UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 20172023
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to_________
Commission File Number 0-4057
PORTSMOUTH SQUARE, INC.
(Exact name of registrant as specified in its charter)
| 94-1674111 | ||
(State or other jurisdiction of | (I.R.S. Employer | |
| Incorporation or organization) | Identification No.) |
1100 Glendon Avenue, PH1, 1516 S. Bundy Dr., Suite 200, Los Angeles, California 9002490025
(Address of principal executive offices)(Zip (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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post 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 or an emerging growth company.
| Large accelerated filer | Accelerated filer | ||
| Non-accelerated filer | Smaller reporting company | ||
| 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 ☒ No
¨ Yesx No
The number of shares outstanding of registrant’s Common Stock, as of January 30, 2018February 14, 2024 was 734,183..
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| NONE | NONE | NONE |
TABLE OF CONTENTS
| -2- |
FINANCIAL INFORMATION
Item 1 – Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | December 31, 2023 | |||||||
| (unaudited) | June 30, 2023 | |||||||
| ASSETS | ||||||||
| Investment in hotel, net | $ | 34,638,000 | $ | 34,381,000 | ||||
| Investment in marketable securities | 325,000 | 359,000 | ||||||
| Cash and cash equivalents | 3,668,000 | 2,295,000 | ||||||
| Restricted cash | 800,000 | 2,911,000 | ||||||
| Accounts receivable, net | 447,000 | 419,000 | ||||||
| Other assets, net | 979,000 | 735,000 | ||||||
| Total assets | $ | 40,857,000 | $ | 41,100,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities - Hotel | $ | 11,884,000 | $ | 11,615,000 | ||||
| Accounts payable and other liabilities | 119,000 | 66,000 | ||||||
| Accounts payable and other liabilities | 119,000 | 66,000 | ||||||
| Accounts payable to related party | 9,241,000 | 7,283,000 | ||||||
| Related party notes payable | 18,200,000 | 15,700,000 | ||||||
| Other notes payable | 2,671,000 | 2,954,000 | ||||||
| Mortgage notes payable, net | 106,503,000 | 107,117,000 | ||||||
| Total liabilities | 148,618,000 | 144,735,000 | ||||||
| Shareholders’ deficit: | ||||||||
| Common stock, no par value: Authorized shares - ; shares issued and outstanding shares as of December 31, 2023 and June 30, 2023, respectively | 2,092,000 | 2,092,000 | ||||||
| Accumulated deficit | (109,853,000 | ) | (105,727,000 | ) | ||||
| Total shareholders’ deficit | (107,761,000 | ) | (103,635,000 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 40,857,000 | $ | 41,100,000 | ||||
| As of | December 31, 2017 | June 30, 2017 | ||||||
| ASSETS | ||||||||
| Investment in hotel, net | $ | 34,040,000 | $ | 35,213,000 | ||||
| Investment in real estate, net | 973,000 | 973,000 | ||||||
| Investment in marketable securities | 2,779,000 | 3,861,000 | ||||||
| Other investments, net | 305,000 | 389,000 | ||||||
| Cash and cash equivalents | 1,454,000 | 2,049,000 | ||||||
| Restricted cash | 5,467,000 | 5,111,000 | ||||||
| Accounts receivable - hotel, net | 1,232,000 | 1,436,000 | ||||||
| Other assets, net | 793,000 | 867,000 | ||||||
| Deferred tax asset | 7,763,000 | 10,927,000 | ||||||
| Total assets | $ | 54,806,000 | $ | 60,826,000 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities | $ | 13,494,000 | $ | 15,085,000 | ||||
| Due to securities broker | 770,000 | 592,000 | ||||||
| Obligations for securities sold | 535,000 | 867,000 | ||||||
| Related party and other notes payable | 10,050,000 | 10,209,000 | ||||||
| Mortgage notes payable - hotel, net | 115,038,000 | 115,615,000 | ||||||
| Total liabilities | 139,887,000 | 142,368,000 | ||||||
| Shareholders' deficit: | ||||||||
| Common stock, no par value: Authorized shares - 750,000; 734,183 shares issued and outstanding shares as of December 31, 2017 and June 30, 2017 | 2,092,000 | 2,092,000 | ||||||
| Accumulated deficit | (80,711,000 | ) | (77,120,000 | ) | ||||
| Total Portsmouth shareholders' deficit | (78,619,000 | ) | (75,028,000 | ) | ||||
| Noncontrolling interest | (6,462,000 | ) | (6,514,000 | ) | ||||
| Total shareholders' deficit | (85,081,000 | ) | (81,542,000 | ) | ||||
| Total liabilities and shareholders' deficit | $ | 54,806,000 | $ | 60,826,000 | ||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -3- |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)(Unaudited)
| For the three months ended December 31, | 2017 | 2016 | 2023 | 2022 | ||||||||||||
| Revenue - Hotel | $ | 13,187,000 | $ | 12,837,000 | $ | 10,225,000 | $ | 9,892,000 | ||||||||
| Costs and operating expenses | ||||||||||||||||
| Hotel operating expenses | (10,743,000 | ) | (9,926,000 | ) | (9,405,000 | ) | (8,726,000 | ) | ||||||||
| Hotel depreciation and amortization expense | (634,000 | ) | (760,000 | ) | (841,000 | ) | (635,000 | ) | ||||||||
| General and administrative expense | (164,000 | ) | (144,000 | ) | (434,000 | ) | (517,000 | ) | ||||||||
| Total costs and operating expenses | (11,541,000 | ) | (10,830,000 | ) | (10,680,000 | ) | (9,878,000 | ) | ||||||||
| Income from operations | 1,646,000 | 2,007,000 | ||||||||||||||
| Income (Loss) from operations | (455,000 | ) | 14,000 | |||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense - mortgage | (1,980,000 | ) | (1,909,000 | ) | (1,599,000 | ) | (1,655,000 | ) | ||||||||
| Net loss on marketable securities | (597,000 | ) | (997,000 | ) | ||||||||||||
| Impairment loss on other investments | (72,000 | ) | (6,000 | ) | ||||||||||||
| Interest expense - related party | (525,000 | ) | (429,000 | ) | ||||||||||||
| Net gain on marketable securities | 54,000 | 107,000 | ||||||||||||||
| Dividend and interest income | 5,000 | 10,000 | 3,000 | 6,000 | ||||||||||||
| Trading and margin interest expense | (46,000 | ) | (44,000 | ) | (44,000 | ) | (81,000 | ) | ||||||||
| Total other expense, net | (2,690,000 | ) | (2,946,000 | ) | (2,111,000 | ) | (2,052,000 | ) | ||||||||
| Loss before income taxes | (1,044,000 | ) | (939,000 | ) | (2,566,000 | ) | (2,038,000 | ) | ||||||||
| Income tax (expense) benefit | (2,902,000 | ) | 377,000 | |||||||||||||
| Income tax benefit | - | 718,000 | ||||||||||||||
| Net loss | (3,946,000 | ) | (562,000 | ) | ||||||||||||
| Less: Net (income) loss attributable to the noncontrolling interest | 21,000 | (9,000 | ) | |||||||||||||
| Net Loss | $ | (2,566,000 | ) | $ | (1,320,000 | ) | ||||||||||
| Net loss attributable to Portsmouth | $ | (3,925,000 | ) | $ | (571,000 | ) | ||||||||||
| Basic and diluted net loss per share attributable to Portsmouth | $ | (5.35 | ) | $ | (0.78 | ) | ||||||||||
| Basic and diluted net loss per share | $ | ) | $ | ) | ||||||||||||
| Weighted average number of common shares outstanding - basic and diluted | 734,183 | 734,183 | ||||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -4- |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)(Unaudited)
| For the six months ended December 31, | 2017 | 2016 | 2023 | 2022 | ||||||||||||
| Revenue - Hotel | $ | 27,624,000 | $ | 27,442,000 | $ | 21,318,000 | $ | 22,202,000 | ||||||||
| Costs and operating expenses | ||||||||||||||||
| Hotel operating expenses | (21,332,000 | ) | (20,182,000 | ) | (18,686,000 | ) | (18,032,000 | ) | ||||||||
| Hotel depreciation and amortization expense | (1,283,000 | ) | (1,424,000 | ) | (1,662,000 | ) | (1,262,000 | ) | ||||||||
| General and administrative expense | (362,000 | ) | (298,000 | ) | (753,000 | ) | (826,000 | ) | ||||||||
| Total costs and operating expenses | (22,977,000 | ) | (21,904,000 | ) | (21,101,000 | ) | (20,120,000 | ) | ||||||||
| Income from operations | 4,647,000 | 5,538,000 | 217,000 | 2,082,000 | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense - mortgage | (3,967,000 | ) | (3,897,000 | ) | (3,205,000 | ) | (3,287,000 | ) | ||||||||
| Net loss on marketable securities | (901,000 | ) | (735,000 | ) | ||||||||||||
| Impairment loss on other investments | (72,000 | ) | (11,000 | ) | ||||||||||||
| Interest expense - related party | (1,027,000 | ) | (859,000 | ) | ||||||||||||
| Net (loss) gain on marketable securities | (34,000 | ) | 97,000 | |||||||||||||
| Dividend and interest income | 16,000 | 20,000 | 6,000 | 32,000 | ||||||||||||
| Trading and margin interest expense | (98,000 | ) | (77,000 | ) | (82,000 | ) | (115,000 | ) | ||||||||
| Total other expense, net | (5,022,000 | ) | (4,700,000 | ) | (4,342,000 | ) | (4,132,000 | ) | ||||||||
| Income (loss) before income taxes | (375,000 | ) | 838,000 | |||||||||||||
| Income tax expense | (3,164,000 | ) | (328,000 | ) | ||||||||||||
| Loss before income taxes | (4,125,000 | ) | (2,050,000 | ) | ||||||||||||
| Income tax (expense) benefit | (1,000 | ) | 721,000 | |||||||||||||
| Net (loss) income | (3,539,000 | ) | 510,000 | |||||||||||||
| Less: Net income attributable to the noncontrolling interest | (52,000 | ) | (116,000 | ) | ||||||||||||
| Net Loss | $ | (4,126,000 | ) | $ | (1,329,000 | ) | ||||||||||
| Net income (loss) attributable to Portsmouth | $ | (3,591,000 | ) | $ | 394,000 | |||||||||||
| Basic and diluted net loss per share | $ | ) | $ | ) | ||||||||||||
| Basic and diluted net income (loss) per share attributable to Portsmouth | $ | (4.89 | ) | $ | 0.54 | |||||||||||
| Weighted average number of common shares outstanding - basic and diluted | 734,183 | 734,183 | ||||||||||||||
| Weighted average number of common shares outstanding-basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -5- |
CONDENDSEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ DEFICIT
(UNAUDITED)(Unaudited)
| For the six months ended December 31, | 2017 | 2016 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (3,539,000 | ) | $ | 510,000 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Net unrealized loss on marketable securities | 899,000 | 773,000 | ||||||
| Impairment loss on other investments | 72,000 | 11,000 | ||||||
| Deferred tax asset | 3,164,000 | 328,000 | ||||||
| Depreciation and amortization | 1,339,000 | 1,424,000 | ||||||
| Changes in assets and liabilities: | ||||||||
| Investment in marketable securities | 183,000 | (538,000 | ) | |||||
| Accounts receivable | 204,000 | 2,337,000 | ||||||
| Other assets | 74,000 | 194,000 | ||||||
| Accounts payable and other liabilities | (1,591,000 | ) | (3,053,000 | ) | ||||
| Due to securities broker | 178,000 | 398,000 | ||||||
| Obligations for securities sold | (332,000 | ) | 109,000 | |||||
| Net cash provided by operating activities | 651,000 | 2,493,000 | ||||||
| Cash flows from investing activities: | ||||||||
| Payments for hotel furniture, equipment and building improvements | (110,000 | ) | (318,000 | ) | ||||
| Proceeds from other investments | 12,000 | - | ||||||
| Net cash used in investing activities | (98,000 | ) | (318,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Restricted cash - payments to mortgage impounds, net | (356,000 | ) | (913,000 | ) | ||||
| Net payments to related party and other notes payable | (792,000 | ) | (2,326,000 | ) | ||||
| Net cash used in financing activities | (1,148,000 | ) | (3,239,000 | ) | ||||
| Net decrease in cash and cash equivalents | (595,000 | ) | (1,064,000 | ) | ||||
| Cash and cash equivalents at the beginning of the period | 2,049,000 | 3,378,000 | ||||||
| Cash and cash equivalents at the end of the period | $ | 1,454,000 | $ | 2,314,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 4,009,000 | $ | 3,922,000 | ||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Total | ||||||||||||||||
| Common Stock | Accumulated | Shareholders’ | ||||||||||||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Balance at | ||||||||||||||||
| July 1, 2023 | 734,187 | $ | 2,092,000 | $ | (105,727,000 | ) | $ | (103,635,000 | ) | |||||||
| Net loss | - | - | (1,560,000 | ) | (1,560,000 | ) | ||||||||||
| Balance at | ||||||||||||||||
| September 30, 2023 | 734,187 | 2,092,000 | (107,287,000 | ) | (105,195,000 | ) | ||||||||||
| Net loss | - | - | (2,566,000 | ) | (2,566,000 | ) | ||||||||||
| Balance at | ||||||||||||||||
| December 31, 2023 | 734,187 | $ | 2,092,000 | $ | (109,853,000 | ) | $ | (107,761,000 | ) | |||||||
| Total | ||||||||||||||||
| Common Stock | Accumulated | Shareholders’ | ||||||||||||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Balance at | ||||||||||||||||
| July 1, 2022 | 734,187 | $ | 2,092,000 | $ | (92,524,000 | ) | $ | (90,432,000 | ) | |||||||
| Net loss | - | - | (9,000 | ) | (9,000 | ) | ||||||||||
| Balance at | ||||||||||||||||
| September 30, 2022 | 734,187 | 2,092,000 | (92,533,000 | ) | (90,441,000 | ) | ||||||||||
| Balance | 734,187 | 2,092,000 | (92,533,000 | ) | (90,441,000 | ) | ||||||||||
| Net loss | - | - | (1,320,000 | ) | (1,320,000 | ) | ||||||||||
| Balance at | ||||||||||||||||
| December 31, 2022 | 734,187 | $ | 2,092,000 | $ | (93,853,000 | ) | $ | (91,761,000 | ) | |||||||
| Balance | 734,187 | $ | 2,092,000 | $ | (93,853,000 | ) | $ | (91,761,000 | ) | |||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -6- |
PORTSMOUTH SQUARE, INC.
CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the six months ended December 31, | 2023 | 2022 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (4,126,000 | ) | $ | (1,329,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Net unrealized loss (gain) on marketable securities | 34,000 | (234,000 | ) | |||||
| Depreciation and amortization | 1,662,000 | 1,262,000 | ||||||
| Amortization of loan costs | 122,000 | 122,000 | ||||||
| Amortization of other notes payable | (283,000 | ) | (283,000 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Investment in marketable securities | - | 473,000 | ||||||
| Accounts receivable | (28,000 | ) | 53,000 | |||||
| Other assets | (244,000 | ) | (946,000 | ) | ||||
| Accounts payable and other liabilities - Hotel | 269,000 | 1,617,000 | ||||||
| Accounts payable and other liabilities | 53,000 | (130,000 | ) | |||||
| Accounts payable related party | 1,958,000 | 501,000 | ||||||
| Due to securities broker | - | (130,000 | ) | |||||
| Net cash (used in) provided by operating activities | (583,000 | ) | 976,000 | |||||
| Cash flows from investing activities: | ||||||||
| Payments for hotel furniture, equipment and building improvements | (1,919,000 | ) | (2,682,000 | ) | ||||
| Net cash used in investing activities | (1,919,000 | ) | (2,682,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related party note payable | 2,500,000 | - | ||||||
| Payments of mortgage, finance leases and other notes payable | (736,000 | ) | (1,162,000 | ) | ||||
| Net cash provided by (used in) financing activities | 1,764,000 | (1,162,000 | ) | |||||
| Net decrease in cash, cash equivalents, and restricted cash | (738,000 | ) | (2,868,000 | ) | ||||
| Cash, cash equivalents, and restricted cash at the beginning of the period | 5,206,000 | 8,888,000 | ||||||
| Cash, cash equivalents, and restricted cash at the end of the period | $ | 4,468,000 | $ | 6,020,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 3,205,000 | $ | 3,288,000 | ||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
PORTSMOUTH SQUARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have been prepared by Portsmouth Square, Inc. (“Portsmouth” or the “Company”), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial statements of Portsmouth and the notes therein included in the Company'sCompany’s Annual Report on Form 10-K for the year ended June 30, 2017.2023. The June 30, 2017 Condensed Consolidated Balance SheetDecember 31, 2023 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, 2017.2023.
The unaudited condensed consolidated financial statements include the accounts of our wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended December 31, 20172023 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2018.2024.
Portsmouth’s primary business iswas conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”). Effective July 15, 2021, Portsmouth has a 93.1%completed the purchase of 100% of the limited partnership interest inof Justice and isthrough the sole general partner.acquisition of the remaining 0.7% non-controlling interest. Effective December 23, 2021, the Partnership was dissolved. The financial statements of Justice arewere consolidated with those of the Company.
As ofPrior to its dissolution effective December 31, 2017, Santa Fe Financial Corporation (“Santa Fe”), a public company, owns approximately 68.8% of the outstanding common shares of Portsmouth. Santa Fe is an 81.9%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a public company. InterGroup also directly owns approximately 13.4% of the common stock of Portsmouth.
23, 2021, Justice through its subsidiaries Justice Holdings Company, LLC (“Holdings”), Justice Operating Company, LLC (“Operating”), Justice Mezzanine Company, LLC (“Mezzanine”),owned and Kearny Street Parking, LLC (“Parking’) ownsoperated 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. Holdings,garage through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine and Parking are all wholly-owned subsidiariesCompany, LLC (“Mezzanine”). Mezzanine was a wholly owned subsidiary of the Partnership; Operating is a wholly-ownedwholly owned subsidiary of Mezzanine. Effective December 23, 2021, Portsmouth replaced Justice as the single member of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice,Portsmouth, 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).(“Hilton”) through January 31, 2030.
Justice had a management agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years, subject to the Partnership’s right to terminate at any time with or without cause. Effective January 2014, the management agreement with Prism was amended by the Partnership to change the nature of the services provided by Prism and the compensation payable to Prism, among other things. Prism’s management agreement was terminated upon its expiration date of February 3, 2017. Effective December 1, 2013, GMP Management, Inc. (“GMP”), a company owned by a Justice limited partner and a related party, also provided management services for the Partnership pursuant to a management services agreement, with a three-year term, subject to the Partnership’s right to terminate earlier for cause. In June 2016, GMP resigned. On February 1, 2017, JusticeOperating entered into a Hotelhotel management agreement (“HMA”) with Interstate Management Company, LLCAimbridge Hospitality (“Interstate”Aimbridge”) to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the HMAmanagement agreement is for an initial period of ten years commencing on the takeoverFebruary 3, 2017 date and automatically renewalsrenews for an additionalsuccessive one (1) year periods, not to exceed five years in the aggregate, subject to certain conditions. Theconditions. Under the terms of the HMA, also provides for Interstatebase management fee payable to advance a key moneyAimbridge shall be one and seven-tenths percent (1.70%) of total Hotel revenue. In addition to the base management fee, Aimbridge shall be entitled to an annual incentive fee for each fiscal year equal to ten percent (10%) of the Hotel for capital improvementsamount by which Gross Operating Profit in the amountcurrent fiscal year exceeds the previous fiscal year’s Gross Operating Profit.
As of $2,000,000 under certain termsDecember 31, 2023, The InterGroup Corporation (“InterGroup”), a public company, owns approximately 75.7% of the outstanding common shares of Portsmouth and conditions described in a separate key money agreement. The $2,000,000 is included in the restricted cashCompany’s Chairman of the Board and related partyChief Executive Officer, John V. 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 other notes payable balances inChief Executive Officer of InterGroup and owns approximately 68.6% of the condensed consolidated balance sheetsoutstanding common shares of InterGroup as of December 31, 2017 and June 30, 2017.2023.
| -8- |
The parking garage that is part of the Hotel property was managed by Ace Parking pursuant to a contract with the Partnership. The contract was terminated with an effective termination date of October 4, 2016. The Company began managing the parking garage in-house after the termination of Ace Parking. Effective February 3, 2017, Interstate took over the management of the parking garage along with the Hotel.
Due to Securities Broker
Various securities brokersThere have advanced fundsbeen no material changes 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 expenseCompany’s significant accounting policies during the three and six months ended December 31, 2017 and 2016 represents2023. Please refer to the income tax effectCompany’s Annual Report on Form 10-K for the Company’s pretax income which includes its share in the net incomeyear ended June 30, 2023 for a summary of the Hotel.significant accounting policies.
Financial ConditionRecently Issued and LiquidityAdopted Accounting Pronouncements
The Company’s cash flows are primarily generated from its Hotel operations. The Company also receives cash generated from the investment of its cash and marketable securities and other investments.
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. 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 thru January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period thru its maturity date of January 2024. As additional security for the mortgage loan, there is a limited guaranty executed by the Company in favor of 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 bears interest at 9.75% per annum and matures in January 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by the Company in favor of mezzanine lender.
Effective as of 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 a certain net worth and liquidity. As of December 31, 2017, InterGroup is2023, there was no material impact from the recent adoption of new accounting pronouncements, nor expected material impact from recently issued accounting pronouncements yet to be adopted, on the Company’s consolidated financial statements.
Going Concern
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in compliance with both requirements.the normal course of business. As discussed in Note 9 – Related Party and Other Financing Transactions, as of December 31, 2023, the outstanding balance consists of a senior mortgage loan and mezzanine loan totaling $106,503,000. Both loans matured on January 1, 2024, in addition, the Company has recurring losses and has an accumulated deficit of $109,853,000 which includes a $64,100,000 increase adjustment made in December 2013 as a result of the partnership redemption.
Despite an uncertain economy,Due to these factors and the Hotel has continueduncertainty around the Company’s ability to generate positive operating income. Whilesuccessfully refinance the debt service requirements related the loans may create some additional risk for the Company and its ability to generate cash flowson favorable terms in the future, management believes that cash flows from the operations of the Hotel and the garage will continuecurrent lending environment gives rise to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.
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.
Management believes that its cash, marketable securities, and the cash flows generated from those assets and from the partnership management fees, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.
Recently Issued Accounting Pronouncements and U.S. Tax Reform
In August 2014, the FASB issued ASU No. 2014-15,Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern that requires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern withinfor one year after the financial statement issuance date.
The Company has been exploring the possibility of refinancing its senior mortgage and mezzanine debt with potential lenders. Additionally, the Company has been in fluent communications with its current lenders since October 2023 exploring the possibility of loan modifications or extensions to the existing debt, however, the Company may be unable to access further financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. On January 4, 2024, the Company was made aware of a notice of default (the “Notice”) issued by its senior loan special servicer LNR Partners, LLC to Justice Operating Company, LLC which is the wholly owned subsidiary of Portsmouth Square, Inc. The Notice states that the lender has rights as a result of such defaults, including, but not limited to, acceleration of the loans, foreclosure on collateral and other rights and remedies under the loan documents and otherwise available under the law. During the entire life of the outstanding debt, the Company has made all mortgage payments timely as of the date of maturity and as of December 31, 2023, there were no delinquent amounts due to the senior or mezzanine lenders.
In 2018-2019 the Company completed major improvements to its Hotel, such as the installation of a state-of-the-art high-speed internet Cisco Meraki system and updated all ethernet wiring with Cat6A and added the best available fiber to each guest room and common areas, added 55” and 65” Smart 4-K Samsung Televisions to all rooms and common areas, installed a new window-washing system and equipment, updated all computers and servers, and others. During 2021 and first part of calendar 2022, we took advantage of the slow periods to make certain capital improvements including resurfacing half of the hotel bathtubs that needed repair, refreshed meeting space and lobby paint and vinyl, replaced all bed frames and socks, and completed the carpet and wall covering corridor installation. In November 2022, we began our guestroom renovation and had completed approximately 352 guestrooms as of December 31, 2023. Hotel improvements are ongoing to remain competitive in this tough market and we anticipate completing the guestroom renovations by the end of May 2024. Once the Company completes its full renovation, management anticipates its high occupancy to continue and its average daily rates to increase as it completes the renovation.
The financial statements are issued on both an interimdo not include any adjustments to the carrying amounts of assets, liabilities, and annual basis. Management is required to provide certain footnote disclosuresreported expenses that may be necessary if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s abilityCompany were unable to continue as a going concern. ASU No. 2014-15 becomes effective for annual periods beginning after December 15, 2016
| -9- |
NOTE 2 - LIQUIDITY
Historically, our cash flows have been primarily generated from our Hotel operations. However, the responses by federal, state, and for interim reporting periods thereafter. The Company’s adoption of this ASU did notlocal civil authorities to the COVID-19 pandemic continues to have a material detrimental impact on our liquidity. For the six months ended December 31, 2023, our net cash used in operating activities was $583,000. 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, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets. As the hospitality and travel environment continues to recover, we will continue to evaluate what services we bring back. During the six months ended December 31, 2023, the Company continued to make capital improvements to the Hotel in the amount of $1,919,000 and anticipates continuing its consolidated financial statements.guest room upgrade program during the remaining of fiscal year 2024.
The Company had cash and cash equivalents of $3,668,000 and $2,295,000 as of December 31, 2023 and June 30, 2023, respectively. The Company had restricted cash of $800,000 and $2,911,000 as of December 31, 2023 and June 30, 2023, respectively. The Company had marketable securities of $325,000 and $359,000 as of December 31, 2023 and June 30, 2023, respectively. These marketable securities are short-term investments and liquid in nature.
On JuneJuly 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, 2023. On December 16, 2016,2020, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifiesPartnership and InterGroup entered into a loan modification agreement which increased the impairment modelPartnership’s borrowing from InterGroup as needed up to utilize an expected loss methodology in place$10,000,000. Upon the dissolution of the currently used incurred loss methodology, which will resultPartnership in December 2021, Portsmouth assumed the Partnership’s note payable to InterGroup in the more timely recognitionamount of losses. ASU No. 2016-13$11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. In July 2023, the note maturity date was extended to July 31, 2025 and the borrowing amount available was increased to $20,000,000. As of June 30, 2023 the balance of the loan was $15,700,000 net of loan amortization costs of zero. The Company agreed to a 0.5% loan extension and modification fee payable to InterGroup. During the six months ended December 31, 2023, the Company borrowed an additional $2,500,000 to fund its hotel operations. As of December 31, 2023 the balance of the loan was $18,200,000 and the Company has not made any paid-downs to its note payable to InterGroup. The Company could amend its by-laws and increase the number of authorized shares to issue additional shares to raise capital in the public markets if needed.
The Company’s 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. The objectives of our cash management policy are to increase existing leverage levels and the availability of liquidity, while minimizing operational costs. However, there can be no guarantee that management will be effective for ussuccessful with its plan.
The following table provides a summary as of January 1, 2020. December 31, 2023, the Company’s material financial obligations which also including interest payments:
SCHEDULE OF FINANCIAL OBLIGATIONS INCLUDING INTEREST PAYMENTS
| 6 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | ||||||||||||||||||||||
| Mortgage notes payable | $ | 106,503,000 | $ | 106,503,000 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
| Hilton/Aimbridge other notes payable | 2,671,000 | 283,000 | 567,000 | 567,000 | 463,000 | 317,000 | 474,000 | |||||||||||||||||||||
| Related party notes payable | 18,200,000 | - | 18,200,000 | - | - | - | - | |||||||||||||||||||||
| Interest | 5,169,000 | 2,985,000 | 2,184,000 | - | - | - | - | |||||||||||||||||||||
| Total | $ | 132,543,000 | $ | 109,771,000 | $ | 20,951,000 | $ | 567,000 | $ | 463,000 | $ | 317,000 | $ | 474,000 | ||||||||||||||
| -10- |
NOTE 3 – REVENUE
The Companyfollowing table presents our revenues disaggregated by revenue streams.
SCHEDULE OF REVENUE DISAGGREGATION BY REVENUE STREAMS
| For the three months ended December 31, | 2023 | 2022 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 8,403,000 | $ | 8,250,000 | ||||
| Food and beverage | 972,000 | 625,000 | ||||||
| Garage | 708,000 | 717,000 | ||||||
| Other operating departments | 142,000 | 300,000 | ||||||
| Total hotel revenue | $ | 10,225,000 | $ | 9,892,000 | ||||
| For the six months ended December 31, | 2023 | 2022 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 17,964,000 | $ | 19,054,000 | ||||
| Food and beverage | 1,599,000 | 1,160,000 | ||||||
| Garage | 1,533,000 | 1,539,000 | ||||||
| Other operating departments | 222,000 | 449,000 | ||||||
| Total hotel revenue | $ | 21,318,000 | $ | 22,202,000 | ||||
Performance obligations
We identified the following performance obligations for which revenue is currently reviewingrecognized as the effect of ASU No. 2016-13.respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:
In May 2014,● Cancelable room reservations or ancillary services are typically satisfied as the FASB issued Accounting Standards Update No. 2014-09,Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)(ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The newhotel guest, which is generally when the room stay occurs.
● Non-cancelable 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 recognition standard will be effectiveprimarily 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 Companynature 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 first quarter of 2019, withguest cancels within the optionspecified time before any services are rendered. Refunds related to adopt it inservice are generally recognized as an adjustment to the first quarter of 2018. We currently anticipate adopting the new standard effective July 1, 2019. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognizedtransaction price at the date of initial application (the modified retrospective method). The Company currently anticipates adoptingtime the standard using the modified retrospective method. While the Company is still in the process of completing the analysis on the impact this guidance will have on the consolidated financial statementshotel stay occurs or services are rendered.
Contract assets and related disclosures, theliabilities
The Company does not expect the impact to be material.
Onhave any material contract assets as of December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts31, 2023 and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing corporate income tax by, among other things, lowering corporate income tax rates. As the Company has a June 30, fiscal year-end,2023, other than trade and other receivables, net on our condensed consolidated balance sheets. Our receivables are primarily the lower corporate income tax rateresult of contracts with customers, that were entered into within the past 12 months, which are reduced by a reserve for estimated credit losses that reflects our estimate of amounts that will not be phased in, resulting in a statutory federal rate of approximately 28% for our fiscal year endingcollected and amount to $0 and $1,000 at December 31, 2023 and June 30, 2018,2023, respectively.
| -11- |
The Company records contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and 21% for subsequent fiscal years.
The reductionother liabilities on our consolidated balance sheets and had a balance of $290,000 at July 1, 2023. During the corporate tax rate will cause us to reduce our deferred tax asset to the lower federal base rate of 21%. As a result, a provisional net charge of $3,313,000 was included in the income tax expense for the quartersix months ended December 31, 2017.2023 $203,000 was received in advance of guests and recorded as contract liabilities. The increase at December 31, 2023 was primarily driven by advance deposits received from customers for services to be performed after December 31, 2023. Contract liabilities at July 1, 2022 was $493,000. During the six months ended December 31, 2022, the entire $493,000 was recognized as revenues. Contract liabilities was $1,828,000 as of December 31, 2022.
The changes included in the Tax ActContract 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 broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impact. The Securities Exchange Commission has issued rules that would allow for a measurement period of up toless than one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018.year.
NOTE 24 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
SCHEDULE OF INVESTMENT IN HOTEL, NET
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| December 31, 2017 | Cost | Depreciation | Value | |||||||||||||||||||||
| December 31, 2023 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||||||||
| Finance lease ROU assets | 1,805,000 | (1,397,000 | ) | 408,000 | ||||||||||||||||||||
| Furniture and equipment | 27,896,000 | (25,297,000 | ) | 2,599,000 | 39,329,000 | (30,506,000 | ) | 8,823,000 | ||||||||||||||||
| Building and improvements | 55,933,000 | (25,616,000 | ) | 30,317,000 | 57,591,000 | (33,308,000 | ) | 24,283,000 | ||||||||||||||||
| $ | 84,953,000 | $ | (50,913,000 | ) | $ | 34,040,000 | ||||||||||||||||||
| Investment in Hotel, net | $ | 99,849,000 | $ | (65,211,000 | ) | $ | 34,638,000 | |||||||||||||||||
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| June 30, 2017 | Cost | Depreciation | Value | |||||||||||||||||||||
| June 30, 2023 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||||||||
| Finance lease ROU assets | 1,805,000 | (1,239,000 | ) | 566,000 | ||||||||||||||||||||
| Furniture and equipment | 27,681,000 | (24,570,000 | ) | 3,111,000 | 38,727,000 | (29,682,000 | ) | 9,045,000 | ||||||||||||||||
| Building and improvements | 55,918,000 | (24,940,000 | ) | 30,978,000 | 56,273,000 | (32,627,000 | ) | 23,646,000 | ||||||||||||||||
| $ | 84,723,000 | $ | (49,510,000 | ) | $ | 35,213,000 | ||||||||||||||||||
| Investment in Hotel, net | $ | 97,929,000 | $ | (63,548,000 | ) | $ | 34,381,000 | |||||||||||||||||
Finance lease ROU assets, furniture and equipment are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years and amortized over the life of the lease. Building and improvements are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 15 to 39 years. Depreciation expense for the six months ended December 31, 2023 and 2022 are $1,662,000 and $1,262,000, respectively.
NOTE 3 – 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 basedestate-based companies and REITs, where financial benefit could transfer to its shareholders through income and/or capital gain.
| -12- |
At
As of December 31, 20172023, and June 30, 2017,2023, 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:
SCHEDULE OF TRADING SECURITIES
| Net | ||||||||||||||||||||||||||||||||||||||||
| Gross | Gross | Net | Fair | Gross | Gross | Unrealized | Fair | |||||||||||||||||||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | Cost | Unrealized Gain | Unrealized Loss | Gain | Value | ||||||||||||||||||||||||||||||
| As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||||
| Equities | $ | 7,823,000 | $ | 369,000 | $ | (5,413,000 | ) | $ | (5,044,000 | ) | $ | 2,779,000 | $ | 274,000 | $ | 96,000 | $ | (45,000 | ) | $ | 51,000 | $ | 325,000 | |||||||||||||||||
| As of June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
| As of June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||||
| Equities | $ | 8,012,000 | $ | 381,000 | $ | (4,532,000 | ) | $ | (4,151,000 | ) | $ | 3,861,000 | $ | 274,000 | $ | 133,000 | $ | (48,000 | ) | $ | 85,000 | $ | 359,000 | |||||||||||||||||
As of December 31, 2017 and June 30, 2017, approximately 25% and 42%, respectively, of the investment marketable securities balance above is comprised of the common stock of Comstock Mining, Inc.
As of December 31, 2017 and June 30, 2017, the Company had $5,367,000 and $4,494,000, respectively, of unrealized losses related to securities held for over one year.
Net gain (loss) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the two componentsnet gains (losses) on marketable securities for the three and six months ended December 31, 20172023 and 2016, respectively.2022, respectively:
SCHEDULE OF NET GAINS (LOSSES) ON MARKETABLE SECURITIES COMPRISING OF REALIZED AND UNREALIZED GAINS (LOSSES)
| For the three months ended December 31, | 2017 | 2016 | ||||||
| Realized gain (loss) on marketable securities | $ | 12,000 | $ | (13,000 | ) | |||
| Unrealized gain (loss) on marketable securities | 88,000 | (6,000 | ) | |||||
| Unrealized loss on marketable securities related to Comstock | (697,000 | ) | (978,000 | ) | ||||
| Net loss on marketable securities | $ | (597,000 | ) | $ | (997,000 | ) | ||
| For the three months ended December 31, | 2023 | 2022 | ||||||
| Realized loss on marketable securities, net | $ | - | $ | (37,000 | ) | |||
| Unrealized gain on marketable securities, net | 54,000 | 144,000 | ||||||
| Net gain on marketable securities | $ | 54,000 | $ | 107,000 | ||||
| For the six months ended December 31, | 2017 | 2016 | ||||||
| Realized (loss) gain on marketable securities | $ | (2,000 | ) | $ | 38,000 | |||
| Unrealized gain on marketable securities | 8,000 | 27,000 | ||||||
| Unrealized loss on marketable securities related to Comstock | (907,000 | ) | (800,000 | ) | ||||
| Net loss on marketable securities | $ | (901,000 | ) | $ | (735,000 | ) | ||
NOTE 4 – OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the securities investment committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses.
Other investments, net consist of the following:
| Type | December 31, 2017 | June 30, 2017 | ||||||
| Private equity hedge fund, at cost | $ | 212,000 | $ | 284,000 | ||||
| Other preferred stock | 93,000 | 105,000 | ||||||
| $ | 305,000 | $ | 389,000 | |||||
| For the six months ended December 31, | 2023 | 2022 | ||||||
| Realized loss on marketable securities, net | $ | - | $ | (137,000 | ) | |||
| Unrealized (loss) gain on marketable securities, net | (34,000 | ) | 234,000 | |||||
| Net (loss) gain on marketable securities | $ | (34,000 | ) | $ | 97,000 | |||
NOTE 5 – 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
| December 31, 2023 | June 30, 2023 | |||||||||||||||
| As of | 12/31/2017 | 6/30/2017 | Total - Level 1 | Total - Level 1 | ||||||||||||
| Total - Level 1 | Total - Level 1 | |||||||||||||||
| Assets: | ||||||||||||||||
| Investment in marketable securities: | ||||||||||||||||
| REITs and real estate companies | $ | 320,000 | $ | 350,000 | ||||||||||||
| Basic materials | $ | 893,000 | $ | 1,816,000 | 5,000 | 9,000 | ||||||||||
| Energy | 116,000 | 411,000 | ||||||||||||||
| Technology | 699,000 | 918,000 | ||||||||||||||
| Other | 1,071,000 | 716,000 | ||||||||||||||
| $ | 2,779,000 | $ | 3,861,000 | |||||||||||||
| Investment in marketable securities | $ | 325,000 | $ | 359,000 | ||||||||||||
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.
| -13- |
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 or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments).
NOTE 7 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table showsprovides a reconciliation of cash, cash equivalents, and restricted cash reported within the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:
| Net loss for the six months | ||||||||||||
| Assets | Level 3 | December 31, 2017 | ended December 31, 2017 | |||||||||
| Other non-marketable investments | $ | 305,000 | $ | 305,000 | $ | (72,000 | ) | |||||
| Net loss for the six months | ||||||||||||
| Assets | Level 3 | June 30, 2017 | ended December 31, 2016 | |||||||||
| Other non-marketable investments | $ | 389,000 | $ | 389,000 | $ | (11,000 | ) | |||||
Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control overcondensed consolidated balance sheets that sum to the entities that issue these investments and holds less than 20% ownership in eachtotal of the investments. These investments are reviewed on a periodic basissame such amounts shown in the condensed consolidated statement of cash flows:
SCHEDULE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
| As of | December 31, 2023 | June 30, 2023 | ||||||
| Cash and cash equivalents | $ | 3,668,000 | $ | 2,295,000 | ||||
| Restricted cash | 800,000 | 2,911,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 4,468,000 | $ | 5,206,000 | ||||
Restricted cash is comprised of amounts held by lenders 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)payment of real estate taxes, insurance, replacement and capital addition reserves for 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.Hotel.
NOTE 6 – 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 and six months ended December 31, 20172023 and 2016,2022, respectively. Operating income from Hotel operations consists of the operation of the hotel and operation of the garage. Income (loss)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 expensebenefit for the entire Company.
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SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended December 31, 2023 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 10,225,000 | $ | - | $ | - | $ | 10,225,000 | ||||||||
| Segment operating expenses | (9,405,000 | ) | - | (434,000 | ) | (9,839,000 | ) | |||||||||
| Segment income (loss) | 820,000 | - | (434,000 | ) | 386,000 | |||||||||||
| Interest expense - mortgage | (1,599,000 | ) | - | - | (1,599,000 | ) | ||||||||||
| Interest expense - related party | (525,000 | ) | - | - | (525,000 | ) | ||||||||||
| Depreciation and amortization expense | (841,000 | ) | - | - | (841,000 | ) | ||||||||||
| Income from investments | - | 13,000 | - | 13,000 | ||||||||||||
| Income tax benefit | - | - | - | - | ||||||||||||
| Net (loss) income | $ | (2,145,000 | ) | $ | 13,000 | $ | (434,000 | ) | $ | (2,566,000 | ) | |||||
| Total assets | $ | 40,209,000 | $ | 325,000 | $ | 323,000 | $ | 40,857,000 | ||||||||
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended December 31, 2022 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 9,892,000 | $ | - | $ | - | $ | 9,892,000 | ||||||||
| Segment operating expenses | (8,726,000 | ) | - | (517,000 | ) | (9,243,000 | ) | |||||||||
| Segment income (loss) | 1,166,000 | - | (517,000 | ) | 649,000 | |||||||||||
| Interest expense - mortgage | (1,655,000 | ) | - | - | (1,655,000 | ) | ||||||||||
| Interest expense - related party | (429,000 | ) | - | - | (429,000 | ) | ||||||||||
| Depreciation and amortization expense | (635,000 | ) | - | - | (635,000 | ) | ||||||||||
| Income from investments | 32,000 | - | 32,000 | |||||||||||||
| Income tax benefit | - | - | 718,000 | 718,000 | ||||||||||||
| Net (loss) income | $ | (1,553,000 | ) | $ | 32,000 | $ | 201,000 | $ | (1,320,000 | ) | ||||||
| Total assets | $ | 39,673,000 | $ | 302,000 | $ | 9,030,000 | $ | 49,005,000 |
| As of and for the six months | Hotel | Investment | ||||||||||||||
| ended December 31, 2023 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 21,318,000 | $ | - | $ | - | $ | 21,318,000 | ||||||||
| Segment operating expenses | (18,686,000 | ) | - | (753,000 | ) | (19,439,000 | ) | |||||||||
| Segment income (loss) | 2,632,000 | - | (753,000 | ) | 1,879,000 | |||||||||||
| Interest expense - mortgage | (3,205,000 | ) | - | - | (3,205,000 | ) | ||||||||||
| Interest expense - related party | (1,027,000 | ) | - | - | (1,027,000 | ) | ||||||||||
| Depreciation and amortization expense | (1,662,000 | ) | - | - | (1,662,000 | ) | ||||||||||
| Loss from investments | - | (110,000 | ) | - | (110,000 | ) | ||||||||||
| Income tax expense | - | - | (1,000 | ) | (1,000 | ) | ||||||||||
| Net loss | $ | (3,262,000 | ) | $ | (110,000 | ) | $ | (754,000 | ) | $ | (4,126,000 | ) | ||||
| Total assets | $ | 40,209,000 | $ | 325,000 | $ | 323,000 | $ | 40,857,000 | ||||||||
| As of and for the six months | Hotel | Investment | ||||||||||||||
| ended December 31, 2022 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 22,202,000 | $ | - | $ | - | $ | 22,202,000 | ||||||||
| Segment operating expenses | (18,032,000 | ) | - | (826,000 | ) | (18,858,000 | ) | |||||||||
| Segment income (loss) | 4,170,000 | - | (826,000 | ) | 3,344,000 | |||||||||||
| Interest expense - mortgage | (3,287,000 | ) | - | - | (3,287,000 | ) | ||||||||||
| Interest expense - related party | (859,000 | ) | - | - | (859,000 | ) | ||||||||||
| Depreciation and amortization expense | (1,262,000 | ) | - | - | (1,262,000 | ) | ||||||||||
| Income from investments | - | 14,000 | - | 14,000 | ||||||||||||
| Income tax benefit | - | - | 721,000 | 721,000 | ||||||||||||
| Net (loss) income | $ | (1,238,000 | ) | $ | 14,000 | $ | (105,000 | ) | $ | (1,329,000 | ) | |||||
| Total assets | $ | 39,673,000 | $ | 302,000 | $ | 9,030,000 | $ | 49,005,000 | ||||||||
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended December 31, 2017 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 13,187,000 | $ | - | $ | - | $ | 13,187,000 | ||||||||
| Segment operating expenses | (10,743,000 | ) | - | (164,000 | ) | (10,907,000 | ) | |||||||||
| Segment income (loss) | 2,444,000 | - | (164,000 | ) | 2,280,000 | |||||||||||
| Interest expense - mortgage | (1,980,000 | ) | - | - | (1,980,000 | ) | ||||||||||
| Depreciation and amortization expense | (634,000 | ) | - | - | (634,000 | ) | ||||||||||
| Loss from investments | - | (710,000 | ) | - | (710,000 | ) | ||||||||||
| Income tax expense | - | - | (2,902,000 | ) | (2,902,000 | ) | ||||||||||
| Net loss | $ | (170,000 | ) | $ | (710,000 | ) | $ | (3,066,000 | ) | $ | (3,946,000 | ) | ||||
| Total assets | $ | 42,846,000 | $ | 3,084,000 | $ | 8,876,000 | $ | 54,806,000 | ||||||||
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended December 31, 2016 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 12,837,000 | $ | - | $ | - | $ | 12,837,000 | ||||||||
| Segment operating expenses | (9,926,000 | ) | - | (144,000 | ) | (10,070,000 | ) | |||||||||
| Segment income (loss) | 2,911,000 | - | (144,000 | ) | 2,767,000 | |||||||||||
| Interest expense - mortgage | (1,909,000 | ) | - | - | (1,909,000 | ) | ||||||||||
| Depreciation and amortization expense | (760,000 | ) | - | - | (760,000 | ) | ||||||||||
| Loss from investments | - | (1,037,000 | ) | - | (1,037,000 | ) | ||||||||||
| Incomt tax benefit | - | - | 377,000 | 377,000 | ||||||||||||
| Net income (loss) | $ | 242,000 | $ | (1,037,000 | ) | $ | 233,000 | $ | (562,000 | ) | ||||||
| Total assets | $ | 41,586,000 | $ | 4,151,000 | $ | 12,927,000 | $ | 58,664,000 | ||||||||
| As of and for the six months | Hotel | Investment | ||||||||||||||
| ended December 30, 2017 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 27,624,000 | $ | - | $ | - | $ | 27,624,000 | ||||||||
| Segment operating expenses | (21,332,000 | ) | - | (362,000 | ) | (21,694,000 | ) | |||||||||
| Segment income (loss) | 6,292,000 | - | (362,000 | ) | 5,930,000 | |||||||||||
| Interest expense - mortgage | (3,967,000 | ) | - | - | (3,967,000 | ) | ||||||||||
| Depreciation and amortization expense | (1,283,000 | ) | - | - | (1,283,000 | ) | ||||||||||
| Loss from investments | - | (1,055,000 | ) | - | (1,055,000 | ) | ||||||||||
| Income tax expense | - | - | (3,164,000 | ) | (3,164,000 | ) | ||||||||||
| Net income (loss) | $ | 1,042,000 | $ | (1,055,000 | ) | $ | (3,526,000 | ) | $ | (3,539,000 | ) | |||||
| Total assets | $ | 42,846,000 | $ | 3,084,000 | $ | 8,876,000 | $ | 54,806,000 | ||||||||
| As of and for the six months | Hotel | Investment | ||||||||||||||
| ended December 30, 2016 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 27,442,000 | $ | - | $ | - | $ | 27,442,000 | ||||||||
| Segment operating expenses | (20,182,000 | ) | - | (298,000 | ) | (20,480,000 | ) | |||||||||
| Segment income (loss) | 7,260,000 | - | (298,000 | ) | 6,962,000 | |||||||||||
| Interest expense - mortgage | (3,897,000 | ) | - | - | (3,897,000 | ) | ||||||||||
| Depreciation and amortization expense | (1,424,000 | ) | - | - | (1,424,000 | ) | ||||||||||
| Loss from investments | - | (803,000 | ) | - | (803,000 | ) | ||||||||||
| Incomt tax expense | - | - | (328,000 | ) | (328,000 | ) | ||||||||||
| Net income (loss) | $ | 1,939,000 | $ | (803,000 | ) | $ | (626,000 | ) | $ | 510,000 | ||||||
| Total assets | $ | 41,586,000 | $ | 4,151,000 | $ | 12,927,000 | $ | 58,664,000 | ||||||||
NOTE 7 – 9 - RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The following summarizes the balances of related party and other notes payable as of December 31, 2023 and June 30, 2023, respectively:
SCHEDULE OF RELATED PARTY AND OTHER NOTES PAYABLE
| As of | December 31, 2023 | June 30, 2023 | ||||||
| Note payable - InterGroup | $ | 18,200,000 | $ | 15,700,000 | ||||
| Note payable - Hilton | 1,900,000 | 2,058,000 | ||||||
| Note payable - Aimbridge | 771,000 | 896,000 | ||||||
| Note payable | 771,000 | 896,000 | ||||||
| Total related party and other notes payable | $ | 20,871,000 | $ | 18,654,000 | ||||
On July 2, 2014, the Partnership obtained from InterGroup (a related party) an unsecured loan in the principal amount of $4,250,000$4,250,000 at 12%12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3%3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023. On December 16, 2020, the Partnership and InterGroup entered into a loan modification agreement which increased the Partnership’s borrowing from InterGroup as needed up to $10,000,000. Upon the dissolution of the Partnership in December 2021, Portsmouth assumed the Partnership’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2018.
Also included in2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. In July 2023, the note maturity date was extended to July 31, 2025 and the borrowing amount available was increased to $20,000,000. As of June 30, 2023 the balance of related partythe loan was $15,700,000 net of loan amortization costs of zero. The Company agreed to a 0.5% loan extension and modification fee payable to InterGroup. During the six months ended December 31, 2023, the Company borrowed an additional $2,500,000 to fund its hotel operations. As of December 31, 2023 the balance of the loan was $18,200,000 and the Company has not made any paid-downs to its note payable at December 31, 2017 isto InterGroup. The Company could amend its by-laws and increase the obligationnumber of authorized shares to issue additional shares to raise capital in the public markets if needed.
Note payable to Hilton (Franchisor) in the form ofis a self-exhausting, interest free development incentive note which is reduced by approximately $316,000$317,000 annually through 2030 by Hilton if the PartnershipCompany is still a Franchisee with Hilton. The outstanding balance of the note as of December 31, 2017 and June 30, 2017, was $3,800,000 and $3,958,000, respectively.
On February 1, 2017, JusticeOperating entered into a Hotel management agreement (“HMA”)an HMA with Interstate Management Company, LLC (“Interstate”)Ambridge 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 InterstateAmbridge to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000$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)(8) year period commencing on the second (2nd) anniversary of the takeover date. The $2,000,000unamortized portion of $771,000 and $896,000 of the key money is included in restricted cash and related party notethe other notes payable balances in the condensed consolidated balance sheets as of December 31, 20172023 and June 30, 2017.2023, respectively.
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In April
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, | ||||
| 2024 (6 months) | $ | 283,000 | ||
| 2025 | 18,767,000 | |||
| 2026 | 567,000 | |||
| 2027 | 463,000 | |||
| 2028 | 317,000 | |||
| Thereafter | 474,000 | |||
| Long term debt | $ | 20,871,000 | ||
As of December 31, 2023 and June 30, 2023, the Company had accounts payable to related party of $9,241,000 and $7,283,000, respectively. These are amounts due to InterGroup and represent accrued interests and 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 10-year mortgage loan is secured by the Company’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 $86,503,000 and $87,240,000 as of December 31, 2023 and June 30, 2023, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth obtained from InterGroupin 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 unsecured short-terminterest 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 $1,000,000 at 5%$20,000,000. The prior Mezzanine Loan which had a 9.75% per year fixedannum 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. In September 2023, the Company entered into an agreement with Hart Advisors Group, LLC to assist in the negotiations of loan modifications with the senior and mezzanine lenders. The communications with the lenders have been fluent and all parties have been cooperative. The Company believes it will achieve loan forbearance or extensions but given the complexity of commercial mortgage-backed securities (CMBS loans), the process will take some time and there are no guaranties. On January 4, 2024, the Company was made aware of a termnotice of five monthsdefault (the “Notice”) issued by its senior loan special servicer LNR Partners, LLC to Justice Operating Company, LLC which is the wholly owned subsidiary of Portsmouth Square, Inc. The Notice states that the lender has rights as a result of such defaults, including, but not limited to, acceleration of the loans, foreclosure on collateral and maturing September 6, 2017. Theother rights and remedies under the loan was extendeddocuments and otherwise available under the law. During the entire life of the outstanding debt, the Company has made all mortgage payments timely as of the date of maturity and as of December 31, 2023, there were no delinquent amounts due to September 15, 2017 and paid off on September 13, 2017.the senior or mezzanine lenders.
Effective May 12,11, 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$97,000,000 mortgage loan and the $20,000,000$20,000,000 mezzanine loan, in orderloan. Pursuant to the agreement, InterGroup is required to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unable to satisfy independently as of March 31, 2017.
In connection with the redemption of the limited partnership interest of Justice, Justice Operating Company, LLC agreed to pay a total of $1,550,000 in fees to certain officers and directors of the Company for services rendered in connection with the redemption of the partnership interests, refinancing of the Justices properties and reorganization of Justice. This agreement was superseded by a letter dated December 11, 2013 from Justice, in which Justice assumed the payment obligations of Justice Operating Company, LLC.liquidity. As of December 31, 2017, $400,0002023, InterGroup is in compliance with both requirements. Operating has not been meeting certain of these fees remain payableits loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lockbox by the Lender for all cash collected by the Hotel. However, such lockbox has been created and are includedutilized from the loan inception and will be in related party and other notes payable on the accompanying condensed consolidated balalcne sheets.
Justice had an outstanding accounts payable balanceplace up to InterGroup for $116,000 for managementloan maturity regardless of the Hotel from June to DecemberDSCR.
The Company’s Board of 2016 which was paid in full asDirectors is currently comprised of December 31, 2017.
Four ofdirectors John V. Winfield, William J. Nance, John C. Love, Yvonne Murphy, and Steve Grunwald. All the Company’s directors also serve as directors of InterGroupInterGroup. The Company’s director and threeChairman of the Company’s Directors serve on the Board of Santa Fe.Audit Committee is William J. Nance.
| -17- |
John V. Winfield serves as Chief Executive Officer and Chairman of the Company Santa Fe, and InterGroup. Effective June 2016, Mr. Winfield became the Managing Director of Justice until its dissolution in December 2021. Depending on certain market conditions and various risk factors, the Chief Executive Officer Santa Fe and InterGroup may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and the resources of Santa Fe and InterGroup, at risk in connection with investment decisions made on behalf of the Company.
On May 24, 2021, John V. Winfield resigned effective immediately as the Company’s President and the Company’s Board of Directors elected David C. Gonzalez as the Company’s new President, effective as of May 24, 2021. Mr. Gonzalez serves as Chief Operating Officer of InterGroup and is an advisor of the Executive Strategic Real Estate and Securities Investment Committee of InterGroup and Portsmouth.
NOTE 10 – ACCOUNTS PAYABLE AND OTHER LIABILITIES
The following summarizes the balances of accounts payable and other liabilities as of December 31, 2023 and June 30, 2023, respectively.
SCHEDULE OF ACCOUNTS PAYABLE AND OTHER LIABILITIES
| As of | December 31, 2023 | June 30, 2023 | ||||||
| Trade payable | $ | 2,830,000 | $ | 1,235,000 | ||||
| Advance deposits | 535,000 | 301,000 | ||||||
| Property tax payable | - | 59,000 | ||||||
| Payroll and related accruals | 3,101,000 | 2,863,000 | ||||||
| Management fees payable | 2,189,000 | 1,683,000 | ||||||
| Mortgage interest payable | 518,000 | 1,580,000 | ||||||
| Withholding and other taxes payable | 1,202,000 | 1,204,000 | ||||||
| Security deposit | - | 52,000 | ||||||
| Franchise fees | 1,375,000 | 2,510,000 | ||||||
| Other payables | 253,000 | 194,000 | ||||||
| Total accounts payable and other liabilities | $ | 12,003,000 | $ | 11,681,000 | ||||
NOTE 11 – SUBSEQUENT EVENTS
On January 4, 2024, the Company was made aware of a notice of default (the “Notice”) issued by the senior mortgage’s special servicer, LNR Partners, LLC, to Operating, which is a wholly owned subsidiary of Portsmouth Square, Inc. The Notice states that the lenders have rights as a result of such defaults, including, but not limited to, acceleration of the loans, foreclosure on collateral and other rights and remedies under the loan documents and otherwise available under the law. On January 10, 2024, the Company filed the required Form 8-K with the Securities and Exchange Commission. The Company has made all debt service payments since the loans inception. The Company continues to work with its senior and mezzanine leaders to reach an agreement on a loan forbearance or extension. While the outcome is uncertain, terms have been negotiated and are currently being reviewed for approval by the senior loan stakeholders and the Company expects a response from the senior lenders in due course.
| -18- |
We are involved from time to time in legal proceedings of types regarded as common in our business, including administrative or judicial proceedings, such as employment of labor disputes, breach of contract liability and premises liability litigation. Where appropriate, we may establish financial reserves for such proceedings. We also maintain insurance to mitigate certain types of risk.
On April 21, 2014, the Partnership commenced arbitration against Glaser Weil Fink Howard Avchen & Shapiro, LLP, Greet J. Cohen, Gary N. Jacobs, Janet S. McCloud, Paul B. Salvaty, and Joseph K. Fletcher III (“Respondents”) in connection with the redemption transaction. The arbitration alleges legal malpractice and also seeks declaratory relief regarding provisions of the redemption option agreement. The arbitration proceedings are active; discovery is proceeding. The hearing is set for April 2018 before JAMS in Los Angeles, California. The parties have began mediation sessions in order to attempt to resolve the matter prior to the hearding of April 2018. No prediction can be given as to the outcome of this matter.
On May 5, 2016, Justice and Portsmouth entered into a settlement agreement relating to previously reported litigation with Evon Corporation and certain other parties. Under the settlement agreement, Justice, a subsidiary of Portsmouth agreed to payEvon Corporation $5,575,000. The final installment due was made in January 2017 and all conditions of the settlement agreement have been satisfied by the Company.
Item 3 – MANAGEMENT'S2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time makeThis quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and projections concerningSection 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, including anticipated repayment of certain of the Company’s indebtedness, the impact to our business and financial condition, the effects of competition and the effects of future expectations. When usedlegislation or regulations and other non-historical statements, the impact from macroeconomic factors (including inflation, increases in this discussion,interest rates, potential economic slowdown or a recession and geopolitical conflicts). Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words “anticipate,“outlook,” “estimate,“believes,” “expect,“expects,” “project,“potential,” “intend,” “plan,” “believe,“continues,” “may,” “will,” “should,” “could,” “might”“seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. You should not rely on forward-looking statements since they involve known and similar expressions,unknown risks, uncertainties and other factors which are, intended to identify forward-looking statements. Thesein some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events.
Such statements are subject to certain risks and uncertainties. These risks and uncertainties such asinclude, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry,industry; the impact of terrorism and war on the national and international economies, including tourism, and securities markets, energy and fuel costs,costs; natural disasters,disasters; general economic conditions and competition in the hotel industry in the San Francisco area,area; seasonality, labor relations and labor disruptions,disruptions; actual and threatened pandemics such as swine flu partnership distributions,or the outbreak of COVID-19 or similar outbreaks; the ability to obtain financing at favorable interest rates and terms,terms; securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017, that2023. These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company'sCompany’s principal business is conducted throughsource of revenue continues to be derived from its generalownership in Operating inclusive of hotel room revenue, food and limited partnership interest inbeverage revenue, garage revenue, and revenue from other operating departments. Operating owns the Justice Investors Limited Partnership (“Justice” or the “Partnership”). Justice owns a 544 room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the “Hilton San Francisco Financial District” (the “Hotel” or the “Property”)Hotel and related facilities, including a five-level underground parking garage. The financial statements of JusticeOperating have been consolidated with those of the Company.
The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with HLT Franchise Holding LLC (Hilton). The Partnership entered into the License Agreement on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received on July 1, 2015.
Justice had a management agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years and could be terminated at any time with or without cause by the Partnership. Effective January 2014, the management agreement with Prism was amended by the Partnership to change the nature of the services provided by Prism and the compensation payable to Prism, among other things. Prism’s management agreement was terminated upon its expiration date of February 3, 2017. Effective December 1, 2013, GMP Management, Inc. (“GMP”), a company owned by a Justice limited partner and a related party, began to provide management services for the Partnership pursuant to a management services agreement with a term of three years, subject to the Partnership’s right to terminate earlier, for cause. In June 2016, GMP resigned. After a lengthy review process of several national third party hotel management companies, on February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of HMA is for an initial period of ten years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The $2,000,000 was received in May 2017 and is included in the restricted cash and related party and other notes payable balances in the condensed consolidated balance sheets as of December 31, 2017 and June 30, 2017.
The parking garage that is part of the Hotel property was managed by Ace Parking pursuant to a contract with the Partnership. The contract was terminated with an effective termination date of October 4, 2016. The Company began managing the parking garage in-house after the termination of Ace Parking. Effective February 3, 2017, Interstate took over the management of the parking garage along with the Hotel.
Three Months Ended December 31, 20172023 Compared to Three Months Ended December 31, 20162022
The Company had a net loss of $3,946,000$2,566,000 for the three months ended December 31, 20172023 compared to net loss of $562,000$1,320,000 for the three months ended December 31, 2016. The increase in the net loss is primarily attributable to the increase in income tax expense.2022.
Hotel Operations
The Company had net loss from Hotel operations of $170,000$2,145,000 for the three months ended December 31, 20172023 compared to net incomeloss of $242,000$1,553,000 for the three months ended December 31, 2016. The change is primarily due to increased operating expenses.2022. The increase in revenues wereloss is primarily attributable to the increase in operating expenses, offset by increased franchise fees, legal feesrooms and union wages during the quarter ended December 31, 2017 compared to December 31, 2016.food and beverage revenues.
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The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 20172023 and 2016.2022:
| For the three months ended December 31, | 2017 | 2016 | 2023 | 2022 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 10,710,000 | $ | 10,497,000 | $ | 8,403,000 | $ | 8,250,000 | ||||||||
| Food and beverage | 1,614,000 | 1,506,000 | 972,000 | 625,000 | ||||||||||||
| Garage | 735,000 | 643,000 | 708,000 | 717,000 | ||||||||||||
| Other operating departments | 128,000 | 191,000 | 142,000 | 300,000 | ||||||||||||
| Total hotel revenues | 13,187,000 | 12,837,000 | 10,225,000 | 9,892,000 | ||||||||||||
| Operating expenses excluding depreciation and amortization | (10,743,000 | ) | (9,926,000 | ) | (9,405,000 | ) | (8,726,000 | ) | ||||||||
| Operating income before interest, depreciation and amortization | 2,444,000 | 2,911,000 | 820,000 | 1,166,000 | ||||||||||||
| Interest expense - mortgage | (1,980,000 | ) | (1,909,000 | ) | ||||||||||||
| Interest expense - mortgages | (1,599,000 | ) | (1,655,000 | ) | ||||||||||||
| Interest expense - related party | (525,000 | ) | (429,000 | ) | ||||||||||||
| Depreciation and amortization expense | (634,000 | ) | (760,000 | ) | (841,000 | ) | (635,000 | ) | ||||||||
| Net (loss) income from Hotel operations | $ | (170,000 | ) | $ | 242,000 | |||||||||||
| Net loss from Hotel operations | $ | (2,145,000 | ) | $ | (1,553,000 | ) | ||||||||||
For the three months ended December 31, 2017,2023, the Hotel had operating income of $2,444,000$820,000 before interest expense, depreciation, and amortization on total operating revenues of $13,187,000$10,225,000 compared to operating income of $2,911,000$1,166,000 before interest expense, depreciation, and amortization on total operating revenues of $12,837,000$9,892,000 for the three months ended December 31, 2016. Room revenues increased by $213,000 for2022.
For the three months ended December 31, 20172023, room revenues increased by $153,000, food and beverage revenue increased by $347,000 and garage decreased by $9,000 compared to the three months ended December 31, 2016 primarily due to Salesforce citywide conference moving from third quarter in 2016 to fourth quarter in 2017. Food and beverage revenue increased by $108,000 as a result of increased catering and banquet services. Garage revenues increased by $92,000.
2022. Total operating expenses increased by $817,000 this quarter primarily$679,000 due to increased operating expenses related toincrease in union salaries and wages, room cost, food and beverage rooms, franchise fees, and legal fees.cost.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”)RevPAR of the Hotel for the three months ended December 31, 20172023 and 2016.2022:
| Three Months Ended December 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||
| 2017 | $ | 240 | 89 | % | $ | 212 | ||||||
| 2016 | $ | 236 | 89 | % | $ | 210 | ||||||
Three Months Ended December 31, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||
| 2023 | $ | 207 | 81 | % | $ | 168 | ||||||
| 2022 | $ | 199 | 82 | % | $ | 164 | ||||||
The Hotel’s revenues increased by 2.7%3% this quarter as compared to the previous comparable quarter. Average daily rate increased by $4$8, average occupancy decreased by 1%, and RevPAR increased by $2$4 for the three months ended December 31, 20172023 compared to the three months ended December 31, 2016. Average occupancy was 89% for both quarters.2022.
Investment Transactions
The Company had a net lossgain on marketable securities of $597,000$54,000 for the three months ended December 31, 20172023 compared to a net lossgain on marketable securities of $997,000$107,000 for the three months ended December 31, 2016. As of December 31, 2017 and June 30, 2017, approximately 25% and 42%, respectively, of the investment in marketable securities’ balance above is comprised of the common stock of Comstock Mining, Inc. (Comstock). As the result, the change in the market price of the common stock of Comstock will have a significant impact on the gain (loss) on marketable securities. For the three months ended Dedember 31, 2017, the Company had a net realized gain of $12,000 and a net unrealized loss of $609,000.2022. For the three months ended December 31, 2016,2023, the Company had net unrealized gain of $54,000. For the three months ended December 31, 2022, the Company had a net realized loss of $13,000$37,000 and a net unrealized lossgain of $984,000.$144,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
The Company consolidatesconsolidated Justice (Hotel)(“Hotel”) for financial reporting purposes and iswas not taxed on its non-controlling interest in the Hotel. However, effective July 15, 2021, the Company become the owner of 100% of Justice and will include all the Hotel’s income and expense accounts into its income taxes calculations going forward. The income tax (expense) benefit during the three months ended December 31, 2017 and 2016 represents2022 represent the income tax effect on the Company’sCompany’s pretax income (loss)loss which includes its share in the net income (loss)operations of the Hotel.
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Six Months Ended December 31, 20172023 Compared to Six Months Ended December 31, 20162022
The Company had net loss of $3,539,000$4,126,000 for the six months ended December 31, 20172023 compared to net incomeloss of $510,000$1,329,000 for the six months ended December 31, 2016.2022. The increase in the net losschange is primarily attributable to the decrease in Hotel revenue and increase in income tax expense and decreasedoperating expenses.
Hotel Operations
The Company had net income from Hotel operations.
Hotel Operations
Net incomeloss from Hotel operations was $1,042,000of $3,262,000 for the six months ended December 31, 20172023 compared to net incomeloss of $1,939,0001,238,000 for the six months ended December 31, 2016. The decrease in net income is primarily due to increased operating expenses.2022. The increase in revenues were offset by increased franchise fees, legal feesloss is primarily attributable to the decrease in rooms revenue and union wages during the six months ended December 31, 2017 compared to December 31, 2016.an increase in operating expenses.
The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 20172023 and 2016.2022:
| For the six months ended December 31, | 2017 | 2016 | 2023 | 2022 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 22,552,000 | $ | 22,795,000 | $ | 17,964,000 | $ | 19,053,000 | ||||||||
| Food and beverage | 3,373,000 | 2,955,000 | 1,599,000 | 1,160,000 | ||||||||||||
| Garage | 1,516,000 | 1,324,000 | 1,533,000 | 1,539,000 | ||||||||||||
| Other operating departments | 183,000 | 368,000 | 222,000 | 450,000 | ||||||||||||
| Total hotel revenues | 27,624,000 | 27,442,000 | 21,318,000 | 22,202,000 | ||||||||||||
| Operating expenses excluding depreciation and amortization | (21,332,000 | ) | (20,182,000 | ) | (18,686,000 | ) | (18,032,000 | ) | ||||||||
| Operating income before interest, depreciation and amortization | 6,292,000 | 7,260,000 | 2,632,000 | 4,170,000 | ||||||||||||
| Interest expense - mortgage | (3,967,000 | ) | (3,897,000 | ) | ||||||||||||
| Interest expense - mortgages | (3,205,000 | ) | (3,287,000 | ) | ||||||||||||
| Interest expense - related party | (1,027,000 | ) | (859,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,283,000 | ) | (1,424,000 | ) | (1,662,000 | ) | (1,262,000 | ) | ||||||||
| Net income from Hotel operations | $ | 1,042,000 | $ | 1,939,000 | ||||||||||||
| Net loss from Hotel operations | $ | (3,262,000 | ) | $ | (1,238,000 | ) | ||||||||||
For the six months ended December 31, 2017,2023, the Hotel had operating income of $6,292,000$2,632,000 before interest expense, depreciation, and amortization on total operating revenues of $27,624,000$21,318,000 compared to operating income of $7,260,000$4,170,000 before interest expense, depreciation, and amortization on total operating revenues of $27,442,000$22,202,000 for the six months ended December 31, 2016. Room revenues decreased by $243,000 for2022. For the six months ended December 31, 20172023, room revenues decreased by $1,089,000, food and beverage revenue increased by $439,000, garage revenue decreased by $6,000 compared to the six months ended December 31, 2016 primarily as the result of the decrease in group business and the decrease in the average daily rate. Food and beverage revenue increased by $418,000 as the result of an increase in the catering and banquet services from the decrease in the group business. Garage revenues increased by $192,000 as a result of freeing parking spaces that were utilized as storage by previous management as well as additional valet parking income.
2022. Total operating expenses increased by $1,150,000 for the six months ended December 31, 2017 as compared to the six months ended December 31, 2016 primarily$654,000 due to the increase in legal fees associated with the Glaser matter, franchise fees,room costs, food and beverage costs, and room operating expenses; the increase was offset by reduced advertisingsalaries and sales costs, repairs and maintenance expense, and other operating department expenses.wages.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”)RevPAR of the Hotel for the six months ended December 31, 20172023 and 2016.2022.
| Six months Ended December 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||
| 2017 | $ | 247 | 91 | % | $ | 225 | ||||||
| 2016 | $ | 245 | 93 | % | $ | 228 | ||||||
Six Months Ended December 31, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||
| 2023 | $ | 212 | 84 | % | $ | 180 | ||||||
| 2022 | $ | 215 | 88 | % | $ | 190 | ||||||
The Hotel’s total revenues increaseddecreased by 0.7%4% for the six months ended December 31, 20172023 as compared to the six months ended December 31, 2016.2022. Average daily rate increaseddecreased by $2$3, average occupancy decreased by 4%, and RevPAR decreased by $3$10 for the six months ended December 31, 20172023 compared to the six months ended December 31, 2016. Average occupancy decreased by 2% during the six months ended December 31, 2017 versus the comparable period.2022.
Investment Transactions
The Company had a net loss on marketable securities of $901,000$34,000 for the six months ended December 31, 20172023 compared to a net lossgain on marketable securities of $735,000$97,000 for the six months ended December 31, 2016.2022. For the six months ended December 31, 2017 and 2016,2023, the Company had a net unrealized loss of approximately $907,000 and $800,000 related to the Company’s investment in the common stock of Comstock, respectively.$34,000. For the six months ended December 31, 2017,2022, the Company had a net realized loss of $2,000$137,000 and a net unrealized loss of $899,000. For the six months ended December 31, 2016, the Company had a net realized gain of $38,000 and a net unrealized loss of $773,000.$234,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
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The
Effective July 15, 2021, the Company consolidatesbecome the owner of 100% of Justice (Hotel) for financial reporting purposes and is not taxed onwill includes all the Hotel’s income and expense accounts into its non-controlling interest in the Hotel.income taxes calculations from that date. The income tax (expense)benefitexpense during the six months ended December 31, 20172023 was $1,000 and 2016 representsDecember 31, 2022 was $721,000 income tax benefit, represent the income tax effect on the Company’sCompany’s pretax income(loss)loss which includes its share in the net incomeoperations of the Hotel.
MARKETABLE SECURITIES
The following table shows the composition of the Company’s marketable securities portfolio as of December 31, 20172023 and June 30, 20172023 by selected industry groups.
| % of Total | ||||||||
| As of December 31, 2023 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 320,000 | 98.5 | % | ||||
| Basic materials | 5,000 | 1.5 | % | |||||
| $ | 325,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of December 31, 2017 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 893,000 | 32.1 | % | ||||
| Technology | 699,000 | 25.2 | % | |||||
| Energy | 116,000 | 4.2 | % | |||||
| REITs and real estate companies | 150,000 | 5.4 | % | |||||
| Financial | 252,000 | 9.1 | % | |||||
| Other | 669,000 | 24.1 | % | |||||
| $ | 2,779,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of June 30, 2023 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | 350,000 | 97.5 | % | |||||
| Basic materials | 9,000 | 2.5 | % | |||||
| $ | 359,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of June 30, 2017 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 1,816,000 | 47.0 | % | ||||
| Technology | 918,000 | 23.9 | % | |||||
| Energy | 411,000 | 10.6 | % | |||||
| REITs and real estate companies | 274,000 | 7.1 | % | |||||
| Other | 442,000 | 11.4 | % | |||||
| $ | 3,861,000 | 100.0 | % | |||||
As of December 31, 2017, 25% of2023, the Company’s investment in marketable securities portfolio includes five equity positions. The Company holds three equity security that is more than 10% of the equity value of the portfolio. The largest security position represents 61% of the portfolio and consists of the common stock of Comstock Mining,American Realty Investors, Inc. (“Comstock” - NYSE MKT: LODE) which(NYSE: ARL) and is included in the basic materialsREITS and real estate companies industry group.
As of June 30, 2023, the Company held five different equity positions in its investment portfolio. The Company held three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 69% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL) and is included in REITS and real estate companies industry group.
The following table shows the net gain (loss) on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods:
| For the three months ended December 31, | 2023 | 2022 | ||||||
| Net gain on marketable securities | $ | 54,000 | $ | 107,000 | ||||
| Dividend and interest income | 3,000 | 6,000 | ||||||
| Margin interest expense | - | (1,000 | ) | |||||
| Trading and management expenses | (44,000 | ) | (80,000 | ) | ||||
| $ | 13,000 | $ | 32,000 | |||||
| For the six months ended December 31, | 2023 | 2022 | ||||||
| Net (loss) gain on marketable securities | $ | (34,000 | ) | $ | 97,000 | |||
| Dividend and interest income | 6,000 | 32,000 | ||||||
| Margin interest expense | - | (1,000 | ) | |||||
| Trading and management expenses | (82,000 | ) | (114,000 | ) | ||||
| $ | (110,000 | ) | $ | 14,000 |
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FINANCIAL CONDITION AND LIQUIDITY
The Company’s cash flows are primarily generated from its Hotel operations, general partner management fees, and limited partnership distributions from the Partnership. The Company also receiveshad cash, generated from the investmentcash equivalents and restricted cash of its cash$4,468,000 and marketable securities and other investments.
On December 18, 2013, the Partnership completed an Offer to Redeem any and all limited partnership interests not held by Portsmouth. As a result, Portsmouth, which prior to the Offer to Redeem owned 50% of the then outstanding limited partnership interests now controls approximately 93% of the voting interest in Justice and is now its sole General Partner.
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. 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 thru January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period thru its maturity date of January 2024. As additional security for the mortgage loan, there is a limited guaranty executed by the Company in favor of mortgage lender. The mezzanine loan is a secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan bears interest at 9.75% per annum and matures in January 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by the Company in favor of mezzanine lender. The outstanding balance of the senior loan and the mezzanine loans$5,206,000 as of December 31, 2017 were $95,710,0002023 and $20,000,000, respectively.Effective May 12, 2017, InterGroup (a related party) agreedJune 30, 2023, respectively. The Company had marketable securities, net of margin due to become an additional guarantor under the limited guarantysecurities brokers, of $325,000 and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan$359,000 as of December 31, 2023 and the $20,000,000 mezzanine loan.June 30, 2023, respectively. These marketable securities are short-term investments and liquid in nature.
On July 2, 2014, the Partnership obtained from InterGroup (a related party) 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, 2023. On December 31, 2018.
In April 2017, Portsmouth obtained16, 2020, the Partnership and InterGroup entered into a loan modification agreement which increased the Partnership’s borrowing from InterGroup an unsecured short-term loanas needed up to $10,000,000. Upon the dissolution of the Partnership in December 2021, Portsmouth assumed the Partnership’s note payable to InterGroup in the amount of $1,000,000 at 5% per year fixed interest, with$11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a term of five months and maturing September 6, 2017. The short-term loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. In July 2023, the note maturity date was extended to September 15, 2017 and paid off on September 13, 2017.
Despite an uncertain economy, the Hotel has continued to generate strong revenue growth. While the debt service requirements related the loansJuly 31, 2025 and the legal settlement may create some additional risks forborrowing amount available was increased to $20,000,000. As of June 30, 2023 the balance of the loan was $15,700,000 net of loan amortization costs of zero. The Company agreed to a 0.5% loan extension and modification fee payable to InterGroup. During the six months ended December 31, 2023, the Company borrowed an additional $2,500,000 to fund its hotel operations. As of December 31, 2023 the balance of the loan was $18,200,000 and the Company has not made any paid-downs to its abilitynote payable to generate cash flowsInterGroup. The Company could amend its by-laws and increase the number of authorized shares to issue additional shares to raise capital in the future,public markets if needed.
The Company’s known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management believes that cash flows from the operationsand franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the HotelHotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the garageHotel. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. The objectives of our cash management policy are to increase existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential sources of liquidity that management may be able to obtain, will be sufficient to meet allfund our working capital needs. The Partnership obtained from Intergroup has provided additional funding as needed to assist as a source of liquidity. As well as our capital lease and debt obligations, even if current levels of occupancy and revenue per occupied room (“RevPAR”, calculated by multiplying the hotel’s average daily room rate by its occupancy percentage) were to persist for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
Going Concern
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As discussed in Note 9 – Related Party and Other Financing Transactions, as of December 31, 2023, the outstanding balance consists of a senior mortgage loan and mezzanine loan totaling $106,503,000. Both loans matured on January 1, 2024, in addition, the Company has recurring losses and has an accumulated deficit of $109,853,000 which includes a $64,100,000 increase adjustment made in December 2013 as a result of the Partnership’spartnership redemption.
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Due to these factors and the uncertainty around the Company’s ability to successfully refinance the debt on favorable terms in the current and future obligations andlending environment gives rise to substantial doubt about the Company’s ability to continue as a going concern for one year after the financial requirements.statement issuance date.
The Company has investedbeen exploring the possibility of refinancing its senior mortgage and mezzanine debt with potential lenders. Additionally, the Company has been in short-term, income-producing instruments and in equity andfluent communications with its current lenders since October 2023 exploring the possibility of loan modifications or extensions to the existing debt, securitieshowever, the Company may be unable to access further financing when deemed appropriate. The Company's marketable securities are classified as trading with unrealized gains and losses recorded throughneeded. As such, there can be no assurance that the consolidated statements of operations.
Management believes that its cash, marketable securities, and the cash flows generated from those assets and from the partnership management fees,Company will be adequateable to meetobtain additional liquidity when needed or under acceptable terms, if at all. On January 4, 2024, the Company’s currentCompany was made aware of a notice of default (the “Notice”) issued by its senior loan special servicer LNR Partners, LLC to Justice Operating Company, LLC which is the wholly owned subsidiary of Portsmouth Square, Inc. The Notice states that the lender has rights as a result of such defaults, including, but not limited to, acceleration of the loans, foreclosure on collateral and future obligations. Additionally,other rights and remedies under the loan documents and otherwise available under the law. During the entire life of the outstanding debt, the Company has made all mortgage payments timely as of the date of maturity and as of December 31, 2023, there were no delinquent amounts due to the senior or mezzanine lenders.
In 2018-2019 the Company completed major improvements to its Hotel, such as the installation of a state-of-the-art high-speed internet Cisco Meraki system and updated all ethernet wiring with Cat6A and added the best available fiber to each guest room and common areas, added 55” and 65” Smart 4-K Samsung Televisions to all rooms and common areas, installed a new window-washing system and equipment, updated all computers and servers, and others. During 2021 and first part of calendar 2022, we took advantage of the slow periods to make certain capital improvements including resurfacing half of the hotel bathtubs that needed repair, refreshed meeting space and lobby paint and vinyl, replaced all bed frames and socks, and completed the carpet and wall covering corridor installation. In November 2022, we began our guestroom renovation and had completed approximately 352 guestrooms as of December 31, 2023. Hotel improvements are ongoing to remain competitive in this tough market and we anticipate completing the guestroom renovations by the end of May 2024. Once the Company completes its full renovation, management believes there is significant appreciated value inanticipates its high occupancy to continue and its average daily rates to increase as it completes the Hotel propertyrenovation.
The financial statements do not include any adjustments to support additional borrowings,the carrying amounts of assets, liabilities, and reported expenses that may be necessary if necessary.the Company were unable to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of December 31, 2017,2023, the Company’s material financial obligations which also including interest payments:
| 6 Months | Year | Year | Year | Year | 6 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage notes payable | $ | 115,710,000 | $ | 692,000 | $ | 1,397,000 | $ | 1,460,000 | $ | 1,554,000 | $ | 1,639,000 | $ | 108,968,000 | $ | 106,503,000 | $ | 106,503,000 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||
| Related party and other notes payable | 10,050,000 | 158,000 | 4,671,000 | 567,000 | 567,000 | 567,000 | 3,520,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Hilton/Aimbridge other notes payable | 2,671,000 | 283,000 | 567,000 | 567,000 | 463,000 | 317,000 | 474,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Related party notes payable | 18,200,000 | - | 18,200,000 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest | 41,547,000 | 3,761,000 | 7,254,000 | 6,936,000 | 6,842,000 | 6,757,000 | 9,997,000 | 5,169,000 | 2,985,000 | 2,184,000 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 167,307,000 | $ | 4,611,000 | $ | 13,322,000 | $ | 8,963,000 | $ | 8,963,000 | $ | 8,963,000 | $ | 122,485,000 | $ | 132,543,000 | $ | 109,771,000 | $ | 20,951,000 | $ | 567,000 | $ | 463,000 | $ | 317,000 | $ | 474,000 | ||||||||||||||||||||||||||||
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
IMPACT OF INFLATION
Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since the CompanyAimbridge has the power and ability under the terms of its management agreement to adjust hotelHotel room rates on an ongoing basis,there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company'sCompany’s income is not viewed by management as material.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policiesestimates are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-goingongoing basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company’s critical accounting policies or methods or assumptions during the six months ended December 31, 2017. Please refer2023.
INCOME TAXES
Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws, or interpretations thereof). In addition, we are subject to examination of our income tax returns by the IRS and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements. We evaluate tax positions taken or expected to be taken on a tax return to determine whether they are more likely than not of being sustained, assuming that the tax reporting positions will be examined by taxing authorities with full knowledge of all relevant information, prior to recording the related tax benefit in our consolidated financial statements. If a position does not meet the more likely than not standard, the benefit cannot be recognized. Assumptions, judgment, and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard with respect to a position could materially impact our consolidated financial statements.
DEFERRED INCOME TAXES – VALUATION ALLOWANCE
We assess the realizability of our deferred tax assets quarterly and recognize a valuation allowance when it is more likely than not that some or all of our deferred tax assets are not realizable. This assessment is completed by tax jurisdiction and relies on the weight of both positive and negative evidence available, with significant weight placed on recent financial results. Cumulative pre-tax losses for the three-year period are considered significant objective negative evidence that some or all of our deferred tax assets may not be realizable. Cumulative reported pre-tax income is considered objectively verifiable positive evidence of our ability to generate positive pre-tax income in the future. In accordance with GAAP, when there is a recent history of pre-tax losses, there is little or no weight placed on forecasts for purposes of assessing the recoverability of our deferred tax assets. When necessary, we use systematic and logical methods to estimate when deferred tax liabilities will reverse and generate taxable income and when deferred tax assets will reverse and generate tax deductions. Assumptions, judgment, and the use of estimates are required when scheduling the reversal of deferred tax assets and liabilities, and the exercise is inherently complex and subjective. However, significant judgment will be required to determine the timing and amount of any reversal of the valuation allowance in future periods.
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HOTEL ASSETS AND DEFINITE-LIVED INTANGIBLE ASSETS
We evaluate property and equipment, and definite-lived intangible assets for impairment quarterly, and when events or circumstances indicate the carrying value may not be recoverable, we evaluate the net book value of the assets by comparing to the Company’s Annual Report on Form 10-K for the year ended June 30, 2017 for a summaryprojected undiscounted cash flows of the critical accounting policies.assets. We use judgment to determine whether indications of impairment exist and consider our knowledge of the hospitality industry, historical experience, location of the property, market conditions, and property-specific information available at the time of the assessment. The results of our analysis could vary from period to period depending on how our judgment is applied and the facts and circumstances available at the time of the analysis. When an indicator of impairment exists, judgment is also required in determining the assumptions and estimates to use within the recoverability analysis and when calculating the fair value of the asset or asset group, if applicable. Changes in economic and operating conditions impacting the judgments used could result in impairments to our long-lived assets in future periods. Historically, changes in estimates used in the property and equipment and definite-lived intangible assets impairment assessment process have not resulted in material impairment charges in subsequent periods as a result of changes made to those estimates. There were no indicators of impairment on its hotel investments or intangible assets and accordingly no impairment losses recorded during the six months ended December 31, 2023 and 2022, respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon suchtheir evaluation, theour Chief Executive Officer and PrincipalChief Financial Officer have concluded that as of the end of such period, the Company’sour disclosure controls and procedures are(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective because of a material weakness in ensuringour internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that information requiredthere is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, the Company’s management has concluded that our control around the interpretation and accounting for the deferred tax asset valuation allowance was not effectively designed or maintained. In light of this material weakness, we performed additional analysis as deemed necessary to be disclosedensure that our financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this filing is accumulatedQuarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and communicated to management and is recorded, processed, summarized and reported withincash flows for the time periods specified in the Securities and Exchange Commission rules and forms.period presented.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As stated in the Company’s Form 10-K for the year ended June 30, 2017,2023, we identified a material weakness in internal controls over financial reporting related to our accounting for the deferred income taxes and income tax expense during the fourth quarter of fiscal 2017. During the quarter ended September 30, 2017, weasset valuation allowance was not effectively designed or maintained. We hired a new tax CPA specialistprovision to perform detailed analysis which was completed for the year ended June 30, 2017. We also assigned our audit committee with oversight responsibilities.moving forward. The Company has taken steps to remediate the material weakness and improvedimprove its internal controlcontrols over financial reporting during the last quarterly period covered by this Form 10-Q.
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OTHER INFORMATION
Portsmouth Square, Inc. (the “Company”), through its operating company Justice Operating Company, LLC, a Delaware limited liability company (“Justice”), is the owner of the real property located at 750 Kearny Street in San Francisco, currently improved with a 27 – story building which houses a Hilton Hotel (the “Property”). The Property was purchased and improved by predecessor entities pursuant to a series of agreements with the City and County of San Francisco (the “City”) in the early 1970’s. The terms of the agreements and subsequent approvals and permits included a condition by which the Company’s predecessors were required to construct an ornamental overhead pedestrian bridge across Kearny Street, connecting the Property to a nearby City park and underground parking garage known as Portsmouth Square (the “Bridge”). Included in the approval process was the City’s issuance of a Major Encroachment Permit (“Permit”) allowing the Bridge to span over Kearney Street. As of May 24, 2022, the City has purported to revoke the Permit and on June 13, 2022, directed Justice to submit a general bridge removal and restoration plan (the “Plan”) at its expense. Justice disputes the legality of the purported revocation of the Permit. Justice further disputes the existence of any legal or contractual obligation to remove the Bridge at its expense. In particular, representatives of the Company and Justice participated in meetings with the City on and at various times after August 1, 2019, to discuss a collaborative process for the possible removal of the Bridge. Until the purported revocation of the Permit in 2022, the City representatives repeatedly and consistently promised and agreed that the City will pay for the associated costs of any Bridge removal. Nevertheless, without waiving any rights, in an effort to understand all of the available options, and to provide a response to the City’s directives, Justice has engaged a Project Manager, a structural engineering firm and an architect to advise on the development of a Plan for the Bridge removal, as well as the reconstruction of the front of the Hilton Hotel. In that regard, the Company and Justice have been working cooperatively with the City on the potential process for removal of the Bridge and its related physical encroachments, including obtaining regulatory approvals and necessary permits. A final Plan is currently not expected to be completed until early 2024, and permits are unlikely to be obtained until late 2024 at the earliest. Justice is currently in discussion with the City regarding both the process and financial responsibility for the implementation of the Plan and reconstruction of the impacted portions of the Hotel. Those discussions are expected to continue through the first calendar quarter of 2024.
The Company may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company will defend itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or result of operations when resolved.
Item 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no events that are required to be reported under this Item.
Item 3. DEFAULTS UPON SENIOR SECURITIES
There have been no events that are required to be reported under this Item.
Item 4. MINE SAFETY DISCLOSURES
There have been no events that are required to be reported under this Item.
Item 5. Exhibits.OTHER INFORMATION
There have been no events that are required to be reported under this Item.
Item 6. EXHIBITS
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB Inline XBRL Taxonomy Extension Label Linkbase
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PORTSMOUTH SQUARE, INC. (Registrant) | |||||
| Date: | February 14, 2024 | ||||
| by | /s/ John V. Winfield | ||||
| John V. Winfield | |||||
| Chairman of the Board and | |||||
| Chief Executive Officer | |||||
| Date: | February 14, 2024 | by /s/ Ann Marie Blair | |||
| Treasurer and Controller | |||||
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