NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2017 AND JANUARY 31, 2017
AND
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2017 AND 2016
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of October 31, 2017, InnSuites Hospitality Trust (the “Trust”, “we” 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 Hosptality 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 has and does provide 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 74.23% and 72.11% interest in the Partnership as of October 31, 2017 and January 31, 2017, respectively. The Trust’s
weighted average ownership for the nine month period ended October 31, 2017 and 2016 was 72.97% and 72.11%, respectively. As of
October 31, 2017, the Partnership owned a 51.01% interest in an InnSuites® hotel located in Tucson, Arizona. As of October
31, 2017, the Trust owns a direct 15.90% interest in a Yuma, Arizona hotel property (see Note 6), and a direct 26.46% 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 was sold to an unrelated third party
for $17,500,000 (see Note 11).
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 muli-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 2018.
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.
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 October 31, 2017 and January 31, 2017, 284,376 and 276,131 Class
A Partnership units were issued and outstanding, representing 2.21% and 2.09% of the total Partnership units, respectively. Additionally,
as of October 31, 2017 and January 31, 2017, 3,024,038 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, respectively. If all of the Class A
and B Partnership units were converted on October 31, 2017 and January 31, 2017, the limited partners in the Partnership would
receive 3,308,414 and 3,684,069 Shares of Beneficial Interest of the Trust, respectively. As of October 31, 2017 and January 31,
2017, the Trust owns 9,527,448 general partner units in the Partnership, representing 74.23% 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 property. 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 sales of non-controlling interests and to service our debt.
As
of October 31, 2017 and January 31, 2017, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an
amount receivable of approximately $172,000 and amount payable of $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/lending capacity of $1,000,000, which is available through June 30, 2019. As of December 7, 2017, the
outstanding net balance receivable on the Demand/Revolving Line of Credit/Promissory Note was approximately $402,000.
As
of October 31, 2017 and January 31, 2017, the Trust had two available Advances to Affiliate credit facilities each with a maximum
borrowing/lending capacity of $500,000 for a total maximum borrowing capacity of $1,000,000, which is available through June 30,
2019. As of October 31, 2017 and January 31, 2017, the Trust had an amount receivable of approximately $963,000, and payable of
approximately $379,000, respectively. As of December 7, 2017, the outstanding net balance receivable on the available Advances
to Affiliate credit facility was approximately $963,000.
On
August 24, 2017, the Trust entered into a Promissory Note Agreement with RepublicBankAZ, N.A. (“Republic Bank LOC”)
for a $150,000 revolving line of credit with a maturity date of August 24, 2018. The IHT Agreement has interest only payments
due monthly and the variable interest rate is 1.50% above the highest prime rate as published in the Wall Street Journal. No prepayment
penalty exists.
On
October 31, 2017, Yuma Hospitality Properties, LLLP, Tucson Hospitality Properties, LLLP and Albuquerque Suite Hospitality LLC,
subsidiaries of the Trust, each entered into a Business Loan Agreement. Each Business Loan Agreement is for $50,000, has a maturity
date of October 31, 2022, is guaranteed by the Trust and requires monthly interest only payments. Each Business Loan Agreement
has no prepayment penalties and a variable interest rate based on the highest prime rate as published in the Wall Street Journal
plus a margin of 1.00 percent. Each Business Loan Agreement allows unlimited advances not to exceed the Business Loan Agreement
maximum borrowing capacity of $50,000.
With approximately
$7,627,000 of cash, as of October 31, 2017, the availability of a $1,000,000 related party Demand/Revolving Line of Credit/Promissory
Note, the availability of the $1,000,000 Affiliate credit facility and the availability of the $300,000 Republic
Bank LOC, 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. The results for the period ended October 31, 2017 are not necessarily indicative
of the results to be expected for the entire fiscal year ending January 31, 2018 or any future period.
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 and Yuma Hospitality
Properties LLLP have been determined to be variable interest entities with the Partnership as the primary beneficiary (see Note
7 – “Variable Interest Entity”). Therefore, the financial statements of Albuquerque Suite Hospitality, LLC and
Yuma Hospitality Properties, LLP 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 hotel located in New Mexico historically experiences its 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
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 that 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
of this standard 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 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 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 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 currently believes that it
will retain much of the same accounting treatment as used to recognized revenue under current standards.
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. 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 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 and nine months ended October 31, 2017 and 2016.
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 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.
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 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 (Business to Consumer)’s 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 hotels receive it as we have entire onboarding team dedicated that 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 record 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.
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 3,308,414 Shares of the Beneficial Interest, as discussed in Note
1.
For
the periods ended October 31, 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 3,528,578 and 3,684,069 in addition to the basic shares outstanding
for the nine months ended October 31, 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 October 31, 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 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. 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 Hospitality in that segment. Included
in these costs are 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 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 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 a false 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.
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 October 31, 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 nine months ended October 31, 2017, the Trust recognized expenses of $38,880 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 2017. 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 nine months ended October 31, 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
|
|
|
(18,000
|
)
|
|
$
|
2.16
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance
of unvested awards at October 31, 2017
|
|
|
6,000
|
|
|
$
|
2.16
|
|
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, as amended on June 19, 2017, bears interest at 7.0% per annum
for both a payable and recievable, is interest only quarterly and matures on June 30, 2019. 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/lending capacity of $1,000,000. As of October 31, 2017 and January
31, 2017, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount receivable of approximately
$172,000 and amount payable of $145,000, respectively. As of December 7, 2017, the outstanding net balance receivable on the Demand/Revolving
Line of Credit/Promissory Note was approximately $402,000.
As of January 31,
2017, the Trust had two available Affiliate credit facilities each with a maximum borrowing/lending capacity of $500,000
to Phoenix Northern Resort, LLC and Tempe/Phoenix Airport Resort LLC for a total maximum borrowing/lending capacity of
$1,000,000. On June 19, 2017, the Board changed the terms of Tempe/Phoenix Airport Resort LLC Affiliate credit facilities by increasing
the borrowing capacity to $1,000,000 and changed the Maturity Date from June 30, 2017 to June 30, 2019, bears interest at 7.0%
per annum for both a payable and receivable. On June 19, 2017, the Board terminated the Phoenix Northern Resort, LLC Affiliate
credit facility. As of October 31, 2017 and January 31, 2017, the Trust had an amount receivable of approximately $963,000, and
account payable of approximately $379,000, respectively. As of December 12, 2017, the outstanding net balance receivable on the
available Affiliate credit facility was approximately $963,000. During the period ended October 31, 2017, the Trust received $708
and $0 interest income from Phoenix Northern Resort, LLC and Tempe/Phoenix Airport Resort LLC, respectively.
As
of October 31, 2017 and January 31, 2017, Mr. Wirth and his affiliates held 3,024,038 and 3,407,938 Class B Partnership units,
which represented 23.56% and 25.80% of the total outstanding Partnership units. As of October 31, 2017 and January 31, 2017, Mr.
Wirth and his affiliates held 6,939,429 and 9,647,028respectively, Shares of Beneficial Interest in the Trust, which represented
72.57% and 71.93%, respectively, of the total issued and outstanding Shares of Beneficial Interest. For the nine months ended
October 31, 2017, Mr. Wirth’s affiliates paid the Trust $292,984 for management and licensing fees.
On
July 10, 2017, InnSuites Hospitality Trust (the “Trust”) entered into a Securities Purchase Agreement (the “Agreement”)
to purchase a total of 88,000 Shares of Beneficial Interest of the Trust (“Share”) from three individuals, at a purchase
price of $2.00 per Share with the sellers set forth on the signature page thereto, for the aggregate cost of $176,000 to the Trust.
Pursuant to the Agreement, Marc Berg, Executive Vice President of the Trust sold 40,000 Shares and two non-affiliated individuals
each sold 24,000 Shares.
On
July 10, 2017, RRF Limited Partnership entered into multiple Assignment of Partners Interest Agreements (the RRF Agreements”)
to purchase a total of 433,900 RRF Limited Partnership units convertible 1:1 to Shares of Beneficial Interest of InnSuites Hospitality
Trust at a purchase price of $2.00 per RRF Limited Partnership unit, for the aggregate cost of $867,800 to the Trust. Pursuant
to the RRF Agreements, James F. Wirth, the Chairman and Chief Executive Officer of the Trust, sold 250,000 RRF Limited Partnership
units and Mr. Wirth’s family member, Pamela Barnhill, Vice Chairperson and President of the Trust sold 45,975 RRF Limited
Partnership units and three other of Mr. Wirth’s family members who are each not affiliated with the Trust each sold 45,975
RRF Limited Partnership units. On July 10, 2017, the closing price of Shares of Beneficial Interest of the Trust on the NYSE American
was $2.00 per Share. The Board of Trustees (the “Board”) and the Audit Committee of the Trust approved this purchase
as part of the Trust’s NYSE Equity Enhancement Plan.
On
July 10, 2017, the Trust entered into three Promissory Notes for a total of $176,000 to purchase 88,000 Shares as described above.
On July 10, 2017, RRF Limited Partnership entered into five Each Promissory Notes for a total of $867,800 to purchase a total
of 433,900 Shares. Each Promissory Note has a 3 year term paying monthly interest and principle amounts including 7% interest.
The foregoing description is not intended to be complete and is qualified in its entirety by reference to the full text of the
Agreement, which is filed as Exhibit 10.2 to this Current Report on Form 8-K and is incorporated herein by reference.
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 $60,000 yearly salary.
On
February 28, 2017, the Trust entered into a Securities Purchase Agreement to sell a total of 111,111 Shares of Beneficial Interest
of the Trust, at a sale price of $1.80 per Share for the Aggregate proceeds of $200,000 to the Trust. Pursuant to the Security
Purchase Agreement, Rare Earth purchased 55,556 Shares of Beneficial Interest of the Trust and one non-affiliated individual purchased
55,555 Shares of Beneficial Interest of the Trust. These shares are included in the Shares of Beneficial Interest, issued and
outstanding, however issuance is pending certain administrative matters.
On
May 4, 2017, the Trust entered into a Securities Purchase Agreement to sell a total of 106,952 Shares of Beneficial Interest of
the Trust, at a sale of price of $1.87 per Share for the aggregate proceeds of $200,000 to the Trust. Pursuant to the Security
Purchase Agreement, Rare Earth purchased 53,476 Shares of Beneficial Interest of the Trust and one non-affiliated individual purchased
55,476 Shares of Beneficial Interest of the Trust. These shares are included in the Shares of Beneficial Interest, issued and
outstanding, however issuance is pending certain administrative matters.
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
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 October 31, 2017 and January 31, 2017, the business loan balance was
paid in full and approximately $316,000, respectively, net of a discount of approximately $0 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 October 31, 2017 and January 31, 2017, the
business loan balance was approximately $58,000 and $393,000, respectively, net of a discount of approximately $1,000 and approximately
$14,000, 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 October 31, 2017, the business loan balance was approximately $164,000, net of a discount of approximately $3,000.
As of January 31, 2017, the business loan balance was approximately $285,000, net of a discount of approximately $5,000.
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 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. As of October 31, 2017, the Promissory Note balance was approximately $833,000, net
of a discount of approximately $7,000.
On
June 29, 2017, Tucson Hospitality Properties, LLLP, a subsidiary of InnSuites Hospitality Trust, 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. T he 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 October 14, 2016. As
of October 31, 2017, the Tucson Loan was approximately $4.9 million, net of a discount of $5,000.
On
June 29, 2017, Tucson Hospitality Properties, LLLP, simultaneous with the execution and funding of the Tucson Loan, paid off and
terminated the existing first mortgage credit facility with an approximate balance of $3.045 million which was originated on November
18, 2014, with a maturity date of November 18, 2029, an initial principal balance of $3.5 million and a current interest rate
of 4.19% with an adjusted variable rate of US Treasury + 3.75% starting November 18, 2019.
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 one of
the entities 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.
On
February 15, 2017, the Trust and Partnership entered into a restructuring agreement with Rare Earth Financial, LLC (“REF”)
to allow for the sale of non-controlling partnership units in Albuquerque Suite Hospitality LLC (“Albuquerque”) for
$10,000 per unit, which operates the Best Western InnSuites Albuquerque Hotel and Suites Airport hotel property, a 100 unit hotel
in Albuquerque, New Mexico (the “Property”). REF and IHT are restructuring the Albuquerque 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. REF, as a General Partner of Yuma, will coordinate
the offering and sale of Class A Interests to qualified third parties. REF and other REF 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 American Company Guide.
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. This restructuring is part of the
Trust’s Equity Enhancement Plan to comply with Section 1003(a)(iii) of the NYSE American Company Guide. As described below,
as of October 31, 2017, the Trust has sold approximately $2,710,000 of non-controlling partnership units in the Yuma entity.
During
the nine months ended October 31, 2017, there were 164 Class A units sold, of which 120.69 came from the Trust’s Class B
units, and no C units of the Albuquerque entity sold. As of October 31, 2017 and January 31, 2017, the Trust held a 26.46% and
50.91% ownership interest, or 158.31 and 279 Class B units, in the Albuquerque entity, Mr. Wirth and his affiliates held a 0.17%
interest, or 1 Class C unit, and other third parties held a 73.37% interest, or 439 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 nine months ended October 31, 2017, there were no Class A, B or C units of the Tucson entity sold. As of October 31, 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 0.38% interest, or 3 Class C units, and other parties held a 48.6% interest, or 385 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 October 31, 2017, there were no Class A units, B or C units of the Ontario entity sold. On June 2, 2017,
the Trust sold its Ontario hotel to an unrelated third party for approximately $17.5 million, which the Trust received in cash.
The Trust used $7.2 million of the proceeds to satisfy its mortgage note payable on the property, approximately $2.4 million to
reduce accruals and payables, and retained the remaining proceeds to fund future operations and capital improvements.
During
the nine months ended October 31, 2017, there were 294.40 Class A units of the Yuma entity sold, at $10,000 per unit, of which
271 units were sold from the Trust. As of October 31, 2017, the Trust held a 15.90% ownership interest, or 130.90 Class B units,
in the Yuma entity, Mr. Wirth and his affiliates held a 0.50% interest, or 4.10 Class C units, and other parties held a 83.60%
interest, or 688.40 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 nine months ended October 31, 2017, the priority distributions were paid for the three
months ended October 31, 2017 and no priority distributions were accrued for the three months ended October 31, 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 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 quarter ended October 31, 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 $450,635 and $569,952 in cash for interest for the nine months ended October 31, 2017 and 2016, respectively for continuing
operations. The Trust paid $19,907 and $0 in cash for taxes for the nine months ended October 31, 2017 and 2016, respectively
for continuing operations.
9.
COMMITMENTS AND CONTINGENCIES
The
Albuquerque Hotel is subject to a non-cancelable ground lease that expires in 2058. Total expense associated with the non-cancelable
ground lease for the nine months ended October 31, 2017 and 2016 was approximately $112,000 and $111,000, respectively.
On
August 4, 2017, the Trust entered into a five year office lease agreement with Northpoint Properties for a commercial office lease
at 1730 E Northern Ave, Suite 122, Phoenix, Arizona 85020 commencing on September 1, 2017. Base monthly rent of $4,100 increases
6% on a yearly basis. No rent is due for October 2018 and October 2022 months. The Trust also agreed to pay electricity and applicable
sales tax. The office lease agreement provides early termination with a 90 day notification with an early termination fee of $12,000,
$8,000, $6,000, $4,000 and $2,000 for years 1 – 5 of the lease term.
Future
minimum lease payments under the non-cancelable ground leases are as follows:
Fiscal
Year Ending
|
|
|
|
Remainder
of FY 2018
|
|
|
44
,231
|
|
FY 2019
|
|
|
163,938
|
|
FY 2020
|
|
|
166,965
|
|
FY 2021
|
|
|
170,172
|
|
FY 2022
|
|
|
173,569
|
|
FY 2023
|
|
|
149,740
|
|
Thereafter
|
|
|
5,473,313
|
|
Total
|
|
|
6,341,928
|
|
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 October 31, 2017 and January 31, 2017.
InnSuites
Hotels has entered into membership agreements with Best Western International, Inc. (“Best Western”) with respect
to all three 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 $223,000 and $252,000 for the nine months ended October 31,
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 Hospitality 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
|
|
NINE
MONTHS ENDED OCTOBER 31, 2017
|
|
|
|
Hotel
Operations & Corporate Overhead
|
|
|
IBC Hospitality
|
|
|
Total
|
|
Total
Revenue
|
|
$
|
7,214,919
|
|
|
$
|
964,022
|
|
|
$
|
8,178,941
|
|
Loss
From Continuing Operations
|
|
|
(219,632
|
)
|
|
|
(1,138,716
|
)
|
|
|
(1,358,348
|
)
|
STATEMENT
OF OPERATIONS
|
|
THREE
MONTHS ENDED OCTOBER 31, 2017
|
|
|
|
Hotel
Operations & Corporate Overhead
|
|
|
IBC
Hospitality
|
|
|
Total
|
|
Total
Revenue
|
|
$
|
2,303,967
|
|
|
$
|
416,143
|
|
|
$
|
2,720,110
|
|
Loss
From Continuing Operations
|
|
|
(175,429
|
)
|
|
|
(478,508
|
)
|
|
|
(653,937
|
)
|
STATEMENT
OF OPERATIONS
|
|
NINE
MONTHS ENDED OCTOBER 31, 2016 (i)
|
|
|
|
Hotel
Operations & Corporate Overhead
|
|
|
IBC
Hospitality
|
|
|
Total
|
|
Total
Revenue
|
|
$
|
6,302,333
|
|
|
$
|
522,427
|
|
|
$
|
6,824,760
|
|
Loss
From Continuing Operations
|
|
|
(1,000,315
|
)
|
|
|
(785,613
|
)
|
|
|
(1,785,928
|
)
|
STATEMENT
OF OPERATIONS
|
|
THREE
MONTHS ENDED OCTOBER 31, 2016 (i)
|
|
|
|
Hotel
Operations & Corporate Overhead
|
|
|
IBC
Hospitality
|
|
|
Total
|
|
Total
Revenue
|
|
$
|
1,993,992
|
|
|
$
|
125,726
|
|
|
$
|
2,119,718
|
|
Loss
From Continuing Operations
|
|
|
(965,899
|
)
|
|
|
(403,247
|
)
|
|
|
(1,369,146
|
)
|
(i)
Difference from Q3 2016 10Q due to classification of Ontario Hospitality Properties, LP as Discontinued Operations in 2017.
11.
SALE OF ONTARIO HOSPITALITY PROPERTIES, LP
On
June 2, 2017, the Trust sold its Ontario hotel to an unrelated third party for approximately $17.5 million, which the Trust received
in cash. The Trust used $7.2 million of the proceeds to satisfy its mortgage note payable on the property, approximately $2.4
million to reduce accruals and payables, and retained the remaining proceeds to fund future operations and capital improvements.
For the nine months ended October 31, 2017, Ontario had approximately $1,471,000 of revenue, and approximately $2,100,000 of operating
expenses. As of October 31, 2017, Ontario had approximately $12,000 of current assets consisting primarily of cash and receivables,
and approximately $3,000 of current liabilities consisting of accounts payables and accrued expenses. During the nine months ended
October 31, 2017, and October 31, 2016, depreciation/amortization and capital expenses were approximately $178,000 and $0, respectively.
In addition, there were no significant non-cash operating and investing activities during such period. See our Note 6 –
“Sale of Ownership Interests in Subsidiaries” for information about investing activities during the nine months ended
October 31, 2017.
12.
DISCONTINUED OPERATIONS
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 October 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).
The
Trust has recognized the sale of the Ontario hotel into discontinued operations in accordance with Accounting Standards Codification
(ASC) No. 205-20,
Discontinued Operations
. As such, the historical results of the Ontario hotel has been adjusted for comparability
purposes and exclude any corporate general and administrative expenses.
Discontinued
operations in the nine months ended October 31, 2017 and 2016 primarily consists of all hotels operational revenues and expenses
for the Ontario hotel property and does not include the sale proceeds and profit from the sale of the Ontario hotel.
The
following unaudited financial information presents the aggregate carrying amounts of the classes of assets and liabilities of
discontinued operations for the nine months ended October 1, 2017 and the fiscal year ended January 31, 2017 as well as the statements
of operations for the nine months and three months ended October 31, 2017 and the nine months and three months ended October 31,
2016.
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
OCTOBER
31, 2017
|
|
|
JANUARY
31, 2017
|
|
|
|
(UNAUDITED)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
11,785
|
|
|
$
|
89,561
|
|
Accounts
Receivable
|
|
|
-
|
|
|
|
92,743
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
-
|
|
|
|
46,823
|
|
Total
Current Assets of Discontinued Operations
|
|
|
11,785
|
|
|
|
229,127
|
|
Property,
Plant and Equipment, net
|
|
|
-
|
|
|
|
6,080,597
|
|
TOTAL
ASSETS OF DISCONTINUED OPERATIONS
|
|
$
|
11,785
|
|
|
$
|
6,309,724
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$
|
3,000
|
|
|
$
|
400,402
|
|
Current
Portion of Mortgage Notes Payable
|
|
|
-
|
|
|
|
185,207
|
|
Total
Current Liabilities of Discontinued Operations
|
|
|
3,000
|
|
|
|
585,609
|
|
Mortgage
Notes Payable
|
|
|
-
|
|
|
|
5,047,838
|
|
TOTAL
LIABILITIES OF DISCONTINUED OPERATIONS
|
|
$
|
3,000
|
|
|
$
|
5,633,447
|
|
|
|
FOR
THE NINE MONTHS ENDED
|
|
|
|
OCTOBER
31,
|
|
|
|
2017
|
|
|
2016 (i)
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Room
|
|
$
|
1,397,324
|
|
|
$
|
2,927,489
|
|
Food
and Beverage
|
|
|
64,976
|
|
|
|
126,193
|
|
Other
|
|
|
8,443
|
|
|
|
20,922
|
|
TOTAL
REVENUE
|
|
|
1,470,743
|
|
|
|
3,074,604
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Room
|
|
|
939,897
|
|
|
|
941,512
|
|
Food
and Beverage
|
|
|
66,152
|
|
|
|
147,006
|
|
Telecommunications
|
|
|
-
|
|
|
|
656
|
|
General
and Administrative
|
|
|
278,815
|
|
|
|
341,108
|
|
Sales
and Marketing
|
|
|
123,300
|
|
|
|
199,453
|
|
Repairs
and Maintenance
|
|
|
100,149
|
|
|
|
221,621
|
|
Hospitality
|
|
|
122,227
|
|
|
|
167,889
|
|
Utilities
|
|
|
74,640
|
|
|
|
193,695
|
|
Depreciation
|
|
|
177,824
|
|
|
|
574,528
|
|
Intangible
Amortization
|
|
|
-
|
|
|
|
-
|
|
Real
Estate and Personal Property Taxes, Insurance and Ground Rent
|
|
|
56,015
|
|
|
|
99,599
|
|
Other
|
|
|
3,569
|
|
|
|
(974
|
)
|
TOTAL
OPERATING EXPENSES
|
|
|
1,942,588
|
|
|
|
2,886,093
|
|
OPERATING
(LOSS) INCOME
|
|
|
(471,845
|
)
|
|
|
188,511
|
|
Interest
Income
|
|
|
961
|
|
|
|
-
|
|
TOTAL
OTHER INCOME
|
|
|
961
|
|
|
|
-
|
|
Interest
on Mortgage Notes Payable
|
|
|
127,787
|
|
|
|
208,765
|
|
Interest
on Other Notes Payable
|
|
|
428
|
|
|
|
4,518
|
|
TOTAL
INTEREST EXPENSE
|
|
|
128,215
|
|
|
|
213,283
|
|
CONSOLIDATED
NET LOSS OF DISCONTINUED OPERATIONS
|
|
$
|
(599,099
|
)
|
|
$
|
(24,772
|
)
|
(i)
Discontinued Operations
|
|
FOR THE THREE MONTHS ENDED
|
|
|
|
OCTOBER
31,
|
|
|
|
2017
|
|
|
2016
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Room
|
|
$
|
-
|
|
|
$
|
995,493
|
|
Food and Beverage
|
|
|
-
|
|
|
|
37,726
|
|
Management and Trademark Fees
|
|
|
-
|
|
|
|
-
|
|
Reservation and Convention
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
3,630
|
|
TOTAL REVENUE
|
|
|
-
|
|
|
|
1,036,849
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Room
|
|
|
-
|
|
|
|
342,367
|
|
Food and Beverage
|
|
|
-
|
|
|
|
44,828
|
|
Telecommunications
|
|
|
-
|
|
|
|
49
|
|
General and Administrative
|
|
|
21,951
|
|
|
|
113,618
|
|
Sales and Marketing
|
|
|
-
|
|
|
|
58,146
|
|
Repairs and Maintenance
|
|
|
-
|
|
|
|
58,308
|
|
Hospitality
|
|
|
-
|
|
|
|
49,668
|
|
Utilities
|
|
|
-
|
|
|
|
71,392
|
|
Depreciation
|
|
|
-
|
|
|
|
574,528
|
|
Intangible Amortization
|
|
|
-
|
|
|
|
-
|
|
Real Estate and Personal Property Taxes, Insurance and
Ground Rent
|
|
|
-
|
|
|
|
28,905
|
|
Other
|
|
|
-
|
|
|
|
10,015
|
|
TOTAL OPERATING EXPENSES
|
|
|
21,951
|
|
|
|
1,351,824
|
|
OPERATING LOSS
|
|
|
(21,951
|
)
|
|
|
(314,975
|
)
|
Interest Income
|
|
|
-
|
|
|
|
-
|
|
Interest Income on Advances to
Affiliates - Related Party
|
|
|
-
|
|
|
|
-
|
|
TOTAL OTHER INCOME
|
|
|
-
|
|
|
|
-
|
|
Interest on Mortgage Notes Payable
|
|
|
-
|
|
|
|
69,682
|
|
Interest on Notes Payable to Banks
|
|
|
-
|
|
|
|
-
|
|
Interest on Other Notes Payable
|
|
|
-
|
|
|
|
-
|
|
Interest on Advances to Affiliates
- Related Party
|
|
|
-
|
|
|
|
-
|
|
TOTAL INTEREST EXPENSE
|
|
|
-
|
|
|
|
69,682
|
|
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS
|
|
$
|
(21,951
|
)
|
|
$
|
(384,657
|
)
|
13.
SUBSEQUENT EVENTS
On
December 6, 2017, the Board of Trustees approved a cash dividend of $0.01 per Share of Beneficial Interest of the Trust, payable
on January 31, 2018 to shareholders of record as of December 20, 2017.