Company Quick10K Filing
Santa Fe Financial
Price-0.00 EPS3
Shares1 P/E-0
MCap-0 P/FCF-0
Net Debt-11 EBIT8
TEV-11 TEV/EBIT-1
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-06-18
10-Q 2019-12-31 Filed 2020-01-24
10-Q 2019-09-30 Filed 2019-10-25
10-K 2019-06-30 Filed 2019-08-30
10-Q 2019-03-31 Filed 2019-05-03
10-Q 2018-12-31 Filed 2019-02-01
10-Q 2018-09-30 Filed 2018-11-02
10-K 2018-06-30 Filed 2018-08-31
10-Q 2018-03-31 Filed 2018-04-27
10-Q 2017-12-31 Filed 2018-02-02
10-Q 2017-09-30 Filed 2017-11-09
10-K 2017-06-30 Filed 2017-10-13
10-Q 2017-03-31 Filed 2017-05-15
10-Q 2016-12-31 Filed 2017-02-14
10-Q 2016-09-30 Filed 2016-11-04
10-K 2016-06-30 Filed 2016-09-28
10-Q 2016-03-31 Filed 2016-05-13
10-Q 2015-12-31 Filed 2016-02-05
10-Q 2015-09-30 Filed 2015-10-29
10-K 2015-06-30 Filed 2015-09-04
10-Q 2015-03-31 Filed 2015-05-11
10-Q 2014-12-31 Filed 2015-02-11
10-Q 2014-09-30 Filed 2014-11-14
10-K 2014-06-30 Filed 2014-09-29
10-Q 2014-03-31 Filed 2014-05-16
10-Q 2013-12-31 Filed 2014-02-14
10-Q 2013-09-30 Filed 2013-11-08
10-K 2013-06-30 Filed 2013-09-18
10-Q 2013-03-31 Filed 2013-05-10
10-Q 2012-12-31 Filed 2013-02-13
10-Q 2012-09-30 Filed 2012-11-09
10-K 2012-06-30 Filed 2012-09-20
10-Q 2012-03-31 Filed 2012-05-10
10-Q 2011-12-31 Filed 2012-02-09
10-Q 2011-09-30 Filed 2011-11-14
10-K 2011-06-30 Filed 2011-09-22
10-Q 2011-03-31 Filed 2011-05-12
10-Q 2010-12-31 Filed 2011-02-11
10-Q 2010-09-30 Filed 2010-11-12
10-K 2010-06-30 Filed 2010-09-27
10-Q 2010-03-31 Filed 2010-05-13
10-Q 2009-12-31 Filed 2010-02-12
8-K 2020-05-14
8-K 2020-02-26
8-K 2020-02-05
8-K 2019-12-27
8-K 2019-02-28
8-K 2018-02-27

SFEF 10Q Quarterly Report

Part I
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, Net
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

Santa Fe Financial Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
9565355-25-552012201420172020
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 0-6877

 

SANTA FE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

NEVADA   95-2452529

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

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 [X] 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

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

 

The number of shares outstanding of registrant’s Common Stock, as of June 18, 2020 was 1,339,310.

 

 

 

   
   

 

TABLE OF CONTENTS

 

 

 

Page
     
  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  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 8-19
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20-27
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 27
     
     
  PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 28
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
     
Item 3. Defaults Upon Senior Securities 29
     
Item 4. Mine Safety Disclosures 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 29
     
Signatures   30

 

 -2- 
   

 

PART I

FINANCIAL INFORMATION

 

Item 1 - Condensed Consolidated Financial Statements

 

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

As of  March 31, 2020   June 30, 2019 
ASSETS          
Investment in hotel, net  $35,847,000   $36,336,000 
Investment in real estate, net   4,786,000    4,866,000 
Investment in marketable securities   526,000    2,679,000 
Other investments, net   230,000    351,000 
Cash and cash equivalents   5,962,000    9,800,000 
Restricted cash   11,550,000    11,027,000 
Accounts receivable - hotel, net   183,000    848,000 
Other assets, net   1,629,000    1,643,000 
Deferred tax assets   6,647,000    6,402,000 
           
Total assets  $67,360,000   $73,952,000 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
Liabilities:          
Accounts payable and other liabilities - Justice  $8,116,000   $11,298,000 
Accounts payable and other liabilities   502,000    362,000 
Accounts payable to related party   5,262,000    5,105,000 
Due to securities broker   -    396,000 
Obligations for securities sold   -    625,000 
Related party and other notes payable   7,796,000    8,221,000 
Finance leases   1,206,000    1,486,000 
Mortgage notes payable - real estate   3,308,000    3,315,000 
Mortgage notes payable - hotel, net   111,729,000    113,087,000 
           
Total liabilities   137,919,000    143,895,000 
           
Shareholders’ deficit:          
Common stock - par value $.10 per share; Authorized - 2,000,000; Issued 1,437,138 and 1,339,638; outstanding 1,339,310 and 1,241,810 as of March 31, 2020 and June 30, 2019, respectively   144,000    134,000 
Additional paid-in capital   7,895,000    8,808,000 
Accumulated deficit   (52,959,000)   (54,183,000)
Treasury stock, at cost, 97,828 shares   (951,000)   (951,000)
Total Santa Fe shareholders’ deficit   (45,871,000)   (46,192,000)
Noncontrolling interest   (24,688,000)   (23,751,000)
Total shareholders’ deficit   (70,559,000)   (69,943,000)
           
Total liabilities and shareholders’ deficit  $67,360,000   $73,952,000 

 

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

 

 -3- 
   

 

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

For the three months ended March 31,  2020   2019 
         
Revenues:          
Hotel  $11,259,000   $15,469,000 
Real estate   79,000    81,000 
Total revenues   11,338,000    15,550,000 
           
Costs and operating expenses:          
Hotel operating expenses   (10,060,000)   (11,378,000)
Real estate operating expenses   (53,000)   (52,000)
Depreciation and amortization expense   (598,000)   (613,000)
General and administrative expense   (440,000)   (364,000)
           
Total costs and operating expenses   (11,151,000)   (12,407,000)
           
Income from operations   187,000    3,143,000 
           
Other income (expense):          
Interest expense - mortgage   (1,695,000)   (1,838,000)
Interest expense - related party   (126,000)   (129,000)
Loss on disposal of assets   -    (398,000)
Net (loss) gain on marketable securities   (456,000)   67,000 
Net (loss) gain on marketable securities - Comstock   (20,000)   207,000 
Impairment loss on other investments   (64,000)   (61,000)
Dividend and interest income   52,000    112,000 
Trading and margin interest expense   (54,000)   (77,000)
           
Total other expense, net   (2,363,000)   (2,117,000)
           
(Loss) income before income taxes   (2,176,000)   1,026,000 
Income tax benefit (expense)   582,000    (280,000)
           
Net (loss) income   (1,594,000)   746,000 
Less: Net loss (income) attributable to the noncontrolling interest   436,000    (320,000)
           
Net (loss) income attributable to Santa Fe  $(1,158,000)  $426,000 
           
Basic and diluted net (loss) income per share attributable to Santa Fe  $(0.89)  $0.34 
           
Weighted average number of common shares outstanding - basic and diluted   1,301,810    1,241,810 

 

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

 

 -4- 
   

 

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

For the nine months ended March 31,  2020   2019 
         
Revenues:          
Hotel  $41,589,000   $45,276,000 
Real estate   237,000    242,000 
Total revenues   41,826,000    45,518,000 
           
Costs and operating expenses:          
Hotel operating expenses   (33,138,000)   (33,424,000)
Real estate operating expenses   (135,000)   (170,000)
Depreciation and amortization expense   (1,807,000)   (1,902,000)
General and administrative expense   (1,050,000)   (843,000)
           
Total costs and operating expenses   (36,130,000)   (36,339,000)
           
Income from operations   5,696,000    9,179,000 
           
Other income (expense):          
Interest expense - mortgage   (5,229,000)   (5,562,000)
Interest expense - related party   (384,000)   (375,000)
Loss on asset disposal   -    (398,000)
Net loss on marketable securities   (553,000)   (330,000)
Net loss on marketable securities - Comstock   (293,000)   (134,000)
Impairment loss on other investments   (64,000)   (61,000)
Dividend and interest income   158,000    150,000 
Trading and margin interest expense   (191,000)   (257,000)
           
Total other expense, net   (6,556,000)   (6,967,000)
           
(Loss) income before income taxes   (860,000)   2,212,000 
Income tax benefit (expense)   244,000    (769,000)
           
Net (loss) income   (616,000)   1,443,000 
Less: Net income attributable to the noncontrolling interest   (66,000)   (977,000)
           
Net (loss) income attributable to Santa Fe Financial Corporation  $(682,000)  $466,000 
           
Basic and diluted net (loss) income per share attributable to Santa Fe Financial Corporation  $(0.54)  $0.38 
           
Weighted average number of common shares outstanding - basic and diluted   1,261,665    1,241,810 

 

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

 

 -5- 
   

 

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)

 

                   Total         
       Additional           Santa Fe       Total 
   Common Stock   Paid-in   Accumulated   Treasury   Shareholders’   Noncontrolling   Shareholders’ 
   Shares   Amount   Capital   Deficit   Stock   Deficit   Interest   Deficit 
                                 
Balance at July 1, 2019     1,339,638   $  134,000   $  8,808,000   $(54,183,000)  $  (951,000)  $      (46,192,000)  $(23,751,000)  $   (69,943,000)
                                         
Net income   -    -    -    361,000    -    361,000    350,000    711,000 
                                         
Balance at September 30, 2019   1,339,638   $134,000   $8,808,000   $(53,822,000)  $(951,000)  $(45,831,000)  $(23,401,000)  $(69,232,000)
                                         
Net income   -    -    -    115,000    -    115,000    152,000    267,000 
                                         
Balance at December 31, 2019   1,339,638   $134,000   $8,808,000   $(53,707,000)  $(951,000)  $(45,716,000)  $(23,249,000)  $(68,965,000)
                                         
Net loss   -    -    -    (1,158,000)   -    (1,158,000)   (436,000)   (1,594,000)
                                         
Investment in Woodland   97,500    10,000    (913,000)   1,906,000    -    1,003,000    (1,003,000)   - 
                                         
Balance at March 31, 2020   1,437,138   $144,000   $7,895,000   $(52,959,000)  $(951,000)  $(45,871,000)  $(24,688,000)  $(70,559,000)

 

                   Total         
       Additional           Santa Fe       Total 
   Common Stock   Paid-in   Accumulated   Treasury   Shareholders’   Noncontrolling   Shareholders’ 
   Shares   Amount   Capital   Deficit   Stock   Deficit   Interest   Deficit 
                                 
Balance at July 1, 2018     1,339,638   $  134,000   $  8,808,000   $(57,442,000)  $  (951,000)  $   (49,451,000)  $(24,606,000)  $   (74,057,000)
                                         
Net income   -    -    -    566,000    -    566,000    501,000    1,067,000 
                                         
Balance at September 30, 2018   1,339,638   $134,000   $8,808,000   $(56,876,000)  $(951,000)  $(48,885,000)  $(24,105,000)  $(72,990,000)
                                         
Net (loss) income   -    -    -    (526,000)   -    (526,000)   156,000    (370,000)
                                         
Balance at December 31, 2018   1,339,638   $134,000   $8,808,000   $(57,402,000)  $(951,000)  $(49,411,000)  $(23,949,000)  $(73,360,000)
                                         
Net income   -    -    -    426,000    -    426,000    320,000    746,000 
                                         
Balance at March 31, 2019   1,339,638   $134,000   $8,808,000   $(56,976,000)  $(951,000)  $(48,985,000)  $(23,629,000)  $(72,614,000)

 

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

 

 -6- 
   

 

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

For the nine months ended March 31,  2020   2019 
Cash flows from operating activities:          
Net (loss) income  $(616,000)  $1,443,000 
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized loss on marketable securities   576,000    665,000 
Loss on disposal of assets   -    398,000 
Impairment loss on other investments   64,000    61,000 
Deferred taxes   (244,000)   769,000 
Depreciation and amortization   1,672,000    1,770,000 
Changes in operating assets and liabilities:          
Investment in marketable securities   1,577,000    458,000 
Accounts receivable   665,000    1,187,000 
Other assets   14,000    (154,000)
Accounts payable and other liabilities - Justice   (3,182,000)   (2,130,000)
Accounts payable and other liabilities   140,000    (18,000)
Accounts payable related party   157,000    417,000 
Due to securities broker   (396,000)   (122,000)
Obligations for securities sold   (625,000)   (481,000)
Net cash (used in) provided by operating activities   (198,000)   4,263,000 
           
Cash flows from investing activities:          
Payments for hotel and real estate investments   (1,205,000)   (992,000)
Payments for real estate   (3,000)   - 
Proceeds from other investments   57,000    62,000 
Net cash used in investing activities   (1,151,000)   (930,000)
           
Cash flows from financing activities:          
Net payments of mortgage and other notes payable   (1,966,000)   (1,020,000)
Net cash used in financing activities   (1,966,000)   (1,020,000)
           
Net (decrease) increase in cash and cash equivalents:   (3,315,000)   2,313,000 
Cash, cash equivalents and restricted cash at the beginning of the period   20,827,000    14,766,000 
Cash, cash equivalents and restricted cash at the end of the period  $17,512,000   $17,079,000 
           
Supplemental information:          
Interest paid  $5,648,000   $6,013,000 
Taxes paid  $2,000   $47,000 
           
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- 
   

 

SANTA FE FINANCIAL CORPORATION

NOTES TO 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 Santa Fe Financial Corporation (“Santa Fe” 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 Santa Fe 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.

 

Santa Fe owns approximately 68.8% of the outstanding common shares of Portsmouth Square, Inc. (“Portsmouth”), a public company (OTC Market Inc.’s Pink: PRSI). The Company generates income from the ownership and management of real estate. On December 31, 1997, the Company acquired a controlling 55.4% interest in Intergroup Woodland Village, Inc. (“Woodland Village”) from The InterGroup Corporation (“InterGroup”), a public company (NASDAQ Capital Market: INTG). Woodland Village’s major asset is a 27-unit apartment complex located in Santa Monica, California. Santa Fe also owns a two-unit apartment building in West Los Angeles, California.

 

On February 5, 2020, the Santa Fe entered into a Contribution Agreement (the “Contribution Agreement”) with InterGroup, pursuant to which InterGroup received 97,500 shares of common stock, par value $0.10 per share, of Santa Fe, in exchange for InterGroup’s contribution to Santa Fe of 4,460 shares of common stock (the “Common Stock”) of Woodland Village Inc. (the “Transaction”). As a result of the contribution, Woodland Village has become a wholly owned subsidiary of Santa Fe. Before the issuance of the stock referenced in the preceding sentence, InterGroup had the power to vote 86.3% of the voting shares of Santa Fe, which includes the power to vote an approximately 4% interest in the common stock in Santa Fe owned by the Company’s Chairman and CEO, John V. Winfield, pursuant to a voting trust agreement entered into on June 30, 1998. Subsequent to this issuance, InterGroup has the power to vote 87.3% of the issued and outstanding common stock of Santa Fe, which includes the power to vote an approximately 3.7% interest in the common stock in Santa Fe under the aforementioned voting trust agreement. Mr. Winfield, Chairman of the Board of both InterGroup and Santa Fe, is a control person of both entities.

 

On February 5, 2020, after review by an independent director of the Company, and by the unanimous vote of all directors of the Company (with Mr. Winfield abstaining), the Board approved the entry into the Contribution Agreement and the consummation of the Transaction. The Company’s Board approved the Transaction after the receipt of a fairness opinion from a third-party independent firm. The Board was first made aware of the Transaction in early January 2020, received information to review on or about January 17, 2020 and was given multiple opportunities to discuss the materials with management before the February 5, 2020 Board meeting. The Contribution Agreement also contains a provision for a potential subsequent earn out to InterGroup pursuant to terms set forth therein.

 

InterGroup also directly owns approximately 13.5% of the common stock of Portsmouth. 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 controls 93.3% of the voting interest in Justice and is the sole general partner. The financial statements of Justice are consolidated with those of Portsmouth.

 

 -8- 
   

 

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.

 

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 benefit (expense) during the nine months ended March 31, 2020 and 2019 represent the income tax effect on the Company’s pretax (loss) 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 company, 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.

 

 -9- 
   

 

As of March 31, 2020, we had cash, cash equivalents, and restricted cash of $17,512,000 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.  

 

We may also have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup to meet 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.

 

 -10- 
   

 

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  $115,964,000   $366,000   $4,525,000   $1,642,000   $1,732,000   $107,403,000   $296,000 
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   24,609,000    2,160,000    6,777,000    6,295,000    6,184,000    3,080,000    113,000 
Total  $  149,575,000   $  2,776,000   $  12,318,000   $  11,970,000   $  8,666,000   $  111,050,000   $  2,795,000 

 

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.

 

NOTE 2 – REVENUE

 

Our revenue from real estate is primarily rental income from residential property leases which is recorded when due from residents and is recognized monthly as earned. The following table present our Hotel revenue 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 

 

 -11- 
   

 

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.

 

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.

 

 -12- 
   

 

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 and lease agreements do not extend beyond 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  $1,896,000   $-   $1,896,000 
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   59,467,000    (30,163,000)   29,304,000 
Investment in Hotel, net  $93,581,000   $(57,734,000)  $35,847,000 

 

       Accumulated   Net Book 
June 30, 2019  Cost   Depreciation   Value 
             
Land  $1,896,000   $-   $1,896,000 
Finance lease ROU assets   521,000    (35,000)   486,000 
Furniture and equipment   30,585,000    (26,841,000)   3,744,000 
Building and improvements   59,341,000    (29,131,000)   30,210,000 
Investment in Hotel, net  $92,343,000   $(56,007,000)  $36,336,000 

 

NOTE 4 – INVESTMENT IN REAL ESTATE, NET

 

The Company owns and operates a 2-unit and 27-unit multi-family apartment complexes located in West Los Angeles, California and Santa Monica, California, respectively. The Company also owns land held for development located in Maui, Hawaii. Investment in real estate consisted of the following:

 

As of  March 31, 2020   June 30, 2019 
Land  $2,430,000   $2,430,000 
Buildings, improvements and equipment   2,921,000    2,922,000 
Accumulated depreciation   (1,545,000)   (1,463,000)
    3,806,000    3,889,000 
Land held for development   980,000    977,000 
Investment in real estate, net  $4,786,000   $4,866,000 

 

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.

 

 -13- 
   

 

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    
Investment  Cost  

Unrealized

Gain

  

Unrealized

Loss

  

Unrealized

Loss

  

Fair

Value

 
                     
As of March 31, 2020                         
Corporate                         
Equities  $5,741,000   $84,000   $(5,299,000)  $(5,215,000)  $526,000 
                          
As of June 30, 2019                         
Corporate                         
Equities  $10,922,000   $449,000   $(8,692,000)  $(8,243,000)  $2,679,000 

 

As of March 31, 2020, and June 30, 2019, approximately 41% and 19%, 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 $5,291,000 and $8,617,000 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 $5,221,000 and $8,556,000, respectively. For the nine months ended March 31, 2020, the decrease in unrealized losses is a result of reclassing $3,628,000 of 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 the net gains (losses) 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  $(316,000)  $(89,000)
Unrealized (loss) gain on marketable securities, net   (140,000)   156,000 
Unrealized (loss) gain on marketable securities related to Comstock   (20,000)   207,000 
Net (loss) gain on marketable securities  $(476,000)  $274,000 

 

For the nine months ended March 31,  2020   2019 
Realized (loss) gain on marketable securities, net  $(269,000)  $201,000 
Unrealized loss on marketable securities, net   (284,000)   (531,000)
Unrealized loss on marketable securities related to Comstock   (293,000)   (134,000)
Net loss on marketable securities  $(846,000)  $(464,000)

 

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.

 

 -14- 
   

 

Other investments, net consist of the following:

 

Type  March 31, 2020   June 30, 2019 
Private equity hedge fund, at cost  $169,000   $233,000 
Other investments   61,000    118,000 
   $230,000   $351,000 

 

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:

 

As of  3/31/2020   6/30/2019 
Assets:  Total - Level 1   Total - Level 1 
Investment in marketable securities:          
Basic materials  $262,000   $537,000 
REITs and real estate companies   258,000    816,000 
Consumer cyclical   3,000    636,000 
Energy   -    286,000 
Financial services   -    331,000 
Other   3,000    73,000 
   $526,000   $2,679,000 

 

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

 

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:

 

           Net loss for the nine months 
Assets  Level 3   March 31, 2020   ended March 31, 2020 
                
Other non-marketable investments  $230,000   $230,000   $(64,000)

 

           Net loss for the nine months 
Assets  Level 3   June 30, 2019   ended March 31, 2019 
                
Other non-marketable investments  $351,000   $351,000   $(61,000)

 

For the nine months ended March 31, 2020 and 2019, we received distribution from other non-marketable investments of $57,000 and $62,000, 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.

 

 -15- 
   

 

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  $5,962,000   $9,800,000 
Restricted cash   11,550,000    11,027,000 
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows  $17,512,000   $20,827,000 

 

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 three reportable segments, the operation of the Hotel (“Hotel Operations”), its multi-family residential properties (“Real Estate Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These three operating segments, as presented in the 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. Segment income (loss) from Hotel operations consists of the operation of the Hotel and operation of the garage. Segment income (loss) from real estate operations consists of the operation of the rental properties. Segment (loss) gain from investments consists of net investment gain (loss), dividend and interest income and investment related expenses.

 

As of and for the three months  Hotel   Real Estate   Investment         
ended March 31, 2020  Operations   Operations   Transactions   Corporate   Total 
Revenues  $11,259,000   $79,000   $-   $-   $11,338,000 
Segment operating expenses   (10,060,000)   (53,000)   -    (440,000)   (10,553,000)
Segment income (loss)   1,199,000    26,000    -    (440,000)   785,000 
Interest expense - mortgage and related party   (1,793,000)   (28,000)   -    -    (1,821,000)
Depreciation and amortization expense   (571,000)   (27,000)   -    -    (598,000)
Loss from investments   -    -    (542,000)   -    (542,000)
Income tax benefit   -    -    -    582,000    582,000 
Net income (loss)  $(1,165,000)  $(29,000)  $(542,000)  $142,000   $(1,594,000)
Total assets  $54,284,000   $4,786,000   $756,000   $7,534,000   $67,360,000 

 

For the three months  Hotel   Real Estate   Investment         
ended March 31, 2019  Operations   Operations   Transactions   Corporate   Total 
Revenues  $15,469,000   $81,000   $-   $-   $15,550,000 
Segment operating expenses   (11,378,000)   (52,000)   -    (364,000)   (11,794,000)
Segment income (loss)   4,091,000    29,000    -    (364,000)   3,756,000 
Interest expense - mortgage and related party   (1,941,000)   (26,000)   -    -    (1,967,000)
Loss on disposal of assets   (398,000)   -    -    -    (398,000)
Depreciation and amortization expense   (585,000)   (28,000)   -    -    (613,000)
Gain from investments   -    -    248,000    -    248,000 
Income tax expense   -    -    -    (280,000)   (280,000)
Net income (loss)  $1,167,000   $(25,000)  $248,000   $(644,000)  $746,000 

 

As of and for the nine months  Hotel   Real Estate   Investment         
ended March 31, 2020  Operations   Operations   Transactions   Corporate   Total 
Revenues  $41,589,000   $237,000   $-   $-   $41,826,000 
Segment operating expenses   (33,138,000)   (135,000)   -    (1,050,000)   (34,323,000)
Segment income (loss)   8,451,000    102,000    -    (1,050,000)   7,503,000 
Interest expense - mortgage and related party   (5,541,000)   (72,000)   -    -    (5,613,000)
Depreciation and amortization expense   (1,725,000)   (82,000)   -    -    (1,807,000)
Loss from investments   -    -    (943,000)   -    (943,000)
Income tax benefit   -    -    -    244,000    244,000 
Net income (loss)  $1,185,000   $(52,000)  $(943,000)  $(806,000)  $(616,000)
Total assets  $54,284,000   $4,786,000   $756,000   $7,534,000   $67,360,000 

 

As of and for the nine months  Hotel   Real Estate   Investment         
ended March 31, 2019  Operations   Operations   Transactions   Corporate   Total 
Revenues  $45,276,000   $242,000   $-   $-   $45,518,000 
Segment operating expenses   (33,424,000)   (170,000)   -    (843,000)   (34,437,000)
Segment income (loss)   11,852,000    72,000    -    (843,000)   11,081,000 
Interest expense - mortgage and related party   (5,733,000)   (204,000)   -    -    (5,937,000)
Loss on disposal of assets   (398,000)   -    -    -    (398,000)
Depreciation and amortization expense   (1,820,000)   (82,000)   -    -    (1,902,000)
Loss from investments   -    -    (632,000)   -    (632,000)
Income tax expense   -    -    -    (769,000)   (769,000)
Net income (loss)  $3,901,000   $(214,000)  $(632,000)  $(1,612,000)  $1,443,000 

 

 -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