NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF JULY 31, 2019 AND JANUARY 31, 2019
AND
FOR THE THREE AND SIX MONTHS ENDED JULY 31 2019 AND 2018
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As of July 31, 2019, InnSuites Hospitality
Trust (the “Trust”, “IHT”, “we”, “us” or “our”) is a publicly traded
company with hotels IHT owns and hotels IHT manages. The Trust and its shareholders directly in and through a Partnership, own
interests in two hotels with an aggregate of 267 suites in Arizona and New Mexico, both (the “Hotels”) operated under
the federally trademarked name “InnSuites Hotels” or “InnSuites” as well as operating under the
brand name “Best Western”.
Hotel
Operations:
Our Tucson, Arizona Hotel and our Hotel located
in Albuquerque, New Mexico are limited service hotels. Both hotels offer swimming pools, fitness centers, business centers, and
complimentary breakfast. In addition the Hotels offer social areas and modest conference facilities.
The Trust is the sole general partner of RRF Limited Partnership, a Delaware limited partnership (the “Partnership”),
and owned a 74.94% and 74.80% interest in the Partnership as of July 31, 2019 and January 31, 2019 respectively. The Trust’s
weighted average ownership for the six months ended July 31, 2019 and 2018 was 74.94% and 74.80%. As of July 31, 2019, the Partnership
owned a 51.01% interest in an InnSuites® hotel located in Tucson, Arizona. The Trust owns a direct 20.53% interest in an InnSuites®
hotel located in Albuquerque, New Mexico.
InnSuites
Hotels Inc.(“IHI”), a subsidiary, manages the Hotels’ daily operations under 5 management agreements.
The Trust also provides the use of the “InnSuites” trademark to the Hotels through wholly-owned IHI. All
expenses and reimbursements between the Trust, IHI and the Partnership have been eliminated in consolidation.
The Trust classified the Hotels as operating
assets, but, these assets are being marketed for sale. At this time, the Trust is unable to predict when, and if, any of these
will be sold. The Trust has listed the Tucson Hotel with a local real estate hotel broker. The Albuquerque Hotel is not currently
listed but the Trust is willing to consider offers for the Hotel. Each of the Hotels is being marketed at a price that management
believes is reasonable in relation to its current fair value.
On October 24, 2018, the Yuma Hospitality Properties
LLLP (the “Yuma entity”) was sold to an unrelated third party for $16,050,000 (see Note 18).
PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION
These
consolidated financial statements have been prepared by management in accordance with accounting principles in conformity
with accounting principles generally accepted in the United States of America (“GAAP”), and include all assets,
liabilities, revenues and expenses of the Trust and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated. Certain items have been reclassified to conform to the current fiscal year presentation. The Trust
exercises unilateral control over the Partnership and the entities listed below. Therefore, the 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
|
|
|
20.53
|
%
|
|
|
-
|
|
Tucson Hospitality Properties, LLLP
|
|
|
-
|
|
|
|
51.01
|
%
|
RRF Limited Partnership
|
|
|
74.94
|
%
|
|
|
-
|
|
InnSuites Hotels Inc.
|
|
|
100.00
|
%
|
|
|
-
|
|
(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 limited partner holding the
units. The Class B Partnership units may only become convertible, each into one newly-issued Share of Beneficial Interest
of the Trust, with the approval of the Board of Trustees, in its sole discretion. On July 31, 2019 and January 31, 2019, 211,708
Class A Partnership units were issued and outstanding, representing 1.67% of the total Partnership units, respectively. Additionally,
as of July 31, 2019 and January 31, 2019, 2,974,038 Class B Partnership units were outstanding to and owned by 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 July 31, 2019 and January 31, 2019, the limited partners in the Partnership would receive 3,185,746 Shares
of Beneficial Interest of the Trust. As of July 31, 2019 and January 31, 2019, the Trust owns 9,527,448 general partner units
in the Partnership, representing 74.94% and 74.94% of the total Partnership units, respectively.
LIQUIDITY
The
Trust’s principal source of cash to meet its cash requirements, including distributions to its shareholders, is our share
of the RRF quarterly distributions coming from the Tucson Hotel as well as cash flow, quarterly distributions and cash flow from
the Albuquerque, New Mexico property, repayments of intercompany loans for the Tucson and Albuquerque Hotels, and more recently,
sales of certain of our Hotels. The Partnership’s principal source of cash flow is quarterly distributions from the Tucson,
Arizona property. The Trust’s liquidity, including our ability to make distributions to its shareholders, will depend upon
the ability of the Trust and the Partnership’s ability to generate sufficient cash flow from hotel operations and to service
debt, as well as to generate funds from repayment of loans and sale of assets.
As of July 31, 2019, the Trust had a related
party Demand/Revolving Line of Credit/Promissory Note with an amount receivable of approximately $232,000. 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, 2019. As of
September 1, 2019, the outstanding net balance receivable on the Demand/Revolving Line of Credit/Promissory Note was $243,000.
As of July 31, 2019, the Trust had an Advance
to Affiliate credit facilities with an aggregate maximum borrowing capacity of $1,000,000, which is available through December
31, 2019. As of July 31, 2019, the Trust had an amount receivable of the Advances to Affiliate credit facility of approximately
$986,000. As of September 1, 2019, the amount receivable from the Advance to Affiliate credit facility was approximately
$903,000.
As of July 31, 2019, the Trust had a Revolving
line of Credit of $150,000 with the Republic Bank of Arizona. The line had a zero balance as of July 31, 2019.
With approximately $2,101,000 of cash
and short term investments, as of July 31, 2019, the availability of a $1,000,000 related party Demand/Revolving Line of Credit/Promissory
Note, the availability of the combined $1,000,000 Advance to Affiliate credit facilities, and the Revolving Line of Credit with
Republic Bank, the Trust believes that it will have enough cash on hand to meet all of the financial obligations as they become
due for at least the next year. In addition, management is analyzing other strategic options available to the Trust, including
the sale of one or both Hotel properties. However, such transactions may not be available on terms that are favorable to the Trust,
or at all.
There
can be no assurance that the Trust will be successful selling properties, refinancing debt or raising additional or replacement
funds, or that these funds may be available on terms that are favorable to it. If the Trust is unable to raise additional or replacement
funds, it may be required to sell certain of our assets to meet liquidity needs, which may not be on terms that are favorable.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared by the Trust in accordance with GAAP
for interim financial information, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated
by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statement presentation. However, the Trust believes that the disclosures are adequate
to make the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal
recurring accruals) considered necessary for a fair presentation have been included.
Operating
results for the six months ended July 31, 2019 are not necessarily indicative of the results that may be expected for the year
ending January 31, 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the Trust’s Annual Report on Form 10-K for the year
ended January 31, 2019.
The
Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission.
Other than those events disclosed in Note 21 the Company is not aware of any other significant events that occurred subsequent
to the balance sheet date but prior to the filing of this report that would have a material impact on the Trust’s financial
statements.
As
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
4 – “Variable Interest Entity”). Therefore, the financial statements of Albuquerque Suite Hospitality, LLC and
Yuma Hospitality Properties, LLP, prior to its sale on October 24, 2018, are consolidated with the Partnership and the Trust,
and all significant intercompany transactions and balances have been eliminated.
SEASONALITY
OF THE HOTEL BUSINESS
The
Hotels’ operations historically have been somewhat seasonal. The Tucson Arizona Hotel experiences the highest occupancy
in the first fiscal quarter (the winter season) and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter
tends to be the lowest occupancy period at this Arizona Hotel. This seasonality pattern can be expected to cause fluctuations
in the Trust’s quarterly revenues. The Hotel located in Albuquerque, New Mexico historically 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 should occur at either of its two hotels, the adverse impact to the Trust’s revenues and
profit could be significant.
RECENTLY
ISSUED ACCOUNTING GUIDANCE
The
Company adopted ASU No. 2016-02 as of February 1, 2019, using the modified retrospective approach wherein entities were
allowed to initially apply the new leases standard at adoption date which had no effect to the opening balance of retained earnings in the period of adoption. Accordingly, all periods prior to February 1,
2019 were presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative
periods presented.
The
Company elected the package of practical expedients permitted under the new standard which, among other things, allowed the Company
to not reassess the lease classification, the lease identification and the initial direct costs for any existing leases. Further,
as permitted by the standard, the Company made an accounting policy election not to record ROU assets or lease liabilities for
leases with a term of 12 months or less. Instead, consistent with legacy accounting guidance, the Company will recognize payments
for such leases in the consolidated statement of operations on a straight-line basis over the lease term. With adoption on February
1, 2019, this standard resulted in the recognition of additional assets of $2,821,410 and liabilities of $2,913,568 upon adoption
on its accompanying condensed consolidated balance sheet. The new standard did not have a material impact on the Company’s
results of operations or cash flows.
In
January 2017, the FASB issued Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. The update simplifies how the entity is required to test goodwill for impairment
by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair
value of a reporting unit’s goodwill with the carrying amount. This update is effective for annual or interim periods beginning
after December 15, 2019. The Trust is still in the process of completing the analysis on the impact this guidance will have on
the consolidated financial statements and related disclosures, and the Trust does not expect the impact to be material.
In
June 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation
(Topic 718) Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this ASU will become effective
for us beginning February 1, 2019, and early adoption is permitted. The Trust has adopted this ASU which did not have a material
effect on the consolidated financial statements.
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 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.
For
tax purposes the Trust takes advantage of accelerated depreciation methods (MACRS) for new capital additions and improvements
to its Hotels.
Management
applies guidance ASC 360-10-35, to determine when it is required to test an asset for recoverability of its carrying value and
whether, or not, an impairment exists. Under ASC 360-10-35, the Trust is required to test a long-lived asset for impairment when
there is an indicator of impairment. Impairment indicators may include, but are not limited to, a drop in the performance of a
long-lived asset, a decline in the hospitality industry or a decline in the economy. If an indicator of potential impairment is
present, then an assessment is performed of whether the carrying amount of an asset exceeds its estimated undiscounted future
cash flows over its estimated remaining life.
If
the estimated undiscounted future cash flows over the asset’s estimated remaining life are greater than the asset’s
carrying value, no impairment is recognized; however, if the carrying value of the asset exceeds the estimated undiscounted future
cash flows, then the Trust would recognize an impairment expense to the extent the asset’s carrying value exceeds its fair
value, if any. The estimated future cash flows are based upon, among other things, assumptions about expected future operating
performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are analyzed on a property-specific
basis independent of the cash flows of other groups of assets. Evaluation of future cash flows is based on historical experience
and other factors, including certain economic conditions and committed future bookings. Management impaired these assets during
the fiscal year 2018, and has determined that no further impairment is required of long-lived assets for the fiscal period ended
July 31, 2019.
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
ASU
2014-09 (Topic 606), “Revenue from Contracts with Customers” is effective for reporting periods after January 1, 2018.
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.
Revenues
are primarily derived from the sources below and are recognized as services are rendered and when collectability is reasonably
assured. Amounts received in advance of revenue recognition are considered deferred liabilities, and are generally not significant.
Revenues
primarily consist of room rentals, food and beverage sales, management and trademark fees and other miscellaneous revenues from
our properties. Revenues are recorded when rooms are occupied and when food and beverage sales are delivered. 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.
Each
room night consumed by a guest with a cancellable reservation represents a contract whereby the Company has a performance obligation
to provide the room night at an agreed upon price. For cancellable reservations, the Company recognizes revenue as each performance
obligation (i.e., each room night) is met. Such contract is renewed if the guest continues their stay. For room nights consumed
by a guest with a non-cancellable reservation, the entire reservation period represents the contract term whereby the Company
has a performance obligation to provide the room night or nights at an agreed upon price. For non-cancellable reservations, the
Company recognizes revenue over the term of the performance period (i.e., the reservation period) as room nights are consumed.
For these reservations, the room rate is typically fixed over the reservation period. The Company uses an output method based
on performance completed to date (i.e., room nights consumed) to determine the amount of revenue it recognizes on a daily basis
if the length of a non-cancellable reservation exceeds one night since consumption of room nights indicates when services are
transferred to the guest. In certain instances, variable consideration may exist with respect to the transaction price, such as
discounts, coupons and price concessions made upon guest checkout.
In
evaluating its performance obligation, the Company bundles the obligation to provide the guest the room itself with other obligations
(such as free WiFi, grab and go breakfast, access to on-site laundry facilities and parking), as the other obligations are not
distinct and separable because the guest cannot benefit from the additional amenities without the consumed room night. The Company’s
obligation to provide the additional items or services is not separately identifiable from the fundamental contractual obligation
(i.e., providing the room and its contents). The Company has no performance obligations once a guest’s stay is complete.
We
are required to collect certain taxes and fees from customers on behalf of government agencies and remit these back to the applicable
governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes
and fees and, therefore, they are not included in revenues. We record a liability when the amounts are collected and relieve the
liability when payments are made to the applicable taxing authority or other appropriate governmental agency.
ACCOUNTS
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are 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 due and 100% of balances over 120
days due. 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 six months ended July 31, 2019 and the fiscal year ended January 31, 2019.
Fiscal Year
|
|
Balance at the
Beginning
of Period
|
|
|
Discontinued
Operations
Adjustment
|
|
|
Charged to
Expense
|
|
|
Deductions
|
|
|
Balance at
the End
of Period
|
|
July 31, 2019
|
|
$
|
(3,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(3,000
|
)
|
January 31, 2019
|
|
$
|
(3,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(3,000
|
)
|
LEASE
ACCOUNTING
The
Trust determines, at the inception of a contract, if the arrangement is a lease and whether it meets the classification criteria
for a finance or operating lease. ROU assets represent the Trust’s right to use an underlying asset during the lease term
and lease liabilities represent the Trust’s obligation to make lease payments arising from the lease. ROU assets and lease
liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. ROU assets
also include any advance lease payments and exclude lease incentives. As most of the Trust’s operating leases do not provide
an implicit rate, the Trust uses its incremental borrowing rate based on information available at commencement date in determining
the present value of lease payments. Finance lease agreements generally include an interest rate that is used to determine the
present value of future lease payments. Operating fixed lease expense and finance lease depreciation expense are recognized on
a straight-line basis over the lease term (see Note 16).
STOCK-BASED
COMPENSATION
The
Trust has an employee equity incentive plan, which is described more fully in Note 17 - “Share-Based Payments.” For
the six months ended July 31, 2019 and 2018, the Trust has paid the annual fees due to its Trustees by issuing Shares of Beneficial
Interest out of its authorized but unissued Shares. Upon issuance, the Trust recognizes the shares as outstanding. The Trust recognizes
expense related to the issuance based on the fair value of the shares upon the date of the restricted share grant and amortizes
the expense equally over the period during which the shares vest to the Trustees.
During
the six months ended July 31, 2019, the Trust granted restricted stock awards of 18,000 Shares to three independent members
of the Board of Trustees, resulting in stock-based compensation of $16,200. During
six months ended July 31, 2018, the Trust granted restricted stock awards of 18,000 Shares to members of the Board of Trustees, resulting in stock-based compensation of $16,200. The remaining shares vested
through the end of fiscal year ended January 31, 2019 on a monthly basis at a rate of approximately 500 shares for each outside
Trustee or a total of 1,500 per month for three independent Trustees.
TREASURY
STOCK
Treasury
stock is carried at cost, including any brokerage commissions paid to repurchase the shares. Any shares issued from treasury stock
are removed at cost, with the difference between cost and fair value at the time of issuance recorded against Shares of Beneficial
Interest.
(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 3,185,746 Shares of the Beneficial Interest, as discussed in Note
1.
For
the six months ended July 31, 2019 and 2018, 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 3,185,746 and 3,185,746 in addition to the basic shares outstanding for
the six months ended July 31, 2019 and 2018, respectively. These Shares of Beneficial Interest issuable upon conversion of the
Class A and Class B Partnership units were anti-dilutive during the six months ended July 31, 2019 and 2018 and are excluded
in the calculation of diluted earnings per share for those periods.
ADVERTISING
COSTS
Amounts incurred for advertising costs are
expensed as incurred. Advertising expense for continuing and discontinued operations totaled approximately $42,000 and $63,000
for the three months ended July 31, 2019 and 2018 respectively, and $84,000 and $126,000 for the six months ended July
31, 2019 and 2018, 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 six months ended July 31, 2019 and the year ended January 31, 2019.
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 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 June 19, 2019 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 Albuquerque, 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.
During
the year ended January 31, 2019, there were 15 Class A units sold ($10,000/unit), of which 13.50 came from the Trust’s Class
B units; no C units of the Albuquerque entity sold. There were no units sold in the six months ended July 31, 2019. As
of July 31, 2019 and January 31, 2019, the Trust held a 20.53% and 20.53 % ownership interest, or 123.50 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 79.30%
interest, or 477 Class A units. The Trust no longer accrues for these distributions as the preference period has expired.
During
the six months ended July 31, 2019, there were no Class A, B or C units of the Tucson entity sold. As of July 31, 2019 and January
31, 2019, 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 48.61% interest, or 385 Class A units. The Trust no longer
accrues for these distributions as the preference period has expired.
As
of July 31, 2019, the Trust has sold its entire ownership interest in the Yuma entity which occurred in October 2018.
4.
VARIABLE INTEREST ENTITIES
Management
evaluates the Trust’s explicit and implicit variable interests to determine if they have any interests in variable interest
entities (“VIEs”). Variable interests are contractual, ownership, or other pecuniary interests in an entity whose
value changes with changes in the fair value of the entity’s net assets, exclusive of variable interests. Explicit variable
interests are those which directly absorb the variability of a VIE and can include contractual interests such as loans or guarantees
as well as equity investments. An implicit variable interest acts the same as an explicit variable interest except it involves
the absorbing of variability indirectly, such as through related party arrangements or implicit guarantees. The analysis includes
consideration of the design of the entity, its organizational structure, including decision making ability over the activities
that most significantly impact the VIE’s economic performance. GAAP requires a reporting entity to consolidate a VIE when
the reporting entity has a variable interest, or combination of variable interest, that provides it with a controlling financial
interest in the VIE. The entity that consolidates a VIE is referred to as the primary beneficiary of that VIE.
The
Partnership has determined that the Albuquerque entity, and the Yuma entity, prior to its sale on October 24, 2018, were a 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 Albuquerque and Yuma entities, including its distribution obligations.
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 Albuquerque and Yuma entities, including providing the personnel to operate the property on a daily basis.
During
the six months ended July 31, 2019 and the fiscal year ended January 31, 2019, neither the Trust nor the Partnership have provided
any implicit or explicit financial support for which they were not previously contracted. Both the Partnership and the Trust provided
mortgage loan guarantees which allow our properties to obtain new financing as needed.
5.
PROPERTY, PLANT, AND EQUIPMENT AND HOTEL PROPERTIES
As
of July 31, 2019 and January 31, 2019, hotel properties consisted of the following:
|
|
July 31, 2019
|
|
|
January 31, 2019
|
|
Land
|
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
Building and improvements
|
|
|
10,397,393
|
|
|
|
10,334,919
|
|
Furniture, fixtures and equipment
|
|
|
3,986,032
|
|
|
|
3,860,574
|
|
Total hotel properties
|
|
|
16,883,425
|
|
|
|
16,695,493
|
|
Less accumulated depreciation
|
|
|
(7,722,529
|
)
|
|
|
(7,312,868
|
)
|
Hotel Properties in Service, net
|
|
|
9,160,896
|
|
|
|
9,382,625
|
|
Construction in progress
|
|
|
40,980
|
|
|
|
43,657
|
|
Hotel properties, net
|
|
$
|
9,201,876
|
|
|
$
|
9,426,282
|
|
As
of July 31, 2019 and January 31, 2019, corporate property, plant and equipment consisted of the following:
|
|
July 31, 2019
|
|
|
January 31, 2019
|
|
Land
|
|
$
|
7,005
|
|
|
$
|
7,005
|
|
Building and improvements
|
|
|
75,662
|
|
|
|
75,662
|
|
Furniture, fixtures and equipment
|
|
|
534,879
|
|
|
|
534,879
|
|
Total property, plant and equipment
|
|
|
617,546
|
|
|
|
617,546
|
|
Less accumulated depreciation
|
|
|
(525,296
|
)
|
|
|
(511,035
|
)
|
Property, Plant and Equipment, net
|
|
$
|
92,250
|
|
|
$
|
106,511
|
|
6.
MORTGAGE NOTES PAYABLE
At July 31, 2019 and January 31, 2019, the
Trust had a mortgage note payable outstanding with respect to the Tucson Hotels. The mortgage note payable has a scheduled maturity
dates ranging in June 2042. Weighted average annual interest rates on mortgage notes payable as of July 31, 2019 and January 31,
2019 were 4.69%, respectively.
The Trust’s mortgage note payable, net
of debt discounts, as of July 31, 2019 and January 31, 2019 were $4,766,896 and $4,824,692, respectively. The mortgage
note payable is 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 July 31, 2019 and January 31, 2019.
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 funds 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
July 31, 2019 and January 31, 2019, the mortgage loan balance was approximately $4,766,896 and $4,825,000, respectively,
net of a discount of approximately $5,000.
See Note 11 – “Minimum Debt Payments”
for scheduled minimum payments on the mortgage notes payable.
7.
LINES OF CREDIT AND NOTES RECEIVABLE – 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 Financial, LLC, an entity which is wholly
owned by Mr. Wirth and his family members. The Demand/Revolving Line of Credit/Promissory Note, as amended on June 19, 2017, bears
interest at 7.0% per annum for both a payable and receivable, is interest only quarterly and matures on December 31, 2019, and
renews annually for each calendar year. 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 July 31, 2019 and January 31, 2019, the Trust had an amount receivable of approximately $232,000,
including accrued interest and $632,000, respectively. During the six months ended July 31, 2019 and 2018, the Trust accrued
approximately $844 and $3,632, respectively, of interest income.
As
of July 31, 2019, the Trust had approximately $325,642 in promissory notes outstanding to related parties arising from the repurchase
of 439,900 Class B Partnership units and the repurchase of 40,000 Shares of Beneficial Interest. The Shares of Beneficial Interest
were repurchased from Marc E. Berg, the Trust’s Executive Vice President and Vice Chairman of the Board of Trustees. The
Class B Partnership units were repurchased from James Wirth, CEO, President, and Chairman of the Board of Trustees and Mr. Wirth’s
family members. These promissory notes all bear interest at 7% per year and are due in varying monthly payments through July 2020.
8. OTHER NOTES PAYABLE
As of July 31, 2019, the Trust had approximately
$391,081 in promissory notes outstanding to unrelated third parties arising from the repurchase of 82,588 Class A Partnership
units in privately negotiated transactions and the repurchase of 266,894 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 July 31, 2019, the Trust had a $200,000
unsecured note payable with an individual lender. The promissory note is payable on demand, or on June 30, 2021, whichever
occurs first. The loan accrues interest at 4.0% and interest only payments shall be made monthly and are due on the first of the
following month. The Trust may pay all of part of this note without any repayment penalties. The total principal amount of this
loan is $100,000 as of July 31, 2019.
On
June 20, 2016, the Trust and the Partnership together entered into multiple unsecured loans totaling $270,000 with Guy C. Hayden
III (“Hayden Loans”). As of July 1, 2019 these loans were consolidated and extended at 4.0% interest only, with similar
terms to June 30, 2021. The Trust may pay all or part of this note without any repayment penalties. The total principal amount
of the Hayes Loans is $270,000 as of July 31, 2019.
On
December 5, 2016, the Trust and the Partnership together entered into eight unsecured loans for a total of $425,000 with H. W.
Hayes Trust (“Hayes Loans”). The Hayes loans were paid in full at maturity on July 1, 2019.
On
March 20, 2017, the Trust and Partnership entered into multiple, unsecured loans to Marriott Sweitzer Hayes (“Sweitzer Loans”),
totaling $100,000. As of July 1, 2019 these loans were consolidated and extended at 4.5% interest only, with similar terms to
June 30, 2021. The total principal amount of the Sweitzer Loans is $100,000 as of July 31, 2019.
See
Note 11 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.
9. MINIMUM DEBT PAYMENTS
Scheduled minimum payments of debt, net of
debt discounts, as of July 31, 2019 are approximately as follows in the respective fiscal years indicated:
FISCAL YEAR
|
|
MORTGAGES
|
|
|
NOTES PAYABLE
RELATED
PARTIES
|
|
|
OTHER NOTES
PAYABLE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020- remaining
|
|
|
57,000
|
|
|
|
159,000
|
|
|
|
705,000
|
|
|
|
921,000
|
|
2021
|
|
|
119,000
|
|
|
|
167,000
|
|
|
|
198,000
|
|
|
|
484,000
|
|
2022
|
|
|
127,000
|
|
|
|
|
|
|
|
58,000
|
|
|
|
185,000
|
|
2023
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
130,000
|
|
2024
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
135,000
|
|
Thereafter
|
|
|
4,199,000
|
|
|
|
|
|
|
|
|
|
|
|
4,199,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,767,000
|
|
|
$
|
326,000
|
|
|
$
|
961,000
|
|
|
$
|
6,054,000
|
|
10.
DESCRIPTION OF BENEFICIAL INTERESTS
Holders
of the Trust’s Shares of Beneficial Interest are entitled to receive dividends when and if declared by the Board of Trustees
of the Trust out of funds legally available. The holders of Shares of Beneficial Interest, upon any liquidation, dissolution or
winding-down of the Trust, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the
Trust. The Shares of Beneficial Interest possess ordinary voting rights, each share entitling the holder thereof to one vote.
Holders of Shares of Beneficial Interest do not have cumulative voting rights in the election of Trustees and do not have preemptive
rights.
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, of 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 six months ended July 31, 2019 and
2018, the Trust repurchased 65,142 and 149,603 Shares of Beneficial Interest at an average price of $1.68 and $1.92
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 411,776 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.
11.
RELATED PARTY TRANSACTIONS
As
of July 31, 2019 and January 31, 2019, Mr. Wirth and his affiliates held 2,974,038 Class B Partnership units, which represented
23.39% and 23.39% of the total outstanding Partnership units, respectively. As of July 31, 2019 and January 31, 2019, Mr. Wirth
and his affiliates held 5,881,683 Shares of Beneficial Interest in the Trust, respectively, which represented 62.93% and 62.84%
respectively, of the total issued and outstanding Shares of Beneficial Interest.
As
of July 31, 2019 and January 31, 2019, the Trust owned 74.94% and 74.94% of the Partnership, respectively. As of July 31, 2019,
the Partnership owned a 51.01% interest in the InnSuites® hotel located in Tucson. The Trust also owned a direct 20.53% interest
in one InnSuites® hotel located in Albuquerque, New Mexico.
The
Trust directly manages the Hotels through the Trust’s wholly-owned subsidiary, InnSuites Hotels Inc. Under the management
agreements, InnSuites Hotels Inc. manages the daily operations of the two Hotels and the hotel owned by affiliates of Mr. Wirth.
Revenues and reimbursements among the Trust, InnSuites Hotels Inc. and the Partnership have been eliminated in consolidation.
The management fees for the Hotels and the hotel owned by affiliates of Mr. Wirth are set at 5.0% of room revenue and a monthly
accounting fee of $2,000 per hotel. These agreements have no expiration date and may be cancelled by either party with 90-days
written notice or 30-days written notice in the event the property changes ownership. For the six months ended July 31, 2019,
the Trust recognized approximately $65,312 of revenue.
Pamela
Barnhill, former Vice Chairperson and President of the Trust, resigned in June 2018, and is the daughter of Mr. Wirth, the Trust’s
Chairman and Chief Executive Officer. Ms. Barnhill had compensation of $0 and $40,945 for the six months ended July 31, 2019 and
2018, respectively. The Trust also employs another immediate family member of Mr. Wirth, Brian James Wirth, who provides technology
support services to the Trust, receiving a $36,000 annual salary.
On
December 22, 2015, the Trust provided Advances to Affiliate – Related Party in the amount of $500,000 to Tempe/Phoenix Airport
Resort LLC. Mr. Wirth, individually and thru one of his affiliates owns approximately 42% Tempe/Phoenix Airport Resort LLC. The
note has a due date of December 31, 2019 and accrues interest of 7.0%. During the six months ended July 31, 2019 and 2018, the
Trust received $1,970 and $0 of interest income, respectively, from Tempe/Phoenix Airport Resort LLC, respectively. As of July
31, 2019, the Advances from Affiliate – Related Party balance was $986,361 from Tempe/Phoenix Airport Resort LLC.
12.
STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The Trust paid $122,902 and $177,313 in cash
for interest for the six months ended July 31, 2019 and 2018, respectively for continuing operations. The amounts related to Notes
Payables - IHT Shares of Beneficial Interest and Partnership Units repurchases amounted to $11,000 and $-0-, respectively,
for the six months ended July 31, 2019 and 2018. No cash was paid for taxes for the six months ended July 31, 2019 and 2018.
13.
COMMITMENTS AND CONTINGENCIES
Restricted
Cash:
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 is reported on the Trust’s Consolidated Balance Sheet as “Restricted Cash.”
Since a $0 cash balance existed in Restricted Cash as of July 31, 2019 and January 31, 2019, Restricted Cash line was omitted
on the Trust’s Consolidated Balance Sheet.
Membership
Agreements:
InnSuites
Hotels has entered into membership agreements with Best Western International, Inc. (“Best Western”) for both of the
hotel properties. In exchange for use of the Best Western name, trademark and reservation system, all Hotels pay fees to Best
Western based on reservations received through the use of the Best Western reservation system and the number of available suites
at the Hotels. The agreements with Best Western have no specific expiration terms and may be cancelled by either party. Best Western
requires that the 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
$91,000 and $175,000 for the three months ended July 31, 2019 and 2018, respectively, and $174,000 and $381,000 for the six months
ended July 31, 2019 and 2018, respectively. These costs include fees for the Albuquerque and Tucson hotels in 2018, and the Albuquerque,
Tucson and Yuma hotels in 2018. These fees are included in room operating expenses, for Albuquerque and Tucson, and discontinued
operations for Yuma, in the Unaudited Condensed Consolidated Statements of Operations.
The
nature of the operations of the Hotels exposes them to risks of claims and litigation in the normal course of their business.
Although the outcome of these matters cannot be determined and is covered by insurance, management does not expect that the ultimate
resolution of these matters will have a material adverse effect on the consolidated financial position, results of operations
or liquidity of the Trust.
Litigation:
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.
Indemnification:
The
Trust has entered into indemnification agreements with all of our executive officers and Trustees. The agreements provide for
indemnification against all liabilities and expenses reasonably incurred by an officer or Trustee in connection with the defense
or disposition of any suit or other proceeding, in which he or she may be involved or with which he or she may be threatened,
while in office or thereafter, because of his or her position at the Trust. There is no indemnification for any matter as to which
an officer or Trustee is adjudicated to have acted in bad faith, with willful misconduct or reckless disregard of his or her duties,
with gross negligence, or not in good faith in the reasonable belief that his or her action was in the Trust’s best interests.
These agreements require the Trust, among other things, to indemnify the director or officer against specified expenses and liabilities,
such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or
proceeding arising out of the individual’s status or service as our director or officer, other than liabilities arising
from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by
the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to
indemnification by us. The Trust may advance payments in connection with indemnification under the agreements. The level of indemnification
is to the full extent of the net equity based on appraised and/or market value of the Trust. Historically, the Trust has not incurred
any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying
consolidated balance sheets.
See
Note 16 – Leases, for discussion on lease payment commitments.
14.
LEASES
The
Company has operating leases for its corporate offices in Phoenix, Arizona, land leased in Albuquerque, New Mexico, and cable
equipment leased for its Tucson, Arizona property. The Company’s lease terms include options to extend or terminate the
leases and the Company includes these options in the lease term when it is reasonably certain to exercise that option.
Operating
Leases
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.
The
Company’s Albuquerque Hotel is subject to non-cancelable ground lease. The Albuquerque Hotel non-cancelable ground lease
was extended on January 14, 2014 and expires in 2058.
The
Company’s Tucson, Arizona hotel property leases satellite television equipment for all of its 159 rooms and common areas.
The lease commenced in November 2018 and expires 5 years from the date of commencement.
The
following table presents the Company’s lease costs for the six months ended July 31, 2019:
|
|
Six months Ended
|
|
|
|
July 31, 2019
|
|
Lease Costs:
|
|
|
|
|
Operating lease cost*
|
|
$
|
113,305
|
|
*
Short term lease costs were immaterial.
Supplemental
cash flow information is as follows:
|
|
Six months Ended
|
|
|
|
July 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
115,968
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases, net
|
|
$
|
2,871,000
|
|
The aggregate future
lease payments for Operating Lease Liability as of July 31, 2019 are as follows:
For the Years Ending January 31,
|
|
|
|
Remaining in 2020
|
|
$
|
173,956
|
|
2021
|
|
|
231,941
|
|
2022
|
|
|
231,941
|
|
2023
|
|
|
208,829
|
|
2024
|
|
|
168,691
|
|
Thereafter
|
|
|
5,025,726
|
|
Total minimum lease payments
|
|
$
|
6,041,084
|
|
Less: amount representing interest
|
|
|
3,210,634
|
|
Total present value of minimum payments
|
|
|
2,830,450
|
|
Less: current portion
|
|
$
|
98,113
|
|
Long-term obligations
|
|
$
|
2,732,337
|
|
Weighted
average remaining lease terms and discount rates were as follows:
Weighted average remaining lease term (years)
|
|
July 31, 2019
|
|
Operating leases
|
|
|
33.83
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
4.76
|
%
|
15.
SHARE-BASED PAYMENTS
The
Trust compensates its non-employee Trustees for their services through grants of restricted Shares. The aggregate grant date fair
value of these Shares was $32,400. These restricted 18,000 shares vest in equal monthly amounts during fiscal year 2020.
During
fiscal year 1999, the shareholders of the Trust adopted the 1997 Stock Incentive and Option Plan (the “Plan”). Pursuant
to the Plan, the Compensation Committee may grant options to the Trustees, officers, other key employees, consultants, advisors
and similar employees of the Trust and certain of its subsidiaries and affiliates. The number of options that may be granted in
a year is limited to 10% of the total Shares of Beneficial Interest and Partnership units in the Partnership (Class A and Class
B) outstanding as of the first day of such year.
Generally,
granted options expire 10 years from the date of grant, are exercisable during the optionee’s lifetime only by the recipient
and are non-transferable. Unexercised options held by employees of the Trust generally terminate on the date the individual ceases
to be an employee of the Trust.
There
were no options granted during the six months ended July 31, 2019, and no options were outstanding as of that period end. The
Plan currently has 1,000,000 options available to grant. See Note 19 for additional information on stock options. The Plan also
permits the Trust to award stock appreciation rights, none of which, as of July 31, 2019, have been issued.
See
Note 2 – “Summary of Significant Accounting Policies” for information related to grants of restricted shares
under “Stock-Based Compensation.”
16.
DISCONTINUED OPERATIONS
Sale
of IBC Hospitality Technologies; IBC Hotels LLC (IBC)
Discontinued operations for the six months
ended July 31, 2018 consist of the operations from the IBC Technology Segment. On August 15, 2018 the Trust entered
into a final sale agreement for its subsidiary IBC Hotels LLC (IBC) with an effective sale date as of August 1, 2018 to an unrelated
third party buyer (Buyer). The buyer hired IHT’s former Chief Operating Officer, who is a family member of IHT’s CEO.
The sale price was $3,000,000, to be paid to IHT as follows:
|
1.
|
$250,000
at closing, which was received on August 14, 2018;
|
|
|
|
|
2.
|
A secured promissory note receivable
in the principal amount of $2,750,000 with interest to be accrued at 3.75% per annum,
recorded in the accompanying condensed balance sheet in continuing operations. The
note was amended after closing, so that interest shall accrue for the first 14
months (starting August 2018), thereafter for month 15 and 16 principal
and interest payments of 50% ($25,632 per month), then the remaining amount to be amortized
over 59 months (payments of $52,054 per month) with maturity in June 2024. Future receipts
from this note are shown in the table below.
|
FISCAL YEAR
|
|
|
|
2020
|
|
$
|
91,667
|
|
2021
|
|
|
550,000
|
|
2022
|
|
|
550,000
|
|
2023
|
|
|
550,000
|
|
2024
|
|
|
550,000
|
|
Thereafter
|
|
|
458,333
|
|
|
|
$
|
2,750,000
|
|
The note is secured by (1) pledge of
the Buyer’s interest in IBC, and (2) a security interest in all assets of IBC provided IHT shall agree to subordinate such
equity interest to commercially reasonable debt financing upon request.
If
after effective date IBC closes an equity transaction with net proceeds to IBC in excess of $2,500,000, IBC/Buyer shall pay to
IHT an amount equal to (a) 50% of the net proceeds received by IBC and (b) 50% of the sum of the unpaid balance of the note and
accrued interest accrued but unpaid interest thereon, as the date of receipt of the net proceeds by IBC.
IHT
has agreed to provide continuing working capital support for a period of six months in the amount of approximately $100,000 over
a six month period to IBC for transitional purposes. IHT has no managerial control nor does IHT have the ability to direct the
operations or capital requirements of IBC as of August 1, 2018. IHT has no rights to any benefits or losses from IBC as of August
1, 2018. During the fiscal year ended January 31, 2019 IHT had provided $100,000 to IBC.
Default
If
Buyer has not paid two or more payments on the note as scheduled, or if Buyer has not satisfied any other provisions in the note,
IHT may give Buyer notice of default. If Buyer fails to cure the default within 30 days after notice (a) on or before February
5, 2020, then 75% of the issued and outstanding IBC interest shall be transferred to IHT, and (b) on or after February 5, 2020,
then 51% of the issued and outstanding interest of the Company shall be transferred to IHT. Currently there has been no default.
Sale
of Yuma Property
On July 31, 2018, IHT entered into a purchase
and sale agreement to sell its InnSuites Yuma Hotel and Suites Best Western (Yuma), together with certain furniture, fixtures,
equipment, operating supplies and other ancillary items pertaining to the daily operations to an unrelated third party. The sale
was completed on October 24, 2018. The sales price, as revised, was approximately $16.05 million, of which the net proceeds (net
of mortgage payoff, commissions and closing costs) received by the IHT was approximately $9.93 million
|
|
FOR THE SIX MONTHS ENDED
|
|
|
|
JULY 31,
|
|
|
|
2019
|
|
|
2018
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Room
|
|
$
|
-
|
|
|
$
|
2,254,307
|
|
Food and Beverage
|
|
|
-
|
|
|
|
21,649
|
|
Reservation and Convention
|
|
|
-
|
|
|
|
265,681
|
|
Other
|
|
|
-
|
|
|
|
35,061
|
|
TOTAL REVENUE
|
|
|
-
|
|
|
|
2,576,698
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Room
|
|
|
-
|
|
|
|
550,485
|
|
Food and Beverage
|
|
|
-
|
|
|
|
29,102
|
|
Telecommunications
|
|
|
-
|
|
|
|
16,383
|
|
General and Administrative
|
|
|
-
|
|
|
|
878,785
|
|
Sales and Marketing
|
|
|
-
|
|
|
|
512,222
|
|
Reservation Acquisition Costs
|
|
|
-
|
|
|
|
142,842
|
|
Repairs and Maintenance
|
|
|
-
|
|
|
|
118,880
|
|
Hospitality
|
|
|
-
|
|
|
|
117,109
|
|
Utilities
|
|
|
-
|
|
|
|
97,677
|
|
Depreciation
|
|
|
-
|
|
|
|
279,267
|
|
Intangible Amortization
|
|
|
-
|
|
|
|
-
|
|
Real Estate and Personal Property Taxes, Insurance and Ground Rent
|
|
|
-
|
|
|
|
42,065
|
|
Other
|
|
|
-
|
|
|
|
6,662
|
|
TOTAL OPERATING EXPENSES
|
|
|
-
|
|
|
|
2,791,479
|
|
OPERATING LOSS
|
|
|
-
|
|
|
|
(214,781
|
)
|
Interest Income
|
|
|
-
|
|
|
|
-
|
|
TOTAL OTHER INCOME
|
|
|
-
|
|
|
|
-
|
|
Interest on Mortgage Notes Payable
|
|
|
-
|
|
|
|
142,038
|
|
Interest on Notes Payable to Banks
|
|
|
-
|
|
|
|
3,725
|
|
Interest on Other Notes Payable
|
|
|
-
|
|
|
|
25,743
|
|
TOTAL INTEREST EXPENSE
|
|
|
-
|
|
|
|
171,506
|
|
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS
|
|
$
|
-
|
|
|
$
|
(386,287
|
)
|
17.
STOCK OPTIONS
Effective
February 5, 2015, the Board of Trustees of the Trust adopted the 2015 Equity Incentive Plan (“2015 Plan”), subject
to shareholder approval, under which up to 1,600,000 Shares of Beneficial Interest of the Trust are authorized to be issued pursuant
to grant of stock options, stock appreciation rights, restricted shares, restricted share units or other awards.
The
Board of Trustees of the Trust has decided to terminate the 2015 Plan. Effective October 31, 2016, it has been determined that
the Shareholders will not approve the 2015 Plan and the proposed grants have been rescinded. During the 2017 Annual Meeting of
Shareholders, the IHT Shareholders approved the InnSuites Hospitality Trust 2017 Equity Incentive Plan (“2017 Plan”).
Management has not granted any options under the 2017 Plan.
18.
INCOME TAXES
The
Trust’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Trust
has received various IRS and state tax jurisdiction notices which the Trust in the process of responding to in which management
believes the notices are without merit and expect full remediation of all tax notices. However, the Trust has accrued approximately
$200,000, respectively, for potential interest and/or penalties as of July 31, 2019 and January 31, 2019 related to these IRS
and State tax jurisdiction notices.
19.
SUBSEQUENT EVENTS
Subsequent to the six months ended July 31,
2019, the Trust repurchased 4,844 Shares of Beneficial Interest on the open market for a total cash repurchase price of
approximately $8,200.