NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE YEARS ENDED JANUARY 31, 2019 AND 2018
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of January 31, 2019, InnSuites Hospitality Trust (the “Trust”, “we”, “us” or “our”)
is a publicly traded company with hotels IHT owns and hotels IHT manages. The Trust and its shareholders own interests directly
in and through a partnership interest, two hotels with an aggregate of 267 suites in Arizona and New Mexico (the “Hotels”)
operated under the federally trademarked name “InnSuites Hotels” or “InnSuites.
Hotel
Operations:
Full
service hotels often contain upscale full-service facilities with a large volume of full service accommodations, on-site full-service
restaurant(s), and a variety of on-site amenities such as swimming pools, a health club, children’s activities, ballrooms
and on-site conference facilities. Moderate or limited service hotels are small to medium-sized hotel establishments that offer
a limited amount of on-site amenities. Most moderate or limited service establishments may still offer full service accommodations
but lack leisure amenities such as an on-site restaurant or a swimming pool. The Trust considers its 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 74.94% and 74.80% interest in the Partnership as of January 31, 2019 and 2018. The Trust’s weighted average
ownership for the years ended January 31, 2019 and 2018 was 74.94% and 72.53%. As of January 31, 2019, the Partnership owned a
51.01% interest in an InnSuites® hotel located in Tucson, Arizona. The Trust owns a direct 20.53% interest in an InnSuites®
hotel located in Albuquerque, New Mexico.
Under
certain management agreements, InnSuites Hotels Inc., a subsidiary, manages the Hotels’ daily operations. The Trust
also provides the use of the “InnSuites” trademark to the Hotels through wholly-owned InnSuites Hotels. All such expenses
and reimbursements between the Trust, InnSuites Hotels and the Partnership have been eliminated in consolidation.
On
August 1, 2015, the Trust finalized and committed to a plan to sell all the hotel properties. As of May 1, 2016, the Trust listed
all the Hotel properties with a local real estate hotel broker, and management believed that each of the assets was being marketed
at a price that was reasonable in relation to its current fair value. The Trust believes that the plan to sell these assets will
not be withdrawn. Through the Trust’s Form 10-Q for the quarter ended July 31, 2016 filed with the SEC on December 14, 2016,
the Trust classified all the Hotel properties as Assets Held for Sale. As of October 31, 2016, the Trust has decided to reclassify
these assets back into operations as many of these assets have been marketed for sale for more than one year. At this time, the
Trust is unable to predict when, and if, any of these Hotel properties will be sold. The Trust continues to list these properties
with local real estate hotel brokers and believes that each of the assets is being marketed at a price that is reasonable in relation
to its current fair value. On October 24, 2018, the Yuma Hospitality Properties LLLP (the “Yuma entity”) was sold
to an unrelated third party for $16,050,000 (see Note 23).
IBC
Technology Segment; IBC Hospitality Technologies:
In
fiscal 2019 the Trust sold its wholly owned subsidiary, InnDependent Boutique Collection (“IBC”, “IBC Hotels”,
“IBC Hotels, LLC”, “IBC Hospitality” or “IBC Hospitality Technologies”), which had a network
of approximately 2,000 unrelated hospitality properties; providing reservation services with proprietary software, plus exclusive
marketing distribution and services. The sale occurred in August 2018, and the transaction date was July 2018.
PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION
These
consolidated financial statements have been prepared by management in accordance with accounting principles in accordance with
GAAP, and include all assets, liabilities, revenues and expenses of the Trust and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated. Certain items have been reclassified to conform to the current fiscal
year presentation. The Trust exercises unilateral control over the Partnership and the entities listed below. Therefore, the financial
statements of the Partnership and the entities listed below are consolidated with the Trust, and all significant intercompany
transactions and balances have been eliminated.
|
|
IHT
OWNERSHIP %
|
|
ENTITY
|
|
DIRECT
|
|
|
INDIRECT
(i)
|
|
Albuquerque
Suite Hospitality, LLC (see Note 6)
|
|
|
20.53
|
%
|
|
|
-
|
|
Tucson
Hospitality Properties, LLLP
|
|
|
-
|
|
|
|
51.01
|
%
|
RRF
Limited Partnership
|
|
|
74.94
|
%
|
|
|
-
|
|
InnSuites
Hotels Inc.
|
|
|
100.00
|
%
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
(i)
Indirect ownership is through the Partnership
|
|
|
|
|
|
|
|
|
PARTNERSHIP
AGREEMENT
The
Partnership Agreement of the Partnership provides for the issuance of two classes of Limited Partnership units, Class A and Class
B. Class A and Class B Partnership units are identical in all respects, except that each Class A Partnership unit is convertible
into one newly-issued Share of Beneficial Interest of the Trust at any time at the option of the 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 January 31, 2019 and 2018, 211,708 and 235,812 Class A Partnership
units were issued and outstanding, representing 1.72% and 1.85% of the total Partnership units, respectively. Additionally, as
of both January 31, 2019 and 2018, 2,974,038 and 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 January 31, 2019, the limited partners in the Partnership would receive 3,185,746 Shares of Beneficial Interest of the Trust.
As of both January 31, 2019, and 2018, the Trust owns 9,527,448 general partner units in the Partnership, representing 74.94%
and 74.80% of the total Partnership units, respectively.
LIQUIDITY
The
Trust’s
principal
source of cash to meet its cash requirements, including distributions to its shareholders, is our share of the Partnership’s
cash flow, quarterly distributions from the Albuquerque, New Mexico property 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. The Trust’s liquidity, including our ability to make distributions to its shareholders,
will depend upon the ability of the Trust and the Partnership’s ability to generate sufficient cash flow from
hotel operations and to service debt.
As
of January 31, 2019, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount receivable of
approximately $632,000. The Demand/Revolving Line of Credit/Promissory Note accrues interest at 7.0% per annum and requires interest
only payments. The Demand/Revolving Line of Credit/Promissory Note has a maximum borrowing capacity to $1,000,000, which is available
through December 31, 2019, and automatically renews year to year, unless either party gives six month advance notice
to terminate. As of May 31, 2019, the outstanding net balance receivable on the Demand/Revolving Line of Credit/Promissory
Note was $632,000.
As
of January 31, 2018, the Trust had an Advance to Affiliate credit facilities with an aggregate maximum borrowing capacity of $1,000,000,
which is available through December 31, 2019, and automatically renews year to year, unless either party gives six month
advance notice to terminate. As of January 31, 2019, the Trust had an amount receivable of the Advances to Affiliate credit
facility of approximately $762,000. As of June 18, 2019, the amount receivable from the Advance to Affiliate credit facility
was approximately $562,000.
With
approximately $2,645,000 of cash and short term investments, as of January 31, 2019, 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, the Trust believes that we will have enough cash on hand to meet all of its financial obligations
as they become due for at least the next year. In addition, management of the Trust is analyzing other strategic options
available to it, 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 the Trust, or at all.
There
can be no assurance that the Trust 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 it. If the Trust is unable
to raise additional or replacement funds, it may be required to sell certain of our assets to meet liquidity needs, which
may not be on terms that are favorable.
SEASONALITY
OF THE HOTEL BUSINESS
The
Hotels’ operations historically have been somewhat seasonal. The two southern Arizona hotels experience their highest occupancy
in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest
occupancy period at those two southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust’s
quarterly revenues. The hotel located in New Mexico historically 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.
RECENTLY
ISSUED ACCOUNTING GUIDANCE
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 still evaluating the impact of ASU 2016-02, 2018-10, and 2018-11,
but believes it will have a material effect on our total assets and liabilities.
In
January 2017, the FASB issued Accounting Standards Update (ASU) 2017-04,
Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
. The update simplifies how the entity is required to test goodwill for impairment
by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair
value of a reporting unit’s goodwill with the carrying amount. This update is effective for annual or interim periods beginning
after December 15, 2019. 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
In
June 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-07,
Compensation – Stock Compensation
(Topic 718) Improvements to Nonemployee Share-Based Payment Accounting
. This ASU expands the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this ASU will become effective
for us beginning February 1, 2019, and early adoption is permitted. The Trust does not anticipate that this ASU will have
a material effect on our consolidated financial statements.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE
OF ESTIMATES
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The
Trust’s operations are affected by numerous factors, including the economy, competition in the hotel industry and the effect
of the economy on the travel and hospitality industries. The Trust cannot predict if any of the above items will have a significant
impact in the future, nor can it predict what impact, if any, the occurrence of these or other events might have on the Trust’s
operations and cash flows. Significant estimates and assumptions made by management include, but are not limited to, the estimated
useful lives of long-lived assets and recoverability of long-lived assets and the fair values of the long-lived assets.
PROPERTY,
PLANT AND EQUIPMENT AND HOTEL PROPERTIES
Furniture,
fixtures, building improvements and hotel properties are stated at cost and depreciated using the straight-line method over estimated
lives ranging up to 40 years for buildings and 3 to 10 years for furniture and equipment.
Management
applies guidance ASC 360-10-35, to determine when it is required to test an asset for recoverability of its carrying value and
whether, or not, an impairment exists. Under ASC 360-10-35, the Trust is required to test a long-lived asset for impairment when
there is an indicator of impairment. Impairment indicators may include, but are not limited to, a drop in the performance of a
long-lived asset, a decline in the hospitality industry or a decline in the economy. If an indicator of potential impairment is
present, then an assessment is performed of whether the carrying amount of an asset exceeds its estimated undiscounted future
cash flows over its estimated remaining life.
If
the estimated undiscounted future cash flows over the asset’s estimated remaining life are greater than the asset’s
carrying value, no impairment is recognized; however, if the carrying value of the asset exceeds the estimated undiscounted future
cash flows, then the Trust would recognize an impairment expense to the extent the asset’s carrying value exceeds its fair
value, if any. The estimated future cash flows are based upon, among other things, assumptions about expected future operating
performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are analyzed on a property-specific
basis independent of the cash flows of other groups of assets. Evaluation of future cash flows is based on historical experience
and other factors, including certain economic conditions and committed future bookings. Management impaired these assets during
the fiscal year 2018, and has determined that no further impairment is required of long-lived assets for the fiscal period ended
January 31, 2019.
BUSINESS
COMBINATIONS
The
Trust
accounts
for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration
at their fair values on the acquisition date. The final purchase price may be adjusted up to one year from the date of the acquisition.
Identifying the fair value of the tangible and intangible assets and liabilities requires the use of estimates by management and
was based upon currently available data.
The
Trust allocates the excess of purchase price over the identifiable intangible and net tangible assets to goodwill. Such goodwill
is not deductible for tax purposes and represents the value placed on entering new markets and expanding market share (see Note
8).
Unanticipated
events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date,
included changes from events after the acquisition date, such as changes in our estimate of relevant revenue or other targets,
will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related
contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have
a material effect on the consolidated statements of operations, financial position and cash flows in the period of the change
in the estimate.
GOODWILL
The
Trust tests goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred,
by comparing its reporting unit’s carrying value to its implied fair value. Impairment may result from, among other things,
deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations
and a variety of other circumstances. If the Trust determines that an impairment has occurred, it is required to record a write-down
of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating
the recoverability of the carrying value of goodwill, the Trust must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly
impact those judgements in the future and require an adjustment to the recorded balances.
The
Trust’s Technology Segment (IBC Hotels LLC) in fiscal year ended January 31, 2019 determined that it was more likely than
not that the fair value of IBC Hotels was less than its carrying value. Accordingly, management decided to write down the entire
amount of intangible assets, equaling $500,000 as of January 31, 2018.
CASH
AND CASH EQUIVALENTS
The
Trust considers all highly liquid short-term investments with maturities of three months or less at the time of purchase to be
cash equivalents. The Trust believes it places its cash and cash equivalents only with high credit quality financial institutions,
although these balances may periodically exceed federally insured limits.
REVENUE
RECOGNITION
Hotel
and Operations
ASU
2014-09 (Topic 606), “Revenue from Contracts with Customers” is effective for reporting periods after January
1, 2018. ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification
of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction
price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.
Revenues
are primarily derived from the sources below and are recognized as services are rendered and when collectability is reasonably
assured. Amounts received in advance of revenue recognition are considered deferred liabilities, and are generally not significant.
Revenues
primarily consist of room rentals, food and beverage sales, management and trademark fees and other miscellaneous revenues from
our properties. Revenues are recorded when rooms are occupied and when food and beverage sales are delivered. Management and trademark
fees from non-affiliated hotels include a monthly accounting fee and a percentage of hotel room revenues for managing the daily
operations of the Hotels and the one hotel owned by affiliates of Mr. Wirth.
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 Segment – 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 fiscal years ended January 31, 2019 and 2018.
ASU
2014-09 (Topic 606), “Revenue from Contracts with Customers is effective for reporting periods 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.
|
●
|
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.
|
ACCOUNTS
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts
receivable are carried at original amounts billed less an estimate made for doubtful accounts based on a review of outstanding
amounts on a quarterly basis. Management generally records an allowance for doubtful accounts for 50% of balances over 90 days
and 100% of balances over 120 days. Accounts receivable are written off when collection efforts have been exhausted and they are
deemed uncollectible. Recoveries, if any, of receivables previously written off are recorded when received. The Trust does not
charge interest on accounts receivable balances and these receivables are unsecured. The following is a reconciliation of the
allowance for doubtful accounts for the fiscal years ended January 31, 2019 and 2018.
Fiscal
Year
|
|
Balance
at the Beginning of Year
|
|
|
Discontinued
Operations Adjustment
|
|
|
Charged
to Expense
|
|
|
Deductions
|
|
|
Balance
at the End of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
(28,564
|
)
|
|
$
|
25,000
|
|
|
|
|
|
|
$
|
(2,379
|
)
|
|
$
|
(5,943
|
)
|
2018
|
|
$
|
53,720
|
|
|
$
|
(19,750
|
)
|
|
$
|
11,356
|
|
|
$
|
(73,890
|
)
|
|
$
|
(28,564
|
)
|
STOCK-BASED
COMPENSATION
The
Trust has
an employee
equity incentive plan, which is described more fully in Note 22 - “Share-Based Payments.” For fiscal years
2019 and 2018, the Trust has paid the annual fees due to its Trustees by issuing Shares of Beneficial Interest out of its authorized
but unissued Shares. Upon issuance, the Trust recognizes the shares as outstanding. The Trust recognizes expense related to the
issuance based on the fair value of the shares upon the date of the restricted share grant and amortizes the expense equally over
the period during which the shares vest to the Trustees.
During
fiscal year 2019, the Trust granted restricted stock awards of 24,000 Shares to members of the Board of Trustees, all of which
vested in fiscal year 2019 resulting in stock-based compensation of $30,600. During fiscal year 2018, the Trust granted restricted
stock awards of 24,000 Shares to members of the Board of Trustees, all of which vested in fiscal year 2018 resulting in stock-based
compensation of $55,560.
The
following table summarizes restricted share activity during fiscal years 2019 and 2018.
|
|
Restricted
Shares
|
|
|
|
Shares
|
|
|
Price
on date of grant
|
|
Balance at
January 31, 2017
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
24,000
|
|
|
$
|
2.31
|
|
Vested
|
|
|
(24,000
|
)
|
|
$
|
2.31
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
Balance
of unvested awards at January 31, 2018
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
24,000
|
|
|
$
|
2.16
|
|
Vested
|
|
|
(24,000
|
)
|
|
$
|
2.16
|
|
Balance
of unvested awards at January 31, 2019
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
TREASURY
STOCK
Treasury
stock is carried at cost, including any brokerage commissions paid to repurchase the shares. Any shares issued from treasury stock
are removed at cost, with the difference between cost and fair value at the time of issuance recorded against Shares of Beneficial
Interest.
INCOME
TAXES
The
Trust is subject to federal and state corporate income taxes, and accounts for deferred taxes utilizing an asset and liability
method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when it is determined to be more likely than not
that some portion, or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment (see Note 16).
DIVIDENDS
AND DISTRIBUTIONS
In
fiscal years 2018 and 2019, the Trust paid a dividend of $0.01 per share at end of the second fiscal quarter and at the end of
the fourth fiscal quarter for a total dividend of $0.02 for the fiscal year in the amounts of $195,575 and $197,512,
respectively. The Trust’s ability to pay dividends is largely dependent upon the operations of the Hotels.
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.
INCOME
(LOSS) PER SHARE
Basic
and diluted income (loss) per Share of Beneficial Interest is computed based on the weighted-average number of Shares of Beneficial
Interest and potentially dilutive securities outstanding during the period. Dilutive securities are limited to the Class A and
Class B units of the Partnership, which are convertible into 3,024,038 Shares of the Beneficial Interest, as discussed in Note
1.
For
the fiscal years ended January 31, 2019 and 2018, there were Class A and Class B Partnership units outstanding, which are convertible
into Shares of Beneficial Interest of the Trust. Assuming conversion at the beginning of each period, the aggregate weighted-average
of these Shares of Beneficial Interest would have been 3,185,746 and 3,473,085 in addition to the basic shares outstanding
for fiscal years 2019 and 2018, respectively. These Shares of Beneficial Interest issuable upon conversion of the Class A and
Class B Partnership units were dilutive during fiscal 2018 and are included in the calculation of diluted earnings per share for
that year below.
|
|
For
the Year Ended
|
|
|
|
January
31,
|
|
|
|
2019
|
|
|
2018
|
|
Net
Income attributable to controlling interest
|
|
$
|
1,161,086
|
|
|
$
|
1,397,601
|
|
Plus:
Net Income attributable to non-controlling interests
|
|
|
9,413,845
|
|
|
|
5,410,300
|
|
Net
Income
|
|
$
|
10,574,931
|
|
|
$
|
6,807,901
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
9,283,081
|
|
|
|
9,612,139
|
|
Plus:
Weighted average incremental shares resulting from unit conversion
|
|
|
3,153,475
|
|
|
|
3,473,085
|
|
Weighted
average common shares outstanding after unit conversion
|
|
|
12,436,556
|
|
|
|
13,085,223
|
|
|
|
|
|
|
|
|
|
|
Diluted
Income Per Share
|
|
$
|
0.85
|
|
|
$
|
0.52
|
|
SEGMENT
REPORTING
As
a result of the sale of IBC (see Note 23), 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 two hotel properties with an aggregate of 267 suites in Arizona and
New Mexico. Prior to the sale of IBC, the Trust had previously determined that its operations were comprised of two reportable
segments, a Hotel Operations & Corporate Overhead segment, and the IBC Hospitality segment serving 2,000 unrelated hotel properties.
In connection with the sale of IBC, the historical financial information presented in this Form 10-K 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.
ADVERTISING
COSTS
Amounts
incurred for advertising costs are expensed as incurred. Advertising expense totaled approximately $581,000 and $368,000 for the
years ended January 31, 2019 and 2018, respectively.
CONCENTRATION
OF CREDIT RISK
Credit
risk is the risk of an unexpected loss if a third party to a financial instrument fails to meet its contractual obligations. Financial
instruments that potentially subject the Trust to a concentration of credit risk consist primarily of cash and cash equivalents.
Management’s assessment of the Trust’s credit risk for cash and cash equivalents is low as cash and cash equivalents
are held in financial institutions believed to be credit worthy. The Trust limits its exposure to credit loss by placing its cash
with major financial institutions and invests only in short-term obligations.
While
the Trust is exposed to credit losses due to the non-performance of its counterparties, the Trust considers the risk of this remote.
The Trust estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
For
disclosure purposes, fair value is determined by using available market information and appropriate valuation methodologies. Fair
value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price)
in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.
The fair value framework specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation
technique are observable or unobservable. The fair value hierarchy levels are as follows:
|
●
|
Level
1 – Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets
or liabilities that are identical to the assets or liabilities being measured.
|
|
|
|
|
●
|
Level
2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities
that are similar to the assets or liabilities being measured and / or quoted prices for assets or liabilities that are identical
or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in
which all significant inputs and significant value drivers are observable in active markets are level 2 valuation techniques.
|
|
|
|
|
●
|
Level
3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable
inputs are valuation technique inputs that reflect a company’s own judgments about the assumptions that market participants
would use in pricing an asset or liability.
|
The
Trust has no assets or liabilities that are carried at fair value on a recurring basis and had no fair value re-measurements during
the years ended January 31, 2019 and 2018.
Due
to their short maturities, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value and are considered level 1 inputs. The fair value of mortgage notes payable, notes payable
to banks and notes and advances payable to related parties is estimated by using the current rates which would be available for
similar loans having the same remaining maturities and are based on level 3 inputs.
3.
SALE OF OWNERSHIP INTERESTS IN ALBUQUERQUE SUBSIDIARY
On
July 22, 2010, the Board of Trustees unanimously approved, with Mr. Wirth abstaining, for the Partnership to enter into an agreement
with Rare Earth Financial, LLC (“Rare Earth”), an affiliate of Mr. Wirth, to sell units in Albuquerque Suite Hospitality,
LLC (the “Albuquerque entity”), which owns and operates the Albuquerque, New Mexico hotel property. Under the agreement,
Rare Earth agreed to either purchase or bring in other investors to purchase at least 49% of the membership interests in the Albuquerque
entity and the parties agreed to restructure the operating agreement of the Albuquerque entity. A total of 400 units were available
for sale for $10,000 per unit, with a two-unit minimum subscription. On September 24, 2010, the parties revised the Amended and
Restated Operating Agreement to name Rare Earth as the administrative member of the Albuquerque entity in charge of the day-to-day
management.
On
December 9, 2013, the Trust entered into an updated restructuring agreement with Rare Earth to allow for the sale of additional
interest units in the Albuquerque entity for $10,000 per unit. Under the updated restructuring agreement, Rare Earth agreed to
either purchase or bring in other investors to purchase up to 150 (and potentially up to 190 if the overallotment is exercised)
units. Under the terms of the updated restructuring agreement, the Trust agreed to hold at least 50.1% of the outstanding units
in the Albuquerque entity, on a post-transaction basis, and intends to maintain this minimum ownership percentage through the
purchase of units under this offering. The Board of Trustees approved this restructuring on December 9, 2013. The units in the
Albuquerque entity are allocated to three classes with differing cumulative discretionary priority distribution rights through
December 31, 2015. Class A units are owned by unrelated third parties and have first priority for distributions. Class B units
are owned by the Trust and have second priority for distributions. Class C units are owned by Rare Earth or other affiliates of
Mr. Wirth and have the lowest priority for distributions from the Albuquerque entity. Priority distributions of $700 per unit
per year were cumulative until December 31, 2015; however, after December 31, 2015 Class A unit holders continue to hold a preference
on distributions over Class B and Class C unit holders.
If
certain triggering events related to the Albuquerque entity occur prior to the payment of all accumulated distributions to its
members, such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds
to the members. In the event that funds generated from a triggering event are insufficient to pay the total amount of all such
accumulated distributions owed to the members, all Class A members will participate pro rata in the funds available for distribution
to them until paid in full, then Class B, and then Class C. After all investors have received their initial capital plus a 7%
per annum simple return, any additional profits will be allocated 50% to Rare Earth, with the remaining 50% allocated proportionately
to all unit classes. Rare Earth received a restructuring fee of $128,000, conditioned upon and arising from the sale of the first
100 units in the Albuquerque entity following the December 31, 2013 restructuring. The Albuquerque entity plans to use its best
efforts to pay the discretionary priority distributions. The Trust does not guarantee and is not otherwise obligated to pay the
cumulative discretionary priority distributions. InnSuites Hotels will continue to provide management, licensing and reservation
services to the Albuquerque, New Mexico property.
On
February 15, 2017, the Trust and Partnership entered into a restructuring agreement with Rare Earth to allow for the sale of non-controlling
partnership units in the Albuquerque entity for $10,000 per unit. Rare Earth and the Trust have restructured the Albuquerque Entity
Membership Interest by creating 250 additional Class A membership interests from General Member majority-owned to accredited investor
member-owned. In the event of sale of 250 Class A Interests, total interests outstanding will change from 550 to 600 with Class
A, Class B and Class C Limited Liability Company Interests (referred to collectively as “Interests”) restructured
with IHT selling approximately 200 Class B Interests to accredited investors as Class A Interest. Rare Earth, as a General Partner
of the Albuquerque entity, will coordinate the offering and sale of Class A Interests to qualified third parties. Rare Earth and
other Rare Earth affiliates may purchase Interests under the offering. As part of this offering, Rare Earth was paid $200,000
for a restructuring fee which was recorded in Equity.
During
the fiscal year ended January 31, 2019, there were 15 Class A units of the Albuquerque entity sold for total proceeds of $150,000,
of which 13.5 came from the Trust at $10,000 per unit. As of January 31, 2019, the Trust held a 20.70% ownership interest, or
123.5 Class B units, in the Albuquerque entity, Mr. Wirth and his affiliates held a 0.17% interest, or 1 Class C unit, and other
parties held a 79.13% interest, or 477 Class A units. During the fiscal year ended January 31, 2019, the Albuquerque entity has
made discretionary Priority Return payments to unrelated unit holders of approximately $323,000, and to the Trust of approximately
$90,000. The Trust no longer accrues for these distributions as the preference period has expired.
4.
SALE OF OWNERSHIP INTERESTS IN TUCSON HOSPITALITY PROPERTIES SUBSIDIARY
On
February 17, 2011, the Partnership entered into a restructuring agreement with Rare Earth to allow for the sale of non-controlling
interest units in Tucson Hospitality Properties, LP (the “Tucson entity”), which operates the Tucson Oracle hotel
property, then wholly-owned by the Partnership. Under the agreement, Rare Earth agreed to either purchase or bring in other investors
to purchase up to 250 units, which represents approximately 41% of the outstanding limited partnership units in the Tucson entity,
on a post-transaction basis, and the parties agreed to restructure the limited partnership agreement of the Tucson entity. The
Board of Trustees approved this restructuring on January 31, 2011.
On
October 1, 2013, the Partnership entered into an updated restructured limited partnership agreement with Rare Earth to allow for
the sale of additional interest units in the Tucson entity for $10,000 per unit. Under the agreement, Rare Earth agreed to either
purchase or bring in other investors to purchase up to 160 (and potentially up to 200 if the overallotment is exercised) units.
Under the terms of the updated restructuring agreement, the Partnership agreed to hold at least 50.1% of the outstanding limited
partnership units in the Tucson entity, on a post-transaction basis, and intends to maintain this minimum ownership percentage
through the purchase of units under this offering. The Board of Trustees approved this restructuring on September 14, 2013. The
limited partnership interests in the Tucson entity are allocated to three classes with differing cumulative discretionary priority
distribution rights through June 30, 2017. Class A units are owned by unrelated third parties and have first priority for distributions.
Class B units are owned by the Partnership and have second priority for distributions. Class C units are owned by Rare Earth or
other affiliates of Mr. Wirth and have the lowest priority for distributions from the Tucson entity. Priority distributions of
$700 per unit per year are cumulative until June 30, 2016; however, after June 30, 2016 Class A unit holders continue to hold
a preference on distributions over Class B and Class C unit holders.
If
certain triggering events related to the Tucson entity occur prior to the payment of all accumulated distributions to its members,
such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds to the
members. In the event that funds generated from a triggering event are insufficient to pay the total amount of all such accumulated
distributions owed to the members, all Class A members will participate pro rata in the funds available for distribution to them
until paid in full, then Class B, and then Class C. After all investors have received their initial capital plus a 7% per annum
simple return, any additional profits will be allocated 50% to Rare Earth, with the remaining 50% allocated proportionately to
all unit classes. Rare Earth also received a restructuring fee of $128,000, conditioned upon and arising from the sale of the
first 100 units in the Tucson entity following the October 1, 2013 restructuring. The Tucson entity plans to use its best efforts
to pay the discretionary priority distributions. The Trust does not guarantee and is not otherwise obligated to pay the cumulative
discretionary priority distributions. InnSuites Hotels will continue to provide management, licensing and reservation services
to the Tucson, Arizona property
During
the fiscal years ended January 31, 2019 and 2018, there were no units of the Tucson entity sold. As of January 31, 2019, the Partnership
held a 51.01% ownership interest, or 404 Class B units, in the Tucson entity, Mr. Wirth and his affiliates held a 0.38% interest,
or approximately 3 Class C units, and other parties held a 48.61% interest, or approximately 385 Class A units. For the fiscal
year ended January 31, 2018, the Tucson entity made discretionary Priority Return payments to unrelated unit holders of approximately
$67,735 and to the Partnership of approximately $70,700. The Trust no longer accrues for these distributions as the preference
period has expired.
5.
VARIABLE INTEREST ENTITY (VIE)
Management
evaluates the Trust’s explicit and implicit variable interests to determine if they have any variable interests in VIEs.
Variable interests are contractual, ownership, or other pecuniary interests in an entity whose value changes with changes in the
fair value of the entity’s net assets, exclusive of variable interests. Explicit variable interests are those which directly
absorb the variability of a VIE and can include contractual interests such as loans or guarantees as well as equity investments.
An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing of variability indirectly,
such as through related party arrangements or implicit guarantees. The analysis includes consideration of the design of the entity,
its organizational structure, including decision making ability over the activities that most significantly impact the VIE’s
economic performance. GAAP requires a reporting entity to consolidate a VIE when the reporting entity has a variable interest,
or combination of variable interest, that provides it with a controlling financial interest in the VIE. The entity that consolidates
a VIE is referred to as the primary beneficiary of that VIE.
The
Partnership has determined that the Albuquerque entity and the Yuma entity, prior to its sale on October 24, 2018, were a
variable interest entities with the Partnership as the primary beneficiary with the ability to exercise control, as determined
under the guidance of ASC Topic 810-10-25. In its determination, management considered the following qualitative and quantitative
factors:
a)
The Partnership, Trust and their related parties, which share common ownership and management, have guaranteed material financial
obligations of the Albuquerque and Yuma entities, including its distribution obligations.
b)
The Partnership, Trust and their related parties have maintained, as a group, a controlling ownership interest in the Albuquerque
entity and Yuma, with the largest ownership belonging to the Partnership.
c)
The Partnership, Trust and their related parties have maintained control over the decisions which most impact the financial performance
of the Albuquerque and Yuma entities, including providing the personnel to operate the property on a daily basis.
On
February 15, 2017, the Trust and Partnership entered into a restructuring agreement with Rare Earth to allow for the sale of non-controlling
partnership units in the Yuma entity for $10,000 per unit. Rare Earth and the Trust are restructuring the Yuma Partnership Interest
from General Partner majority-owned to accredited investor majority-owned. Total interests outstanding will remain unchanged at
800 with Class A, Class B and Class C Limited Liability Limited Partnership Interests (referred to collectively as “Interests”)
restructured with the Yuma entity purchasing 300 existing IHT Class B Interests and reissuing 300 Class A units to accredited
investors as Class A Interests causing the Yuma entity to offer and sell up to approximately 300 Class A (2017 series) Interests.
Rare Earth, as a General Partner of the Yuma entity, will coordinate the offering and sale of Class A Interests to qualified third
parties. Rare Earth and other Rare Earth affiliates may purchase Interests under the offering. The Trust paid $240,000 as a restructuring
fee to Rare Earth during the fiscal year ended January 31, 2018, which was included in equity.
During
the fiscal years ended January 31, 2019 and January 31, 2018, neither the Trust nor the Partnership have provided
any implicit or explicit financial support for which they were not previously contracted. Both the Partnership and the Trust provided
mortgage loan guarantees which allow our properties to obtain new financing as needed.
6.
PROPERTY, PLANT, AND EQUIPMENT AND HOTEL PROPERTIES
As
of January 31, 2019 and 2018, hotel properties consisted of the following:
|
|
2019
|
|
|
2018(i)
|
|
Land
|
|
$
|
2,500,000
|
|
|
$
|
2,805,015
|
|
Building
and improvements
|
|
|
10,334,919
|
|
|
|
18,066,151
|
|
Furniture,
fixtures and equipment
|
|
|
3,860,574
|
|
|
|
5,621,820
|
|
Total
hotel properties
|
|
|
16,695,493
|
|
|
|
26,492,986
|
|
Less
accumulated depreciation
|
|
|
(7,312,869
|
)
|
|
|
(12,124,650
|
)
|
Hotel
Properties in Service, net
|
|
|
9,382,625
|
|
|
|
14,368,336
|
|
Construction
in progress
|
|
|
43,657
|
|
|
|
76,683
|
|
Hotel
properties, net
|
|
$
|
9,426,282
|
|
|
$
|
14,445,019
|
|
(i)
Includes discontinued operations
As
of January 31, 2019 and 2018, corporate property, plant and equipment consisted of the following:
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
7,005
|
|
|
$
|
7,005
|
|
Building
and improvements
|
|
|
75,662
|
|
|
|
75,662
|
|
Furniture,
fixtures and equipment
|
|
|
534,879
|
|
|
|
1,178,941
|
|
Total
property, plant and equipment
|
|
|
617,546
|
|
|
|
1,261,608
|
|
Less
accumulated depreciation
|
|
|
(511,035
|
)
|
|
|
(694,876
|
)
|
Property,
Plant and Equipment, net
|
|
$
|
106,511
|
|
|
$
|
566,732
|
|
7.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets are carried at historical cost and are expected to be consumed within one year. As of
January 31, 2019, and 2018, prepaid expenses and other current assets consisted of the following:
|
|
2019
|
|
|
2018
|
|
Prepaid
Assets
|
|
$
|
-
|
|
|
$
|
15,545
|
|
Tax
and Insurance Escrow
|
|
|
57,810
|
|
|
|
57,235
|
|
Deposits
|
|
|
3,000
|
|
|
|
8,000
|
|
Prepaid
Insurance
|
|
|
5,000
|
|
|
|
7,417
|
|
Prepaid
Workman’s Compensation
|
|
|
21,459
|
|
|
|
7,617
|
|
Miscellaneous
Prepaid Expenses
|
|
|
8,284
|
|
|
|
17,636
|
|
Total
Prepaid Expenses and Current Assets
|
|
$
|
95,553
|
|
|
$
|
113,450
|
|
8.
INTANGIBLE ASSETS, GOODWILL AND IMPAIRMENT
Intangible
Assets
For
the fiscal year ending January 31, 2019, the Trust has no intangible assets.
For
the fiscal year ending January 31, 2018, intangible assets consisted of the following, all related to the IBC Technology segment
which was sold in fiscal year 2019:
|
|
|
|
|
Fiscal
Year
January 31, 2018 Impairment
|
|
|
Fiscal
year
1/31/2018
Accumulated
|
|
|
|
|
|
Useful
Lives
|
|
|
|
Amount
|
|
|
Expense
|
|
|
Amortization
|
|
|
Net
Amount
|
|
|
(years)
|
|
Marketing
Related Intangibles
|
|
$
|
100,000
|
|
|
$
|
90,000
|
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
|
10
|
|
Customer
Base
|
|
|
400,000
|
|
|
|
343,000
|
|
|
|
57,000
|
|
|
|
-
|
|
|
|
7
|
|
Total:
|
|
$
|
500,000
|
|
|
$
|
433,000
|
|
|
$
|
67,000
|
|
|
$
|
-
|
|
|
|
|
|
The
Trust recorded amortization of intangibles of approximately $433,000 for the year ended January 31, 2018.
Goodwill
For
the fiscal year ending January 31, 2019, the Trust has no goodwill.
The
changes in the carrying value of the Trust’s goodwill for the year ended January 31, 2018 is as follows:
Beginning
Balance January 31, 2017
|
|
|
500,000
|
|
|
|
|
|
|
Impairment
|
|
|
(500,000
|
)
|
Ending Balance
January 31, 2018
|
|
$
|
-
|
|
9.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As
of January 31, 2019 and 2018, accounts payable and accrued expenses consisted of the following:
|
|
2019(i)
|
|
|
2018(i)
|
|
Accounts Payable
|
|
$
|
166,339
|
|
|
$
|
741,917
|
|
Accrued Salaries and Wages
|
|
|
251,773
|
|
|
|
271,739
|
|
Accrued Vacation
|
|
|
28,780
|
|
|
|
38,957
|
|
Income Tax Payable
|
|
|
631,130
|
|
|
|
340,169
|
|
Accrued Interest Payable
|
|
|
4,857
|
|
|
|
26,565
|
|
Advanced Customer Deposits
|
|
|
60,322
|
|
|
|
15,000
|
|
Accrued Property Taxes
|
|
|
79,516
|
|
|
|
140,439
|
|
Accrued Land Lease
|
|
|
161,856
|
|
|
|
130,015
|
|
Sales Tax Payable
|
|
|
114,753
|
|
|
|
305,071
|
|
Deferred Revenue
|
|
|
31,239
|
|
|
|
107,467
|
|
Accrued Other
|
|
|
108,238
|
|
|
|
331,668
|
|
Total Accounts
Payable and Accrued Expenses
|
|
$
|
1,638,803
|
|
|
$
|
2,449,007
|
|
(i)
Includes current liabilities of discontinued operations.
10.
MORTGAGE NOTES PAYABLE
At
January 31, 2019 and 2018, the Trust had mortgage notes payable outstanding with respect to each of the Hotels except the Albuquerque
property. The mortgage notes payable have various repayment terms and have scheduled maturity dates ranging from August 2022 to
June 2042. Weighted average annual interest rates on the mortgage notes payable for the fiscal years ended January 31, 2019 and
2018 were 4.85% and 4.65%, respectively.
The
following table summarizes the Trust’s mortgage notes payable, net of debt discounts, as of January 31, 2019:
|
|
2019
|
|
|
2018
|
|
Mortgage
note payable, due in monthly installments of $28,493, including interest at 4.69% per year, through June 19, 2042, secured
by the Tucson Oracle property with a carrying value of $7.6 million at January 31, 2019.
|
|
|
4,824,692
|
|
|
|
4,927,076
|
|
|
|
|
|
|
|
|
|
|
Mortgage
note payable, due in monthly installments of $32,419, including interest at the prime rate plus one percentage point over
the index, with a floor of 5.0% per year (5% per year as of January 31, 2015), through August 1, 2022 plus a balloon payment
of $4,112,498 in September 2022, secured by the Yuma property. The Yuma property was sold on October 24, 2018.
|
|
|
-
|
|
|
|
4,827,259
|
|
Totals:
|
|
$
|
4,824,692
|
|
|
$
|
9,754,335
|
|
On
June 29, 2017, Tucson Oracle entered into a $5.0 million Business Loan Agreement (“Tucson Loan”) as a first mortgage
credit facility with KS State Bank to refinance the existing first mortgage credit facility with an approximate payoff balance
of $3.045 million which will allow Tucson Hospitality Properties, LLLP 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 January 31, 2019, the mortgage loan balance was approximately
$4,825,000, net of a discount of approximately $5,000.
See
Note 14 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.
11.
NOTES PAYABLE TO BANKS
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. This loan was paid in full during the fiscal year ended January 31, 2019. Due to the sale of the IBC Technology Segment
(IBC Hotels LLC), the loan was classified at January 31, 2018 and recorded under liabilities of discontinued operations in the
accompanying consolidated balance sheet (see note 23).
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 had 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 was
guaranteed by InnSuites Hospitality Trust. This loan was paid in full upon the sale of the Yuma hotel, and was classified
at January 31, 2018 and recorded under liabilities of discontinued operations in the accompanying consolidated balance
sheet (see note 23).
12.
LINES OF CREDIT – RELATED PARTY
On
December 1, 2014, the Trust entered into a $1,000,000 net maximum Demand/Revolving Line of Credit/Promissory Note with Rare Earth
Financial, LLC, an entity which is wholly owned by Mr. Wirth and his family members. The Demand/Revolving Line of Credit/Promissory
Note, as amended on June 19, 2017, bears interest at 7.0% per annum for both a payable and receivable, is interest only quarterly
and matures on 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 January 31, 2019 and January 31, 2018, the Trust had a an amount receivable of approximately $632,000,
including accrued interest and $811,000, respectively. During the twelve months period ended January 31, 2019, the Trust advanced
approximately $1,391,000, received approximately $1,569,000 in repayments and accrued approximately $102,000 of interest income.
13.
OTHER NOTES PAYABLE
As
of January 31, 2019 the Trust had approximately $499,000 in promissory notes outstanding to unrelated third parties arising
from the repurchase of 82,588 Class A Partnership units in privately negotiated transactions and the repurchase of 266,894
Shares of Beneficial Interest in privately negotiated transactions. These promissory notes bear interest at 7% per year and
are due in varying monthly payments through July 2020.
As
of January 31, 2018 the Trust had approximately $959,000 in promissory notes outstanding to unrelated third parties arising from
the repurchase of 91,259 Class A Partnership Units and 524,930 IHT Shares of Beneficial Interest in privately negotiated
transactions. These promissory notes bear interest at 7% per year and are due in varying monthly payments through July 2020.
As
of January 31, 2019, the Trust had a $200,000 note payable with an individual lender. The promissory note is payable
on demand or on July 31, 2020, whichever occurs first. The loan accrues interest at 7% and interest only payments shall be made
monthly and are due on the first of the following month. The Trust may pay all of part of this note without any repayment penalties
On
June 20, 2016, the Trust and the Partnership together entered into an unsecured loan of $80,000 with Guy C. Hayden III (“Hayden
Loan”). The Hayden loan is due on June 20, 2019 or on demand, whichever occurs first. The Hayden loan accrues interest at
7% and interest only payments shall be made monthly and are due on the first of the following month. The Trust and Partnership
may pay all of part of these notes without any repayment penalties. On March 1, 2017, the Trust and the Partnership together added
an additional $36,960 to the Hayden Loan. On May 30, 2017, the Trust and the Partnership together added an additional $63,040
to the Hayden Loan. On July 18, 2017 the Trust and Partnership together added an additional $90,000 to the Hayden Loan. The total
principal amount of the Hayden Loan is $270,000 as of January 31, 2019.
On
December 5, 2016, the Trust and the Partnership together entered into eight unsecured loans for a total of $425,000 with varying
principal amounts ranging from $25,000 to $100,000 with H. W. Hayes Trust (“Hayes Loans”). The Trust and the Partnership
together also entered into two unsecured on-demand $25,000 loans for a total of $50,000 with Lita M. Sweitzer (“Sweitzer
Loans”). On March 20, 2017, the Trust and Partnership added an additional $50,000 to the Sweitzer Loans. The total principal
amount of the Hayes Loans and the Sweitzer Loans is $525,000 as of January 31, 2019. The Hayes Loans and the Sweitzer Loans are
due on June 20, 2019 or on demand, whichever occurs first. The Hayes Loans requires from a 0-120 day notification of the demand
to repay the loans prior to June 20, 2019. Both the Hayes Loans and the Sweitzer Loans accrue interest at 7.0% per year on the
unpaid balance and interest only payments shall be made monthly and are due on the first of the following month. The Trust and
Partnership may pay all or part of these notes without any repayment penalties.
See
Note 14 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.
14.
MINIMUM DEBT PAYMENTS
Scheduled
minimum payments of debt, net of debt discounts, as of January 31, 2019 are as follows in the respective fiscal years indicated:
FISCAL
YEAR
|
|
MORTGAGES
|
|
|
NOTES
PAYABLE RELATED PARTIES
|
|
|
OTHER
NOTES PAYABLE
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
115,000
|
|
|
|
318,000
|
|
|
|
1,229,069
|
|
|
|
1,662,069
|
|
2021
|
|
|
119,000
|
|
|
|
166,000
|
|
|
|
216,000
|
|
|
|
501,000
|
|
2022
|
|
|
127,000
|
|
|
|
|
|
|
|
49,000
|
|
|
|
176,000
|
|
2023
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
130,000
|
|
2024
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
135,000
|
|
Thereafter
|
|
|
4,199,000
|
|
|
|
|
|
|
|
|
|
|
|
4,199,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,825,000
|
|
|
$
|
484,000
|
|
|
$
|
1,494,069
|
|
|
$
|
6,803,069
|
|
15.
DESCRIPTION OF BENEFICIAL INTERESTS
Holders
of the Trust’s Shares of Beneficial Interest are entitled to receive dividends when and if declared by the Board of Trustees
of the Trust out of funds legally available therefore. The holders of Shares of Beneficial Interest, upon any liquidation, dissolution
or winding-down of the Trust, are entitled to share ratably in any assets remaining after payment in full of all liabilities of
the Trust. The Shares of Beneficial Interest possess ordinary voting rights, each share entitling the holder thereof to one vote.
Holders of Shares of Beneficial Interest do not have cumulative voting rights in the election of Trustees and do not have preemptive
rights.
On
January 2, 2001, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of
1934, as amended, for the purchase of up to 250,000 Partnership units and/or Shares of Beneficial Interest in open market or privately
negotiated transactions. On September 10, 2002, August 18, 2005 and September 10, 2007, the Board of Trustees approved the purchase
of up to 350,000 additional Partnership units and/or Shares of Beneficial Interest in open market or privately negotiated transactions.
Additionally, on January 5, 2009, September 15, 2009 and January 31, 2010, the Board of Trustees approved the purchase of up to
300,000, 250,000 and 350,000, respectively, of additional Partnership units and/or Shares of Beneficial Interest in open market
or privately negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for
future acquisitions and financings and/or for awards granted under the Trust’s equity compensation plans/programs. Additionally,
on June 19, 2017, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of
1934, as amended, for the purchase of up to 750,000 Partnership units and/or Shares of Beneficial Interest in open market or privately
negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for future acquisitions
and financings and/or for awards granted under the InnSuites Hospitality Trust 1997 Stock Incentive and Option Plan.
For
the years ended January 31, 2019 and 2018, the Trust repurchased 433,377 and 150,973 Shares of Beneficial Interest at an
average price of $1.71 and $1.99 per share, respectively. The average price paid includes brokerage commissions. The Trust intends
to continue repurchasing Shares of Beneficial Interest in compliance with applicable legal and NYSE AMERICAN requirements. The
Trust remains authorized to repurchase an additional 445,694 Partnership units and/or Shares of Beneficial Interest pursuant to
the publicly announced share repurchase program, which has no expiration date. Repurchased Shares of Beneficial Interest are accounted
for as treasury stock in the Trust’s Consolidated Statements of Shareholders’ Equity.
16.
FEDERAL INCOME TAXES
The
Trust and subsidiaries have income tax net operating loss carryforwards of approximately $4.4 million at January 31, 2019. In
2005, the Trust had an ownership change within the meaning of Internal Revenue Code Section 382. However, the Trust determined
that such ownership change would not have a material impact on the future use of the net operating losses.
Total
and net deferred income tax assets at January 31,
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
705,000
|
|
|
$
|
2,763,000
|
|
Bad
debt allowance
|
|
|
3,000
|
|
|
|
(22,000
|
)
|
Accrued
expenses
|
|
|
2,000
|
|
|
|
89,000
|
|
Syndications
|
|
|
2,923,000
|
|
|
|
5,179,000
|
|
Prepaid
Insurance
|
|
|
-
|
|
|
|
30,000
|
|
Alternative
minimum tax credit
|
|
|
51,000
|
|
|
|
91,000
|
|
Total
deferred tax asset
|
|
|
3,684,000
|
|
|
|
8,130,000
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liability associated with book/tax
|
|
|
(1,570,000
|
)
|
|
|
(2,884,000
|
)
|
Net
deferred income tax asset
|
|
|
2,114,000
|
|
|
|
5,246,000
|
|
Valuation
allowance
|
|
|
(2,114,000
|
)
|
|
|
(5,246,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
taxes for the year ended January 31,
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Current
income tax provision (benefit)
|
|
|
-
|
|
|
|
335,000
|
|
Deferred
income tax provision (benefit)
|
|
|
(3,132,000
|
)
|
|
|
(1,701,000
|
)
|
Change
in valuation allowance
|
|
|
3,132,000
|
|
|
|
1,701,000
|
|
Net
income tax expense (benefit)
|
|
|
-
|
|
|
|
335,000
|
|
The
differences between the statutory and effective tax rates are as follows for the year ended January 31, 2019:
|
|
2019
|
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Federal
statutory rates
|
|
$
|
208,000
|
|
|
|
21
|
%
|
State
income taxes
|
|
|
50,000
|
|
|
|
5
|
%
|
Change
in valuation allowance
|
|
|
(3,132,000
|
)
|
|
|
(316
|
)%
|
True-up
to prior year returns
|
|
|
2,872,000
|
|
|
|
290
|
%
|
Other
|
|
|
2,000
|
|
|
|
0
|
%
|
Effective
rate
|
|
$
|
-
|
|
|
|
0
|
%
|
The
differences between the statutory and effective tax rates are as follows for the year ended January 31, 2018:
|
|
2018
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Federal
statutory rates
|
|
$
|
1,604,000
|
|
|
|
34
|
%
|
State
income taxes
|
|
|
576,000
|
|
|
|
12
|
%
|
Change
in valuation allowance
|
|
|
(1,701,000
|
)
|
|
|
(36
|
)%
|
True-up
to prior year returns
|
|
|
(240,000
|
)
|
|
|
(5
|
)%
|
Other
|
|
|
96,000
|
|
|
|
2
|
%
|
Effective
rate
|
|
$
|
335,000
|
|
|
|
7
|
%
|
17.
OTHER RELATED PARTY TRANSACTIONS
As
of January 31, 2019 and 2018, Mr. Wirth and his affiliates held 2,974,038 and 3,064,038 Class B Partnership units, which represented
23.35% and 23.86% of the total outstanding Partnership units, respectively. As of January 31, 2019 and 2018, Mr. Wirth and his
affiliates held 5,881,683 and 6,939,429, respectively, Shares of Beneficial Interest in the Trust, which represented 62.84% and
70.99% respectively, of the total issued and outstanding Shares of Beneficial Interest.
As
of January 31, 2019 and 2018, the Trust owned 74.90% and 74.80% of the Partnership, respectively. As of January 31, 2019, the
Partnership owned a 51.01% interest in the InnSuites® hotel located in Tucson. The Trust also owned a direct 22.83% interest
in one InnSuites® hotel located in Albuquerque, New Mexico.
The
Trust directly manages the Hotels through the Trust’s wholly-owned subsidiary, InnSuites Hotels Inc. Under the management
agreements, InnSuites Hotels Inc. manages the daily operations of the Hotels and the hotel owned by affiliates of Mr. Wirth. Revenues
and reimbursements among the Trust, InnSuites Hotels Inc. and the Partnership have been eliminated in consolidation. The management
fees for the Hotels and the two hotels owned by affiliates of Mr. Wirth are set at 5.0% of room revenue and a monthly accounting
fee of $2,000 per hotel. These agreements have no expiration date and may be cancelled by either party with 90-days written notice
or 30-days written notice in the event the property changes ownership. During the years ended January 31, 2019 and 2018, the Trust
recognized approximately $165,000 and approximately $200,000, respectively of revenue.
The
Tucson Oracle property has an unsecured demand/revolving line of credit/promissory note as described in Note 13 – Lines
of Credit - Related Party. The Trust has an unsecured demand/revolving line of credit/promissory note as described in Note 13
– Lines of Credit - Related Party.
During
the fiscal years ended January 31, 2019 and 2018, the Trust paid Berg Investment Advisors $6,000 and $42,500, respectively, for
additional consultative services rendered by Mr. Marc Berg, the Trust’s Executive Vice President.
Pamela
Barnhill, former Vice Chairperson and President of the Trust, resigned in June, 2019, and is the daughter of Mr. Wirth,
the Trust’s Chairman and Chief Executive Officer. Ms. Barnhill’s total compensation was $74,471 and $169,931 for
the fiscal years ended January 31, 2019 and 2018, respectively. The Trust also employs another immediate family member of
Mr. Wirth who provides technology support services to the Trust, receiving a $47,500 annual salary.
During
the fiscal years ended January 31, 2019 and 2018, Rare Earth received restructuring fees of $-0- and $440,000, respectively, relating
to the syndications of our Albuquerque, New Mexico and Yuma, Arizona (sold October 2018) hotel properties.
On
December 22, 2015, the Trust provided Advances to Affiliate – Related Party in the amount of $500,000 to Tempe/Phoenix Airport
Resort LLC. Mr. Wirth, individually and thru one of his affiliates owns approximately 42% Tempe/Phoenix Airport Resort LLC. The
note has a due date of June 30, 2019 and accrues interest of 7.0%. During the fiscal year ended January 31, 2019, the Trust received
$102,000 interest income from Tempe/Phoenix Airport Resort LLC, respectively. As of January 31, 2019, the Advances from Affiliate
– Related Party balance was $950,353 from Tempe/Phoenix Airport Resort LLC. As of January 31, 2018, the Lending from Affiliate
– Related Party balance $ $970,353 from Tempe/Phoenix Airport Resort LLC.
18.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
following table presents the estimated fair values of the Trust’s debt instruments and the associated carrying value recognized
in the accompanying consolidated balance sheets at January 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Mortgage
notes payable
|
|
$
|
4,824,692
|
|
|
$
|
3,141,032
|
|
|
$
|
9,752,596
|
|
|
$
|
8,164,897
|
|
Notes
payable to banks
|
|
$
|
9,300
|
|
|
$
|
9,300
|
|
|
$
|
952,213
|
|
|
$
|
952,213
|
|
Other
notes payable
|
|
$
|
1,494,030
|
|
|
$
|
1,494,030
|
|
|
$
|
1,954,405
|
|
|
$
|
1,954,405
|
|
19.
SUPPLEMENTAL CASH FLOW DISCLOSURES
|
|
2019
|
|
|
2018
|
|
Cash
paid for interest
|
|
$
|
634,337
|
|
|
$
|
539,072
|
|
|
|
|
|
|
|
|
|
|
Notes
Payables - IHT Shares of Beneficial
Interest
and Partnership Units repurchases
|
|
$
|
1,677,572
|
|
|
$
|
1,141,756
|
|
20.
COMMITMENTS AND CONTINGENCIES
Leases:
The
Albuquerque Hotel is subject to non-cancelable ground lease. The Albuquerque Hotel non-cancelable ground lease was extended on
January 14, 2014 and expires in 2058. Total expense associated with the non-cancelable ground lease for the fiscal years ended
January 31, 2019 and 2018 was approximately $152,000 and $150,000, respectively.
On
August 4, 2017, the Trust entered into a five year office lease agreement with Northpoint Properties for a commercial office lease
at 1730 E Northern Ave, Suite 122, Phoenix, Arizona 85020 commencing on September 1, 2017. Base monthly rent of $4,100 increases
6% on a yearly basis. No rent is due for October 2018 and October 2022 months. The Trust also agreed to pay electricity and applicable
sales tax. The office lease agreement provides early termination with a 90 day notification with an early termination fee of $12,000,
$8,000, $6,000, $4,000 and $2,000 for years 1 - 5 of the lease term.
Future
minimum lease payments under these non-cancelable ground lease and office lease are as follows:
Fiscal
Year Ending
|
|
|
|
FY
2020
|
|
$
|
167,225
|
|
FY 2021
|
|
|
170,448
|
|
FY 2022
|
|
|
173,864
|
|
FY 2023
|
|
|
144,565
|
|
FY 2024
|
|
|
113,508
|
|
Thereafter
|
|
|
5,359,805
|
|
|
|
$
|
6,129,414
|
|
Restricted
Cash:
The
Trust is obligated under a loan agreement relating to the Tucson Oracle property to deposit 4% of the individual hotel’s
room revenue into an escrow account to be used for capital expenditures. The escrow funds applicable to the Tucson Oracle property
for which a mortgage lender escrow exists is reported on the Trust’s Consolidated Balance Sheet as “Restricted Cash.”
Since a $0 cash balance existed in Restricted Cash for the fiscal years 2019 and 2018, Restricted Cash line was omitted on the
Trust’s Consolidated Balance Sheet.
Membership
Agreements:
InnSuites
Hotels has entered into membership agreements with Best Western International, Inc. (“Best Western”) for both
of the hotel properties. In exchange for use of the Best Western name, trademark and reservation system, all Hotels pay fees to
Best Western based on reservations received through the use of the Best Western reservation system and the number of available
suites at the Hotels. The agreements with Best Western have no specific expiration terms and may be cancelled by either party.
Best Western requires that the hotels meet certain requirements for room quality, and the Hotels are subject to removal from its
reservation system if these requirements are not met. The Hotels with third-party membership agreements received significant reservations
through the Best Western reservation system. Under these arrangements, fees paid for membership fees and reservations were approximately
$276,000 and $286,000 for fiscal years ended January 31, 2019 and 2018, respectively.
The
nature of the operations of the Hotels exposes them to risks of claims and litigation in the normal course of their business.
Although the outcome of these matters cannot be determined and is covered by insurance, management does not expect that the ultimate
resolution of these matters will have a material adverse effect on the consolidated financial position, results of operations
or liquidity of the Trust.
Litigation:
The
Trust is involved from time to time in various other claims and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Trust’s
consolidated financial position, results of operations or liquidity.
Indemnification:
The
Trust has
entered into
indemnification agreements with all of our executive officers and Trustees. The agreements provide for indemnification against
all liabilities and expenses reasonably incurred by an officer or Trustee in connection with the defense or disposition of any
suit or other proceeding, in which he or she may be involved or with which he or she may be threatened, while in office or thereafter,
because of his or her position at the Trust. There is no indemnification for any matter as to which an officer or Trustee is adjudicated
to have acted in bad faith, with willful misconduct or reckless disregard of his or her duties, with gross negligence, or not
in good faith in the reasonable belief that his or her action was in the Trust’s best interests. These agreements
require the Trust, among other things, to indemnify the director or officer against specified expenses and liabilities,
such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or
proceeding arising out of the individual’s status or service as our director or officer, other than liabilities arising
from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by
the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to
indemnification by us. The Trust may advance payments in connection with indemnification under the agreements. The level
of indemnification is to the full extent of the net equity based on appraised and/or market value of the Trust. Historically,
the Trust has not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these
indemnities in the accompanying consolidated balance sheets.
22.
SHARE-BASED PAYMENTS
The
Trust
compensates
its non-employee Trustees for their services through grants of restricted Shares. The aggregate grant date fair value of these
Shares was $32,400. These restricted Shares vested in equal monthly amounts during fiscal year 2019. As of January 31,
2019, Messrs. Kutasi, Chase and did not hold any unvested Shares
During
fiscal year 1999, the shareholders of the Trust adopted the 1997 Stock Incentive and Option Plan (the “Plan”). Pursuant
to the Plan, the Compensation Committee may grant options to the Trustees, officers, other key employees, consultants, advisors
and similar employees of the Trust and certain of its subsidiaries and affiliates. The number of options that may be granted in
a year is limited to 10% of the total Shares of Beneficial Interest and Partnership units in the Partnership (Class A and Class
B) outstanding as of the first day of such year.
Generally,
granted options expire 10 years from the date of grant, are exercisable during the optionee’s lifetime only by the recipient
and are non-transferable. Unexercised options held by employees of the Trust generally terminate on the date the individual ceases
to be an employee of the Trust.
There
were no options granted in fiscal year 2019 or 2018, and no options were outstanding as of January 31, 2019 and 2018. The Plan
currently has 1,000,000 options available to grant. See Note 24 for additional information on stock options. The Plan also
permits the Trust to award stock appreciation rights, none of which, as of January 31, 2019, have been issued.
See
Note 2 – “Summary of Significant Accounting Policies” for information related to grants of restricted shares
under “Stock-Based Compensation.”
22.
SEGMENT REPORTING
As
a result of the sale of IBC (see Note 23), 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 two hotel properties with an aggregate of 267 suites in Arizona and New Mexico.
Prior to the sale of IBC, the Trust had previously determined that its operations were comprised of two reportable segments, a
Hotel Operations & Corporate Overhead segment, and the IBC Hospitality segment serving 2,000 unrelated hotel properties. In
connection with the sale of IBC, the historical financial information presented in this Form 10-K reflects this change with IBC
being reported as discontinued operation.
The
Trust’s 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.
The
Trust determined its reportable segments are the Hotel Operations and IBC Developments segments. Reportable segments are determined
based on discrete financial information reviewed by the Trust’s CODM. The Trust organizes and reviews operations based on
products and services, and currently there are no operating segments that are aggregated. The Trust performs an annual analysis
of its reportable segments.
23.
DISCONTINUED OPERATIONS
Sale
of IBC Hospitality Technologies; IBC Hotels LLC (IBC)
Discontinued
operations during the fiscal year ended January 31, 2019 consist of the operations from the IBC Technology Segment (IBC
Hotels LLC). 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 unrelated third party buyer (Buyer). The buyer hired IHT’s
former Chief Operating Officer, who is a family member of IHT’s CEO. The sale price was $3,000,000, to be paid to
IHT as follows:
|
1.
|
$250,000
at closing, which was received on August 14, 2018;
|
|
|
|
|
2.
|
A
secured promissory note 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. Future payments on this
note are shown in the table below.
|
FISCAL
YEAR
|
|
|
|
|
2020
|
|
|
$
|
229,167
|
|
2021
|
|
|
|
550,000
|
|
2022
|
|
|
|
550,000
|
|
2023
|
|
|
|
550,000
|
|
2024
|
|
|
|
550,000
|
|
Thereafter
|
|
|
|
320,833
|
|
|
|
|
$
|
2,750,000
|
|
Note
is secured by (1) pledge of the Buyer’s interest in IBC, and (2) a security interest in all assets of IBC, provided
IHT shall agree to subordinate such equity interest to commercially reasonable debt financing upon request.
If
after effective date IBC closes an equity transaction with net proceeds to IBC in excess of $2,500,000, IBC/Buyer shall pay to
IHT an amount equal to (a) 50% of the net proceeds received by IBC and (b) 50% of the sum of the unpaid balance of the note and
accrued interest accrued but unpaid interest thereon, as the date of receipt of the net proceeds by IBC.
IHT
has agreed to provide continuing working capital support for a period of six months in the amount of approximately $100,000 over
a six month period to IBC for transitional purposes. IHT has no managerial control nor does IHT have the ability to direct the
operations or capital requirements of IBC as of August 1, 2018. IHT has no rights to any benefits or losses from IBC, as
of August 1, 2018. During the fiscal year ended January 31, 2019 IHT had provided $100,000 to IBC.
As
a result of the sale, the Trust recorded a gain on sale of approximately $2,394,000, net of taxes of $0. The gain is determined
by the sales prices of approximately $3,000,000 less the estimated book value of the assets sold and liabilities
assigned 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. Currently there has been no default.
Debt/Working
Capital adjustment
On
or before the sixty calendar days following the effective date (August 1, 2018) Buyer prepared and delivered 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. There is no maximum period, and the obligation may be cancelled after six months. As of February
1, 2019 the payment was reduced to $6,500, and further reduced to $5,500 going forward as of March 1, 2019 by mutual agreement.
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 was then the 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
On
July 31, 2018, IHT entered into a purchase and sale agreement to sell its Innsuites Yuma Hotel and Suites Best Western (Yuma),
together with certain furniture, fixtures, equipment, operating supplies and other ancillary items pertaining to the daily operations
to an unrelated third party. The sale was completed on October 24, 2018. The sales price, as revised, was approximately $16.05
million, of which the net proceeds (net of mortgage payoff, commissions and closing costs) received by the IHT was approximately
$9.93 million
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 for the fiscal year ended January 31, 2019 and January
31, 2018 and the discontinued operations for fiscal year ended January 31, 2019 and January 31, 2018.
DISCONTINUED
OPERATIONS
|
|
JANUARY
31, 2019
|
|
|
JANUARY
31, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
305,835
|
|
|
|
200,705
|
|
Accounts Receivable
|
|
|
932
|
|
|
|
414,787
|
|
Prepaid Expenses
and Other Current Assets
|
|
|
13,680
|
|
|
|
50,828
|
|
Current
Portion of Notes Receivable
|
|
|
|
|
|
|
|
|
Total Current Assets of Discontinued
Operations
|
|
|
320,447
|
|
|
|
666,320
|
|
Noncurrent assets
of Discontinued Operations
|
|
|
-
|
|
|
|
|
|
Property,
Plant and Equipment, net
|
|
|
-
|
|
|
|
5,240,535
|
|
TOTAL ASSETS
OF DISCONTINUED OPERATIONS
|
|
$
|
320,447
|
|
|
|
5,906,855
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts Payable
and Accrued Expenses
|
|
$
|
546,803
|
|
|
|
607,488
|
|
Current
Portion of Notes Payable to Banks, net of Discount
|
|
|
-
|
|
|
|
145,549
|
|
Total Current Liabilities of Discontinued
Operations
|
|
|
546,803
|
|
|
|
753,037
|
|
Noncurrent Liabilities of Discontinued
Operations
|
|
|
|
|
|
|
|
|
Mortgage Notes
Payable, net of Discount
|
|
|
-
|
|
|
|
4,677,444
|
|
Notes
Payable to Banks, net of Discount
|
|
|
-
|
|
|
|
812,930
|
|
TOTAL LIABILITIES
OF DISCONTINUED OPERATIONS
|
|
$
|
546,803
|
|
|
|
6,243,411
|
|
|
|
FOR
THE YEARS ENDED
|
|
|
|
JANUARY
31,
|
|
|
|
2019
|
|
|
2018
|
|
REVENUE
|
|
|
|
|
|
|
Room
|
|
$
|
3,225,783
|
|
|
$
|
5,455,777
|
|
Food and Beverage
|
|
|
27,569
|
|
|
|
106,919
|
|
Reservation and Convention
|
|
|
173,399
|
|
|
|
1,051,454
|
|
Other
|
|
|
41,057
|
|
|
|
32,985
|
|
TOTAL REVENUE
|
|
|
3,467,808
|
|
|
|
6,647,135
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Room
|
|
|
1,261,875
|
|
|
|
1,930,833
|
|
Food and Beverage
|
|
|
35,592
|
|
|
|
125,559
|
|
Telecommunications
|
|
|
21,803
|
|
|
|
34,268
|
|
General and Administrative
|
|
|
766,475
|
|
|
|
1,987,723
|
|
Sales and Marketing
|
|
|
469,457
|
|
|
|
1,524,621
|
|
Reservation Acquisition Costs
|
|
|
142,842
|
|
|
|
234,000
|
|
Repairs and Maintenance
|
|
|
185,148
|
|
|
|
381,356
|
|
Hospitality
|
|
|
167,874
|
|
|
|
332,493
|
|
Utilities
|
|
|
160,641
|
|
|
|
277,020
|
|
Depreciation
|
|
|
393,581
|
|
|
|
749,964
|
|
Intangible Amortization
|
|
|
-
|
|
|
|
933,000
|
|
Real Estate and Personal Property
Taxes, Insurance and Ground Rent
|
|
|
88,344
|
|
|
|
149,550
|
|
Other
|
|
|
-
|
|
|
|
10,297
|
|
TOTAL OPERATING
EXPENSES
|
|
|
3,693,632
|
|
|
|
8,670,684
|
|
OPERATING LOSS
|
|
|
(225,824
|
)
|
|
|
(2,023,548
|
)
|
Interest Income
|
|
|
-
|
|
|
|
961
|
|
TOTAL OTHER
INCOME
|
|
|
-
|
|
|
|
961
|
|
Interest on Mortgage Notes Payable
|
|
|
214,811
|
|
|
|
402,611
|
|
Interest on Notes Payable to Banks
|
|
|
41,390
|
|
|
|
50,236
|
|
TOTAL INTEREST
EXPENSE
|
|
|
256,201
|
|
|
|
452,847
|
|
CONSOLIDATED
NET LOSS OF DISCONTINUED OPERATIONS
|
|
$
|
(482,025
|
)
|
|
$
|
(2,475,434
|
)
|
24.
STOCK OPTIONS
Effective
February 5, 2015, the Board of Trustees of the Trust adopted the 2015 Equity Incentive Plan (“2015 Plan”), subject
to shareholder approval, under which up to 1,600,000 Shares of Beneficial Interest of the Trust are authorized to be issued pursuant
to grant of stock options, stock appreciation rights, restricted shares, restricted share units or other awards.
The
Board of Trustees of the Trust has decided to terminate the 2015 Plan. Effective October 31, 2016, it has been determined that
the Shareholders will not approve the 2015 Plan and the proposed grants have been rescinded. During the 2017 Annual Meeting of
Shareholders, the IHT Shareholders approved the InnSuites Hospitality Trust 2017 Equity Incentive Plan (“2017 Plan”).
Management has not granted any options under the 2017 Plan.
25.
SUBSEQUENT EVENTS
On
May 30, 2019 the Trust’s Board of Trustees approved a one cent semi-annual dividend, payable on July 31, 2019, on shares
held of record a July 19, 2019. This continues the Trust’s recent practice of paying total annual dividends of two cents
per share, payable one cent each semi-annually on July 31 and January 31. This dividend continues 49 consecutive uninterrupted
fiscal years during which the Trust has paid annual dividends, since the formation of the Trust and the initial listing of its
shares on the New York Stock Exchange in 1971.
The
Trust’s listing of the Albuquerque Hotel for sale for $7.5 million expired on April 30, 2019. The Trust continues to entertain
offers at this asking price, but decided not to relist the property at this time because management perceives that year-over-year
increases in operating revenues and anticipated profits have occurred, which could command a higher listing price.
Effective
May 31, 2019, the Trust listed the Tucson Hotel for sale at a price of $15.8 million with a real estate broker who successfully
sold four other InnSuites hotels in the past three years. The Trust set forth this price as the asking price for the Tucson Hotel
in its current Annual Report on Form 10-K, and management believes that that year-over-year increases in operating revenues and
anticipated profits support this as a listing price.
As
part of the Trust’s business strategy, and as described in the Trust’s current Annual Report on Form 10-K, management
is actively seeking a larger company that is not listed on the NYSE AMERICAN as a potential partner for a reverse merger. The
Trust has begun limited discussions with potential candidates.
On
May 30, 2019, the Trust’s Board of Trustees set a date of July 24, 2019 for the Annual Shareholder meeting, to be held at
11:00 AM MST at the Trust’s corporate office: 1730 East Northern Ave, Suite 122, Phoenix, AZ 85020. Shareholders of
record of the Trust on June 24, 2019 will be entitled to vote at the meeting.
Subsequent
to the fiscal year ended January 31, 2019 the Trust repurchased 36,454 Shares of Beneficial Interest on the open market for a
total cash repurchase price of approximately $36,000.