETS, GOODWILL AND IMPAIRMENT
On
January 8, 2016, the Trust and IBC Hotels purchased the tangible and intangible assets excluding cash, receivables, prepaid booking/expenses,
accrued expenses, and an automobile from Vacation Technologies International, Inc., a Texas Corporation, dba International Vacation
Hotels (“International Vacation Hotels”). Assets purchased primarily consist of hotel revenue booking contracts, websites
and other key business intangible assets. The transaction has been accounted for as a business combination under the acquisition
method of accounting. Tangible assets acquired were considered worthless and therefore were not separately valued. Accordingly,
the identifiable intangible assets acquired have been recorded at fair value, with the remaining purchase price recorded as goodwill.
The
fair values of assets acquired at the transaction date are summarized below:
Marketing
Related Intangibles
|
|
$
|
100,000
|
|
Customer
Base
|
|
|
400,000
|
|
Total
identifiable intangible assets
|
|
|
500,000
|
|
|
|
|
|
|
Goodwill
|
|
|
500,000
|
|
|
|
|
|
|
Total
acquired assets
|
|
$
|
1,000,000
|
|
Over
the past several fiscal years, the Trust has made significant investment in IBC Hotels, including its investment in the purchase
of International Vacation Hotels for $1 million in January 2016. In the fiscal year ended January 31, 2017, the Trust incurred
approximately $1 million net operating loss from IBC Hotels. In the fiscal year ended January 31, 2018, IBC Hotels lost
approximately $1.6 million excluding the write-off of the intangible assets.
After assessing the
totality of events and circumstances including the historical losses and projected losses, the Trust determined that it is more
likely than not that the fair value of IBC Hotels is less than its carrying value. Accordingly, Management has decided to write
down the entire amount of intangible assets as of January 31, 2018 as such amounts are not considered recoverable.
Intangible
Assets
For
the fiscal year ending January 31, 2018, intangible
assets consisted of the following:
|
|
Amount
|
|
|
Fiscal
Year January 31, 2018 Impairment Expense
|
|
|
Fiscal
year 1/31/2017
Accumulated Amortization
|
|
|
Net
Amount
|
|
|
Useful
Lives
(years)
|
|
Marketing Related Intangibles
|
|
$
|
100,000
|
|
|
$
|
90,000
|
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
|
10
|
|
Customer Base
|
|
|
400,000
|
|
|
|
343,000
|
|
|
|
57,000
|
|
|
|
-
|
|
|
|
7
|
|
Total:
|
|
$
|
500,000
|
|
|
$
|
433,000
|
|
|
$
|
67,000
|
|
|
$
|
-
|
|
|
|
|
|
The
Trust recorded amortization of goodwill expense of $433,000 and $67,000 for the years ended January 31, 2018 and
2017, respectively.
Goodwill
The
changes in the carrying value of the Trust’s goodwill for the years ended January 31, 2018 and 2017 is as follows:
Beginning
Balance January 31, 2016
|
|
$
|
-
|
|
Acquisition
of Vacation Technology Hotels
|
|
|
500,000
|
|
Ending
Balance January 31, 2017
|
|
|
500,000
|
|
|
|
|
|
|
Impairment
|
|
|
(500,000
|
)
|
Ending
Balance January 31, 2018
|
|
$
|
-
|
|
10.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As
of January 31, 2018 and 2017, accounts payable and accrued expenses consisted of the following:
|
|
2018
(i)
|
|
|
2017
|
|
Accounts
Payable
|
|
$
|
741,917
|
|
|
$
|
1,025,749
|
|
Accrued
Salaries and Wages
|
|
|
271,739
|
|
|
|
257,259
|
|
Accrued
Vacation
|
|
|
38,957
|
|
|
|
32,608
|
|
Income
Tax Payable
|
|
|
340,169
|
|
|
|
20,000
|
|
Accrued
Interest Payable
|
|
|
26,565
|
|
|
|
52,852
|
|
Advanced
Customer Deposits
|
|
|
15,000
|
|
|
|
11,832
|
|
Accrued
Property Taxes
|
|
|
140,439
|
|
|
|
190,533
|
|
Accrued
Land Lease
|
|
|
130,015
|
|
|
|
98,175
|
|
Sales
Tax Payable
|
|
|
305,071
|
|
|
|
163,772
|
|
Deferred
Revenue
|
|
|
107,467
|
|
|
|
133,146
|
|
Accrued
Other
|
|
|
180,813
|
|
|
|
177,974
|
|
Total
Accounts Payable and Accrued Expenses
|
|
$
|
2,298,152
|
|
|
$
|
2,163,900
|
|
|
(i)
|
Includes
current liabilities of discontinued operations.
|
11.
MORTGAGE NOTES PAYABLE
At
January 31, 2018 and 2017, the Trust had mortgage notes payable outstanding with respect to each of the Hotels except the Albuquerque
property. The mortgage notes payable have various repayment terms and have scheduled maturity dates ranging from August 2022 to
June 2042. Weighted average annual interest rates on the mortgage notes payable for the fiscal years ended January 31, 2018 and
2017 were 4.85% and 4.65%, respectively.
The
following table summarizes the Trust’s mortgage notes payable, net of debt discounts, as of January 31:
|
|
2018
|
|
|
2017
|
|
Mortgage note payable,
due in monthly installments of $28,493, including interest at 4.69% per year, through June 19, 2042, secured by the Tucson
Oracle property with a carrying value of $7.6 million at January 31, 2018.
|
|
|
4,927,076
|
|
|
|
3,112,112
|
|
|
|
|
|
|
|
|
|
|
Mortgage note
payable, due in monthly installments of $32,419, including interest at the prime rate plus one percentage point over the index,
with a floor of 5.0% per year (5% per year as of January 31, 2015), through August 1, 2022 plus a balloon payment of $4,112,498
in September 2022, secured by the Yuma property with a carrying value of $4.8 million at January 31, 2018.
|
|
|
4,827,259
|
|
|
|
4,963,645
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
$
|
9,754,335
|
|
|
$
|
8,075,757
|
|
The
mortgage note payable secured by the Yuma hotel property is recourse to the Trust as a full guarantor. None of the other mortgage
notes are recourse to the Partnership or the Trust.
On
August 24, 2012, the Yuma entity entered into a $5,500,000 mortgage loan with 1
st
Bank Yuma to refinance the then existing
term debt. The mortgage loan calls for a 10 year maturity date and an interest rate of the Wall Street Journal Prime Rate plus
one percentage point, with a floor of 5.0% per year. Prepayment fees exist for refinancing this debt with another lender until
the maturity date. As of January 31, 2018, the mortgage loan balance was approximately $4,828,000, net of a discount of approximately
$11,000.
On
November 24, 2014, the Tucson Oracle entity entered into a $3,500,000 mortgage loan with Kansas State Bank of Manhattan to acquire
the land associated with this property, re-finance the existing Tucson hotel loan first deed of trust and pay off other existing
debt. This new loan lowered the interest rate for this property’s mortgage from 8.0% to 4.19% per annum. The $3,500,000
commercial real estate loan has a 15 year term with a 4.19% per annum fixed interest rate for five years, and adjusts annually
based upon the Weekly Average Yield of the US Treasury Securities, with a 4.19% floor. The loan closed simultaneous to the land
purchase. Rare Earth, the Partnership, the Trust, the Wirth Family Trust dated July 14, 2006 and James and Gail Wirth are joint
guarantors. On June 29, 2017, Tucson Oracle entered into a $5.0 million Business Loan Agreement (“Tucson Loan”) as
a first mortgage credit facility with KS State Bank to refinance the existing first mortgage credit facility with an approximate
payoff balance of $3.045 million which will allow Tucson Hospitality Properties, LLLP to be reimbursed for prior and future hotel
improvements. The Tucson Loan has a maturity date of June 19, 2042. The Tucson Loan has an initial interest rate of 4.69% for
the first five years and thereafter a variable rate equal to the US Treasury + 2.0% with a floor of 4.69% and no prepayment penalty.
This credit facility is guaranteed by InnSuites Hospitality Trust, RRF Limited Partnership, Rare Earth Financial, LLC, James F.
Wirth and Gail J. Wirth and the Wirth Family Trust dated July 14, 2016. As of January 31, 2018, the mortgage loan balance was
approximately $4,927,000, net of a discount of approximately $5,000.
See
Note 15 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.
12.
NOTES PAYABLE TO BANKS
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 January 31, 2018, the business loan balance was approximately $124,000, net of a discount of approximately $2,000.
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 January 31, 2018, the line of credit balance has been paid in full.
On
May 11, 2017, Yuma Hospitality Properties, LLLP entered into a $850,000 Promissory Note Agreement (“Yuma Loan Agreement”)
as a credit facility to replenish funds for the hotel remodel with 1st 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. As of January 31, 2018, the loan balance was approximately $828,000, net of a discount of approximately
$6,000.
See
Note 15 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.
13.
LINES OF CREDIT – RELATED PARTY
On
December 1, 2014, the Trust entered into a $1,000,000 net maximum Demand/Revolving Line of Credit/Promissory Note with Rare Earth.
The Demand/Revolving Line of Credit/Promissory Note bears interest at 7.0% per annum, is interest only quarterly and matures on
December 31, 2018. No prepayment penalty exists on the Demand/Revolving Line of Credit/Promissory Note. The balance fluctuates
significantly through the period with the highest payable balance being $630,000 during the fiscal year ended January 31, 2018.
The Demand/Revolving Line of Credit/Promissory Note has a net maximum borrowing capacity of $1,000,000. Related party interest
expense or income for the Demand/Revolving Line of Credit/Promissory Note for the fiscal years ended January 31, 2018 was $4,768
of expense and $15,567 of revenue, and for the fiscal year ended January 31, 2017 was $5,112 of expense. The Demand/Revolving
Line of Credit/Promissory Notes are presented together as one line item on the balance sheet and totaled a receivable of $810,799,
and a payable of $145,000 at January 31, 2018 and 2017, all of which is considered a current receivable and liability, respectively.
14.
OTHER NOTES PAYABLE
As
of January 31, 2018 the Trust had approximately $959,000 in promissory notes outstanding to unrelated third parties arising from
the repurchase of 91,259 Class A Partnership units in privately negotiated transactions and the repurchase of 524,930 Shares
of Beneficial Interest in privately negotiated transactions. These promissory notes bear interest at 7% per year and are due in
varying monthly payments through July 2020. As of January 31, 2017 the Trust had approximately $18,000 in promissory notes outstanding
to unrelated third parties arising from the repurchase of 9,903 Partnership Units and 3,259 IHT Shares of Beneficial Interest
in privately negotiated transactions. These promissory notes bear interest at 7% per year and are due in varying monthly payments
through June 2019.
As
of January 31, 2018, the Trust had $200,000 notes payable with an individual lender.
On
June 20, 2016, the Trust and the Partnership together entered into an unsecured loan of $80,000 with Guy C. Hayden III (“Hayden
Loan”). The Hayden loan is due on June 20, 2019 or on demand, whichever occurs first. The Hayden loan accrues interest at
7% and interest only payments shall be made monthly and are due on the first of the following month. The Trust and Partnership
may pay all of part of these notes without any repayment penalties. On March 1, 2017, the Trust and the Partnership together added
an additional $36,960 to the Hayden Loan. On May 30, 2017, the Trust and the Partnership together added an additional $63,040
to the Hayden Loan. On July 18, 2017 the Trust and Partnership together added an additional $90,000 to the Hayden Loan. The total
principal amount of the Hayden Loan is $270,000.
On
December 5, 2016, the Trust and the Partnership together entered into eight unsecured loans for a total of $425,000 with varying
principal amounts ranging from $25,000 to $100,000 with H. W. Hayes Trust (“Hayes Loans”). The Trust and the Partnership
together also entered into two unsecured on-demand $25,000 loans for a total of $50,000 with Lita M. Sweitzer (“Sweitzer
Loans”). On March 20, 2017, the Trust and Partnership added an additional $50,000 to the Sweitzer Loans. The total
principal amount of the Hayes Loans and the Sweitzer Loans is $525,000. The Hayes Loans and the Sweitzer Loans are due on June
20, 2019 or on demand, whichever occurs first. The Hayes Loans requires from a 0-120 day notification of the demand to repay the
loans prior to June 20, 2019. Both the Hayes Loans and the Sweitzer Loans accrue interest at 7.0% per year on the unpaid balance
and interest only payments shall be made monthly and are due on the first of the following month. The Trust and Partnership may
pay all or part of these notes without any repayment penalties.
See
Note 15 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.
15.
MINIMUM DEBT PAYMENTS
Scheduled
minimum payments of debt, net of debt discounts, as of January 31, 2018 are as follows in the respective fiscal years indicated:
FISCAL
YEAR
|
|
MORTGAGES
|
|
|
NOTES
PAYABLE TO BANK
|
|
|
OTHER
NOTES PAYABLE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
254,460
|
|
|
|
144,185
|
|
|
$
|
1,355,664
|
|
|
$
|
1,754,309
|
|
2020
|
|
|
267,441
|
|
|
|
21,625
|
|
|
|
378,817
|
|
|
|
667,883
|
|
2021
|
|
|
278,588
|
|
|
|
22,868
|
|
|
|
216,489
|
|
|
|
517,945
|
|
2022
|
|
|
295,336
|
|
|
|
22,552
|
|
|
|
3,433
|
|
|
|
321,321
|
|
2023
|
|
|
4,330,880
|
|
|
|
740,983
|
|
|
|
-
|
|
|
|
5,071,863
|
|
Thereafter
|
|
|
4,327,630
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,327,630
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,754,335
|
|
|
$
|
952,213
|
|
|
$
|
1,954,403
|
|
|
$
|
12,660,951
|
|
16.
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 therefore. 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.
On
January 2, 2001, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of
1934, as amended, for the purchase of up to 250,000 Partnership units and/or Shares of Beneficial Interest in open market or privately
negotiated transactions. On September 10, 2002, August 18, 2005 and September 10, 2007, the Board of Trustees approved the purchase
of up to 350,000 additional Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions.
Additionally, on January 5, 2009, September 15, 2009 and January 31, 2010, the Board of Trustees approved the purchase of up to
300,000, 250,000 and 350,000, respectively, additional Partnership units and/or Shares of Beneficial Interest in open market or
privately negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for
future acquisitions and financings and/or for awards granted under the Trust’s equity compensation plans/programs. Additionally,
on June 19, 2017, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of
1934, as amended, for the purchase of up to 750,000 Partnership units and/or Shares of Beneficial Interest in open market or privately
negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for future acquisitions
and financings and/or for awards granted under the InnSuites Hospitality Trust 1997 Stock Incentive and Option Plan.
For
the years ended January 31, 2018 and 2017, the Trust repurchased 150,973 and 30,277 Shares of Beneficial Interest at an average
price of $1.99 and $2.55 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
remains authorized to repurchase an additional 662,117 Partnership units and/or Shares of Beneficial Interest pursuant to the
publicly announced share repurchase program, which has no expiration date. Repurchased Shares of Beneficial Interest are accounted
for as treasury stock in the Trust’s Consolidated Statements of Shareholders’ Equity.
17.
FEDERAL INCOME TAXES
The
Trust and subsidiaries have income tax net operating loss carryforwards of approximately $4.8 million at January 31, 2018. In
2005, the Trust had an ownership change within the meaning of Internal Revenue Code Section 382. However, the Trust determined
that such ownership change would not have a material impact on the future use of the net operating losses.
Income taxes for the years ended January 31,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Current
income tax provision (benefit)
|
|
|
335,000
|
|
|
|
(227,000
|
)
|
Deferred
income tax provision (benefit)
|
|
|
-
|
|
|
|
-
|
|
Net
income tax expense (benefit)
|
|
$
|
335,000
|
|
|
$
|
(227,000
|
)
|
Total and net deferred income tax assets at January 31,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
2,763,000
|
|
|
$
|
4,040,000
|
|
Bad debt allowance
|
|
|
(22,000
|
)
|
|
|
(18,000
|
)
|
Accrued expenses
|
|
|
89,000
|
|
|
|
84,000
|
|
Syndications
|
|
|
5,179,000
|
|
|
|
5,179,000
|
|
Prepaid Insurance
|
|
|
30,000
|
|
|
|
30,000
|
|
Alternative
minimum tax credit
|
|
|
91,000
|
|
|
|
91,000
|
|
Total deferred tax assets
|
|
|
8,130,000
|
|
|
|
9,406,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income
tax liability associated with book/tax differnces in hotel properties
|
|
|
(2,884,000
|
)
|
|
|
(2,459,000
|
)
|
Net deferred income tax asset
|
|
|
5,246,000
|
|
|
|
6,947,000
|
|
Valuation
allowance
|
|
|
(5,246,000
|
)
|
|
|
(6,947,000
|
)
|
Net deferred
income tax
|
|
$
|
-
|
|
|
$
|
-
|
|