NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE YEARS ENDED JANUARY 31, 2023 AND 2022
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As
of January 31, 2023, 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”), $588,750 in UniGen’s privately-held diversification common stock (495,000 shares), and hold
warrants to make further UniGen Investments in the future, as further discussed in Note 2 .
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. The Trust considers
its Tucson, Arizona hotel and our hotel located in a subsidiary of Albuquerque, New Mexico to be moderate or limited service hotels.
IHT provides management services and marketing.
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 January 31, 2023 and January 31, 2022, respectively. The Trust’s weighted average ownership
for the twelve months ended January 31, 2023 and 2022 was 75.98% and 75.93%, respectively. As of January 31, 2023, 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
consolidated financial statements have been prepared by management in accordance with accounting principles in conformity with accounting
principles generally accepted in the United States of America (“GAAP”), and include all assets, liabilities, revenues and
expenses of the Trust and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. Certain
items have been reclassified to conform to the current fiscal year presentation. The Trust exercises unilateral control over the Partnership
and the entities listed below. Therefore, the financial statements of the Partnership and the entities listed below are consolidated
with the Trust, and all significant intercompany transactions and balances have been eliminated.
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 |
The
Trust has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other
than those events disclosed 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 5 – “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.
NON-CONTROLLING
INTEREST
Non-controlling
interest in the Trust represents the limited partners’ proportionate share of the capital and earnings of the Partnership and the
two hotels. 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.
As of January 31, 2023, non-controlling interest represented 48.99% interest in the InnSuites® hotel located in Tucson, Arizona,
78.50% interest in the InnSuites® hotel located in Albuquerque, New Mexico, and 24.02% in 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 January 31, 2023 and 2022, 200,003
Class A Partnership units were outstanding, representing 1.51%
of the total Partnership units, respectively. Additionally, as of January 31, 2023 and 2022, 2,974,038
Class B Partnership units were outstanding to and owned by James Wirth, the Trust’s Chairman and Chief Executive Officer,
and Mr. Wirth’s affiliates, representing 22.51%
ownership in the Partnership. If all the Class A and B Partnership units were converted on January 31, 2023 and 2021, the limited partners
in the Partnership would receive 3,174,041
Shares of Beneficial Interest of the Trust. As of January 31, 2023, and 2022, the Trust owns 10,037,476
general partner units in the Partnership, representing 75.98%
of the total Partnership units.
On
February 1, 2021, an investor sold 8,014 RRF units to the Trust.
On
July 27, 2021, an investor converted 3,691 RRF units to 3,691 IHT shares of beneficial interest.
On
January 31, 2023, the total IHT Shares of Beneficial Interest are 9,160,991. Total Class A and Class B RRF Limited Partnership units
are 3,174,041. The total diluted shares that are convertible one for one is 12,335,032.
LIQUIDITY
The
Trust’s principal source of cash to meet its cash requirements is revenues from hotel room reservations and from RRF Management
fees from the Tucson, Arizona and Albuquerque, New Mexico 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 well as to generate funds from repayment of intercompany advances and sale of assets. The Covid-19
Virus (the “Virus”) as of March 15, 2020, had previously disrupted the quarterly distributions from both the Albuquerque
and Tucson hotels. These quarterly distributions from both the Albuquerque and Tucson hotels resumed 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 investments.
As
of January 31, 2023, the Trust had a related party Demand/Revolving Line of Credit/Promissory Note with an amount payable of
$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, 2021, 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 January 31, 2023, the Trust had an amount receivable of the Advances to Affiliate credit facility of approximately $0.
As
of January 31, 2023, 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 January 31, 2023.
With
approximately $2,111,000 of cash as of January 31, 2023, the availability of the combined $2,000,000 Advance to Affiliate credit facilities,
and the $250,000 Revolving Line 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-K. In addition, management is analyzing
other strategic options available to the Trust, including the sale or refinance of one or both Hotel properties, or other investments.
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, 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 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 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 no impairment for the Fiscal Years ended January 31, 2023,
and January 31, 2022, respectively.
CASH
The
Trust believes it places its cash only with high credit quality financial institutions, although these balances periodically exceed federally
insured limits.
COST
METHOD INVESTMENT IN PRIVATE COMPANY STOCK
Investment
in private company stock consists of equity securities recorded at fair value. Fair value is defined as the price that would be received
to sell an asset in an orderly transaction between market participants at the measurement date. We analyze our marketable securities
in accordance with Accounting Standard Codification 321 (“ASC 321”). Valuations for private company stock are based on quoted
prices for identical assets in active markets. Where marketable securities were found not be part of an actively traded market, we made
a measurement alternative election and estimate the fair value at cost of the investment minus impairment.
During
the Fiscal Quarter ended January 31, 2023, 15,000 warrants were exercised for $15,000 and in return the Trust received 15,000 shares
of UniGen. As of January 31, 2023, the Trust owned 495,000 shares of common stock in UniGen Power, Inc. (UniGen), a non-affiliated privately
held entity, at a cost of $588,750. As of January 31, 2023, the Trust accounted for such securities at cost minus impairment due to the
investment not being traded on an active market noting that UniGen had limited operations and was still in the start-up and research
and development stage. 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.
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 carried at original amounts billed less an estimate made for doubtful accounts based on a review of outstanding amounts
on a quarterly basis (net realizable value). 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. There is $0 in the allowance for doubtful accounts for
the Fiscal Years ended January 31, 2023 and 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 16).
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.
In
addition, 3,000 IHT Restricted Shares were issued to each of the Trust’s three accountants, and 2,000 restricted IHT Shares to
each of the three IHT employees. The shares were fully vested at January 31, 2023.
The
following table summarizes restricted share activity during Fiscal Years 2022 and 2023.
SUMMARIZES OF RESTRICTED SHARE ACTIVITY
| | |
Restricted Shares | |
| | |
Shares | | |
Price on date of grant | |
| Balance at January 31, 2021 | |
- | | |
- | |
| Granted | |
| 63,000 | | |
$ | 1.60 | |
| Vested | |
| (63,000 | ) | |
$ | 1.60 | |
| Forfeited | |
| - | | |
| | |
| Balance of unvested awards at January 31, 2022 | |
| - | | |
| | |
| | |
| | | |
| | |
| Granted | |
| 38,000 | | |
$ | 2.08 | |
| Vested | |
| (25,333 | ) | |
$ | 2.08 | |
| Balance of unvested awards at January 31, 2023 | |
| (12,667 | ) | |
| | |
| | |
| - | | |
| | |
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.
InnSuites Hospitality Trust continues its Company Stock Buyback Plan allowed within the NYSE American limitations.
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 18).
DIVIDENDS
AND DISTRIBUTIONS
In
Fiscal Years 2023 and 2022, the Trust paid a semi-annual dividend of $0.01 per share each, at the end of the second Fiscal quarter and
at the end of the fourth Fiscal quarter for a total annual dividend of $0.02 for each Fiscal Year in the amounts of $182,785 and $186,492,
respectively. The Trust’s long-term ability to pay dividends is largely dependent upon the operations of the Hotels, and/or sale
of assets. The Trust has paid uninterrupted dividends annually for 52 consecutive years since the Trust registered in 1971, and listed
with the NYSE.
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 Years ended January 31, 2023 and 2022, 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 years ended January
31, 2023 and 2022. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B Partnership units were anti-dilutive
during the years ended January 31, 2023 and 2022 and are excluded in the calculation of diluted earnings per share for those periods.
SEGMENT
REPORTING
The
Chief Operating Decision Maker (“CODM”), Mr. Wirth, CEO of the Trust, has determined that the Trust hotel ownership, Operations,
and Management Services are comprised of one reportable segment, Hotel Operations & Hotel Management Services (continuing operations)
segment that has ownership interest in two hotel properties with an aggregate of 270 suites in Arizona and New Mexico.
The
Trust has chosen to focus its hotel investments on 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 $338,000 and $252,000 for the twelve
months ended January 31, 2023 and 2022, respectively, and is reported in the consolidated Statement of Operations.
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 audited 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.
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 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. The Trust does not accrue for these
distributions as the preference periods have expired.
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. 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. 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 Fiscal Year ending January 31, 2023 and 2022, the Trust purchased a net of 2 units, and sold 0 units, respectively.
Three
Class A units were sold back to the Trust during the Fiscal Year ended January 31, 2023 for $30,000. Two Class A units were sold during
the Fiscal Year ended January 31, 2022 for $20,000. As of January 31, 2023, the Trust held a 21.00% ownership interest, or 129 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 78.33%
interest, or 470 Class A units.
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 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. The Trust
does not accrue for these distributions as the preference periods have expired.
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. RRF Limited Partnership
will continue to provide management, licensing and reservation services to the Tucson, Arizona property
As
of January 31, 2023, 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, 2023, the Tucson entity made quarterly Priority Return payments.
5.
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 Fiscal Years ended January 31, 2023, and January 31, 2022, neither the Trust nor the Partnership have provided any implicit or explicit
financial support for which they were not previously contracted, respectively. 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.
The
following table includes assets that can only be used to settle the liabilities of Albuquerque Suites Hospitality LLC (Albuquerque Hotel)
and the creditors have no recourse to the Trust. These assets and liabilities, with the exception of the intercompany accounts, which
are eliminated upon consolidation with the Trust, are included in the accompanying consolidated balance sheets.
SCHEDULE
OF VARIABLE INTEREST ENTITIES
| | |
| | |
| |
| | |
January 31, | |
| | |
2023 | | |
2022 | |
| Assets | |
| | |
| |
| Cash | |
$ | 60,506 | | |
$ | 419,762 | |
| Accounts Receivable | |
| 11,514 | | |
| 29,985 | |
| Prepaid Expenses and Deposits | |
| - | | |
| 9,869 | |
| Hotel Properties, Net | |
| 1,017,392 | | |
| 1,181,154 | |
| Operating Lease -Right of Use | |
| 2,108,418 | | |
| 2,021,354 | |
| | |
| | | |
| | |
| Total Assets | |
$ | 3,197,830 | | |
$ | 3,662,124 | |
| | |
| | | |
| | |
| Liabilities | |
| | | |
| | |
| Accounts Payable and Accrued Expenses | |
$ | 496,109 | | |
$ | 567,190 | |
| Other Notes Payable | |
| - | | |
| - | |
| Operating Lease Liability (ASC 842) | |
| 2,279,655 | | |
| 2,275,092 | |
| Mortgage Notes Payable | |
| 1,251,356 | | |
| 1,296,019 | |
| Total Liabilities | |
$ | 4,027,120 | | |
$ | 4,138,301 | |
| | |
| | | |
| | |
| Equity | |
| (829,290 | ) | |
| (476,177 | ) |
| | |
| | | |
| | |
| Liabilities & Equity | |
$ | 3,197,830 | | |
$ | 3,662,124 | |
6.
NOTES RECEIVABLE
Sale
of IBC Hospitality Technologies; IBC Hotels LLC (IBC)
On
August 15, 2018 InnSuites Hospitality Trust (IHT) entered into a final sale agreement of its technology subsidiary, IBC Hotels LLC (IBC),
to an unrelated third-party buyer (Buyer). As a part of the amended sale agreement, the Trust received a secured promissory note adjusted
to 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 recently
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 | |
As
of January 31, 2023, 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.
7.
CONVERTIBLE NOTE RECEIVABLE, COMMON STOCK AND WARRANTS IN UNIGEN POWER, INC.
On
December 16, 2019, the Trust entered into a Convertible Debenture Purchase Agreement with UniGen Power Inc. (“UniGen”).
The
Trust purchased secured convertible debentures (“Debentures”) in the aggregate amount of $1,000,000 (the “Loan Amount”)
(the “Loan”) at an annual interest rate of 6% (approximately $15,000 per quarter). 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 Stock. 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 purchase warrants (“Additional Warrants”) to purchase up to 500,000 shares
of UniGen Class A Common Stock. The Additional Warrants are exercisable at an exercise price of $2.25 per share of Class A Common Stock.
IHT
may fund a $500,000 line of credit at the option of IHT convertible into 500,000 shares of UniGen stock at $1 per share.
The
total of all stock ownership upon conversion of the note receivable is 1 million shares and if all stock warrants available but not outstanding
are exercised, these could total approximately 3 million UniGen shares, which amounts to approximately 25% of fully diluted UniGen equity.
On
the Trust’s balance sheet, the investment of the $1,000,000 consists of approximately $700,000 in note receivables and approximately
$300,000 as the fair value of the warrant issued with the Trust’s investment in UniGen. The value of the premium related to the
fair value of the warrants will accrete over the life of the debentures.
The
value of the warrants issued with the note receivable was based on Black-Scholes pricing model based on the following inputs:
SCHEDULE
OF WARRANTS VALUATION ASSUMPTIONS
Debenture
Warrants
| 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 | % |
If
all notes are converted and all available but not outstanding warrants exercised, IHT could hold up to approximately 25% of UniGen fully
diluted equity ownership. Subsequent to January 31, 2023, no activity has occurred with this line of credit and thus no draws have been
taken.
During
the year ended January 31, 2023, the Trust reinvested $60,000 of interest income to exercise 60,000 warrants for 60,000 shares of common
stock in UniGen. Additionally, the Trust exercised 161,250 warrants for a total of $255,000 for 161,250 shares of common stock in UniGen.
As
of January 31, 2023, IHT held 495,000 common shares of UniGen, purchased at a cost of $588,750. 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.
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.
8.
PROPERTY AND EQUIPMENT
As
of January 31, 2023 and January 31, 2022, hotel properties consisted of the following:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| | |
| | | |
| | |
| | |
January 31, 2023 | | |
January 31, 2022 | |
| Land | |
$ | 2,500,000 | | |
$ | 2,500,000 | |
| Building and improvements | |
| 10,762,859 | | |
| 10,577,297 | |
| Furniture, fixtures and equipment | |
| 4,261,400 | | |
| 4,114,400 | |
| Total hotel properties | |
| 17,524,259 | | |
| 17,191,697 | |
| Total property, plant and equipment | |
| 17,524,259 | | |
| 17,191,697 | |
| | |
| | | |
| | |
| Less accumulated depreciation | |
| (10,358,060 | ) | |
| (9,664,472 | ) |
| Hotel properties, net | |
| 7,166,199 | | |
| 7,527,225 | |
| Property, Plant and equipment, net | |
| 7,166,199 | | |
| 7,527,225 | |
As
of January 31, 2023 and January 31, 2022, property and equipment consisted of the following:
| | |
January 31, 2023 | | |
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 | |
| (432,256 | ) | |
| (423,458 | ) |
| Property, Plant and Equipment, net | |
$ | 43,289 | | |
$ | 52,088 | |
9.
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, 2023,
and 2021, prepaid expenses and other current assets consisted of the following:
SCHEDULE
OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| | |
January 31, 2023 | | |
January 31, 2022 | |
| Tax and Insurance Escrow | |
$ | 96,774 | | |
$ | 63,512 | |
| Deposits | |
| 7,000 | | |
| 7,000 | |
| Prepaid Insurance | |
| 32,159 | | |
| - | |
| Prepaid Workman’s Compensation | |
| 562 | | |
| - | |
| Miscellaneous Prepaid Expenses | |
| 63,934 | | |
| 47,356 | |
| Total Prepaid Expenses and Current Assets | |
$ | 200,429 | | |
$ | 117,868 | |
10.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As
of January 31, 2023 and 2020, accounts payable and accrued expenses consisted of the following:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| | |
January 31, 2023 | | |
January 31, 2022 | |
| Accounts Payable | |
$ | 85,198 | | |
$ | 203,165 | |
| Accrued Salaries and Wages | |
| 236,845 | | |
| 246,600 | |
| Accrued Vacation | |
| 10,000 | | |
| 10,000 | |
| Income Tax Payable | |
| - | | |
| 93,944 | |
| Accrued Interest Payable | |
| - | | |
| 14,950 | |
| Advanced Deposits | |
| 1,963 | | |
| 250 | |
| Accrued Property Taxes | |
| 192,543 | | |
| 35,392 | |
| Sales Tax Payable | |
| 234,366 | | |
| 154,079 | |
| Accrued Other | |
| 229,376 | | |
| 142,989 | |
| Total Accounts Payable and Accrued Expenses | |
$ | 990,291 | | |
$ | 901,369 | |
11.
MORTGAGE NOTES PAYABLE
On
January 31, 2022, the Trust had a mortgage note payable outstanding with respect to the Tucson Hotel. The mortgage note payable has a
scheduled maturity date in June 2042. Weighted average annual interest rates on mortgage notes payable as of January 31, 2022 was 4.69%.
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 4.99% for the first five years and thereafter a variable
rate equal to the US Treasury + 2.0% with a floor of 4.99% 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, 2022, the mortgage loan balance was approximately $4,461,000.
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.
The
following table summarizes the Trust’s mortgage notes payable, net of debt discounts, as of January 31, 2023:
SCHEDULE
OF MORTGAGE NOTES PAYABLE
| | |
2023 | | |
2022 | |
| Mortgage note payable, due in monthly installments of $55,827, including interest at 4.99% per year, through March 29, 2047, secured by the Tucson Oracle property with a carrying value of $8.2 million at January 31, 2023. | |
$ | 8,223,648 | | |
$ | 4,461,283 | |
| | |
| | | |
| | |
| Mortgage note payable, due in monthly installments of $9,218, including interest at 4.90% per year, through December 2, 2029, secured by the Albuquerque property with a carrying value of $1.2 million at January 31, 2023. | |
| 1,251,356 | | |
| 1,296,019 | |
| Totals: | |
$ | 9,475,004 | | |
$ | 5,757,302 | |
As
of January 31, 2023, and January 31, 2022, the mortgage loan balance was approximately $9,475,000 and $5,757,000, 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 January
31, 2023, and January 31, 2022, the mortgage loan balance was approximately $1,251,000, and $1,296,000, respectively, net of financing
fees of approximately $13,000.
See
Note 15 – “Minimum Debt Payments” for scheduled minimum payments on the mortgage notes payable.
12.
NOTES PAYABLE TO BANKS
On
October 17, 2017, the Trust entered into a Business Loan Agreement with Republic Bank of Arizona for a revolving line of credit for $150,000.
The loan has a variable rate as the published rate in the Wall Street Journal and matures in December 2024. The balance as of January
31, 2023 and 2022 was $0.
On
October 17, 2017 Albuquerque Suite Hospitality LLC (the Albuquerque Hotel) entered into a Business Loan Agreement with Republic Bank
of Arizona for a revolving line of credit for $50,000. The loan has a variable rate as the published rate in the Wall Street Journal
and matures in October 2023. The balance as of January 31, 2023 and 2021 was $0.
On
October 17, 2017 Tucson Hospitality Properties LLLP (the Tucson Hotel) entered into a Business Loan Agreement for a revolving line of
credit for $50,000. The loan has a variable rate as the published rate in the Wall Street Journal and matures in October 2023. The balance
as of January 31, 2023 and 2021 was $0.
13.
RELATED PARTY NOTES
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 January 31, 2023, and January 31, 2022, the Trust had an amount payable of approximately $0 and
$977,000, respectively. During the Fiscal Years ended January 31, 2023 and 2022, the Trust accrued approximately $0, respectively, of
interest expense.
14.
OTHER NOTES PAYABLE
As
of January 31, 2023, the Trust had $0
in promissory notes outstanding to unrelated third parties arising from the repurchase of 0
Class A Partnership units in privately negotiated transactions. Typically these promissory notes would bear interest at 7%
per year and are due in varying monthly payments through January
2023.
As
of January 31, 2023, 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 January
31, 2023.
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 January 31, 2023.
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 January 31, 2023. 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 15 – “Minimum Debt Payments” for scheduled minimum payments on the debt liabilities.
15.
MINIMUM DEBT PAYMENTS
Scheduled
minimum payments of debt, net of debt discounts, as of January 31, 2023 are approximately as follows in the respective Fiscal Years indicated:
SCHEDULE
OF MINIMUM PAYMENTS OF DEBT
| FISCAL YEAR | |
MORTGAGES | | |
OTHER NOTES PAYABLE | | |
NOTES PAYABLE - RELATED PARTY | | |
TOTAL | |
| | |
| | |
| | |
| | |
| |
| 2024 | |
| 223,680 | | |
| 570,000 | | |
| - | | |
| 793,680 | |
| 2025 | |
| 234,169 | | |
| - | | |
| - | | |
| 234,169 | |
| 2026 | |
| 247,906 | | |
| - | | |
| - | | |
| 247,906 | |
| 2027 | |
| 260,999 | | |
| - | | |
| - | | |
| 260,999 | |
| 2028 | |
| 263,125 | | |
| - | | |
| - | | |
| 263,125 | |
| Thereafter | |
| 8,245,125 | | |
| - | | |
| | | |
| 8,245,125 | |
| | |
$ | 9,475,004 | | |
$ | 570,000 | | |
$ | - | | |
$ | 10,045,004 | |
16.
LEASES
The
Trust has operating leases for its corporate offices in Phoenix, Arizona and land leased in Albuquerque, New Mexico, and a cable equipment
finance lease in Tucson, Arizona. The Trust’s corporate office lease includes options to extend or terminate the leases and the
Trust includes these options in the lease term when it is reasonably certain to exercise that option. All leases are non-cancelable.
Operating
Leases
On
August 4, 2017, the Trust entered into a five-year office lease agreement with Northpoint Properties for a commercial office lease at
1730 E Northern Ave, Suite 122, Phoenix, Arizona 85020 commencing on September 1, 2017. Base monthly rent of $4,100 increases 6% on a
yearly basis. The Trust also agreed to pay electricity and applicable sales tax. The office lease was renewed in March, 2022 on a month
to month basis.
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
Trust’s Operating Lease costs recognized in the consolidated statement of operations for the year ended January 31, 2023 consist
of the following:
SCHEDULE OF LEASE COSTS
| | |
Fiscal Year Ended | |
| | |
January 31, 2023 | |
| Operating Lease Costs: | |
| | |
| Operating lease cost* | |
| 53,940 | |
Supplemental
cash flow information is as follows:
SCHEDULE OF CASH FLOW INFORMATION
| | |
Fiscal Year Ended | |
| | |
January 31, 2023 | |
| | |
| |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| Operating cash flows from operating leases | |
$ | 85,131 | |
| | |
| | |
| Lease obligations: | |
| | |
| Operating leases, net | |
$ | 2,279,655 | |
| 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) | |
January 31, 2023 | |
| Operating leases | |
| 35 | |
| | |
| | |
| Weighted average discount rate | |
| 4.85 | % |
| Operating leases | |
| | |
Finance
Leases
The
Company’s Tucson Oracle Hotel is subject to non-cancelable cable lease that expires in 2023.
The
Trust’s Finance Lease costs recognized in the Consolidated Statement of Income for the Fiscal Year ended January 31, 2023 consist
of the following:
SCHEDULE OF LEASE COSTS
| | |
Fiscal Year Ended | |
| | |
January 31, 2023 | |
| Finance Lease Costs: | |
| | |
| Amortization of right-of-use assets | |
$ | 27,749 | |
| Interest on lease obligations | |
| 1,883 | |
Supplemental
cash flow information is as follows:
SCHEDULE OF CASH FLOW INFORMATION
| | |
Fiscal Year Ended | |
| | |
January 31, 2023 | |
| | |
| |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| Operating cash flows from finance leases | |
$ | 1,493 | |
| | |
| | |
| Lease obligations: | |
| | |
| Finance leases, net | |
$ | 22,877 | |
| 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) | |
January 31, 2023 | |
| Finance leases | |
| 1 | |
| | |
| | |
| Weighted average discount rate | |
| 4.85 | % |
| Finance leases | |
| | |
The
aggregate future lease payments for Finance Lease Liability as of January 31, 2023 are as follows:
SCHEDULE
OF FUTURE LEASE PAYMENTS FOR FINANCE LEASE LIABILITY
| For the Years Ending January 31, | |
| |
| Finance
Lease Liability | |
| | |
| 2024 | |
| 23,342 | |
| Total minimum lease payments | |
$ | 23,342 | |
| Less: amount representing interest | |
| 465 | |
| Total present value of minimum payments | |
| 22,877 | |
| Less:current portion | |
$ | 15,159 | |
| Long term portion of finance lease liability | |
| 7,718 | |
The
aggregate annual lease obligations at January 31, 2023 are as follows:
SCHEDULE
OF ANNUAL LEASE OBLIGATIONS
| Fiscal Year | |
Operating
Leases | | |
Finance
Leases | |
| 2024 | |
$ | 134,342 | | |
$ | 23,342 | |
| 2025 | |
| 134,355 | | |
| | |
| 2026 | |
| 134,367 | | |
| | |
| 2027 | |
| 134,379 | | |
| | |
| 2028 | |
| 134,391 | | |
| | |
| Thereafter | |
| 4,127,258 | | |
| | |
| Total Undiscounted Lease Obligations | |
| 4,799,092 | | |
| 23,342 | |
| | |
| | | |
| | |
| Less Imputed Interest | |
| 2,519,437 | | |
| 465 | |
| Net Lease Obligations | |
$ | 2,279,655 | | |
$ | 22,877 | |
17.
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, 2023 and 2022, the Trust repurchased 106,604 and 44,076
Shares of Beneficial Interest at an average price of $2.69
and $2.96 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 266,361
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.
18.
FEDERAL INCOME TAXES
The
Trust and subsidiaries have income tax net operating loss carryforwards of approximately $5.4 million at January 31, 2023. 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.
The
Trust amended the federal and state income tax returns for tax years 2017 and 2018, resulting in a recalculation of the net operating
loss carry-forward. The impact of the amended returns are reflected in the below data.
Total
and net deferred income tax assets on January 31,
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| Net operating loss carryforwards | |
$ | 1,432,100 | | |
$ | 1,352,000 | |
| Bad debt allowance | |
| - | | |
| - | |
| Accrued expenses | |
| (1,000 | ) | |
| (2,000 | ) |
| Syndications | |
| 2,923,000 | | |
| 2,923,000 | |
| Prepaid insurance | |
| 32,159 | | |
| - | |
| Alternative minimum tax credit | |
| 51,000 | | |
| 51,000 | |
| Total deferred tax asset | |
| 4,437,259 | | |
| 4,324,000 | |
| | |
| | | |
| | |
| Deferred income tax liability associated with book/tax | |
| (1,877,544 | ) | |
| (1,396,860 | ) |
| Net deferred income tax asset | |
| 2,559,715 | | |
| 2,927,140 | |
| Valuation Allowance | |
| (2,559,715 | ) | |
| (2,927,140 | ) |
| Net deferred income tax | |
| - | | |
| - | |
Income
taxes for the year ended January 31,
SCHEDULE
OF INCOME TAX PROVISION
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| Current income tax benefit | |
| (93,497 | ) | |
| (50 | ) |
| Deferred income tax provision | |
| 165,631 | | |
| 321,306 | |
| Change in valuation allowance | |
| (165,631 | ) | |
| (321,306 | ) |
| Net income tax benefit | |
| (93,497 | ) | |
| (50 | ) |
The
differences between the statutory and effective tax rates are as follows for the year ended January 31, 2023:
SCHEDULE
OF EFFECTIVE INCOME TAX RATE RECONCILIATION
| | |
Amount | | |
Percent | |
| | |
2023 | |
| | |
Amount | | |
Percent | |
| | |
| | |
| |
| Federal statutory rates | |
$ | 159,518 | | |
| 21 | % |
| State income taxes | |
| (39,615 | ) | |
| 5 | % |
| Change in valuation allowance | |
| 165,600 | | |
| -22 | % |
| True-up in prior year returns | |
| - | | |
| 0 | % |
| Effective Rate | |
| - | | |
| 4 | % |
The
differences between the statutory and effective tax rates are as follows for the year ended January 31, 2022:
| | |
Amount | | |
Percent | |
| | |
2022 | |
| | |
Amount | | |
Percent | |
| | |
| | |
| |
| Federal statutory rates | |
$ | 53,370 | | |
| -4 | % |
| State income taxes | |
| 13,254 | | |
| -1 | % |
| Change in valuation allowance | |
| (80,100 | ) | |
| 5 | % |
| True-up in prior year returns | |
| - | | |
| 0 | % |
| Effective Rate | |
| - | | |
| 1 | % |
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 $4.4 million which includes cumulative net operating loss carryforwards of $1.4 million and syndications
of $2.9 million, and deferred tax liability associated with book/tax differences of $1.8 million as of January 31, 2023. We have evaluated
the net deferred tax asset and determined that it is not more likely than not we will receive full benefit from the net operating loss
carryforwards. Therefore, we have determined a valuation allowance of approximately $2.6 million.
19.
OTHER RELATED PARTY TRANSACTIONS
As
of January 31, 2023 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 January 31, 2023 and January 31, 2022, Mr. Wirth and his affiliates
held 6,228,296
and 5,876,683 Shares of Beneficial Interest in the Trust, respectively, which represented 69.12%
and 64.72%
respectively, of the total issued and outstanding Shares of Beneficial Interest.
As
of January 31, 2023 and January 31, 2022, the Trust owned 75.98% of the Partnership. As of January 31, 2023, the Partnership owned a 51.01%
interest in the InnSuites® hotel located in Tucson. The Trust also owned a direct 21.50%
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.
During
the Fiscal Years ended January 31, 2023 and 2022, the Trust paid Berg Investment Advisors $6,000 and $6,000 for additional consultative
services rendered by Mr. Marc Berg, the Trust’s Executive Vice President.
The
Trust employs part time, an immediate family member of Mr. Wirth, Brian James Wirth, who provides IT Technology support services to the
Trust, receiving a $37,000 annual salary.
20.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
following table presents the estimated fair values of the Trust’s debt instruments, based on rates currently available to the Trust
for bank loans with similar terms and average maturities, and the associated carrying value recognized in the consolidated balance sheets
at January 31, 2023 and 2022:
SCHEDULE OF FAIR VALUE LIABILITIES
MEASURED ON RECURRING BASIS
| | |
2023 | | |
2022 | |
| | |
Carrying Amount | | |
Fair Value | | |
Carrying Amount | | |
Fair Value | |
| Mortgage Notes Payable | |
$ | 9,584,449 | | |
$ | 3,408,024 | | |
$ | 5,757,302 | | |
$ | 3,408,024 | |
| Other Notes Payable | |
$ | 570,000 | | |
$ | 570,000 | | |
$ | 571,187 | | |
$ | 571,187 | |
| Notes Payable - Related Party | |
$ | - | | |
$ | - | | |
$ | 977,547 | | |
$ | 977,547 | |
21.
SUPPLEMENTAL CASH FLOW DISCLOSURES
SCHEDULE
OF SUPPLEMENTAL CASH FLOWS DISCLOSURES
| | |
2023 | | |
2022 | |
| Cash Paid for Interest | |
$ | 465,000 | | |
$ | 374,000 | |
| | |
| | | |
| | |
| Notes Payable | |
$ | 46,000 | | |
$ | 10,000 | |
22.
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 for the Fiscal Years 2023 and 2022, 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 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 $173,000 and $160,000 for the Fiscal Years ended January
31, 2023 and 2022, respectively. These costs include fees for the Albuquerque and Tucson hotels in 2022. These fees are included in room
operating expenses on the consolidated statements of operations for Albuquerque and Tucson.
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 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 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.
23.
SHARE-BASED PAYMENTS
The
Trust compensates its three non-employee Trustees for their services through grants of restricted Shares. The aggregate grant date fair
value of these Shares was $37,440. These restricted 18,000 shares, (6,000 each to the three Independent Trustees), vest in equal monthly
amounts during Fiscal Year 2023.
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 $79,040. These shares partially vest
on December 31, 2022, and May 31, 2023, in two equal amounts.
In
addition, 3,000 IHT Restricted Shares were issued to each of the Trust’s three accountants, and 2,000 restricted IHT Shares to
each of the three IHT employees. The shares were fully vested at January 31, 2023.
See
Note 2 – “Summary of Significant Accounting Policies” for information related to grants of restricted shares under
“Stock-Based Compensation.”
24.
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.
COVID-19
and its consequences had dramatically reduced travel and demand for hotel rooms, in Fiscal Year 2021. We believe that lodging demand
and revenue level have now significantly recovered.
In
Fiscal Year 2022, ended January 31, 2022, COVID-19 had shrinking impact on our business, financial results and liquidity. Fiscal Year
2023, starting February 1, 2022 and ending January 31, 2023, showed a significant strong rebound and encouraging progress, with signs
of future additional recovery completed. The start of Fiscal Year 2024, starting February 1, 2023 and ending January 31, 2024, has shown
no ill effects from the pandemic whatsoever.
COVID-19
and its consequences previously reduced travel and demand for hotel rooms, which previously had an impact our business, operations, and
financial results. We believe that lodging demand and revenue level is rebounding and close to fully recovery. The extent to which COVID-19
currently impacts our business, operations, and financial results, including the duration and magnitude of such effects, is diminished.
The negative impact COVID-19 had on global and regional economies and economic activity, including the duration and magnitude of its
impact on consumer discretionary spending has been reduced significantly, and its short and longer-term impact on the demand for travel,
transient and group business, and levels of consumer confidence is no longer considered a major factor for Fiscal Year 2024, (February
1, 2023 to January 31, 2024).
25.
OCCUPANCY TAX LIABILITY REVERSAL
Sales
and occupancy tax expenses decreased approximately $798,000,
to $0 for the twelve months ended January 31, 2023 from approximately $798,000
for the twelve months ended January 31, 2022. This represents a reversal of liability arising from an occupancy tax discrepancy
generated from our Tucson Oracle and Albuquerque hotels from prior periods, as the liabilities had been assumed by a related party. These
additional amounts were due for Hotel sales and occupancy expenses owed by hotel guests that were erroneously not collected at the time
of stay, nor remitted to the respective states accordingly, and are not expected to be recurring, since the Trust collects and remits
all necessary occupancy taxes to the state monthly. The related party was responsible for these liabilities initially and they were never
owed by either Hotel property.
No
additional 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.
26.
EMPLOYEE RETENTION TAX CREDIT
The
Trust has become aware of 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 Fiscal Years ended January 31, 2023 and 2022, respectively. The Trust
has further conservatively recognized an additional 12% each Fiscal Quarter, approximately, of the total anticipated Tax Credit receivable
for the Quarter ended January 31, 2023.
27.
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, 2023 and 2022, 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, as well as February 1, 2023, and is once again anticipated for July 31, 2023.
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.
Subsequent
to the Fiscal Year ended January 31, 2023 the Trust repurchased 622 Shares of Beneficial Interest on the open market for a total
cash repurchase price of approximately $1,029.
Hotel
Operation results of the Albuquerque Hotel and the Tucson Hotel both achieved record results for the Fiscal Year ended January 31, 2023.
Increased record results are expected for the two hotels, during the Fiscal Year 2024, ending January 31, 2024. IHT reported a strong annual improvement of results in Fiscal Year 2023, (February 1, 2022, to January 31, 2023),
with Net Income Attributable to Controlling Interests doubling, increasing by 106%, to $523,171 as compared to $254,144. Earnings Per
Share based on this Net Income Attributable to Controlling Interest amount was $0.06, also more than doubling, up $0.03 from the prior
year of $0.03. Total Revenues increased to approximately $7.5 million, which is an approximate increase of 11% from the same prior Fiscal
Year total of $6.7 million. Consolidated Net Income before non-cash depreciation expense was $1,439,437 for the Fiscal Year ended January
31, 2023. IHT hotel operations are contributing to a solid start in the current 2024 Fiscal First Quarter, with both the Tucson Hotel
and Albuquerque Hotel achieving record results for the combined months of February, March, and April 2023 of the current Fiscal Year.
These are all positive signs for InnSuites, as progress continues heading in the right direction as the Travel Industry, and InnSuites
Hospitality Trust (IHT) specifically, continue to rebound and thrive.