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, 20172020
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 1-10324
THE INTERGROUP CORPORATION
(Exact name of registrant as specified in its charter)
| DELAWARE | 13-3293645 | |
| (I.R.S. Employer | ||
| Incorporation or organization) | Identification No.) |
1100 Glendon Avenue, PH-1,1516 S. Bundy Dr., Suite 200, Los Angeles, California 9002490025
(Address of principal executive offices) (Zip Code)
(310) 889-2500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x
[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
[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):
¨
[ ] Yesx [X] No
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common stock | INTG | NASDAQ CAPITAL MARKET |
The number of shares outstanding of registrant’s Common Stock, as of January 30, 201829, 2021 was 2,355,098.2,277,344.
TABLE OF CONTENTS
| -2- |
PART I
Item 1 - Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)(Unaudited)
| As of | December 31, 2017 | June 30, 2017 | December 31, 2020 | June 30, 2020 | ||||||||||||
| ASSETS | ||||||||||||||||
| Investment in hotel, net | $ | 40,820,000 | $ | 42,092,000 | ||||||||||||
| Investment in Hotel, net | $ | 37,970,000 | $ | 38,769,000 | ||||||||||||
| Investment in real estate, net | 54,402,000 | 54,984,000 | 46,476,000 | 50,338,000 | ||||||||||||
| Investment in marketable securities | 13,209,000 | 17,177,000 | 22,008,000 | 6,178,000 | ||||||||||||
| Other investments, net | 963,000 | 1,211,000 | 71,000 | 278,000 | ||||||||||||
| Cash and cash equivalents | 2,309,000 | 2,871,000 | 16,815,000 | 14,163,000 | ||||||||||||
| Restricted cash | 7,686,000 | 7,402,000 | 8,235,000 | 14,123,000 | ||||||||||||
| Other assets, net | 3,075,000 | 3,365,000 | 1,982,000 | 1,985,000 | ||||||||||||
| Deferred income taxes | 3,688,000 | 4,107,000 | ||||||||||||||
| Deferred tax asset | 4,979,000 | 4,383,000 | ||||||||||||||
| Total assets | $ | 126,152,000 | $ | 133,209,000 | $ | 138,536,000 | $ | 130,217,000 | ||||||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Accounts payable and other liabilities - Justice | $ | 6,031,000 | $ | 7,414,000 | ||||||||||||
| Accounts payable and other liabilities | $ | 2,971,000 | $ | 2,947,000 | 3,761,000 | 4,213,000 | ||||||||||
| Accounts payable and other liabilities - hotel | 11,870,000 | 12,833,000 | ||||||||||||||
| Due to securities broker | 2,792,000 | 3,012,000 | 8,320,000 | 1,576,000 | ||||||||||||
| Obligations for securities sold | 2,071,000 | 3,710,000 | 704,000 | 294,000 | ||||||||||||
| Related party and other notes payable | 5,920,000 | 6,112,000 | 4,371,000 | 4,654,000 | ||||||||||||
| Mortgage notes payable - hotel | 115,038,000 | 115,615,000 | ||||||||||||||
| Mortgage notes payable - real estate | 63,597,000 | 64,298,000 | ||||||||||||||
| Finance leases | 901,000 | 1,098,000 | ||||||||||||||
| Other notes payable - SBA Loans | 5,172,000 | 5,172,000 | ||||||||||||||
| Line of credit payable | - | 2,985,000 | ||||||||||||||
| Mortgage notes payable - Hotel, net | 110,810,000 | 111,446,000 | ||||||||||||||
| Mortgage notes payable - real estate, net | 69,203,000 | 65,612,000 | ||||||||||||||
| Total liabilities | 204,259,000 | 208,527,000 | 209,273,000 | 204,464,000 | ||||||||||||
| Shareholders' deficit: | ||||||||||||||||
| Shareholders’ deficit: | ||||||||||||||||
| Preferred stock, $.01 par value, 100,000 shares authorized; none issued | - | - | - | - | ||||||||||||
| Common stock, $.01 par value, 4,000,000 shares authorized; 3,395,616 and 3,395,616 issued; 2,355,098 and 2,359,724 outstanding, respectively | 33,000 | 33,000 | ||||||||||||||
| Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 and 3,404,982 issued; 2,280,674 and 2,288,809 outstanding, respectively | 33,000 | 33,000 | ||||||||||||||
| Additional paid-in capital | 10,468,000 | 10,346,000 | 6,636,000 | 6,626,000 | ||||||||||||
| Accumulated deficit | (46,915,000 | ) | (45,298,000 | ) | (39,056,000 | ) | (43,541,000 | ) | ||||||||
| Treasury stock, at cost, 1,040,518 and 1,035,892 shares, respectively | (12,735,000 | ) | (12,626,000 | ) | ||||||||||||
| Total InterGroup shareholders' deficit | (49,149,000 | ) | (47,545,000 | ) | ||||||||||||
| Treasury stock, at cost, 1,124,308 and 1,116,173 shares, respectively | (15,251,000 | ) | (14,995,000 | ) | ||||||||||||
| Total InterGroup shareholders’ deficit | (47,638,000 | ) | (51,877,000 | ) | ||||||||||||
| Noncontrolling interest | (28,958,000 | ) | (27,773,000 | ) | (23,099,000 | ) | (22,370,000 | ) | ||||||||
| Total shareholders' deficit | (78,107,000 | ) | (75,318,000 | ) | ||||||||||||
| Total shareholders’ deficit | (70,737,000 | ) | (74,247,000 | ) | ||||||||||||
| Total liabilities and shareholders' equity | $ | 126,152,000 | $ | 133,209,000 | ||||||||||||
| Total liabilities and shareholders’ deficit | $ | 138,536,000 | $ | 130,217,000 | ||||||||||||
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 | 2020 | 2019 | ||||||||||||
| Revenues: | ||||||||||||||||
| Hotel | $ | 13,187,000 | $ | 12,837,000 | $ | 3,109,000 | $ | 14,901,000 | ||||||||
| Real estate | 3,625,000 | 3,605,000 | 3,554,000 | 3,839,000 | ||||||||||||
| Total revenues | 16,812,000 | 16,442,000 | 6,663,000 | 18,740,000 | ||||||||||||
| Costs and operating expenses: | ||||||||||||||||
| Hotel operating expenses | (10,743,000 | ) | (9,611,000 | ) | (5,133,000 | ) | (11,730,000 | ) | ||||||||
| Real estate operating expenses | (2,102,000 | ) | (1,754,000 | ) | (2,100,000 | ) | (2,089,000 | ) | ||||||||
| Depreciation and amortization expenses | (1,267,000 | ) | (1,370,000 | ) | (1,181,000 | ) | (1,232,000 | ) | ||||||||
| General and administrative expenses | (730,000 | ) | (602,000 | ) | (560,000 | ) | (581,000 | ) | ||||||||
| Total costs and operating expenses | (14,842,000 | ) | (13,337,000 | ) | (8,974,000 | ) | (15,632,000 | ) | ||||||||
| Income from operations | 1,970,000 | 3,105,000 | ||||||||||||||
| (Loss) income from operations | (2,311,000 | ) | 3,108,000 | |||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense - mortgages | (2,490,000 | ) | (2,402,000 | ) | (2,241,000 | ) | (2,330,000 | ) | ||||||||
| Net loss on marketable securities | (1,178,000 | ) | (3,290,000 | ) | ||||||||||||
| Net gain (loss) on marketable securities | 3,501,000 | (53,000 | ) | |||||||||||||
| Net loss on marketable securities - Comstock | (44,000 | ) | (66,000 | ) | ||||||||||||
| Impairment loss on other investments | (200,000 | ) | (24,000 | ) | (27,000 | ) | - | |||||||||
| Dividend and interest income | 48,000 | 68,000 | 81,000 | 111,000 | ||||||||||||
| Trading and margin interest expense | (313,000 | ) | (291,000 | ) | (287,000 | ) | (241,000 | ) | ||||||||
| Total other expense, net | (4,133,000 | ) | (5,939,000 | ) | ||||||||||||
| Total other income (expense), net | 983,000 | (2,579,000 | ) | |||||||||||||
| Loss before income taxes | (2,163,000 | ) | (2,834,000 | ) | ||||||||||||
| Income tax (expense) benefit | (344,000 | ) | 825,000 | |||||||||||||
| Net loss | (2,507,000 | ) | (2,009,000 | ) | ||||||||||||
| Less: Net loss attributable to the noncontrolling interest | 1,302,000 | 293,000 | ||||||||||||||
| Net loss attributable to InterGroup | $ | (1,205,000 | ) | $ | (1,716,000 | ) | ||||||||||
| (Loss) income before income taxes | (1,328,000 | ) | 529,000 | |||||||||||||
| Income tax benefit (expense) | 265,000 | (149,000 | ) | |||||||||||||
| Net (loss) income | (1,063,000 | ) | 380,000 | |||||||||||||
| Less: Net loss (income) attributable to the noncontrolling interest | 998,000 | (132,000 | ) | |||||||||||||
| Net (loss) income attributable to InterGroup Corporation | $ | (65,000 | ) | $ | 248,000 | |||||||||||
| Net loss per share | ||||||||||||||||
| Basic and diluted | $ | (1.06 | ) | $ | (0.85 | ) | ||||||||||
| Net (loss) income per share | ||||||||||||||||
| Basic | $ | (0.47 | ) | $ | 0.17 | |||||||||||
| Diluted | N/A | $ | 0.14 | |||||||||||||
| Net loss per share attributable to InterGroup | ||||||||||||||||
| Basic and diluted | $ | (0.51 | ) | $ | (0.72 | ) | ||||||||||
| Net income per share attributable to InterGroup Corporation | ||||||||||||||||
| Basic | $ | (0.03 | ) | $ | 0.11 | |||||||||||
| Diluted | N/A | $ | 0.09 | |||||||||||||
| Weighted average number of basic and diluted common shares outstanding | 2,371,125 | 2,375,654 | ||||||||||||||
| Weighted average number of basic common shares outstanding | 2,283,229 | 2,302,748 | ||||||||||||||
| Weighted average number of diluted common shares outstanding | 2,617,224 | 2,633,143 | ||||||||||||||
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 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 27,624,000 | $ | 27,442,000 | ||||
| Real estate | 7,302,000 | 7,254,000 | ||||||
| Total revenues | 34,926,000 | 34,696,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (21,332,000 | ) | (19,867,000 | ) | ||||
| Real estate operating expenses | (3,997,000 | ) | (3,561,000 | ) | ||||
| Depreciation and amortization expenses | (2,541,000 | ) | (2,638,000 | ) | ||||
| General and administrative expenses | (1,561,000 | ) | (1,330,000 | ) | ||||
| Total costs and operating expenses | (29,431,000 | ) | (27,396,000 | ) | ||||
| Income from operations | 5,495,000 | 7,300,000 | ||||||
| Other income (expense): | ||||||||
| Interest expense - mortgages | (4,983,000 | ) | (4,864,000 | ) | ||||
| Net loss on marketable securities | (2,200,000 | ) | (2,136,000 | ) | ||||
| Impairment loss on other investments | (200,000 | ) | (44,000 | ) | ||||
| Dividend and interest income | 131,000 | 110,000 | ||||||
| Trading and margin interest expense | (626,000 | ) | (553,000 | ) | ||||
| Total other expense, net | (7,878,000 | ) | (7,487,000 | ) | ||||
| Loss before income taxes | (2,383,000 | ) | (187,000 | ) | ||||
| Income tax expense | (419,000 | ) | (227,000 | ) | ||||
| Net loss | (2,802,000 | ) | (414,000 | ) | ||||
| Less: Net loss (income) attributable to the noncontrolling interest | 1,185,000 | (111,000 | ) | |||||
| Net loss attributable to InterGroup | $ | (1,617,000 | ) | $ | (525,000 | ) | ||
| Net loss per share | ||||||||
| Basic and diluted | $ | (1.18 | ) | $ | (0.17 | ) | ||
| Net loss per share attributable to InterGroup | ||||||||
| Basic and diluted | $ | (0.68 | ) | $ | (0.22 | ) | ||
| Weighted average number of basic and diluted common shares outstanding | 2,371,445 | 2,378,690 | ||||||
| For the six months ended December 31, | 2020 | 2019 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 6,534,000 | $ | 30,330,000 | ||||
| Real estate | 7,038,000 | 7,556,000 | ||||||
| Total revenues | 13,572,000 | 37,886,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (10,166,000 | ) | (23,078,000 | ) | ||||
| Real estate operating expenses | (3,988,000 | ) | (4,039,000 | ) | ||||
| Depreciation and amortization expenses | (2,372,000 | ) | (2,445,000 | ) | ||||
| General and administrative expenses | (1,926,000 | ) | (1,341,000 | ) | ||||
| Total costs and operating expenses | (18,452,000 | ) | (30,903,000 | ) | ||||
| Loss (income) from operations | (4,880,000 | ) | 6,983,000 | |||||
| Other income (expense): | ||||||||
| Interest expense - mortgages | (4,556,000 | ) | (4,727,000 | ) | ||||
| Gain from sale of real estate | 12,043,000 | - | ||||||
| Net gain (loss) on marketable securities | 3,248,000 | (198,000 | ) | |||||
| Net gain (loss) on marketable securities - Comstock | 51,000 | (370,000 | ) | |||||
| Impairment loss on other investments | (89,000 | ) | - | |||||
| Dividend and interest income | 205,000 | 241,000 | ||||||
| Trading and margin interest expense | (556,000 | ) | (534,000 | ) | ||||
| Total other income (expense), net | 10,346,000 | (5,588,000 | ) | |||||
| Income before income taxes | 5,466,000 | 1,395,000 | ||||||
| Income tax expense | (1,710,000 | ) | (371,000 | ) | ||||
| Net income | 3,756,000 | 1,024,000 | ||||||
| Less: Net loss (income) attributable to the noncontrolling interest | 729,000 | (440,000 | ) | |||||
| Net income attributable to InterGroup Corporation | $ | 4,485,000 | $ | 584,000 | ||||
| Net income per share | ||||||||
| Basic | $ | 1.64 | $ | 0.44 | ||||
| Diluted | $ | 1.43 | $ | 0.39 | ||||
| Net income per share attributable to InterGroup Corporation | ||||||||
| Basic | $ | 1.96 | $ | 0.25 | ||||
| Diluted | $ | 1.71 | $ | 0.22 | ||||
| Weighted average number of basic common shares outstanding | 2,283,657 | 2,306,070 | ||||||
| Weighted average number of diluted common shares outstanding | 2,617,652 | 2,636,465 | ||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -5- |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ DEFICIT
(UNAUDITED)(Unaudited)
| For the six months ended December 31, | 2017 | 2016 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (2,802,000 | ) | $ | (414,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,597,000 | 2,638,000 | ||||||
| Net unrealized loss on marketable securities | 2,081,000 | 2,448,000 | ||||||
| Impairment loss on other investments | 200,000 | 44,000 | ||||||
| Stock compensation expense | 122,000 | 140,000 | ||||||
| Deferred taxes | 419,000 | 227,000 | ||||||
| Changes in assets and liabilities: | ||||||||
| Investment in marketable securities | 1,887,000 | (5,210,000 | ) | |||||
| Other assets | 290,000 | 2,648,000 | ||||||
| Accounts payable and other liabilities | (939,000 | ) | (3,406,000 | ) | ||||
| Due to securities broker | (220,000 | ) | 2,530,000 | |||||
| Obligations for securities sold | (1,639,000 | ) | 867,000 | |||||
| Net cash provided by operating activities | 1,996,000 | 2,512,000 | ||||||
| Cash flows from investing activities: | ||||||||
| Investment in hotel, net | (109,000 | ) | (317,000 | ) | ||||
| Investment in real estate, net | (578,000 | ) | (615,000 | ) | ||||
| Investment in Santa Fe | - | (30,000 | ) | |||||
| Proceeds from other investments | 48,000 | - | ||||||
| Net cash used in investing activities | (639,000 | ) | (962,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Restricted cash - payment of mortgage impounds | (284,000 | ) | (962,000 | ) | ||||
| Net payments of mortgage and other notes payable | (1,526,000 | ) | (1,869,000 | ) | ||||
| Purchase of treasury stock | (109,000 | ) | (352,000 | ) | ||||
| Net cash used in financing activities | (1,919,000 | ) | (3,183,000 | ) | ||||
| Net decrease in cash and cash equivalents | (562,000 | ) | (1,633,000 | ) | ||||
| Cash and cash equivalents at the beginning of the period | 2,871,000 | 5,404,000 | ||||||
| Cash and cash equivalents at the end of the period | $ | 2,309,000 | $ | 3,771,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 5,336,000 | $ | 5,167,000 | ||||
| Additional | InterGroup | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | Shareholders’ | Noncontrolling | Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2020 | 3,404,982 | $ | 33,000 | $ | 6,626,000 | $ | (43,541,000 | ) | $ | (14,995,000 | ) | $ | (51,877,000 | ) | $ | (22,370,000 | ) | $ | (74,247,000 | ) | ||||||||||||
| Net income | - | - | - | 4,550,000 | - | 4,550,000 | 269,000 | 4,819,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 5,000 | - | - | 5,000 | - | 5,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (140,000 | ) | (140,000 | ) | - | (140,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2020 | 3,404,982 | 33,000 | 6,631,000 | (38,991,000 | ) | (15,135,000 | ) | (47,462,000 | ) | (22,101,000 | ) | (69,563,000 | ) | |||||||||||||||||||
| Net income (loss) | - | - | - | (65,000 | ) | - | (65,000 | ) | (998,000 | ) | (1,063,000 | ) | ||||||||||||||||||||
| Stock options expense | - | - | 5,000 | - | - | 5,000 | - | 5,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (116,000 | ) | (116,000 | ) | - | (116,000 | ) | |||||||||||||||||||||
| Balance at December 31, 2020 | 3,404,982 | $ | 33,000 | $ | 6,636,000 | $ | (39,056,000 | ) | $ | (15,251,000 | ) | $ | (47,638,000 | ) | $ | (23,099,000 | ) | $ | (70,737,000 | ) | ||||||||||||
| Additional | InterGroup | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | Shareholders’ | Noncontrolling | Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2019 | 3,404,982 | $ | 33,000 | $ | 10,342,000 | $ | (39,760,000 | ) | $ | (14,347,000 | ) | $ | (43,732,000 | ) | $ | (24,697,000 | ) | $ | (68,429,000 | ) | ||||||||||||
| Net income | - | - | - | 336,000 | - | 336,000 | 308,000 | 644,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 8,000 | - | - | 8,000 | - | 8,000 | ||||||||||||||||||||||||
| Investment in Santa Fe | - | - | (147,000 | ) | - | - | (147,000 | ) | 74,000 | (73,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (156,000 | ) | (156,000 | ) | - | (156,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2019 | 3,404,982 | 33,000 | 10,203,000 | (39,424,000 | ) | (14,503,000 | ) | (43,691,000 | ) | (24,315,000 | ) | (68,006,000 | ) | |||||||||||||||||||
| Net income | - | - | - | 248,000 | - | 248,000 | 132,000 | 380,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 9,000 | - | - | 9,000 | - | 9,000 | ||||||||||||||||||||||||
| Investment in Santa Fe | - | - | (46,000 | ) | - | - | (46,000 | ) | 22,000 | (24,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (190,000 | ) | (190,000 | ) | - | (190,000 | ) | |||||||||||||||||||||
| Balance at December 31, 2019 | 3,404,982 | $ | 33,000 | $ | 10,166,000 | $ | (39,176,000 | ) | $ | (14,693,000 | ) | $ | (43,670,000 | ) | $ | (24,161,000 | ) | $ | (67,831,000 | ) | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -6- |
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the six months ended December 31, | 2020 | 2019 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 3,756,000 | $ | 1,024,000 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 2,260,000 | 2,417,000 | ||||||
| Gain from sale of real estate | (12,043,000 | ) | - | |||||
| Deferred taxes | (596,000 | ) | 371,000 | |||||
| Net unrealized (gain) loss on marketable securities | (4,232,000 | ) | 491,000 | |||||
| Impairment loss on other investments | 89,000 | - | ||||||
| Stock compensation expense | 10,000 | 17,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Investment in marketable securities | (11,598,000 | ) | 1,057,000 | |||||
| Other assets | 3,000 | (102,000 | ) | |||||
| Accounts payable and other liabilities - Justice | (1,383,000 | ) | (2,651,000 | ) | ||||
| Accounts payable and other liabilities | (452,000 | ) | 288,000 | |||||
| Due to securities broker | 6,744,000 | 726,000 | ||||||
| Obligations for securities sold | 410,000 | (1,209,000 | ) | |||||
| Net cash (used in) provided by operating activities | (17,032,000 | ) | 2,429,000 | |||||
| Cash flows from investing activities: | ||||||||
| Payments for hotel investments | (333,000 | ) | (909,000 | ) | ||||
| Payments for real estate investments | (483,000 | ) | (531,000 | ) | ||||
| Proceeds from other investments | 118,000 | 48,000 | ||||||
| Proceeds from sale of real estate | 15,178,000 | - | ||||||
| Payments for investment in Santa Fe | - | (97,000 | ) | |||||
| Net cash provided by (used in) investing activities | 14,480,000 | (1,489,000 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Net payments of mortgage and other notes payable | (190,000 | ) | (2,386,000 | ) | ||||
| Issuance cost from renewing line of credit | (5,000 | ) | - | |||||
| Issuance cost from refinance of mortgage notes payable - real estate | (233,000 | ) | - | |||||
| Purchase of treasury stock | (256,000 | ) | (346,000 | ) | ||||
| Net cash used in financing activities | (684,000 | ) | (2,732,000 | ) | ||||
| Net decrease in cash, cash equivalents and restricted cash | (3,236,000 | ) | (1,792,000 | ) | ||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 28,286,000 | 25,132,000 | ||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 25,050,000 | $ | 23,340,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 4,631,000 | $ | 4,799,000 | ||||
| Taxes paid | $ | 2,741,000 | $ | 39,000 | ||||
| Non-cash transaction: | ||||||||
| Additions to Hotel equipment through capital lease | $ | 30,000 | ||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
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THE INTERGROUP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have been prepared by The InterGroup Corporation (“InterGroup” 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 InterGroup and the notes therein included in the Company'sCompany’s Annual Report on Form 10-K for the year ended June 30, 2017.2020. The June 30, 2017December 31, 2020 Condensed Consolidated Balance Sheet was derived from the Consolidated Balance Sheet as included in the Company’s Form 10-K for the year ended June 30, 2017.2020.
The results of operations for the three and six months ended December 31, 20172020 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2018.2021.
Basic and diluted lossincome per share is computed by dividing net lossincome available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted income per share is similar to the computation of basic earnings per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. The Company'sCompany’s only potentially dilutive common shares are stock options.
As of December 31, 2017,2020, the Company had the power to vote 85.8%87.4% of the voting shares of Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF). This percentage includes the power to vote an approximately 4%3.7% interest in the common stock in Santa Fe owned by the Company’s Chairman and PresidentCEO, John V. Winfield, pursuant to a voting trust agreement entered into on June 30, 1998. Mr. Winfield, Chairman of the Board of both Santa Fe and InterGroup, is a control person of both entities.
Santa Fe’s primary business is conducted through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a public company (OTCBB: PRSI). Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership; a California limited partnership (“Justice” or the “Partnership”). InterGroup also directly owns approximately 13.4%13.5% of the common stock of Portsmouth.
Justice, through its subsidiaries Justice Holdings Company, LLC (“Holdings”), a Delaware Limited Liability Company, Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”), owns and operates a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Holdings and Mezzanine are bothis a wholly-owned subsidiariessubsidiary of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton). through January 31, 2030.
Justice 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. 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, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10ten years commencing on the takeover date and automatically renews for an additionalsuccessive one (1) year periods, to not to exceed five years in the aggregate, subject to certain conditions. TheUnder the terms on the HMA, also provides forbase management fee payable to Interstate to advance a key money incentive fee toshall be one and seven-tenths percent (1.70%) of total Hotel revenue. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the Hotel for capital improvementscompletion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The $2,000,000 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.Americas.
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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.
In addition to the operations of the Hotel, the Company also generates income from the ownership, management and, when appropriate, sale of real estate. Properties include fifteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the United States, but are concentrated in Dallas, Texas and Southern California. The Company also has an investment in unimproved real property. As of December 31, 2017,2020, all of the Company’s residential and commercial rental properties are managed in-house.
Due to Securities Broker
Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.
Obligations for Securities Sold
Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the condensed consolidated statements of operations.
Income Tax
The Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the three and six months ended December 31, 20172020 and 2016 represents2019 represent the income tax effect on the Company’s pretax income which includes its share in the net (loss) income of the Hotel.
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 fromIn February 2016, the investment of its cash and marketable securities and other investments.
To fund the redemption of limited partnership interests andFinancial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees 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 is in compliance with both requirements.
Despite an uncertain economy, the Hotel has continued to generate positive operating income. While the debt service requirements related the loans may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue 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 thoserecognize lease assets and fromlease liabilities on the partnership management fees, will be adequate to meet the Company’s currentbalance sheet and future obligations. Additionally, management believes thererequires expanded disclosures about leasing arrangements. ASU 2016-02 is significant appreciated valueeffective for fiscal years beginning after December 15, 2018, and interim periods in the Hotel property to support additional borrowings, if necessary.
Recently Issued Accounting Pronouncements and U.S. Tax Reform
fiscal years beginning after December 15, 2018, with early adoption permitted. In May 2014, 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,July 2018, the FASB issued ASU No. 2015-14,2018-11, Revenue from Contracts with CustomersLeases (Topic 606)842): Deferral of the Effective DateTargeted Improvements, which delays the effective date of. ASU 2014-09 by one year. The FASB also agreed to allow2018-11 provides entities another option for transition, allowing 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 new revenue recognition standard will be effective for the Company in the first quarter of 2019, with the option to adopt it in the first quarter of 2018. We currently anticipate adoptingnot apply the new standard effectivein the comparative periods they present in their financial statements in the year of adoption. 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 recognized at the date of initial application (the modified retrospective method). The Company currently anticipates adopting the standard2019, we adopted ASU 2016-02 using the modified retrospective method. Whileapproach provided by ASU 2018-11. We elected certain practical expedients permitted under the Company is still intransition guidance, including the processelection to carryforward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of completingless than twelve months on our consolidated balance sheets. In addition, we elected the analysis onlease and non-lease components practical expedient, which allowed us to calculate the impact this guidance will have onpresent value of the consolidated financial statementsfixed payments without performing an allocation of lease and related disclosures, the Company doesnon-lease components. We did not expect the impact to be material.
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 conditionsrecord any operating lease right-of-use (“ROU”) assets and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. ASU No. 2014-15 becomes effective for annual periods beginning after December 15, 2016 and for interim reporting periods thereafter. The Company’soperating lease liabilities upon adoption of this ASUthe new standard as the aggregate value of the ROU assets and operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2020 and 2019. The standard did not have a materialan impact on its consolidated financial statements.our other finance leases, statements of operations or cash flows. See Note 4 and Note 11 for balances of finance lease ROU assets and liabilities, respectively.
On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timelytimelier recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2020.2023. The Company is currently reviewing the effect of ASU No. 2016-13.
OnIn August 2018, the FASB issued Accounting Standard Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) (ASU 2018-13), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 22, 2017,15, 2019. The amendments on changes in unrealized gains and losses, the U.S. government enacted comprehensive tax legislation commonly referredrange and weighted average of significant unobservable inputs used to asdevelop Level 3 fair value measurements, and the Tax Cutsnarrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and Jobs Act (the “Tax Act”).delay adoption of the additional disclosures until their effective date. The Tax Act significantly revises the future ongoing corporate income tax by, among other things, lowering corporate income tax rates. As the Company has adopted the new standard effective July 1, 2020 and the adoption of this guidance does not have a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years.material impact on its condensed consolidated financial statements.
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The reduction ofNOTE 2 - LIQUIDITY
Historically, our cash flows have been primarily generated from our Hotel and real estate operations. However, the corporate tax rate will cause us to reduce our deferred tax assetresponses by federal, state, and local civil authorities to the lower federal base rate of 21%. AsCOVID-19 pandemic has had a result, a provisional net charge of $879,000 was included inmaterial detrimental impact on our liquidity. For the income tax expense for the quartersix months ended December 31, 2017.2020, our net cash flow used in operations was $17,032,000. For the six months ended December 31, 2019, our net cash flow provided by operations was $2,429,000. 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, postponing capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets.
The changes includedCompany had cash and cash equivalents of $16,815,000 and $14,163,000 as of December 31, 2020 and June 30, 2020, respectively. The Company had funds available from its investments in the Tax Act are broad and complex. The final transition impactsmarketable securities of the Tax Act may differ from the above estimate, possibly materially,$22,008,000 as of December 31, 2020 net of $8,320,000 due to among other things, changessecurities broker and $704,000 obligations for securities sold. As of June 30, 2020, the Company had funds available from investments in interpretationsmarketable securities of $6,178,000 net of $1,576,000 due to securities broker and $294,000 obligations for securities sold. In addition, the Tax Act, any legislative action to address questions that arise becauseHotel had $5,977,000 and $10,666,000 of restricted cash held by its senior lender Wells Fargo Bank, N.A. (“Lender”) as of December 31, 2020 and June 30, 2020, respectively. 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$10,666,000 restricted cash held as of June 30, 2020, $2,432,000 was for a measurement periodpossible future property improvement plan (“PIP”) requested by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of up to one year(i) January 2030, which is six years after the enactmentmaturity 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 fiscalsenior and mezzanine loans, or (ii) upon the sale of our Hotel. On August 19, 2020, Lender released PIP deposits in the amount of $2,379,000 to the Hotel. The funds were utilized to fund operating expenses, including franchise and management fees and other expenses.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of December 31, 2020, Justice had used all proceeds of the SBA Loan - Justice in qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of December 31, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 27, 2022 and has a 1.00% interest rate. All payments of principal and interests are deferred until July 2021, and the repayment obligations under both loans may be forgiven if the funds are used for payroll and other qualified expenses. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All unforgiven portion of the principal and accrued interest will be due at maturity. As of December 31, 2020, Justice and InterGroup have each submitted its application for full loan forgiveness.
In order to increase its liquidity position and to take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, InterGroup refinanced one of its California properties and generated net proceeds of $1,144,000. During the three months ended December 31, 2020, InterGroup completed refinancing on two of its California properties and generated net proceeds of $4,327,000. In January 2021, InterGroup refinanced an additional California property and generated net proceeds of $1,057,000. InterGroup is currently evaluating other refinancing opportunities and it could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. InterGroup has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) and the entire $8,000,000 is available to be drawn down as of December 31, 2020 should additional liquidity be necessary. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,043,000. Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000 as InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale. Santa Fe will not seek a replacement property.
| -10- |
As the sole general partner of Justice that controls approximately 96.6% of the voting interest in the Partnership, Portsmouth has the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup and/or Santa Fe to meet any capital calls and its other obligations during the next twelve months and beyond. On August 28, 2020, the Board of InterGroup and Santa Fe passed resolutions, respectively, to provide funding to Portsmouth if necessary. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000 from its current loan balance of $3,000,000 due to InterGroup. On December 31, 2020, InterGroup advanced $700,000 to Justice per the aforementioned agreement. The Partnership is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy and low revenue per available room (“RevPAR”) were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
The following table provides a summary as of December 31, 2020, the Company’s material financial obligations which also includes interest payments.
| 6 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 181,372,000 | $ | 3,856,000 | $ | 3,142,000 | $ | 28,410,000 | $ | 108,348,000 | $ | 3,734,000 | $ | 33,882,000 | ||||||||||||||
| Other notes payable | 10,443,000 | 520,000 | 6,220,000 | 750,000 | 567,000 | 567,000 | 1,819,000 | |||||||||||||||||||||
| Interest | 29,556,000 | 3,863,000 | 8,419,000 | 7,625,000 | 4,411,000 | 904,000 | 4,334,000 | |||||||||||||||||||||
| Total | $ | 221,371,000 | $ | 8,239,000 | $ | 17,781,000 | $ | 36,785,000 | $ | 113,326,000 | $ | 5,205,000 | $ | 40,035,000 | ||||||||||||||
NOTE 3 – REVENUE
Our revenue from real estate is primarily rental income from residential and commercial property leases which is recorded when due from residents and is recognized monthly as earned. The following table present our Hotel revenue disaggregated by revenue streams.
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| For the three months ended December 31, | 2020 | 2019 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 2,584,000 | $ | 12,497,000 | ||||
| Food and beverage | 76,000 | 1,425,000 | ||||||
| Garage | 424,000 | 776,000 | ||||||
| Other operating departments | 25,000 | 203,000 | ||||||
| Total hotel revenue | $ | 3,109,000 | $ | 14,901,000 | ||||
| For the six months ended December 31, | 2020 | 2019 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 5,474,000 | $ | 25,811,000 | ||||
| Food and beverage | 113,000 | 2,647,000 | ||||||
| Garage | 894,000 | 1,512,000 | ||||||
| Other operating departments | 53,000 | 360,000 | ||||||
| Total hotel revenue | $ | 6,534,000 | $ | 30,330,000 | ||||
Performance obligations
We identified the following performance obligations, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:
| ● | Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs. | |
| ● | Noncancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation. | |
| ● | Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest. | |
| ● | Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above. |
Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.
We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year endingor less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.
Contract assets and liabilities
We do not have any material contract assets as of December 31, 2020 and June 30, 2018.2020 other than trade and other receivables, net on our condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.
| -12- |
We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our condensed consolidated balance sheets. Contract liabilities decreased to $221,000 as of December 31, 2020, from $375,000 as of June 30, 2020. The decrease for the six months ended December 31, 2020 was primarily driven by $154,000 of revenue recognized and refunds issued to guests as a result of the COVID-19 outbreak.
Contract costs
We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers and lease agreements do not extend beyond one year.
NOTE 24 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| December 31, 2017 | Cost | Depreciation | Value | |||||||||||||||||||||
| December 31, 2020 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||||||||
| Finance lease ROU assets | 1,805,000 | (448,000 | ) | 1,357,000 | ||||||||||||||||||||
| Furniture and equipment | 27,896,000 | (25,297,000 | ) | 2,599,000 | 30,282,000 | (27,754,000 | ) | 2,528,000 | ||||||||||||||||
| Building and improvements | 64,324,000 | (28,841,000 | ) | 35,483,000 | 64,584,000 | (33,237,000 | ) | 31,347,000 | ||||||||||||||||
| $ | 94,958,000 | $ | (54,138,000 | ) | $ | 40,820,000 | ||||||||||||||||||
| Investment in Hotel, net | $ | 99,409,000 | $ | (61,439,000 | ) | $ | 37,970,000 | |||||||||||||||||
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| June 30, 2017 | Cost | Depreciation | Value | |||||||||||||||||||||
| June 30, 2020 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||||||||
| Finance lease ROU assets | 1,775,000 | (291,000 | ) | 1,484,000 | ||||||||||||||||||||
| Furniture and equipment | 27,681,000 | (24,569,000 | ) | 3,112,000 | 30,528,000 | (27,498,000 | ) | 3,030,000 | ||||||||||||||||
| Building and improvements | 64,308,000 | (28,066,000 | ) | 36,242,000 | 64,005,000 | (32,488,000 | ) | 31,517,000 | ||||||||||||||||
| $ | 94,727,000 | $ | (52,635,000 | ) | $ | 42,092,000 | ||||||||||||||||||
| Investment in Hotel, net | $ | 99,046,000 | $ | (60,277,000 | ) | $ | 38,769,000 | |||||||||||||||||
NOTE 35 – INVESTMENT IN REAL ESTATE, NET
The Company’s investment in real estate includes fifteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the United States, but are concentrated in Dallas, Texas and Southern California. The Company also has an investment in unimproved real property. Investment in real estate consisted of the following:
| As of | December 31, 2017 | June 30, 2017 | December 31, 2020 | June 30, 2020 | ||||||||||||
| Land | $ | 25,033,000 | $ | 25,033,000 | $ | 21,568,000 | $ | 23,565,000 | ||||||||
| Buildings, improvements and equipment | 67,382,000 | 66,804,000 | 67,170,000 | 69,417,000 | ||||||||||||
| Accumulated depreciation | (38,013,000 | ) | (36,853,000 | ) | (43,730,000 | ) | (44,112,000 | ) | ||||||||
| 45,008,000 | 48,870,000 | |||||||||||||||
| Land held for development | 1,468,000 | 1,468,000 | ||||||||||||||
| Investment in real estate, net | $ | 54,402,000 | $ | 54,984,000 | $ | 46,476,000 | $ | 50,338,000 | ||||||||
In July 2015,On August 28, 2020, the Company purchased residential housesold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,043,000. We will manage our federal and state income tax liability, and anticipates the utilization of our available net operating losses and capital loss carryforwards. We received net proceeds of $12,163,000 after selling costs and repayment of the RLOC of $2,985,000 as we had drawn on our RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. We will not seek a replacement property.
| -13- |
On November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California asto InterGroup for $1,530,000 in exchange for a strategic assetreduction of $1,196,000 of its obligation to InterGroup. Santa Fe acquired the property on February 1, 2002 for $1,975,000 in cash. In August 2016, the Company obtained a$785,000. Outstanding mortgage note payable on the houseproperty for $334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately $901,000, which was eliminated in consolidation at InterGroup. The sales price of the amount of $1,000,000. The note has an adjustable interest rate of 5.25%property represents its current value as of December 31, 2017the sale date as appraised by a licensed independent third-party appraiser. The fairness of the sale terms of the transaction were reviewed and requires interest only payments forapproved by the first twenty-three months with a balloon payment at maturity in August 2018.independent directors of Santa Fe and InterGroup, and unanimously approved by the entire Board of Directors of both companies.
NOTE 46 – INVESTMENT IN MARKETABLE SECURITIES
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.
At December 31, 20172020 and June 30, 2017,2020, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:
| Gross | ||||||||||||||||||||||||||||||||||||||||||
| Gross | Gross | Net | Fair | Unrealized | Gross | Net | Fair | |||||||||||||||||||||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | Cost | Gain | Unrealized Loss | Unrealized Loss | Value | ||||||||||||||||||||||||||||||||
| As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||
| As of | ||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||
| Corporate Equities | $ | 27,296,000 | $ | 2,251,000 | $ | (16,338,000 | ) | $ | (14,087,000 | ) | $ | 13,209,000 | $ | 23,018,000 | $ | 4,001,000 | $ | (5,011,000 | ) | $ | (1,010,000 | ) | $ | 22,008,000 | ||||||||||||||||||
| As of June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||
| As of | ||||||||||||||||||||||||||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||
| Corporate Equities | $ | 29,170,000 | $ | 1,768,000 | $ | (13,761,000 | ) | $ | (11,993,000 | ) | $ | 17,177,000 | $ | 11,459,000 | $ | 902,000 | $ | (6,183,000 | ) | $ | (5,281,000 | ) | $ | 6,178,000 | ||||||||||||||||||
As of December 31, 20172020 and June 30, 2017,2020, approximately 16%3% and 28%11%, respectively, of the investment in marketable securities balance above is comprised of the common stock of Comstock Mining Inc.
Inc (“Comstock”). As of December 31, 20172020 and June 30, 2017,2020, the Company had $4,472,000 and $5,734,000, respectively, of unrealized losses of $16,105,000 and $13,294,000, respectively, related to securities held for over one year.year; of which $4,322,000 and $5,427,000 are related to its investment in Comstock, respectively.
Net lossgains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the two componentsnet loss on marketable securities for the respective periods:three and six months ended December 31, 2020 and 2019, respectively:
| For the three months ended December 31, | 2017 | 2016 | ||||||
| Realized gain (loss) on marketable securities | $ | 181,000 | $ | (107,000 | ) | |||
| Unrealized gain (loss) on marketable securities | 726,000 | (260,000 | ) | |||||
| Unrealized loss on marketable securities related to Comstock | (2,085,000 | ) | (2,923,000 | ) | ||||
| Net loss on marketable securities | $ | (1,178,000 | ) | $ | (3,290,000 | ) | ||
| For the three months ended December 31, | 2020 | 2019 | ||||||
| Realized loss on marketable securities, net | $ | (672,000 | ) | $ | (3,000 | ) | ||
| Unrealized gain (loss) on marketable securities, net | 4,173,000 | (50,000 | ) | |||||
| Unrealized loss on marketable securities related to Comstock | (44,000 | ) | (66,000 | ) | ||||
| Net gain (loss) on marketable securities | $ | 3,457,000 | $ | (119,000 | ) | |||
| For the six months ended December 31, | 2017 | 2016 | ||||||
| Realized (loss) gain on marketable securities | $ | (119,000 | ) | $ | 312,000 | |||
| Unrealized gain (loss) on marketable securities | 673,000 | (57,000 | ) | |||||
| Unrealized loss on marketable securities related to Comstock | (2,754,000 | ) | (2,391,000 | ) | ||||
| Net loss on marketable securities | $ | (2,200,000 | ) | $ | (2,136,000 | ) | ||
| -14- |
| For the six months ended December 31, | 2020 | 2019 | ||||||
| Realized loss on marketable securities, net | $ | (934,000 | ) | $ | (77,000 | ) | ||
| Unrealized gain (loss) on marketable securities, net | 4,182,000 | (121,000 | ) | |||||
| Unrealized gain (loss) on marketable securities related to Comstock | 51,000 | (370,000 | ) | |||||
| Net gain (loss) on marketable securities | $ | 3,299,000 | $ | (568,000 | ) | |||
NOTE 57 – OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the securities investment committeeExecutive Strategic Real Estate and 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 consolidated balance sheet as part of other investments, net of other than temporary impairment losses. Other investments also include non-marketable warrants carried at fair value.
Other investments, net consist of the following:
| Type | December 31, 2017 | June 30, 2017 | December 31, 2020 | June 30, 2020 | ||||||||||||
| Private equity hedge fund, at cost | $ | 582,000 | $ | 782,000 | $ | 71,000 | $ | 157,000 | ||||||||
| Other preferred stock, at cost | 381,000 | 429,000 | - | 121,000 | ||||||||||||
| $ | 963,000 | $ | 1,211,000 | $ | 71,000 | $ | 278,000 | |||||||||
NOTE 6 –8 - 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 and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
The assets measured at fair value on a recurring basis are as follows:
| As of | 12/31/2017 | 6/30/2017 | December 31, 2020 | June 30, 2020 | ||||||||||||
| Total - Level 1 | Total - Level 1 | |||||||||||||||
| Assets: | Total - Level 1 | Total - Level 1 | ||||||||||||||
| Investment in marketable securities: | ||||||||||||||||
| Basic materials | $ | 2,640,000 | $ | 6,222,000 | ||||||||||||
| REITs and real estate companies | $ | 8,088,000 | $ | 2,365,000 | ||||||||||||
| Financial services | 3,972,000 | 282,000 | ||||||||||||||
| Energy | 3,233,000 | 767,000 | ||||||||||||||
| Consumer cyclical | 1,887,000 | 295,000 | ||||||||||||||
| Technology | 3,039,000 | 4,134,000 | 1,428,000 | 121,000 | ||||||||||||
| REITs and real estate companies | 1,494,000 | 1,820,000 | ||||||||||||||
| Energy | 472,000 | 1,345,000 | ||||||||||||||
| Corporate Bonds | 1,774,000 | 1,683,000 | ||||||||||||||
| Industrials | 1,297,000 | 484,000 | ||||||||||||||
| Basic material | 1,269,000 | 1,209,000 | ||||||||||||||
| Communication services | 442,000 | 157,000 | ||||||||||||||
| Healthcare | 267,000 | 43,000 | ||||||||||||||
| Other | 3,790,000 | 1,973,000 | 125,000 | 38,000 | ||||||||||||
| Corporate bonds | - | 417,000 | ||||||||||||||
| $ | 13,209,000 | $ | 17,177,000 | $ | 22,008,000 | $ | 6,178,000 | |||||||||
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.
Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments in 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).impairment. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:
| Net loss for the six months | ||||||||||||
| Assets | Level 3 | December 31, 2017 | ended December 31, 2017 | |||||||||
| Other non-marketable investments | $ | 963,000 | $ | 963,000 | $ | (200,000 | ) | |||||
| Net loss for the six months | ||||||||||||
| Assets | Level 3 | June 30, 2017 | ended December 31, 2016 | |||||||||
| Other non-marketable investments | $ | 1,211,000 | $ | 1,211,000 | $ | (44,000 | ) | |||||
| -15- |
| Net loss for the six months ended | ||||||||||||
| Assets | Level 3 | December 31, 2020 | December 31, 2020 | |||||||||
| Other non-marketable investments | $ | 71,000 | $ | 71,000 | $ | (89,000 | ) | |||||
| Net loss for the six months ended | ||||||||||||
| Assets | Level 3 | June 30, 2020 | December 31, 2019 | |||||||||
| Other non-marketable investments | $ | 278,000 | $ | 278,000 | $ | - | ||||||
For the six months ended December 31, 2020 and 2019, we received distribution from other non-marketable investments of $118,000 and $48,000, respectively.
Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments and holds less than 20% ownership in each of the investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
NOTE 9 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows.
| As of | December 31, 2020 | June 30, 2020 | ||||||
| Cash and cash equivalents | $ | 16,815,000 | $ | 14,163,000 | ||||
| Restricted cash | 8,235,000 | 14,123,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 25,050,000 | $ | 28,286,000 | ||||
Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel. As of June 30, 2020, restricted cash also includes key money received from Interstate that is restricted for capital improvements for the Hotel. As of December 31, 2020, the key money balance was zero as Hotel obtained approval from Interstate to use the funds for hotel operations during the first quarter of fiscal year 2021.
NOTE 710 – STOCK BASED COMPENSATION PLANS
The Company follows Accounting Standard Codification (ASC) Topic 718 “Compensation – Stock Compensation”, which addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units.
Please refer to Note 16 – Stock Based Compensation Plans in the Company'sCompany’s Form 10-K for the year ended June 30, 20172020 for more detaildetailed information on the Company’s stock-based compensation plans.
During the three months ended December 31, 20172020 and 2016,2019, the Company recorded stock option compensation cost of $60,000$5,000 and $66,000,$9,000, respectively, related to stock options that were previously issued. ForDuring the six months ended December 31, 20172020 and 2016,2019, the Company recorded stock option compensation cost of $122,000$10,000 and $140,000,$17,000, respectively, related to stock options that were previously issued. As of December 31, 2017,2020, there was a total of $181,000$8,000 of unamortized compensation related to stock options which is expected to be recognized over the weighted-average period of 2.901.17 years.
| -16- |
In December 2018, the Company’s President and Chief Executive Officer, John V. Winfield exercised 26,805 vested Incentive Stock Options by surrendering 17,439 shares of the Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation expense was recorded related to the issuance.
On February 25, 2020, shareholders of the Company voted in favor of amendments to the Company’s 2010 Omnibus Employee Incentive Plan (the “2010 Incentive Plan”) which would amend Section 1.3 of the 2010 Incentive Plan to extend the term from ten (10) years to sixteen (16) years, and Section 6.4 of the 2010 Incentive Plan to change “tenth (10th) anniversary date” to “twentieth (20th) anniversary date”. This would increase the term of the 2010 Incentive Plan to 20 years (expiring in February 2030 instead of February 2020) and also permit the existence of options with a term longer than ten years. The purpose of the amendment to the term is to extend its existence as our only equity incentive plan. The purpose of amendment of the allowable term of options is so that the Board may extend the term of the 100,000 options granted to John Winfield on March 16, 2010 from ten years to sixteen years so that these options will terminate on March 16, 2026 instead of on March 16, 2020, in recognition of Mr. Winfield’s contributions to and leadership of our Company. Upon approval of these amendments by the shareholders, our Board of Directors extended the term of Mr. Winfield’s options as described in this paragraph. As a result of extending Mr. Winfield’s options, the Company recorded stock option compensation cost of $116,000 in March 2020.
Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history. The Company has selected to use the simplified method for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.
The following table summarizes the stock options activity from July 1, 20162019 through December 31, 2017:2020:
| Number of | Weighted Average | Weighted Average | Aggregate | |||||||||||||||||||||||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | Shares | Exercise Price | Remaining Life | Intrinsic Value | |||||||||||||||||||||||||||||
| Oustanding at | July 1, 2016 | 350,000 | $ | 16.70 | 5.95 years | $ | 3,082,000 | July 1, 2019 | 341,195 | $ | 16.95 | 3.07 years | $ | 4,680,000 | ||||||||||||||||||||||
| Granted | 18,000 | 27.30 | - | - | ||||||||||||||||||||||||||||||||
| Exercised | - | - | - | - | ||||||||||||||||||||||||||||||||
| Forfeited | - | - | - | - | ||||||||||||||||||||||||||||||||
| Exchanged | - | - | - | - | ||||||||||||||||||||||||||||||||
| Oustanding at | June 30, 2017 | 368,000 | $ | 17.21 | 5.17 years | $ | 3,046,000 | |||||||||||||||||||||||||||||
| Outstanding at | June 30, 2020 | 341,195 | $ | 16.95 | 3.83 years | $ | 3,271,000 | |||||||||||||||||||||||||||||
| Exercisable at | June 30, 2017 | 286,000 | $ | 16.19 | 5.20 years | $ | 2,635,000 | June 30, 2020 | 323,195 | $ | 16.38 | 3.67 years | $ | 3,271,000 | ||||||||||||||||||||||
| Vested and Expected to vest at | June 30, 2017 | 368,000 | $ | 17.21 | 5.17 years | $ | 3,046,000 | June 30, 2020 | 341,195 | $ | 16.95 | 3.83 years | $ | 3,271,000 | ||||||||||||||||||||||
| Oustanding at | July 1, 2017 | 368,000 | $ | 17.21 | 5.17 years | $ | 3,046,000 | July 1, 2020 | 341,195 | $ | 16.95 | 3.83 years | $ | 3,271,000 | ||||||||||||||||||||||
| Granted | - | - | - | - | ||||||||||||||||||||||||||||||||
| Exercised | - | - | - | - | ||||||||||||||||||||||||||||||||
| Forfeited | - | - | - | - | ||||||||||||||||||||||||||||||||
| Exchanged | - | - | - | - | ||||||||||||||||||||||||||||||||
| Oustanding at | December 31, 2017 | 368,000 | $ | 17.21 | 4.67 years | $ | 2,500,575 | |||||||||||||||||||||||||||||
| Outstanding at | December 31, 2020 | 341,195 | $ | 16.95 | 3.32 years | $ | 5,004,000 | |||||||||||||||||||||||||||||
| Exercisable at | December 31, 2017 | 318,000 | $ | 16.47 | 4.80 years | $ | 2,345,000 | December 31, 2020 | 333,995 | $ | 16.73 | 3.26 years | $ | 4,973,000 | ||||||||||||||||||||||
| Vested and Expected to vest at | December 31, 2017 | 368,000 | $ | 17.21 | 4.67 years | $ | 2,500,575 | December 31, 2020 | 341,195 | $ | 16.95 | 3.32 years | $ | 5,004,000 | ||||||||||||||||||||||
NOTE 811 – SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the hotel (“Hotel Operations”), the operation of its multi-family residential properties (“Real Estate Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this information.
| -17- |
Information below represents reported segments for the three and six months ended December 31, 20172020 and 2016.2019. Operating income (loss) from hotel operations consistconsists of the operation of the hotel and operation of the garage. Operating income for rental properties consistfrom real estate operations consists of the operation of rental income.properties. Operating income (loss) forloss from investment transactions consistconsists of net investment gain (loss)gains (losses), impairment loss on other investments, net unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax expense(expense) benefit for the entire Company.
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2020 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 3,109,000 | $ | 3,554,000 | $ | - | $ | - | $ | 6,663,000 | ||||||||||
| Segment operating expenses | (5,133,000 | ) | (2,101,000 | ) | - | (559,000 | ) | (7,793,000 | ) | |||||||||||
| Segment income (loss) from operations | (2,024,000 | ) | 1,453,000 | - | (559,000 | ) | (1,130,000 | ) | ||||||||||||
| Interest expense - mortgage | (1,668,000 | ) | (573,000 | ) | - | - | (2,241,000 | ) | ||||||||||||
| Depreciation and amortization expense | (582,000 | ) | (599,000 | ) | - | - | (1,181,000 | ) | ||||||||||||
| Gain from investments | - | - | 3,224,000 | - | 3,224,000 | |||||||||||||||
| Income tax benefit | - | - | - | 265,000 | 265,000 | |||||||||||||||
| Net income (loss) | $ | (4,274,000 | ) | $ | 281,000 | $ | 3,224,000 | $ | (294,000 | ) | $ | (1,063,000 | ) | |||||||
| Total assets | $ | 45,990,000 | $ | 46,476,000 | $ | 22,079,000 | $ | 23,991,000 | $ | 138,536,000 | ||||||||||
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended December 31, 2017 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| For the three months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended December 31, 2019 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 13,187,000 | $ | 3,625,000 | $ | - | $ | - | $ | 16,812,000 | $ | 14,901,000 | $ | 3,839,000 | $ | - | $ | - | $ | 18,740,000 | ||||||||||||||||||||
| Segment operating expenses | (10,743,000 | ) | (2,102,000 | ) | - | (730,000 | ) | (13,575,000 | ) | (11,730,000 | ) | (2,089,000 | ) | - | (581,000 | ) | (14,400,000 | ) | ||||||||||||||||||||||
| Segment income (loss) from operations | 2,444,000 | 1,523,000 | - | (730,000 | ) | 3,237,000 | 3,171,000 | 1,750,000 | - | (581,000 | ) | 4,340,000 | ||||||||||||||||||||||||||||
| Interest expense - mortgage | (1,850,000 | ) | (640,000 | ) | - | - | (2,490,000 | ) | (1,735,000 | ) | (595,000 | ) | - | - | (2,330,000 | ) | ||||||||||||||||||||||||
| Depreciation and amortization expense | (682,000 | ) | (585,000 | ) | - | - | (1,267,000 | ) | (611,000 | ) | (621,000 | ) | - | - | (1,232,000 | ) | ||||||||||||||||||||||||
| Loss from investments | - | - | (1,643,000 | ) | - | (1,643,000 | ) | - | - | (249,000 | ) | - | (249,000 | ) | ||||||||||||||||||||||||||
| Income tax expense | - | - | - | (344,000 | ) | (344,000 | ) | - | - | - | (149,000 | ) | (149,000 | ) | ||||||||||||||||||||||||||
| Net income (loss) | $ | (88,000 | ) | $ | 298,000 | $ | (1,643,000 | ) | $ | (1,074,000 | ) | $ | (2,507,000 | ) | $ | 825,000 | $ | 534,000 | $ | (249,000 | ) | $ | (730,000 | ) | $ | 380,000 | ||||||||||||||
| Total assets | $ | 49,626,000 | $ | 54,402,000 | $ | 14,172,000 | $ | 7,952,000 | $ | 126,152,000 | ||||||||||||||||||||||||||||||
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended December 31, 2016 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| As of and for the six months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended December 31, 2020 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 12,837,000 | $ | 3,605,000 | $ | - | $ | - | $ | 16,442,000 | $ | 6,534,000 | $ | 7,038,000 | $ | - | $ | - | $ | 13,572,000 | ||||||||||||||||||||
| Segment operating expenses | (9,611,000 | ) | (1,754,000 | ) | - | (602,000 | ) | (11,967,000 | ) | (10,166,000 | ) | (3,988,000 | ) | - | (1,926,000 | ) | (16,080,000 | ) | ||||||||||||||||||||||
| Segment income (loss) from operations | 3,226,000 | 1,851,000 | - | (602,000 | ) | 4,475,000 | (3,632,000 | ) | 3,050,000 | - | (1,926,000 | ) | (2,508,000 | ) | ||||||||||||||||||||||||||
| Interest expense - mortgage | (1,750,000 | ) | (652,000 | ) | - | - | (2,402,000 | ) | (3,368,000 | ) | (1,188,000 | ) | - | - | (4,556,000 | ) | ||||||||||||||||||||||||
| Gain on sale of real estate | 12,043,000 | 12,043,000 | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization expense | (810,000 | ) | (560,000 | ) | - | - | (1,370,000 | ) | (1,161,000 | ) | (1,211,000 | ) | - | - | (2,372,000 | ) | ||||||||||||||||||||||||
| Loss from investments | - | - | (3,537,000 | ) | - | (3,537,000 | ) | |||||||||||||||||||||||||||||||||
| Income tax benefit | - | - | - | 825,000 | 825,000 | |||||||||||||||||||||||||||||||||||
| Gain from investments | - | - | 2,859,000 | - | 2,859,000 | |||||||||||||||||||||||||||||||||||
| Income tax expense | - | - | - | (1,710,000 | ) | (1,710,000 | ) | |||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 666,000 | $ | 639,000 | $ | (3,537,000 | ) | $ | 223,000 | $ | (2,009,000 | ) | $ | (8,161,000 | ) | $ | 12,694,000 | $ | 2,859,000 | $ | (3,636,000 | ) | $ | 3,756,000 | ||||||||||||||||
| Total assets | $ | 50,206,000 | $ | 55,856,000 | $ | 18,029,000 | $ | 8,701,000 | $ | 132,792,000 | $ | 45,990,000 | $ | 46,476,000 | $ | 22,079,000 | $ | 23,991,000 | $ | 138,536,000 | ||||||||||||||||||||
| As of and for the six months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2017 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 27,624,000 | $ | 7,302,000 | $ | - | $ | - | $ | 34,926,000 | ||||||||||
| Segment operating expenses | (21,332,000 | ) | (3,997,000 | ) | - | (1,561,000 | ) | (26,890,000 | ) | |||||||||||
| Segment income (loss) from operations | 6,292,000 | 3,305,000 | - | (1,561,000 | ) | 8,036,000 | ||||||||||||||
| Interest expense - mortgage | (3,703,000 | ) | (1,280,000 | ) | - | - | (4,983,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,381,000 | ) | (1,160,000 | ) | - | - | (2,541,000 | ) | ||||||||||||
| Loss from investments | - | - | (2,895,000 | ) | - | (2,895,000 | ) | |||||||||||||
| Income tax expense | - | - | - | (419,000 | ) | (419,000 | ) | |||||||||||||
| Net income (loss) | $ | 1,208,000 | $ | 865,000 | $ | (2,895,000 | ) | $ | (1,980,000 | ) | $ | (2,802,000 | ) | |||||||
| Total assets | $ | 49,626,000 | $ | 54,402,000 | $ | 14,172,000 | $ | 7,952,000 | $ | 126,152,000 | ||||||||||
| As of and for the six months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended December 31, 2016 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| For the six months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended December 31, 2019 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 27,442,000 | $ | 7,254,000 | $ | - | $ | - | $ | 34,696,000 | $ | 30,330,000 | $ | 7,556,000 | $ | - | $ | - | $ | 37,886,000 | ||||||||||||||||||||
| Segment operating expenses | (19,867,000 | ) | (3,561,000 | ) | - | (1,330,000 | ) | (24,758,000 | ) | (23,078,000 | ) | (4,039,000 | ) | - | (1,341,000 | ) | (28,458,000 | ) | ||||||||||||||||||||||
| Segment income (loss) from operations | 7,575,000 | 3,693,000 | - | (1,330,000 | ) | 9,938,000 | 7,252,000 | 3,517,000 | - | (1,341,000 | ) | 9,428,000 | ||||||||||||||||||||||||||||
| Interest expense - mortgage | (3,579,000 | ) | (1,285,000 | ) | - | - | (4,864,000 | ) | (3,527,000 | ) | (1,200,000 | ) | - | - | (4,727,000 | ) | ||||||||||||||||||||||||
| Depreciation and amortization expense | (1,523,000 | ) | (1,115,000 | ) | - | - | (2,638,000 | ) | (1,204,000 | ) | (1,241,000 | ) | - | - | (2,445,000 | ) | ||||||||||||||||||||||||
| Loss from investments | - | - | (2,623,000 | ) | - | (2,623,000 | ) | - | - | (861,000 | ) | - | (861,000 | ) | ||||||||||||||||||||||||||
| Income tax expense | - | - | - | (227,000 | ) | (227,000 | ) | - | - | - | (371,000 | ) | (371,000 | ) | ||||||||||||||||||||||||||
| Net income (loss) | $ | 2,473,000 | $ | 1,293,000 | $ | (2,623,000 | ) | $ | (1,557,000 | ) | $ | (414,000 | ) | $ | 2,521,000 | $ | 1,076,000 | $ | (861,000 | ) | $ | (1,712,000 | ) | $ | 1,024,000 | |||||||||||||||
| Total assets | $ | 50,206,000 | $ | 55,856,000 | $ | 18,029,000 | $ | 8,701,000 | $ | 132,792,000 | ||||||||||||||||||||||||||||||
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NOTE 912 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
On July 2, 2014,The following summarizes the Partnership obtained from the Company 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 December 31, 2018.
Also included in the balancebalances of related party noteand other notes payable atas of December 31, 2017 is the obligation2020 and June 30, 2020, respectively.
| As of | December 31, 2020 | June 30, 2020 | ||||||
| Note payable - Hilton | 2,850,000 | 3,008,000 | ||||||
| Note payable - Interstate | 1,521,000 | 1,646,000 | ||||||
| SBA Loans | 5,172,000 | 5,172,000 | ||||||
| Total related party and other notes payable | $ | 9,543,000 | $ | 9,826,000 | ||||
Note payable to Hilton (Franchisor) in the form ofis a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton. 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, Justice entered into a Hotel management agreement (“HMA”)an HMA with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for anan initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. The $2,000,000As of December 31, 2020, the key money balance was zero as Hotel obtained approval from Interstate to use the funds for hotel operations during the first quarter of fiscal year 2021. As of June 30, 2020, balance of the key money plus accrued interest is $1,009,000 and is included in restricted cash and related party and other notes payable balances in the condensed consolidated balance sheetssheet. Unamortized portion of the key money is included in the related party notes payable in the condensed consolidated balance sheets.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of December 31, 2020, Justice had used all proceeds of the SBA Loan - Justice in qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of December 31, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 27, 2022 and has a 1.00% interest rate. All payments of principal and interests are deferred until July 2021, and the repayment obligations under both loans may be forgiven if the funds are used for payroll and other qualified expenses. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All unforgiven portion of the principal and accrued interest will be due at maturity. As of December 31, 2020, Justice and InterGroup have each submitted its application for full loan forgiveness.
As of December 31, 2020, the Company had finance lease obligations outstanding of $901,000. These finance leases expire in various years through 2023 at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of December 31, 2020 are as follows:
For the year ending June 30,
| 2021 | $ | 262,000 | ||
| 2022 | 508,000 | |||
| 2023 | 188,000 | |||
| Total minimum lease payments | 958,000 | |||
| Less interest on finance lease | (57,000 | ) | ||
| Present value of future minimum lease payments | $ | 901,000 |
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Future minimum principal payments for all related party and other financing transactions are as follows:
For the year ending June 30,
| 2021 | $ | 678,000 | ||
| 2022 | 6,220,000 | |||
| 2023 | 750,000 | |||
| 2024 | 567,000 | |||
| 2025 | 567,000 | |||
| Thereafter | 1,661,000 | |||
| $ | 10,443,000 |
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024. Outstanding principal balance on the loan was $91,536,000 and $92,292,000 as of December 31, 2020 and June 30, 2017.
In April 2017,2020, 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 with a term of five monthsrate was paid off. Interest rate on the new mezzanine loan is 7.25% and maturing September 6, 2017. Thethe loan was extended to September 15, 2017 and paid offmatures on September 13, 2017.January 1, 2024. Interest only payments are due monthly.
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 mortgage loan and the $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 unableliquidity. As of December 31, 2020, InterGroup is in compliance with both requirements. However, due to satisfy independently.
In connection with the redemption ofHotel’s current low occupancy and its negative impact on the limited partnership interest of Justice,Hotel’s cash flow, Justice Operating Company, LLC agreedmay not meet certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lock-box by the Lender for all cash collected by the Hotel. However, such lockbox has been created and utilized from the loan inception and will be in place up to pay a total of $1,550,000 in fees to certain officers and directorsloan maturity regardless of the Company for services renderedDSCR.
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in connectionthe principal amount of $4,250,000 at 12% per year fixed interest, with the redemptiona term of the partnership interests, refinancing2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 1, 2021. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000 from its current loan balance of the Justices properties$3,000,000 due to InterGroup. The balance of this loan was $3,700,00 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. As$3,000,000 as of December 31, 2017, $400,000 of these fees remain payable.2020 and June 30, 2020, respectively, and is eliminated in the condensed consolidated balance sheets.
AsIn July 2018, InterGroup obtained a revolving $5,000,000 line of June 30, 2017, Justice had an outstanding accountscredit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable balanceat Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for $316,000the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is a subsidiary of Santa Fe and the Company. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC. In July 2020, InterGroup entered into a second modification agreement with CIBC which extended the maturity date of its RLOC to July 21, 2021. The $2,969,000 mortgage due to InterGroup was also extended to July 21, 2021. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for management$15,650,000 and received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale.
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On November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to InterGroup for $1,530,000 in exchange for a reduction of $1,196,000 of its obligation to InterGroup. Santa Fe acquired the property on February 1, 2002 for $785,000. Outstanding mortgage on the property for $334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately $901,000, which was eliminated in consolidation at InterGroup. The sales price of the Hotel from June to Decemberproperty represents its current value as of 2016. Asthe sale date as appraised by a licensed independent third-party appraiser. The fairness of December 31,2017, that balance was paid off.the sale terms of the transaction were reviewed and approved by the independent directors of Santa Fe and InterGroup, and unanimously approved by the entire Board of Directors of both companies.
Four of the Portsmouth directors serve as directors of InterGroup. ThreeTwo of those directors also serve as directors of Santa Fe. The threetwo Santa Fe directors also serve as directors of InterGroup.
As Chairman of the Executive Strategic Real Estate and Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Portsmouth and Santa Fe and oversees the investment activity of those companies. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.
Item 2NOTE 13 – LEGAL PROCEEDINGSACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE
We are involved from time to time in legal proceedingsThe following summarizes the balances of types regardedaccounts payable and other liabilities – Justice as common in our business, including administrative or judicial proceedings, suchof December 31, 2020 and June 30, 2020.
| As of | December 31, 2020 | June 30, 2020 | ||||||
| Trade payable | $ | 1,177,000 | $ | 3,000,000 | ||||
| Advance deposits | 221,000 | 375,000 | ||||||
| Property tax payable | 523,000 | 523,000 | ||||||
| Payroll and related accruals | 2,221,000 | 1,969,000 | ||||||
| Mortgage interest payable | 416,000 | 527,000 | ||||||
| Withholding and other taxes payable | 519,000 | 370,000 | ||||||
| Security deposit | 52,000 | 52,000 | ||||||
| Other payables | 902,000 | 598,000 | ||||||
| Total accounts payable and other liabilities - Justice | $ | 6,031,000 | $ | 7,414,000 | ||||
NOTE 14 – ACCOUNTS PAYABLE AND OTHER LIABILITIES
The following summarizes the balances of accounts payable and other liabilities as employment or labor disputes, breach of contract liabilityDecember 31, 2020 and premises liability litigation. Where appropriate, we may establish financial reserves for such proceedings. We also maintain insurance to mitigate certain of such risks.June 30, 2020.
| As of | December 31, 2020 | June 30, 2020 | ||||||
| Trade payable | $ | 510,000 | $ | 709,000 | ||||
| Advance deposits | 318,000 | 422,000 | ||||||
| Property tax payable | 855,000 | 554,000 | ||||||
| Payroll and related accruals | 46,000 | 42,000 | ||||||
| Interest payable | 218,000 | 218,000 | ||||||
| Withholding and other taxes payable | 768,000 | 1,189,000 | ||||||
| Security deposit | 750,000 | 745,000 | ||||||
| Other payables | 296,000 | 334,000 | ||||||
| Total accounts payable and other liabilities | $ | 3,761,000 | $ | 4,213,000 | ||||
NOTE 15 – SUBSEQUENT EVENTS
On April 21, 2014,January 8, 2021, the Partnership commenced arbitration against Glaser Weil Fink Howard Avchen & Shapiro, LLP, Brett J. Cohen, Gary N. Jacobs, JanetCompany refinanced one of its California property’s $1.6 million Fannie Mae mortgage with a new Freddie Mac mortgage in the amount of $2.8 million at a fixed rate of 3.05% for 10-years. The Company received net proceeds of approximately $1.0 million.
On January 15, 2021, we moved our corporate office from 12121 Wilshire Boulevard, Suite 610, Los Angeles, California to 1516 S. McCloud, Paul B. Salvaty,Bundy Dr., Suite 200, Los Angeles, California where we signed a four year lease.
As of November 25, 2020, a group of less than ten shareholders of Santa Fe Financial Corporation approved a Corporate Action to distribute the assets of that company and Joseph K. Fletcher III (“Respondents”) in connection withthen liquidate the redemption transaction.corporate entity. The arbitration alleges legal malpractice and also seeks declaratory relief regarding provisionsCorporate Action was approved by the holders of approximately 87.4% 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 began a seriestotal issued and outstanding voting capital stock of mediation sessions priorthat company entitled to vote on matters submitted to the scheduled hearing. No prediction can be givenholders of common stock as to the outcome of this matter.that record date.
On May 5, 2016,The terms of the dissolution are:
| ● | The assets of that company consist of: | |
| ○ | 505,437 shares of Portsmouth Square, Inc. common stock with a per share price of $41.00 as of January 15, 2021 |
| ○ | Cash in the approximate amount of $6.0 million (net of income taxes paid) | |
| ● | On the 20th calendar day following the date of mailing of the definitive information statement on Schedule 14C which was filed with the SEC on January 22, 2021, the holder of each share of Santa Fe common stock will receive .38 of a share of Portsmouth common stock and the amount of cash in Santa Fe divided by 1,339,310 (the number of issued and outstanding shares of Santa Fe common stock). Subsequent to when the cash of Santa Fe shall be distributed to all shareholders, net of tax liabilities, on a pro rata basis based upon number of shares of common stock of Santa Fe owned by each shareholder on the date of liquidation pursuant to the plan of liquidation and dissolution. With respect thereto, when stockholders of Santa Fe will receive 0.38 shares of Portsmouth stock for each share of Santa Fe stock owned, they will receive cash in lieu of fractional Portsmouth shares. |
In January 2021, InterGroup advanced $2,000,000 to Justice and Portsmouthper the loan modification agreement 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 Justice and Portsmouth.on December 16, 2020.
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ItemItem 3 –2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “could,” “will”, “would”“might” and similar expressions, are intended to identify forward-looking statements. These
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 or the outbreak of COVID-19 or similar outbreaks; partnership distributions,distributions; 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, that2020. 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.
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NEGATIVE EFFECTS OF CIVIL AUTHORITY ACTIONS ON OUR BUSINESS
On February 25, 2020, the City of San Francisco issued the proclamation by the Mayor declaring the existence of a local emergency. The negative effects of the civil authority actions related to the novel strain of coronavirus (“COVID-19”) on our business have been significant. In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. To mitigate the harm from the pandemic, on March 16, 2020, the City and County of San Francisco, along with a group of five other Bay Area counties and the City of Berkeley, issued parallel health officer orders imposing shelter in place limitations across the Bay Area, requiring everyone to stay safe at home except for certain essential needs. Since February 2020, several unfavorable events and civil authority actions have unfolded causing demand for our hotel rooms to suffer including cancellations of all citywide conventions, reduction of flights in and out of the Bay Area and decline in both leisure and business travel.
In December 2020, due to the surge in COVID-19 cases and hospitalizations, the Health Officer of the City and County of San Francisco (the “County”) has suspended or restricted certain activities. Health Order C19-07q (the “Order”) incorporates suspensions, reductions in capacity limits, and other restrictions contained in the Regional Stay At Home Order issued by the California Department of Public Health on December 3, 2020. Effective December 17, 2020, the Bay Area Region, including San Francisco, is required to comply with the State’s December 3, 2020 Regional Stay-at-Home Order. The Order strongly discourages anyone in the County from travelling for leisure, recreation, business or other purposes that can be postponed until after the current surge. With limited exceptions, this Order imposed a mandatory quarantine on anyone traveling, moving, or returning to the County from anywhere outside the Bay Area. Effective January 20, 2021, Health Order C19-07r revised and replaced the previous Order; it continues to temporarily prohibit certain businesses and activities from resuming but allows certain other businesses, activities, travel and governmental functions to occur subject to specified health and safety restrictions, limitations, and conditions to limit the transmission of COVID-19. The Mayor announced on January 25, 2021 that hotels and lodging may accept reservations for tourist use from in-state and out of state guests. Out of Bay Area guests are required to quarantine for 10 days and must make a reservation for 10 days or longer in order to do so. Indoor gyms, meeting rooms, ballrooms and dining must remain closed, though outdoor dining can resume.
In response to the decrease in demand, we have since furloughed all managers at the Hotel except for members of the executive team and continue to limit hourly staff to a minimum. By the end of March 2020, we had temporarily closed all of our food and beverage outlets, valet parking, concierge and bell services, fitness center, as well as the executive lounge facility. We continue to implement social distancing standards and cleaning processes designed by Interstate and Hilton to keep employees and guests safe. The full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this report. The pandemic effectively eliminated our ability to generate any profits, due to the drastic decline in both leisure and business travel. As a result, management believes the ongoing length and severity of the economic downturn caused by the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results. We are also assessing the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets. As of the date of this report, the effects of the pandemic continue to affect our economy, business and leisure travel, and our needs to continue to curtail certain revenue generating activities at the Hotel, and until there are vaccines or other methodologies to effectively combat this pandemic, we expect that the effects will have a material adverse effect on our business.
As a result of the CARES Act signed into law on March 27, 2020, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration (“SBA”). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the CARES Act. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of December 31, 2020, Justice had used all proceeds of the SBA Loan - Justice in qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of December 31, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 27, 2022 and has a 1.00% interest rate. All payments of principal and interests are deferred until July 2021, and the repayment obligations under both loans may be forgiven if the funds are used for payroll and other qualified expenses. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All unforgiven portion of the principal and accrued interest will be due at maturity. As of December 31, 2020, Justice and InterGroup have each submitted its application for full loan forgiveness.
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RESULTS OF OPERATIONS
As of December 31, 2017,2020, the Company ownedhas the power to vote for approximately 81.9%87.4% of the common shares of its subsidiary, Santa Fe, and Santa Fe owned approximately 68.8% of the common shares of Portsmouth Square, Inc. InterGroup also directly owns approximately 13.4%13.5% of the common shares of Portsmouth. The Company'sHistorically, the Company’s principal sourcessource of revenue continue to beis derived from the general and limited partnership interestsinvestment of its subsidiary, Portsmouth, in the Justice Investors limited partnershipLimited Partnership (“Justice” or the “Partnership”), rental income inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from its investments in multi-family real estate properties and income received from investment of its cash and securities assets.other operating departments. 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 Justice have been consolidated with those of the Company. However, the impact of the COVID-19 pandemic is highly uncertain and management expects that the ongoing length and severity of the economic downturn will have a material adverse impact on our business, financial condition, liquidity and financial results.
The Hotel is operated by the Partnership as a full servicefull-service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with HLT Franchise Holding LLC (“Hilton”).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 can 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, onOn February 1, 2017, Justice entered into a Hotel management agreement (“HMA”)an HMA with Interstate Management Company, LLC (“Interstate”) to manage the Hotel and related facilities with an effective takeover date of February 3, 2017. The term of management agreementHMA is for an initial period of 10ten years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the 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 is included in restricted cash and related party and other notes payable 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.
In addition to the operations of the Hotel, the Company also generates income from the ownership, management and, managementwhen appropriate, sale of real estate. Properties include sixteenfifteen apartment complexes, one commercial real estate property, and three single-family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property. All of the Company’s residential and commercial rental operating properties are managed in-house.
The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential.
Three Months Ended December 31, 20172020 Compared to the Three Months Ended December 31, 20162019
The Company had a net loss of $2,507,000$1,063,000 for the three months ended December 31, 20172020 compared to net lossincome of $2,009,000$380,000 for the three months ended December 31, 2016.2019. The increase in the net losschange is primarily attributable to higher operating expenses from the decrease in Hotel operations and the increase in income tax expense.revenue.
Hotel Operations
The Company had net loss from Hotel operations of $88,000$4,274,000 for the three months ended December 31, 20172020 compared to net income of $666,000$825,000 for the three months ended December 31, 2016.2019. The change is primarily dueattributable to increased operating expenses. The increasethe decrease in revenues were offset by increased franchise fees, legal fees and union wages during the quarter ended December 31, 2017 compared to December 31, 2016.
Hotel revenue.
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The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 20172020 and 2016.2019.
| For the three months ended December 31, | 2017 | 2016 | 2020 | 2019 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 10,710,000 | $ | 10,497,000 | $ | 2,584,000 | $ | 12,497,000 | ||||||||
| Food and beverage | 1,614,000 | 1,506,000 | 76,000 | 1,425,000 | ||||||||||||
| Garage | 735,000 | 643,000 | 424,000 | 776,000 | ||||||||||||
| Other operating departments | 128,000 | 191,000 | 25,000 | 203,000 | ||||||||||||
| Total hotel revenues | 13,187,000 | 12,837,000 | 3,109,000 | 14,901,000 | ||||||||||||
| Operating expenses excluding depreciation and amortization | (10,743,000 | ) | (9,611,000 | ) | (5,133,000 | ) | (11,730,000 | ) | ||||||||
| Operating income before interest, depreciation and amortization | 2,444,000 | 3,226,000 | ||||||||||||||
| Operating (loss) income before interest, depreciation and amortization | (2,024,000 | ) | 3,171,000 | |||||||||||||
| Interest expense - mortgage | (1,850,000 | ) | (1,750,000 | ) | (1,668,000 | ) | (1,735,000 | ) | ||||||||
| Depreciation and amortization expense | (682,000 | ) | (810,000 | ) | (582,000 | ) | (611,000 | ) | ||||||||
| Net income (loss) from Hotel operations | $ | (88,000 | ) | $ | 666,000 | |||||||||||
| Net (loss) income from Hotel operations | $ | (4,274,000 | ) | $ | 825,000 | |||||||||||
For the three months ended December 31, 2017,2020, the Hotel had operating incomeloss of $2,444,000$2,024,000 before interest expense, depreciation and amortization on total operating revenues of $13,187,000$3,109,000 compared to operating income of $3,226,000$3,171,000 before interest expense, depreciation and amortization on total operating revenues of $12,837,000$14,901,000 for the three months ended December 31, 2016. Room revenues increased by $213,000 for2019. For the three months ended December 31, 20172020, room revenues decreased by $9,913,000, food and beverage revenue decreased by $1,349,000, and garage revenue decreased by $352,000, compared to the three months ended December 31, 2016 primarily due to Salesforce citywide conference moving from third quarter2019. The year over year decline in 2016 to fourth quarter in 2017. Food and beverage revenue increased by $108,000 as aall areas are result of increased cateringthe business interruption attributable to a variety of responses by federal, state, and banquet services. Garage revenues increased by $92,000.
local civil authority to the COVID-19 outbreak since March 2020. Total operating expenses increaseddecreased by $1,132,000 this quarter as compared to the previous comparable quarter primarily$6,597,000 due to increased operating expenses related to fooddecrease in salaries and beverage,wages, rooms franchisecommission, credit card fees, management fees, and legalfranchise fees.
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, 20172020 and 2016.2019.
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 | |||||||||
| 2020 | $ | 107 | 48 | % | $ | 52 | ||||||
| 2019 | $ | 255 | 98 | % | $ | 250 | ||||||
The Hotel’s revenues increaseddecreased by 2.7%79% this quarter as compared to the previous comparable quarter. Average daily rate increaseddecreased by $4$149, average occupancy dropped 50%, and RevPAR increaseddecreased by $2$199 for the three months ended December 31, 20172020 compared to the three months ended December 31, 2016. Average occupancy was 89% for both quarters.2019.
Real Estate Operations
RealNet income from real estate revenuesoperations for the three months ended December 31, 2017 and 2016 remained relatively consistent at $3,625,000 and $3,605,000, respectively. Real estate operating expenses increased for the three months ended December 31, 2017 comparing2020 decreased by $253,000 compared to the three months ended December 31, 2016 primarily2019. The decrease year over year is due to increase in real estate taxes.increased vacancy loss and bad debt expense as the pandemic has affected some tenants’ ability to pay rent on time. All of the Company’s properties are managed in-house. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.
Investment Transactions
The Company had a net lossgain on marketable securities of $1,178,000$3,457,000 for the three months ended December 31, 20172020 compared to a net loss on marketable securities of $3,290,000$119,000 for the three months ended December 31, 2016. As of December 31, 2017 and 2016, approximately 16% and 41%, 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.2019. For the three months ended December 31, 2017, the Company had a net realized gain of $181,000 and a net unrealized loss of $1,359,000. For the three months ended December 31, 2016,2020, the Company had a net realized loss of $107,000$672,000 and a net unrealized gain of $4,129,000. For the three months ended December 31, 2019, the Company had a net realized loss of $3,000 and a net unrealized loss of $3,183,000.$116,000. 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 Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expense during the three months ended December 31, 20172020 and 2016 represents2019 represent primarily the income tax effect of the pre-taxpretax income (loss) at InterGroup, Santa Fe, and the pretax income of Portsmouth, which includes its share in net income (loss) of the Hotel.Justice.
Six Months Ended December 31, 20172020 Compared to the Six Months Ended December 31, 20162019
The Company had a net lossincome of $2,802,000$3,756,000 for the six months ended December 31, 20172020 compared to net lossincome of $414,000$1,024,000 for the six months ended December 31, 2016.2019. The increase in the net losschange is primarily attributable to higher operating expensesgains from the Hotelmarketable securities and sale of real estate.estates.
Hotel Operations
Net incomeThe Company had net loss from Hotel operations was $1,208,000of $8,161,000 for the six months ended December 31, 20172020 compared to net income of $2,473,000$2,521,000 for the six months ended December 31, 2016.2019. The change is primarily attributable to the decrease in net income is primarily due to increased operating expenses. The increase in revenues were offset by increased franchise fees, legal fees and union wages during the six months ended December 31, 2017 compared to December 31, 2016.Hotel revenue.
The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 20172020 and 2016.2019.
| For the six months ended December 31, | 2017 | 2016 | 2020 | 2019 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 22,552,000 | $ | 22,795,000 | $ | 5,474,000 | $ | 25,811,000 | ||||||||
| Food and beverage | 3,373,000 | 2,955,000 | 113,000 | 2,647,000 | ||||||||||||
| Garage | 1,516,000 | 1,324,000 | 894,000 | 1,512,000 | ||||||||||||
| Other operating departments | 183,000 | 368,000 | 53,000 | 360,000 | ||||||||||||
| Total hotel revenues | 27,624,000 | 27,442,000 | 6,534,000 | 30,330,000 | ||||||||||||
| Operating expenses excluding depreciation and amortization | (21,332,000 | ) | (19,867,000 | ) | (10,166,000 | ) | (23,078,000 | ) | ||||||||
| Operating income before loss on disposal of assets, interest, depreciation and amortization | 6,292,000 | 7,575,000 | ||||||||||||||
| Operating (loss) income before interest, depreciation and amortization | (3,632,000 | ) | 7,252,000 | |||||||||||||
| Interest expense - mortgage | (3,703,000 | ) | (3,579,000 | ) | (3,368,000 | ) | (3,527,000 | ) | ||||||||
| Depreciation and amortization expense | (1,381,000 | ) | (1,523,000 | ) | (1,161,000 | ) | (1,204,000 | ) | ||||||||
| Net income from Hotel operations | $ | 1,208,000 | $ | 2,473,000 | ||||||||||||
| Net (loss) income from Hotel operations | $ | (8,161,000 | ) | $ | 2,521,000 | |||||||||||
For the six months ended December 31, 2017,2020, the Hotel had operating incomeloss of $6,292,000$3,632,000 before interest expense, depreciation and amortization on total operating revenues of $27,624,000$6,534,000 compared to operating income of $7,575,000$7,252,000 before interest expense, depreciation and amortization on total operating revenues of $27,442,000$30,330,000 for the six months ended December 31, 2016. Room revenues decreased by $243,000 for2019. For the six months ended December 31, 20172020, room revenues decreased by $20,337,000, food and beverage revenue decreased by $2,534,000, and garage revenue decreased by $618,000, compared to the six months ended December 31, 2016 primarily as the2019. The year over year decline in all areas are result of the decrease in group business interruption attributable to a variety of responses by federal, state, and local civil authority to 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.
COVID-19 outbreak since March 2020. Total operating expenses increaseddecreased by $1,465,000 for the six months ended December 31, 2017 as compared to the six months ended December 31, 2016 primarily$12,912,000 due to the increasedecrease in legalsalaries and wages, rooms commission, credit card fees, associated with the Glaser matter,management fees, and franchise fees, food, beverage and room operating expenses; the increase was offset by reduced advertising and sales costs, repairs and maintenance expense, and other operating department expenses.fees.
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, 20172020 and 2016.2019.
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 | |||||||||
| 2020 | $ | 107 | 51 | % | $ | 55 | ||||||
| 2019 | $ | 263 | 98 | % | $ | 258 | ||||||
The Hotel’s total revenues increaseddecreased by 0.7%79% for the six months ended December 31, 20172020, as compared to the six months ended December 31, 2016.2019. Average daily rate increaseddecreased by $2$156, average occupancy decreased by 47%, and RevPAR decreased by $3$203 for the six months ended December 31, 20172020, 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.2019.
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Real Estate Operations
Real Estate Operations
RealNet income from real estate revenuesoperations for the six months ended December 31, 2017 and 2016 remained relatively consistent at $7,302,000 and $7,254,000, respectively. Real estate operating expenses2020 increased for the six months ended December 31, 2017 comparingby $11,618,000 compared to the six months ended December 31, 2016 primarily2019. The change year over year is due to increasethe sale of the Company’s 27-unit apartment complex located in real estate taxes.Santa Monica, California for $15,650,000. All of the Company’s properties are managed in-house. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.
Investment Transactions
The Company had a net lossgain on marketable securities of $2,200,000$3,299,000 for the six months ended December 31, 20172020 compared to a net loss on marketable securities of $2,136,000$568,000 for the six months ended December 31, 2016.2019. For the six months ended December 31, 2017 and 2016, the Company had a net loss of approximately $2,754,000 and $2,391,000 related to the Company’s investment in the common stock of Comstock. For the six months ended December 31, 2017,2020, the Company had a net realized loss of $119,000$934,000 and a net unrealized lossgain of $2,081,000.$4,233,000. For the six months ended December 31, 2016,2019, the Company had a net realized gainloss of $312,000$77,000 and a net unrealized loss of $2,448,000.$491,000. 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.
During the six months ended December 31, 2017 and 2016, the Company performed an impairment analysis of its other investments and determined that its investments had an other than temporary impairment and recorded impairment losses of $200,000 and $44,000 in the respective periods.
The Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax (expense) benefitexpense during the six months ended December 31, 20172020 and 2016 represents2019 represent primarily the income tax effect of the pre-tax losspretax income (loss) at InterGroup, Santa Fe, and Portsmouth’s pretax income (loss)Portsmouth, which includes its share in net income (loss) of the Hotel.Justice.
MARKETABLE SECURITIES
The following table shows the composition of the Company’s marketable securities portfolio as of December 31, 20172020 and June 30, 20172020 by selected industry groups.
| As of | % of Total | |||||||
| December 31, 2020 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 8,088,000 | 36.7 | % | ||||
| Financial services | 3,972,000 | 18.0 | % | |||||
| Energy | 3,233,000 | 14.7 | % | |||||
| Consumer cyclical | 1,887,000 | 8.6 | % | |||||
| Technology | 1,428,000 | 6.5 | % | |||||
| Industrials | 1,297,000 | 5.9 | % | |||||
| Basic material | 1,269,000 | 5.8 | % | |||||
| Communication services | 442,000 | 2.0 | % | |||||
| Healthcare | 267,000 | 1.2 | % | |||||
| Other | 125,000 | 0.6 | % | |||||
| $ | 22,008,000 | 100.0 | % | |||||
| As of | % of Total | |||||||
| June 30, 2020 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 2,365,000 | 38.3 | % | ||||
| Basic material | 1,209,000 | 19.6 | % | |||||
| Energy | 767,000 | 12.4 | % | |||||
| Industrials | 484,000 | 7.8 | % | |||||
| Corporate bonds | 417,000 | 6.7 | % | |||||
| Consumer cyclical | 295,000 | 4.8 | % | |||||
| Financial services | 282,000 | 4.6 | % | |||||
| Communication services | 157,000 | 2.5 | % | |||||
| Technology | 121,000 | 2.0 | % | |||||
| Other | 81,000 | 1.3 | % | |||||
| $ | 6,178,000 | 100.0 | % | |||||
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| % of Total | ||||||||
| As of December 31, 2017 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 2,640,000 | 20.0 | % | ||||
| Technology | 3,039,000 | 23.0 | % | |||||
| REIT's and real estate ompanies | 1,494,000 | 11.3 | % | |||||
| Corporate Bonds | 1,774,000 | 13.4 | % | |||||
| Energy | 472,000 | 3.6 | % | |||||
| Financial | 1,046,000 | 7.9 | % | |||||
| Other | 2,744,000 | 20.8 | % | |||||
| $ | 13,209,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of June 30, 2017 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 6,222,000 | 36.2 | % | ||||
| Technology | 4,134,000 | 24.1 | % | |||||
| REIT's and real estate ompanies | 1,820,000 | 10.6 | % | |||||
| Corporate Bonds | 1,683,000 | 9.8 | % | |||||
| Energy | 1,345,000 | 7.8 | % | |||||
| Other | 1,973,000 | 11.5 | % | |||||
| $ | 17,177,000 | 100.0 | % | |||||
As of December 31, 2017, 16% of2020, the Company’s investment in marketable securities portfolio is diversified with 132 different equity positions. The Company holds one equity security that comprised more than 10% of the equity value of the portfolio. The largest security position represents 10% of the portfolio and consists of the common stock of Comstock Mining,Colony Financial Inc. (“Comstock” - NYSE MKT: LODE)(NYSE: CLNY) which is included in the basic materialsREITs and real estate companies’ industry group.
As of June 30, 2020, the Company’s investment portfolio is diversified with 59 different equity positions. The Company holds two equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 19% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL) which is included in the REITs and real estate companies’ industry group.
The following table shows the net gain or lossincome (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, | 2017 | 2016 | 2020 | 2019 | ||||||||||||
| Net loss on marketable securities | $ | (1,178,000 | ) | $ | (3,290,000 | ) | ||||||||||
| Net gain (loss) on marketable securities | $ | 3,457,000 | $ | (119,000 | ) | |||||||||||
| Impairment loss on other investments | (200,000 | ) | (24,000 | ) | (27,000 | ) | - | |||||||||
| Dividend and interest income | 48,000 | 68,000 | 81,000 | 111,000 | ||||||||||||
| Margin interest expense | (162,000 | ) | (159,000 | ) | (161,000 | ) | (116,000 | ) | ||||||||
| Trading and management expenses | (151,000 | ) | (132,000 | ) | (126,000 | ) | (125,000 | ) | ||||||||
| $ | (1,643,000 | ) | $ | (3,537,000 | ) | |||||||||||
| Net income (loss) from investment transactions | $ | 3,224,000 | $ | (249,000 | ) | |||||||||||
| For the six months ended December 31, | 2020 | 2019 | ||||||
| Net gain (loss) on marketable securities | $ | 3,299,000 | $ | (568,000 | ) | |||
| Impairment loss on other investments | (89,000 | ) | - | |||||
| Dividend and interest income | 205,000 | 241,000 | ||||||
| Margin interest expense | (281,000 | ) | (252,000 | ) | ||||
| Trading and management expenses | (275,000 | ) | (282,000 | ) | ||||
| Net income (loss) from investment transactions | $ | 2,859,000 | $ | (861,000 | ) | |||
FINANCIAL CONDITION AND LIQUIDITY
The Company had cash and cash equivalents of $16,815,000 and $14,163,000 as of December 31, 2020 and June 30, 2020, respectively. The Company had funds available from its investments in marketable securities of $22,008,000 as of December 31, 2020 net of $8,320,000 due to securities broker and $704,000 obligations for securities sold. As of June 30, 2020, the Company had funds available from its investments in marketable securities of $6,178,000 net of $1,576,000 due to securities broker and $294,000 obligations for securities sold. In addition, the Hotel had $5,977,000 and $10,666,000 of restricted cash held by its senior lender Wells Fargo Bank, N.A. (“Lender”) as of December 31, 2020 and June 30, 2020, respectively. Of the $10,666,000 restricted cash held as of June 30, 2020, $2,432,000 was for a possible future property improvement plan (“PIP”) requested by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i) January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. On August 19, 2020, Lender released PIP deposits in the amount of $2,379,000 to the Hotel. The funds were utilized to fund operating expenses, including franchise and management fees and other expenses.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of December 31, 2020, Justice had used all proceeds of the SBA Loan - Justice in qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of December 31, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 27, 2022 and has a 1.00% interest rate. All payments of principal and interests are deferred until July 2021, and the repayment obligations under both loans may be forgiven if the funds are used for payroll and other qualified expenses. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All unforgiven portion of the principal and accrued interest will be due at maturity. As of December 31, 2020, Justice and InterGroup have each submitted its application for full loan forgiveness.
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| For the six months ended December 31, | 2017 | 2016 | ||||||
| Net loss on marketable securities | $ | (2,200,000 | ) | $ | (2,136,000 | ) | ||
| Impairment loss on other investments | (200,000 | ) | (44,000 | ) | ||||
| Dividend and interest income | 131,000 | 110,000 | ||||||
| Margin interest expense | (352,000 | ) | (303,000 | ) | ||||
| Trading and management expenses | (274,000 | ) | (250,000 | ) | ||||
| $ | (2,895,000 | ) | $ | (2,623,000 | ) | |||
FINANCIAL CONDITION AND LIQUIDITYIn order to increase its liquidity position and to take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, InterGroup refinanced one of its California properties and generated net proceeds of $1,144,000. During the three months ended December 31, 2020, InterGroup completed refinancing on two of its California properties and generated net proceeds of $4,327,000. In January 2021, InterGroup refinanced an additional California property and generated net proceeds of $1,057,000. InterGroup is currently evaluating other refinancing opportunities and it could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. InterGroup has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) and the entire $8,000,000 is available to be drawn down as of December 31, 2020 should additional liquidity be necessary. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,043,000. Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000 as InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale. Santa Fe will not seek a replacement property.
The Company’s cash flows are primarily generated from its Hotel operations, andAs the sole general partner management fees and limited partnership distributions fromof Justice Investors, its real estate operations and from the investment of its cash in 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 nowthat controls approximately 93%96.6% of the voting interest in the Partnership, Portsmouth has the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup and/or Santa Fe to meet any capital calls and its other obligations during the next twelve months and beyond. On August 28, 2020, the Board of InterGroup and Santa Fe passed resolutions, respectively, to provide funding to Portsmouth if necessary. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000 from its current loan balance of $3,000,000 due to InterGroup. On December 31, 2020, InterGroup advanced $700,000 to Justice per the aforementioned agreement. The Partnership is now its sole General Partner.also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital.
To fund the redemptionOur known short-term liquidity requirements primarily consist of limited partnership interestsfunds necessary to pay for operating and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loanother expenditures, including management and a $20,000,000 mezzanine loan. The mortgage loan is secured by the Partnership’sfranchise fees, corporate expenses, payroll and related costs, taxes, interest and principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annumpayments on our outstanding indebtedness, and matures in January 2024. Beginning in February 2017, the loan began to amortize over a thirty-year period thru its maturity date. 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 Mezzaninerepairs and is subordinated to the Mortgage Loan. The mezzanine loan initially 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 balancemaintenance of the senior loan and the mezzanine loans as of September 30, 2017 were $96,028,399 and $20,000,000 respectively. Effective May 12, 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.Hotel.
On July 2, 2014, the Partnership obtained from InterGroup (a related party) an unsecured loan in the principal amountOur long-term liquidity requirements primarily consist 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 extendedfunds necessary to December 31, 2018.
In April 2017, Portsmouth obtained from InterGroup an unsecured short-term loan in the amount of $1,000,000 at 5% per year fixed interest, with a term of five monthspay for scheduled debt maturities and maturing September 6, 2017. The short-term loan 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 loans and the legal settlement may create some additional risks for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operationscapital improvements of the Hotel and the garageour real estate properties. We will continue to be sufficient to meet all offinance our business activities primarily with existing cash, including from the Partnership’s currentactivities described above, 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 assetsour operations. After considering our approach to liquidity and fromaccessing our available sources of cash, we believe that our cash position, after giving effect to the partnership management fees,transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the Company’sdate of issuance of these financial statements, even if current levels of low occupancy and future obligations. Additionally,low revenue per available room (“RevPAR”) were to persist. The objectives of our cash management believespolicy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.can be no guarantee that management will be successful with its plan.
The following table provides a summary as of December 31, 2020, the Company’s material financial obligations which also includes interest payments.
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of December 31, 2017,2020, the Company’s material financial obligations which also includingincludes interest payments.
| 6 Months | Year | Year | Year | Year | 6 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 179,704,000 | $ | 1,463,000 | $ | 3,980,000 | $ | 3,103,000 | $ | 15,171,000 | $ | 3,078,000 | $ | 152,909,000 | $ | 181,372,000 | $ | 3,856,000 | $ | 3,142,000 | $ | 28,410,000 | $ | 108,348,000 | $ | 3,734,000 | $ | 33,882,000 | ||||||||||||||||||||||||||||
| Other notes payable | 5,919,000 | 184,000 | 474,000 | 607,000 | 567,000 | 567,000 | 3,520,000 | 10,443,000 | 520,000 | 6,220,000 | 750,000 | 567,000 | 567,000 | 1,819,000 | ||||||||||||||||||||||||||||||||||||||||||
| Interest | 54,872,000 | 5,139,000 | 9,919,000 | 9,529,000 | 9,120,000 | 8,591,000 | 12,574,000 | 29,556,000 | 3,863,000 | 8,419,000 | 7,625,000 | 4,411,000 | 904,000 | 4,334,000 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 240,495,000 | $ | 6,786,000 | $ | 14,373,000 | $ | 13,239,000 | $ | 24,858,000 | $ | 12,236,000 | $ | 169,003,000 | $ | 221,371,000 | $ | 8,239,000 | $ | 17,781,000 | $ | 36,785,000 | $ | 113,326,000 | $ | 5,205,000 | $ | 40,035,000 | ||||||||||||||||||||||||||||
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 PrismInterstate has the power and ability under the terms of its management agreement to adjust hotel room rates on an ongoing basis,there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company'sCompany’s income is not viewed by management as material.
The Company'sCompany’s residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are expected to offset anticipated increased property operating expenses.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those that are most significant to the presentation of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company’s critical accounting policies during the six months ended December 31, 2017.2020. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 20172020 for a summary of the critical accounting policies.
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.
Item 4. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As statedThere have been no changes in the Company’s Form 10-K for the year ended June 30, 2017, we identified a material weakness in internal controls over financial reporting related to our deferred income taxes and income tax expense during the fourth quarter of fiscal 2017. During the quarter ended September 30, 2017, we hired new tax CPA specialist to perform detailed analysis which was completed for the year ended June 30, 2017. We also assigned our audit committee with oversight responsibilities. The Company has taken steps to remediate the material weakness and improved its internal control over financial reporting during the last quarterly period
covered by this Quarterly Report on Form 10-Q.10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II.
PART II.Item 1. LEGAL PROCEEDINGS
OTHER INFORMATION
During the period ending December 31, 2020, there were no pending or threatened legal actions.
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
As of November 25, 2020, a group of less than ten shareholders of Santa Fe Financial Corporation approved a Corporate Action to distribute the assets of that company and then liquidate the corporate entity. The Corporate Action was approved by the holders of approximately 87.4% of the total issued and outstanding voting capital stock of that company entitled to vote on matters submitted to the holders of common stock as of that record date.
The terms of the dissolution are:
| ● | The assets of that company consist of: |
| ○ | 505,437 shares of Portsmouth Square, Inc. common stock with a per share price of $41.00 as of January 15, 2021 |
| ○ | Cash in the approximate amount of $6.0 million (net of income taxes paid) |
| ● | On the 20th calendar day following the date of mailing of the definitive information statement on Schedule 14C which was filed with the SEC on January 22, 2021, the holder of each share of Santa Fe common stock will receive .38 of a share of Portsmouth common stock and the amount of cash in the Company divided by 1,339,310 (the number of issued and outstanding shares of Santa Fe common stock).Subsequent to when the cash of the Company shall be distributed to all shareholders, net of tax liabilities, on a pro rata basis based upon number of shares of common stock of the Company owned by each shareholder on the date of liquidation pursuant to the plan of liquidation and dissolution. With respect thereto, when the Company stockholders will receive 0.38 shares of Portsmouth stock for each share of Company stock owned, they will receive cash in lieu of fractional Portsmouth shares. | |
| ● | Santa Fe shall file a final U.S. Corporate Income Tax Return for the period ending on the date of liquidation, as well as file Form 966, Corporate Dissolution or Liquidation,” within 30 days of the liquidation. | |
| ● | However, with respect to third party shareholders, the transaction is expected to be treated as a taxable liquidation under section 331 of the IRS Code. Therefore, Santa Fe is expected to recognize built-in gain or loss on the assets distributed third party shareholders under Section 336 of the Code, and the third-party shareholders are expected to recognize gain or loss on the cancellation of their shares equal to the difference between the fair market value of the assets received and their stock basis in Santa Fe. To the extent third party shareholders include non-U.S. persons, these shareholders are not expected to be subject to U.S. federal income tax unless Santa Fe is considered a U.S. real property holding corporation (“USRPHC”) under the Foreign Investment in Real Property Tax Act within five years preceding the date of the liquidation. A U.S. corporation is generally considered a USRPHC if at least 50 percent of its assets includes “U.S. Real Property Interests.” If Santa Fe is considered a USRPHC, then it is responsible for withholding 15% of the amount realized by the non-U.S. SHs on the liquidation. |
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| 31.1 | Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a). |
| 31.2 | Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a). |
| 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 | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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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.
| THE INTERGROUP CORPORATION | |||||
| (Registrant) | |||||
| Date:January 29, 2021 | /s/ John V. Winfield | ||||
| Chairman of the Board and | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| Date: January 29, 2021 | by | /s/ Danfeng Xu | |||
| Danfeng Xu | |||||
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