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EX-32.1 - INNSUITES HOSPITALITY TRUSTex32-1.htm
EX-31.2 - INNSUITES HOSPITALITY TRUSTex31-2.htm
EX-31.1 - INNSUITES HOSPITALITY TRUSTex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2019

 

Commission File Number 1-7062

 

INNSUITES HOSPITALITY TRUST

(Exact name of registrant as specified in its charter)

 

Ohio   34-6647590

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

InnSuites Hotels Centre

1730 E. Northern Avenue, Suite 122

Phoenix, AZ 85020

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (602) 944-1500

 

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)    
Smaller reporting company [X] Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Aggregate market value of Shares of Beneficial Interest held by non-affiliates of the registrant as of October 31, 2019, based upon the closing sales price of the registrant’s Shares of Beneficial Interest on that date, as reported on the NYSE AMERICAN: $5,357,052

 

Number of outstanding Shares of Beneficial Interest, without par value, as of December 26, 2019 9,309,025

 

 

 

   
 

 

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   OCTOBER 31, 2019   JANUARY 31, 2019 
   (Unaudited)     
ASSETS          
Current Assets:          
Cash and Cash Equivalents  $739,298   $749,075 
Short-Term Investments – Available For Sale Securities   790,373    1,896,556 
Accounts Receivable, including approximately $45,000 and $79,000 from related parties and net of Allowance for Doubtful Accounts of approximately $3,000 as of October 31, 2019 and January 31, 2019, respectively   382,126    236,942 
Advances to Affiliates - Related Party   1,088,063    986,361 
Notes Receivable - Related Party   -    632,027 
Current Portion of Note Receivable   229,167    229,167 
Prepaid Expenses and Other Current Assets   84,006    95,553 
Current Assets of Discontinued Operations   -    320,447 
Total Current Assets   3,313,033    5,146,128 
Property, Plant and Equipment, net   9,116,548    9,532,793 
Note Receivable   2,520,833    2,520,833 
Operating Lease – Right of Use   2,720,605    - 
TOTAL ASSETS  $17,671,019   $17,199,754 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
LIABILITIES          
Current Liabilities:          
Accounts Payable and Accrued Expenses  $1,708,674   $1,092,000 
Current Portion of Notes Payable - Related Party   245,392    317,738 
Current Portion of Mortgage Notes Payable, net of Discount   118,639    115,106 
Current Portion of Notes Payable to Banks, net of Discount   -    9,300 
Current Portion of Other Notes Payable   796,256    1,229,069 
Current Portion of Operating Lease Liability, net of current portion   98,913    - 
Current Liabilities of Discontinued Operations   -    546,803 
Total Current Liabilities   2,967,874    3,310,016 
Notes Payable - Related Party   -    166,677 
Mortgage Notes Payable, net of Discount   4,619,164    4,709,586 
Other Notes Payable   104,354    264,960 
Operating Lease Liability, net of current portion   2,708,007    - 
TOTAL LIABILITIES   10,399,399    8,451,239 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY          
Shares of Beneficial Interest, without par value, unlimited authorization; 18,607,960 and 18,859,960 shares issued and 9,310,691 and 9,366,076 shares outstanding at October 31, 2019 and January 31, 2019, respectively   22,660,724    23,738,260 
Treasury Stock, 9,297,269 and 9,223,884 shares held at cost at October 31, 2019 and January 31 2019, respectively   (13,641,600)   (13,517,833)
TOTAL TRUST SHAREHOLDERS’ EQUITY   9,019,124    10,220,427 
NON-CONTROLLING INTEREST   (1,747,504)   (1,471,912)
TOTAL EQUITY   7,271,620    8,748,515 
TOTAL LIABILITIES AND EQUITY  $17,671,019   $17,199,754 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 2 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   FOR THE NINE MONTHS ENDED 
   OCTOBER 30, 
   2019   2018 
REVENUE          
Room  $4,917,000   $4,582,269 
Food and Beverage   52,456    34,413 
Management and Trademark Fees   129,202    128,546 
Other   25,003    58,045 
TOTAL REVENUE   5,123,661    4,803,273 
           
OPERATING EXPENSES          
Room   1,520,904    1,435,117 
Food and Beverage   71,521    52,480 
Telecommunications   395    3,479 
General and Administrative   1,712,769    1,397,784 
Sales and Marketing   386,498    440,137 
Repairs and Maintenance   297,761    362,303 
Hospitality   398,220    343,771 
Utilities   308,540    274,273 
Depreciation   764,566    623,671 
Real Estate and Personal Property Taxes, Insurance and Ground Rent   250,672    291,781 
Other   17,416    3,026 
TOTAL OPERATING EXPENSES   5,729,262    5,227,822 
OPERATING LOSS   (605,601)   (424,549)
Interest Income   65,752    95,110 
TOTAL OTHER INCOME   65,752    95,110 
Interest on Mortgage Notes Payable   181,503    180,790 
Interest on Notes Payable to Banks   -    36,643 
Interest on Other Notes Payable   190,941    73,941 
TOTAL INTEREST EXPENSE   372,444    291,374 
CONSOLIDATED NET LOSS BEFORE INCOME TAX PROVISION AND DISCONTINUED OPERATIONS   (912,293)   (620,813)
Income Tax Provision   -    (407,727)
CONSOLIDATED NET LOSS FROM CONTINUING OPERATIONS  $(912,293)  $(1,028,540)
Discontinued Operations, Net of Non-Controlling Interest  $-   $(1,170,589)
Gain on Disposal of Discontinued Operations  $-   $13,323,418 
CONSOLIDATED NET INCOME FROM DISCONTINUED OPERATIONS  $-   $12,152,829 
CONSOLIDATED NET (LOSS) INCOME  $(912,293)  $11,124,289 
LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST  $93,634   $9,594,620 
NET (LOSS) INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS  $(1,005,927)  $1,529,669 
NET LOSS PER SHARE FROM CONTINUING OPERATIONS – BASIC & DILUTED  $(0.10)  $(0.11)
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS – BASIC & DILUTED  $-   $1.27 
NET (LOSS) INCOME PER SHARE TOTAL – BASIC & DILUTED  $(0.10)  $1.16 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC & DILUTED   9,324,548    9,570,253 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 3 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   FOR THE THREE MONTHS ENDED 
   OCTOBER 31, 
   2019   2018 
REVENUE          
Room  $1,439,693   $1,435,454 
Food and Beverage   20,049    12,250 
Management and Trademark Fees   37,504    38,103 
Reservation and Convention   -    (15,014)
Other   -    15,390 
TOTAL REVENUE   1,497,246    1,486,183 
           
OPERATING EXPENSES          
Room   493,030    485,089 
Food and Beverage   24,214    17,388 
Telecommunications   -    290 
General and Administrative   217,526    430,981 
Sales and Marketing   112,278    122,265 
Repairs and Maintenance   95,429    166,432 
Hospitality   127,258    115,211 
Utilities   115,300    58,261 
Depreciation   269,887    209,196 
Real Estate and Personal Property Taxes, Insurance and Ground Rent   65,222    95,788 
Other   7,697    496 
TOTAL OPERATING EXPENSES   1,527,841    1,701,397 
OPERATING LOSS   (30,595)   (215,214)
Interest Income   62,225    34,231 
TOTAL OTHER INCOME   62,225    34,231 
Interest on Mortgage Notes Payable   68,338    63,722 
Interest on Other Notes Payable   115,195    37,674 
TOTAL INTEREST EXPENSE   183,533    101,396 
CONSOLIDATED NET LOSS BEFORE INCOME TAX PROVISION AND DISCONTINUED OPERATIONS   (151,903)   (282,379)
Income Tax Provision   -    (197,896)
CONSOLIDATED NET LOSS FROM CONTINUING OPERATIONS  $(151,903)  $(480,275)
Discontinued Operations, Net of Non-Controlling Interest  $-   $(784,304)
Gain on Disposal of Discontinued Operations  $-   $13,323,418 
CONSOLIDATED NET INCOME FROM DISCONTINUED OPERATIONS  $-   $12,539,114 
CONSOLIDATED NET (LOSS) INCOME  $(151,903)  $12,058,839 
LESS: NET (LOSS) INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST  $49,202   $9,159,128 
NET (LOSS) INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS  $(201,105)  $2,899,711 
NET LOSS PER SHARE FROM CONTINUING OPERATIONS – BASIC & DILUTED  $(0.02)  $(0.05)
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS – BASIC & DILUTED  $-   $1.27 
NET (LOSS) INCOME PER SHARE TOTAL – BASIC & DILUTED  $(0.02)  $1.22 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC & DILUTED   9,298,268    9,847,104 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 4 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

FOR THE NINE MONTHS ENDED OCTOBER 31, 2019

 

   Shares of Beneficial Interest   Treasury Stock   Trust
Shareholders'
   Non- Controlling   Total 
   Shares   Amount   Shares   Amount   Equity   Interest   Equity 
Balance, January 31, 2019   9,366,076    23,738,260    9,223,884    (13,517,833)   10,220,427    (1,471,912)   8,748,515 
Net (Loss) Income   -    (328,854)   -    -    (328,854)   59,024    (269,830)
Purchase of Treasury Stock   (32,732)   -    32,732    (58,096)   (58,096)   -    (58,096)
Shares of Beneficial Interest Issued for Services Rendered   18,000    8,100    -    -    8,100    -    8,100 
Distribution to Non-Controlling Interests   -    -    -    -    -    (139,679)   (139,679)
Balance, April 30, 2019   9,351,344   $23,417,506    9,256,616   $(13,575,929)  $9,841,577   $(1,552,567)  $8,289,010 
                                    
Net Loss   -    (475,968)   -    -    (475,968)   (14,592)   (490,560)
Dividends   -    (95,909)   -    -    (95,909)   -    (95,909)
Purchase of Treasury Stock   (32,410)   -    32,410    (51,385)   (51,385)   -    (51,385)
Shares of Beneficial Interest Issued for Services Rendered   -    8,100    -    -    8,100    -    8,100 
Distribution to Non-Controlling Interests   -    -    -    -    -    (60,554)   (60,554)
Balance, July 31, 2019   9,318,934   $22,853,729    9,289,026   $(13,627,314)  $9,226,415   $(1,627,713)  $7,598,702 
                                    
Net Loss   -    (201,105)   -    -    (201,105)   49,202    (151,903)
Purchase of Treasury Stock   (8,243)   -    8,243    (14,286)   (14,286)   -    (14,286)
Shares of Beneficial Interest Issued for Services Rendered   -    8,100    -    -    8,100    -    8,100 
Distribution to Non-Controlling Interests   -    -    -    -    -    (168,993)   (168,993)
Balance, October 31, 2019   9,310,691   $22,660,724    9,297,269   $(13,641,600)  $9,019,124   $(1,747,504)  $7,271,620 

 

 

FOR THE NINE MONTHS ENDED OCTOBER 31, 2018

 

   Shares of Beneficial Interest   Treasury Stock   Trust Shareholders'   Non-Controlling   Total 
   Shares   Amount   Shares   Amount   Equity   Interest   Equity 
Balance, January 31, 2018   9,775,669    22,333,905    8,796,546    (12,662,996)   9,670,909    (1,551,940)   8,118,969 
Net (Loss) Income   -    (652,015)   -    -    (652,015)   362,054    (289,961)
Purchase of Treasury Stock   (149,603)   -    149,603    (287,868)   (287,868)   -    (287,868)
Shares of Beneficial Interest Issued for Services Rendered   18,000    8,100    -    -    8,100    -    8,100 
Sales of Ownership Interests in Subsidiary, net   -    -    -    -    -    102,824    102,824 
Distribution to Non-Controlling Interests   -    -    -    -    -    (257,245)   (257,245)
Reallocation of Non-Controlling Interests and Other   -    124,903    -    -    124,903    (124,903)   - 
Balance, April 30, 2018   9,644,066   $21,814,893    8,946,149   $(12,950,864)  $8,864,029   $(1,469,210)  $7,394,819 
                                    
Net (Loss) Income   -    (730,034)   -    -    (730,034)   73,291    (656,743)
Dividends   -    (99,673)   -    -    (99,673)   -    (99,673)
Purchase of Treasury Stock   (121,851)   -    121,851    (293,564)   (293,564)   -    (293,564)
Shares of Beneficial Interest Issued for Services Rendered   -    8,100    -    -    8,100    -    8,100 
Sales (Purchase) of Ownership Interests in Subsidiary, net   -    -    -    -    -    (16,032)   (16,032)
Distribution to Non-Controlling Interests   -    -    -    -    -    (197,079)   (197,079)
Reallocation of Non-Controlling Interests and Other   -    762    -    -    762    (762)   - 
Balance, July 31, 2018   9,522,215   $20,994,048    9,068,000   $(13,244,428)  $7,749,620   $(1,609,792)  $6,139,828 
                                    
Net Income   -    2,911,718    -    -    2,911,718    9,159,275    12,070,993 
Purchase of Treasury Stock   (128,369)   -    128,369    (214,458)   (214,458)   -    (214,458)
Shares of Beneficial Interest Issued for Services Rendered   -    8,100    -    -    8,100    -    8,100 
Sales (Purchase) of Ownership Interests in Subsidiary, net   -    -    -    -    -    14,999    14,999 
Distribution to Non-Controlling Interests   -    -    -    -    -    (245,342)   (245,342)
Reallocation of Non-Controlling Interests and Other   -    16,813    -    -    16,813    (16,813)   - 
Balance, October 31, 2018   9,393,846   $23,930,679    9,196,369   $(13,458,886)  $10,471,793   $7,302,327   $17,774,120 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 5 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   FOR THE NINE MONTHS ENDED 
   OCTOBER 31, 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES          
Consolidated Net (Loss) Income  $(912,293)  $11,124,289 
Adjustments to Reconcile Consolidated Net (Loss) Income to Net Cash Provided By (Used In) Operating Activities:          
Stock-Based Compensation   24,300    24,300 
Depreciation   764,566    1,017,252 
Gain on Disposals on Assets   -    (13,323,418)
Changes in Assets and Liabilities:          
Accounts Receivable   (145,184)   30,249 
Prepaid Expenses and Other Assets   11,547    22,936 
Accrued Interest Income   -    (93,000)
Accounts Payable and Accrued Expenses   370,667    (503,132)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   113,603    (1,700,524)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Improvements and Additions to Hotel Properties   (242,355)   (778,525)
Redemption of Marketable Securities   1,106,183    1,000,330 
Cash Received From Sale of Hotel Property and IBC   -    10,184,766 
Lendings on Advances to Affiliates - Related Party   (127,055)   (704,253)
Collections on Advances to Affiliates - Related Party   25,353    602,992 
NET CASH PROVIDED BY INVESTING ACTIVITIES   762,126    10,305,310 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Principal Payments on Mortgage Notes Payable   (86,889)   (296,486)
Payments on Notes Payable to Banks, net of financing costs   (156,000)   - 
Borrowings on Notes Payable to Banks, net of financing costs   146,700    - 
Lendings on Notes Receivable - Related Party   (254,813)   - 
Collections on Notes Receivable - Related Party   888,027    - 
Payments on Notes Payable - Related Party   (240,210)   (229,126)
Payments on Other Notes Payable   (604,419)   (88,930)
Borrowings on Other Notes Payable   11,000    - 
Payment of Dividends   (95,909)   (99,673)
Proceeds from Sale of Non-Controlling Ownership Interest in Subsidiary, net   -    76,114 
Distributions to Non-Controlling Interest Holders   (369,226)   (669,734)
Repurchase of Treasury Stock   (123,767)   (323,646)
NET CASH USED IN  FINANCING ACTIVITIES   (885,506)   (1,631,481)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (9,777)   6,973,305 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   749,075    4,776,453 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $739,298   $11,749,758 

 

** Depreciation includes depreciation expense in discontinued operations for the nine months ended October 31, 2018

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 6 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF OCTOBER 31, 2019 AND JANUARY 31, 2019

AND FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2019 AND 2018

 

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

As of October 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 hotel 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 October 31, 2019 and January 31, 2019 respectively. The Trust’s weighted average ownership for the nine months ended October 31, 2019 and 2018 was 74.94% and 74.94%. As of October 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 3 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 16).

 

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

 

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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 October 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 October 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 October 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 October 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 October 31, 2019, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount receivable of approximately $-0-. 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, and renews annually. As of December 23, 2019, the outstanding net balance receivable on the Demand/Revolving Line of Credit/Promissory Note was $-0-.

 

As of October 31, 2019, the Trust had Advance to Affiliate credit facilities with an aggregate maximum borrowing capacity of $1,000,000, which is available through December 31, 2019, and renews annually. As of October 31, 2019, the Trust had an amount receivable of the Advances to Affiliate credit facility of approximately $1,000,000. As of December 23, 2019, the amount receivable from the Advance to Affiliate credit facility was approximately $1,000,000.

 

As of October 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 October 31, 2019.

 

With approximately $1,530,000 of cash and short term investments, as of October 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.

 

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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 nine months ended October 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 19 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.

 

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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.

 

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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 October 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.

 

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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 nine months ended October 31, 2019 and the fiscal year ended January 31, 2019.

 

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Fiscal Year  Balance at the
Beginning
of Period
   Discontinued
Operations
Adjustment
   Charged to
Expense
   Deductions   Balance at
the End
of Period
 
October 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 14).

 

STOCK-BASED COMPENSATION

 

The Trust has an employee equity incentive plan, which is described more fully in Note 15 - “Share-Based Payments.” For the nine months ended October 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 nine months ended October 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 $24,300. During nine months ended October 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 $24,300. 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.

 

INCOME (LOSS) PER SHARE

 

Basic and diluted income (loss) per Share of Beneficial Interest is computed based on the weighted-average number of Shares of Beneficial Interest and potentially dilutive securities outstanding during the period. Dilutive securities are limited to the Class A and Class B units of the Partnership, which are convertible into 3,185,746 Shares of the Beneficial Interest, as discussed in Note 1.

 

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For the nine months ended October 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 nine months ended October 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 nine months ended October 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 $59,000 and $144,000 for the three months ended October 31, 2019 and 2018 respectively, and $233,000 and $525,000 for the nine months ended October 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.

 

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  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 nine months ended October 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.

 

 15 
 

 

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 nine months ended October 31, 2019. As of October 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 nine months ended October 31, 2019, there were no Class A, B or C units of the Tucson entity sold. As of October 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 October 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 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.

 

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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 nine months ended October 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 October 31, 2019 and January 31, 2019, hotel properties consisted of the following:

 

   October 31, 2019   January 31, 2019 
Land  $2,500,000   $2,500,000 
Building and improvements   10,436,689    10,334,919 
Furniture, fixtures and equipment   3,998,560    3,860,574 
Total hotel properties   16,935,249    16,695,493 
Less accumulated depreciation   (7,945,919)   (7,312,869)
Hotel Properties in Service, net   8,989,330    9,382,625 
Construction in progress   40,979    43,657 
Hotel properties, net  $9,030,309   $9,426,282 

 

As of October 31, 2019 and January 31, 2019, corporate property, plant and equipment consisted of the following:

 

   October 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   (531,307)   (511,035)
Property, Plant and Equipment, net  $86,239   $106,511 

  

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6. MORTGAGE NOTES PAYABLE

 

At October 31, 2019 and January 31, 2019, the Trust had a mortgage note payable outstanding with respect to the Tucson Hotel. The mortgage note payable has a scheduled maturity date in June 2042. The weighted average annual interest rates on mortgage notes payable as of October 31, 2019 and January 31, 2019 were  4.69%, respectively.

 

The mortgage note payable reflects a $5.0 million Business Loan Agreement (“Tucson Loan”) as a first mortgage credit facility with KS State Bank, entered into on June 29, 2017, to refinance the existing first mortgage credit facility with an approximate payoff balance of $3.045 million. The loan will allow Tucson Hospitality Properties, LLLP funds for prior and future hotel improvements. The Tucson Loan has a maturity date of June 19, 2042 and 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 October 31, 2019 and January 31, 2019, the mortgage loan balance was approximately $4,738,000 and $4,825,000, respectively, net of a discount of approximately $5,000. The mortgage note payable is due in monthly installments of $28,493.

 

See Note 9 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.

 

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7. LINES OF CREDIT AND NOTES RECEIVABLE – RELATED PARTY

 

On December 1, 2014, the Trust entered into a Demand/Revolving Line of Credit/Promissory Note with Rare Earth Financial, LLC, an entity which is wholly owned by Mr. Wirth and his family members. The Demand/Revolving Line of Credit/Promissory Note, as amended on June 19, 2017, bears interest at 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 October 31, 2019 and January 31, 2019, the Trust had an amount receivable of approximately $-0-, and $632,000, respectively. During the nine months ended October 31, 2019 and 2018, the Trust accrued approximately $10,000 and $3,632, respectively, of interest income.

 

As of October 31, 2019, the Trust had approximately $245,000 in promissory notes outstanding to related parties arising from the repurchase of 433,900 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 October 31, 2019, the Trust had approximately $330,000 in promissory notes outstanding to unrelated third parties arising from the repurchase of 57,732 Class A Partnership units in privately negotiated transactions and the repurchase of 274,100 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 October 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 $200,000 as of October 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 October 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 October 31, 2019.

 

See Note 9 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.

 

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9. MINIMUM DEBT PAYMENTS

 

Scheduled minimum payments of debt, net of debt discounts, as of October 31, 2019 are approximately as follows in the respective fiscal years indicated:

 

FISCAL YEAR  MORTGAGES   NOTES PAYABLE RELATED PARTIES   OTHER NOTES PAYABLE   TOTAL 
                 
2020   29,000    79,000    629,000    737,000 
2021   119,000    166,000    212,000    497,000 
2022   127,000         60,000    187,000 
2023   130,000              130,000 
2024   135,000              135,000 
2025   142,000              142,000 
Thereafter   4,056,000              4,056,000 
   $4,738,000   $245,000   $901,000   $5,884,000 

 

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 nine months ended October 31, 2019 and 2018, the Trust repurchased 73,385 and 399,823 Shares of Beneficial Interest at an average price of $1.71 and $1.70 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 982,101 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 October 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 October 31, 2019 and January 31, 2019, Mr. Wirth and his affiliates held 5,876,683 and 5,881,683 Shares of Beneficial Interest in the Trust, respectively, which represented 61.32% and 62.84% respectively, of the total issued and outstanding Shares of Beneficial Interest.

 

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As of October 31, 2019 and January 31, 2019, the Trust owned 74.94% and 74.94% of the Partnership, respectively. As of October 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 nine months ended October 31, 2019, the Trust recognized approximately $105,635 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 nine months ended October 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 was amended on June 17, 2017 to increase the amount to $1,000.000, and extend the due date. The note has a due date of December 31, 2019, renews annually, and accrues interest of 7.0%. During the nine months ended October 31, 2019 and 2018, the Trust received $1,970 and $0 of interest income, respectively, from Tempe/Phoenix Airport Resort LLC, respectively. As of October 31, 2019, the Advances from Affiliate – Related Party balance was approximately $1,000,000 from Tempe/Phoenix Airport Resort LLC.

 

12. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES

 

The Trust paid $372,444 and $380,000 in cash for interest for the nine months ended October 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 $123,767 and $323,646, respectively, for the nine months ended October 31, 2019 and 2018. Cash paid for taxes for the nine months ended October 31, 2019 and 2018 was $-0- and $-0- respectively.

 

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 October 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 $40,822 and $84,550 for the three months ended October 31, 2019 and 2018, respectively, and $125,277 and $210,566 for the nine months ended October 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.

 

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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 14 – 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.

 

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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 nine months ended October 31, 2019:

 

   Nine months 
   Ended 
   31-Oct-19 
Lease Costs:     
Operating lease cost*  $201,656 

 

* Short term lease costs were immaterial.

 

Supplemental cash flow information is as follows:

 

   Nine months 
   Ended 
   31-Oct-19 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $161,843 
      
Right-of-use assets obtained in exchange for lease obligations:     
Operating leases, net  $2,720,605 

 

The aggregate future lease payments for Operating Lease Liability as of October 31, 2019 are as follows:

 

For the Years Ending January 31,    
Remaining in 2020  $57,985 
2021   231,941 
2022   231,941 
2023   208,829 
2024   168,691 
Thereafter   5,050,859 
Total minimum lease payments  $5,950,246 
Less: amount representing interest   3,143,326 
Total present value of minimum payments   2,806,920 
Less: current portion  $98,913 
Long-term obligations  $2,708,007 

 

Weighted average remaining lease terms and discount rates were as follows:

 

Weighted average remaining lease term (years)  October 31, 2019 
Operating leases   35.16 
      
Weighted average discount rate     
Operating leases   4.77%

 

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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 nine months ended October 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 17 for additional information on stock options. The Plan also permits the Trust to award stock appreciation rights, none of which, as of October 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 nine months ended October 31, 2018 consist of the operations from the IBC Technology Segment (the “Company”). 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 in cash 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 26 months (starting August 2018), thereafter for month 27 and 28 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 November 2025. Future receipts from this note are shown in the table below.

 

FISCAL YEAR    
2020  $- 
2021   91,667 
2022   550,000 
2023   550,000 
2024   550,000 
Thereafter   1,008,333 
   $2,750,000 

 

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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 nine 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, 2021, then 75% of the issued and outstanding IBC interest shall be transferred to IHT, and (b) on or after February 5, 2021, 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 October 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 NINE MONTHS ENDED 
   OCTOBER 31, 
   2019   2018 
REVENUE        
Room  $-   $3,225,783 
Food and Beverage   -    27,569 
Reservation and Convention   -    265,282 
Other   -    41,057 
TOTAL REVENUE   -    3,559,691 
           
OPERATING EXPENSES          
Room   -    1,282,853 
Food and Beverage   -    34,136 
Telecommunications   -    21,803 
General and Administrative   -    1,371,098 
Sales and Marketing   -    636,120 
Reservation Acquisition Costs   -    142,842 
Repairs and Maintenance   -    180,112 
Hospitality   -    167,095 
Utilities   -    149,635 
Depreciation   -    393,581 
Intangible Amortization   -    - 
Real Estate and Personal Property Taxes, Insurance and Ground Rent   -    88,344 
Other   -    5,483 
TOTAL OPERATING EXPENSES   -    4,473,102 
OPERATING LOSS   -    (913,411)
Interest Income   -    - 
TOTAL OTHER INCOME   -    - 
Interest on Mortgage Notes Payable   -    214,458 
Interest on Notes Payable to Banks   -    4,901 
Interest on Other Notes Payable      -    37,819 
TOTAL INTEREST EXPENSE   -    257,178 
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS  $-   $(1,170,589)

 

   FOR THE THREE MONTHS ENDED 
   OCTOBER 31, 
   2019   2018 
REVENUE                
Room  $-    971,476 
Food and Beverage   -    5,920 
Reservation and Convention   -    (399)
Other   -    5,996 
TOTAL REVENUE   -    982,993 
           
OPERATING EXPENSES          
Room   -    732,368 
Food and Beverage   -    5,035 
Telecommunications   -    5,421 
General and Administrative   -    524,737 
Sales and Marketing   -    91,473 
Reservation Acquisition Costs   -    - 
Repairs and Maintenance   -    61,232 
Hospitality   -    49,986 
Utilities   -    51,958 
Depreciation   -    114,314 
Intangible Amortization   -    - 
Real Estate and Personal Property Taxes, Insurance and Ground Rent   -    46,278 
Other   -    - 
TOTAL OPERATING EXPENSES   -    1,682,802 
OPERATING LOSS   -    (699,809)
Interest Income   -    - 
TOTAL OTHER INCOME   -    - 
Interest on Mortgage Notes Payable   -    72,420 
Interest on Notes Payable to Banks   -    12,075 
Interest on Other Notes Payable   -    - 
TOTAL INTEREST EXPENSE   -    84,495 
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS  $-   $(784,304)

 

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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 October 31, 2019 and January 31, 2019 related to these IRS and State tax jurisdiction notices.

 

19. SUBSEQUENT EVENTS

 

Subsequent to the nine months ended October 31, 2019, the Trust repurchased 1,666 Shares of Beneficial Interest on the open market for a total cash repurchase price of approximately $2,900.

 

On December 2, 2019, Albuquerque Suite Hospitality, LLC, a subsidiary of InnSuites Hospitality Trust, entered into a $1.4 million Business Loan Agreement (“Albuquerque Loan”) as a first mortgage credit facility with Republic Bank of Arizona. The Albuquerque Loan has a maturity date of December 2, 2029. The Albuquerque Loan has an initial interest rate of 4.90% for the first five years and thereafter a variable rate equal to the US Treasury + 3.5% with a floor of 4.90% and no prepayment penalty. This credit facility is guaranteed by InnSuites Hospitality Trust. The Albuquerque Loan enabled Albuquerque Suite Hospitality, LLC to repay its intercompany loan to InnSuites Hospitality Trust of approximately $1,257,000 and accrued interest of approximately $80,000 subsequent to the loan funding on December 4, 2019.

 

On December 16, 2019, pursuant to a 2019 Convertible Debenture Purchase Agreement between UniGen and InnSuites Hospitality Trust, seeking diversification of its holdings, IHT has agreed to invest up to $1,500,000 or more in UniGen Power Inc. Details are contained in Innsuites Hospitality Trust’s form 8-K filed with the Securities and Exchange Commission (SEC) on December 20, 2019.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

GENERAL

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and our Form 10-K for the fiscal year ended January 31, 2019.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this Form 10-Q, including statements containing the phrases “believes,” “intends,” “expects,” “anticipates,” “predicts,” “projects,” “will be,” “should be,” “looking ahead,” “may” or similar words, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that such forward-looking statements be subject to the safe harbors created by such Acts. These forward-looking statements include statements regarding our intent, belief or current expectations in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) our financing plans; (v) our position regarding investments, acquisitions, developments, financings, conflicts of interest and other matters; (vi) expansion of IBC Hotels; (vii) our plans and expectations regarding future sales of hotel properties; and (viii) trends affecting our or any Hotel’s financial condition or results of operations.

 

These forward-looking statements reflect our current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels that may cause our actual results to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to:

 

  local, national or international, political economic and business conditions, including, without limitation, conditions that may, or may continue to, affect public securities markets generally, the hospitality industry or the markets in which we operate or will operate;
     
  fluctuations in hotel occupancy rates;
     
  changes in room rental rates that may be charged by InnSuites Hotels in response to market rental rate changes or otherwise;
     
  seasonality of our hotel operations business;
     
  our ability to sell any of our Hotels at market value, listed sale price or at all;
     
  interest rate fluctuations;
     
  changes in, or reinterpretations of, governmental regulations, including, but not limited to, environmental and other regulations, the Americans with Disability Act and federal income tax laws and regulations;
     
  competition including supply and demand for hotel rooms and hotel properties;
     
  availability of credit or other financing;
     
  our ability to meet present and future debt service obligations;
     
  our ability to refinance or extend the maturity of indebtedness at, prior to, or after the time it matures;
     
  any changes in our financial condition or operating results due to acquisitions or dispositions of hotel properties;
     
  insufficient resources to pursue our current strategy;
     
  concentration of our investments in the InnSuites Hotels® brand;
     
  loss of membership contracts;
     
  the financial condition of franchises, brand membership companies and travel related companies;
     
  ability to develop and maintain positive relations with “Best Western Plus” or “Best Western” and potential future franchises or brands;
     
  real estate and hospitality market conditions;

 

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  hospitality industry factors;
     
  our ability to carry out our strategy, including our strategy regarding diversification and investments;
     
  the Trust’s ability to remain listed on the NYSE American;
     
  effectiveness of the Trust’s software program;
     
  the need to periodically repair and renovate our Hotels at a cost at or in excess of our standard 4% reserve;
     
  tariffs may affect trade and travel
     
  our ability to cost effectively integrate any acquisitions with the Trust in a timely manner;
     
  increases in the cost of labor, energy, healthcare, insurance and other operating expenses as a result of changed or increased regulation or otherwise;
     
  terrorist attacks or other acts of war;
     
  outbreaks of communicable diseases attributed to our hotels or impacting the hotel industry in general;
     
  natural disasters, including adverse climate changes in the areas where we have or serve hotels;
     
  airline strikes;
     
  transportation and fuel price increases;
     
  adequacy of insurance coverage and increases in cost for health care coverage for employees and potential government regulation with respect to health care coverage;
     
  data breaches or cybersecurity attacks, including breaches impacting the integrity and security of employee and guest data; and
     
  loss of key personnel and uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act

 

We do not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise except as may be required by law. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, as amended, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Form 10-K relating to the operations of the Partnership.

 

OVERVIEW

 

We are engaged in the ownership and operation of hotel properties. At October 31, 2019, the Trust had two moderate service hotels in Tucson, Arizona and Albuquerque, New Mexico with 267 hotel suites, and managed a third hotel in Tempe, Arizona. Both of our Hotels are branded through membership agreements with Best Western, and both are trademarked as InnSuites Hotels. We are also involved in various operations incidental to the operation of hotels, such as the operation of restaurants and meeting/banquet room rentals.

 

At October 31, 2019, we owned, through our sole general partner’s interest in the Partnership, a direct 20.53% interest in the Albuquerque, New Mexico Hotel, and, together with the Partnership, owned an indirect 51.01% interest in the Tucson, Arizona Hotel.

 

Our operations consist of one reportable segment – Hotel Operations & Hotel Management Services. Hotel Operations derives its revenue from the operation of the Trust’s two hotel properties with an aggregate of 267 hotel suites in Arizona and New Mexico. Hotel management services, provides management services for the Trust’s two Hotels and a non-owned hotel in Tempe, Arizona. As part of our management services, we also provide trademark and licensing services.

 

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Our results are significantly affected by occupancy and room rates at the Hotels, our ability to manage costs, changes in room rates, and changes in the number of available suites caused by the Trust’s disposition activities. Results are also significantly impacted by overall economic conditions and conditions in the travel industry. Unfavorable changes in these factors could negatively impact hotel room demand and pricing, which would reduce our profit margins on rented suites. Additionally, our ability to manage costs could be adversely impacted by significant increases in operating expenses, resulting in lower operating margins and higher hourly labor costs. Either a further increase in supply or a further decline in demand could result in increased competition, which could have an adverse effect on the rates and revenue of the Hotels in their respective markets.

 

We are experiencing flat or slightly weaker economic conditions during the first nine months of fiscal year 2020, compared to fiscal 2019. We are uncertain that this economy will continue during the remainder of fiscal 2020 and fiscal 2021. We expect the major challenge for the remainder of fiscal year 2020 to be the continuation of strong competition for corporate leisure group and government business in the markets in which we operate, which may affect our ability to increase room rates while maintaining market share. We believe that we have positioned the Hotels to remain competitive through refurbishment of our Hotels, by offering a relatively large number of two-room suites at each location, and by maintaining a robust complementary guest items and a free Internet access system.

 

Our strategic plan is to obtain the full benefit of our real estate equity, by marketing the Hotels at attractive current market prices. In addition, the Trust is seeking a public, or large private reverse merger partner that may benefit from a merger that would afford that partner access to our listing on the NYSE AMERICAN. As we sell hotels and increase liquidity from our substantial equity, which exceeds our debt and/or low book values, we seek to diversify. Our investments. For more information on our strategic plan, including information on our progress in disposing of our hotel properties, see “Future Positioning” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

HOTEL OPERATIONS

 

Our expenses consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt, professional fees, depreciation of the Hotels and hotel operating expenses. Hotel operating expenses consist primarily of payroll, guest and maintenance supplies, marketing and utilities expenses. Under the terms of its Partnership Agreement, the Partnership is required to reimburse us for all such expenses. Accordingly, management believes that a review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, which is calculated as rooms sold divided by total rooms available, average daily rate (“ADR”), calculated as total room revenue divided by number of rooms sold, and revenue per available room (“REVPAR”), calculated as total room revenue divided by number of rooms available, is appropriate for understanding revenue from the Hotels.

 

The following tables show historical financial and other information for the periods indicated:

 

   For the Nine Months Ended 
Albuquerque  October 31, 
   2019   2018   change   %-Incr/decr 
Occupancy   92.30%   90.60%   1.70%   1.88%
Average Daily Rate (ADR)  $88.35   $83.55   $4.80    5.75%
Revenue Per Available Room (REVPAR)  $81.56   $75.71   $5.85    7.73%

 

   For the Nine Months Ended 
Tucson  October 31, 
   2019   2018   change   %-Incr/decr 
Occupancy   67.60%   74.71%   -7.11%   -9.52%
Average Daily Rate (ADR)  $66.25   $64.28   $1.97    3.06%
Revenue Per Available Room (REVPAR)  $44.76   $47.63   $26.67    55.99%

 

No assurance can be given that occupancy, ADR and REVPAR will not increase or decrease as a result of changes in national or local economic or hospitality industry conditions.

 

We enter into transactions with certain related parties from time to time. For information relating to such related party transactions see the following:

 

  For a discussion of management and licensing agreements with certain related parties, see “Note 2 to our Condensed Consolidated Financial Statements – Summary of Significant Policies – Revenue Recognition – Hotel Operations”
     
  For a discussion of guarantees of our mortgage notes payable by certain related parties, see Note 6 to our Condensed Consolidated Financial Statements – “Mortgage Notes Payable.”
     
  For a discussion of our equity sales and restructuring agreements involving certain related parties, see Notes 3 to our Condensed Consolidated Financial Statements – “Sale of Ownership Interests in Subsidiaries”.
     
  For a discussion of other related party transactions, see Note 11 to our Condensed Consolidated Financial Statements – “Related Party Transactions.”

 

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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 2019 COMPARED TO THE NINE MONTHS ENDED OCTOBER 31, 2018

 

A summary of total operating results of the Trust for the nine months ended October 31, 2019 and 2018 is as follows:

 

   2019   2018   Change   % Change 
Total Revenues from Continuing Operations  $5,123,661   $4,803,273   $320,388    7%
Operating Expenses from Continuing Operations   5,729,262    5,227,822    (501,440)   (10%)
Operating Loss from Continuing Operations   (605,601)   (424,549)   (181,052)   (43%)
Interest Income from Continuing Operations   65,752    95,110    (29,358)   (31%)
Interest Expense from Continuing Operations   372,444    291,374    81,070    28%
Income Tax Provision from Continuing Operations   -    (407,727)   407,727    (100%)
Consolidated Net Loss from Continuing Operations   (912,293)   (1,028,540)   116,247    11%

 

 

As a result of the sale of IBC (see Note 16), the Chief Operating Decision Maker (“CODM”), Mr. Wirth, CEO of the Trust, has determined that the Trust operations are comprised of one reportable segment, Hotel Operations & Corporate Overhead (continuing operations) segment that has ownership interest in three hotel properties with an aggregate of 267 suites in Arizona and New Mexico. The Trust has a concentration of assets in the southwest United States and the southern Arizona market. Prior to the sale of IBC, the Trust had previously determined that its operations were comprised of two reportable segments, a Hotel Operations & Corporate Overhead segment, and the IBC Hospitality segment serving 2,000 unrelated hotel properties. In connection with the sale of IBC, the historical financial information presented in this Form 10-Q reflects this change with IBC being reported as discontinued operation.

 

The Trust has 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.

 

REVENUE – CONTINUING OPERATIONS:

 

For the nine months ended October 31, 2019, we had total revenue of approximately $5.1 million compared to approximately $4.8 million for the nine months ended October 31, 2018, an increase of approximately $0.3 million. In the prior fiscal years ended January 31, 2019, 2018 and 2017, we made significant improvements to our Albuquerque, New Mexico and Tucson, Arizona properties which allowed us to increase rates with increased occupancy. For comparability purposes, the revenues do not include our Yuma, Arizona property which was sold October 24, 2018, and our IBC Technology Division which was sold in August of 2018.

 

We realized a 6.7% increase in room revenues during the nine months ended October 31, 2019 as room revenues were approximately $4.9 million for the nine months ending October 31, 2019 as compared to approximately $4.6 million for the nine months ending October 31, 2018. With additional hotel occupancy and change in our food and beverage offerings, our food and beverage revenue increased by 52.9% to approximately $52,000 for the nine months ending October 31, 2019 as compared to approximately $34,000 during the nine months ending October 31, 2018, an increase of approximately $18,000. During fiscal year 2020, we expect additional improvements in occupancy, modest improvements in rates and steady food and beverage revenues. Management and trademark fee revenues during the nine months ended October 31, 2019 were flat at approximately $129,000 compared to approximately $129,000 during the nine months ended October 31, 2018. During the remainder of fiscal year 2020, we expect management and trademark fee revenues to be flat or modestly increase over fiscal year 2019 on increases in revenues. We realized an approximate 57% decrease in other revenues from the hotel properties during the nine months ended October 31, 2019 to approximately $25,000 as compared to approximately $58,000 during the nine months ended October 31, 2018.

 

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EXPENSES – CONTINUING OPERATIONS:

 

Total expenses net of interest expense and income tax provision was approximately $5.7 million for the nine months ended October 31, 2019 reflecting an increase of approximately $0.5 million, or 9.6%, compared to total expenses net of interest expense and income tax provision of approximately $5.2 million for the nine months ended October 31, 2018. The increase was primarily due to an increase in operating expenses related to increased occupancy and revenues at the hotel properties.

 

Room expenses consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation fees and room supplies were approximately $1,521,000 for the nine months ended October 31, 2019 compared to approximately $1,435,000 in the prior year nine month period for an increase of approximately $86,000, or 6.0%. Room expenses increased as occupancy at the hotels increased, and additional expenses were incurred with the increased occupancy.

 

Food and beverage expenses included food and beverage costs, personnel and miscellaneous costs to provide banquet events. For the nine months ended October 31, 2019, food and beverage expenses increased approximately $20,000, or 38%, to approximately $72,000 for the nine months ended October 31, 2019, compared to approximately $52,000 for the nine months ended October 31, 2018. This increase relates directly to the increase in the food and beverage revenue.

 

General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $1,713,000 for the nine months ended October 31, 2019, increased approximately $315,000 from approximately $1,398,000 for the nine months ended October 31, 2018 primarily due to changes in corporate staffing in support of the hotels and property sales efforts.

 

Sales and marketing expense decreased approximately $54,000, or 12.3%, to approximately $386,000 for the nine months ended October 31, 2019 from approximately $440,000 for the nine months ended October 31, 2018. Open positions for sales and marketing resources, due to a tight labor market, accounted for the decrease.

 

Repairs and maintenance expense decreased by approximately $64,000, or 17.7%, from approximately $362,000 reported for the nine months ended October 31, 2018 compared to approximately $298,000 for the nine months ended October 31, 2019. Having completed the property improvements at our Tucson, Arizona, and we anticipate that this decrease will continue through the remainder of fiscal year ending January 31, 2020. Management also believes the improvements which complies with the increasing Best Western standards, leads to significant improvement in guest satisfaction and will drive additional revenue growth through increased occupancy and increased rates.

 

Hospitality expense increased by approximately $54,000, or 15.7%, from $344,000 for the nine months ended October 31, 2018 to approximately $398,000 for the nine months ended October 31, 2019. The increase was primarily due to the additional occupancy at the hotel properties and the additional food and beverage product mix provided during the Hotels’ complimentary breakfast and happy hour required by Best Western.

 

Utility expenses decreased approximately $35,000, or 12.8%, to approximately $309,000 reported for the nine months ended October 31, 2019 compared with approximately $274,000 for the nine months ended October 31, 2018.

 

Hotel property depreciation expenses increased by approximately $141,000 from approximately $624,000 reported for the nine months ended October 31, 2018 compared to approximately $765,000 for the nine months ended October 31, 2019. Increased depreciation resulted from the additional capital expenditures associated with the Tucson hotel improvements and, to a lesser extent, improvements at the Albuquerque hotel.

 

Real estate and personal property taxes, Insurance and Ground Rent expenses decreased approximately $41,000, or 14.0%, to approximately $251,000 reported for the nine months ended October 31, 2019 compared with approximately $292,000 for the nine months ended October 31, 2018.

 

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REVENUE – DISCONTINUED OPERATIONS

 

There were no discontinued operations for the nine months ended October 31, 2019.

 

For the nine months ended October 31, 2018, we had total revenue of approximately $3.6 million related to discontinued operations. Discontinued operations include the Yuma Hotel, which was sold as of October 24, 2018 and the IBC Technology Segment (IBC Hotels LLC, or “IBC”), which was sold as of August 1, 2018.

 

Of the 3.6 million in discontinued operations revenues, $3.3 million was attributable to the Yuma hotel, and $0.3 million to IBC.

 

EXPENSES – DISCONTINUED OPERATIONS

 

There were no discontinued operations for the nine months ended October 31, 2019.

 

For the nine months ended October 31, 2018 total operating expenses for discontinued operations were $4.5 million.

 

Of the 4.5 million in expenses for discontinued operations, $3.4 million was attributable to the Yuma hotel, and $1.1 million to IBC.

 

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2019 COMPARED TO THE THREE MONTHS ENDED OCTOBER 31, 2018

 

REVENUE – CONTINUING OPERATIONS:

 

For the three months ended October 31, 2019, we had total revenue of approximately $1.5 million compared to approximately $1.5 million for the three months ended October 31, 2018, unchanged from the prior year. For comparability purposes, these revenues do not include our Yuma, Arizona property which was sold October 24, 2018, and our IBC Technology Division which was sold in August of 2018.

 

We realized a 1.6% increase in room revenues during the three months ended October 31, 2019 as room revenues were approximately $0.49 million for the three months ending October 31, 2019 as compared to approximately $0.48 million for the three months ending October 31, 2018. Despite decreased occupancy, changes in our food and beverage offerings allowed our food and beverage revenue to increase by 67% to approximately $20,000 for the three months ending October 31, 2019 as compared to approximately $12,000 during the three months ending October 31, 2018, an increase of approximately $8,000. During the remainder of fiscal year 2020, we expect improvements in occupancy, modest improvements in rates and proportional increases in food and beverage revenues. Management and trademark fee revenues during the three months ended October 31, 2019 and October 31, 2018 were flat at approximately $38,000. During the remainder of fiscal year 2020, we expect management and trademark fee revenues to grow, as they are directly proportional to revenues, which are expected to grow. Other revenues were approximately $0, decreasing from $15,000, a $15,000 decrease, or 100%, for the three months ended October 31 2019, and 2018, respectively. 

 

EXPENSES – CONTINUING OPERATIONS:

 

Total expenses net of interest expense and income tax provision was approximately $1.5 million for the three months ended October 31, 2019 reflecting a decrease of approximately $156,000 million, or 9.2%, compared to total expenses net of interest expense and income tax provision of approximately $1.7 million for the three months ended October 31, 2018. The decrease was primarily due to decreases in operating expenses due to decreased occupancy at the hotel properties.

 

Room expenses consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation fees and room supplies were approximately $493,000 for the three months ended October 31, 2019 compared to approximately $485,000 in the prior period for an increase of approximately $9,000, or 1.6% increase in costs. Room expenses increases were attributable to increases in wages, year on year.

 

Food and beverage expenses included food and beverage costs, personnel and miscellaneous costs to provide banquet events. For the three months ended October 31, 2019, food and beverage expenses increased approximately $7,000, or 41%, to approximately $24,000 for the three months ended October 31, 2019, compared to approximately $17,000 for the three months ended October 31, 2018. This increase supports the increase in the food and beverage revenue and the improved food and beverage offerings.

 

General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $218,000 for the three months ended October 31, 2019, decreased approximately $213,000, or 49.4%, from approximately $431,000 for the three months ended October 31, 2018 primarily due to changes in corporate staff, and other administrative costs in support of the hotels.

 

Sales and marketing expense decreased approximately $10,000, or 8.2%, to approximately $112,000 for the three months ended October 31, 2019 from approximately $122,000 for the three months ended October 31, 2018. Open positions for sales and marketing resources at our properties were predominantly responsible for the decrease.

 

Repairs and maintenance expense decreased by approximately $71,000, or 42.8%, from approximately $166,000 reported for the three months ended October 31, 2018, to approximately $95,000 for the three months ended October 31, 2019. With the completion of the property improvements at our Tucson, Arizona property during the fiscal year ended January 31, 2019, management believes that this expense will continue to decrease for the remainder of fiscal year 2020. Management also believes these improvements which complies with the increasing Best Western standards, leads to significant improvement in guest satisfaction and will drive additional revenue growth through increased occupancy and increased rates.

 

Hospitality expense increased by approximately $12,000, or 10.4%, from $115,000 for the three months ended October 31, 2018 to approximately $127,000 for the three months ended October 31, 2019. The increase was directly proportional linked to the increased occupancy and revenue at the hotel properties.

 

Utility expenses increased approximately $57,000, or 98.3% to approximately $115,000 reported for the three months ended October 31, 2019 compared with approximately $58,000 for the three months ended October 31, 2018, due to increased utility costs year over year.

 

Hotel property depreciation expenses increased by approximately $61,000, or 29.2%, from approximately $209,000 reported for the three months ended October 31, 2018 compared to approximately $270,000 for the three months ended October 31, 2019. Increased depreciation is results from the capitalization of the property improvements previously referred to.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Overview – Hotel Operations & Corporate Overhead

 

Our principal source of cash to meet our cash requirements, including distributions to our shareholders, is our share of the Partnership’s cash flow of the Tucson hotel, quarterly distributions from the Albuquerque, New Mexico properties, management fees earned in the operation of the Trusts’ two hotels plus one affiliated hotel, and the sale of our hotel property in Yuma, Arizona, as well as potential future hotel sales. The Partnership’s principal source of revenue is hotel operations for the one hotel property it owns in Tucson, Arizona. Our liquidity, including our ability to make distributions to our shareholders, will depend upon our ability, and the Partnership’s ability, to generate sufficient cash flow from hotel operations and to service our debt.

 

Hotel operations are significantly affected by occupancy and room rates at the Hotels. We anticipate occupancy and ADR will continue to grow moderately during this coming year and capital improvements are expected to decrease from the prior year.

 

With approximately $1,530,000 of cash and short term investments as of October 31, 2019 and the availability of a $150,000 bank line of credit, a $1,000,000 related party Demand/Revolving Line of Credit/Promissory Note and the availability of our two available Advances to Affiliate credit facilities for a total of $1,000,000 maximum borrowing capacity, we believe that we will have enough cash on hand to meet all of our financial obligations as they become due for at least the next twelve months from the issuance date of the these consolidated financial statements. In addition, our management is analyzing other strategic options available to us, including raising additional funds, additional asset sales, increasing borrowings at either, or both, the Albuquerque and Tucson hotels and using the funds generated to pay intercompany loans (1) due from the Tucson hotel to the Partnership of approximately $3.2 million, (2) due from the Albuquerque hotel due to the Trust of approximately $1.4 million, which was repaid to the Trust on December 4, 2019 and, (3) other due from affiliates; however, such transactions may not be available on terms that are favorable to us, or at all.

 

IHT and IBC agreed to extend the payment schedule on IBC’s note receivable by one (1) year, extending the first payment from November 2019 to November 2020. The reason for the extension is in support of IBC’s cash requirements; related to IBC’s realization of fully benefiting from their recent agreement with a large search-engine company and a European digital marketing company, which together have the potential of greatly increasing both IBC’s revenues and profits. These potential benefits, will in turn improve IHT’s secured position on its note receivable from IBC. Management also believes that the future collectability is probable and not subject to impairment, or allowance at this time.

 

Refer to Note 16 – “Discontinued Operations” for information related to the Sale of IBC Hospitality Technologies (IBC).

 

With the proceeds of the recently executed mortgage loan agreement for Albuquerque Suite Hospitality of $1.4 million (the “Albuquerque Loan”), the Albuquerque Hotel was able to fully repay IHT its intercompany loan and accrued interest of approximately $1.4 million. With the repayment of the intercompany loan IHT’s cash position was enhanced, facilitating a $1.0 million loan to UniGen Power, Inc. of which $600,000 was funded in December 2019, and an additional $400,000 will fund in February 2020, during IHT’s high hotel season.

 

Refer to Note 19 – “Subsequent Events” for information related to the “Albuquerque Loan” and the investment in UniGen Power.

 

There can be no assurance that we will be successful in refinancing debt or raising additional or replacement funds, or that these funds may be available on terms that are favorable to us. If we are unable to raise additional or replacement funds, we may be required to sell certain of our assets to meet our liquidity needs, which may not be on terms that are favorable.

 

We anticipate some additional new-build hotel supply during the remaining fiscal year 2020, and accordingly we anticipate some additional pressure on revenues and operating margins. We expect the major challenge for the upcoming fiscal year to be the continuation of strong competition for corporate, leisure, group, and government business in the markets in which we operate, which may affect our ability to increase room rates while maintaining market share.

 

Net cash provided by operating activities from continuing operations totaled approximately $113,000 during the nine months ended October 31, 2019 as compared to net cash used of approximately $1,701,000 during the nine months ended October 31, 2018. Consolidated net loss was approximately $912,000 for the nine months ended October 31, 2019 as compared to consolidated net income for the nine months ended October 31, 2018 of approximately $11,124,000. Explanation of the differences between these fiscal years are explained above in the results of operations of the Trust.

 

Changes in the adjustments to reconcile net loss for the nine months ended October 31, 2019 and 2018, respectively, consist primarily of operating lease costs, stock based compensation, hotel property depreciation, and changes in assets and liabilities. Operating lease costs and stock-based compensation were approximately $(19,700) and $24,300, respectively, during the nine months ended October 31, 2019. Hotel property depreciation was approximately $765,000 during the nine months ended October 31, 2019 compared to approximately $1,017,000 during the nine months ended October 31, 2018, a decrease of $252,000 as the Trust recognized less depreciation as one of the hotel properties was sold during the fiscal year 2019.

 

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Changes in assets and liabilities for accounts receivable, prepaid expenses and other assets and accounts payable and accrued expenses totaled approximately $257,000 and approximately ($573,000) for the nine months ended October 31, 2019 and 2018, respectively. This significant increase in changes in assets and liabilities for the nine months ended October 31, 2019 compared to the nine months ended October 31, 2018 was due to the decrease in operating liabilities related to ongoing operations.

 

Net cash provided by investing activities totaled approximately $762,000 for the nine months ended October 31, 2019 compared to net cash provided by investing activities of approximately $10,305,000 for the nine months ended October 31, 2018. The decrease in net cash provided by investing activities during the nine months ended October 31, 2019 was due primarily due to the sale of the Yuma property, which was sold in October of 2018, which provided cash of $9,930,000.

 

Net cash used in financing activities totaled approximately $886,000 and $1,631,000, respectively, for the nine months ended October 31, 2019 and 2018. The decrease of approximately $745,000 was primarily due to collections on Notes - Related Party.

 

Principal payments on mortgage notes payables for continuing operations was approximately $87,000 and $297,000 during the nine months ended October 31, 2019 and 2018, respectively. Net payments and borrowings on notes payable to banks was approximately ($9,000) and approximately $-0- during the nine months ended October 31, 2019 and 2018, respectively.

 

Collections on notes payables–related party, netted against borrowings on note payable–related party, was approximately $633,000 and $-0- of cash provided by financing activities during the nine months ended October 31, 2019 and 2018, respectively.

 

Collections on other notes payables netted against borrowings on other note payable was approximately ($845,000) and ($318,000) of net cash used in financing activities during the nine months ended October 31, 2019 and 2018, respectively.

 

Proceeds from sales of non-controlling ownership interests in subsidiaries decreased by approximately $76,000 as sales of non-controlling ownership interest was -0- for the nine months ended October 31, 2019 and approximately $76,000 for the nine months ended October 31, 2018. During the nine months ended October 31, 2018, we primarily sold additional non-controlling interests in our Yuma, Arizona and Albuquerque, New Mexico property subsidiaries. We had no sales of our IHT stock for the nine months ended October 31, 2019 and 2018.

 

During the nine months ended October 31, 2019, our distributions to non-controlling interest holders was approximately $369,000 compared with approximately $670,000 for the nine months ended October 31, 2018.

 

We continue to contribute to a Capital Expenditures Fund (the “Fund”) an amount equal to 4% of the InnSuites Hotels’ revenues from operation of the Hotels. The Fund is restricted by the mortgage lender for one of our properties. As of October 31, 2019 and 2018, there were no monies held in these accounts reported on our Consolidated Balance Sheet as “Restricted Cash.” The Fund is intended to be used for capital improvements to the Hotels and refurbishment and replacement of furniture, fixtures and equipment. During the nine months ended October 31, 2019 and 2018, the Hotels spent approximately $242,000 and $779,000, respectively, for capital expenditures. The capital expenditures were primarily associated with the property improvements at the Hotels, as required to meet continuing Best Western standards. We consider the majority of these improvements to be revenue producing. Therefore, these amounts are capitalized and depreciated over their estimated useful lives. For the remaining fiscal year 2020 capital expenditures, we plan on spending less on capital improvements as we have completed our property improvements at our Tucson, Arizona hotel which required significant amounts of capital improvements during the nine months ending October 31, 2018. Repairs and maintenance were charged to expense as incurred and approximated $298,000 and $362,000 for the nine months ended October 31, 2019 and 2018, respectively.

 

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We have minimum debt payments, net of debt discounts, of approximately $737,000 and approximately $496,000 due during fiscal years 2020 and 2021, respectively. Minimum debt payments due during fiscal year 2020 and 2021 include approximately $29,000 and $119,000 of mortgage notes payable, approximately $79,000 and $166,000 for related party notes payable, and approximately $629,000 and $212,000 of other notes payable, which are secured promissory notes outstanding to unrelated third parties arising from the Shares of Beneficial Interest and Partnership unit repurchases, respectively.

 

We may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by us may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate and be subject to such other terms as we consider prudent.

 

COMPETITION IN THE HOTEL INDUSTRY

 

The hotel industry is highly competitive. We expect the major challenge for the fiscal years ending January 31, 2020 and January 31, 2021 (“fiscal years 2020 and 2021”) to be the continuation of competition for corporate leisure group and government business in the markets in which we operate, which may affect our ability to increase room rates while maintaining market share. Each of the Hotels, and the Tempe Hotel faces competition primarily from other mid-market hotels located in its immediate vicinity, but also competes with hotel properties located in other geographic markets, and increasingly from alternative lodging facilities, such as Airbnb. While none of the Hotels’ competitors dominate any of their geographic markets, some of those competitors may have greater marketing and financial resources than the Trust.

 

Certain additional hotel property refurbishments have recently been completed by competitors in both of the Hotels’ markets, and additional hotel property developments may be built in the future. Such hotel developments have had, and could continue to have, an adverse effect on the revenue of our Hotels in their respective markets.

 

The Trust’s hotel investments are located in Arizona and New Mexico. With the completed renovations at our Tucson, Arizona and Albuquerque, New Mexico hotel properties, those hotels have seen modest additional demand as supply has been relatively steady in those respective markets. Either an increase in supply or a decline in demand could result in increased competition, which could have an adverse effect on occupancy, room rates and revenues of our Hotels in their respective markets.

 

The Trust may also compete for investment diversified opportunities with other entities that have greater financial resources. These entities also may generally accept more risk than the Trust can prudently manage. Competition may generally reduce the number of suitable future investment opportunities available to the.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

In our Annual Report on Form 10-K for the fiscal year ended January 31, 2019 filed with the SEC on June 19, 2019, we identified the critical accounting policies that affect our more significant estimates and assumptions used in preparing our condensed consolidated financial statements. We believe that the policies we follow for the valuation of our Hotel properties, which constitute the majority of our assets, are our most critical policies which has not changed in the period ended October 31, 2019. Those policies include methods used to recognize and measure any identified impairment of our Hotel property assets.

 

 36 
 

 

Asset Impairment

 

We believe that the policies we follow for the valuation of our hotel properties, which constitute the majority of our assets, are our most critical policies. The Financial Accounting Standards Board (“FASB”) has issued authoritative guidance related to the impairment or disposal of long-lived assets, codified in ASC Topic 360-10-35, which we apply to determine when it is necessary to test an asset for recoverability. On an events and circumstances basis, we review the carrying value of our hotel properties. We will record an impairment loss and reduce the carrying value of a property when anticipated undiscounted future cash flows and the current market value of the property do not support its carrying value. In cases where we do not expect to recover the carrying cost of hotel properties held for use, we will reduce the carrying value to the fair value of the hotel, as determined by a current appraisal or other acceptable valuation methods. We did not recognize a hotel properties impairment loss for the nine months ended October 31, 2019 or 2018. As of October 31, 2019, our management does not believe that the carrying values of any of our hotel properties are impaired.

 

Sale of Hotel Assets

 

On August 1, 2015, the Trust finalized and committed to a plan to sell Hotel properties over time. The Trust listed Hotel properties with real estate hotel brokers, Effective October 24, 2018, the Trust sold the Yuma hotel to an unrelated third party for $16.05 million, and on June 2, 2017, the Trust sold its Ontario, California hotel to an unrelated third party for approximately $17.5 million. Management believes that our currently owned Hotels are available at prices that are reasonable in relation to their current fair market value. The Trust believes that the plan to sell these assets will not be withdrawn. At this time, the Trust is unable to predict when, and if, either of its Hotel properties will be sold. The Trust seeks to sell one hotel per year over the next 2-3 years. The Trust continues to list the Tucson Hotel with a local real estate hotel broker. We believe that each of the assets is available at a price that is reasonable in relation to its current fair market value. There have been no other material changes to our basis of presentation since October 31, 2017.

 

Revenue Recognition

 

ASU 2014-09 (Topic 606), “Revenue from Contracts with Customers” is effective for reporting period 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 following sources and are recognized as services are rendered and when collectability is reasonably assured. Amounts received in advance of revenue recognition are considered deferred liabilities.

 

Revenues primarily consist of room rentals, food and beverage sales, management and trademark fees and other miscellaneous revenues from our properties. Revenues are recorded when rooms are occupied and when food and beverage sales are delivered. Management and trademark fees from non-affiliated hotels include a monthly accounting fee and a percentage of hotel room revenues for managing the daily operations of the Hotels and the one hotel owned by affiliates of Mr. Wirth.

 

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.

 

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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.

 

COMPLIANCE WITH CONTINUED LISTING STANDARDS OF NYSE AMERICAN

 

On May 17, 2019, the Trust received a letter from NYSE AMERICAN giving an official notice of noncompliance of the Trust with continued listing standards of NYSE American LLC (the “Exchange”) because the Trust failed to timely file with the Securities and Exchange Commission (the “SEC”) its Annual Report on Form 10-K for the year ended January 31, 2019 (the “Delinquent Report”). This filing delinquency subjects the Trust to the procedures and requirements of Section 1007 of the NYSE American Company Guide. The requisite Form 8-K and associated press release were issued on May 23, 2019, and the Trust filed the annual Form 10-K on June 19, 2019.

 

On July 25, 2019, the Trust received a letter from NYSE AMERICAN giving official notice that the Trust is back in compliance with the NYSE American LLC (the “Exchange”) continued listing standards set forth in Part 10 of the NYSE American Company Guide (“Company Guide”). Specifically, the Trust has resolved the listing deficiency with respect to Sections 134 and 1101 of the Company Guide, referenced in the Exchange’s letter of May 17, 2019

 

NON-GAAP FINANCIAL MEASURES

 

The following non-GAAP presentations of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and funds from operations (“FFO”) are made to assist our investors in evaluating our operating performance.

 

Adjusted EBITDA is defined as earnings before interest expense, amortization of loan costs, interest income, income taxes, depreciation and amortization, and non-controlling interests in the Trust. We present Adjusted EBITDA because we believe these measurements (a) more accurately reflect the ongoing performance of our hotel assets and other investments, (b) provide more useful information to investors as indicators of our ability to meet our future debt payments and working capital requirements, and (c) provide an overall evaluation of our financial condition. Adjusted EBITDA as calculated by us may not be comparable to Adjusted EBITDA reported by other companies that do not define Adjusted EBITDA exactly as we define the term. Adjusted EBITDA does not represent cash generated from operating activities determined in accordance with GAAP and should not be considered as an alternative to (a) GAAP net income or loss as an indication of our financial performance or (b) GAAP cash flows from operating activities as a measure of our liquidity.

 

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A reconciliation of net loss attributable to controlling interests to Adjusted EBITDA for the three and nine months ended October 31, 2019 and 2018 is approximately as follows:

 

   Three Months Ended
October 31,
   Nine Months Ended
October 31,
 
   2019   2018   2019   2018 
Net loss attributable to controlling interests  $(201,000)  $2,900,000   $(1,006,000)  $1,530,000 
Add back:                    
   Depreciation   270,000    209,000    765,000    624,000 
   Interest expense   184,000    101,000    372,000    291,000 
   Taxes   -    (198,000)   -    (408,000)
Less:                    
Interest Income   (62,000)   (34,000)   (66,000)   (95,000)
Adjusted EBITDA  $191,000   $2,978,000   $65,000   $1,942,000 

 

FFO is calculated on the basis defined by the National Association of Real Estate Investment Trusts (“NAREIT”), which is net income (loss) attributable to common shareholders, computed in accordance with GAAP, excluding gains or losses on sales of properties, asset impairment adjustments, and extraordinary items as defined by GAAP, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated joint ventures and non-controlling interests in the operating partnership. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP. The Trust is an unincorporated Ohio real estate investment trust; however, the Trust is not a real estate investment trust for federal taxation purposes. Management uses this measurement to compare itself to REITs with similar depreciable assets. We consider FFO to be an appropriate measure of our ongoing normalized operating performance. We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other companies that either do not define the term in accordance with the current NAREIT definition or interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to (a) GAAP net income or loss as an indication of our financial performance or (b) GAAP cash flows from operating activities as a measure of our liquidity, nor is it indicative of funds available to satisfy our cash needs, including our ability to make cash distributions. However, to facilitate a clear understanding of our historical operating results, we believe that FFO should be considered along with our net income or loss and cash flows reported in the consolidated financial statements.

 

A reconciliation of net loss attributable to controlling interests to FFO for the three and nine months ended October 31, 2019 and 2018:

 

   Three Months Ended
October 31,
   Nine Months Ended
October 31,
 
   2019   2018   2019   2018 
Net loss attributable to controlling interests  $(201,000)  $2,900,000   $(1,006,000)  $1,530,000 
Add back:                    
   Depreciation   270,000    209,000    765,000    624,000 
   Non-controlling interest   49,000    9,159,000    94,000    9,595,000 
Less:                    
   Gain on Disposal of Discontinued Operations   -    (13,323,000)   -    (13,323,000)
FFO  $118,000   $(1,055,000)  $(147,000)  $(1,574,000)

 

IHT Trailing 12 Month Operation Increases

 

Trailing 12 months revenue for the period November 1, 2018 through October 31, 2019 was approximately $6.5 million (including both continuing and discontinued operations). This is a decrease from the prior year which was approximately $12.2 million for the twelve month period November 1, 2017 through October 31, 2018, which included the gains on the sale of our IBC Hospitality Technology segment and the sale of our Yuma Hotel property.

 

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Total 12-month trailing net income for the same 12-month time period was approximately $658,000, a decrease of 89% from approximately $8.3 million for the same 12-month period in the prior year, which included the gain on the sale of the Trust’s Yuma hotel and the IBC technology sector.

 

Non-cash depreciation for the current 12-month trailing period was approximately $987,000 with the 12-month trailing profit before non-cash depreciation totaling approximately $1,645,000.

 

FUTURE POSITIONING

 

In viewing the hotel industry cycles, the Board of Trustees determined that it was appropriate to actively seek buyers for our Hotel properties. We engaged the services of several hotel brokers and began independently advertising our Hotels for sale. We sold the Ontario hotel in June 2017 and the Yuma Hotel in October 2018. We continue to make our Tucson Hotel and Albuquerque Hotel available for sale at market value, on the website www.suitehotelsrealty.com.

 

The table below provides book values, mortgage balances and listed asking price for the Hotels.

 

Hotel Property  Book Value  

Mortgage

Balance

  

Listed Asking

Price

 
Albuquerque  $1,752,371   $-    7,995,000 
Tucson Oracle   7,449,506    4,756,000    16,600,000 
                
   $9,201,877   $4,756,000   $24,595,000 

 

The “Estimated Market / Listed Asking Price” is the amount at which we would sell each of the Hotels and is adjusted to reflect recent hotel sales in the Hotels’ areas of operation and current earnings of each of the Hotels. The listed asking price is not based on appraisals of the properties.

 

We have from time to time listed each of the properties with a local real estate hotel broker who has successfully sold four of our hotel properties and we believe that each of the assets are being marketed at a price that is reasonable in relation to its current fair value. We plan to sell our remaining two Hotel properties within two years, based on feedback received by our local hotel real estate property professional brokers and we have engaged hotel real estate brokers who specialize in the selling/buying hotel real estate properties for the sale of our Tucson and Albuquerque Hotel properties. We can provide no assurance that we will be able to sell either or both of the Hotel properties on terms favorable to us or within our expected time frame, or at all.

 

It is feasible, but we may be unable to realize the listed asking price for the individual Hotel properties or to sell them at all. However, we believe that the listed values are reasonable based on local market conditions, comparable sales, and strong upturns in occupancy, rates, and profits per hotel. Changes in market conditions have in part resulted, and may in the future result, in our changing one or all of the listed asking prices.

 

Our long-term strategic plan is to obtain the full benefit of our real estate equity and to pursue a merger with another company, likely a private larger entity that seeks to go public or list on the NYSE AMERICAN Exchange.

 

SHARE REPURCHASE PROGRAM

 

For information on the Trust’s Share Repurchase Program, see Part II, Item 5. “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” of our most recent 10-K Annual Report filed on June 19, 2019.

 

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OFF-BALANCE SHEET ARRANGEMENTS

 

Other than lease commitments and legal contingencies incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities. We do not have any majority-owned or controlled subsidiaries that are not included in our consolidated financial statements.

 

SEASONALITY

 

The Hotels’ operations historically have been somewhat seasonal. The Tucson Arizona hotel experience 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 New Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the Trust’s hotel business.

 

The seasonal nature of the Trust’s business increases its vulnerability to risks such as labor force shortages and cash flow issues. Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, data breach, regional economic downturn or poor weather conditions should at either of its two hotels, the adverse impact to the Trust’s revenues and profit could be significant.

 

INFLATION

 

We rely entirely on the performance of the Hotels and InnSuites Hotels’ ability to increase revenue to keep pace with inflation. Operators of hotels in general and InnSuites Hotels in particular can change room rates quickly, but competitive pressures may limit InnSuites Hotels’ ability to raise rates as fast as or faster than inflation

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of October 31, 2019.

 

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

 41 
 

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that we determined to be material weaknesses, as follows:

 

  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
     
  We have not properly implemented comprehensive entity-level internal controls;
     
  We have not properly implemented adequate system and manual controls;
     
  We do not have sufficient segregation of duties;
     
  We lack sufficient personnel with appropriate training and expertise in accounting principles generally accepted in the United States; and
     
  We had not implemented appropriate information technology controls related to access rights for certain financial spreadsheets that are relevant to the preparation of the consolidated financial statements and our system of internal control over financial reporting.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Assessment of Internal Control over Financial Reporting

 

Our management assessed the effectiveness of our internal control over financial reporting as of January 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting was not effective as of January 31, 2019. Current year efforts are being made to remediate some, if not all, of these material weaknesses.

 

Management’s Remediation Initiatives

 

In an effort to remediate the identified material weakness and other deficiencies and enhance the Company’s internal control over financial reporting, the Company made attempts to increase its technical accounting expertise by hiring a new Chief Financial Officer and Corporate Controller with public company reporting experience to assist with the Company’s technical accounting and internal control issues. The departure in December 2018 of the newly hired Chief Financial Officer, who was not replaced, has made this attempt non-effective.

 

 42 
 

 

We need to take appropriate and reasonable steps to make necessary improvements to our internal control over financial reporting, which will require management to support the hiring of sufficient personnel with appropriate training and expertise in accounting principles generally accepted in the United States. This increase to staffing will allow us to make the necessary improvements, including:

 

  Continuing to improve the control environment through (i) being staffed with sufficient number of personnel to address segregation of duties issues, ineffective controls and to perform control monitoring activities, (ii) increasing the level of GAAP knowledge by retaining additional technical accountants, (iii) implementing formal process to account for non-standard transactions, and (iv) implementing and formalizing management oversight of financial reporting at regular intervals;
     
  Continuing to update the documentation of our internal control processes, including implementing formal risk assessment processes and entity level controls;
     
  Implementing control activities that address relevant risks and assure that all transactions are subject to such control activities; Ensure systems that impact financial information and disclosures have effective information technology controls;
     
  Implementing plan to increase oversight and review of ad hoc spreadsheets while also working to reduce their use; and
     
  We are in the process of further enhancing the supervisory procedures to include additional levels of analysis and quality control reviews within the accounting and financial reporting functions.

 

We believe that the remediation measures described above will strengthen our internal control over financial reporting and remediate the material weaknesses we have identified. We expect these remediation efforts will be implemented throughout fiscal year 2020 and 2021.

 

Despite the material weaknesses reported above, our management believes that our financial statements included in this Quarterly Report on Form 10-Q for the nine months ended October 31, 2019 fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the nine months ended October 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not required for smaller reporting companies.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On January 2, 2001, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, for the purchase of up to 250,000 Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions. On September 10, 2002, August 18, 2005 and September 10, 2007, the Board of Trustees approved the purchase of up to 350,000 additional Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Additionally, on January 5, 2009, September 15, 2009 and January 31, 2010, the Board of Trustees approved the purchase of up to 300,000, 250,000 and 350,000, respectively, additional Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for future acquisitions and financings and/or for awards granted under the Trusts’ equity compensation plans/programs. During the nine months ended October 31, 2019, the Trust acquired 65,142 Shares of Beneficial Interest in open market transactions at an average price of $1.68 per share. 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 982,101 Partnership units and/or Shares of Beneficial Interest pursuant to the publicly announced share repurchase program, which has no expiration date. On June 25, 2019, the Trust’s Board of Trustee’s authorized the repurchase of up to 750,000 shares and units in addition to the above amounts previously authorized.

 

       Issuer Purchases of Equity Securities 
Period  Total Number
of Shares
Purchased
   Average
Price
Paid per
Share
   Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
   Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
 
February 1 - February 28, 2019   10,449   $1.86    235,251    739,551 
March 1 - March 31, 2019   7,022   $1.88    242,273    732,529 
April 1 - April 30, 2019   15,261   $1.67    257,534    717,268 
May 1 - May 31, 2019   4,034   $1.55    261,568    1,013,234 
June 1 - June 31, 2019   7,892   $1.61    269,460    1,005,342 
July 1 - July 31, 2019   20,484   $1.58    289,944    984,858 
August 1 - August 31, 2019   4,587   $1.67    294,531    980,271 
September 1 - September 30, 2019   2,288   $1.78    296,819    977,983 
October 1 - October 31, 2019   1,426   $1.78    298,245    976,557 
Total   73,385                

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

Exhibit No.   Exhibit
     
31.1   Section 302 Certification by Chief Executive Officer
     
31.2   Section 302 Certification by Chief Financial Officer
     
32.1 *   Section 906 Certification of Principal Executive Officer and Principal Financial Officer
     
101   XBRL Exhibits
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Schema Document
     
101.CAL   XBRL Calculation Linkbase Document
     
101.LAB   XBRL Labels Linkbase Document
     
101.PRE   XBRL Presentation Linkbase Document
     
101.DEF   XBRL Definition Linkbase Document

 

+ Management contract or compensation plan or arrangement.

 

* Furnished, note filed.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  INNSUITES HOSPITALITY TRUST
   
Date: December 26, 2019 /s/ James F. Wirth
  James F. Wirth
  Chairman and Chief Executive Officer
  (Principal Executive Officer)
   
Date: December 26, 2019 /s/ Craig S. Miller
  Craig S. Miller
 

Craig Miller, Controller and Chief Accounting Officer

(Principal Financial and Accounting Officer)

 

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