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, 2021. The June 30, 2021 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,
2021.
The
results of operations for the three months ended September 30, 2021 are not necessarily indicative of results to be expected for the
full fiscal year ending June 30, 2022.
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”). As of September 30, 2021, Portsmouth
completed the purchase of 100% of the limited partnership interest of Justice and is in the process of dissolving the partnership. The
financial statements of Justice are consolidated with those of the Company.
As
of September 30, 2021, the InterGroup Corporation (“InterGroup”), a public company, owns approximately 74.9% of the outstanding
common shares of Portsmouth. As of September 30, 2021, the Company’s Chairman of the Board and Chief Executive Officer, John Winfield,
owns approximately 2.5% of the outstanding common shares of the Company. Mr. Winfield also serves as the President, Chairman of the Board
and Chief Executive Officer of InterGroup.
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 combined company
has been positioned under the Aimbridge Hospitality (“Aimbridge”) 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 was not taxed on its non-controlling interest
in the Hotel. Effective July 15, 2021, the Company became the owner of 100% of Justice and will include all of the Hotel’s income
and expense accounts into its income taxes calculations. The income tax benefit during the three months ended September 30, 2021 and
2020 represent the income tax effect on the Company’s pretax loss which includes its share in the net loss of the Hotel accordingly.
Recently
Issued and Adopted Accounting Pronouncements
None.
NOTE
2 - LIQUIDITY
Historically,
our cash flows have been primarily generated from our Hotel operations. However, the responses by federal, state, and local civil authorities
to the COVID-19 pandemic has had a material detrimental impact on our liquidity. For the three months ended September 30, 2021 and 2020,
our net cash flow used in operations was $43,000 and $3,665,000, respectively. We have taken several steps to preserve capital and increase
liquidity at our Hotel, including implementing strict cost management measures to eliminate non-essential expenses, postponing major
capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets.
The
Company had cash and cash equivalents of $1,782,000 and $2,310,000 as of September 30, 2021 and June 30, 2021, respectively. The Company
had marketable securities, net of margin due to securities brokers, of $1,281,000 and $1,821,000 as of September 30, 2021 and June 30,
2021, respectively. These marketable securities are short-term investments and liquid in nature.
On
December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup
as needed up to $10,000,000. During the three months ending September 30, 2021, InterGroup advanced $1,500,000 to Justice per the aforementioned
loan modification agreement, bringing the total amount due to InterGroup to $8,150,000 at September 30, 2021. The Company could amend
its by-laws and increase the number of authorized shares in order to issue additional shares to raise capital in the public markets if
needed. On September 7, 2021, the Board of InterGroup passed resolution to provide funding to Portsmouth for the working capital of the
Hotel up to $16,000,000 if necessary.
In
order to increase its liquidity position and to take advantage of the favorable interest rate environment, InterGroup refinanced its
151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, InterGroup
refinanced one of its California properties and generated net proceeds of $1,144,000. During the fiscal year ended June 30, 2021, InterGroup
completed refinancing on six of its California properties and generated net proceeds of $6,762,000. During the three months ending September
30, 2021, InterGroup refinanced four of its California properties’ existing mortgages and obtained a mortgage note payable on one
of its California properties, generating net proceeds totaling $3,161,000 as a result. InterGroup is currently evaluating other refinancing
opportunities and it could refinance additional multifamily properties should the need arise, or should management consider the interest
rate environment favorable. InterGroup has an uncollateralized $5,000,000 revolving line of credit from CIBC Bank USA (“CIBC”)
and the entire $5,000,000 is available to be drawn down as of September 30, 2021 should additional liquidity be necessary.
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). Justice
received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice used the proceeds from
the SBA Loan for payroll costs and other qualified expenses. The SBA Loan was scheduled to mature on April 9, 2022 with 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. On June 10, 2021, the SBA Loan was forgiven in full.
On
February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the
SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice had used all proceeds from the Second
SBA Loan primarily for payroll costs. The Second SBA Loan is scheduled to mature on February 3, 2026 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.
All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness
amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered
period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of
the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of
the principal and accrued interest will be due at maturity. Justice submitted its application for full loan forgiveness on September
3, 2021.
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.
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
and low RevPAR 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, 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 September 30, 2021, the Company’s material financial obligations which also including
interest payments:
Schedule
of Financial Obligations Including Interest Payments
|
|
|
|
|
9
Months
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
Total
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
2026
|
|
|
Thereafter
|
|
Mortgage
notes payable
|
|
$
|
110,355,000
|
|
|
$
|
1,242,000
|
|
|
$
|
1,721,000
|
|
|
$
|
107,392,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
PPP
and other notes payable
|
|
|
2,544,000
|
|
|
|
361,000
|
|
|
|
183,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
-
|
|
Related
party notes payable
|
|
|
12,097,000
|
|
|
|
425,000
|
|
|
|
8,717,000
|
|
|
|
567,000
|
|
|
|
567,000
|
|
|
|
567,000
|
|
|
|
1,254,000
|
|
Interest
|
|
|
15,063,000
|
|
|
|
5,431,000
|
|
|
|
6,180,000
|
|
|
|
3,452,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
140,059,000
|
|
|
$
|
7,459,000
|
|
|
$
|
16,801,000
|
|
|
$
|
111,411,000
|
|
|
$
|
567,000
|
|
|
$
|
2,567,000
|
|
|
$
|
1,254,000
|
|
NOTE
3 – REVENUE
The
following table present our revenues disaggregated by revenue streams.
Schedule
of Revenue Disaggregation by Revenue Streams
For
the three months ended September 30,
|
|
2021
|
|
|
2020
|
|
Hotel
revenues:
|
|
|
|
|
|
|
|
|
Hotel
rooms
|
|
$
|
5,562,000
|
|
|
$
|
2,890,000
|
|
Food
and beverage
|
|
|
266,000
|
|
|
|
37,000
|
|
Garage
|
|
|
907,000
|
|
|
|
470,000
|
|
Other
operating departments
|
|
|
70,000
|
|
|
|
28,000
|
|
Total
hotel revenue
|
|
$
|
6,805,000
|
|
|
$
|
3,425,000
|
|
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.
Contract
assets and liabilities
We
do not have any material contract assets as of September 30, 2021 and June 30, 2021, 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 increased to $399,000 as of
September 30, 2021, from $161,000 as of June 30, 2021. The increase for the three months ended September 30, 2021 was primarily driven
by $238,000 of advance deposits received for future reservations.
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
4 – INVESTMENT IN HOTEL, NET
Investment
in hotel consisted of the following as of:
Schedule
of Investment in Hotel, Net
|
|
|
|
|
Accumulated
|
|
|
Net
Book
|
|
September
30, 2021
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,124,000
|
|
|
$
|
-
|
|
|
$
|
1,124,000
|
|
Finance
lease ROU assets
|
|
|
1,805,000
|
|
|
|
(685,000
|
)
|
|
|
1,120,000
|
|
Furniture
and equipment
|
|
|
31,254,000
|
|
|
|
(28,087,000
|
)
|
|
|
3,167,000
|
|
Building
and improvements
|
|
|
56,196,000
|
|
|
|
(30,382,000
|
)
|
|
|
25,814,000
|
|
Investment
in Hotel, net
|
|
$
|
90,379,000
|
|
|
$
|
(59,154,000
|
)
|
|
$
|
31,225,000
|
|
|
|
|
|
|
Accumulated
|
|
|
Net
Book
|
|
June
30, 2021
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,124,000
|
|
|
$
|
-
|
|
|
$
|
1,124,000
|
|
Finance
lease ROU assets
|
|
|
1,805,000
|
|
|
|
(606,000
|
)
|
|
|
1,199,000
|
|
Furniture
and equipment
|
|
|
31,014,000
|
|
|
|
(27,956,000
|
)
|
|
|
3,058,000
|
|
Building
and improvements
|
|
|
56,194,000
|
|
|
|
(30,062,000
|
)
|
|
|
26,132,000
|
|
Investment
in Hotel, net
|
|
$
|
90,137,000
|
|
|
$
|
(58,624,000
|
)
|
|
$
|
31,513,000
|
|
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 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.
As
of September 30, 2021, and June 30, 2021, all 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:
Schedule
of Changes in Unrealized Gains and Losses on Investments
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Net
|
|
|
|
|
Investment
|
|
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
4,365,000
|
|
|
$
|
216,000
|
|
|
$
|
(2,076,000
|
)
|
|
$
|
(1,860,000
|
)
|
|
$
|
2,505,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
4,987,000
|
|
|
$
|
438,000
|
|
|
$
|
(1,889,000
|
)
|
|
$
|
(1,451,000
|
)
|
|
$
|
3,536,000
|
|
As
of September 30, 2021, and June 30, 2021, approximately 19% of the investment marketable
securities balance above is comprised of the common stock of Comstock Mining, Inc. (“Comstock” - NYSE AMERICAN: LODE), respectively.
As
of September 30, 2021, and June 30, 2021, the Company had $1,958,000 and $1,873,000, respectively, of unrealized losses related to securities
held for over one year; of which $1,947,000 and $1,789,000 are related to its investment in Comstock, respectively.
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 months ended September 30, 2021 and 2020, respectively:
Schedule of Net Loss on Marketable Securities
For
the three months ended September 30,
|
|
2021
|
|
|
2020
|
|
Realized
loss on marketable securities, net
|
|
$
|
(5,000
|
)
|
|
$
|
(11,000
|
)
|
Realized
loss on marketable securities related to LODE
|
|
|
(40,000
|
)
|
|
|
-
|
|
Unrealized
gain (loss) on marketable securities, net
|
|
|
(263,000
|
)
|
|
|
22,000
|
|
Unrealized
gain (loss) on marketable securities related to LODE
|
|
|
(137,000
|
)
|
|
|
46,000
|
|
Net
gain (loss) on marketable securities
|
|
$
|
(445,000
|
)
|
|
$
|
57,000
|
|
NOTE
6 - 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:
Schedule
of Fair Value, Assets Measured on Recurring Basis
As
of
|
|
September
30, 2021
|
|
|
June
30, 2021
|
|
|
|
Total
- Level 1
|
|
|
Total
- Level 1
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment
in marketable securities:
|
|
|
|
|
|
|
|
|
Communication
services
|
|
$
|
1,177,000
|
|
|
$
|
1,334,000
|
|
Basic
materials
|
|
|
509,000
|
|
|
|
720,000
|
|
REITs
and real estate companies
|
|
|
412,000
|
|
|
|
438,000
|
|
Industrials
|
|
|
210,000
|
|
|
|
653,000
|
|
Energy
|
|
|
187,000
|
|
|
|
250,000
|
|
Healthcare
|
|
|
10,000
|
|
|
|
141,000
|
|
|
|
$
|
2,505,000
|
|
|
$
|
3,536,000
|
|
The
fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance
sheet date.
NOTE 7 – 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:
Schedule of Cash, Cash Equivalents and Restricted Cash
As
of
|
|
September
30, 2021
|
|
|
June
30, 2021
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,782,000
|
|
|
$
|
2,310,000
|
|
Restricted
cash
|
|
|
7,063,000
|
|
|
|
6,222,000
|
|
Total
cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
|
|
$
|
8,845,000
|
|
|
$
|
8,532,000
|
|
Restricted
cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for
the Hotel.
NOTE
8 - 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 months ended September 30, 2021 and 2020, respectively. Operating (loss) 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.
Schedule of Segment Reporting Information, by Segment
As
of and for the three months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended
September 30, 2021
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
6,805,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,805,000
|
|
Segment
operating expenses
|
|
|
(6,333,000
|
)
|
|
|
-
|
|
|
|
(328,000
|
)
|
|
|
(6,661,000
|
)
|
Segment
income (loss)
|
|
|
472,000
|
|
|
|
-
|
|
|
|
(328,000
|
)
|
|
|
144,000
|
|
Interest
expense - mortgage
|
|
|
(1,661,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,661,000
|
)
|
Interest
expense - related party
|
|
|
(237,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(237,000
|
)
|
Depreciation
and amortization expense
|
|
|
(529,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(529,000
|
)
|
Loss
from investments
|
|
|
-
|
|
|
|
(467,000
|
)
|
|
|
-
|
|
|
|
(467,000
|
)
|
Income
tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
775,000
|
|
|
|
775,000
|
|
Net
loss
|
|
$
|
(1,955,000
|
)
|
|
$
|
(467,000
|
)
|
|
$
|
447,000
|
|
|
$
|
(1,975,000
|
)
|
Total
assets
|
|
$
|
40,704,000
|
|
|
$
|
2,525,000
|
|
|
$
|
9,020,000
|
|
|
$
|
52,249,000
|
|
For
the three months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended
September 30, 2020
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
3,425,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,425,000
|
|
Segment
operating expenses
|
|
|
(5,033,000
|
)
|
|
|
-
|
|
|
|
(176,000
|
)
|
|
|
(5,209,000
|
)
|
Segment
loss
|
|
|
(1,608,000
|
)
|
|
|
-
|
|
|
|
(176,000
|
)
|
|
|
(1,784,000
|
)
|
Interest
expense - mortgage
|
|
|
(1,700,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,700,000
|
)
|
Interest
expense - related party
|
|
|
(91,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(91,000
|
)
|
Depreciation
and amortization expense
|
|
|
(530,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(530,000
|
)
|
Income
from investments
|
|
|
-
|
|
|
|
19,000
|
|
|
|
-
|
|
|
|
19,000
|
|
Income
tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
1,071,000
|
|
|
|
1,071,000
|
|
Net
income (loss)
|
|
$
|
(3,929,000
|
)
|
|
$
|
19,000
|
|
|
$
|
895,000
|
|
|
$
|
(3,015,000
|
)
|
NOTE
9 - RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The
following summarizes the balances of related party and other notes payable as of September 30, 2021 and June 30, 2021, respectively.
Schedule of Related Party and Other Notes Payable
As
of
|
|
September
30, 2021
|
|
|
June 30,
2021
|
|
Note
payable - InterGroup
|
|
$
|
8,112,000
|
|
|
$
|
6,650,000
|
|
Note
payable - Hilton
|
|
|
2,613,000
|
|
|
|
2,692,000
|
|
Note
payable - Interstate
|
|
|
1,333,000
|
|
|
|
1,396,000
|
|
SBA
Loan - Justice
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Total
related party and other notes payable
|
|
$
|
14,058,000
|
|
|
$
|
12,738,000
|
|
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 31, 2022. On December 16, 2020, Justice and InterGroup entered into a loan modification
agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000. As of September 30, 2021 and June 30,
2021, the balance of the loan was $8,150,000 and $6,650,000, net of loan amortization costs of $37,500 and zero, respectively.
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 anniversary of the takeover date. During the first quarter of fiscal year 2021, the Hotel obtained
approval from Interstate to use the key money for hotel operations and the funds were exhausted by December 31, 2020. Unamortized portion
of the key money is included in the related party notes payable in the condensed consolidated balance sheets.
On
February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the
SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice had used all proceeds from the Second
SBA Loan primarily for payroll costs. The Second SBA Loan is scheduled to mature on February 3, 2026 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.
All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness
amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered
period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of
the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of
the principal and accrued interest will be due at maturity. Justice submitted its application for full loan forgiveness on September
3, 2021.
As
of September 30, 2021, the Company had finance lease obligations outstanding of $544,000. 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 September
30, 2021 are as follows:
Schedule of Minimum Future Lease Payments for Assets
For
the year ending June 30,
|
|
|
|
|
|
|
|
2022
|
|
$
|
378,000
|
|
2023
|
|
|
188,000
|
|
Total
minimum lease payments
|
|
|
566,000
|
|
Less
interest on finance lease
|
|
|
(22,000
|
)
|
Present
value of future minimum lease payments
|
|
$
|
544,000
|
|
Future
minimum principal payments for all related party and other financing transactions are as follows:
Schedule of Future Minimum Principal Payments
For
the year ending June 30,
|
|
|
|
2022
|
|
$
|
786,000
|
|
2023
|
|
|
8,900,000
|
|
2024
|
|
|
567,000
|
|
2025
|
|
|
567,000
|
|
2026
|
|
|
2,567,000
|
|
Thereafter
|
|
|
1,254,000
|
|
Long-term
Debt
|
|
$
|
14,641,000
|
|
As
of September 30, 2021, and June 30, 2021, the Company had accounts payable to related party of $3,396,000 and $3,193,000, respectively.
These are amounts due to InterGroup and represent certain shared costs and expenses, primarily general and administrative expenses, rent,
insurance and other expenses.
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 $90,355,000 and $90,745,000 as of September 30, 2021 and June 30, 2021, 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.
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 September 30, 2021, 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.
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.
John
V. Winfield serves as Chief Executive Officer and Chairman of the Company and InterGroup. Effective June 2016, Mr. Winfield became the
Managing Director of Justice. Depending on certain market conditions and various risk factors, the Chief Executive Officer 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 InterGroup, at risk in connection with investment decisions made on behalf
of the Company.
NOTE
10 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE
The
following summarizes the balances of accounts payable and other liabilities -Justice as of September 30, 2021 and June 30, 2021, respectively.
Schedule of Accounts Payable and Other Liabilities - Justice
As
of
|
|
September
30, 2021
|
|
|
June 30,
2021
|
|
|
|
|
|
|
|
|
Trade
payable
|
|
$
|
3,497,000
|
|
|
$
|
2,809,000
|
|
Advance
deposits
|
|
|
399,000
|
|
|
|
161,000
|
|
Property
tax payable
|
|
|
509,000
|
|
|
|
-
|
|
Payroll
and related accruals
|
|
|
2,549,000
|
|
|
|
2,345,000
|
|
Mortgage
interest payable
|
|
|
518,000
|
|
|
|
582,000
|
|
Withholding
and other taxes payable
|
|
|
649,000
|
|
|
|
885,000
|
|
Security
deposit
|
|
|
52,000
|
|
|
|
52,000
|
|
Finance
leases
|
|
|
544,000
|
|
|
|
664,000
|
|
Other
payables
|
|
|
687,000
|
|
|
|
606,000
|
|
Total
accounts payable and other liabilities - Justice
|
|
$
|
9,404,000
|
|
|
$
|
8,104,000
|
|
NOTE
11 – SUBSEQUENT EVENTS
None.