Attached files

file filename
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 JULY 31, 2017

 

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]

 

Number of outstanding Shares of Beneficial Interest, without par value, as of September 14, 2017: 9,782,074

 

 

 

 
 

 

PART I

FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   JULY 31, 2017   JANUARY 31, 2017 
   (UNAUDITED)     
ASSETS          
Current Assets:          
Cash and Cash Equivalents  $7,476,881   $478,835 
Restricted cash   374,069    - 
Accounts Receivable, including $12,035 and $1,783 from related parties and net of Allowance for Doubtful Accounts of $10,041 and $51,948 as of July 31, 2017 and January 31, 2017, respectively   1,184,957    626,174 
Advances to Affiliates - Related Party   783,292    - 
Notes Receivable - Related Party   641,993    - 
Prepaid Expenses and Other Current Assets   153,645    130,831 
Current Assets of Discontinued Operations   131,189    229,127 
Total Current Assets   10,746,026    1,464,967 
Property, Plant and Equipment, net   14,476,568    13,694,268 
Intangible Assets, net   399,500    433,000 
Goodwill   500,000    500,000 
Noncurrent assets of Discontinued Operations   -    6,080,597 
TOTAL ASSETS  $26,122,094   $22,172,832 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
           
LIABILITIES          
Current Liabilities:          
Accounts Payable and Accrued Expenses  $2,702,044   $1,763,498 
Notes Payable - Related Party   -    145,000 
Lending From Affiliates - Related Party   -    379,167 
Current Portion of Mortgage Notes Payable, net of Discount of $2,628 and $2,966 as of July 31, 2017 and January 31, 2017, respectively   248,156    320,193 
Current Portion of Notes Payable to Banks, net of Discount of $12,643 and $39,796 as of July 31, 2017 and January 31, 2017, respectively   334,890    646,376 
Current Portion of Other Notes Payable   1,106,160    565,657 
Current Liabilities of Discontinued Operations   20,111    585,609 
Total Current Liabilities   4,411,361    4,405,500 
Mortgage Notes Payable, net of discount of $15,182 and $17,671 as of July 31, 2017 and January 31, 2017, respectively   9,620,396    7,755,564 
Notes Payable to Banks, net of discount of $6,741 and $2,317 as of July 31, 2017 and January 31, 2017, respectively   873,341    1,331,270 
Other Notes Payable   925,155    7,411 
Noncurrent Liabilities of Discontinued Operations   -    5,047,838 
TOTAL LIABILITIES   15,830,253    18,547,583 
           
COMMITMENTS AND CONTINGENCIES (SEE NOTE 9)          
           
SHAREHOLDERS' EQUITY          
Shares of Beneficial Interest, without par value, unlimited authorization; 18,548,805 and 18,292,601 shares issued and 9,782,425 and 9,665,328 shares outstanding at July 31, 2017 and January 31, 2017, respectively   21,733,557    16,794,132 
Treasury Stock, 8,766,380 and 8,645,573 shares held at cost at July 31, 2017 and January 31, 2017, respectively   (12,609,129)   (12,362,952)
TOTAL TRUST SHAREHOLDERS' EQUITY   9,124,428    4,431,180 
NON-CONTROLLING INTEREST   1,167,413    (805,931)
TOTAL EQUITY   10,291,841    3,625,249 
TOTAL LIABILITIES AND EQUITY  $26,122,094   $22,172,832 

 

See accompanying notes to unaudited
condensed consolidated financial statements

 

2
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    FOR THE SIX MONTHS ENDED  
    JULY 31,  
    2017     2016  
REVENUE                
Room   $ 4,752,209     $ 4,137,313  
Food and Beverage     26,015       17,720  
Management and Trademark Fees     118,423       138,301  
Reservation and Convention     519,978       377,907  
Other     42,257       34,838  
TOTAL REVENUE     5,458,882       4,706,079  
                 
OPERATING EXPENSES                
Room     1,359,133       1,192,042  
Food and Beverage     35,033       64,754  
Telecommunications     20,044       8,245  
General and Administrative     2,023,727       1,961,777  
Sales and Marketing     910,146       548,006  
Repairs and Maintenance     327,942       326,891  
Hospitality     323,965       271,297  
Utilities     281,219       287,564  
Depreciation     604,680       161,420  
Intangible Amortization     33,500       33,500  
Real Estate and Personal Property Taxes, Insurance and Ground Rent     244,160       259,823  
Other     -       7,829  
TOTAL OPERATING EXPENSES     6,163,549       5,123,148  
OPERATING LOSS     (704,667 )     (417,069 )
Interest Income     1,722       1,263  
Interest Income on Advances to Affiliates - Related Party     1,344       10,520  
TOTAL OTHER INCOME     3,066       11,783  
Interest on Mortgage Notes Payable     235,827       197,863  
Interest on Notes Payable to Banks     18,319       14,059  
Interest on Other Notes Payable     25,630       (4,518 )
Interest on Advances to Affiliates - Related Party     -       -  
TOTAL INTEREST EXPENSE     279,776       207,404  
CONSOLIDATED NET LOSS BEFORE INCOME TAX PROVISION, DISCONTINUED OPERATIONS AND GAIN ON DISPOSAL OF ASSETS     (981,377 )     (612,690 )
Income Tax Provision     (330,000 )     -  
CONSOLIDATED NET LOSS FROM CONTINUING OPERATIONS   $ (1,311,377 )   $ (612,690 )
Discontinued Operations, Net of Non-Controlling Interest   $ (577,272 )   $ 360,010  
Gain on Disposal of Discontinued Operations   $ 11,445,879     $ -  
CONSOLIDATED NET INCOME FROM DISCONTINUED OPERATIONS   $ 10,868,607     $ 360,010  
CONSOLIDATED NET INCOME (LOSS)   $ 9,557,230     $ (252,680 )
LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST   $ 136,236     $ 311,673  
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTERESTS   $ 9,420,994     $ (564,353 )
NET LOSS PER SHARE FROM CONTINUING OPERATIONS – BASIC   $ (0.13 )   $ (0.07 )
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS – BASIC   $ 1.10     $ 0.04  
NET INCOME (LOSS) PER SHARE PER SHARE TOTAL - BASIC   $ 0.97     $ (0.03 )
NET LOSS PER SHARE FROM CONTINUING OPERATIONS –DILUTED   $ (0.13 )   $ (0.07 )
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS –DILUTED   $ 1.10     $ 0.04  
NET INCOME (LOSS) PER SHARE PER SHARE TOTAL - DILUTED   $ 0.97     $ (0.03 )
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC     9,880,780       8,812,748  
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED     13,307,360       12,496,817  

 

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  
    JULY 31,  
    2017     2016  
REVENUE                
Room   $ 2,041,309     $ 1,763,179  
Food and Beverage     15,048       10,091  
Management and Trademark Fees     38,139       61,308  
Reservation and Convention     289,965       174,363  
Other     20,543       19,385  
TOTAL REVENUE     2,405,004       2,028,326  
                 
OPERATING EXPENSES                
Room     679,902       566,510  
Food and Beverage     16,818       27,853  
Telecommunications     10,245       4,732  
General and Administrative     1,063,031       939,174  
Sales and Marketing     458,483       281,357  
Repairs and Maintenance     194,020       154,567  
Hospitality     163,221       121,277  
Utilities     160,715       141,109  
Depreciation     316,421       27,766  
Intangible Amortization     16,750       16,750  
Real Estate and Personal Property Taxes, Insurance and Ground Rent     117,100       110,795  
TOTAL OPERATING EXPENSES     3,196,706       2,391,890  
OPERATING LOSS     (791,702 )     (363,564 )
Interest Income     1,717       356  
TOTAL OTHER INCOME     1,717       356  
Interest on Mortgage Notes Payable     127,045       100,295  
Interest on Notes Payable to Banks     2,375       6,901  
Interest on Other Notes Payable     8,753       (5,929 )
TOTAL INTEREST EXPENSE     138,173       101,267  
CONSOLIDATED NET LOSS BEFORE INCOME TAX PROVISION, DISCONTINUED OPERATIONS AND GAIN ON DISPOSAL OF ASSETS     (928,158 )     (464,475 )
Income Tax Provision     (270,000 )     -  
CONSOLIDATED NET LOSS FROM CONTINUING OPERATIONS   $ (1,198,158 )   $ (464,475 )
Discontinued Operations, Net of Non-Controlling Interest   $ (748,543 )   $ 194,558  
Gain on Disposal of Discontinued Operations   $ 11,445,879     $ -  
CONSOLIDATED NET INCOME FROM DISCONTINUED OPERATIONS   $ 10,697,337     $ 194,558  
CONSOLIDATED NET INCOME   $ 9,499,179     $ (269,917 )
LESS: NET (LOSS) INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST   $ (128,821 )   $ 92,782  
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTERESTS   $ 9,628,000     $ (362,699 )
NET LOSS PER SHARE FROM CONTINUING OPERATIONS – BASIC   $ (0.12 )   $ (0.05 )
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS – BASIC   $ 1.08     $ 0.02  
NET INCOME (LOSS) PER SHARE PER SHARE TOTAL - BASIC   $ 0.96     $ (0.03 )
NET LOSS PER SHARE FROM CONTINUING OPERATIONS –DILUTED   $ (0.12 )   $ (0.04 )
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS –DILUTED   $ 1.08     $ 0.02  
NET INCOME (LOSS) PER SHARE PER SHARE TOTAL - DILUTED   $ 0.96     $ (0.02 )
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC     9,754,810       8,809,485  
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED     13,244,274       12,493,554  

 

See accompanying notes to unaudited
condensed consolidated financial statements

 

4
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JULY 31, 2017

 

   Total Equity 
   Shares of Beneficial Interest   Treasury Stock   Trust
Shareholders'
   Non-Controlling     
   Shares   Amount   Shares   Amount   Equity   Interest   Amount 
Balance, January 31, 2017   9,665,328   $16,794,132    8,645,573   $(12,362,952)  $4,431,180   $(805,931)  $3,625,249 
Net Income   -    9,420,994    -    -    9,420,994    136,236    9,557,230 
Dividends   -    (96,353)   -    -    (96,353)        (96,353)
Purchase of Treasury Stock   (120,807)   -    120,807    (246,177)   (246,177)   -    (246,177)
Shares of Beneficial Interest Issued for Services Rendered   24,000    25,920    -    -    25,920    -    25,920 
Sale of Shares of Benficial Interest   213,904    400,000    -    -    400,000    -    400,000 
Sales of Ownership Interests in Subsidiary, net   -    -    -    -    -    2,316,768    2,316,768 
Distribution to Non-Controlling Interests   -    -    -    -    -    (5,290,796)   (5,290,796)
Reallocation of Non-Controlling Interests and Other   -    (4,811,136)   -    -    (4,811,136)   4,811,136    - 
Balance, July 31, 2017   9,782,425   $21,733,557    8,766,380   $(12,609,129)  $9,124,428   $1,167,413   $10,291,841 

 

See accompanying notes to unaudited
condensed consolidated financial statements

 

5
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   FOR THE SIX MONTHS ENDED 
   JULY 31, 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES          
Consolidated Net Income (Loss)  $9,557,230   $(252,680)
Adjustments to Reconcile Consolidated Net Income (Loss) to Net Cash Used In Operating Activities:          
Stock-Based Compensation   25,920    71,346 
Recovery of Uncollectible Receivables   (43,679)   (10,297)
Depreciation   782,504    161,420 
Amortization of Intangibles   33,500    33,500 
Amortization of Debt Discounts and Deferred Financing Fees   63,822    5,164 
Gain on Disposal of Assets   (11,445,879)   - 
Changes in Assets and Liabilities:          
Accounts Receivable   (432,607)   (665,435)
Prepaid Expenses and Other Assets   20,670    (51,099)
Accounts Payable and Accrued Expenses   558,256    (37,677)
NET CASH USED IN OPERATING ACTIVITIES   (880,264)   (745,758)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Improvements and Additions to Hotel Properties   (1,556,944)   (1,253,058)
Cash Received From Sale of Hotel Property   9,603,610    - 
Lendings on Advances to Affiliates - Related Party   (1,729,000)   (211,150)
Collections on Advances to Affiliates - Related Party   566,541    745,000 
NET CASH PROVIDED BY INVESTING ACTIVITIES   6,884,207    (719,208)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Principal Payments on Mortgage Notes Payable   (566,337)   (240,023)
Borrowings on Mortgage Notes Payable   5,000,000    - 
Payments on Notes Payable to Banks, net of financing costs   (2,462,144)   (164,547)
Borrowings on Notes Payable to Banks, net of financing costs   1,670,000    358,050 
Payments on Line of Credit - Related Party   (775,000)   (49,356)
Borrowings on Line of Credit - Related Party   632,384    65,000 
Payments on Notes Payable - Related Party   (706,761)   (693,113)
Borrowings on Notes Payable - Related Party   62,384    683,230 
Payments on Other Notes Payable   (25,553)   (33,240)
Borrowings on Other Notes Payable   1,483,800    55,000 
Payment of Dividends   (96,353)   - 
Proceeds from Sale of Non-Controlling Ownership Interest in Subsidiary, net   2,316,768    75,000 
Sale of Shares of Beneficial Interest   400,000    - 
Distributions to Non-Controlling Interest Holders   (5,290,796)   (266,158)
Repurchase of Treasury Stock   (246,177)   (19,676)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   1,396,215    (229,833)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   7,400,157    (1,694,799)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   568,396    1,957,687 
CASH AND CASH EQUIVALENTS AT END OF PERIOD (i)  $7,968,553   $262,888 

 

See accompanying notes to unaudited
condensed consolidated financial statements

 

(i) Including $117,603 and $237,766 of cash included in discontinued operations as of July 31, 2017 & July 31, 2016, respectively.

 

6
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JULY 31, 2017 AND JANUARY 31, 2017

AND FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2017 AND 2016

 

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

As of July 31, 2017, InnSuites Hospitality Trust (the “Trust”, “we” or “our”) owns interests directly in and through a partnership interest, three hotels with an aggregate of 424 suites in Arizona and New Mexico (the “Hotels”). The Hotels operate under the trade name “InnSuites Hotels.”

 

Full service hotels often contain upscale full-service facilities with a large volume of full service accommodations, on-site full service restaurant(s), and a variety of on-site amenities such as swimming pools, a health club, children’s activities, ballrooms and on-site conference facilities. Moderate or limited service hotels are small to medium-sized hotel establishments that offer a limited amount of on-site amenities. Most moderate or limited service establishments may still offer full service accommodations but lack leisure amenities such as an on-site restaurant or a swimming pool. We consider our Tucson, Arizona hotel and our hotel located in Albuquerque, New Mexico to be moderate or limited service establishments. Our properties are limited service hotels.

 

The Trust is the sole general partner of RRF Limited Partnership, a Delaware limited partnership (the “Partnership”), and owned a 74.23% and 72.11% interest in the Partnership as of July 31, 2017 and January 31, 2017, respectively. The Trust’s weighted average ownership for the six month period ended July 31, 2017 and 2016 was 72.35% and 72.11%, respectively. As of July 31, 2017, the Partnership owned a 51.01% interest in an InnSuites® hotel located in Tucson, Arizona. As of July 31, 2017, the Trust owns a direct 16.36% interest in a Yuma, Arizona hotel property (see Note 6), and a direct 37.80% interest in an InnSuites® hotel located in Albuquerque, New Mexico.

 

Under certain management agreements, InnSuites Hotels Inc., our subsidiary, manages the Hotels’ daily operations. The Trust also provides the use of the “InnSuites” trademark to the Hotels through wholly-owned InnSuites Hotels. All such expenses and reimbursements between the Trust, InnSuites Hotels and the Partnership have been eliminated in consolidation.

 

InnDependent Boutique Collection (“IBC Hotels” or “IBC Developments”), a wholly owned subsidiary of InnSuites Hospitality Trust, has a network of approximately 6,300 unrelated hotel properties, of which over 1,800 hotel properties are exclusive and provides revenue generating services and cost savings solutions to independent boutique hotels. Included in the 1,800 exclusive hotel properties are approximately 500 exclusive hotels obtained when IBC Hotels purchased International Vacation Hotels (“IVH”) on January 8, 2016.

 

On August 1, 2015, the Trust finalized and committed to a plan to sell all the hotel properties. As of May 1, 2016, the Trust listed all the Hotel properties with a local real estate hotel broker, and management believed that each of the assets was being marketed at a price that was reasonable in relation to its current fair value. The Trust believes that the plan to sell these assets will not be withdrawn. Through the Trust’s Form 10-Q for the quarter ended July 31, 2016 filed with the SEC on September 14, 2016, the Trust classified all the Hotel properties as Assets Held for Sale. As of October 31, 2016, the Trust has decided to reclassify these assets back into operations as many of these assets have been marketed for sale for more than one year. At this time, the Trust is unable to predict when, and if, any of these Hotel properties will be sold. The Trust continues to list these properties with local real estate hotel brokers, and believes that each of the assets is being marketed at a price that is reasonable in relation to its current fair value. On June 2, 2017, the Ontario Hospitality Properties LLLP was sold to an unrelated third party for $17,500,000 (see Note 11).

 

7
 

 

PARTNERSHIP AGREEMENT

 

The Partnership Agreement of the Partnership provides for the issuance of two classes of Limited Partnership units, Class A and Class B. Class A and Class B Partnership units are identical in all respects, except that each Class A Partnership unit is convertible into one newly-issued Share of Beneficial Interest of the Trust at any time at the option of the particular limited partner. The Class B Partnership units may only become convertible, each into one newly-issued Share of Beneficial Interest of the Trust, with the approval of the Board of Trustees, in its sole discretion. On July 31, 2017 and January 31, 2017, 284,376 and 276,131 Class A Partnership units were issued and outstanding, representing 2.21% and 2.09% of the total Partnership units, respectively. Additionally, as of July 31, 2017 and January 31, 2017, 3,024,038 and 3,407,938 Class B Partnership units were outstanding to James Wirth, the Trust’s Chairman and Chief Executive Officer, and Mr. Wirth’s affiliates, respectively. If all of the Class A and B Partnership units were converted on July 31, 2017 and January 31, 2017, the limited partners in the Partnership would receive 3,308,414 and 3,684,069 Shares of Beneficial Interest of the Trust, respectively. As of July 31, 2017 and January 31, 2017, the Trust owns 9,527,448 general partner units in the Partnership, representing 74.23% and 72.11% of the total Partnership units, respectively.

 

LIQUIDITY

 

Our principal source of cash to meet our cash requirements, including distributions to our shareholders, is our share of the Partnership’s cash flow, quarterly distributions from the Albuquerque, New Mexico and Yuma, Arizona properties and more recently, sales of non-controlling interests in certain of our Hotels. The Partnership’s principal source of cash flow is quarterly distributions from the Tucson, Arizona property. Our Ontario, California property was sold on June 2, 2017 and will no longer provide quarterly distributions. However, the Trust received net proceeds of approximately $9.6 million in the sale. Our liquidity, including our ability to make distributions to our shareholders, will depend upon our ability and the Partnership’s ability to generate sufficient cash flow from hotel operations and sales of non-controlling interests and to service our debt.

 

As of July 31, 2017 and January 31, 2017, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount receivable of approximately $642,000 and amount payable of $145,000, respectively. The Demand/Revolving Line of Credit/Promissory Note accrued interest at 7.0% per annum and requires interest only payments. The Demand/Revolving Line of Credit/Promissory Note has a maximum borrowing capacity to $1,000,000, which is available through June 30, 2019. As of September 7, 2017, the outstanding net balance receivable on the Demand/Revolving Line of Credit/Promissory Note was approximately $942,000.

 

As of July 31, 2017 and January 31, 2017, the Trust had an available Advances to Affiliate credit facility with a maximum borrowing capacity of $500,000 for a total maximum borrowing capacity of $1,000,000, which is available through June 30, 2019. As of July 31, 2017 and January 31, 2017, the Trust had an amount receivable of approximately $783,000, and account payable of approximately $379,000, respectively. As of September 7, 2017, the outstanding net balance payable on the available Advances to Affiliate credit facilities was approximately $883,000.

 

On August 24, 2017, the Trust entered into a Promissory Note Agreement with RepublicBankAZ, N.A. (“Republic Bank LOC”) for a $150,000 revolving line of credit with a maturity date of August 24, 2018. The IHT Agreement has interest only payments due monthly and the variable interest rate is 1.50% above the highest prime rate as published in the Wall Street Journal. No prepayment penalty exists.

 

With approximately $7,968,000 of cash, as of July 31, 2017, 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 availability of the $150,000 Republic Bank LOC, we believe that we will have enough cash on hand to meet all of our financial obligations as they become due for at least the next year. In addition, our management is analyzing other strategic options available to us, including the refinancing of another property or raising additional funds through additional non-controlling interest sales; however, such transactions may not be available on terms that are favorable to us, or at all.

 

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

 

8
 

 

BASIS OF PRESENTATION

 

The condensed consolidated balance sheet as of January 31, 2017, which has been derived from audited consolidated financial statements, and these unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information related to the Trust’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in the Trust’s annual consolidated financial statements for the year ended January 31, 2017, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with the Trust’s Form 10-K for the year ended January 31, 2017.

 

As sole general partner of the Partnership, the Trust exercises unilateral control over the Partnership, and the Trust owns all of the issued and outstanding classes of shares of InnSuites Hotels Inc. Therefore, the financial statements of the Partnership and InnSuites Hotels Inc. are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated.

 

Under Accounting Standards Codification (“ASC”) Topic 810-10-25, Albuquerque Suite Hospitality, LLC and Yuma Hospitality Properties, LLLP have been determined to be a variable interest entity with the Partnership as the primary beneficiary (see Note 7 – “Variable Interest Entity”). Therefore, the financial statements of Albuquerque Suite Hospitality, LLC and Yuma Hospitality Properties, LLLP are consolidated with the Partnership and the Trust, and all significant intercompany transactions and balances have been eliminated.

 

SEASONALITY OF THE HOTEL BUSINESS

 

The Hotels’ operations historically have been somewhat seasonal. The two southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those two southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust’s quarterly revenues. The hotel located in New Mexico historically experiences its most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the Trust’s hotel business.

 

The seasonal nature of the Trust’s business increases its vulnerability to risks such as labor force shortages and cash flow issues. Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, data breach, regional economic downturn or poor weather conditions should occur during the first or fourth fiscal quarters, the adverse impact to the Trust’s revenues could likely be greater as a result of its southern Arizona seasonal business.

 

RECENTLY ISSUED ACCOUNTING GUIDANCE

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). Under generally accepted accounting principles (“GAAP”), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the Liquidation Basis of Accounting. Even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in ASU 2014-15 require additional disclosure of information about the relevant conditions and events. The amendments in ASU 2014-15 are effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Trust has adopted this guidance on its consolidated financial statements and we believe no material impact exists at this time.

 

9
 

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” a new standard which simplifies the accounting for share-based payment transactions. This guidance requires that excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the Consolidated Statements of Operations rather than additional paid-in capital. Additionally, the excess tax benefits will be classified along with other income tax cash flows as an operating activity, rather than a financing activity, on the Statement of Cash Flows. Further, the update allows an entity to make a policy election to recognize forfeitures as they occur or estimate the number of awards expected to be forfeited. It will be effective for us beginning in 2018 and should be applied prospectively, with certain cumulative effect adjustments. Early adoption is permitted. We are currently assessing the impact that this standard will have on our consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosures of financial instruments including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. ASU 2016-01 will become effective for the Trust for the fiscal year ending January 31, 2018. The Trust is currently evaluating the guidance to determine the potential impact of this standard on its financial condition, results of operations, cash flows and financial statement disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Trust is currently evaluating the impact of the adoption of ASU 2016-02 on the Trust’s consolidated financial statements.

 

The FASB issued the following accounting standard updates related to Topic 606, Revenue Contracts with Customers:

 

● In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) No. 2014-09. “Revenue from Contracts with Customers.” This new standard will replace the existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is the recognition of revenue for the transfer of goods and services equal to the amount an entity expects to receive for those goods and services. This ASU requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates and changes in those estimates. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” that delayed the effective date of ASU 2014-09 by one year to January 1, 2018, as the Trust’s annual reporting period is after December 15, 2017.

 

The Trust has continued to analyze the impact of the new standard on its financial results based on an inventory of the Trust’s current Contracts with customers. The Trust has obtained an understanding of the new standard and currently believes that it will retain much of the same accounting treatment as used to recognized revenue under current standards.

 

The Trust continues to evaluate the impact of ASU No. 2014-09 on our financial results and prepare for the adoption of the standard on February 1, 2018, including readying its internal processes and control environment for new requirements, particularly around enhanced disclosures, under the new standard. The standard allows for both retrospective and modified retrospective methods of adoption. The Trust is in the process of determining the method of adoption it will elect and the impact on our consolidated financial statements and footnote disclosures, and will provide enhanced disclosures as we continue our assessment.

 

10
 

 

● ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) in May 2014. ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.

 

● ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”) in March 2016. ASU 2016-08 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations.

 

● ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”) in April 2016. ASU 2016-10 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.

 

● ASU No. 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)” (“ASU 2016-11”) in May 2016. ASU 2016-11 rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 EITF meeting. The SEC Staff is rescinding SEC Staff Observer comments that are codified in Topic 605 and Topic 932, effective upon adoption of Topic 606.

 

● ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”) in May 2016. ASU 2016-12 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance.

 

● ASU No. 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties that Are under Common Control (ASU 2016-17”) in October 2016. ASU 2016-17 amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiation of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. ASU 2017-04 is effective for public companies that file with the SEC for annual or any interim beginning after December 15, 2017. The Trust has adopted this ASU for the fiscal year ending January 31, 2017 and evaluated the impact of the adoption of this guidance on its consolidated financial statements and we believe no material impact exists at this time.

 

● ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) in January 2017. ASU 2017-04 allows companies to measure goodwill impairment as the excess of the reporting unit’s carrying value over its fair value. ASU 2017-04 is effective for public companies that file with the SEC for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Trust is in the process of determining the impact on our consolidated financial statements and footnote disclosures, and will provide enhanced disclosures as we continue our assessment.

 

These ASUs will become effective for the Trust beginning interim period February 1, 2018.

 

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.

 

11
 

 

The Trust’s operations are affected by numerous factors, including the economy, competition in the hotel industry and the effect of the economy on the travel and hospitality industries. The Trust cannot predict if any of the above items will have a significant impact in the future, nor can it predict what impact, if any, the occurrence of these or other events might have on the Trust’s operations and cash flows. Significant estimates and assumptions made by management include, but are not limited to, the estimated useful lives of long-lived assets and estimates of future cash flows used to test a long-lived asset for recoverability, the fair values of the long-lived assets, collections of receivables and valuation of stock based compensation.

 

PROPERTY, PLANT AND EQUIPMENT AND HOTEL PROPERTIES

 

Furniture, fixtures, building improvements and hotel properties are stated at cost and are depreciated using the straight-line method over estimated lives ranging up to 40 years for buildings and 3 to 10 years for furniture and equipment.

 

Management applies guidance ASC 360-10-35, to determine when it is required to test an asset for recoverability of its carrying value and whether an impairment exists. Under ASC 360-10-35, the Trust is required to test a long-lived asset for impairment when there is an indicator of impairment. Impairment indicators may include, but are not limited to, a drop in the performance of a long-lived asset, a decline in the hospitality industry or a decline in the economy. If an indicator of potential impairment is present, then an assessment is performed of whether the carrying amount of an asset exceeds its estimated undiscounted future cash flows over its estimated remaining life.

 

If the estimated undiscounted future cash flows over the asset’s estimated remaining life are greater than the asset’s carrying value, no impairment is recognized; however, if the carrying value of the asset exceeds the estimated undiscounted future cash flows, then the Trust would recognize an impairment expense to the extent the asset’s carrying value exceeds its fair value, if any. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are analyzed on a property-specific basis independent of the cash flows of other groups of assets. Evaluation of future cash flows is based on historical experience and other factors, including certain economic conditions and committed future bookings. Management has determined that no impairment of long-lived assets existed during the Trust’s fiscal quarters and six months ended July 31, 2017 and 2016.

 

Restricted Cash

 

Restricted cash consists of amounts held in reserve by lenders to find capital improvements to the properties.

 

REVENUE RECOGNITION

 

Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” summarizes the SEC’s views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 104 establishes the SEC’s view that it is not appropriate to recognize revenue until all of the following criteria are met: persuasive evidence that an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. Further, SAB No. 104 requires that both title and the risks and rewards of ownership be transferred to the buyer before revenue can be recognized. We believe that our revenue recognition policies as described below are in compliance with SAB No. 104.

 

Revenues are primarily derived from the following sources and are recognized as services are rendered and when collectability is reasonably assured. Amounts received in advance of revenue recognition are considered deferred liabilities.

 

Revenues primarily consist of room rentals, food and beverage sales, management and trademark fees and other miscellaneous revenues from our properties. Revenues are recorded when rooms are occupied and when food and beverage sales are delivered. Management and trademark fees from hotels include a monthly accounting fee and a percentage of hotel room revenues for managing the daily operations of the Hotels and the two hotels owned by affiliates of Mr. Wirth. IBC Development revenues are recognized after services are rendered by the IBC member hotel.

 

12
 

 

We are required to collect certain taxes and fees from customers on behalf of government agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and fees and, therefore, they are not included in revenues. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.

 

Based on our policy, we recognize revenue when we believe that persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and the collectability of our revenues are reasonably assured.

 

INCOME PER SHARE

 

Basic and diluted income (loss) per Share of Beneficial Interest is computed based on the weighted-average number of Shares of Beneficial Interest and potentially dilutive securities outstanding during the period. Dilutive securities are limited to the Class A and Class B units of the Partnership, which are convertible into 3,308,414 Shares of the Beneficial Interest, as discussed in Note 1.

 

For the periods ended July 31, 2017 and 2016, there were Class A and Class B Partnership units outstanding, which are convertible into Shares of Beneficial Interest of the Trust. Assuming conversion at the beginning of each period, the aggregate weighted-average of these Shares of Beneficial Interest would have been 3,308,414 and 3,684,069 in addition to the basic shares outstanding for the periods ended July 31, 2017 and 2016, respectively. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B Partnership units were dilutive during the periods ended July 31, 2017 and 2016, and are included in the calculation of diluted loss per share for these periods.

 

SEGMENT REPORTING

 

The Trust determined that its operations are comprised of two reportable segments, a Hotel Operations & Corporate Overhead segment that has ownership interest in three hotel properties with an aggregate of 424 suites in Arizona and New Mexico, and the IBC Developments segment serving 6,300 unrelated hotel properties. The Trust has a concentration of assets in the southwest United States and the southern Arizona market. Consistent with the change in reportable segments, the Trust revised its prior period financial information for the segment structure. Historical financial information presented in this Form 10-Q reflects this change. On an overall basis, the Trust has elected to only put the costs directly attributable to the IBC Developments in that segment. Included in these costs are sales, marketing and technology development costs.

 

IBC Hotels was formed during the fiscal year ended January 31, 2014. IBC Hotels charges a 10% - 20% booking fee which, we believe, increases the independent hotel profits. Competitors of IBC Hotels can charge anywhere from a 30% to 50% booking fee. InnDependent InnCentives, IBC’s loyalty program, allows hoteliers to benefit from guests who frequently stay at IBC independent hotels. We are planning significant expansion of IBC Hotels during the next couple of fiscal years as we concentrate our sales and marketing efforts towards consumers, but can provide no assurance that we will be successful.

 

The Chief Operating Decision Maker (“CODM”), the Trust’s CEO, Mr. Wirth, does not see any value in allocating costs for items not directly attributable to the IBC Developments segment for several reasons. The first is that the Trust’s base business is the Hotel Operations & Corporate Overhead segment, and the majority of the expenses of the Trust would continue even if the Trust was not in the reservation business. If the Trust were to allocate general expenses to the reservation business based on some allocation method (e.g., on sales), it would not improve the value of segment reporting, but it would only serve to make the results of the Hotel Operations & Corporate Overhead segment look better and give investors a false sense of the profitability of the Hotel Operations & Corporate Overhead segment without the IBC Developments segment. The CODM wants to understand the true investment in the reservation business and that result is delivered by allocating only costs directly associated with the IBC Developments segment. By retaining the remainder of costs not associated with the IBC Developments segment in the Hotel Operations & Corporate Overhead segment, the Trust is able to compare the Hotel Operations & Corporate Overhead segment to historical figures where the bulk of the business was only that segment of operations to gauge relative efficiency of the Hotel Operations & Corporate Overhead segment as compared to historical norms.

 

13
 

 

The Trust has chosen to focus its hotel investments in the southwest region of the United States. The CODM does not review assets by geographical region; therefore, no income statement or balance sheet information by geographical region is provided.

 

NON-CONTROLLING INTEREST

 

Non-controlling interest in the Trust represents the limited partners’ proportionate share of the capital and earnings of the Partnership. Income or loss is allocated to the non-controlling interest based on a weighted average ownership percentage in the entities throughout the period, and capital is allocated based on the ownership percentage at quarter-end. Any difference between the weighted average and point-in-time allocations is presented as a reallocation of non-controlling interest as a component of shareholders’ equity.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

For disclosure purposes, fair value is determined by using available market information and appropriate valuation methodologies. Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. The fair value framework specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The fair value hierarchy levels are as follows:

 

  Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
     
  Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and / or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are level 2 valuation techniques.
     
  Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the trust’s own judgments about the assumptions that market participants would use in pricing an asset or liability.

 

The Trust has no assets or liabilities that are carried at fair value on a recurring basis and had no fair value re-measurements during the periods ended July 31, 2017 and 2016.

 

Due to their short maturities, the carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses approximates fair value. The fair value of mortgage notes payable, notes payable to banks and notes and advances payable to related parties is estimated by using the current rates which would be available for similar loans having the same remaining maturities and are based on level 3 inputs.

 

3. STOCK-BASED COMPENSATION

 

TRUSTEE STOCK COMPENSATION

 

For the six months ended July 31, 2017, the Trust recognized expenses of $25,920 related to stock-based compensation. The Trust issued 24,000 restricted shares with a total market value of $51,840 in the first fiscal quarter of fiscal year 2018 as compensation to its three outside Trustees for fiscal year 2017. On a monthly basis through January 31, 2018, these shares vest at a rate of approximately 500 shares for each outside Trustee.

 

14
 

 

The following table summarizes restricted share activity during the six months ended July 31, 2017:

 

   Restricted Shares 
   Shares   Weighted-Average
Per Share Grant
Date Fair Value
 
         
Balance of unvested awards at January 31, 2017   -    - 
Granted   24,000   $2.16 
Vested   (12,000)  $2.16 
Forfeited   -    - 
Balance of unvested awards at July 31, 2017   12,000   $2.16 

 

OFFICER STOCK COMPENSATION

 

On February 22, 2016, the Compensation Committee of the Board of Trustees (the “Committee”) of Trust approved a stock incentive bonus plan for Pamela J. Barnhill, President, Chief Operating Officer, Vice Chairperson, and Trustee of the Trust, Marc E. Berg, Executive Vice President, Secretary, Treasurer and Trustee of the Trust and Adam B. Remis, Chief Financial Officer of the Trust (individually, an “Executive” and collectively, the “Executives”).

 

To give incentive to get hotel operations off to a strong start for the fiscal year starting February 1, 2016, the Committee also adopted an incentive bonus programs for the Executives based on the targeted gross operating profit (i.e., total revenues less operating expenses) (the “Target GOP”) for February 2016 and March 2016, the first two months of the fiscal year. The program provided that if the Target GOP were achieved or exceeded, each Executive would be entitled to a bonus consisting of cash and Shares of Beneficial Interest of the Trust in the amounts set forth below:

 

Executive Officer  Cash   Equity
Pamela J. Barnhill  $10,000   10,000 Shares of Beneficial Interest
Marc E. Berg  $2,500   2,500 Shares of Beneficial Interest
Adam B. Remis  $5,000   5,000 Shares of Beneficial Interest

 

The Trust met the Target GOP for February 2016 and March 2016. The Executives agreed to purchase the stock on the open market and were reimbursed by the Trust. On May 16, 2016, Ms. Barnhill purchased 5,000 Shares of Beneficial Interest at $2.449 and on May 20, 2016, Ms. Barnhill purchased 2,000 Shares of Beneficial Interest at $2.4883 and 3,000 Shares of Beneficial Interest at $2.4999 as described on Forms 4 filed with the Securities Exchange Commission on May 18, 2016 and May 24, 2016, respectively. Mr. Berg purchased 2,500 Shares of Beneficial Interest at $2.49 on May 10, 2016 as described on Form 4 filed with the Securities and Exchange Commission on May 17, 2016. Mr. Remis purchased 5,000 Shares of Beneficial Interest at $2.50 on May 18, 2016 as described on Form 4 filed with the Securities and Exchange Commission on May 18, 2016.

 

The Committee also adopted an incentive bonus program for the Executives for the fiscal year ended January 31, 2017 (the “2017 Fiscal Year Bonus Program”). Under the 2017 Fiscal Year Bonus Program, an Executive was entitled to receive a bonus consisting of cash and Shares of Beneficial Interest of the Trust of the maximum amount set forth below upon the achievement by the Executive of performance-based objectives, which include revenue, gross operating profit and strategy for the hotel and IBC Developments Division. These performance-based objectives were achieved for the period ended April 30, 2016.

 

Executive Officer  Cash   Equity
Pamela J. Barnhill  $25,000   10,000 Shares of Beneficial Interest
Marc E. Berg  $5,000   2,500 Shares of Beneficial Interest
Adam B. Remis  $10,000   5,000 Shares of Beneficial Interest

 

On January 24, 2017, the Committee exercised negative discretion, based on the Trust’s financial condition and its limited cash flow in fiscal 2017, and the Committee and the Board approved the following payouts for Ms. Barnhill and Messrs. Berg and Remis under the 2017 Fiscal Year Bonus Program:

 

Executive  Cash   Equity
Pamela J. Barnhill  $5,000   3,000 Shares of Beneficial Interest
Marc E. Berg  $1,000   750 Shares of Beneficial Interest
Adam B. Remis  $2,000   1,500 Shares of Beneficial Interest

 

15
 

 

Fiscal 2018 Bonuses

 

Fiscal 2018– Short-Term Cash and Equity Bonus Program

 

On January 24, 2017, the Compensation Committee and the Board, with the advice from Mr. Wirth, our Chairman and Chief Executive Officer, authorized the following additional bonuses for the Executives, up to the maximum amounts listed below, which may be earned based on the growth and financial developments of IBC Hotels during the period from February 1, 2017 through May 31, 2017 and the Trust’s cash availability, with such bonuses, if any, to be paid before January 31, 2018.

 

Executive  Cash   Equity
Pamela J. Barnhill  $5,000   3,000 Shares of Beneficial Interest
Marc E. Berg  $1,000   750 Shares of Beneficial Interest
Adam B. Remis  $2,000   1,500 Shares of Beneficial Interest

 

In addition, the Compensation Committee and the Board, with the advice from Mr. Wirth, our Chairman and Chief Executive Officer, also authorized the following bonuses for the Executives, up to the maximum amounts listed below, which may be earned based on the IBC Hotels division growth and financial developments during the period from June 1, 2017 through December 31, 2017 and the Trust’s cash availability, with such bonuses, if any, to be paid before January 31, 2018.

 

Executive  Cash   Equity
Pamela J. Barnhill  $10,000   4,000 Shares of Beneficial Interest
Marc E. Berg  $2,000   1,000 Shares of Beneficial Interest
Adam B. Remis  $4,000   2,000 Shares of Beneficial Interest

 

Fiscal 2018– Full Year Cash and Equity Bonus Program

 

On January 24, 2017, the Compensation Committee also adopted an incentive bonus program for the Executives for the full fiscal year ending January 31, 2018 (the “2018 Fiscal Year Bonus Program”). Under the 2018 Fiscal Year Bonus Program, an Executive will be entitled to receive a bonus consisting of cash and Shares of Beneficial Interest of the Trust, up to the maximum amounts set forth below, upon the achievement by the Executive of performance-based objectives which included exceeding budget by at least 5% for hotel revenues, hotel gross operating profits, IBC Hotels division revenues and IBC Hotels division profits.

 

Executive  Cash   Equity
Pamela J. Barnhill  $25,000   10,000 Shares of Beneficial Interest
Marc E. Berg  $5,000   2,500 Shares of Beneficial Interest
Adam B. Remis  $10,000   5,000 Shares of Beneficial Interest

 

4. RELATED PARTY TRANSACTIONS

 

On December 1, 2014, the Trust entered into a $1,000,000 net maximum Demand/Revolving Line of Credit/Promissory Note with Rare Earth Financial, LLC, an entity which is wholly owned by Mr. Wirth and his family members, including Pamela Barnhill, Vice Chairperson and President of the Trust. The Demand/Revolving Line of Credit/Promissory Note, as amended on June 19, 2017, bears interest at 7.0% per annum, is interest only quarterly and matures on June 30, 2019. No prepayment penalty exists on the Demand/Revolving Line of Credit/Promissory Note. The balance fluctuates significantly through the period. The Demand/Revolving Line of Credit/Promissory Note has a net maximum borrowing capacity of $1,000,000. As of July 31, 2017 and January 31, 2017, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount receivable of approximately $642,000 and amount payable of $145,000, respectively. As of September 7, 2017, the outstanding net balance receivable on the Demand/Revolving Line of Credit/Promissory Note was approximately $942,000.

 

16
 

 

As of January 31, 2017, the Trust had two available Advance to Affiliate credit facilities each with a maximum borrowing capacity of $500,000 to Phoenix Northern Resort, LLC and Tempe/Phoenix Airport Resort LLC for a total maximum borrowing capacity of $1,000,000. On June 19, 2017, the Board changed the terms of Tempe/Phoenix Airport Resort LLC Advance to Affiliate credit facilities by increasing the borrowing capacity to $1,000,000 and changed the Maturity Date from June 30, 2017 to June 30, 2019. On June 19, 2017, the Board terminated the Phoenix Northern Resort, LLC Advance to Affiliate credit facility. As of July 31, 2017 and January 31, 2017, the Trust had an amount receivable of approximately $783,000, and account payable of approximately $379,000, respectively. As of September 7, 2017, the outstanding net balance payable on the available Advances to Affiliate credit facility was approximately $883,000. During the period ended July 31, 2017, the Trust received $708 and $0 interest income from Phoenix Northern Resort, LLC and Tempe/Phoenix Airport Resort LLC, respectively.

 

As of July 31, 2017 and January 31, 2017, Mr. Wirth and his affiliates held 3,024,038 and 3,407,938 Class B Partnership units, which represented 23.56% and 25.80% of the total outstanding Partnership units. As of July 31, 2017 and January 31, 2017, Mr. Wirth and his affiliates held 6,939,429, respectively, Shares of Beneficial Interest in the Trust, which represented 72.52% and 71.93%, respectively, of the total issued and outstanding Shares of Beneficial Interest. For the six months ended July 31, 2017, Mr. Wirth’s affiliates paid the Trust $106,423 for management and licensing fees.

 

On July 10, 2017, InnSuites Hospitality Trust (the “Trust”) entered into a Securities Purchase Agreement (the “Agreement”) to purchase a total of 88,000 Shares of Beneficial Interest of the Trust (“Share”) from three individuals, at a purchase price of $2.00 per Share with the sellers set forth on the signature page thereto, for the aggregate cost of $176,000 to the Trust. Pursuant to the Agreement, Marc Berg, Executive Vice President of the Trust sold 40,000 Shares and two non-affiliated individuals each sold 24,000 Shares.

 

On July 10, 2017, RRF Limited Partnership entered into multiple Assignment of Partners Interest Agreements (the RRF Agreements”) to purchase a total of 433,900 RRF Limited Partnership units convertible 1:1 to Shares of Beneficial Interest of InnSuites Hospitality Trust at a purchase price of $2.00 per RRF Limited Partnership unit, for the aggregate cost of $867,800 to the Trust. Pursuant to the RRF Agreements, James F. Wirth, the Chairman and Chief Executive Officer of the Trust, sold 250,000 RRF Limited Partnership units and Mr. Wirth’s family member, Pamela Barnhill, Vice Chairperson and President of the Trust sold 45,975 RRF Limited Partnership units and three other of Mr. Wirth’s family members who are each not affiliated with the Trust each sold 45,975 RRF Limited Partnership units. On July 10, 2017, the closing price of Shares of Beneficial Interest of the Trust on the NYSE American was $2.00 per Share. The Board of Trustees (the “Board”) and the Audit Committee of the Trust approved this purchase as part of the Trust’s NYSE Equity Enhancement Plan.

 

On July 10, 2017, the Trust entered into three Promissory Notes for a total of $176,000 to purchase 88,000 Shares as described above. On July 10, 2017, RRF Limited Partnership entered into five Each Promissory Notes for a total of $867,800 to purchase a total of 433,900 Shares. Each Promissory Note has a 3 year term paying monthly interest and principle amounts including 7% interest. The foregoing description is not intended to be complete and is qualified in its entirety by reference to the full text of the Agreement, which is filed as Exhibit 10.2 to this Current Report on Form 8-K and is incorporated herein by reference.

 

Besides Pamela Barnhill, Vice Chairperson and President of the Trust and daughter of Mr. Wirth, the Trust’s Chairman and Chief Executive Officer, the Trust also employs two other immediate family members of Mr. Wirth who provide technology and administrative support services to the Trust with each receiving a $60,000 yearly salary.

 

On February 28, 2017, the Trust entered into a Securities Purchase Agreement to sell a total of 111,111 Shares of Beneficial Interest of the Trust, at a sale price of $1.80 per Share for the Aggregate proceeds of $200,000 to the Trust. Pursuant to the Security Purchase Agreement, Rare Earth purchased 55,556 Shares of Beneficial Interest of the Trust and one non-affiliated individual purchased 55,555 Shares of Beneficial Interest of the Trust. These shares are included in the Shares of Beneficial Interest, issued and outstanding, however issuance is pending certain administrative matters.

 

On May 4, 2017, the Trust entered into a Securities Purchase Agreement to sell a total of 106,952 Shares of Beneficial Interest of the Trust, at a sale of price of $1.87 per Share for the aggregate proceeds of $200,000 to the Trust. Pursuant to the Security Purchase Agreement, Rare Earth purchased 53,476 Shares of Beneficial Interest of the Trust and one non-affiliated individual purchased 55,476 Shares of Beneficial Interest of the Trust. These shares are included in the Shares of Beneficial Interest, issued and outstanding, however issuance is pending certain administrative matters.

 

See Notes 3, 4, 5, 6, 7, 18 and 28 to our Consolidated Financial Statements – “Sale of Ownership Interests in Albuquerque Subsidiary,” “Sale of Ownership Interests in Tucson Hospitality Properties Subsidiary,” “Sale of Ownership Interests in Ontario Hospitality Properties Subsidiary,” “Sale of Ownership Interests in Yuma Hospitality Properties Subsidiary,” and “Sale of Ownership Interests in Tucson Saint Mary’s Suite Hospitality,” “Other Related Party Transactions,” and “Subsequent Events,” respectively, in our Form 10-K Annual Report filed with the SEC on May 1, 2017 and below in Note 6 – “Sale of Ownership Interests in Subsidiaries” for further description of the Trust’s related party transactions.

 

17
 

 

5. NOTES PAYABLE

 

On October 17, 2016, the Yuma entity, a subsidiary of the Trust, entered into a $520,000 business loan, including $20,000 of loan fees which are classified as debt discount and amortized to interest expense over the term of the loan using the effective interest rate method, with American Express Bank, FSB (the “Yuma Merchant Agreement”) with a maturity date of October 16, 2017. The Yuma Merchant Agreement includes a loan fee of 4% of the original principal balance of the loan with acceleration provisions upon default. The business loan is secured and paid back with 22% of the Yuma American Express, VISA, MasterCard and Discover merchant receipts received during the loan period. As of July 31, 2017 and January 31, 2017, the business loan balance was approximately $4,000 and approximately $316,000, respectively, net of a discount of approximately $3,000 and approximately $13,000, respectively.

 

On December 19, 2016, Tucson Hospitality Properties LLLP, a subsidiary of the Trust, entered into a $438,880 business loan, including $16,880 of loan fees, with American Express Bank, FSB (the “Tucson Oracle Merchant Agreement”) with a maturity date of December 18, 2017. The Tucson Oracle Merchant Agreement included a loan fee of 4% of the original principal balance of the loan with acceleration provisions upon default. The business loan is secured and paid back with 15% of the Tucson Oracle American Express, VISA and MasterCard merchant receipts received during the loan period. As of July 31, 2017 and January 31, 2017, the business loan balance was approximately $172,000 and $393,000, respectively, net of a discount of approximately $6,000 and approximately $14,000, respectively.

 

On January 8, 2016, in connection with the acquisition of substantially all of the assets of International Vacation Hotels, the Trust entered into a $400,000 business loan with Laurence Holdings Limited, an Ontario, Canada corporation, with a maturity date of February 1, 2019 pursuant to the terms of the Security Agreement and Promissory Note (the “Laurence Holdings Agreement”). The Laurence Holdings Agreement required the funds be used for the purchase of International Vacation Hotels assets. The Laurence Holdings Agreement provides for interest- only payments for the first three months of the term and principal and interest payments for the remaining portion of the loan. The Laurence Holdings Agreement sets an interest rate of 8% per annum with no prepayment penalty. As of July 31, 2017, the business loan balance was approximately $207,000, net of a discount of approximately $3,000. As of January 31, 2017, the business loan balance was approximately $285,000, net of a discount of approximately $5,000.

 

On May 11, 2017, Yuma Hospitality Properties, LLLP entered into a $850,000 Promissory Note Agreement (“Yuma Loan Agreement”) as a credit facility to replenish funds for the hotel remodel with 1st Bank of Yuma Arizona Bank & Trust with a maturity date of September 1, 2022. The Yuma Loan Agreement has an initial interest rate of 5.50% with a variable rate adjustment equal to the Wall Street Journal Prime Rate plus 1.50% with a floor of 5.50% and no prepayment penalty. This credit facility is guaranteed by InnSuites Hospitality Trust. As of July 31, 2017, the Promissory Note balance was approximately $846,000, net of a discount of approximately $7,000.

 

On June 29, 2017, Tucson Hospitality Properties, LLLP, a subsidiary of InnSuites Hospitality Trust, entered into a $5.0 million Business Loan Agreement (“Tucson Loan”) as a first mortgage credit facility with KS State Bank to refinance the existing first mortgage credit facility with an approximate payoff balance of $3.045 million which will allow Tucson Hospitality Properties, LLLP to be reimbursed for prior and future hotel improvements. The Tucson Loan has a maturity date of June 19, 2042. The Tucson Loan has an initial interest rate of 4.69% for the first five years and thereafter a variable rate equal to the US Treasury + 2.0% with a floor of 4.69% and no prepayment penalty. This credit facility is guaranteed by InnSuites Hospitality Trust, RRF Limited Partnership, Rare Earth Financial, LLC, James F. Wirth and Gail J. Wirth and the Wirth Family Trust dated July 14, 2016.

 

On June 29, 2017, Tucson Hospitality Properties, LLLP, simultaneous with the execution and funding of the Tucson Loan, paid off and terminated the existing first mortgage credit facility with an approximate balance of $3.045 million which was originated on November 18, 2014, with a maturity date of November 18, 2029, an initial principal balance of $3.5 million and a current interest rate of 4.19% with an adjusted variable rate of US Treasury + 3.75% starting November 18, 2019.

 

18
 

 

6. SALE OF OWNERSHIP INTERESTS IN SUBSIDIARIES

 

The Trust has sold non-controlling interests in certain subsidiaries, including Albuquerque Suite Hospitality, LLC (the “Albuquerque entity”), Tucson Hospitality Properties, LP (the “Tucson entity”), Ontario Hospitality Properties, LP (the “Ontario entity”), and Yuma Hospitality Properties, Limited Partnership (the “Yuma entity”), which sales are described in detail in our Annual Report on Form 10-K filed on May 1, 2017 with the Securities and Exchange Commissions. Generally, interests have sold for $10,000 per unit with a two-unit minimum subscription. The Trust maintains at least 50.1% of the units in one of the entities and intends to maintain this minimum ownership percentage. Generally, the units in the each of the entities are allocated to three classes with differing cumulative discretionary priority distribution rights through a certain time period. Class A units are owned by unrelated third parties and have first priority for distributions. Class B units are owned by the Trust and have second priority for distributions. Class C units are owned by Rare Earth or other affiliates of Mr. Wirth and have the lowest priority for distributions. Priority distributions of $700 per unit per year are cumulative until a certain date; however, after that date, generally Class A unit holders continue to hold a preference on distributions over Class B and Class C unit holders. As of February 1, 2017, the Trust no longer accrues for these distributions as the preference period generally has expired.

 

On February 15, 2017, the Trust and Partnership entered into a restructuring agreement included in Exhibit 10.1 with Rare Earth Financial, LLC (“REF”) to allow for the sale of non-controlling partnership units in Albuquerque Suite Hospitality LLC (“Albuquerque”) for $10,000 per unit, which operates the Best Western InnSuites Albuquerque Hotel and Suites Airport hotel property, a 100 unit hotel in Albuquerque, New Mexico (the “Property”). REF and IHT are restructuring the Albuquerque Membership Interest by creating 250 additional Class A membership interests from General Member majority-owned to accredited investor member-owned. In the event of sale of 250 Class A Interests, total interests outstanding will change from 550 to 600 with Class A, Class B and Class C Limited Liability Company Interests (referred to collectively as “Interests”) restructured with IHT selling approximately 200 Class B Interests to accredited investors as Class A Interest. REF, as a General Partner of Yuma, will coordinate the offering and sale of Class A Interests to qualified third parties. REF and other REF Affiliates may purchase Interests under the offering. This restructuring is part of the Trust’s Equity Enhancement Plan to comply with Section 1003(a)(iii) of the NYSE American Company Guide.

 

On February 15, 2017, the Trust and Partnership entered into a restructuring agreement with Rare Earth to allow for the sale of non-controlling partnership units in the Yuma entity for $10,000 per unit. Rare Earth and the Trust are restructuring the Yuma Partnership Interest from General Partner majority-owned to accredited investor majority-owned. Total interests outstanding will remain unchanged at 800 with Class A, Class B and Class C Limited Liability Limited Partnership Interests (referred to collectively as “Interests”) restructured with the Yuma entity purchasing 300 existing IHT Class B Interests and reissuing 300 Class A units to accredited investors as Class A Interests causing the Yuma entity to offer and sell up to approximately 300 Class A (2017 series) Interests. Rare Earth, as a General Partner of the Yuma entity, will coordinate the offering and sale of Class A Interests to qualified third parties. Rare Earth and other Rare Earth affiliates may purchase Interests under the offering. This restructuring is part of the Trust’s Equity Enhancement Plan to comply with Section 1003(a)(iii) of the NYSE American Company Guide. As described below, as of July 31, 2017, the Trust has sold approximately $2,710,000, gross of offering costs, of non-controlling partnership units in the Yuma entity.

 

During the six months ended July 31, 2017, there were 97.19 Class A units sold, of which 52.19 came from the Trust’s Class B units, and no C units of the Albuquerque entity sold. As of July 31, 2017 and January 31, 2017, the Trust held a 37.80% and 50.27% ownership interest, or 226.81 and 279 Class B units, in the Albuquerque entity, Mr. Wirth and his affiliates held a 0.17% interest, or 1 Class C unit, and other third parties held a 62.03% interest, or 372.19 Class A units. As of February 1, 2016, the Trust no longer accrues for these distributions as the preference period generally has expired.

 

During the six months ended July 31, 2017, there were no Class A, B or C units of the Tucson entity sold. As of July 31, 2017 and January 31, 2017, the Partnership held a 51.01% ownership interest, or 404 Class B units, in the Tucson entity, Mr. Wirth and his affiliates held a 0.38% interest, or 5 Class C units, and other parties held a 48.61% interest, or 383 Class A units. As of February 1, 2016, the Trust no longer accrues for these distributions as the preference period generally has expired.

 

19
 

 

During the six months ended July 31, 2017, there were no Class A units, B or C units of the Ontario entity sold. On June 2, 2017, the Trust sold its Ontario hotel to an unrelated third party for approximately $17.5 million, which the Trust received in cash. The Trust used $7.2 million of the proceeds to satisfy its mortgage note payable on the property, approximately $2.4 million to reduce accruals and payables, and retained the remaining proceeds to fund future operations and capital improvements. As of July 31, 2017, the Partnership held a 100% ownership interest in the Ontario entity.

 

During the six months ended July 31, 2017, there were 271 Class A units of the Yuma entity sold, at $10,000 per unit, of which all units were sold from the Trust. As of July 31, 2017, the Trust held a 16.36% ownership interest, or 130.90 Class B units, in the Yuma entity, Mr. Wirth and his affiliates held a 0.51% interest, or 4.10 Class C units, and other parties held a 83.13% interest, or 665 Class A units. As of February 1, 2017, the Trust no longer accrues for these distributions as the preference period generally has expired. During the six months ended July 31, 2017, the priority distributions were paid for the three months ended April 30, 2017 and no priority distributions were accrued for the three months ended July 31, 2017.

 

7. VARIABLE INTEREST ENTITY

 

Management evaluates the Trust’s explicit and implicit variable interests to determine if they have any variable interests in VIEs. Variable interests are contractual, ownership, or other pecuniary interests in an entity whose value changes with changes in the fair value of the entity’s net assets, exclusive of variable interests. Explicit variable interests are those which directly absorb the variability of a VIE and can include contractual interests such as loans or guarantees as well as equity investments. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing of variability indirectly, such as through related party arrangements or implicit guarantees. The analysis includes consideration of the design of the entity, its organizational structure, including decision making ability over the activities that most significantly impact the VIE’s economic performance. GAAP requires a reporting entity to consolidate a VIE when the reporting entity has a variable interest, or combination of variable interest, that provides it with a controlling financial interest in the VIE. The entity that consolidates a VIE is referred to as the primary beneficiary of that VIE.

 

The Partnership has determined that the Yuma and Albuquerque entities are variable interest entities with the Partnership as the primary beneficiary with the ability to exercise control, as determined under the guidance of ASC Topic 810-10-25. In its determination, management considered the following qualitative and quantitative factors:

 

a) The Partnership, Trust and their related parties, which share common ownership and management, have guaranteed material financial obligations of the Yuma and Albuquerque entities, including its mortgage note payable and distribution obligations, which based on the capital structure of the Yuma and Albuquerque entities, management believes could potentially be significant.

 

b) The Partnership, Trust and their related parties have maintained, as a group, a controlling ownership interest in the Albuquerque and Yuma entities, with the largest ownership belonging to the Partnership.

 

c) The Partnership, Trust and their related parties have maintained control over the decisions which most impact the financial performance of the Yuma and Albuquerque entities, including providing the personnel to operate the property on a daily basis.

 

During the fiscal quarter ended July 31, 2017, neither the Trust nor the Partnership have provided any implicit or explicit financial support for which they were not previously contracted. Both the Partnership and the Trust provided mortgage loan guarantees which allowed our properties to obtain new financing as needed.

 

8. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES

 

The Trust paid $229,865 and $218,507 in cash for interest for the six months ended July 31, 2017 and 2016, respectively for continuing operations. The Trust paid $19,907 and $0 in cash for taxes for the six months ended July 31, 2017 and 2016, respectively for continuing operations.

 

Capital expenditures from discontinued operations approximated $37,500 and $182,000 for the six months ended July 31, 2017 and 2016, respectively.

 

20
 

 

9. COMMITMENTS AND CONTINGENCIES

 

The Albuquerque Hotel is subject to a non-cancelable ground lease that expires in 2058. Total expense associated with the non-cancelable ground lease for the six months ended July 31, 2017 and 2016 was approximately $75,000 and $74,000, respectively. Total expense associated with the non-cancelable ground lease for the three months ended July 31, 2017 and 2016 was approximately $37,000 and $28,000, respectively.

 

During 2010, the Trust entered into a five-year office lease for its corporate headquarters. On April 30, 2014, the lease was extended for 36 months and expired in 2017. The lease provided for month to month terms after April 30, 2017. The Trust recorded approximately $18,000 of general and administrative expense related to the lease during the each of the six months ended July 31, 2017 and 2016.

 

Future minimum lease payments under the non-cancelable ground leases are as follows:

 

Fiscal Year Ending    
Remainder of FY 2018   63,863 
FY 2019   113,508 
FY 2020   113,508 
FY 2021   113,508 
FY 2022   113,508 
FY 2023   113,508 
Thereafter   5,473,313 
Total   6,104,716 

 

The Trust is obligated under a note payable agreement for its Tucson, Arizona property to deposit 4% of the Tuscon, Arizona property’s room revenue into an escrow account to be used for capital expenditures. The escrow funds are reported on the Trust’s Condensed Consolidated Balance Sheet as “Restricted Cash” with the balance as of July 31, 2017 and January 31, 2017 of $374,069 and $0, respectively.

 

The Trust is obligated under a loan agreement relating to the Tucson Oracle property to deposit 4% of the individual hotel’s room revenue into an escrow account to be used for capital expenditures. The escrow funds applicable to the Tucson Oracle property for which a mortgage lender escrow exists are not reported on the Trust’s Consolidated Balance Sheet as “Restricted Cash” as the balance was $0 as of July 31, 2017 and January 31, 2017.

 

InnSuites Hotels has entered into membership agreements with Best Western International, Inc. (“Best Western”) with respect to all three of the Hotels. In exchange for use of the Best Western name, trademark and reservation system, the participating Hotels pay fees to Best Western based on reservations received through the use of the Best Western reservation system and the number of available suites at the participating Hotels. The agreements with Best Western have no specific expiration terms and may be cancelled by either party. Best Western requires that the participating hotels meet certain requirements for room quality, and the Hotels are subject to removal from its reservation system if these requirements are not met. The Hotels with third-party membership agreements received significant reservations through the Best Western reservation system. Under these arrangements, fees paid for membership fees and reservations were approximately $162,000 and $169,000 for the six months ended July 31, 2017 and 2016, respectively.

 

The nature of the operations of the Hotels exposes them in most cases to risks of claims and litigation in the normal course of their business. Although the outcome of these matters cannot be determined and is covered by insurance, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Trust.

 

The Trust is involved from time to time in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Trust’s consolidated financial position, results of operations or liquidity.

 

The trust is obligated under a note payable agreement for its Tucson, Arizona property to deposit 4% of the Tucson, Arizona property’s room revenue into an escrow account to be used for capital expenditures. The escrow funds are reported on the Trust’s Condensed Consolidated Balance Sheet as “Restricted Cash”. 

 

10. SEGMENT REPORTING

 

The Trust determined that its reportable segments are the Hotel Operations & Corporate Overhead and IBC Developments segments. Reportable segments are determined based on discrete financial information reviewed by the Trust’s CODM. The Trust organizes and reviews operations based on products and services, and currently there are no operating segments that are aggregated.

 

21
 

 

Information relative to the Trust’s reportable segments for operations, for which there is no intersegment revenues, is as follows:

 

STATEMENT OF OPERATIONS  SIX MONTHS ENDED JULY 31, 2017 
   Hotel Operations & Corporate Overhead   IBC Developments   Total 
Total Revenue  $4,911,003   $547,879   $5,458,882 
Loss From Continuing Operations   (44,458)   (660,209)   (704,667)

 

STATEMENT OF OPERATIONS  THREE MONTHS ENDED JULY 31, 2017 
   Hotel Operations & Corporate Overhead   IBC Developments   Total 
Total Revenue  $2,101,334   $303,670   $2,405,004 
Loss From Continuing Operations   (446,161)   (345,541)   (791,702)

 

STATEMENT OF OPERATIONS  SIX MONTHS ENDED JULY 31, 2016 
   Hotel Operations & Corporate Overhead   IBC Developments   Total 
Total Revenue  $4,309,378   $396,701   $4,706,079 
Loss From Continuing Operations   (21,523)   (395,546)   (417,069)

 

STATEMENT OF OPERATIONS  THREE MONTHS ENDED JULY 31, 2016 
   Hotel Operations & Corporate Overhead   IBC Developments   Total 
Total Revenue  $1,849,110   $179,216   $2,028,326 
Loss From Continuing Operations   (94,609)   (268,955)   (363,564)

 

11. SALE OF ONTARIO HOSPITALITY PROPERTIES, LP

 

On June 2, 2017, the Trust sold its Ontario hotel to an unrelated third party for approximately $17.5 million, which the Trust received in cash. The Trust used $7.2 million of the proceeds to satisfy its mortgage note payable on the property, approximately $2.4 million to reduce accruals and payables, and retained the remaining proceeds to fund future operations and capital improvements. For the six months ended July 31, 2017, Ontario had approximately $1,471,000 of revenue, and approximately $2,100,000 of operating expenses. As of July 31, 2017, Ontario had approximately $131,000 of current assets consisting primarily of cash and receivables, and approximately $160,000 of current liabilities consisting of accounts payables and accrued expenses. During the six months ended July 31, 2017, and July 31, 2016, depreciation/amortization and capital expenses were approximately $178,000 and $0, respectively. In addition, there were no significant non-cash operating and investing activities during such period. See our Note 6 – “Sale of Ownership Interests in Subsidiaries” for information about investing activities during the six months ended July 31, 2017.

 

12. DISCONTINUED OPERATIONS

 

On August 1, 2015, the Trust finalized and committed to a plan to sell all the hotel properties. As of May 1, 2016, the Trust listed all the Hotel properties with a local real estate hotel broker, and management believes that each of the assets is being marketed at a price that is reasonable in relation to its current fair value. The Trust believes that the plan to sell these assets will not be withdrawn. Through the Trust’s Form 10-Q for the quarter ended July 31, 2016 filed with the SEC on September 14, 2016, the Trust classified all the Hotel properties as Assets Held for Sale. As of October 31, 2016, the Trust has decided to reclassify these assets back into operations as many of these assets have been marketed for sale for more than one year. At this time, the Trust is unable to predict when, and if, any of these Hotel properties will be sold. The Trust continues to list these properties with local real estate hotel brokers, and believes that each of the assets is being marketed at a price that is reasonable in relation to its current fair value. On June 2, 2017, the Ontario Hospitality Properties LLLP was sold to an unrelated third party for $17,500,000 (see Note 11).

 

The Trust has recognized the sale of the Ontario hotel into discontinued operations in accordance with Accounting Standards Codification (ASC) No. 205-20, Discontinued Operations. As such, the historical results of the Ontario hotel has been adjusted for comparability purposes and exclude any corporate general and administrative expenses.

 

22
 

 

Discontinued operations in the six months ended July 31, 2017 and July 31, 2016 primarily consists of all hotels operational revenues and expenses for the Ontario hotel property and does not include the sale proceeds and profit from the sale of the Ontario hotel.

 

The following unaudited financial information presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations for the six months ended July 31, 2017 and the fiscal year ended January 31, 2017 as well as the statements of operations for the six months and three months ended July 31, 2017 and the six months and three months ended July 31, 2016.

 

   DISCONTINUED OPERATIONS 
   JULY 31, 2017   JANUARY 31, 2017 
   (UNAUDITED)     
ASSETS          
Current Assets:          
Cash and Cash Equivalents  $117,604   $89,561 
Accounts Receivable   10,246    92,743 
Prepaid Expenses and Other Current Assets   3,339    46,823 
Total Current Assets of Discontinued Operations   131,189    229,127 
Property, Plant and Equipment, net   -    6,080,597 
TOTAL ASSETS OF DISCONTINUED OPERATIONS  $131,189   $6,309,724 
           
LIABILITIES          
           
LIABILITIES          
Current Liabilities:          
Accounts Payable and Accrued Expenses  $20,111   $400,402 
Current Portion of Mortgage Notes Payable   -    185,207 
Total Current Liabilities of Discontinued Operations   20,111    585,609 
Mortgage Notes Payable   -    5,047,838 
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS  $20,111   $5,633,447 

 

23
 

 

   FOR THE SIX MONTHS ENDED 
   JULY 31, 
   2017   2016 
         
REVENUE          
Room  $1,397,324   $1,931,996 
Food and Beverage   64,976    88,467 
Other   8,443    17,417 
TOTAL REVENUE   1,470,743    2,037,880 
           
OPERATING EXPENSES          
Room   939,663    599,147 
Food and Beverage   66,152    102,178 
Telecommunications   -    607 
General and Administrative   256,986    221,994 
Sales and Marketing   123,299    141,307 
Repairs and Maintenance   100,149    163,314 
Hospitality   122,465    118,222 
Utilities   74,640    122,303 
Depreciation   177,824    - 
Intangible Amortization   56,015    - 
Real Estate and Personal Property Taxes, Insurance and Ground Rent   -    70,693 
Other   3,568    (5,496)
TOTAL OPERATING EXPENSES   1,920,761    1,534,269 
OPERATING INCOME (LOSS)   (450,018)   503,611 
Interest Income   961    - 
TOTAL OTHER INCOME   961    - 
Interest on Mortgage Notes Payable   127,787    139,083 
Interest on Other Notes Payable   428    4,518 
TOTAL INTEREST EXPENSE   128,215    143,601 
CONSOLIDATED NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS, NET OF NON-CONTROLLING INTEREST  $(577,272)  $360,010 

 

Capital expenditures from discontinued operations approximately $37,500 and $182,000 for the six months ended July 31, 2017 and 2016, respectively.

 

24
 

 

   FOR THE THREE MONTHS ENDED 
   JULY 31, 
   2017   2016 
         
REVENUE          
Room  $353,233   $1,030,774 
Food and Beverage   16,159    34,614 
Management and Trademark Fees   -    - 
Reservation and Convention   -    - 
Other   3,093    11,114 
TOTAL REVENUE   372,485    1,076,502 
           
OPERATING EXPENSES          
Room   645,177    331,231 
Food and Beverage   17,707    45,520 
Telecommunications   -    6 
General and Administrative   115,581    127,164 
Sales and Marketing   63,996    82,309 
Repairs and Maintenance   39,748    62,502 
Hospitality   72,663    58,395 
Utilities   20,772    61,580 
Depreciation   52,684    - 
Intangible Amortization   -    - 
Real Estate and Personal Property Taxes, Insurance and Ground Rent   26,310    39,101 
Other   3,485    - 
TOTAL OPERATING EXPENSES   1,058,123    807,808 
OPERATING INCOME (LOSS)   (685,638)   268,695 
Interest Income   961    - 
Interest Income on Advances to Affiliates - Related Party   -    - 
TOTAL OTHER INCOME   961    - 
Interest on Mortgage Notes Payable   63,438    69,619 
Interest on Notes Payable to Banks   -    - 
Interest on Other Notes Payable   428    4,518 
Interest on Advances to Affiliates - Related Party   -    - 
TOTAL INTEREST EXPENSE   63,866    74,137 
CONSOLIDATED NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS, NET OF NON-CONTROLLING INTEREST  $(748,543)  $194,558 

 

Capital expenditures from discontinued operations approximately $37,500 and $182,000 for the six months ended July 31, 2017 and 2016, respectively.

 

13. SUBSEQUENT EVENTS

 

On August 24, 2017, the Trust entered into a Promissory Note Agreement with RepublicBankAZ, N.A. (“RepublicBank LOC”) for a $150,000 revolving line of credit with a maturity date of August 24, 2018. May 9, 2017, The RepublicBank LOC has interest only payments due monthly and the variable interest rate is 1.50% above the highest prime rate as published in the Wall Street Journal. No prepayment penalty exists.

 

On 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 July 2018 and July 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 a early termination fee of $12,000, $8,000, $6,000, $4,000 and $2,000 for years 1 – 5 of the lease term.

 

25
 

 

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, 2017.

 

Our principal source of cash to meet our cash requirements, including distributions to our shareholders, is our share of the Partnership’s cash flow, quarterly distributions from the Albuquerque, New Mexico and Yuma, Arizona properties and more recently, sales of non-controlling interests in our Hotels. The Partnership’s principal source of cash flow is quarterly distributions from the Tucson, Arizona property. 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. In addition, our management is analyzing other strategic options available to us, including the refinancing of another property or raising additional funds through additional non-controlling interest sales; however, such transactions may not be available on terms that are favorable to us, or at all.

 

In furtherance of our strategic plan, we have significantly expanded InnDependent Boutique Collection (“IBC Hotels”), a wholly owned subsidiary of InnSuites Hospitality Trust, which has a network of approximately 6,300 members representing 170 countries and over 2,000,000 rooms and suites. During the fiscal year ended January 31, 2014, IBC Hotels formed a marketing alliance with the ILIA. We believe this new hotel network provides independent hotel owners a competitive advantage against traditional franchised brands in their markets. The network provides a booking system and loyalty program. IBC Hotels charges a 10% - 20% booking fee, which we believe increases the independent hotel profits. Competitors of IBC Hotels can charge anywhere from a 30% to 50% booking fee. InnDependent InnCentives, IBC’s loyalty program, allows hoteliers to benefit from guests who frequently stay at IBC independent hotels. IBC Hotels is dedicated to providing guests with a unique, non-cookie cutter hotel experience in addition to providing value-added amenities and resort locations to its guests. IBC Hotels has an InnDependent InnCentives travel rewards program that provides a free stay at any worldwide IBC Hotel of the guests’ choice after booking 12 nights on IBC Hotels’ website. In addition, on January 8, 2016, IBC Hotels purchased substantially all of the assets of International Vacation Hotels, a technology company located in Dallas, Texas, which provides reservation services to over 600 independent international hotels.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

In our Annual Report on Form 10-K for the fiscal year ended January 31, 2017 filed with the SEC on May 1, 2017, 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 July 31, 2017. Those policies include methods used to recognize and measure any identified impairment of our Hotel property assets.

 

On August 1, 2015, the Trust finalized and committed to a plan to sell all the hotel properties. As of May 1, 2016, the Trust listed all the Hotel properties with a local real estate hotel broker, and management believes that each of the assets is being marketed at a price that is reasonable in relation to its current fair value. The Trust believes that the plan to sell these assets will not be withdrawn. Through the Trust’s Form 10-Q for the quarter ended July 31, 2016 filed with the SEC on September 14, 2016, the Trust classified all the Hotel properties as Assets Held for Sale. As of October 31, 2016, the Trust has decided to reclassify these assets back into operations as many of these assets have been marketed for sale for more than one year. At this time, the Trust is unable to predict when, and if, any of these Hotel properties will be sold. The Trust continues to list these properties with local real estate hotel brokers, and believes that each of the assets is being marketed at a price that is reasonable in relation to its current fair value. On June 2, 2017, the Ontario Hospitality Properties LLLP was sold to an unrelated third party for $17,500,000 (see Note 11).

 

26
 

 

HOTEL PROPERTIES

 

Our long-term strategic plan is to obtain the full benefit of our real estate equity and to migrate our focus from a hotel owner to a hospitality service company by expanding our trademark license, management, reservation, and advertising services, through IBC Hotels, a wholly-owned subsidiary of the Trust. As of July 31, 2017, IBC Hotels provided services to approximately 6,300 hotels.

 

We are planning significant expansion of IBC Hotels during the next several years as we concentrate our sales and marketing efforts towards consumers. We anticipate the IBC Hotels sales and marketing efforts to increase our revenues and decrease our consolidated net loss over the next several years. For each reservation, IBC Hotels receives a 10% - 20% transactional fee plus reimbursement of our credit card processing fees associated with the reservation. We cannot provide any assurance that our plans will be successful or in line with our expectations.

 

This plan is similar to strategies followed by internationally diversified hotel industry leaders, which over the last several years have reduced real estate holdings and concentrated on hospitality services. We began our long-term corporate strategy when we relinquished our REIT income tax status in January 2004, which had previously prevented us from providing management services to hotels. In June 2004, we acquired our trademark license and management agreements and began providing management, trademark and reservations services to our Hotels.

 

We expect to use proceeds from the sale of the Hotels, if any, as needed to support hospitality service operations as cash flow from current operations, primarily the rental of hotel rooms, declines with the sale of the Hotels.

 

The table below lists the Hotel properties, their respective carrying and mortgage value and the listed asking price for the hotel properties.

 

Hotel Property  Book Value   Mortgage Balance   Listed Asking Price 
Albuquerque  $1,957,627   $-   $5,950,000 
Tucson Oracle   7,105,476    4,975,400    11,950,000 
Yuma   4,964,661    4,893,152    12,900,000 
   $14,027,764   $9,868,552   $30,800,000 

 

The listed asking price is the amount at which we would sell each of the Hotels and is based on the original listed selling price 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. On June 2, 2017, our Ontario hotel property was sold for $17,500,000 to a third party.

 

COMPLIANCE WITH CONTINUED LISTING STANDARDS OF NYSE AMERICAN

 

On January 19, 2017, the Trust received a letter from the NYSE American Exchange, formerly known as NYSE American, informed the Trust that the staff of the NYSE American’s Corporate Compliance Department had determined that the Trust is not in compliance with Section 1003(a)(iii) of the NYSE American Company Guide due to the Trust having stockholders’ equity of less than $6.0 million and net losses from continuing operations in its five most recent fiscal years ended January 31, 2016.

 

The NYSE American’s letter informed the Trust that, to maintain its listing, it must submit a plan of compliance by February 20, 2017, addressing how it intends to regain compliance with the NYSE American’s continued listing standards within the maximum potential 18-month plan period available (the “Plan Period”). Elements of the compliance plan may include the sale of one or more of its assets (management believes IHT hotels have a much lower book value than market value), sale of additional Trust stock at market value, sale of minority interest in specific hotel properties and/or anticipated continuation of the current operational upward current trends in hotel gross operating profits.

 

On June 2, 2017, the Trust sold its Ontario hotel to an unrelated third party for approximately $17.5 million, which the Trust received in cash. The Trust has recognized a gain of approximately $11.4 million on its consolidated statement of operations for the six months ended July 31, 2017. As of July 31, 2017, the Trust Shareholders’ Equity was approximately $9.1 million which exceeds the minimum requirements of the NYSE American Company Guide. The Trust believes that IHT will regain compliance with the NYSE American Exchange after it files the third fiscal quarter financial results showing two consecutive fiscal quarters of shareholders equity exceeding $6.0 million. We can provide no assurance that our plans to regain compliance with the NYSE American’s continued listing standards will be successful within the Plan Period or at all.

 

27
 

 

NON-GAAP FINANCIAL MEASURES

 

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

 

Adjusted EBITDA is defined as earnings before minority interest, 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) reflect the ongoing performance of our hotel assets and other investments, (b) provide useful information to investors as indicators of our ability to meet our future debt payment 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.

 

A reconciliation of net loss attributable to controlling interests to Adjusted EBITDA for the six months ended July 31, 2017 and 2016 is as follows:

 

   Six Months Ended July 31, 
   2017   2016 
Net income (loss) attributable to controlling interests  $9,420,994   $(564,353)
Add back:          
Depreciation from Continuing Operations   604,680    161,420 
Interest expense from Continuing Operations   279,776    207,404 
Taxes from Continuing Operations   330,000    - 
Less:          
Gain on Disposal of Discontinued Operations   (11,445,879)     
Interest income from Continuing Operations   (3,066)   (11,783)
Adjusted EBITDA  $(813,495)  $(207,312)

 

   Three Months Ended July 31, 
   2017   2016 
Net income (loss) attributable to controlling interests  $9,628,000   $(362,699)
Add back:          
Depreciation from Continuing Operations   316,421    27,766 
Interest expense from Continuing Operations   138,173    101,267 
Taxes from Continuing Operations   270,000    - 
Less:          
Gain on Disposal of Discontinued Operations   (11,445,879)     
Interest income from Continuing Operations   (1,717)   (356)
Adjusted EBITDA  $(1,095,002  $(234,022)

 

FFO is calculated on the basis defined by the National Association of Real Estate Investment Trusts (“NAREIT”), which is net income (loss) 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.

 

28
 

 

A reconciliation of net loss attributable to controlling interests to FFO for the six months ended July 31, 2017 and 2016 follows:

 

   Six Months Ended July 31, 
   2017   2016 
Net income (loss) attributable to controlling interests  $9,420,994   $(564,353)
Add back:          
Depreciation from Continuing Operations   604,680    161,420 
Non-controlling interest from Continuing Operations   (136,236)   (311,673)
Less:          
Gain on Disposal of Discontinued Operations   (11,445,879)     
FFO  $(1,556,441  $(714,606)

 

   Three Months Ended July 31, 
   2017   2016 
Net income (loss) attributable to controlling interest  $9,628,000   $(362,699)
Add back:          
Depreciation from Continuing Operations   316,421    27,766 
Non-controlling interest from Continuing Operations   128,821    (92,782)
Less:          
Gain on Disposal of Discontinued Operations    (11,445,879)     
FFO  $(1,372,637  $(427,715)

 

RESULTS OF 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. In the first six months of fiscal year 2018, occupancy increased 4.27% to 77.38% from 73.11% in the first six months of the prior fiscal year. ADR increased by $6.21, or 8.5%, to $79.17 during the first six months of fiscal year 2018 from $72.96 in the first six months of fiscal year 2017. The increased occupancy and the increased ADR resulted in an increase in REVPAR of $8.10, or 15.1%, to $61.63 in the first six months of fiscal year 2018 from $53.53 in the first six months of fiscal year 2017. Our properties in Ontario, California and Yuma, Arizona during the prior fiscal year had significant improvements, resulting in an improved product that was able to increase its occupancy and rates which allowed an increase in our overall revenues for the first six months of fiscal year 2018 compared with the first six months of fiscal year 2017. We anticipate this rate and occupancy levels to be steady during the rest of fiscal year 2018 due to slowly improving economic and travel industry conditions. On June 2, 2017, our Ontario, California property was sold which may impact the increased rate and occupancy levels for the remainder part of fiscal year 2018.

 

29
 

 

The following table shows certain historical financial and other information for the periods indicated:

 

   For the Six Months Ended
July 31,
 
   2017   2016 
Occupancy   77.38%   73.11%
Average Daily Rate (ADR)  $79.17   $72.96 
Revenue Per Available Room (REVPAR)  $61.63   $53.53 

 

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 or other factors.

 

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 2017 COMPARED TO THE SIX MONTHS ENDED JULY 31, 2016

 

A summary of total operating results of the Trust for the six months ended July 31, 2017 and 2016 is as follows:

 

   2017   2016   Change   % Change 
Total Revenue from Continuing Operations  $5,458,882   $4,706,079   $752,803    16.0%
Operating Expenses from Continuing Operations   (6,163,549)   (5,123,148)   1,040,401    20.3%
Operating Income from Continuing Operations   (704,667)   (417,069)   (287,598)   (69.0%)
Other Income from Continuing Operations   3,066    11,783    (8,717)   (74.0%)
Interest Expense from Continuing Operations   (279,776)   (207,404)   (72,372)   (34.9%)
Income Tax Provision from Continuing Operations   (330,000)   -    (330,000)   (100.0%)
Consolidated Net Loss from Continuing Operations   (1,311,377)   (612,690)   (698,687)   (114.0%)

 

Our overall results for the first six months of fiscal year 2018 were positively affected by a significant increase in revenues which included our growing IBC Hotels division. See below for discussion of operating results by segment.

 

A summary of operating results by segment for the six months ended July 31, 2017 and 2016 is as follows:

 

   2017   2016         
   Hotel Operations &
Corporate Overhead
   Hotel Operations &
Corporate Overhead
   Change   % Change 
Total Revenue from Continuing Operations  $4,911,003   $4,309,378   $601,625    14.0%
Operating Expenses from Continuing Operations   (4,955,461)   (4,330,901)   624,560    14.4%
Operating Income from Continuing Operations   (44,458)   (21,523)   (22,935)   (106.6%)
Other Income from Continuing Operations   3,066    11,783    (8,717)   (74.0%)
Interest Expense from Continuing Operations   (269,036)   (194,224)   (74,812)   (38.5%)
Income Tax Provisio from Continuing Operationsn   (330,000)   -    (330,000)   (100.0%)
Net Loss from Continuing Operations  $(640,428)  $(203,964)  $(436,464)   (214.0%)

 

   2017   2016         
   IBC Developments   IBC Developments   Change   % Change 
Total Revenue  $547,879   $396,701   $151,178    38.1%
Operating Expenses   (1,208,088)   (792,247)   415,841    52.5%
Operating Loss   (660,209)   (395,546)   (264,663)   (66.9%)
Interest Expense   (10,740)   (13,180)   2,440    18.5%
Net Loss  $(670,949)  $(408,726)  $(262,223)   (64.2%)

 

30
 

 

REVENUE

 

Hotel Operations & Corporate Overhead Segment

 

For the six months ended July 31, 2017, we had total revenue of approximately $4,911,000 compared to approximately $4,309,000 for the six months ended July 31, 2016, an increase of approximately $602,000. With an improved and renovated hotel property at our Yuma, Arizona and Ontario, California markets, we realized an overall 14% increase in room revenues during the first six months of fiscal year 2018 as room revenues were approximately $4,752,000 for the first six months of fiscal year 2018 as compared to approximately $4,137,000 during the first six months of fiscal year 2017. Food and beverage revenue was approximately $26,000 for the first six months of fiscal year 2018 as compared to approximately $18,000 for the first six months of fiscal year 2017, an increase of approximately $8,000. During the remainder of fiscal year 2018, we expect improvements in occupancy, modest improvements in rates and steady food and beverage revenues. We also realized a 14.4% decrease in management and trademark fee revenues during the first six months of fiscal year 2018 as management and trademark revenues were approximately $118,000 during the first six months of fiscal year 2018 as compared to approximately $138,000 during first six months of fiscal year 2017. During the remainder of fiscal year 2018, we expect management and trademark fee revenues to decrease as Mr. Wirth sold one of his hotels, which will put significant pressure on our management and trademark fee revenues as management and trademark revenues are primarily collected historically from Mr. Wirth’s three properties and now Mr. Wirth only has one hotel property.

 

IBC Developments Segment

 

For the six months ended July 31, 2017, we had total revenue of approximately $548,000 compared to approximately $397,000 for the six months ended July 31, 2016, an increase of approximately $151,000. We anticipate strong growth in this segment over the next several fiscal years but can provide no assurances regarding such growth. The increase in total revenues was due to additional demand for the contracted hotels.

 

EXPENSES

 

Hotel Operations & Corporate Overhead Segment

 

Total operating expenses of approximately $4,955,000 for the six months ended July 31, 2017 reflect an increase of approximately $625,000 compared to total operating expenses of approximately $4,331,000 for the six months ended July 31, 2016. The increase was primarily due to an increase in occupancy resulting in an increase in operating expenses for our rooms and depreciation expenses.

 

Room expenses, consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation fees and room supplies, were approximately $1,359,000 for the six months ended July 31, 2017 compared to approximately $1,192,000 for the six months ended July 31, 2016 of approximately a $167,000, or 14%, increase in costs. With increased occupancy at several of our hotel properties, we incurred additional room expenses which was anticipated and planned. Management anticipates this will be consistent for the remainder of fiscal year 2018.

 

Food and beverage expenses included food and beverage costs, personnel and miscellaneous costs to provide small banquet events. For the first six months ended July 31, 2017, food and beverage expenses were approximately $35,000 as compared to approximately $65,000 for the first six months ended July 31, 2016, a decrease of approximately $30,000, or 46.2%. The decrease during the first six months of fiscal year 2018 as compared to the first six months of fiscal year 2017 corresponded with an increased amount of demand and additional significant efficiencies gained with less menu items at our restaurant located in our Ontario, California property.

 

Telecommunications expense, consisting of telephone and Internet costs, were for the first six months ended July 31, 2017 were approximately $20,000 as compared approximately $8,000 for the first six months ended July 31, 2016. Telecommunications expenses increased in fiscal year 2018 due to additional internet costs incurred at our Best Western properties. Management anticipates this will be consistent for the remainder of fiscal year 2018.

 

General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $1,398,000 for the six months ended July 31, 2017 decreased approximately $105,000 from approximately $1,503,000 for the six months ended July 31, 2016 primarily due to decrease in overhead and closer monitoring of spending. Management anticipates this will be consistent for the remainder of fiscal year 2018.

 

31
 

 

Sales and marketing expense increased approximately $126,000, or 42.5%, to approximately $422,000 for the six months ended July 31, 2017 from approximately $296,000 for the six months ended July 31, 2016. The increase was due to additional use of online booking agencies and additional sales and marketing staff at our hotel properties.

 

Repairs and maintenance expense was approximately $328,000 for the six the six months ended July 31, 2017 from approximately $327,000 reported for the six months ended July 31, 2016, a difference of $1,000. We continue to focus on maintaining our properties and completing ongoing repairs and maintenance initiatives to ensure that the hotel properties exceeds our guests’ expectation. Management anticipates this will be consistent for the remainder of fiscal year 2018.

 

Hospitality expense increased by approximately $53,000, or 19.6%, from $271,000 for the six months ended July 31, 2016 to approximately $324,000 for the six months ended July 31, 2017. The increase was primarily due to the increased occupancy at our hotel properties.

 

Utility expenses decreased by approximately $7,000 from approximately $287,000 reported for the six months ended July 31, 2016 compared with approximately $281,000 for the six months ended July 31, 2017. The properties had increased occupancy which normally would increase utility expenses but utility expenses were offset by our Housekeeping staff turning down the room air conditioning units overnight when guests were not occupying the rooms.

 

Hotel property depreciation expense increased significantly at approximately $559,000 for the six months ended July 31, 2017 as compared to approximately $127,000 for the six months ended July 31, 2016. The change occurred as all of our hotel properties are no longer presented in our financial statements as assets held for sale whereby depreciation was temporarily suspended.

 

Real estate and personal property taxes, insurance and ground rent expense decreased by approximately $16,000, from approximately $260,000 for the six months ended July 31, 2016 to approximately $244,000 for the six months ended July 31, 2017 as last fiscal year we purchased the land under one of our Tucson, Arizona properties, which no longer required us to pay for a land lease.

 

Interest expenses were approximately $280,000 for the six months ended July 31, 2017, an increase of approximately $73,000 from the interest expenses for the six months ended July 31, 2016 of approximately $207,000. The increase was primarily due to a change in the calculation of interest expense relating to the restructuring of the Ontario, California mortgage note payable, coupled with the increased use of our American Express note payables and our related party lines of credit offset by a decrease in our Albuquerque, New Mexico note payable payoff.

 

Income tax provision was $330,000 for the six months ended July 31, 2017, an increase of $330,000 from n no income tax provision for the six months ended July 31, 2016. Increase in the tax provision was due to the sale of our hotel property in Ontario, California which occurred in June 2017 and our increased net sales of ownership interests in our properties during our first six months of fiscal year 2018 as compared to the first six months of fiscal year 2017. Sales of ownership interests in our properties for tax purposes are considered income but under generally accepted accounting principles (“GAAP”), they are considered an increase in the Trusts’ equity.

 

IBC Developments Segment

 

Total expenses, which are comprised primarily of general and administrative and sales and marketing expense of approximately $1,208,000 for the six months ended July 31, 2017, reflect an increase of approximately $416,000, as compared to total expenses of approximately $792,000 for the six months ended July 31, 2016. During the first six months ended July 31, 2017, we expanded our sales and marketing efforts by increasing our sales resources and the development of technology to meet independent guest and hotelier needs. Specifically, we expanded our hotel booking engine capabilities, website and hotel guest rewards program.

 

32
 

 

Net Income before income taxes:

 

We had consolidated net loss before income taxes of approximately $981,000 for the six months ended July 31, 2017, compared to approximately $610,000 for the six months ended July 31, 2016. After deducting income tax provision of approximately $330,000 for the six months ended July 31, 2017, we had consolidated net loss from continued operations of approximately $1,311,000 as compared with consolidated net loss of approximately $610,000 for the six months ended July 31, 2016, an increase in consolidated net loss of approximately $701,000.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal source of cash to meet our cash requirements, including distributions to our shareholders, is our share of the Partnership’s cash flow, quarterly distributions from the Albuquerque, New Mexico and Yuma, Arizona properties and more recently, sales of non-controlling interests in our Hotels. The Partnership’s principal source of cash flow is quarterly distributions from the Tucson, Arizona property and Ontario, California (through the date of sale) property. Our liquidity, including our ability to make distributions to our shareholders, will depend upon our ability and the Partnership’s ability to generate sufficient cash flow from hotel operations and sales of non-controlling interests to service our debt.

 

Hotel operations are significantly affected by occupancy and room rates at the Hotels. We anticipate occupancy and ADR will be improved in the coming year; capital improvements are expected to be similar from the prior year. As of September 6, 2017, the Trust had $0 drawn on its bank line of credit. Our credit line matures on August 24, 2018.

 

With the sale of our Ontario, California hotel property on June 2, 2017, full access to our bank line of credit, the availability of the $1,000,000 related party Demand/Revolving Line of Credit/Promissory Note and the availability of the two available Advances to Affiliate credit facilities, management believes that it will have enough cash on hand to meet all of our financial obligations as they become due for at least the next year. In addition, our management is analyzing other strategic options available to us, including raising additional funds through additional non-controlling interest sales; however, such transactions may not be available on terms that are favorable to the Trust.

 

As of July 31, 2017 and January 31, 2017, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount receivable of approximately $642,000 and amount payable of $145,000, respectively. The Demand/Revolving Line of Credit/Promissory Note accrued interest at 7.0% per annum and requires interest only payments. The Demand/Revolving Line of Credit/Promissory Note has a maximum borrowing capacity to $1,000,000, which is available through June 30, 2019. As of September 7, 2017, the outstanding net balance receivable on the Demand/Revolving Line of Credit/Promissory Note was approximately $942,000.

 

As of January 31, 2017, the Trust had two available Advance to Affiliate credit facilities each with a maximum borrowing capacity of $500,000 for a total maximum borrowing capacity of $1,000,000. On June 19, 2017, the Board changed the terms of one of Advance to Affiliate credit facilities and increased the borrowing capacity to $1,000,000 and changed the Maturity Date from June 30, 2017 to June 30, 2019. On June 19, 2017, the Board terminated the second Advance to Affiliate credit facility. As of July 31, 2017 and January 31, 2017, the Trust had an amount receivable of approximately $783,000, and account payable of approximately $379,000, respectively. As of September 7, 2017, the outstanding net balance payable on the available Advances to Affiliate credit facility was approximately $883,000.

 

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

 

We anticipate a moderate improvement in the overall economic situation that affected results in the first quarter of 2017, which could result in higher revenues and operating margins in the remainder of fiscal year 2018. We expect the major challenge for the remaining portion of fiscal year 2018 is 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.

 

33
 

 

Net cash used in operating activities totaled approximately $880,000 and $746,000 for the six months ended July 31, 2017 and July 31, 2016, respectively. Refer to the discussion below for the change in the net cash used in operating activities.

 

Consolidated net income was approximately $9,557,000 and consolidated net loss was approximately $252,000 for the six months ended July 31, 2017 and 2016, respectively. The differences in consolidated net income for the six months ended July 31, 2017 compared with the consolidated net loss for the six months ended July 31, 2016 is explained above in the results of operations of the Trust.

 

Changes in the adjustments to reconcile consolidated net income to net cash used in operating activities for the six months ended July 31, 2017 and 2016, respectively, consist primarily of changes in the hotel property depreciation of approximately $783,000 for the six months ended July 31, 2017 compared with approximately $161,000 for the six months ended July 31, 2016, gain on disposal of assets of approximately $11,445,000 for the six months ended July 31, 2017 compared with $0 for the six months ended July 31, 2016, cumulative changes in assets and liabilities for accounts payable and accrued expenses of approximately $558,000 and approximately ($37,000) for the six months ended July 31, 2017 and 2016, respectively. These changes resulted in net cash used by operating activities of approximately $880,000 for the six months ended July 31, 2017 and approximately $745,000 for the six months ended July 31, 2016. Hotel depreciation increased significantly during the six months ended July 31, 2017 compared with the six months ended July 31, 2016, as several of the our hotels are included continuing operations and no longer included in discontinued operations and assets held for sale when depreciation has halted.

 

Net cash provided by investing activities was approximately $14,799,000 and net cash used in investing activities was approximately $719,000 for the six months ended July 31, 2017 and 2016, respectively. The additional net cash provided by investing activities was primarily due to the sale of our Ontario, California property offset by the additional advances to affiliates – related party and our continued investment in our hotels with improvements and additions to the hotel properties.

 

Net cash provided (used in) financing activities totaled approximately $1,396,000 for the six months ended July 31, 2017 and approximately ($230,000) for the six months ended July 31, 2016. The increase in cash provided was primarily due to principal payments on mortgage notes payable, payments on notes payable to banks, payments on line of credit – related party and distributions to non-controlling interest holders offset by borrowings on mortgage notes payable, borrowings on notes payable to banks, borrowings on line of credit, borrowings on other notes payable, proceeds from the sale of non-controlling ownership interest in subsidiary and sale of beneficial interest.

 

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 July 31, 2017, there was 374,069 held in these accounts, which are 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 six months ended July 31, 2017 and 2016, the Hotels and Corporate office spent approximately $1,557,000 and $1,253,000, respectively, for capital expenditures. We consider the majority of these improvements to be revenue producing. Therefore, these amounts are capitalized and depreciated over their estimated useful lives. For fiscal year 2018 capital expenditures, we plan on spending approximately the same amount as we did during fiscal year 2017. Continued operations repairs and maintenance were charged to expense of $328,000 and $327,000 for six months ending July 31, 2017 and 2016, respectively.

 

We have minimum debt payments of approximately $1,470,000 and approximately $738,000 due during fiscal years 2018 and 2019, respectively. Minimum debt payments due during fiscal year 2018 include approximately $132,000 of mortgage notes payable.

 

As of July 31, 2017, we had mortgage notes payable, net of discounts, of approximately $9,869,000 outstanding with respect to the Hotels, approximately $167,000 in gross short term secured promissory notes with a credit card merchant processor, approximately $838,000 in a note payable, approximately $204,000 in an unsecured promissory note to a unrelated party, and approximately $1,036,000 of secured promissory notes outstanding to unrelated third parties arising from the Shares of Beneficial Interest and Partnership unit repurchases.

 

34
 

 

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.

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2017 COMPARED TO THE THREE MONTHS ENDED JULY 31, 2016

 

A summary of total operating results of the Trust for the three months ended July 31, 2017 and 2016 is as follows:

 

   2017   2016   Change   % Change 
Total Revenues from Continuing Operations  $2,405,004   $2,028,326   $376,678    18.6%
Operating Expenses from Continuing Operations   (3,196,706)   (2,391,890)   804,816    33.6%
Operating Loss from Continuing Operations   (791,702)   (363,564)   (428,138)   (117.8%)
Interest Income from Continuing Operations   1,717    356    1,361    382.3%
Interest Expense from Continuing Operations   (138,173)   (101,267)   (36,906)   (36.4%)
Income Tax Provision from Continuing Operations   (270,000)   -    (270,000)   (100.0%)
Consolidated Net Loss from Continuing Operations   (1,198,158)   (464,475)   (733,683)   (158.0%)

 

Our overall results for the three months ended July 31, 2017 as compared to the three months ended July 31, 2016 were positively affected by an increase in room revenues primarily due to the additional business in the Yuma, Arizona market and our growing IBC Hotels division.

 

   2017   2016         
   Hotel Operations &
Corporate Overhead
   Hotel Operations &
Corporate Overhead
   Change   % Change 
Total Revenue from Continuing Operations  $2,101,334   $1,849,110   $252,224    13.6%
Operating Expenses from Continuing Operations   (2,547,495)   (1,943,719)   (603,776)   (31.1%)
Operating Loss from Continuing Operations   (446,161)   (94,609)   (351,552)   (371.6%)
Interest Income from Continuing Operations   1,717    356    1,361    382.3%
Interest Expense from Continuing Operations   (133,192)   (170,224)   37,032    21.8%
Income Tax Provision from Continuing Operations   (270,000)   -    (270,000)   100.0%
Net Loss from Continuing Operations  $(847,636)  $(264,477)  $(583,159)   (220.5%)

 

   2017   2016         
   IBC Developments   IBC Developments   Change   % Change 
Total Revenue  $303,670   $179,216   $124,454    69.4%
Operating Expenses   (649,211)   (448,171)   (201,040)   (44.9%)
Operating Loss   (345,541)   (268,955)   (76,586)   (28.5%)
Interest Expense   (4,981)   (5,180)   199    (100.0%)
Net Loss  $(350,522)  $(274,135)  $(76,387)   (27.9%)