NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2022 AND JANUARY 31, 2022
AND
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2022 AND 2021
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of October 31, 2022, InnSuites Hospitality Trust (the “Trust”, “IHT”, “we”, “us” or
“our”) is a publicly traded unincorporated Ohio real estate investment trust (REIT) with two hotels IHT owns and
manages. The Trust and its shareholders directly in and through a Partnership, own interests in two hotels with an aggregate of 270
hotel suites in Arizona and New Mexico, both (the “Hotels”) operated under the federally trademarked name
“InnSuites” as well as operating under the brand name “Best Western”. The Trust and its shareholders hold a
$1
million 6%
convertible debenture in UniGen Power Inc., (“UniGen”), $413,750
in UniGen’s privately-held diversification common stock (320,000 shares), and hold warrants to make further UniGen Investments in the
future.
Hotel
Operations:
Our
Tucson, Arizona Hotel and our Hotel located in Albuquerque, New Mexico are moderate service hotels. Both hotels offer swimming pools,
fitness centers, business centers, and complimentary breakfast. In addition, the Hotels offer complementary social areas and modest conference
facilities. The Tucson hotel has “PJ’s” Pub and Café, as well.
The
Trust is the sole general partner of RRF Limited Partnership, a Delaware limited partnership (the “Partnership”), and owned
a 75.98% interest in the Partnership as of October 31, 2022 and January 31, 2022, respectively. The Trust’s weighted average ownership
for the nine months ended October 31, 2022 and 2021 was 75.98% and 75.89%, respectively. As of October 31, 2022, the Partnership owned
a 51.01% interest in an InnSuites® hotel located in Tucson, Arizona. The Trust owns a direct 21% interest in an InnSuites® hotel
located in Albuquerque, New Mexico.
RRF
Limited Partnership, a subsidiary, manages the Hotels’ daily operations under 2 management agreements. RRF also provides the use
of the “InnSuites” trademark to the Hotels. All expenses and reimbursements between the Trust and RRF Partnership have been
eliminated in consolidation.
The
Trust classified the Hotels as operating assets, but these assets are available for sale. At this time, the Trust is unable to predict
when, and if, either of these will be sold. Neither the Tucson Hotel nor the Albuquerque Hotel is currently listed for sale but the Trust
is willing to consider offers for each Hotel. Each of the Hotels is being made available at a price that management believes is reasonable
in relation to its current fair market value, earnings, profits, and replacement cost.
PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION
These
unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles in conformity
with accounting principles generally accepted in the United States of America (“GAAP”), and include all assets, liabilities,
revenues and expenses of the Trust and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated.
Certain items have been reclassified to conform to the current fiscal year presentation. The Trust exercises unilateral control over
the Partnership and the entities listed below. Therefore, the unaudited condensed 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.
SCHEDULE OF ENTITY OWNERSHIP PERCENTAGE
| | |
| | | |
| | |
| | |
IHT OWNERSHIP % | |
| ENTITY | |
DIRECT | | |
INDIRECT (i) | |
| Albuquerque Suite Hospitality, LLC | |
| 21.00 | % | |
| - | |
| Tucson Hospitality Properties, LLLP | |
| - | | |
| 51.01 | % |
| RRF Limited Partnership | |
| 75.98 | % | |
| - | |
| |
(i) |
Tucson
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. On October 31, 2022 and January 31, 2022, 200,003 Class A Partnership
units were issued and outstanding, representing 1.51% of the total Partnership units, respectively. Additionally,
as of October 31, 2022 and January 31, 2022, 2,974,038 Class B Partnership units were outstanding, owned by James Wirth, the Trust’s
Chairman and Chief Executive Officer, and Mr. Wirth’s affiliates, representing 22.51% ownership in the Partnership. If all the
Class A and B Partnership units were converted on October 31, 2022 and January 31, 2022, the limited partners in the Partnership would
receive 3,174,041 Shares of Beneficial Interest of the Trust. As of October 31, 2022, and January 31, 2022, the Trust owns 10,037,476
general partner units in the Partnership, representing 75.98% of the total Partnership units.
LIQUIDITY
Two
of the Trust’s principal sources of cash to meet its cash requirements, including distributions to its shareholders, is our
share of the Partnership distributions of monthly hotel management fee income; and our share of the Partnership quarterly
distributions coming from the Tucson Hotel and cash flow, plus quarterly distributions, and cash flow from the Albuquerque, New
Mexico property. The Trust’s liquidity, including our ability to make distributions to its shareholders, will depend upon the
ability of the Trust and the Partnership’s ability to generate sufficient cash flow from hotel operations and to service debt,
as well as to generate funds from a sale of assets. The Covid virus related travel slowdown caused hotel quarterly distributions
from both the Albuquerque and Tucson hotels to be temporarily put on hold May 15, 2020, which was reinstated on February 15,
2022.
At
a future date, the Trust may receive cash from hotel and/or energy operations and/or full or partial sale of one or both hotels, and/or
its UniGen diversification investment.
As
of October 31, 2022, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount payable of approximately
$0. The Demand/Revolving Line of Credit/Promissory Note accrues interest at 7.0% per annum and requires interest only payments. The Demand/Revolving
Line of Credit/Promissory Note has a maximum borrowing capacity to $2,000,000, which is available through December 31, 2022, and automatically
renews annually. This is a two-way Line of Credit, with both the Trust and an Affiliate lender having access to draw on the credit amount
of up to $2,000,000 for either party.
As
of October 31, 2022, the Trust had three Revolving lines of Credit totaling $250,000 with the Republic Bank of Arizona. The lines had
a zero balance as of October 31, 2022.
With
approximately $2,847,000 of cash, as of October 31, 2022, the availability of $2,250,000 from the combined $2,000,000 Advance to Affiliate
credit facilities, and the $250,000 Revolving Lines of Credit with Republic Bank, the Trust believes that it has and will have enough
cash on hand to meet all of the financial obligations as they become due for twelve months from the date of filing this 10-Q. In addition,
management is analyzing strategic options available to the Trust, including the sale of one or both Hotel properties, and/or a possible
merger. However, such transactions may not be available on terms that are favorable to the Trust, or at all.
There
can be no assurance that the Trust will be successful selling properties, merging, 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 or refinance certain of our assets to meet liquidity needs, which may not be on terms that are favorable.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared by the Trust in accordance with Generally Accepted
Accounting Principles (“GAAP”), for interim financial information, and pursuant to the instructions to Form 10-Q and Article
10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all
of the information and footnotes required by U.S. GAAP for complete financial statement presentation. However, the Trust believes that
the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting
primarily of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating
results for the Fiscal Nine Months ended October 31, 2022 are not necessarily indicative of the results that may be expected for the
Fiscal Year ending January 31, 2023. The unaudited condensed consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and related notes thereto included in the Trust’s Annual Report on Form 10-K for the
Fiscal Year ended January 31, 2022.
The
Trust has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other
than those events disclosed indicating the recovery of economic and business activity, and continuing progress by UniGen in developing
its innovative clean energy product, the Trust is not aware of any other significant events that occurred subsequent to the balance sheet
date but prior to the filing of this report that would have a material impact on the Trust’s financial statements.
As
the general partner of the Partnership, the Trust exercises unilateral control over the Partnership. Therefore, the financial statements
of the Partnership are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated.
Under
Accounting Standards Codification (“ASC”) Topic 810-10-25, Albuquerque Suite Hospitality, LLC has been determined to be a
variable interest entity with the Trust as the primary beneficiary (see Note 4 – “Variable Interest Entity”). Therefore,
the financial statements of Albuquerque Suite Hospitality, LLC, are consolidated with the Trust, and all significant intercompany transactions
and balances have been eliminated.
The
financial statements of the Partnership and Tucson Hospitality Properties, LLLP are consolidated with the Partnership and the Trust,
and all significant intercompany transactions and balances have been eliminated.
SEASONALITY
OF THE HOTEL BUSINESS
The
Hotels’ operations historically have been somewhat seasonal. The Tucson Arizona Hotel historically experiences the highest occupancy
in the first fiscal quarter (the winter high season) and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter (summer
low season) historically tends to be the lowest occupancy period at this Arizona Hotel. This seasonality pattern can be expected to
cause fluctuations in the Trust’s quarterly revenues. The Hotel located in Albuquerque, New Mexico historically experiences its
most profitable periods during the second and third fiscal quarters (the summer high 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 travel disruptions, labor force shortages
and cash flow issues. Further, if an adverse event such as an actual or threatened virus pandemic, terrorist attack, international conflict,
data breach, regional economic downturn or poor weather should occur at either of its two hotels, the adverse impact to the Trust’s
revenues and profit could be significant.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE
OF ESTIMATES
The
preparation of the unaudited condensed consolidated 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 audited condensed 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, inflation, virus/pandemic, competition in the hotel
industry and the effect of the economy and interest rates, 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, recoverability of long-lived assets, interest rates affecting discounting
of future funds to the current types of inflation, and the fair values of the long-lived assets.
PROPERTY
AND EQUIPMENT
Furniture,
fixtures, building and improvements and hotel properties are stated at cost, except for land, and depreciated using the straight-line
method over estimated lives ranging up to 40 years for buildings and improvements, and 3 to 10 years for furniture, fixtures and equipment.
Land
is an indefinite-lived asset. The Trust tests its land for impairment annually, or whenever events or changes in circumstances indicates
an impairment may have occurred, by comparing its carrying value to its implied fair value.
For
tax purposes the Trust takes advantage of accelerated depreciation methods (MACRS) for new capital additions and improvements to its
Hotels.
Management
applies guidance ASC 360-10-35, to determine when it is required to test an asset for recoverability of its carrying value and whether,
or not, an impairment exists. Under ASC 360-10-35, the Trust is required to test a long-lived asset for impairment when there is an indicator
of impairment. Impairment indicators may include, but are not limited to, a drop in the performance of a long-lived asset, a decline
in the hospitality industry or a decline in the economy. If an indicator of potential impairment is present, then an assessment is performed
of whether the carrying amount of an asset exceeds its estimated undiscounted future cash flows over its estimated remaining life.
If
the estimated undiscounted future cash flows over the asset’s estimated remaining life are greater than the asset’s carrying
value, no impairment is recognized; however, if the carrying value of the asset exceeds the estimated undiscounted future cash flows,
then the Trust would recognize an impairment expense to the extent the asset’s carrying value exceeds its fair value, if any. The
estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ
from actual cash flows. Long-lived assets evaluated for impairment are analyzed on a property-specific basis independent of the cash
flows of other groups of assets. Evaluation of future cash flows is based on historical experience and other factors, including certain
economic conditions, and committed future bookings. Management has determined that no further impairment is required of long-lived assets
for the fiscal period ended October 31, 2022.
CASH
The
Trust believes it places its cash only with high credit quality financial institutions, although these balances periodically exceed federally
insured limits.
REVENUE
RECOGNITION
Hotel
and Operations
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 currently 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 include a monthly accounting fee and a percentage of hotel room revenues for managing the daily operations of the Hotels.
Each
room night consumed by a guest with a cancelable reservation represents a contract whereby the Trust has a performance obligation to
provide the room night at an agreed upon price. For cancellable reservations, the Trust recognizes revenue as each performance obligation
(i.e., each room night) is met. Such contract is renewed if the guest continues their stay. For room nights consumed by a guest with
a non-cancellable reservation, the entire reservation period represents the contract term whereby the Trust has a performance obligation
to provide the room night or nights at an agreed upon price. For non-cancellable reservations, the Trust recognizes revenue over the
term of the performance period (i.e., the reservation period) as room nights are consumed. For these reservations, the room rate is typically
fixed over the reservation period. The Trust uses an output method based on performance completed to date (i.e., room nights consumed)
to determine the amount of revenue it recognizes on a daily basis if the length of a non-cancellable reservation exceeds one night since
consumption of room nights indicates when services are transferred to the guest. In certain instances, variable consideration may exist
with respect to the transaction price, such as discounts, coupons and price concessions made upon guest checkout.
In
evaluating its performance obligation, the Trust bundles the obligation to provide the guest the room itself with other obligations (such
as free Wi-Fi, complimentary breakfast, and parking), as the other obligations are not distinct and separable because the guest cannot
benefit from the additional amenities without the consumed room night. The Trust’s obligation to provide the additional items or
services is not separately identifiable from the fundamental contractual obligation (i.e., providing the room and its contents). The
Trust has no performance obligations once a guest’s stay is complete.
We
are required to collect certain taxes and fees from customers on behalf of government agencies and remit these back to the applicable
governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and
fees and, therefore, they are not included in revenues. We record a liability when the amounts are collected and relieve the liability
when payments are made to the applicable taxing authority or other appropriate governmental agency.
ACCOUNTS
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts
receivable are derived from guest stays and other reservations at the Hotels. Accounts receivable are carried at original amounts billed
less an estimate made for doubtful accounts based on a review of outstanding amounts on a quarterly basis. Management generally records
an allowance for doubtful accounts for 50% of balances over 90 days due and 100% of balances over 120 days due. Accounts receivable are
written off when collection efforts have been exhausted and they are deemed uncollectible. Recoveries, if any, of receivables previously
written off are recorded when received. The Trust does not charge interest on accounts receivable balances and these receivables are
unsecured. There is $0 in the allowance for doubtful accounts for the nine months ended October 31, 2022 and January 31, 2022.
LEASE
ACCOUNTING
The
Trust determines, at the inception of a contract, if the arrangement is a lease and whether it meets the classification criteria for
a finance or operating lease. ROU assets represent the Trust’s right to use an underlying asset during the lease term and lease
liabilities represent the Trust’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are
recognized at commencement date based on the present value of fixed lease payments over the lease term. ROU assets also include any advance
lease payments and exclude lease incentives. As most of the Trust’s operating leases do not provide an implicit rate, the Trust
uses its incremental borrowing rate based on information available at commencement date in determining the present value of lease payments.
Finance lease agreements generally include an interest rate that is used to determine the present value of future lease payments. Operating
fixed lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term (see Note 14).
TRUSTEE
STOCK-BASED COMPENSATION
The
Trust has an employee equity incentive plan, which is described more fully in Note 15 - “Share-Based Payments.” The three
independent members of the Board of Trustees each earn 6,000 IHT fully paid restricted Shares per year. All shares vest over one year
from date of grant. 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. From time to time, the Trustees and key employees receive one-time fully paid restricted share
grants, as well.
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.
NET
INCOME PER SHARE
Basic
and diluted net income per Share of Beneficial Interest is computed based on the weighted-average number of Shares of Beneficial Interest
and potentially dilutive securities outstanding during the period. Dilutive securities are limited to the Class A and Class B units of
the Partnership, which are convertible into 3,174,041 Shares of the Beneficial Interest, as discussed in Note 1.
For
the Fiscal Nine Months ended October 31, 2022 and 2021, 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 3,174,041 in addition to the basic shares
outstanding for the Fiscal Third Quarter, Fiscal Three Months ended October 31, 2022 and 2021, respectively. These Shares of Beneficial
Interest issuable upon conversion of the Class A and Class B Partnership units were anti-dilutive during the three months ended October
31, 2022 and 2021 and are excluded in the calculation of diluted earnings per share for those periods.
ADVERTISING
COSTS
Amounts
incurred for advertising costs are expensed as incurred. Advertising expense for continuing operations totalled approximately $92,000
and $39,000 for the three months ended October 31, 2022 and 2021 respectively, and $263,000 and $154,000 for the nine months ended October
31, 2022 and 2021, 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 various 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 assets that are carried at fair value on a recurring basis, including stock and warrants in a 3rd party private
company on the unaudited condensed consolidated balance sheet.
Due
to their short maturities, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value. The fair value of mortgage notes payable, notes payable to banks and notes and advances payable to related parties
is estimated by using the current rates which would be available for similar loans having the same remaining maturities and are based
on level 3 inputs.
CONVERTIBLE
NOTE RECEIVABLE IN UNIGEN POWER, INC.
On
December 16, 2019 the Trust entered into a Convertible Debenture Purchase Agreement with UniGen Power Inc. (“UniGen”).
InnSuites Hospitality Trust (IHT) made an initial $1
million diversification investment in late Fiscal Year 2020 and early Fiscal Year 2021 that could expand into a multi-million-dollar
investment totaling up to approximately 25
percent ownership in privately held UniGen Power, Inc. (UniGen) to develop a patented high profit potential new efficient clean
energy generation innovation. UniGen management indicates positive progress to date despite the virus, economic, and travel
disruptions of 2020, as well as more recent cost overruns and technical delays. The investment includes warrants convertible to
UniGen stock upon election of the Trust. The investment is valued at fair value (level 3), as defined in Note 2 of the Consolidated
Financial Statements. There is no Investment Commitment to UniGen requiring any restriction of cash.
The
Trust purchased secured convertible debentures (“Debentures”) in the aggregate amount of $1,000,000 (the “Loan Amount”)
(the “Loan”) yielding at an annual interest rate of 6%. The Debentures are convertible into 1,000,000 Class A shares of UniGen
Common Stock at an initial conversion rate of $1.00 per share.
UniGen
issued the Trust common stock purchase warrants (the “Debenture Warrants”) to purchase up to 1,000,000 shares of Class A
Common. The Debenture Warrants are exercisable at an exercise price of $1.00 per share of Class A Common Stock.
UniGen,
also, issued the Trust additional common stock in the amount of 1 million shares at $1 per share, and additional purchase warrants
(“Additional Warrants”) to purchase up to 200,000
shares of Class A Common Stock plus a separate grant of 300,000
warrants. The Additional Warrants are exercisable at an exercise price of $2.25
per share of Class A Common Stock.
On
the Trust’s balance sheet, the investment of the $1,413,750
consists of approximately $700,000
in note receivables, approximately $300,000
as the fair value of the warrants issued with the Trust’s investment in UniGen, and $413,750
of UniGen Common Stock (320,000 shares), at cost. The value of the premium related to the fair value of the warrant will accrete
over the life of the debentures.
IHT
holds an opportunity to extend and then convert a $500,000 UniGen line of credit into 500,000 shares of UniGen. IHT, but not UniGen,
has an option to extend the line of credit up to $500,000, and also has the option to receive payment convertible into stock at $1 per
share. Full conversion of all IHT held convertible debt and UniGen warrants could result in 3 million shares of UniGen stock. If all
shares from all parties are fully exercised, it would result in approximately 12.5 million UniGen shares outstanding, of which approximately
up to 25% of the fully diluted UniGen equity would be held by IHT. The Trust owns less than 1% of the outstanding shares of UniGen as
of October 31, 2022.
The
value of the warrants issued with the note receivable was based on Black-Scholes pricing model based on the following inputs:
Debenture
Warrants
SCHEDULE
OF WARRANTS VALUATION ASSUMPTIONS
| Type of option | |
Call option | |
| Stock price | |
$ | 2.25 | |
| Exercise (Strike) price | |
$ | 1.00 | |
| Time to maturity (years) | |
| 2.0 | |
| Annualized risk-free rate | |
| 1.630 | % |
| Annualized volatility | |
| 27.43 | % |
Additional
Warrants
| Type of option | |
Call option | |
| Stock price | |
$ | 2.25 | |
| Exercise (Strike) price | |
$ | 2.25 | |
| Time to maturity (years) | |
| 3.0 | |
| Annualized risk-free rate | |
| 1.630 | % |
| Annualized volatility | |
| 27.43 | % |
During
the Fiscal Quarter ended October 31, 2022, 15,000
warrants were exercised for $15,000
and in return the Trust received 15,000
shares of UniGen. As of October 31, 2022, IHT held 320,000
common shares of UniGen, purchased at a cost of $413,750. Management believes recording the investment at cost approximates fair value since there have been no
significant changes in the operations of UniGen and UniGen’s projects are still in the R&D phase.
UniGen
Power Inc. management during calendar year 2022, has reported progress on several fronts of the InnSuites Hospitality Trust (IHT)
efficient clean energy innovation diversification investment including the following:
1.
Despite travel and supply chain disruptions including “reshoring” of a major portion of UniGen parts, UniGen management targets
the UPI 1000 TA first prototype to be assembled with a target date of June 30, 2023, subject to continuing supply chain delay challenges,
and subject to available cash of UniGen.
2.
Due to global travel and economic events, an increasingly unreliable American power grid, inflation, and supply chain pressures, the
UniGen marketing team estimates product’s market has grown, and has increased the planned power plant price. The initial order
for thirty units was recently reaffirmed.
3.
UniGen raised an additional $1.3
million in 2022, through early existing UniGen warrant exercises, including a $300,000
investment from IHT, of which $160,000
has yet to be funded as part of a pre-production GenSet capital raise.
4.
IHT may exercise up to 95,000 warrants on or before February 10, 2023, and up to 100,000 warrants on or before May 31, 2023, to facilitate
the ordering of parts and tooling with a target date of assembling the first prototype by June 30, 2023.
5. UniGen has confirmed that the major design work
for the UPI 1000 NG engine is now complete.
6. The tooling parts and prototype assembly facilities
are all currently being built by UniGen.
7. Based on a 96 core “super computer “
simulated test together with advanced software, UniGen has confirmed that the UPI 1000 NG engine with the addition of recent technological
advancements, is approximately 33% more fuel efficient than first estimated and will emit only approximately 25% of the maximum admissions
allowed by CARB, the strictest of the regulatory standards issued by the state of California.
8. UniGen is in the process of design with steps to
produce generators fueled not only with relatively clean natural gas but also with other even cleaner fuels such as ethanol and hydrogen
(that emits only water).
9. Future UniGen generators will produce up to 4
megawatts of energy without increasing in size or weight.
James
Wirth (IHT President) and Marc Berg (IHT Executive Vice President) both lack significant UniGen control. They have two of the six
UniGen Board of Directors seats or 33%
and were elected in December 2019 to serve on the board of UniGen to closely monitor and assist in the success of this potentially
power industry disruptive relatively clean energy generation innovation.
The
Trust has valued UniGen investment as a level 3 fair value measurement, for the following reasons: The investment does not qualify for
level 1 since there are no identical actively traded instruments or level 2 identical or similar unobservable markets.
3.
SALE OF OWNERSHIP INTERESTS IN SUBSIDIARIES
The
Trust has sold non-controlling interests in certain subsidiaries, including Albuquerque Suite Hospitality, LLC (the “Albuquerque
entity”) and Tucson Hospitality Properties, LLLP (the “Tucson entity, which sales are described in detail in our Annual Report
on Form 10-K filed on May 27, 2022 with the Securities and Exchange Commissions. Generally, interests have sold for $10,000 per unit
with a two-unit minimum subscription. The Trust maintains at least 50.1% of the units in one of the entities and intends to maintain
this minimum ownership percentage. Generally, the units in the each of the entities are allocated to three classes with differing cumulative
discretionary priority distribution rights through a certain time period. Class A units are owned by unrelated third parties and have
priority for distributions. Class B units are owned by the Trust and have second priority for distributions. Class C units are owned
by Rare Earth or other affiliates of Mr. Wirth and have the lowest priority for distributions. Priority distributions of $700 per unit
per year were cumulative until a certain date; however, after that date, generally Class A unit holders continue to hold a preference
on distributions over Class B and Class C unit holders. The Trust does not accrue for these distributions as the preference periods have
expired.
On
February 15, 2017, the Trust and Partnership entered into a restructuring agreement with Rare Earth Financial, LLC (“REF”)
to allow for the sale of non-controlling partnership units in Albuquerque Suite Hospitality LLC (“Albuquerque”) for $10,000
per unit, which operates the Best Western InnSuites Albuquerque Hotel and Suites Airport hotel property, a 112 unit hotel in Albuquerque,
New Mexico (the “Property”). REF and IHT restructured the Albuquerque Membership Interest by creating 250 additional Class
A membership interests from General Member majority-owned to accredited investor member-owned. In the event of sale of 250 Class A Interests,
total interests outstanding changed from 550 to 600 with Class A, Class B and Class C Limited Liability Company Interests (referred to
collectively as “Interests”) restructured with IHT selling approximately 200 Class B Interests to accredited investors as
Class A Interest. REF, as an Administrative Manager of Albuquerque, coordinating the offering and sale of Class A Interests to qualified
third parties. REF, IHT, and other REF Affiliates may purchase Interests from time to time. This restructuring is part of the Trust’s
Equity Enhancement Plan to comply with Section 1003(a)(iii) of the NYSE American Company Guide. For the nine months ending October 31,
2022 and 2021, the Trust purchased a net of 2 units, and sold 0 units, respectively.
4.
VARIABLE INTEREST ENTITIES
Management
evaluates the Trust’s explicit and implicit variable interests to determine if they have any interests in variable interest entities
(“VIEs”). Variable interests are contractual, ownership, or other pecuniary interests in an entity whose value changes with
changes in the fair value of the entity’s net assets, exclusive of variable interests. Explicit variable interests are those which
directly absorb the variability of a VIE and can include contractual interests such as loans or guarantees as well as equity investments.
An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing of variability indirectly,
such as through related party arrangements or implicit guarantees. The analysis includes consideration of the design of the entity, its
organizational structure, including decision making ability over the activities that most significantly impact the VIE’s economic
performance. GAAP requires a reporting entity to consolidate a VIE when the reporting entity has a variable interest, or combination
of variable interest, that provides it with a controlling financial interest in the VIE. The entity that consolidates a VIE is referred
to as the primary beneficiary of that VIE.
The
Partnership has determined that the Albuquerque entity is a variable interest entity 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 hotel.
b)
The Partnership, Trust and their related parties have maintained, as a group, a controlling ownership interest in the Albuquerque hotel,
with the largest ownership belonging to the Trust.
c)
The Partnership, Trust and their related parties have maintained control over the decisions which most impact the financial performance
of the Albuquerque hotel, including providing the personnel to operate the property daily.
During
the nine months ended October 31, 2022 and the Fiscal Year ended January 31, 2022, 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, including the refinance of the Tucson Hotel on
March 29, 2022.
5.
PROPERTY AND EQUIPMENT
As
of October 31, 2022, and January 31, 2022, hotel properties consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
| | |
| | |
| |
| HOTEL SEGMENT | |
| | |
| |
| | |
| | |
| |
| | |
October 31,
2022 | | |
January 31,
2022 | |
| Land | |
$ | 2,500,000 | | |
$ | 2,500,000 | |
| Building and improvements | |
| 10,680,469 | | |
| 10,577,297 | |
| Furniture, fixtures and equipment | |
| 4,193,969 | | |
| 4,114,400 | |
| Total hotel properties | |
| 17,374,438 | | |
| 17,191,697 | |
| Less accumulated depreciation | |
| (10,187,838 | ) | |
| (9,664,472 | ) |
| Hotel properties, net | |
| 7,186,600 | | |
| 7,527,225 | |
As
of October 31, 2022, and January 31, 2022, corporate property, plant, and equipment consisted of the following:
| | |
| | |
| |
| CORPORATE PP&E | |
| | |
| |
| | |
| | |
| |
| | |
October 31,
2022 | | |
January 31,
2022 | |
| Land | |
$ | 7,005 | | |
$ | 7,005 | |
| Building and improvements | |
| 75,662 | | |
| 75,662 | |
| Furniture, fixtures and equipment | |
| 392,878 | | |
| 392,879 | |
| Total property, plant and equipment | |
| 475,545 | | |
| 475,546 | |
| Less accumulated depreciation | |
| (430,043 | ) | |
| (423,458 | ) |
| Property, Plant and Equipment, net | |
$ | 45,502 | | |
$ | 52,088 | |
6.
MORTGAGE NOTES PAYABLE
On
March 29, 2022 Tucson Hospitality Properties LLLP, 51% owned by RRF Limited partnership, a subsidiary of InnSuites Hospitality Trust,
funded a new loan for $8.4 million to refinance it’s relatively low $ 4.5 million first position debt along with approximately
$ 3.8 million in inter-company advances from IHT used to complete the Best Western Product Improvement Plan (“PIP”) refurbishment
of the Hotel at an interest rate of 4.99% financed on a 25 year amortization with no prepayment penalty and no balloon. This credit facility
is guaranteed by InnSuites Hospitality Trust, RRF Limited Partnership, Rare Earth Financial, LLC, James F. Wirth and Gail J. Wirth, and
the Wirth Family Trust dated July 14, 2016.
As
of October 31, 2022, and January 31, 2022, the mortgage loan balance was approximately $8,267,000 and $4,461,000, respectively. The mortgage
note payable is due in monthly installments of $49,778.
On
December 2, 2019, Albuquerque Suites Hospitality, LLC entered into a $1.4 million Business Loan Agreement (“Albuquerque Loan”)
as a first mortgage credit facility with Republic Bank of Arizona. The Albuquerque Loan has a maturity date of December 2, 2029. The
Albuquerque Loan has an initial interest rate of 4.90% for the first five years and thereafter a variable rate equal to the US Treasury
+ 3.5% with a floor of 4.90% and no prepayment penalty. This credit facility is guaranteed by InnSuites Hospitality Trust. As of October
31, 2022, the mortgage loan balance was approximately $1,275,000, net of financing fees of approximately $13,000.
7.
NOTES PAYABLE AND NOTES RECEIVABLE – RELATED PARTY
On
December 1, 2014, the Trust entered a Demand/Revolving Line of Credit/Promissory Note with Rare Earth Financial, LLC, an entity which
is wholly owned by Mr. Wirth and his family members. The Demand/Revolving Line of Credit/Promissory Note, as amended on June 19, 2017,
bears interest at 7.0% per annum for both a payable and receivable, interest is due quarterly, matures on August 24, 2023, and automatically
renews annually each calendar year. No prepayment penalty exists on the Demand/Revolving Line of Credit/Promissory Note. The balance
fluctuates through the period. On December 30, 2020, the Demand/Revolving Line of Credit/Promissory Note was extended and increased to
the current level of $2,000,000. As of October 31, 2022, and January 31, 2022, the Trust had an amount payable of approximately $0 and
$977,000, respectively. During the nine months ended October 31, 2022 and 2021, the Trust accrued approximately $0, respectively, of
interest expense.
8.
OTHER NOTES PAYABLE
As
of October 31, 2022, the Trust had approximately $8,000 in promissory notes outstanding to unrelated third parties arising from the
repurchase of 86,924 Class A Partnership units in privately negotiated transactions. These promissory notes bear interest at 7% per year
and are due in varying monthly payments through January 2023.
As
of October 31, 2022, the Trust had a $200,000 unsecured note payable with an individual lender. The promissory note is payable on demand,
or on June 30, 2024, whichever occurs first. The loan accrues interest at 4.5% and interest only payments shall be made monthly.
The Trust may pay all of part of this note without any repayment penalties. The total principal amount of this loan is $200,000 as of
October 31, 2022.
On
July 1, 2019, the Trust and the Partnership together entered into an unsecured loan totaling $270,000
with an individual investor at 4.5%,
interest only, payable monthly. The
loan has been subsequently extended to June 30, 2024. The
Trust may pay all or part of this note without any repayment penalties. The total principal amount of this loan is $270,000
as of October 31, 2022.
On
July 1, 2019, the Trust and Partnership together entered into an unsecured loan, totaling $100,000
with an individual investor at 4.0%
interest only, payable monthly. The
loan has been subsequently extended to December 31, 2022. The total principal amount of this loan is $100,000
as of October 31, 2022. It is expected this loan will be repaid in full during the first Fiscal Quarter of Fiscal Year 2024.
As
a result of the Virus Pandemic, and the subsequent Legislation passed within the CARES Act of 2020, the Trust applied for and received
Small Business Administration (“SBA”) loans through the Paycheck Protection Program (“PPP”). Loans in the amount
of approximately $229,000, $188,000, and $87,000, for Tucson, Albuquerque, InnSuites Hospitality, respectively, were granted and received.
As
of January 31, 2021 the PPP Loan in other income received by the Trust was fully forgiven in the amount of approximately $87,000 recorded
in other income in the statement of operations. The PPP loan received by Tucson for $228,602 was forgiven in March 2021. The remaining
Albuquerque Hotel loan forgiveness for $187,686 was forgiven in March 2021. The forgiveness was recognized as income for GAAP Financial
Statement purposes, and is tax free for tax purposes.
On
March 5, 2021, the Albuquerque hotel received another PPP Loan in the amount of $253,253. On March 15, 2021, the Tucson hotel received
an additional PPP Loan in the amount of $297,601. Both of these loans were forgiven in July, 2021. The forgiveness was recognized as
other income for GAAP Financial Statement purposes, and is also tax free for tax purposes.
See
Note 9 – “Minimum Debt Payments” for scheduled minimum payments on the debt liabilities.
9.
MINIMUM DEBT PAYMENTS
Scheduled
minimum payments of debt, net of debt discounts, as of October 31, 2022 are approximately as follows in the respective fiscal years indicated:
SCHEDULED
OF MINIMUM PAYMENTS OF DEBT
| FISCAL YEAR | |
MORTGAGES | | |
OTHER NOTES PAYABLE | | |
NOTES PAYABLE - RELATED PARTY | | |
TOTAL | |
| | |
| | |
| | |
| | |
| |
| 2023 | |
| 53,125 | | |
| 95,595 | | |
| - | | |
| 618,720 | |
| 2024 | |
| 223,680 | | |
| 470,000 | | |
| - | | |
| 223,680 | |
| 2025 | |
| 234,169 | | |
| - | | |
| - | | |
| 234,169 | |
| 2026 | |
| 247,906 | | |
| - | | |
| - | | |
| 247,906 | |
| 2027 | |
| 260,999 | | |
| - | | |
| - | | |
| 260,999 | |
| Thereafter | |
| 8,508,591 | | |
| - | | |
| | | |
| 8,508,591 | |
| | |
$ | 9,528,470 | | |
$ | 565,595 | | |
$ | - | | |
$ | 10,094,065 | |
10.
DESCRIPTION OF BENEFICIAL INTERESTS
Holders
of the Trust’s Shares of Beneficial Interest are entitled to receive dividends when and if declared by the Board of Trustees of
the Trust out of funds legally available. The holders of Shares of Beneficial Interest, upon any liquidation, dissolution or winding-down
of the Trust, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the Trust. The Shares
of Beneficial Interest possess ordinary voting rights, each share entitling the holder thereof to one vote. Holders of Shares of Beneficial
Interest do not have cumulative voting rights in the election of Trustees and do not have pre-emptive rights.
For
the nine months ended October 31, 2022, and 2021, the Trust repurchased 83,871 and 23,775 Shares of Beneficial Interest at an average price
of $2.91 and $3.72 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.
11.
RELATED PARTY TRANSACTIONS
As
of October 31, 2022, and January 31, 2022, Mr. Wirth and his affiliates held 2,974,038 Class B Partnership units, which represented 22.51%
of the total outstanding Partnership units, respectively. As of October 31, 2022, and January 31, 2022, Mr. Wirth and his affiliates
held 5,876,683 Shares of Beneficial Interest in the Trust, respectively, which represented 65.05% and 64.85% respectively, of the total
issued and outstanding Shares of Beneficial Interest.
As
of October 31, 2022, and January 31, 2022, the Trust owned 75.98% of the Partnership, respectively. As of October 31, 2022, the Partnership
owned a 51.01% interest in the InnSuites® hotel located in Tucson. The Trust also owned a direct 21.00% interest in one InnSuites®
hotel located in Albuquerque, New Mexico.
The
Trust directly manages the Hotels through the Trust’s majority-owned subsidiary, RRF Limited Partnership. Under the management
agreements, RRF manages the daily operations of both Trust Hotels. All Trust managed Hotel expenses, revenues and reimbursements among
the Trust, and the Partnership have been eliminated in consolidation. The management fees for the Hotels are 5% of room revenue and a
monthly accounting fee of $2,000 per hotel. These agreements have no expiration dates but may be cancelled by either party with 30-days
written notice, or potentially sooner in the event the property changes ownership.
The
Trust employs an immediate family member of Mr. Wirth, Brian James Wirth, who provides technology support services to the Trust, currently
receiving a $36,000 annual salary.
12.
STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The
Trust paid $383,000
and $241,000 in
cash for interest for the nine months ended October 31, 2022 and 2021, respectively for operations. The amounts related to Notes
Payables - IHT Shares of Beneficial Interest and Partnership Units repurchases amounted to $0
and $20,000 for the nine months ended October 31, 2022 and 2021, respectively. Cash paid for taxes for the nine months ended
October, 2022 and 2021 was $0,
respectively.
13.
COMMITMENTS AND CONTINGENCIES
Restricted
Cash:
The
Trust is obligated under a loan agreement relating to the Tucson Oracle property to deposit 4% of the individual hotel’s room revenue
into an escrow account to be used for capital expenditures. The escrow funds applicable to the Tucson Oracle property for which a mortgage
lender escrow exists is reported on the Trust’s Consolidated Balance Sheet as “Restricted Cash.” Since a $0 cash balance
existed in Restricted Cash as of October 31, 2022 and January 31, 2022, Restricted Cash line was omitted on the Trust’s Consolidated
Balance Sheet.
Membership
Agreements:
The
Tucson and Albuquerque Hotels have entered into membership agreements with Best Western International, Inc. (“Best Western”)
for both 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 annually by either party. Best Western
requires that the hotels meet certain requirements for room quality. The two Best Western Hotels receive significant reservations through
the Best Western reservation system, and through Online Travel Agent (OTA) reservations systems, Expedia and Booking.com. Under these
arrangements, fees paid for membership fees and reservations were approximately $133,000 and $69,000 for the nine months ended October
31, 2022 and 2021, respectively. These costs include fees for the Albuquerque and Tucson hotels in 2021. These fees are included in room
operating expenses on the unaudited condensed consolidated statements of operations for Albuquerque and Tucson.
Litigation:
The
Trust and/or its hotel affiliates, are 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
unaudited condensed consolidated financial position, results of operations or liquidity.
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 unaudited condensed consolidated financial position, results of operations
or liquidity of the Trust.
Indemnification:
The
Trust has entered into indemnification agreements with all 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 Trustee 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 Trustee or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent
or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual
with respect to which the individual may be entitled to indemnification by us. The Trust may advance payments in connection with indemnification
under the agreements. The level of indemnification is to the full extent of the net equity based on appraised and/or market value of
the Trust. Historically, the Trust has not incurred any payments for these obligations and, therefore, no liabilities have been recorded
for these indemnities in the accompanying consolidated balance sheets.
See
Note 14 – Leases, for discussion on lease payment commitments.
14.
LEASES
The
Trust has operating leases for its land leased in Albuquerque, New Mexico, and a cable equipment finance lease in Tucson, Arizona. All
leases are non-cancelable.
Operating
Leases
The
Trust’s Albuquerque Hotel is subject to non-cancelable ground lease. The Albuquerque Hotel non-cancelable ground lease was extended
on January 14, 2014 and expires in 2058.
The
following table presents the Trust’s lease costs for the nine months ended October 31, 2022:
SCHEDULE OF LEASE COSTS
| | |
| | |
| | |
Nine Months
Ended | |
| | |
October 31, 2022 | |
| Operating Lease Costs: | |
| | |
| Operating lease cost* | |
| 19,674 | |
| |
* |
Short
term lease costs were immaterial. |
Supplemental
cash flow information is as follows:
SCHEDULE OF CASH FLOW INFORMATION
| | |
| | |
| | |
Nine Months
Ended | |
| | |
October 31, 2022 | |
| | |
| |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| Operating cash flows from operating leases | |
$ | (83,984 | ) |
| | |
| | |
| Lease obligations: | |
| | |
| Operating leases, net | |
$ | 2,285,552 | |
| Long-term obligations | |
$ | 2,267,645 | |
Weighted
average remaining lease terms and discount rates were as follows:
SCHEDULE OF WEIGHTED AVERAGE REMAINING LEASE TERMS AND DISCOUNT RATES
| Weighted average remaining lease term (years) | |
October 31, 2022 | |
| Operating leases | |
| 35 | |
| | |
| | |
| Weighted average discount rate Operating leases | |
| 4.85 | % |
The
aggregate future lease payments for Operating Lease Liability as of October 31, 2021 are as follows:
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASE
| | |
| | |
| For the Years Ending October 31, | |
| |
| Operating Lease Liability | |
| | |
| 2023 | |
$ | 33,586 | |
| 2024 | |
| 134,342 | |
| 2025 | |
| 134,355 | |
| 2026 | |
| 134,367 | |
| 2027 | |
| 134,379 | |
| Thereafter | |
| 4,261,648 | |
| Total minimum lease payments | |
$ | 4,832,677 | |
| Less: amount representing interest | |
| 2,547,125 | |
| Total present value of minimum payments | |
| 2,285,552 | |
| Less: current portion | |
$ | 17,907 | |
| Long term portion of operating lease liability | |
| 2,267,645 | |
Finance
Leases
The
Company’s Tucson Oracle Hotel is subject to non-cancellable cable lease. The Tucson Oracle Hotel non-cancellable cable lease expires
in 2023.
The
following table presents the Company’s lease costs for the nine months ended October 31, 2022:
SCHEDULE OF LEASE COSTS
| | |
| | |
| | |
Nine Months
Ended | |
| | |
October 31, 2022 | |
| Finance Lease Costs: | |
| | |
| Amortization of right-of-use assets | |
$ | 20,812 | |
| Interest on lease obligations | |
| 1,546 | |
Supplemental
cash flow information is as follows:
SCHEDULE OF CASH FLOW INFORMATION
| | |
| |
| | |
Nine Months
Ended | |
| | |
October 31, 2022 | |
| | |
| |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| Operating cash flows from finance leases | |
$ | (986 | ) |
| | |
| | |
| Lease obligations: | |
| | |
| Finance leases, net | |
$ | 30,321 | |
| Long-term obligations | |
$ | 7,718 | |
Weighted
average remaining lease terms and discount rates were as follows:
SCHEDULE OF WEIGHTED AVERAGE REMAINING LEASE TERMS AND DISCOUNT RATES
| Weighted average remaining lease term (years) | |
October 31, 2022 | |
| Finance leases | |
| 2 | |
| | |
| | |
| Weighted average discount rate | |
| 4.85 | % |
| Finance leases | |
| | |
The
aggregate future lease payments for Finance Lease Liability as of October 31, 2022 are as follows:
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR FINANCE LEASE
| | |
| | |
| For the Years Ending October 31, | |
| |
| Finance
Lease Liability | |
| | |
| 2023 | |
| 7,781 | |
| 2024 | |
| 23,342 | |
| Total minimum lease payments | |
$ | 31,123 | |
| Less: amount representing interest | |
| 802 | |
| Total present value of minimum payments | |
| 30,321 | |
| Less: current portion | |
$ | 22,603 | |
| Long term portion of finance lease liability | |
| 7,718 | |
15.
SHARE-BASED PAYMENTS
On
May 31, 2022, the Trust’s Board of Trustees approved a grant to issue Officers, Trustees, and Key Employees totaling 38,000
fully paid IHT restricted shares. The aggregate grant date fair value of these Shares was approximately $99,840.
These shares partially vest on December 31, 2022, and May 31, 2023, in two equal amounts.
See
Note 2 – “Summary of Significant Accounting Policies” for information related to grants of restricted shares under
“Stock-Based Compensation.”
16.
NOTES RECEIVEABLE
Sale
of IBC Hospitality Technologies; IBC Hotels LLC (IBC)
On
August 15, 2018 InnSuites Hospitality Trust (IHT) entered into a final sale agreement for its technology subsidiary, IBC Hotels LLC (IBC),
with an effective sale date as of August 1, 2018 to an unrelated third-party buyer (Buyer). The sale agreement was later amended due
to the effects of Covid-19, on October 20, 2021, as further described below. As a part of the amended sale agreement, the Trust received
a secured promissory note in the principal amount of $1,925,000 with interest to be accrued at 3.75% per annum, which is recorded in
the accompanying consolidated balance sheet in continuing operations.
| |
● |
No
interest accrued through May 2023, and no payments on the note receivable including principal and interest based on the extended time period are due through May 2023. |
| |
|
|
| |
● |
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 or pre-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. |
| |
|
|
| |
● |
The
note matures on June 1, 2024 |
| |
|
|
| |
● |
Future
payments on this note are shown in the table below. |
SCHEDULE
OF FUTURE PAYMENTS OF DEBT
| | |
| | |
| FISCAL YEAR | |
| |
| 2023 | |
$ | 250,000 | |
| 2024 | |
| 1,675,000 | |
| Total | |
$ | 1,925,000 | |
| |
● |
Management’s
evaluation of the current financial position of the Buyer, based on unaudited financial statements provided. |
| |
|
|
| |
● |
Management’s
best, conservative valuation of IBC’s assets, and their marketability, in the case of a default by the Buyer. |
| |
|
|
| |
● |
The
current and future impact of the COVID-19 pandemic, on the travel and hospitality industry, in which IBC’s reservation and
booking technology operates. |
As
of October 31, 2022, management evaluated the carrying value of the note determined no further impairment is needed at this time. This
is detailed further with an extension to May 2023, which allows time for IBC to benefit from the current rebound in the travel, hospitality
services, and hotel industries currently being experienced.
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.
17.
INCOME TAXES
The
Trust is taxed as a C-Corporation. The Trust’s practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. The Trust has received various IRS and state tax jurisdiction notices which the Trust in the process of responding
to in which management believes the notices are without merit and expect full remediation of all tax notices. The Trust and subsidiaries
have deferred tax assets of $4.3 million which includes cumulative net operating loss carryforwards of $1.3 million and syndications
of $2.9 million, and deferred tax liability associated with book/tax differences of $1.5 million as of January 31, 2022. We have evaluated
the net deferred tax asset and determined that it is more likely than not we will receive full benefit from the net operating loss carryforwards.
Therefore, we have determined a valuation allowance of approximately $2.9 million.
18.
COVID-19 DISCLOSURE
COVID-19
had a material detrimental impact on our business, financial results and liquidity, in Fiscal Year 2021, ended January 31, 2021 and Fiscal
Year 2022, ended January 31, 2022.
COVID-19
and its consequences had dramatically reduced travel and demand for hotel rooms, in Fiscal Year 2021 and Fiscal Year 2022. We believe
that lodging demand and revenue level have now significantly recovered.
19.
OCCUPANCY TAX
No
occupancy tax assessments have transpired since September 2020. Management has assessed the materiality of the discrepancy on prior reported
periods and has concluded it is qualitatively immaterial to the readers of our Consolidated Financial Statements.
20.
EMPLOYEE RETENTION TAX CREDIT
The
Trust is in the process of working to review Economic Relief through a Credit allowed for Entities that suffered financial hardship during
the Covid-19 Pandemic, under the CARES (The Coronavirus Aid, Relief, and Economic Security) Act (2020), and The Consolidated Appropriations
Act (2021). Both provided fast and direct economic assistance for American workers, families, small businesses, and industries, by the
U.S. Department of the Treasury along with Congress. This Credit was available for all Entities impacted by the Virus and who paid Employment
Taxes, while trying to remain solvent and viable. It is a fully refundable tax credit for Eligible Employers that paid employees to carry
on a trade or business that was partially or fully suspended during any calendar year 2020; or that experienced significant decline in
gross receipts during any calendar quarter in 2020, due to COVID-19.
As
a result of both legislative acts, the Trust will be receiving a substantial amount in a combination of Employment Tax
Refunds and Credits, for the two calendar years 2020, and 2021, respectively. As a result, the
Trust conservatively placed an amount equal to approximately 12% of this total as a Tax Credit Receivable and Tax Refund on the
Balance Sheet and Income statement, respectively, for the year ended January 31, 2022. The Trust has further conservatively
recognized an additional 12% each Fiscal Quarter, approximately, of the total anticipated Tax Credit receivable for the Quarter
ended October 31, 2022.
21.
SUBSEQUENT EVENTS
The
Trust intends to maintain its current conservative dividend policy. The Trust currently is, and has, been paying two semi-annual dividends
each Fiscal Year totaling $0.02 per share per Fiscal Year. In the Fiscal Years ended January 31, 2022 and 2021, the Trust paid dividends
of $0.01 per share per share in each of the second and the fourth quarters. The Trust has paid dividends each Fiscal Year since its inception
in 1971. The Trust paid the scheduled semi-annual $0.01 dividend payable on July 29, 2022.
The
Trust’s Management received communication from the NYSE-American on August 29, 2022, indicating IHT is fully compliant with all
of the Continued Listing Standards Equity Requirements set forth in Part 10 of the NYSE American Company Guide, of the NYSE-American.
