Company Quick10K Filing
Portsmouth Square
Price55.50 EPS3
Shares1 P/E18
MCap41 P/FCF5
Net Debt129 EBIT10
TEV170 TEV/EBIT17
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-06-18
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PRSI 10Q Quarterly Report

Part 1
Item 1 - Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
Note 2 - Revenue
Note 3 - Investment in Hotel, Net
Note 4 - Investment in Real Estate
Note 5 - Investment in Marketable Securities, Net
Note 6 - Other Investments, Net
Note 7 - Fair Value Measurements
Note 8 - Cash, Cash Equivalents and Restricted Cash
Note 9 - Segment Information
Note 10 - Related Party and Other Financing Transactions
Note 11 - Accounts Payable and Other Liabilities - Justice
Note 12 - Subsequent Events
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II.
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Portsmouth Square Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
855219-14-47-802012201420172020
Assets, Equity
201482-4-102012201420172020
Rev, G Profit, Net Income
10.06.02.0-2.0-6.0-10.02012201420172020
Ops, Inv, Fin

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to_________

 

Commission File Number 0-4057

 

PORTSMOUTH SQUARE, INC.

(Exact name of registrant as specified in its charter)

 

CALIFORNIA   94-1674111
 (State or other jurisdiction of   (I.R.S. Employer
 Incorporation or organization)   Identification No.)

 

12121 Wilshire Boulevard, Suite 610, Los Angeles, California 90025

(Address of principal executive offices) (Zip Code)

 

(310) 889-2500

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

[X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer [  ]   Accelerated filer [  ]
     
Non-accelerated filer [  ]   Smaller reporting company [X]
     
    Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):

[  ] Yes [X] No

 

The number of shares outstanding of registrant’s Common Stock, as of June 18, 2020 was 734,183.

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
NONE   NONE   NONE

 

 

 

 
 

 

TABLE OF CONTENTS

 

  Page
     
  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
 

Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019 (Unaudited)

3
 

Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2020 and 2019 (Unaudited)

4
 

Condensed Consolidated Statements of Operations for the Nine Months ended March 31, 2020 and 2019 (Unaudited)

5
 

Condensed Consolidated Statements of Shareholders’ Deficit for the Nine Months ended March 31, 2020 and 2019 (Unaudited)

6
 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended March 31, 2020 and 2019 (Unaudited)

7
  Notes to the Condensed Consolidated Financial Statements 8-18
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19-25
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
     
Item 4. Controls and Procedures 26
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 26
     
Item 1A. Risk Factors 26
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
     
Item 3. Defaults Upon Senior Securities 27
     
Item 4. Mine Safety Disclosures 27
     
Item 5. Other Information 27
     
Item 6. Exhibits 28
     
Signatures 29

 

-2-
 

 

PART 1

FINANCIAL INFORMATION

 

Item 1 – Condensed Consolidated Financial Statements

 

PORTSMOUTH SQUARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

As of  March 31, 2020   June 30, 2019 
ASSETS        
Investment in hotel, net  $32,935,000   $33,352,000 
Investment in real estate, net   980,000    977,000 
Investment in marketable securities   331,000    1,425,000 
Other investments, net   129,000    196,000 
Cash and cash equivalents   5,907,000    9,789,000 
Restricted cash   11,550,000    11,027,000 
Accounts receivable - hotel, net   183,000    848,000 
Other assets, net   1,108,000    886,000 
Deferred tax assets   4,028,000    4,054,000 
           
Total assets  $57,151,000   $62,554,000 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
Liabilities:          
Accounts payable and other liabilities - Justice  $8,116,000   $11,298,000 
Accounts payable and other liabilities   233,000    182,000 
Accounts payable to related party   2,243,000    2,122,000 
Due to securities broker   -    151,000 
Obligations for securities sold   -    325,000 
Related party and other notes payable   7,796,000    8,221,000 
Finance Leases   1,206,000    1,486,000 
Mortgage notes payable - hotel, net   111,729,000    113,087,000 
           
Total liabilities   131,323,000    136,872,000 
           
Shareholders’ deficit:          
Common stock, no par value: Authorized shares - 750,000;          
734,183 shares issued and outstanding shares as of March 31, 2020 and June 30, 2019   2,092,000    2,092,000 
Accumulated deficit   (70,792,000)   (70,876,000)
Total Portsmouth shareholders’ deficit   (68,700,000)   (68,784,000)
Noncontrolling interest   (5,472,000)   (5,534,000)
Total shareholders’ deficit   (74,172,000)   (74,318,000)
           
Total liabilities and shareholders’ deficit  $57,151,000   $62,554,000 

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

-3-
 

 

PORTSMOUTH SQUARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

For the three months ended March 31,  2020   2019 
         
Revenue - Hotel  $11,259,000   $15,469,000 
           
Costs and operating expenses          
Hotel operating expenses   (10,060,000)   (11,378,000)
Hotel depreciation and amortization expense   (547,000)   (561,000)
General and administrative expense   (167,000)   (274,000)
           
Total costs and operating expenses   (10,774,000)   (12,213,000)
           
Income from operations   485,000    3,256,000 
           
Other income (expense)          
Interest expense - mortgage   (1,703,000)   (1,852,000)
Interest expense - related party   (90,000)   (89,000)
Loss on asset disposal   -    (398,000)
Net (loss) gain on marketable securities   (294,000)   7,000 
Net (loss) gain on marketable securities - Comstock   (13,000)   137,000 
Impairment loss on other investments   (38,000)   (36,000)
Dividend and interest income   41,000    105,000 
Trading and margin interest expense   (33,000)   (41,000)
           
Total other expense, net   (2,130,000)   (2,167,000)
           
(Loss) income before income taxes   (1,645,000)   1,089,000 
Income tax benefit (expense)   440,000    (280,000)
           
Net (loss) income   (1,205,000)   809,000 
Less:  Net loss (income) attributable to noncontrolling interest   82,000    (78,000)
           
Net (loss) income attributable to Portsmouth  $(1,123,000)  $731,000 
           
Basic and diluted net (loss) income per share attributable to Portsmouth  $(1.53)  $1.00 
           
Weighted average number of common shares outstanding - basic and diluted   734,183    734,183 

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

-4-
 

 

PORTSMOUTH SQUARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

For the nine months ended March 31,  2020   2019 
         
Revenue - Hotel  $41,589,000   $45,276,000 
           
Costs and operating expenses          
Hotel operating expenses   (33,138,000)   (33,424,000)
Hotel depreciation and amortization expense   (1,653,000)   (1,748,000)
General and administrative expense   (553,000)   (596,000)
           
Total costs and operating expenses   (35,344,000)   (35,768,000)
           
Income from operations   6,245,000    9,508,000 
           
Other income (expense)          
Interest expense - mortgage   (5,270,000)   (5,463,000)
Interest expense - related party   (271,000)   (270,000)
Loss on asset disposal   -    (398,000)
Net loss on marketable securities   (327,000)   (220,000)
Net loss on marketable securities - Comstock   (194,000)   (89,000)
Impairment loss on other investments   (38,000)   (36,000)
Dividend and interest income   129,000    125,000 
Trading and margin interest expense   (103,000)   (136,000)
           
Total other expense, net   (6,074,000)   (6,487,000)
           
Income before income taxes   171,000    3,021,000 
Income tax expense   (25,000)   (769,000)
           
Net income   146,000    2,252,000 
Less:  Net income attributable to the noncontrolling interest   (62,000)   (248,000)
           
Net income attributable to Portsmouth  $84,000   $2,004,000 
           
Basic and diluted net income per share attributable to Portsmouth  $0.11   $2.73 
           
Weighted average number of common shares outstanding - basic and diluted   734,183    734,183 

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

-5-
 

 

PORTSMOUTH SQUARE, INC

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(Unaudited)

 

       Retained   Total         
      Earnings   Portsmouth       Total 
   Common Stock   (Accumulated   Shareholders’   Noncontrolling   Shareholders’ 
   Shares   Amount   Deficit)   Deficit   Interest   Deficit 
                        
Balance at July 1, 2019   734,183   $2,092,000   $(70,876,000)  $(68,784,000)  $(5,534,000)  $(74,318,000)
                               
Net income   -    -    826,000    826,000    99,000    925,000 
                              
Balance at September 30, 2019   734,183    2,092,000    (70,050,000)   (67,958,000)   (5,435,000)   (73,393,000)
                               
Net income   -    -    381,000    381,000    45,000    426,000 
                              
Balance at December 31, 2019   734,183    2,092,000    (69,669,000)   (67,577,000)   (5,390,000)   (72,967,000)
                               
Net loss             (1,123,000)   (1,123,000)   (82,000)   (1,205,000)
                               
Balance at March 31, 2020   734,183   $2,092,000   $(70,792,000)  $(68,700,000)  $(5,472,000)  $(74,172,000)

 

       Retained   Total         
      Earnings   Portsmouth       Total 
   Common Stock   (Accumulated   Shareholders’   Noncontrolling   Shareholders’ 
   Shares   Amount   Deficit)   Deficit   Interest   Deficit 
                         
Balance at July 1, 2018   734,183   $2,092,000   $(73,475,000)  $(71,383,000)  $(5,699,000)  $(77,082,000)
                               
Net income   -    -    1,321,000    1,321,000    161,000    1,482,000 
                               
Balance at September 30, 2018   734,183    2,092,000    (72,154,000)   (70,062,000)   (5,538,000)   (75,600,000)
                               
Net income (loss)   -    -    (48,000)   (48,000)   9,000    (39,000)
                               
Balance at December 31, 2018   734,183    2,092,000    (72,202,000)   (70,110,000)   (5,529,000)   (75,639,000)
                               
Net income             731,000    731,000    78,000    809,000 
                               
Balance at March 31, 2019   734,183   $2,092,000   $(71,471,000)  $(69,379,000)  $(5,451,000)  $(74,830,000)

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

-6-
 

 

PORTSMOUTH SQUARE, INC.

CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

For the nine months ended March 31,  2020   2019 
Cash flows from operating activities:        
Net income  $146,000   $2,252,000 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:          
Net unrealized loss on marketable securities   346,000    377,000 
Loss on disposal of assets   -    398,000 
Deferred taxes   26,000    769,000 
Impairment loss on other investments   38,000    36,000 
Depreciation and amortization   1,519,000    1,604,000 
Changes in operating assets and liabilities:          
Investment in marketable securities   748,000    253,000 
Accounts receivable   665,000    1,187,000 
Other assets   (222,000)   (161,000)
Accounts payable and other liabilities - Justice   (3,182,000)   (2,130,000)
Accounts payable and other liabilities   51,000    23,000 
Accounts payable related party   121,000    170,000 
Due to securities broker   (151,000)   (44,000)
Obligations for securities sold   (325,000)   (268,000)
Net cash (used in) provided by operating activities   (220,000)   4,466,000 
           
Cash flows from investing activities:          
Payments for hotel furniture, equipment and building improvements   (1,206,000)   (983,000)
Proceeds from other investments   29,000    35,000 
Payments for real estate investments   (3,000)   - 
Net cash used in investing activities   (1,180,000)   (948,000)
           
Cash flows from financing activities:          
Payments of mortgage and other notes payable   (1,959,000)   (1,138,000)
Net cash used in financing activities   (1,959,000)   (1,138,000)
           
Net (decrease) increase in cash, cash equivalents, and restricted cash   (3,359,000)   2,380,000 
Cash, cash equivalents, and restricted cash at the beginning of the period   20,816,000    14,683,000 
Cash, cash equivalents, and restricted cash at the end of the period  $17,457,000   $17,063,000 
           
Supplemental information:          
Interest paid  $5,560,000   $5,770,000 
Taxes paid  $2,000   $68,000 
           
Non-cash transaction:          
Additions to Hotel equipment through capital lease  $30,000   $71,000 

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

-7-
 

 

PORTSMOUTH SQUARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The condensed consolidated financial statements included herein have been prepared by Portsmouth Square, Inc. (“Portsmouth” or the “Company”), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial statements of Portsmouth and the notes therein included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. The March 31, 2020 condensed consolidated balance sheet was derived from the consolidated balance sheet as included in the Company’s Form 10-K for the year ended June 30, 2019.

 

The results of operations for the nine months ended March 31, 2020 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2020.

 

Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”). Portsmouth has a 93.3% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated with those of the Company.

 

As of March 31, 2020, Santa Fe Financial Corporation (“Santa Fe”), a public company, owns approximately 68.8% of the outstanding common shares of Portsmouth. Santa Fe is an 87.3%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a public company. This percentage includes the power to vote an approximately 3.7% interest in the common stock in Santa Fe owned by InterGroup’s Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998. InterGroup also directly owns approximately 13.5% of the common stock of Portsmouth.

 

Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”) owns and operates a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Mezzanine is a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (“Hilton”) through January 31, 2030.

 

Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.

 

Due to Securities Broker

 

Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.

 

-8-
 

 

Obligations for Securities Sold

 

Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the condensed consolidated statements of operations.

 

Income Tax

 

The Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the nine months ended March 31, 2020 and 2019 represent the income tax effect on the Company’s pretax income which includes its share in the net income of the Hotel.

 

We have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27, 2020. The effect of tax law changes is required to be recognized either in the interim period in which the legislation is enacted or reflected in the computation of the annual effective tax rate, depending on the nature of the change. As of March 31, 2020, we evaluated the income tax provisions of the CARES Act and have determined there to be no material effect on the March 31, 2020 tax provision. We will continue to evaluate the income tax provisions of the CARES Act and monitor the tax law changes that could have income tax accounting and disclosure implications.

 

Financial Condition and Liquidity

 

Historically, our cash flows have been primarily generated from our Hotel operations. However, management expects that the ongoing length and severity of the economic downturn, resulting from the continuing and uncertain impact of the COVID-19 pandemic, will have a material adverse impact on our business, financial condition, liquidity and financial results. As a result of our Hotel’s material decrease in occupancy and average daily rate, we expect our cash flow from operations to continue to be significantly lower than historical rates for the foreseeable future, until the pandemic resolves, and hotel occupancies return to historical rates.

 

We have taken several steps to preserve capital and increase liquidity, including the implementation of various cost saving initiatives at our Hotel. For further discussion, see “Item 2 - Negative Effects of COVID-19 on our Business” included in this Quarterly Report. We may also receive cash generated from the investment of our cash and marketable securities, other investments, and other sources, including financing from our parent companies, Santa Fe and InterGroup. Subsequent to March 31, 2020, in order to increase its liquidity positions and take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex in Parsippany, New Jersey, generating net proceeds of approximately $6,814,000. InterGroup is also currently refinancing two of its California properties scheduled to close in June and July 2020, and it could refinance additional multifamily properties should the need arise; however, InterGroup does not deem it necessary at this time. InterGroup has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) of which $5,000,000 is available to be drawn down as of June 18, 2020, should additional liquidity be necessary.

 

As of March 31, 2020, we had cash, cash equivalents, and restricted cash of $17,457,000 which included $11,550,000 of restricted cash held by our Hotel senior lender Wells Fargo Bank, N.A. (“Lender”). Of the total restricted cash, $7,977,000 was held for furniture, fixtures and equipment (“FF&E”) reserves and $2,432,000 was held for a possible future property improvement plan (“PIP”) request by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i) January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. Therefore, Justice is currently in discussions with the Lender to release the PIP deposits to the Hotel and to allow the Hotel to utilize some or all of its FF&E reserves to fund operating expenses as well as debt service. Additionally, Justice has requested to temporarily pay interest only on the senior mortgage and the suspension of the monthly FF&E reserve installment, for a combined monthly savings in cash flow of approximately $321,000. Justice anticipates a resolution with the Lender in regard to the aforementioned requests before June 30, 2020.

 

On April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. Justice received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice will use the proceeds from the SBA Loan primarily for payroll costs. The SBA Loan is scheduled to mature on April 9, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The loan may be forgiven if the funds are used for payroll and other qualified expenses. New guidance on the criteria for forgiveness continues to be released.  

 

-9-
 

 

We may also have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup to meets our obligations during the next twelve months and beyond, should the need arise.

 

We cannot presently estimate the full financial impact of the unprecedented COVID-19 pandemic on our business or predict the related federal, state and local civil authority actions, which are highly dependent on the severity and duration of the pandemic, but we expect that the COVID-19 closures and other imposed restrictions will continue to have a significant adverse impact on our results of operations. Due to the uncertainties associated with the COVID-19 pandemic and the indeterminate length of time it will affect the hospitality industry, we have taken proactive measures to secure our liquidity position to be able to meet our obligations for the foreseeable future, including implementing strict cost management measures to eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets.

 

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel. The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company’s marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.

 

Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, cash provided by the SBA loan, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.

 

The following table provides a summary as of March 31, 2020, the Company’s material financial obligations which also including interest payments:

 

       3 Months   Year   Year   Year   Year     
   Total   2020   2021   2022   2023   2024   Thereafter 
Mortgage notes payable  $112,656,000   $364,000   $1,547,000   $1,632,000   $1,721,000   $107,392,000   $- 
Related party and other notes payable   9,002,000    250,000    1,016,000    4,033,000    750,000    567,000    2,386,000 
Interest   24,403,000    2,123,000    6,756,000    6,283,000    6,172,000    3,069,000    - 
Total  $146,061,000   $2,737,000   $9,319,000   $11,948,000   $8,643,000   $111,028,000   $2,386,000 

 

Recently Issued and Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. Effective July 1, 2019, we adopted ASU 2016-02 using the modified retrospective approach provided by ASU 2018-11. We elected certain practical expedients permitted under the transition guidance, including the election to carryforward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets. In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value of the fixed payments without performing an allocation of lease and non-lease components. We did not record any operating lease right-of-use (“ROU”) assets and operating lease liabilities upon adoption of the new standard as the aggregate value of the ROU assets and operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2019. The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 3 and Note 10 for balances of finance lease ROU assets and liabilities, respectively.

 

On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2023. The Company is currently reviewing the effect of ASU No. 2016-13.

 

-10-
 

 

NOTE 2 – REVENUE

 

The following table present our revenues disaggregated by revenue streams.

 

For the three months ended March 31,  2020   2019 
Hotel revenues:          
Hotel rooms  $9,642,000   $13,521,000 
Food and beverage   874,000    1,218,000 
Garage   650,000    652,000 
Other operating departments   93,000    78,000 
Total hotel revenue  $11,259,000   $15,469,000 

 

For the nine months ended March 31,  2020   2019 
Hotel revenues:          
Hotel rooms  $35,453,000   $38,608,000 
Food and beverage   3,521,000    4,232,000 
Garage   2,162,000    2,160,000 
Other operating departments   453,000    276,000 
Total hotel revenue  $41,589,000   $45,276,000 

 

Performance obligations

 

We identified the following performance obligations for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:

 

  Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
     
  Noncancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
     
  Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
     
  Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.

 

Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.

 

We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.

 

-11-
 

 

Contract assets and liabilities

 

We do not have any material contract assets as of March 31, 2020 and June 30, 2019, other than trade and other receivables, net on our condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.

 

We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our condensed consolidated balance sheets. Contract liabilities decreased to $404,000 as of March 31, 2020, from $1,215,000 as of June 30, 2019. The decrease for the nine months ended March 31, 2020 was primarily driven by $811,000 revenue recognized that was included in the advanced deposits balance as of June 30, 2019.

 

Contract costs

 

We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers are less than one year.

 

NOTE 3 – INVESTMENT IN HOTEL, NET

 

Investment in hotel consisted of the following as of:

 

       Accumulated   Net Book 
March 31, 2020  Cost   Depreciation   Value 
             
Land  $1,124,000   $-   $1,124,000 
Finance lease ROU assets   1,746,000    (213,000)   1,533,000 
Furniture and equipment   30,472,000    (27,358,000)   3,114,000 
Building and improvements   55,614,000    (28,450,000)   27,164,000 
Investment in Hotel, net  $88,956,000   $(56,021,000)  $32,935,000 

 

       Accumulated   Net Book 
June 30, 2019  Cost   Depreciation   Value 
             
Land  $1,124,000   $-   $1,124,000 
Finance lease ROU assets   521,000    (35,000)   486,000 
Furniture and equipment   30,585,000    (26,840,000)   3,745,000 
Building and improvements   55,488,000    (27,491,000)   27,997,000 
Investment in Hotel, net  $87,718,000   $(54,366,000)  $33,352,000 

 

NOTE 4 – INVESTMENT IN REAL ESTATE

 

In August 2007, the Company agreed to acquire 50% interest in InterGroup Uluniu, Inc., a Hawaiian corporation and a 100% owned subsidiary of InterGroup, for $973,000, which represents an amount equal to the costs paid by InterGroup for the acquisition and carrying costs of approximately two acres of unimproved land held for development located in Maui, Hawaii. As a related-party transaction, the fairness of the financial terms of the transaction were reviewed and approved by the independent director of the Company.

 

-12-
 

 

NOTE 5 - INVESTMENT IN MARKETABLE SECURITIES, NET

 

The Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically invested in corporate bonds and income producing securities, which may include interests in real estate-based companies and REITs, where financial benefit could transfer to its shareholders through income and/or capital gain.

 

At March 31, 2020, and June 30, 2019, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:

 

        Gross   Gross   Net   Fair 
Investment   Cost   Unrealized Gain   Unrealized Loss   Unrealized Loss   Value 
                      
As of March 31, 2020                
Corporate                          
Equities   $3,921,000   $50,000   $(3,640,000)  $(3,590,000)  $331,000 
                           
As of June 30, 2019                     
Corporate                          
Equities   $6,923,000   $240,000   $(5,738,000)  $(5,498,000)  $1,425,000 

 

As of March 31, 2020, and June 30, 2019, approximately 43% and 24%, respectively, of the investment marketable securities balance above is comprised of the common stock of Comstock Mining, Inc. (“Comstock” - NYSE AMERICAN: LODE).

 

As of March 31, 2020, and June 30, 2019, the Company had $3,631,000 and $5,697,000, respectively, of unrealized losses related to securities held for over one year. As of March 31, 2020, and June 30, 2019, unrealized losses related to the Company’s investment in Comstock were $3,594,000 and $5,666,000, respectively. For the nine months ended March 31, 2020, the decrease in unrealized losses is a result of reclassing $2,266,000 net unrealized gain related to Comstock that was included in the cost basis as of June 30, 2019.

 

Net gains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of net gain (loss) on marketable securities for the three and nine months ended March 31, 2020 and 2019, respectively:

 

For the three months ended March 31,  2020   2019 
Realized loss on marketable securities, net  $(192,000)  $(80,000)
Unrealized (loss) gain on marketable securities, net   (102,000)   87,000 
Unrealized (loss) gain on marketable securities related to LODE   (13,000)   137,000 
Net (loss) gain on marketable securities  $(307,000)  $144,000 

 

For the nine months ended March 31,  2020   2019 
Realized (loss) gain on marketable securities, net  $(175,000)  $68,000 
Unrealized loss on marketable securities, net   (152,000)   (288,000)
Unrealized loss on marketable securities related to LODE   (194,000)   (89,000)
Net loss on marketable securities  $(521,000)  $(309,000)

 

-13-
 

 

NOTE 6 – OTHER INVESTMENTS, NET

 

The Company may also invest, with the approval of the securities investment committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses.

 

Other investments, net consist of the following:

 

Type  March 31, 2020   June 30, 2019 
         
Private equity hedge fund, at cost  $99,000   $137,000 
Other preferred stock   30,000    59,000 
   $129,000   $196,000 

 

NOTE 7 - FAIR VALUE MEASUREMENTS

 

The carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).

 

The assets measured at fair value on a recurring basis are as follows:

 

   3/31/2020   6/30/2019 
As of  Total - Level 1   Total - Level 1 
Assets:        
Investment in marketable securities:        
Basic materials  $170,000   $351,000 
REITs and real estate companies   158,000    451,000 
Energy   -    98,000 
Financial Services   -    165,000 
Consumer cyclical   3,000    318,000 
Other   -    42,000 
   $331,000   $1,425,000 

 

The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.

 

-14-
 

 

Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments, net (non-marketable securities),” that were initially measured at cost and have been written down to fair value as a result of impairment. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:

 

Assets  Level 3   March 31, 2020   Net loss for the nine months ended March 31, 2020 
             
Other non-marketable investments  $129,000   $129,000   $(38,000)

 

Assets  Level 3   June 30, 2019   Net loss for the nine months ended March 31, 2019 
                
Other non-marketable investments  $196,000   $196,000   $(36,000)

 

For the nine months ended March 31, 2020 and 2019, we received distribution from other non-marketable investments of $29,000 and $35,000, respectively.

 

Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments and holds less than 20% ownership in each of the investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

 

NOTE 8 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows:

 

As of  3/31/2020   6/30/2019 
         
Cash and cash equivalents  $5,907,000   $9,789,000 
Restricted cash   11,550,000    11,027,000 
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows  $17,457,000   $20,816,000 

 

Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel. It also includes key money received from Interstate that is restricted for capital improvements for the Hotel.

 

NOTE 9 - SEGMENT INFORMATION

 

The Company operates in two reportable segments, the operation of the hotel (“Hotel Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These two operating segments, as presented in the consolidated financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this same information.

 

Information below represents reporting segments for the three and nine months ended March 31, 2020 and 2019, respectively. Operating income from Hotel operations consists of the operation of the hotel and operation of the garage. Income (loss) from investment transactions consist of net investment gain (loss), impairment loss on other investments, net unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax (expense) benefit for the entire Company.

 

-15-
 

 

As of and for the three months  Hotel   Investment         
ended March 31, 2020  Operations   Transactions   Corporate   Total 
Revenues  $11,259,000   $-   $-   $11,259,000 
Segment operating expenses   (10,060,000)   -    (167,000)   (10,227,000)
Segment income (loss)   1,199,000    -    (167,000)   1,032,000 
Interest expense - mortgage and related party   (1,793,000)   -    -    (1,793,000)
Depreciation and amortization expense   (547,000)   -    -    (547,000)
Loss from investments   -    (337,000)   -    (337,000)
Income tax benefit   -    -    440,000    440,000 
Net income (loss)  $(1,141,000)  $(337,000)  $273,000   $(1,205,000)
Total assets  $51,372,000   $460,000   $5,319,000   $57,151,000 

 

For the three months  Hotel   Investment         
ended March 31, 2019  Operations   Transactions   Corporate   Total 
Revenues  $15,469,000   $-   $-   $15,469,000 
Segment operating expenses   (11,378,000)   -    (274,000)   (11,652,000)
Segment income (loss)   4,091,000    -    (274,000)   3,817,000 
Interest expense - mortgage and related party   (1,941,000)   -    -    (1,941,000)
Loss on disposal of assets   (398,000)             (398,000)
Depreciation and amortization expense   (561,000)   -    -    (561,000)
Gain from investments   -    172,000    -    172,000 
Income tax expense   -    -    (280,000)   (280,000)
Net income (loss)  $1,191,000   $172,000   $(554,000)  $809,000 

 

As of and for the nine months  Hotel   Investment         
ended March 31, 2020  Operations   Transactions   Corporate   Total 
Revenues  $41,589,000   $-   $-   $41,589,000 
Segment operating expenses   (33,138,000)   -    (553,000)   (33,691,000)
Segment income (loss)   8,451,000    -    (553,000)   7,898,000 
Interest expense - mortgage and related party   (5,541,000)   -    -    (5,541,000)
Depreciation and amortization expense   (1,653,000)   -    -    (1,653,000)
Loss from investments   -    (533,000)   -    (533,000)
Income tax expense   -    -    (25,000)   (25,000)
Net income (loss)  $1,257,000   $(533,000)  $(578,000)  $146,000 
Total assets  $51,372,000   $460,000   $5,319,000   $57,151,000 

 

For the nine months  Hotel   Investment         
ended March 31, 2019  Operations   Transactions   Corporate   Total 
Revenues  $45,276,000   $-   $-   $45,276,000 
Segment operating expenses   (33,424,000)   -    (596,000)   (34,020,000)
Segment income (loss)   11,852,000    -    (596,000)   11,256,000 
Interest expense - mortgage and related party   (5,733,000)   -    -    (5,733,000)
Loss on disposal of assets   (398,000)   -    -    (398,000)
Depreciation and amortization expense   (1,748,000)   -    -    (1,748,000)
Loss from investments   -    (356,000)   -    (356,000)
Income tax expense   -    -    (769,000)   (769,000)
Net income (loss)  $3,973,000   $(356,000)  $(1,365,000)  $2,252,000 

 

-16-
 

 

NOTE 10 - RELATED PARTY AND OTHER FINANCING TRANSACTIONS

 

The following summarizes the balances of related party and other notes payable as of March 31, 2020 and June 30, 2019, respectively.

 

As of  3/31/2020   6/30/2019 
Note payable - InterGroup  $3,000,000   $3,000,000 
Note payable - Hilton   3,088,000    3,325,000 
Note payable - Interstate   1,708,000    1,896,000 
Total related party and other notes payable  $7,796,000   $8,221,000 

 

On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 1, 2021.

 

Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.

 

On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. As of March 31, 2020, and June 30, 2019, balance of the key money plus accrued interest is $1,008,000 and $2,049,000, respectively, and is included in restricted cash in the condensed consolidated balance sheets. Unamortized portion of the key money is included in the related party notes payable in the condensed consolidated balance sheets.

 

As of March 31, 2020, the Company had finance lease obligations outstanding of $1,206,000. These finance leases expire in various years through 2023 at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of March 31, 2020 are as follows:

 

For the year ending June 30,     
2020   $126,000 
2021    503,000 
2022    492,000 
2023    188,000 
 Total minimum lease payments      1,309,000 
Less interest on finance lease    (103,000)
Present value of future minimum lease payments   $1,206,000 

 

Future minimum principal payments for all related party and other financing transactions are as follows:

 

For the year ending June 30,     
2020   $250,000 
2021    1,016,000 
2022    4,033,000 
2023    750,000 
2024    567,000 
Thereafter      2,386,000 
    $9,002,000 

 

-17-
 

 

As of March 31, 2020, and June 30, 2019, the Company had accounts payable to related party of $2,243,000 and $2,122,000, respectively. These are amounts due to InterGroup and represent certain shared costs and expenses, primarily general and administrative expenses, rent, insurance and other expenses that are allocated among the Company, Santa Fe and InterGroup.

 

To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024. Outstanding principal balance on the loan was $92,656,000 and $93,746,000 as of March 31, 2020 and June 30, 2019, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. On July 31, 2019, Mezzanine refinanced the mezzanine loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan which had a 9.75% per annum interest rate was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. As a result of the refinance, Justice has generated $500,000 in annual interest expense savings.

 

Effective May 11, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain certain net worth and liquidity. As of March 31, 2020, InterGroup is in compliance with both requirements. However, due to the Hotel’s current low occupancy and its negative impact on the Hotel’s cash flow, Justice Operating Company, LLC may not meet certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lock-box by the Lender for all cash collected by the Hotel. However, such lockbox has been created and utilized from the loan inception and will be in place up to loan maturity regardless of the DSCR. Justice has not missed any of its debt service payments and does not anticipate missing any debt obligations even during these uncertain times for at least the next twelve months and beyond.

 

The Company’s Board of Directors is currently comprised of directors John V. Winfield, William J. Nance, John C. Love, Jerold R. Babin, and Steve Grunwald. All of the Company’s directors also serve as directors of InterGroup except for Mr. Grunwald. Messrs. Winfield and Nance also serve on the Board of Santa Fe.

 

John V. Winfield serves as Chief Executive Officer and Chairman of the Company, Santa Fe, and InterGroup. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Santa Fe and InterGroup may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and the resources of Santa Fe and InterGroup, at risk in connection with investment decisions made on behalf of the Company.

 

NOTE 11 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE

 

The following summarizes the balances of accounts payable and other liabilities -Justice as of March 31, 2020 and June 30, 2019, respectively.

 

As of  3/31/2020   6/30/2019 
         
Trade payable  $3,041,000   $1,792,000 
Advance deposits   404,000    1,215,000 
Property tax payable   31,000    1,046,000 
Payroll and related accruals   1,768,000    2,584,000 
Interest payable   421,000    412,000 
Withholding and other taxes payable   1,144,000    1,831,000 
Security deposit   52,000    52,000 
Other payables   1,255,000    2,366,000 
Total accounts payable and other liabilities - Justice  $8,116,000   $11,298,000 

 

NOTE 12 – SUBSEQUENT EVENTS

 

On April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, the Company will use proceeds from the SBA Loan primarily for payroll costs. The SBA Loan is scheduled to mature on April 9, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The loan may be forgiven if the funds are used for payroll and other qualified expenses. New guidance on the criteria for forgiveness continues to be released.  

 

-18-
 

 

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

 

The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “could,” “might” and similar expressions, are intended to identify forward-looking statements.

 

Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry; the impact of terrorism and war on the national and international economies, including tourism, securities markets, energy and fuel costs; natural disasters; general economic conditions and competition in the hotel industry in the San Francisco area; seasonality, labor relations and labor disruptions; actual and threatened pandemics such as swine flu or the outbreak of COVID-19 or similar outbreaks; partnership distributions; the ability to obtain financing at favorable interest rates and terms; securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

On March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 194, the Securities and Exchange Commission issued Order Release No. 34-88465 (the “Order”) granting exemptions to registrants subject to the reporting requirements of the Exchange Act Section 13(a) or 15(d) due to circumstances related to the coronavirus disease 2019 (“COVID-19”). Due to the circumstances related to COVID-19, the Company has relied on the Order with respect to this Quarterly Report on Form 10-Q (“Form 10-Q”) for the period ended March 31, 2020. Absent the Order, the Form 10-Q was due on May 15, 2020. The Company was unable to file the Form 10-Q on a timely basis due to delays in the preparation and final review of the Form 10-Q by the relevant parties within the Company, due in part by the attention and resources the Company has focused on addressing the severe impacts of the COVID-19 pandemic on our business and operations.

 

Negative Effects of COVID-19 on our Business

 

On February 25, 2020, the City of San Francisco issued the proclamation by the Mayor declaring the existence of a local emergency. The negative effects of the novel strain of coronavirus (“COVID-19”) on our business have been significant. In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. To mitigate the harm from the pandemic, on March 16, 2020, the City and County of San Francisco, along with a group of five other Bay Area counties and the City of Berkeley, issued parallel health officer orders imposing shelter in place limitations across the Bay Area, requiring everyone to stay safe at home except for certain essential needs. Since February 2020, several unfavorable events have unfolded causing demand for our hotel rooms to suffer including cancellations of all citywide conventions, reduction of flights in and out of the Bay Area and decline in both leisure and business travel.

 

In response to the decrease in demand, we have since furloughed all managers at the Hotel except for members of the executive team and continue to limit hourly staff to a minimum. As of the date of this Quarterly Report, we have temporarily closed all of our food and beverage outlets. We continue to implement social distancing standards to keep employees and guests safe. The full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report. The pandemic effectively eliminated our ability to generate any profits, due to the drastic decline in both leisure and business travel. As a result, management believes the ongoing length and severity of the economic downturn caused by the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results for the fiscal year ending June 30, 2020. We are also assessing the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets.

 

As a result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration (“SBA”). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. We are currently evaluating the impact of the provisions of the CARES Act. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. As described in Note 12 – Subsequent Events, on April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the CARES Act. The Company received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, the Company will use proceeds from the SBA Loan primarily for payroll costs. The SBA Loan is scheduled to mature on April 9, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The loan may be forgiven if the funds are used for payroll and other qualified expenses. New guidance on the criteria for forgiveness continues to be released.  

 

-19-
 

 

RESULTS OF OPERATIONS

 

The Company’s principal source of revenue continues to be derived from its general and limited partnership interest in the Justice Investors Limited Partnership (“Justice” or the “Partnership”) inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. Justice owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company.

 

The Hotel is operated by the Partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with Hilton. The Partnership entered into the License Agreement on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received on July 1, 2015.

 

On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel and related facilities with an effective takeover date of February 3, 2017. The term of HMA is for an initial period of ten years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement.

 

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

 

The Company had net loss of $1,205,000 for the three months ended March 31, 2020 compared to net income of $809,000 for the three months ended March 31, 2019. The change is primarily attributable to the decrease in Hotel revenue.

 

The following table sets forth a more detailed presentation of Hotel operations for the three months ended March 31, 2020 and 2019.

 

For the three months ended March 31,  2020   2019 
Hotel revenues:        
Hotel rooms  $9,642,000   $13,521,000 
Food and beverage   874,000    1,218,000 
Garage   650,000    652,000 
Other operating departments   93,000    78,000 
Total hotel revenues   11,259,000    15,469,000 
Operating expenses excluding depreciation and amortization   (10,060,000)   (11,378,000)
Operating income before interest, depreciation and amortization   1,199,000    4,091,000 
Loss on disposal of assets   -    (398,000)
Interest expense - mortgage   (1,793,000)   (1,941,000)
Depreciation and amortization expense   (547,000)   (561,000)
Net (loss) income from Hotel operations  $(1,141,000)  $1,191,000 

 

For the three months ended March 31, 2020, the Hotel had operating income of $1,199,000 before interest expense, depreciation and amortization on total operating revenues of $11,259,000 compared to operating income of $4,091,000 before interest expense, depreciation and amortization on total operating revenues of $15,469,000 for the three months ended March 31, 2019. For the three months ended March 31, 2020, room revenues decreased by $3,879,000, and food and beverage revenue decreased by $344,000, compared to the three months ended March 31, 2019. The year over year decline in both areas are result of the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak in March 2020. Revenue from garage and other operating departments increased mainly due to increase in cancellation revenue.

 

-20-
 

 

Total operating expenses decreased by $1,318,000 due to decrease in salaries and wages, rooms commission, credit card fees, management fees, franchise fees, and legal fees.

 

The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended March 31, 2020 and 2019.

 

Three Months

Ended March 31,

  

Average

Daily Rate

  

Average

Occupancy %

  

 

RevPAR

 
              
2020   $242    76%  $184 
2019   $290    95%$ 276 

 

The Hotel’s revenues decreased by 27% this quarter as compared to the previous comparable quarter. Average daily rate decreased by $48, average occupancy dropped 19%, and RevPAR decreased by $92 for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

 

Investment Transactions

 

The Company had a net loss on marketable securities of $307,000 for the three months ended March 31, 2020 compared to a net gain on marketable securities of $144,000 for the three months ended March 31, 2019. For the three months ended March 31, 2020, the Company had a net realized loss of $192,000 and a net unrealized loss of $115,000. For the three months ended March 31, 2019, the Company had a net realized loss of $80,000 and a net unrealized gain of $224,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.

 

The Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax (expense) benefit during the three months ended March 31, 2020 and 2019 represents the income tax effect on the Company’s pretax income (loss) which includes its share in the net income (loss) of the Hotel.

 

Nine Months Ended March 31, 2020 Compared to Nine Months Ended March 31, 2019

 

The Company had net income of $146,000 for the nine months ended March 31, 2020 compared to net income of $2,252,000 for the nine months ended March 31, 2019. The change is primarily attributable to the decrease in Hotel revenue.

 

Hotel Operations

 

Net income from Hotel operations was $1,257,000 for the nine months ended March 31, 2020 compared to net income of $3,973,000 for the nine months ended March 31, 2019. The decrease in net income is primarily due to decrease in revenue.

 

-21-
 

 

The following table sets forth a more detailed presentation of Hotel operations for the nine months ended March 31, 2020 and 2019.

 

For the nine months ended March 31,  2020   2019 
Hotel revenues:        
Hotel rooms  $35,453,000   $38,608,000 
Food and beverage   3,521,000    4,232,000 
Garage   2,162,000    2,160,000 
Other operating departments   453,000    276,000 
Total hotel revenues   41,589,000    45,276,000 
Operating expenses excluding depreciation and amortization   (33,138,000)   (33,424,000)
Operating income before interest, depreciation and amortization   8,451,000    11,852,000 
Loss on disposal of assets   -    (398,000)
Interest expense - mortgage   (5,541,000)   (5,733,000)
Depreciation and amortization expense   (1,653,000)   (1,748,000)
Net income from Hotel operations  $1,257,000   $3,973,000 

 

For the nine months ended March 31, 2020, the Hotel had operating income of $8,451,000 before interest, depreciation and amortization on total operating revenues of $41,589,000 compared to operating income of $11,852,000 before interest, depreciation and amortization on total operating revenues of $45,276,000 for the nine months ended March 31, 2019.

 

For the nine months ended March 31, 2020, room revenues decreased by $3,155,000 and food and beverage revenue decreased by $711,000. The year over year decline in both areas are result of the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak in March 2020. Garage revenue remained consistent year over year. Revenue from other operating departments increased by $177,000 as a result of increase in cancellation revenue.

 

Total operating expenses decreased by $286,000 due to decrease in management fees, rooms commission, and franchise fees.

 

The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”) of the Hotel for the nine months ended March 31, 2020 and 2019.

 

Nine Months

Ended March 31,

  

Average

Daily Rate

  

Average

Occupancy %

  

 

RevPAR

 
              
2020   $256    91%  $233 
2019   $269    96%  $259 

 

The Hotel’s total revenues decreased by 8% for the nine months ended March 31, 2020 as compared to the nine months ended March 31, 2019. Average daily rate decreased by $13 and RevPAR decreased by $26 for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. Average occupancy dropped by 5% during the nine months ended March 31, 2020 versus the comparable period.

 

Investment Transactions

 

The Company had a net loss on marketable securities of $521,000 for the nine months ended March 31, 2020 compared to a net loss on marketable securities of $309,000 for the nine months ended March 31, 2019. For the nine months ended March 31, 2020, the Company had a net realized loss of $175,000 and a net unrealized loss of $346,000. For the nine months ended March 31, 2019, the Company had a net realized gain of $68,000 and a net unrealized loss of $377,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.

 

-22-
 

 

The Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the nine months ended March 31, 2020 and 2019 represents the income tax effect on the Company’s pretax income which includes its share in the net income of the Hotel.

 

MARKETABLE SECURITIES

 

The following table shows the composition of the Company’s marketable securities portfolio as of March 31, 2020 and June 30, 2019 by selected industry groups.

 

       % of Total 
As of March 31, 2020      Investment 
Industry Group  Fair Value   Securities 
         
Basic materials  $170,000    51.4%
REITs and real estate companies   158,000    47.7%
Consumer cyclical   3,000    0.9%
   $331,000    100.0%

 

       % of Total 
As of June 30, 2019      Investment 
Industry Group  Fair Value   Securities 
         
REITs and real estate companies  $451,000    31.7%
Basic materials   351,000    24.6%
Consumer cyclical   318,000    22.3%
Financial Services   165,000    11.6%
Energy   98,000    6.9%
Healthcare   42,000    2.9%
   $1,425,000    100.0%

 

As of March 31, 2020, the Company’s investment portfolio includes four equity positions. The Company holds two equity securities that are more than 10% of the equity value of the portfolio. The largest security position represents 48% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL), which is included in the REITs and real estate companies’ industry group. The second largest security position represents 43% of the portfolio and consists of the common stock of Comstock, which is included in the basic materials industry group.

 

As of June 30, 2019, the Company’s investment portfolio includes approximately eleven equity positions. The Company holds five equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 24% of the portfolio and consists of the common stock of Comstock, which is included in the basic materials industry group.

 

-23-
 

 

The following table shows the net loss on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods: 

 

For the three months ended March 31,  2020   2019 
Net (loss) gain on marketable securities  $(307,000)  $144,000 
Impairment loss on other investments   (38,000)   (36,000)
Dividend and interest income   41,000    105,000 
Margin interest expense   (5,000)   (8,000)
Trading and management expenses   (28,000)   (33,000)
   $(337,000)  $172,000 

 

For the nine months ended March 31,   2020    2019 
Net loss on marketable securities  $(521,000)  $(309,000)
Impairment loss on other investments   (38,000)   (36,000)
Dividend and interest income   129,000    125,000 
Margin interest expense   (19,000)   (37,000)
Trading and management expenses   (84,000)   (99,000)
   $(533,000)  $(356,000)

 

FINANCIAL CONDITION AND LIQUIDITY

 

Historically, our cash flows have been primarily generated from our Hotel operations. However, management expects that the ongoing length and severity of the economic downturn, resulting from the continuing and uncertain impact of the COVID-19 pandemic, will have a material adverse impact on our business, financial condition, liquidity and financial results. As a result of our Hotel’s material decrease in occupancy and average daily rate, we expect our cash flow from operations to continue to be significantly lower than historical rates for the foreseeable future, until the pandemic resolves, and hotel occupancies return to historical rates.

 

We have taken several steps to preserve capital and increase liquidity, including the implementation of various cost saving initiatives at our Hotel. For further discussion, see “Item 2 - Negative Effects of COVID-19 on our Business” included in this Quarterly Report. We may also receive cash generated from the investment of our cash and marketable securities, other investments, and other sources, including financing from our parent companies, Santa Fe and InterGroup. Subsequent to March 31, 2020, in order to increase its liquidity positions and take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex in Parsippany, New Jersey, generating net proceeds of approximately $6,814,000. InterGroup is also currently refinancing two of its California properties scheduled to close in June and July 2020, and it could refinance additional multifamily properties should the need arise; however, InterGroup does not deem it necessary at this time. InterGroup has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) of which $5,000,000 is available to be drawn down as of June 18, 2020, should additional liquidity be necessary.

 

As of March 31, 2020, we had cash, cash equivalents, and restricted cash of $17,457,000 which included $11,550,000 of restricted cash held by our Hotel senior lender Wells Fargo Bank, N.A. (“Lender”). Of the total restricted cash, $7,977,000 was held for furniture, fixtures and equipment (“FF&E”) reserves and $2,432,000 was held for a possible future property improvement plan (“PIP”) request by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i) January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. Therefore, Justice is currently in discussions with the Lender to release the PIP deposits to the Hotel and to allow the Hotel to utilize some or all of its FF&E reserves to fund operating expenses as well as debt service. Additionally, Justice has requested to temporarily pay interest only on the senior mortgage and the suspension of the monthly FF&E reserve installment, for a combined monthly savings in cash flow of approximately $321,000. Justice anticipates a resolution with the Lender in regard to the aforementioned requests before June 30, 2020.

 

On April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. Justice received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice will use the proceeds from the SBA Loan primarily for payroll costs. The SBA Loan is scheduled to mature on April 9, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The loan may be forgiven if the funds are used for payroll and other qualified expenses. New guidance on the criteria for forgiveness continues to be released.  

 

-24-
 

 

We may also have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup to meets our obligations during the next twelve months and beyond, should the need arise.

 

We cannot presently estimate the full financial impact of the unprecedented COVID-19 pandemic on our business or predict the related federal, state and local civil authority actions, which are highly dependent on the severity and duration of the pandemic, but we expect that the COVID-19 closures and other imposed restrictions will continue to have a significant adverse impact on our results of operations. Due to the uncertainties associated with the COVID-19 pandemic and the indeterminate length of time it will affect the hospitality industry, we have taken proactive measures to secure our liquidity position to be able to meet our obligations for the foreseeable future, including implementing strict cost management measures to eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets.

 

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel. The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company’s marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.

 

Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, cash provided by the SBA loan, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.

 

MATERIAL CONTRACTUAL OBLIGATIONS

 

The following table provides a summary as of March 31, 2020, the Company’s material financial obligations which also includes interest payments:

 

       3 Months   Year   Year   Year   Year     
   Total   2020   2021   2022   2023   2024   Thereafter 
Mortgage notes payable  $112,656,000   $364,000   $1,547,000   $1,632,000   $1,721,000   $107,392,000   $- 
Related party and other notes payable   9,002,000    250,000    1,016,000    4,033,000    750,000    567,000    2,386,000 
Interest   24,403,000    2,123,000    6,756,000    6,283,000    6,172,000    3,069,000    - 
Total  $146,061,000   $2,737,000   $9,319,000   $11,948,000   $8,643,000   $111,028,000   $2,386,000 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has no material off balance sheet arrangements.

 

IMPACT OF INFLATION

 

Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Interstate has the power and ability to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company’s income is not viewed by management as material.

 

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

Critical accounting policies are those that are most significant to the presentation of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company’s critical accounting policies during the nine months ended March 31, 2020 except for the adoption of ASU 2016-02. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for a summary of the critical accounting policies.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.

 

Item 4. Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There have been no changes in the Company’s internal control over financial reporting during the last quarterly period

covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

During the period ending March 31, 2020, there were no pending or threatened legal actions.

 

Item 1A. RISK FACTORS

 

Except as set forth below, during the period ended March 31, 2020, there were no material changes to the Risk Factors disclosed in Item 1A - “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019.

 

The responses by federal, state, and local civil authority to the COVID-19 pandemic has had a material detrimental impact on our business, financial results and liquidity, and such impact could worsen and last for an unknown period of time.

 

The global spread of the COVID-19 pandemic is complex and rapidly-evolving, with governments, public institutions and other organizations imposing or recommending, and businesses and individuals implementing, restrictions on various activities or other actions to combat its spread, such as restrictions and bans on travel or transportation, limitations on the size of gatherings, closures of work facilities, schools, public buildings and businesses, cancellation of events, including sporting events, conferences and meetings, and quarantines and lock-downs. The shelter-in-place, physical distancing, city closures and their consequences have dramatically reduced travel, conventions and demand for hotel rooms, which has and will continue to impact our business, operations, and financial results. The extent to which the closures impacts our business, operations, and financial results, including the duration and magnitude of such effects, will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the closures; the negative impact it has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence; our ability to successfully navigate the impacts of the closures; governments actions, businesses and individuals take in response to the closures, including limiting or banning travel; and how quickly economies, travel activity, and demand for lodging recovers after the closures subsides.

 

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The COVID-19 closures have subjected our business, operations and financial condition to a number of risks, including, but not limited to, those discussed below:

 

  Risks Related to Revenue: The COVID-19 closures and other imposed restrictions have negatively impacted and will in the future negatively impact to an extent we are unable to predict, our revenue from the Hotel. Currently, the Hotel is not generating revenue sufficient to meet its operating expenses, which is adversely affecting our net income.
     
  Risks Related to Operations: Because of the significant decline in the demand for hotel rooms, Interstate have taken steps to reduce operating costs and improve efficiency, including furloughing a substantial number of its personnel and implementing reduced work weeks for other personnel. Such steps, and further changes we may make in the future to reduce costs, may negatively impact guest loyalty, or our ability to attract and retain associates, and our reputation and market share may suffer as a result. For example, if our furloughed personnel do not return to work with us when the COVID-19 closures and imposed restrictions are lifted, including because they find new jobs during the furlough, we may experience operational challenges that impact guest loyalty and our market share, which could limit our ability to grow revenue and could reduce our profits. Further, reputational damage from, and the financial impact of, reduced work weeks could lead associates to depart the company and could make it harder for us to recruit new associates in the future. We may also face demands or requests from labor unions that represent our associates, whether in the course of our periodic renegotiation of our collective bargaining agreements or otherwise, for additional compensation, healthcare benefits or other terms as a result of COVID-19 that could increase costs, and we could experience labor disputes or disruptions as we continue to implement our COVID-19 mitigation plans.

 

COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could also precipitate or aggravate the other risk factors that we identify in our 2019 Form 10-K, which in turn could materially adversely affect our business, financial condition, liquidity, and results of operations (including revenues and profitability). Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider presenting significant risks to our operations.

 

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

 

There have been no events that are required to be reported under this Item.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

There have been no events that are required to be reported under this Item.

 

Item 4. MINE SAFETY DISCLOSURES

 

There have been no events that are required to be reported under this Item.

 

Item 5. OTHER INFORMATION

 

There have been no events that are required to be reported under this Item.

 

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Item 6. EXHIBITS

 

 

101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
101.DEF XBRL Taxonomy Extension Definition Linkbase
   
101.LAB XBRL Taxonomy Extension Label Linkbase
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PORTSMOUTH SQUARE, INC.
  (Registrant)
     
Date: June 18, 2020 by /s/ John V. Winfield
    John V. Winfield
    President, Chairman of the Board and
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: June 18, 2020 by /s/ Danfeng Xu
    Danfeng Xu
    Treasurer and Controller
    (Principal Financial Officer)

 

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