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

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED October 31, 2018

 

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 December 10, 2018: 9,353,497

 

 

 

   
 

 

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   OCTOBER 31, 2018   JANUARY 31, 2018 
   (UNAUDITED)     
ASSETS        
Current Assets:          
Cash and Cash Equivalents  $1,764,008   $4,575,748 
Short-Term Investments – Available For Sale Securities   -    1,000,330 
Accounts Receivable, including approximately $36,000 and $15,000 from related parties and net of Allowance for Doubtful Accounts of approximately $6,000 and $29,000 as of October 31, 2018 and January 31, 2018, respectively   112,192    78,731 
Advances to Affiliates - Related Party   406,361    970,353 
Notes Receivable - Related Party   1,569,052    810,799 
Prepaid Expenses and Other Current Assets   127,662    138,831 
Current Assets of Discontinued Operations   10,201,097    491,529 
Total Current Assets   14,180,373    8,066,321 
Property, Plant and Equipment, net   9,601,863    9,771,216 
Note Receivable - Obasa   2,750,000    - 
Noncurrent assets of Discontinued Operations   -    5,240,535 
TOTAL ASSETS  $26,532,236   $23,078,072 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
LIABILITIES          
Current Liabilities:          
Accounts Payable and Accrued Expenses  $1,143,069   $1,690,211 
Current Portion of Notes Payable - Related Party   316,175    296,315 
Current Portion of Mortgage Notes Payable, net of Discount   113,746    109,547 
Current Portion of Notes Payable to Banks, net of Discount   -    - 
Current Portion of Other Notes Payable   1,230,678    1,059,349 
Current Liabilities of Discontinued Operations   651,951    897,039 
Total Current Liabilities   3,455,618    4,052,461 
Notes Payable - Related Party   245,272    494,258 
Mortgage Notes Payable, net of discount   4,736,503    4,817,529 
Notes Payable to Banks, net of discount   -    - 
Other Notes Payable   320,722    104,481 
Noncurrent Liabilities of Discontinued Operations, net of current portion   -    5,490,374 
TOTAL LIABILITIES   8,758,116    14,959,103 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY          
Shares of Beneficial Interest, without par value, unlimited authorization; 18,571,960 and 18,571,960 shares issued and 9,380,141 and 9,774,937 shares outstanding at October 31, 2018 and January 31, 2018, respectively   23,930,678     22,333,905 
         
Treasury Stock, 9,191,819 and 8,797,023 shares held at cost at October 31, 2018 and January 31, 2018, respectively   (13,458,886)   (12,662,996)
TOTAL TRUST SHAREHOLDERS’ EQUITY   10,471,792    9,670,909 
NON-CONTROLLING INTEREST   7,302,328    (1,551,940)
TOTAL EQUITY   17,774,120    8,118,969 
TOTAL LIABILITIES AND EQUITY  $26,532,236   $23,078,072 

 

See accompanying notes to unaudited

condensed consolidated financial statements

 

 2 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   FOR THE NINE MONTHS ENDED 
   OCTOBER 31, 
   2018   2017 
REVENUE        
Room  $4,582,269   $3,995,074 
Food and Beverage   34,412    16,188 
Management and Trademark Fees   128,546    157,242 
Other   58,044    68,362 
TOTAL REVENUE   4,803,272    4,236,867 
           
OPERATING EXPENSES          
Room   1,474,271    1,276,625 
Food and Beverage   52,479    18,434 
Telecommunications   3,479    2,382 
General and Administrative   1,727,224    1,780,638 
Sales and Marketing   440,137    413,118 
Repairs and Maintenance   362,303    294,885 
Hospitality   343,772    335,274 
Utilities   274,273    271,916 
Depreciation   620,610    526,567 
Real Estate and Personal Property Taxes, Insurance and Ground Rent   291,781    296,475 
Other   3,023    0 
TOTAL OPERATING EXPENSES   5,593,353    5,216,315 
OPERATING LOSS   (790,081)   (979,448)
Interest Income   95,111    6,288 
TOTAL OTHER INCOME   95,111    6,288 
Interest on Mortgage Notes Payable   182,675    162,636 
Interest on Notes Payable to Banks   41,544    (9,087)
Interest on Other Notes Payable   70,217    39,710 
Interest on Advances to Affiliates - Related Party        - 
TOTAL INTEREST EXPENSE   294,436    193,259 
CONSOLIDATED NET LOSS BEFORE INCOME TAX PROVISION AND DISCONTINUED OPERATIONS   (989,406)   (1,166,419)
Income Tax Provision   (407,727)   (330,000)
CONSOLIDATED NET LOSS FROM CONTINUING OPERATIONS  $(1,397,133)  $(1,496,419)
Discontinued Operations, Net of Non-Controlling Interest  $(801,996)  $(1,219,106)
Gain on Disposal of Discontinued Operations  $13,323,418   $11,445,879 
CONSOLIDATED NET INCOME FROM DISCONTINUED OPERATIONS AND GAIN ON SALE OF DISCONTINUED OPERATIONS  $12,521,422   $10,226,773 
CONSOLIDATED NET INCOME  $11,124,289   $8,730,354 
LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST  $9,594,620   $113,519 
NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS  $1,529,669   $8,616,835 
NET LOSS PER SHARE FROM CONTINUING OPERATIONS – BASIC  $(0.15)  $(0.15)
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS – BASIC  $1.31   $1.04 
NET INCOME PER SHARE FROM NON-CONTROLLING INTEREST – BASIC  $1.00   $0.01 
NET INCOME PER SHARE CONTROLLING INTEREST - BASIC  $0.16   $0.88 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC   9,570,253    9,847,104 
NET LOSS PER SHARE FROM CONTINUING OPERATIONS – DILUTED  $(0.11)  $(0.11)
NET INCOME PER SHARE FROM DISCONTINUED OPERATIONS – DILUTED  $0.99   $0.78 
NET INCOME PER SHARE FROM NON-CONTROLLING INTEREST – DILUTED  $0.76   $0.01 
NET INCOME PER SHARE CONTROLLING INTEREST - DILUTED  $0.12   $0.65 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED   12,671,891    13,161,778 

 

See accompanying notes to unaudited

condensed consolidated financial statements

 

 3 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   FOR THE THREE MONTHS ENDED 
   OCTOBER 31, 
   2018   2017 
REVENUE        
Room  $1,435,454   $1,217,292 
Food and Beverage   12,249    9,869 
Management and Trademark Fees   38,103    38,820 
Other   15,390    38,976 
TOTAL REVENUE   1,501,196    1,304,956 
           
OPERATING EXPENSES          
Room   491,681    402,400 
Food and Beverage   17,219    12,348 
Telecommunications   291    764 
General and Administrative   565,482    560,966 
Sales and Marketing   91,810    132,743 
Repairs and Maintenance   164,633    99,808 
Hospitality   115,191    113,097 
Utilities   58,261    91,862 
Depreciation   209,196    201,690 
Real Estate and Personal Property Taxes, Insurance and Ground Rent   95,787    102,501 
Other   3,832    - 
TOTAL OPERATING EXPENSES   1,813,381    1,718,179 
OPERATING LOSS   (312,185)   (413,222)
Interest Income   34,232    4,566 
TOTAL OTHER INCOME   34,232    4,566 
Interest on Mortgage Notes Payable   63,722    68,046 
Interest on Notes Payable to Banks   12,075    (4,767)
Interest on Other Notes Payable   37,674    4,256 
Interest on Advances to Affiliates - Related Party   -    - 
TOTAL INTEREST EXPENSE   113,472    67,535 
CONSOLIDATED NET LOSS BEFORE INCOME TAX PROVISION AND DISCONTINUED OPERATIONS   (391,425)   (476,191)
Income Tax Provision   (197,896)   - 
CONSOLIDATED NET LOSS FROM CONTINUING OPERATIONS  $(589,321)  $(476,191)
Discontinued Operations, Net of Non-Controlling Interest  $(675,257)  $(350,637)
Gain on Disposal of Discontinued Operations  $13,323,418   $- 
CONSOLIDATED NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS AND GAIN ON SALE OF DISCONTINUED OPERATIONS  $12,648,161   $(350,637)
CONSOLIDATED NET INCOME (LOSS)  $12,058,840   $(826,828)
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST  $9,159,128   $(128,821)
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTERESTS  $2,899,711   $(698,007)
NET LOSS PER SHARE FROM CONTINUING OPERATIONS – BASIC  $(0.06)  $(0.05)
NET INCOME (LOSS) PER SHARE FROM DISCONTINUED OPERATIONS – BASIC  $1.34   $(0.04)
NET INCOME (LOSS) PER SHARE FROM NON-CONTROLLING INTEREST – BASIC  $0.97   $(0.01)
NET INCOME (LOSS) PER SHARE CONTROLLING INTEREST - BASIC  $0.31   $(0.07)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC   9,426,212    9,566,948 
NET LOSS PER SHARE FROM CONTINUING OPERATIONS – DILUTED  $(0.05)  $(0.05)
NET INCOME (LOSS) PER SHARE FROM DISCONTINUED OPERATIONS – DILUTED  $0.99   $(0.04)
NET INCOME (LOSS) PER SHARE FROM NON-CONTROLLING INTEREST – DILUTED  $0.72   $(0.01)
NET (LOSS) INCOME PER SHARE CONTROLLING INTEREST - DILUTED  $0.23   $(0.07)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED   12,734,626    9,566,948 

 

See accompanying notes to unaudited

condensed consolidated financial statements

 

 4 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   FOR THE NINE MONTHS ENDED 
   OCTOBER 31, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES          
Consolidated Net Income  $11,124,289   $8,730,354 
Adjustments to Reconcile Consolidated Net Income to Net Cash Used In Operating Activities:          
Stock-Based Compensation   24,300    38,880 
Recovery of Uncollectible Receivables        (47,630)
Depreciation   1,017,252    1,131,177 
Amortization of Intangibles        50,250 
Amortization of Debt Discounts and Deferred Financing Fees        47,590 
Gain on Disposal of Assets   (13,323,418)   (11,445,879)
Changes in Assets and Liabilities:          
Accounts Receivable   30,249    (717,451)
Prepaid Expenses and Other Assets   22,936    79,900 
Accrued Interest Income   (93,000)     
Accounts Payable and Accrued Expenses   (503,132)   745,569 
NET CASH USED IN OPERATING ACTIVITIES   (1,700,524)   (1,387,240)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Improvements and Additions to Hotel Properties   (778,525)   (2,154,775)
Redemption of Marketable Securities   1,000,330    - 
Cash Received From Sale of Hotel Property and IBC   10,184,766    9,603,610 
Lendings on Advances to Affiliates - Related Party   (704,253)   (1,939,000)
Collections on Advances to Affiliates - Related Party   602,992    596,541 
NET CASH PROVIDED BY INVESTING ACTIVITIES   10,305,310    6,106,376 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Principal Payments on Mortgage Notes Payable   (296,486)   (588,908)
Borrowings on Mortgage Notes Payable        5,000,000 
Payments on Notes Payable to Banks, net of financing costs        (2,330,565)
Borrowings on Notes Payable to Banks, net of financing costs        1,370,000 
Lendings on Advances to Affiliates - Related Party          
Collections on Advances to Affiliates - Related Party          
Payments on Line of Credit - Related Party        (775,000)
Borrowings on Line of Credit - Related Party        632,384 
Payments on Notes Receivable - Related Party        - 
Borrowings on Notes Receivable - Related Party        - 
Payments on Notes Payable - Related Party   (229,126)   (1,046,761)
Borrowings on Notes Payable - Related Party        696,384 
Payments on Other Notes Payable   (88,930)   (112,599)
Borrowings on Other Notes Payable        1,551,465 
Payment of Dividends   (99,673)   (98,879)
Proceeds from Sale of Non-Controlling Ownership Interest in Subsidiary, net   76,114    3,236,543 
Sale of Shares of Beneficial Interest        400,000 
Distributions to Non-Controlling Interest Holders   (669,734)   (5,512,333)
Repurchase of Treasury Stock   (323,646)   (82,280)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES   (1,631,481)   2,339,451 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   6,973,305    7,058,586 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   4,776,453*   568,396*
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $11,749,758*  $7,626,982*

 

* Cash balances include cash held in discontinued operations for the nine months period ended October 31, 2018 and 2017.

 

See accompanying notes to unaudited

condensed consolidated financial statements

 

 5 
 

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF OCTOBER 31, 2018 AND JANUARY 31, 2018

AND FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2018 AND 2017

 

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

As of October 31, 2018, InnSuites Hospitality Trust (the “Trust”, “IHT”, “we”, “us” or “our”) is a publicly traded company with continuing operations of hotels IHT owns and manages.. The Trust and its shareholders owns interests directly in and through a partnership interest, three hotels with an aggregate of 260 suites in Arizona and New Mexico (the “Hotels”) operated under the federally trademarked name “InnSuites Hotels” or “InnSuites”. On July 31, 2018, the Trust entered into a sale agreement to sell its Yuma Hotel property which was closed on October 24, 2018. As a result, the Trust has restated the assets and liabilities of the Yuma Hotel operations reported in the accompanying condensed consolidated balance sheet at January 31, 2018 as discontinued operations and reported the Yuma Hotel operations as discontinued operations in the accompanying statement of operations for the three and nine month period ended October 31, 2018 and reclassified the results of operations for the prior year three and nine months period ended October 31, 2018 as discontinued operations in the accompanying statements of operations (see Note 10).

 

Hotel Operations – Continuing Operations:

 

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

 

The Trust is the sole general partner of RRF Limited Partnership, a Delaware limited partnership (the “Partnership”), and owned a 75.89% and 74.80% interest in the Partnership as of October 31, 2018 and January 31, 2018, respectively. As of October 31, 2018, the Partnership owned a 51.01% interest in an InnSuites® hotel located in Tucson, Arizona. The Trust owns a direct 0% interest in a Yuma, Arizona hotel property (see Note 10), and a direct 20.33% interest in an InnSuites® hotel located in Albuquerque, New Mexico.

 

Pursuant to ASC 205-20 Discontinued Operations, the Trust has determined that Yuma Hotel shall be reported in the accompanying condensed consolidated financial statements as discontinued operations (see Note 10).

 

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.

 

IBC Hospitality Technologies – Discontinued Operations:

 

InnDependent Boutique Collection (“IBC”, “IBC Hotels”, “IBC Hospitality” or “IBC Hospitality Technologies”), a wholly-owned subsidiary of InnSuites Hospitality Trust as of February 1, 2018 has been sold on August 1, 2018 (see Note 10), has a network of approximately 2,000 unrelated hospitality properties with proprietary software exclusive marketing distribution and services as well as brand-like cost savings solutions to independent boutique hotels and alternative lodging (serviced apartments, B&B’s, villas and multi-unit ownership/management of luxury private residences). Additionally, IBC provides software and solutions to a variety of branded hotels looking to increase direct bookings and receive full guest information IBC’s patent-pending loyalty program allows consumers to book highly discounted travel when logged in and shopping for lodging on www.ivhtravel.com. IVHTravel.com and its proprietary booking engine has over 1.1 million lodging choices globally and provides add-on capability for activities, rental car and cancellation protection with airfare on its roadmap in 2019.

 

 6 
 

 

Pursuant to ASC 205-20 Discontinued Operations, the Trust has determined that IBC shall be reported in the accompanying condensed consolidated financial statements as discontinued operations (see Note 10).

 

Intellectual Property

 

In order to provide our previous business to business solutions thru IBC and our previous business to consumer solutions thru IVH, we used software, business processes and proprietary information to carry out our previous business. These assets including related intellectual property rights, copyrights and website domains were part of the sale to a third party on August 1, 2018 and have be reported in the accompanying condensed consolidated balance sheet at January 31, 2018 as assets held under discontinued operations (see Note 10).

 

InnSuites Hospitality Trust relies on the combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect these assets and we license software and other intellectual property both to and from third parties. Intellectual property assets are considered a valuable part of our business and have become a value-add portion of the services we provide. We consider our intellectual property assets a valuable asset to our business and we renew appropriate registrations and regularly monitor potential infringements of these assets.

 

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

 

These consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in the United States of America (GAAP), and include all assets, liabilities, revenues and expenses of the Trust and its wholly-owned subsidiaries and consolidated variable interest entities. All material intercompany transactions and balances have been eliminated. The Trust exercises unilateral control over the Partnership and the entities listed below. Therefore, the financial statements of the Partnership and the entities listed below are consolidated with the Trust (through the indicated date sold, if applicable), and all significant intercompany transactions and balances have been eliminated.

 

   IHT OWNERSHIP % 
ENTITY  DIRECT   INDIRECT (i) 
Albuquerque Suite Hospitality, LLC (see Note 6)   20.33%   - 
Tucson Hospitality Properties, LLLP   -    51.01%
Ontario Hospitality Properties, LLLP (sold in June, 2017)   99.60%   - 
Yuma Hospitality Properties, LLLP (sold October 2018, Note 6 and 10)   12.79%   - 
Tucson Saint Mary’s Hospitality LLC   -    83.66%
RRF Limited Partnership (“RRF”)   75.89%   - 
InnSuites Hotels Inc.   100.00%   - 
IBC Hotels, LLC (including dba International Vacation Hotels) (Sold August 1, 2018)   99.90%   0.10%
           
(i) Indirect ownership is through the Partnership      

 

 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 October 31, 2018 and January 31, 2018, 211,708 and 235,812 Class A Partnership units were issued and outstanding, representing 1.60% and 1.76% of the total Partnership units, respectively. Additionally, as of October 31, 2018 and January 31, 2018, 2,974,038 Class B Partnership units were outstanding to James Wirth, the Trust’s Chairman and Chief Executive Officer, and Mr. Wirth’s affiliates. If all of the Class A and B Partnership units were converted on October 31, 2018 and January 31, 2018, the limited partners in the Partnership would receive 3,185,746 and 3,209,850 Shares of Beneficial Interest of the Trust. As of October 31, 2018 and January 31, 2018, the Trust owns 10,025,771 and 10,001,667 general partner units in the Partnership, representing 75.89% and 75.70% of the total Partnership units, respectively.

 

LIQUIDITY

 

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

 

With approximately $2,000,000 of cash and cash equivalent (including short term investments maturing thru January 2019), as of October 31, 2018, the availability of a $1,000,000 related party Demand/Revolving Line of Credit/Promissory Note, and the availability of the combined $1,000,000 Advance to Affiliate credit facilities, we believe that we will have enough cash on hand to meet all of our financial obligations as they become due for at least the next year. In addition, our management is analyzing other strategic options available to us, including the refinancing of another property or raising additional funds through additional non-controlling interest sales; however, such transactions may not be available on terms that are favorable to us, or at all.

 

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

 

Please see related party footnote at Note 4 regarding additional liquidity items.

 

BASIS OF PRESENTATION

 

The condensed consolidated balance sheet as of January 31, 2018, 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, 2018, 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, 2018.

 

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.

 

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

 

On August 1, 2018, the Trust sold its interest in its wholly-owned subsidiary IBC Hospitality Technologies and IVHTravel.com. As a result of the sale, the Trust has reported the operations of IBC as of July 31, 2018 and restated prior year January 31, 2018 as discontinued operations in the accompanying condensed balance sheet, statement of operations and cash flows (see Note 10).

 

On July 31, 2018, the Trust entered into a sale agreement to sell its Yuma Hotel property which was closed on October 24, 2018. As a result, the Trust has restated the assets and liabilities of the Yuma Hotel operations reported in the accompanying condensed consolidated balance sheet at January 31, 2018 as discontinued operations and reported the Yuma Hotel operations as discontinued operations in the accompanying statement of operations for the three and nine month period ended October 31, 2018 and reclassified the results of operations for the prior year three and nine months period ended October 31, 2017 as discontinued operations in the accompanying statements of operations (see Note 10).

 

CORRECTION OF ERROR

 

The management of Innsuites Hospitality Trust determined, after discussions with our independent registered public accounting firm, that based on a review of the Company’s accounting for certain revenue and expense transactions related to our former subsidiary IBC during the first quarter period ended April 2018 were not properly accounted for and the related revenues previously reported were misstated. In addition, certain liabilities were incorrectly recorded during the first quarter April 2018.

 

During the first quarter period ended April 30, 2018, we improperly recognized revenue and liabilities related to certain pass through transactions which did not belong to IBC. As a result of our analysis, we have concluded that these revenues, expenses and liabilities should not have been recorded. Accordingly, the revenue balances for IBC have been restated as follows: Revenue as reported was approximately $345,000; Revenue as adjusted is approximately $131,000; Revenue was overstated by approximately $214,000. In addition, expenses as reported were approximately $890,000; Expenses as adjusted is approximately $728,000; as a result, expenses were overstated by approximately $162,000. As a result, operating loss for IBC as restated is approximately $598,000 and as reported was approximately $546,000. Management believes the restatements had no material impact on our reported net loss per share of $0.03. On August 1, 2018, IBC has been sold and the current and historical financial information has been presented as discontinued operations in the accompanying condensed balance sheets and statements of operations.

 

SEASONALITY OF THE HOTEL BUSINESS

 

The Hotels’ operations historically have been somewhat seasonal. The 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 the Arizona hotel. This seasonality pattern can be expected to cause fluctuations in the Trust’s quarterly revenues. The hotel located in New Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the Trust’s hotel business.

 

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

 

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Reclassifications

 

Certain amounts in previously issued financial statements have been reclassified to conform to the presentation following the sale of IBC and the Yuma Hotel, which includes the reclassification of the combined financial position and results of operations of IBC and the Yuma Hotel as discontinued operations (see Note 10) for all periods presented.

 

Discontinued Operations

 

Pursuant to ASC 205-20 Discontinued Operations, in determining whether a group of assets that is disposed (or to be disposed) should be presented as a discontinued operation, we analyze whether the group of assets being disposed represents a component of the Company; that is, whether it had historic operations and cash flows that were clearly distinguished, both operationally and for financial reporting purposes. In addition, we consider whether the disposal represents a strategic shift that has or will have a major effect on our operations and financial results. The results of discontinued operations, as well as any gain or loss on the disposal, if applicable, are aggregated and separately presented in our condensed consolidated statements of operations, net of income taxes. The historical financial position of discontinued operations are aggregated and separately presented in our accompanying condensed consolidated balance sheets.

 

RECENTLY ISSUED ACCOUNTING GUIDANCE

 

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases, including operating leases, to be recognized in the statement of financial position as right-of-use assets and lease liabilities by lessees. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. In July 2018, the FASB issued ASU 2018-10 “Codification Improvements of Topic 842, Leases” and ASU No. 2018-11,“Leases (Topic 842): Targeted Improvements.” ASU 2018-11 provides companies another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The consideration in the contract is allocated to the lease and nonlease components on a relative standalone price basis (for lessees) or in accordance with the allocation guidance in the new revenue standard (for lessors). ASU 2018-11 also provides lessees with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component. If a lessee makes that accounting policy election, it is required to account for the nonlease components together with the associated lease component as a single lease component and to provide certain disclosures. Lessors are not afforded a similar practical expedient. The Trust is evaluating the effect ASU 2016-02, 2018-10 and 2018-11 will have on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its ongoing financial reporting at this time.

 

In June 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this ASU will become effective for us beginning February 1, 2019, and early adoption is permitted. We do not anticipate that this ASU will have a material effect on our consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. This update is effective for annual and interim periods beginning after December 15, 2019, and interim periods within that reporting period. While we are still in the process of completing our analysis on the impact this guidance will have on the consolidated financial statements and related disclosures, we do not expect the impact to be material.

 

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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

 

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.

 

Construction in progress, consisting of hotel land redevelopment costs, hotel pre-renovation costs, hotel renovation costs, interest incurred on financing, architectural plans, is not depreciated until the related asset is placed in service. The balance of construction in progress at October 31, 2018 was approximately $417,000, which management believes will be placed into service during the third quarter ended November 30, 2018. The majority of the construction in progress as of October 31, 2018 related to the renovation costs associated with the Tucson hotel property. The expected remaining cost of the Tucson renovation is approximately $100,000 at October 31, 2018. The renovation of the Tucson Hotel property was completed the first week of December 2018.

 

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 impaired these assets during the fiscal year 2018, and has determined that no further impairment is required of long-lived assets for the fiscal period ending October 31, 2018.

 

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REVENUE RECOGNITION

 

Hotel and Operations – Continuing Operations:

 

ASU 2014-09 (Topic 606), “Revenue from Contracts with Customers” is effective for reporting period after January 1, 2018. ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.

 

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

 

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

 

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

 

IBC Technologies Discontinued Operations

 

This ASU became effective for the Trust beginning interim period February 1, 2018. Based on our evaluation of the new revenue recognition standard the Trust presents revenue on a net basis for the period ending October 31, 2018.

 

ASU 2014-09 (Topic 606), “Revenue from Contracts with Customers) is effective for reporting period after January 1, 2018.

 

International Vacation Hotels Travel (“IVH”) Transactional Business to Consumer (“B-to-C”) Revenues

 

 

IVH Collect - IVH will charge the guests in full on booking and remit the payments to the Hotel for all completed stays for rates contracted less the agreed upon commission.

     
 

Hotel Collect - the Hotel will charge the guests in full upon arrival and IVH will invoice the Hotel at the end of each month the agreed upon commission for the hotel guest stays completed.

     
 

Split - Guest pays deposit to IVH equal to the commission, provides credit card details and pays the balance to the Member upon arrival.

 

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IBC Business to Business (“B-to-B”) Revenues

 

 

SaaS Revenue – SaaS revenues which include CRS and digital marketing services are billed on a monthly basis and paid for by the individual hotel properties the following month services are provided.

     
  Digital Marketing revenues – Performance of professional services on a fixed price monthly basis.

 

INCOME (LOSS) PER SHARE

 

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

 

For the periods ended October 31, 2018 and 2017, there were Class A and Class B Partnership units outstanding, which are convertible into Shares of Beneficial Interest of the Trust. Assuming conversion at the beginning of each period, the aggregate weighted-average of these Shares of Beneficial Interest would have been 3,308,848 and 3,101,638 for the three and nine months period ended October 31, 2018 and 3,314,674 for the nine months period ended October 31, 2017, respectively, in addition to the basic weighted average shares outstanding. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B Partnership units were dilutive during the three and nine months period ended October 31, 2018 and for the nine months period ended October 31, 2017 and are included in the calculation of diluted earnings per share. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B Partnership units during the three months period ended October 31, 2017 are excluded in the calculation of diluted loss per share as their effect would be anti-dilutive as we reported a net loss for the period.

 

SEGMENT REPORTING

 

As a result of the sale of IBC (see Note 10), the Chief Operating Decision Maker (“CODM”), Mr. Wirth, CEO of the Trust, has determined that the Trust operations are comprised of one reportable segment, Hotel Operations & Corporate Overhead (continuing operations) segment that has ownership interest in three hotel properties with an aggregate of 260 suites in Arizona and New Mexico. The Trust has a concentration of assets in the southwest United States and the southern Arizona market. Prior to the sale of IBC, the Trust has previously determined that its operations were comprised of two reportable segments, a Hotel Operations & Corporate Overhead segment, and the IBC Hospitality segment serving 2,000 unrelated hotel properties. In connection with the sale of IBC, the historical financial information presented in this Form 10-Q reflects this change with IBC being reported as discontinued operation.

 

The Trust has 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 year-end. Any difference between the weighted average and point-in-time allocations is presented as a reallocation of non-controlling interest as a component of shareholders’ equity.

 

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FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

The Trust has approximately $1.8 million invested in Level 1 short-term bonds during the period ended October 31, 2018, and had no other assets or liabilities carried at fair value on a recurring basis and had no fair value re-measurements during the period ended October 31, 2018. As the short term bonds mature thru January 2019, the Company has classified such amounts as cash in the accompanying condensed balance sheet at October 31, 2018, due to the short term nature of the instruments.

 

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

 

3. STOCK-BASED COMPENSATION

 

TRUSTEE STOCK COMPENSATION

 

For the three and nine month periods ended October 31, 2018 and 2017, the Trust recognized expenses of approximately $8,000 and $13,000 and $24,000 and $39,000, respectively, related to stock-based compensation. During the nine months period ended October 31, 2018, the Trust issued 18,000 restricted shares with a total market value of $32,400 in the first fiscal quarter of fiscal year 2019 as compensation to its three outside Trustees for fiscal year 2019. On a monthly basis through January 31, 2019, these shares vest at a rate of approximately 500 shares for each outside Trustee. As of October 31, 2018, the remaining unamortized stock based compensation to be recognized into stock based compensation over the next six months is approximately $8,000.

 

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The following table summarizes restricted share activity during the nine months ended October 31, 2018:

 

   Restricted Shares 
   Shares   Weighted-Average Per Share Grant Date Fair Value 
         
Balance of unvested awards at January 31, 2018   -    - 
Granted   18,000   $1.8 
Vested   (13,500)  $1.8 
Forfeited   -    - 
Balance of unvested awards at October 31, 2018   4,500   $              1.8 

 

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. The Demand/Revolving Line of Credit/Promissory Note, as amended on June 19, 2017, bears interest at 7.0% per annum for both a payable and receivable, is interest only quarterly and matures on June 30, 2019. No prepayment penalty exists on the Demand/Revolving Line of Credit/Promissory Note. The balance fluctuates significantly through the period. The Demand/Revolving Line of Credit/Promissory Note has a net maximum borrowing/lending capacity of $1,000,000. As of October 31, 2018 and January 31, 2018, the Trust had a an amount receivable of approximately $1,569,000, including accrued interest and $811,000, respectively. The outstanding balance is in excess of the permitted amount of $1,000,000. During the nine months period ended October 31, 2018, the Trust advanced approximately $754,000, received approximately $50,000 in repayments and accrued approximately $54,000 of interest income. Subsequent to October 31, 2018, Rare Earth Financial, LLC made a payment of $580,000 to IHT on the related note receivable which reduced the outstanding balance on the note receivable to under $1,000,000.

 

As of January 31, 2017, the Trust had an available Affiliate credit facility with a maximum borrowing/lending capacity of $500,000 to Tempe/Phoenix Airport Resort LLC. On June 19, 2017, the Board changed the terms of Tempe/Phoenix Airport Resort LLC Affiliate credit facilities by increasing the borrowing capacity to $1,000,000 and changed the Maturity Date from June 30, 2017 to June 30, 2019, bears interest at 7.0% per annum for both a payable and receivable. As of October 31, 2018 and January 31, 2018, the Trust had an amount receivable of approximately $406,000 and $970,000, respectively. During the nine months period ended October 31, 2018, the Trust accrued approximately $39,000 of interest income, received payments of approximately $760,000 and made cash advances of approximately $157,000. Subsequent to October 31, 2018, IHT advanced $580,000 to Tempe/Phoenix which increased the related note receivable balance to approximately $1,000,000. Tempe then advanced the monies to Rare Earth Financial, LLC.

 

As of October 31, 2018 and January 31, 2018, Mr. Wirth and his affiliates held 2,974,038 and 2,974,038 Class B Partnership units, which represented 22.5% and 22.5% of the total outstanding Partnership units. As of October 31, 2018 and January 31, 2018, Mr. Wirth and his affiliates held 7,048,462 and 6,939,429 respectively, Shares of Beneficial Interest in the Trust, which represented 73.09% and 70.99%, respectively, of the total issued and outstanding Shares of Beneficial Interest. For the three and nine months ended October 31, 2018, Mr. Wirth’s affiliates paid the Trust approximately $30,000 and $130,000 respectively, for management and licensing fees.

 

During the nine months period ended October 31, 2018, Ms. Pamela Barnhill, immediate family member to Mr. Jim Wirth, was employed by the Trust and IBC and was paid approximately $78,000 for the nine months period ended October 31, 2018. The Trust also employs another immediate family member of Mr. Wirth who provides technology support services to the Trust, receiving a $60,000 yearly salary. Another immediate family member of Mr. Wirth provides investor relations support and services on an hourly basis, of which the Trust has paid this individual approximately $14,000 during the nine month period ended October 31, 2018.

 

5. NOTES PAYABLE

 

On August 24, 2012, the Yuma entity entered into a $5,500,000 mortgage loan with 1st Bank Yuma to refinance the then existing term debt. The mortgage loan calls for a 10 year maturity date and an interest rate of the Wall Street Journal Prime Rate plus one percentage point, with a floor of 5.0% per year. Prepayment fees exist for refinancing this debt with another lender until the maturity date. As of October 31, 2018, the mortgage loan was paid in full in connection with the Sale of the Yuma Hotel property (see Note 10). The mortgage note payable was reclassified at January 31, 2108 and recorded under liabilities of discontinued operations in the accompanying condensed consolidated balance sheet (see Note 10).

 

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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 October 31, 2018, the Promissory Note was paid in full in connection with the sale of the Yuma Hotel property (see Note 10). The Promissory Note was reclassified at January 31, 2018 and recorded under liabilities of discontinued operations in the accompanying condensed consolidated balance sheet (see Note 10).

 

On January 8, 2016, in connection with the acquisition of substantially all of the assets of International Vacation Hotels, the Trust entered into a $400,000 business loan with Laurence Holdings Limited, an Ontario, Canada corporation, with a maturity date of February 1, 2019 pursuant to the terms of the Security Agreement and Promissory Note (the “Laurence Holdings Agreement”). The Laurence Holdings Agreement required the funds be used for the purchase of International Vacation Hotels assets. The Laurence Holdings Agreement provides for interest- only payments for the first three months of the term and principal and interest payments for the remaining portion of the loan. The Laurence Holdings Agreement sets an interest rate of 8% per annum with no prepayment penalty. As of October 24, 2018, the business loan was paid in full. The loan was reclassified at January 31, 2018 and recorded under liabilities of discontinued operations in the accompanying condensed consolidated balance sheet (see Note 10).

 

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. As of October 31, 2018, the Tucson Loan was approximately $4,852,000.

 

Scheduled minimum payments of debt, net of debt discounts, as of October 31, 2018 are as follows in the respective fiscal years indicated:

 

FISCAL YEAR   MORTGAGES   NOTES PAYABLE RELATED
PARTIES
   OTHER NOTES PAYABLE   TOTAL 
                  
Remainder of 2019 (3 mos)   $27,000   $148,000   $1,055,000   $1,230,000 
2020    115,000    318,000    238,000    671,000 
2021    119,000    95,000    212,000    426,000 
2022    127,000         46,000    173,000 
2023    130,000              130,000 
Thereafter    4,334,000              4,334,000 
    $4,852,000   $561,000   $1,551,000   $6,964,000 

 

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6. SALE OF OWNERSHIP INTERESTS IN SUBSIDIARIES

 

During the nine months period ended October 31, 2018, there were 14.50 Class A units sold for $145,000 ($10,000/unit), of which 14.50 came from the Trust’s Class B units, and no C units of the Albuquerque entity sold. As of July 31, 2018, and January 31, 2018, the Trust held a 20.33% and 22.83% ownership interest, or 122 and 137 Class B units, in the Albuquerque entity, Mr. Wirth and his affiliates held a 0.17% interest, or 1 Class C unit, and other third parties held a 79.50% interest, or 477 Class A units as of October 31, 2018 and 79.25% or 475.5 units as of January 31, 2018. As of February 1, 2017, the Trust no longer accrues for these distributions as the preference period generally has expired. During the three and nine months period ended October 31, 2018 the Trust paid distributions in the amount of approximately $105,000, of which approximately $22,000 was to IHT, which were eliminated during the consolidation process for reporting purposes and approximately $83,000 was to the third party non-controlling interest holder and approximately $308,000, of which approximately $69,000 was to IHT, which were eliminated during the consolidation process for reporting purposes, and approximately $239,000 was to the third party the non-controlling interest holders, respectively.

 

During the nine months ended October 31, 2018, there were no Class A, B or C units of the Tucson entity sold. As of October 31, 2018, and January 31, 2018, the Partnership held a 51.01% ownership interest, or 404 Class B units, in the Tucson entity, Mr. Wirth and his affiliates held a 0.38% interest, or 3 Class C units, and other parties held a 48.6% interest, or 385 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 three and nine months period ended October 31, 2018 the Trust paid distributions in the amount of approximately $0 and approximately $139,000, of which approximately $71,000 was to RRF Limited Partnership, which were eliminated during the consolidation process for reporting purposes, and approximately $68,000 was to the third party the non-controlling interest holders, respectively.

 

During the nine months ended October 31, 2018, there were no Class A, B or C units of the Yuma entity sold. As of October 31, 2018, the Trust held a 12.79% ownership interest, or 102.30 Class B units, in the Yuma entity, Mr. Wirth and his affiliates held a 0.63% interest, or 5 Class C units, and other parties held a 86.59% interest, or 692.70 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 three and nine months period ended October 31, 2018 the Company paid distributions in the amount of approximately $140,000, of which approximately $19,000 was to IHT, which were eliminated during the consolidation process for reporting purposes, and approximately $121,000 was to the third party non-controlling interest holder and approximately $432,000, of which approximately $69,000 was to IHT, which were eliminated during the consolidation process for reporting purposes, and approximately $363,000 was to the third party non-controlling interest holders, respectively.

 

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.

 

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

 

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

 

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

 

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

 

On July 31, 2018, the Trust entered into a sale agreement to sell its Yuma Hotel property which was closed on October 24, 2018. As a result, the Trust has reclassified the assets and liabilities of the Yuma Hotel operations reported in the accompanying condensed consolidated balance sheet at January 31, 2018 as discontinued operations and reported the Yuma Hotel operations as discontinued operations in the accompanying statement of operations for the three and nine month period ended October 31, 2018 and restated the prior year three and nine months period ended October 31, 2018 (see Note 10).

 

8. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES

 

The Trust paid approximately $380,000 and $451,000 in cash for interest for the nine months period ended October 31, 2018 and 2017, respectively for continuing operations. The Trust paid approximately $550,000 and $20,000 for taxes for the nine months period ended October 31, 2018 and 2017, respectively for continuing operations.

 

In connection with the sale of the Yuma property, the related mortgage note payable was paid off in full in the amount of approximately $5,560,000 at the time of the sale.

 

In connection with the sale of IBC, the Trust entered into a note receivable for $2,750,000 for a portion of the purchase price.

 

Purchase of treasury stock on notes payable were approximately $477,000 for the nine months period ended October 31, 2018.

 

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 three and nine months ended October 31, 2018 and 2017 was approximately $31,000 and $37,000, respectively and approximately $106,000 and $112,000, respectively. Deferred rent was approximately $145,000 at October 31, 2018 and is recorded under accrued expenses in the accompanying condensed consolidated balance sheet.

 

On August 4, 2017, the Trust entered into a five year office lease agreement with Northpoint Properties for a commercial office lease at 1730 E Northern Ave, Suite 122, Phoenix, Arizona 85020 commencing on September 1, 2017. Base monthly rent of $4,100 increases 6% on a yearly basis. No rent is due for October 2018 and October 2022 months. The Trust also agreed to pay electricity and applicable sales tax. The office lease agreement provides early termination with a 90 day notification with an early termination fee of $12,000, $8,000, $6,000, $4,000 and $2,000 for years 1 – 5 of the lease term, respectively. Rent expense on this lease agreement for the three and nine months period ended October 31, 2018 was approximately $10,000 and $30,000 (net of sublease rental income of approximately $7,000 for the three and nine months period ended October 31, 2018). Deferred rent was approximately $6,000 at October 31, 2018 and is recorded under accrued expenses in the accompanying condensed consolidated balance sheet. Rent expense incurred by the Trust for the three and nine months period ended October 31, 2017 was approximately $9,000 and $18,000, respectively.

 

 18 
 

 

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

 

Fiscal Year Ending    
Remainder of FY 2019   62,000 
FY 2020   167,000 
FY 2021   170,000 
FY 2022   174,000 
FY 2023   145,000 
Thereafter   4,204,000 
Total   4,922,000 

 

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 deminimus as of October 31, 2018 and January 31, 2018.

 

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 $46,000 and $37,000 for the three months ended October 31, 2018 and 2017, respectively, and approximately $125,000 and $114,000 for the nine months ended October 31, 2018 and 2017, 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.

 

Indemnification:

 

We have entered into indemnification agreements with all of our executive officers and Trustees. The agreements provide for indemnification against all liabilities and expenses reasonably incurred by an officer or Trustee in connection with the defense or disposition of any suit or other proceeding, in which he or she may be involved or with which he or she may be threatened, while in office or thereafter, because of his or her position at the Trust. There is no indemnification for any matter as to which an officer or Trustee is adjudicated to have acted in bad faith, with willful misconduct or reckless disregard of his or her duties, with gross negligence, or not in good faith in the reasonable belief that his or her action was in our best interests. These agreements require us, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status or service as our director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by us. We may advance payments in connection with indemnification under the agreements. The level of indemnification is to the full extent of the net equity based on appraised and/or market value of the Trust. Historically, we have not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets.

 

 19 
 

 

Legal

 

From time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any legal proceedings or claims that it believes will have a material adverse effect on its business, financial condition or operating results.

 

10. Discontinued Operations

 

Sale of IBC

 

Discontinued operations during the nine months period ended October 31, 2018 consist of the operations from the IBC subsidiary. On August 15, 2018 Innsuites Hospitality Trust (IHT) entered into a final sale agreement for its subsidiary IBC Hotels LLC (IBC) with an effective sale date as of August 1, 2018 to a third party buyer (Buyer). The third-party purchaser hired IHT’s former Chief Operating Officer, who is a family member of IHT’s CEO. The sale price was $3,000,000 to be paid to IHT as follows:

 

  1. $250,000 at closing, which was received on August 14, 2018;
  2. A secured promissory note in the principal amount of $2,750,000 with interest to be accrued at 3.75% per annum, recorded in the accompanying condensed balance sheet in continuing operations. Interest shall accrue for the first 10 months (starting August 2018), thereafter for month 11 and 12 principal and interest payments of 50% ($25,632 per month), then the remaining amount to be amortized over 59 months (payments of $52,054 per month) with maturity in June 2024.

 

Note is secured by (1) pledge of the Buyer’s interest, and (2) a security interest in all assets of IBC, provided IHT shall agree to subordinate such equity interest to commercially reasonable debt financing upon request.

 

If after effective date IBC closes an equity transaction with net proceeds to IBC in excess of $2,500,000, IBC/Buyer shall pay to IHT an amount equal to (a) 50% of the net proceeds received by IBC and (b) 50% of the sum of the unpaid balance of the note and accrued interest accrued but unpaid interest thereon, as the date of receipt of the net proceeds by IBC.

 

IHT has agreed to provide continuing working capital support for a period of six months in the amount of approximately $37,500 per month to IBC for transitional purposes. IHT has no managerial control nor does IHT have the ability to direct the operations or capital requirements of IBC as of August 1, 2018. IHT has no rights to any benefits or losses from IBC as of August 1, 2018.

 

As a result of the sale, the Trust recorded a gain on sale of approximately $2,244,000, net of taxes of $0. The gain is determined by the sales prices of approximately $3,000,000 let the estimated book value of the assets acquired and liabilities assumed of approximately $431,000 and costs associated with the sale of approximately $325,000.

 

Default

 

If Buyer has not paid two or more payments on the note as scheduled, or if Buyer has not satisfied any other provisions in the note, IHT may give Buyer notice of default. If Buyer fails to cure the default within 30 days after notice (a) on or before February 5, 2020, then 75% of the issued and outstanding IBC interest shall be transferred to IHT, and (b) on or after February 5, 2020, then 51% of the issued and outstanding interest of the Company shall be transferred to IHT.

 

 20 
 

 

Debt/Working Capital adjustment

 

On or before the sixty calendar days following the effective date (August 1, 2018) Buyer shall prepare and deliver to IHT a written statement (closing statement) setting forth a calculation of the aggregate amount of (i) all indebtedness, (ii) working capital of IBC as of the close of business on the last business day immediately preceding the effective date (closing net working capital) , and (iii) a proposed adjustment to the principal amount of the note payable, calculated as follows:

 

  If the closing new working capital is between $0 and negative $100,000, the purchase price shall not be adjusted;
  If the closing working capital is less then negative $100,000, the principal amount of the note shall be decreased in amount equal to the amount by which the closing net working capital is greater than negative $100,000; and
  If the closing working capital is greater than $0, the principal amount of the note shall be increased in an amount equal to the closing working capital.

 

There were no working capital adjustments to the sale price at the conclusion of the 60 day adjustment period.

 

Office Lease/Contracts

 

IHT will maintain an existing reservation center contract with IBC requiring IHT to make payments of $7,500 per month for a minimum of 6 months after closing.

 

IHT will continue to rent office space to IBC on the same terms and conditions as in effect currently on a month to month basis at a monthly rent of approximately $2,500, terminable by either IHT or IBC on a 30-day prior written notice.

 

Indemnification

 

IHT has agreed to indemnify and hold harmless the Buyer from and against any and all losses suffered, sustained or incurred by any Buyer indemnified party, resulting from, arising in connection with or related to (i) any breach of a representation or warranty made by IHT, (ii) any breach of a seller fundamental representation by IHT, (iii) any breach of any covenant made by IHT in this agreement, certification or writing delivered pursuant to the agreement, (iv) any claims or liabilities under, related to or in connection with any person status as a security holder of the company prior to closing, or (v) any transaction expense or indebtedness not accounted for in the final determination of the purchase price.

 

Incentive Bonus

 

On September 4, 2018, the Board approved to pay a $15,000 bonus to the daughter of the CEO, and who is the former Chief Operating Officer, in connection with the sale of IBC. The CEO’s daughter is now employed by the Company that acquired IBC. In addition, the Board approved to pay a $10,000 bonus to the Executive Vice President of the Trust in connection with the sale of IBC. These bonuses will be paid upon receipt of the monthly payments to be received in connection with the note receivable described above starting in September 2019 at $1,000 per month.

 

The Trust also paid the former CFO a $5,000 compensation bonus related to the sale of IBC.

 

Sale of Yuma Property

 

Discontinued operations during the three and nine months ended October 31, 2018 consisted of the sale of the Yuma Hotel property. On July 31, 2018, IHT entered into a purchase and sale agreement to sell its Innsuites Yuma Hotel and Suites Best Western (Yuma), together with certain furniture, fixtures, equipment, operating supplies and other ancillary items pertaining to the daily operations to a third party. The sale was completed on October 24, 2018. The sales price, as revised, was approximately $16.05 million, of which the net proceeds  (net of mortgage payoff, commissions and closing costs) received by the IHT was approximately $9.93 million.

 

 21 
 

 

The Trust recorded a gain on sale of approximately $11,080,000, net of estimated tax of approximately $381,000. The gain was determined by the sale price less the estimated book value other assets sold of approximately $4,589,000. In connection with the sale of the Yuma property the related mortgage note payable in the amount of approximately $5,560,000 at the time of the sale was paid in full.

 

The following tables list the assets and liabilities of discontinued operations at October 31, 2018 and January 31, 2018 and the discontinued operations for IBC and Yuma for the three and nine months period ended October 31, 2018 and IBC, Yuma and Ontario for the and three and nine months period October 31, 2017

 

DISCONTINUED OPERATIONS

 

   OCTOBER 31, 2018 
    Yuma 
ASSETS     
Current Assets:     
Cash and Cash Equivalents  $9,985,750 
Accounts Receivable   201,667 
Prepaid Expenses and Other Current Assets   13,680 
Total Current Assets of Discontinued Operations   10,201,097 
Property, Plant and Equipment, net   - 
TOTAL ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE  $10,201,097 
      
LIABILITIES     
      
LIABILITIES     
Current Liabilities:     
Accounts Payable and Accrued Expenses  $651,951 
Current Portion of Mortgage Notes Payable   - 
Current Portion of Notes Payable to Banks   - 
Current Portion of Other Notes Payable   - 
Total Current Liabilities of Discontinued Operations   651,951 
      
Mortgage Notes Payable   - 
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS AND HELD FOR SALE  $651,951 

 

 22 
 

 

DISCONTINUED OPERATIONS

 

   JANUARY 31, 2018 
   Total   Yuma   IBC   Ontario 
ASSETS                
Current Assets:                    
Cash and Cash Equivalents  $200,705    178,317    22,388    - 
Accounts Receivable   265,377    70,139    195,238    - 
Prepaid Expenses and Other Current Assets   25,447    10,803    14,644    - 
Total Current Assets of Discontinued Operations   491,529    259,259    232,270    - 
Property, Plant and Equipment, net   5,240,535    4,815,664    424,871    - 
TOTAL ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE  $5,732,064    5,074,922    657,141    - 
                     
LIABILITIES                    
                     
LIABILITIES                    
Current Liabilities:                    
Accounts Payable and Accrued Expenses  $607,941    269,242    251,723    86,976 
Current Portion of Mortgage Notes Payable   -                
Current Portion of Notes Payable to Banks   165,239    165,239           
Current Portion of Other Notes Payable   123,859         123,859    - 
Total Current Liabilities of Discontinued Operations   897,039    434,481    375,582    86,976 
                     
Mortgage Notes Payable and Notes to Bank   5,490,374    5,490,374    -    - 
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS AND HELD FOR SALE  $6,387,413    5,924,855    375,582    86,976 

 

 23 
 

 

   FOR THE THREE MONTHS ENDED 
   OCTOBER 31, 
   2018   2018 
      IBC   Yuma 
REVENUE            
Room  $971,476        $971,476 
Food and Beverage   5,920         5,920 
Reservation and Convention   0           
Other   5,996         5,996 
TOTAL REVENUE   983,392    -    983,392 
                
OPERATING EXPENSES               
Room   725,776         725,776 
Food and Beverage   5,205         5,205 
Telecommunications   5,421         5,421 
General and Administrative   390,236    86,530    303,706 
Sales and Marketing   121,928    36,428    85,500 
Reservation Acquisition Costs   -           
Repairs and Maintenance   63,031         63,031 
Hospitality   50,007         50,007 
Utilities   51,958         51,958 
Depreciation   114,314         114,314 
Intangible Amortization   -           
Real Estate and Personal Property Taxes, Insurance and Ground Rent   46,279         46,279 
Other   -           
TOTAL OPERATING EXPENSES   1,574,154    122,958    1,451,195 
OPERATING LOSS   (590,761)   (122,958)   (467,803)
Interest Income   -           
TOTAL OTHER INCOME   -    -    - 
Interest on Mortgage Notes Payable   72,420         72,420 
Interest on Notes Payable to Banks   12,075         12,075 
Interest on Other Notes Payable   -           
TOTAL INTEREST EXPENSE   84,496    -    84,496 
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS  $(675,257)  $(122,958)  $(552,299)

 

 24 
 

 

   FOR THE THREE MONTHS ENDED 
   OCTOBER 31, 
   2017   2017 
      IBC   Yuma   Ontario 
REVENUE                
Room  $1,033,218        $1,033,218      
Food and Beverage   10,839         10,839      
Reservation and Convention   365,749    365,749           
Other   5,346         5,346      
TOTAL REVENUE   1,415,152    365,749    1,049,403    - 
                     
OPERATING EXPENSES                    
Room   224,201         224,201      
Food and Beverage   15,563         15,563      
Telecommunications   5,689         5,689      
General and Administrative   477,627    363,303    92,623    21,701 
Sales and Marketing   564,472    483,289    81,183      
Reservation Acquisition Costs   -                
Repairs and Maintenance   86,296         86,296      
Hospitality   54,643         54,643      
Utilities   64,160         64,160      
Depreciation   146,984    26,541    120,443      
Intangible Amortization   16,750    16,750           
Real Estate and Personal Property Taxes, Insurance and Ground Rent   21,284         21,284      
Other   150         150      
TOTAL OPERATING EXPENSES   1,677,819    889,883    766,235    21,701 
OPERATING LOSS   (262,667)   (524,134)   283,168    (21,701)
Interest Income   -                
TOTAL OTHER INCOME   -    -    -    - 
Interest on Mortgage Notes Payable   83,178         83,178      
Interest on Notes Payable to Banks   4,767    4,767           
Interest on Other Notes Payable   26         26      
TOTAL INTEREST EXPENSE   87,970    4,767    83,203    - 
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS  $(350,637)  $(528,901)  $199,965   $(21,701)

 

 25 
 

 

   FOR THE NINE MONTHS ENDED 
   OCTOBER 31, 
   2018   2018 
      IBC   Yuma 
REVENUE            
Room  $3,225,783         3,225,783 
Food and Beverage   27,569         27,569 
Reservation and Convention   265,281    265,281      
Other   41,057         41,057 
TOTAL REVENUE   3,559,691    265,281    3,294,410 
                
OPERATING EXPENSES               
Room   1,243,699         1,243,699 
Food and Beverage   34,136         34,136 
Telecommunications   21,803         21,803 
General and Administrative   1,041,658    493,451    548,206 
Sales and Marketing   636,119    384,038    252,082 
Reservation Acquisition Costs   142,842    142,842      
Repairs and Maintenance   180,112         180,112 
Hospitality   167,095         167,095 
Utilities   149,635         149,635 
Depreciation   396,642    51,008    345,634 
Intangible Amortization   -           
Real Estate and Personal Property Taxes, Insurance and Ground Rent   88,344         88,344 
Other   5,486         5,486 
TOTAL OPERATING EXPENSES   4,107,570    1,071,340    3,036,231 
OPERATING LOSS   (547,880)   (806,059)   258,179 
Interest Income   -           
TOTAL OTHER INCOME   -    -    - 
Interest on Mortgage Notes Payable   212,573         212,573 
Interest on Notes Payable to Banks   -           
Interest on Other Notes Payable   41,543    3,725    37,819 
TOTAL INTEREST EXPENSE   254,116    3,725    250,391 
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS  $(801,996)  $(809,784)  $7,788 

 

 26 
 

 

   FOR THE NINE MONTHS ENDED 
   OCTOBER 31, 
   2017   2017 
        IBC     Yuma      Ontario 
REVENUE                    
Room  $4,405,046         3,007,722    1,397,324 
Food and Beverage   95,511         30,535    64,976 
Reservation and Convention   887,274    887,274           
Other   24,987         16,544    8,443 
TOTAL REVENUE   5,412,819    887,274    3,054,802    1,470,743 
                     
OPERATING EXPENSES                    
Room   1,648,772         708,874    939,898 
Food and Beverage   110,663         44,511    66,152 
Telecommunications   24,116         24,116    - 
General and Administrative   1,504,218    952,710    272,692    278,815 
Sales and Marketing   1,353,825    1,008,029    222,496    123,300 
Reservation Acquisition Costs   -                
Repairs and Maintenance   319,309         219,160    100,149 
Hospitality   278,896         156,669    122,227 
Utilities   239,965         165,325    74,640 
Depreciation   604,610    75,083    351,703    177,824 
Intangible Amortization   50,250    50,250           
Real Estate and Personal Property Taxes, Insurance and Ground Rent   127,484         71,469    56,015 
Other   1,457         (2,111)   3,568 
TOTAL OPERATING EXPENSES   6,263,564    2,086,073    2,234,904    1,942,588 
OPERATING LOSS   (850,745)   (1,198,799)   819,899    (471,845)
Interest Income   961              961 
TOTAL OTHER INCOME   961    -    -    961 
Interest on Mortgage Notes Payable   352,203         224,416    127,787 
Interest on Notes Payable to Banks   16,666    16,666           
Interest on Other Notes Payable   454         26    428 
TOTAL INTEREST EXPENSE   369,322    16,666    224,441    128,215 
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS  $(1,219,106)  $(1,215,465)  $595,457   $(599,099)

 

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11. STOCKHOLDERS EQUITY

 

Repurchase of Stock and Units

 

In June 2018 the Trust entered into a Note Payable with an investor for $175,000. The Note Payable has a maturity date of May 2021 and is related to the repurchase of 60,000 shares of IHT Stock. The note payable is due in equal monthly payments of approximately $5,435 with 7% interest per annum. No prepayment penalty exists. The outstanding balance at October 31, 2018 was approximately $158,000.

 

In March 2018 the Trust entered into a Note Payable with an investor for approximately $125,000. The Note Payable has a maturity date of March 2021 and is related to the repurchase of 41,167 shares of IHT Stock. The note payable is due in equal monthly payments of approximately $3,825 with 7% interest per annum. No prepayment penalty exists. The outstanding balance at October 31, 2018 was approximately $102,000.

 

In April 2018 the Trust entered into a Note Payable with an investor for approximately $140,000. The Note Payable has a maturity date of February 2021 and is related to the repurchase of 93,247 shares of IHT Stock. The note payable is due in equal monthly payments of approximately $4,325 with 7% interest per annum. No prepayment penalty exists. The outstanding balance at October 31, 2018 was approximately $111,000.

 

In May 2018 the Trust entered into a Note Payable with an investor for approximately $14,000. The Note Payable has a maturity date of August 2021 and is related to the repurchase of 5,827 shares of IHT Stock. The note payable is due in equal monthly payments of approximately $400 with 7% interest per annum. No prepayment penalty exists. The outstanding balance at October 31, 2018 was approximately $8,000.

 

In June 2018, the Trust entered into a severance agreement with its former CFO in which is was agreed that the Trust would repurchase 10,500 shares of IHT stock at a price of $2.14 per share, the original exercise price. No prepayment penalty exists. The note payable in the amount of approximately $23,000 matures in September 2020, with monthly payments of approximately $970 per month, including interest at 7% per annum, beginning in September 2018. The outstanding balance was approximately $21,000 at October 31, 2018.

 

During the prior year January 31, 2018, the Trust entered into various Note Payables with various third party investors in the aggregate amount of approximately $101,000 for the repurchase of 51,126 shares of common stock. The notes range from approximately $5,000 to $48,000 and mature on various dates thru July 2020, and accrue interest at 7%. The outstanding balance on these notes were approximately $55,000 at October 31, 2018.

 

During the prior year January 31, 2018, the Trust entered into a Note Payable with Mr. Marc Berg, Vice President and Trustee of the Trust, in the amount of $40,000 for the repurchase of 80,000 shares of common stock. The note matures in July 2020, requires monthly payments of approximately $2,500 and accrues interest at 7%. The outstanding balance on the related note payable was approximately $47,000 at October 31, 2018.

 

During the nine months period ended October 31, 2018, the Trust repurchased 184,055 shares of common stock on the open mark on various dates for a total cash purchase price of approximately $311,000.

 

The Trust has recorded the above transactions as treasury stock under stockholders’ equity in the accompanying condensed balance sheet as of October 31, 2018. In addition, pursuant to the above notes payable, the Company made down payments related to the purchase of the treasury stock of approximately $13,000 in aggregate to the various note holders.

 

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During the nine months period ended October 31, 2018, the Trust provided working capital to the General Partner in the form of notes payable to third party investors for the repurchase of 24,104 units of the beneficial partnership units for the benefit of the General Partner. The notes payables aggregated to approximately $42,000 and vary in amounts ranging from $7,000 to $20,000 and mature on various dates thru August 2021, with monthly payments of approximately $500 per note payable. The notes accrue interest at 7% per annum. In addition, during the year end January 31, 2018, the Trust provided working capital to the General Partner in the form of notes payable to third party investors for the repurchase of 48,584 units of the beneficial partnership units for the benefit of the General Partner. The notes payables aggregated to approximately $88,000 and vary in amounts ranging from $4,000 to $22,000 and mature on various dates thru January 2021, with monthly payments ranging from approximately $500 to approximately $1,000 per note payable. The notes accrue interest at 7% per annum. The balance of the notes outstanding was approximately $101,000 at October 31, 2018.

 

During the year end January 31, 2018, the Trust provided working capital to the General Partner in the form of notes payable to related parties ( Mr. James Wirth and family) for the repurchase of 433,900 units of the beneficial partnership units for the benefit of the General Partner. The notes payables aggregated to approximately $868,000 and vary in amounts ranging from $92,000 to $500,000 and mature on various dates thru July 2020, with monthly payments ranging from approximately $3,000 to approximately $15,000 per note payable. The notes accrue interest at 7% per annum. The balance of the notes outstanding was approximately $515,000 at October 31, 2018.

 

Dividends

 

The Trust had originally declared a dividend on June 19, 2018, of $0.01 per share payable on July 31, 2018 to shareholders of record as of July 16, 2018. However, the Trust rescinded the original dividend and re-declared the dividend on July 26,2018 with a date of record as of August 8, 2018 and paid on August 20, 2018 in the amount of approximately $99,000.

 

Sale of Shares or Units

 

During the nine months ended October 31, 2018, there were 14.50 Class A units sold for $145,000 ($10,000/unit), of which 14.50 came from the Trust’s Class B units of the Albuquerque entity.

 

12. INCOME TAXES

 

During the nine months period ended October 31, 2018, the Trust recorded approximately $220,000 in the accompanying condensed statement of operations for related tax payable true-ups related to prior year tax return related primarily to the sale of Ontario hotel operations resulting in a tax payable of approximately $550,000. During the three months period ended, the Trust paid the income tax payable of approximately $550,000. The Trust’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Trust has received various IRS and state tax jurisdiction notices which the Trust in the process of responding to in which management believes the notices are without merit and expect full remediation of all tax notices. As a result, the Trust has accrued approximately $200,000 and $0 for potential interest and/or penalties at October 31, 2018 and January 31, 2018 related to these IRS and State tax jurisdiction notices.

 

13. SUBSEQUENT EVENTS

 

Subsequent to October 31, 2018, the Trust repurchased 26,644 shares of common stock on the open mark on various dates for a total cash purchase price of approximately $47,000.

 

Subsequent to October 31, 2018, the Trust, through its subsidiary Yuma Hospitality, made a cash distribution of approximately $7,773,000 to third party syndicate investors and approximately $825,000 to REF, a related party, in connection with the sale of Yuma.

 

On December 6, 2018, the Board approved a bonus in the amount of $36,000 to be paid over a 5 month period to the Executive Vice President of the Trust. The bonus is in connection with the sale of the Yuma Hotel property.

 

On December 6, 2018, the Board declared a dividend of $0.01 per share payable on January 30, 2019 to shareholders of record as of January 10, 2019.

 

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

 

GENERAL

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and our Form 10-K for the fiscal year ended January 31, 2018.

 

OVERVIEW

 

We are engaged in the ownership, operation and support of hotel properties, continuing operations. At October 31, 2018, the Trust had three moderate and full-service hotels with 260 hotel suites. All of our Hotels are branded through membership agreements with Best Western. All Hotels are trademarked as InnSuites Hotels. We are also involved in various operations incidental to the operation of hotels, such as the operation of restaurants, meeting/banquet room rentals, and the operation of a reservation system.

 

Our continuing operations consist of hotel ownership, which derives its revenue from the operation of the Hotels and technology reservation services for approximately 2,000 unrelated hotel properties. We provide management services for the Hotels and a hotel owned by affiliates of James F. Wirth, the Trust’s Chairman and Chief Executive Officer. One of the affiliate hotels owned by James F. Wirth was sold in February 2017. We also provide trademark and licensing services to the Hotels, one hotel owned by affiliates of Mr. Wirth and one unrelated hotel property.

 

On July 31, 2018, IHT entered into a purchase and sale agreement to sell its Innsuites Yuma Hotel and Suites Best Western (Yuma), together with certain furniture, fixtures, equipment, operating supplies and other ancillary items pertaining to the daily operations to a third party. The sale was completed on October 24, 2018 for a revised sales price of approximately $16.050 million As a result, the Trust has reclassified the assets and liabilities of the Yuma Hotel operations reported in the accompanying condensed consolidated balance sheet at January 31, 2018 as discontinued operations and reported the Yuma Hotel operations as discontinued operations in the accompanying statement of operations for the three and nine month period ended October 31, 2018 and reclassified the results of operations for the prior year three and nine months period ended October 31, 2018 as discontinued operations in the accompanying statements of operations.

 

On August 1, 2018, the Trust sold its subsidiary InnDependent Boutique Collection. InnDependent Boutique Collection (“IBC”, “IBC Hotels” or “IBC Hospitality Technologies”), which has a network of approximately 2,000 unrelated hotel properties with exclusive marketing distribution and services as well as brand-like cost savings solutions to independent boutique hotels. As a result of the sale of this subsidiary, the Trust has reported this subsidiary as a discounted operation as of October 31, 2018 and has restated prior year financial information as of October 31, 2017.

 

Our long-term strategic plan and continuing operations is to obtain the full benefit of our real estate equity value and hotel operations with the expectations of either selling all the remaining interest in our hotels and/or a potential merger candidate for the Trust which will hopefully increase share value to the shareholders.

 

As a result of the sale of IBC and the Yuma hotel property in 2018 and the sale of the Ontario, California hotel property in 2017, the following discussion related to continuing operations excludes the operations from these subsidiaries as they are reported as discontinued operations for all periods presented.

 

HOTEL PROPERTIES-CONTINUING OPERATIONS

 

Our long-term strategic plan and continuing operations is to obtain the full benefit of our real estate equity value and hotel operations with the expectations of either selling all the remaining interest in our hotels and/or a potential merger candidate for the Trust which will hopefully increase share value to the shareholders.

 

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Our 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, including furniture and fixtures, their respective approximate net book carrying and mortgage value and the listed asking price for the hotel properties.

 

Hotel Property  Book Value   Mortgage Balance   Listed Asking Price 
Albuquerque  $1,848,000   $-   $7,000,000 
Tucson Oracle   7,640,000    4,850,000    15,500,000 
                
   $9,488,000   $4,850,000   $22,500,000 

 

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.

 

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

 

We experienced stronger economic conditions during fiscal year 2018, and we continue to anticipate that a steady economy will exist during all of 2019. We expect the major challenge for fiscal year 2019 to be the continuation of strong competition for corporate leisure group and government business in the markets in which we operate, which may affect our ability to increase room rates while maintaining market share. We believe that we have positioned the Hotels to remain competitive through refurbishment, by offering a relatively large number of two-room suites at each location and by maintaining a robust complementary guest Internet access system.

 

At October 31, 2018, we owned through our sole general partner’s interest in the Partnership a direct 20.33% interest in the Albuquerque, New Mexico Hotel. Additionally, at October 31, 2018, we, together with the Partnership, owned a 51.01% interest in a hotel located in Tucson, Arizona.

 

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 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.

 

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NON-GAAP FINANCIAL MEASURES

 

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

 

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

 

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A reconciliation of net loss attributable to controlling interests to Adjusted EBITDA for the three and nine months ended October 31, 2018 and 2017 is as follows:

 

   Three Months Ended October 31,   Nine Months Ended October 31, 
   2018   2017   2018   2017 
Consolidated Net income (loss)  $12,059,000   $(827,000)  $11,124,000   $8,730,000 
Add back:                    
Depreciation   323,000    349,000    1,018,000    1,132,000 
Interest expense   197,000    156,000    548,000    563,000 
Taxes   198,000         407,000    330,000 
Less:                    
Interest income   (34,000)   (5,000)   (95,000)   (6,000)
Gain on Disposal of Discontinued Operations   (13,323,000)   -    (13,323,000)   (11,446,000)
Adjusted EBITDA  $(546,000)  $(327,000)  $(226,000)  $(697,000)

 

For the 12-month trailing periods November 1, 2017 to October 31, 2018, and November 1, 2016 to October 31, 2017, total revenue from continuing operations was approximately $6.1 million and approximately $5.4 million, respectively. Total net income before non-controlling interest was approximately $9.2 million and approximately $8.2 million, respectively. Total net income/gain from discontinued operations was approximately $12.5 million and approximately $10.2 million, respectively. For the same two 12-month trailing periods, non-cash depreciation and amortization was approximately $1.4 million and $1.9 million, respectively. Net income before non-controlling interest before non-cash depreciation and amortization was approximately $10.6 million and $10.1 million for the same 12-month trailing periods, while basic earnings per share was $0.96 and $0.84 for the same 12-month trailing periods.

 

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

 

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A reconciliation of net loss attributable to controlling interests to FFO for the three and nine months ended October 31, 2018 and 2017:

 

   Three Months Ended October 30,   Nine Months Ended October 30, 
   2018   2017   2018   2017 
Net Income (loss) attributable to controlling interests  $2,900,000   $(698,000)  $1,530,000   $8,617,000 
Add back:                    
Depreciation   323,000    349,000    1,018,000    1,132,000 
Non-controlling interest   9,159,000    129,000    9,595,000    114,000 
Less:                    
Gain on Disposal of Discontinued Operations   (13,323,000)   -    (13,323,000)   (11,446,000)
FFO  $(941,000)  $(220,000)  $(1,180,000)  $(1,583,000)

 

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. We anticipate this rate and occupancy levels to be steady during the rest of fiscal year 2019 due to slowly improving economic and travel industry conditions. On October 24, 2018, the Trust completed that sale of our Yuma property for approximately $16.050 million, as revised. In addition, the Trust is currently in the process of renovating the Tucson property which was completed during the first week of December 2018.

 

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

 

   For the Nine Months Ended 
   October 31, 
   2018   2017 
Occupancy   82.88%   75.81%
Average Daily Rate (ADR)  $78.19   $79.48 
Revenue Per Available Room (REVPAR)  $65.06   $60.50 

 

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.

 

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RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2018 COMPARED TO THE THREE MONTHS ENDED OCTOBER 31, 2017

 

REVENUE CONTINUING OPERATIONS

 

For the three months ended October 31, 2018, we had total revenue (excluding other revenue) of approximately $1,486,000 compared to approximately $1,266,000 for the three months ended October 31, 2017, an increase of approximately $220,000. With an improved economy and renovated hotels in the New Mexico and Arizona market, we realized an overall 18% increase in room revenues during the three months period ended October 31, 2018 as room revenues were approximately $1,436,000 for the third quarter of fiscal year 2019 as compared to approximately $1,217,000 during the third quarter of fiscal year 2018. Food and beverage revenue was approximately $12,000 for the third quarter of fiscal year 2019 as compared to approximately $10,000 for the third quarter of fiscal year 2018, an increase of approximately $2,000. During the remainder of fiscal year 2019, we expect improvements in occupancy, modest improvements in rates and steady food and beverage revenues. We also realized no significant change in management and trademark fee revenues during the third quarter of fiscal year 2019 as management and trademark revenues were approximately $38,000 during the third quarter of fiscal year 2019 as compared to approximately $39,000 during third quarter of fiscal year 2018. During the remainder of fiscal year 2019, 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.

 

EXPENSES CONTINUING OPERATIONS

 

Hotel Operations & Corporate Overhead Segment

 

Total operating expenses were approximately $1,813,000 for the three months ended October 31, 2018, reflecting an increase of approximately $93,000 compared to total operating expenses of approximately $1,718,000 for the three months ended October 31, 2017. The increase was primarily due to overall increase in occupancy at Albuquerque hotel property resulting in an increase in operating expenses for our rooms, and depreciation of capital expenses due to product improvement plans (PIP) offset partially by certain rooms not being available for occupancy at the Tucson hotel due to the renovation in progress that was completed during the first week of December 2018.

 

Room expenses, consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation fees and room supplies, were approximately $492,000 for the three months ended October 31, 2018 compared to approximately $402,000 for the three months ended October 31, 2017, approximately a $90,000, or 22% 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 2019.

 

Food and beverage expenses included food and beverage costs, personnel and miscellaneous costs to provide small banquet events. For the three months ended October 31, 2018, food and beverage expenses were approximately $17,000 as compared to approximately $12,000 for the three months ended October 31, 2017, a increase of approximately $5,000, or 42%. The increase during the second quarter of fiscal year 2019 as compared to the second quarter of fiscal year 2018 corresponded with an increased amount of demand.

 

General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $566,000 for the three months ended October 31, 2018 increase approximately $5,000 from approximately $561,000 for the three months ended October 31, 2017 primarily due to slight increase in overhead and offset by closer monitoring of spending, in addition due to the renovation at the Tucson hotel, certain expenses were reduced until such renovation is completed. Management anticipates this will be consistent for the remainder of fiscal year 2019.

 

Sales and marketing expense decreased approximately $41,000, or 31% to approximately $92,000 for the three months ended October 31, 2018 from approximately $133,000 for the three months ended October 31, 2017. The decrease is due to the loss of sales employees who have not yet been replace during the three months period ended October 31, 2018. We expect this expense to increase in the near future with the hiring of sale personnel.

 

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Repairs and maintenance expense was approximately $165,000 for the three months ended October 31, 2018 from approximately $100,000 reported for the three months ended October 31, 2017, a difference of $65,000. 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. We are currently in the process of renovating our Tucson hotel so repairs and maintenance at Tucson have decreased as we renovate and capitalize renovation costs that extend the life and benefit of the property. Management anticipates this will be consistent for the remainder of fiscal year 2019.

 

Hospitality expense increased by approximately $2,000, or 2%, from $113,000 for the three months ended October 31, 2017 to approximately $115,000 for the three months ended October 31, 2018. The increase was primarily due to the increased overall occupancy at our hotel properties.

 

Utility expenses decreased by approximately $34,000 from approximately $92,000 reported for the three months ended October 31, 2017 compared with approximately $58,000 for the three months ended October 31, 2018. Due to the renovation at our Tucson property, we experienced a decrease in utilities expense during the three months period ended. Management expects this to increase in the near future with the renovation done at the Tucson property resulting in increase occupancy and increased utilities expense.

 

Hotel property depreciation expense increased to approximately $209,000 for the three months ended October 31, 2018 as compared to approximately $202,000 for the three months ended October 31, 2017, an increase of approximately $7,000. The change is a combination of increased depreciation due to our property improvements, and the high depreciation expense from the prior year period due to the re-classification of properties from assets held for sale to continuing operations.

 

Real estate and personal property taxes, insurance and ground rent expense decreased by approximately $7,000, from approximately $103,000 for the three months ended October 31, 2017 to approximately $96,000 for the three months ended October 31, 2018.

 

Interest expenses were approximately $113,000 for the three months ended October 31, 2018, an increase of approximately $45,000 from the interest expenses for the three months ended October 31, 2017 of approximately $68,000. The increase is due to additional notes payable being incurred for the repurchase of beneficial shares.

 

Income tax provision was approximately $200,000 for the three months ended October 31, 2018, a increase of $200,000 from approximately $0 of income tax provision for the three months ended October 31, 2017. Increase is mainly due to the tax on the gain on sale of the Yuma and IBC along with estimated penalties and interest.

 

Gain on disposal of discontinued operations increased approximately $13,323,000 to approximately $13,323,000 during the three months period ended October 31, 2018 from approximately $0 during the three months period ended October 31, 2017. The increase is a result of the sale of the Yuma hotel property and IBC during the three months period ended October 31, 2018.

 

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RESULTS OF CONTINUING OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 2018 COMPARED TO THE NINE MONTHS ENDED OCTOBER 31, 2017

 

REVENUE CONTINUING OPERATIONS

 

Hotel Operations & Corporate Overhead Continuing Operations

 

For the nine months ended October 31, 2018, we had total revenue (excluding other revenue) of approximately $4,745,000 compared to approximately $4,169,000 for the nine months ended October 31, 2017, an increase of approximately $576,000. With an improved and renovated hotels and the overall economy, we realized an overall 15% increase in room revenues during the first nine months of fiscal year 2019 as room revenues were approximately $4,582,000 for the nine months of fiscal year 2019 as compared to approximately $3,995,000 during the nine months of fiscal year 2018. Food and beverage revenue was approximately $34,000 for the nine months of fiscal year 2019 as compared to approximately $16,000 for the first nine months of fiscal year 2018, an increase of approximately $18,000, or 113%. During the remainder of fiscal year 2019, we expect improvements in occupancy, modest improvements in rates and steady food and beverage revenues. We also realized a 18% decrease in management and trademark fee revenues during the nine months of fiscal year 2019 as management and trademark revenues were approximately $129,000 during the nine months of fiscal year 2019 as compared to approximately $157,000 during nine months of fiscal year 2018. During the remainder of fiscal year 2019, 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.

 

EXPENSES CONTINUING OPERATIONS

 

Hotel Operations & Corporate Overhead Continuing Operations

 

Total operating expenses of approximately $5,593,000 for the nine months ended October 31, 2018 reflect an increase of approximately $377,000 compared to total operating expenses of approximately $5,216,000 for the nine months ended October 31, 2017. The increase was primarily due to an increase in overall 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 $1,474,000 for the nine months ended October 31, 2018 compared to approximately $1,277,000 for the nine months ended October 31, 2017 of approximately a $197,000, or 15%, 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 2019.

 

Food and beverage expenses included food and beverage costs, personnel and miscellaneous costs to provide small banquet events. For the nine months ended October 31, 2018, food and beverage expenses were approximately $53,000 as compared to approximately $18,000 for the nine months ended October 31, 2017, an increase of approximately $35,000, or 195%. The increase during the nine months of fiscal year 2019 as compared to the first nine months of fiscal year 2018 corresponded with an increased amount of demand.

 

General and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative expenses of approximately $1,727,000 for the nine months ended October 31, 2018 decreased approximately $54,000 from approximately $1,781,000 for the nine months ended October 31, 2017 primarily due to decrease in overhead and offset by increase in operating expenses due to increase in overall occupancy, as management continues to closely monitoring spending. Management anticipates this will be consistent for the remainder of fiscal year 2019.

 

Sales and marketing expense increased approximately $27,000, or 14%, to approximately $440,000 for the nine months ended October 31, 2018 from approximately $413,000 for the nine months ended October 31, 2017. 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 $362,000 for the nine months ended October 31, 2018 from approximately $295,000 reported for the nine months ended October 31, 2017, a difference of $67,000. 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 2019.

 

Hospitality expense increased by approximately $9,000, or 3%, from $335,000 for the nine months ended October 31, 2017 to approximately $344,000 for the nine months ended October 31, 2018. The increase was primarily due to the increased occupancy at our hotel properties.

 

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Utility expenses increased by approximately $2,000 from approximately $272,000 reported for the nine months ended October 31, 2017 compared with approximately $274,000 for the nine months ended October 31, 2018. The properties had increased overall occupancy which increase utility expenses and increase usage of the room air conditioning units overnight when guests are occupying the rooms.

 

Hotel property depreciation expense increased significantly to approximately $621,000 for the nine months ended October 31, 2018 as compared to approximately $527,000 for the nine months ended October 31, 2017. The change occurred as all of our hotel properties are either going thru renovations which is increasing our capitalize costs and repairs that extend the life of our operating assets, which increase our depreciation.

 

Real estate and personal property taxes, insurance and ground rent expense decreased by approximately $4,000, from approximately $296,000 for the nine months ended October 31, 2017 to approximately $292,000 for the nine months ended October 31, 2018 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 $295,000 for the nine months ended October 31, 2018, an increase of approximately $102,000 from the interest expenses for the nine months ended October 31, 2017 of approximately $193,000. The increase is due to additional notes payable being incurred for the repurchase of beneficial shares. Also, 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 approximately $408,000 for the nine months ended October 31, 2018, an decrease of $78,000 from $330,000 income tax provision for the nine months ended October 31, 2017. Increase is due to the sale of Yuma hotel and accrued penalties and interest related to various IRS notices received. 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.

 

We had a consolidated net loss from continuing operations of approximately $1,397,000 for the nine months period ended October 31, 2018 compared to net loss from continuing operations of approximately $1,496,000 for the nine months period ended October 31, 2017. The decrease in net loss from continuing operations is due to the increase in overall occupancy at the hotels which increase our revenue for rooms, food and beverage.

 

Consolidated net loss from discontinued operations was approximately $802,000 for the nine months period ended October 31, 2018 compared to a net loss from discontinued operations of approximately $(1,219,000) for the nine months period ended October 31, 2017.

 

Gain on disposal of discontinued operations increased approximately $1,878,000 to approximately $13,323,000 during the nine months period ended October 31, 2018 from approximately $11,446,000 during the nine months period ended October 31, 2017. The increase is a result of the sale of the Yuma hotel property and IBC during the three and nine months period ended October 31, 2018.

 

Net income attributable to controlling interest was approximately $1,530,000 for the nine months period ended October 31, 2018 compared to net income attributable to controlling interest of approximately $8,617,000 for the nine months period ended October 31, 2017.

 

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DISCONTINUED OPERATIONS

 

IBC Developments

 

For the nine months ended October 31, 2018, we had total revenue of approximately $266,000 compared to approximately $887,000 for the nine months ended October 31, 2017, an decrease of approximately $621,000. Comparative revenues for fiscal year 2019 to 2018 are impacted by the adoption of ASU 2014-09 (Topic 606) which was effective for reporting period after February 1, 2018. This adoption now requires revenues to be reported at net value versus gross value for 2018. The impact of the adoption for 2018 was a reduction to gross revenue for the current period ending October 31, 2018.

 

Ontario and Yuma Hotel Operations

 

For the nine months period ended October 31, 2017 the Ontario hotel has revenue of approximately $1,471,000 compared to $0 for the nine months period ended October 31, 2018.The hotel was sold in 2017.

 

For the nine months period ended October 31, 2017 the Yuma hotel has revenue of approximately $3,055,000 compared to $3,294,000 for the nine months period ended October 31, 2018.The hotel was sold in 2018.

 

IBC Developments

 

Total expenses, which are comprised primarily of general and administrative and sales and marketing expense of approximately $1,071,000 for the nine months ended October 31, 2018, reflect an decrease of approximately $1,015,000, as compared to total expenses of approximately $2,086,000 for the nine months ended October 31, 2017. During the first nine months ended October 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.

 

Ontario and Yuma Hotel Operations

 

For the nine months period ended October 31, 2017 the Ontario hotel has expenses of approximately $1,943,000 compared to $0 for the nine months period ended October 31, 2018.The hotel was sold in 2017.

 

For the nine months period ended October 31, 2017 the Yuma hotel has expenses of approximately $2,235,000 compared to $3,036,000 for the nine months period ended October 31, 2018.The hotel was sold in 2018.

 

IBC Hospitality

 

For the three months ended October 31, 2018, we had total revenue of approximately $0, a decrease of 100% as compared to approximately $366,000 for the three months ended October 31, 2017. IBC was sold August 1, 2018.

 

Yuma Hotel Operations

 

For the three months period ended October 31, 2017 the Yuma hotel had revenue of approximately $1,050,000 compared to $983,000 for the three months period ended October 31, 2018.The hotel was sold in October 2018.

 

IBC Hospitality

 

Total expenses, which are comprised primarily of general and administrative, sales and marketing expense, cost of reservations was approximately $122,000 for the three months ended October 31, 2018 as compared to approximately $890,000 for the three months ended October 31, 2017, a decrease of approximately 86%.

 

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Ontario and Yuma Hotel Operations

 

For the three months period ended October 31, 2017 the Ontario hotel has expenses of approximately $22,000 compared to $0 for the three months period ended October 31, 2018.The hotel was sold in 2017.

 

For the three months period ended October 31, 2017 the Yuma hotel has expenses of approximately $766,000 compared to $1,451,000 for the three months period ended October 31, 2018.The hotel was sold in 2018. The increase is due to the cost of sale of the Yuma property in October 2018.

 

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 from the sale of the Yuma, Arizona properties and more recently, sales of non-controlling interests in certain of our Hotels and the sale of hotel properties. The Partnership’s principal source of revenue is hotel operations for the one hotel property it owns in Tucson, Arizona and the proceeds from the sale of the Yuma, Arizona and Ontario, California 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.

 

Hotel operations are significantly affected by occupancy and room rates at the Hotels. We anticipate occupancy and ADR will be steady during this coming year; capital improvements will decrease from the prior year.

 

With approximately $3,000,000 of cash and short term investments as of October 31, 2018 (including $1,122,0000 distributed to the Trust after October 31, 2018 from the proceeds of the Yuma Hotel sale, which is included in discontinued operations at October 31, 2018) and the availability of a $1,000,000 related party Demand/Revolving Line of Credit/Promissory Note and the availability of our two available Advances to Affiliate credit facilities for a total of $1,000,000 maximum borrowing capacity, we believe that we will have enough cash on hand to meet all of our financial obligations as they become due for at least the next twelve months from the issuance date of the these consolidated financial statements. In addition, our management is analyzing other strategic options available to us, including raising additional funds through additional non-controlling interest sales; however, such transactions may not be available on terms that are favorable to us, or at all.

 

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

 

We anticipate some additional new-build hotel supply during fiscal year 2019. In fiscal year 2019, we anticipate additional pressure on revenues and operating margins. We expect the major challenge for fiscal year 2019 to be the continuation of strong competition for corporate leisure group and government business in the markets in which we operate, which may affect our ability to increase room rates while maintaining market share.

 

Net cash used in operating activities totaled approximately $1,700,000 during period ended October 31, 2018 as compared to approximately $1,387,000 used in operating activities during the period ending October 31, 2017. Consolidated net income was approximately $11,124,000 for the year ended October 31, 2018 as compared to consolidated net income for the fiscal year ended October 31, 2017 of approximately $8,730,000, offset by a gain on disposal of assets of approximately $13,323,000 and $11,446,000 as of October 31, 2018 and 2017, respectively. Explanation of the differences between these fiscal years are explained above in the results of operations of the Trust.Most notably is the gain on sale of Yuma and IBC compared to the gain on sale of Ontario in prior year.

 

Net cash provided by investing activities totaled approximately $10,305,000 for the period ended October 31, 2018 compared to net cash provided by investing activities of approximately $6,106,000 for the period ended October 31, 2017. The increase in net cash provided by investing activities during period ending October 31, 2018 was due to the sale of Yuma and IBC in the current period along with the redemption of marketable securities offset by improvements at the hotels in the current period.

 

Net cash used by financing activities totaled approximately $1,631,000 for the period ended October 31, 2018, compare to cash provided of approximately $2,339,000 for the period ended October 31, 2017. The change of approximately $3,970,000 is attributable to repurchases of treasury stock of approximately $324,000, distributions to Non-controlling interest holders of approximately $670,000, offset by reduced payments on Notes Payable to Banks and Principal Payments on Mortgage Notes Payable and the prior year contributions from non-controlling owners.

 

We continue to contribute to a Capital Expenditures Fund (the “Fund”) an amount equal to 4% of the InnSuites Hotels’ revenues from operation of the Hotels. The Fund is restricted by the mortgage lender for one of our properties. As of October 31, 2018 and 2017, there were deminimus monies held in these accounts reported on our Consolidated Balance Sheet as “Restricted Cash.” These amounts are capitalized and depreciated over their estimated useful lives, and classified under Prepaid Expenses and Other Current Assets on our Consolidated Balance Sheet.

 

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We have minimum debt payments, net of debt discounts, of approximately $1,230,000 and approximately $671,000 due during fiscal years 2019 and 2020, respectively. Minimum debt payments due during fiscal year 2019 include approximately $27,000 of mortgage notes payable, approximately $1,203,000 of other notes payable secured promissory notes outstanding to unrelated third parties arising from the Shares of Beneficial Interest and Partnership unit repurchases.

 

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.

 

SEASONALITY

 

The Hotels’ operations historically have been somewhat seasonal. The southern Arizona hotel experiences its 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 the southern Arizona hotel. 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.

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

 

local, national or international, political economic and business conditions, including, without limitation, conditions that may, or may continue to, affect public securities markets generally, the hospitality industry or the markets in which we operate or will operate;

     
  fluctuations in hotel occupancy rates;
     
 

changes in room rental rates that may be charged by InnSuites Hotels in response to market rental rate changes or otherwise;

     
  seasonality of our hotel operations business;
     
  our ability to sell any of our Hotels at market value, listed sale price or at all;
     

 

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  interest rate fluctuations;
     
 

changes in, or reinterpretations of, governmental regulations, including, but not limited to, environmental and other regulations, the ADA and federal income tax laws and regulations;

     
  competition including supply and demand for hotel rooms and hotel properties;
     
  availability of credit or other financing;
     
  our ability to meet present and future debt service obligations;
     
  our ability to refinance or extend the maturity of indebtedness at, prior to, or after the time it matures;
     
  any changes in our financial condition or operating results due to acquisitions or dispositions of hotel properties;
     
  insufficient resources to pursue our current strategy;
     
  concentration of our investments in the InnSuites Hotels® brand;
     
  loss of membership contracts;
     
  the financial condition of franchises, brand membership companies and travel related companies;
     
 

ability to develop and maintain positive relations with “Best Western Plus” or “Best Western” and potential future franchises or brands;

     
  real estate and hospitality market conditions;
     
  hospitality industry factors;
     
  our ability to carry out our strategy, including our strategy regarding IBC Hotels;
     
  the Trust’s ability to remain listed on the NYSE American;
     
  effectiveness of the Trust’s software program;
     
  the need to periodically repair and renovate our Hotels at a cost at or in excess of our standard 4% reserve;
     
  our ability to cost effectively integrate any acquisitions with the Trust in a timely manner;
     
 

increases in the cost of labor, energy, healthcare, insurance and other operating expenses as a result of changed or increased regulation or otherwise;

     
  terrorist attacks or other acts of war;
     
  outbreaks of communicable diseases attributed to our hotels or impacting the hotel industry in general;
     
  natural disasters, including adverse climate changes in the areas where we have or serve hotels;
     
  airline strikes;
     
  transportation and fuel price increases;
     
 

adequacy of insurance coverage and increases in cost for health care coverage for employees and potential government regulation with respect to health care coverage;

     
 

data breaches or cybersecurity attacks, including breaches impacting the integrity and security of employee and guest data; and

     
  loss of key personnel and uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act

 

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In addition, examples of such uncertainties we specifically face in our IBC Hospitality Technologies division include, but are not limited to:

 

  transaction volumes in the global travel industry;
     
  pricing pressure from travel suppliers and competition in the travel distribution market;
     
  the amount of resources needed to implement our software solutions;
     
  the use of alternative distribution models by travel suppliers;
     
 

failures, capacity constraints, business interruptions and other forces impacting the integrity of our systems and infrastructure;

     
  international privacy regulations, compliance with these regulations could impose significant compliance burdens;

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of October 31, 2018.

 

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

 

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Management’s Report on Internal Control Over Financial Reporting

 

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

 

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

 

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

 

Assessment of Internal Control over Financial Reporting

 

Our management assessed the effectiveness of our internal control over financial reporting as of October 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting was not effective as of October 31, 2018.

 

Management’s Remediation Initiatives

 

In an effort to remediate the identified material weakness and other deficiencies and enhance the Company’s internal control over financial reporting, the Company increased its technical accounting expertise by hiring a new Chief Financial Officer and Corporate Controller with public company reporting experience to assist with the Company’s technical accounting and internal control issues.

 

We continue to take appropriate and reasonable steps to make necessary improvements to our internal control over financial reporting, including:

 

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

 

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We believe that the remediation measures described above will strengthen our internal control over financial reporting and remediate the material weaknesses we have identified. We expect that our remediation efforts will continue throughout fiscal year 2019.

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have had significant turn over in our accounting department within the last 9 months, which includes turnover at our Chief Financial Officer and Chief Operating Officer positions.

 

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PART II

 

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not required for smaller reporting companies.

 

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

 

On January 2, 2001, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, for the purchase of up to 250,000 Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions. On September 10, 2002, August 18, 2005 and September 10, 2007, the Board of Trustees approved the purchase of up to 350,000 additional Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Additionally, on January 5, 2009, September 15, 2009 and January 31, 2010, the Board of Trustees approved the purchase of up to 300,000, 250,000 and 350,000, respectively, additional Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Additionally, on June 19, 2017, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, for the purchase of up to 750,000 Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for future acquisitions and financings and/or for awards granted under the InnSuites Hospitality Trust 1997 Stock Incentive and Option Plan. During the nine months ended October 31, 2017, the Trust acquired 184,055 Shares of Beneficial Interest in open market transactions at an average price of $1.70 per share. The average price paid includes brokerage commissions. The Trust intends to continue repurchasing Shares of Beneficial Interest in compliance with applicable legal and NYSE American requirements. During the nine months period ended October 31, 2018, the Trust also repurchased 210,741 Shares of Beneficial Interest in private transactions for an average price of $2.21 per share by issuing note payables for each transaction with an annual interest rate of 7%. During the nine months period ended October 31, 2018, the Trusts related Company RRF Limited Partnership also repurchased 24,104 Shares of Beneficial Interest in private transactions for an average price of $1.72 per share by issuing note payables for each transaction with an annual interest rate of 7%. The Trust remains authorized to repurchase an additional 267,321 Partnership units and/or Shares of Beneficial Interest pursuant to the publicly announced share repurchase program, which has no expiration date.

 

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